The following discussion and analysis of our financial condition and results of our operations should be read together with our consolidated financial statements, including the related notes thereto, included elsewhere in this report. The following discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this report. Prior to
October 30, 2020, we were known as Healthcare Merger Corp.On October 30, 2020, we completed the Merger Transaction with Legacy SOC Telemed and, for accounting purposes, Healthcare Merger Corp.was deemed to be the acquired entity. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we", "our", "us", the "Company" or "SOC Telemed" is intended to mean the business and operations of SOC Telemed, Inc.and its consolidated subsidiaries as they currently exist. Overview We are the leading provider of acute care telemedicine services and technology to U.S.hospitals and healthcare systems, based on number of customers. We provide technology-enabled clinical solutions, which include acute teleNeurology, telePsychiatry, teleCritical Care (ICU), telePulmonology, teleCardiology and other specialties. We support time-sensitive specialty care when patients are vulnerable and may not otherwise have access. Our solution was developed to support complex workflows in the acute care setting by integrating our cloud-based software platform, Telemed IQ, with a panel of consult coordination experts and a network of clinical specialists to create a seamless, acute care telemedicine solution. We derive a substantial portion of our revenues from consultation fees generated under contracts with facilities that access our Telemed IQ software platform and clinical provider network. In general, our contracts are non-cancellable and typically have an initial one-to-three-year term, with an automatic renewal provision. They provide for a predetermined number of consultations for a fixed monthly fee and consultations in excess of the monthly allotment generate additional consultation fees, which we characterize as variable fee revenue. Revenues are driven primarily by the number of facilities, the consultations from our facilities, the number of services contracted for by a facility, the contractually negotiated prices of our services, and the negotiated pricing that is specific to that particular facility. Our revenues were $94.4 millionand $58.0 millionfor the years ended December 31, 2021and 2020, respectively, representing a period-over-period increase of 63%, including an incremental $29.3 millionof revenues from the Acquisition. We experienced higher core consultation volume during the year ended December 31, 2021, as compared to the year ended December 31, 2020, due to the Acquisition and the impact of the COVID-19 pandemic on the utilization of our core services. In recent periods, we have seen an improvement in our utilization rates for these services. We incurred net losses of $50.5 millionand $49.8 millionfor the years ended December 31, 2021and December 31, 2020, respectively. This increase was primarily due to our investments in growth, transaction costs associated with the Acquisition, and costs related to transitioning to becoming a public company. Recent Developments
February 2, 2022, we entered into the Transaction Agreement to be acquired by affiliates of investment funds advised Patient Square Capital, a dedicated health care investment firm, in an all-cash transaction that values SOC Telemedat approximately $364 million, including net debt. Subject to the terms, conditions and certain exceptions set forth in the Transaction Agreement, SOC Telemedstockholders will receive $3.00per share in cash, without any interest and subject to applicable withholding taxes, upon completion of the Transaction. The Transaction is expected to be completed in the second quarter of 2022, subject to the satisfaction or waiver of customary closing conditions, including the adoption and approval of the Transaction Agreement by SOC Telemedstockholders. See Note 27, Subsequent Events, in our consolidated financial statements included elsewhere in this report for further information. Because the Transaction is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented elsewhere in this report, including those that present forward-looking information as that term is defined elsewhere herein, assume the continuation of SOC Telemedas a public company. If the Transaction is consummated, our actions and results may be different than those anticipated by such forward-looking statements contained in this report, and such differences may be material. 44 COVID-19 Update The COVID-19 pandemic had an impact on the utilization levels of our core services when it was declared a global pandemic in March 2020, and, as a result, our financial condition and year-to-date results of operations have been negatively impacted. Immediately following the declaration of COVID-19 as a global pandemic, the utilization levels of our core services decreased by approximately 40% in the aggregate. We have seen improvement in the utilization rates of these solutions in recent periods and have nearly returned to normal utilization levels in the third quarter of 2021. The future impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the pandemic and the emergence of new variants of COVID-19, the impact on our customers and our sales cycles, the impact on our marketing efforts, and the effect on our suppliers, all of which are uncertain and cannot be predicted. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to our and our customers' operations and the operations of our third-party suppliers, along with any related global slowdown in economic activity, may result in decreased revenues and increased costs, and we expect such impacts on our revenues and costs to continue through the duration of the pandemic. Further, the economic effects of COVID-19 have financially constrained some of our prospective and existing customers' healthcare spending, offset by the increasing awareness that telemedicine can be a more cost-efficient model for hospitals and health systems to provide access to critical, clinical specialists and mitigate business disruption by assuring continuity of access to those providers. We have taken measures in response to the COVID-19 pandemic, including temporarily closing our offices and implementing a work-from-home policy for our workforce; suspending employee travel and in-person meetings; modifying our clinician provisioning protocols; and adjusting our supply chain and equipment levels. We may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, and stockholders. The net impact of these dynamics may negatively impact our ability to acquire new customers, complete implementations, and renew contracts with or sell additional solutions to our existing customers. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain. It is possible that the COVID-19 pandemic, the measures taken by the U.S.government, as well as state and local governments in response to the pandemic, and the resulting economic impact may materially and adversely affect our results of operations, cash flows and financial positions as well as our customers. We believe our business is well-positioned to benefit from the trends that are accelerating digital transformation of the health care industry as a result of the COVID-19 pandemic. The COVID-19 pandemic has had a significant impact on the telemedicine market by increasing utilization, awareness and acceptance among patients and providers. In the current environment, telemedicine has been promoted at the highest levels of government as a key tool for on-going healthcare delivery while access to healthcare facilities remains limited due to constraints in healthcare facilities' resources and general patient fear of traditional in-person visits. Moreover, with clinicians quarantined or otherwise relegated to their homes due to safety issues, telemedicine has provided a solution for remote providers to continue to care for patients and for hospitals to access additional specialists to augment remaining staff. During the COVID-19 pandemic, the U.S. Congressand the CMS have significantly reduced regulatory and reimbursement barriers for telemedicine. As a result, telemedicine spending increased starting in 2020, and we expect this trend to continue after the public health emergency. In addition to Medicare and Medicaid, many states have issued executive orders or permanent legislation removing or reducing the regulatory and reimbursement barriers for telemedicine.
