SHARECARE, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
The following discussion and analysis of the financial condition and results of operations of
Sharecare, Inc.(for purposes of this section, "the Company," " Sharecare," "we," "us," and "our") should be read together with the Company's consolidated financial statements as of and for the years ended December 31, 2021, 2020, and 2019, in each case together with the accompanying notes thereto, included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the section entitled "Risk Factors." Actual results may differ materially from those contained in any forward-looking statements.
Caution Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements regarding, among other things, the plans, strategies and prospects, both business and financial, of
Sharecare. These statements are based on the beliefs and assumptions of our management. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words "believes," 43
"estimates," "expects," "forecasts," "may," "will," "should," "seeks," "plans," "scheduled," "anticipates," "possible," "continue," "might," "potential" or "intends" or similar expressions. Forward-looking statements contained in this report include, but are not limited to, statements regarding our expectations as to:
•our ability to realize the expected benefits of the Business Combination;
•our success in retaining or recruiting, or changes required in, our officers key employees or directors, including our ability to increase our headcount as we expand our business following the consummation of the Business Combination;
• our ability to maintain the listing of our common stock and public warrants on the Nasdaq;
• our business, operations and financial performance, including:
• expectations regarding our financial and business performance, including financial projections and business metrics and any underlying assumptions arising therefrom;
•future business plans and growth opportunities, including revenue opportunities available from new or existing customers and expectations regarding enhanced platform capabilities and the addition of new solution offerings;
• developments and projections relating to our competitors and the digital health industry;
•the impact of the COVID-19 pandemic on our business and the measures we may take in response;
•expectations regarding our future acquisitions, partnerships or other relationships with third parties;
• our future capital requirements and our sources and uses of liquidity, including our ability to obtain additional capital in the future and to fully access our revolving credit facility; and
• our ability to recognize revenue based on performance;
• our status as an EGC and our intention to take advantage of the accommodations available for EGCs under the JOBS law; and
•the other estimates and matters described in this Annual Report on Form 10-K in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements are based on information available as of the date of this report, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Important factors could cause actual results to differ materially from those indicated or implied by forward-looking statements include, but are not limited to, those set forth in the section entitled "Risk Factors" in this Annual Report on Form 10-K. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results may vary in material respects from those expressed or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.
We are a leading digital healthcare platform company that helps members consolidate and manage various components of their health in one place, regardless of where they are on their health journey. Our comprehensive platform is a health and well-being digital hub that unifies elements of individual and community health into one experience in order to enable members to live better, longer lives. We are driven by our philosophy that we are "All Together Better" as well as our goal to turn individual progress into community transformation. Given a unique blend of expertise across technology, media, and healthcare, we have, through a number of strategic acquisitions and integration of key technologies and capabilities over the last ten years, built our platform into what we believe is the most comprehensive and seamless experience currently available in the digital healthcare space. Our business combines business-to-business and direct-to-consumer sales models and functions on a more distinctive business-to-business-to-person model. Focusing on the individual, we aim to provide a solution that we believe is more comprehensive than other digital platforms by bringing together scientifically validated clinical programs and engaging content 44
to provide a personalized experience for our members, whether they come to us through the workplace, exam room or lounge.
We derive net revenue from multiple stakeholders and while we are focused on the individual's unique experience, our platform is purpose-built to seamlessly connect stakeholders to the health management tools they need to drive engagement, establish sustained participation, increase satisfaction, reduce costs, and improve outcomes. As we expand our offerings and look to further develop our technologies, we continue to consider the distinct needs of each client channel as well as opportunities to better connect and cross-sell while we grow and integrate our solutions into one seamless platform. Our operations are mostly domestic to
the United States, but we do derive some revenue from international operations, mostly from Brazil. The revenue for 2021 from international operations was $19.5 million, or approximately 5% of total revenues. Our one platform can be disaggregated into three client channels. The consumer solutions channel (as referenced in previous filings) was renamed the life sciences channel in order to more accurately portray the customer base of the channel. •Enterprise: Our enterprise channel includes a range of clients - from large employers and healthcare systems to government agencies and health plans - that use our platform to engage with their population, dynamically measure the impact of that engagement, and efficiently deliver health and wellness services. •Provider: Our suite of data and information-driven solutions for healthcare providers are tailored to improve productivity and efficiency and enhance patient care and management while upholding the latest compliance, security, and privacy standards. •Life Sciences: Our robust platform and suite of digital products and medical expert knowledge provides members with personalized information, programs, and resources to improve their health and well-being, and affords sponsors the opportunity to integrate their brands into Sharecare'sconsumer experience in a highly contextual, relevant, and targeted environment.
Recent developments affecting comparability
Impact of COVID-19
The continued global impact of COVID-19 has prompted various emergency measures to combat the spread of the virus. With the emergence of COVID-19 variants and increasing vaccination rates, the status of ongoing measures varies widely by country and locality.
