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DOCUMENTS INCORPORATED BY REFERENCE
None.
SOC Telemed, inc.
annual
report on form 10-K
For the fiscal year ended decembEr 31, 2021
Table of Contents
i
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (this “report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are forward-looking and as such are not historical facts. These forward-looking statements include, without limitation, statements regarding future financial performance, business strategies, expansion plans, future results of operations, estimated revenues, losses, projected costs, prospects, plans and objectives of management. These forward-looking statements are based on our management’s current expectations, estimates, projections and beliefs, as well as a number of assumptions concerning future events, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this report, words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “would” and variations thereof and similar words and expressions are intended to identify such forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about:
| ● | our ability to consummate the proposed transaction with Patient Square Capital (the “Transaction”) on the anticipated terms and timeframe, including obtaining stockholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, litigation, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the Company’s business and other conditions to the completion of the Transaction; |
| ● | our ability to recognize the anticipated benefits of the Acquisition, which may be affected by, among other things, competition and our ability to manage our growth following the Acquisition; |
| ● | our financial performance and capital requirements; |
| ● | our expectations relating to bookings and revenues; |
| ● | our market opportunity and our ability to estimate the size of our target market; |
| ● | our ability to retain our existing customers and to increase our number of customers; |
| ● | potential acquisitions and integration of complementary businesses and technologies; |
| ● | our ability to maintain and expand our network of established, board-certified physicians and other provider specialists; |
| ● | our ability to attract, integrate, and retain key personnel and highly qualified personnel; |
| ● | our ability to comply with new or modified laws and regulations that currently apply or become applicable to our business; |
| ● | the implementation and effects of our restructuring plan; |
| ● | the effects of the COVID-19 pandemic on our business and operations; |
| ● | the outcome of any known and unknown litigation and regulatory proceedings; |
| ● | the possibility that our business may be harmed by other economic, business, and/or competitive factors; and |
| ● | other factors described in this report, including those described in the section entitled “Risk Factors” under Part I, Item 1A of this report. |
The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on our business. There can be no assurance that future developments affecting our business will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the section entitled “Risk Factors” under Part I, Item 1A of this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the effect of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.
The forward-looking statements made by us in this report speak only as of the date of this report. Except to the extent required under the federal securities laws and rules and regulations of the SEC, we disclaim any obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, there is no assurance that the events or results suggested by the forward-looking statements will in fact occur, and you should not place undue reliance on these forward-looking statements.
Unless the context otherwise indicates, references in this report to the terms “SOC Telemed,” the “Company,” “we,” “our” and “us” refer to SOC Telemed, Inc., a Delaware corporation, and its consolidated subsidiaries.
ii
Risk Factors Summary
Our business is subject to numerous risks and uncertainties, including those described in the section entitled “Risk Factors” under Part I, Item 1A of this report, that represent challenges that we face in connection with the successful implementation of our strategy and growth of our business. The occurrence of one or more of the events or circumstances described in the section entitled “Risk Factors,” alone or in combination with other events or circumstances, may adversely affect our ability realize the anticipated benefits of the Transaction and may harm our business. Such risks include, but are not limited to:
| ● | The Transaction, the pendency of the Transaction or our failure to complete the Transaction could harm our business, results of operations, financial condition and stock price. |
| ● | We operate in a competitive industry, and if we are not able to compete effectively, our business, financial condition, and results of operations will be harmed. |
| ● | The level of demand for and market utilization of our solutions are subject to a high degree of uncertainty. |
| ● | We have a history of losses and anticipate that we will continue to incur losses in the future. We may never achieve or sustain profitability. |
| ● | Our business, results of operations, and financial condition may fluctuate on a quarterly and annual basis, which may result in a decline in our stock price if such fluctuations result in a failure to meet any projections that we may provide or the expectations of securities analysts or investors. |
| ● | Our business, financial condition and results of operations have been and may continue to be adversely impacted by the COVID-19 pandemic or similar epidemics in the future or other adverse public health developments, including government responses to such events. |
| ● | Our sales cycle can be long and unpredictable and requires considerable time and expense. As a result, our sales, revenues, and cash flows are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly. |
| ● | Developments affecting spending by the healthcare industry could adversely affect our revenues. |
| ● | If our existing customers do not continue or renew their contracts with us, renew at lower fee levels or decline to purchase additional services from us, our business may be harmed. |
| ● | Our telemedicine business and growth strategy depend on our ability to maintain and expand our network of established, board-certified physicians and other provider specialists. If we are unable to do so, our future growth would be limited and our business would be harmed. |
| ● | Our telemedicine business is dependent on our relationships with affiliated professional entities, which we do not own, to provide physician services, and our business would be harmed if those relationships were disrupted. |
| ● | We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations, and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could harm our business. |
| ● | We may require additional capital from equity or debt financings to support business growth, and this capital might not be available on acceptable terms, if at all. |
| ● | Our substantial indebtedness following the Acquisition could harm our business and growth prospects. |
| ● | If we fail to comply with extensive healthcare laws and government regulations, we could suffer penalties or be required to make significant changes to our operations. |
| ● | Our use and disclosure of personally identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm to us, which could, in turn, harm our customer base and our business. |
| ● | Warburg Pincus has significant influence over us, and their interests may conflict with ours and those of our other stockholders in the future. |
| ● | Future sales of shares by existing stockholders and future exercise of registration rights may adversely affect the market price of our Class A common stock. |
iii
Part I
Item 1. Business.
Corporate History and Background
We were incorporated in Delaware in September 2019 and formed as a special purpose acquisition company known as Healthcare Merger Corp. (“HCMC”) for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. Our legacy business (“Legacy SOC Telemed”) was founded in 2004. On October 30, 2020, we completed the acquisition of Legacy SOC Telemed pursuant to an Agreement and Plan of Merger, dated as of July 29, 2020 (the “Merger Agreement”), by and among us, Sabre Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of HCMC, Sabre Merger Sub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of HCMC, and Specialists On Call, Inc., a Delaware corporation. We collectively refer to the transactions contemplated by the Merger Agreement as the “Merger” or the “Merger Transaction.” As part of the Merger Transaction, we changed our name from Healthcare Merger Corp. to SOC Telemed, Inc.
On March 26, 2021, we completed the acquisition (the “Acquisition”) of Access Physicians Management Services Organization, LLC (“Access Physicians”), a multi-specialty acute care telemedicine provider. The Acquisition expanded our clinical solutions to include teleCardiology, teleInfectious Disease, teleMaternal-Fetal Medicine, teleNephrology, teleEndocrinology and other specialties to offer a comprehensive acute care telemedicine portfolio to meet the demands of the market and grow our provider breadth and depth.
Acquisition by Patient Square Capital
On February 2, 2022, we entered into an Agreement and Plan of Merger (the “Transaction Agreement”) with Spark Parent, Inc., a Delaware corporation (“Spark Parent”), and Spark Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Parent (“Spark Merger Sub”), pursuant to which Spark Merger Sub will merge with and into the Company (the “Transaction”), with the Company surviving the Transaction as a direct, wholly owned subsidiary of Spark Parent (the “Surviving Corporation”). Spark Parent and Spark Merger Sub are each subsidiaries of investment funds advised by Patient Square Capital, L.P. (“Patient Square Capital”), a leading dedicated health care investment firm. At the effective time of the Transaction (the “Effective Time”), the Surviving Corporation, will be indirectly owned by Patient Square Capital and certain of its affiliates.
The Company’s Board of Directors (the “Board”) has unanimously approved the Transaction Agreement and the transactions contemplated thereby, including the Transaction, and, subject to certain exceptions set forth in the Transaction Agreement, resolved to recommend that our stockholders adopt and approve the Transaction Agreement.
Under the terms of the Transaction Agreement, at the Effective Time, each share of our Class A common stock outstanding immediately prior to the Effective Time (subject to certain exceptions, including shares of Class A common stock owned by stockholders of the Company who have not voted in favor of the adoption and approval of the Transaction Agreement and properly exercised appraisal rights in accordance with Section 262 of the General Corporation Law of the State of Delaware) will be canceled and automatically converted into the right to receive $3.00 in cash (the “Transaction Consideration”), without any interest thereon and subject to any applicable withholding taxes. The Transaction Agreement provides that the Company’s equity awards that are outstanding immediately prior to the Effective Time will be subject to the following treatment as of the Effective Time:
| ● | Each option to purchase shares of Class A common stock that is vested in accordance with its terms and outstanding as of immediately prior to the Effective Time will, provided that such option has a per share exercise price less than the Transaction Consideration, automatically and without any required action on the part of the holder thereof, be canceled and converted into the right to receive an amount in cash, without interest, equal to (i) the total number of shares of Class A common stock underlying such option multiplied by (ii) the excess of (A) the Transaction Consideration over (B) the per share exercise price for such option, subject to applicable withholding taxes; |
| ● | Each option that is not vested and is outstanding as of immediately prior to the Effective Time will, provided that such option has a per share exercise price less than the Transaction Consideration, automatically and without any required action on the part of the holder thereof, be canceled and replaced with a new award to be issued by Spark Parent or one of its affiliates following the Effective Time; |
| ● | Any option, whether or not vested, that has a per share exercise price that is equal to or greater than the Transaction Consideration will be canceled for no consideration; |
1
| ● | Each RSU held by a non-employee director of the Company that is outstanding as of immediately prior to the Effective Time will, automatically and without any required action on the part of the holder thereof, be canceled and converted into the right to receive an amount in cash, without interest, equal to (i) the total number of shares of Class A common stock underlying such RSU multiplied by (ii) the Transaction Consideration, subject to applicable withholding taxes; |
| ● | Each RSU (other than those held by a non-employee director of the Company) that is not vested and is outstanding as of immediately prior to the Effective Time will, automatically and without any required action on the part of the holder thereof, be canceled and replaced with a new award to be issued by Spark Parent or one of its affiliates following the Effective Time; |
| ● | Each PSU that is outstanding as of immediately prior to the Effective Time and for which the applicable performance condition has been satisfied as of immediately prior to the Effective Time will, automatically and without any required action on the part of the holder thereof, be canceled and converted into the right to receive an amount in cash, without interest, equal to (i) the total number of shares of Class A common stock underlying such PSU multiplied by (ii) the Transaction Consideration, subject to applicable withholding taxes; and |
| ● | Each PSU that is outstanding as of immediately prior to the Effective Time and for which the applicable performance condition has not been satisfied as of immediately prior to the Effective Time will be canceled for no consideration. |
The Transaction Agreement also provides that, following the date of the Transaction Agreement, except for the offering under the Company’s 2020 Employee Stock Purchase Plan (the “ESPP”) in effect as of the date of the Transaction Agreement, no offering under the ESPP will be authorized or commenced, no new participants will commence participation in the ESPP, no participant in the ESPP will be permitted to increase his or her payroll contribution rate in effect as of the date of the Transaction Agreement or make separate non-payroll contributions, the accumulated contributions of each participant will be used to purchase shares of Class A common stock prior to the Effective Time in accordance with the ESPP, after which all purchase rights under the ESPP will be terminated, and the ESPP will terminate effective as of (and subject to the occurrence of) the Effective Time. The Transaction Agreement further provides that, at the Effective Time, each warrant that is outstanding as of immediately prior to the Effective Time will, in accordance with its terms, automatically and without any required action on the part of the holder thereof, cease to represent a warrant in respect of our Class A common stock and will become a warrant exercisable for Transaction Consideration.
During the period beginning on the date of the Transaction Agreement and continuing until 11:59 p.m., New York time on March 4, 2022, we had the right to, among other things, (1) solicit alternative acquisition proposals, (2) provide information (including non-public information) to third parties in connection therewith pursuant to an acceptable confidentiality agreement, and (3) initiate or continue discussions with third parties in connection therewith. During such period, the Company’s financial advisor, at the direction of the Board, communicated with additional parties to gauge their interest in making an alternative acquisition proposal. No party made an alternative acquisition proposal during such period. From and after 11:59 p.m., New York time on March 4, 2022, the Company must comply with customary non-solicitation restrictions.
Either we or Spark Parent may terminate the Transaction Agreement in certain circumstances, including if (1) the Transaction is not completed by August 2, 2022, subject to certain limitations, (2) a court of competent jurisdiction has issued a final, non-appealable injunction prohibiting the consummation of the Transaction, (3) the Company’s stockholders fail to adopt and approve the Transaction Agreement, and (4) the other party breaches its representations, warranties or covenants in the Transaction Agreement such that certain conditions would not be satisfied, subject in certain cases, to the right of the breaching party to cure the breach. The parties may also terminate the Transaction Agreement by mutual written consent. If the Transaction Agreement is terminated in certain other circumstances, including by us in order to enter into a superior proposal or by Spark Parent because the Board withdraws its recommendation in favor of the Transaction, we would be required to pay Spark Parent a termination fee of approximately $11.5 million; provided that a lower fee of approximately $7.7 million will apply with respect to a termination to enter into a superior proposal during the “go-shop” period described in the preceding paragraph. In addition, if the Transaction Agreement is validly terminated (1) by Spark Parent for our breach of our representations, warranties or covenants in the Transaction Agreement such that certain conditions would not be satisfied, subject in certain cases, to our right to cure the breach, (2) by either party if the Company’s stockholders fail to adopt and approve the Transaction Agreement or (3) because the Transaction is not completed by August 2, 2022 (subject to certain limitations), we will be required to pay the termination fee if, within 12 months after termination of the Transaction Agreement, we enter into an alternative acquisition proposal that was made prior to the termination of the Transaction Agreement.
We made customary representations, warranties and covenants in the Transaction Agreement, including, among others, covenants to conduct our business in all material respects in the ordinary course during the period between the date of the Transaction Agreement and the completion of the Transaction. The parties have agreed to use reasonable best efforts to take all actions necessary to consummate the Transaction, including cooperating to obtain the regulatory approvals necessary to complete the Transaction.
2
Completion of the Transaction is subject to the satisfaction or waiver of customary closing conditions, including (1) the adoption and approval of the Transaction Agreement by the Company’s stockholders; (2) the expiration or termination of the applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); (3) the absence of any order, injunction or law prohibiting the Transaction; (4) the accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Transaction Agreement; (5) compliance in all material respects with the other party’s obligations under the Transaction Agreement; and (6) each party having received from the other party a certificate confirming that the relevant conditions have been satisfied with respect to that party. The parties made the filings required under the HSR Act on February 14, 2022, and the applicable waiting period under the HSR Act expired at 11:59 p.m., Eastern Time, on March 16, 2022. A special meeting of the Company’s stockholders to consider and vote on a proposal to adopt and approve the Transaction Agreement is scheduled to be held on April 4, 2022. The parties expect the Transaction to close in the second quarter of 2022. If the Transaction is consummated, the Company’s Class A common stock and warrants to purchase shares of Class A common stock will be delisted from the Nasdaq Global Select Market (“Nasdaq”) and deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
On February 2, 2022, concurrently with the execution of the Transaction Agreement, each of Christopher M. Gallagher, the Company’s Chief Executive Officer and a member of the Board, the Gallagher 2020 Children’s Trust, for which Dr. Gallagher serves as a trustee, Steven J. Shulman, the Chairman of the Board, and SOC Holdings LLC, an affiliate of Warburg Pincus LLC (“Warburg Pincus”), entered into a voting and support agreement with the Company and Spark Parent pursuant to which each such stockholder has agreed, among other things, to vote their shares of Class A common stock in favor of adoption and approval of the Transaction Agreement, and against any competing transaction, so long as, among other things, the Transaction Agreement remains in effect. As of February 25, 2022, the record date for the special meeting, those stockholders beneficially owned and are entitled to vote in the aggregate approximately 38.7% of the issued and outstanding shares of Class A common stock entitled to vote at the special meeting.
For additional information related to the Transaction Agreement and related voting and support agreements, please refer to our filings previously made with the SEC in connection with the Transaction, including the Company’s definitive proxy statement filed on March 7, 2022, and the full text of the Transaction Agreement and the form of voting and support agreement, copies of which were filed on February 4, 2022, as Exhibits 2.1 and 99.1 to the Company’s Current Report on Form 8-K.
Because the Transaction is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented elsewhere in this report, including those that present forward-looking information as that term is defined elsewhere herein, assume the continuation of SOC Telemed as a public company. If the Transaction is consummated, our actions and results may be different than those anticipated by such forward-looking statements contained in this report, and such differences may be material.
Our Mission
Our mission is to partner with healthcare organizations to bring clinicians and patients together using innovative technologies to improve clinical care and patient outcomes in a measurable way.
Overview
We are the leading provider of acute care telemedicine services and technology to U.S. hospitals and healthcare systems, based on number of customers. We provide technology-enabled clinical solutions, which include acute teleNeurology, telePsychiatry, teleCritical Care (ICU), telePulmonology, teleCardiology and other specialties. We support time-sensitive specialty care when patients are vulnerable and may not otherwise have access. Our solution was developed to support complex workflows in the acute care setting by integrating our cloud-based software platform, Telemed IQ, with a panel of consult coordination experts and a network of clinical specialists to create a seamless, acute care telemedicine solution.
Hospitals and health systems today face many challenges. Over the next decade, the U.S. is expected to continue to face a shortage of primary care and specialist physicians in both urban and rural communities, which will adversely impact access to care and clinical outcomes. In addition, hospitals and health systems have difficulty efficiently staffing with unknown and unpredictable patient demand, leading to increased costs or delays in patient care. These challenges, combined with increased financial pressure, are driving hospitals and healthcare systems to seek solutions that can deliver cost-effective access to qualified clinicians and high-quality care.
We focus on the acute care telemedicine industry. Access to timely care is essential to improved health outcomes, but the complexity in the operating environment for acute care telemedicine creates significant barriers to entry. Technology, workflows and clinical network elasticity are critical to connect remote specialists to patients and on-site providers within minutes. Additionally, predictive modeling, actionable analytics, a flexible decision engine and workflow assurance facilitate clinician deployment in a protocol driven framework. An effective telemedicine platform also must be integrated across hospitals and health systems yet work within the local system hardware and software infrastructure in order to optimize workflow and enhance clinical outcomes.
3
Our cloud-based Telemed IQ platform optimizes workflows and supports various provider-to-provider and provider-to-patient interactions (on-demand, scheduled, rounding, etc.) via any web-enabled device, at any care location, across the care continuum. Our platform is a fully integrated and configurable technology solution that seamlessly combines voice, video, imaging, electronic medical record (“EMR”) integration, clinical workflow optimization, clinical resource management, analytics, predictive modeling and other reporting tools. As an enterprise offering, Telemed IQ enables hospitals, health systems and other healthcare organizations to provide telemedicine programs and drive revenue growth and/or optimize clinical coverage costs, either with their own clinical team or in conjunction with our affiliated network of established, board-certified physicians and other provider specialists. Our affiliated national provider network is comprised of more than 380 board-certified neurologists, psychiatrists, intensivists, pulmonologists, cardiologists, infectiologists, perinatologists, nephrologists, endocrinologists and other physicians, representing a critical mass of scarce clinical resources ready for deployment and collaboration at nationwide sites of care. Our platform can be extended to other specialties and service lines, based on our customer’s needs and their own clinical teams, and has been utilized across more than 20 specialties.
We have experienced significant growth since the founding of our business in 2004. We derive our revenues primarily from hospitals and health systems, physician groups, post-acute providers, and government customers. As a result of the Acquisition, we have expanded our focus from primarily the emergency department to include other inpatient-based specialties, thus diversifying both the number of clinical services and where they are provided in the acute care setting. We also now offer hybrid services with on-site physicians in addition to our primary telemedicine service offering.
Our customers generally enter into multi-year agreements where they pay us a fixed monthly fee for the availability to perform a pre-determined number of consults and/or to provide on-demand consultations. In 2021, approximately 70% of our revenues were from fixed monthly fees. In addition, if our customers exceed their fixed monthly allotment of consults, we charge a per consult rate (i.e., a variable fee) for any subsequent consultations during that period. Customers may also choose to license the Telemed IQ platform for virtualizing their own clinician networks. In these instances, we receive a subscription license fee for each clinician that uses our platform. Although revenues from Telemed IQ subscription license fees have been immaterial to date, they have been increasing in recent periods and we plan to continue to invest in the go-to-market resources to address our market opportunity. We also provide RCM capabilities to customers where physician services are eligible for reimbursement. In these cases, we bill patients and third-party payers for physician services rendered.
COVID-19 Impact on Telemedicine
The COVID-19 pandemic has had a significant impact on the telemedicine market by increasing utilization, awareness and acceptance among patients and providers. In the current environment, telemedicine has been promoted at the highest levels of government as a key tool for on-going healthcare delivery while access to healthcare facilities remains limited due to state-mandated stay-at-home orders and general patient fear of traditional in-person visits. Moreover, with clinicians quarantined or otherwise relegated to their homes due to safety issues, telemedicine has provided a solution for remote providers to continue to care for patients and for hospitals to access additional specialists to augment remaining staff. During the COVID-19 pandemic, the U.S. Congress and the Centers for Medicare and Medicaid Services (“CMS”) significantly reduced regulatory and reimbursement barriers for telemedicine. As a result, telemedicine spending increased starting in 2020, and we expect this trend to continue after the public health emergency. In addition to Medicare and Medicaid, many states have issued executive orders or permanent legislation removing or reducing the regulatory and reimbursement barriers for telemedicine.
Our Stakeholders
We provide value to all of our stakeholders — the hospital, the physician and the patient.
| ● | Hospitals: We provide hospitals with efficient, collaborative high-quality care at a lower cost. In particular, we enable hospitals to retain high-value capabilities benefiting their communities, such as stroke care, avoid costly backlogs for psychiatric evaluations in emergency departments and inpatient sites of care, and improve patient quality of care through timely access to specialized resources. |
| ● | Physician Groups: We enable physician groups to more effectively deploy clinical capital. By doing so, physician groups can better optimize scarce and expensive clinical resources to better match clinician supply to patient demand and improve their productivity and profitability. |
| ● | Patients: We provide patients with access to quality care when and where it is needed. We ensure patients have access to scarce clinical specialists and rapid intervention to address acute procedures for better outcomes. |
4
Our Telemed IQ Platform
Adapting the acute care workflow to telemedicine involves a complex orchestration between patient, remote physician, bedside health provider and consult coordination experts. All of these participants are mediated by a low-code, highly configurable software platform, which features a configurable decision engine, matching patients and physicians and coordinating the various stages of the procedure and follow-up.
Illustrative example:
| ● | Patient presents in the emergency room with stroke symptoms. |
| ● | Onsite clinician initiates a consult request to a teleNeurologist using our Telemed IQ platform. |
| ● | Our configurable decision engine prioritizes the consult given clinically based acuity and required response time data points. |
| ● | Simultaneously, the platform scores and ranks the physicians who are eligible to handle this consult. |
| ● | After the most appropriate and available teleNeurologist is selected, contacted and engaged on our Telemed IQ platform, the physician evaluates the patient over an automated video connection. Through our platform, the physician views the same images that are available in the hospital and collaborates with the onsite clinicians for the patient’s care. Upon completion of the consultation, evaluation notes are seamlessly transferred via the Telemed IQ into the patient’s EMR. |
Our Solution
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Acute care is a complex and heterogeneous environment within a single hospital, and every hospital within a larger integrated delivery network can have its own unique workflows. To operate in this environment, we need to be flexible, adapting to these workflows and the technology infrastructure. We built our platform technology and solutions around this premise and have successfully addressed this complexity. As a result, we can enable varying provider-to-patient and provider-to-provider interactions across different specialties, provider groups, locations and technology infrastructure.
