SEC Filing | Tabula Rasa HealthCare, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐ 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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, par value $0.0001 per share	TRHC	The Nasdaq Stock Market

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 July 31, 2019, the Registrant had 22,088,187 shares of Common Stock outstanding.

Table of Contents

TABULA RASA HEALTHCARE, INC.

QUARTERLY REPORT ON FORM 10-Q

For the period ended June 30, 2019

TABLE OF CONTENTS

		Page
		Number

PART I	Financial Information	3
Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	3
	Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018	4
	Unaudited Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018	5
	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52
PART II	Other Information	53
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
Signatures		55

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)


	June 30,		December 31,
	2019		2018
Assets
Current assets:
Cash	$	52,137	$	20,278
Restricted cash		4,565		4,751
Accounts receivable, net		32,950		27,950
Inventories		3,683		3,594
Prepaid expenses		3,346		2,573
Other current assets		6,315		4,165
Total current assets		102,996		63,311
Property and equipment, net		14,435		11,865
Operating lease right-of-use assets		22,602		—
Software development costs, net		13,292		8,248
Goodwill		150,922		108,213
Intangible assets, net		202,144		77,206
Deferred income tax assets		—		75
Note receivable		—		1,000
Other assets		1,319		1,039
Total assets	$	507,710	$	270,957
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt and finance leases, net	$	548	$	945
Current operating lease liabilities		4,070		—
Acquisition-related contingent consideration		8,540		43,397
Accounts payable		11,132		14,830
Accrued expenses and other liabilities		28,078		16,556
Total current liabilities		52,368		75,728
Line of credit		—		45,000
Long-term debt and finance leases, net		220,198		152
Noncurrent operating lease liabilities		21,666		—
Long-term acquisition-related contingent consideration		10,200		7,800
Deferred income tax liability		19,223		—
Other long-term liabilities		113		3,268
Total liabilities		323,768		131,948

Commitments and contingencies (Note 17)

Stockholders' equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018		—		—
Common stock, $0.0001 par value; 100,000,000 shares authorized, 22,244,227 and 20,719,297 shares issued and 22,081,777 and 20,557,537 shares outstanding at June 30, 2019 and December 31, 2018, respectively		2		2
Additional paid-in capital		271,811		209,330
Treasury stock, at cost; 162,450 and 161,760 shares at June 30, 2019 and December 31, 2018, respectively		(3,865)		(3,825)
Accumulated deficit		(84,006)		(66,498)
Total stockholders’ equity		183,942		139,009
Total liabilities and stockholders’ equity	$	507,710	$	270,957

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				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenue:
Product revenue	$	33,372	$	27,378	$	64,354	$	54,558
Service revenue		42,883		21,220		72,860		37,984
Total revenue		76,255		48,598		137,214		92,542
Cost of revenue, exclusive of depreciation and amortization shown below:
Product cost		24,861		20,075		48,336		40,907
Service cost		20,295		12,335		38,488		23,167
Total cost of revenue, exclusive of depreciation and amortization		45,156		32,410		86,824		64,074
Operating expenses:
Research and development		5,197		2,922		10,747		5,135
Sales and marketing		6,871		2,314		11,721		4,316
General and administrative		12,883		6,528		26,626		12,405
Change in fair value of acquisition-related contingent consideration expense		1,830		35,283		3,006		48,804
Depreciation and amortization		9,078		3,966		15,377		8,014
Total operating expenses		35,859		51,013		67,477		78,674
Loss from operations		(4,760)		(34,825)		(17,087)		(50,206)
Other expense:
Interest expense, net		4,308		120		7,001		183
Total other expense		4,308		120		7,001		183
Loss before income taxes		(9,068)		(34,945)		(24,088)		(50,389)
Income tax benefit		(2,539)		(5,919)		(6,580)		(3,269)
Net loss	$	(6,529)	$	(29,026)	$	(17,508)	$	(47,120)
Net loss per share, basic and diluted	$	(0.32)	$	(1.53)	$	(0.86)	$	(2.50)
Weighted average common shares outstanding, basic and diluted		20,482,032		18,956,445		20,433,564		18,873,297

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)