Sharecareis an essential business for its customers, the pandemic has not had a significant negative impact to our consolidated financial position, results of operations, and cash flows related to this matter. As a result of the broader economic impact and the prolonged disruption to the economy, customers may be facing liquidity issues and may be slower to pay or altogether withdraw from their commitments; however, the long-term financial impact related to the pandemic remains uncertain. Given the volatility of the circumstances surrounding the pandemic, Sharecarehas evaluated potential risks to its business plan. Further economic slowdown could delay Sharecare'ssales objectives for new business for its digital product; the decline in non-urgent medical appointments could lessen the demand for medical record transfers in the release-of-information business; and Blue Zonecommunities may see a decrease in spending due to social distancing. In addition, Sharecaremay be impacted by currency fluctuations, as the U.S.Dollar has gained strength during the pandemic, with the biggest impact thus far being to the Brazilian Real.
Main factors and trends affecting our operating performance
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including our success with respect to the following: •Expanding our Footprint. We believe that our current client base represents a small fraction of potential clients that could benefit from our highly differentiated solutions. We will continue to invest in our sales and marketing efforts and leverage our partner relationships to continue to acquire new clients, including individuals, providers, employers, health plans, government organizations, and communities.
• Develop our relationships with existing customers. We also believe there is significant opportunity to generate growth by maintaining and expanding our relationships with existing customers, including:
•increasing engagement and enrollment of eligible members with our existing enterprise clients through continued sales and marketing efforts, including targeted next-generation digital modeling and marketing, and capitalizing on insights from claims ingestion (the process by which we receive and process information from our clients), population risk stratification and incentives management; •promoting our marketplace of existing targeted digital therapeutics to close gaps in care in high-cost areas (with incremental fee per enrollee), which we believe represents a
$1 billionrevenue opportunity within our currently contracted clients; and
•expanding our relationships with our top 25 supplier customers with the ability to extend our supplier products and services to over 7,000 additional healthcare sites.
•Offering Additional Solutions. We believe there is significant opportunity to cross-sell our provider solutions to existing accounts, including deploying our value-based care and payment integrity solutions to approximately 6,000 health system clients. •Growing our Platform. We are constantly evaluating the marketplace for ways to broaden and enhance our client and member experience, improve clinical results, and increase revenue through product innovation, partnerships, and acquisitions. We intend to continue to leverage our expertise through adding digital therapeutics partnerships as well as the acquisition of products and services that are directly relevant to our existing clients. Additionally, we believe our strong and embedded client relationships provide us with unique perspectives into their evolving needs and the needs of their populations. •Evolving our Products to Cater to an Evolving Industry. As the digital healthcare industry grows, we closely monitor evolving consumer trends and organizations' needs so that we may adapt our platform to better suit our clients' demands. Since
March 2020, the COVID-19 pandemic has greatly accelerated the demand for virtual care solutions and resulted in rapid growth and increased adoption of digital health technologies, which Sharecarewas in a unique position to undertake. By building on our deep expertise in handling and managing mass health data, we launched a suite of distinct but complementary digital tools and programs to address the evolving emotional, educational, clinical, and operational challenges introduced by the pandemic. We intend to continue to look for opportunities to leverage our platform and expertise to provide first-mover solutions to evolving and future demands in the digital healthcare industry. •Acquisitions. We believe that our proven track record of successful acquisitions coupled with the flexibility and capabilities of our platform positions us to continue opportunistically pursuing attractive M&A opportunities. We believe this potential is further accentuated by our multiple client channels and constantly expanding member base. Future acquisitions could drive value and growth in a host of ways, including access to new customers and potential cross-sell opportunities; unlocking new customer channels or geographies; adding new solutions to serve our existing client base; and adding new capabilities to enhance our existing solution offering or the efficiency of our platform. In addition, we believe our acquisition track record demonstrates our ability to realize synergies and optimize performance of potential M&A partners.
Components of our operating results
The enterprise channel provides employers and health plans with health management programs for large populations, including digital engagement, telephonic coaching, incentives, biometrics, digital therapeutics, home health offerings, and subscriptions to the
Sharecareplatform. Revenue is recognized on a per member per month ("PMPM") basis or as services are provided. Provider revenue is primarily based on health document requests filled in the health data services business line, as well as subscription fees for various technology related services that assist providers with performance and maximizing reimbursement. Life sciences revenue is generated mostly through ad sponsorships to Sharecare'sextensive member database.
Costs of revenue primarily consists of costs incurred in connection with delivering our various revenue generating activities, including personnel related expenses. Costs are primarily driven by volumes related to requests, engagement, and incentive fulfillment. The major components that make up our cost of revenue are personnel costs to support program delivery as well as customer service along with share-based compensation for employees engaged in delivering products and services to customers, data management fees related to file processing, and variable fees to deliver specific services that may require third party vendors, direct marketing, fulfillment, transaction fees, or other costs that can be reduced to offset a decline in revenue. 46
Because our growth strategy includes substantial opportunity to scale low-personnel cost products, we would anticipate future revenue to grow at a faster rate than cost of revenue as those low-personnel cost products mature. Costs of revenue do not include depreciation or amortization, which are accounted for separately.
Sales and marketing expenses
Sales and marketing expenses consist primarily of employee-related expenses, including salaries, benefits, commissions, employment taxes, travel, and share-based compensation costs for our employees engaged in sales, account management, marketing, public relations and related support. In addition, these expenses include marketing sponsorships and engagement marketing spend. These expenses exclude any allocation of occupancy expense and depreciation and amortization. We expect our sales and marketing expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related account management, marketing, public relations and related support personnel to capture an increasing amount of our market opportunity and upsell/cross-sell within our existing client base. As we scale our sales and marketing personnel in the short- to medium-term, we expect these expenses to increase in both absolute dollars and as a percentage of revenue.
