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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement to be filed subsequently and delivered to stockholders in connection with the 2023 annual meeting of stockholders are incorporated herein by reference in response to Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year ended December 31, 2022.
TABLE OF CONTENTS
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of federal securities laws, including Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements that do not relate to historical or current facts are forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Many of these statements appear, in particular, under the headings Business and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 1 of Part I and Item 7 of Part II, respectively. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. The forward-looking statements in this Annual Report on Form 10-K include, among other things, statements about:
|●||our expectations regarding industry and market trends, including the expected growth and continued structural change and consolidation in the market for healthcare in the United States;|
|●||our expectations about the growth of Programs of All-Inclusive Care for the Elderly (“PACE”) organizations;|
|●||our expectations about private payers establishing their own at-risk programs;|
|●||the advantages of our solutions as compared to those of competitors;|
|●||our estimates about our financial performance;|
|●||the visibility into future cash flows from our business model;|
|●||our ability to reduce expenses as a result of our disposition of non-core businesses;|
|●||our growth strategy, including our ability to grow our client base;|
|●||our plans to further penetrate existing markets and enter new markets;|
|●||expectations of earnings, revenue, and other financial items;|
|●||plans, strategies, and objectives of management for future operations;|
|●||our ability to establish and maintain intellectual property rights;|
|●||our ability to retain and hire necessary associates and appropriately staff our operations;|
|●||future capital expenditures;|
|●||future economic conditions or performance;|
|●||our plans to pursue strategic acquisitions and partnerships;|
|●||our plans to expand and enhance our solutions; and|
|●||our estimates regarding capital requirements and needs for additional financing.|
These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to the risks and uncertainties listed below under “Risk Factors Summary” and further described under the heading “Risk Factors” in Part I, Item 1A of this Report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission.
Risk Factor Summary
The following is a summary of the risks and uncertainties that could materially adversely affect our financial condition, results of operations, cash flows, and competitive position.
Risks Relating to Our Business and Industry
|●||The continued evolution of the healthcare industry in the United States, or U.S.;|
|●||Our inability to continue offering innovative products and services;|
|●||The competitive nature of the medication management market;|
|●||Our historic significant net losses;|
|●||Our failure to effectively manage our future growth;|
|●||Our failure to continue to grow at the rates we’ve achieved historically or at all;|
|●||Our dependence on medication revenue from sales of prescription medications;|
|●||Our dependence on revenue from PACE organizations;|
|●||Consolidation in the healthcare industry;|
|●||Failure by PACE organization clients to meet applicable penetration benchmarks;|
|●||Dependence on the growth of our clients;|
|●||Our dependence on our ten largest clients and the loss of one or more of these clients or the reduction in demands or change in contract terms relating to one or more of these clients;|
|●||Our practice of billing our clients and recognizing revenue over the term of the contract;|
|●||Our potential inability to attract new clients;|
|●||Our inability to maintain and enhance our reputation and brand recognition;|
|●||Our failure to produce positive outcomes and cost reductions for our clients;|
|●||Our dependence on positive references from existing clients for marketing;|
|●||The unpredictability of our sales and implementation cycle;|
|●||Any failure to offer high-quality client support services;|
|●||The failure of our proprietary products and services to operate properly;|
|●||Adverse drug events that may arise as a result of recommendations made by our services;|
|●||Our dependence on a group purchasing organization;|
|●||The expiration of the EMTM Pilot Program;|
|●||Restrictions to license or share data and integrate third-party technologies;|
|●||Data loss or corruption due to failures or errors in our systems;|
|●||Our inability, or the inability of our third-party vendors, to safeguard the privacy of confidential data;|
|●||Our reliance on internet infrastructure, bandwidth providers, and third parties;|
|●||Our reliance on third-party vendors to host and maintain our technology platform;|
|●||The potential loss of one or more of our executive officers or key employees, an inability to attract and retain highly skilled employees, or the impact of recent departures of one or more of our executive officers or key employees;|
|●||The potential lack of additional capital to support business growth;|
|●||Adverse impacts due to changes in tax laws;|
|●||The potential that we could be subject to additional state and local taxation;|
|●||Risks associated with our review of potential strategic alternatives and potential divestitures;|
|●||The impact of activist shareholder activity, including on our strategic direction;|
|●||Potential litigation, investigations, or government proceedings and the impact on our business or management;|
|●||Risks associated with sales to clients outside the U.S. or clients with international operations; and|
|●||The impact of the COVID-19 pandemic and other public health crises.|
Risks Relating to Our Intellectual Property
|●||Our inability to obtain, maintain, and enforce intellectual property protection for our technology and products;|
|●||Our inability to adequately protect our trademarks, trade names, and domain names;|
|●||The potential that we could incur substantial costs as a result of any infringement claim;|
|●||Risks relating to our use of open source software;|
|●||Risks relating to intellectual property lawsuits and litigation; and|
|●||Our inability to protect the confidentiality of our trade secrets, know-how, and other proprietary information.|
Risks Relating to Industry Regulation and Other Legal Compliance Matters
|●||The uncertain and evolving nature of the healthcare regulatory and political framework;|
|●||Restrictions imposed by data privacy and security laws, regulations, and contractual obligations;|
|●||Costs associated with compliance with state and federal statutes and regulations relating to the healthcare industry;|
|●||Further modifications to the Medicare Part D program and changes in pricing benchmarks; and|
|●||Legislative or regulatory initiatives relating to climate change or other environment, social and governance (“ESG”) matters.|
Risks Relating to Our Common Stock
|●||The influence of executive officers, directors, and principal stockholders over all matters submitted to stockholders for approval;|
|●||Provisions of Delaware law that may discourage, delay, or prevent someone from acquiring us or merging with us;|
|●||Our exclusive forum provision;|
|●||The volatility of our common stock;|
|●||Our inability to implement effective internal control over financial reporting;|
|●||Our historic lack of cash dividends;|
|●||The potential limited ability to use net operating loss carryforwards (“NOLs”); and|
|●||Our stockholder rights plan could discourage a transaction that stockholders may find favorable.|
Risks Relating to Our Convertible Senior Subordinated Notes
|●||Our inability to generate cash flow required to pay our substantial debt;|
|●||Our potential to incur substantially more debt;|
|●||Our inability to settle conversions of the 2026 Convertible Notes;|
|●||The impact of the conditional conversion feature of the 2026 Convertible Notes on our financial condition;|
|●||The impact of the accounting method for convertible debt securities that may be settled in cash; and|
|●||Our entry into convertible note hedge and warrant transactions.|
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Unless the context requires otherwise, the terms the “Company,” “Tabula Rasa HealthCare,” “we,” “us,” and “our” mean Tabula Rasa HealthCare, Inc., a Delaware corporation, and its consolidated subsidiaries.
Websites Used in This Report
Website addresses referenced in this Annual Report on Form 10-K are provided for convenience only, and the content on the referenced websites does not constitute a part of, and shall not be deemed incorporated by reference into, this Annual Report on Form 10-K.
Trademarks Used in This Report
Trademarks or service marks owned by us, when first used in each item of this report, appear with an initial capital and are followed by the symbol ® or ™, as applicable. In subsequent uses of the marks in the item, the symbols may be omitted.
Tabula Rasa HealthCare, Inc. is a healthcare technology company advancing the safe use of medications by creating solutions designed to empower pharmacists, providers, and patients to optimize medication regimens. Our advanced proprietary technology, MedWise®, identifies causes of and risks for medication-related problems, including adverse drug events (“ADEs”), so that healthcare professionals can minimize harm and reduce medication-related risks. Our software and services help drive valued-based care by improving patient outcomes and lowering healthcare costs through reduced hospitalizations, emergency department visits, and healthcare utilization. Our vision and mission are supported by our experienced leadership team, our significant investments in our technology, services, and people, and partnerships with our healthcare clients including health plans and provider organizations to manage the most complex and vulnerable individuals.
We operate our business through two segments, CareVention HealthCare and MedWise HealthCare.
Our CareVention HealthCare segment provides our clients, primarily organizations with PACE, with medication fulfillment services, cloud-based software, pharmacy benefit management (“PBM”) solutions, and clinical pharmacist services at the point-of-care. PACE is a Centers for Medicare & Medicaid Services (“CMS”) sponsored program providing comprehensive medical and social services to adults aged 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, St. Paul’s PACE, and Welbe Health. We access the market through a number of different service lines and brands, including CareKinesis®, Capstone Risk Adjustment Services, CareVention Consulting™, PACElogic™, TruChart®, PeakTPA, PersonifilRx®, and Pharmastar®.
Our largest CareVention HealthCare revenue offering is our medication fulfillment services, which are built around our advanced proprietary MedWise technology, designed to enable clinicians to increase patient safety, create individualized medication regimens, promote adherence, and eliminate unnecessary prescriptions. Our medication fulfillment and adherence packaging services utilize MedWise 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, PBM solutions, cloud-based electronic health records solutions, and third-party administration services, which are all specifically tailored to the PACE market. Our CareVention HealthCare segment serves more than 150 healthcare organizations.
The CareVention HealthCare segment revenue model is primarily based on payments for charges and dispensing fees for medication fulfillment, payments on a per-member, per-month (“PMPM”) basis, payments on a subscription basis, and payments on a per claim basis.
Our MedWise HealthCare segment provides technology-enabled solutions to promote medication safety and adherence to improve patient outcomes and reduce healthcare costs. The technology-enabled solutions 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 medication safety review and clinical assessment completed.
As described further below under “Divestiture of Non-Core Businesses,” we completed the sale of our PrescribeWellness business in 2022 and completed the sales of our DoseMe and SinfoníaRx businesses in January and March 2023, respectively. These non-core businesses collectively comprised the majority of our MedWise HealthCare segment during 2022, with PrescribeWellness representing the most significant portion of this segment, and these
divestitures represented a strategic business shift having a significant effect on our Company’s operations and financial results.
Substantially all of our revenue is recognized in the U.S., and substantially all of our assets are located in the U.S.
Industry and Market
We believe demographic, legislative, and regulatory trends support our long-term growth targets. Our core market is the U.S. senior population, defined as individuals 65 years and older, which represent a large and growing segment within the U.S. as seniors are living longer with the current life expectancy in 2023 at 79.1 years according to the United Nations. According to the U.S. Census Bureau, the population of U.S. seniors is expected to grow to 73.1 million by 2030, up from 56.1 million in 2020, and to increase as a percentage of the population from 17% to 21% over the same period.
We believe there is a significant opportunity to scale our business by addressing the growing need to optimize medication regimens for seniors. An April 2020 report from the Lown Institute noted that polypharmacy (defined as the simultaneous use of five or more medications) has reached “epidemic proportions.” The Lown Institute also stated in that report that 40% of seniors 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.
Our solutions, as evidenced by a number of peer-reviewed publications, result in improved outcomes for the individual and a material reduction in the total cost of care for health plans. Medicare provides health insurance for individuals 65 and older and in 2021 Medicare spending totaled $829 billion. Medicare spending is expected to grow to $1.8 trillion in 2031 due to growing Medicare enrollment increased use of services and intensity of care, and rising healthcare costs.
From a legislative and regulatory perspective, we believe there are important drivers to support future growth including: the long-term transition to value-based care, led by CMS, which established a goal to reach 100% of Medicare beneficiaries in some type of value-based model by 2025; CMS Medicare Part C and Part D Star Ratings, which are published annually and measure the quality of health and drug services received by consumers; and a number of bills introduced in the U.S. House of Representatives and Senate focused on increasing the number of individuals that have access to PACE, our largest market today, including: the House and Senate including the Elizabeth Dole VA Home and Community Based Services for Veterans and Caregivers Act of 2022; the PACE Part D Choice Act; and the PACE Plus Act.
Our Growth Strategy
We continue to progress toward the long-term growth strategy that we articulated in early 2020. Continued achievement of this long-term growth is based on two key tenets:
|1)||Further penetration of the PACE market by:|
|a.||Leveraging our existing client base, which includes more than 80% of all PACE participants utilizing at least one of our solutions and cross-selling to increase our average revenue per participant;|
|b.||Organic member growth within our existing clients based upon (i) the growing number of individuals enrolling in Medicare and Medicaid, (ii) the evolution from the National PACE Association’s PACE 2.0 initiative to the PACE 200K project, which is designed to significantly increase enrollment to 200,000 by 2028, as compared to 63,606 as of December 2022 according to the National PACE Association, and (iii) the growing influence of for-profit PACE operators such as InnovAge and WelbeHealth; and|
|c.||Continued investments in our offerings to attract new PACE members and, more broadly, managed care organizations and at-risk provider groups with a focus on the more than 12 million dual-eligible beneficiaries.|
Our PACE clients had a combined patient census of 53,430, an increase of 7.4%, at the end of 2022, as compared to 49,769 and 44,947 patients at the end of 2021 and 2020, respectively. The 10.7% growth in patient census for 2021, as compared to 2020, benefited from inorganic growth from the October 2020 acquisition of Personica.
|2)||Accelerating the adoption of our MedWise software and clinical pharmacy programs by health plans across all lines of business, including Medicare Part C and Part D, Medicaid managed care, and commercial clients.|
Further Penetrate the Programs of All-Inclusive Care for the Older Adult Market
We believe that we are the market leader in providing medication risk management services to PACE, a CMS-sponsored program through which participating healthcare organizations provide fully integrated healthcare services on an at-risk basis for older adults, most of whom are dually eligible for Medicare and Medicaid. Our medication management, together with pharmacy fulfillment PACE clients, cover approximately 32% of the total PACE enrollees nationwide reported by the National PACE Association at the end of 2022, as compared to 30% at the end of 2021.
We have organized our PACE offerings under our CareVention HealthCare segment that offers a comprehensive set of solutions, including medication management services and fulfillment, PBM solutions, risk adjustment services, third-party administrator services, and electronic health records software. By organizing our sales and marketing resources, we have streamlined efforts to facilitate cross-selling and increase the adoption of our services.
We believe that we have a significant opportunity to continue to grow within the PACE market, and we expect our PACE clients to continue to grow organically to cover more eligible lives through expansion of existing sites and new PACE center locations. Based on recent industry data, there are 2.2 million PACE-eligible individuals in the U.S., which equates to a current penetration rate of approximately 3%. In 2023, the National PACE Association will launch its PACE 200K project with the goal of 200,000 participants by 2028.
Continue Expansion into the Payer and At-Risk Provider Markets
We believe that the growth of government healthcare programs and the shift to value-based care models are creating opportunities to capture growing portions of the expanding healthcare market. Accordingly, we are actively targeting at-risk, value-based markets, including managed care organizations, physician provider groups, and self-insured employer groups. We have recently started leveraging our CareVention HealthCare portfolio of services to secure contracts with a number of start-up Medicare Advantage plans and at-risk provider groups, and we expect to continue to further penetrate the broader Medicare and Medicaid market with our solutions
Continue to Innovate and Expand Platform Offerings to Meet Evolving Market Needs
We believe our strategic investments in human capital, technology, and services position us to continue to pursue rapid innovation and expand our medication risk management solutions and other platform offerings to the broader healthcare marketplace. For example, we developed the MedWise Risk Score™ (the “MRS”) and launched associated high-throughput medication risk stratification technology for identification of patients in need of clinical intervention.
Divestiture of Non-Core Businesses
In February 2022, we announced plans to evaluate non-core assets to refocus our corporate strategy and increase stockholder value, and we commenced an initial plan to sell the DoseMe business, which we acquired in January 2019. In March 2022, we completed our evaluation of additional divestiture opportunities and commenced plans to sell the SinfoníaRx and PrescribeWellness businesses, acquired in September 2017 and March 2019, respectively. As described further below, we completed our sales of the PrescribeWellness, DoseMe, and SinfoníaRx business in August 2022, January 2023, and March 2023, respectively. We determined that these businesses met the requirements to be classified as held for sale and discontinued operations as of March 31, 2022, and the DoseMe and SinfoníaRx businesses continued to meet such requirements as of December 31, 2022. Accordingly, the accompanying consolidated financial statements in this Annual Report on Form 10-K have been recast for all periods presented to reflect the assets, liabilities, revenue, and expenses related to these businesses as discontinued operations.
On August 1, 2022 (the “PW Sale Date”), we completed the sale of our unincorporated PrescribeWellness business division (the “PrescribeWellness Business”), and the assets, properties, and rights that were primarily used or held for use in connection with the PrescribeWellness Business, and the KD Assets (as defined below), to Transaction Data Systems, Inc. (“TDS”). On the PW Sale Date, we also completed the acquisition of certain intellectual property from karmadata, Inc. (“KD”), which had historically been licensed to us (the “KD Assets”). The KD Assets acquired were simultaneously transferred to TDS on the PW Sale Date. The purchase consideration included $125 million in cash, subject to certain customary post-closing adjustments, of which $118.6 million was paid directly to us and $5.9 million was paid to KD on the PW Sale Date. In October 2022, TDS also paid us $1.5 million for certain customary post-closing adjustments. We are also entitled to receive up to $15.0 million in contingent consideration based upon the PrescribeWellness Business’s achievement of certain performance-based metrics during the fiscal years ending December 31, 2023 and 2024.
On January 20, 2023, we entered into a Share and Asset Purchase Agreement to sell our unincorporated DoseMe business (the “DoseMe Business”), and the assets, properties, and rights that are primarily used or held for use in connection with the DoseMe Business. The purchase consideration included $2.0 million in cash, subject to certain customary post-closing adjustments, and a note receivable of $3.0 million with an annual interest rate of 7%, which matures on January 20, 2027.
On March 2, 2023, we entered into an Asset Purchase Agreement to sell our unincorporated SinfoníaRx business (the “SinfoníaRx Business”), and the assets, properties, and rights that are primarily used or held for use in connection with the SinfoníaRx Business. The purchase consideration included $1.4 million in cash, subject to certain customary post-closing adjustments, and a note receivable of $3.6 million with an annual interest rate of 3%, which matures on December 31, 2023. We may also be entitled to receive up to $1.0 million in contingent consideration based upon potential regulatory changes affecting the business.
We used the cash proceeds from the sale of the PrescribeWellness Business to pay off our line of credit with Western Alliance Bank (the “2020 Credit Facility”) and increase our liquidity. The remaining cash proceeds, along with cash proceeds received and promissory notes from the divestitures of the DoseMe and SinfoníaRx businesses, will provide our Company with the financial flexibility to optimize our capital structure, as well as to focus on our core value-based care business and our MedWise science, including our offerings targeted at the PACE market.
When the Company commenced plans to sell the PrescribeWellness, DoseMe, and SinfoníaRx businesses, these businesses collectively comprised the majority of our MedWise HealthCare segment, with PrescribeWellness representing the most significant portion of this segment. The disposition of these non-core businesses represents the completion of our previously-announced strategic business shift.
On September 13, 2022, we entered into a cooperation agreement (the “Cooperation Agreement”) with a significant stockholder, pursuant to which, among other matters, we agreed to effect certain changes to our management team and the composition of our Board of Directors (the “Board”) and implement certain corporate governance changes. In connection with the Cooperation Agreement, we also formed a Strategic Review Committee, which oversaw the Company’s strategic process relating to the sale of the non-core assets described above and continues to oversee management’s exploration of other strategic alternatives and value-creation opportunities with a view toward maximizing stockholder value. For further information regarding the Cooperation Agreement, refer to Note 21, “Related Party Transactions,” in the notes to the consolidated financial statements in this Annual Report on Form 10-K.
Our Software and Services
Our cloud-based software applications are designed to assist prescribers and pharmacists with patient engagement, identification, and prioritization of high-risk patients, clinical decision support, documentation of clinical interactions, ordering medications and lab tests, and care management.
Most of our personalized medication risk management services are based on our MedWise® Science. For each patient, MedWise Science incorporates personal medical history data, summarizes the aggregate risk of the patient’s medications based on proprietary algorithms, and provides patient-specific clinical alerts for risk, including cognitive impairment, sedation, heart rhythm problems, and unintentional overdose. MedWise results may be utilized by prescribers independently or analyzed by our pharmacists to optimize patient medication regimens. Elements of MedWise are currently available in EireneRx®, TruChart®, and PACElogic™.