Our cloud-based Telemed IQ technology platform supports various clinical workflows and can support any specialty, be deployed across our network of board-certified physicians and other provider specialists, third-party clinicians or both, and run on any telemedicine endpoint at any location. We leverage our platform across two different configurations that we sell to the market:
| ● | Core Services: We integrate our Telemed IQ platform and acute physician network to provide a turnkey acute care telemedicine solution that addresses the clinical provisioning and financial needs of our customers. The benefits of our core services are to rapidly provide access to scarce physicians and other provider specialists to help our hospital partners increase access to specialist care, improve outcomes for their patients, retain high-value capabilities, reduce costs and enable customers to care for more clinically complex cases. Following the Acquisition, we also offer a hybrid model, which provides physicians on-site using our Telemed IQ platform. |
| ● | Telemed IQ Platform: We provide our Telemed IQ platform on a standalone basis as a solution to health systems and other provider groups that want to virtualize their own clinician resources using a technology platform that was purpose-built to support the complex and unique needs of an acute patient care setting. Our platform has been utilized across more than 20 specialties. |
Our Offerings
Core Services. We integrate our Telemed IQ platform and acute physician network to provide a turnkey acute care telemedicine solution that addresses the clinical provisioning and financial needs of our customers. The benefits of our core services are to rapidly provide access to scarce physicians and other provider specialists to help our hospital partners increase access to specialist care, improve outcomes for their patients, retain high-value capabilities, reduce costs and enable customers to care for more clinically complex cases.
Telemed IQ Platform. We provide our Telemed IQ platform on a standalone basis as a solution to health systems and other provider groups that want to virtualize their own clinician resources using a technology platform that was purpose-built to support the complex and unique needs of an acute patient care setting. Our platform has been utilized across more than 20 specialties.
RCM Capabilities. We provide RCM capabilities to customers where physician services are eligible for reimbursement. In these cases, we bill patients and third-party payers for physician services rendered.
Technology
Our Telemed IQ platform was purpose-built to run our acute care services business. We developed a scaled, configurable platform with sophisticated functionality to meet our clinical, financial and operational needs. Our customers benefit from our experience, data analysis, continuous enhancements and best practices. Our Telemed IQ platform helps our customers achieve their clinical, financial and operational goals by facilitating the efficient deployment of clinical resources to where it is needed most. Our platform can be extended to other specialties and service lines, based on the customer’s needs, and has been utilized across more than 20 specialties. Customers can deploy the platform with their own network of clinicians, our network of board-certified physicians and other provider specialists, third-party clinicians, or any combination thereof.
Our low-code development platform provides us with a significant competitive advantage. We can conceptualize, configure, and deploy new workflows and clinical service lines rapidly, adding value to our customers and facilitating growth. Our browser-based platform permits clinicians to conduct telemedicine evaluations using a laptop, tablet or phone application on iOS and Android platforms. We offer two-way integration with EMR systems and have received formal certification from both Epic and Cerner.
To optimize the assignment of clinicians to the telemedicine consult, our platform uses multiple automated decision support engines that sort incoming consults according to customer-guided custom priority rules. The decision support engines determine the most appropriate clinician who can and should take the consult based on each customer’s predetermined rules. Our platform also manages the structured communication between the clinician initiating the consult and the clinician accepting the consult assigned action.
Our Telemed IQ platform captures a significant volume of clinical and operational data that is utilized on a de-identified basis to provide our customers with actionable data analytics and benchmarking. We believe our data analytic tools and transparency fosters trust among our customers and helps optimize their workflow while improving quality of care, throughput, response time, and productivity.
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Scalability and Security
We host our applications and serve our customers from several cloud-based data centers, including those operated by Amazon Web Services, which are designed to support high levels of availability and have redundant subsystems and compartmentalized security zones. Our data center facilities employ advanced measures to ensure physical integrity, including redundant power and cooling systems and advanced fire and flood prevention. We have implemented telehealth industry-standard processes, policies and tools across our software development and network administration, including regularly scheduled vulnerability scanning and third-party penetration testing in order to reduce the risk of vulnerabilities in our system. We also have achieved HITRUST CSF security certification, a recommended framework trusted by many health systems and hospitals to manage risk, and realized over 99.99% uptime of our platform during the twelve months ended December 31, 2021. Our systems transmit encrypted backup files and logs over secure connections to multiple storage devices. We monitor our systems for any signs of trouble and take precautions as necessary.
Operations
Our implementation, training, clinical provisioning, credentialing, customer service and technical teams work collaboratively to onboard new customers and efficiently execute acute care telemedicine consultation requests.
Implementation and Training
In the ordinary course, a typical installation of our solution requires approximately 90 to 120 days, depending on customer processes and resources. However, we can rapidly deploy our solution in as little as 72 hours as we demonstrated during the COVID-19 pandemic. We provide training for our customers to ensure a seamless transition to our telemedicine services. Prior to any implementation, we analyze our customers’ workflow and develop an implementation plan that meets their objectives and incorporates industry best practices.
Clinical Provisioning
Our clinical provisioning team matches clinical supply to demand by focusing on both our customer’s long-term and short-term clinical coverage needs. We analyze historical data and use our proprietary and predictive analytics and tools to evaluate each clinical service line to project consult demand in order to assess the number of specialists needed for each hour of the day and each day of the week. We continuously monitor and analyze utilization data from across the country to identify patterns, surges and spikes and adjust coverage as necessary. We also use a variety of data sources and analytics to drive our long-term staffing strategy and scale our practice in advance of demand.
Credentialing, Licensing, and Privileging
Acute care telemedicine is different from consumer telehealth offerings because physicians must be both licensed in the state where the patient is located and be privileged at the healthcare facility where the patient is being treated. These requirements create a highly complex compliance environment, because there is significant variability in the licensing and credentialing requirements and procedures mandated by individual state licensing boards and related lead times. At the facility level, the administrative burden associated with credentialing and privileging is a resource-intensive process. We ensure that our network of board-certified physicians and other provider specialists acquire and maintain the qualifications required for their specialty and receive the licenses and privileges necessary to practice across multiple states and facilities in a timely manner. We have established rigorous processes and policies that allow us to meet the expectations of our customers and comply with applicable federal, state and accreditation standards. Every physician who applies for privileges is reviewed by a group of peers in accordance with applicable regulatory and accreditation requirements. As of December 31, 2021, we manage approximately 3,600 licenses and 15,600 privileges on behalf of our network physicians.
Consult Coordination Center
The critical nature of our work often requires physicians to make life-saving decisions shortly after interacting with a health facility or patient. Every inbound request and consultation is monitored by a team of consult coordination experts. These experts are responsible for monitoring and managing the efficient execution of our services from the initial consult request through preparation, physician assignment, and post-evaluation documentation on a 24-hour, 7-days-a-week, and 365-days-a-year basis. Our technology solution empowers the team managing this capability with tools to manage consult flow, prioritize by consult severity and ensure that the technology, physician, bedside provider and patient are ready for clinical interaction. All of our communications take place in real-time, providing physicians and other provider specialists with immediate updates around patient status. Appropriate metrics are captured for each telemedicine consult for quality assurance purposes and evaluation in quality care and customer satisfaction.
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Quality
We are focused on providing the highest level of clinical and operational quality. We have developed a comprehensive quality management program that supports evidence-based practices, tracks customer satisfaction levels and encourages continuous improvement of telemedicine services. Our clinical leaders regularly review industry accepted standards and, when appropriate, make changes to our protocols. As new practice standards are introduced, our network of board-certified physicians and other provider specialists review these standards and adapt them for national telemedicine practice. Our network physicians and other specialists are continuously trained and evaluated to appropriately integrate and utilize these updated practice standards.
In 2006, we were the first telemedicine organization to earn The Joint Commission’s Gold Seal of Approval for Ambulatory Health Care Accreditation, a status we have retained since that time. Similar to our hospital customers, we are evaluated for compliance with ambulatory care standards, including coordination of care, physician credentialing, monitoring of clinical quality, operational infrastructure, security and emergency procedures. Since 2018, we have been accredited for telemedicine by URAC (formerly known as the ClearHealth Quality Institute). Our processes undergo regular review by The Joint Commission and URAC as part of their ongoing accreditation processes.
Sales and Marketing
We have a team of experienced sales executives who are primarily responsible for selling our solutions and services directly to hospitals and health systems. Our team is organized into geographic territories and supported by clinical experts, technical experts, business development and lead-generation managers. In addition, we have developed channel customers who incorporate our platform as part of a model that combines on-site staffing solutions with telemedicine.
Our marketing program supports our growth and lead generation though content development, brand awareness, search engine optimization, field marketing events, integrated campaigns, industry relations and public media.
Research and Development
Our ability to continue to differentiate and enhance our platform depends on our capacity to continue to introduce new services, technologies and functionality. Our product development team is responsible for the design, development, testing and certification of our solution. We are a customer-led organization that has invested heavily in our strategic product management team, low-code development platform, network of industry relationships and innovative infrastructure. We focus our research and development spend on delivering new products and further enhancing the functionality, performance and flexibility of our solution.
Competition
The telemedicine market is rapidly evolving and highly competitive. We expect competition to intensify in the future as existing competitors and new entrants introduce new telemedicine services and software platforms or other technology to U.S. healthcare providers, particularly hospitals and healthcare systems. We currently face competition from a range of companies, including other incumbent providers of acute care telemedicine consultation services and specialized software providers that are continuing to grow and enhance their service offerings and develop more sophisticated and effective transaction and service platforms. In addition, large, well-financed healthcare providers have in some cases developed their own telemedicine services and technologies utilizing their own and third-party platforms and may provide these solutions to their patients.
While there are several competitors in our industry, many began from a hardware-centric focus, with the goal of extending and integrating their devices into hospitals. We approached the development of our Telemed IQ platform differently by focusing on optimizing a large network of board-certified physicians and other provider specialists across numerous complex workflows. As a result, configurability, modularity and optimization became imperative and we subsequently made these capabilities available on a low-code development platform to address the configurability needs of our customers.
We believe we compete favorably based on the following key competitive factors for our industry:
| ● | access to a broad network of established, board-certified physicians and other provider specialists; |
| ● | purpose-built acute care platform with highly configurable workflows and easy integration; |
| ● | demonstrated scalability; |
| ● | clinical and service quality; |
| ● | customer satisfaction; |
| ● | value; |
| ● | reporting, analytics and benchmarking; |
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| ● | experience; and |
| ● | flexibility. |
Tele-Physicians Practices
We support and coordinate the services of our affiliated clinician network through administrative support services agreements, management services agreements or similar arrangements (collectively, “Administrative Agreements”) with nine independent professional entities: Tele-Physicians, P.C. (d/b/a California Tele-Physicians), Tele-Physicians, P.C. (d/b/a Georgia Tele-Physicians), Tele-Physicians, P.C. (d/b/a New Jersey Tele-Physicians), Tele-Physicians, P.A. (d/b/a Texas Tele-Physicians), JSA Health California PC, JSA Health Texas PLLC, Access Physicians, PLLC, AP US 9, P.C. and AP US 14, P.A. (collectively, the “Tele-Physicians Practices”). The Tele-Physician Practices are 100% physician-owned and employ or contract with physicians for the clinical and professional services provided to customers of ours and the Tele-Physicians Practices. Under the Administrative Agreements, we have agreed to serve as the sole and exclusive administrator of all non-clinical, day-to-day operations and business functions required for the administrative operation of each Tele-Physicians Practice, including business support services, contracting support, accounting, billing and payables support and technology support, so that each Tele-Physicians Practice may provide to its customers professional medical diagnosis, evaluation and therapeutic intervention services in certain specialty areas through telemedicine and other in-person consultations. The Administrative Agreements typically require the Tele-Physicians Practices to maintain the state licensure and other credentialing requirements of its physicians and professional liability insurance covering each of its physicians. We separately carry a medical professional liability insurance policy. Under each of the Administrative Agreements, the applicable Tele-Physicians Practice pays us either (a) a monthly administrative fee of a fixed dollar amount multiplied by the average number of customer facilities then under contract with the Tele-Physicians Practice, plus certain direct costs incurred by us on behalf of the Tele-Physicians Practice, or (b) a monthly management fee consisting of (i) a fixed monthly amount, (ii) certain overhead costs we incur and attribute to the applicable Tele-Physicians Practice and (iii) a set percentage of such incurred overhead costs. Typically, the Administrative Agreements have an initial five-year term and automatic annual extensions thereafter, while the Administrative Agreements assumed with the Access Physicians acquisition have an initial fifteen-year term. Unless earlier terminated upon mutual agreement of the parties or unilaterally by a party following the commencement of bankruptcy or liquidation proceedings by the non-terminating party, a material breach of the applicable Administrative Agreement by the non-terminating party or otherwise pursuant to the terms thereof, each of the Administrative Agreements automatically renews for a one-year term. The Tele-Physicians Practices are considered variable interest entities and their financial results are included in our consolidated financial statements. See Note 5, Variable Interest Entities, of our consolidated financial statements included elsewhere in this report.
Intellectual Property
We believe that our intellectual property rights are valuable and important to our business. We primarily rely on a combination of trademarks, copyrights, trade secrets, intellectual property assignment agreements, confidentiality procedures, nondisclosure agreements and employee nondisclosure and invention assignment agreements, and other similar measures to establish and protect our intellectual property and internally developed technology, including our Telemed IQ software platform. Our trademarks include SOC Telemed, marks for our acquired businesses, and various marketing slogans. Although we do not currently hold a patent for Telemed IQ, we continually assess the most appropriate methods of protecting our intellectual property and may decide to pursue available protections in the future. However, these intellectual property rights and procedures may not prevent others from competing with us. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our solution or to obtain and use information that we regard as proprietary, and may also attempt to develop similar technology independently. We may be unable to obtain, maintain and enforce the intellectual property rights on which our business depends, and assertions by third parties that we violate their intellectual property rights could harm our business.
Regulatory Environment
Our operations are subject to comprehensive United States federal, state and local regulation in the jurisdictions in which we do business. The laws and rules governing our business and interpretations of those laws and rules continue to expand and become more restrictive each year and are subject to frequent change, especially health regulatory requirements. Our ability to operate profitably will depend in part upon our ability, and that of our affiliated provider network, to operate in compliance with applicable laws and rules. Those laws and rules continue to evolve, and we therefore devote significant resources to monitoring developments in healthcare regulation. As the applicable laws and rules change, we are likely to make conforming modifications in our business processes from time to time. No assurance can be made that a review of our business by courts or regulatory authorities will not result in determinations that could adversely affect our operations or that the healthcare regulatory environment will not change in a way that restricts our operations.
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Provider Licensing, Medical Practice, Telemedicine Standards and Related Laws and Guidelines
The practice of medicine is subject to various federal, state and local laws, regulations and approvals, relating to, among other things, health provider licensure, adequacy and continuity of medical care, medical practice standards (including specific requirements when providing healthcare utilizing telemedicine technologies and consulting services among providers), medical records maintenance, personnel supervision, and prerequisites for the prescription of medication. The application of some of these laws to telemedicine is unclear and subject to differing interpretation. Further, laws and regulations specific to delivering medical services utilizing telemedicine technologies continues to evolve, with some states incorporating modality and consent requirements for certain telemedicine encounters.
U.S. Corporate Practice of Medicine; Fee-Splitting
We contract with physician-owned professional associations and professional corporations to make available coordinated telemedicine services on our platform. In connection with these arrangements, we administer all non-clinical aspects of the telemedicine services to support the independent professional associations, professional corporations, and their health providers, including billing, scheduling and a wide range of other administrative and support services, and they pay us a pre-determined amount for those services. These contractual relationships are subject to various state laws that prohibit fee-splitting (sharing of professional services income with non-professionals) or the practice of medicine by lay entities or unlicensed persons.
The corporate practice of medicine and fee-splitting laws vary from state to state and are not always consistent among states. In addition, these requirements are subject to broad powers of interpretation, enforcement discretion by state regulators, and, in some cases, dated, yet still valid case law. Some of these requirements may apply to us or our affiliated provider network even if we do not have a physical presence in the state, based solely on the engagement of a provider licensed in the state or the provision of telemedicine to a resident of the state. However, regulatory authorities or other parties, including providers in our affiliated provider network, may assert that, despite these arrangements, we are engaged in the corporate practice of medicine or that our contractual arrangements with affiliated physician groups constitute unlawful fee-splitting. In this event, failure to comply could lead to adverse judicial or administrative action against us and/or our providers, civil or criminal penalties, receipt of cease-and-desist orders from state regulators, loss of provider licenses, or the need to make changes to the arrangements with our affiliated provider network; each of which could interfere with our business or prompt other adverse consequences.
U.S. Federal and State Fraud and Abuse Laws
Federal Stark Law
Our affiliated provider network may be subject to the federal self-referral prohibitions, commonly known as the Stark Law. Where applicable, this law prohibits a physician from referring beneficiaries of certain government programs to an entity providing “designated health services” if the physician or a member of such physician’s immediate family has a “financial relationship” with the entity, unless an exception applies. The penalties for violating the Stark Law include the denial of payment for services ordered in violation of the statute, mandatory refunds of any sums paid for such services, civil penalties for each violation, and possible exclusion from future participation in the federally funded healthcare programs. A person who engages in a scheme to circumvent the Stark Law’s prohibitions may be fined for each applicable arrangement or scheme. The Stark Law is a strict liability statute, which means proof of specific intent to violate the law is not required. In addition, the government and some courts have taken the position that claims presented in violation of the various statutes, including the Stark Law can be considered a violation of the federal False Claims Act (described below) based on the contention that a provider impliedly certifies compliance with all applicable laws, regulations and other rules when submitting claims for reimbursement. A determination of liability under the Stark Law could harm our business.
Federal Anti-Kickback Statute
We are also subject to the federal Anti-Kickback Statute. The Anti-Kickback Statute is broadly worded and prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, (i) the referral of a person covered by Medicare, Medicaid or other governmental programs, (ii) the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental programs or (iii) the purchasing, leasing or ordering or arranging or recommending purchasing, leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other governmental programs. Certain federal courts have held that the Anti-Kickback Statute can be violated if “one purpose” of a payment is to induce referrals. In addition, a person or entity does not need to have actual knowledge of this statute or specific intent to violate it to have committed a violation, making it easier for the government to prove that a defendant had the requisite state of mind or “scienter” required for a violation. Moreover, the government may assert that a claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act, as discussed below. Violations of the Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental programs as well as civil and criminal penalties, including fines per violation and damages of up to three times the amount of the unlawful remuneration, and imprisonment of up to ten years. Imposition of any of these remedies could harm our business. In addition to a few statutory exceptions, the U.S. Department of Health and Human Services Office of Inspector General, or OIG, has published safe harbor regulations that outline categories of activities deemed protected from prosecution under the Anti-Kickback Statute provided all applicable criteria are met. The failure of a financial relationship to meet all of the applicable safe harbor criteria does not necessarily mean that the particular arrangement violates the Anti-Kickback Statute. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG.
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False Claims Act
Both federal and state government agencies have continued civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies and their executives and managers. Although there are a number of civil and criminal statutes that can be applied to healthcare providers, a significant number of these investigations involve the federal False Claims Act. These investigations can be initiated not only by the government but also by a private party asserting direct knowledge of fraud. These “qui tam” whistleblower lawsuits may be initiated against any person or entity alleging such person or entity has knowingly or recklessly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or has made a false statement or used a false record to get a claim approved. In addition, the improper retention of an overpayment for 60 days or more is also a basis for a False Claim Act action. Penalties for False Claims Act violations include fines for each false claim, plus up to three times the amount of damages sustained by the federal government. A False Claims Act violation may provide the basis for exclusion from the federally funded healthcare programs. In addition, some states have adopted similar fraud, whistleblower and false claims provisions.
State Fraud and Abuse Laws
Most states in which we operate have also adopted similar fraud and abuse laws as described above. The scope of these laws and the interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Some state fraud and abuse laws apply to items or services reimbursed by any payor, including patients and commercial insurers, not just those reimbursed by a federally funded healthcare program. A determination of liability under such state fraud and abuse laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Other Healthcare Laws
The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which we collectively refer to as HIPAA, established several separate criminal penalties for making false or fraudulent claims to insurance companies and other non-governmental payors of healthcare services. Under HIPAA, these two additional federal crimes are: “Healthcare Fraud” and “False Statements Relating to Healthcare Matters.” The Healthcare Fraud statute prohibits knowingly and recklessly executing a scheme or artifice to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The False Statements Relating to Healthcare Matters statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact by any trick, scheme or device or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment. These criminal statutes punish certain conduct resulting in the submission of claims to private payors that may also implicate the federal False Claims Act if resulting in claims to governmental health programs.
In addition, the Civil Monetary Penalties Law imposes civil administrative sanctions for, among other violations, inappropriate billing of services to federally funded healthcare programs and employing or contracting with individuals or entities who are excluded from participation in federally funded healthcare programs. Moreover, a person who offers or transfers to a Medicare or Medicaid beneficiary any remuneration, including waivers of co-payments and deductible amounts, that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services may be liable for civil monetary penalties for each wrongful act. Moreover, in certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid beneficiaries without appropriate justification can also be held liable under the federal Anti-Kickback Statute and False Claims Act, which can impose additional penalties. One of the statutory exceptions to the prohibition is non-routine, unadvertised waivers of copayments or deductible amounts based on individualized determinations of financial need or exhaustion of reasonable collection efforts. The OIG emphasizes, however, that this exception should only be used occasionally to address special financial needs of a particular patient. Although this prohibition applies only to federal healthcare program beneficiaries, the routine waivers of copayments and deductibles offered to patients covered by commercial payers may implicate applicable state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud.
U.S. Federal and State Health Information Privacy and Security Laws
There are numerous U.S. federal and state laws and regulations related to the privacy and security of personally identifiable information, or PII, including health information. In particular, HIPAA establishes privacy and security standards that limit the use and disclosure of protected health information, or PHI, and require the implementation of administrative, physical, and technical safeguards to ensure the confidentiality, integrity and availability of individually identifiable health information in electronic form. Our affiliated network providers and our hospital, health system and other provider customers are all regulated as covered entities under HIPAA. Since the effective date of the HIPAA Omnibus Final Rule on September 23, 2013, HIPAA’s requirements are also directly applicable to the independent contractors, agents and other “business associates” of covered entities that create, receive, maintain or transmit PHI in connection with providing services to covered entities. SOC Telemed is a business associate under HIPAA when we are working on behalf of our affiliated medical groups and hospital, health system, and other provider customers.