Product and technology expenses
Product and technology expenses include personnel and related expenses for software engineering, information technology infrastructure, business intelligence, technical account management, project management, safety, product development and equity compensation. Product and technology expenses also include indirect hosting and related costs to support our technology, outsourced software and engineering services. Our technology and development costs exclude any allocation of occupancy costs and depreciation and amortization.
We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development of our technology platform. Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period partially due to the timing and extent of our technology and development expenses.
General and administrative expenses
General and administrative expenses include personnel and related expenses for our executive, finance, legal, and human resources departments plus all indirect staff in the divisions not attributable to Sales, Marketing or Product and Technology. They also include professional fees, share-based compensation, rent, utilities and maintenance related costs. Our general and administrative expenses exclude any allocation of depreciation and amortization. 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 costs associated with continuing to grow our business. Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period partially due to the timing and extent of our general and administrative expenses.
Depreciation and amortization
Amortization mainly includes the amortization of fixed assets, the amortization of software, the amortization of capitalized software development costs and the amortization of intangible assets related to acquisitions.
Interest expense primarily relates to interest incurred on our debt and amortization of debt issuance costs.
Other income (expenses)
Other income (expense) relates primarily to changes in the fair value of contingent consideration and warrant liabilities.
Table of Contents Results of Operations
Comparison of the years ended
The following table presents our audited consolidated statement of income for the years ended
Year Ended December 31, 2020 to 2021 2019 to 2020 (in thousands) 2021 2020 2019 % Change % Change Revenue
$ 412,815 $ 328,805 $ 339,54126 % (3) % Costs and operating expenses: Costs of revenue (exclusive of amortization and depreciation below) 203,218 160,911 179,967 26 % (11) % Sales and marketing 51,407 33,335 33,993 54 % (2) % Product and technology 74,438 44,078 45,855 69 % (4) % General and administrative 136,594 83,238 65,824 64 % 26 % Depreciation and amortization 32,601 24,684 23,782 32 % 4 % Total costs and operating expenses 498,258 346,246 349,421 44 % (1) % Loss from operations (85,443) (17,441) (9,880) 390 % 77 % Other income (expense) Interest income 96 71 149 35 % (52) % Interest expense (27,662) (31,037) (28,685) (11) % 8 % Loss on extinguishment of debt (1,148) - - 100 % - % Other income (expense) 27,007 (9,709) (808) (378) % 1102 % Total other expense (1,707) (40,675) (29,344) (96) % 39 % Net loss before taxes and loss from equity method investment (87,150) (58,116) (39,224) 50 % 48 % Income tax benefit (expense) 2,021 1,557 (213) 30 % (831) % Loss from equity method investment - (3,902) - n.m. n.m. Net loss $ (85,129) $ (60,461) $ (39,437)41 % 53 % Net (loss) income attributable to noncontrolling interest in subsidiaries (129) (443) 543 (71) % (182) % Net loss attributable to Sharecare, Inc. $ (85,000) $ (60,018) $ (39,980)42 % 50 % ____________
nm – Percent change not significant
Comparison of the years ended
$84.0 million, or 26%, from $328.8 millionfor the year ended December 31, 2020to $412.8 millionfor the year ended December 31, 2021. Revenue growth of $115.0 millionwas driven by contributions from new product lines, including digital therapeutics and health security programs, and newly acquired products, such as home health, as well as organic growth in existing lines. Offsetting this growth was a negative impact of $30.3 millionattributable to COVID-19, which includes reduced services and the attrition of one contract related to a previous acquisition. The COVID-19 impact is primarily attributable to customers' overall concern about the economy that affected long-term contract decisions. The channel revenue changed as follows: enterprise channel increased by $55.1 million(from $188.3 millionfor 2020 to $243.4 millionfor 2021), the provider channel increased by $11.6 million(from $79.3 millionfor 2020 to $90.9 millionfor 2021) and the life sciences channel increased by $17.4 million(from $61.1 millionfor 2020 to $78.5 millionfor 2021). Increases in the enterprise channel (29%) were attributable to a combination of new product and client gains in the digital, digital therapeutics, health security, home health and community programs, partially offset by the aforementioned impact of COVID-19 and contract attrition from a previous acquisition. The Provider channel increase (15%) was attributable to new products in the payment integrity area, continued recovery in demand for our services as compared to the prior year, and 48
increased volumes and new customers within our existing product lines. The increase in the life sciences channel (28%) is due to the addition of new client brands and increased pharmaceutical ad spend.
Costs and expenses
Costs of revenue increased
$42.3 million, or 26%, from $160.9 millionfor the year ended December 31, 2020to $203.2 millionfor the year ended December 31, 2021. The increase was due to the corresponding increase in sales.