EireneRx is our cloud-based medication decision-support and e-prescribing platform. It includes an order entry module used by healthcare organizations to access patient medication-related information and our personalized proprietary MedWise Science on demand. EireneRx provides a shared patient medication profile that enables client-clinicians and our pharmacists to collaborate on medication management in real time. EireneRx provides MedWise dashboards, as well as a secure instant messaging feature, through which our pharmacists and PACE clinicians can communicate. EireneRx is integrated with our prescription fulfillment pharmacies and is capable of transmitting prescriptions to community pharmacies in the U.S.
TruChart offers electronic health records (“EHR”), care coordination, and financial management in one program, allowing PACE programs to track measurable outcomes in defined timeframes for the populations they serve. Developed specifically for PACE, TruChart is a comprehensive, scalable, and secure technology solution that delivers PACE functionality. TruChart covers end-to-end functionality to manage care coordination, enrollments, authorizations, utilization management, scheduling, claims payment, interfaces, and reporting.
PACElogic delivers neatly organized, real-time shareable workflows covering all aspects of operations for PACE organizations and other small health plans. Capable of integrating with any EHR, PACElogic also delivers value as a robust, stand-alone solution. PACElogic offers an array of best-of-breed features, including EHR, customer relationship management, claims adjudication, electronic data interchange, care management, coordination and planning, integration with community-based providers, and all federal and state required reporting. PACElogic brings clinical and non-clinical data together into a unified health plan management system.
Our clinical pharmacist collaboration service, prescription fulfillment, and adherence packaging service, health plan management services, including risk adjustment and third-party administrator services, and pharmacy benefit management services are designed to improve patient experiences and outcomes and contain costs. The revenue models under these service contracts typically include a fee assessed for each medication review, payments on a PMPM basis, payments on a subscription basis, and charges and dispensing fees for medication fulfillment.
Clinical Pharmacist Collaboration
We have teams of clinical pharmacists dedicated to performing medication safety reviews (the “MSRs”). These interventions include one-on-one consultations with patients, as well as communications with prescribers. Clinical pharmacist recommendations can include guidance based on the clinical application of pharmacogenomic test results, assessment of the MedWise findings and of patient medical history, and optimization of medication regimens. Our clinical pharmacists provide these personalized medication recommendations through real-time digital and verbal communications. We provide clinical decision support, medication safety recommendations, and adherence support for patients nationwide.
Prescription Fulfillment and Adherence Packaging
We operate four prescription fulfillment pharmacies strategically located to efficiently distribute medications nationwide. Informed by each patient’s personalized MedWise Matrix, we package medications, synchronize fills, and aggregate doses by day and time-of-day. These measures increase the ease of adherence by patients to their optimized
medication regimens. Using robotic dispensing machines, our scalable, high-performance systems allow for an array of medication packaging options that include multi-dose, deep-well cards and multi-dose pouches.
Health Plan Management
Our health plan management services include risk adjustment services through our Capstone Risk Adjustment Services offerings and third-party administration services through our PeakTPA service offerings.
Long-term optimization of risk adjustment outcomes is complex and, for many organizations, significantly affects financial performance. We take a prospective approach to risk adjustment beyond the typical strategy of providing retrospective reviews and claims data analysis. We specialize in helping clients optimize processes and systems to capture timely, complete, and accurate data. Through these services, we help PACE and other healthcare organizations remain compliant with regulations, make reliable comparisons to internal and external benchmarks and identify high-volume/high-cost issues for quality program initiatives.
We provide third-party administrator services that optimize health plans’ financial management functions and fulfill regulatory requirements. Our expertise in health plan management, particularly in PACE, enables our clients to focus on delivering high-quality care to their members. Our services include enrollment management, accounts receivable, claims adjudication, risk adjustment data submission, encounter data processing and submission, and Medicare Part D data submission.
Pharmacy Benefit Management Solutions
We provide PBM solutions to PACE and commercial organizations. These capabilities cover a broad range of administrative and clinical functions, including: claims processing, rebate administration and direct and indirect renumeration reporting, drug utilization review programs, prescription drug event management, compliance and audit risk, plan-to-plan management, annual Medicare Part D bids, coordination of benefits, true out-of-pocket cost support, and government and state-level reporting.
Our clients are typically at-risk healthcare organizations, primarily PACE organizations, managed-care organizations, government and commercial health plans, and other provider groups. We have strong and long-standing relationships with our clients, in many cases providing services under multi-year contracts. As of December 31, 2022, our largest segment, our CareVention HealthCare segment, served more than 150 healthcare organizations, predominantly PACE organizations.
PACE, a federal and state collaboration, is one of only three established models serving the more than 12 million dual-eligible patient population in the U.S. and focuses on preventing institutional-based placement. PACE embodies many of the characteristics and trends affecting the healthcare industry as a whole: specifically, value-based payment models and the desire for seniors to age in place. We believe we are the market-leader in providing medication risk management technology and services to PACE organizations, which are responsible for individuals who typically have complex medication regimens. Our PACE clients utilizing our medication risk management and pharmacy fulfillment services covered approximately 32% of the total PACE enrollees nationwide at the end of 2022. In addition, we also provide a suite of complementary solutions to assist PACE organizations with clinical, financial, and administrative operations.
Managed Care Organizations
According to CMS, at the end of 2022, 53.0 million Americans were enrolled in Medicare Part C (i.e., Medicare Advantage) and Part D (Prescription Drug Plan or PDP), a 3.0% increase as compared to the end of 2021, driven by growth in Medicare Advantage. In the past decade, the number of beneficiaries enrolled in Medicare Advantage (“MA”) plans has more than doubled to 29.6 million in 2022. MA enrollment increased 8.4% in 2022 and total enrollment is expected to grow to more than 40 million by 2030. The Congressional Budget Office projects that MA will increase to nearly 51% of total Medicare enrollment or more than 80 million Americans by 2030. According to
Medicaid.gov, there were 47.6 million adult lives covered under Medicaid as of October 2022, which represents an increase of 3.4 million lives since the end of 2021. According to the Kaiser Family Foundation, 156.2 million Americans, or 49% of the country’s total population, are covered under employer-sponsored health insurance. Many of the health plans with which we currently contract have multiple lines of business spanning Medicare, Medicaid, and the self-funded employer market. We currently provide a range of clinical programs, including MSRs, to these markets. We believe our solutions are broadly applicable throughout the managed care landscape, including to self-funded employer groups.
At-Risk Provider Groups
We contract with at-risk provider groups across the country to provide risk adjustment services, care transition support, and comprehensive medication management services. With respect to our comprehensive medication management services, we risk-stratify patient cohorts for these groups and identify patients at risk for medication problems. We then collaborate with these groups on interventions to mitigate that risk. These interventions are performed by our clinical teams, or in some cases, by employees of the at-risk provider who we have trained and certified.
We create, own, and maintain various intellectual property assets that, in the aggregate, are of material importance to our business. Our intellectual property assets include: six issued patents and nineteen pending patent applications related to our innovations, products, and services; trademarks related to our brands, products, and services; copyrights in software, documentation, content, and databases; and trade secrets relating to data processing, statistical methodologies, data security, and other aspects of our business. We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed on a nonexclusive basis to use certain technology and other intellectual property rights owned and controlled by us.
We rely on patent, copyright, trademark, and trade secret laws, as well as confidentiality agreements, licenses, and other agreements with employees, consultants, vendors, and clients to protect our intellectual property. We also seek to control access to and distribution of our proprietary software, confidential information and know-how, technology, and other intellectual property. We have seven issued patents: (i) U.S. Pat. No. 8,392,220, entitled “Medication Management System and Method” and issued on March 5, 2013; (ii) U.S. Pat. No. 10,720,241, entitled “Medication Risk Mitigation System and Method” and issued on July 21, 2020; (iii) U.S. Pat. No. 10,890,577, entitled “Treatment Methods Having Reduced Drug-Related Toxicity and Methods of Identifying the Likelihood of Patient Harm from Prescribed Medications” and issued on January 12, 2021; (iv) Japanese Pat. 7042256, entitled “Methods of Treatment Having Reduced Drug-Related Toxicity and Methods of Identifying the Likelihood of Patient Harm Arising from Prescribed Medications” and issued on March 16, 2022, (v) Mexico Pat. 389003, entitled “Methods of Treatment Having Reduced Drug-Related Toxicity and Methods of Identifying the Likelihood of Patient Harm Arising from Prescribed Medications” and issued on January 3, 2022 and (vi) Chinese Pat. 110022908, entitled “Methods of Treatment Having Reduced Drug-Related Toxicity and Methods of Identifying the Likelihood of Patient Harm Arising from Prescribed Medications” and issued on April 5, 2022 and (vii) U.S. Pat. 11,361,856, entitled “Population-based Medication Risk Stratification and Personalized Medication Risk Score” and issued on June 14, 2022 . We also have six non-provisional patent applications pending in the United States, comprising: (i) Application No. 15/008,555, filed on January 28, 2016 and relating to a medication risk mitigation matrix system, (ii) Application No. 16/928,557, filed on July 14, 2020, and relating to medication risk mitigation matrix systems and methods, (iii) Application No. 17/143,936, filed on January 7, 2021, relates to treatment methods having reduced drug-related toxicity and methods for identifying patient harm. This application also has related foreign counterpart pending applications in Canada, Hong Kong, Mexico, and Europe. Application No. 16/760,631, filed on April 30, 2020, relates to population-based medication risk stratification. This application also has related foreign counterpart applications in Canada, Europe, Hong Kong, and Singapore. Application No. 16/870,517, filed on May 8, 2020, is related to population-based medication risk stratification. We have pending application No. 17/837,841, filed on June 10, 2022 and entitled “Population-based Medication Risk Stratification and Personalized Medication Risk Score”. We have a pending PCT application no. PCT/US2021/057063, entitled “System and Method of Processing Pharmaceutical Substance Data” and filed October 28, 2021. We also have a pending design patent application, Application No. 29/746,708835,609, filed on April 20, 2022 related to a novel graphical user interface. We own copyright registrations in connection with the following software: EireneRx, PACElogic, CaseLogic, Mobile Workforce Manager, and Enterprise Services.
We own and use trademarks in connection with products and services, including both unregistered common law marks and issued trademark registrations in the U.S. Our material trademarks, service marks, and other marks include: EireneRx®, Carekinesis®, Medication Risk Mitigation by CareKinesis®, MedWise®, MedWise Advisor®, MedWise Risk ScoreTM, NiaRx®, CareVentions®, Tabula Rasa HealthCare®, Medliance®, Medication Risk MitigationTM, Medication Risk Mitigation MatrixTM, Peak PACE SolutionsTM, Mediture®, TruChart®, CognifyTM, PACElogicTM, PersonifilRx®, Personifil®, and Pharmastar®.
Our Competitive Landscape
We compete with a broad and diverse set of businesses. We believe that the competitive landscape is highly fragmented with no single competitor offering our novel, multi-drug interaction software and similarly expansive capabilities and solution offerings. Our competitive advantage is largely based on our proprietary multi-drug interaction software, healthcare industry expertise, breadth and depth of services, intellectual property, including six patents issued or pending, ease of use, reputation, innovation, security, price, reliability, and client service. Our multi-drug interaction software has been developed over the course of three decades. A competitive challenge is to demonstrate to our existing and potential clients the value of utilizing our platforms rather than developing or assembling their own alternative capabilities or utilizing providers who offer a subset of our services. However, we believe that the combination of our competitive strengths and successful culture of innovation, including the real-world-tested nature of our solutions and subject matter expertise of our team members, makes it time- and cost-prohibitive for our clients or competitors to replace or replicate all that we offer.
Current industry participants that offer medication risk management services include large and small healthcare data analytics and consulting companies, community and long-term care pharmacies, national pharmacy providers, health plans, genomic testing labs, and healthcare information technology companies. Many of our competitors’ solutions are regulatory-driven, retrospective in nature, and offer no intervention at the point of care. The services offered by these organizations may include e-prescribing and EHRs utilizing antiquated drug interaction analysis, lab-based genomic evaluation, basic risk stratification solutions, and other traditional approaches to MTM. Many health plans attempt to address non-adherence solely through outreach efforts, which often require in-house or third-party consultants and have low success rates. Many genomic testing labs lack the ability to apply patient test results in a useful way at the point of care. Post-acute providers typically employ pharmacist consultants to review prescription regimens every 30 days, which is retrospective in nature and generally less effective in improving patient outcomes. Furthermore, typical prescription fulfillment models are reimbursed on a fee-for-service basis and are incentivized based on prescription dispensing volumes. Our clients partner with us to mitigate and prevent medication problems, lower healthcare costs, and improve overall health outcomes, which often involve utilizing our software to optimize prescription regimens.
While we believe that no competitor provides a similar breadth and depth of solutions, we nevertheless compete with other companies’ specific products or solutions and markets or care settings. For example, traditional, single drug-to-drug interaction databases are provided by Wolters Kluwer, Elsevier, and Hearst Health. Additional competitors across both of our major market segments include our health plan clients that opt to in-source clinical programs (such as MTM), as well as external vendors such as Cardinal Health, Adhere Health, RxAnte, Cureatr, Aspen RxHealth, Clarest Health, Pack4U, and MedWatchers. We expect that competition will continue to increase as a result of consolidation in both the information technology and healthcare industries. The continued growth in healthcare spending, the ongoing shift to value-based payment models, such as PACE and Medicare Advantage, and changes in government regulation may draw increasing attention and generate new competitors, such as management consultants, traditional technology companies, and start-ups that may enter the market.
We operate in a highly regulated industry and our business operations must comply with a number of complex and evolving federal and state agency requirements. While we believe we comply in all material respects with applicable healthcare laws and regulations, these laws can vary significantly from jurisdiction to jurisdiction, and the state and federal interpretation of existing laws and regulations, and their enforcement, may change from time to time. Additionally, a state or federal government enforcement body may disagree that we are in material compliance with applicable healthcare laws and regulations. Federal and state legislatures also may enact various legislative proposals that could materially impact certain aspects of our business.
To date, there has been no material adverse effect to our consolidated financial statements or competitive positions as a result of these government regulations. Refer to “Risks Related to Industry Regulation and Other Legal Compliance Matters” in the “Risk Factors” section included in Item 1A. of Part I of this Annual Report on Form 10-K for further discussion of the potential impacts of government regulation on our business.
A non-exhaustive list of federal and state statutes, regulations, sub-regulatory guidance, and contractual provisions that may apply to our business activities includes:
In 2010, Congress passed major health reform legislation, mostly through the Affordable Care Act (“ACA”). Generally, the ACA was designed to expand coverage for the uninsured while containing overall healthcare costs. Following passage, the U.S. government has issued numerous rules and regulations to implement the provisions of the ACA. While not all of these rules, regulations, and reforms affect our business directly, many continue to affect the coverage and plan designs that are or will be provided by many of our clients.
The Biden administration and the United States Congress are considering a number of legislative and regulatory proposals that could, if passed into law, impact the healthcare system, the ACA, and/or the Medicare and Medicaid programs. Congress is considering legislation to increase the number of individuals covered by the Medicare or Medicaid programs, reduce prescription drug costs, increase price transparency for consumers, restrict the sale of certain classes of drugs, and reform medication management practices. While not all of the potential legislation, if enacted, would affect our business directly, much of it could indirectly impact some or many of our business arrangements, if not directly. In addition, regulatory agencies have separately implemented price transparency rules for hospitals and insurers that, while not impacting our business directly, could change the way we interact with these entities. Given that legislative and regulatory change is still being formulated, we cannot predict with any certainty the outcome of any future legislation or regulation.
There has been a trend in federal and state legislation aimed at lowering costs for drug products, including by requiring pharmaceutical companies to disclose information about their pricing and production and marketing costs, and heightened governmental scrutiny over the manner in which pharmaceutical manufacturers set prices for their marketed products. There have been several presidential executive orders and U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. For example, on October 10, 2018 the Patient Right to Know Drug Prices Act (for private plans) and the Know the Lowest Price Act (for Medicare Parts C and D) were signed into law, which prohibited health plans from restricting pharmacies from informing individuals regarding prices for certain drugs.
On August 15, 2022, the Inflation Reduction Act of 2022 was signed into law by President Biden. This legislation is intended to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government. The prescription drug provisions included in the Inflation Reduction Act will require the federal government to negotiate prices for some drugs covered under Medicare Part B and Part D with the highest total spending, beginning in 2026, and require drug companies to pay rebates to Medicare if prices rise faster than inflation for drugs used by Medicare beneficiaries, beginning in 2023. We are unable at this time to assess any impact this legislation may have on our business.
Our partnership with PACE organizations is a significant source of our current revenue stream. The PACE program is a unique, comprehensive managed care benefit for older adults, most of whom are dually eligible for Medicare and Medicaid benefits, provided by a not-for-profit or public entity. The PACE program features a comprehensive medical and social service delivery system using an interdisciplinary team approach in an adult day health center that is supplemented by in-home and referral services in accordance with participants’ needs. Financing for the program is capped, which allows providers to deliver all needed services rather than only those reimbursable under Medicare and Medicaid fee-for-service plans. PACE is a program under Medicare, and states can elect to provide PACE services to Medicaid program beneficiaries as an optional Medicaid benefit. The PACE program becomes the sole
source of Medicaid and Medicare benefits for PACE participants. According to the National PACE Association, as of January 2023, there are 149 PACE programs operating in 32 states.
HIPAA Healthcare Fraud Provisions
In addition to privacy protections, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created and expanded federal criminal statutes regarding fraud. Specifically, the HIPAA healthcare fraud statute prohibits, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, or to obtain by false or fraudulent pretenses any of the money or property owned by a healthcare benefit program, knowingly and willfully embezzling or stealing from a healthcare benefit program, and willfully obstructing a criminal investigation of a healthcare offense. The HIPAA healthcare fraud statutes also prohibit, among other things, concealing a material fact or making a materially false statement in connection with the delivery of or payment for healthcare benefits, items, or services. The ACA amended the intent standard for certain healthcare fraud statutes under HIPAA, like the federal Anti-Kickback Statute (“AKS”), such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Noncompliance with the AKS can result in exclusion from the Medicare, Medicaid or other governmental programs and civil and criminal penalties.
The AKS is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. To create better clarity, the Office of the Inspector General (“OIG”) of the U.S. Department of Health and Human Services (“HHS”) has issued regulations as "safe harbor" guidelines which if met in form and substance, will assure healthcare providers that they will not be prosecuted for violation of the Anti-kickback Statute. The OIG issued a final rule on November 20, 2020, as part of the Regulatory Sprint to Coordinated Care initiative by HHS that, among other things, established new "safe harbors" under the AKS for certain value-based compensation arrangements. Although full compliance with these provisions ensures against prosecution under the AKS, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the AKS will be pursued.
State and Federal Data Privacy and Security Laws
We process, collect, use, and disclose individual patient data directly or for our clients and, therefore, we are subject to various laws protecting privacy and security of that patient information. Certain businesses of our company qualify as a “Covered Entity” under HIPAA, and others qualify as a “Business Associate” to our partners who are Covered Entities. We are required to comply with HIPAA and the Health Information Technology for Economic and Clinical Health (“HITECH”) Act as implemented through regulations promulgated thereunder by HHS, which include the HIPAA Omnibus Final Rule, the HIPAA Privacy Rule and the HIPAA Security Rule. HIPAA generally requires Covered Entities and their Business Associates (each as defined therein) to adopt certain safeguards to ensure the privacy and security of protected health information, or PHI, and to limit uses and disclosures of such PHI to those permissible under the law. When Covered Entities utilize Business Associates to provide services, pursuant to which the Business Associate may access the Covered Entity’s PHI, the parties must enter into a Business Associate Agreement through which the Business Associate must contractually agree to safeguard PHI in certain ways and to notify the Covered Entity of improper uses or disclosures of PHI.
Covered Entities and Business Associates are required to have written policies and procedures addressing HIPAA compliance and must designate a Security Officer to oversee the development and implementation of the policies and procedures related to the safeguards to protect privacy of electronic PHI. Covered Entities must also designate a Privacy Officer (as defined in HIPAA), although the Privacy Officer and the Security Officer may be the same person. As part of their security policies and procedures, Covered Entities and Business Associates are required to conduct periodic risk assessments to identify vulnerabilities to electronic PHI. Additionally, Covered Entities and Business Associates are required to train all employees on their HIPAA policies and procedures. Further, in the event of a breach of PHI as defined by HIPAA, Covered Entities must notify affected individuals, HHS, and sometimes the media, and must take steps to mitigate damage, and they may be subject to fines and penalties. HIPAA violations can result in significant civil monetary penalties and/or imprisonment for up to ten years depending on the facts surrounding the violation.
