(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with a narrative from the perspective of management on the Company's financial condition, results of operations, liquidity and certain other factors that may affect future results. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. The following discussion focuses on 2020 and 2019 financial condition and results of operations and year-to-year comparisons between 2020 and 2019. Similar discussion of our 2018 financial condition and results and year-to-year comparisons between 2019 and 2018 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
We are innovating and redefining the medication safety market and, creating solutions designed to empower pharmacists, providers, and patients to optimize medication regimens. Our advanced technology, MedWise(TM), predicts and identifies the cause of medication-related problems, including adverse drug events, so healthcare professionals can minimize harm and reduce medication-related risks. Our software and services help improve patient outcomes, reduce hospitalizations and lower healthcare costs. We also believe we have the most extensive clinical tele-pharmacy network in the United States. Our solutions are trusted by health plans and pharmacies nationwide to assist them in meeting value-based payment requirements. Our vision and mission are supported by our industry-recognized leadership team,
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our significant investments and collaborations to advance medication safety-related pharmacotherapy research and its application in clinical practice, and our culture.
We operate our business through two segments, CareVention HealthCare and MedWise HealthCare, which accounted for 69% and 31% of revenue, respectively, for the year ended December 31, 2020. Our CareVention HealthCare segment provides our clients, primarily PACE programs, with medication fulfillment services, cloud-based software, pharmacy benefit management solutions, and clinical pharmacist services at the point-of-care. Our MedWise HealthCare segment provides our clients with cloud-based pharmacy software and full-service clinical pharmacy programs.
CareVention HealthCare primarily services PACE, which is a Centers for Medicare & Medicaid Services, or CMS, sponsored program providing comprehensive medical and social services to adults age 55 and older who need a nursing facility level of care but can live safely in community settings. Our clients include ArchCare Senior Life, Trinity Health, Palm Beach PACE, and St. Paul's PACE. We go to market through a number of different brands, including CareKinesis, Capstone Risk Adjustment Services, PACElogic, TruChart, PeakTPA, PersonifilRx, and Pharmastar.
Our largest CareVention HealthCare offering is our medication fulfillment services which are built around our novel and proprietary Medication Risk Mitigation Matrix, or MRM Matrix, designed to enable clinicians to increase patient safety, create individualized medication regimens, promote adherence, reduce total medication burden, and eliminate unnecessary prescriptions. Our medication fulfillment and reminder packaging services utilize the MRM Matrix technology to reduce medication-related risk for the high-cost, high-risk PACE population. The CareVention HealthCare suite of offerings also includes risk adjustment services, pharmacy benefit management solutions, cloud-based electronic health records solutions and third-party administration services, which are all specifically tailored to the PACE market.
The CareVention HealthCare segment revenue model is primarily based on payments on a per-member per-month, or PMPM, basis, payments on a subscription basis, payments on a transaction basis, and charges and dispensing fees for medication fulfillment.
As of December 31, 2020, our CareVention HealthCare segment served more than 130 healthcare organizations.
Our MedWise HealthCare segment is primarily comprised of service offerings from our acquisitions of Sinfon�aRx in September 2017 and PrescribeWellness in March 2019. As a result of these acquisitions, we are a leading provider of Medication Therapy Management, or MTM, software and services for Medicare, Medicaid, and commercial health plans and also a leading provider of cloud-based patient engagement software and services to more than 14,000 pharmacies nationwide.
More than 280 health plans, including several Blue Cross Blue Shield organizations, Express Scripts, Humana, UnitedHealth Group, and WellCare, utilize our MedWise HealthCare solutions to execute a range of clinical programs. These programs support MTM, Enhanced MTM (a five-year Centers for Medicare & Medicaid Services Innovation Part D pilot that began January 1, 2017), Medicare Part D Star Ratings, Healthcare Effectiveness Data and Information Set (HEDIS) quality measures, and post-hospital discharge care transitions through a combination of our nearly 30,000 PrescribeWellness network pharmacists and/or our clinical tele-pharmacy call centers across the country employing nearly 400 pharmacists. Within our MedWise HealthCare segment, we offer our cloud-based software and clinical pharmacist services through a number of different brands, including MedWise, Sinfon�aRx, RxCompanion, PrescribeWellness, and DoseMeRx. The MedWise HealthCare segment revenue model is primarily based on payments on a PMPM basis, payments on a subscription basis, and payments on a fee-for-service basis for each clinical intervention.