	Stockholders' Equity
	For the Three and Six Months Ended June 30, 2019
	Common Stock			Treasury Stock			Additional		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Equity
Balance, January 1, 2019	20,719,297	$	2	(161,760)	$	(3,825)	$	209,330	$	(66,498)	$	139,009
Issuance of common stock in connection with acquisition	149,053		—	—		—		9,504		—		9,504
Issuance of common stock awards	9,547		—	—		—		—		—		—
Issuance of restricted stock	565,840		—	—		—		—		—		—
Exercise of stock options	82,686		—	(690)		(40)		1,077		—		1,037
Issuance of common stock in connection with the settlement of acquisition-related contingent consideration	614,225		—	—		—		(609)		—		(609)
Conversion feature of convertible senior subordinated notes, net of allocated debt issuance costs, net of tax	—		—	—		—		74,049		—		74,049
Purchase of convertible note hedges	—		—	—		—		(101,660)		—		(101,660)
Sale of warrants in connection with convertible senior subordinated notes	—		—	—		—		65,910		—		65,910
Stock-based compensation expense	—		—	—		—		6,852		—		6,852
Net loss	—		—	—		—		—		(10,979)		(10,979)
Balance, March 31, 2019	22,140,648		2	(162,450)		(3,865)		264,453		(77,477)		183,113
Issuance of common stock awards	30,101		—	—		—		—		—		—
Issuance of restricted stock	23,562		—	—		—		—		—		—
Exercise of stock options	49,916		—	—		—		499		—		499
Conversion feature of convertible senior subordinated notes, net of allocated debt issuance costs, tax effect	—		—	—		—		(47)		—		(47)
Stock-based compensation expense	—		—	—		—		6,906		—		6,906
Net loss	—		—	—		—		—		(6,529)		(6,529)
Balance, June 30, 2019	22,244,227	$	2	(162,450)	$	(3,865)	$	271,811	$	(84,006)	$	183,942

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	Stockholders' Equity
	For the Three and Six Months Ended June 30, 2018
	Common Stock			Treasury Stock			Additional		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Equity
Balance, January 1, 2018	19,371,005	$	2	(73,466)	$	(959)	$	144,074	$	(19,229)	$	123,888
Common stock offering issuance costs	—		—	—		—		(2)		—		(2)
Issuance of restricted stock	395,254		—	—		—		—		—		—
Forfeitures of restricted shares	—		—	(2,474)		—		—		—		—
Shares repurchased	—		—	(80,000)		(2,866)		—		—		(2,866)
Exercise of stock options	374,904		—	—		—		902		—		902
Stock-based compensation expense	—		—	—		—		1,945		—		1,945
Net loss	—		—	—		—		—		(18,094)		(18,094)
Balance, March 31, 2018	20,141,163		2	(155,940)		(3,825)		146,919		(37,323)		105,773
Issuance of restricted stock	23,365		—	—		—		—		—		—
Exercise of stock options	216,989		—	—		—		1,253		—		1,253
Stock-based compensation expense	—		—	—		—		2,180		—		2,180
Net loss	—		—	—		—		—		(29,026)		(29,026)
Balance, June 30, 2018	20,381,517	$	2	(155,940)	$	(3,825)	$	150,352	$	(66,349)	$	80,180

See accompanying notes to unaudited consolidated financial statements.

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TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Six Months Ended
	June 30,
	2019		2018
Cash flows from operating activities:
Net loss	$	(17,508)	$	(47,120)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		15,377		8,014
Amortization of deferred financing costs and debt discount		4,603		41
Deferred taxes		(6,633)		(3,067)
Stock-based compensation		13,758		4,125
Change in fair value of acquisition-related contingent consideration		3,006		48,804
Acquisition-related contingent consideration paid		(24,450)		—
Other noncash items		12		29
Changes in operating assets and liabilities, net of effect from acquisitions:
Accounts receivable, net		(2,383)		(4,195)
Inventories		(89)		(593)
Prepaid expenses and other current assets		(1,468)		(2,152)
Other assets		(140)		196
Accounts payable		(5,571)		(2,057)
Accrued expenses and other liabilities		5,661		1,800
Other long-term liabilities		(40)		(64)
Net cash (used in) provided by operating activities		(15,865)		3,761

Cash flows from investing activities:
Purchases of property and equipment		(3,508)		(2,564)
Software development costs		(6,618)		(2,155)
Purchases of intangible assets		—		(30)
Proceeds from repayment of note receivable		1,000		—
Acquisitions of businesses, net of cash acquired		(158,762)		(6,957)
Net cash used in investing activities		(167,888)		(11,706)

Cash flows from financing activities:
Payments for repurchase of common stock		—		(2,866)
Proceeds from exercise of stock options		1,536		2,173
Payments for debt financing costs		(9,477)		(2)
Borrowings on line of credit		—		8,000
Repayments of line of credit		(45,000)		—
Payments of equity offering costs		—		(357)
Payments of acquisition-related contingent consideration		(20,342)		(1,646)
Repayments of long-term debt and finance leases		(541)		(514)
Proceeds from issuance of convertible senior subordinated notes		325,000		—
Proceeds from sale of warrants		65,910		—
Purchase of convertible note hedges		(101,660)		—
Net cash provided by financing activities		215,426		4,788
Net increase (decrease) in cash and restricted cash		31,673		(3,157)
Cash and restricted cash, beginning of period		25,029		10,430
Cash and restricted cash, end of period	$	56,702	$	7,273

