UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 30, 2020
SOC TELEMED, INC.
(Exact name of registrant as specified in its charter) |
Delaware | 001-39160 | 84-3131208 | ||
(State or other jurisdiction
of incorporation) |
(Commission File Number) |
(IRS Employer
Identification No.) |
1768 Business Center Drive, Suite 100
Reston, Virginia 20190
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (866) 483-9690
Healthcare Merger Corp.
623 Fifth Avenue, 14th Floor
New York, NY 10022
Telephone: (646) 975-6581
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Class A Common Stock, par value of $0.0001 per share | TLMD | The Nasdaq Stock Market LLC | ||
Warrants, each exercisable for one share of Class A Common Stock for $11.50 per share | TLMDW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Introductory Note
This Amendment No. 1 on Form 8-K/A (this “Amendment”) amends Item 9.01 of the Current Report on Form 8-K filed by SOC Telemed, Inc. (the “Company”) on November 5, 2020 (the “Original Report”), in which the Company reported, among other events, the consummation of the Business Combination. This Amendment No. 1 amends the historical financial statements provided under Items 9.01(a) and 9.01(b) in the Original Report to include (a) the unaudited condensed consolidated financial statements of Legacy SOC Telemed for the nine months ended September 30, 2020 and 2019, and (b) the unaudited pro forma condensed combined financial information of the Company as of September 30, 2019, and for the nine months ended September 30, 2019 and 2018, respectively. This Amendment No. 1 does not amend any other item of the Original Report or purport to provide an update or a discussion of any developments at the Company subsequent to the filing date of the Original Report.
Capitalized terms used but not defined herein have the meanings given in the Original Report.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The following financial statements included in the Proxy Statement beginning on page F-2 are incorporated herein by reference:
1. | The unaudited condensed consolidated financial statements of Legacy SOC Telemed for the six months ended June 30, 2020 and 2019; and |
2. | The consolidated financial statements of Legacy SOC Telemed as of and for the years ended December 31, 2019 and 2018. |
The unaudited condensed consolidated financial statements of Legacy SOC Telemed for the nine months ended September 30, 2020 and 2019, are attached hereto as Exhibit 99.3 and are incorporated herein by reference.
Also attached hereto as Exhibit 99.4 and incorporated herein by reference is the Legacy SOC Telemed Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2020.
(b) Pro forma financial information.
The unaudited pro forma condensed consolidated combined financial information of the Company for the six months ended June 30, 2020, and for the year ended December 31, 2019, attached as Exhibit 99.2 to the Original Report is incorporated herein by reference from the Original Report. The unaudited pro forma condensed consolidated combined financial information of the Company for the nine months ended September 30, 2020, and for the year ended December 31, 2019, is attached hereto as Exhibit 99.5 and is incorporated herein by reference.
(d) List of Exhibits.
1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
SOC Telemed, Inc. | ||
Date: November 16, 2020 | /s/ Hai Tran | |
Name: Hai Tran | ||
Title: Chief Financial Officer and
Chief Operating Officer |
2
Exhibit 99.3
Specialists On Call, Inc.
Specialists On Call, Inc. and Subsidiaries and Affiliates
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share amounts)
(Unaudited)
September
30,
2020 |
December
31,
2019 |
|||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents (from Variable interest entities $1,589 and $3,509, respectively) | $ | 2,395 | $ | 4,541 | ||||
Accounts receivable, net of allowance for doubtful accounts of $458 and $538 (from Variable interest entities, net of allowance $8,339 and $10,125, respectively) | 8,820 | 10,545 | ||||||
Prepaid expenses and other current assets | 3,611 | 843 | ||||||
Total current assets | 14,826 | 15,929 | ||||||
Property and equipment, net | 3,905 | 2,387 | ||||||
Capitalized software costs, net | 8,669 | 7,647 | ||||||
Intangible assets, net | 6,348 | 7,429 | ||||||
Goodwill | 16,281 | 16,281 | ||||||
Deposits and other assets | 289 | 321 | ||||||
Total assets | $ | 50,318 | $ | 49,994 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities | ||||||||
Accounts payable (from Variable interest entities $868 and $1,882, respectively) | $ | 4,581 | $ | 3,435 | ||||
Accrued expenses (from Variable interest entities $1,948 and $1,226, respectively) | 10,051 | 6,078 | ||||||
Deferred revenues | 523 | 516 | ||||||
Capital lease obligations | 9 | 48 | ||||||
Total current liabilities | 15,164 | 10,077 | ||||||
Puttable option liabilities | 518 | 1 | ||||||
Deferred revenues | 1,013 | 807 | ||||||
Related party - Convertible bridge notes payable, net of unamortized issuance costs | 3,982 | - | ||||||
Long term debt, net of unamortized discount and debt issuance costs | 80,523 | 77,140 | ||||||
Total liabilities | $ | 101,200 | $ | 88,025 | ||||
COMMITMENTS AND CONTINGENCIES (Note 11) | ||||||||
CONTINGENTLY REDEEMABLE PREFERRED STOCK (Redeemable convertible preferred stock, $0.001 par value; 21,816,134 and 21,805,134 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 21,816,134 and 21,805,134 shares issued and outstanding as of September 30, 2020 and December 31, 2019 respectively; aggregate liquidation preference of $79,094 and, $62,466 as of September 30, 2020 and December 31, 2019 respectively). | 78,514 | 61,907 | ||||||
STOCKHOLDERS’ DEFICIT | ||||||||
Common stock, $0.001 par value; 132,034,637 and 132,034,637 shares authorized as of September 30, 2020 and December 31, 2019; 84,370,027 and 84,370,027 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively. | 84 | 84 | ||||||
Treasury stock 223,157 shares, at cost, as of September 30, 2020 and December 31, 2019 | (768 | ) | (768 | ) | ||||
Additional paid-in capital | 82,728 | 87,118 | ||||||
Accumulated deficit | (211,440 | ) | (186,372 | ) | ||||
Total stockholders’ deficit | (129,396 | ) | (99,938 | ) | ||||
Total liabilities, contingently redeemable preferred stock and stockholders’ deficit | $ | 50,318 | $ | 49,994 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Specialists On Call, Inc. and Subsidiaries and Affiliates
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per share amounts)
(Unaudited)
Three
Months Ended
September 30, |
Nine
Months Ended
September 30, |
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | $ | 15,132 | $ | 17,052 | $ | 43,493 | $ | 49,615 | ||||||||
Cost of revenues | 9,534 | 9,853 | 29,277 | 30,251 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 11,993 | 8,135 | 30,267 | 25,805 | ||||||||||||
Changes in fair value of contingent consideration | - | (258 | ) | - | (1,712 | ) | ||||||||||
Total operating expenses | 11,993 | 7,878 | 30,267 | 24,093 | ||||||||||||
Loss from operations | (6,395 | ) | (678 | ) | (16,051 | ) | (4,729 | ) | ||||||||
Other income (expense) | ||||||||||||||||
Gain (Loss) on puttable option liabilities | (412 | ) | - | (517 | ) | - | ||||||||||
Interest expense | (2,853 | ) | (2,650 | ) | (8,469 | ) | (7,495 | ) | ||||||||
Interest expense – Related party | (21 | ) | - | (21 | ) | - | ||||||||||
Total other expense | (3,286 | ) | (2,650 | ) | (9,007 | ) | (7,495 | ) | ||||||||
Loss before income taxes | (9,681 | ) | (3,328 | ) | (25,058 | ) | (12,224 | ) | ||||||||
Income tax expense | 7 | 2 | 10 | 5 | ||||||||||||
Net loss and comprehensive loss | $ | (9,688 | ) | $ | (3,330 | ) | $ | (25,068 | ) | $ | (12,229 | ) | ||||
Accretion of redeemable convertible preferred stock | (2,152 | ) | (1,412 | ) | (5,670 | ) | (4,054 | ) | ||||||||
Net loss attributable to common stockholders | $ | (11,840 | ) | $ | (4,742 | ) | $ | (30,738 | ) | $ | (16,283 | ) | ||||
Net loss per share attributable to common stockholders | ||||||||||||||||
Basic | $ | (0.14 | ) | $ | (0.06 | ) | $ | (0.36 | ) | $ | (0.19 | ) | ||||
Diluted | $ | (0.14 | ) | $ | (0.06 | ) | $ | (0.36 | ) | $ | (0.19 | ) | ||||
Weighted-average shares used to compute net loss per share attributable to common stockholders: | ||||||||||||||||
Basic | 84,874,870 | 84,581,205 | 84,874,870 | 84,581,205 | ||||||||||||
Diluted | 84,874,870 | 84,581,205 | 84,874,870 | 84,581,205 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Specialists On Call, Inc. and Subsidiaries and Affiliates
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands, except share amounts)
(Unaudited)
Common Stock | Treasury Stock |
Additional
Paid-in |
Accumulated |
Total
Stockholders’ |
||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
Balance, December 31, 2019 | 84,370,027 | $ | 84 | 223,157 | $ | (768 | ) | $ | 87,118 | $ | (186,372 | ) | $ | (99,938 | ) | |||||||||||||
Stock-based compensation | - | - | - | - | 99 | - | 99 | |||||||||||||||||||||
Accretion of stock issuance costs and dividends on Series H, I and J contingently redeemable preferred stock | - | - | - | - | (1,495 | ) | - | (1,495 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (7,217 | ) | (7,217 | ) | |||||||||||||||||||
Balance, March 31, 2020 | 84,370,027 | $ | 84 | 223,157 | $ | (768 | ) | $ | 85,722 | $ | (193,589 | ) | $ | (108,551 | ) | |||||||||||||
Stock-based compensation | - | - | - | - | 148 | - | 148 | |||||||||||||||||||||
Accretion of stock issuance costs and dividends on Series H, I and J contingently redeemable preferred stock | - | - | - | - | (2,023 | ) | - | (2,023 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (8,163 | ) | (8,163 | ) | |||||||||||||||||||
Balance, June 30, 2020 | 84,370,027 | $ | 84 | 223,157 | $ | (768 | ) | $ | 83,847 | $ | (201,752 | ) | $ | (118,589 | ) | |||||||||||||
Stock-based compensation | - | - | - | - | 1,033 | - | 1,033 | |||||||||||||||||||||
Accretion of stock issuance costs and dividends on Series H, I and J contingently redeemable preferred stock | - | - | - | - | (2,152 | ) | - | (2,152 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (9,688 | ) | (9,688 | ) | |||||||||||||||||||
Balance, September 30, 2020 | 84,370,027 | $ | 84 | 223,157 | $ | (768 | ) | $ | 82,728 | $ | (211,440 | ) | $ | (129,396 | ) |
Common Stock | Treasury Stock |
Additional
Paid-in |
Accumulated |
Total
Stockholders’ |
||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
Balance, December 31, 2018 | 84,341,527 | $ | 84 | 223,157 | $ | (768 | ) | $ | 91,533 | $ | (168,130 | ) | $ | (77,281 | ) | |||||||||||||
Stock-based compensation | - | - | - | - | 619 | - | 619 | |||||||||||||||||||||
Accretion of stock issuance costs and dividends on Series H and Series I contingently redeemable preferred stock | - | - | - | - | (1,242 | ) | - | (1,242 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (4,678 | ) | (4,678 | ) | |||||||||||||||||||
Balance, March 31, 2019 | 84,341,527 | $ | 84 | 223,157 | $ | (768 | ) | $ | 90,910 | $ | (172,080 | ) | $ | (82,582 | ) | |||||||||||||
Stock-based compensation | - | - | - | - | 244 | - | 244 | |||||||||||||||||||||
Accretion of stock issuance costs and dividends on Series H and Series I contingently redeemable preferred stock | - | - | - | - | (1,400 | ) | - | (1,400 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (4,221 | ) | (4,221 | ) | |||||||||||||||||||
Balance, June 30, 2019 | 84,341,527 | $ | 84 | 223,157 | $ | (768 | ) | $ | 89,754 | $ | (177,029 | ) | $ | (87,959 | ) | |||||||||||||
Exercise of stock options | 23,500 | - | - | - | 18 | - | 18 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 252 | - | 252 | |||||||||||||||||||||
Accretion of stock issuance costs and dividends on Series H, I and J contingently redeemable preferred stock | - | - | - | - | (1,412 | ) | - | (1,412 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (3,330 | ) | (3,330 | ) | |||||||||||||||||||
Balance, September 30, 2019 | 84,365,027 | $ | 84 | 223,157 | $ | (768 | ) | $ | 88,612 | $ | (180,359 | ) | $ | (92,431 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Specialists On Call, Inc. and Subsidiaries and Affiliates
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine
Months Ended
September 30, |
||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (25,068 | ) | $ | (12,229 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation and amortization | 4,008 | 3,150 | ||||||
Stock-based compensation | 1,280 | 1,115 | ||||||
Loss on puttable option liabilities | 517 | - | ||||||
Change in fair value of contingent consideration | - | (1,712 | ) | |||||
Bad debt expense | 64 | 150 | ||||||
Accrued interest on convertible bridge debt (related party) | 21 | - | ||||||
Paid-in kind interest on senior debt | 2,310 | 2,055 | ||||||
Amortization of debt issuance costs and accretion of original issuance discount | 1,073 | 920 | ||||||
Change in assets and liabilities, net of acquisitions | ||||||||
Accounts receivable, net of allowance | 1,661 | (262 | ) | |||||
Prepaid expense and other current assets | (599 | ) | (32 | ) | ||||
Deposits and other assets | 32 | - | ||||||
Accounts payable | 891 | 214 | ||||||
Accrued expenses and other liabilities | 1,657 | (2,012 | ) | |||||
Deferred revenues | 213 | (93 | ) | |||||
Net cash used in operating activities | (11,940 | ) | (8,736 | ) | ||||
Cash flows from investing activities: | ||||||||
Capitalization of software development costs | (3,252 | ) | (3,002 | ) | ||||
Purchase of property and equipment | (1,724 | ) | (973 | ) | ||||
Net cash used in investing activities | (4,976 | ) | (3,975 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal payments under capital lease obligations | (66 | ) | (104 | ) | ||||
Proceeds from long term debt, net of issuance costs | 3,961 | 12,867 | ||||||
Exercise of stock options | - | 19 | ||||||
Payment of deferred transaction related costs | (63 | ) | - | |||||
Issuance of contingently redeemable preferred stock, net of offering costs | 10,938 | - | ||||||
Net cash provided by financing activities | 14,770 | 12,782 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (2,146 | ) | 771 | |||||
Cash and cash equivalents at beginning of the period | 4,541 | 3,989 | ||||||
Cash and cash equivalents at end of the period | $ | 2,395 | $ | 4,060 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Nine
Months Ended
September 30, |
||||||||
2020 | 2019 | |||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for taxes | $ | 46 | $ | 15 | ||||
Cash paid during the period for interest | 5,198 | 4,624 | ||||||
Supplemental schedule of non-cash investing and financing transactions: | ||||||||
Accretion of contingently redeemable preferred stock | $ | 5,670 | $ | 4,054 | ||||
Assets acquired under capital lease arrangements | 26 | 59 | ||||||
Purchase of property and equipment reflected in accounts payable and accruals at the period end | 465 | 110 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Notes to Unaudited Condensed Consolidated Financial Statements
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Specialists On Call, Inc. was formed on July 14, 2004 as a Delaware C-Corporation. Specialists On Call, Inc. and Subsidiaries and Affiliates (collectively, the “Company”, “Specialists On Call”, “SOC”) is committed to improving patient care by providing advanced, real-time telemedicine and the highest quality critical consultation services by connecting emergency physicians with critical care experts 24 hours a day, every day of the year. The Company is a health services management company that is responding to the need for rapid, effective treatment of emergency patients and the shortage of critical care experts. The Company operates as a single operating and reportable segment.