As of December 31, 2020, our MedWise HealthCare segment served more than 280 health plans and approximately 14,000 retail pharmacies.
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Our total revenues for the years ended December 31, 2020 and 2019 were $297.2 million and $284.7 million, respectively. We incurred a net loss of $81.0 million for the year ended December 31, 2020 and net loss of $32.4 million for the year ended December 31, 2019. Our adjusted EBITDA for the year ended December 31, 2020 was $21.8 million compared to $37.9 million for the year ended December 31, 2019. See "Non-GAAP Financial Measures - Adjusted EBITDA" for our definition of Adjusted EBITDA, why we present Adjusted EBITDA and a reconciliation of net losses to Adjusted EBITDA.
We face a variety of challenges and risks, which we will need to address and manage as we pursue our growth strategy. In particular, we will need to continue to innovate in the face of a rapidly changing healthcare landscape if we are to remain competitive. We will also need to effectively manage our growth, especially related to our expansion beyond the PACE and post-acute markets to other at-risk providers and payers. Our senior management continuously focuses on these and other challenges, and we believe that our culture of innovation and our history of growth and expansion will contribute to the success of our business. We cannot, however, assure you that we will be successful in addressing and managing the many challenges and risks that we face.
Key Business Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate and manage our business. These metrics are useful in evaluating our operating performance compared to that of other companies in our industry.
December 31, Change 2020 2019 $ % (Dollars in thousands) Revenues $ 297,219 $ 284,707 $ 12,512 4 % Net loss (80,966) (32,436) (48,530) (150) Adjusted EBITDA 21,775 37,921 (16,146) (43)
We monitor the key metrics set forth in the preceding table to help us evaluate trends, establish budgets, measure the effectiveness and efficiency of our operations and gauge our cash generation. We discuss Adjusted EBITDA in more detail in "Non-GAAP Financial Measures - Adjusted EBITDA." We also monitor revenue retention rate described as follows.
Net Revenue Retention
We believe that our ability to retain revenue associated with new or existing client relationships is an indicator of the stability of our revenue base and the long-term value we provide to our clients. We assess our performance in this area using a metric we refer to as net revenue retention. We calculate our net revenue retention by comparing revenue by client and segment at the end of the most recent calendar year divided by revenue at the end of the prior calendar year from only clients that were contracted with us at the end of the prior calendar year. We believe net revenue retention is a more meaningful metric versus prior disclosures, such as client retention, as this figure captures our cross-sell success, client expansion, changes in pricing, and client churn or downgrades.
Excluding the impact of the Personica acquisition, we generated net revenue retention of 111% at our PACE clients during 2020, driven by census growth at existing clients and cross-sell revenue. Our MedWise HealthCare segment generated net revenue retention of 73% in 2020 compared to 119% in 2019. The decline in the 2020 MedWise HealthCare net revenue retention was primarily due to consolidation in the health plan industry, which redirected MTM work previously delivered by us, new restrictions related to comprehensive medications reviews completed with caregivers and prescribers, which temporarily slowed patient engagement during the year, and fewer adherence programs resulting from higher adherence rates in 2020 due to health plan actions taken to respond to COVID-19 earlier this year.
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Factors Affecting our Future Performance
We believe that our future success will be dependent on many factors, including our ability to maintain and grow our relationships with existing clients, expand our client base, continue to enter new markets and expand our offerings to meet evolving market needs. While these areas present significant opportunities, they also present risks that we must manage to ensure successful results. See the section entitled "Risk Factors" for a discussion of certain risks and uncertainties that may impact our future success.