Key Factors Affecting SOC Telemed Performance
The following factors have been important to our business and we expect them to impact our business, results of operations and financial condition in future periods: Attracting new facilities
Sustaining our growth requires continued adoption of our clinical solutions and platform by new and existing facilities. We will continue to invest in building brand awareness as we further penetrate our addressable markets. Our revenue growth rate and long-term profitability are affected by our ability to increase our number of facilities because we derive a substantial portion of our revenues from fixed and variable consultation fees. Our financial performance will depend on our ability to attract, retain and cross-sell additional solutions to facilities under favorable contractual terms. We believe that increasing our facilities is an integral objective that will provide us with the ability to continually innovate our services and support initiatives that will enhance experiences and lead to increasing or maintaining our existing recurring revenue streams.
Increase in the number of consultations on the
Our revenues are generated from consultations performed on our platform. We also realize variable revenue from facilities in connection with the completion of consultations that are in excess of their contracted number of monthly consultations. Accordingly, our consultation fee revenue generally increases as the number of visits increase. Consultation fee revenue is driven primarily by the number of consultations and facility utilization of our network of providers and the contractually negotiated prices of our services. Our success in driving increased utilization within the facilities under contract depends in part on the expansion of service lines with existing customers and the effectiveness of our customer success organization which we deploy on-site and through targeted engagement programs. We believe that increasing our current facility utilization rate is a key objective in order for our customers to realize tangible clinical and financial benefits from our solutions. 45
Continuous investment in growth
We plan to continue investing in our business, including our internally developed Telemed IQ software platform, so we can capitalize on our market opportunity and increasing awareness of the clinical and financial value that can be realized with telemedicine. We expect to continue to make focused investments in marketing to drive brand awareness, increase the number of opportunities and expand our digital footprint. We also intend to continue to invest in our customer success function to target expansion of our business and to attract new facilities. Although we expect these activities will increase our net losses in the near term, we believe that these investments will contribute to our long-term growth and positively impact our business and results of operations. Key Performance Measures We review several key performance measures, discussed below, to evaluate business and results, measure performance, identify trends, formulate plans and make strategic decisions. We believe that the presentation of such metrics is useful to its investors because they are used to measure and model the performance of companies such as ours, with recurring revenue streams. Number of facilities
We believe that the number of facilities using our platform are indicators of future revenue growth and our progress on our path to long-term profitability because we derive a substantial portion of our revenues from consultation fees under contracts with facilities that provide access to our professional provider network and platform. A facility represents a distinct physical location of a medical care site. The Acquisition of Access Physicians contributed 190 facilities as of
December 31, 2021. As of December 31, 2021 2020 Facilities 1,112 831 Bookings
We believe that new bookings are an indicator of future revenue growth and provide investors with useful information on period-to-period performance as evaluated by management and as a comparison to our past financial performance. Prior to the Acquisition, we defined bookings as the minimum contractual value for the initial 12 months of a contract as of the contract execution date, which amount included the minimum fixed consultation revenue, upfront implementation fees and technology and support fees, but excluded estimates of variable revenue for utilization in excess of the contracted amounts of consultations. Following the Acquisition, we changed our definition of bookings to reflect the annual recurring revenue from new contracts signed during a given period, which we believe more closely represents the annual revenues expected from those new agreements and creates a single definition for bookings between
SOC Telemedand Access Physicians. As now defined, bookings represent the estimated annual recognized revenue for the initial 12 months of a contract as of the contract execution date. The minimum fixed consultation revenue, estimated variable fee revenue, 12 months of amortized upfront implementation fees, and technology and support fees are included in bookings. The minimum fixed consultation fee, variable fee revenue, as well as the technology and support fees are invoiced and recognized as revenues on a monthly basis. The upfront implementation fees are invoiced upon contract signing and accounted for as deferred revenues and amortized over our average customer relationship period. Bookings for the year ended December 31, 2021, are inclusive of activity from Access Physicians for the full period. Bookings attributable to Access Physicians prior to the closing date of the Acquisition were $5.1 million. Year Ended December 31, 20212020 (dollars in thousands)
$ 31,825 $ 12,16146 Number of implementations
An implementation is the process by which we enable a new service offering at a facility. We determine a new service offering has been enabled when facilities are fully able to access our platform, which typically involves designing the solution, credentialing and privileging physicians, testing and installing telemedicine technologies, and training facility staff. Implementations result in new customers utilizing our services or delivery of new services to existing customers and are an indicator of revenue growth. Implementations for the year ended
December 31, 2021, are inclusive of activity from Access Physicians for the full period. Implementations attributable to Access Physicians prior to the closing date of the Acquisition were 38. Year Ended December 31, 2021 2020 Implementations 390 260 Number of consultations Because our consultation fee revenue generally increases as the number of visits increase, we believe the number of consultations provides investors with useful information on period-to-period performance as evaluated by management and as a comparison to our past financial performance. We define core consultations as consultations utilizing our 11 core services. Telemed IQ / other consultations are defined as consultations performed by other physician networks utilizing our technology platform, Telemed IQ. We experienced increased core consultation volume and Telemed IQ / other consultation volume for the year ended December 31, 2021, as compared to the year ended December 31, 2020, due to the impact of the COVID-19 pandemic on the utilization of our core services during 2020. Core consultations for the year ended December 31, 2021, include 109,723 core consultations attributable to Access Physicians since the closing date of the Acquisition. Year Ended December 31, 2021 2020 Core consultations 254,814 129,606
