SEC Filing | Tabula Rasa HealthCare, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-37888

Tabula Rasa HealthCare, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State of incorporation)	46-5726437 (I.R.S. Employer Identification No.)
228 Strawbridge Drive, Suite 100 Moorestown, NJ 08057 (Address of Principal Executive Offices, including Zip Code)	(866) 648 - 2767 (Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒	Non-accelerated filer ☐	Smaller reporting company ☐

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2018, the Registrant had 20,465,936 shares of Common Stock outstanding.

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TABULA RASA HEALTHCARE, INC.

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2018

TABLE OF CONTENTS

		Page
		Number

PART I	Financial Information	3
Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3
	Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017	4
	Unaudited Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2018	5
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	51
PART II	Other Information	52
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
Signatures		56

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	September 30,		December 31,
	2018		2017
Assets	(unaudited)		(as adjusted)*
Current assets:
Cash	$	13,947	$	10,430
Accounts receivable, net		25,020		17,087
Inventories		3,613		2,795
Rebates receivable		242		342
Prepaid expenses		2,469		2,253
Other current assets		7,269		2,544
Total current assets		52,560		35,451
Property and equipment, net		11,025		9,243
Software development costs, net		6,861		5,001
Goodwill		90,919		74,613
Intangible assets, net		68,677		62,736
Deferred income tax assets		3,938		—
Other assets		556		788
Total assets	$	234,536	$	187,832
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	1,028	$	921
Acquisition-related contingent consideration ($35,929 payable in common stock as of September 30, 2018)		73,788		1,640
Accounts payable		10,553		16,218
Accrued expenses and other liabilities		21,945		8,988
Total current liabilities		107,314		27,767
Line of credit		26,500		—
Long-term debt		340		784
Long-term acquisition-related contingent consideration		—		31,789
Deferred income tax liability		—		989
Other long-term liabilities		2,785		2,615
Total liabilities		136,939		63,944

Commitments and contingencies (Note 17)

Stockholders' equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017		—		—
Common stock, $0.0001 par value; 100,000,000 shares authorized, 20,512,499 and 19,371,005 shares issued and 20,356,559 and 19,297,539 shares outstanding at September 30, 2018 and December 31, 2017, respectively		2		2
Additional paid-in capital		157,353		144,074
Treasury stock, at cost; 155,940 and 73,466 at September 30, 2018 and December 31, 2017, respectively		(3,825)		(959)
Accumulated deficit		(55,933)		(19,229)
Total stockholders’ equity		97,597		123,888
Total liabilities and stockholders’ equity	$	234,536	$	187,832

*See Note 3 to accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenue:			(as adjusted)*				(as adjusted)*
Product revenue	$	28,045	$	23,780	$	82,603	$	68,995
Service revenue		26,373		8,951		64,357		21,150
Total revenue		54,418		32,731		146,960		90,145
Cost of revenue, exclusive of depreciation and amortization shown below:
Product cost		21,100		18,418		62,007		53,151
Service cost		13,958		5,047		37,125		10,937
Total cost of revenue, exclusive of depreciation and amortization		35,058		23,465		99,132		64,088
Operating expenses:
Research and development		3,380		1,527		8,515		4,037
Sales and marketing		2,669		1,325		6,985		3,869
General and administrative		7,824		4,098		20,229		16,097
Change in fair value of acquisition-related contingent consideration (income) expense		(8,419)		923		40,385		960
Depreciation and amortization		4,096		2,166		12,110		5,730
Total operating expenses		9,550		10,039		88,224		30,693
Income (loss) from operations		9,810		(773)		(40,396)		(4,636)
Other expense:
Interest expense		232		174		415		327
Total other expense		232		174		415		327
Income (loss) before income taxes		9,578		(947)		(40,811)		(4,963)
Income tax (benefit) expense		(838)		(7,112)		(4,107)		(6,852)
Net income (loss)	$	10,416	$	6,165	$	(36,704)	$	1,889
Net income (loss) attributable to common stockholders:
Basic	$	10,416	$	6,165	$	(36,704)	$	1,889
Diluted	$	10,416	$	6,165	$	(36,704)	$	1,889
Net income (loss) per share attributable to common stockholders:
Basic	$	0.54	$	0.37	$	(1.93)	$	0.11
Diluted	$	0.47	$	0.33	$	(1.93)	$	0.10
Weighted average common shares outstanding:
Basic		19,217,623		16,699,102		18,989,334		16,483,169
Diluted		22,288,873		18,646,031		18,989,334		18,411,800