On July 29, 2020, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Healthcare Merger Corp. (“HCMC”) Pursuant to the Agreement, HCMC will acquire the Company with consideration of a combination of cash and shares. As discussed in Note 14, on October 30, 2020 the business combination was consummated with Specialists On Call, Inc. and Subsidiaries becoming wholly owned subsidiaries of HCMC, which was renamed as SOC Telemed, Inc. as a result of the transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Specialists On Call, Inc. and its Subsidiaries and Affiliates and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”).
The accompanying interim unaudited condensed consolidated financial statements include the accounts of the Company. All intercompany balances and transactions are eliminated upon consolidation. In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2020, and its results of operations for the three and nine months ended September 30, 2020, and 2019, and cash flows for the nine months ended September 30, 2020, and 2019. The condensed balance sheet at December 31, 2019, was derived from the Company’s audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes of the Company included in HCMC’s definitive proxy statement/definitive consent solicitation statement/final prospectus dated October 14, 2020, filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on October 15, 2020 (the “Proxy Statement”)..
As discussed in Note 3, Variable Interest Entities, Specialists On Call, Inc. holds a variable interest in the Tele-Physician Practices which contract with physicians in order to provide services to the customers. The Tele-Physician Practices are considered variable interest entities (“VIE” or “VIEs”) which are denominated Affiliates for consolidation purposes.
COVID – 19 Outbreak
The recent outbreak of the novel coronavirus (“COVID-19”), which was declared a pandemic by the World Health Organization on March 11, 2020 and declared a National Emergency by the President of the United States on March 13, 2020, has led to adverse impacts on the U.S. and global economies and created uncertainty regarding potential impacts on the Company’s operating results, financial condition and cash flows. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including expenses and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impacts.
7
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
While not currently known, the full impact of COVID-19 could have a material impact on the operations of our business. For the three and nine months ended September 30, 2020 our variable revenues decreased as a result of the lower volume of consultations due to the COVID-19 pandemic with corresponding impacts on our cost of sales due to declined demand for physicians. For more details, see Going Concern Consideration below.
The Company continues to closely monitor the current macro environment related to monetary and fiscal policies, as well as pandemics or epidemics, such as the recent COVID-19 outbreak.
Going Concern Consideration
As of September 30, 2020, the Company has experienced negative cash flows from operations each year since inception and has an accumulated deficit of $211 million. The Company incurred net losses of $25.1 million and $12.2 million for the nine months ended September 30, 2020 and 2019, respectively and cash outflows from operations of $12.0 million and $8.7 million for the nine months ended September 30, 2020 and 2019, respectively. In March 2020, the World Health Organization declared the 2019 novel coronavirus, or COVID-19, a global pandemic. The Company experienced a reduction in service utilization in and around the same time and consequently experienced a decrease in revenue and margin. The Company immediately adjusted variable costs, including physician fees, travel expenses, other discretionary spending to preserve margins. The Company is closely monitoring the impact of COVID-19 on all aspects of the business and continuously modifying operational protocols, cost structure, and discretionary spending to evolving business conditions.
The Company has historically funded its operations through the issuance of preferred stock and long-term debt. Given the historical operating and cash flow losses from the Company’s result of operations and expected cash needs, management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. This evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt is deemed to exist, management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
In December 2019, the Company raised additional capital through the issuance of Series J preferred stock to Warburg Pincus (“WP”), SOC’s controlling shareholder, for $4 million. The Series J purchase agreement further provided additional closings with call dates to be determined in 2020 based on the Company’s needs for $11.0 million. The total available amount was called and funded in cash on January 28, 2020 for $3.7 million, on March 27, 2020 for $3.7 million, and on June 12, 2020 for $3.6 million. Additionally, on August 14, 2020, WP, signed a support letter committing funds (the “Warburg Commitment Letter”) up to $15.0 million available to the Company from August 2020 through December 2021 to enable the Company to meet all obligations as they come due. On September 3, 2020, SOC sold to WP through SOC Holdings LLC an entity controlled by WP and Specialists On Call, Inc.’s controlling shareholder, $2.0 million aggregate principal amount of subordinated convertible promissory notes in a financing pursuant to the August support letter. WP subsequently recommitted to fund up to $15.0 million available from September 2020 through December 31, 2021, subject to ongoing evaluations between the parties following the closing of the Merger transaction, under a new support letter dated September 23, 2020, that superseded and replaced the August support letter. On September 28, 2020, SOC sold to WP through SOC Holdings LLC an additional $2.0 million aggregate principal amount of subordinated convertible promissory notes pursuant to the September support letter. These proceeds were utilized to fund the operations of the Company through the date of these financial statements, with $2.4 million in cash remaining on September 30, 2020.
8
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
As discussed in Note 14, on October 30, 2020 the business combination between HCMC and SOC Telemed was approved with Specialists On Call, Inc. and Subsidiaries becoming wholly owned subsidiaries of HCMC, which was renamed as SOC Telemed, Inc. as a result of the transaction. The closing of the transaction resulted in settlement of the long term debt and the related party convertible bridge notes payable of $84.2 million and $6.1 million, respectively, with remaining cash balance (net of transaction costs) of $45 million.
The Company rapidly adapted to the impacts of COVID-19 and modified its variable cost structure effectively to preserve margins which included real time assessment of physician coverage needs to appropriately align with changes in utilization experienced as a result of COVID-19. The Company’s financial forecasts have been revised to incorporate these changes and our assessment of the financial impact of COIVD-19. The Company’s financial forecasts, combined with existing cash and cash equivalents resulting from the merger transaction with HCMC, indicate sufficient liquidity for at least the next twelve months. Accordingly, the Company believes its liquidity plans described above have alleviated the substantial doubt raised. Accordingly, the Company’s unaudited condensed consolidated financial statements have been prepared on the basis that it will continue as a going concern for a period of one year from the financial statement issuance date.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed federally insured limits.
During the nine months ended September 30, 2020 and 2019, no customer accounts for more than 10% of the Company’s total revenues. As of September 30, 2020 and December 31, 2019, no customer accounts for more than 10% of the Company’s total accounts receivable.
Impairment of Goodwill
Goodwill is tested for impairment on an annual basis as of December 31st or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company operates as one operating segment, which the Company has determined to be one reporting unit for the purposes of impairment testing. The Company compares 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.
The fair value of the reporting unit is determined using various techniques, including multiple of earnings and discounted cash flow valuation methodologies. Determining the fair value of the reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include changes in revenue and operating margins used to project future cash flows, discount rates, valuation multiples of entities engaged in the same or similar lines of business, and future economic and market conditions.
No impairments were recorded during the nine months ended September 30, 2020 and 2019.
Impairment of Long-Lived Assets
The Company determines whether long-lived assets are to be held for use or disposal. The Company monitors its long-lived assets for events or changes in circumstances that indicate that their carrying values may not be recoverable. Upon indication of possible impairment of long-lived assets held for use, the Company evaluates 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. When an evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value of the asset, the asset is adjusted to its estimated fair value. No impairments were recorded during the nine months ended September 30, 2020 and 2019.
9
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Revenue Recognition
The Company recognizes revenue from contracts when all of the following criteria are met:
● | Persuasive evidence of an arrangement exists |
● | The price is fixed or determinable |
● | Services have been rendered, and |
● | Collectability is reasonably assured |
The Company enters into service contracts with hospitals or hospital systems, physician practice groups, and other users. Under the contracts, the clients pay a fixed monthly fee for physician consultation services. The fixed monthly fee provides for a predetermined number of monthly consultations. Should the number of consultations exceed the contracted amount, the clients also pay a variable consultation fee for the additional service. To facilitate the delivery of the consultation services, the facilities use telemedicine equipment, which can be provided and installed by the Company. The Company also provides the hospitals with user training, maintenance and support services for the telemedicine equipment used to perform the consultation services. Prior to the start of a contract, clients generally make upfront nonrefundable payments to the Company when contracting for Company training, maintenance, equipment, and implementation services. Consideration received from these upfront fees is recognized ratably over the client relationship period.
The Company has determined that the separate deliverables under its contracts include the fixed and variable medical consultation services, as well as the monthly maintenance and support services. The Company allocates contract consideration to each of the elements based on their relative selling price, using the best estimate of selling price (“BESP”), because vendor specific objective evidence (“VSOE”) and third-party evidence (“TPE”) are not available. BESP is estimated as if the elements were sold regularly on a stand-alone basis considering internal factors such as historical pricing practices, gross margin objectives, customer demands, and geography.
Consideration allocated to fixed and variable medical consultation services is recognized in the period in which the physician consultation service is provided. Consideration allocated to the maintenance and support services is recognized ratably over the life of the service contract. Deferred revenue consists of the unamortized balance of nonrefundable upfront fees and maintenance fees which are classified as current and non-current based on the timing of when the Company expects to recognize revenue.
Use of estimates and judgements
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions about future events that affect the amounts reported in its unaudited condensed consolidated financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. On an ongoing basis, management evaluates these estimates, judgments and assumptions. Significant estimates and assumptions are included within, but not limited to: (1) revenue recognition, including the determination of the customer relationship period, (2) accounts receivable and allowance for doubtful accounts, (3) long-lived asset recoverability, (4) useful lives of long-lived and intangible assets, (5) stock-based compensation, option, and warrant liabilities, (6) fair value of identifiable purchased tangible and intangible assets in a business combination, (7) determination of the cash flows for goodwill impairment testing, (8) fair value measurements, and (9) the provision for income taxes and related deferred tax accounts. The Company bases these estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates, and any such differences may be material to the Company’s unaudited condensed consolidated financial statements.
10
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company is unable to predict the full impact that COVID-19 will have on its financial position, operating results, and cash flows due to numerous uncertainties. The extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others. The Company’s unaudited condensed consolidated financial statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.
Emerging Growth Company
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use the extended transition period under the JOBS Act until such time the Company is not considered to be an EGC. The adoption dates are discussed below to reflect this election.
Recently Issued Accounting Pronouncements
Accounting pronouncements issued and adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (“Topic 820”), which modifies, removes and adds certain disclosure requirements on fair value measurements. The new guidance was required for the Company for the annual reporting period beginning January 1, 2020 and interim periods within that fiscal year. The Company adopted this guidance starting from January 1, 2020, however, there was no material impact resulting from the adoption of this pronouncement.
Accounting pronouncements issued but not yet adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”) and Other Assets and Deferred Costs (“Topic 340”), which updates numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. This standard, as amended, contains principles with respect to the measurement and timing of recognition of revenue. The Company will recognize revenue to reflect the transfer of goods or services to customers at an amount that it expects to be entitled to receive in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). Subsequent to the issuance of ASU 2014-09, the FASB also issued several updates related to ASU 2014-09 including deferring its adoption date. As per the latest ASU 2020-05, issued by the FASB, the entities who have not yet issued or made available for issuance the financial statements as of June 3, 2020 can defer the new guidance for one year. The Company will be adopting this guidance for the annual reporting period beginning January 1, 2020, and interim reporting periods within the annual reporting period beginning January 1, 2021. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company plans on applying the modified retrospective method of adoption for this guidance. The Company is in the process of evaluating the impact that the pronouncement will have on the consolidated financial statements.