Many states also have similar data privacy and security laws that track federal requirements or impose different and/or more stringent conditions for use and disclosure of PHI. Failure to comply with these laws may also result in the imposition of significant civil and/or criminal penalties. The California Consumer Privacy Act of 2018 (the “CCPA”) imposes rules governing how businesses handle personal data of California residents. Companies that do business in California are, as of January 1, 2020, required to disclose the types of data they collect, the purpose for the data collection, and how the data will be used and to expand organizational responsibilities pertaining to individual rights, accountability, and governance. In November 2020, California voters passed the California Privacy Rights and Enforcement Act of 2020 (“CPRA”), which was effective on January 1, 2023. The CPRA expands the CCPA and establishes a California regulatory agency dedicated to enforcing data privacy compliance requirements. Other states are considering legislation similar to the CCPA and the CPRA, which could expand our data protection obligations.
Federal and State Oversight of Medical Devices, Genomic Testing, Drugs, and Controlled Substances
Some technologies and software applications used in connection with healthcare analytics and genomic testing and analysis are considered medical devices and are subject to regulation by the Food and Drug Administration (the “FDA”). The 21st Century Cures Act (Pub. L. 114-255) (“Cures Act”), enacted in December 2016, included certain changes to the Federal Food, Drug, and Cosmetic Act to exempt certain medical-related software from FDA regulation. In December 2017, the FDA issued a draft guidance document describing the FDA’s proposed interpretation of the exemption under the Cures Act for clinical decision support, (“CDS”), software. The FDA issued the final version of this CDS software guidance document in September 2022, which represents a more conservative interpretation of the CDS software exemption under the Cures Act. The 2022 final guidance also does not include any policies of enforcement discretion. Although we believe that our technologies and software are not subject to active FDA regulation, there is a risk that the FDA could disagree. If the FDA determines that any of our current or future services, technologies, or software applications are regulated by the FDA as medical devices, we would become subject to various statutes, regulations, and policies enforced by the FDA and other governmental authorities, including both pre-market and post-market requirements, and we would need to ensure that the affected services, technologies, and/or software comply with such requirements. The FDA could also require that we cease marketing and/or recall the affected services, technologies, and/or software unless and until they comply with the FDA’s requirements.
Clinical laboratories that perform human genomic testing are subject to oversight by CMS and state regulators. The laboratories that we contract with for genomic testing must comply with federal and state laws and regulations applicable to clinical laboratories and genomic testing, including the Clinical Laboratory Improvement Amendments and the Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”). To date, there have been no regulations implementing EKRA proposed by the Department of Justice.
The Drug Enforcement Administration (“DEA”), the FDA, and state regulators, such as state boards of pharmacy, regulate drug and controlled substance packaging, repackaging, purchasing, handling, storage, distribution, security, and dispensing activities. Our prescription fulfillment pharmacies must comply with the applicable FDA, DEA, and state statutes, regulations, and policies. In addition, our prescription fulfillment pharmacies may be subject to periodic audits by the FDA, the DEA, and state regulators to assess our compliance with these requirements.
Noncompliance with applicable federal or state requirements, as described above, can result in an enforcement action that could substantially harm our business.
The federal AKS makes it unlawful for individuals or entities, among other things, to knowingly and willfully solicit, offer, receive, or pay any kickback, bribe, or other remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in exchange for or to induce or reward the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a federal healthcare program, or the purchase, lease, or order, or arranging for or recommending purchasing, leasing, or ordering, of any good, facility, service, or item for which payment may be made in whole or in part under a federal healthcare program. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment, and possible exclusion from federal healthcare programs.
The AKS is applicable to us as operators of specialty pharmacies, contractors to health plans and providers, and contractors to various federal healthcare program payers. When our compensation arrangements implicate the AKS, we evaluate whether we believe they fall within one of the safe harbors. If not, we consider the factors to identify the intent behind such arrangements and the relative risk of fraud and abuse. We also design business models that seek to reduce the risk that any such arrangements might be viewed as abusive and trigger AKS scrutiny or claims.
In addition to the federal AKS, many states have anti-kickback prohibitions that may apply to arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers.
Federal and State Self-Referral Laws
The Stark Law prohibits a physician who has a financial relationship, or who has an immediate family member who has a financial relationship, with entities providing designated health services, or DHS, from referring Medicare and Medicaid patients to such entities for the furnishing of DHS, unless an exception applies. The Stark Law also prohibits the entity from billing for any such prohibited referral. Unlike the AKS, the Stark Law is violated if the financial arrangement does not meet an applicable exception, regardless of any intent by the parties to induce or reward referrals or the reasons for the financial relationship and the referral.
We evaluate when these physician (or immediate family member) financial arrangements are created to ensure we do not enter into a prohibited financial relationship and design structures that satisfy exceptions under the Stark Law.
Our business may implicate federal and state physician self-referral laws to the extent our pharmacy, a designated health services entity, has financial arrangements in the form of ownership, investment, or compensation with referring physicians or a referring physician’s immediate family member. Our pharmacy may have compensation arrangements with physicians who serve on its Clinical Advisory Panel and who order designated health services for patients enrolled in a PACE program. If any such compensation arrangements exist, we believe such compensation arrangements fall within an exception to the physician self-referral prohibition.
A number of states have statutes and regulations that prohibit the same general types of conduct as those prohibited by the Stark Law, but some have even broader applications, extending beyond Medicare and Medicaid programs and including commercial and self-payers.
Federal and State False Claims Acts
The federal false claims and civil monetary penalties laws, including the civil False Claims Act, impose criminal and civil liability on individuals and entities that, among other things, knowingly submit, or cause to be submitted, false or fraudulent claims for payment to the federal government or knowingly make, or cause to be made, a false statement in order to have a false claim paid. The civil False Claims Act provides for treble damages and mandatory and significant minimum penalties per false claim or statement ($13,507 to $27,018 per false claim). The qui tam or whistleblower provisions of the civil False Claims Act permit a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. Our future activities relating to the manner in which we sell and market our services may be subject to scrutiny under these laws. False Claims Act qui tam lawsuits in healthcare are common, although the government often declines to pursue such actions following investigation. Analogous state false claims laws also may apply to our sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers.
Other State Laws
The vast majority of, if not all, states have laws regulating licensure, registration and certification of pharmacies, pharmacists, pharmacy technicians, other pharmacy personnel, and health insurance administrators. We are licensed in all states that require such licensure in which we do business and believe that we substantially comply with all state licensing laws applicable to our business. Where required by law, we also have pharmacists licensed in all states in which we dispense. If we violate state pharmacy licensure laws or engage in conduct prohibited under our license, we could be subject to enforcement action, including but not limited to, suspension or loss of such pharmacy license.
The DEA, as well as some similar state agencies, requires our pharmacy locations to individually register in order to handle controlled substances, including prescription pharmaceuticals. Federal and various state laws also regulate specific labeling, reporting, and record-keeping related to controlled substances. We maintain DEA registrations for each of our facilities that require such registration and follow procedures intended to comply with all applicable federal and state requirements regarding dispensing controlled substances.
Our success is built upon our dedicated and passionate employees who strive to transform the communities we serve by delivering excellent service, utilizing advanced technology, and delivering results. We believe that our success is largely dependent upon our ability to attract and retain qualified employees. We are focused on recruiting a diverse talent pool, promoting leadership development and performance management, and maintaining positive relations with our employees. As of December 31, 2022, we had 1,027 employees. None of our employees are represented by labor unions or subject to collective bargaining agreements and substantially all of our employees currently work in the United States. We believe that we have been successful to date in attracting skilled and experienced professionals.
Diversity & Inclusion
We continue to focus on building a high performing organization with an engaging work culture and have established initiatives to support this strategic priority. We embrace differences, diversity, and varying perspectives among our employee base, and we are an equal opportunity employer. We have a zero-tolerance policy regarding any type of harassment and discrimination. We believe in respecting every employee and expect our staff to show respect for everyone.
We believe that our company culture relies on collaboration and input from multiple perspectives. We also believe that building upon our diversity, equity, and inclusion (“DEI”) initiatives is key to engaging in responsible business practices. Our DEI committee provides training for all of our employees, and we offer employee resource groups. As of December 31, 2022, 68% of our employees and 56% of our managers self-identified as female. Moreover, as of December 31, 2022, 55% of our Board self-identified as diverse.
We strongly believe that our success depends, in part, on open and regular communication with employees to help foster a high-performing and engaged workforce. We use a variety of channels to facilitate open and direct communication to help ensure that employees fully understand the Company’s long-term strategy, annual goals, and how their work contributes to the Company’s success.
We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports with the SEC. You may obtain copies of these documents by accessing the SEC’s website at www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of these documents available to the public, free of charge, through our website. Our website address is www.trhc.com.
For required financial information related to our operations, please refer to our consolidated financial statements, including the notes thereto, included with this Annual Report on Form 10-K.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this Annual Report on Form 10-K, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes. We cannot assure you that any of the events discussed in the risk factors below will not occur. The occurrence of any of the events or developments described below could have a material and adverse impact on our business, results of operations, financial condition, cash flows and future prospects and, if any such event were to happen, our future prospects could be materially and adversely affected. If any of such events were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks described below represent the material risks known to us at the time of this filing. These risks are not the only ones that we may face, and additional risks or uncertainties not known to us or that we currently deem immaterial may also impair our business and future prospects. Please also refer to “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.
Risks Relating to Our Business and Industry
The healthcare industry in the U.S. is rapidly evolving, which makes it difficult to forecast demand for our technology-enabled products and services. If we are not successful in promoting the benefits of our products and services, our growth may be limited.
The healthcare industry in the U.S. is rapidly evolving. We believe demand for our products and services has been driven in large part by price pressure in traditional fee-for-service healthcare, a regulatory environment that is incentivizing value-based care models, the movement toward patient-centricity and personalized healthcare and advances in technology. Widespread acceptance of the value-based care model is critical to our future growth and success. A reduction in the growth of value-based care or patient-centric models could reduce the demand for our products and services and result in a lower revenue growth rate or decreased revenue.
It is uncertain whether the market for technology-enabled healthcare products and services will achieve and sustain high levels of demand and market adoption. Our future financial performance will depend in part on growth in this market and on our ability to adapt to the emerging demands of our clients. It is difficult to predict the future growth rate and size of our target markets. If the estimates and assumptions we use to determine the size of our target markets are inaccurate, our future growth rate may be impacted.
Our success depends to a substantial extent on the willingness of healthcare organizations to increase their use of our technology and our ability to demonstrate the value of our technology to our existing clients and potential clients. If healthcare organizations do not recognize or acknowledge the benefits of our products and services or if we are unable to continue to reduce healthcare costs and drive positive health outcomes, then the market for our products and services might not develop at all, or it might develop more slowly than we expect.
If we are unable to offer innovative products and services or our products and services fail to keep pace with our clients’ needs, our clients may terminate or fail to renew their agreements with us, and our revenue and results of operations may suffer.
Our success depends on providing innovative, high-quality products and services that healthcare providers and payers use to improve clinical, financial, and operational performance. If we cannot adapt to rapidly evolving industry standards, technology, and increasingly sophisticated and varied client needs, our existing technology could become undesirable, obsolete, or harm our reputation. In order to remain competitive, we must continue to invest significant resources in our personnel and technology in a timely and cost-effective manner to enhance our existing products and services and introduce new high-quality products and services that existing clients and potential new clients will want. We are continuously involved in a number of projects to develop new products and services, including the further expansion and refinement of our proprietary MedWise offerings. If our innovations are not responsive to the needs of our existing clients or potential new clients, are not appropriately timed with market opportunity, are not effectively brought to market, or are a significant increase to our operating costs, we may lose existing clients or be unable to obtain new clients and our results of operations may suffer. In addition, the introduction of new solutions by competitors, the emergence of new industry standards, or the development of entirely new technologies to replace existing offerings could render our existing or future solutions obsolete.
The medication management market is highly competitive, and we may be unable to compete successfully against new entrants and established companies with greater resources and/or existing business relationships with our current and potential customers.
The medication management market is intensely competitive. We expect continued and increased competition from current and future competitors, many of which have significantly greater financial, technical, marketing, and other resources than we do. The competitive challenges we face in the medication management market include, but are not limited to, the following:
|●||certain competitors may offer or have the ability to offer a broader range of solutions in the marketplace that we are unable to match;|
|●||certain competitors may develop alternative solutions to the customer problems our products are designed to solve that may provide a better customer outcome or a lower cost of operation;|
|●||certain competitors may develop new features or capabilities for their products not previously offered that could compete directly with our products;|
|●||competitive pressures could result in increased price competition for our products and services, fewer customer orders, and reduced gross margins, any of which could harm our business;|
|●||current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, including larger, more established healthcare supply companies, thereby increasing their ability to develop and offer a broader suite of products and services to address the needs of our prospective customers;|
|●||our competitive environment has recently experienced a significant degree of consolidation, which could lead to competitors developing new business models that require us to adapt how we market, sell, or distribute our products;|
|●||other established or emerging companies may enter the medication management and supply chain solutions market, or the medication adherence market, with products and services that are preferred by our current and potential customers based on factors such as features, capabilities, or cost;|
|●||our competitors may develop, license, or incorporate new or emerging technologies or devote greater resources to the development, promotion, and sale of their products and services than we do;|
|●||certain competitors have greater brand name recognition and a more extensive installed base of medication and supply dispensing systems or other products and services than we do, and such advantages could be used to increase their market share;|
|●||certain competitors may have existing business relationships with our current and potential customers, which may cause these customers to purchase medication and supply dispensing systems or automation solutions from these competitors; and|
|●||our competitors may secure products and services from suppliers on more favorable terms or secure exclusive arrangements with suppliers or buyers that may impede the sales of our products and services.|
We have incurred significant net losses and we may not be able to generate net income in the future, and may have difficulty obtaining financing on favorable terms, or at all.
We have incurred net losses since our inception. As of December 31, 2022, we had an accumulated deficit of $407.9 million. Substantially all of our operating losses resulted from $159.3 million of stock-based compensation expense, $119.2 million amortization of acquired intangibles, $61.9 million of impairment charges primarily related to
our long-lived assets, goodwill and operating lease right-of-use assets, $51.8 million of change in fair value of contingent consideration expense and receivable, a $6.4 million loss on extinguishment of debt, and a $2.9 million loss related to the sale of the PrescribeWellness Business. Our ability to generate net income is dependent upon, among other things, the acceptance of our products and services by, and the strength of, our existing and potential clients. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We are unable to accurately predict when, or if, we will be able to achieve profitability. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. If we are not able to achieve or maintain positive cash flow in the long term, we may require additional financing, which may not be available on favorable terms or at all and/or which may be dilutive to our stockholders. If we are unable to achieve or maintain profitability or positive cash flow, the value of our common stock could be negatively impacted.
If we fail to effectively manage our growth, our business and results of operations could be harmed.
We have expanded our operations significantly since our inception. For example, we grew from 241 employees in 2016 to 1,027 employees as of December 31, 2022. Our revenue from continuing operations grew from $94.8 million for the year ended December 31, 2016 to $299.5 million for the year ended December 31, 2022. If we do not effectively manage our growth as we continue to expand, the quality of our products and services could suffer and our revenue could decline. Our growth to date has increased the significant demands on our management, our operational and financial systems, IT infrastructure, security mechanisms and other resources. In order to successfully expand our business, we must effectively recruit, integrate, and motivate new employees, while maintaining the beneficial aspects of our corporate culture. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity, and retention could suffer, and our business and results of operations could be harmed. We must also continue to improve our existing systems for operational and financial management, including our reporting systems, procedures, and controls. These improvements could require significant capital expenditures and place increasing demands on our management. We may not be successful in managing or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not successfully manage these processes, our business and results of operations could be harmed.
We may not grow at the rates we have achieved historically or at all, even if our key metrics may indicate growth, which could cause the market price of our common stock to decline.
We have experienced significant growth in revenues in the past several years. Future revenue may not grow at these same rates or may decline. Our future growth will depend, in part, on our ability to grow our revenue from existing clients, to complete sales to new clients, and to expand our client base in the healthcare industry and with provider and payer organizations. We may not be successful in executing on our growth strategies and may not continue to grow our revenue at similar rates as we have in the past. Our ability to execute on our existing sales pipeline, create additional sales pipelines, and expand our client base depends on the attractiveness of our products and services relative to those offered by our competitors, our ability to demonstrate the value of our existing and future products and services, and our ability to attract and retain a sufficient number of qualified sales and marketing personnel. In addition, clients in some market segments in which we have a more limited presence may be slower to adopt our products and services than we currently anticipate. Our ability to maintain future revenue growth may also impact assumptions utilized in our assessments over the fair value of our assets, including our goodwill and intangible assets, and a decline in revenue growth could result in potential impairment charges to these assets.
To date, we have derived substantially all of our medication revenue from sales of prescription medications, and revenue from sales of prescription medications is dependent upon factors outside of our control.
To date, substantially all of our medication revenue has been derived from sales of prescription medications and related services, and for the foreseeable future we expect to continue to derive the substantial majority of our medication revenue from sales of prescription medications and related services. Revenue from prescription medication fulfillment is dependent upon a number of factors, many of which are outside of our control, such as growth or contraction in the patient populations of our clients and the number and mix of medications each patient is prescribed. Any change in these factors could harm our financial results.
We derive a significant portion of our revenue from PACE organizations. Any changes in laws or regulations, or any other factors that cause a decline in the use of PACE organizations to provide healthcare could hurt our ability to generate revenue and grow our business.
We derive a significant portion of our revenue from PACE organizations, which are our largest clients and account for 99% of our revenue from continuing operations for the year ended December 31, 2022. PACE organizations reflect a value-based model for providing healthcare to the elderly and are funded by both Medicare and Medicaid. Our ability to generate revenue and grow our business may be compromised if the laws and regulations that currently promote PACE organizations were to change in a way that makes operating a PACE organization less attractive, if other Medicare or Medicaid reimbursement models are developed that are more attractive to the healthcare providers that operate PACE organizations, or if the prevalence of PACE organizations were to decline for any other reason.
Consolidation in the healthcare industry could lead to the elimination of some of our clients and make others larger, which could decrease demand for our solutions or create pricing pressure.
Many healthcare industry participants are consolidating to create larger and more integrated healthcare delivery systems. If regulatory and economic conditions continue to facilitate additional consolidation in the healthcare industry, some of our current clients, and possibly our future clients, may be eliminated. Such market fluctuations may result in decreased need for some or all of our products and services as some of our clients disappear, and others acquire larger market power, which may be used to develop various solutions in-house, rather than purchasing them from us, or negotiate fee reductions for our products and services.
Failure by PACE organization clients to meet applicable penetration benchmarks could result in loss of their service area, which could lead to our loss of that business and a corresponding decline in our revenue.
PACE organizations in many states are subject to penetration benchmarks regarding the number of eligible lives in their service areas that have been captured by the program. If the number of members covered by any of our PACE organization clients were to be reduced by a material amount, such decrease may lead to a loss of their service area, which could result in our loss of the client and a corresponding decline in our revenue.
The growth of our business relies, in part, on the growth of members covered by our clients’ programs, which is difficult to predict and is affected by factors outside of our control.
We enter into agreements with our clients under which a portion of our fees are dependent upon the number of members that are covered by our clients’ programs each month. The number of members covered by a client’s program is often affected by factors outside of our control, such as the client’s pricing, overall quality of service, and member retention initiatives. If the number of members covered by one or more of our client’s programs were to be reduced, such decrease would lead to a decrease in our revenue. In addition, the growth forecasts of our clients are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate. Even if the markets in which our clients compete meet the size estimates and growth forecasted, their program membership could fail to grow at similar rates, if at all.
A few clients account for a significant portion of our revenue and, as a result, the loss of one or more of these clients could hurt our revenue.
Our ten largest clients accounted for 52%, 50%, and 55% of our total revenue from continuing operations during the years ended December 31, 2022, 2021, and 2020, respectively. Our engagement with our ten largest clients is generally covered through multi-year contracts. One or more of these clients may decline to renew their existing contracts with us upon expiration and any such failure to renew could have a negative impact on our revenue and compromise our growth strategy. Further, if one or more of these clients significantly decreases its use of our solutions, we would lose revenue and our growth would be compromised. We believe our clients view us as a trusted partner that shares their commitment to improving medication-related health outcomes and reducing overall healthcare costs.