*See Note 3 to accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)



														Total
	Preferred Stock			Common Stock			Treasury Stock			Additional		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Equity
Balance, January 1, 2018, as adjusted*	—	$	—	19,371,005	$	2	(73,466)	$	(959)	$	144,074	$	(19,229)	$	123,888
Common stock offering issuance costs	—		—	—		—	—		—		(9)		—		(9)
Issuance of common stock in connection with acquisition	—		—	45,561		—	—		—		3,595		—		3,595
Issuance of restricted stock	—		—	433,459		—	—		—		—		—		—
Shares surrendered by stockholder	—		—	—		—	(2,474)		—		—		—		—
Shares repurchased	—		—	—		—	(80,000)		(2,866)				—		(2,866)
Net exercise of stock options	—		—	258,289		—	—		—		(18)		—		(18)
Exercise of stock options	—		—	404,185		—	—		—		2,590		—		2,590
Stock-based compensation expense	—		—	—		—	—		—		7,121		—		7,121
Net loss	—		—	—		—	—		—		—		(36,704)		(36,704)
Balance, September 30, 2018	—	$	—	20,512,499	$	2	(155,940)	$	(3,825)	$	157,353	$	(55,933)	$	97,597

*See Note 3 to accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Nine Months Ended
	September 30,
	2018		2017
Cash flows from operating activities:			(as adjusted)*
Net (loss) income	$	(36,704)	$	1,889
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		12,110		5,730
Amortization of deferred financing costs and debt discount		66		72
Deferred taxes		(4,536)		(7,144)
Stock-based compensation		7,121		7,776
Change in fair value of acquisition-related contingent consideration		40,385		960
Other noncash items		51		17
Changes in operating assets and liabilities, net of effect from acquisitions
Accounts receivable, net		(7,035)		(1,359)
Inventories		(818)		130
Rebates receivable		100		(30)
Prepaid expenses and other current assets		(5,015)		(18)
Other assets		267		(58)
Accounts payable		(5,163)		29
Accrued expenses and other liabilities		8,421		3,274
Other long-term liabilities		(7)		432
Net cash provided by operating activities		9,243		11,700

Cash flows from investing activities:
Purchases of property and equipment		(3,484)		(2,618)
Software development costs		(3,564)		(2,223)
Purchases of intangible assets		(29)		—
Acquisition of business, net of cash acquired		(21,981)		(34,452)
Net cash used in investing activities		(29,058)		(39,293)

Cash flows from financing activities:
Payments for repurchase of common stock		(2,866)		(959)
Proceeds from exercise of stock options		2,590		194
Payments for employee taxes for shares withheld		—		(2,123)
Payments for debt financing costs		(103)		(220)
Borrowings on line of credit		26,500		35,342
Repayments of line of credit		—		(342)
Payments of acquisition-related consideration		—		(550)
Payments of equity offering costs		(364)		(132)
Payments of contingent consideration		(1,646)		(1,498)
Repayments of long-term debt		(779)		(525)
Net cash provided by financing activities		23,332		29,187
Net increase in cash		3,517		1,594
Cash, beginning of period		10,430		4,345
Cash, end of period	$	13,947	$	5,939

Supplemental disclosure of cash flow information:
Acquisition of equipment under capital leases	$	442	$	—
Additions to property, equipment, and software development purchases included in accounts payable and accrued expenses	$	390	$	50
Deferred offering costs included in accounts payable	$	—	$	46
Cash paid for interest	$	251	$	146
Employee payroll taxes on exercise of stock options included in accrued expenses	$	348	$	—
Stock issued in connection with acquisition	$	3,595	$	11,541

*See Note 3 to accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

1. Nature of Business

Tabula Rasa HealthCare, Inc. (the “Company”) provides patient-specific, data-driven technology and solutions that enable healthcare organizations to optimize medication regimens to improve patient outcomes, reduce hospitalizations, lower healthcare costs and manage risk. The Company delivers its solutions through a comprehensive suite of technology-enabled products and services for medication risk management (“MRM”) and to support health plan management. The Company serves healthcare organizations that focus on populations with complex healthcare needs and extensive medication requirements. The Company's suite of cloud-based software solutions provides prescribers, pharmacists and healthcare organizations with sophisticated and innovative tools to better manage the medication-related needs of patients.