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Violations of HIPAA may result in civil and criminal penalties. We must also comply with HIPAA’s breach notification rule. Under the breach notification rule, covered entities must notify affected individuals without unreasonable delay in the case of a breach of unsecured PHI, which may compromise the privacy, security or integrity of the PHI. In addition, notification must be provided to the HHS and the local media in cases where a breach affects more than 500 individuals. Breaches affecting fewer than 500 individuals must be reported to HHS on an annual basis. The regulations also require business associates of covered entities to notify the covered entity of breaches by the business associate.
State attorneys general also have the right to prosecute HIPAA violations committed against residents of their states. While HIPAA does not create a private right of action that would allow individuals to sue in civil court for a HIPAA violation, its standards have been used as the basis for the duty of care in state civil suits, such as those for negligence or recklessness in misusing personal information. In addition, HIPAA mandates that HHS conduct periodic compliance audits of HIPAA covered entities and their business associates for compliance. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the Civil Monetary Penalty fine paid by the violator. In light of the HIPAA Omnibus Final Rule, recent enforcement activity, and statements from HHS, we expect increased federal and state HIPAA privacy and security enforcement efforts.
HIPAA also required HHS to adopt national standards establishing electronic transaction standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically.
Many states in which we operate and in which patients of our customers reside also have laws that protect the privacy and security of sensitive and personal information, including health information. These laws may be similar to or even more protective than HIPAA and other federal privacy laws. For example, the laws of the State of California, in which we operate, are more restrictive than HIPAA. Where state laws are more protective than HIPAA, we must comply with the state laws we are subject to, in addition to HIPAA. In certain cases, it may be necessary to modify our planned operations and procedures to comply with these more stringent state laws. Not only may some of these state laws impose fines and penalties upon violators, but also some, unlike HIPAA, may afford private rights of action to individuals who believe their personal information has been misused. In addition, state laws are changing rapidly, and there is discussion of a new federal privacy law or federal breach notification law, to which we may be subject.
In addition to HIPAA, state health information privacy and state health information privacy laws, we may be subject to other state and federal privacy laws, including laws that prohibit unfair privacy and security practices and deceptive statements about privacy and security and laws that place specific requirements on certain types of activities, such as data security and texting.
In recent years, there have been a number of well-publicized data breaches involving the improper use and disclosure of PII and PHI. Many states have responded to these incidents by enacting laws requiring holders of personal information to maintain safeguards and to take certain actions in response to a data breach, such as providing prompt notification of the breach to affected individuals and state officials. In addition, under HIPAA and pursuant to the related contracts that we enter into with our business associates, we must report breaches of unsecured PHI to our contractual partners following discovery of the breach. Notification must also be made in certain circumstances to affected individuals, federal authorities and others.
Reimbursement
Medicare
The Medicare program offers beneficiaries different ways to obtain medical benefits: (i) Medicare Part A, which covers, among other things, in-patient hospital, SNFs, home healthcare, and certain other types of healthcare services; (ii) Medicare Part B, which covers physicians’ services, outpatient services, durable medical equipment, and certain other types of items and healthcare services; (iii) Medicare Part C, also known as Medicare Advantage, which is a managed care option for beneficiaries who are entitled to Medicare Part A and enrolled in Medicare Part B; and (iv) Medicare Part D, which provides coverage for prescription drugs that are not otherwise covered under Medicare Part A or Part B for those beneficiaries that enroll.
Our affiliated provider network is reimbursed by the Part B and Part C programs for certain of the telemedicine services it provides to Medicare beneficiaries. Medicare coverage for telemedicine services is treated distinctly from other types of professional medical services and is limited by federal statute and subject to specific conditions of participation and payment pursuant to Medicare regulations, policies and guidelines, including the location of the patient, the type of service, and the modality for delivering the telemedicine service, among others.
Medicaid
Medicaid programs are funded jointly by the federal government and the states and are administered by states (or the state’s designated managed care or other similar organizations) under approved plans. Our affiliated provider network is reimbursed by certain state Medicaid programs for certain of the telemedicine services it provides to Medicaid beneficiaries. Medicaid coverage for telemedicine services varies by state and is subject to specific conditions of participation and payment.
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Participation in Medicare/Medicaid Programs
Participation in the Medicare, including Medicare Advantage, and Medicaid programs is heavily regulated by federal and state (in the case of Medicaid) statute, regulation, policy, and guidance protocols. If a provider fails to comply substantially with the requirements for participating in the programs, the provider’s participation may be terminated and/or civil or criminal penalties may be imposed. Our affiliated network providers are enrolled with Medicare and certain Medicaid programs, and they also participate in arrangements administered by commercial payers under the Medicare Advantage program. In the ordinary course of business, we may from time to time be subject to inquiries, investigations and audits by federal and state agencies that oversee applicable government program participation. In addition to auditing compliance with program requirements, these audits can trigger, particularly when issues are identified, investigations, repayments, and requirements under certain of the U.S. Federal and State Fraud and Abuse Laws described above.
COVID-19 Waivers and Limited Statutory Changes
As a result of the COVID-19 pandemic, federal and state governments have enacted legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers seeking to utilize telemedicine methods in providing care to patients during the public health emergency. These measures include temporary relief from certain Medicare conditions of participation requirements for healthcare providers, temporary relaxation of licensure requirements for healthcare professionals by some states, temporary relaxation of privacy restrictions for telemedicine remote communications, and temporarily expanding the scope of services for which Medicare and Medicaid reimbursement is available during the emergency period. These changes have temporarily increased reimbursement available to our affiliated provider network for telemedicine services provided.
Human Capital
As of December 31, 2021, we had 415 employees. Of these employees, all are located in the United States and approximately 61% are female and approximately 39% are male, with an average tenure across all employees of approximately 2.61 years. None of our employees are represented by a labor union. We leverage a network of established, board-certified physicians and other provider specialists through our relationships with affiliated professional entities.
Our human capital management objective is to attract, retain and develop talent to deliver on our corporate strategy. We manage our human capital through the following programs:
Employee Health and Safety and COVID-19—During the COVID-19 pandemic, our primary focus has been on the safety and well-being of our employees and their families. In response to the pandemic, we mandated that our employees work from home, with limited exceptions of essential employees onsite. As the pandemic continues, the health and well-being of our workforce remains our top priority while we ensure productivity while working from home.
Compensation and Benefits—Our compensation and benefits program is designed to attract, retain and motivate employees. We offer competitive base salaries and a variety of short-term, long-term and commission-based incentive compensation programs to reward performance relative to key strategic and financial metrics. We also offer comprehensive benefit options, including retirement savings plans, medical insurance, prescription drug benefits, dental insurance, vision insurance, accident and critical illness insurance, life and disability insurance, health savings accounts, flexible spending accounts and legal insurance.
Engagement—We believe in continual improvement and use employee feedback to drive and improve processes and programs that support our customers and ensure a deep understanding of our employees’ experience. We conduct a confidential employee survey each year.
Diversity, Equity & Inclusion (“DEI”)—We believe a diverse workforce and equitable and inclusive working environment are key factors in achieving better outcomes across all levels of our business. We value diverse perspectives and are proud of our diverse representation throughout the organization. To further this, we launched a DEI Council in 2021 to generate ideas on how we can continue to create an inclusive, equitable and diverse environment and measure progress. We support employee-led efforts, and the DEI Council will be comprised of employees from across the Company. We believe it is equally important that leadership is engaged, and the DEI Council is sponsored by our Chief Executive Officer and Senior Vice President of Human Resources, who have expressed commitment and support of increasing our DEI initiatives.
Also see the section entitled “Risk Factors—Risks Related to Our Business and Industry—We depend on our senior management team, and the loss of one or more of these employees or an inability to attract and retain qualified key personnel could harm our business” under Part I, Item 1A of this report.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the internet at the SEC’s website at www.sec.gov. Our SEC filings are also available free of charge on the Investor Relations portion of our website at soctelemed.com as soon as reasonably practicable after they are filed with or furnished to the SEC. Our website and the information contained on or through that site are not incorporated into this report. All website addresses in this report are intended to be inactive textual references only.
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Item 1A. Risk Factors.
Our business and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, together with all of the other information in this report, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. Our business, results of operations, financial condition, and prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of these risks actually occur, our business, results of operations, financial condition, and prospects could be materially and adversely affected. Unless otherwise indicated, references in these risk factors to our business being harmed will include harm to our business, reputation, brand, financial condition, results of operations, and prospects. In such event, the market price of our securities could decline.
Risks Related to Our Business and Industry
The Transaction, the pendency of the Transaction or our failure to complete the Transaction could harm our business, results of operations, financial condition and stock price.
On February 2, 2022, we entered into the Transaction Agreement with Spark Parent and Spark Merger Sub, providing for our acquisition by affiliates of investment funds advised by Patient Square Capital, a dedicated health care investment firm. Completion of the Transaction is subject to the satisfaction or waiver of customary closing conditions, including (1) the adoption and approval of the Transaction Agreement by the Company’s stockholders; (2) the expiration or termination of the applicable waiting period under the HSR Act; (3) the absence of any order, injunction or law prohibiting the Transaction; (4) the accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Transaction Agreement; (5) compliance in all material respects with the other party’s obligations under the Transaction Agreement; and (6) each party having received from the other party a certificate confirming that the relevant conditions have been satisfied with respect to that party. There is no assurance that all of the various conditions will be satisfied, or that the Transaction will be completed on the proposed terms, within the expected timeframe, or at all. Furthermore, there are additional inherent risks in the Transaction, including the risks detailed below.
During the period prior to the closing of the Transaction, our business is exposed to certain inherent risks due to the effect of the announcement or pendency of the Transaction on our business relationships, financial condition, operating results and business, including:
| ● | potential uncertainty in the marketplace, which could lead customers, distributors, vendors and other third parties who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us; |
| ● | the possibility of disruption to our business and operations, including diversion of management attention and resources; |
| ● | the inability to attract and retain key personnel, and the possibility that our current employees could be distracted, and their productivity decline as a result, due to uncertainty regarding the Transaction; |
| ● | the inability to pursue alternative business opportunities or make changes to our business pending the completion of the Transaction, and other restrictions on our ability to conduct our business; |
| ● | our inability to solicit other acquisition proposals during the pendency of the Transaction following the expiration of the “go-shop” period; |
| ● | the amount of the costs, fees, expenses and charges related to the Transaction Agreement and the Transaction; and |
| ● | other developments beyond our control, including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Transaction. |
The Transaction may be delayed, and may ultimately not be completed, due to a number of factors, including:
| ● | the outcome of legal proceedings that have been and may be instituted against us, our directors, executive officers and others relating to the Transaction and other legal and regulatory proceedings, which could delay or prevent the Transaction; and |
| ● | the failure to satisfy the other conditions to the completion of the Transaction. |
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Litigation is very common in connection with the sale of public companies, regardless of whether the claims have any merit. One of the conditions to consummating the Transaction is the absence of any order or injunction prohibiting the Transaction. Consequently, if any lawsuit challenging the Transaction is successful in obtaining an order preventing the consummation of the Transaction, that order may delay or prevent the Transaction from being completed. While we will evaluate and defend against any lawsuits, the time and costs of defending against litigation relating to the Transaction may harm our business.
Further, we have incurred significant legal, advisory and financial services fees in connection with the Transaction. We have incurred, and expect to continue to incur, additional costs in connection with the satisfaction of the various conditions to closing of the Transaction, including seeking approval from our stockholders. If there is any delay in the consummation of the Transaction, these costs could increase significantly.
If the Transaction does not close, our business and stockholders would be exposed to additional risks, including:
| ● | to the extent that the current market price of our Class A common stock reflects an assumption that the Transaction will be completed, the price of our Class A common stock and/or warrants could decrease if the Transaction is not completed; |
| ● | investor confidence could decline, additional stockholder litigation could be brought against us, relationships with existing and prospective customers, service providers, investors, lenders and other business partners may be adversely impacted, we may be unable to retain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the pending Transaction; and |
| ● | the requirement that we pay a termination fee of $11.5 million if the Transaction Agreement is terminated in certain circumstances, including by the Company to enter into a superior proposal or by Spark Parent because the Board withdraws its recommendation in favor of the Transaction. |
If the Transaction Agreement is terminated, the termination fee we may be required to pay, if any, under the Transaction Agreement may require us to use available cash that would have otherwise been available for general corporate purposes or other uses. For these and other reasons, termination of the Transaction Agreement could harm our business, results of operations or financial condition, which in turn could cause the price of our Class A common stock and/or warrants to decrease.
Even if successfully completed, there are certain risks to our stockholders from the Transaction, including:
| ● | the amount of Transaction Consideration to be paid under the Transaction Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or operating results or in the event of any change in the market price of, analyst estimates of, or projections relating to, our Class A common stock; |
| ● | the fact that receipt of the all-cash per share Transaction Consideration under the Transaction Agreement is taxable to stockholders that are treated as U.S. holders for U.S. federal income tax purposes; and |
| ● | the fact that, if the Transaction is completed, our stockholders will forego the opportunity to realize the potential long-term value of the successful execution of our current strategy as an independent company. |
We operate in a competitive industry, and if we are not able to compete effectively, our business, financial condition, and results of operations will be harmed.
The telemedicine market is rapidly evolving and highly competitive. We expect competition to intensify in the future as existing competitors and new entrants introduce new telemedicine services and software platforms or other technology to U.S. healthcare providers, particularly hospitals and healthcare systems. We currently face competition from a range of companies, including other incumbent providers of telemedicine consultation services and specialized software providers, that are continuing to grow and enhance their service offerings and develop more sophisticated and effective transaction and service platforms. In addition, large, well-financed healthcare providers have in some cases developed their own telemedicine services and technologies utilizing their own and third-party platforms and may provide these solutions to their patients. Electronic medical record vendors could build telemedicine functionality directly into their existing systems for healthcare providers instead of utilizing our solution. The surge in interest in telemedicine, and in particular the relaxation of HIPAA privacy and security requirements, has also attracted new competition from providers who utilize consumer-grade video conferencing platforms. Competition from specialized telemedicine services and software providers, healthcare providers and other parties will result in continued pricing pressures, which is likely to lead to price declines in certain of our services, which could negatively impact our sales, profitability and market share.
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Some of our competitors may have greater name recognition, longer operating histories and significantly greater resources than we do. Further, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In addition, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their solutions in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of the telemedicine market, which could create additional price pressure. In light of these factors, even if our solutions are more effective than those of our competitors, current or potential customers may accept competitive solutions in lieu of purchasing our solutions. If we are unable to compete successfully in the telemedicine industry, our business, financial condition and results of operations will be harmed.
Moreover, we expect that competition will continue to increase as a result of consolidation in the healthcare industry. Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As provider networks and managed care organizations consolidate, thus decreasing the number of market participants, competition to provide services like ours will become more intense, and the importance of establishing and maintaining relationships with key industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our telemedicine consultation and platform services. If we are forced to reduce our prices and are unable to achieve a corresponding reduction in our expenses, our revenues would decrease, which could harm our business.
The level of demand for and market utilization of our solutions are subject to a high degree of uncertainty.
The market for telemedicine services and related technology is in the early stages of development and characterized by rapid change. As telemedicine specialty consultation workflows and related business drivers continue to evolve, the level of demand for and market utilization of our telemedicine services and platform remain subject to a high degree of uncertainty. Our success will depend to a substantial extent on the willingness of healthcare organizations to use, and to increase the frequency and extent of their utilization of, our solutions and our ability to demonstrate the value of telemedicine to healthcare providers. If healthcare organizations do not recognize or acknowledge the benefits of our telemedicine services or software platform or if we are unable to reduce healthcare costs or generate positive health outcomes, then the market for our solutions might not develop at all, or it might develop more slowly than we expect. Similarly, negative publicity regarding patient confidentiality and privacy in the context of technology-enabled healthcare or concerns about our solutions or the telemedicine market as a whole could limit market acceptance of our solutions. If our customers do not perceive the benefits of our solutions, then our market may not develop at all, or it may develop more slowly than we expect. Achieving and maintaining market acceptance of our solutions could be negatively affected by many factors, including:
| ● | the popularity, pricing and timing of telemedicine consultation services being launched and distributed by us and our competitors; |
| ● | general economic conditions, particularly economic conditions adversely affecting discretionary and reimbursable healthcare spending; |
| ● | federal and state policy initiatives impacting the need for and pricing of telemedicine services; |
| ● | changes in customer needs and preferences; |
| ● | the development of specialty care practice standards or industry norms applicable to telemedicine consultation services; |
| ● | the availability of other forms of medical and telemedicine assistance; |
| ● | the lack of additional evidence or peer-reviewed publication of clinical evidence supporting the safety, ease-of-use, cost-savings or other perceived benefits of our solutions over competitive products or other currently available methodologies; |
| ● | perceived risks associated with the use of our solutions or similar products or technologies generally; and |
| ● | critical reviews and public tastes and preferences, all of which change rapidly and cannot be predicted. |
In addition, our solutions may be perceived by our customers or potential customers to be more complicated or less effective than traditional approaches, and our customers and potential customers may be unwilling to change their current healthcare practices. Healthcare providers are often slow to change their medical treatment practices for a variety of reasons, including perceived liability risks arising from the use of new products and services and the uncertainty of third-party reimbursement. Accordingly, healthcare providers may not recommend our solutions until there is sufficient evidence to convince them to alter their current approach. Any of these factors could adversely affect the demand for and market utilization of our solutions, which would harm our business.
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We have a history of losses and anticipate that we will continue to incur losses in the future. We may never achieve or sustain profitability.
We have incurred net losses on an annual basis since our inception. We incurred net losses of $50.5 million and $49.8 million for the years ended December 31, 2021 and 2020, respectively. We had an accumulated deficit of approximately $286.8 million as of December 31, 2021. We expect our costs to stabilize in the foreseeable future and our losses will decrease as we implement our restructuring plan. However, these efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues or decreasing our costs sufficiently. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. To date, we have financed our operations principally from the sale of our equity securities, revenue from sales of our telemedicine consultation services, and the incurrence of indebtedness. Our cash flow from operations was negative for the years ended December 31, 2021 and 2020, and we may not generate positive cash flow from operations in any given period. If we are not able to achieve or maintain positive cash flow in the long term, we will require additional financing, which may not be available on favorable terms or at all or which would be dilutive to our stockholders. If we are unable to address these risks and challenges successfully as we encounter them, our business may be harmed. Our failure to achieve or maintain profitability or positive cash flow could negatively affect the value of our Class A common stock.
Our restructuring plan and the associated headcount reduction may not result in anticipated savings, could result in total costs and expenses that are greater than expected and could disrupt our business.
On October 28, 2021, the Board approved certain strategic, operational and organizational plans to improve productivity and reduce complexity in the way we manage our business. The restructuring plan includes a reduction in our non-clinical headcount by approximately 12% as well as additional cost-saving initiatives. These actions were substantially completed by the end of 2021. We may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from our restructuring efforts due to unforeseen difficulties, delays or unexpected costs. If we are unable to realize the expected operational efficiencies and cost savings from the restructuring, our business may be harmed. Furthermore, our restructuring plan may be disruptive to our operations. For example, our headcount reductions could yield unanticipated consequences, such as increased difficulties in implementing our business strategy, including retention of our remaining employees.
The developing and rapidly evolving nature of our business and the markets in which we operate may make it difficult to evaluate our business.
We have been creating offerings for the developing and rapidly evolving market for telemedicine services since the founding of our business in 2004. Our initial focus was on our teleNeurology services and we have since expanded our services to include other specialties and offerings. For example, we have started offering our Telemed IQ telemedicine software platform to hospitals and healthcare systems independent of the utilization of our provider network, and our sales team has less experience marketing this service. Accordingly, we have a relatively limited operating history with our current solutions and business model, which makes it difficult to evaluate our business and prospects. In particular, because we depend in part on market acceptance of our newer services, including our Telemed IQ software platform, it is difficult to evaluate trends that may affect our business and whether our expansion will be profitable. You should consider our business and prospects in light of the risks and difficulties we encounter or may encounter. These risks and difficulties include those frequently experienced by growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our existing and future solutions, competition from other companies, acquiring and retaining customers, hiring, integrating, training and retaining skilled personnel, developing new solutions, determining prices for our solutions, unforeseen expenses, and challenges in forecasting accuracy. If we have difficulty launching new solutions, our reputation and our business may be harmed. Additional risks include our ability to effectively manage growth and process, cross-license and privilege physicians, store, protect and use personal data in compliance with governmental regulation, contractual obligations and other legal obligations related to privacy and security. If our assumptions regarding these and other similar risks and uncertainties, which we use to plan our business, are incorrect or change as we gain more experience operating our business or due to changes in our industry, or if we do not address these challenges successfully, our business, financial condition and results of operations could differ materially from our expectations and our business could suffer.
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Our business, results of operations, and financial condition may fluctuate on a quarterly and annual basis, which may result in a decline in our stock price if such fluctuations result in a failure to meet any projections that we may provide or the expectations of securities analysts or investors.
Our operating results have in the past and could in the future vary significantly from quarter-to-quarter and year-to-year and may fail to match our past performance, our projections or the expectations of securities analysts because of a variety of factors, many of which are outside of our control. In addition, a significant percentage of our revenues is based upon variable fee provisions in our customer service contracts for additional utilization of our consultation services. Those variable consultation fees fluctuate based on the degree to which customers are utilizing our services exceed the contracted amounts, which is difficult to predict in advance. As a result, we may not be able to accurately forecast our operating results and growth rate. Any of these events could cause the market price of our Class A common stock to fluctuate. Factors that may contribute to the variability of our operating results include:
| ● | the Transaction, the pendency of the Transaction or our failure to complete the Transaction; |
| ● | the addition or loss of large hospital and healthcare system customers, including through acquisitions or consolidations of such customers; |
| ● | seasonal and other variations in the timing of our sales and implementation cycles, especially in the case of our large customers; |
| ● | the timing of recognition of revenue, including possible delays in the recognition of revenue due to sometimes unpredictable implementation timelines; |
| ● | the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure; |
| ● | our ability to effectively manage the size and composition of our proprietary network of healthcare professionals relative to the level of demand for services from our customers; |
| ● | the timing and success of introductions of new products and services by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, hospital and healthcare system customers or strategic partners; |
| ● | hospital and healthcare system customer renewal rates and the timing and terms of such renewals; |
| ● | the mix of services sold and utilization volume of our services during a period; |
| ● | the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; |
| ● | technical difficulties or interruptions in our services; |
| ● | breaches of information security or privacy; |
| ● | our ability to hire and retain qualified personnel, including cross-licensing and privileging our physician network; |
| ● | changes in the structure of healthcare provider and payment systems; |
| ● | changes in the legislative or regulatory environment, including with respect to healthcare, privacy, or data protection, or enforcement by government regulators, including fines, orders, or consent decrees; |
| ● | the cost and potential outcomes of ongoing or future regulatory investigations or examinations, or of future litigation; |
| ● | the duration and severity of the COVID-19 pandemic and the extent of further resurgences, the actions taken to contain or address its impact, including the availability, adoption and effectiveness of a vaccine, and their impact on economic, industry and market conditions, customer spending budgets and our ability to conduct business; |
| ● | political, economic and social instability, including terrorist activities and health epidemics (including the COVID-19 pandemic), and any disruption these events may cause to the global economy; and |
| ● | changes in business or macroeconomic conditions. |
The impact of one or more of the foregoing and other factors may cause our operating results to vary significantly. As such, we believe that quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.