Because we generally bill our clients and recognize revenue over the term of the contract, near-term declines in new or renewed agreements may not be reflected immediately in our operating results.
Most of our revenue in each quarter is derived from agreements entered into with our clients during previous quarters. Consequently, a decline in new or renewed agreements in any one quarter may not be fully reflected in our revenue for that quarter because, although we enter into multi-year contracts with our clients and recognize revenue over the term of the contract, such revenue varies based on the volume and pricing of prescriptions filled and the number of members of the healthcare organization and is, thus, not recognized evenly. Such declines, however, would negatively affect our revenue in future periods. The effect of any significant downturns in sales of, and market demand for, our products and services, as well as any potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. In addition, we may be unable to adjust our cost structure rapidly, or at all, to take account of reduced revenue.
If we do not continue to attract new clients, we may not be able to grow our business.
In order to grow our business, we must continually attract new clients. Our ability to do so depends in large part on the success of our sales and marketing efforts. Potential clients may seek out other options. Therefore, we must demonstrate that our products and services provide a viable solution for potential clients. If we fail to provide high-quality solutions and convince individual clients of our value proposition, we may not be able to attract new clients. Our financial results could be harmed if the market for our products and services declines or grows more slowly than we expect, or if the number of individual clients that use our solutions declines or fails to increase as we expect.
If we are not able to maintain and enhance our reputation and brand recognition, our business will be harmed.
Maintaining and enhancing our reputation and brand recognition is critical to our relationships with existing clients and to our ability to attract new clients. The promotion of our brand may require us to make substantial investments. As our market becomes increasingly competitive, we anticipate that these marketing initiatives may become more difficult and expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur. In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of our clients, could make it substantially more difficult for us to attract new clients. If we do not successfully maintain and enhance our reputation and brand recognition, our business may not grow and we could lose our relationships with clients.
Positive outcomes and cost reductions for our clients are not necessarily predictive of future outcomes or costs.
Although several of our clients have reported improved outcomes for their patients and cost reductions as a result of our services, these results are not necessarily predictive of future outcomes. Other factors, including changes in healthcare regulations or other business practices or our clients’ implementation of other cost saving measures may have contributed to positive outcomes or reduced costs. Moreover, outcome and cost reduction data are often susceptible to varying interpretations and analyses. If we fail to produce positive outcomes and reduce costs for our clients, they may not continue to use our services and we may be unable to attract new clients. Each of these factors could harm our business.
Our marketing efforts depend significantly on our ability to receive positive references from our existing clients.
Our marketing efforts depend significantly on our ability to call on our current clients to provide positive references to new, potential clients. The loss or dissatisfaction of any client could substantially harm our brand and reputation, inhibit the market adoption of our products and services, impair our ability to attract new clients and maintain existing clients and, ultimately, harm our financial results.
Our sales and implementation cycle can be long and unpredictable and can require considerable time and expense, which may cause our operating results to fluctuate.
The sales cycle for our products and services, from initial sales activity with a potential client to contract execution and implementation, can be long and varies widely by client, typically ranging from three to twelve months. Some of our clients undertake pilot programs for our products and services that generally range from six to eighteen months in length. These pilot programs may result in extended sales cycles and upfront sales costs as the potential client evaluates our products and services. Our sales efforts involve educating our clients about the use, technical capabilities, and benefits of our products and services. It is possible that in the future we may experience even longer sales cycles, more complex client requirements, higher upfront sales costs, and less predictability in completing sales, as we continue to expand into new territories and add additional products and services. If our sales cycle lengthens or our substantial upfront sales and implementation investments do not result in sufficient sales to justify our investments, our operating results may be harmed.
The failure to offer high-quality client support services may adversely affect our relationships with our clients and harm our financial results.
Our clients depend on our technical support to resolve any issues relating to our offering and technology solutions and to provide initial and ongoing training and education when necessary. In addition, our sales process is highly dependent on the quality of our offering, our business reputation, and strong recommendations from our existing clients. Any failure to maintain high-quality and highly responsive technical support, or a market perception that we do not maintain high-quality and highly responsive support, could harm our reputation and compromise our ability to sell our solutions to existing and prospective clients.
We offer client support services with our offerings and may be unable to respond quickly enough to accommodate short-term increases in client demand for support services, particularly as we increase the size of our client base. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. It is difficult to predict client demand for our support services. If client demand increases significantly, we may be unable to provide satisfactory support services to our clients. Additionally, increased client demand for these services, without corresponding revenue, could increase costs and hurt our ability to achieve profitability.
Our proprietary products and services may not operate properly, which could damage our reputation, give rise to a variety of claims against us, or divert our resources from other purposes, any of which could harm our business and operating results.
Technology-enabled product and service development is time-consuming, expensive, and complex and may involve unforeseen difficulties. We may encounter technical obstacles, and we may discover additional problems that prevent our proprietary products and services from operating properly. If our products and services do not function reliably or fail to achieve client expectations in terms of performance, clients could assert liability claims against us and attempt to cancel their contracts with us. Moreover, material performance problems, defects, or errors in our existing or new products and services may arise in the future and may result from, among other things, the lack of interoperability of our software with systems and data that we did not develop, the function of which is outside of our control or undetected in our testing. Defects or errors in our products or services might discourage existing or potential clients from purchasing services from us. Correction of defects or errors could prove to be time-consuming, costly, impossible, or impracticable. The existence of errors or defects in our products and services and the correction of such errors could divert our resources from other matters relating to our business, damage our reputation, and increase our costs.
Adverse drug events resulting from optimizing a patient’s medication regimen through recommendations made by our services or our pharmacists could give rise to claims against us and could damage our reputation.
We provide medication risk management services that include answering prescriber questions and making recommendations to prescribers and providing formal consultations with physicians and patients. In the event that optimizing a patient’s medication regimen through recommendations made by our services or our pharmacists contributes to an adverse drug event, clients and patients could assert liability claims against us, which may not be subject to a contractually agreed upon liability cap, and clients could attempt to cancel their contracts with us. Such
instances may also generate significant negative publicity that could harm our reputation, increase our costs, and materially affect our results of operations.
We purchase a significant portion of our pharmaceutical products from a group purchasing organization which receives discounts from a primary supplier with a term lasting through March 31, 2024, subject to renewal provisions.
On June 30, 2020, we entered into an Affiliated Pharmacy Agreement and Pharmaceutical Program Supply Agreement, including an associated High Volume Retailer Addendum (the “Pharmaceutical Supply Agreements”) with Thrifty Drug Stores, Inc. (“Thrifty Drug”). Pursuant to the terms of the Pharmaceutical Supply Agreements, which have a term lasting through March 31, 2024, subject to renewal under certain circumstances, we agree to purchase not less than 98% of our total prescription product requirements from Thrifty Drug. The Pharmaceutical Supply Agreements can be terminated solely by Thrifty Drug for, among other things, a payment default that continues for ten days after notice thereof and our failure to maintain creditworthiness. If we are no longer able to purchase our pharmaceutical products from a group purchasing organization, there can be no assurance that our operations would not be disrupted or that we could obtain the necessary pharmaceutical products at similar cost or at all. In this event, failure to satisfy our clients’ requirements would result in defaults under client contracts, subjecting us to damages and the potential termination of those contracts.
As of January 1, 2022, we ceased recognizing revenue related to the EMTM Pilot Program, which expired on December 31, 2021.
On January 1, 2017, we launched the Enhanced Medication Therapy Management (“EMTM”) program, with a large, regional Medicare Part D Prescription Drug Plan participating in the CMMI Medicaid Part D pilot. The EMTM Pilot Program expired on December 31, 2021 and, as a result, beginning on January 1, 2022, we ceased recognizing revenue related to the EMTM Pilot Program. For the years ended December 31, 2021 and 2020, the EMTM Pilot Program revenue accounted for 4% and 5%, respectively, of total revenue from continuing operations. Accordingly, the expiration of the EMTM Pilot Program has adversely affected our results of operations in 2022 and could adversely affect our business, financial condition, and results of operations going forward.
Any restrictions on our ability to license or share data and integrate third-party technologies could harm our business.
We depend upon licenses from third parties for some of the technology and data used in our products and services, and for some of the technology platforms upon which these products and services are built and operate. Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us. We also license some of our technology and share data we collect with our clients, including under agreements with health systems and providers of electronic health records. We expect that we will need to obtain additional licenses from third parties in the future in connection with the development of our products and services. In addition, we obtain a portion of the data that we use from public records and from our clients for specific client engagements. Our licenses for information may not be sufficient to allow us to use the data that is incorporated into our products and services for all potential or contemplated applications and products.
In the future, data providers could withdraw their data from us or restrict our usage for any reason, including if there is a competitive reason to do so, if legislation is passed restricting the use of the data, or if judicial interpretations are issued restricting use of the data that we currently use in our products and services. In addition, data providers could fail to adhere to our quality control standards in the future, causing us to incur additional expense to appropriately utilize the data. If a substantial number of data providers were to withdraw or restrict their data, or if they were to fail to adhere to our quality control standards, and if we were unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide products and services to our clients would be compromised and our future growth and success could be delayed or limited.
We also integrate into our proprietary applications and use third-party software to maintain and enhance, among other things, content generation and delivery, and to support our technology infrastructure. Some of this software is proprietary and some is open-source software. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology, and our inability to generate revenue from licensed
technology sufficient to offset associated acquisition and maintenance costs. These technologies may not be available to us in the future on commercially reasonable terms or at all and could be difficult to replace once integrated into our own proprietary applications. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to obtain, maintain, or comply with any of these licenses could delay development until equivalent technology can be identified, licensed, and integrated, which could delay or limit our future growth.
Data loss or corruption due to failures or errors in our systems may expose us to liability, hurt our reputation and relationships with existing clients, and force us to incur significant costs.
Hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our clients regard as significant. Complex software such as ours may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. We continually introduce new software and updates and enhancements to our existing software. Despite testing by us, we may discover defects or errors in our software. Any defects or errors could expose us to risk of liability to clients and the government and could cause delays in the introduction of new products and services, result in increased costs and diversion of development resources, require design modifications, decrease market acceptance or client satisfaction with our products and services, or cause harm to our reputation. Data losses related to personal health records could result in additional risks. We are subject to data privacy and security laws and regulations and contractual obligations governing the transmission, security, and privacy of health and other sensitive or proprietary information, which may impose restrictions on the manner in which we access, store, transmit, use, and disclose such information and subject us to penalties if we are unable to fully comply with such laws or contractual provisions.
Furthermore, our clients might use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, hurt our reputation, and lead to significant client relations problems.
We are subject to cybersecurity risks and other risks associated with cyber incidents. If we are unable to safeguard the security and privacy of confidential data, we may incur increased expenses to mitigate our disclosure or address any such incidents, and our reputation and business will be harmed.
Our products and services involve the collection, storage, and analysis of confidential or proprietary information, and we are subject to numerous laws, rules, and regulations in the U.S. (both federal and state) that protect personally identifiable information and personal health information. If a cyber incident such as a phishing or ransomware attack, virus, malware installation, server malfunction, software or hardware failure, impairment of data integrity, loss of data or other computer assets, insider threat, or other similar issue impairs or shuts down one or more of our computing systems or our IT network, or results in the unauthorized access to confidential, proprietary, or personally identifiable information, we may be subject to negative treatment and lawsuits by our clients and business partners, and to regulatory scrutiny. In addition, attention to remediating cyber incidents may distract our technical or management personnel from their normal responsibilities. Public announcements of such cyber incidents could adversely affect the price of our common stock, and we could lose sales and clients.
In certain cases, confidential or proprietary information is provided to third parties, such as the service providers that host our technology platform, and we may be unable to control the use of our information or the security protections used by third parties. Cyber incidents and malicious internet-based activity continue to increase generally, and providers of hosting and cloud-based services are often targeted. If the third parties with whom we work violate applicable laws, contracts, or our security policies, these violations could also put our confidential or proprietary information at risk and otherwise hurt our business. Cyber incidents can also occur as a result of non-technical issues, including employee error or malfeasance, poor password management, or other irregularities by us or by our third-party service providers that result in the unauthorized access to personally identifiable, confidential, or proprietary information. In addition, if the security measures of our clients are compromised, even without any actual compromise of our own systems, we may face negative publicity or reputational harm if our clients or anyone else attributes the blame for such security breaches to us or our systems.
We may be required to expend significant capital and other resources to protect against cybersecurity risks or to remediate and recover from security incidents. We, our customers, and our third-party service providers face an evolving threat landscape in which cybercriminals, among others, employ a complex array of cyber-attack techniques designed to
access sensitive information or disrupt our operations, including, for example, the use of fraudulent or stolen access credentials, malware, ransomware, phishing, denial-of-service, and other types of attacks. These types of cyber-attacks are becoming more prevalent, particularly in the healthcare industry, and we have been the target of such attacks in the past and may be a target in the future. While cyber incidents have not to date had a material impact on our operations, there is no assurance that such impacts will be immaterial in the future. Moreover, despite our implementation of security measures, techniques used to obtain unauthorized access to information or to sabotage information technology systems change frequently, are becoming increasingly sophisticated, and often are not recognized until launched against a target. Furthermore, unknown cyber vulnerabilities caused by third-party software or services may exist within our system. As a result, we or our third-party service providers may be unable to anticipate such techniques or vulnerabilities or to implement adequate preventive measures. Any compromise or perceived compromise of our security could damage our reputation and our relationship with our clients, reduce demand for our products and services and require us to defend against lawsuits and regulatory actions, and subject us to significant liability. Were an incident to occur, we may also incur significant remediation costs, including repairing system damage, hiring outside counsel or technical specialists, purchasing new software or technology, or providing notice and benefits to affected customers or employees. In addition, in the event that new privacy or data security laws are implemented, we may not be able to timely comply with such requirements, or such requirements may not be compatible with our current processes and technology. Changing our processes and acquiring new technology could be time-consuming and expensive, and failure to timely implement required changes could subject us to liability for noncompliance.
We rely on internet infrastructure, bandwidth providers, other third parties, and our own systems to provide services to our clients, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and hurt our reputation and relationships with clients.
Our ability to deliver our products and services, particularly our cloud-based solutions, is dependent on the development and maintenance of the infrastructure of the internet and other telecommunications services by third parties. This includes maintenance of a reliable network connection with the necessary speed, data capacity, and security for providing reliable internet access and services and reliable telephone and facsimile services. Our services are designed to operate without perceptible interruption in accordance with our service level commitments.
We have, however, experienced limited interruptions in these systems in the past, including server failures that temporarily slowed down the performance of our services, and we may experience similar or more significant interruptions in the future. We rely on internal systems as well as third-party suppliers, including bandwidth and telecommunications equipment providers, to provide our services. We do not currently maintain redundant systems or facilities for some of these services. Interruptions in these systems or services, whether due to system failures, cyber incidents, physical or electronic break-ins, or other events, could affect the security or availability of our services and prevent or inhibit the ability of our clients and their patients to access our services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in substantial costs to remedy those problems or harm our relationship with our clients and our business.
Additionally, any disruption in the network access, telecommunications, or co-location services provided by third-party providers or any failure of or by third-party providers’ systems or our own systems to handle current or higher volume of use could significantly harm our business. We exercise limited control over our third-party suppliers, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions, or delays experienced in connection with these third-party technologies and information services or our own systems could hurt our relationships with clients and expose us to third-party liabilities. Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we might not continue to be able to obtain adequate insurance coverage at an acceptable cost.
The reliability and performance of our internet connection may be harmed by increased usage or by denial-of-service attacks or related cyber incidents. The services of other companies delivered through the internet have experienced a variety of outages and other delays as a result of damage to portions of the internet’s infrastructure, and such outages and delays could affect our systems and services in the future. These outages and delays could reduce the level of internet usage as well as the availability to us of the internet for delivery of our internet-based services.
We rely on third-party vendors to host and maintain our technology platform.
We rely on third-party vendors to host and maintain our technology platform, including our EireneRx and MedWise software. Our ability to offer our products and services and operate our business is dependent on maintaining our relationships with third-party vendors, particularly Amazon Web Services, and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors or our failure to enter into agreements with vendors in the future could harm our business and our ability to pursue our growth strategy. Because of the large amount of data that we collect and manage, it is possible that, despite precautions taken at our vendors’ facilities, the occurrence of a natural disaster, cyber incident, a decision to close the facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions in our service. These service interruptions could cause our platform to be unavailable to our clients and impair our ability to deliver products and services and to manage our relationships with new and existing clients.
If our vendors are unable or unwilling to provide the services necessary to support our business, or if our agreements with such vendors are terminated, our operations could be significantly disrupted. Some of our vendor agreements may be unilaterally terminated by the licensor for convenience, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all. We may also incur substantial costs, delays, and disruptions to our business in transitioning such services to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business.
We depend on our senior management team, and the loss of one or more of our executive officers or key employees or an inability to attract and retain highly skilled employees could compromise our ability to pursue our growth strategy and grow our business.
Our success depends largely upon the continued services of our executive officers and other key employees. We do not maintain “key person” insurance for our executive officers, other than for our Interim Chief Executive Officer, Mr. Brian W. Adams, or any of our other key employees. From time to time there may be changes in our senior management team resulting from the hiring or departure of executives, which could disrupt our business. For example, in 2022, Dr. Calvin H. Knowlton and Dr. Orsula V. Knowlton resigned as Chief Executive Officer of the Company and Co-President and Chief Marketing & New Business Development Officer of the Company, respectively, and from the Board. Dr. Calvin H. Knowlton was replaced by Mr. Brian W. Adams, our then Co-President. All of our employees’ employment is at-will, including the employment of our Interim Chief Executive Officer and our Chief Financial Officer, which means that any of these employees could leave our employment at any time. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.
In addition, competition for qualified management in our industry is intense. Many of the companies with which we compete for management personnel have greater financial and other resources than we do. As a result, we may experience difficulty hiring and retaining qualified personnel. The departure of key personnel could also hurt our business. In such event, we would be required to hire other personnel to manage and operate our business, and we might not be able to employ a suitable replacement for the departing individual, or a replacement might not be willing to work for us on terms that are favorable to us.
In addition, in making employment decisions, particularly in the technology industry, job candidates often consider the value of the stock options or other equity instruments they are to receive in connection with their employment. Volatility in the price of our common stock might therefore compromise our ability to attract or retain highly skilled personnel. Furthermore, the requirement to expense stock options and other equity instruments might discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.
We may require additional capital to support business growth, and this capital might not be available to us on acceptable terms or at all.
Our operations have required a significant investment of cash since inception. We intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, develop new
applications and services, enhance our existing platform and services, hire additional sales and marketing personnel, enhance our operating infrastructure, and potentially acquire complementary businesses and technologies. As of December 31, 2022, we had $70.0 million of unrestricted cash and cash equivalents.
Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, renewal activity, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services, and the continuing market acceptance of our products and services. Accordingly, we might need to engage in equity or debt financings or collaborative arrangements to secure additional funds. In March 2021, the U.K.’s Financial Conduct Authority, a regulator of financial services firms and financial markets in the U.K., stated that it will plan for a phase out of regulatory oversight of LIBOR interest rates indices beginning as of December 31, 2021. In the U.S., the Alternative Reference Rates Committee, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York, recommended SOFR plus a recommended spread adjustment as LIBOR's replacement. LIBOR and SOFR have significant differences, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR being an overnight rate while LIBOR reflects term rates at different maturities. Introduction of SOFR may introduce additional basis risk for market participants as an alternative index is utilized along with LIBOR. The Company is not able to predict whether SOFR will become a widely accepted benchmark, or what the impact the transition to SOFR may be on the Company's financial condition and results of operations.
If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We might have to obtain funds through arrangements with collaborators or others that may require us to relinquish rights to our technologies or offerings that we otherwise would not consider. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be limited.
Our effective tax rate may increase or decrease, and we may be adversely impacted by changes in tax laws.
We are subject to income taxes in the U.S. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to audit by tax authorities where we do business. Although we believe that our tax estimates and tax positions are reasonable, they could be materially affected by many factors, including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations, and related interpretations, our global mix of earnings and the realizability of deferred tax assets. An increase or decrease in our effective tax rate could have a material adverse impact on our financial condition and results of operations.