11
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
In February 2016, the FASB issued ASU 2016-02, Leases (“Topic 842”) which outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize almost all of their leases on the balance sheet by recording a lease liability and corresponding right-of-use assets for all leases with lease terms greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. As per the latest ASU 2020-05 issued by FASB, the entities who have not yet issued or made available for issuance the financial statements as of June 3, 2020 can defer the new guidance for one year. The Company will be adopting this guidance for the annual reporting period beginning January 1, 2022, and interim reporting periods within annual reporting period beginning January 1, 2023. This will require application of the new accounting guidance at the beginning of the earliest comparative period presented in the year of adoption. The Company is in the process of evaluating the impact that the pronouncement will have on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (“Topic 326”) Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. As per the latest ASU 2020-02, the FASB deferred the timelines for certain small public and private entities. The new guidance will be adopted by the Company for the annual reporting period beginning January 1, 2023, including interim periods within that annual reporting period. The standard will apply as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify various aspects related to accounting for income taxes. The Company is expecting to adopt the guidance from annual periods beginning after December 15, 2021 and interim periods beginning December 15, 2022. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
3. VARIABLE INTEREST ENTITIES
Specialists On Call, Inc. holds a variable interest in the Tele-Physicians Practices which contract with physicians in order to provide services to the customers. Specialists On Call, Inc. and the Tele-Physicians Practices have entered into a management services agreement with each other. Under these agreements, Specialists On Call, Inc. agrees to serve as the sole and exclusive administrator of all non-clinical, day-to-day operations and business functions required for the operation of each Tele-Physicians Practice, including business support services, contracting support with customers and payers, accounting, billing and payables support, technology support, licensing exclusive telemedicine technologies, and working capital support to cover the expenses of each Tele-Physicians Practice. The Tele-Physicians Practices are considered variable interest entities (“VIE” or “VIEs”) since they do not have sufficient equity to finance their activities without additional subordinated financial support. An enterprise having a controlling financial interest in a VIE must consolidate the VIE if it has both power and benefits — that is, it has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (power) and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). Under the management services agreements, Specialists On Call, Inc. has the power and rights to direct all non-clinical activities of the professional corporations and funds and absorbs all losses of the VIEs. Therefore, each of the Tele-Physicians Practices are consolidated with Specialists On Call, Inc.
12
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NeuroCall and JSA Health are wholly owned subsidiaries and as such consolidated by Specialists On Call, Inc. JSA Health comprises four entities: JSA Health Corporation (“Corporate”), JSA Health California LLC (“LLC”), JSA California PC (“CAPC”), and JSA Texas PLLC (“PLLC”). CAPC and PLLC are medical practices (the “Medical Practices”) and Corporate and LLC provide management services to the Medical Practices (the “Management Companies”). More specifically, Corporate and PLLC have entered into a management services agreement with each other, and LLC and CAPC have entered into a management services agreement with each other. As a result, Corporate and LLC hold variable interests in their respective Medical Practices which contract with physicians in order to provide services to Corporate and LLC. The Medical Practices are considered VIEs since they do not have sufficient equity to finance their activities without additional subordinated financial support. These relationships are similar to the relationship between Specialists On Call, Inc. and the Tele-Physician Practices. Therefore, each of the Medical Practices are consolidated with JSA Health.
Specialists On Call, Inc. consolidates certain VIEs for which it was determined to be the primary beneficiary. The assets of the consolidated VIEs may only be used to settle obligations of the consolidated VIEs, if any. In addition, there is no recourse to the Company for the consolidated VIEs’ liabilities. Specialists On Call, Inc. reassesses whether changes in the facts and circumstances regarding the Company’s involvement with a VIE could cause a change in its conclusions related to consolidation. Changes in consolidation status are applied prospectively.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair value.
The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The Company utilizes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - | Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. |
Level 2 - | Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. The Company has no assets or liabilities valued with Level 2 inputs. |
Level 3 - | Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Liabilities historically valued with Level 3 inputs on a recurring basis are warrants and puttable stock options. As of September 30, 2020 and December 31, 2019, the Company’s outstanding liability consisted of only puttable stock options. Puttable option liabilities’ fair value is computed using the Black-Scholes model.
13
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
As a result of the JSA Health acquisition in 2018, the Company measured its contingent consideration at fair value determined at Level 3. The Company estimated the fair value of contingent consideration as the present value of the expected contingent payments, determined using an Option Pricing Model and Discounted Cash Flow methods. As of September 30, 2020, December 31, 2019 and September 30, 2019 the Company had contingent consideration liabilities of $0 million, $0 million, and $0.1 million, respectively. The change in fair value of the Company’s contingent liability was recorded in other expenses as “Change in fair value of contingent consideration” in the consolidated statements of operations. For the nine months ended September 30, 2019, the Company recognized a gain of $1.7 million in changes in fair value of contingent consideration on the unaudited consolidated statement of operations
The carrying value of Cash and Cash Equivalents approximate their fair value because of the short-term or on demand nature of these instruments.
There were no transfers between fair value measurement levels during the nine months ended September 30, 2020.
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis (in thousands):
Carrying |
Fair
Value Measurements as of
September 30, 2020 Using: |
|||||||||||||||||||
Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,395 | $ | 2,395 | - | - | $ | 2,395 | ||||||||||||
Total | $ | 2,395 | $ | 2,395 | - | - | $ | 2,395 | ||||||||||||
Liabilities | ||||||||||||||||||||
Puttable option liabilities | $ | 518 | $ | - | - | $ | 518 | $ | 518 | |||||||||||
Total | $ | 518 | $ | - | - | $ | 518 | $ | 518 |
Carrying |
Fair
Value Measurements as of
December 31, 2019 Using: |
|||||||||||||||||||
Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,541 | $ | 4,541 | - | - | $ | 4,541 | ||||||||||||
Total | $ | 4,541 | $ | 4,541 | - | - | $ | 4,541 | ||||||||||||
Liabilities | ||||||||||||||||||||
Puttable option liabilities | $ | 1 | $ | - | - | $ | 1 | $ | 1 | |||||||||||
Total | $ | 1 | $ | - | - | $ | 1 | $ | 1 |
14
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table represents a reconciliation of Puttable option liabilities fair value measurements using the significant unobservable inputs (Level 3) (in thousands):
Puttable Option Liabilities | ||||||||
Shares |
Fair Value
(in thousands) |
|||||||
Balance, December 31, 2018 | 382,417 | $ | 164 | |||||
Change in fair value | - | - | ||||||
Balance, March 31, 2019 | 382,417 | $ | 164 | |||||
Change in fair value | - | - | ||||||
Balance, June 30, 2019 | 382,417 | $ | 164 | |||||
Change in fair value | - | - | ||||||
Balance, September 30, 2019 | 382,417 | $ | 164 | |||||
Shares expired unexercised | (80,000 | ) | (22 | ) | ||||
Change in fair value | - | (141 | ) | |||||
Balance, December 31, 2019 | 302,417 | $ | 1 | |||||
Shares expired unexercised | (30,000 | ) | (4 | ) | ||||
Change in fair value | - | 13 | ||||||
Balance, March 31, 2020 | 272,417 | $ | 10 | |||||
Change in fair value | - | 96 | ||||||
Balance, June 30, 2020 | 272,417 | $ | 106 | |||||
Change in fair value | - | 412 | ||||||
Balance, September 30, 2020 | 272,417 | $ | 518 |
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
At September 30, 2020 and December 31, 2019 prepaid expenses and other currents assets consisted of the following (in thousands):
September 30,
2020 |
December 31,
2019 |
|||||||
Prepaid expenses | $ | 1,440 | $ | 789 | ||||
Deferred transaction related costs | 2,169 | - | ||||||
Other current assets | 2 | 54 | ||||||
$ | 3,611 | $ | 843 |
15
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Prepaid expenses include prepayments related to information technology, insurance, tradeshows and conferences.
Deferred transaction related costs primarily includes attorney and consulting fees in support of the Company’s anticipated reverse merger. Upon completion, these costs will be offset against the gross proceeds of the reverse merger.
6. INTANGIBLE ASSETS
The carrying amount of the Intangible Assets as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
September 30, 2020 | Useful Life |
Gross
Value |
Accumulated
Amortization |
Net Carrying
Value |
Weighted
Average Remaining Useful Life (in years) |
|||||||||||||
Hospital contracts relationships | 6 to 10 years | $ | 8,480 | $ | (2,830 | ) | $ | 5,650 | 6.9 | |||||||||
Non-compete agreements | 4 to 5 years | 45 | (29 | ) | 16 | 2.5 | ||||||||||||
Trade names | 4 to 5 years | 1,810 | (1,128 | ) | 682 | 1.7 | ||||||||||||
Intangible assets, net | $ | 10,335 | $ | (3,987 | ) | $ | 6,348 | 6.3 |
December 31, 2019 | Useful Life |
Gross
Value |
Accumulated
Amortization |
Net Carrying
Value |
Weighted
Average Remaining Useful Life (in years) |
|||||||||||||
Hospital contracts relationships | 6 to 10 years | $ | 8,480 | $ | (2,066 | ) | $ | 6,414 | 7.5 | |||||||||
Non-compete agreements | 4 to 5 years | 45 | (21 | ) | 24 | 3.0 | ||||||||||||
Trade names | 4 to 5 years | 1,810 | (819 | ) | 991 | 2.4 | ||||||||||||
Intangible assets, net | $ | 10,335 | $ | (2,906 | ) | $ | 7,429 | 6.8 |
Periodic amortization that will be charged to expense over the remaining life of the intangible assets as of September 30, 2020 is as follows (in thousands):
Years ending December 31, |
Amortization
Expense |
|||
Remainder of 2020 | $ | 360 | ||
2021 | 1,437 | |||
2022 | 1,193 | |||
2023 | 629 | |||
2024 | 590 | |||
Thereafter | 2,139 | |||
$ | 6,348 |
16
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
7. DEBT
Related party - Convertible Bridge Notes Payable
The table below represents the components of outstanding debt (in thousands):
September 30,
2020 |
December 31,
2019 |
|||||||
Related party - Convertible bridge notes payable | 4,022 | - | ||||||
Less: Unamortized discounts, fees and issue costs | (40 | ) | - | |||||
Balance at | $ | 3,982 | $ | - |
On September 1, 2020, the Company entered into a convertible bridge note purchase agreement (the “Bridge Notes”, the “Bridge Note Agreement”) with its controlling stockholder, SOC Holdings LLC (“SOC Holdings”, “the Lead Investor”). SOC Holdings constitutes a related party of the Company, pursuant to ASC 850, Related Parties.
Under the Bridge Note Agreement, the Company is permitted to borrow aggregate principal of up to $8.0 million, pursuant to an initial closing and potential additional closings that may take place on or before January 29, 2021. The initial closing of $2.0 million occurred on September 3, 2020. Two additional closings of $2.0 million each occurred on September 28, 2020 and October 13, 2020 respectively.
The terms of the Bridge Notes are summarized as follows:
● | Annual interest rate: 13% paid “in-kind” (PIK), compound quarterly based on a 365 day year. |
● | Stated maturity: Any time after June 30, 2023, the outstanding principal and accrued PIK interest becomes due and payable upon the written demand of the Lead Investor. |
● | Optional prepayments: The Company may prepay the Bridge Notes and PIK interest any time before June 30, 2023 without penalty. |
The Bridge Notes include the following redemption and conversion features that may accelerate settlement of principal and PIK interest prior to the stated maturity. As discussed below, the Bridge Notes may become convertible into the Company’s equity securities only following the termination of the Company’s Merger Agreement with Healthcare Merger Corporation (HCMC), dated July 29, 2020 (“the Merger”, the “Merger Agreement”).
● | Upon the occurrence of the Merger or any other change of control, the principal and PIK interest become immediately due and payable. |
● | Upon the occurrence of an event of default, the principal and PIK interest become due and payable upon the written demand of the Lead Investor. |
● | If the Merger Agreement is terminated, a post-termination period of three months applies. Upon the closing of a transaction during the post-termination period in which the Company issues and sells shares of equity securities yielding cash proceeds of at least $5.0 million (the “Next Equity Financing”), the Bridge Note principal and PIK interest will be converted as follows: |
At the Lead Investor’s option, into the Company’s Series J preferred units at a conversion price of $1,000 per unit. Each Series J unit comprises one share of the Company’s Series J contingently redeemable preferred stock and one warrant to purchase 67 shares of the Company’s common stock at an exercise price of $0.01 per common share. Refer to Note 9 for further details regarding the Company’s contingently redeemable preferred stock and common warrants.
17
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
If the Lead Investor does not elect to convert into Series J preferred units, principal and PIK interest automatically convert into the equity securities issued in Next Equity Financing upon its closing. The number of equity securities issued upon conversion is variable and shall be based upon the per-unit market value of the equity securities.
If the Merger Agreement is terminated, but the Next Equity Financing is not consummated prior to the end of the post-termination period, the Lead Investor may elect to convert into Series J preferred units any time subsequent to the post-termination period.
As of September 30, 2020, outstanding principal and PIK interest on the Bridge Notes totaled approximately $4.0 million. The Bridge Notes are classified as a non-current liability on the Company’s consolidated balance sheet. For the nine months ended September 30, 2020, interest expense of less than $0.1 million was recognized.
On October 30, 2020, the Bridge Notes were extinguished in connection with the closing of the Company’s Merger with HCMC. Refer to Note 2, Going Concern Consideration section, and 14 for further discussion. .
Term Loan Agreement
The table below represents the components of outstanding debt (in thousands):
September 30,
2020 |
December 31,
2019 |
|||||||
Term Loan Agreement with an effective interest rate of 14.7%, due 2023 | $ | 82,172 | $ | 79,862 | ||||
Less: Unamortized discounts, fees and issue costs | (1,649 | ) | (2,722 | ) | ||||
Balance at | $ | 80,523 | $ | 77,140 |
In June 2016, the Company entered into a Term Loan Agreement with CRG Servicing LLC (“CRG). In addition to the principal and PIK interest balances, the Company will also be liable for a final payoff fee of 6% of the principal balance payable at maturity or upon prepayment. The Company estimated the payoff fee to be $4.7 million, which is included as a debt discount offset against the Company’s outstanding debt balance on the consolidated balance sheets and amortized as a component of interest expense over the term of the loan.
Interest expense related to the long-term debt agreements, including amortization of debt issuance costs and discount, for the nine months ended September 30, 2020 and 2019 was $8.5 million and $7.5 million, respectively.