On January 30, 2020, the World Health Organization, or WHO, announced a global health emergency caused by a new strain of coronavirus originating in Wuhan, China, or the COVID-19 outbreak, and the risks to the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of COVID-19 continues to evolve as of the date of this Annual Report on Form 10-K. As such, we are uncertain as to the full magnitude of the impact that the pandemic will have on our financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and the ramification on our financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not able to estimate the effects that the COVID-19 pandemic may have on our results of operations, financial condition, or liquidity for 2021. However, we are dependent on our workforce to sell and deliver our products and services. Social distancing and shelter-in-place directives could impact our ability to deploy our workforce effectively. These same developments may affect the operations of our suppliers and customers, as their own workforces and operations are disrupted by the spread of this virus.
As a result of the ongoing COVID-19 pandemic, we have experienced challenges with revenue growth. The pandemic has delayed the closing of contracts across both our CareVention HealthCare and MedWise HealthCare segments and, in some cases, shifted project priorities and timelines, which we believe resulted in fewer new business wins relative to our original expectations. Overall census growth for PACE has remained below historical levels, which has affected the Company's CareVention HealthCare segment growth as our segment revenue growth is largely driven by organic census increases at our existing PACE organizations. We are closely monitoring the ongoing pandemic in terms of infection and death rates, the latter of which spiked in the month of May and again increased at the end of 2020, negatively impacting our overall census figures. Our MedWise HealthCare segment also has experienced delays in the timing of implementation and closing of new business, as well as a negative impact from COVID-19 on medication adherence initiatives, which are seasonally weighted toward the second half of the calendar year. The continued impact of the COVID-19 pandemic is highly uncertain and subject to change depending on factors such as the rollout of COVID-19 vaccines. We did not see material delays in scheduled PACE center openings during 2020. Accordingly, we believe that our current backlog of new extension centers and new PACE organizations under contract to open over the next 12 months could represent in excess of $75 million in annual revenue when the centers are operating at full capacity, which typically takes two to three years once a PACE center has opened its doors. The extent to which COVID-19 may impact our results and financial position will depend on future developments, which are uncertain and difficult to predict, including new information that may emerge concerning the severity of the COVID-19 pandemic, actions taken to contain it or address its impact, and the availability and widespread distribution and use of effective vaccines.
On October 5, 2020, we acquired all of the issued and outstanding membership interests of Personica, a provider of pharmacy services, including 340B and Medicare Part D administration solutions for PACE. The consideration for the acquisition was comprised of (i) cash consideration of $10.0 million paid upon closing, subject to certain customary post-closing adjustments; (ii) the issuance of 555,555 shares of our common stock; and (iii) promissory notes, or the Notes, for the payment of (a) $7.5 million in cash, which was paid in January 2021, (b) $5.5 million in cash within two business days following April 1, 2021, and (c) $4 million in cash within two business days following October 5, 2021. We may set-off amounts due under the Notes to the extent we are entitled to indemnification under the related purchase agreement or in respect of adjustments to the purchase price.
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We account for acquisitions using the purchase method of accounting. We allocated the purchase price to the assets acquired, including intangible assets, and liabilities assumed, based on estimated fair values at the date of the acquisition. The results of operations from the acquisition are included in our consolidated financial statements from the acquisition date.
On December 18, 2020, we entered into a Loan and Security Agreement with Western Alliance Bank, or the 2020 Credit Facility, which provides for a $120.0 million secured revolving credit facility, with a $1.0 million sublimit for cash management services and letters of credit and foreign exchange transactions. The 2020 Credit Facility replaced the previous line of credit agreement with Western Alliance Bank, or the 2015 Line of Credit, which matured on December 6, 2020. The 2020 Credit Facility bears an interest rate of LIBOR plus 3.25% and matures on May 16, 2025. The 2020 Credit Facility contains certain affirmative and negative covenants, including, but not limited to, restrictions on our ability to incur indebtedness, create liens, merge or consolidate, make dispositions, pay dividends or make distributions, make investments, pay any subordinated indebtedness, enter into certain transactions with affiliates, or make capital expenditures. The 2020 Credit Facility also contains certain financial covenants, including (i) maintaining unrestricted cash balances with Western Alliance Bank, plus amounts available for draw under the credit facility of at least $10.0 million at all times, and (ii) maintaining a leverage ratio of less than 3.00:1.00, on a trailing twelve-month basis, measured quarterly. The obligations under the 2020 Credit Facility are secured by all of our Company's assets, as set forth in the Loan and Security Agreement.