Sales and Marketing
Sales and marketing expense increased
$18.1 million, or 54%, from $33.3 millionfor the year ended December 31, 2020to $51.4 millionfor the year ended December 31, 2021. The increase was primarily related to a $10.6 millionincrease in salaries and commissions as we ramp sales efforts and $4.7 millionin consulting and sponsorship expenses to advance engagement metrics and provide sales and marketing support for growth and new product rollout. Also contributing to the increase was $1.4 millionin additional non-cash share-based compensation expense and $1.1 millionof additional non-recurring expense related to our transition to being a public company.
Product and technology
Product and technology expenses increased
$30.4 million, or 69%, from $44.1 millionfor the year ended December 31, 2020to $74.4 millionfor the year ended December 31, 2021. The largest variance was non-cash share-based compensation expense of $12.1 million, mostly related to acquisitions. The continued investment in product and technology staffing and outside contract services accounted for $9.0 millionof the increase, of which $5.7 millionderived from acquisitions. The remaining increase includes a non-operational expense of $4.7 millionalong with incremental platform and consulting fees of $4.5 millionas we ramp new technologies and user volume increases.
General and administrative
General and administrative expense increased
$53.4 million, or 64%, from $83.2 millionfor the year ended December 31, 2020to $136.6 millionfor the year ended December 31, 2021. The increase was due mostly to non-recurring costs of becoming a public company, acquisition-related expenses and non-cash share-based compensation expenses totaling $37.7 million. Personnel expenses increased $11.7 millionrelated to compensation restoration for employees who had previously accepted salary reductions in connection with prior period COVID-19 related cost reductions and increased headcount to support public company processes in the current period. The remainder of the increase is mostly related to business insurance and other cost increases, associated with being a public company.
Depreciation and amortization
Depreciation and amortization increased
$7.9 million, or 32%, from $24.7 millionfor the year ended December 31, 2020to $32.6 millionfor the year ended December 31, 2021. The increase was related to our continued investment in product enhancements and new products, as well as amortization expense incurred on recently acquired intangible assets.
Interest expense decreased
$3.4 million, or 11%, from $31.0 millionfor the year ended December 31, 2020to $27.7 millionfor the year ended December 31, 2021. The decrease is attributable to the retirement of our debt either through the conversion to common stock or through its repayment during the year ended December 31, 2021.
Other income (expenses)
Other income and expense fluctuated
$36.7 millionfrom $9.7 millionof expense for the year ended December 31, 2020to $27.0 millionof income for the year ended December 31, 2021. This activity was mostly related to non-cash mark-to-market adjustments to contingent consideration and warrant liabilities where the adjustment is tied to the change in the per share price of the Company's common stock. See Note 1 to Sharecare'sconsolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Comparison of the years ended
$10.7 million, or 3%, from $339.5 millionfor the year ended December 31, 2019to $328.8 millionfor the year ended December 31, 2020. Overall, COVID-19 substantially impacted multiple product lines with an impact on 49
$26.5 millionfrom delayed new revenue starts, cancellations and reduced services. More specifically, biometric screenings and gym memberships for our clients employees/members were cut back, release-of-information requests slowed down due to less doctor visits overall and community events, diabetes and heart health programs were canceled or limited. We continued our shift away from clients with low margin products inherited from a previous acquisition, accounting for a decline of $9.7 million. Currency translation fluctuations, mostly from our Braziloperations, negatively impacted revenues by $4.4 million. In addition, non-cash warrant value for revenue contracts increased by $0.7 million, resulting in a corresponding decrease to revenue. On the growth side, we saw gains in our new digital and digital therapeutics products of $12.2 million; or 39%, and grew or added new customers across multiple product lines of $18.2 million. On the new digital therapeutics growth, we upsold 14 customers, with several buying multiple products. The channel revenue changed as follows: enterprise channel decreased by $14.3 million(from $202.6 millionfor 2019 to $188.3 millionfor 2020), the provider channel decreased by $1.4 million(from $80.7 millionfor 2019 to $79.3 millionfor 2020) and the life sciences channel increased by $5.0 million(from $56.2 millionfor 2019 to $61.1 millionfor 2020). The enterprise channel decline came from a combination of the impact of COVID-19, inherited client attrition and currency translation losses offset by new product and client gains. The provider channel decline was a combination of COVID-19 impacts offset by new client gains, of which $1.2 millionwas from the acquisition of Visualize Healthin 2020. The life sciences channel increase was due to a strong fourth quarter of 2020 which saw client spend on pharma advertising ramp up, offset by a COVID-19 impact on the non-pharma clients who reduced advertising spend in the second and third quarters of 2020.
Costs and expenses
Costs of revenue decreased
$19.1 million, or 11%, from $180.0 millionfor the year ended December 31, 2019to $160.9 millionfor the year ended December 31, 2020. The cost reductions resulted from several of the revenue shifts mentioned above, specifically, the termination of acquired enterprise clients and the decline in several of the COVID-19 impacted products (release-of-information, diabetes and heart health management, biometric screenings and gym memberships). Additionally, we reduced direct staffing across multiple product lines in response to the COVID-19 slowdown and used these reductions to make efficiency improvements. Sales and Marketing Sales and marketing expense decreased $0.7 million, or 2%, from $34.0 millionfor the year ended December 31, 2019to $33.3 millionfor the year ended December 31, 2020. The sales and marketing costs increased by $1.2 millionfor additional staff and related variable compensation tied to additional staff and $1.2 millionfor outside sales consulting services in the fourth quarter of 2020. Several components of sales and marketing expenses decreased due to travel and trade show reductions caused by COVID-19 limitations on face-to-face interactions ( $1.7 million), reduced marketing sponsorships ( $0.7 million), lower stock compensation expense ( $0.4 million) and reduced severance ( $0.4 million).