On April 15, 2020, the Term Loan Agreement with CRG was amended (“the Fourth Amendment”) to incorporate the following modifications: (i) extend the interest-only period until March 31, 2022; (ii) extend the PIK period until March 31, 2022; and (iii) change the stated maturity date of all tranches to March 31, 2023.
The following reflects the contractually required payments under the term loan agreement as amended by the Fourth Amendment (in thousands):
Years ending December 31, | Amount | |||
Remainder of 2020 | $ | - | ||
2021 | - | |||
2022 | 61,694 | |||
2023 | 25,500 | |||
2024 and thereafter | - |
18
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Term Loan Agreement includes two financial covenants: (i) minimum liquidity of $2.0 million at all times while the principal is outstanding under the term loan and (ii) minimum revenue of at least $37.5 million in 2018, $42.5 million in 2019, $47.5 million in 2020 and $52.5 million in 2021. On August 31, 2020, the Term Loan Agreement with CRG was amended (“the Sixth Amendment”) to change the minimum liquidity financial covenant to $1.0 million effective from August 31, 2020 to November 30, 220. Additionally, the Sixth Amendment approved the issuance of the Related party - Convertible bridge notes payable, as detailed above. The Company was in compliance with all financial covenants at September 30, 2020 and December 31, 2019 and 2018. The Term Loan Agreement contains affirmative covenants which include the delivery of audited financial statements within 180 days of year end and an audit opinion not subject to any “going-concern” or like qualification. As discussed in Note 14, as a result of the merger transaction with Healthcare Merger Corp., on June 4, 2020, the Term Loan Agreement with CRG was amended (“the Fifth Amendment”) to allow the Company to provide the lender with audited consolidated financial statements for the year ending December 31, 2019 within 270 days after the end of such fiscal year. Therefore, the Company was in compliance with this covenant for 2019. The Term Loan Agreement also contains negative covenants which, in certain circumstances, would limit the Company’s ability to engage in acquisitions. The Company obtained waivers for this covenant in 2018 and 2017 in order to consummate the acquisitions of JSA Health and NeuroCall, respectively. Also, the Company’s obligations under the term loan are senior to the Series H, I and J contingently redeemable preferred stock, meaning that all such obligations must be paid before the holders of the Series H, I and J contingently redeemable preferred stock receive any return.
The Company determines the fair value of long-term debt using discounted cash flows, applying current interest rates and current credit spreads, based on its own credit risk. Such instruments are classified as Level 2. The fair value amounts were approximately $81.0 million and $76.9 million as of September 30, 2020 and December 31 2019, respectively.
The Term Loan Agreement contains a material adverse change provision which permits the lender to accelerate the scheduled maturities of the obligations under the loan. The conditions which would permit this acceleration are not objectively determinable or defined within the agreement. A potential condition which could qualify as a material adverse change would be substantial doubt about the Company’s ability to continue as a going concern. As disclosed in Note 2, as a result of the support letter provided by WP, Specialists On Call, Inc.’s controlling shareholder, committing funds up to $15.0 million available to Specialists On Call, Inc. through December 2021, the Company’s plans have alleviated substantial doubt with respect to going concern and acceleration of the Term Loan is not deemed probable. Therefore, the Company classified the term loan as a non-current liability on the consolidated balance sheets as of September 30, 2020 and December 31, 2019.
Both amendments were accounted for as modifications of debt.
On October 30, 2020, the Term Loan was extinguished in connection with the closing of the Company’s Merger with HCMC. Refer to Note 2, Going Concern Consideration section, and 14 for further discussion.
8. ACCRUED EXPENSES
At September 30, 2020 and December 31, 2019 accrued expenses consisted of the following (in thousands):
September 30,
2020 |
December 31,
2019 |
|||||||
Accrued compensation | $ | 3,402 | $ | 2,473 | ||||
Accrued bonuses | 2,197 | 1,082 | ||||||
Accrued professional and service fees | 3,403 | 2,228 | ||||||
Accrued other expenses | 1,049 | 295 | ||||||
$ | 10,051 | $ | 6,078 |
19
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
9. CONTINGENTLY REDEEMABLE PREFERRED STOCK
The Company has three outstanding series of redeemable preferred stock. The authorized, issued and outstanding shares, issue price, and carrying value are as follows:
As of September 30, 2020 | ||||||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||
Shares Authorized | Shares Issued and Outstanding | Issue Price | Carrying Amount | |||||||||||||
Series H | 21,781,134 | 21,781,134 | $ | 1.14 | $ | 34,202 | ||||||||||
Series I | 20,000 | 20,000 | 1,000.00 | 28,288 | ||||||||||||
Series J | 15,000 | 15,000 | 1,000.00 | 16,024 | ||||||||||||
21,816,134 | 21,816,134 | $ | 78,514 |
As of December 31, 2019 | ||||||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||
Shares Authorized | Shares Issued and Outstanding | Issue Price | Carrying Amount | |||||||||||||
Series H | 21,781,134 | 21,781,134 | $ | 1.14 | $ | 32,675 | ||||||||||
Series I | 20,000 | 20,000 | 1,000.00 | 25,412 | ||||||||||||
Series J | 4,000 | 4,000 | 1,000.00 | 3,820 | ||||||||||||
21,805,134 | 21,805,134 | $ | 61,907 |
Based on the Series J Preferred Stock Purchase Agreement the Company conducted three subsequent closings totaling $11.0 million, fully funded in cash for $3.7 million on January 28, 2020, $3.7 million on March 27, 2020, and $3.6 million on June 12, 2020.
10. NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock of the Company outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock of the Company, including outstanding stock options, warrants, contingently redeemable preferred stock and convertible notes, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock of the Company outstanding would have been anti-dilutive.
20
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents the calculation of basic and diluted net loss per share for the Company’s common stock (in thousands, except shares and per share amounts):
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (9,688 | ) | $ | (3,330 | ) | $ | (25,068 | ) | $ | (12,229 | ) | ||||
Preferred stock dividends | (2,152 | ) | (1,412 | ) | (5,670 | ) | (4,054 | ) | ||||||||
Numerator for Basic and Dilutive EPS – Loss available to common stockholders | $ | (11,840 | ) | $ | (4,742 | ) | $ | (30,738 | ) | $ | (16,283 | ) | ||||
Denominator: | ||||||||||||||||
Common stock | 84,146,870 | 84,121,205 | 84,146,870 | 84,121,205 | ||||||||||||
Series I and Series J common warrants | 728,000 | 460,000 | 728,000 | 460,000 | ||||||||||||
Denominator for Basic and Dilutive EPS – Weighted-average common stock outstanding | 84,874,870 | 84,581,205 | 84,874,870 | 84,581,205 | ||||||||||||
Basic net loss per share | $ | (0.14 | ) | $ | (0.06 | ) | $ | (0.36 | ) | $ | (0.19 | ) | ||||
Dilutive net loss per share | $ | (0.14 | ) | $ | (0.06 | ) | $ | (0.36 | ) | $ | (0.19 | ) |
The adjusted net loss per share and shares in the table below reflect the impact of the two and four hundred eighty-eight thousandths-for-one stock conversion ratio of the reverse recapitalization of Specialists On Call, Inc. and Healthcare Merger Corporation which occurred on October 30, 2020 which will be retroactively recast in the period in which the reverse recapitalization occurs. This information is unaudited and is presented to facilitate the understanding of the impact of the reverse recapitalization on net loss per share prior to its consummation.
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (9,688 | ) | $ | (3,330 | ) | $ | (25,068 | ) | $ | (12,229 | ) | ||||
Preferred stock dividends | (2,152 | ) | (1,412 | ) | (5,670 | ) | (4,054 | ) | ||||||||
Numerator for Basic and Dilutive EPS – Loss available to common stockholders | $ | (11,840 | ) | $ | (4,742 | ) | $ | (30,738 | ) | $ | (16,283 | ) | ||||
Denominator: | ||||||||||||||||
Common stock | 33,825,936 | 33,815,619 | 33,825,936 | 33,815,619 | ||||||||||||
Series I and Series J common warrants | 292,646 | 184,914 | 292,646 | 184,914 | ||||||||||||
Denominator for Basic and Dilutive EPS – Weighted-average common stock outstanding | 34,118,582 | 34,000,533 | 34,118,582 | 34,000,533 | ||||||||||||
Basic net loss per share | $ | (0.35 | ) | $ | (0.14 | ) | $ | (0.90 | ) | $ | (0.48 | ) | ||||
Dilutive net loss per share | $ | (0.35 | ) | $ | (0.14 | ) | $ | (0.90 | ) | $ | (0.48 | ) |
11. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases three separate facilities under non-cancelable operating agreements expiring on December 31, 2020, December 31, 2021 and October 31, 2022, respectively. Rent expense is recognized on the straight-line method over the life of the lease and was approximately $0.4 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively. Rent expense is included in selling, general and administrative expenses on the statements of operations.
21
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company also leases telemedicine and office equipment under various non-cancelable operating leases through July 2021. Rent expense under these leases was less than $0.1 million and $0.2 million for the nine months ended September 30, 2020 and 2019, respectively, and included in cost of revenues on the statements of operations. The Company also leased office equipment under various non-cancelable operating leases through December 2019. Rent expense under these leases was $0 million and less than $0.1 million for the nine months ended September 30, 2020 and 2019, respectively, and included in selling, general and administrative expenses on the statements of operations.
There was no sublease income for the nine months ended September 30, 2020 and 2019. There were no future minimum sublease payments to be received under non-cancelable subleases as of September 30, 2020.
The following reflects the future minimum non-cancelable lease payments required under the above operating leases (in thousands):
Years ending December 31, | Amount | |||
Remainder of 2020 | $ | 162 | ||
2021 | 543 | |||
2022 and thereafter | 33 |
Contingencies
The Company is involved in litigation and legal matters which have arisen in the normal course of business, including but not limited to medical malpractice matters. Although the ultimate results of these matters are not currently determinable, management does not expect that they will have a material adverse effect on the Company’s consolidated statements of financial position, results of operations, or cash flows.
12. INCOME TAXES
Income tax expense equals the current tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities during the year.
The realizability of the deferred tax assets, generated primarily from net operating loss carryforwards, is dependent upon future taxable income generated during the periods in which net operating loss carryforwards are available. Management considers projected future taxable income and tax planning strategies, which can be implemented by the Company in making this assessment. Since the history of cumulative losses provides strong evidence that it is unlikely that future taxable income will be generated in the periods net operating losses are available, management has established a valuation allowance equal to the net deferred tax assets.
The Company’s effective tax rate was not material for the nine months ended September 30, 2020 and 2019. The income tax expense for the three and nine months ended September 30, 2020 and 2019 is attributable to U.S. state income tax.
Income tax expense during interim periods is based on the Company’s estimated annual effective income tax rate plus any discrete items that are recorded in the period in which they occur. The Company’s tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year.
There are no unrecognized income tax benefits for the nine-month periods ended September 30, 2020 and 2019 and the Company does not anticipate any material changes in its unrecognized tax benefits in the next twelve months.
22
Specialists On Call, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
13. RELATED-PARTY TRANSACTIONS
During the nine months ended September 30, 2020 and 2019, respectively, the Company issued 11,000 and 4,000 shares of Series J contingently redeemable preferred stock to certain previous Company stockholders in exchange for cash consideration (See Note 9).
As discussed in Note 2, Going Concern Consideration, on August 14, 2020, WP, Specialists On Call, Inc.’s controlling shareholder, signed a support letter committing funds up to $15.0 million available to Specialists On Call, Inc. from August 2020 through December 2021. On September 3, 2020, SOC sold to WP $2.0 million aggregate principal amount of subordinated convertible promissory notes in a financing pursuant to this support letter. WP subsequently recommitted to fund up to $15.0 million available from September 2020 through December 31, 2021, subject to ongoing evaluations between the parties following the closing of the Merger transaction, under a new support letter dated September 23, 2020, that superseded and replaced the August support letter. This transaction is also discussed in Note 7, Debt, and Note 14, Subsequent Events, as appropriate.
14. SUBSEQUENT EVENTS
The Company evaluated its financial statements for subsequent events through November 16, 2020, the date the financial statements were available to be issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements except as discussed below.
On July 29, 2020, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Healthcare Merger Corp., a Delaware corporation (“HCMC”). Pursuant to the Agreement, HCMC will acquire the Company with consideration of a combination of cash and shares. The terms of the Agreement contain customary representations, warranties, covenants, closing conditions, termination fee provisions and other terms relating to the mergers and the other transactions contemplated. On October 30, 2020 the business combination was consummated with Specialists On Call, Inc. and Subsidiaries becoming wholly owned subsidiaries of HCMC, which was renamed as SOC Telemed, Inc. Total consideration paid for the transaction was $723.9 million, a portion of which was used to extinguish $90.3 million of outstanding debt. The closing of the transaction will trigger the grant of awards to several officers and directors of the surviving publicly-held corporation.
As discussed in Note 7, Debt, and Note 13, Related-Party Transactions, on October 13, 2020 SOC sold to WP through SOC Holdings LLC, an entity controlled by WP and Specialists On Call, Inc.’s controlling shareholder, additional $1.9 million aggregate principal amount of subordinated convertible promissory notes in a financing pursuant to the support letter dated September 23, 2020, that superseded and replaced the August support letter and $0.1 million to other existing shareholders pursuant to the Convertible Bridge Note Agreement. Additionally, as discussed in Note 2, Going Concern Consideration section, on October 30, 2020 the business combination between HCMC and SOC Telemed was consummated. The closing of the transaction resulted in settlement of the long term debt and the related party convertible bridge notes payable of $84.2 million and $6.1 million, respectively, with remaining cash balance of $55.3 million.