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Our business, financial condition and results of operations have been and may continue to be adversely impacted by the COVID-19 pandemic or similar epidemics in the future or other adverse public health developments, including government responses to such events.
The outbreak of COVID-19 has caused many governments to implement quarantines, shelter-in-place orders and significant restrictions on travel, and to instruct individuals to avoid crowds, which has led to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours and the healthcare system generally. Although there are vaccines that have been approved and are in distribution, it cannot be predicted how long it will take before a sufficient percentage of the United States’ population is vaccinated to return to normal conditions. Additionally, new and more contagious variants of COVID-19 have been identified, which could further amplify the impact of the pandemic. This outbreak, as well as intensified measures undertaken to contain the spread of COVID-19, could decrease healthcare industry spending and has and may continue to adversely impact demand for and utilization of our services if healthcare providers continue to prioritize treatment of COVID-19-related illnesses and patients are unable or unwilling to visit health care providers. Economic downturns and other adverse impacts resulting from COVID-19 or other similar epidemics or adverse public health developments may further negatively impact the utilization rates of our services by our customers and our ability to attract new customers and may increase the likelihood of customers not renewing their contracts with us or being unable to pay us in accordance with the terms of their agreements. In addition, the operations of several of our third-party service providers have been negatively impacted by the COVID-19 pandemic. As a result of the COVID-19 pandemic or other similar epidemics or adverse public health developments, our operations, and those of our providers, have experienced, and may in the future continue to experience, delays or disruptions, such as temporary suspension of operations. In particular, 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 annual 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. While the utilization levels of these solutions have substantially rebounded in the subsequent months, they have not completely recovered and there can be no assurances that the utilization rates of our solutions will return to prior period levels in the foreseeable future. Our business, financial condition and results of operations may continue to be adversely impacted in the event that the economic downturn or measures undertaken to contain the spread of COVID-19 continue for a long period of time. In addition, as a result of the COVID-19 pandemic or other similar epidemics or adverse public health developments, we may be impacted by employee illness, shutdowns and other community response measures meant to prevent spread of the virus, all of which could negatively impact our business, financial condition and results of operations. Further, if we are regularly unable to meet our obligations to deliver our services, our customers may decide to terminate their contracts or we may be subject to other contractual penalties. We cannot predict with any certainty whether and to what degree the disruption caused by the COVID-19 pandemic and reactions thereto will continue, and expect to face difficulty accurately predicting our internal financial forecasts. The extent to which COVID-19 pandemic-related business disruption and economic uncertainty affects our results will depend on future developments, which are highly uncertain. The COVID-19 pandemic may also have the effect of heightening many of the other risks identified elsewhere in this “Risk Factors” section.
Our sales cycle can be long and unpredictable and requires considerable time and expense. As a result, our sales, revenues, and cash flows are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly.
The sales cycle for our solutions from initial contact with a potential lead to contract execution and implementation varies widely by customer. Some of our customers undertake a significant and prolonged evaluation process, including to determine whether our solutions meet their unique telemedicine service needs, which frequently involves evaluation of not only our solutions but also an evaluation of those of our competitors, which has in the past resulted in extended sales cycles. Our sales efforts involve educating our customers about the use, technical capabilities and potential benefits of our solutions. Moreover, our large hospital and healthcare system customers often begin to deploy our solutions on a limited basis, but nevertheless demand extensive configuration, integration services and pricing concessions, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our solution widely enough across their organization to justify our substantial upfront investment. It is possible that in the future we may experience even longer sales cycles, more complex customer needs, higher upfront sales costs and less predictability in completing some of our sales, including as a result of the COVID-19 pandemic, as we continue to expand our direct sales force, expand into new territories and market additional solutions and services. If our sales cycle lengthens or our substantial upfront sales and implementation investments do not result in sufficient sales to justify our investments, our business could be harmed.
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Developments affecting spending by the healthcare industry could adversely affect our revenues.
The U.S. healthcare industry has changed significantly in recent years, and we expect that significant changes will continue to occur. General reductions in expenditures by healthcare industry participants could result from, among other things:
| ● | government regulations or private initiatives that affect the manner in which healthcare providers interact with patients, payors or other healthcare industry participants, including changes in pricing or means of delivery of healthcare products and services; |
| ● | consolidation of healthcare industry participants; |
| ● | federal amendments to, lack of enforcement or development of applicable regulations for, or repeal of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (as amended, the “ACA”); |
| ● | reductions in government funding for healthcare; and |
| ● | adverse changes in business or economic conditions affecting healthcare payors or providers or other healthcare industry participants. |
Any of these changes in healthcare spending could adversely affect our revenues. Even if general expenditures by industry participants remain the same or increase, developments in the healthcare industry may result in reduced spending in some or all of the specific market segments that we serve now or in the future. However, the timing and impact of developments in the healthcare industry are difficult to predict. We cannot assure you that the demand for our solutions and services will continue to exist at current levels or that we will have adequate technical, financial, and marketing resources to react to changes in the healthcare industry.
Economic uncertainties or prolonged downturns in the general economy, or political changes, could disproportionately affect the demand for our solutions and harm our business.
Current or future economic uncertainties or prolonged downturns, including those caused by the ongoing COVID-19 pandemic, could harm our business. Negative conditions in the general economy in the United States, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political deadlock, natural catastrophes, pandemics, social unrest, warfare and terrorist attacks, could cause a decrease in funds available to our customers and potential customers and negatively affect the growth rate of our business.
These economic conditions may make it difficult for our customers and us to forecast and plan future budgetary decisions or business activities accurately, and they could cause our customers to reevaluate their decisions to purchase our solutions, which could delay and lengthen our sales cycles or result in cancellations of planned purchases. Furthermore, during challenging economic times or as a result of political changes, our customers may tighten their budgets and face constraints in gaining timely access to sufficient funding or other credit, which could result in an impairment of their ability to make timely payments to us. In turn, we may be required to increase our allowance for doubtful accounts, which would adversely affect our financial results.
To the extent our solutions are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general information technology and telemedicine spending. Also, customers may choose to develop in-house software as an alternative to using our Telemed IQ platform. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in the healthcare industry may result in reduced overall spending on our solutions.
We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within the healthcare industry, or the effect of political changes. If the economic conditions of the general economy or the healthcare industry do not improve, or worsen from present levels, our business could be harmed.
If our existing customers do not continue or renew their contracts with us, renew at lower fee levels or decline to purchase additional services from us, our business may be harmed.
We expect to derive a significant portion of our revenues from renewal of existing customer contracts and sales of additional services to existing customers. Factors that may affect our ability to sell additional solutions and services include, but are not limited to, the following:
| ● | the price, performance and functionality of our solutions; |
| ● | the availability, price, performance and functionality of competing solutions; |
| ● | our ability to develop and sell complementary solutions and services; |
| ● | the stability, performance and security of our Telemed IQ software platform; |
| ● | changes in healthcare laws, regulations or trends; and |
| ● | the business environment and strategic priorities of our customers. |
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We typically enter into multi-year contracts with our customers. These contracts generally have stated initial terms between one to three years. Most of our customers have no obligation to renew their subscriptions for our solutions after the initial term expires. In addition, our customers may negotiate terms less advantageous to us upon renewal, which may reduce our revenues from these customers. If our customers fail to renew their contracts, renew their contracts upon less favorable terms or at lower fee levels or fail to purchase new solutions and services from us, our revenues may decline, or our future revenue growth may be constrained.
Our telemedicine business and growth strategy depend on our ability to maintain and expand our network of established, board-certified physicians and other provider specialists. If we are unable to do so, our future growth would be limited and our business would be harmed.
Our success is dependent upon our continued ability to maintain a network of established, board-certified physicians and other provider specialists. Fulfilling our clinical and customer service obligations requires a robust supply of specialist physicians who must be licensed across many states and privileged at a large number of our customer hospitals. If we are unable to recruit and retain board-certified physicians and other healthcare professionals, it would harm our business and ability to grow and would adversely affect our results of operations. In any particular market, these providers could demand higher payments or take other actions that could result in higher costs, less attractive service for our customers or difficulty meeting regulatory or accreditation requirements. Our ability to develop and maintain satisfactory relationships with these providers also may be negatively impacted by other factors not associated with us, such as changes in Medicare and/or Medicaid reimbursement levels and other pressures on healthcare providers and consolidation activity among hospitals, physician groups and healthcare providers. The failure to maintain or to secure new cost-effective provider contracts may result in a loss of or inability to grow our customer base, higher costs, healthcare provider network disruptions, less attractive service for our customers and/or difficulty in meeting regulatory or accreditation requirements, any of which could harm our business.
Our telemedicine business is dependent on our relationships with affiliated professional entities, which we do not own, to provide physician services, and our business would be harmed if those relationships were disrupted.
There is a risk that U.S. state authorities in some jurisdictions may find that our contractual relationships with our physicians providing telehealth services violate laws prohibiting the corporate practice of medicine. These laws generally prohibit the practice of medicine by lay persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing a physician’s professional judgment. The extent to which each state considers particular actions or contractual relationships to constitute improper influence of professional judgment varies across the states and is subject to change and to evolving interpretations by state boards of medicine and state attorneys general, among others. As such, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis and we cannot guarantee that subsequent interpretation of the corporate practice of medicine laws will not circumscribe our business operations. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage physicians from participating in our network of providers.
The corporate practice of medicine prohibition exists in some form, by statute, regulation, board of medicine or attorney general guidance, or case law, in most states, though the broad variation between state application and enforcement of the doctrine makes an exact count difficult. Due to the prevalence of the corporate practice of medicine doctrine, including in the states where we predominantly conduct our business, we contract for provider services through administrative support services agreements with nine 100% physician-owned, independent professional corporations in California, Georgia, Kansas, New Jersey and Texas which employ or contract with physicians for the clinical and professional services provided to our customers. We do not own these physician organizations; instead, the physician organizations are owned by physicians licensed in their respective states. Although we expect that these relationships will continue, we cannot guarantee that they will. A material change in our relationship with any of these physician organizations, or among these physician organizations and their contracted physicians, whether resulting from a dispute among the parties, a change in government regulation or the loss of these affiliations, could impair our ability to provide services to our customers and harm our business. Further, any scrutiny, investigation or litigation with regard to our arrangement with these professional corporations could also harm our business.
We depend on a limited number of third-party suppliers for our telemedicine equipment, and the loss of any of these suppliers, or their inability to provide us with an adequate supply of materials, could harm our business.
We rely on a limited number of third-party suppliers to manufacture and transport our telemedicine carts and equipment. For our business strategy to be successful, our suppliers must be able to provide us with components in sufficient quantities, in compliance with regulatory requirements and quality control standards, in accordance with agreed-upon specifications, at acceptable costs and on a timely basis. Increases in our providing telemedicine equipment to customers, whether forecasted or unanticipated, could strain the ability of our suppliers to deliver an increased supply of components in a manner that meets these various requirements. Further, in the event of a component shortage or supply interruption from suppliers of these components, we may not be able to increase capacity from other sources or develop alternate or secondary sources without incurring material additional costs and substantial delays. Quality or performance failures of the components or changes in the suppliers’ financial or business condition could also disrupt our ability to supply telemedicine equipment to our customers and thereby harm our business.
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Moreover, volatile economic conditions, including as a result of the global COVID-19 pandemic, may make it more likely that our suppliers may be unable to timely deliver supplies, or at all, and there is no guarantee that we will be able to timely locate alternative suppliers of components of comparable quality at an acceptable price. Further, since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding tariffs against foreign imports of certain materials. Several of the components that go into the manufacturing of our telemedicine equipment are sourced internationally, including from China, where the Office of the U.S. Trade Representative has imposed tariffs on imports of specified products. These tariffs have an impact on our component costs and have the potential to have an even greater impact depending on the outcome of the current trade negotiations, which have been protracted and have resulted in increases in U.S. tariff rates on specified products from China. Increases in our component costs could have a material effect on our gross margins. The loss of a significant supplier, an increase in component costs, or delays or disruptions in the delivery of components, could adversely affect our ability to generate future revenue and earnings and harm our business.
Any failure to offer high-quality technical support services may harm our relationships with our customers and our financial results.
Our customers depend on our support organization to resolve any technical issues relating to our services. In addition, our sales process is highly dependent on the quality of our solutions, our business reputation and on strong recommendations from our existing customers. Any failure to maintain high-quality and highly responsive technical support, or a market perception that we do not maintain high-quality and highly responsive support, could harm our reputation, adversely affect our ability to sell our solutions to existing and prospective customers, and harm our business.
We offer technical support services with our solutions and may be unable to respond quickly enough to accommodate short-term increases in demand for support services, particularly as we increase the size of our customer base. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. It is difficult to predict demand for technical support services and if demand increases significantly, we may be unable to provide satisfactory support services to our customers. Additionally, increased demand for these services, without corresponding revenue, could increase costs and adversely affect our results of operations.
Because competition for qualified personnel is intense, we may not be able to attract and retain the highly skilled employees we need to support our continued growth.
To continue to execute on our growth plan, we must attract and retain highly qualified personnel. The pool of qualified personnel with experience working in the healthcare market is limited overall and the competition to hire them is intense. As such, we may not be successful in continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, our search for replacements for departed employees may cause uncertainty regarding the future of our business, impact employee hiring and retention, and adversely impact our revenue, financial condition and results of operations. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.
We depend on our senior management team, and the loss of one or more of these employees or an inability to attract and retain qualified key personnel could harm our business.
Our success depends largely upon the continued services of our key executive officers. These executive officers are “at-will” employees and therefore may terminate employment with us at any time with no advance notice. We also rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there have been and may continue to be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives. In addition, volatility or lack of performance in our stock price may affect our ability to attract and retain replacements should key personnel depart. If we are not able to retain any of our key personnel, our business could be harmed.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws, rules and regulations that govern public companies. Following the completion of the Merger Transaction, we became subject to significant obligations relating to reporting, procedures and internal controls, and our management team may not successfully or efficiently manage such obligations or the ongoing transition of our business to a public company. These obligations and constituents require significant attention from our management team and could divert their attention away from the day-to-day management of our business, which could harm our business, results of operations, and financial condition. In addition, we will need to expand our employee base and hire additional employees to support our operations as a public company, which will increase our operating costs in future periods.
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If we are not able to develop and release new solutions, or successful enhancements, new features and modifications to our existing solutions, our business could be harmed.
To date, we have derived a substantial majority of our revenues from sales of our telemedicine consultation services, and our longer-term results of operations and continued growth will depend on our ability successfully to develop and market new solutions in a timely manner. In addition, we have invested, and will continue to invest, significant resources in research and development to enhance our existing solutions, particularly the features, functionality and performance of our Telemed IQ software platform. If existing customers are not willing to make additional payments for such new solutions, or if new customers do not value such new solutions or enhancements, it could harm our business. If we are unable to predict customer and user preferences or if our industry changes, or if we are unable to enhance or modify our solutions on a timely basis, we may lose customers. In addition, our results of operations would suffer if our innovations are not responsive to the needs of our, appropriately timed with market opportunity or effectively brought to market. Delays in launching new solutions may open windows of opportunity for new and existing competitors to erode our market share and may negatively impact our revenues and profitability.
We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations, and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could harm our business.
We have in the past and may in the future seek to acquire or invest in businesses, applications and services or technologies that we believe could complement or expand our solutions, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.
In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, but not limited to:
| ● | inability to integrate or benefit from acquired technologies or services in a profitable manner; |
| ● | unanticipated costs or liabilities, including legal liabilities, associated with the acquisition; |
| ● | difficulty integrating the accounting systems, operations and personnel of the acquired business; |
| ● | difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; |
| ● | difficulty converting the customers of the acquired business onto our platform and contract terms, including disparities in the revenue, licensing, support or professional services model of the acquired company; |
| ● | diversion of management’s attention from other business concerns; |
| ● | adverse effects to our existing business relationships with business partners and customers as a result of the acquisition; |
| ● | the potential loss of key employees or contractors; |
| ● | use of resources that are needed in other parts of our business; and |
| ● | use of substantial portions of our available cash to consummate the acquisition. |
In addition, a significant portion of the purchase price of businesses we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could adversely affect our results of operations.
Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations or cause the market price of our Class A common stock to decline. In addition, if an acquired business fails to meet our expectations, our business may be harmed.
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If we are unable to grow, or if we fail to manage future growth effectively, our revenues may not increase and we may be unable to implement our business strategy.
Our future success depends upon our ability to grow, and if we are unable to manage our growth effectively, we may incur unexpected expenses and be unable to meet our customers’ requirements, all of which could harm our business. A key aspect to managing our growth is our ability to scale our capabilities, including in response to unexpected shifts in demand for telemedicine, such as during the COVID-19 pandemic. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. We must also attract, train and retain a significant number of board-certified physicians, sales and marketing personnel, customer support personnel, professional services personnel, software engineers, technical personnel and management personnel, and the availability of such personnel, in particular physicians and software engineers, may be constrained.
Our growth depends on the acceptance of our solutions as a suitable supplement to traditional healthcare delivery systems and on our ability to overcome operational challenges. Our business model and solutions could lose their viability as a supplement to traditional healthcare delivery systems due to customer dissatisfaction or new alternative solutions. If we are unable to address the needs of our customers, or our customers are dissatisfied with the quality of our solutions, our customers may not renew their contracts, seek to cancel or terminate their relationship with us or renew on less favorable terms, any of which could cause our annual net dollar retention rate to decrease.
As we continue to grow, including from the integration of employees and businesses acquired in connection with previous or future acquisitions, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our profitability and our ability to retain and recruit qualified personnel who are essential for our future success. If we do not effectively manage our growth, we may not be able to execute on our business plan, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements or maintain high-quality solutions. Additionally, we may not be able to expand and upgrade our systems and infrastructure to accommodate future growth.
Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our growth is expected to require significant capital expenditures and may divert financial resources from other projects such as the development of new solutions and services. If we are unable to effectively manage our growth, our expenses may increase more than expected, our revenues may not increase or may grow more slowly than expected and we may be unable to implement our business strategy. The quality of our services may also suffer, which could negatively affect our reputation and harm our ability to attract and retain customers.
We may be unable to successfully execute on our growth initiatives, business strategies or operating plans.
We are continually executing a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, we recently entered into new specialist healthcare professional markets. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. Moreover, we may not be able to complete these growth initiatives successfully, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve, or it may be more costly to do so than we anticipate. A variety of risks could cause us not to realize some or all of the expected benefits. These risks include, among others, delays in the anticipated timing of activities related to such growth initiatives, strategies and operating plans, increased difficulty and cost in implementing these efforts, including difficulties in complying with new regulatory requirements and the incurrence of other unexpected costs associated with operating the business. Moreover, our continued implementation of these programs may disrupt our operations and performance. As a result, we cannot assure you that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business may be harmed.
Our growth depends in part on the success of our strategic relationships with third parties.
To grow our business, we anticipate that we will continue to depend on relationships with third parties, such as channel partners. In addition to growing our indirect sales channels, we intend to pursue additional relationships with other third parties, such as physician groups, integrated delivery networks and government contractors. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be effective in causing third parties to favor their products or services over our solutions. In addition, acquisitions of such partners by our competitors could result in a decrease in the number of our current and potential customers, as these partners may no longer facilitate the adoption of our solutions. Further, some of our partners are or may become competitive with certain of our solutions and may elect to no longer integrate with our platform. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenues could be impaired, and our results of operations may suffer. Even if we are successful, we cannot ensure that these relationships will result in increased customer usage of our applications or increased revenue.
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If the estimates and assumptions we use to determine the size of our total addressable market are inaccurate, our future growth rate may be affected and our business would be harmed.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. The principal assumptions relating to our market opportunity include all hospitals in the United States adopting outsourced clinical resources via telemedicine and that we can successfully add specialties to our solutions beyond those currently offered today. Our market opportunity is also based on the assumption that our existing and future offerings will be more attractive to our customers and potential customers than competing solutions. If these assumptions prove inaccurate, our business could be harmed.
We may not grow at the rates we historically have achieved or at all, even if our key metrics may indicate growth, which may adversely affect the market price of our Class A common stock.
We have experienced significant growth in recent years. Future revenues may not grow at these same rates or may decline. Our future growth will depend, in part, on our ability to grow our revenues from existing customers, to complete sales to potential future customers, to expand our customer base, and to develop new solutions and services. We can provide no assurances that we will be successful in executing on these growth strategies or that, even if our key metrics would indicate future growth, we will continue to grow our revenues or to generate net income. Our ability to execute on our existing sales pipeline, create additional sales pipelines and expand our customer base depends on, among other things, the attractiveness of our services relative to those offered by our competitors, our ability to demonstrate the value of our existing and future services and our ability to attract and retain a sufficient number of qualified sales and marketing leadership and support personnel. In addition, our existing customers may be slower to adopt our services than we currently anticipate, which could harm our business and growth prospects and adversely affect the market price of our Class A common stock.
We have been and may in the future become subject to litigation, which could be costly and time-consuming to defend.
We have been and may in the future become subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes or employment claims made by our current or former associates. Litigation may result in substantial costs and may divert management’s attention and resources, which may substantially harm our business, financial condition and results of operations. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims and may not continue to be available on terms acceptable to us. Resolution of some of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely affect our results of operations and cash flows, thereby harming our business and stock price. For example, fines or assessments could be levied against us under domestic or foreign data privacy laws (such as the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the General Data Protection Regulation (“GDPR”), or the California Consumer Privacy Act of 2018 (“CCPA”)) or under authority of privacy enforcing governmental entities (such as the Federal Trade Commission (“FTC”), or the U.S. Department of Health and Human Services (“HHS”)) or as a result of private actions, such as class actions based on data breaches or based on private rights of action (such as that contained in the CCPA). Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely affect our results of operations and cash flows, expose us to increased risks that would be uninsured and adversely affect our ability to attract directors and officers. In addition, such litigation could result in increased scrutiny by government authorities having authority over our business, such as the FTC, the HHS, Office for Civil Rights (“OCR”), and state attorneys general.
We may become subject to medical liability claims, which could cause us to incur significant expenses, may require us to pay significant damages if not covered by insurance, and could harm our business.
Our business entails the risk of medical liability claims against us and our affiliated professional entities. We and our affiliated professional entities have in the past and may in the future be subject to medical liability claims and, if these claims are successful, substantial damage awards. Although we maintain insurance covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our business, we cannot predict the outcomes of medical malpractice cases, the effect that any claims of this nature, regardless of their ultimate outcome, could have on our business or reputation or on our ability to attract and retain customers. Professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services. As a result, adequate professional liability insurance may not be available to our providers or to us in the future at acceptable costs or at all.
Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our providers from our operations, which could harm our business. In addition, any claims may harm our business or reputation.