Effective January 1, 2020, in order to facilitate the administration, management, and development of our business and minimize the burden on our tax and regulatory reporting obligations, we implemented a reorganization pursuant to which all of our domestic subsidiaries, other than CK Solutions, LLC, merged with and into our wholly-owned subsidiary CareKinesis, Inc., which had previously changed its legal name on December 20, 2019 to TRHC OpCo, Inc. In the second quarter of 2020, TRHC OpCo, Inc. further changed its name to Tabula Rasa HealthCare Group, Inc., or the TRHC Group. Following such reorganization, our only directly owned subsidiary is TRHC Group, which is the parent of CK Solutions, LLC, three foreign subsidiaries related to the acquisition of DoseMe, and Personica. In conjunction with our reorganization, we now operate our business through two segments, CareVention HealthCare and MedWise HealthCare.
Components of Our Results of Operations
Our revenue is derived from our product sales and service activities under our CareVention HealthCare and MedWise HealthCare segments. For the years ended December 31, 2020 and 2019, product sales represented 57% and 48% of our total revenue, respectively. For the years ended December 31, 2020 and 2019, service revenue represented 43% and 52% of our total revenue, respectively.
PACE Product Revenue
We provide medication fulfillment pharmacy services to PACE organizations, and, while the majority of medications are routinely filled in order to treat chronic conditions, the mix and quantity of medications can vary. Revenue from medication fulfillment services is generally billed monthly or weekly, depending on whether the PACE organization is contracted with a pharmacy benefit manager (PBM), and recognized when medications are delivered and control has passed to the client. At the time of delivery, we have performed substantially all of our performance obligations under our client contracts. We do not experience a significant level of returns or reshipments.
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We provide services to PACE organizations, and these services primarily include medication safety services and health plan management services, which consist of risk adjustment services, PBM solutions, electronic health records solutions, and third party administration services. Revenue related to these services primarily consists of a fixed monthly fee assessed based on number of members served, or per member per month, a fee for each claim adjudicated, and subscription fees. These fees are recognized when we satisfy our performance obligation to stand ready to provide PACE services, which occurs when our clients have access to the PACE services. We generally bill for PACE services on a monthly basis as the services are provided.
We provide COVID-19 test kits to pharmacies and other clients. Revenue from the sale of these products is generally billed when test kits are shipped and is recognized as we satisfy our performance obligations to deliver the test kits and provide the test results. We do not experience a significant level of returns or reshipments.
Medication Safety Services
We provide medication safety services, which include identification of high-risk individuals, medication regimen reviews including patient and prescriber counseling, and targeted interventions to increase adherence and close gaps in care. Revenue related to these services primarily consists of per member per month fees and fees for each medication review and assessment completed. Revenue is recognized when we satisfy our performance obligation to stand ready to provide medication safety services, which occurs when our clients have access to the medication safety services, and when medication reviews and assessments are completed. We generally bill for the medication safety services on a monthly basis.
Software Subscription and Services
We provide software as a service, or SaaS, solutions, which allow for the identification of individuals with high medication-related risk, for patient communication and engagement, for documentation of clinical interventions, for optimizing medication therapy, for targeting adherence improvement, and for precision dosing. Revenues related to these software services primarily consist of monthly subscription fees and are recognized monthly as we meet our performance obligation to provide access to the software. Revenue for implementation and set up services is generally recognized over the contract term as the software services are provided. We generally bill for the software services on a monthly basis.
