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.
Overview
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.
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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.
Year Ended
December 31,
Change
(Dollars in thousands)
Revenues from continuing operations
Net loss from continuing operations
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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
Revenue
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.
CareVention HealthCare
Medication Revenue
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.
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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.
MedWise HealthCare
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
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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
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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
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.
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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,
Change
Revenue:
Medication revenue
Technology-enabled solutions revenue
Total 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
Operating expenses:
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
Other income
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
Net loss
Medication Revenue
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
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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
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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
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
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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.
Other Income
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.
Income Taxes
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 Sinfon í aRx businesses continued to meet the requirements as of December 31, 2022. Accordingly, al l 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.
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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.
Year Ended
December 31,
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)
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 .
Operating Activities
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 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.
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Investing Activities
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.
Financing Activities
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.
Funding Requirements
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.
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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
Less
More
than 1
than 5
Total
year
1-3 years
3-5 years
years
(In thousands)
Convertible senior subordinated notes, including interest
Vendor financing arrangements
Operating leases
Other commitments
Total
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.
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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.
Revenue Recognition
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.
Medication Revenue
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.
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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
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, which estimate fair value based on a selection of appropriate peer group companies. The determination of the fair value of the reporting units requires us to make significant assumptions and estimates, which include, but are not limited to: forecasts of revenue, operating income, income taxes, capital expenditures, and working capital requirements; the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount rates; terminal growth rates; and long-term operating margin assumptions. We also consider each reporting unit’s current and historical financial results and the current industry trends. Our estimates can be affected by several factors, including general economic, industry, and regulatory conditions; the risk-free interest rate environment; our market capitalization; and our ability to achieve our forecasted operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results.
We complete our goodwill impairment assessment on October 1 of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
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2022 and 2021 Goodwill Impairment Tests
During our annual impairment analysis as of October 1, 2022 and 2021, we evaluated qualitative factors that could indicate whether the fair value of our reporting units may be lower than the carrying value. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test as of October 1, 2021. However, during the fourth of quarter of 2021 and the first and second quarters of 2022, we experienced a sustained decline in the market price of our Company’s common stock and determined that an indicator of impairment was present. As a result, we performed a quantitative goodwill impairment assessment as of December 31, 2021, March 31, 2022, June 30, 2022 and our annual impairment assessment as of October 1, 2022 for each reporting unit.
The fair value of the CareVention HealthCare reporting unit exceeded its carrying value by a significant margin as each of testing date. The fair value of the MedWise HealthCare reporting unit exceeded its carrying value by approximately 11%, 22%, 6%, and 15% as of December 31, 2021, March 31, 2022, June 30, 2022 and October 1, 2022, respectively. As a result, goodwill was not impaired as of December 31, 2021 and 2022.
2020 Goodwill Impairment Tests
For the year ended December 31, 2020, we performed a qualitative assessment of goodwill and determined that it was not more likely than not that the fair value of our reporting units was less than the carrying amount. Accordingly, no impairment loss was recorded for the year ended December 31, 2020.
Impairment of Long-Lived Assets, Including Other Intangible Assets
Long-lived assets consist of property and equipment, 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.
Although we believe the carrying values of our long-lived assets are currently realizable, future events could cause us to conclude otherwise. If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was expected, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.
During the fourth quarter of 2022, we determined that certain leased spaces no longer provided an economic benefit and either terminated the leases or vacated the leased spaces. 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 ROU 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 equal to $4.1 million for the year ended December 31, 2022.
During the fourth quarter of 2021, we determined that an indicator of impairment was present as it related to the financial performance of the DoseMe business. We evaluated the recoverability of the related intangible assets and determined that the estimated fair value of the asset group was greater than its carrying value. As a result, the related
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intangible assets were not impaired and no impairment charges were recorded for the year ended December 31, 2021.
During the fourth quarter of 2020, we became aware of changes in circumstances impacting the future performance of our pharmacy cost management services, which relate to certain intangible assets acquired from the Medliance acquisition in 2014. We evaluated the recoverability of the related intangible assets and determined that certain customer relationships and developed technology intangible assets were impaired. As a result, we recognized noncash impairment charges of $5.0 million to the related intangible assets for the year ended December 31, 2020.
Assets Held for Sale and Discontinued Operations
A long-lived asset (or disposal group) is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable within a year. A long-lived asset (or disposal group) classified as held for sale is initially measured at the lower of its carrying amount or fair value less costs to sell. An impairment loss is recognized for any initial or subsequent write-down of the long-lived asset (or disposal group) to fair value less costs to sell. A gain or loss not previously recognized by the date of the sale of the long-lived asset (or disposal group) is recognized at the date of derecognition.
Long-lived assets (including those that are part of a disposal group) are not depreciated or amortized while they are classified as held for sale. Long-lived assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet.
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. These businesses collectively comprised the majority of our MedWise HealthCare segment. We sold the PrescribeWellness business on August 1, 2022, the DoseMe business in January 2023, and the SinfoníaRx business in March 2023. 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.
During the second quarter of 2022, as a result of our intention to sell the PrescribeWellness business, we prepared an impairment test on the related net assets held for sale. Using a market approach to determine fair value, we concluded that the carrying value of the net assets held for sale for the PrescribeWellness business did not exceed its fair value, less costs to sell. As a result, we recorded goodwill impairment charges of $12.1 and impairment charges of $8.5 on net assets held for sale. On August 1, 2022, we recorded an additional $2.9 million for the final loss on the sale of the PrescribeWellness business, resulting in an aggregate loss of $11.4 million on the net assets sold for the year ended December 31, 2022.
In 2022, as a result of our intention to sell the DoseMe and SinfoníaRx businesses, we prepared an impairment test on the related net assets held for sale. Using a market approach to determine fair value, we concluded that the carrying values of the net assets held for sale for the SinfoníaRx and DoseMe businesses did not exceed their fair values, less costs to sell. As a result, we recorded $6.1 million of goodwill impairment charges and $21.1 million of impairment charges on the net assets held for sale related to the DoseMe and SinfoníaRx businesses for the year ended December 31, 2022.
Recent Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for a summary of new accounting standards.
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