2. Summary of Significant Accounting Policies

The Company's significant accounting policies are disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2017, which are included in the Company’s annual report filed on Form 10-K on March 14, 2018. Since the date of those audited consolidated financial statements, there have been no changes to the Company's significant accounting policies, including the status of recent accounting pronouncements, other than those detailed below.

(a) Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals and adjustments), necessary for the fair statement of the Company's interim consolidated financial position for the periods indicated. The interim results for the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods, or any future year or period. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report as filed on Form 10-K.

(b) Liquidity

The Company's unaudited consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. Management believes that the Company's cash on hand of $13,947 as of September 30, 2018, cash flows from operations and borrowing availability under the Amended and Restated Loan and Security Agreement (as amended, the “Amended and Restated 2015 Revolving Line”) are sufficient to fund the Company's planned operations through at least December 31, 2019. See Note 11 for additional information. As of the date of this filing, the Company is in the process of evaluating potential refinancing options in order to increase its borrowing capacity. There are no assurances that the Company will be successful in refinancing its borrowing capacity on terms acceptable to the Company, if at all.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates or assumptions.

(d) Revenue Recognition

The Company evaluates its contractual arrangements to determine the performance obligations and transaction

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

prices. Revenue is allocated to each performance obligation and recognized when the related performance obligations are satisfied. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue. See Note 3 for additional information about the adoption of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). See Note 4 for additional detail about the Company’s products and service lines.

(e) Cost of Product Revenue

Cost of product revenue includes all costs directly related to the fulfillment and distribution of prescription drugs as part of the Company’s MRM offerings. Costs consist primarily of the purchase price of the prescription drugs the Company dispenses, expenses to package, dispense and distribute prescription drugs, and expenses associated with the Company's prescription fulfillment centers, including employment costs and stock-based compensation, and expenses related to the hosting of the Company’s technology platform. Such costs also include direct overhead expenses, as well as allocated miscellaneous overhead costs. The Company allocates miscellaneous overhead costs among functions based on employee headcount.

(f) Cost of Service Revenue

Cost of service revenue includes all costs directly related to servicing the Company’s MRM service contracts, which primarily consist of labor costs, outside contractors, technology services, hosting fees and overhead costs. In addition, service costs include all labor costs, including stock-based compensation expense, directly related to the health plan management and pharmacy cost management services and expenses for claims processing, technology services and overhead costs.

(g) Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, and has subsequently issued a number of amendments to ASU 2014-09. ASU 2014-09, as amended, represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. ASU 2014-09 sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. For public companies, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 and interim reporting periods within that reporting period. The Company adopted ASU-2014-09 as of January 1, 2018 using the full retrospective method. As a result, the Company revised the consolidated balance sheets as of December 31, 2017, and the consolidated statements of operations and cash flows for the three and nine months ended September 30, 2017, and related notes to the unaudited consolidated financial statements for the effects of adoption. See Note 3 for additional information.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02") and has subsequently issued a number of amendments to ASU 2016-02. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently analyzing its leasing arrangements and evaluating the practical expedients and accounting policy elections to determine the potential impact of the adoption of this standard. The Company is also in the process of assessing any potential impacts on its internal controls, business processes, and accounting policies related to both the implementation of, and ongoing compliance, with the new standard. The Company anticipates that this standard will

