(EDGAR Online via COMTEX) -- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and related notes and other financial information included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2019, included in our 2019 Form 10-K.
This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as "believe," "will," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "could," "potentially" or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other "forward-looking" information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, (i) the impacts of the current COVID-19 pandemic and other health epidemics; (ii) our ability to adapt to changes or trends within the market for healthcare in the U.S.; (iii) a significant increase in competition from a variety of companies in the health care industry; (iv) developments and changes in laws and regulations, including increased regulation of the healthcare industry through legislative action and revised rules and standards; (v) the extent to which we are successful in gaining new long-term relationships with clients or retaining existing clients; (vi) the growth and success of our clients, which is difficult to predict and is subject to factors outside of our control; (vii) our ability to maintain relationships with a specified drug wholesaler; (viii) increasing consolidation in the healthcare industry; (ix) managing our growth effectively;
We are innovating and redefining the medication safety market, creating solutions designed to empower pharmacists, providers, and patients to optimize medication regimens. Our advanced proprietary technology, MedWise(TM), 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 suite of solutions is 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, our significant investments and collaborations to advance medication safety-related pharmacotherapy research and its application in clinical practice, and our culture, best captured in the 32 "Fundamentals" known as "The TRHC Way."
We operate our business through two segments, CareVention HealthCare and MedWise HealthCare, which accounted for 71% and 29% of revenue, respectively for the three months ended September 30, 2020 and accounted for 68% and 32% of revenue, respectively for the nine months ended September 30, 2020. Our CareVention HealthCare segment provides our clients, primarily PACE, with medication fulfillment services, cloud-based software, pharmacy benefit services, 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. Substantially all of our revenue is recognized in the U.S. and substantially all of our long-lived assets are located in the U.S.
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Our total revenues for the three and nine months ended September 30, 2020 were $70.5 million and $220.2 million, respectively, compared to $74.3 million and $211.5 million for the three and nine months ended September 30, 2019, respectively. We incurred a net loss of $21.6 million and net loss of $50.3 million for the three and nine months ended September 30, 2020, respectively, compared to a net loss of $8.1 million and $25.6 million for the three and nine months ended September 30, 2019, respectively. Adjusted EBITDA for the three and nine months ended September 30, 2020 was $5.1 million and $17.0 million, respectively, compared to $10.6 million and $29.9 million for the three and nine months ended September 30, 2019, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures - Adjusted EBITDA" for our definition of Adjusted EBITDA, why we present Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.
On October 5, 2020, we completed the acquisition of Personica, LLC and its subsidiaries PersonifilRx, Pharmastar, and PersonifilRx New England, a provider of pharmacy services, including 340B and Medicare Part D administration solutions to Programs of All-inclusive Care for the Elderly, or PACE. The purchase price consisted of (i) the payment of $10.0 million in cash consideration, subject to adjustments, (ii) the issuance of 555,555 shares of our common stock, and (iii) the issuance of promissory notes for the payment of
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. Within our CareVention HealthCare segment, we offer our medication fulfillment services, clinical pharmacist services at the point-of-care, cloud-based software, and health plan management services through a number of different brands, including CareKinesis, Capstone Performance Systems, PeakTPA, PersonifilRx, Pharmastar, Mediture, and Cognify.
The majority of our CareVention HealthCare product and service offerings are fortified by our novel and proprietary Medication Risk Mitigation Matrix, or MRM Matrix, designed to increase patient safety, create and promote adherence to individualized medication regimens, and reduce the total medication burden by eliminating 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 services, 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 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.
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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 15,000 pharmacies nationwide. More than 350 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 Center for Medicare & Medicaid Innovation Part D pilot that began January 1, 2017), Medicare Part D Star Ratings, Healthcare Effectiveness Data and Information Set 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 500 pharmacists. Within our MedWise HealthCare business unit, 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 based on payments on a PMPM basis, payments on a subscription basis, and payments on a fee-for-service basis for each clinical intervention.
In early 2020, we articulated a long-term growth strategy based on three key tenets:
Further penetration of the PACE market by leveraging our existing CareVention HealthCare membership base and cross-selling to increase our average PMPM fee,
Accelerating the adoption of our MedWise software and clinical pharmacy
Increasing the number of pharmacists licensing the PrescribeWellness solution
We believe demographic, legislative, and industry trends support our long-term growth targets. According to data from the U.S. Census Bureau, the number of Americans age 65 and older is expected to reach 74.1 million by 2030, which will represent more than one in five Americans. An April 2020 report from the Lown Institute noted polypharmacy (defined as five or more medications) has reached "epidemic proportions". The Institute stated that 40% of seniors (age 65+) are taking five or more prescription medications to treat the growing prevalence of multiple chronic conditions including heart disease, diabetes, asthma, high blood pressure, and cancer.
From a legislative perspective, important drivers that will support our growth are: the long-term transition to value-based care; CMS Medicare Part C and Part D regulations governing Star Ratings; the ongoing Enhanced MTM pilot, and a changing pharmacy landscape, including the expanding scope and role of community pharmacists as highlighted by new state laws, for example, Ohio SB 265, which recognized pharmacists as providers.