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	$	291	$	452
Cash paid for interest	$	364	$	121
Cash paid for taxes	$	279	$	—
Interest costs capitalized to property and equipment and software development costs, net of depreciation and amortization	$	148	$	—
Stock issued in connection with acquisitions	$	9,504	$	—

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 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 cloud-based software solutions provide prescribers, pharmacists, pharmacies 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, 2018, which are included in the Company’s annual report on Form 10-K filed on March 1, 2019 (“2018 Form 10-K”). 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 to present fairly the Company's interim consolidated financial position for the periods indicated. The interim results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, 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 audited consolidated financial statements and accompanying notes included in the Company’s 2018 Form 10-K.

(b) Use of Estimates

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.

On an ongoing basis, management evaluates its estimates and assumptions, including, but not limited to, those related to: (i) the fair value of assets acquired and liabilities assumed for business combinations, (ii) the recognition and disclosure of contingent liabilities, (iii) the useful lives of long-lived assets (including definite-lived intangible assets), (iv) the evaluation of revenue recognition criteria, (v) assumptions used in the Black-Scholes option-pricing model to determine the fair value of stock-based compensation instruments, (vi) the realizability of long-lived assets including goodwill and intangible assets, (vii) the assumptions used to determine the fair value of right-of-use assets and liabilities for the Company’s leases, and (viii) the assumptions used to determine the fair value of convertible debt instruments and related equity-classified conversion option. These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company has engaged and may, in the future, engage third-party valuation specialists to assist with estimates related to the valuation of assets and liabilities acquired. Such estimates often require the selection of appropriate valuation methodologies and models, and significant judgment in evaluating ranges of assumptions and financial inputs. Actual results may differ from those estimates under different assumptions or circumstances.

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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 evaluates its contractual arrangements to determine the performance obligations and transaction prices. Revenue is allocated to each performance obligation and recognized when the related performance obligation is 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 detail about the Company’s products and service lines.

(d) Cost of Product Revenue (exclusive of depreciation and amortization)

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 platforms. 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.

(e) Cost of Service Revenue (exclusive of depreciation and amortization)

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, data acquisition costs, 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.

(f) Restricted Cash

Cash and cash equivalents that are restricted as to withdrawal or use under certain contractual agreements are recorded in restricted cash on the Company’s consolidated balance sheets. As part of the Company’s third party administrative services, which fall under the Company’s health plan management services, the Company holds funds on behalf of its clients. These amounts are recorded as restricted cash with an offsetting liability recorded in accrued expenses and other liabilities on the Company’s consolidated balance sheets.

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sum to the total cash and restricted cash as reported in the consolidated statements of cash flows.


		June 30,
	2019		2018
Cash	$	52,137	$	6,406
Restricted cash		4,565		867
Total cash and restricted cash as presented in the consolidated statement of cash flows	$	56,702	$	7,273

(g) Accounts Receivable, net

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the Company’s clients’ financial condition, the amount of receivables in dispute and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. The allowance for doubtful accounts was $1,223 and $528 as of June 30, 2019 and December 31, 2018, respectively.

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

(h) Leases

The Company determines if an arrangement is a lease at inception. As of January 1, 2019, operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of long-term debt and finance leases, and long-term debt and finance leases in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

ROU assets and liabilities are recognized at the lease commencement date based on the estimated net present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate in determining the net present value of lease payments. The estimated incremental borrowing rate is derived from relevant market information and other publicly available data for instruments with similar characteristics at the lease commencement date.

Leases with an initial term of 12 months or less are not recorded on the balance sheet. The lease expense for short-term leases is recognized on a straight-line basis over the lease term. Many leases include options to renew, with the exercise of lease renewal options at the Company’s sole discretion. The lease terms that include options to renew the lease require such renewal to be included when it is reasonably certain that the Company will exercise such option. The depreciable life of finance lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

The Company’s lease agreements do not contain any residual value guarantees. The Company has elected to include both lease and nonlease components as a single lease component for its operating leases.

(i) Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) and, thereafter, has subsequently provided updates and improvements (as so updated and improved, "ASU 2016-02"). The new standard establishes a 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 was effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which provides an additional modified transition method by which entities may elect to initially apply the transition requirements in ASU 2016-02 at the effective date with the effects of initial application recognized as a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, and without retrospective application to any comparative prior periods presented. The Company adopted ASU 2016-02 on January 1, 2019 using the modified transition method permitted by ASU 2018-11.