23
Exhibit 99.4
SOC TELEMED MANAGEMENT’S DISCUSSION
AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, references in this “SOC Telemed 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 Specialists On Call, Inc. and its consolidated subsidiaries prior to the consummation of the Business Combination. Capitalized terms used but not described in this Exhibit 99.4 shall have the meanings ascribed to them in the Original Report.
You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and the related notes attached as Exhibit 99.3 to the Amendment. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Forward-Looking Statements” and “Risk Factors” included in the Original Report (including the related disclosures in the Proxy Statement incorporated by reference therein) for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a leading provider of acute care telemedicine services and technology to U.S. hospitals and healthcare systems based on number of clients, which services include acute teleNeurology, telePsychiatry, and teleICU, and we believe that we have significant opportunities to expand into other specialties. We provide time-sensitive specialty care when patients are vulnerable. Our solution was developed to support complex workflows in the acute care setting by integrating our cloud-based software platform, Telemed IQ, with our network of qualified physicians and other provider specialists to create a seamless, acute 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 $43.5 million and $49.6 million for the nine months ended September 30, 2020 and 2019, respectively, representing a period-over-period decrease of 12%, primarily resulting from decreased utilization of our core services due to the COVID-19 pandemic. We incurred net losses of $25.1 million and $12.2 million for the nine months ended September 30, 2020 and 2019, respectively, primarily due to our investments in growth.
COVID-19 Update
In March 2020, the World Health Organization declared the 2019 novel coronavirus, or COVID-19, a global pandemic. We are closely monitoring the impact of COVID-19 on all aspects of our business. 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, clients, and stockholders. The effects of these operational modifications are unknown and may not be realized until further reporting periods.
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. However, we have seen improvement in the utilization rates of these solutions in recent periods and expect to return to normal utilization levels in the second 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, impact on our clients and our sales cycles, impact on our marketing efforts, and 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 clients’ operations and the operations of our third-party suppliers, along with the 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 clients’ 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. The net impact of these dynamics may negatively impact our ability to acquire new clients, complete implementations, and renew contracts with or sell additional solutions to our existing clients. The extent to which the coronavirus outbreak 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 clients.
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 from the COVID-19 pandemic. In recent periods, the disruptions caused by the pandemic have had a significant impact on the telemedicine market by increasing awareness and acceptance among patients and providers. Telemedicine provided access to care when access to healthcare facilities was limited due to state-mandated stay-at-home orders. Moreover, as the clinicians themselves were quarantined or otherwise relegated to their homes due to safety issues, telemedicine provided a solution for those remote providers to continue to provide care to patients or for hospitals to access additional specialists to augment their remaining staff. In addition, the Centers for Medicare and Medicaid Services have significantly reduced regulatory and reimbursement barriers for telehealth during the pandemic.
Key Factors Affecting SOC Telemed’s 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.
Expanding number of consultations on the SOC Telemed platform
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 clients and the effectiveness of our client 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 clients to realize tangible clinical and financial benefits with our solutions.
2
Continued 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 intend to grow marketing, client success and sales expenses to target expansion of our business and to attract new facilities. 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 add headcount to sales, client success and marketing functions, as well as in general and administrative functions as we scale to meet our reporting, compliance and other obligations as a public company. 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.
As of September 30, | ||||||||
2020 | 2019 | |||||||
Facilities | 843 | 603 |
Bookings
We believe that new bookings are an indicator of future revenue growth and provides investors with useful information on period-to-period performance as evaluated by management and comparison with our past financial performance. Bookings represents the minimum contractual value for the initial 12 months of a contract as of the contract execution date. The minimum fixed consultation revenue, upfront implementation fees and technology and support fees are included in bookings. Estimates of variable revenue for utilization in excess of the contracted amounts of consultations is not included in the value of bookings. The minimum fixed consultation fee 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 over our average client relationship period.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Bookings | $ | 2,588 | $ | 1,684 | $ | 8,289 | $ | 4,108 |
3
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 clients utilizing our services or delivery of new services to existing clients and are an indicator of revenue growth.
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Implementations | 55 | 54 | 211 | 117 |
Number of core 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 comparison with our past financial performance. We define core consultations as consultations utilizing our core services, including our teleNeurology, telePsychiatry and teleICU solutions. We experienced lower core consultation volume for the three and nine months ended September 30, 2020 as compared to the three and nine months ended September 30, 2019, respectively, due to the impact of COVID-19 on the utilization of our core services.
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Core Consultations | 32,126 | 41,803 | 98,686 | 121,894 |
Components of Results of Operations
Revenues
We enter into contracts with hospitals or hospital systems, physician practice groups, and other users. Under the contracts, the clients 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 client also pays a variable consultation fee for the additional utilization. To facilitate the delivery of the consultation services, facilities use telemedicine equipment which is either provided and installed by the Company or procured by the client from external vendors. 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, clients make upfront nonrefundable payments when contracting for implementation services. Consideration received from these upfront fees is recognized ratably over our average client relationship period. Revenue is driven primarily by the number of facilities, the number of services contracted for by the facilities, the utilization of our services and the contractually negotiated prices of our services. We recognize revenue when the following criteria are met: (i) there is an executed contract, (ii) service is available to be accessed, (iii) collection of the fees is reasonably assured and (iv) the amount of fees to be paid is fixed and determinable. Our agreements typically have a term of one to three years with an auto renewal provision. We generally invoice our facilities in advance on a monthly basis. Variable consult fees are recognized as incurred and billed in arrears.
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 clients 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.
4
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. We expect our annual gross margin to improve over the near term as we invest in technology enabled solutions to optimize deployment and utilization of our physicians.
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, client 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.
We expect our sales and marketing expenses to increase for the foreseeable future as we continue to increase the size of our sales and client success teams and marketing investments and expand into new products and markets. Our sales and marketing expenses will increase in the near term as we increase brand awareness, expand market presence and strategically invest to expand our business. We expect to continue to invest in sales and marketing by hiring additional personnel and promoting our brand through a variety of marketing and public relations activities. As we scale our sales and related client success and sales support personnel in the short- to medium-term, we expect these expenses to increase in both absolute dollars and as a percentage of revenue.
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
Operations expenses consist primarily of personnel and related expenses for our physician licensing, credentialing and privileging, project management, implementation, consult coordination center, and clinical provisioning functions.
We expect our operations expenses to increase as we continue to increase the size of our staff and expand into new products and markets.
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, professional fees (including legal, tax, and accounting). Additionally, during 2020, we incurred significant integration, acquisition, transaction and executive severance costs in connection with the Business Combination. Integration, acquisition, transaction and executive severance costs represent the transaction and business integration costs related to the Business Combination, including incremental expenses incurred in connection with the Business Combination, such as advisory, legal, accounting, valuation, and other professional or consulting fees, as well as other related incremental executive severance costs. We expect our general and administrative expenses to increase for the foreseeable future following the completion of the Business Combination due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company, as well as other costs associated with continuing to grow our business.
5
Depreciation and amortization
Depreciation and amortization consists primarily of depreciation of fixed assets, amortization of capitalized software development costs (internal-use software) and amortization of acquisition-related intangible assets.
Changes in Fair Value of Contingent Consideration
Changes in fair value of contingent consideration consists of the change in fair value of contingent consideration associated with the acquisition of JSA Health Corporation (“JSA”), a provider of physician-based psychiatric telemedicine services, in August 2018.
Interest Expense
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 agreement.
Gain (Loss) on Puttable Option Liabilities
Gain (loss) on puttable option liabilities consists of changes in the fair value of puttable option liabilities. These puttable option liabilities are considered to expire between 2020 and 2024.
Results of Operations
The following table sets forth our consolidated statements of operations data for the periods indicated (in thousands):
Three Months Ended
September 30, |
Nine
Months Ended
|
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(in thousands) | ||||||||||||||||
Consolidated Statement of Operations data: | ||||||||||||||||
Revenues | $ | 15,132 | $ | 17,052 | $ | 43,493 | $ | 49,615 | ||||||||
Cost of revenues | 9,534 | 9,853 | 29,277 | 30,251 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 11,993 | 8,135 | 30,267 | 25,805 | ||||||||||||
Changes in fair value of contingent consideration | — | (258 | ) | — | (1,712 | ) | ||||||||||
Total costs and expenses | 11,993 | 7,878 | 30,267 | 24,093 | ||||||||||||
Loss from operations | (6,395 | ) | (678 | ) | (16,051 | ) | (4,729 | ) | ||||||||
Other income (expense) | (412 | ) | — | (517 | ) | — | ||||||||||
Interest expense | (2,874 | ) | (2,650 | ) | (8,490 | ) | (7,495 | ) | ||||||||
Loss before income taxes | 9,681 | ) | (3,328 | ) | (25,058 | ) | (12,224 | ) | ||||||||
Income tax (expense) benefit | (7 | ) | (2 | ) | (10 | ) | (5 | ) | ||||||||
Net loss | $ | (9,688 | ) | $ | (3,330 | ) | $ | (25,068 | ) | $ | (12,229 | ) |
6
Consolidated Results of Operations
Revenues
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Revenues | $ | 15,132 | $ | 17,052 | $ | 43,493 | $ | 49,615 | $ | (1,920 | ) | (11 | )% | $ | (6,122 | ) | (12 | )% |
Comparison of the Three Months Ended September 30, 2020 and 2019
Revenues decreased by $1.9 million, or 11%, for the three months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decrease was primarily driven by lower volume of core consultations over the same period due to the COVID-19 pandemic.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Revenues decreased by $6.1 million, or 12%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decrease was primarily driven by the same factors that affected revenues in the three months ended September 30, 2020.
Cost of Revenues and Gross Margin
Three Months
Ended September 30, |
Nine Months
Ended
|
Three Months
Ended September 30, |
Nine
Months
|
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Cost of revenues | $ | 9,534 | $ | 9,853 | $ | 29,277 | $ | 30,251 | $ | (319 | ) | (3 | )% | $ | (974 | ) | (3 | )% | ||||||||||||||
Gross margin | 37 | % | 42 | % | 33 | % | 39 | % |
Comparison of the Three Months Ended September 30, 2020 and 2019 Cost of revenues decreased by $0.3 million, or 3%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This decrease was due to $0.9 million lower clinician fees due to lower volume of core consultations and $0.1 million decrease in equipment maintenance costs over the same period, partially offset by $0.4 million increase in depreciation and amortization of telemedicine equipment and internal-use software and $0.3 million increase in medical malpractice and licensing costs.
Gross margin was 37% for the three months ended September 30, 2020 compared to 42% for the three months ended September 30, 2019. The decrease in gross margin was due to the lower volume of core consultations over the same period due to the COVID-19 pandemic partially offset by a decrease of $0.3 million in cost of revenues over the same period. Utilization levels of these core services have continued to recover since the initial impact of the COVID-19 pandemic in March 2020; however, we do not expect a return to normal utilization levels until the second quarter of 2021.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Cost of revenues decreased by $1.0 million, or 3%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decrease was due to $2.4 million lower clinician fees due to lower volume of core consultations and $0.1 million decrease in equipment maintenance costs over the same period, partially offset by $0.9 million increase in depreciation and amortization of telemedicine equipment and internal-use software and $0.6 million increase in medical malpractice and licensing costs.
7
Gross margin was 33% for the nine months ended September 30, 2020 compared to 39% for the nine months ended September 30, 2019. The decrease in gross margin was due to the lower volume of core consultations over the same period due to the COVID-19 pandemic, partially offset by a decrease of $1.0 million in cost of revenues over the same period.
Selling, General and Administrative Expenses
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Selling, general and administrative expenses(1) | $ | 11,993 | $ | 8,135 | $ | 30,267 | $ | 25,805 | $ | 3,858 | 47 | % | $ | 4,462 | 17 | % | ||||||||||||||||
Sales and marketing | 1,936 | 1,364 | 4,920 | 5,122 | 572 | 42 | % | (202 | ) | (4 | )% | |||||||||||||||||||||
Research and development | 398 | 270 | 940 | 827 | 128 | 47 | % | 113 | 14 | % | ||||||||||||||||||||||
Operations | 2,357 | 1,991 | 6,539 | 5,916 | 366 | 18 | % | 623 | 11 | % | ||||||||||||||||||||||
General and administrative | 7,302 | 4,510 | 17,868 | 13,940 | 2,792 | 62 | % | 3,928 | 28 | % | ||||||||||||||||||||||
$ | 11,993 | $ | 8,135 | $ | 30,267 | $ | 25,805 | $ | 3,858 | 47 | % | $ | 4,462 | 17 | % |
(1) | Selling, general, and administrative expenses includes the following expenses for the periods presented: |
Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | |||||||||||||||||||||||
Stock-Based Compensation |
Depreciation and Amortization |
Integration Costs |
Stock-Based Compensation |
Depreciation and Amortization |
Integration Costs |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Sales and marketing | $ | 3 | $ | — | $ | — | $ | 100 | $ | — | $ | — | ||||||||||||
Research and development | 8 | — | — | 8 | — | — | ||||||||||||||||||
Operations | 10 | — | — | 11 | — | — | ||||||||||||||||||
General and administrative | 1,012 | 397 | 1,018 | 133 | 411 | 31 | ||||||||||||||||||
Total selling, general and administrative expenses | $ | 1,033 | $ | 397 | $ | 1,018 | $ | 252 | $ | 411 | $ | 31 |
Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
Stock-Based
Compensation |
Depreciation
and Amortization |
Integration
Costs |
Stock-Based
Compensation |
Depreciation
and Amortization |
Integration
Costs |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Sales and marketing | $ | 18 | $ | — | $ | — | $ | 671 | $ | — | $ | — | ||||||||||||
Research and development | 48 | — | — | 38 | — | — | ||||||||||||||||||
Operations | 45 | — | — | 34 | — | — | ||||||||||||||||||
General and administrative | 1,169 | 1,201 | 3,521 | 372 | 1,252 | 1,050 | ||||||||||||||||||
Total selling, general and administrative expenses | $ | 1,280 | $ | 1,201 | $ | 3,521 | $ | 1,115 | $ | 1,252 | $ | 1,050 |
8
Comparison of the Three Months Ended September 30, 2020 and 2019
Sales and marketing expenses increased by $0.6 million, or 42%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase was primarily due to increased headcount across our sales and client success teams and higher marketing investments of $0.6 million to increase brand awareness and our market presence.