Telemed IQ / other consultations 254,002 171,218 Total consultations
Components of operating results
Revenues We enter into contracts with hospitals or hospital systems, physician practice groups, and other users. Under the contracts, the customers pay a fixed monthly fee for access to our Telemed IQ software platform and our clinical provider network. The fixed monthly fee provides for a predetermined number of monthly consultations. Should the number of consultations exceed the contracted amount, the customer also pays a variable consultation fee for the additional utilization. Under certain contracts, we receive payments from patients, third-party payers and others for services rendered. The third-party payers pay us based on contracted rates or the entities' billed charges. To facilitate the delivery of the consultation services, facilities use telemedicine equipment, which is either provided and installed by us or procured by the customer from external vendors. Customers of Access Physicians are sold a telemedicine cart with a computer and camera in order to properly facilitate meetings between patients, on-site health professionals, and remote physicians. We also provide the facilities with user training as well as technology and support services, which include monitoring and maintenance of our telemedicine equipment and access to our reporting portal. Prior to the start of a contract, customers make upfront non-refundable payments when contracting for implementation services.
Revenue is primarily determined by the number of installs, the number of services contracted by installs, the usage of our services and the contractually negotiated prices of our services.
The Company recognizes revenue using a five-step model:
1) Identify the contract(s) with a customer; 2) Identify the performance obligation(s) in the contract; 3) Determine the transaction price;
4) Allocate the transaction price to the performance obligations in the contract; and 5) Recognize revenue when (or as) it satisfies a performance obligation. 47 Revenues are recognized when we satisfy our performance obligation to provide telemedicine consultation services as requested. These consultations covered by the fixed monthly fee, consultations that incur a variable fee, services rendered to be paid by patients and third-party payers, use of telemedicine equipment, training, maintenance, and support are substantially the same and have the same pattern of transfer. Therefore, we have determined these represent a series of distinct services provided over a period of time in a single performance obligation. Access Physicians sells telemedicine carts to its customers and satisfaction of this performance obligation occurs upon delivery to the customer when control of the telemedicine cart is transferred. Revenues from telemedicine cart sales is recognized at a point in time, upon delivery. We have assurance-type warranties that do not result in separate performance obligations. Upfront nonrefundable fees do not result in the transfer of promised goods or services to the customer; therefore, we defer this revenue and recognize it over the average customer life of 48 months. Deferred revenue consists of the unamortized balance of nonrefundable upfront fees and maintenance fees, which are classified as current and non-current based on when we expect to recognize revenue.
See “- Critical Accounting Policies and Estimates – Revenue Recognition” for a more detailed discussion of our revenue recognition policy.
Cost of Revenues Cost of revenues primarily consists of fees paid to our physicians, costs incurred in connection with licensing our physicians, equipment leasing, maintenance and depreciation, amortization of capitalized software development costs (internal-use software), and costs related to medical malpractice insurance. Cost of revenues is driven primarily by the number of consultations completed in each period. Our business and operational models are designed to be highly scalable and leverage variable costs to support revenue-generating activities. We will continue to invest additional resources in our platform, providers, and clinical resources to expand the capability of our platform and ensure that customers are realizing the full benefit of our offerings. The level and timing of investment in these areas could affect our cost of revenues in the future.
Gross profit and gross margin
Our gross profit is our total revenues minus our total cost of revenues, and our gross margin is our gross profit expressed as a percentage of our total revenues. Our gross margin has been and will continue to be affected by a number of factors, most significantly the fees we charge and the number of consultations we complete.
Selling, general and administrative expenses
Our selling, general and administrative expenses consist of sales and marketing, research and development, operations, and general and administrative expenses. Personnel costs are the most significant component of selling, general and administrative expenses and consist of salaries, benefits, bonuses, stock-based compensation expense, and payroll taxes. Selling, general and administrative expenses also include overhead costs for facilities, professional fees, and shared IT related expenses, including depreciation expense. Sales and Marketing Sales and marketing expenses consist primarily of personnel and related expenses for our sales, customer success, and marketing staff, including costs of communications materials that are produced to generate greater awareness and utilization among our facilities. Marketing costs also include third-party independent research, trade shows and brand messages, public relations costs and stock-based compensation for our sales and marketing employees. Our sales and marketing expenses exclude any allocation of occupancy expense and depreciation and amortization.
Research and development
Research and development, or R&D expense, consists primarily of engineering, product development, support and other costs associated with products and technologies that are in development. These expenses include employee compensation, including stock-based compensation. We expect R&D expenses as a percentage of revenues to vary over time depending on the level and timing of our new product development efforts, as well as the development of our clinical solutions and other related activities. Operations
Operating expenses primarily include personnel costs and related expenses for our physician licensing, accreditation and privilege functions, project management, implementation, consultation coordination center, revenue cycle management and clinical supply.