In addition, at any time, U.S. federal tax laws or the administrative interpretations of those laws may be changed. We also cannot predict whether, when, or to what extent other new U.S. federal tax laws, regulations, interpretations, or rulings will be issued. As a result, changes in U.S. federal tax laws could adversely affect our business, financial condition, and results of operations, and adversely impact our stockholders.
Occasionally, changes in state and local tax laws or regulations are enacted that may result in an increase in our tax liability. Shortfalls in tax revenues for states and municipalities in recent years may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income.
Certain U.S. state tax authorities may assert that we have a state nexus and seek to impose state and local income taxes, which could adversely affect our results of operations.
We are currently licensed to operate in all 50 states and file state income tax returns in 41 states. There is a risk that certain state tax authorities where we do not currently file a state income tax return could assert that we are liable for state and local income taxes based upon income or gross receipts allocable to such states. States are becoming increasingly aggressive in asserting a nexus for state income tax purposes. We could be subject to state and local taxation, including penalties and interest attributable to prior periods, if a state tax authority successfully asserts that our
activities give rise to a nexus. Such tax assessments, penalties, and interest may adversely affect our results of operations.
Our review of potential strategic alternatives may not result in an executed or consummated transaction or other strategic alternative, and the process of reviewing strategic alternatives or its conclusion could adversely affect our business and our stockholders.
In February 2022, we announced plans to evaluate non-core assets to refocus our corporate strategy and increase stockholder value, and we commenced an initial plan to sell the DoseMe business, which we acquired in January 2019. In March 2022, we completed our evaluation of additional divestiture opportunities and commenced plans to sell the SinfoníaRx and PrescribeWellness businesses, acquired in September 2017 and March 2019, respectively. We completed the sales of our unincorporated PrescribeWellness, DoseMe, SinfoníaRx businesses in August 2022, January 2023, and March 2023, respectively. In September 2022, the Company entered into a cooperation agreement with a significant stockholder, in connection with which the Board of Directors formed a new Strategic Review Committee to oversee our strategic process relating to the sale of non-core assets and to explore other strategic alternatives and value creation opportunities with a view toward maximizing stockholder value.
Any potential strategic alternative would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, regulatory approvals, and the availability of financing for a potential transaction on reasonable terms. The process of reviewing potential strategic alternatives may be time-consuming, distracting, and disruptive to our business operations, which may cause concern to our current or potential customers, employees, investors, strategic partners, and other constituencies and may have a material impact on our business and operating results and/or result in increased volatility in our share price. We have and will continue to incur substantial expenses associated with identifying, evaluating, and negotiating potential strategic alternatives. There can be no assurance that any potential transaction or other strategic alternative, if consummated, will provide greater value to our stockholders than that reflected in the current price of our common stock. Until the process is concluded, perceived uncertainties related to our future may result in the loss of potential business opportunities and volatility in the market price of our common stock and may make it more difficult for us to attract and retain qualified personnel and business partners. Similarly, activist investors may engage in proxy solicitations or advance shareholder proposals, or otherwise attempt to effect changes and assert influence on our Board and management, which could lead to the impacts on our business, Board, management, and employees discussed above.
We may incur liabilities in connection with divestitures.
In connection with various divestitures, and certain other transactions, we have indemnified or guaranteed parties against certain liabilities. These indemnities and guarantees relate, among other things, to liabilities which may arise with respect to the period during which we or our subsidiaries operated a divested business, and to certain ongoing contractual relationships and entitlements with respect to which we or our subsidiaries made commitments in connection with the divestiture.
Actions of activist stockholders against us could be disruptive and costly. The possibility that activist stockholders may wage proxy contests or seek representation on our Board could cause uncertainty about the strategic direction of our business.
Stockholders may from time to time engage in proxy solicitations, advance stockholder proposals, or Board nominations or otherwise attempt to effect changes, assert influence, or acquire some level of control over us.
We recently engaged in a process with one of our significant stockholders, which culminated in our entering into the Cooperation Agreement with that significant stockholder and several resulting changes in our management and corporate governance. The stockholder also agreed to customary standstill provisions during the term of the Cooperation Agreement, which expired on January 26, 2023.
That stockholder, following the termination of the standstill provisions in the Cooperation Agreement, or another activist stockholder, may attempt to effect additional changes in our strategic direction, and in furtherance thereof seek changes to how our company is governed, through further changes to our Board of Directors or otherwise. While our Board and management team will continue to strive to maintain constructive, ongoing
communications with our stockholders, and welcomes their views and opinions with the goal of enhancing value for all stockholders, if that stockholder takes further action, or if another stockholder were to launch an activist campaign that seeks to further replace members of our Board or bring about changes in our strategic direction, it could have an adverse effect on us because:
|●||Responding to actions by activist stockholders can disrupt our operations, are costly and time-consuming, and divert the attention of our Board and senior management team from the pursuit of business strategies, which could adversely affect our results of operations and financial condition;|
|●||Perceived uncertainties as to our future direction as a result of changes to the composition of our Board or changes to our stockholder base may lead to the perception of a change in the direction of the business, instability, or lack of continuity, which may be exploited by our competitors, result in the loss of potential business opportunities, cause concern for our client base, and make it more difficult to attract and retain qualified personnel and business partners;|
|●||These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business; and|
|●||If individuals are elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and to create additional value for our stockholders.|
We and certain of our officers may become involved in litigation, investigations, and governmental proceedings that may be costly, may divert the efforts of our key personnel, and could result in adverse court rulings, fines, or penalties, which could materially harm our business.
We may become involved in litigation, including antitrust and commercial matters, putative securities class action suits, and other actions or governmental inquiries or proceedings. Litigation is subject to inherent risks and uncertainties that may cause actual results to differ materially from our expectations. In the event of an adverse outcome in any litigation, investigation, or governmental proceeding, we could be required to pay substantial damages, fines, or penalties and cease certain practices or activities. Regardless of their merit, such matters can be complex, can extend for a protracted period of time, and can be very expensive, even unpredictably expensive. In addition, litigation, investigations, or governmental proceedings and any related publicity may divert the efforts and attention of some of our key personnel, affect demand for our products, and harm the market prices of our securities.
We may be obligated to indemnify our current or former directors or employees, or former directors or employees of companies that we have acquired, in connection with litigation, investigations, or governmental proceedings. These liabilities could be substantial and may include, among other things: the cost of defending lawsuits against these individuals; the cost of defending shareholder derivative suits; the cost of governmental, law-enforcement, or regulatory investigations or proceedings; civil or criminal fines and penalties; legal and other expenses; and expenses associated with the remedial measures, if any, which may be imposed.
Future sales to clients outside the U.S. or clients with international operations might expose us to risks inherent in international markets, which could hurt our business.
Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the U.S. Because of our limited experience with international operations, any potential future international expansion efforts might not be successful in creating demand for our products and services outside of the U.S. or in effectively selling our products and services in the international markets we enter. In addition, we could face risks such as compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, anti-bribery, foreign investment, tax, privacy, and data protection laws and regulations. The occurrence of these risks could negatively affect our business and results of operations.
The COVID-19 pandemic and other public health crises could have a material adverse effect on our business operations, results of operations, cash flows, and financial position.
The COVID-19 pandemic has impacted, and could continue to impact, our business and those of our clients and their suppliers and other business partners. These impacts include additional costs resulting from our efforts to protect the health and well-being of our employees, increased logistics, component, and other costs. While our facilities are all currently operational, we have experienced, and may experience in the future, temporary closures of certain facilities related to the pandemic. Future outbreaks of infectious disease or other public health crises may have a similar impact.
The effects of such health crises, including the COVID-19 pandemic, are uncertain and difficult to predict, but may include:
|●||disruptions to our business, our clients’ businesses, or our supply chain caused by employees or others contracting infectious diseases, or governmental orders to contain the spread of infectious disease, such as travel restrictions, quarantines, shelter-in-place orders, trade controls, and business shut-downs;|
|●||deterioration of credit markets that may limit our ability to obtain or increase the cost of obtaining external financing to fund our operations and capital expenditures and result in a higher rate of losses on our accounts receivables due to customer credit defaults;|
|●||volatility in financial markets, which may harm our ability to access the financial markets on acceptable terms;|
|●||increased data security and technology risk as some employees continue to work from home, including possible outages to systems and technologies critical to remote work and increased data privacy risk with cybercriminals attempting to take advantage of the disruption;|
|●||reduced productivity or other disruptions of our operations if workers in our factories or our other worksites are exposed to or spread infectious disease to other employees; and|
|●||reduced ability to purchase or obtain pharmaceutical products, which may result in higher supply chain costs and could otherwise disrupt our operations.|
The extent to which the COVID-19 pandemic or future public health crises ultimately impacts our business and our clients and their patients, suppliers, and other business partners will depend on numerous factors that are beyond our control, highly uncertain and cannot be predicted at this time.
Risks Related to Our Intellectual Property
If we are unable to obtain, maintain, and enforce intellectual property protection for our technology and products or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and products substantially similar to ours, and our ability to successfully commercialize our technology and products may be compromised.
Our business depends on proprietary technology and content, including software, databases, confidential information, and know-how, the protection of which is crucial to the success of our business. We rely on a combination of patent, trademark, trade-secret, and copyright laws, confidentiality procedures, cyber security practices, and contractual provisions to protect the intellectual property rights of our proprietary technology and content. We may over time increase our investment in protecting our intellectual property through additional trademark, patent, and other intellectual property filings, which could be expensive and time-consuming. We may not be able to obtain protection for our technology and, even if we are successful in attaining effective patent, trademark, trade-secret, and copyright protection, it is expensive to maintain these rights and the costs of defending our rights could be substantial. Furthermore, recent changes to U.S. intellectual property laws may jeopardize the enforceability and validity of our intellectual property portfolio and harm our ability to obtain patent protection for some of our unique business methods.
In addition, these measures may not be sufficient to offer us meaningful protection or provide us with any competitive advantages. If we are unable to adequately protect our intellectual property and other proprietary rights, our competitive position and our business could be harmed, as third parties may be able to commercialize and use technologies and software products that are substantially the same as ours without incurring the development and licensing costs that we have incurred. Any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, or misappropriated; our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties; or our intellectual property rights may not be sufficient to permit us to take advantage of current market trends or to otherwise provide us with competitive advantages, which could result in costly redesign efforts, discontinuance of some of our offerings, or other competitive harm.
Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time we seek to analyze our competitors’ products and services, and may in the future seek to enforce our rights against potential infringement. However, the steps we have taken to protect our proprietary rights may not be adequate to enforce our rights against infringement or misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully protect our intellectual property rights could harm our ability to compete and reduce demand for our products and services. Moreover, our failure to develop and properly manage new intellectual property could hurt our market position and business opportunities. Also, some of our products and services rely on technologies, data, and software developed by or licensed from third parties, and we may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all. Any loss of the right to use any third-party technologies, data, or software could result in delays in implementing or provisioning our products and services until equivalent technology is either developed by us or, if available, is identified, obtained, and integrated, which could harm our business.
We may also be required to protect our proprietary technology and content in an increasing number of jurisdictions, a process that is expensive and may not be successful, or which we may not pursue in every location. In addition, effective intellectual property protection may not be available to us in every country, and the laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S. Additional uncertainty may result from changes to intellectual property legislation enacted in the U.S. and elsewhere, and from interpretations of intellectual property laws by applicable courts and agencies. Accordingly, we may be unable to obtain, maintain, and enforce the intellectual property rights necessary to provide us with a competitive advantage. Our failure to obtain, maintain, and enforce our intellectual property rights could therefore adversely affect our business, financial condition, and results of operations.
If our trademarks and trade names are not adequately protected and if we cannot protect our domain names, we may not be able to build name recognition in our markets of interest and our competitive position may be harmed.
The registered or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed, or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with potential clients. In addition, third parties may in the future file for registration of trademarks similar or identical to our trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to develop brand recognition of our technologies, products, or services. If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively.
We also currently own the web domain names www.tabularasahealthcare.com, www.trhc.com, www.careventionhc.com, www.careventions.com, www.medliance.com, www.capstoneperformancesystems.com, www.eirenerx.com, www.medwisehealthcare.com, www.medwise.com, www.mediture.com, and www.cognify.com, each of which is critical to the operation of our business. The acquisition and maintenance of domain names is generally regulated by governmental agencies and their designees. The regulation of domain names in the U.S. and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars, or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or otherwise decrease the value of our trademarks and other proprietary rights. We may not be able to successfully implement our business
strategy of establishing a strong brand if we cannot prevent others from using similar domain names or trademarks. This failure could impair our ability to increase our market share and revenue.
We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.
Our commercial success depends in part on our ability to develop and commercialize our products and services without infringing or being claimed to have infringed the intellectual property or proprietary rights of third parties. Intellectual property disputes can be costly to defend and may cause our business, operating results, and financial condition to suffer. As the market for technology-enabled healthcare solutions in the U.S. expands and intellectual property protections asserted by others increase, the risk increases that there may be intellectual property asserted by others and patents issued to third parties that relate to our products and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Whether merited or not, we may face allegations that we, our clients, our licensees, or parties indemnified by us have infringed or otherwise violated the patents, trademarks, copyrights, or other intellectual property rights of third parties. In addition, we have received letters from third parties from time to time claiming that our software, technologies, or methodologies are covered by their patents or that our activities are otherwise violating their patents, trademarks, copyrights, or other intellectual property rights, and future claims may require us to expend time and money to address and resolve these claims. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from other technology-reliant companies.
We may also face allegations that our employees or consultants have misappropriated the intellectual property or proprietary rights of their former employers or other third parties. It may be necessary for us to initiate litigation to defend ourselves in order to determine the scope, enforceability, and validity of third-party intellectual property or proprietary rights, or to establish our respective rights. Regardless of whether claims that we are infringing patents or other intellectual property rights have merit, such claims can be time-consuming, divert management's attention and financial resources, and can be costly to evaluate and defend. Results of any such litigation are difficult to predict and may require us to stop commercializing or using our products or technology, obtain licenses, modify our products and technology while we develop non-infringing substitutes, incur substantial damages or settlement costs, or face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services. If we require a third-party license, it may not be available on reasonable terms or at all, and we may have to pay substantial royalties, upfront fees, or grant cross-licenses to intellectual property rights for our products and services. We may also have to redesign our products or services so they do not infringe third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and time, during which our technology and products may not be available for commercialization or use. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not obtain a third-party license to the infringed technology at all, license the technology on reasonable terms, or obtain similar technology from another source, our ability to operate our business could be compromised.
Our use of open-source software could compromise our ability to offer our services and subject us to possible litigation.
We use open-source software in connection with our products and services. Companies that incorporate open-source software into their products have from time to time faced claims challenging the use of open-source software and compliance with open-source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open-source software or claiming noncompliance with open-source licensing terms. Some open-source software licenses require users who distribute software containing open-source software to publicly disclose all or part of the source code to the licensee’s software that incorporates, links, or uses such open-source software, and make available to third parties at no cost, any derivative works of the open-source code created by the licensee, which could include the licensee’s own valuable proprietary code. While we monitor our use of open-source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open-source agreement, such use could inadvertently occur, or could be claimed to have occurred, in part because open-source license terms are often ambiguous. Any actual or claimed requirement to disclose our proprietary source code or pay damages for breach of contract could harm our business and could help our competitors develop products and services that are similar to or better than ours.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming, and unsuccessful.
Competitors may infringe our issued patents or other intellectual property. To counter infringement or unauthorized use, we may be required to monitor for such infringement and file infringement claims, both of which can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, or may construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in a proceeding could put one or more of our patents at risk of being invalidated.
We may be subject to claims by third parties asserting that our employees, our contractors, or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees and contractors were previously employed at universities or other technology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees and our contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that our employees, our contractors, or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s or contractor’s former employer. Costly litigation may be necessary to defend against these claims.
In addition, while it is our policy to require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings against us relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.
If we are unable to protect the confidentiality of our trade secrets, know-how, and other proprietary information, the value of our technology, products, and services could be hurt.
We may not be able to adequately protect our trade secrets, know-how, and other proprietary information. Although we use reasonable efforts to protect this proprietary information and technology, our employees, consultants, and other parties may unintentionally or willfully disclose our information or technology to competitors. In addition, our trade secrets, know-how, and other proprietary information may be accessed or disclosed during a cyber incident, which could have a significant negative impact on us. Further, such cyber incidents, if disclosed publicly, could adversely affect the price of our common stock.
Enforcing a claim that a third party illegally obtained and is using any of our proprietary information or technology is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the U.S. are sometimes less willing to protect trade secrets, know-how, and other proprietary information. We rely, in part, on non-disclosure, confidentiality, and invention assignment agreements with our employees, consultants, and other parties to protect our trade secrets, know-how, and other intellectual property and proprietary information. These agreements may not be self-executing, or they may be breached, and we may not have adequate remedies for such breach. Moreover, third parties may independently develop similar or equivalent proprietary information or otherwise gain access to our trade secrets, know-how, and other proprietary information.
Risks Related to Industry Regulation and Other Legal Compliance Matters
The healthcare regulatory and political framework is uncertain and evolving.
Healthcare laws and regulations are rapidly evolving and may change significantly in the future. For example, in March 2010, the ACA was adopted, which is a healthcare reform measure that seeks to contain healthcare costs while improving quality and access to coverage. The ACA includes a variety of healthcare reform provisions and requirements that have already become effective and substantially changed the way healthcare is financed by both governmental and private insurers, which may significantly affect our industry and our business. In addition, other legislation expanding or modifying the ACA may be considered by Congress in the future.
On October 24, 2018, President Trump signed legislation into law aimed at curbing the opioid crisis in the U.S. The SUPPORT Act includes provisions that address law enforcement, public health, and coverage under the Medicare and Medicaid programs. Broad in scope, the legislation increases federal oversight with respect to the production and distribution of opioids, bolsters fraud prevention safeguards, enhances oversight of prescription opioids, expands coverage of opioid addiction treatment services, and authorizes consumer education and provider training programs aimed at preventing and treating opioid use disorders. The potential for additional regulatory oversight and enforcement will likely add to the costs associated with the prescription and any downstream handling of medications. Whether it impacts medication management companies or health plans is difficult to determine without seeing the implementing regulations, but, given the intent to crack down on opioid abuse in this country, it is likely that more time, attention, and personnel will be required to ensure compliance. Implementation of the SUPPORT Act has been slow to occur. We cannot be sure whether additional legislative changes will be enacted, given the continued scrutiny of prescription opioids by the U.S. Congress, or predict what the impact of future regulations generated by the SUPPORT Act, if any, may be.
There has been a trend in federal and state legislation aimed at lowering costs for drug products, including by requiring pharmaceutical companies to disclose information about their pricing and production and marketing costs, and heightened governmental scrutiny over the manner in which pharmaceutical manufacturers set prices for their marketed products. There have been several presidential executive orders and U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. For example, on October 10, 2018 the Patient Right to Know Drug Prices Act (for private plans) and the Know the Lowest Price Act (for Medicare Parts C and D) were signed into law, which prohibited health plans from restricting pharmacies from informing individuals regarding prices for certain drugs.
Additionally, a significant amount of our business depends on the evolution of the health care environment and concomitant clinical integration and care coordination, including certain demonstration projects operated by the federal government. If these demonstration projects are modified, cancelled, or not ultimately made permanent as part of federal health care programs, this might affect demand for the types of services we provide. In 2020, CMS and OIG finalized rules as part of the federal government’s “Regulatory Sprint to Coordinated Care” initiative. The impact of these rules is still unknown, but they focus on protecting and encouraging certain value-based arrangements.
In addition, we are subject to various other healthcare laws and regulations, including, among others, the Stark Law relating to self-referrals, anti-kickback laws, including the federal AKS, antitrust laws, and the data privacy and security laws and regulations described below. For instance, the CCPA imposes rules governing how businesses handle personal data of California residents. Companies that do business in California will be required to disclose the types of
data they collect, the purpose of the data collection, and how the data will be used and to expand organizational responsibilities pertaining to individual rights, accountability, and governance. Companies subject to the CCPA must have complied by January 1, 2020. There were additional regulatory provisions and legislative amendments related to the CCPA during 2020, including the passage of the CPRA. The CPRA modifies the CCPA and will impose additional data protection obligations on companies doing business in California effective January 1, 2023. If we were to become subject to litigation or liabilities or found to be out of compliance with these or other laws, our business could be hurt. We may become subject to litigation, which could be costly and result in significant liability.