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Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As of December 31, 2021, we had approximately $297.3 million of federal gross net operating loss carryforwards and $273.6 million of state gross net operating loss carryforwards. The federal gross net operating loss carryforwards of $176.3 million created subsequent to the year ended December 31, 2017, carry forward indefinitely, whereas the remaining federal gross net operating loss carryforwards of $121.0 million begin to expire in 2025. Our ability to utilize NOLs may be currently subject to limitations due to prior ownership changes. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, further limiting our ability to utilize NOLs arising prior to such ownership change in the future. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. We have recorded a full valuation allowance against the deferred tax assets attributable to our NOLs that are not more likely than not expected to be utilized.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added, or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.
We do not collect sales and use and similar taxes in any states for telemedicine services based on our belief that our services are not subject to such taxes in any state. Sales and use and similar tax laws and rates vary greatly from state to state. Certain states in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest with respect to past services, and we may be required to collect such taxes for services in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our results of operations.
If our relationships with physicians and other provider specialists within our network are characterized as employees, we would be subject to employment and withholding liabilities.
Although we believe that some of our physicians and other provider specialists within our network are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships. If such regulatory authorities or state, federal or foreign courts were to determine that our providers or experts are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay social security, Medicare and similar taxes and to pay unemployment and other related payroll taxes. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that our providers or experts are our employees could harm our business.
We may require additional capital from equity or debt financings to support business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. In order to achieve these objectives, we may make future commitments of capital resources, including incurring additional indebtedness under the Term Loan Facility. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
Our Term Loan Agreement contains certain restrictions that may limit our ability to operate our business.
In connection with the Acquisition, we entered into the Term Loan Agreement with SLR Investment. The terms of the Term Loan Agreement and the related collateral documents contain, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability, and the ability of our subsidiaries, to take actions that may be in our best interests, including, among others, disposing of assets, entering into change of control transactions, mergers or acquisitions, incurring additional indebtedness, granting liens on our assets, declaring and paying dividends, and agreeing to do any of the foregoing. The Term Loan Facility requires us to satisfy a specified minimum liquidity level of at least $5.0 million at all times and to achieve certain minimum net revenue thresholds measured quarterly on a trailing twelve-month basis from March 31, 2022, through December 31, 2022, and then 60% of projected net revenues in accordance with an annual plan to be submitted to the lenders commencing on March 31, 2023, and thereafter. Our ability to meet these and other financial covenants can be affected by events beyond our control, including as a result of the economic downturn caused by the COVID-19 pandemic, and we may not be able to continue to meet these covenants. A breach of any of these covenants or the occurrence of other events (including a material adverse effect) specified in these agreements and/or the related collateral documents would result in an event of default under such agreements. Upon the occurrence of an event of default, SLR Investment, as collateral agent for the lenders, could elect to declare all amounts outstanding, if any, under the Term Loan Agreement to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, SLR Investment, as collateral agent for the lenders, could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets as collateral under the loan documents. If SLR Investment, as collateral agent for the lenders, accelerates the repayment of borrowings, if any, we may not have sufficient funds to repay our existing debt.
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Our substantial indebtedness following the Acquisition could harm our business and growth prospects.
In connection with the Acquisition, we funded the cash portion of the purchase price in part with proceeds from the Term Loan Facility. Our substantial indebtedness as a result of these borrowings, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds.
Our indebtedness, the cash flow needed to satisfy our debt and the covenants contained in our debt agreements could have important consequences to us, including limiting funds otherwise available for financing our operations, capital expenditures, selling and marketing efforts, development of new solutions, future business opportunities and other purposes by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt; limiting our ability to incur or prepay existing indebtedness, pay dividends or distributions, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments and make changes in the nature of the business, among other things; making us more vulnerable to rising interest rates, as borrowings under the Term Loan Facility bear variable rates of interest; and making us more vulnerable in the event of a downturn in our business.
Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, tax laws, including the disallowance or deferral of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and harm our business. Further, the Term Loan Agreement contains customary affirmative and negative covenants and certain restrictions on operations that could impose operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business.
We expect to use cash flow from operations to meet current and future financial obligations, including funding our operations, debt service requirements and capital expenditures. The ability to make these payments depends on our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and to certain financial, business, economic and other factors beyond our control.
We have identified material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately report our financial statements or report them in a timely manner, which may adversely affect investor confidence in us and, as a result, the value of our Class A common stock.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Prior to the Merger Transaction, Legacy SOC Telemed operated as a private company with limited accounting and financial reporting personnel and other resources with which to address its internal controls and procedures, and, as previously disclosed, had identified a material weakness in its internal control over financial reporting related to the design of its control environment. We have identified material weaknesses in our internal control over financial reporting and, as a result, our management concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2021. See “Controls and Procedures” under Part II, Item 9A of this report. 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.
Consistent with our prior disclosures, we determined that we had a material weakness related to the design of our control environment because we did not (i) maintain a sufficient complement of personnel with an appropriate degree of knowledge, experience, and training, commensurate with our accounting and reporting requirements; (ii) 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) design and maintain effective controls over segregation of duties with respect to creating and posting manual journal entries.
In addition, we determined that we had a material weakness related to informational technology (“IT”) general controls because we did not design and maintain effective controls over IT general controls for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain (i) program change management controls for financial systems to ensure that information technology and data changes affecting financial IT applications and underlying accounts records are identified, tested, authorized, and implemented appropriately; and (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel.
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The material weakness related to the control environment did not result in adjustments to the financial statements for the year ended December 31, 2021. The IT deficiencies did not result in a material misstatement to our consolidated financial statements; however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, we have determined these deficiencies in the aggregate constitute a second material weakness. Additionally, each of the above material weaknesses could result in a misstatement of our account balances or disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected.
With the oversight of senior management and our audit committee, we have implemented 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; (iv) the establishment of formalized internal controls to maintain segregation of duties between control operators; (v) the implementation of additional program change management policies and procedures, control activities, and tools to ensure changes affecting IT applications and underlying accounting records are identified, authorized, tested, and implemented appropriately; and (vi) the enhancement of the design and operation of user access control activities and procedures to ensure that access to IT applications and data is adequately restricted to appropriate Company personnel. We believe the measures described above, which continues the implementation of a remediation plan commenced by Legacy SOC Telemed prior to the Merger Transaction, will remediate the material weaknesses 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.
While we continue to implement this plan to remediate the material weaknesses described above, we cannot predict the success of such plan or the outcome of our assessment of these plans at this time. If our steps are insufficient to remediate the material weaknesses successfully and otherwise establish and maintain an effective system of internal control over financial reporting, the reliability of our financial reporting, investor confidence in us, and the value of our Class A common stock could be materially and adversely affected. We can give no assurance that the implementation of this plan will remediate these deficiencies in internal control or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements, causing us to fail to meet our reporting obligations.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting, which includes hiring additional accounting and financial personnel to implement such processes and controls. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. If any of these new or improved controls and systems do not perform as expected, we may experience material weaknesses in our controls in addition to those discussed in the section entitled “Controls and Procedures” under Part II, Item 9A of this report. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, additional weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future.
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Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq. As discussed in the section entitled “Controls and Procedures” under Part II, Item 9A of this report, our management has concluded that our disclosure controls and internal control over financial reporting were not effective as of December 31, 2021. Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act or a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could harm our business and could cause a decline in the price of our Class A common stock.
Risks Related to Governmental Regulation
Government regulation of healthcare creates risks and challenges with respect to our compliance efforts and our business strategies.
The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory, and other influences. Existing and new laws and regulations affecting the healthcare industry could create unexpected liabilities for us, could cause us to incur additional costs, and could restrict our operations. Many healthcare laws are complex, and their application to specific products and services may not be clear. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the services that we provide. However, these laws and regulations may nonetheless be applied to our business. Our failure to accurately anticipate the application of these laws and regulations, or other failure to comply, could create liability for us, result in adverse publicity and harm our business.
If we fail to comply with extensive healthcare laws and government regulations, we could suffer penalties or be required to make significant changes to our operations.
The healthcare industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:
| ● | licensure of health providers, certification of organizations and enrollment with government reimbursement programs; |
| ● | necessity and adequacy of medical care; |
| ● | relationships with physicians and other referral sources and referral recipients; |
| ● | billing and coding for services; |
| ● | properly handling overpayments; |
| ● | quality of medical equipment and services; |
| ● | qualifications of medical and support personnel; |
| ● | confidentiality, maintenance, data breach, identity theft and security issues associated with health-related and personal information and medical records; and |
| ● | communications with patients and consumers. |
Among these laws are the federal Stark Law, the federal Anti-Kickback Statute, the False Claims Act, and similar state laws. If we fail to comply with applicable laws and regulations, we could suffer civil sanctions and criminal penalties, including the loss of our ability to participate in the Medicare, Medicaid and other federal and state healthcare programs. While we endeavor to ensure that our financial relationships with referral sources such as hospitals and physicians comply with the applicable laws (including applicable safe harbors and exceptions), evolving interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make changes in our operations. A determination that we have violated these or other laws, or the public announcement that we are being investigated for possible violations of these or other laws, could harm our business, and our business reputation could suffer significantly. In addition, other legislation or regulations at the federal or state level may be adopted that could harm our business.
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Our use and disclosure of personally identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm to us, which could, in turn, harm our customer base and our business.
Numerous state and federal laws and regulations, including HIPAA, govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of personally identifiable information, or PII, including protected health information. HIPAA establishes a set of basic national privacy and security standards for the protection of protected health information (“PHI”) by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services, which includes us.
HIPAA requires healthcare providers like us to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims.
HIPAA imposes mandatory penalties for certain violations. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts will be able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities or business associates for compliance with the HIPAA Privacy and Security Standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the Civil Monetary Penalty fine paid by the violator.
HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually.
Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of PII, including PHI. These laws in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our customers and potentially exposing us to additional expense, adverse publicity and liability.
New health information standards, whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we must handle healthcare related data, and the cost of complying with standards could be significant. If we do not comply with existing or new laws and regulations related to PHI, we could be subject to criminal or civil sanctions.
Because of the extreme sensitivity of the PII we store and transmit, the security features of our technology platform are very important. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to obtain access to sensitive customer and patient data, including HIPAA-regulated PHI. As a result, our reputation could be severely damaged, adversely affecting customer or investor confidence. Customers may curtail their use of or stop using our services or our customer base could decrease, which would cause our business to suffer. In addition, we could face litigation, damages for contract breach, penalties and regulatory actions for violation of HIPAA and other applicable laws or regulations and significant costs for remediation, notification to individuals and for measures to prevent future occurrences. Any potential security breach could also result in increased costs associated with liability for stolen assets or information, repairing system damage that may have been caused by such breaches, incentives offered to customers or other business partners in an effort to maintain our business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. While we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and, in any event, insurance coverage would not address the reputational damage that could result from a security incident.
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We outsource important aspects of the storage and transmission of customer and patient information, and thus rely on third parties to manage functions that have material cyber-security risks. We attempt to address these risks by requiring outsourcing subcontractors who handle customer and patient information to sign business associate agreements contractually requiring those subcontractors to adequately safeguard personal health data to the same extent that applies to us and in some cases by requiring such outsourcing subcontractors to undergo third-party security examinations. However, we cannot assure you that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of such information on our behalf by our subcontractors.
We also publish statements to our customers that describe how we handle and protect personal information. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders.
We have specific requirements to protect the privacy and security of personal health information we collect from or on behalf of our customers.
Privacy and security of personal health information, particularly personal health information stored and transmitted electronically, is a major issue in the United States. The Privacy Standards and Security Standards under HIPAA establish a set of national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and healthcare providers (referred to as covered entities) and their business associates. We may be required to comply with the HIPAA Privacy and Security Standards for physical, technical, and administrative safeguards, among other requirements. We cannot assure you that it will adequately address the risks created by these requirements, and if it fails to do so we could potentially be subject to HIPAA’s criminal and civil penalties. The Health Information Technology for Economic and Clinical Health (or “HITECH”) Act, which was enacted as part of the American Recovery and Reinvestment Act of 2009, and amended HIPAA, increased civil penalty amounts for violations of HIPAA and significantly strengthened enforcement by requiring the United States Department of Health and Human Services to conduct periodic audits to confirm compliance and authorizing state attorneys general to bring civil actions seeking either injunctions or damages in response to violations of HIPAA Privacy and Security Standards that threaten the privacy of state residents.
Both federal and state governments continue to adopt and/or are considering a number of new regulations related to protection of personal information. Thus, we may incur costs to monitor, evaluate, and modify operational processes for compliance.
If we fail to comply with federal and state laws and policies governing claim submissions to government healthcare programs or commercial insurance programs, we or our customers may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs and contractual claims by commercial insurers.
We offer revenue cycle management services to our customers that include the preparation and submission of claims for professional service and billing agent collection processing with payers on behalf of our customers. Certain of these reimbursement claims are governed by federal and state laws with potential civil and criminal penalties for non-compliance. The HIPAA security, privacy and transaction standards also have a potentially significant effect on our claims preparation, transmission and submission services, because such services must be structured and provided in a way that supports our customers’ HIPAA compliance obligations. Errors by us or our systems with respect to entry, formatting, preparation or transmission of claim information may be determined or alleged to be in violation of these laws and regulations. If our revenue cycle management services fail to comply with these laws and regulations, we may be subjected to federal or state government investigations and possible penalties may be imposed upon us, false claims actions may have to be defended, private payers may file claims against us, and we may be excluded from Medicare, Medicaid or other government-funded healthcare programs. Further, our customers may seek contractual remedies and indemnification. Any investigation or proceeding related to these topics, even if unwarranted or without merit, could adversely affect demand for our services, could force us to expend significant capital, research and development and other resources to address the failure, and may harm our business.
If we fail to comply with Medicare and Medicaid regulatory, guidance, or policy requirements, we may be subjected to reduced reimbursement, overpayment demands or loss of eligibility to participate in these programs.
Our affiliated professional entities enrolled and recently began participating in certain government health care programs covering certain of the professional services delivered by our affiliated professional entities. We expect a growing portion of our patient services to be reimbursed by government health care programs. The Medicare and Medicaid programs are highly regulated, and unique requirements governing the reimbursement of professional services delivered using telemedicine are evolving and complicated. In addition, changes in government health care programs may reduce the reimbursement we receive and could harm our business. In particular, there is uncertainty regarding whether temporary waivers of certain Medicare conditions of participation and payment for many virtual care services and temporary expansions of the types of Medicare-covered services that can be provided remotely will continue or be made permanent. If we fail to comply with applicable reimbursement laws and regulations, reimbursement under these programs and participation in these programs could be adversely affected. Federal or state governments may also impose other sanctions on us for failure to comply with the applicable reimbursement regulations, including but not limited to recovering an overpayment. Failure to comply with these or future laws and regulations could result in our or our affiliated provider network’s ability to provide telemedicine services to our customers.
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Physician licensing and credentialing, a cost of providing professional services, can negatively impact our margins as we may incur increased expenses to utilize appropriately licensed and credentialed physicians for consult demands, especially when expanding to new jurisdictions and new hospital customers.
A physician’s ability to perform telemedicine consults is dictated by where the physician is licensed to practice and with whom the physician is privileged to provide services. State licensure and physician credentialing requirements take time to procure, often necessitating months of lead-time before a physician is able to take consults for a particular hospital facility. Our ability to manage and anticipate physician need and prioritize licensing and credentialing could impact profit margins and expense management. As consult demands increase in areas where only a limited number of physicians hold necessary licenses and credentials, those physicians with appropriate licensing and credentialing to meet customer demands may assume additional overtime shifts or otherwise demand increased fees, thereby increasing our costs. Further, obtaining a license to practice medicine in a particular jurisdiction is at the discretion of the local state medical board, and, as such, timing to achieve licensure in certain jurisdictions may be outside our ability to accomplish within expected time frames.
Recent and frequent state legislative and regulatory changes specific to telemedicine may present us with additional requirements and state compliance costs, with potential operational impacts in certain jurisdictions.
In recent years, states have adopted an abundance of new legislation and regulations specific to telemedicine. In some cases, this legislation and regulation, typically targeting “direct to consumer” telehealth service offerings rather than specialty consultative services, such as our acute care telemedicine solutions, incorporates informed consent, modality, medical record, and other requirements. Thus, where new legislation and regulations apply to our telemedicine solutions, we may incur costs to monitor, evaluate, and modify operational processes for compliance. All such activities increase our costs and could, in certain circumstances, impact our ability to make available telemedicine services in a particular state.
Risks Related to Our Use of Technology
Failure to keep pace with advances in technology could cause our solutions to become obsolete, which could harm our business, financial condition and results of operations.
The telemedicine industry is characterized by rapid technological change, changing consumer requirements, short product lifecycles and evolving industry standards. The successful implementation of our business model depends on our ability to anticipate and adapt to evolving technologies and industry standards and introduce new solutions accordingly. For example, we recently started deploying our Telemed IQ software platform to hospital organizations as a stand-alone solution independent of our clinical services to enable these providers to optimize and scale our platform across all of their care sites. These new solutions carry risks, such as cost overruns, delays in delivery, performance problems, and lack of acceptance by our customers. If we cannot anticipate or adapt to rapidly evolving industry standards, technology, and increasingly sophisticated customers and their employees, our existing technology could become undesirable, obsolete, or harm our reputation. Moreover, we may not be successful in developing, using, marketing, selling or maintaining new technologies effectively or adapting our solutions to evolving customer requirements or emerging industry standards, and, as a result, our business could be harmed. In addition, we have limited insight into trends that might develop and affect our business, which could lead to errors in our predicting and reacting to relevant business, legal, and regulatory trends and healthcare reform. Further, there can be no assurance that technological advances by one or more of our competitors or future competitors will not result in our present or future solutions and services becoming uncompetitive or obsolete. If any of these events occur, it could harm our business.
We depend upon third-party service providers for certain technologies. If these third-party providers fail to fulfill their contractual obligations, fail to maintain or support those technologies or choose to discontinue their services, our operations could be disrupted and our business may be harmed.
We depend upon third-party service providers for important functions of our solutions. Software, network applications and data, as well as the core video and audio system integral to our business, are hosted on third-party sites. These facilities may be vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures, COVID-19 pandemic-related business disruptions, and similar events. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions in our providing our services. The facilities also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct. Redundancies and backup systems are in place to prevent operational disruptions and data loss, but if these technologies fail or are of poor quality, our business could be harmed. Failures or disruption in the delivery of telemedicine services could result in customer dissatisfaction, disrupt our operations, and adversely affect our operating results. Additionally, we have significantly less control over the technologies third parties provide to us than if we maintained and operated them ourselves. In some cases, functions necessary to some of our solutions may be performed by these third-party technologies. If we need to find an alternative source for performing these functions, we may have to expend significant money, resources and time to develop the alternative, and if this development is not accomplished in a timely manner and without significant disruption to our business, we may be unable to fulfill our obligations to customers. Any errors, failures, interruptions, or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with customers and harm our business and could expose us to third-party liabilities.
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If the systems that we use to provide our services experience security breaches, we may incur significant liabilities, and our reputation and business may be harmed.
Our services involve the storage and transmission of our customers’ proprietary information, sensitive or confidential data, including valuable personal information of patients, customers and others, as well as the PHI of our customers. Because of the extreme sensitivity of the information we store and transmit, the security features of our computer, network and communications systems infrastructure are critical to the success of our business. We are also dependent on third-party vendors to keep their systems secure in order to protect our information systems and data. A breach or failure of our or our third-party vendors’ security measures could result from a variety of circumstances and events, including third-party action, employee negligence or error, malfeasance, computer viruses, cyber-attacks by computer hackers, failures during the process of upgrading or replacing software and databases, power outages, hardware failures, telecommunication failures, user errors or catastrophic events. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. As cyber threats continue to evolve, we may be required to expend additional resources to further enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. If our or our third-party vendors’ security measures fail or are breached, it could result in unauthorized persons accessing sensitive customer or patient data (including PHI), a loss of or damage to our data, an inability to access data sources, or process data or provide our services to our customers. Such failures or breaches of our or our third-party vendors’ security measures, or our or our third-party vendors’ inability to effectively resolve such failures or breaches in a timely manner, could severely damage our reputation, adversely affect customer or investor confidence in us, and reduce the demand for our services from existing and potential customers. In addition, we could face litigation, damages for contract breach, monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial measures to prevent future occurrences and mitigate past violations. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and, in any event, insurance coverage would not address the reputational damage that could result from a security incident.
We or our third-party vendors may experience cyber-security and other breach incidents that remain undetected for an extended period. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched, we or our third-party vendors may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our or our third-party vendors’ security occurs, or if we or our third-party vendors are unable to effectively resolve such breaches in a timely manner, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers, which could harm our business.
We rely on telecommunications and internet service providers for providing solutions to our customers, and any interruption or failure in the services provided by these third parties could harm our business.
Our business is highly dependent on telecommunications and internet service providers. We serve our customers using third-party data centers and telecommunications solutions, including cloud infrastructure services. Our services are designed to operate 24-hours-a-day, seven-days-a-week, without interruption. However, we have experienced, and we expect that we will continue to experience, interruptions and delays in services and availability from time to time. We may not maintain redundant systems or facilities for some of these services. While we control and have access to our servers, we do not control the operation of these facilities. The cloud vendors and the owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our cloud vendors or data center operators is acquired, we may be required to transfer our servers and other infrastructure to a new vendor or a new data center facility, and we may incur significant costs and possible service interruption in connection with doing so. Problems faced by our cloud vendors or third-party data center locations with the telecommunications network providers with whom we or they contract or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our cloud vendors or third-party data center operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy faced by our cloud vendors or third-party data centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict.
Additionally, if our cloud or data centers vendors are unable to keep up with our growing needs for capacity, this could harm our business. For example, a rapid expansion of our business could affect the service levels at our cloud vendors or data centers or cause such cloud systems or data centers and systems to fail. Any changes in third-party service levels at our cloud vendors or data centers or any disruptions or other performance problems with our solution could harm our reputation and may damage our customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services may reduce our revenue, cause us to issue refunds to customers for prepaid and unused subscriptions, subject us to potential liability or adversely affect customer renewal rates.
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In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationships with customers. To operate without interruption, both we and our service providers must guard against:
| ● | damage from fire, power loss, natural disasters and other force majeure events outside our control; |
| ● | communications failures; |
| ● | software and hardware errors, failures and crashes; |
| ● | security breaches, computer viruses, hacking, denial-of-service attacks and similar disruptive problems; and |
| ● | other potential interruptions. |
Moreover, system failures may result in loss of data, including patient data, which is critical to the provision of our services. Any errors, failures, interruptions or delays experienced in connection with our or our third parties’ systems could negatively impact our relationships with customers, adversely affect our brand and expose us to liabilities to third parties, all of which could harm our business.
Failure to protect or enforce our intellectual property rights could impair our ability to protect our internally developed technology and our brand and the costs involved in such enforcement could harm our business.
Our intellectual property includes our internally developed processes, methodologies, algorithms, applications, technology platform, software code, website content, user interfaces, graphics, trade dress, databases and domain names. We rely on a combination of trademark, trade secret and copyright laws and confidentiality procedures and contractual provisions to protect our intellectual property rights in our internally developed technology and content. We believe that our intellectual property is an essential asset of our business. If we do not adequately protect our intellectual property, our brand and reputation could be harmed and competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business, negatively affect our position in the marketplace, limit our ability to commercialize our technology, and delay or render impossible our achievement of profitability. A failure to protect our intellectual property in a cost-effective and meaningful manner could adversely affect our ability to compete. We regard the protection of our trade secrets, copyrights, trademarks, trade dress, databases and domain names as critical to our success.