Product and technology
Product and technology expenses decreased
$1.8 million, or 4%, from $45.9 millionfor the year ended December 31, 2019to $44.1 millionfor the year ended December 31, 2020. Three main areas of the product and technology expense caused the decrease: reduced travel due to COVID-19 restrictions ( $0.5 million), lower employee cell phone and internet charges ( $0.5 million) and lower severance ( $0.8 million).
General and administrative
General and administrative expense increased
$17.4 million, or 26%, from $65.8 millionfor the year ended December 31, 2019to $83.2 millionfor the year ended December 31, 2020. The biggest factor for the increase was the additional non-cash stock option expense tied to executive and senior management option issuances in 2020 ( $15.6 million). Excluding this non-cash impact, the general and administrative expense increased 3%. Professional fees tied to legal, audit and valuation service fees from several acquisitions and public company readiness activities caused an increase in professional fees ( $2.5 million). Additionally, bad debt expense increased $3.7 milliontied to clients in the release-of-information and life sciences service lines and correlated to tightened budgets from COVID-19 impacts. Offsetting the increases mentioned above, salary reductions in response to the revenue impacts of COVID-19 ( $2.2 million) and reduced travel ( $1.5 million) in response to COVID-19 restrictions, resulted in expense savings. In addition, work- 50
work-from-home policies for most of the workforce beginning late in the first quarter of 2020 in response to COVID-19 and reduced office space in several locations resulted in a decrease in
Depreciation and amortization
for the year ended
Interest expense increased
$2.4 million, or 8%, from $28.7 millionfor the year ended December 31, 2019to $31.0 millionfor the year ended December 31, 2020. In the first quarter of 2020, we moved from a cash-based interest arrangement with a majority of our convertible debt holders to a non-cash payment-in-kind ("PIK") arrangement at a higher interest rate, resulting in the higher expense.
Other expenses increased
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with GAAP, we believe the non-GAAP measures, adjusted EBITDA, adjusted net income (loss), and adjusted earnings (loss) per share ("adjusted EPS"), are useful in evaluating our operating performance. We use adjusted EBITDA, adjusted net income (loss), and adjusted EPS to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. In particular, we believe that the use of adjusted EBITDA, adjusted net income (loss), and adjusted EPS is helpful to our investors as they are metrics used by management in assessing the health of our ongoing business and our operating performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as a tool for comparison. The reconciliations of adjusted EBITDA, adjusted net income (loss), and adjusted EPS to net income (loss), the most directly comparable financial measures stated in accordance with GAAP, are provided below. Investors are encouraged to review the reconciliations and not to rely on any single financial measure to evaluate our business.
Adjusted EBITDA is a key performance measure that management uses to assess our operating performance. Because adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes. We calculate adjusted EBITDA as net income (loss) adjusted to exclude (i) depreciation and amortization, (ii) interest income, (iii) interest expense, (iv) income tax (benefit) expense, (v) loss on extinguishment of debt, (vi) other expense (income) (non-operating), (vii) loss on equity method investments, (viii) share-based compensation, (ix) severance, (x) warrants issued with revenue contracts, and (xi) transaction and closing costs. We do not view the items excluded as representative of our ongoing operations. 51
The following table provides a reconciliation of Adjusted EBITDA to the most comparable GAAP measure, net loss, for each of the years ended
Year Ended December 31, 2021 2020 2019 Net loss
$ (85,129) $ (60,461) $ (39,437)Add: Depreciation and amortization 32,601 24,684 23,782 Interest income (96) (71) (149) Interest expense 27,662 31,037 28,685 Income tax (benefit) expense (2,021) (1,557)
Loss on extinguishment of debt 1,148 -
Other expense (income) (27,007) 9,709
Loss from equity method investments - 3,902 - Share-based compensation 46,780 19,160 3,532 Severance 1,278 2,553 4,378 Warrants issued with revenue contracts(a) 79 1,188
Transaction and closing costs(b) 31,733 2,187 2,675 Adjusted EBITDA(c)
$ 27,028 $ 32,331 $ 24,972____________
(a) Represents the non-monetary value of warrants issued to customers to meet specific revenue thresholds.
(b)Represents costs related to the business combination and transaction and post-closing costs related to acquisitions made in 2021 and prior years.
(c) Includes non-cash amortization associated with contract liabilities recognized in connection with acquired businesses.
Adjusted net profit (loss)
Adjusted net income (loss) is a key performance measure that management uses to assess our operating performance. Because adjusted net income (loss) facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes and to evaluate our performance. We calculate adjusted net income (loss) as net income (loss) attributable to
Sharecare, Inc.adjusted to exclude (i) amortization of acquired intangibles, (ii) amortization of deferred financing fees, (iii) change in fair value of warrant liability and contingent consideration, (iv) loss from equity method investments, (v) share-based compensation, (vi) severance, (vii) warrants issued with revenue contracts, (viii) transaction and closing costs, and (ix) the related income tax adjustments. We do not view the items excluded as representative of our ongoing operations.