General and Administrative
General and administrative expenses include personnel and related expenses of, and professional fees incurred by, our executive, finance, legal, information technology infrastructure, and human resources departments. They also include stock-based compensation, all facilities costs including utilities, communications and facilities maintenance, and professional fees (including legal, tax, and accounting). Additionally, during 2020, we incurred significant integration, acquisition, transaction and executive severance costs in connection with the Merger Transaction, including incremental expenses such as advisory, legal, accounting, valuation, and other professional or consulting fees, as well as other related incremental executive severance costs. During 2021, we have incurred significant integration, acquisition, severance and transaction costs in connection with the Acquisition and restructuring. 48
Depreciation and amortization
Amortization mainly includes the amortization of fixed assets, the amortization of capitalized software development costs (software for internal use) and the amortization of intangible assets related to acquisitions.
Changes in fair value of contingent consideration
Changes in fair value of contingent consideration consist of changes in the fair value of contingent consideration associated with the Acquisition of Access Physicians in
March 2021. See Note 4, Business Combinations, to our consolidated financial statements included elsewhere in this report for further information.
Gain on liabilities related to the issuance of contingent shares
Gain on contingent shares issuance liabilities consists of the change in the fair value of (1) 1,875,000 shares of our Class A common stock held by HCMC's sponsor and subsequently distributed to its permitted transferees which were modified and became subject to forfeiture in connection with the closing of the Merger Transaction, and (2) 350,000 private placement warrants granted to HCMC's sponsor and subsequently distributed to its permitted transferees as part of the Merger Transaction. The contingent shares issuance liabilities are revalued at their fair value every reporting period. See Note 6, Fair Value of Financial Instruments, and Note 17, Contingent Shares Issuance Liabilities, to our consolidated financial statements included elsewhere in this report for further information.
Gain on callable option liabilities
Gain on puttable option liabilities consists of changes in the fair value of puttable option liabilities. These puttable options are no longer outstanding as they were exercised as part of the Merger Transaction on
October 30, 2020.
Interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and issuance costs associated with our Term Loan Facility and the Subordinated Note. Results of Operations
Comparison of the years ended
The following table presents data from our Consolidated Statements of Income for the years ended
Year Ended December 31, 2021 2020 (in thousands) Consolidated Statement of Operations data: Revenues
$ 94,442 $ 57,995Cost of revenues 64,091 38,542 Operating expenses Selling, general and administrative 86,606 61,280 Changes in fair value of contingent consideration (3,265 ) - Total costs and expenses 147,432 99,822 Loss from operations (52,990 ) (41,827 )
Gain on contingent share issuance liabilities 11,325 4,237 Gain on puttable option liabilities
- 1 Interest expense (6,800 ) (12,152 ) Interest expense - Related party (2,229 ) (75
) Loss before income taxes (50,694 ) (49,816 ) Income tax benefit (expense) 152 (31 ) Net loss
$ (50,542 ) $ (49,847 )49 Revenues Year Ended December 31,
2021 2020 Change % Change (dollars in thousands) Revenues
$ 94,442 $ 57,995 $ 36,44763 % Revenues increased primarily due to the Acquisition, which contributed $29.3 millionin incremental revenue. The increase was also due to an increase in fixed fees of $5.0 millionattributable to new implementations and facilities and an increase in variable fee revenue of $2.1 milliondriven by an increase in core consultation volume.
Revenue Cost and Gross Margin
Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Cost of revenues
$ 64,091 $ 38,542 $ 25,54966 % Gross margin 32 % 34 % Cost of revenues increased primarily due to the Acquisition, which contributed $19.1 millionin incremental costs. The increase was also driven by an increase of $5.0 millionin physician fees due to an increase in our scheduled hours over the same period due to the recovery of demand for services and an increase of $1.4 millionin equipment, licensing, and medical malpractice costs.
The decline in gross margin is mainly attributable to an increase in basic consulting volume during the year ended
Selling, general and administrative expenses
Years Ended December 31, 2021 2020 Change % Change (dollars in thousands) Selling, general and administrative expenses: Sales and marketing
$ 8,8617,446 $ 1,41519 % Research and development 2,894 1,376 1,518 110 % Operations 10,328 9,032 1,296 14 % General and administrative 64,523 43,426 21,097 49 % Total $ 86,606 $ 61,280 $ 25,32641 %
Sales and marketing expenses increased due to investments in our go-to-market strategy and additional headcount for our sales and marketing teams.
Research and development spending has increased as we continue to invest in product development.
Operating expenses increased due to salaries, benefits and stock-based compensation associated with the increased headcount of our operations team, including revenue cycle management, certification , licenses and privileged personnel.
General and administrative expenses increased primarily due to
$15.3 millionattributable to the Acquisition and $5.2 millionin integration, acquisition, transaction and executive severance costs in connection with the Merger Transaction, the Acquisition and the restructuring, and other costs associated with operating as a publicly traded company, offset by a $3.2 milliondecrease in stock-based compensation. 50
The following table reflects the share of total selling, general and administrative expenses related to stock-based compensation, depreciation and amortization and integration costs for the year ended
Year Ended Year Ended December 31, December 31, 2021 2020 Depreciation Stock-Based Depreciation and Integration Stock-Based and Integration Compensation Amortization Costs (1) Compensation Amortization Costs (1) (dollars in thousands) Sales and marketing $ 255 $ $ $ 41 $ - $ - Research and development 661 143 - - Operations 612 114 - - General and administrative 13,226 4,231 12,499 17,611 1,593 7,304 Total
$ 14,754$ 4,231 $ 12,499 $ 17,909 $ 1,593 $ 7,304
(1) Represents integration, acquisition, transaction and severance costs.