Research and development expenses increased by $0.1 million, or 47% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, as we made additional investments in product development.
Operations expenses increased by $0.4 million, or 18%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This increase is due to salaries and benefits associated with additional headcount for our operations team, including credentialing, licensing and privileging personnel.
General and administrative expenses increased by $2.8 million, or 62%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This increase was due primarily to additional accounting, finance and legal costs as part of preparing to become a public company in connection with the Business Combination, as well as a $0.9 million increase in stock-based compensation expense primarily related to an option modification.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Sales and marketing expenses decreased by $0.2 million, or 4%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decrease was primarily due COVID-19 related travel restrictions and cancellation of trade shows and events.
Research and development expenses increased by $0.1 million, or 14% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, as we made additional investment in product development.
Operations expenses increased by $0.6 million, or 11%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase is due to salaries and benefits associated with additional headcount for our operations team, including consult coordination center, credentialing, licensing and privileging personnel.
General and administrative expenses increased by $3.9 million, or 28%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase was due to $2.5 million higher integration, acquisition, transaction, and severance costs, a $0.8 million increase in stock-based compensation expense and $0.8 million in additional accounting, finance and legal costs as part of preparing to become a public company in connection with the Business Combination.
Changes in Fair Value of Contingent Consideration
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Changes in fair value of contingent consideration | $ | — | $ | (258 | ) | $ | — | $ | (1,712 | ) | $ | 258 | * | $ | 1,712 | * |
* | Percentage not meaningful |
9
Comparison of the Three Months Ended September 30, 2020 and 2019
Changes in fair value of contingent consideration increased by $0.3 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This increase was due to the revaluation of the previously recorded contingent consideration associated with the JSA acquisition to reflect that thresholds requiring payment under the earn-out would not be met.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Changes in fair value of contingent consideration increased by $1.7 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase was due to the same factors that affected changes in fair value of contingent consideration for the three months ended September 30, 2020.
Loss from operations
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Loss from operations | $ | 6,395 | $ | 678 | $ | 16,051 | $ | 4,729 | $ | 5,717 | 843 | % | $ | 11,322 | 239 | % |
Comparison of the Three Months Ended September 30, 2020 and 2019
Loss from operations increased by $5.7 million, or 843% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This increase was due to a decline in revenues resulting from the reduction in core consultations related to the COVID-19 pandemic, the increase in selling, general and administrative expenses described above, and the revaluation of the previously recorded contingent consideration associated with the JSA acquisition. We expect our selling, general, and administrative costs and our losses from operations to increase as we continue to invest in growing our business and operating as a public company.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Loss from operations increased by $11.3 million, or 239%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase was due to the same factors that affected loss from operations for the three months ended September 30, 2020.
Interest Expense
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Interest expense | $ | 2,874 | $ | 2,650 | $ | 8,490 | $ | 7,495 | $ | 224 | 8 | % | $ | 995 | 13 | % |
10
Comparison of the Three Months Ended September 30, 2020 and 2019
Interest expense increased by $0.2 million, or 8%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This increase was due primarily to an additional $4.0 million in borrowings under the Term Loan Agreement in April and August 2019.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Interest expense increased by $1.0 million, or 13%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase was due to the same factors that affected interest expense for the three months ended September 30, 2020.
Income Tax Expense
Three Months
Ended September 30, |
Nine Months
Ended
|
Three Months
Ended September 30, |
Nine Months
Ended
|
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Income Tax Expense | $ | 7 | $ | 2 | $ | 10 | $ | 5 | $ | 5 | 250 | % | $ | 5 | 100 | % |
Comparison of the Three Months Ended September 30, 2020 and 2019
Income tax expense was consistent for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Income tax expense was consistent for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
Net loss
Three Months
Ended September 30, |
Nine
Months
|
Three Months
Ended September 30, |
Nine
Months
|
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Net loss | $ | 9,688 | $ | 3,330 | $ | 25,068 | $ | 12,229 | $ | 6,358 | 191 | % | $ | 12,839 | 105 | % |
Comparison of the Three Months Ended September 30, 2020 and 2019
Net loss increased by $6.4 million, or 191%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The change in net loss was due primarily to an increase in the loss from operations as described above and an increase in the interest expense related to additional borrowings under the Term Loan Agreement in April and August 2019.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Net loss increased by $12.8 million, or 105%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The change in net loss was due to the same factors that affected net loss for the three months ended September 30, 2020.
11
Certain Non-GAAP Financial Measures
We believe that, in addition to our financial results determined in accordance with 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.
Three Months
September 30, |
Nine Months
September 30, |
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Adjusted gross profit | $ | 6,617 | $ | 7,979 | $ | 17,080 | $ | 21,470 | ||||||||
Adjusted gross margin | 44 | % | 47 | % | 39 | % | 43 | % | ||||||||
Adjusted EBITDA | $ | (2,943 | ) | $ | 477 | $ | (7,242 | ) | $ | (1,126 | ) |
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 are:
● | 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 may calculate these financial measures differently than we do, limiting 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 this presentation. 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) and equipment leasing costs. 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:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Revenues | $ | 15,132 | $ | 17,052 | $ | 43,493 | $ | 49,615 | $ | (1,920 | ) | (11 | )% | $ | (6,122 | ) | (12 | )% | ||||||||||||||
Cost of revenues | 9,534 | 9,853 | 29,277 | 30,251 | (319 | ) | (3 | )% | (974 | ) | (3 | )% | ||||||||||||||||||||
Gross profit | 5,598 | 7,199 | 14,216 | 19,364 | (1,601 | ) | (22 | )% | (5,148 | ) | (27 | )% | ||||||||||||||||||||
Add: | ||||||||||||||||||||||||||||||||
Depreciation and amortization | 1,004 | 719 | 2,807 | 1,898 | 285 | 40 | % | 909 | 48 | % | ||||||||||||||||||||||
Equipment leasing costs | 15 | 61 | 57 | 208 | (46 | ) | (75 | )% | (151 | ) | (73 | )% | ||||||||||||||||||||
Adjusted gross profit | $ | 6,617 | $ | 7,979 | $ | 17,080 | $ | 21,470 | (1,362 | ) | (17 | )% | (4,390 | ) | (20 | )% | ||||||||||||||||
Adjusted gross margin (as a percentage of revenues) | 44 | % | 47 | % | 39 | % | 43 | % |
12
Adjusted gross profit decreased by $1.4 million and $4.4 million, or 17% and 20%, for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019, respectively. This decrease was primarily due to lower revenues as a result of lower volume of core consultations over the same periods, primarily due to the impact of the COVID-19 pandemic.
Adjusted EBTIDA
We believe that adjusted EBTIDA 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, stock-based compensation, gain or loss on puttable options, depreciation and amortization (including internal-use software) 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:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Change | % Change | Change | % Change | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Net loss | $ | (9,688 | ) | $ | (3,330 | ) | $ | (25,068 | ) | $ | (12,229 | ) | $ | (6,358 | ) | 191 | % | $ | (12,839 | ) | 105 | % | ||||||||||
Add: | ||||||||||||||||||||||||||||||||
Interest expense | 2,874 | 2,650 | 8,490 | 7,495 | 224 | 8 | % | 995 | 13 | % | ||||||||||||||||||||||
Income tax expense (benefit) | 7 | 2 | 10 | 5 | 5 | 250 | % | 5 | 100 | % | ||||||||||||||||||||||
Depreciation and amortization | 1,401 | 1,130 | 4,008 | 3,150 | 271 | 24 | % | 858 | 27 | % | ||||||||||||||||||||||
Stock-based compensation | 1,033 | 252 | 1,280 | 1,115 | 781 | 310 | % | 165 | 15 | % | ||||||||||||||||||||||
Gain/(Loss) on puttable option revaluation | 412 | — | 517 | — | 412 | * | 517 | * | ||||||||||||||||||||||||
Changes in fair value of contingent consideration | — | (258 | ) | — | (1,712 | ) | 258 | * | 1,712 | * | ||||||||||||||||||||||
Integration, acquisition, transaction, and severance costs | 1,018 | 31 | 3,521 | 1,050 | 987 | (3,184 | )% | 2,471 | 235 | % | ||||||||||||||||||||||
Adjusted EBITDA | $ | (2,943 | ) | $ | 477 | $ | (7,242 | ) | $ | (1,126 | ) | (3,420 | ) | (717 | )% | (6,116 | ) | 543 | % |
* | Percentage not meaningful |
13
Adjusted EBITDA decreased by $3.4 million and $6.1 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019, respectively. This change is driven by lower adjusted gross profit over the same period, primarily due to the impact from the COVID-19 pandemic.
Liquidity and Capital Resources
Since the Company’s inception in 2004 and prior to the consummation of the Business Combination, we have financed operations primarily through the net proceeds received from private placements of convertible preferred stock, borrowings on our senior loan facilities, the convertible bridge note funding commitment under a support letter from two entities affiliated with Warburg Pincus (“WP”), our controlling shareholder, described below, and revenue from the sale of our services. As of September 30, 2020, our principal source of liquidity was cash and cash equivalents totaling $2.4 million and funding available under the support letter from WP. We believe that our cash and cash equivalents as of September 30, 2020, together with our expected revenues and funding available under our support letter from WP and the additional cash and cash equivalents we received upon the consummation of the Business Combination, will 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 following the Business Combination will 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.
Indebtedness
Term Loan Agreement
We entered into a Term Loan Agreement with CRG Servicing LLC (“CRG”) on June 17, 2016, which was most recently amended on September 3, 2020, that established a secured term loan facility of up to $68.0 million. Interest-only payments on the outstanding balance is payable quarterly in arrears at a rate of 13.0% per annum, payable, at our election, as 9.0% cash interest and 4.0% paid-in-kind interest during the paid-in-kind interest period, which continues until March 31, 2022. If we deliver financial statements to CRG evidencing EBITDA (as defined in the Term Loan Agreement) greater than or equal to zero for any consecutive six-month period, the interest rate will be reduced permanently to 12.5% (payable, at our election, as 9.0% cash interest and 3.5% paid-in-kind interest). We have elected to make the paid-in-kind interest payments and accrue and capitalize the paid-in-kind interest of 4% each quarter as an addition to the principal debt balance. The outstanding principal balance is repayable in four equal quarterly installments commencing June 30, 2022. The term loan matures on March 31, 2023. As of September 30, 2020, the principal amount outstanding under the term loan was $80.5 million. The term loan also has a final payoff fee of 6% of the principal balance payable at maturity or upon prepayment. We repaid the term loan on October 30, 2020, with proceeds received upon the consummation of the Business Combination.
The term loan is guaranteed by certain of our subsidiaries and secured by substantially all of our assets and certain of our subsidiaries. The Term Loan Agreement includes several affirmative and negative covenants, including a requirement that we maintain minimum liquidity, minimum revenue and observe restrictions on dispositions of property, changes in our business, mergers or acquisitions, incurring indebtedness, and distributions or investments. Additionally, the Term Loan Agreement requires us to provide audited financial statements within 180 days after our year-end. We obtained a waiver to this reporting covenant for the year ended December 31, 2019 to extend the requirement to 270 days after year-end. We were in compliance with all such applicable covenants as of September 30, 2020.
14
Convertible Bridge Notes
In August 2020, WP committed to fund up to $15.0 million available from August 2020 through December 31, 2021, subject to ongoing evaluations between the parties following the closing of the Business Combination. In September 3, 2020, we sold to WP $2.0 million aggregate principal amount of subordinated convertible promissory notes (“Bridge Notes”) in a financing pursuant to this support letter. WP subsequently recommitted to fund up to $15.0 million available from September 2020 through December 31, 2021, subject to ongoing evaluations between the parties following the closing of the Business Combination, under a new support letter dated September 23, 2020, that superseded and replaced the August support letter. On September 28, 2020, we sold to WP an additional $2.0 million aggregate principal amount of Bridge Notes pursuant to the September support letter. On October 13, 2020, we sold to WP an additional $1.9 million aggregate principal amount of Bridge Notes pursuant to the September support letter. The Bridge Notes accrue payment-in-kind interest at a rate of 13% per annum, become immediately due and payable upon the closing of the Business Combination or other change of control, and otherwise become due and payable upon the written demand of WP upon the earlier of any time after June 30, 2023, and the occurrence, and during the continuance of, an event of default under the Bridge Notes. We may voluntarily prepay the Bridge Notes in whole or in part without penalty upon the approval of the majority of our disinterested directors. On October 30, 2020, we repaid the then-outstanding Bridge Notes with proceeds received upon the consummation of the Business Combination.
See Note 7 in our condensed consolidated financial statements attached as Exhibit 99.3 to the Amendment for further information.
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
Nine Months Ended
September 30, |
||||||||
2020 | 2019 | |||||||
(in thousands) | ||||||||
Net cash (used in) provided by: | ||||||||
Operating activities | $ | (11,940 | ) | $ | (8,736 | ) | ||
Investing activities | (4,976 | ) | (3,975 | ) | ||||
Financing activities | 14,770 | 12,782 | ||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (2,146 | ) | $ | 71 |
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2020 was $11.9 million, consisting primarily of a net loss of $25.1 million offset by changes in working capital of $3.9 million and non-cash charges of $9.3 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.