The Company elected the package of practical expedients permitted under the transition guidance, which permits the Company to carry forward its prior conclusions about lease identification, lease classification, and initial direct costs, but did not elect the hindsight practical expedient. ROU assets and liabilities for the Company’ existing leases were recognized on January 1, 2019 based on the estimated net present value of lease payments over the remaining lease term. The adoption of ASU 2016-02 resulted in the recording of lease assets and lease liabilities of $18,469 and $21,173, respectively, as of January 1, 2019. The standard had no impact on the Company’s opening balance of retained earnings, consolidated net earnings or cash flows. See Note 7 for additional information on the Company’s leases.

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

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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 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 incurred in a hosting arrangement that is a service contract with the requirements for capitalization of 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. Revenue

The Company provides technology-enabled solutions tailored toward the specific needs of the healthcare organizations 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, directly to healthcare organizations. Revenue from MRM prescription fulfillment services is generally recognized when medications are delivered and control has passed to the client and is generally billed monthly. At the time of delivery, 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 identification of high risk individuals, patient engagement, medication regimen reviews, and software for pharmacists to track clinical interventions regarding optimizing medication therapy, including dosing, and methodologies to increase adherence. 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

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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. Fees for these services are generally billed monthly. 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. Set-up activities that do not have value apart from the broader health plan management services provided to the client and that do not represent a separate performance obligation are recognized over the contract term as services are provided. Set-up activities that have value apart from the services provided to the client represent a separate performance obligation and as such, are recognized as performed.

Pharmacy cost management services. The Company has a stand ready obligation to provide monthly pharmacy cost management services which include 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 fees from the sale of drug utilization data are 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. The Company's MRM and health plan management clients consist primarily of healthcare payors, providers, and pharmacies. The Company’s pharmacy cost management clients consist primarily of post-acute care facilities. Substantially all of the Company’s revenue is recognized in the United States (“U.S.”) and substantially all of the Company’s assets are located in the U.S.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
		2019		2018		2019		2018
Major service lines:
MRM prescription fulfillment services	$	33,372	$	27,378	$	64,354	$	54,558
MRM services		29,242		16,659		49,200		30,354
Health plan management services		9,317		3,132		18,300		4,837
Pharmacy cost management services		4,238		1,366		5,246		2,661
Other services		86		63		114		132
	$	76,255	$	48,598	$	137,214	$	92,542

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

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 June 30, 2019 and December 31, 2018.


	June 30,		December 31,
	2019		2018
Contract assets	$	4,557	$	3,075
Contract liabilities		5,483		1,733

Contract assets as of June 30, 2019 consisted of $2,411 related to data analytics contract assets, $1,310 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 $836 related to the gain-share component of completed health plan management services contracts. Contract assets as of December 31, 2018 consisted of $2,913 related to data analytics contract assets and $162 related to the gain-share component of completed health plan management services contracts. 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 as of June 30, 2019 consisted of $2,456 related to acquired performance obligations for software services contracts associated with the Company’s acquisitions of DoseMe and PrescribeWellness in the first quarter of 2019 (see Note 5), $1,049 related to advanced billings for prescription medications not yet fulfilled or dispensed, $1,011 related to advanced payments received for service obligations on MRM performance guaranteed contracts, $829 related to performance obligations on software maintenance contracts for electronic health records solutions, and $138 related to unamortized setup fees on health plan management contracts. The contract liabilities as of December 31, 2018 consisted of $858 related to advanced billings for prescription medications not yet fulfilled or dispensed, $730 related to performance obligations on software maintenance contracts for electronic health records solutions, and $145 related to 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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Significant changes in the contract assets and the contract liabilities balances during the six months ended June 30, 2019 are as follows:


	June 30,
	2019
Contract assets:
Contract assets, beginning of period	$	3,075
Decreases due to cash received		(5,070)
Changes to the contract assets at the beginning of the year as a result of changes in estimates		290
Increases, net of reclassifications to receivables		6,262
Contract assets, end of period	$	4,557

Contract liabilities:
Contract liabilities, beginning of period	$	1,733
Revenue recognized that was included in the contract liabilities balance at the beginning of the period		(1,408)
Increases due to cash received, excluding amounts recognized as revenue during the period		2,868
Increases due to business combinations, excluding amounts recognized as revenue during the period		2,290
Contract liabilities, end of period	$	5,483

During the six months ended June 30, 2018, the Company recognized $1,257 of revenue that was included in the December 31, 2017 contract liability balance of $1,350.