Adjusted EPS is a key performance measure that management uses to assess our operating performance. Because adjusted EPS facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes and to evaluate our performance.
We calculate Adjusted EPS as Adjusted net income, as defined above, divided by the weighted average number of common shares outstanding – basic and diluted. We do not consider the excluded items to be representative of our ongoing operations.
The following table presents a reconciliation of adjusted net income (loss) and adjusted EPS from the most comparable GAAP measure, net loss, for each of the years ended
December 31, 2021, 2020 and 2019 (in thousands, except share numbers and per share amounts): Year Ended December 31, 2021 2020 2019
Net loss attributable to
$ (39,980)Add: Amortization of acquired intangibles(a) 5,321 3,851 4,225 Amortization of deferred financing fees 15,537 6,801 6,747 Change in fair value of warrant liability and contingent consideration (26,123) 9,647 566 Loss from equity method investments - 3,902 - Share-based compensation 46,780 19,160 3,532 Severance 1,278 2,553 4,378 Warrants issued with revenue contracts(b) 79 1,188 485 Transaction and closing costs(c) 31,733 2,187 2,675 Adjusted net loss(d) $ (10,395)$
Weighted-average common shares outstanding, basic and diluted 281,026,365 215,094,037 205,888,637 Loss per share
$ (0.30) $ (0.28) $ (0.19)Adjusted loss per share $ (0.04) $ (0.05) $ (0.08)____________
(a) Represents non-cash charges related to amortization of intangible assets related to acquired businesses.
(b) Represents the non-monetary value of warrants issued to customers to meet specific revenue thresholds.
(c) Represents costs related to the business combination and transaction and post-closing costs related to acquisitions made in 2021 and prior years.
(d)The income tax effect of the Company's non-GAAP reconciling items are offset by valuation allowance adjustments of the same amount, because the Company is in a full valuation allowance position for all periods presented.
Cash and capital resources
We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations and other commitments, with cash flows from operations and other sources of funding. Our ability to expand and grow our business will depend on many factors, including our working capital needs and the evolution of our operating cash flows. We had
$271.1 millionin cash and cash equivalents as of December 31, 2021. Our principal commitments as of December 31, 2021, consist of operating leases, and purchase commitments. The Company maintains its Senior Secured Credit Agreement. As of December 31, 2021, there was $50.7 millionavailable for borrowing under the Revolving Facility. See Note 7 and Note 12 to Sharecare'sconsolidated financial statements included elsewhere in this Annual Report on Form 10-K. We believe our operating cash flows, together with our cash on hand, which includes the cash we obtained as a result of the Business Combination, will be sufficient to meet our working capital and capital expenditure requirements in the short-term, i.e., the 12 months from the date of this Annual Report on Form 10-K. Our long-term liquidity needs include cash necessary to support our business growth and contractual commitments. We believe that the potential financing capital available to us in the future is sufficient to fund our long-term liquidity needs, however, we are continually reviewing our capital resources to determine whether we can meet our short- and long-term goals and we may require additional capital to do so. We may also need additional cash resources due to potential changes in business conditions or other developments, including unanticipated 53
regulatory developments, significant acquisitions, and competitive pressures. We expect our capital expenditures and working capital requirements to continue to increase in the immediate future as we seek to expand our solution offerings. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the needed financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in new product offerings and related marketing initiatives or to scale back our existing operations, which could have an adverse impact on our business and financial prospects. See Note 1 to
Sharecare'saudited consolidated financial statements and the "Risk Factors - Risks Related to Financing and Tax - We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all." included elsewhere in this Annual Report on Form 10-K The following table summarizes our cash flow activities for the periods presented: Year Ended December 31, (in thousands) 2021 2020 2019
Net cash (used in)/provided by operating activities
Net cash used in investing activities
$ (112,387) $ (19,171) $ (16,644)Net cash provided by financing activities $ 415,220 $ 3,770 $ 20,797Operating Activities Net cash used in operating activities for the year ended December 31, 2021was $54.1 million. Cash used during this period included the $85.1 millionnet loss for the year ended December 31, 2021, offset by non-cash items of $58.5 millionwhich were primarily attributable to depreciation and amortization expense, write-off of deferred financing fees and debt discount, amortization of contract liabilities, change in fair value of warrant liability and contingent consideration, share-based compensation, and payment of PIK interest. In addition, changes in operating assets and liabilities of $27.4 millionresulted in net cash used, primarily attributable to increases in accounts receivable and other receivables, prepaid expense and other assets. Accounts receivable increased primarily due to increased revenue. Prepaid expense and other assets increased primarily due to non-cash payment for upfront research and development costs related to the issuance of shares of Series D Preferred Stock (see Note 9 to Sharecare'sconsolidated financial statements included elsewhere in this Annual Report on Form 10-K). Net cash provided by operating activities for the year ended December 31, 2020was $14.8 million, an increase of $12.2 millionfrom $2.6 millionof cash provided by operating activities for the year ended December 31, 2019. Cash provided during this period included the $60.5 millionnet loss for the year ended December 31, 2020, net of non-cash items (which increased $40.1 millionbetween periods). This was partially offset by net cash used in changes in operating assets and liabilities of $6.9 millionbetween periods, primarily attributable to deferred revenue, accounts receivable and other receivables, and