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

have a material impact on the Company’s consolidated financial statements, as all long-term leases will be capitalized on the consolidated balance sheet.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 provides guidance to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has adopted ASU 2016-15 effective January 1, 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (“ASU 2017-01”). ASU 2017-01 provides guidance for evaluating whether a set of transferred assets and activities (the “set”) should be accounted for as an acquisition of a business or group of assets. The guidance provides a screen to determine when a set does not qualify to be a business. When substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar assets, the set is not a business. Also to be considered a business, the set would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company has adopted ASU 2017-01 effective January 1, 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill to measure an impairment charge. Instead, entities will be required to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. ASU 2017-04 is effective for financial statements issued for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company believes the adoption of ASU 2017-04 will not have a material effect on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 amends the scope of modification accounting for share-based payment arrangements. The guidance requires modification accounting only if the fair value, vesting conditions, or the classification of the award (as equity or liability) changes as a result of a change in terms or conditions. ASU 2017-09 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company has adopted ASU 2017-09 effective January 1, 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounts (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns such payments to nonemployees with the current accounting requirements for share-based payments to employees. ASU 2018-07 is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company has elected to early adopt ASU 2018-07 as of September 30, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 updates the disclosure requirements for fair value measurements and is effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company is currently evaluating the potential impact of the adoption of this standard on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

incurred in a hosting arrangement that is a service contract with the requirements for capitalization implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. ASU 2018-15 is effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company is currently evaluating the potential impact of the adoption of this standard on the Company’s consolidated financial statements.

3. Adoption of New Accounting Policy

As described in Note 2, the Company adopted ASU 2014-09 on January 1, 2018 using the full retrospective method and applying the practical expedient in paragraph 606-10-65-1(f)(2) of the FASB Accounting Standards Codification (“ASC”), under which the Company used the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods for those completed contracts with variable consideration. The following is a summary of the changes in accounting policies and presentation resulting from the adoption of ASU 2014-09 on the Company’s consolidated unaudited financial statements.

MRM services

Per member per month fees bundled with prescription fulfillment services fees in the Company’s MRM contracts were previously classified as product revenue. Under ASU 2014-09, the per member per month fees are classified as service revenue and based on relative stand-alone selling prices. The Company continues to recognize the per member per month fees as the services are provided.

Health plan management services

Certain contracts for the Company’s health plan management services include fees based on the gains recognized by clients as a result of services provided. Revenue for these contracts was historically recognized when billed because the price was not fixed or determinable. Under ASU 2014-09, revenue from these contracts is recognized monthly as the health plan management services are provided. The revenue includes the contractual per member per month rate and an estimated gain earned during each reporting period.

Pharmacy cost management services

Data and statistics fees from drug manufacturers were previously recognized as revenue when received due to the unpredictable nature of the payment amounts and because fees were not fixed and determinable until received. Under ASU 2014-09, these fees are recognized when the data is submitted to the drug manufacturers. The fees recognized are estimated using historical data, and adjusted as necessary to reflect new information. The estimated fees are recorded as data analytics related contract assets and are included in other current assets on the consolidated balance sheets. As of September 30, 2018 and December 31, 2017, the balance of the data analytics contract asset was $4,732 and $1,842, respectively.

Impact on financial statements

The following tables summarize the impact of the adoption of ASU 2014-09 on the previously reported consolidated balance sheets as of December 31, 2017 and consolidated statements of operations for the three and nine months ended September 30, 2017. Financial statement line items that were not materially affected by the adoption of ASU 2014-09 are excluded. The adoption of ASU 2014-09 had no impact on cash provided by or used in operating, investing or financing activities in the consolidated statements of cash flows for the nine months ended September 30, 2017.

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)


		For the year ended
		December 31,
		2017
		As Previously Reported		Adjustment for ASU on Revenue Recognition		As Adjusted
Assets
Current assets:
Other current assets	$	702	$	1,842	$	2,544
Total current assets		33,609		1,842		35,451
Total assets	$	185,990	$	1,842	$	187,832
Liabilities and stockholders’ equity
Deferred income tax liability	$	545	$	444	$	989
Total liabilities		63,500		444		63,944
Stockholders' equity:
Accumulated deficit		(20,627)		1,398		(19,229)
Total stockholders’ equity		122,490		1,398		123,888
Total liabilities and stockholders’ equity	$	185,990	$	1,842	$	187,832