Changes in fair value of contingent consideration
Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Changes in fair value of contingent consideration
$ 3,265$ - $ 3,265* * Percentage not meaningful
Changes in the fair value of contingent consideration increased due to the revaluation of the fair value of contingent consideration recognized as part of the acquisition.
Loss from Operations Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Loss from operations
$ 52,990 $ 41,827 $ 11,16327 % * Percentage not meaningful Loss from operations increased due to an increase in selling, general and administrative expenses primarily due to integration, transaction and executive severance costs in connection with the Acquisition and the restructuring, and costs associated with operating as a publicly traded company.
Gain on liabilities related to the issuance of contingent shares
Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Gain on contingent shares issuance liabilities
$ 11,325 $ 4,237 $ 7,088167 %
The gain on contingent share issuance liabilities increased due to the sharper decline in our share price during the year ended
Gain on callable option liabilities
Year Ended December 31, 2021 2020 Change % Change (dollars in thousands)
Gain on puttable options liability $ –
* * Percentage not meaningful Gain on puttable option liabilities decreased to
$0for the year ended December 31, 2021, because the puttable options ceased to be outstanding upon their exercise in connection with the closing of the Merger Transaction in the fourth quarter of 2020. Interest Expense Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Interest expense $ 9,029 $ 12,227 $ (3,198 )(26 )% Interest expense decreased primarily due to a prepayment premium and acceleration of the amortization of discount fees in connection with the payoff of existing debt at the closing of the Merger Transaction in the fourth quarter of 2020. Income Tax Benefit (Expense) Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Income tax benefit (expense) $ 152 $ (31 ) $ 183* * Percentage not meaningful
Income tax expense decreased due to the release of a valuation allowance upon recognition of a deferred tax liability in connection with the acquisition.
Net Loss Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Net loss
$ 50,542 $ 49,847 $ 6951 %
Net loss increased due to the increase in operating loss described above, a gain on liabilities related to the issuance of contingent shares and a decrease in interest expense.
Certain Non-GAAP Financial Measures
We believe that, in addition to our financial results determined in accordance with
U.S.generally accepted accounting principles ("GAAP"), adjusted gross profit, adjusted gross margin, and adjusted EBITDA, all of which are non-GAAP financial measures, are useful in evaluating our business, results of operations, and financial condition. Year Ended December 31, 2021 2020 (dollars in thousands) Adjusted gross profit $ 35,501 $ 23,429Adjusted gross margin 38 % 40 % Adjusted EBITDA $ (19,444 ) $ (11,111 )
However, our use of the terms adjusted gross profit, adjusted gross margin and adjusted EBITDA may vary from that of others in our industry. Adjusted gross profit, adjusted gross margin and adjusted EBITDA should not be considered as an alternative to gross profit, net loss, net loss per share or any other performance measures derived in accordance with GAAP as measures of performance. Adjusted gross profit, adjusted gross margin and adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include: ? Adjusted EBITDA does not reflect the significant interest expense on our debt; ? although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any expenditures for such replacements; and
? other companies in our industry can calculate these financial measures
differently than us, which limits their usefulness as comparative measures.
We compensate for these limitations by using these non-GAAP financial measures along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include gross profit, net loss, net loss per share and other performance measures. In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in the presentation of our non-GAAP financial measures. Our presentation of non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. When evaluating our performance, you should consider these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable GAAP measures set forth in the reconciliation tables below and our other GAAP results.
Adjusted gross profit and adjusted gross margin
Adjusted gross profit and adjusted gross margin are non-GAAP financial measures that our management uses to assess our overall performance. We define adjusted gross profit as GAAP gross profit, plus depreciation and amortization (including internal-use software), equipment leasing costs and stock-based compensation. Our practice of procuring equipment through lease financing ceased in the second quarter of 2017. We define adjusted gross margin as our adjusted gross profit divided by our revenues. We believe adjusted gross profit and adjusted gross margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as these metrics eliminate the effects of depreciation and amortization and equipment lease costs. The following table presents a reconciliation of adjusted gross profit from the most comparable GAAP measure, gross profit, for the periods presented: Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Revenues
$ 94,442 $ 57,995 $ 36,44763 % Cost of revenues 64,091 38,542 25,549 66 % Gross profit 30,351 19,453 10,898 56 % Add:
Depreciation and amortization 5,082 3,910 1,172 30 % Equipment leasing costs 8 66 (58 ) (88 )% Stock-based compensation(1) 60 - 60 * Adjusted gross profit
$ 35,501 $ 23,42912,072 52 % Adjusted gross margin (as a percentage of revenues) 38 % 40 %
* Percentage not significant
(1) Equity compensation relates to physician participation in our ESPP.
Adjusted gross margin increased primarily due to increased demand for basic consultations and acquisition during the same period.