Net cash used in operating activities for the nine months ended September 30, 2019 was $8.7 million, consisting primarily of a net loss of $12.2 million and changes in working capital of $2.2 million offset by non-cash charges of $5.7 million. The changes in working capital was primarily due to an increase in accounts receivable due to growth of our operations. The non-cash charges primarily consisted of depreciation, amortization, stock-based compensation expense, provision for accounts receivable allowances, and non-cash interest expense offset by changes in fair value of contingent consideration.
15
Investing Activities
Net cash used in investing activities in the nine months ended September 30, 2020 was $5.0 million consisting of $3.3 million capitalized software development costs and $1.7 million in purchases of property and equipment.
Net cash used in investing activities in the nine months ended September 30, 2019 was $4.0 million consisting of $3.0 million capitalized software development costs and $1.0 million in purchases of property and equipment.
Financing Activities
Net cash provided by financing activities in the nine months ended September 30, 2020 was $14.8 million consisting primarily of net proceeds from the issuance of our Series J preferred stock of $10.9 million and the issuance of our convertible bridge notes payable of $4.0 million.
Net cash provided by financing activities in the nine months ended September 30, 2019 was $12.8 million consisting primarily of net proceeds from additional borrowings under the Term Loan Agreement.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and currently do not have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
There were no material changes during the nine months ended September 30, 2020, to our contractual obligations and other commitments as disclosed in the Proxy Statement in the section entitled “SOC Telemed Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
For further information on our commitments and contingencies, see Note 11 in our condensed consolidated financial statements attached as Exhibit 99.3 to the Amendment.
Critical 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 U.S. generally accepted accounting principles. The preparation of these 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.
There have been no material changes to our critical accounting policies and estimates as described in Note 2 “Summary of Significant Accounting Policies” of our audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018, included in the Proxy Statement beginning on page F-20 and incorporated by reference into the Original Report and this Amendment, other than as described in the section below titled “Recently Adopted Accounting Pronouncements.”
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We had cash and cash equivalents totaling $2.4 million and $4.5 million as of September 30, 2020, and December 31, 2019, respectively. Our cash is held in non-interest-bearing accounts at high-credit quality financial institutions and are not subject to interest rate risk. At times, such amounts may exceed federally insured limits.
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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 condensed consolidated financial statements attached as Exhibit 99.3 to the Amendment 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 SEC either (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 Business Combination, 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.
Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, that company’s principal executive and principal financial officers, or persons performing similar functions, and influenced by that company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Prior to the completion of the Business Combination, we were a private company and had limited accounting and financial reporting personnel and other resources with which to address our internal control over financial reporting. In connection with the audit of our consolidated financial statements for the year ended December 31, 2019, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We determined that we had a material weakness related to the design of our control environment because we (i) did not maintain a sufficient complement of personnel with an appropriate degree of knowledge, experience, and training, commensurate with our accounting and reporting requirements, (ii) did not maintain sufficient evidence of formal procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures nor were monitoring controls evidenced at a sufficient level to provide the appropriate level of oversight of activities related to our internal control over financial reporting, and (iii) did not design and maintain effective controls over segregation of duties with respect to creating and posting manual journal entries
With the oversight of senior management and our audit committee, we are implementing a remediation plan which includes (i) the hiring of personnel with technical accounting and financial reporting experience to further bolster our ability to assess judgmental areas of accounting and provide an appropriate level of oversight of activities related to internal control over financial reporting, (ii) the implementation of improved accounting and financial reporting procedures and controls to improve the timeliness of our financial reporting cycle, (iii) the implementation of new accounting and financial reporting systems to improve the completeness, and accuracy of our financial reporting and disclosures, and (iv) the establishment of formalized internal controls to maintain segregation of duties between control operators. We believe the measures described above will remediate the material weakness identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures.
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Exhibit 99.5
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Capitalized terms used but not defined in this Exhibit 99.5 shall have the meanings ascribed to them in the Current Report on Form 8-K filed by SOC Telemed, Inc. on November 5, 2020 (the “Original Report”), as amended by Amendment No. 1 to the Original Report filed on November 16, 2020 (the “Amendment”), to which this Exhibit 99.5 is attached.
On October 30, 2020, Specialists On Call, Inc. (“SOC Telemed”) and Healthcare Merger Corp. (“HCMC”) announced the consummation of the transactions contemplated by the Agreement and Plan of Merger, dated as of July 29, 2020 (the “Merger Agreement”), by and among SOC Telemed, HCMC, Sabre Merger Sub I, Inc., a wholly owned subsidiary of HCMC (“First Merger Sub”), and Sabre Merger Sub II, LLC, a wholly owned subsidiary of HCMC (“Second Merger Sub”) (such transactions, the “Business Combination”). In connection with the closing of the Business Combination, the registrant changed its name from Healthcare Merger Corp. to SOC Telemed, Inc. (the “Combined Company”).
The following unaudited pro forma condensed combined balance sheet of the Combined Company as of September 30, 2020 and the unaudited pro forma condensed combined statements of operations of the Combined Company for the nine months ended September 30, 2020 and for the year ended December 31, 2019 present the combination of the financial information of HCMC and SOC Telemed after giving effect to the Business Combination and related adjustments described in the accompanying notes. HCMC and SOC Telemed are collectively referred to herein as the “Companies,” and the Companies, subsequent to the Business Combination, are referred to herein as the Combined Company.
The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and the year ended December 31, 2019 give pro forma effect to the Business Combination as if it had occurred on January 1, 2019. The unaudited pro forma condensed combined balance sheet as of September 30, 2020 gives pro forma effect to the Business Combination as if it were completed on September 30, 2020.
The unaudited pro forma condensed combined financial information was based on and should be read in conjunction with:
● | the accompanying notes to the unaudited pro forma condensed combined financial statements; |
● | the historical unaudited interim financial statements of HCMC as of September 30, 2020, and for the nine months ended September 30, 2020, and the historical audited financial statements of HCMC as of December 31, 2019, and for the period from September 19, 2019 (inception) through December 31, 2019, and the related notes, in each case, included in the Quarterly Report on Form 10-Q filed by the Combined Company on November 16, 2020 (the “Quarterly Report”), and in the Proxy Statement, respectively; |
● | the historical unaudited condensed consolidated financial statements of SOC Telemed as of September 30, 2020, and for the nine months ended September 30, 2020, and the historical consolidated financial statements of SOC Telemed as of and for the year ended December 31, 2019, and the related notes, in each case, included in Exhibit 99.3 attached to the Amendment and incorporated by reference in the Original Report, respectively; and |
● | other information relating to HCMC and SOC Telemed contained in the Original Report, the Quarterly Report or in the Proxy Statement, including the Merger Agreement and the description of certain terms thereof set forth under “The Business Combination and the Merger Agreement” in the Proxy Statement as well as the disclosures contained in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Quarterly Report and relating to the financial condition and results of operations of HCMC as of and for the nine months ended September 30, 2020; “HCMC Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Proxy Statement and relating to the financial condition and results of operations of HCMC as of December 31, 2019, and for the period from September 19, 2019 (inception) through December 31, 2019; “SOC Telemed Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Exhibit 99.4 attached to the Amendment and relating to the financial condition and results of operations of SOC Telemed as of and for the nine months ended September 30, 2020; and “SOC Telemed Management’s Discussion and Analysis of Financial Condition and Results of Operations” incorporated by reference in the Original Report and relating to the financial condition and results of operations of SOC Telemed as of and for the year ended December 31, 2019. |
The unaudited pro forma condensed combined financial statements have been presented for illustrative purposes only and do not necessarily reflect what the Combined Company’s financial condition or results of operations would have been had the Business Combination occurred on the dates indicated. Further, the unaudited pro forma condensed combined financial information also may not be useful in predicting the future financial condition and results of operations of the Combined Company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma adjustments represent management’s estimates based on information available as of the date of these unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and analyses are performed.
On October 30, 2020, SOC Telemed consummated the previously announced Business Combination pursuant to the Merger Agreement dated July 29, 2020 between HCMC, First Merger Sub, Second Merger Sub and SOC Telemed, under the terms of which: (a) First Merger Sub merged with and into SOC Telemed, with SOC Telemed being the surviving corporation of the First Merger and (b) immediately following the First Merger and as part of the same overall transaction as the First Merger, SOC Telemed merged with and into Second Merger Sub, with Second Merger Sub being the surviving company of the Second Merger. After giving effect to the Business Combination, the Combined Company owns, directly or indirectly, all of the issued and outstanding equity interests of SOC Telemed and its subsidiaries, and the SOC Telemed shareholders hold a portion of the Combined Company Class A common stock.
The following pro forma condensed combined financial statements presented herein reflect the actual redemption of 18,606,033 shares of Class A common stock of HCMC’s stockholders in conjunction with the shareholder vote on the Business Combination contemplated by the Merger Agreement at a meeting held on October 30, 2020.
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SOC Telemed, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 2020
(in thousands)
See accompanying notes to unaudited pro forma condensed combined financial information.
3
SOC Telemed, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020
(in thousands, except share and per share amounts)
Healthcare Merger Corp. (Historical) | Specialists On Call, Inc. (Historical) | Pro Forma Adjustments | Note 3 | Pro Forma | ||||||||||||||
Revenues | $ | — | $ | 43,493 | $ | — | $ | 43,493 | ||||||||||
Cost of revenues | — | 29,277 | — | 29,277 | ||||||||||||||
Operating expenses | ||||||||||||||||||
Selling, general and administrative | 2,827 | 30,267 | (4,338 | ) | (i) | 28,756 | ||||||||||||
Total operating expenses | 2,827 | 30,267 | (4,338 | ) | 28,756 | |||||||||||||
Loss from operations | (2,827 | ) | (16,051 | ) | 4,338 | (14,540 | ) | |||||||||||
Other income (expense) | ||||||||||||||||||
Loss on puttable option liabilities | — | (517 | ) | 517 | (j) | — | ||||||||||||
Interest earned on marketable securities held in Trust Account | 1,912 | — | (1,912 | ) | (k) | — | ||||||||||||
Unrealized gain on marketable securities held in Trust Account | 3 | — | (3 | ) | (k) | — | ||||||||||||
Interest expense | — | (8,469 | ) | 8,469 | (l) | — | ||||||||||||
Interest expense - Related party | — | (21 | ) | 21 | (m) | — | ||||||||||||
Loss before income taxes | (912 | ) | (25,058 | ) | 11,430 | (14,540 | ) | |||||||||||
Income tax expense | (3 | ) | (10 | ) | — | (13 | ) | |||||||||||
Net loss | $ | (915 | ) | $ | (25,068 | ) | $ | 11,430 | $ | (14,553 | ) | |||||||
Loss per share | ||||||||||||||||||
Weighted average shares outstanding, basic and diluted | 8,209,618 | 84,874,870 | (n) | 76,773,862 | ||||||||||||||
Basic and diluted net loss per common share | (0.31 | ) | (0.36 | ) | (n) | (0.19 | ) |
See accompanying notes to unaudited pro forma condensed combined financial information.
4
SOC Telemed, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019
(in thousands, except share and per share amounts)
Healthcare Merger Corp. (Historical) | Specialists On Call, Inc. (Historical) | Pro Forma Adjustments | Note 3 | Pro Forma | ||||||||||||||
Revenues | $ | — | $ | 66,200 | $ | — | $ | 66,200 | ||||||||||
Cost of revenues | — | 40,213 | — | 40,213 | ||||||||||||||
Operating expenses | ||||||||||||||||||
Selling, general and administrative | 97 | 35,931 | — | 36,028 | ||||||||||||||
Changes in the fair value of contingent consideration | — | (1,855 | ) | — | (1,855 | ) | ||||||||||||
Total operating
expenses |
97 | 34,076 | — | 34,173 | ||||||||||||||
Loss from operations | (97 | ) | (8,089 | ) | — | (8,186 | ) | |||||||||||
Other income (expense) | ||||||||||||||||||
Gain on puttable option liabilities | — | 163 | (163 | ) | (j) | — | ||||||||||||
Interest earned on marketable securities held in Trust Account | 138 | — | (138 | ) | (k) | — | ||||||||||||
Unrealized loss on marketable securities held in Trust Account | (13 | ) | — | 13 | (k) | — | ||||||||||||
Interest expense | — | (10,308 | ) | 10,308 | (l) | — | ||||||||||||
Income (loss) before income tax expense | 28 | (18,234 | ) | 10,020 | (8,186 | ) | ||||||||||||
Income tax expense | (6 | ) | (8 | ) | — | (14 | ) | |||||||||||
Net income (loss) | $ | 22 | $ | (18,242 | ) | $ | 10,020 | $ | (8,200 | ) | ||||||||
Loss per share | ||||||||||||||||||
Weighted average shares outstanding, basic and diluted | 5,864,684 | 84,599,554 | (n) | 76,773,862 | ||||||||||||||
Basic and diluted net loss per common share | (0.01 | ) | (0.28 | ) | (n) | (0.11 | ) |
See accompanying notes to unaudited pro forma condensed combined financial information.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1 — Description of the Business Combination
On October 30, 2020, SOC Telemed consummated the previously announced Business Combination pursuant to the Merger Agreement dated July 29, 2020 between HCMC, First Merger Sub, Second Merger Sub and SOC Telemed, under the terms of which: (a) First Merger Sub merged with and into SOC Telemed, with SOC Telemed being the surviving corporation of the First Merger and (b) immediately following the First Merger and as part of the same overall transaction as the First Merger, SOC Telemed merged with and into Second Merger Sub, with Second Merger Sub being the surviving company of the Second Merger. After giving effect to the Business Combination, the Combined Company owns, directly or indirectly, all of the issued and outstanding equity interests of SOC Telemed and its subsidiaries, and the SOC Telemed shareholders hold a portion of the Combined Company Class A common stock.