We are subject to data privacy and security laws, regulations, and contractual obligations governing the transmission, security, and privacy of health information and other sensitive or proprietary information, which may impose restrictions on the manner in which we access, store, transmit, use, and disclose such information and subject us to penalties if we are unable to fully comply with such laws or contractual provisions.
As described below, we are required to comply with numerous federal and state laws and regulations governing the collection, use, disclosure, storage, and transmission of individually identifiable health information that we may obtain or have access to in connection with the provision of our services. These laws and regulations, including their interpretation by governmental agencies, are subject to frequent change. These laws and regulations include the following.
|●||The HIPAA and its implementing regulations required expanded protection of the privacy and security of protected health information. Also required are the execution of certain contracts to safeguard protected health information and the adoption of standards for the exchange of electronic health information for health plans, healthcare clearinghouses, and certain healthcare providers, which we refer to as Covered Entities, and their business associates. Among the standards that HHS has adopted pursuant to HIPAA are standards for electronic transactions and code sets, unique identifiers for providers, employers, health plans, and individuals, security, electronic signatures, privacy, and enforcement. Actual failure to comply with HIPAA could result in fines and civil and criminal penalties, as well as contractual damages, which could harm our business, finances, and reputation.|
|●||The HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009, also known as the “Stimulus Bill,” effective February 22, 2010, modified HIPAA by setting forth health information security breach notification requirements and increasing penalties for violations of HIPAA, among other things. The HITECH Act requires individual notification for all breaches as defined by HIPAA, media notification of breaches affecting over 500 individuals located in the same region, and either prompt or annual reporting of breaches to HHS, depending on the number of affected individuals. The HITECH Act also replaced the prior monetary penalty system of $100 per violation and an annual maximum of $25,000 per violation with a four-tier system of sanctions for breaches. Penalties now range from a minimum of $100 per violation and an annual maximum of $25,000 per violation for the first tier to a minimum of $50,000 per violation and an annual maximum of $1.5 million per violation for the fourth tier. Failure to comply with HIPAA as modified by the HITECH Act could result in fines and penalties, criminal sanctions, and reputational damage that could harm our business.|
|●||Numerous federal and state laws and regulations govern the collection, retention, use, and disclosure of personal information. In addition to HIPAA, we are subject to various laws, rules and regulations related to privacy and information security, including those promulgated under the Gramm-Leach-Bliley Act and various state laws regulating the use and security of personal information. Those laws, rules, and regulations include requirements such as reasonable and appropriate safeguards to protect personal information or providing appropriate notice to consumers about how their personal information will be used or disclosed. State legislatures have been actively considering and enacting new laws addressing data security, security breach notification, and privacy. For example, the California Privacy Rights Act, the Colorado Privacy Act, and the Virginia Consumer Data Protection Act were all enacted recently and will become operative in 2023 (some provisions have already become operative). These areas may present implementation challenges, could be an enforcement priority for the state regulators, and could generate increased lawsuits by consumers and other individuals. Our management believes that we are currently operating in compliance with these areas of law. However, continued compliance with these evolving laws, rules and regulations regarding the privacy, security and protection of our customers’ data, or the|
|implementation of any additional privacy and security rules and regulations, could result in higher compliance and technology costs for us.|
|●||State data privacy and security laws that track federal requirements or impose more stringent or different requirements than HIPAA regarding storage, transmission, use, and disclosure of protected health information, general individually identifiable information, or other sensitive information. The CCPA imposes rules governing how businesses handle personal data of California residents. Companies that do business in California are required to disclose the types of data they collect, the purpose of the data collection, how the data will be used, and to expand organizational responsibilities pertaining to individual rights, accountability, and governance. Companies subject to the CCPA and CPRA have needed to comply with the applicable provisions of both laws by January 1, 2023.|
|●||Federal and state consumer protection laws are increasingly being applied by the U.S. Federal Trade Commission and states' attorneys general to regulate the collection, use, storage, and disclosure of personal or individually identifiable information, through websites or otherwise, and to regulate the presentation of website content.|
There is ongoing concern from privacy advocates, regulators and others regarding data protection and privacy issues, and the number of jurisdictions with data protection and privacy laws has been increasing. In addition, the scope of protection afforded to data subjects by many of these data protection and privacy laws has been increasing. Also, there are ongoing public policy discussions regarding whether the standards for deidentified, anonymous, or pseudonymized health information are sufficient, and the risk of re-identification sufficiently small, to adequately protect patient privacy. These discussions may lead to further restrictions on the use of such information. These initiatives or future initiatives could compromise our ability to access and use data or to develop or market current or future services.
The security measures that we and our third-party vendors and subcontractors have in place to ensure compliance with privacy and data protection laws and contractual commitments may not protect our facilities and systems from security breaches, acts of vandalism or theft, cyber incidents, misplaced or lost data, programming and human errors, or other similar events. The occurrence of a cyber incident that affects either individually identifiable health information or other confidential or proprietary information with which we have been entrusted may result in liability and hurt our reputation.
Additionally, as a business associate under HIPAA, we may also be liable for privacy and security breaches of protected health information and certain similar failures of our subcontractors. Even though we contractually require our subcontractors to safeguard protected health information as required by law, we still have limited control over their actions and practices. An actual or perceived breach of privacy or security of individually identifiable health information held by us or by our subcontractors may result in an enforcement action, including criminal and civil liability, against us, as well as negative publicity, reputational harm, and contractual ramifications with our clients.
We are not able to predict the full extent of the impact such incidents may have on our business if such incidents occur. Any failure we may have in complying with HIPAA may result in criminal or civil liability, and due to the heightened enforcement climate and recent changes to the law, the potential for enforcement action against business associates under HIPAA is now greater than in prior years. Enforcement actions against us could be costly and could interrupt regular operations, which may harm our business. While we have not received any notices of violation of the applicable privacy and data protection laws and believe we adequately protect our information, including in compliance with such laws, there can be no assurance that we will not receive such notices in the future. Further, costly breaches can occur regardless of our compliance infrastructure.
We operate in a highly regulated industry and must comply with a significant number of complex and evolving requirements. Achieving and sustaining compliance with state and federal statutes and regulation related to the healthcare industry may prove costly. Changes in these laws could restrict our ability to conduct our business. Further, if we fail to comply with these requirements, we could incur significant penalties and our reputation could suffer.
Our industry is highly regulated and subject to changing political, legislative, regulatory, and other influences. Changes in the laws and regulations may impact the operating environment and healthcare market and, by extension, our business. Among other impacts, existing and new laws and regulations affecting the healthcare industry could create
legal liabilities for us, cause us to incur additional costs and/or restrict our operations. These laws and regulations are complex and their application to specific services and relationships are not always clear. In particular, many existing laws and regulations affecting employee benefits, when enacted, did not anticipate the services that we provide, and these laws and regulations might be applied to our services in ways that we do not anticipate. Our failure to accurately anticipate the application of these laws and regulations, or our failure to comply, could create liability for us, result in adverse publicity, and negatively affect our business. Some of the risks we face from regulation are as follows:
|●||Healthcare Market Reforms. Healthcare services and benefits are delivered and reimbursed under an increasingly intricate, and frequently uncertain, statutory and regulatory framework. Ongoing efforts to repeal and/or reform part or all of the ACA, new payment models for certain federal healthcare programs, and efforts to slow the growth in healthcare spending and to alter the regulatory landscape have created uncertainty in the healthcare industry broadly. For instance, carriers and large employers might experience changes in the numbers of individuals they insure as a result of the elimination of the penalty associated with ACA’s individual mandate, possible repeal of guaranteed issue, and flux in the state and national exchanges under ACA. Although we are unable to predict with any reasonable certainty or otherwise quantify the likely impact of ACA reform efforts and other regulatory initiatives on our business model, financial condition, and operations, as well as changes in the business of our client base, may negatively impact our business.|
|●||Healthcare Cost Reforms. Legislative efforts at cost containment in healthcare programs are ongoing. For example, the American Taxpayer Relief Act of 2012 reduced Medicare payments to certain providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Similarly, at the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control costs, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services. These laws, and others, may result in additional reductions in Medicare and other healthcare funding.|
|●||The AKS, the federal False Claims Act, the Stark Law, and related laws. Providers and suppliers that accept reimbursement from federal and state healthcare programs, and those that contract with them, are required to comply with various laws and regulations intended to minimize the risk of fraud and abuse. These laws include the AKS, which attaches criminal liability to unlawful inducements for the referral of business reimbursable under federally-funded healthcare programs; the Stark Law, which attach repayment and monetary damages where a healthcare service provider seeks reimbursement for providing certain services to a patient who was referred by a physician that has certain types of direct or indirect financial relationships with such service provider; the federal False Claims Act, which attaches per-claim liability and potentially treble damages to the filing of false claims for federal payment; the federal prohibition on beneficiary inducements. Many states have also adopted similar laws that apply to any third-party payor including commercial plans.|
The False Claims Act prohibits intentionally submitting, conspiring to submit, or causing to be submitted, false or otherwise improper claims, records or statements to the federal government, or intentionally failing to return overpayments, in connection with reimbursement by federal government programs. PACE organizations are funded by both Medicare and Medicaid, and the Medicare risk-adjustment methodology applies to the Medicare component of PACE organization reimbursement. PACE submissions may also be comparable to state Medicaid risk-adjustment submissions and vary by state. Because risk adjustment submissions to Medicare and state Medicaid programs have a direct impact on the amounts that Medicare and Medicaid programs pay to PACE organizations, these activities may be the subject of scrutiny and litigation under the federal civil False Claims Act.
The False Claims Act provides for treble damages and mandatory minimum penalties per false claim or statement. In this context it is particularly notable that a significant portion of our revenue is derived from services provided to PACE organizations. In addition, violations of the Stark law and the federal Anti-Kickback Statute can also lead to liability under the federal False Claims Act. Most states have enacted
false claims laws analogous to the federal False Claims Act. In addition, the federal False Claims Act and some state false claims laws permit private individuals to file whistleblower lawsuits known as “qui tam” actions on behalf of the federal or state government. Many states have passed laws similar to the federal False Claims Act that pertain to all payors, not just items or services paid for by the federal government.
In addition, the HHS OIG and many state Medicaid agencies maintain lists of individuals and organizations that have been excluded from participation in a federal healthcare program. A significant part of our revenue is derived from our services as federal healthcare program providers, pharmacies, or contractors to federal healthcare program providers or plans and, as such, we need to comply with restrictions on employing or contracting with personnel and vendors who have been excluded from participation in federal healthcare programs. Adhering to the best practice of conducting monthly screenings against the federal and state exclusion lists for employees and contractors may be costly and resource-consuming, but failure to do so may give rise to significant administrative liability and sanctions.
Moreover, as contractors to PACE organizations and Medicare Advantage organizations (“MAOs”), we are subject to contractual provisions, which impose on us various obligations related to healthcare compliance and healthcare fraud, waste, and abuse reduction and elimination efforts. These obligations stem from the provisions contained in prime contracts between PACE organizations and MAOs, and the federal government. Examples of such flow-down provisions include subcontractor’s compliance with all applicable state and federal laws, subcontractor’s obligation to screen state and federal exclusion lists and obligation to conduct periodic audits, among many others.
|●||Various state licensure, registration, and certification laws are applicable to pharmacies, pharmacists, pharmacy technicians, other pharmacy personnel, and insurance administrators. If we are unable to maintain our licenses or if states place burdensome restrictions or limitations on non-resident pharmacies, this could limit or affect our ability to operate in some states. Additionally, if we or any of our personnel violate conditions of their pharmacy or pharmacist licensure, we could face penalties and lose valuable personnel.|
|●||A number of federal and state laws and registration requirements are applicable to the purchase, handling, and dispensing of controlled substances. If we are unable to maintain our registrations this could limit or affect our ability to purchase, handle, or dispense controlled substances and other violations of these laws could subject us to criminal or other sanctions.|
|●||Federal and state laws and policies require pharmacies to maintain, enroll, and participate in federal healthcare programs or to report specified changes in their operations to the agencies that administer these programs. If we do not comply with these laws, we may not be able to participate in some federal healthcare programs, which could compromise our ability to sell our solutions.|
|●||A number of FDA regulations and guidance documents are relevant to our business. Some technologies and software applications used in healthcare analytics, genomic testing, and analysis are considered medical devices and are subject to regulation by the FDA. However, the 21st Century Cures Act, signed into law in 2016, created new statutory exemptions for medical-related software, and the FDA has issued guidance documents describing its interpretation of these exemptions and other FDA policies of enforcement discretion for software and related technologies. If the FDA determines that any of our current or future services, technologies, or software applications are regulated by the FDA as medical devices, we will become subject to various laws, regulations, and policies enforced by the FDA or other governmental authorities, including both pre-market and post-market requirements, and we would need to bring the affected services, technologies, or software into compliance with such requirements. The FDA could also require that we cease marketing and/or recall the affected services, technologies, and software unless and until we bring them into compliance with FDA requirements. The FDA and state regulators, such as state boards of pharmacy, also regulate drug packaging and repackaging. Our drug packaging activities must comply with the relevant FDA and state statutes, regulations, and policies. Noncompliance with applicable FDA or state requirements, including those related to pharmaceutical and medical device promotional practices and the pre-market and post-market approval requirements for medical devices can result in an enforcement action that could substantially harm our business. Changes in existing regulatory|
|requirements, our failure to comply with current or future requirements, or adoption of new requirements could negatively affect our business.|
|●||Clinical laboratories that perform human genomic testing are subject to oversight by CMS and state regulators, including the Eliminating Kickbacks in Recovery Act of 2018. If the laboratories that we partner with for genomic testing are not in compliance with the applicable CMS or state laws or regulations, they could be subject to enforcement action, which could negatively affect our business.|
Further modifications to the Medicare Part D program and changes in pricing benchmarks may reduce revenue and impose additional costs on the industry.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 included a major expansion of the Medicare program with the addition of a prescription drug benefit under the new Medicare Part D program. The continued impact of these regulations on our business and operations depends upon a variety of factors, including our ongoing relationships with the Part D plans and the patient mix of our clients. Future modifications to the Medicare Part D program may reduce revenue and impose additional costs on the industry. In addition, contracts and fee schedules in the prescription drug industry, including our contracts with certain of our clients, use certain published benchmarks, including average wholesale price (“AWP”) to establish pricing for prescription drugs. Most of our contracts utilize the AWP standard. However, there can be no assurance that our clients will continue to utilize AWP, as previously calculated, or that other pricing benchmarks will not be adopted to establish prices for prescription drugs within the industry.
Legislative or regulatory initiatives related to climate change or other ESG matters could have a material adverse effect on our business.
Greenhouse gases may have an adverse effect on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. Such events could have a negative effect on our business. Concern over climate change may result in new or additional legislative and regulatory requirements to reduce or mitigate the effects of climate change on the environment, which could result in future tax, transportation, and utility increases, and could in turn have a material adverse effect on our business. Moreover, continuing political and social attention to climate change and environmental issues has resulted in both existing and pending international agreements and national, regional and local legislation, regulatory measures, reporting obligations and policy changes. There is increasing societal pressure in some of the areas where we operate to limit greenhouse gas emissions as well as other global initiatives. These agreements and measures may require, or could result in future legislation, regulatory measures or policy changes that would require operational changes, taxes, or purchases of emission credits to reduce emission of greenhouse gases from our operations, which may result in substantial capital expenditures.
Furthermore, increasing attention to climate change has resulted in governmental investigations and public and private litigation, which could increase our costs or otherwise adversely affect our business or results of operations. Any or all of these initiatives may result in significant operational changes and expenditures and could materially adversely affect our business, financial condition, and results of operations.
There is also increased focus, including by investors, customers, and other stakeholders, on these and other ESG and sustainability matters, including with respect to the use of plastic, energy, waste, and worker safety. Our reputation could be damaged if we do not, or are perceived to not, act responsibly with respect to sustainability matters, which could also have a material adverse effect on our business, results of operations, financial position, and cash flows.
Risks Related to Our Common Stock
Our executive officers, directors, and principal stockholders, if they choose to act together, will continue to have the ability to influence all matters submitted to stockholders for approval.
Our executive officers and directors, combined with our stockholders, who own more than five percent of our outstanding capital stock, in the aggregate, beneficially own shares representing approximately 43% of our capital stock. As a result, if these stockholders were to choose to act together, they may be able to influence all matters submitted to our stockholders for approval, as well as our management and affairs. This concentration of ownership control may:
|●||delay, defer, or prevent a change in control;|
|●||entrench our management and the Board of Directors; or|
|●||impede a merger, consolidation, takeover, or other business combination involving us that other stockholders may desire.|
As a result, these executive officers, directors, and current five percent or greater stockholders could pursue transactions that may not be in our best interests and could harm our business.
Some provisions of Delaware law, our amended and restated certificate of incorporation, and our amended and restated bylaws may deter third parties from acquiring us.
Our amended and restated certificate of incorporation and amended and restated bylaws, among other things:
|●||divide our Board of Directors into three staggered classes of directors that are each elected to three-year terms;|
|●||provide that the authorized number of directors may be changed only by resolution of our Board of Directors;|
|●||provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;|
|●||prohibit stockholder action by written consent;|
|●||authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive;|
|●||prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;|
|●||provide that special meetings of the stockholders may be called only by or at the direction of the Board of Directors, the chairman of our Board or the Chief Executive Officer; and|
|●||require advance notice to be given by stockholders for any stockholder proposals or director nominees.|
Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which may discourage, delay, or prevent someone from acquiring us or merging with us, whether or not it is desired by or beneficial to our stockholders. Under the DGCL, a corporation may not in general engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction.
These and the recently adopted Rights Agreement described below could have the effect of discouraging, delaying, or preventing a transaction involving a change in control of our company or could make it more difficult for you and other stockholders to elect directors of your choosing or to cause us to take other corporate actions that you desire.
Our amended and restated certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (c) any action asserting a claim against us arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws, (d) any action to interpret, apply, enforce, or determine the validity of our amended and restated certificate of incorporation or amended and restated bylaws, or (e) any other action asserting a claim against us that is governed by the internal affairs doctrine. We refer to each of these proceedings as a “covered proceeding.” In addition, our amended and restated certificate of incorporation provides that if any action, the subject matter of which is a covered proceeding, is filed in a court other than the specified Delaware courts without the approval of our Board of Directors, which we refer to as a “foreign action,” the claiming party will be deemed to have consented to (1) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (2) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the foreign action as agent for such claiming party. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to or unenforceable in respect of one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions. The exclusive forum provision in the Company’s amended and restated certificate of incorporation will not preclude or contract the scope of exclusive federal or concurrent jurisdiction for actions brought under the federal securities laws, including the Exchange Act or the Securities Act or the respective rules and regulations promulgated thereunder.
The price of our common stock historically has been volatile. This volatility may affect the price at which you could sell your common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock. This volatility may also impact assessments over the potential impairment of our assets.
The market price for our common stock has varied between a high of $6.95 and a low of $2.30 in the 12-month period ending on February 28, 2023. This volatility may affect the price at which you could sell the common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock. Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the other factors discussed in “Risks Relating to Our Business and Industry”; variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts’ estimates; and announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, or capital commitments.
In addition, the sale of substantial amounts of our common stock could adversely impact its price. As of February 28, 2023, we had outstanding approximately 26,870,660 shares of our common stock, of which approximately 1,601,118 are restricted, and options to purchase approximately 1,068,934 shares of our common stock (of which approximately 1,066,569 were exercisable) as of that date. The sale or the availability for sale of a large number of shares of our common stock in the public market could cause the price of our common stock to decline.
The volatility of our common stock may also impact assumptions relied upon in our assessments of the fair value of our assets, including our goodwill and intangible assets, and a decline in our stock price could result in potential impairment charges to these assets. During the second quarter of 2021 and through the date of this report, we experienced a sustained decline in the price of our common stock. If the stock price continues to decline or remains depressed, we may be required to assess our assets, including goodwill and intangible assets, for impairment, which may result in possible impairment charges for 2023.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires that we evaluate and determine the effectiveness of our internal control over financial reporting.