Adjusted gross margin decreased in 2021 as the increase in core consultation volume in the year ended
December 31, 2021due to increased demand for our services required us to increase the number of our scheduled hours resulting in increased physicians fees. Adjusted EBTIDA
We believe that adjusted EBITDA enhances an investor's understanding of our financial performance as it is useful in assessing our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. Adjusted EBITDA consists of net loss before interest, taxes, depreciation and amortization (including internal-use software), write off of property and equipment, net, stock-based compensation, gain on puttable option liabilities, gain on contingent shares issuance liabilities, gain on change in fair value of contingent consideration, and integration, acquisition, transaction and executive severance costs. We believe adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance. The following table reconciles
net loss to adjusted EBITDA: Year Ended December 31, 2021 2020 Change % Change (dollars in thousands) Net loss
$ (50,542 ) $ (49,847 ) $ (695 )1 % Add: Interest expense 9,029 12,227 (3,198 ) (26 )%
Income tax (benefit) expense (152 ) 31 (183 ) * Depreciation and amortization 9,313 5,503 3,810 69 % Write off of property and equipment, net 185 - 185 * Stock-based compensation 14,814 17,909 (3,095 ) (17 )% Gain on contingent shares issuance liabilities (11,325 ) (4,237 ) (7,088 ) 167 % Gain on puttable option liabilities - (1 ) 1 * Gain on change in fair value of contingent consideration (3,265 ) - (3,265 ) * Integration, acquisition, transaction, and executive severance costs 12,499 7,304 5,195 71 % Adjusted EBITDA
$ (19,444 ) $ (11,111 ) $ (8,333 )75 % * Percentage not meaningful
Adjusted EBITDA decreased primarily due to an increase in selling, general, and administrative expenses from the Acquisition and due to operating as a public company, offset by an increase in gross profit due to increased demand for
Cash and capital resources
December 31, 2021, our principal source of liquidity was cash and cash equivalents of $38.9 million. We believe that our cash and cash equivalents as of December 31, 2021will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. We expect our principal sources of liquidity will continue to be our cash and cash equivalents and any additional capital we may obtain through additional equity or debt financings. Our future capital requirements will depend on many factors, including investments in growth and technology. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies which may require us to seek additional equity or debt financing. On February 2, 2022, we entered into the Transaction Agreement to be acquired by affiliates of investment funds advised Patient Square Capitalin an all-cash transaction. We have agreed to various covenants and agreements in the Transaction Agreement, including, among others, covenants to conduct our business in all material respects in the ordinary course during the period between the date of the Transaction Agreement and the completion of the Transaction. In addition, without the consent of Spark Parent, we will not engage in certain types of transactions or take certain actions outside of the ordinary course during such period, including incurring additional debt or issuing any equity securities outside of certain limited exceptions. If the Transaction Agreement is terminated in certain circumstances, including by us in order to enter into a superior proposal or by Spark Parent because the Board withdraws its recommendation in favor of the Transaction, we would be required to pay Spark Parent a termination fee of $11.5 million. We do not believe these restrictions will prevent us from meeting our debt obligations, ongoing costs of operations, working capital needs or capital expenditure requirements. See Note 27, Subsequent Events, in our consolidated financial statements included elsewhere in this report for further information. 54 Indebtedness Term Loan Facility On March 26, 2021, we entered into the Term Loan Agreement with SLR Investment, as collateral agent on behalf of the individual lenders, providing for a Term Loan Facility of up to $125.0 million. Under the Term Loan Facility, $85.0 millionwas immediately available and borrowed on March 26, 2021, in two tranches consisting of $75.0 million("Term A1 Loan") and $10.0 million("Term A2 Loan" and, together with the Term A1 Loan, the "Term A Loans") to finance a portion of the closing cash consideration for the Acquisition. An additional $15 millionwill be made available subject to the terms and conditions of the Term Loan Agreement in two tranches as follows: (i) a $2.5 million( $12.5 millionif the Term A2 Loan is earlier prepaid) to be drawn by June 20, 2022("Term B Loan"), subject to no event of default as defined in the Term Loan Agreement and the Company achieving the net revenue milestone of at least $55.0 millionon a trailing six-month basis by June 20, 2022; and (ii) a $12.5 millionto be drawn by December 20, 2022("Term C Loan"), subject to no event of default as defined in the Term Loan Agreement and the Company achieving the net revenue milestone of at least $65.0 millionon a trailing six-month basis by December 20, 2022. The Term Loan Facility also provides for an uncommitted term loan in the principal amount of up to $25.0 million("Term D Loan" and, collectively with the Term A Loans, the Term B Loan and the Term C Loan, the "Term Loans"), which availability is subject to the sole and absolute discretionary approval of the lenders and the satisfaction of certain terms and conditions in the Term Loan Agreement. Borrowings under the Term Loan Facility bear interest at a rate per annum equal to 7.47% plus the greater of (a) 0.13% and (b) LIBOR (the "Applicable Rate"), payable monthly in arrears beginning on May 1, 2021. Until May 1, 2024, the Company will pay only interest monthly. However, the Term Loan Agreement has an interest-only extension clause which offers the Company the option to extend the interest-only period for six months until November 1, 2024, after having achieved two conditions: (i) a minimum of six months of positive EBITDA prior to January 31, 2024; and (ii) being in compliance with the net revenue financial covenant described below. In either case, the maturity date for each Term Loan is April 1, 2026.
The Term Loan Agreement includes two financial covenants requiring (i) the maintenance of a minimum liquidity level of at least
$5.0 millionat all times; and (ii) minimum net revenues measured quarterly on a trailing twelve-month basis of at least $81.8 millionon March 31, 2022, $88.2 millionon June 30, 2022, $94.5 millionon September 30, 2022, $100.9 millionon December 31, 2022, and thereafter 60% of projected net revenues in accordance with an annual plan to be submitted to the lenders commencing on March 31, 2023. The Term Loan Agreement also contains customary affirmative and negative covenants which, in certain circumstances, would limit the Company's ability to engage in mergers or acquisitions and dispose of any of its subsidiaries.