As a result of Merger Agreement, SOC Telemed’s stockholders received aggregate consideration with a value equal to $563,035,971, which consists of (i) $75,058,894 of cash at closing of the Business Combination and (ii) $487,977,077 in shares of Combined Company Class A common stock at closing of the Business Combination, or 48,504,895 shares based on an assumed stock price of $10.06 per share.
In connection with the Business Combination, 1,875,000 shares of Combined Company Class A common stock previously issued to the Sponsor and its affiliates in exchange of the founder shares were placed in a lock-up (“Sponsor Earnout Shares”) and will be released from a lock-up upon achieving certain market share price milestones within a period of seven years post-Closing. These shares will be forfeited if the set milestones are not reached. The Sponsor Earnout Shares will be immediately released from a lock-up in the event of a change of control.
At the closing, Sponsor forfeited 1,875,000 shares of its HCMC Class B common stock that it owned as of the closing (“Sponsor Contingent Closing Shares”) as HCMC’s available cash at the closing was below $250,000,000. The Closing cash and cash equivalents included PIPE Investment proceeds and funds remaining in the Trust Account after redemptions of public stockholders, after the payment of HCMC’s transaction expenses and other liabilities due at the closing (“Closing Proceeds”).
The following summarizes the pro forma shares of Combined Company Class A common stock outstanding after giving effect to the Business Combination, excluding the potential dilutive effect of the Sponsor Earnout Shares and exercise of warrants:
Shares | % | |||||||
SOC Telemed’s existing shareholders | 48,504,895 | 63.18 | % | |||||
HCMC’s existing public stockholders | 6,393,967 | 8.33 | % | |||||
PIPE Investors | 16,800,000 | 21.88 | % | |||||
Sponsor | 5,075,000 | 6.61 | % | |||||
Closing shares | 76,773,862 | 100 | % |
Note 2 — Basis of presentation
The historical financial information of HCMC and SOC Telemed has been adjusted in the unaudited pro forma condensed combined financial information to give effect to events that are (1) directly attributable to the Business Combination, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The pro forma adjustments are prepared to illustrate the estimated effect of the Business Combination and certain other adjustments.
The Business Combination is accounted for as a reverse recapitalization because SOC Telemed has been determined to be the accounting acquirer under Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). The determination is primarily based on the evaluation of the following facts and circumstances taking into consideration:
● | The pre-combination equityholders of SOC Telemed will hold the majority of the voting rights in the Combined Company; |
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● | The pre-combination equityholders of SOC Telemed will have the right to appoint two directors, while HCMC will have the right to appoint one director. The remaining four directors (which will include the expected CEO of the Combined Company) must be mutually acceptable to SOC Telemed and HCMC; |
● | Senior management of SOC Telemed will comprise the senior management of the Combined Company; and |
● | Operations of SOC Telemed will comprise the ongoing operations of the Combined Company. |
Under the reverse recapitalization model, the Business Combination is treated as SOC Telemed issuing equity for the net assets of HCMC, with no goodwill or intangible assets recorded.
In addition, the unaudited pro forma condensed combined statements of operations does not include any incremental salary or incentive based compensation expense related to our president since July 2020 and who is expected to transition to CEO upon consummation of the Business Combination since his hiring is not directly attributable to the Business Combination.
Note 3 — Pro Forma Adjustments
Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2020
The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2020 are as follows:
a) | Cash. Represents the impact of the Business Combination on the cash balance of the Combined Company. |
The table below represents the sources and uses of funds as it relates to the Business Combination (in thousands):
Note | ||||||
Cash balance of SOC Telemed prior to Business Combination | $ | 2,395 | ||||
Cash balance of HCMC prior to Business Combination | 293 | |||||
HCMC cash held in Trust Account | (1) | 252,039 | ||||
PIPE Investment | (2) | 168,000 | ||||
Payment to redeeming HCMC public stockholders | (3) | (187,184 | ) | |||
Cash to existing SOC Telemed shareholders at the Business Combination | (4) | (75,059 | ) | |||
Payment of convertible bridge notes | (5) | (4,022 | ) | |||
Payment of historical debt | (6) | (83,402 | ) | |||
Payment of deferred underwriting commissions | (7) | (5,000 | ) | |||
Payment of HCMC accrued transaction costs | (8) | (1,836 | ) | |||
Payment of HCMC incremental transaction costs | (8) | (2,177 | ) | |||
Payment of SOC Telemed accrued transaction costs | (9) | (3,224 | ) | |||
Payment of SOC Telemed incremental transaction costs | (9) | (13,396 | ) | |||
Excess cash to balance sheet from Business Combination | $ | 47,427 |
(1) | Represents the amount of the restricted investments and cash held in the Trust Account at the Closing. |
(2) | Represents the issuance, in a private placement consummated concurrently with the Closing, to third-party PIPE Investors of 16,800,000 shares of Class A common stock at a stock price of $10 per share. |
(3) | Represents the amount paid to HCMC public stockholders who exercised their redemption rights, including payment of accrued interest. |
(4) | Represents the amount of cash paid to the existing SOC Telemed shareholders at the Closing. |
(5) | Represents payment of SOC Telemed’s convertible bridge notes under the terms of the Bridge Note Agreement in the amount of $4,021,418 (see Note 3(e)). |
(6) | Represents payment of SOC Telemed’s term loan facility under the terms of the Merger Agreement in the amount of $82,172,259 (see Note 3(f)) and associated prepayment fees in the amount of $1,230,019 (see Note 3(h)). |
(7) | Represents the payment of underwriting costs incurred as part of the HCMC’s IPO (see Note 3(b)(1)). |
(8) | Represents payment of HCMC accrued and incremental transaction costs (see Note 3(b)(2) and 3(b)(3)). |
(9) | Represents payment of SOC Telemed accrued and incremental transaction costs (see Note 3(b)(4) and 3(b)(5)). |
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b) | Transaction costs. |
(1) | Payment of deferred underwriting commissions incurred by HCMC in the amount of $5,000,000 (see Note 3(a)(7)) and reversal of deferred underwriting commissions accrued as of September 30, 2020, that were renegotiated and reduced in the amount of $3,750,000. The unaudited pro forma condensed combined balance sheet reflects payment of these costs as a reduction of cash, with a corresponding decrease in deferred underwriting commissions, and the reversal of accrued costs as an increase in additional paid-in-capital (see Note 3(h)) with a corresponding decrease in deferred underwriting commissions. |
(2) | Payment of accrued transaction costs specific to HCMC related to the Business Combination in the amount of $1,835,825. The unaudited pro forma condensed combined balance sheet reflects these costs as a decrease in accrued expenses, with a corresponding decrease in cash (see Note 3(a)(8)). |
(3) | Payment of incremental transaction costs specific to HCMC related to the Business Combination in the amount of $2,176,592 (see Note 3(a)(8)). The unaudited pro forma condensed combined balance sheet reflects these costs as a reduction of cash, with a corresponding decrease in additional paid-in capital (see Note 3(h)). |
(4) | Payment of accrued transaction costs specific to SOC Telemed related to the Business Combination in the amount of $3,224,209. The unaudited pro forma condensed combined balance sheet reflects these costs as a decrease in accounts payable and accrued expenses, with a corresponding decrease in cash (see Note 3(a)(9)). |
(5) | Payment of incremental transaction costs specific to SOC Telemed related to the Business Combination incurred through the Business Combination in the amount of $13,395,874 (see Note 3(a)(9)). The unaudited pro forma condensed combined balance sheet reflects these costs as a reduction of cash, with a corresponding decrease in additional paid-in capital (see Note 3(h)). |
(6) | Recognition of SOC Telemed’s capitalized expenses related to the Business Combination in the amount of $2,169,044 as a reduction to equity proceeds. The unaudited pro forma condensed combined balance sheet reflects these costs as a decrease in prepaid expenses and other current assets, with a corresponding decrease in additional paid-in capital (see Note 3(h)). |
c) | Trust Account. Represents release of the restricted investments and cash held in the Trust Account upon consummation of the Business Combination to fund the closing of the Business Combination (see Note 3(a)(1)). |
d) | Puttable option liabilities. Represents the impact of the cancellation of puttable option liabilities as a result of the Business Combination. |
e) | Convertible bridge notes. Represents funds from the Business Combination used to repay SOC Telemed’s convertible bridge notes in the amount of $4,021,418 (see Note 3(a)(5)) and write-off of unamortized discounts, fees and issue costs in amount of $40,000 (see Note 3(h)). |
f) | Long-Term Debt. Represents funds from the Business Combination used to repay SOC Telemed’s term loan facility under the terms of the Merger Agreement in the amount of $82,172,259 (see Note 3(a)(6)) and write-off of unamortized discounts, fees and issue costs in the amount of $1,648,743 (see Note 3(h)). |
g) | Share-based compensation. Represents the accelerated vesting of the awards associated with the historical share-based compensation plan of SOC Telemed in the amount of $1,060,547. These awards fully vest upon a qualifying event (i.e., a change in control of the Combined Company), which was recognized upon closing of the Business Combination. This accelerated vesting adjustment is considered to be a one-time charge and is not expected to have a continuing impact on the combined results, thus it is not reflected in the pro forma statements of operations. |
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h) | Impact on equity. The following table represents the impact of the Business Combination on the number of shares of Class A common stock and represents the total equity section (in thousands, except share amounts): |
Common stock | ||||||||||||||||||||||||||||
Number of Shares | Par Value | Additional | ||||||||||||||||||||||||||
Class A
Stock |
Class B
Stock |
Class A
Stock |
Class B
Stock |
Stock |
paid-in
capital |
Accumulated
deficit |
||||||||||||||||||||||
HCMC equity as of September 30, 2020 – pre-Business Combination | 2,202,610 | 6,250,000 | $ | — | $ | 1 | $ | — | $ | 5,892 | $ | (893 | ) | |||||||||||||||
SOC Telemed equity as of September 30, 2020 – pre-Business Combination | — | — | — | — | 77,830 | 82,728 | (211,440 | ) | ||||||||||||||||||||
Pro forma adjustments: | ||||||||||||||||||||||||||||
Reclassification of redeemable shares to Class A common stock | 23,497,390 | — | 2 | — | — | 236,775 | — | |||||||||||||||||||||
Founder Shares | 6,250,000 | (6,250,000 | ) | 1 | (1 | ) | — | — | — | |||||||||||||||||||
Less: Redemption of redeemable stock | (18,606,033 | ) | — | (2 | ) | — | — | (187,182 | ) | — | ||||||||||||||||||
Forfeiture of contingent shares | (1,875,000 | ) | — | — | — | — | — | — | ||||||||||||||||||||
Private Placement | 16,800,000 | — | 2 | — | — | 167,998 | — | |||||||||||||||||||||
Shares issued to SOC Telemed shareholders as consideration | 48,504,895 | — | 5 | — | — | (5 | ) | — | ||||||||||||||||||||
Cash to existing SOC Telemed shareholders at Business Combination | — | — | — | — | — | (75,059 | ) | — | ||||||||||||||||||||
SOC Telemed transaction costs | — | — | — | — | — | (15,565 | ) | — | ||||||||||||||||||||
HCMC transaction costs | — | — | — | — | — | 1,573 | — | |||||||||||||||||||||
Elimination of historical accumulated deficit of HCMC | — | — | — | — | — | (893 | ) | 893 | ||||||||||||||||||||
Elimination of historical shareholder shares of SOC Telemed | — | — | — | — | (77,830 | ) | 77,830 | — | ||||||||||||||||||||
Write-off of unamortized discounts, fees and issue costs related to payoff of historical convertible bridge notes of SOC Telemed | — | — | — | — | — | — | (40 | ) | ||||||||||||||||||||
Payment of fees related to payoff of historical debt of SOC Telemed and write-off of unamortized discounts, fees and issue costs | — | — | — | — | — | (1,230 | ) | (1,649 | ) | |||||||||||||||||||
Cancellation of puttable option liabilities | — | — | — | — | — | 518 | — | |||||||||||||||||||||
Accelerated vesting of historical share-based compensation plan | — | — | — | — | — | 1,061 | (1,061 | ) | ||||||||||||||||||||
Total pro forma adjustments | 74,571,252 | (6,250,000 | ) | 8 | (1 | ) | (77,830 | ) | 205,821 | (1,857 | ) | |||||||||||||||||
Post-Business Combination | 76,773,862 | — | $ | 8 | $ | — | $ | — | $ | 294,441 | $ | (214,190 | ) |
Adjustments to the Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 2020 and year ended December 31, 2019
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The pro forma adjustments included in the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and for the year ended December 31, 2019 are as follows:
i) | Exclusion of transaction expenses. Reflects adjustments made to eliminate non-recurring direct and incremental transaction expenses specifically incurred by HCMC of $2,257,518 the for nine months ended September 30, 2020, and specifically incurred by SOC Telemed of $2,080,224 for the nine months ended September 30, 2020, as part of the Business Combination as these expenses meet the directly attributable and factually supportable criteria. |
j) | Gain (loss) on puttable option liabilities. Represents elimination of the gain on puttable option liabilities as a result of their cancellation in the Business Combination (see Note 3(d)). |
k) | Exclusion of interest income. Adjustment to eliminate historical interest income and the respective unrealized gain (loss) to reflect the use of cash in the Trust Account to close the Business Combination. |
l) | Interest expense. Represents elimination of historical interest expense following the repayment of historical debt in connection with the Business Combination (see Note 3(f)). |
m) | Related party interest expense. Represents elimination of historical interest expense following the repayment of historical related party convertible bridge notes (see Note 3(e)). |
n) | Net loss per share. Represents pro forma net loss per share based on pro forma net loss and 76,773,862 total shares outstanding upon consummation of the Business Combination. For each period presented, there is no difference between basic and diluted pro forma net loss per share as the inclusion of all potential shares of Class A common stock of the Combined Company outstanding would have been anti-dilutive. |
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