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2017						2017
		As Previously Reported		Adjustment for ASU on Revenue Recognition		As Adjusted		As Previously Reported		Adjustment for ASU on Revenue Recognition		As Adjusted
Revenue:
Product revenue	$	24,621	$	(841)	$	23,780	$	71,391	$	(2,396)	$	68,995
Service revenue		8,647		304		8,951		19,222		1,928		21,150
Total revenue		33,268		(537)		32,731		90,613		(468)		90,145
Cost of revenue, exclusive of depreciation and amortization shown below:
Product cost		18,979		(561)		18,418		54,847		(1,696)		53,151
Service cost		4,486		561		5,047		9,241		1,696		10,937
Total cost of revenue, exclusive of depreciation and amortization		23,465		—		23,465		64,088		—		64,088
Loss from operations		(236)		(537)		(773)		(4,168)		(468)		(4,636)
Net income	$	7,695	$	(1,530)	$	6,165	$	3,350	$	(1,461)	$	1,889

Net income attributable to common stockholders, basic	$	7,695	$	(1,530)	$	6,165	$	3,350	$	(1,461)	$	1,889
Net income attributable to common stockholders, diluted	$	7,695	$	(1,530)	$	6,165	$	3,350	$	(1,461)	$	1,889

Net income per share attributable to common stockholders, basic	$	0.46	$	(0.09)	$	0.37	$	0.20	$	(0.09)	$	0.11
Net income per share attributable to common stockholders, diluted	$	0.41	$	(0.08)	$	0.33	$	0.18	$	(0.08)	$	0.10

4. Revenue

The Company provides a comprehensive suite of technology-enabled solutions tailored toward the specific needs of the healthcare organizations and health plans it serves. These solutions can be integrated or provided on a standalone basis. Contracts generally have a term of one to five years and in some cases automatically renew at the end of the initial term. In most cases, clients may terminate their contracts with a notice period ranging from 0 to 180 days without cause, thereby limiting the term in which the Company has enforceable rights and obligations. Revenue is recognized in an amount that reflects the consideration that is expected in exchange for the goods or services. The Company uses the practical expedient not to account for significant financing components because the period between recognition and collection does not exceed one year for most of the Company’s contracts.

Product Revenue

MRM prescription fulfillment services. The Company has a stand ready obligation to provide prescription fulfillment pharmacy services, including dispensing and delivery of an unknown mix and quantity of medications,

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

directly to healthcare organizations. Revenue from MRM prescription fulfillment services is recognized when medications are shipped and control has generally passed to the client and is generally billed monthly. At the time of shipment, the Company has performed substantially all of its performance obligations under its client contracts and does not experience a significant level of returns or reshipments.

Service Revenue

MRM services. The Company provides an array of MRM services. These services include enrollment, medication regimen reviews, and software to identify high risk members and provide medication risk alerts and intervention tracking that enable pharmacists to optimize medication therapy. Revenue related to these performance obligations primarily consists of per member per month fees, monthly subscription fees, and per comprehensive medication review fees. MRM per member per month fees and monthly subscription fees are recognized based on their relative stand-alone selling prices as the services are provided. Additionally, certain of the Company’s MRM service contracts include a performance guarantee based on the number of comprehensive medication reviews completed and guarantees by the Company for specific service level performance. For these contracts, revenue is recognized as comprehensive medication reviews are completed at their relative stand-alone selling price which is estimated based on the Company’s assessment of the total transaction price under each contract. The stand-alone selling price and amount of variable consideration recognized are adjusted as necessary at the end of each reporting period. If client performance guarantees are not being realized, the Company records, as a reduction to revenue, an estimate of the amount that will be due at the end of the respective client’s contractual period. Fees for these services are generally billed monthly.