We strive to protect our intellectual property rights by relying on federal, state, and common law rights and other rights provided under foreign laws. However, the steps we take to protect our intellectual property rights may be inadequate. For example, other parties, including our competitors, may independently develop similar technology, duplicate our services, or design around our intellectual property and, in such cases, we may not be able to assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.
We make business decisions about when to seek patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select may ultimately prove to be inadequate. In particular, we do not currently hold a patent or other registered or applied for intellectual property protection for our Telemed IQ software platform. Even in cases where we seek patent protection, there is no assurance that the resulting patents will effectively protect every significant feature of our solutions, technology or proprietary information, or provide us with any competitive advantages, since intellectual property law, including statutory and case law, particularly in the United States, is constantly developing, and any changes in the law could make it harder for us to enforce our rights.
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put any related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our Class A common stock. Negative publicity related to a decision by us to initiate such enforcement actions against a customer or former customer, regardless of its accuracy, may adversely impact our other customer relationships or prospective customer relationships, harm our brand and business, and could cause the market price of our Class A common stock to decline. Our failure to secure, protect, and enforce our intellectual property rights could harm our brand and our business.
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We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.
There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, including so-called non-practicing entities (NPEs), may own or claim to own intellectual property relating to our solutions. From time to time, third parties may claim that we are infringing upon their intellectual property rights or that we have misappropriated their intellectual property. For example, in some cases, very broad patents are granted that may be interpreted as covering a wide field of machine learning and predictive modeling methods in healthcare. As competition in our market grows, the possibility of patent infringement, trademark infringement and other intellectual property claims against us increases. In the future, we expect others to claim that our solutions and underlying technology infringe or violate their intellectual property rights. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Because patent applications can take years to issue and are often afforded confidentiality for some period of time, there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more aspects of our technology and services. Any claims or litigation could cause us to incur significant expenses and, whether or not successfully asserted against us, could require that we pay substantial damages, ongoing royalty or license payments or settlement fees, prevent us from offering our solutions or using certain technologies, require us to re-engineer all or a portion of our platform, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.
Our use of open source software could adversely affect our ability to offer our solutions and subject us to possible litigation.
We use open source software in connection with our existing and future solutions. Some open source software licenses require those who distribute open source software as part of their own software product to make available the source code for any modifications or derivative works created based upon the open source software, and that such modifications or derivative works are licensed under the terms of a particular open source license or other license granting third parties certain rights of further use. By the terms of certain open source licenses, we could be required to release the source code of our internally developed software and make it available under open source licenses if we combine and/or distribute our internally developed software with open source software in certain manners. Although we monitor our use of open source software, we cannot be sure that all open source software is reviewed prior to use in our software, that our programmers have not incorporated open source software into our internally developed software or that they will not do so in the future. Additionally, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our existing and future solutions to our customers. In addition, the terms of open source software licenses may require us to provide software that we develop using such open source software to others, including our competitors, on unfavorable license terms. As a result of our current or future use of open source software, we may face claims or litigation, be required to release our internally developed source code, pay damages for breach of contract, re-engineer our technology, discontinue sales in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources away from our development efforts, any of which could harm our business.
Our software platform may not perform properly due to errors or similar problems, which could damage our reputation, give rise to claims against us, or divert application of our resources from other purposes, any of which could harm our business.
Telemed IQ, our cloud-based software platform, provides our customers and providers with the ability to, among other things, complete, view and edit medical history; request a consult (either scheduled or on demand); conduct a consult (via video or phone); and initiate an expert medical service. Software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our software platform from operating properly. If our solutions do not function reliably or fail to achieve customer expectations in terms of performance, customers could assert liability claims against us or attempt to cancel their contracts with us. This could damage our reputation and impair our ability to attract or maintain customers.
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Moreover, complex software, such as ours, often contains defects and errors, some of which may remain undetected for a period of time. Material performance problems, defects or errors in our existing or new software and services may arise in the future and may result from interface of our solution with systems and data that we did not develop and the function of which is outside of our control or undetected in our testing. Such errors may be found after the introduction of new software or enhancements to existing software. If we detect any errors before we introduce a solution, we may have to delay deployment for an extended period of time while we address the problem. Any defects and errors, and any failure by us to identify and address them, could result in loss of revenue or market share, diversion of development resources, harm to our reputation and increased service and maintenance costs. Defects or errors may discourage existing or potential customers from purchasing our solutions from us. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors may be substantial and could harm our business.
Risks Related to Our Corporate Governance
Warburg Pincus has significant influence over us, and their interests may conflict with ours and those of our other stockholders in the future.
As of December 31, 2021, investment funds owned by Warburg Pincus LLC (“Warburg Pincus”) and its affiliates beneficially owned approximately 33.5% of our outstanding Class A common stock. As long as Warburg Pincus owns or controls a significant percentage of our outstanding voting power, they will have the ability to significantly influence all corporate actions requiring stockholder approval, including the election and removal of directors and the size of the Board, any amendment to our amended and restated certificate of incorporation or amended and restated by-laws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. In addition, in connection with the Merger Transaction, we entered into an Investor Rights Agreement with Warburg Pincus pursuant to which, among other things, Warburg Pincus has the right to designate (i) up to five of nine directors for as long as it beneficially owns at least 50% of the issued and outstanding shares of Class A common stock, (ii) up to three of nine directors for so long as it beneficially owns at least 35% but less than 50% of the issued and outstanding shares of Class A common stock, (iii) up to two of seven directors for so long as it beneficially owns at least 15% but less than 35% of the issued and outstanding shares of Class A common stock and (iv) up to one of seven directors for so long as it beneficially owns at least 5% but less than 15% of the issued and outstanding shares of Class A common stock. Thomas J. Carella and Amr Kronfol, each a Managing Director of Warburg Pincus, are members of the Board and are deemed to be director designees of Warburg Pincus. Warburg Pincus’ influence over our management could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our Class A common stock to decline or prevent stockholders from realizing a premium over the market price for our Class A common stock.
The interests of Warburg Pincus may not align with our interests as a company or the interests of our other stockholders. Accordingly, Warburg Pincus could cause us to enter into transactions or agreements of which you would not approve or make decisions with which you would disagree. Further, Warburg Pincus is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. Warburg Pincus may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In recognition that directors, principals, officers, employees and other representatives of Warburg Pincus and its affiliates and investment funds may serve as our or our affiliates’ directors, officers or agents, our amended and restated certificate of incorporation provides, among other things, that none of Warburg Pincus or any director, principal, officer, employee or other representatives of Warburg Pincus has any duty to refrain from engaging directly or indirectly in an investment or corporate or business opportunity or offering a prospective economic or competitive advantage in which we or any of our controlled affiliates, directly or indirectly, could have an interest or expectancy or otherwise competing with us or any of our controlled affiliates. In the event that any of these persons or entities acquires knowledge of a potential investment or corporate or business opportunity which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and these persons and entities will not have any duty to communicate or present such corporate opportunity to us and may pursue or acquire such corporate opportunity for themselves or direct such opportunity to another person. These potential conflicts of interest could harm our business if, among other things, attractive corporate opportunities are allocated by Warburg Pincus to itself or its other affiliates.
Provisions in our charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Certain provisions of our amended and restated certificate of incorporation and amended and restated by-laws may have the effect of rendering more difficult, delaying, or preventing a change of control or changes in our management. These provisions provide for, among other things:
| ● | a classified board of directors whose members serve staggered three-year terms; |
| ● | the authorization of “blank check” preferred stock, which could be issued by the Board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our Class A common stock; |
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| ● | a limitation on the ability of, and providing indemnification to, our directors and officers; |
| ● | a requirement that special meetings of our stockholders can be called only by the Board, the Chairperson of the Board or our Chief Executive Officer; |
| ● | a requirement of advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to the Board; |
| ● | a prohibition on cumulative voting in the election of directors; |
| ● | a requirement that our directors may be removed only for cause and by a majority vote of the stockholders; |
| ● | a prohibition on stockholder action by written consent; |
| ● | a requirement that vacancies on the Board may be filled only by a majority of directors then in office (subject to limited exceptions), even though less than a quorum; and |
| ● | a requirement of the approval of the Board or the holders of at least two-thirds of our outstanding shares of capital stock to amend the amended and restated by-laws and certain provisions of the amended and restated certificate of incorporation. |
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our management by making it more difficult for stockholders to replace members of the Board, which is responsible for appointing the members of our management. In addition, institutional stockholder representative groups, stockholder activists and others may disagree with our corporate governance provisions or other practices, including anti-takeover provisions, such as those listed above. We generally will consider recommendations of institutional stockholder representative groups, but we will make decisions based on what the Board and management believe to be in the best long-term interests of our company and stockholders; however, these groups could make recommendations to our stockholders against our practices or our board members if they disagree with our positions.
Finally, we have not opted out of the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our Class A common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of our Class A common stock in an acquisition.
Our amended and restated certificate of incorporation provides that a state or federal court located within the state of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides, to the fullest extent permitted by law, that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
| ● | any derivative action or proceeding brought on behalf of us; |
| ● | any action asserting a claim of breach of a fiduciary duty owed by or other wrongdoing by any current or former director, officer, employee, agent or stockholder of ours to us or our stockholders; |
| ● | any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our by-laws, or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware; or |
| ● | any action asserting a claim governed by the internal affairs doctrine; |
except for, as to each of the above clauses, any action as to which the Court of Chancery of the State of Delaware determines that there is an indispensable party not subject to the personal jurisdiction of the Court of Chancery of the State of Delaware (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery of the State of Delaware within ten (10) days following such determination), in which case the United States District Court for the District of Delaware or other state courts of the State of Delaware, as applicable, shall, to the fullest extent permitted by law, be the sole and exclusive forum for any such claims.
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This provision would not apply to suits brought to enforce a duty or liability created by the Securities Act or the Exchange Act or any claim for which the U.S. federal courts have exclusive or concurrent jurisdiction. Our amended and restated certificate of incorporation further provides that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act or the rules and regulations promulgated thereunder.
These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If any other court of competent jurisdiction were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our business. In addition, although the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court were “facially valid” under Delaware law, there is uncertainty as to whether other courts will enforce our federal forum selection clause.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, particularly after we are no longer an “emerging growth company,” which could harm our business.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of Nasdaq. These requirements have increased and will continue to increase our legal, accounting, and financial compliance costs and have made and will continue to make some activities more time consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on the Board, our board committees or as our executive officers. After we cease to be an “emerging growth company,” we will incur greater legal, accounting, and other expenses than we previously incurred. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.
Risks Related to Our Securities
The market price of our Class A common stock and warrants may be volatile, which could cause the value of your investment to decline.
The market price of our Class A common stock and warrants has been and may continue to be volatile and subject to wide fluctuations depending on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our Class A common stock or warrants. Factors affecting the trading price of our Class A common stock and warrants may include:
| ● | the Transaction, the pendency of the Transaction or our failure to complete the Transaction; |
| ● | market conditions in our industry or the broader stock market; |
| ● | actual or anticipated fluctuations in our financial and operating results; |
| ● | actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally; |
| ● | the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections; |
| ● | changes in financial estimates and recommendations by securities analysts concerning us or the market in general; |
| ● | the public’s reaction to our press releases, our other public announcements and our filings with the SEC; |
| ● | our ability to market new and enhanced solutions on a timely basis; |
| ● | announced or completed acquisitions of businesses, commercial relationships, products, services or technologies by us or our competitors; |
| ● | changes in laws and regulations affecting our business; |
| ● | changes in accounting standards, policies, guidelines, interpretations or principles; |
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| ● | commencement of, or involvement in, litigation involving us; |
| ● | changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; |
| ● | sales, or anticipated sales, of large blocks of our Class A common stock; |
| ● | any major change in the composition of the Board or management; |
| ● | general economic and political conditions such as recessions, interest rates, fuel prices, trade wars, pandemics (such as COVID-19), currency fluctuations and acts of war or terrorism; and |
| ● | other risk factors listed under this “Risk Factors” section. |
Broad market and industry factors may materially harm the market price of our Class A common stock and warrants, regardless of our actual operating performance. The stock market in general and Nasdaq have, from time to time, experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our Class A common stock and warrants, may not be predictable. A loss of investor confidence in the market for the stocks of other companies that investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our Class A common stock or warrants also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
In addition, in the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigations have often been instituted against these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. Any adverse determination in any such litigation or any amounts paid to settle any such actual or threatened litigation could require that we make significant payments.
Further, although our Class A common stock and warrants are currently listed on Nasdaq, an active trading market for our Class A common stock and warrants may not be sustained. Accordingly, if an active trading market for these securities is not maintained, the liquidity of our Class A common stock and warrants, your ability to sell your shares of our Class A common stock or warrants when desired and the prices that you may obtain for your shares or warrants will be adversely affected.
Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders.
We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in complementary businesses and technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our Class A common stock to decline.
Future sales of shares by existing stockholders and future exercise of registration rights may adversely affect the market price of our Class A common stock.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our Class A common stock and may make it more difficult for you to sell your shares of our Class A common stock at a time and price that you deem appropriate. All outstanding shares of our Class A common stock previously held by the pre-Merger Transaction public stockholders at the completion of the Merger Transaction and a substantial number of shares of our Class A common stock issued as merger consideration in the Merger Transaction are freely tradable without restriction under the Securities Act, except for any shares of our Class A common stock that may be held or acquired by our directors, executive officers and other affiliates (including affiliates of Warburg Pincus), as that term is defined in the Securities Act, which are subject to restrictions under the Securities Act.
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In connection with the completion of the Merger Transaction, we entered into an Amended and Restated Registration Rights Agreement with Warburg Pincus and the sponsor of the pre-Merger Transaction company, HCMC Sponsor LLC (the “Sponsor”), pursuant to which we agreed to register for resale and granted certain other registration rights with respect to the approximately 39.0 million shares of Class A common stock held by Warburg Pincus and the Sponsor and their respective permitted transferees, in addition to the warrants originally issued in a private placement to the Sponsor in connection with HCMC’s initial public offering and the up to 350,000 shares of our Class A common stock issuable upon the exercise of the private placement warrants. We also agreed to register for resale the 16.8 million shares of our Class A common stock (the “PIPE shares”) issued in a private placement that closed immediately prior to the Merger Transaction and the 12.5 million shares of Class A common stock issuable upon exercise of our publicly held warrants to purchase shares of Class A common stock. In accordance with the foregoing, we filed a registration statement covering the resale of up to 69.3 million shares of our Class A common stock, including 33.9 million shares of Class A common stock held by Warburg Pincus, the 16.8 million PIPE shares and 12.85 million shares of Class A common stock issuable upon exercise of our outstanding warrants. Shares of Class A common stock sold under such registration statement can be freely sold in the public market. In addition, in connection with the completion of the Acquisition, we agreed to register for resale the 13.8 million shares of our Class A common stock issued to the Sellers at the closing of the Acquisition and any shares of Class A common stock that we may issue in the future under deferred vesting agreements or, in our sole discretion, as payment in respect of certain earn-out amounts and other deferred consideration in accordance with the terms of the Purchase Agreement. In accordance with the foregoing, we filed a registration statement covering the resale of the 13.8 million shares of our Class A common stock issued at the closing of the Acquisition. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of our Class A common stock.
We have also filed a registration statement on Form S-8 under the Securities Act to register shares of our Class A common stock that may be issued under our equity incentive plans from time to time, as well as any shares of our Class A common stock underlying outstanding options and restricted stock units that have been granted to our directors, executive officers and other employees, all of which are subject to time- or performance-based vesting conditions. Shares registered under this registration statement will be available for sale in the public market upon issuance subject to vesting arrangements and exercise of options, as well as Rule 144 in the case of our affiliates.
In addition, approximately 1.9 million of the founder shares initially purchased by the Sponsor in a private placement prior to HCMC’s initial public offering remain subject to lock-up pursuant to the terms of a letter agreement (the “Sponsor Agreement”) entered into between the Sponsor and HCMC in connection with the Merger Transaction, and will be released from this lock-up upon achieving certain market share price milestones within a period of seven years after the closing of the Merger Transaction. If any of these founder shares vest and are released from such lock-up, the Sponsor and its permitted transferees will not be restricted from selling such securities, other than by applicable securities laws.
We are unable to predict the effect that these sales, particularly sales by our directors, executive officers and significant stockholders, may have on the prevailing market price of our Class A common stock. If holders of these shares sell, or indicate an intent to sell, substantial amounts of our Class A common stock in the public market, the trading price of our Class A common stock could decline significantly and make it difficult for us to raise funds through securities offerings in the future.
Because we have no current plans to pay cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your shares for a price greater than that which you are deemed to have paid for it.
We have no current plans to pay cash dividends on our Class A common stock. The declaration, amount and payment of any future dividends will be at the sole discretion of the Board. The Board may take into account general and economic conditions, our financial condition and operating results, our available cash, current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, implications on the payment of dividends by us to our stockholders and such other factors as the board of directors may deem relevant. In addition, the Term Loan Agreement contains and any future indebtedness would likely contain a number of restrictive covenants that impose significant operating and financial restrictions on us, including restricting or limiting our ability to pay cash dividends. Furthermore, because we are a holding company, our ability to pay dividends will depend on our receipt of cash distributions and dividends, loans or other funds from our subsidiaries, which may be similarly affected by, among other things, the terms of any future indebtedness, other contractual restrictions and provisions of applicable law. Accordingly, we may not pay any dividends on our Class A common stock in the foreseeable future.
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If securities and industry analysts do not publish or cease publishing research or reports, or publish inaccurate or unfavorable research or reports, about our business or our market, our stock price and trading volume could decline.
The trading market for our Class A common stock and warrants will depend, in part, on the research and reports that securities and industry analysts publish about us, our business and our market. We do not have any control over these analysts or the information contained in their reports. If securities and industry analysts do not commence and maintain coverage of our business, our stock price and trading volume would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock, publish inaccurate or unfavorable research about our business or our market, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets and demand for our Class A common stock could decrease, which might cause our stock price and trading volume to decline.
We are an “emerging growth company” as well as a “smaller reporting company” within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies or smaller reporting companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.
We are an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) December 31, 2024. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to opt out of such extended transition period and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. This may make the comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accountant standards used.
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our Class A common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our Class A common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make the comparison of our financial statements with other public companies difficult or impossible.
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The issuance of shares of our Class A common stock upon exercise of our outstanding warrants would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
As of December 31, 2021, warrants to purchase an aggregate of approximately 12.85 million shares of our Class A common stock were outstanding and exercisable. The exercise price of these warrants is $11.50 per share. To the extent such warrants are exercised, additional shares of Class A common stock will be issued, which will result in dilution to holders of our Class A common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of our Class A common stock. However, there is no guarantee that the warrants will ever be in the money prior to their expiration, and as such, the warrants may expire worthless.
We may redeem unexpired warrants prior to their exercise at a time that is disadvantageous to warrantholders.
We have the ability to redeem outstanding warrants at any time prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sale price of our Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date we send the notice of redemption to the warrantholders. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding warrants could force warrantholders to: (i) exercise their warrants and pay the exercise price therefor at a time when it may be disadvantageous for them to do so; (ii) sell their warrants at the then-current market price when they might otherwise wish to hold their warrants; or (iii) accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of the warrants. Additionally, in the event we redeem the warrants, the Board may elect to require all holders of warrants to exercise such warrants on a cashless basis, by surrendering the warrants for a number of shares of our Class A common stock as calculated in accordance with the warrant agreement governing the warrants (the “Warrant Agreement”), even if the holder of a warrant would otherwise prefer to exercise the warrant for cash.
None of the private placement warrants will be redeemable by us so long as they are held by the Sponsor or its permitted transferees.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Not applicable.
Item 3. Legal Proceedings.
We are from time to time subject to, and are presently involved in, litigation and other legal proceedings. We believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material effect on our business, financial position, results of operations or cash flows. Information with respect to this Item 3 may be found under the heading “Contingencies” in Note 22, Commitments and Contingencies, and under the heading “Legal Proceedings” in Note 27, Subsequent Events, to the consolidated financial statements in this report, which information is incorporated into this Item 3 by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A common stock and public warrants are listed on the Nasdaq Global Select Market under the symbols “TLMD” and “TLMDW,” respectively. We do not intend to list the private placement warrants on any securities exchange.
Holders
As of March 24, 2022, there were 74 holders of record of our Class A common stock and 10 holders of record of the warrants. Such numbers do not include beneficial owners holding our securities through nominee names.
Dividends
We have not paid any cash dividends on the Class A common stock to date. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Our ability to pay dividends on our Class A common stock is restricted by our Term Loan Facility. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant.
Item 6. [Reserved].
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of our operations should be read together with our consolidated financial statements, including the related notes thereto, included elsewhere in this report. The following discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this report.
Prior to October 30, 2020, we were known as Healthcare Merger Corp. On October 30, 2020, we completed the Merger Transaction with Legacy SOC Telemed and, for accounting purposes, Healthcare Merger Corp. was deemed to be the acquired entity. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we”, “our”, “us”, the “Company” or “SOC Telemed” is intended to mean the business and operations of SOC Telemed, Inc. and its consolidated subsidiaries as they currently exist.
Overview
We are the leading provider of acute care telemedicine services and technology to U.S. hospitals and healthcare systems, based on number of customers. We provide technology-enabled clinical solutions, which include acute teleNeurology, telePsychiatry, teleCritical Care (ICU), telePulmonology, teleCardiology and other specialties. We support time-sensitive specialty care when patients are vulnerable and may not otherwise have access. Our solution was developed to support complex workflows in the acute care setting by integrating our cloud-based software platform, Telemed IQ, with a panel of consult coordination experts and a network of clinical specialists to create a seamless, acute care telemedicine solution.
We derive a substantial portion of our revenues from consultation fees generated under contracts with facilities that access our Telemed IQ software platform and clinical provider network. In general, our contracts are non-cancellable and typically have an initial one-to-three-year term, with an automatic renewal provision. They provide for a predetermined number of consultations for a fixed monthly fee and consultations in excess of the monthly allotment generate additional consultation fees, which we characterize as variable fee revenue. Revenues are driven primarily by the number of facilities, the consultations from our facilities, the number of services contracted for by a facility, the contractually negotiated prices of our services, and the negotiated pricing that is specific to that particular facility.
Our revenues were $94.4 million and $58.0 million for the years ended December 31, 2021 and 2020, respectively, representing a period-over-period increase of 63%, including an incremental $29.3 million of revenues from the Acquisition. We experienced higher core consultation volume during the year ended December 31, 2021, as compared to the year ended December 31, 2020, due to the Acquisition and the impact of the COVID-19 pandemic on the utilization of our core services. In recent periods, we have seen an improvement in our utilization rates for these services. We incurred net losses of $50.5 million and $49.8 million for the years ended December 31, 2021 and December 31, 2020, respectively. This increase was primarily due to our investments in growth, transaction costs associated with the Acquisition, and costs related to transitioning to becoming a public company.