accounts payable and accrued expenses. For the year ended December 31, 2020compared to 2019, deferred revenue decreased due to the recognition of revenue that was deferred as of the beginning of the period related to a contract that was executed in the previous year where payment was received in advance of services being delivered. Accounts receivable decreased between periods due to a decrease in the enterprise channel revenue attributable to the impact of COVID-19 as discussed above. Accrued expenses increased as a result of increased PIK interest, accrued payroll taxes due to the passage of The Coronavirus Aid, Relief, and Economic Security Act in 2020, and an increase of accrued bonuses and professional fees. These increases in accrued expenses were offset by the timing of payments of accounts payable as of December 31, 2020. Investing Activities Net cash used in investing activities for the year ended December 31, 2021was $112.4 millioncompared to $19.2 millionof net cash used in investing activities for the year ended December 31, 2020. The increase in cash outflows was primarily due to cash paid for our acquisitions of CareLinx and doc.ai and cash paid for capitalized internal-use software costs. Net cash used in investing activities for the year ended December 31, 2020was $19.2 millioncompared to $16.6 millionof net cash used in investing activities in 2019. The increase in cash outflows was primarily due to cash paid for our acquisition of Visualize Health. Net cash used in investing activities for the year ended December 31, 2019was $16.6 millionprimarily due to cash paid for internal-use software and property and equipment. 54
Net cash provided by financing activities for the year ended
Net cash provided by financing activities for the year ended
December 31, 2020was $3.8 million, primarily due to cash received from the drawdown on our Senior Secured Credit Agreement, offset by the partial repayment of our outstanding indebtedness. Net cash provided by financing activities for the year ended December 31, 2019was $20.8 million, which was primarily due to cash received from the issuance of Series C convertible preferred stock, partially offset from debt repayments during the period.
There were no material changes to contractual obligations since last presented as of
December 31, 2020except for the Company settling substantially all of its existing indebtedness during July 2021, totaling $178.4 millionin connection with the consummation of the Business Combination. The Company still maintains its Senior Secured Credit Agreement. Additionally, we have contractual obligations related to leases and purchase obligations with certain service providers. See Note 12 to Sharecare'sconsolidated financial statements included elsewhere in this Annual Report.
March 2017, we refinanced our existing debt through the execution of that certain Credit Agreement, dated as of March 9, 2017(which we refer to herein as, the "Senior Secured Credit Agreement"), among Legacy Sharecare, certain subsidiaries of Legacy Sharecare (together with Legacy Sharecare, the "Borrowers"), the lenders named therein (the "Lenders") and Wells Fargo Bank, National Association, as administrative agent (the "Administrative Agent").The Senior Secured Credit Agreement provides for the Revolving Facility with total commitments of $60.0 million. Availability under the Revolving Facility is generally subject to a borrowing base based on a percentage of applicable eligible receivables. Borrowings under the Revolving Facility generally bear interest at a rate equal to, at the applicable Borrower's option, either (a) a base rate or (b) a rate based on LIBOR, in each case, plus an applicable margin. The applicable margin is based on a fixed charge coverage ratio and ranges from (i) 1.75% to 2.25% for U.S.base rate loans and (ii) 2.75% to 3.25% for LIBOR. The Credit Agreement matures on February 10, 2023. In connection with the consummation of the Business Combination, Legacy Sharecare, the other Borrowers, the Lenders and the Administrative Agent entered into the Sixth Amendment. Pursuant to the Sixth Amendment, the Administrative Agent and Lenders provided certain consents with respect to the consummation of the Business Combination and related transactions and certain amendments were made to the terms of the Senior Secured Credit Agreement to reflect the Business Combination and related transactions. The Company and certain other subsidiaries of Legacy Sharecare executed joinders to become a party to the Senior Secured Credit Agreement as required by the Sixth Amendment in July 2021. In connection with the consummation of the Business Combination, we repaid all outstanding amounts under the Senior Secured Credit Agreement. In the future, we may incur additional borrowings under the Senior Secured Credit Agreement. See Note 7 to Sharecare'sconsolidated financial statements included elsewhere in this Annual Report on Form 10-K. The Senior Secured Credit Agreement contains a number of customary affirmative and negative covenants, and we were in compliance with those covenants as of December 31, 2021. As of December 31, 2021, there were approximately $0.4 millionof borrowings outstanding under the Revolving Facility.
Critical accounting estimates
Our financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, revenue recognition, the valuation of assets and liabilities acquired in business combinations, the valuation of common stock prior to the Business Combination, stock-based compensation, and income taxes. We base our estimates on historical experience, known trends, and other market-specific or other relevant factors that we believe to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results may differ from those estimates or assumptions. We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial 55
condition and results of operations. For further information, see Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Revenue Recognition Revenue is recognized when control of the promised good or service is transferred to the client, in an amount that reflects the consideration we expect to be entitled to in exchange for that good or service. Sales and usage-based taxes are excluded from revenue. We serve a diverse group of clients. We are the principal in all outstanding revenue arrangements except for CareLinx. CareLinx has B2C and B2B2C service lines for which CareLinx is the agent and we recognize the commission revenue based on the amount billed using the "as-invoiced" practical expedient.