From an industry perspective, we are addressing a large and growing medication therapy problem, which encompasses adverse drug events, or ADEs, compounded by the demographic trends described above. In 2018, there were 5.8 billion prescriptions dispensed in the U.S. per IQVIA Institute, an increase of 2.7% from 2017. That year, prescriptions for chronic, persistent conditions accounted for more than two-thirds of the total dispensed prescriptions. Also in 2018, a review published in the Annals of Pharmacology estimated the annual cost of prescription-related morbidity and mortality resulting from non-optimized medication therapy at $528.4 billion including 275,689 deaths per year.
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To supplement our organic growth, we made a total of six acquisitions from the beginning of 2018 through October 2020, and we continue to evaluate strategic acquisitions across both segments of our business. Our March 2019 acquisition of PrescribeWellness allowed us to expand our target markets for our MedWise HealthCare technology to include 61,800 pharmacy practice settings across America. In addition to enhancing our capacity, PrescribeWellness's pharmacy customers, which are located within five miles of 300 million people in the U.S., also created a local setting to deliver more clinical programs, such as MTM for our health plan clients. Our acquisitions of Cognify (a provider of electronic health record solutions), Mediture (a provider of electronic health record solutions and third-party administrative services), PeakTPA (a provider of third-party administrative services), and Personica (a provider of pharmacy benefit services) have broadened our portfolio of CareVention HealthCare solutions to sell to our existing PACE clients. Our PACE clients had a combined patient census of 31,820 at the end of 2019, which represented an increase of 15% from 27,690 at the end of 2018.
Key Business Metrics
We continually monitor certain corporate metrics, including the following key metrics, that are useful in evaluating and managing our operating performance compared to that of other companies in our industry.
Three Months Ended
September 30, Change 2020 2019 $ % (Dollars in thousands) Revenues $ 70,506 $ 74,270 $ (3,764) (5) % Net loss (21,589) (8,104) (13,485) (166) Adjusted EBITDA 5,094 10,576 (5,482) (52) Nine Months Ended September 30, Change 2020 2019 $ % (Dollars in thousands) Revenues $ 220,167 $ 211,484 $ 8,683 4 % Net loss (50,336) (25,612) (24,724) (97) Adjusted EBITDA 17,035 29,919 (12,884) (43)
We monitor the key metrics 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 and client retention rate on an annual basis, which are described in our 2019 Form 10-K.
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 opportunity, they also present risks that we must manage to ensure successful results. Please refer to "Item 1A - Risk Factors" in our 2019 Annual Report and this Quarterly Report on Form 10-Q for a discussion of certain risks and uncertainties that may impact our future success.
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 DoseMe foreign subsidiaries, and, subsequent to the end of the third quarter of
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2020, Personica. Please see Note 17 in this Quarterly Report on Form 10-Q for additional information regarding the Personica transaction.
On January 30, 2020, the World Health Organization, or the 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 beyond its point of origin. 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 the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report on Form 10-Q. As such, it is 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 outbreak and the global responses to curb its spread, we are not able to estimate the effects that the COVID-19 outbreak may have on our results of operations, financial condition, or liquidity for 2020 or 2021. However, we are dependent on our workforce to sell and deliver our products and services. Developments such as 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 efforts to curtail 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 timelines to 2021, which we believe resulted in fewer new business wins during the first three quarters of 2020. Overall census growth for Programs of All-Inclusive Care for the Elderly ("PACE") has remained below historical levels, which has affected the Company's CareVention HealthCare segment growth. Our MedWise HealthCare segment also has experienced delays in the timing of implementation and closing of new business and a negative impact from COVID-19 on medication adherence initiatives, which are seasonally weighted toward the second half of the calendar year. However, the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. For example, we have not seen any delays in the scheduled PACE center openings through the third quarter of 2020, and we believe that the 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. We do not yet know the full extent of potential delays or impacts on our business, financing or other activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on our liquidity, capital resources, operations and business and those of the third parties on which we rely.
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 three months ended September 30, 2020 and 2019, product sales represented 56% and 47% of our total revenue, respectively, and service revenue represented 44% and 53% of our total revenue, respectively. For the nine months ended September 30, 2020 and 2019, product sales represented 53% and 47% of our total revenue, respectively, and service revenue represented 47% and 53% 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 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, 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, and subscription fees which 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 service, 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. In addition, we provide implementation and set up assistance services related to the SaaS solutions. Revenues related to these software services primarily consists 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 when the 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 prescription medications we dispense. For the three months ended September 30, 2020 and 2019, medication costs represented 80% of our total product costs. For the nine months ended September 30, 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, and technology expenses. Such costs also include direct overhead expenses, as well as allocated indirect overhead costs. We allocate indirect overhead costs among functions based on employee headcount.
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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, and expenses related to supporting our software platforms. Cost of service revenue also includes direct overhead expenses, as well as allocated indirect overhead costs. We allocate indirect overhead costs among functions based on employee headcount.
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, which include 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, stock-based compensation and employee benefits for sales and marketing . . .
Nov 06, 2020
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