4. Net Loss per Share

Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock of the Company outstanding during the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period plus the impact of dilutive securities, to the extent that they are not anti-dilutive.

The following table presents the calculation of basic and diluted net loss per share for the Company’s common stock:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Numerator (basic and diluted):
Net loss	$	(6,529)	$	(29,026)	$	(17,508)	$	(47,120)
Denominator (basic and diluted):
Weighted average shares of common stock outstanding, basic and diluted		20,482,032		18,956,445		20,433,564		18,873,297
Net loss per share, basic and diluted	$	(0.32)	$	(1.53)	$	(0.86)	$	(2.50)

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

The following potential common shares, presented based on amounts outstanding for the three and six months ended June 30, 2019 and 2018 were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect.



	June 30,
	2019	2018
Stock options to purchase common stock	2,948,279	2,602,641
Unvested restricted stock	1,445,817	1,061,879
Common stock warrants	4,646,393	—
Contingently issuable shares	5,000	154,150
	9,045,489	3,818,670

Shares of common stock associated with the potential conversion of the Company’s convertible senior subordinated notes have been excluded in the table above.

5. Acquisitions

2019 Acquisitions

PrescribeWellness

On March 5, 2019, the Company entered into, and consummated the transactions contemplated by, a Merger Agreement (the “Merger Agreement”) with Prescribe Wellness, LLC, a Nevada limited liability company (“PrescribeWellness”) and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as the initial Holder Representative. PrescribeWellness is a leading cloud-based patient engagement solutions company that facilitates collaboration between more than 10,000 pharmacies with patients, payers, providers, and pharmaceutical companies. The Company paid $150,000 in cash consideration upon closing, subject to certain customary adjustments as set forth in the Merger Agreement. A portion of the closing consideration is being held in escrow to secure potential claims for indemnification under the Merger Agreement and in respect of adjustments to the consideration under the Merger Agreement.

In connection with the acquisition of PrescribeWellness, the Company incurred direct acquisition costs of $59 and $3,230 during the three and six months ended June 30, 2019, respectively, which were recorded in general and administrative expenses in the consolidated statements of operations.

The fair value of the acquisition consideration, net of post-closing adjustments, was $148,626 paid in cash.

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The following table summarizes the preliminary allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


Accounts receivable	$	2,608
Prepaid expenses and other current assets		1,345
Property and equipment		1,155
Operating lease right-of-use-assets		1,467
Trade name		4,100
Developed technology		20,000
Patient database		21,700
Client relationships		74,100
Goodwill		30,846
Total assets acquired	$	157,321

Operating lease liabilities		(1,467)
Trade accounts payable		(1,733)
Accrued expenses and other liabilities		(5,495)
Total purchase price	$	148,626

The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimated fair values. The identifiable intangible assets principally included a trade name, developed technology, patient database, and client relationships, all of which are subject to amortization on a straight-line basis and are being amortized over a weighted average of 5, 10, 5, and 14 years, respectively. The weighted average amortization period for acquired intangible assets as of the date of acquisition is 11.40 years.

The Company, with the assistance of a third-party appraiser, assessed the fair value of the assets of PrescribeWellness. The fair value of the trade name and developed technology was estimated using the relief from royalty method. The Company derived the hypothetical royalty income from the projected revenues of PrescribeWellness. The fair value of client relationships was estimated using a multi period excess earnings method. To calculate fair value, the Company used cash flows discounted at a rate considered appropriate given the inherent risks associated with each client grouping. The fair value of the patient database was estimated using a cost to replace method.

The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method.

The amortization of intangible assets is deductible for income tax purposes.

The Company believes the goodwill related to the acquisition of PrescribeWellness resulted from the establishment of new market opportunities while at the same time expanding its service offering to its existing customer base. The goodwill is deductible for income tax purposes.

Revenue from PrescribeWellness is primarily comprised of subscription fees for its cloud-based patient engagement solutions. Revenue for these services, and the related costs, is recognized each month as performance obligations are satisfied and costs are incurred, and is included in service revenue and cost of revenue – service cost, respectively, in the Company’s consolidated statements of operations. For the three and six months ended June 30, 2019, service revenue of $7,919 and $10,110, respectively, from PrescribeWellness was included in the Company’s consolidated statements of operations. Service revenue was recorded net of a reduction of $544 and $747 for the three and six months ended June 30, 2019, respectively, due to the purchase accounting effects of recording deferred revenue at fair value. Net loss of $2,925 and $3,796, which includes amortization of $3,277 and $4,151 associated with acquired intangible assets, from PrescribeWellness was included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2019, respectively.

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