Health plan management services. The Company has a stand ready obligation to provide risk adjustment services, electronic health records solutions, and third party administration services, which the Company collectively refers to as health plan management services. The performance obligations are a series of distinct services that are substantially the same and have the same pattern of transfer. Revenue related to these performance obligations primarily consists of setup fees, per member per month fees, and in certain contracts a gain-share component. Revenue from these contracts is recognized monthly as the health plan management services are provided. The revenue includes the contractual per member per month rate and an estimated gain earned during each reporting period. Set-up fees related to health plan management contracts represent an upfront fee from the client to compensate the Company for its efforts to prepare the client and configure its system for the data collection process. The set-up activities do not have value apart from the broader health plan management services provided to the client and do not represent a separate performance obligation and as such, setup fees are recognized over the contract term as services are provided. Fees for these services are generally billed monthly.

Pharmacy cost management services. The Company has a stand ready obligation to provide monthly pharmacy cost management services which includes adjudication, pricing validation, utilization analysis and pharmacy transaction review services. The performance obligation is a series of distinct services that are substantially the same and have the same pattern of transfer. Revenue related to this performance obligation primarily consists of subscription fees based on a monthly flat fee or as a percentage of monthly transactions incurred and revenue generated from drug manufacturers for the sale of drug utilization data. Revenue from these services is recognized monthly as the pharmacy cost management services are provided at the contractual subscription fee rate and when the data is submitted to the drug manufacturers based on the estimated fair value of the data. The drug utilization fees recognized are estimated using historical data, and are adjusted as necessary to reflect new information. Drug utilization data is generally submitted monthly and collected 180 days after submission.

Disaggregation of revenue

In the following table, revenue is disaggregated by major service line. The Company manages its operations and allocates its resources as a single reportable segment. All of the Company’s revenue is recognized in the United States and all of the Company’s assets are located in the United States.

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

The Company's MRM and health plan management clients consist primarily of healthcare organizations, commercial health plans, and pharmacies. The Company’s pharmacy cost management clients consist primarily of post-acute care facilities.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2018		2017		2018		2017
Major service lines
MRM prescription fulfillment services	$	28,045	$	23,780	$	82,603	$	68,995
MRM services		15,467		6,138		45,821		12,526
Health plan management services		5,383		1,466		10,220		4,204
Pharmacy cost management services		5,412		1,289		8,073		4,264
Other services		111		58		243		156
	$	54,418	$	32,731	$	146,960	$	90,145

Contract balances

Assets and liabilities related to the Company’s contracts are reported on a contract-by-contract basis at the end of each reporting period. The following table provides information about the Company’s contract assets and contract liabilities from contracts with clients as of September 30, 2018 and December 31, 2017.


	September 30,		December 31,
	2018		2017
	(unaudited)			(as adjusted)*
Contract assets	$	6,857	$	1,842
Contract liabilities		4,240		1,350

*See Note 3 for additional information.

Contract assets as of September 30, 2018 consisted of $4,732 related to data analytics contract assets, $2,030 related to consideration for performance obligations completed related to MRM service contracts but which the Company does not have an unconditional right to the consideration, and $95 related to the gain-share component of completed health plan management services contracts. Contract assets as of December 31, 2017 consisted of $1,842 related to the data analytics contract asset. Contract assets are included in other current assets on the Company’s consolidated balance sheets. The contract assets are transferred to receivables when the rights to the additional consideration becomes unconditional. The contract liabilities primarily relate to advanced billings for prescription medications not yet fulfilled or dispensed, advanced payments received for service obligations on MRM performance guaranteed contracts, acquired performance obligations related to software maintenance contracts associated with our Mediture acquisition (see Note 6), and unamortized setup fees on health plan management contracts. Contract liabilities are included in accrued expenses and other current liabilities and in other long-term liabilities on the Company’s consolidated balance sheets. The Company anticipates that it will satisfy most of its performance obligations associated with its contract liabilities within a year.

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

Significant changes in the contract assets and the contract liabilities balances during the period are as follows:


	September 30,
	2018
	(unaudited)
Contract asset:
Contract asset, beginning of period	$	1,842
Decreases due to cash received		(1,949)
Increases, net of reclassifications to receivables		6,964
Contract asset, end of period	$	6,857

Contract liability
Contract liability, beginning of period	$	1,350
Revenue recognized that was included in the contract liability balance at the beginning of the period		(1,278)
Increases due to cash received, excluding amounts recognized as revenue during the period