The term loan facility is guaranteed by all of the Company’s wholly-owned subsidiaries, including the entities acquired in connection with the Acquisition, subject to customary exceptions. The term loan facility is secured by first ranking security interests in substantially all of the Company’s assets, subject to permitted liens and other customary exceptions.
June 4, 2021, we used a portion of the proceeds from our public offering that was completed in June 2021to make a payment of $10.5 millionto repay the Term A2 Loan, including related prepayment premiums and accrued interest. On November 10, 2021, we entered into an amendment to the Term Loan Agreement, pursuant to which the net revenue milestone for the Term B Loan was reduced from $55.0 millionto $51.5 millionon a trailing six-month basis, which made the tranche immediately available to be drawn. In connection with the amendment, we borrowed the full $12.5 millionof the Term B Loan on November 10, 2021.
See Note 12, Debt, in our consolidated financial statements included elsewhere in this report for more information.
March 26, 2021, the Company issued the Subordinated Note in an aggregate principal amount of $13.5 millionin favor of SOC Holdings LLC, an affiliate of Warburg Pincus, for proceeds at closing of $11.5 million, which proceeds were used to finance a portion of the closing cash consideration for the Acquisition. The unpaid balance of the Subordinated Note accrues interest at an escalating rate per annum initially equal to 7.47% plus the Applicable Rate under the Term Loan Facility, increasing to 10.87% plus the Applicable Rate on September 30, 2021, and then an additional 2.00% each year thereafter, and will be added to the principal amount of the Subordinated Note on a monthly basis. The maturity date of the Subordinated Note is the earliest to occur of September 28, 2026, and the occurrence of a change of control. The Subordinated Note is fully subordinated to the Term Loan Facility and may only be repaid in accordance with the terms of the Term Loan Agreement. The Subordinated Note further provides that we are obligated to repay a portion of the principal amount outstanding under the Term Loan Facility and the balance of the Subordinated Note from the proceeds of any offering by us of our equity securities. On June 4, 2021, we used a portion of the proceeds from our public offering that was completed in June 2021to make a payment of $13.7 millionto repay the balance of the Subordinated Note.
See Note 12, Debt, in our consolidated financial statements included elsewhere in this report for more information.
55 Cash Flows The following table shows a summary of our cash flows for the periods presented: Year Ended December 31, 2021 2020 (in thousands) Net cash (used in) provided by: Operating activities
$ (40,075 ) $ (22,576 )Investing activities (94,078 ) (6,530 ) Financing activities 134,259 63,319
Net increase in cash, cash equivalents
Net cash used in operating activities for the year ended
December 31, 2021, was $40.1 million, consisting primarily of a net loss of $50.5 millionand an increase in working capital of $3.3 million, offset by non-cash charges of $13.7 million. The changes in working capital were primarily due to an increase in accounts receivable and a decrease in prepaid expenses and other current assets due to timing of payments. The non-cash charges primarily consisted of depreciation, amortization, stock-based compensation expense, provision for accounts receivable allowances, and non-cash interest expense, changes in fair value of contingent consideration and gain on contingent share issuance liabilities. Net cash used in operating activities for the year ended December 31, 2020, was $22.6 million, consisting primarily of a net loss of $49.8 millionoffset by changes in working capital of $2.8 millionand non-cash charges of $24.4 million. The changes in working capital was primarily due to a decrease in accounts receivable and increase in accounts payable and accrued liabilities due to timing of payments. The non-cash charges primarily consisted of depreciation, amortization, stock-based compensation expense, provision for accounts receivable allowances, and non-cash interest expense. Investing Activities
Net cash used in investing activities in the year ended
December 31, 2021, was $94.1 million, consisting of $89.8 millionin net cash paid in connection with the Acquisition, $3.3 millionin capitalized software development costs, and $1.0 millionin purchases of property and equipment. Net cash used in investing activities in the year ended December 31, 2020, was $6.5 million, consisting of $4.3 millioncapitalized software development costs and $2.2 millionin purchases of property and equipment. Financing Activities Net cash provided by financing activities in the year ended December 31, 2021, was $134.3 million, consisting primarily of $106.9 millionof net proceeds from borrowings under the Term Loan Facility and proceeds from the Subordinated Note issued in connection with the Acquisition and $51.5 millionof net proceeds from the issuance of Class A common stock in the public offering that was completed in June 2021, offset by $24.5 millionin partial repayment of borrowings under the Term Loan Facility and Subordinated Note. Net cash provided by financing activities in the year ended December 31, 2020, was $63.3 million, consisting primarily of net proceeds from our Merger Transaction of $209.8 millionand $10.9 millionin net proceeds from the issuance of our Series J preferred stock. This was partially offset by repayment of the long-term debt principal of $88.3 millionand liquidation of Series H, I and J preferred stocks by $63.2 million.