We may identify material weaknesses and other deficiencies in the design and operation of our internal controls over financial reporting, which may require remediation to correct in order to conclude that our internal controls over financial reporting are operating effectively. Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. We may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. If we are unable to comply with the requirements of Section 404 in a timely manner, or if we are unable to assert that our internal control over financial reporting is effective, then (a) investors may lose confidence in the accuracy and completeness of our financial reports; (b) the market price of our common stock could be negatively affected; and (c) we could become subject to investigations by the Nasdaq Global Market, on which our securities are listed, the SEC, or other regulatory authorities, which could require us to obtain additional financial and management resources.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change federal net NOLs and other pre-change federal tax attributes (such as research tax credits) to offset its post-change income may be limited. We may experience ownership changes as a result of shifts in our stock ownership that could limit the use of our NOLs. State NOL may be similarly or more stringently limited. As a result, if we earn net taxable income, our ability to use our pre-change NOLs to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, under the Tax Act, the amount of post-2017 NOLs that we are permitted to deduct in any taxable year is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the NOL deduction itself. In addition, the Tax Act generally eliminates the ability to carry back any NOL to prior taxable years, while allowing post-2017 unused NOLs to be carried forward indefinitely. There is a risk that due to regulatory changes, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, whether or not we attain profitability.
Our stockholder rights plan, or “poison pill,” includes terms and conditions that could discourage a takeover or other transaction that stockholders may consider favorable.
On July 25, 2022, our Board approved and adopted a Rights Agreement, dated as of July 25, 2022 (the “Rights Agreement”), by and between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. Pursuant to the Rights Agreement, the Board declared a dividend of one preferred share purchase right (each, a “Right”) for each outstanding share of our common stock (the “Common Shares”). The Rights were distributable to stockholders of record as of the close of business on August 5, 2022 (the “Record Date”). One Right also will be issued together with each Common Share issued by the Company after the Record Date, but before the Distribution Date (as defined in the Rights Agreement) (or the earlier redemption or expiration of the Rights) and, in certain circumstances, after the Distribution Date.
Generally, the Rights Agreement works by causing substantial dilution to any person or group that acquires
beneficial ownership of 10% or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender, or exchange offer or other business combination involving the Company that is not approved by the Board. The Rights Agreement is not intended to interfere with any merger, tender, or exchange offer or other business combination approved by the Board. The Rights Agreement also does not prevent the Board from considering any offer that it considers to be in the best interest of its stockholders. The description and terms of the Rights are set forth in the Rights Agreement, which has previously been filed as an exhibit to our public reports.
As discussed above, the effect of the Rights may be to discourage a third party from attempting to obtain a substantial position in our Common Shares or seeking to obtain control of us. To the extent any potential acquisition is deterred by the Rights, the Rights may make the removal of management difficult even if the removal would be considered beneficial to our stockholders generally and may have the effect of limiting stockholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by our management. The Rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by the Board.
The Rights and the Rights Agreement will expire upon the earliest to occur of (i) the date on which all of the Rights are redeemed, (ii) the date on which the Rights are exchanged, and (iii) the close of business on July 25, 2023.
Risks Related to Our Convertible Senior Subordinated Notes
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the 1.75% Convertible Senior Subordinated Notes due 2026 that we issued in February 2019 (the “2026 Convertible Notes”), depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Despite our current debt levels, we may still incur substantially more debt or take other actions that would intensify the risks discussed above.
Despite our current consolidated debt levels, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which in the future may be secured debt. We are not restricted under the terms of the indenture governing the 2026 Convertible Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt, or taking a number of other actions that could have the effect of diminishing our ability to make payments on the 2026 Convertible Notes when due.
We may not have the ability to raise the funds necessary to settle conversions of the 2026 Convertible Notes in cash or to repurchase the 2026 Convertible Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the 2026 Convertible Notes.
Holders of the 2026 Convertible Notes have the right to require us to repurchase all or a portion of their 2026 Convertible Notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the 2026 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the 2026 Convertible Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2026 Convertible Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the 2026 Convertible Notes surrendered therefor or the 2026 Convertible Notes being converted. In addition, our ability to repurchase the notes or to pay cash upon conversions of the 2026 Convertible Notes may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase 2026 Convertible Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the 2026 Convertible Notes as required by the
indenture would constitute a default under the indenture. A default under the indenture, or the fundamental change itself, could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 2026 Convertible Notes or make cash payments upon conversions thereof.
The conditional conversion feature of the notes, if triggered, may adversely affect our financial condition and operating results.
In certain circumstances specified in the indenture governing the 2026 Convertible Notes, holders of the 2026 Convertible Notes will be entitled to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their 2026 Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Convertible Notes as a current, rather than long-term, liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the 2026 Convertible Notes, could have a material effect on our reported financial results.
In August 2020, the FASB issued Account Standard Update, or ASU 2020-06, Debt - Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which updated the previous accounting guidance for convertible debt instruments under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20. ASU 2020-06 requires a convertible debt instrument to be accounted for as a single liability measured at its amortized cost. We adopted ASU 2020-06 effective January 1, 2021 for purposes of accounting for the 2026 Convertible Notes. Interest expense, recorded in the consolidated statements of operations, is closer to the coupon rate interest expense. In addition, the if-converted method, rather than the treasury stock method, must be used for the calculation of the diluted earnings per share calculation when accounting for the shares issuable upon conversion of the 2026 Convertible Notes, which could adversely affect our diluted earnings per share.
In connection with the 2026 Convertible Notes, we entered into convertible note hedge and warrant transactions that may affect the value of our common stock.
In connection with the pricing of the 2026 Convertible Notes, we entered into convertible note hedge transactions with one or more of the initial purchasers of the Convertible Notes and/or their respective affiliates, which we refer to as the “option counterparties.” We also entered into warrant transactions with the option counterparties. The convertible note hedge transactions are expected generally to reduce the potential dilution upon conversion of the 2026 Convertible Notes and/or offset any cash payments that we are required to make in excess of the principal amount of converted notes. However, the warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants.
In connection with establishing their initial hedges of the convertible note hedge and warrant transactions, the option counterparties or their respective affiliates purchased shares of our common stock and/or entered into various derivative transactions with respect to our common stock concurrently with, or shortly after, the pricing of the 2026 Convertible Notes. This activity may have increased (or reduced the size of any decrease in) the market price of our common stock at that time.
In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2026 Convertible Notes (and are likely to do so during any observation period related to a conversion of 2026 Convertible Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock.
In addition, if any such convertible note hedge and warrant transactions fail to become effective, the option counterparties may unwind their hedge positions with respect to our common stock, which could adversely affect the value of our common stock.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our Company’s principal properties as of December 31, 2022 are described below:
Our corporate headquarters is located in Moorestown, New Jersey, where we lease an aggregate of 74,565 square feet of space under three lease agreements that expire in January 2030. Our corporate headquarters contains administrative and executive office spaces, a facility for prospective medication risk management, that uses our proprietary technology and pharmacy distribution services, including competitive-inhibition informed robotic adherence packaging, and call centers to support our CareVention HealthCare services.
To support our medication and technology-enabled solutions, we also lease an aggregate of 22,619 square feet dedicated to medication fulfillment services in Boulder, Colorado; South San Francisco, California; and Warwick, Rhode Island. Our health plan management services, which include third-party administration services and pharmacy benefit management solutions, and related administrative offices lease an aggregate of 17,169 square feet in Webster Groves, Missouri; Eden Prairie, Minnesota; and Altoona, Wisconsin.
Item 3. Legal Proceedings
We are not currently involved in any significant claims or legal actions that, in the opinion of management, will have a material adverse impact on our Company.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our common stock has been listed on the Nasdaq Global Market under the symbol “TRHC” since September 29, 2016.
As of February 28, 2023, we had 76 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
We have never declared or paid any cash dividend on our common stock. We currently intend to retain all future earnings, if any, generated by our operations for the development and growth of our business for the foreseeable future. The decision to pay dividends is at the discretion of our Board of Directors and depends upon our financial condition, results of operations, capital requirements, and other factors that our Board of Directors deems relevant.
Stock Performance Graph
The following graph compares the five-year cumulative total stockholder return on our common stock, assuming reinvestment of dividends, to the cumulative total returns of the Nasdaq Health Care Index and the NYSE
Composite Index from December 31, 2017 to December 31, 2022. This graph assumes an investment of $100 in shares of our common stock on December 31, 2017.
The comparisons shown in the following graph are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
Purchases of Equity Securities
During the year ended December 31, 2022, we did not repurchase any shares of common stock.
Item 6. [Reserved]
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 2022 and 2021 financial condition and results of operations and year-to-year comparisons between 2022 and 2021. Similar discussion of our 2020 financial condition and results and year-to-year comparisons between 2021 and 2020 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, 2021. See also “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.
We are advancing the safe use of medication by creating solutions designed to empower pharmacists, providers, and patients to optimize medication regimens. Our advanced proprietary technology, MedWise®, identifies the causes of and risks for medication-related problems, including ADEs, so that healthcare professionals can minimize harm and reduce medication-related risks. Our software and services help drive value-based care by improving patient outcomes and lowering healthcare costs through reduced hospitalizations, emergency department visits, and healthcare utilization. Our vision and mission are supported by our experienced leadership team, our significant investments in our technology, services and people, and collaborations to advance precision 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 99% and 1% of revenue from continuing operations, respectively, for the year ended December 31, 2022.
Our total revenues from continuing operations for the years ended December 31, 2022 and 2021 were $299.5 million and $259.9 million, respectively. We incurred net losses from continuing operations for the years ended December 31, 2022 and 2021 of $77.3 million and $52.2 million, respectively.
In February 2022, we announced plans to evaluate non-core assets to refocus our corporate strategy and increase stockholder value, and we commenced an initial plan to sell the DoseMe business, which we acquired in January 2019. In March 2022, we completed our evaluation of additional divestiture opportunities and commenced plans to sell the SinfoníaRx and PrescribeWellness businesses, acquired in September 2017 and March 2019, respectively.
On August 1, 2022, we completed the sale of our unincorporated PrescribeWellness business division, and the assets, properties, and rights that were primarily used or held for use in connection with the PrescribeWellness Business, and the KD Assets (as defined below), to TDS. On the PW Sale Date, we also completed the acquisition of certain intellectual property from KD, which had historically been licensed to the Company (the “KD Assets”). The KD Assets acquired were simultaneously transferred to TDS on the PW Sale Date. The purchase consideration included $125 million in cash, subject to certain customary post-closing adjustments, of which $118.6 million was paid directly to us and $5.9 million was paid to KD on the PW Sale Date. In October 2022, TDS also paid us $1.5 million for certain customary post-closing adjustments. We are also entitled to receive up to $15.0 million in contingent consideration based upon the PrescribeWellness Business’s achievement of certain performance-based metrics during the fiscal years ending December 31, 2023 and 2024.
On January 20, 2023, we entered into a Share and Asset Purchase Agreement, to sell our unincorporated DoseMe Business, and the assets, properties, and rights that are primarily used or held for use in connection with the DoseMe Business. The purchase consideration included $2.0 million in cash, subject to certain customary post-closing adjustments, and a note receivable of $3.0 million with an annual interest rate of 7%, which matures on January 20, 2027.
On March 2, 2023, we entered into an Asset Purchase Agreement to sell our unincorporated SinfoníaRx business, and the assets, properties, and rights that are primarily used or held for use in connection with the SinfoníaRx Business. The purchase consideration included $1.4 million in cash, subject to certain customary post-closing adjustments and a note receivable of $3.6 million with an annual interest rate of 3%, which matures on December 31, 2023. We may also be entitled to receive up to $1.0 million in contingent consideration based upon potential regulatory changes affecting the business.
When we commenced plans to sell the PrescribeWellness, DoseMe, and SinfoníaRx businesses, these businesses (principally, PrescribeWellness) collectively comprised the majority of our MedWise HealthCare segment. Our sales of the PrescribeWellness, DoseMe and SinfoníaRx businesses represented a strategic business shift having a significant effect on our Company’s operations and financial results. As a result, we determined that these businesses met the requirements to be classified as held for sale and discontinued operations as of March 31, 2022, and the DoseMe and SinfoníaRx businesses continued to meet such requirements as of December 31, 2022. Accordingly, the accompanying consolidated financial statements in this Annual Report on Form 10-K have been recast for all periods presented to reflect the assets, liabilities, revenue, and expenses related to these businesses as discontinued operations.
Key Business Metrics
We continually monitor certain corporate metrics, including the following key metrics, that we believe are useful in evaluating and managing our operating performance as compared to that of other companies in our industry.
(Dollars in thousands)
Revenues from continuing operations
Net loss from continuing operations
We monitor the key metrics set forth in the preceding table to help us evaluate trends, establish budgets, and measure the effectiveness and efficiency of our operations.
We also monitor net revenue retention rate. 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 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 captures our cross-sell success, client expansion, changes in pricing, and client churn or downgrades.
During 2022 and 2021, we generated net revenue retention from continuing operations of 115% and 117%, respectively, driven by census growth at existing clients and cross-sell revenue.
Factors Affecting our Future Performance
We believe that our future success depends 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.
As described above, we completed the sales of the PrescribeWellness, DoseMe, and SinfoníaRx businesses in 2022 and early 2023. The continuing operations of the remaining components of our MedWise HealthCare segment promote medication safety and adherence to improve patient outcomes and reduce healthcare costs. 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 MSR and clinical assessment completed.
Components of Our Results of Continuing Operations
Our revenue is derived from our medication revenue and technology-enabled solutions revenue under our CareVention HealthCare and MedWise HealthCare segments. For the years ended December 31, 2022 and 2021, medication revenue represented 77% and 73%, respectively, of our total revenue from continuing operations. For the years ended December 31, 2022 and 2021, technology-enabled solutions revenue represented 23% and 27%, respectively, of our total revenue from continuing operations.
To provide improved description over our disaggregation of revenue, we retitled our revenue categories from product revenue and service revenue to medication revenue and technology-enabled solutions revenue, respectively, in the consolidated statements of operations and the notes to the consolidated financial statements. The change had no impact to the amounts previously reported in the consolidated statements of operations and the notes to the consolidated financial statements.
We provide medication fulfillment pharmacy services to PACE organizations under our CareVention HealthCare segment. 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, and is 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.
Technology-Enabled Solutions Revenue
We provide medication safety services and health plan management services to PACE organizations under our CareVention HealthCare segment. These services primarily include medication safety services, risk adjustment services, PBM solutions, EHR solutions, and third-party administration services. Revenue related to these services primarily consists of a fixed monthly fee assessed on a PMPM basis, 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.
Technology-Enabled Solutions Revenue
Value-Based Care Solutions
We provide medication safety services under our MedWise HealthCare segment, 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 PMPM fees and fees for each medication review and clinical 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 clinical 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 (“SaaS”) solutions, which allow for the identification of individuals with high medication-related risk. Revenues related to SaaS solutions 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 Medication Revenue
Cost of medication revenue includes all costs directly related to the fulfillment and distribution of medications. These costs consist primarily of the purchase price of the medications we dispense, shipping, packaging, expenses associated with operating our medication fulfillment centers, including employment costs and stock-based compensation, and technology expenses. Such costs also include direct overhead expenses and allocated indirect overhead costs. We allocate indirect overhead costs among functions based on employee headcount. The purchase price of medications represented 81% of our total cost of medication revenue for the years ended December 31, 2022 and 2021.
Cost of Technology-Enabled Solutions Revenue
Cost of technology-enabled solutions revenue includes all costs directly related to servicing our technology service contracts and primarily consists of employment 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.
Research and Development Expenses
Our research and development expenses consist primarily of employment costs, including stock-based compensation, for employees engaged in scientific research, healthcare analytics, the design and development of new scientific algorithms, and the enhancement of our software and technology platforms. Research and development expenses also include 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 medication and technology 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 completed and when 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 believe that continued investment in our software solutions is important for our future growth. We expect that our research and development expenses will fluctuate in the short-term as we refocus on our core business but will decrease as a percentage of revenue in the long-term.
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 fluctuate in the short-term as we refocus on our core business 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 fluctuate in the short-term as we refocus on our core business but decrease as a percentage of revenue in the long-term.
Change in Fair Value of Contingent Consideration Receivable
In connection with the sale of the PrescribeWellness Business on August 1, 2022, we may be entitled to additional consideration based on the achievement of certain customer and revenue metrics. The contingent consideration is classified as an asset and is subject to remeasurement at each balance sheet date. Any change in the fair value of the contingent consideration receivable is reflected in our consolidated statements of operations as a change in fair value of the receivable. We adjust the carrying value of the contingent consideration receivable until the contingency is finally determined or final payment is received.
Long-Lived Asset Impairment Charge
Long-lived assets consist of property and equipment, operating lease right-of-use assets, software development costs, and definite-lived intangible assets. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that we consider in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If 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. An impairment loss may be recognized when estimated undiscounted future cash flows expected to result from the use and disposition of an asset are less than its carrying amount. The impairment loss would
be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows or a combination of income and market approaches.
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 our convertible senior subordinated notes (the “2026 Notes”), our Loan and Security Agreement with Western Alliance Bank (the “2020 Credit Facility”) prior to its termination on August 1, 2022, and the promissory notes related to the purchase consideration for the acquisition of Personica, LLC. Interest expense also includes the amortization of debt discount and debt issuance costs related to our various debt arrangements and imputed interest.
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021 (Continuing Operations)
The following table summarizes our results of operations for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended December 31,
Technology-enabled solutions revenue
Cost of revenue, exclusive of depreciation and amortization shown below:
Cost of medication revenue
Cost of technology-enabled solutions revenue
Total cost of revenue, exclusive of depreciation and amortization
Research and development
Sales and marketing
General and administrative
Change in fair value of contingent consideration receivable
Long-lived asset impairment charge
Depreciation and amortization
Total operating expenses
Loss from operations
Other income (expense):
Interest expense, net
Total other expense, net
Loss from continuing operations before income taxes
Income tax expense
Net loss from continuing operations
Net loss from discontinued operations, net of tax
Medication revenue increased $41.5 million, or 22%, from $189.6 million for the year ended December 31, 2021 to $231.1 million for the year ended December 31, 2022. Increased medication fulfillment volume from growth in the number of patients served by our existing clients, medication mix of prescriptions filled, and payer mix contributed $25.1 million to the increase. In addition, new CareVention HealthCare clients that started services since 2021 contributed $10.3 million to the increase in medication revenue during 2022. Revenue for medications dispensed on behalf of CareVention HealthCare by our community pharmacy network where we perform both medication fulfillment and PBM services also increased $6.1 million.
Technology-Enabled Solutions Revenue
Revenue generated from technology-enabled solutions decreased $1.8 million, or 3%, from $70.3 million for the year ended December 31, 2021 to $68.5 million for the year ended December 31, 2022.
Technology-enabled solutions revenue generated by our MedWise HealthCare segment decreased by approximately $7.8 million, or 66%, to $4.0 million for the year ended December 31, 2022, as compared to the same period in 2021. The decrease was primarily due to the conclusion of the EMTM pilot program on December 31, 2021, which contributed $9.2 million of revenues during the year ended December 31, 2021. As a result, no revenues related to the EMTM program were recognized after December 31, 2021. This decrease was partially offset by $1.4 million of revenue generated from new clients added since 2021.
Technology-enabled solutions revenue generated by our CareVention HealthCare segment increased by $6.0 million, or 10%, to $64.4 million for the year ended December 31, 2022, as compared to the same period in 2021. The increase was primarily attributable to new clients and growth within existing clients, primarily in our third-party
administration services division, and an increase in manufacturer rebates earned under our pharmacy benefit management services during the year ended December 31, 2022.
Cost of Medication Revenue
Cost of medication revenue increased $34.8 million, or 24%, from $143.7 million for the year ended December 31, 2021 to $178.5 million for the comparable period in 2022. Increased medication volume from growth in the number of patients served by our customers contributed approximately $27.9 million to the change, of which new clients contributed $6.7 million and $6.1 million was attributable to medications dispensed by our community pharmacy network where we perform both medication fulfillment and PBM services. The increase in cost of medication revenue was also due to a $4.2 million increase in distribution charges related to higher shipping costs and volume for the medications we fulfilled. Cost of medication revenue also increased $2.4 million due to employee compensation costs due to an increase in employee headcount.