Recent Developments
Acquisition by Patient Square Capital
On February 2, 2022, we entered into the Transaction Agreement to be acquired by affiliates of investment funds advised Patient Square Capital, a dedicated health care investment firm, in an all-cash transaction that values SOC Telemed at approximately $364 million, including net debt. Subject to the terms, conditions and certain exceptions set forth in the Transaction Agreement, SOC Telemed stockholders will receive $3.00 per share in cash, without any interest and subject to applicable withholding taxes, upon completion of the Transaction. The Transaction is expected to be completed in the second quarter of 2022, subject to the satisfaction or waiver of customary closing conditions, including the adoption and approval of the Transaction Agreement by SOC Telemed stockholders. See Note 27, Subsequent Events, in our consolidated financial statements included elsewhere in this report for further information.
Because the Transaction is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented elsewhere in this report, including those that present forward-looking information as that term is defined elsewhere herein, assume the continuation of SOC Telemed as a public company. If the Transaction is consummated, our actions and results may be different than those anticipated by such forward-looking statements contained in this report, and such differences may be material.
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COVID-19 Update
The COVID-19 pandemic had an impact on the utilization levels of our core services when it was declared a global pandemic in March 2020, and, as a result, our financial condition and year-to-date results of operations have been negatively impacted. Immediately following the declaration of COVID-19 as a global pandemic, the utilization levels of our core services decreased by approximately 40% in the aggregate. We have seen improvement in the utilization rates of these solutions in recent periods and have nearly returned to normal utilization levels in the third quarter of 2021.
The future impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the pandemic and the emergence of new variants of COVID-19, the impact on our customers and our sales cycles, the impact on our marketing efforts, and the effect on our suppliers, all of which are uncertain and cannot be predicted. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to our and our customers’ operations and the operations of our third-party suppliers, along with any related global slowdown in economic activity, may result in decreased revenues and increased costs, and we expect such impacts on our revenues and costs to continue through the duration of the pandemic. Further, the economic effects of COVID-19 have financially constrained some of our prospective and existing customers’ healthcare spending, offset by the increasing awareness that telemedicine can be a more cost-efficient model for hospitals and health systems to provide access to critical, clinical specialists and mitigate business disruption by assuring continuity of access to those providers. We have taken measures in response to the COVID-19 pandemic, including temporarily closing our offices and implementing a work-from-home policy for our workforce; suspending employee travel and in-person meetings; modifying our clinician provisioning protocols; and adjusting our supply chain and equipment levels. We may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, and stockholders. The net impact of these dynamics may negatively impact our ability to acquire new customers, complete implementations, and renew contracts with or sell additional solutions to our existing customers. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain. It is possible that the COVID-19 pandemic, the measures taken by the U.S. government, as well as state and local governments in response to the pandemic, and the resulting economic impact may materially and adversely affect our results of operations, cash flows and financial positions as well as our customers.
We believe our business is well-positioned to benefit from the trends that are accelerating digital transformation of the health care industry as a result of the COVID-19 pandemic. The COVID-19 pandemic has had a significant impact on the telemedicine market by increasing utilization, awareness and acceptance among patients and providers. In the current environment, telemedicine has been promoted at the highest levels of government as a key tool for on-going healthcare delivery while access to healthcare facilities remains limited due to constraints in healthcare facilities’ resources and general patient fear of traditional in-person visits. Moreover, with clinicians quarantined or otherwise relegated to their homes due to safety issues, telemedicine has provided a solution for remote providers to continue to care for patients and for hospitals to access additional specialists to augment remaining staff. During the COVID-19 pandemic, the U.S. Congress and the CMS have significantly reduced regulatory and reimbursement barriers for telemedicine. As a result, telemedicine spending increased starting in 2020, and we expect this trend to continue after the public health emergency. In addition to Medicare and Medicaid, many states have issued executive orders or permanent legislation removing or reducing the regulatory and reimbursement barriers for telemedicine.
Key Factors Affecting SOC Telemed’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 customers and the effectiveness of our customer success organization which we deploy on-site and through targeted engagement programs. We believe that increasing our current facility utilization rate is a key objective in order for our customers to realize tangible clinical and financial benefits from our solutions.
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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 expect to continue to make focused investments in marketing to drive brand awareness, increase the number of opportunities and expand our digital footprint. We also intend to continue to invest in our customer success function to target expansion of our business and to attract new facilities. Although we expect these activities will increase our net losses in the near term, we believe that these investments will contribute to our long-term growth and positively impact our business and results of operations.
Key Performance Measures
We review several key performance measures, discussed below, to evaluate business and results, measure performance, identify trends, formulate plans and make strategic decisions. We believe that the presentation of such metrics is useful to its investors because they are used to measure and model the performance of companies such as ours, with recurring revenue streams.
Number of facilities
We believe that the number of facilities using our platform are indicators of future revenue growth and our progress on our path to long-term profitability because we derive a substantial portion of our revenues from consultation fees under contracts with facilities that provide access to our professional provider network and platform. A facility represents a distinct physical location of a medical care site. The Acquisition of Access Physicians contributed 190 facilities as of December 31, 2021.
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| Facilities | 1,112 | 831 | ||||||
Bookings
We believe that new bookings are an indicator of future revenue growth and provide investors with useful information on period-to-period performance as evaluated by management and as a comparison to our past financial performance. Prior to the Acquisition, we defined bookings as the minimum contractual value for the initial 12 months of a contract as of the contract execution date, which amount included the minimum fixed consultation revenue, upfront implementation fees and technology and support fees, but excluded estimates of variable revenue for utilization in excess of the contracted amounts of consultations. Following the Acquisition, we changed our definition of bookings to reflect the annual recurring revenue from new contracts signed during a given period, which we believe more closely represents the annual revenues expected from those new agreements and creates a single definition for bookings between SOC Telemed and Access Physicians. As now defined, bookings represent the estimated annual recognized revenue for the initial 12 months of a contract as of the contract execution date. The minimum fixed consultation revenue, estimated variable fee revenue, 12 months of amortized upfront implementation fees, and technology and support fees are included in bookings. The minimum fixed consultation fee, variable fee revenue, as well as the technology and support fees are invoiced and recognized as revenues on a monthly basis. The upfront implementation fees are invoiced upon contract signing and accounted for as deferred revenues and amortized over our average customer relationship period. Bookings for the year ended December 31, 2021, are inclusive of activity from Access Physicians for the full period. Bookings attributable to Access Physicians prior to the closing date of the Acquisition were $5.1 million.
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| (dollars in thousands) | ||||||||
| Bookings | $ | 31,825 | $ | 12,161 | ||||
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Number of implementations
An implementation is the process by which we enable a new service offering at a facility. We determine a new service offering has been enabled when facilities are fully able to access our platform, which typically involves designing the solution, credentialing and privileging physicians, testing and installing telemedicine technologies, and training facility staff. Implementations result in new customers utilizing our services or delivery of new services to existing customers and are an indicator of revenue growth. Implementations for the year ended December 31, 2021, are inclusive of activity from Access Physicians for the full period. Implementations attributable to Access Physicians prior to the closing date of the Acquisition were 38.
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Implementations | 390 | 260 | ||||||
Number of consultations
Because our consultation fee revenue generally increases as the number of visits increase, we believe the number of consultations provides investors with useful information on period-to-period performance as evaluated by management and as a comparison to our past financial performance. We define core consultations as consultations utilizing our 11 core services. Telemed IQ / other consultations are defined as consultations performed by other physician networks utilizing our technology platform, Telemed IQ. We experienced increased core consultation volume and Telemed IQ / other consultation volume for the year ended December 31, 2021, as compared to the year ended December 31, 2020, due to the impact of the COVID-19 pandemic on the utilization of our core services during 2020. Core consultations for the year ended December 31, 2021, include 109,723 core consultations attributable to Access Physicians since the closing date of the Acquisition.
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Core consultations | 254,814 | 129,606 | ||||||
| Telemed IQ / other consultations | 254,002 | 171,218 | ||||||
| Total consultations | 508,816 | 300,824 | ||||||
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 customers pay a fixed monthly fee for access to our Telemed IQ software platform and our clinical provider network. The fixed monthly fee provides for a predetermined number of monthly consultations. Should the number of consultations exceed the contracted amount, the customer also pays a variable consultation fee for the additional utilization. Under certain contracts, we receive payments from patients, third-party payers and others for services rendered. The third-party payers pay us based on contracted rates or the entities’ billed charges. To facilitate the delivery of the consultation services, facilities use telemedicine equipment, which is either provided and installed by us or procured by the customer from external vendors. Customers of Access Physicians are sold a telemedicine cart with a computer and camera in order to properly facilitate meetings between patients, on-site health professionals, and remote physicians. We also provide the facilities with user training as well as technology and support services, which include monitoring and maintenance of our telemedicine equipment and access to our reporting portal. Prior to the start of a contract, customers make upfront non-refundable payments when contracting for implementation services.
Revenue is 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.
The Company recognizes revenue using a five-step model:
| 1) | Identify the contract(s) with a customer; |
| 2) | Identify the performance obligation(s) in the contract; |
| 3) | Determine the transaction price; |
| 4) | Allocate the transaction price to the performance obligations in the contract; and |
| 5) | Recognize revenue when (or as) it satisfies a performance obligation. |
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Revenues are recognized when we satisfy our performance obligation to provide telemedicine consultation services as requested. These consultations covered by the fixed monthly fee, consultations that incur a variable fee, services rendered to be paid by patients and third-party payers, use of telemedicine equipment, training, maintenance, and support are substantially the same and have the same pattern of transfer. Therefore, we have determined these represent a series of distinct services provided over a period of time in a single performance obligation. Access Physicians sells telemedicine carts to its customers and satisfaction of this performance obligation occurs upon delivery to the customer when control of the telemedicine cart is transferred. Revenues from telemedicine cart sales is recognized at a point in time, upon delivery. We have assurance-type warranties that do not result in separate performance obligations. Upfront nonrefundable fees do not result in the transfer of promised goods or services to the customer; therefore, we defer this revenue and recognize it over the average customer life of 48 months. Deferred revenue consists of the unamortized balance of nonrefundable upfront fees and maintenance fees, which are classified as current and non-current based on when we expect to recognize revenue.
See “— Critical Accounting Policies and Estimates — Revenue Recognition” for a more detailed discussion of our revenue recognition policy.
Cost of Revenues
Cost of revenues primarily consists of fees paid to our physicians, costs incurred in connection with licensing our physicians, equipment leasing, maintenance and depreciation, amortization of capitalized software development costs (internal-use software), and costs related to medical malpractice insurance. Cost of revenues is driven primarily by the number of consultations completed in each period. Our business and operational models are designed to be highly scalable and leverage variable costs to support revenue-generating activities. We will continue to invest additional resources in our platform, providers, and clinical resources to expand the capability of our platform and ensure that customers are realizing the full benefit of our offerings. The level and timing of investment in these areas could affect our cost of revenues in the future.
Gross Profit and Gross Margin
Our gross profit is our total revenues minus our total cost of revenues, and our gross margin is our gross profit expressed as a percentage of our total revenues. Our gross margin has been and will continue to be affected by a number of factors, most significantly the fees we charge and the number of consultations we complete.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of sales and marketing, research and development, operations, and general and administrative expenses. Personnel costs are the most significant component of selling, general and administrative expenses and consist of salaries, benefits, bonuses, stock-based compensation expense, and payroll taxes. Selling, general and administrative expenses also include overhead costs for facilities, professional fees, and shared IT related expenses, including depreciation expense.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related expenses for our sales, customer success, and marketing staff, including costs of communications materials that are produced to generate greater awareness and utilization among our facilities. Marketing costs also include third-party independent research, trade shows and brand messages, public relations costs and stock-based compensation for our sales and marketing employees. Our sales and marketing expenses exclude any allocation of occupancy expense and depreciation and amortization.
Research and development
Research and development, or R&D expense, consists primarily of engineering, product development, support and other costs associated with products and technologies that are in development. These expenses include employee compensation, including stock-based compensation. We expect R&D expenses as a percentage of revenues to vary over time depending on the level and timing of our new product development efforts, as well as the development of our clinical solutions and other related activities.
Operations
Operations expenses consist primarily of personnel and related expenses for our physician licensing, credentialing and privileging, project management, implementation, consult coordination center, revenue cycle management, and clinical provisioning functions.
General and Administrative
General and administrative expenses include personnel and related expenses of, and professional fees incurred by, our executive, finance, legal, information technology infrastructure, and human resources departments. They also include stock-based compensation, all facilities costs including utilities, communications and facilities maintenance, and professional fees (including legal, tax, and accounting). Additionally, during 2020, we incurred significant integration, acquisition, transaction and executive severance costs in connection with the Merger Transaction, including incremental expenses such as advisory, legal, accounting, valuation, and other professional or consulting fees, as well as other related incremental executive severance costs. During 2021, we have incurred significant integration, acquisition, severance and transaction costs in connection with the Acquisition and restructuring.
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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 consist of changes in the fair value of contingent consideration associated with the Acquisition of Access Physicians in March 2021. See Note 4, Business Combinations, to our consolidated financial statements included elsewhere in this report for further information.
Gain on Contingent Shares Issuance Liabilities
Gain on contingent shares issuance liabilities consists of the change in the fair value of (1) 1,875,000 shares of our Class A common stock held by HCMC’s sponsor and subsequently distributed to its permitted transferees which were modified and became subject to forfeiture in connection with the closing of the Merger Transaction, and (2) 350,000 private placement warrants granted to HCMC’s sponsor and subsequently distributed to its permitted transferees as part of the Merger Transaction. The contingent shares issuance liabilities are revalued at their fair value every reporting period. See Note 6, Fair Value of Financial Instruments, and Note 17, Contingent Shares Issuance Liabilities, to our consolidated financial statements included elsewhere in this report for further information.
Gain on Puttable Option Liabilities
Gain on puttable option liabilities consists of changes in the fair value of puttable option liabilities. These puttable options are no longer outstanding as they were exercised as part of the Merger Transaction on October 30, 2020.
Interest Expense
Interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and issuance costs associated with our Term Loan Facility and the Subordinated Note.
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table sets forth our consolidated statements of operations data for the years ended December 31, 2021 and 2020:
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Consolidated Statement of Operations data: | ||||||||
| Revenues | $ | 94,442 | $ | 57,995 | ||||
| Cost of revenues | 64,091 | 38,542 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 86,606 | 61,280 | ||||||
| Changes in fair value of contingent consideration | (3,265 | ) | - | |||||
| Total costs and expenses | 147,432 | 99,822 | ||||||
| Loss from operations | (52,990 | ) | (41,827 | ) | ||||
| Gain on contingent shares issuance liabilities | 11,325 | 4,237 | ||||||
| Gain on puttable option liabilities | - | 1 | ||||||
| Interest expense | (6,800 | ) | (12,152 | ) | ||||
| Interest expense – Related party | (2,229 | ) | (75 | ) | ||||
| Loss before income taxes | (50,694 | ) | (49,816 | ) | ||||
| Income tax benefit (expense) | 152 | (31 | ) | |||||
| Net loss | $ | (50,542 | ) | $ | (49,847 | ) | ||
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Revenues
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenues | $ | 94,442 | $ | 57,995 | $ | 36,447 | 63 | % | ||||||||
Revenues increased primarily due to the Acquisition, which contributed $29.3 million in incremental revenue. The increase was also due to an increase in fixed fees of $5.0 million attributable to new implementations and facilities and an increase in variable fee revenue of $2.1 million driven by an increase in core consultation volume.
Cost of Revenues and Gross Margin
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Cost of revenues | $ | 64,091 | $ | 38,542 | $ | 25,549 | 66 | % | ||||||||
| Gross margin | 32 | % | 34 | % | ||||||||||||
Cost of revenues increased primarily due to the Acquisition, which contributed $19.1 million in incremental costs. The increase was also driven by an increase of $5.0 million in physician fees due to an increase in our scheduled hours over the same period due to the recovery of demand for services and an increase of $1.4 million in equipment, licensing, and medical malpractice costs.
The decrease in gross margin was primarily driven by an increase in core consultation volume in the year ended December 31, 2021, due to increased demand for our services, which required us to increase the number of our scheduled hours resulting in increased physicians fees.
Selling, General and Administrative Expenses
| Years Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Selling, general and administrative expenses: | ||||||||||||||||
| Sales and marketing | $ | 8,861 | 7,446 | $ | 1,415 | 19 | % | |||||||||
| Research and development | 2,894 | 1,376 | 1,518 | 110 | % | |||||||||||
| Operations | 10,328 | 9,032 | 1,296 | 14 | % | |||||||||||
| General and administrative | 64,523 | 43,426 | 21,097 | 49 | % | |||||||||||
| Total | $ | 86,606 | $ | 61,280 | $ | 25,326 | 41 | % | ||||||||
Sales and marketing expenses increased due to investment in our go-to-market strategy and additional headcount for our sales and marketing teams.
Research and development expenses increased as we continue to invest in product development.
Operations expenses increased due to salaries, benefits and stock-based compensation associated with increased headcount for our operations team including revenue cycle management, credentialing, licensing and privileging personnel.
General and administrative expenses increased primarily due to $15.3 million attributable to the Acquisition and $5.2 million in integration, acquisition, transaction and executive severance costs in connection with the Merger Transaction, the Acquisition and the restructuring, and other costs associated with operating as a publicly traded company, offset by a $3.2 million decrease in stock-based compensation.
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The following table reflects the portion of the total selling, general and administrative expenses related to stock-based compensation, depreciation and amortization and integration costs for the year ended December 31, 2021, compared to the year ended December 31, 2020:
| Year Ended December 31, 2021 | Year Ended December 31, 2020 | |||||||||||||||||||||||
| Stock-Based Compensation | Depreciation and Amortization | Integration Costs (1) | Stock-Based Compensation | Depreciation and Amortization | Integration Costs (1) | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Sales and marketing | $ | 255 | $ | $ | $ | 41 | $ | — | $ | — | ||||||||||||||
| Research and development | 661 | 143 | — | — | ||||||||||||||||||||
| Operations | 612 | 114 | — | — | ||||||||||||||||||||
| General and administrative | 13,226 | 4,231 | 12,499 | 17,611 | 1,593 | 7,304 | ||||||||||||||||||
| Total | $ | 14,754 | $ | 4,231 | $ | 12,499 | $ | 17,909 | $ | 1,593 | $ | 7,304 | ||||||||||||
| (1) | Represents integration, acquisition, transaction and severance costs. |
Changes in Fair Value of Contingent Consideration
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Changes in fair value of contingent consideration | $ | 3,265 | $ | - | $ | 3,265 | * | |||||||||
| * | Percentage not meaningful |
Changes in fair value of contingent consideration increased due to the re-assessment of the fair value of contingent consideration recorded in connection with the Acquisition.
Loss from Operations
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Loss from operations | $ | 52,990 | $ | 41,827 | $ | 11,163 | 27 | % | ||||||||
| * | Percentage not meaningful |
Loss from operations increased due to an increase in selling, general and administrative expenses primarily due to integration, transaction and executive severance costs in connection with the Acquisition and the restructuring, and costs associated with operating as a publicly traded company.
Gain on Contingent Shares Issuance Liabilities
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Gain on contingent shares issuance liabilities | $ | 11,325 | $ | 4,237 | $ | 7,088 | 167 | % | ||||||||
Gain on contingent shares issuance liabilities increased due to the greater decrease in our stock price during the year ended December 31, 2021 as compared to the period from October 30, 2020 to December 31, 2020.
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Gain on Puttable Option Liabilities
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Gain on puttable option liabilities | $ | - | $ | 1 | $ | (1 | ) | * | ||||||||
| * | Percentage not meaningful |
Gain on puttable option liabilities decreased to $0 for the year ended December 31, 2021, because the puttable options ceased to be outstanding upon their exercise in connection with the closing of the Merger Transaction in the fourth quarter of 2020.
Interest Expense
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Interest expense | $ | 9,029 | $ | 12,227 | $ | (3,198 | ) | (26 | )% | |||||||
Interest expense decreased primarily due to a prepayment premium and acceleration of the amortization of discount fees in connection with the payoff of existing debt at the closing of the Merger Transaction in the fourth quarter of 2020.
Income Tax Benefit (Expense)
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Income tax benefit (expense) | $ | 152 | $ | (31 | ) | $ | 183 | * | ||||||||
| * | Percentage not meaningful |
Income tax expense decreased as a result of the release of a valuation allowance upon recording a deferred tax liability in connection with the Acquisition.
Net Loss
| Year
Ended December 31, |
||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Net loss | $ | 50,542 | $ | 49,847 | $ | 695 | 1 | % | ||||||||
Net loss increased due to the increase in the loss from operations as described above, a gain on contingent shares issuance liabilities, and a decrease in interest expense.
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Certain Non-GAAP Financial Measures
We believe that, in addition to our financial results determined in accordance with U.S. generally accepted accounting principles (“GAAP”), adjusted gross profit, adjusted gross margin, and adjusted EBITDA, all of which are non-GAAP financial measures, are useful in evaluating our business, results of operations, and financial condition.
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| (dollars in thousands) | ||||||||
| Adjusted gross profit | $ | 35,501 | $ | 23,429 | ||||
| Adjusted gross margin | 38 | % | 40 | % | ||||
| Adjusted EBITDA | $ | (19,444 | ) | $ | (11,111 | ) | ||
However, our use of the terms adjusted gross profit, adjusted gross margin and adjusted EBITDA may vary from that of others in our industry. Adjusted gross profit, adjusted gross margin and adjusted EBITDA should not be considered as an alternative to gross profit, net loss, net loss per share or any other performance measures derived in accordance with GAAP as measures of performance. Adjusted gross profit, adjusted gross margin and adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
| ● | Adjusted EBITDA does not reflect the significant interest expense on our debt; |
| ● | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any expenditures for such replacements; and |
| ● | other companies in our industry 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 the presentation of our non-GAAP financial measures. Our presentation of non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. When evaluating our performance, you should consider these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable GAAP measures set forth in the reconciliation tables below and our other GAAP results.
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted gross profit and adjusted gross margin are non-GAAP financial measures that our management uses to assess our overall performance. We define adjusted gross profit as GAAP gross profit, plus depreciation and amortization (including internal-use software), equipment leasing costs and stock-based compensation. Our practice of procuring equipment through lease financing ceased in the second quarter of 2017. We define adjusted gross margin as our adjusted gross profit divided by our revenues. We believe adjusted gross profit and adjusted gross margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as these metrics eliminate the effects of depreciation and amortization and equipment lease costs. The following table presents a reconciliation of adjusted gross profit from the most comparable GAAP measure, gross profit, for the periods presented:
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenues | $ | 94,442 | $ | 57,995 | $ | 36,447 | 63 | % | ||||||||
| Cost of revenues | 64,091 | 38,542 | 25,549 | 66 | % | |||||||||||
| Gross profit | 30,351 | 19,453 | 10,898 | 56 | % | |||||||||||
| Add: | ||||||||||||||||
| Depreciation and amortization | 5,082 | 3,910 | 1,172 | 30 | % | |||||||||||
| Equipment leasing costs | 8 | 66 | (58 | ) | (88 | )% | ||||||||||
| Stock-based compensation(1) | 60 | - | 60 | * | ||||||||||||
| Adjusted gross profit | $ | 35,501 | $ | 23,429 | 12,072 | 52 | % | |||||||||
| Adjusted gross margin (as a percentage of revenues) | 38 | % | 40 | % | ||||||||||||
| * | Percentage not meaningful |
| (1) | Stock-based compensation relates to participation by physicians in our ESPP. |
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Adjusted gross profit increased primarily due to an increase in demand for core consultations and the Acquisition over the same period.