Significant Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are 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. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. 56
While our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments. Revenue Recognition
Our revenues are generated from service contracts with customer hospitals, physician practice groups, or other users. Revenues are recognized when we satisfy our performance obligation to provide telemedicine consultation services as requested. These consultations covered by the fixed monthly fee, consultations that incur a variable fee, services rendered to be paid by patients and third-party payers, use of telemedicine equipment, training, maintenance, and support are substantially the same and have the same pattern of transfer. Therefore, we have determined these represent a series of distinct services provided over a period of time in a single performance obligation. Payments received from third-party payers are generally less than billed charges. We monitor our revenue and receivables from third-party payers and record an estimated contractual allowance to properly account for the differences between billed and reimbursed amounts. Revenue from third-party payers is presented net of an estimated provision for contractual adjustments. Upfront nonrefundable fees do not result in the transfer of promised goods or services to the customer; therefore, we defer this revenue and recognize it over the average customer life of 48 months. Deferred revenue consists of the unamortized balance of nonrefundable upfront fees and maintenance fees, which are classified as current and non-current based on when we expect to recognize revenue. Business Combinations We apply the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by us are included as of the respective acquisition date. We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase consideration over the value of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to the fair value of acquired intangible assets. We may adjust the preliminary purchase price allocation, as necessary, for up to one year after the acquisition closing date if we obtain more information regarding asset valuations and liabilities assumed. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. Stock-Based Compensation We maintain an equity incentive plan to provide long-term incentives for employees, consultants and members of our board of directors. The plan allows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and directors. We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model. The grant date fair value of stock-based awards is expensed on a straight-line basis over the period during which the employee is required to provide service in exchange for the award, which is typically the vesting period. We estimate forfeitures based
on historical experience. Prior to the Merger Transaction, Legacy SOC Telemed estimated the fair value of stock-based awards using the Black-Scholes option-pricing model, which required the input of highly subjective assumptions. Our assumptions were as follows: Fair value - Because the common stock of Legacy SOC Telemed was not publicly traded prior to the Merger Transaction, we had to estimate the fair value of the common stock. The board of directors considered numerous objective and subjective factors to determine the fair value of the common stock at each meeting in which awards were approved. 57 Expected volatility - Because the common stock of Legacy SOC Telemed was not publicly traded prior to the Merger Transaction, the expected volatility was derived from the average historical volatilities of publicly traded companies within our industry that we considered to be comparable to our business over a period approximately equal to the expected term for employees' options and the remaining contractual life for nonemployees' options. In evaluating similarity, we considered factors such as stage of development, risk profile, enterprise value and position within the life sciences industry. Subsequent to the Merger Transaction, we do not have sufficient history of our publicly traded stock; therefore, we continue to estimate volatility using this methodology. Expected term - We determined and continue to determine the expected term based on the average period the stock options are expected to remain outstanding using the simplified method, generally calculated as the midpoint of the stock options' vesting term and contractual expiration period, as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. Risk-free rate - The risk-free interest rate was and continues to be based on the
U.S. Treasuryyield in effect at the time of the grant for zero-coupon U.S. Treasurynotes with remaining terms similar to the expected term of the options. Expected dividend yield - We utilized and continue to utilize a dividend yield of zero, as we do not currently issue dividends, nor do we expect to do so
in the future. The following assumptions were used to calculate the fair value of stock options granted to employees: Year Ended December 31, 2021 (1) 2020 (2) Expected dividend - 0.0 % Weighted average volatility - 80.0 % Expected term - 1 - 5 years Risk-free interest rate - 0.15% - 0.40 %
(1) No new grants were issued during the financial year
(2) No new grants were issued during the year
assumptions relate to option modifications in 2020. We valued all outstanding performance stock units ("PSUs") applying an approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over each one of the components of the PSUs based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial. The fair value of each grant made during the year ended
December 31, 2021, was estimated on the grant date using the Monte Carlo simulation with the following assumptions: Year Ended December 31, 2021 2020(1) Current stock price $ 1.39- 7.52 - Expected volatility 55% - 75% - Expected term (in years) 3 - 3.5 - Risk-free interest rate 0.24% - 0.91% -
(1) No PSUs were issued during the year ended
Liabilities related to the issuance of contingent shares and liabilities related to puttable options
We recognize derivatives as either an asset or liability measured at fair value in accordance with ASC 815, Derivatives and Hedging. The puttable options were our derivative financial instruments and were recorded in the consolidated balance sheets at fair value. We do not enter into derivative transactions for speculative or trading purposes. Contingent shares issuance liabilities reflect our liability to provide a variable number of shares to HCMC's sponsor and its permitted transferees if certain publicly traded stock prices are met at various points in time. The liability was recorded at fair value at the date of the Merger Transaction and is revalued at each reporting period using a Monte Carlo simulation that factors in the current price of our Class A common stock, the estimated likelihood of a change in control, and the vesting criteria of the award.
Goodwillrepresents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwillis not amortized but is tested for impairment annually on December 31or more frequently if events or changes in circumstances indicate that the asset may be impaired. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. We compare the estimated fair value of a reporting unit to its book value, including goodwill. If the fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. However, if the book value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Our annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the consolidated financial statements. Intangible assets resulted from business acquisitions and include hospital contract relationships, non-compete agreements, and trade names. Hospital contract relationships are amortized over a period of 6 to 17 years, non-compete agreements are amortized over a period of 4 to 5 years, and trade names are amortized over a period of 2 to 5 years. All intangible assets are amortized using the straight-line method. Long-lived assets (property and equipment and capitalized software costs) used in operations are reviewed for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. Upon indication of possible impairment of long-lived assets held for use, we evaluate the recoverability of such assets by measuring the carrying amount of the long-lived asset group against the related estimated undiscounted future cash flows of the long-lived asset group. For long-lived assets to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. There were no impairment losses through December 31, 2021.
Recently Adopted Accounting Pronouncements
See the sections titled "Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements - Accounting pronouncements issued but not yet adopted" in Note 2 to our consolidated financial statements included elsewhere in this report for more information. Emerging Growth Company
Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or the
SECeither (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. Following the completion of the Merger Transaction, we intend to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information you receive from other public companies. We also intend to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
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