Cost of Technology-Enabled Solutions Revenue
Cost of technology-enabled solutions revenue increased $4.4 million, or 9%, to $54.1 million for the year ended December 31, 2022 compared to the same period in 2021.
The increase was primarily comprised of $11.4 million of costs related to a new vendor arrangement for business process support and technology services for our third-party administration services and electronic health records solutions, and an $0.8 million increase in information technology expenses, including software licenses and hosting services. These increases were partially offset by a $6.1 million reduction in employee compensation costs, including stock-based compensation, for the employees hired by the third-party provider, and a $2.1 million reduction in resources contracted to deliver medication safety services due to the conclusion of the EMTM program on December 31, 2021.
Research and Development Expenses
Research and development expenses decreased by $0.1 million, or 1%, from $14.6 million for the year ended December 31, 2021 to $14.5 million for the year ended December 31, 2022.
The decrease was primarily due to a $1.1 million decrease in stock-based compensation expense compared to 2021. The decrease in research and development expenses was partially offset by investment in information technology spend of $0.4 million, a $0.4 million increase in professional services, and $0.4 million of expenses related to non-recurring business optimization initiatives during 2022, specifically efforts associated with consolidating our electronic health records solutions platforms.
Sales and Marketing Expenses
Sales and marketing expenses decreased $0.5 million, or 5%, to $10.5 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021.
The decrease was primarily attributable to a $0.8 million decrease in stock-based compensation expense, as compared to 2021 and a $0.3 million decrease in conference-related travel expenses, professional consulting services, and other costs related to branding and marketing strategies. These decreases were partially offset by an increase of $0.3 million in employee compensation costs and $0.2 million of severance costs related to the realignment of our resources.
General and Administrative Expenses
General and administrative expenses increased $11.9 million, or 19%, from $63.1 million for the year ended December 31, 2021, to $75.0 million for the year ended December 31, 2022.
The increase in general and administrative expenses was primarily due to a $3.3 million increase in stock-based compensation expense compared to 2021, of which $4.5 million related to incremental year over year expense a result of the vesting of restricted stock awards related to the retirement of former named executive officers, which was offset by a $1.2 million decrease in stock-based compensation expense due to a decrease in employee headcount. The increase in
general and administrative expenses was also due to a $2.7 million increase in professional services expense related to a new provider of enterprise support services we engaged during the fourth quarter of 2021 as part of our business optimization initiatives. The increase in general and administrative expenses also included $2.7 million of divestiture-related costs, $2.0 million of executive transition costs primarily related to the retirement and transition of former named executive officers, $1.2 million of severance costs, and $1.0 million of legal and advisory costs related to the Cooperation Agreement.
The increase in general and administrative expenses was partially offset by a $0.7 million decrease in employee compensation costs, primarily due to a decrease in employee headcount as a result of the Company’s business optimization initiative to outsource the enterprise support services previously mentioned.
Change in Fair Value of Contingent Consideration Receivable
In connection with the sale of the PrescribeWellness Business on August 1, 2022, we may be entitled to receive additional consideration based on the achievement of certain customer and revenue metrics for the periods ending December 31, 2023 and 2024. The contingent consideration receivable was recorded at the estimated fair value of $7.0 million on the sale date of August 1, 2022. During the year ended December 31, 2022, we recorded a $3.7 million charge to decrease the fair value of the contingent consideration receivable primarily due to updated estimates utilized in the contingent consideration calculation. The fair value of the contingent consideration receivable was $3.3 million as of December 31, 2022.
Long-Lived Asset Impairment Charge
During the year ended December 31, 2022, we recorded $8.9 million in long-lived asset impairment charges primarily due to the impairment of certain operating lease right of use assets and related property and equipment and impairment of certain capitalized software development costs.
During the fourth quarter of 2022, we determined that certain leased spaces no longer provided an economic benefit, and we vacated the leased spaces for our development centers in Moorestown, New Jersey and Charleston, South Carolina. As a result, we incurred $4.9 million in noncash impairment charges, of which $2.8 million was allocated to the operating lease right-of-use assets and $2.1 million was allocated to related property and equipment based on their relative carrying amounts.
During the first quarter of 2022, we became aware of changes in circumstances impacting the future application of certain capitalized software development costs and evaluated the recoverability of the related long-lived assets by comparing their carrying amount to the future net undiscounted cash flows expected to be generated by the assets to determine if the carrying value was not recoverable. The recoverability test indicated that certain capitalized software development costs were impaired. As a result, we recognized an impairment loss of $4.1 million for the year ended December 31, 2022.
We did not record any long-lived asset impairment charges for the year ended December 31, 2021.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $2.9 million, or 14% to $23.3 million for the year ended December 31, 2022.
This increase was primarily due to a $3.2 million increase in the amortization of capitalized software related to new software functionality placed into service since the end of 2021 to support our business. This increase was partially offset by a decrease in amortization expense of $0.5 million primarily due to definite-lived intangible assets which have been fully amortized since the end of the second quarter of 2021.
Interest expense decreased $0.1 million, from $9.1 million for the year ended December 31, 2021 to $9.0 million for the year ended December 31, 2022. The decrease was primarily due to the full satisfaction of the acquisition-related notes payable in October 2021 related to the October 2020 acquisition of Personica, LLC. Approximately $0.5
million of interest expense was recognized for the year ended December 31, 2021, related to the acquisition-related notes payable.
The decrease in interest expense was partially offset by a $0.4 million increase in expense due to amortization of the remaining balance of deferred financing costs to interest expense, as a result of terminating the 2020 Credit Facility. As discussed under Liquidity and Capital Resources below, the Company repaid and terminated the 2020 Credit Facility on August 1, 2022.
In connection with the sale of the PrescribeWellness Business, we entered into a transition services agreement (“TSA”) with TDS pursuant to which we are providing business support services for the PrescribeWellness Business after its sale. We recognized $1.1 million of income related to the TSA for the year ended December 31, 2022, which is reported in other income in our consolidated statement of operations.
For the years ended December 31, 2022 and 2021, we recorded income tax expense of $0.4 million, which resulted in an effective rate of (0.5)% and (0.8)%, respectively. Income tax expense was primarily related to indefinite-lived deferred tax liabilities for goodwill amortization. The effective tax rate differs from the U.S. statutory tax rate primarily due to the full valuation allowance recorded that is currently limiting the realizability of our net deferred tax assets as of December 31, 2022 and 2021. Accordingly, the tax benefit was limited due to unbenefited losses during the year ended December 31, 2022 and 2021. As of December 31, 2022, the Company recorded a full valuation allowance against its deferred tax assets.
On February 12, 2021, the Company received a private letter ruling from the Internal Revenue Service, which determined, based on information submitted and representations made by the Company, that the Company met the requirements to deduct the interest expense resulting from the amortization of the debt discount associated with the 2026 Notes. As a result, the Company recorded a deferred tax asset of $26.3 million and a corresponding $26.3 million increase to its valuation allowance.
Net Loss from Discontinued Operations, Net of Tax
During the first quarter of 2022, we announced plans to evaluate non-core assets and commenced plans to sell the SinfoníaRx, PrescribeWellness, and DoseMe businesses, which were acquired in September 2017, March 2019, and January 2019, respectively. We completed the sales of the PrescribeWellness, DoseMe, and SinfoníaRx businesses on August 1, 2022, January 20, 2023 and March 2, 2023, respectively. Our sales of the PrescribeWellness, DoseMe and SinfoníaRx businesses represented a strategic business shift having a significant effect on our operations and financial results. As a result, we determined that these businesses met such requirements to be classified as held for sale and discontinued operations as of March 31, 2022 and the DoseMe and SinfoníaRx businesses continued to meet the requirements as of December 31, 2022. Accordingly, all related assets and liabilities and the results of operations for all periods presented are classified as discontinued operations in the consolidated financial statements.
Net loss from discontinued operations, net of tax, for the SinfoníaRx and DoseMe businesses was $43.6 million and $18.1 million for the years ended December 31, 2022 and 2021, respectively. Net loss from discontinued operations, net of tax, for the PrescribeWellness Business was $26.6 million and $8.7 million for the years ended December 31, 2022 and 2021, respectively. See Note 6 in the notes to our consolidated financial statements as reported in this Annual Report on Form 10-K for additional information.
Liquidity and Capital Resources
We incurred net losses of $147.5 million, $79.1 million, and $81.0 million for the years ended December 31, 2022, 2021, and 2020, respectively. Our primary liquidity and capital requirements are for software development, research and development, sales and marketing, general and administrative expenses, and debt service obligations. We have funded our operations, working capital needs, and investments with cash generated through operations, proceeds from the divestiture of non-core businesses, issuance of stock, and borrowings under our credit facilities. As of December 31, 2022, we had unrestricted cash and cash equivalents of $70.0 million.
Summary of Cash Flows
The following table shows a summary of our cash flows for the years ended December 31, 2022, 2021, and 2020.
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash (1)
|(1)||The cash flows related to discontinued operations have not been segregated. Accordingly, the consolidated statements of cash flows and the following discussions include the results of continuing and discontinued operations. See Note 6 in the notes to the consolidated financial statements as reported in this Annual Report on Form 10-K.|
Net cash provided by operating activities was $7.4 million for the year ended December 31, 2022 and consisted of our net loss of $147.5 million, offset by the addition of noncash items of $133.2 million and changes in our operating assets and liabilities totaling $21.7 million. The noncash items primarily included $56.8 million of impairment charges primarily related to our long-lived assets, goodwill and operating lease right-of-use assets, $36.8 million of stock-based compensation expense, $30.7 million of depreciation and amortization expense, a $3.7 million change in fair value of contingent consideration receivable, a $2.9 million loss related to the sale of the PrescribeWellness Business, and $2.3 million of amortization of deferred financing costs and debt discounts primarily related to the 2026 Notes. The change in operating assets and liabilities was primarily due to an increase in accrued expenses and other liabilities, an increase in accounts payable due to the timing of vendor payments, and an increase in consideration payable to customers for our PBM solutions. The change in operating assets and liabilities was also due to a decrease in accounts receivable, primarily due to improved collections, and an increase in long-term liabilities due to the vendor financing arrangement entered into in February 2022 related to business process outsourcing and technology services for our third-party administration services and electronic health records solutions. The change in operating assets and liabilities was partially offset by an increase in client claims receivable due to increased growth in PBM services utilized by our pharmacy clients, and an increase in prepaid expenses and other current assets primarily due to an increase in contract assets related to rebate administration services under our PBM solutions.
Net cash provided by operating activities was $15.5 million for the year ended December 31, 2021 and consisted of our net loss of $79.1 million, offset by the addition of noncash items of $88.8 million and changes in our operating assets and liabilities totaling $5.7 million. The noncash items primarily included $47.7 million of depreciation and amortization expense, $38.5 million of stock-based compensation expense, $2.2 million of amortization of deferred financing costs and debt discounts primarily related to the 2026 Notes and acquisition-related notes payable, and a $0.5 million change in net deferred taxes, offset by acquisition-related contingent consideration paid of $0.1 million related to the Cognify acquisition. The change in operating assets and liabilities was primarily due to an increase in accrued expenses and other liabilities mostly due to increased consideration payable to clients under our rebate administration services and an increase in accrued employee compensation costs. The change in operating assets and liabilities was partially offset by an increase in prepaid expenses and other current assets primarily due to an increase in contract assets related to rebate administration services under our PBM solutions and an increase in non-trade receivables.
Net cash provided by investing activities was $91.3 million for the year ended December 31, 2022, and consisted primarily of $120.0 million of cash received related to the sale of the PrescribeWellness Business, which was offset by $26.4 million in software development costs for our CareVention HealthCare and MedWise HealthCare technologies and $2.3 million in purchases of property and equipment to support technology-related needs and infrastructure for our pharmacies and health plan management services.
Net cash used in investing activities was $35.2 million for the year ended December 31, 2021, which reflected $31.8 million in software development costs for our CareVention HealthCare and MedWise HealthCare technologies. Net cash used in investing activities also included $3.4 million in purchases of property and equipment primarily to support technology-related needs and infrastructure at our pharmacies, call center locations, and Moorestown, New Jersey headquarters, as well as fixtures and improvements for our new office space in Eden Prairie, Minnesota and for an expansion of our pharmacy in Boulder, Colorado.
Net cash used in financing activities was $32.0 million for the year ended December 31, 2022 and consisted primarily of $29.5 million of net principal repayments on our 2020 Credit Facility, which was terminated on August 1, 2022, $2.2 million of payments on employee taxes for shares withheld, and $0.4 million of payments for debt financing costs. The cash used in financing activities for the year ended December 31, 2022 was partially offset by $0.1 million of proceeds received from the exercise of stock options.
Net cash provided by financing activities was $6.9 million for the year ended December 31, 2021. Financing activities for the year ended December 31, 2021 primarily reflected $19.5 million of net borrowings on our 2020 Credit Facility mainly used to fund the repayment of the promissory notes in connection with the Personica acquisition. Proceeds received from the exercise of stock options totaled $4.1 million during the year ended December 31, 2021. The net cash provided by financing activities for the year ended December 31, 2021 was partially offset by repayments of $16.5 million related to the promissory notes in connection with the 2020 Personica acquisition.
On December 18, 2020, we entered into the 2020 Credit Facility with Western Alliance Bank (“WAB”), which provided 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 was scheduled to mature on May 16, 2025.
On August 1, 2022, we entered into a payoff letter with WAB with respect to the 2020 Credit Facility, pursuant to which we voluntarily elected to pay all amounts outstanding, including principal and interest, under the 2020 Credit Facility and related loan documents (the “Pay Off”) using cash on hand and proceeds from the sale of the PrescribeWellness Business. Accordingly, on August 1, 2022, we paid a total of $57.4 million to WAB for the Pay Off, and terminated the 2020 Credit Facility and related loan documents.
We believe that our unrestricted cash and cash equivalents of $70.0 million as of December 31, 2022, cash flows from continuing operations, and proceeds from the sales of the DoseMe and SinfoníaRx businesses, including $3.4 million received at closing, will be sufficient to fund our planned operations through the next twelve months and for the foreseeable future. Our ability to maintain successful operations will depend on, among other things, new business, the retention of clients, and the effectiveness of sales and marketing initiatives.
We may seek additional funding through public or private debt or equity financings. We may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect our stockholders. If we are unable to obtain funding, we could be forced to delay, reduce, or eliminate our research and development programs, product portfolio expansion, or commercialization efforts, which could adversely affect our business prospects. There is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all.
Future Cash Requirements
Our material future cash requirements primarily consist of principal and interest payments on our convertible senior subordinated notes, minimum payments on our vendor financing arrangements, minimum rental payments on our noncancelable operating leases, and minimum payments on legally binding service contracts. Contractual obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
The following table summarizes our estimated material future cash requirements as of December 31, 2022:
Payments due by period
Convertible senior subordinated notes, including interest
Vendor financing arrangements
Our convertible senior subordinated notes mature on February 15, 2026, unless earlier converted or repurchased. Interest payments on our convertible senior subordinated notes are payable semiannually at a rate of 1.75% per year.
Our vendor financing arrangements primarily consist of third-party business process support and technology services and software support. On February 24, 2022, we expanded our existing relationship with a third-party service provider for business process support and technology services designed to enhance the operational efficiency of our third-party administration services and transform our electronic health records solutions. As a result, the partner hired approximately 180 employees from our Company, hired to fill existing open positions, and augmented with additional resources to meet client demand. The agreement term is seven years and includes total estimated fees of $115.3 million. In order to determine the present value of the commitment, we used an imputed interest rate of 9.5%, which was reflective of our estimated uncollateralized borrowing rate at signing. As of December 31, 2022, the outstanding principal balance of the financing arrangement was $5.2 million with an unamortized discount of $1.2 million, which was included in accrued expenses and other liabilities and other long-term liabilities on our consolidated balance sheet. Imputed interest expense from the arrangement was $0.2 million for the year ended December 31, 2022.
On October 1, 2022, we entered into a purchase arrangement with a third-party software support and service provider to purchase software licenses for total fees of $1.1 million. The purchased software licenses were delivered to us on the purchase date. The arrangement allows us to pay the fees over 36 monthly installment payments.
Our existing office lease agreements provide us with the option to renew and generally provide for rental payments on a graduated basis. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations.
Other commitments include $9.3 million of minimum purchase obligations under certain vendor agreements that provide information technology services.
Effective March 2019, we entered into an Affiliated Pharmacy Agreement and Pharmaceutical Program Supply Agreement with Thrifty Drug Stores, Inc., which was replaced on July 1, 2020 by a new Affiliated Pharmacy Agreement and Pharmaceutical Program Supply Agreement, to provide us with the pharmaceutical products that we sell. The contract commits us to a minimum purchase obligation of 98% of our total prescription product requirements from Thrifty Drug Stores through March 2024. The table above does not include future payments to Thrifty Drug Stores because certain terms of these payments were not determinable at December 31, 2022 due to the timing and volume of future purchases.
Critical Accounting Policies and Significant Judgments and Estimates
We base this management's discussion and analysis of our financial condition and results of operations on our consolidated financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. We consider these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.
Our significant accounting policies, and related estimates and assumptions, are described more fully in Note 2 – Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K. We believe the following accounting policies are the most critical to the judgments and estimates we use in the preparation of our consolidated financial statements.
We provide technology-enabled solutions tailored toward the specific needs of healthcare organizations, payers, providers, and pharmacies. These solutions can be integrated or provided on a standalone basis. Contracts generally have a term of one to five years and generally renew at the end of the initial term. In most cases, clients may terminate their contracts with a notice period ranging from zero to 180 days without cause, thereby limiting the term in which we have enforceable rights and obligations. Revenue is recognized in an amount that reflects the consideration that is expected in exchange for the goods or services.
We use the practical expedient to not account for significant financing components because the period between recognition and collection does not exceed one year for most of our contracts. We do not disclose the amount of variable consideration that we expect to recognize in future periods as the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation, and the terms of that variable consideration relate specifically to our efforts to transfer the distinct service, or to a specific outcome from transferring the distinct service. Our customers’ contracts primarily include monthly fees associated with unspecified membership, claims, or MSRs that fluctuate throughout the contract.
We provide medication fulfillment pharmacy services to PACE organizations under our CareVention HealthCare segment. 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 PBM, and is 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.
Technology-Enabled Solutions Revenue
We provide medication safety services and health plan management services to PACE organizations under our CareVention HealthCare segment. These services primarily include medication safety services, risk adjustment services, PBM solutions, EHR solutions, and third-party administration services. Revenue related to these services primarily consists of a fixed monthly fee assessed on a PMPM basis, 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.
For client contracts for which we perform both medication fulfillment and the PBM services, we recognize revenue using the gross method at the contract price negotiated with our clients and when we have concluded that we control the prescription drug before it is transferred to the client plan members. We control prescriptions dispensed indirectly through our retail pharmacy network because we have separate contractual arrangements with those pharmacies, have discretion in setting the price for the transaction, and assume primary responsibility for fulfilling the promise to provide prescription drugs to our client plan members while performing the related PBM services. These factors indicate that we are the principal and, as such, we recognize the total prescription price contracted with clients in revenue.
Value-Based Care Solutions
We provide medication safety services under our MedWise HealthCare segment, 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 PMPM fees and fees for each medication review and clinical 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 clinical assessments are completed. We generally bill for the medication safety services on a monthly basis.
Software Subscription and Services
We provide SaaS solutions under our MedWise HealthCare segment, which allow for the identification of individuals with high medication-related risk. Revenues related to these SaaS solutions 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.
Goodwill consists of the excess purchase price over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized but is tested for impairment annually by reporting unit. Based on these considerations, we have determined that our two operating segments, CareVention HealthCare and MedWise HealthCare, each represent a reporting unit for our goodwill impairment assessment.
GAAP provides an entity with an option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount prior to performing the quantitative assessment. If this is the case, the quantitative impairment test is required. If the quantitative impairment test is required, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and an impairment loss is recognized for any excess of the carrying amount over the reporting unit’s fair value.
In 2022, the fair value of the reporting units was estimated using a market approach, which estimates fair value based on a reconciliation of the Company’s market capitalization. In 2021, the fair value of the reporting units was estimated using a combination of a discounted cash flow method, or income approach, and market approaches, whi