Cost of Revenue (exclusive of depreciation and amortization)
Cost of product revenue includes all costs directly related to the fulfillment and distribution of medications under our CareVention HealthCare offerings. Costs consist primarily of the purchase price of the medications we dispense. For the years ended December 31, 2020 and 2019, medication costs represented 79% of our total product costs. In addition to costs incurred to purchase the medications we dispense, other costs include shipping; packaging; expenses associated with operating our medication fulfillment centers, including salaries and related costs, such as stock-based compensation for personnel; technology expenses; direct overhead expenses; and allocated indirect overhead costs. We allocate indirect overhead costs among functions based on employee headcount.
Cost of service revenue includes all costs directly related to servicing our CareVention HealthCare and MedWise HealthCare service contracts, which primarily consist of labor costs, including stock-based compensation; outside contractors; expenses related to supporting our software platforms; direct overhead expenses; and allocated indirect overhead costs. We allocate indirect overhead costs among functions based on employee headcount.
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Research and Development Expenses
Our research and development expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in our research and development functions. This personnel includes software engineers and employees engaged in scientific research, healthcare analytics, and the design and development of new scientific algorithms and the enhancement of our software and technology platforms; fees paid to third-party consultants; costs related to quality assurance and testing; and other allocated facility-related overhead and expenses.
We capitalize certain costs incurred in connection with obtaining or developing the proprietary software platforms that support our product and service contracts, including third-party contractors and payroll costs for employees directly involved with the software development. Capitalized software development costs are amortized beginning when the software project is substantially complete and the asset is ready for its intended use. Costs incurred during the preliminary project stage and post implementation stage, as well as maintenance and training costs, are expensed as incurred. We continue to focus our research and development efforts on adding new features and applications to increase the functionality and enhance the ease of use of our existing suite of software solutions.
We expect our research and development expenses will increase in absolute dollars as we increase our research and development efforts to further strengthen and enhance our software solutions and service offerings, but will decrease as a percentage of revenue in the long term as we expect our revenue to increase at a greater rate than such expenses.
Sales and Marketing Expenses
Sales and marketing expenses consist principally of salaries, commissions, bonuses, and stock-based compensation and employee benefits for sales, marketing, and account management personnel, as well as travel costs related to sales, marketing, and account management activities. Marketing costs also include costs for communication and branding materials, conferences, trade shows, public relations, and allocated overhead.
We expect our sales and marketing expenses to increase in absolute dollars as we strategically invest to grow our sales, account management, and marketing infrastructure as we introduce new products and enter new markets, but decrease as a percentage of revenue in the long term.
General and Administrative Expenses
General and administrative expenses consist principally of employee-related expenses, including salaries, benefits, and stock-based compensation, for employees who are responsible for information systems, administration, human resources, finance, strategy, legal and executive management as well as other corporate expenses associated with these functional areas. General and administrative expenses also include professional fees for legal, consulting and accounting services and allocated overhead. General and administrative expenses are expensed when incurred.
We expect that our general and administrative expenses will increase in absolute dollars as we expand our infrastructure and continue to comply with the requirements applicable to public companies, but decrease as a percentage of revenue in the long term.
Change in Fair Value of Acquisition-related Contingent Consideration
We classify our acquisition-related contingent consideration as a liability. Acquisition-related contingent consideration is subject to remeasurement at each balance sheet date. Any change in the fair value of such acquisition-related contingent consideration is reflected in our consolidated statements of operations as a change in fair value of the liability. We adjust the carrying value of the acquisition-related contingent consideration until the contingency is finally determined or final payment is made.
Intangible Asset Impairment Charge
Definite-lived intangible assets are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. When an impairment review is performed to evaluate a long-lived asset for recoverability, we compare forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. If the estimated undiscounted
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future cash flows expected to result from the use of an asset are less than its carrying amount, we would recognize an impairment loss based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.
Depreciation and Amortization Expenses
Depreciation and amortization expenses are primarily attributable to our capital investment in equipment, our capitalized software, and our acquisition-related intangibles.
Interest expense is primarily attributable to interest expense associated with . . .
Feb 26, 2021
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