The enterprise channel provides employers and health plans with health management programs for large populations, including digital engagement, telephonic coaching, incentives, biometrics, digital therapeutics, home care health offerings, and subscriptions to the
Sharecareplatform. Revenue is recognized on a PMPM basis or as services are provided. Member participation fees are generally determined by multiplying the contractually negotiated member rate by the number of members eligible for services during the month. Member participation rates are established during contract negotiations with clients, often based on a portion of the value the programs are expected to create. Contracts with health plans, health care systems and government organizations generally range from three to five years with several comprehensive strategic agreements extending for longer periods. Contracts with larger employer clients typically have two to four year terms. Health management program contracts often include a fee for the subscription of the Sharecaredigital platform and various other platforms under doc.ai, which may also be sold on a stand-alone basis. These services allow members to access Sharecare'sproprietary mobile application with a comprehensive suite of health and wellness management programs, content, and tools. Revenue is recognized on a per member or a fixed fee basis as the services are provided. Sharecare's Blue Zones Projectis a community well-being improvement initiative designed to change the way people experience the world around them by encouraging and promoting better lifestyle choices, such as commuting, eating, and social habits. Because healthier environments naturally nudge people toward healthier choices, Blue Zones Projectfocuses on influencing the Life Radius®, the area close to home in which people spend 90% of their lives. Blue Zones Projectbest practices use people, places, and policy as levers to transform those surroundings. These contracts normally include two performance obligations, the discovery period and the subsequent content delivery, for each year of engagement. The revenue is recognized based on the relative standalone selling price of the performance obligations evenly over time. These contracts do not include termination clauses and often have two to four year terms. Sharecare'sdoc.ai unlocks the value of health data through licensing artificial intelligence modules and through the creation of products for a portfolio of clients including payors, pharma, and providers. These contracts generally include two performance obligations. The software license and maintenance/support are considered one series of distinct performance obligations and professional services is considered a separate distinct performance obligation. Revenue is recognized for all identified performance obligations as services are delivered. Certain contracts place a portion of fees at risk based on achieving certain performance metrics, such as cost savings, and/or clinical outcomes improvements (performance-based). We use the most likely amount method to estimate variable consideration for these performance guarantees. We include in the transaction price some or all of an amount of variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We utilize customer data in order to measure performance.
If performance levels are not achieved by the end of the assessment period, usually one year, some or all of the performance-based fees must be refunded. During the settlement process under a contract, which typically takes place six to eight months after the end of a contract year, performance-based fees are reconciled and settled.
Clients are generally billed monthly for the entire amount of the fees contractually due for the prior month's enrollment, which typically includes the amount, if any, that is performance-based and may be subject to refund should performance targets not be met. Fees for participation are typically billed in the month after the services are provided. Deferred revenues arise from contracts that permit upfront billing and collection of fees covering the entire contractual service period, generally six months to a year. A limited number of contracts provide for certain performance-based fees that cannot be billed until after they are reconciled with the client.
Our provider channel revenue is primarily based on the volume of health document requests fulfilled and recognized upon satisfactory delivery to the client. In addition, provider revenue is derived from subscription fees for various technology-related services that assist providers with efficiency and productivity and enhanced patient care. Subscription fees are recognized ratably over the contractual period. Life Sciences Revenue Our life sciences channel generates revenue mostly through ad sponsorships and content delivery. Content delivery revenue is recognized when the content is delivered to the client. Ad sponsorship revenue is recognized when the contractual page views or impressions are delivered and the transaction has met the criteria for revenue recognition. Certain customer transactions may contain multiple performance obligations that may include delivery of content, page views, and ad sponsorship over time. To account for each of these elements separately, the delivered elements must be capable of being distinct and must be distinct in the context of the contract. Revenue is allocated based on the stand-alone or unbundled selling price for each performance obligation as the services are provided.
We account for business acquisitions in accordance with ASC Topic 805, Business Combinations. We measure the cost of an acquisition as the aggregate of the acquisition date fair values of the assets transferred and liabilities assumed and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. We record goodwill for the excess of (i) the total costs of acquisition and fair value of any noncontrolling interests over (ii) the fair value of the identifiable net assets of the acquired business. The acquisition method of accounting requires us to exercise judgment and make estimates and assumptions based on available information regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies. We must also refine these estimates within a one-year measurement period, to reflect any new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Estimates and assumptions that we must make in estimating the fair value of acquired technology, user lists, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed, which could materially impact our results of operation.
New accounting statements
See Note 1 to
Accounting Election for Emerging Growth Companies
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. Following the consummation of the Business Combination, we expect to remain an emerging growth company at least through the end of the 2022 fiscal year and expect to continue to take advantage of the benefits of the extended transition period. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions for emerging growth companies because of the potential differences in accounting standards used. For additional information, see "Risk Factors - Risks Related to Being a
Public Company- We are an 'emerging growth company,' and our election to comply with the reduced disclosure requirements as a public company may make our common stock less attractive to investors." included elsewhere in this Annual Report on Form 10-K. 57
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