Adjusted gross margin decreased in 2021 as the increase in core consultation volume in the year ended December 31, 2021 due to increased demand for our services required us to increase the number of our scheduled hours resulting in increased physicians fees.
Adjusted EBTIDA
We believe that adjusted EBITDA enhances an investor’s understanding of our financial performance as it is useful in assessing our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. Adjusted EBITDA consists of net loss before interest, taxes, depreciation and amortization (including internal-use software), write off of property and equipment, net, stock-based compensation, gain on puttable option liabilities, gain on contingent shares issuance liabilities, gain on change in fair value of contingent consideration, and integration, acquisition, transaction and executive severance costs. We believe adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance. The following table reconciles net loss to adjusted EBITDA:
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Net loss | $ | (50,542 | ) | $ | (49,847 | ) | $ | (695 | ) | 1 | % | |||||
| Add: | ||||||||||||||||
| Interest expense | 9,029 | 12,227 | (3,198 | ) | (26 | )% | ||||||||||
| Income tax (benefit) expense | (152 | ) | 31 | (183 | ) | * | ||||||||||
| Depreciation and amortization | 9,313 | 5,503 | 3,810 | 69 | % | |||||||||||
| Write off of property and equipment, net | 185 | - | 185 | * | ||||||||||||
| Stock-based compensation | 14,814 | 17,909 | (3,095 | ) | (17 | )% | ||||||||||
| Gain on contingent shares issuance liabilities | (11,325 | ) | (4,237 | ) | (7,088 | ) | 167 | % | ||||||||
| Gain on puttable option liabilities | - | (1 | ) | 1 | * | |||||||||||
| Gain on change in fair value of contingent consideration | (3,265 | ) | - | (3,265 | ) | * | ||||||||||
| Integration, acquisition, transaction, and executive severance costs | 12,499 | 7,304 | 5,195 | 71 | % | |||||||||||
| Adjusted EBITDA | $ | (19,444 | ) | $ | (11,111 | ) | $ | (8,333 | ) | 75 | % | |||||
| * | Percentage not meaningful |
Adjusted EBITDA decreased primarily due to an increase in selling, general, and administrative expenses from the Acquisition and due to operating as a public company, offset by an increase in gross profit due to increased demand for our services.
Liquidity and Capital Resources
As of December 31, 2021, our principal source of liquidity was cash and cash equivalents of $38.9 million. We believe that our cash and cash equivalents as of December 31, 2021 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 will continue to be our cash and cash equivalents and any additional capital we may obtain through additional equity or debt financings. Our future capital requirements will depend on many factors, including investments in growth and technology. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies which may require us to seek additional equity or debt financing.
On February 2, 2022, we entered into the Transaction Agreement to be acquired by affiliates of investment funds advised Patient Square Capital in an all-cash transaction. We have agreed to various covenants and agreements in the Transaction Agreement, including, among others, covenants to conduct our business in all material respects in the ordinary course during the period between the date of the Transaction Agreement and the completion of the Transaction. In addition, without the consent of Spark Parent, we will not engage in certain types of transactions or take certain actions outside of the ordinary course during such period, including incurring additional debt or issuing any equity securities outside of certain limited exceptions. If the Transaction Agreement is terminated in certain circumstances, including by us in order to enter into a superior proposal or by Spark Parent because the Board withdraws its recommendation in favor of the Transaction, we would be required to pay Spark Parent a termination fee of $11.5 million. We do not believe these restrictions will prevent us from meeting our debt obligations, ongoing costs of operations, working capital needs or capital expenditure requirements. See Note 27, Subsequent Events, in our consolidated financial statements included elsewhere in this report for further information.
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Indebtedness
Term Loan Facility
On March 26, 2021, we entered into the Term Loan Agreement with SLR Investment, as collateral agent on behalf of the individual lenders, providing for a Term Loan Facility of up to $125.0 million. Under the Term Loan Facility, $85.0 million was immediately available and borrowed on March 26, 2021, in two tranches consisting of $75.0 million (“Term A1 Loan”) and $10.0 million (“Term A2 Loan” and, together with the Term A1 Loan, the “Term A Loans”) to finance a portion of the closing cash consideration for the Acquisition. An additional $15 million will be made available subject to the terms and conditions of the Term Loan Agreement in two tranches as follows: (i) a $2.5 million ($12.5 million if the Term A2 Loan is earlier prepaid) to be drawn by June 20, 2022 (“Term B Loan”), subject to no event of default as defined in the Term Loan Agreement and the Company achieving the net revenue milestone of at least $55.0 million on a trailing six-month basis by June 20, 2022; and (ii) a $12.5 million to be drawn by December 20, 2022 (“Term C Loan”), subject to no event of default as defined in the Term Loan Agreement and the Company achieving the net revenue milestone of at least $65.0 million on a trailing six-month basis by December 20, 2022. The Term Loan Facility also provides for an uncommitted term loan in the principal amount of up to $25.0 million (“Term D Loan” and, collectively with the Term A Loans, the Term B Loan and the Term C Loan, the “Term Loans”), which availability is subject to the sole and absolute discretionary approval of the lenders and the satisfaction of certain terms and conditions in the Term Loan Agreement.
Borrowings under the Term Loan Facility bear interest at a rate per annum equal to 7.47% plus the greater of (a) 0.13% and (b) LIBOR (the “Applicable Rate”), payable monthly in arrears beginning on May 1, 2021. Until May 1, 2024, the Company will pay only interest monthly. However, the Term Loan Agreement has an interest-only extension clause which offers the Company the option to extend the interest-only period for six months until November 1, 2024, after having achieved two conditions: (i) a minimum of six months of positive EBITDA prior to January 31, 2024; and (ii) being in compliance with the net revenue financial covenant described below. In either case, the maturity date for each Term Loan is April 1, 2026.
The Term Loan Agreement includes two financial covenants requiring (i) the maintenance of a minimum liquidity level of at least $5.0 million at all times; and (ii) minimum net revenues measured quarterly on a trailing twelve-month basis of at least $81.8 million on March 31, 2022, $88.2 million on June 30, 2022, $94.5 million on September 30, 2022, $100.9 million on December 31, 2022, and thereafter 60% of projected net revenues in accordance with an annual plan to be submitted to the lenders commencing on March 31, 2023. The Term Loan Agreement also contains customary affirmative and negative covenants which, in certain circumstances, would limit the Company’s ability to engage in mergers or acquisitions and dispose of any of its subsidiaries.
The Term Loan Facility is guaranteed by all of the Company’s wholly owned subsidiaries, including the entities acquired pursuant to the Acquisition, subject to customary exceptions. The Term Loan Facility is secured by first priority security interests in substantially all of the Company’s assets, subject to permitted liens and other customary exceptions.
On June 4, 2021, we used a portion of the proceeds from our public offering that was completed in June 2021 to make a payment of $10.5 million to repay the Term A2 Loan, including related prepayment premiums and accrued interest.
On November 10, 2021, we entered into an amendment to the Term Loan Agreement, pursuant to which the net revenue milestone for the Term B Loan was reduced from $55.0 million to $51.5 million on a trailing six-month basis, which made the tranche immediately available to be drawn. In connection with the amendment, we borrowed the full $12.5 million of the Term B Loan on November 10, 2021.
As of December 31, 2021, the outstanding principal balance of these Term Loans was $87.5 million.
See Note 12, Debt, in our consolidated financial statements included elsewhere in this report for further information.
Subordinated Note
On March 26, 2021, the Company issued the Subordinated Note in an aggregate principal amount of $13.5 million in favor of SOC Holdings LLC, an affiliate of Warburg Pincus, for proceeds at closing of $11.5 million, which proceeds were used to finance a portion of the closing cash consideration for the Acquisition. The unpaid balance of the Subordinated Note accrues interest at an escalating rate per annum initially equal to 7.47% plus the Applicable Rate under the Term Loan Facility, increasing to 10.87% plus the Applicable Rate on September 30, 2021, and then an additional 2.00% each year thereafter, and will be added to the principal amount of the Subordinated Note on a monthly basis. The maturity date of the Subordinated Note is the earliest to occur of September 28, 2026, and the occurrence of a change of control. The Subordinated Note is fully subordinated to the Term Loan Facility and may only be repaid in accordance with the terms of the Term Loan Agreement. The Subordinated Note further provides that we are obligated to repay a portion of the principal amount outstanding under the Term Loan Facility and the balance of the Subordinated Note from the proceeds of any offering by us of our equity securities. On June 4, 2021, we used a portion of the proceeds from our public offering that was completed in June 2021 to make a payment of $13.7 million to repay the balance of the Subordinated Note.
See Note 12, Debt, in our consolidated financial statements included elsewhere in this report for further information.
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Cash Flows
The following table shows a summary of our cash flows for the periods presented:
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (40,075 | ) | $ | (22,576 | ) | ||
| Investing activities | (94,078 | ) | (6,530 | ) | ||||
| Financing activities | 134,259 | 63,319 | ||||||
| Net increase in cash, cash equivalents | $ | 106 | $ | 34,213 | ||||
Operating Activities
Net cash used in operating activities for the year ended December 31, 2021, was $40.1 million, consisting primarily of a net loss of $50.5 million and an increase in working capital of $3.3 million, offset by non-cash charges of $13.7 million. The changes in working capital were primarily due to an increase in accounts receivable and a decrease in prepaid expenses and other current assets due to timing of payments. The non-cash charges primarily consisted of depreciation, amortization, stock-based compensation expense, provision for accounts receivable allowances, and non-cash interest expense, changes in fair value of contingent consideration and gain on contingent share issuance liabilities.
Net cash used in operating activities for the year ended December 31, 2020, was $22.6 million, consisting primarily of a net loss of $49.8 million offset by changes in working capital of $2.8 million and non-cash charges of $24.4 million. The changes in working capital was primarily due to a decrease in accounts receivable and increase in accounts payable and accrued liabilities due to timing of payments. The non-cash charges primarily consisted of depreciation, amortization, stock-based compensation expense, provision for accounts receivable allowances, and non-cash interest expense.
Investing Activities
Net cash used in investing activities in the year ended December 31, 2021, was $94.1 million, consisting of $89.8 million in net cash paid in connection with the Acquisition, $3.3 million in capitalized software development costs, and $1.0 million in purchases of property and equipment.
Net cash used in investing activities in the year ended December 31, 2020, was $6.5 million, consisting of $4.3 million capitalized software development costs and $2.2 million in purchases of property and equipment.
Financing Activities
Net cash provided by financing activities in the year ended December 31, 2021, was $134.3 million, consisting primarily of $106.9 million of net proceeds from borrowings under the Term Loan Facility and proceeds from the Subordinated Note issued in connection with the Acquisition and $51.5 million of net proceeds from the issuance of Class A common stock in the public offering that was completed in June 2021, offset by $24.5 million in partial repayment of borrowings under the Term Loan Facility and Subordinated Note.
Net cash provided by financing activities in the year ended December 31, 2020, was $63.3 million, consisting primarily of net proceeds from our Merger Transaction of $209.8 million and $10.9 million in net proceeds from the issuance of our Series J preferred stock. This was partially offset by repayment of the long-term debt principal of $88.3 million and liquidation of Series H, I and J preferred stocks by $63.2 million.
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 GAAP. The preparation of our financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
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While our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments.
Revenue Recognition
Our revenues are generated from service contracts with customer hospitals, physician practice groups, or other users. Revenues are recognized when we satisfy our performance obligation to provide telemedicine consultation services as requested. These consultations covered by the fixed monthly fee, consultations that incur a variable fee, services rendered to be paid by patients and third-party payers, use of telemedicine equipment, training, maintenance, and support are substantially the same and have the same pattern of transfer. Therefore, we have determined these represent a series of distinct services provided over a period of time in a single performance obligation. Payments received from third-party payers are generally less than billed charges. We monitor our revenue and receivables from third-party payers and record an estimated contractual allowance to properly account for the differences between billed and reimbursed amounts. Revenue from third-party payers is presented net of an estimated provision for contractual adjustments. Upfront nonrefundable fees do not result in the transfer of promised goods or services to the customer; therefore, we defer this revenue and recognize it over the average customer life of 48 months. Deferred revenue consists of the unamortized balance of nonrefundable upfront fees and maintenance fees, which are classified as current and non-current based on when we expect to recognize revenue.
Business Combinations
We apply the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by us are included as of the respective acquisition date. We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase consideration over the value of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to the fair value of acquired intangible assets. We may adjust the preliminary purchase price allocation, as necessary, for up to one year after the acquisition closing date if we obtain more information regarding asset valuations and liabilities assumed. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Stock-Based Compensation
We maintain an equity incentive plan to provide long-term incentives for employees, consultants and members of our board of directors. The plan allows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and directors.
We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model. The grant date fair value of stock-based awards is expensed on a straight-line basis over the period during which the employee is required to provide service in exchange for the award, which is typically the vesting period. We estimate forfeitures based on historical experience.
Prior to the Merger Transaction, Legacy SOC Telemed estimated the fair value of stock-based awards using the Black-Scholes option-pricing model, which required the input of highly subjective assumptions. Our assumptions were as follows:
Fair value — Because the common stock of Legacy SOC Telemed was not publicly traded prior to the Merger Transaction, we had to estimate the fair value of the common stock. The board of directors considered numerous objective and subjective factors to determine the fair value of the common stock at each meeting in which awards were approved.
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Expected volatility — Because the common stock of Legacy SOC Telemed was not publicly traded prior to the Merger Transaction, the expected volatility was derived from the average historical volatilities of publicly traded companies within our industry that we considered to be comparable to our business over a period approximately equal to the expected term for employees’ options and the remaining contractual life for nonemployees’ options. In evaluating similarity, we considered factors such as stage of development, risk profile, enterprise value and position within the life sciences industry. Subsequent to the Merger Transaction, we do not have sufficient history of our publicly traded stock; therefore, we continue to estimate volatility using this methodology.
Expected term — We determined and continue to determine the expected term based on the average period the stock options are expected to remain outstanding using the simplified method, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period, as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
Risk-free rate — The risk-free interest rate was and continues to be based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the options.
Expected dividend yield — We utilized and continue to utilize a dividend yield of zero, as we do not currently issue dividends, nor do we expect to do so in the future.
The following assumptions were used to calculate the fair value of stock options granted to employees:
| Year Ended December 31, | ||||||||
| 2021 (1) | 2020 (2) | |||||||
| Expected dividend | - | 0.0 | % | |||||
| Weighted average volatility | - | 80.0 | % | |||||
| Expected term | - | 1 – 5 years | ||||||
| Risk-free interest rate | - | 0.15% – 0.40 | % | |||||
| (1) | No new grants were issued in the year ended December 31, 2021. |
| (2) | No new grants were issued in the year ended December 31, 2020. These assumptions relate to option modifications in 2020. |
We valued all outstanding performance stock units (“PSUs”) applying an approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over each one of the components of the PSUs based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial.
The fair value of each grant made during the year ended December 31, 2021, was estimated on the grant date using the Monte Carlo simulation with the following assumptions:
| Year Ended December 31, | ||||||||
| 2021 | 2020(1) | |||||||
| Current stock price | $ | 1.39 – 7.52 | - | |||||
| Expected volatility | 55% - 75% | - | ||||||
| Expected term (in years) | 3 – 3.5 | - | ||||||
| Risk-free interest rate | 0.24% - 0.91% | - | ||||||
| (1) | No PSUs were issued during the year ended December 31, 2020. |
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Contingent Shares Issuance Liabilities and Puttable Option Liabilities
We recognize derivatives as either an asset or liability measured at fair value in accordance with ASC 815, Derivatives and Hedging. The puttable options were our derivative financial instruments and were recorded in the consolidated balance sheets at fair value. We do not enter into derivative transactions for speculative or trading purposes. Contingent shares issuance liabilities reflect our liability to provide a variable number of shares to HCMC’s sponsor and its permitted transferees if certain publicly traded stock prices are met at various points in time. The liability was recorded at fair value at the date of the Merger Transaction and is revalued at each reporting period using a Monte Carlo simulation that factors in the current price of our Class A common stock, the estimated likelihood of a change in control, and the vesting criteria of the award.
Impairment of Goodwill and Long-lived Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually on December 31 or more frequently if events or changes in circumstances indicate that the asset may be impaired. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. We compare the estimated fair value of a reporting unit to its book value, including goodwill. If the fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. However, if the book value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Our annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the consolidated financial statements.
Intangible assets resulted from business acquisitions and include hospital contract relationships, non-compete agreements, and trade names. Hospital contract relationships are amortized over a period of 6 to 17 years, non-compete agreements are amortized over a period of 4 to 5 years, and trade names are amortized over a period of 2 to 5 years. All intangible assets are amortized using the straight-line method.
Long-lived assets (property and equipment and capitalized software costs) used in operations are reviewed for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. Upon indication of possible impairment of long-lived assets held for use, we evaluate the recoverability of such assets by measuring the carrying amount of the long-lived asset group against the related estimated undiscounted future cash flows of the long-lived asset group. For long-lived assets to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. There were no impairment losses through December 31, 2021.
Recently Adopted Accounting Pronouncements
See the sections titled “Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements — Accounting pronouncements issued but not yet adopted” in Note 2 to our consolidated financial statements included elsewhere in this report for more information.
Emerging Growth Company
Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or the 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 Merger Transaction, we intend to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information you receive from other public companies.
We also intend to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We had cash and cash equivalents totaling $38.9 million and $38.8 million as of December 31, 2021 and 2020, 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.
As of December 31, 2021, we had $87.5 million in variable rate debt outstanding. The maturity date for each Term Loan comprising the Term Loan Facility is April 1, 2026, and borrowings under the Term Loan Facility bear interest at a fluctuating rate per annum equal to 7.47% plus the greater of LIBOR and 0.13%. An immediate 100 basis point change in LIBOR would not have a material impact on our debt-related obligations, financial position or results of operations.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of SOC Telemed, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SOC Telemed, Inc. and its subsidiaries and affiliates (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of changes in stockholders’ equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
March 30, 2022
We have served as the Company’s auditor since 2015.
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SOC Telemed, Inc. and Subsidiaries and Affiliates
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share amounts)
As of December 31,
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents (from variable interest entities $ | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Capitalized software costs, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Deposits and other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable (from variable interest entities $ | $ | $ | ||||||
| Accrued expenses (from variable interest entities $ | ||||||||
| Deferred revenues | ||||||||
| Capital lease obligations | ||||||||
| Other current liabilities | ||||||||
| Stock-based compensation liabilities | ||||||||
| Total current liabilities | ||||||||
| Deferred revenues | ||||||||
| Capital lease obligations | ||||||||
| Long term debt, net of unamortized discount and debt issuance costs | ||||||||
| Contingent shares issuance liabilities | ||||||||
| Other long-term liabilities (from variable interest entities $ | ||||||||
| Total liabilities | $ | $ | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 22) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Class A common stock, $ | ||||||||
| Preferred stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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SOC Telemed, Inc. and Subsidiaries and Affiliates
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per share amounts)
Years ended December 31,
| 2021 | 2020 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Operating expenses | ||||||||
| Selling, general and administrative | ||||||||
| Changes in fair value of contingent consideration | ( | ) | ||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Gain on contingent shares issuance liabilities | ||||||||
| Gain on puttable option liabilities | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest expense – Related party | ( | ) | ( | ) | ||||
| Total other income (expense) | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax benefit (expense) | ( | ) | ||||||
| Net loss and comprehensive loss | $ | ( | ) | $ | ( | ) | ||
| Accretion of redeemable convertible preferred stock | ( | ) | ||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Net loss per share attributable to common stockholders | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted-average shares used to compute net loss per share attributable to common stockholders: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
63
SOC Telemed, Inc. and Subsidiaries and Affiliates
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
| Additional | Total | |||||||||||||||||||||||||||
| Common Stock (1) | Treasury Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2019 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Accretion of stock issuance costs and dividends on Series H, I and J contingently redeemable preferred stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Exercise of stock options, net of withholding taxes | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Exercise of warrants | - | |||||||||||||||||||||||||||
| Redemption of Series H preferred stock through issuance of common stock | - | |||||||||||||||||||||||||||
| Retirement of treasury stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Contingent shares issuance liabilities associated with the Merger and Recapitalization | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Merger and Recapitalization, net of transaction costs | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, December 31, 2020 | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Release of RSUs | - | |||||||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||
| Issuance of shares through employee stock purchase plan | - | |||||||||||||||||||||||||||
| Surrender of shares released through vested RSUs | ( | ) | - | |||||||||||||||||||||||||
| Common stock issued as consideration for business acquisition (Access Physicians) | - | |||||||||||||||||||||||||||
| Issuance of Class A Common stock, net of issuance costs | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, December 31, 2021 | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| (1) |
The accompanying notes are an integral part of these consolidated financial statements.
64
SOC
Telemed, Inc. and Subsidiaries and Affiliates
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Write off of property and equipment, net | ||||||||
| Stock-based compensation | ||||||||
| (Gain) on puttable option liabilities | ( | ) | ||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| (Gain) on contingent shares issuance liabilities | ( | ) | ( | ) | ||||
| Bad debt expense (reversal of allowance for doubtful accounts) | ( | ) | ||||||
| Paid-in kind interest on long-term debt | ||||||||
| Amortization of debt issuance costs and issuance discount | ||||||||
| Income tax benefit | ( | ) | ||||||
| Change in assets and liabilities, net of acquisitions | ||||||||
| Accounts receivable, net of allowance | ( | ) | ||||||
| Prepaid expense and other current assets | ( | ) | ( | ) | ||||
| Inventory | ||||||||
| Deposits and other non-current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses and other liabilities | ||||||||
| Deferred revenues | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Capitalization of software development costs | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of business, net of cash | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal payments under capital lease obligations | ( | ) | ( | ) | ||||
| Proceeds from long-term debt, net of discount | ||||||||
| Proceeds from Related-party – Unsecured subordinated promissory note, net of unamortized discount | ||||||||
| Repayment of long-term debt | ( | ) | ( | ) | ||||
| Repayment of Related-party – Unsecured subordinated promissory note | ( | ) | ||||||
| Issuance of contingently redeemable preferred stock, net of offering costs | ||||||||
| Exercise of stock options and warrants | ||||||||
| Proceeds from Employee Stock Purchase Plan used for common stock purchases | ||||||||
| Stock repurchases from employees for tax withholdings | ( | ) | ||||||
| Liquidation of preferred stock (Series H, I and J) | ( | ) | ||||||
| Proceeds from merger and recapitalization, net of transaction costs | ||||||||
| Proceeds from issuance of Class A Common Stock, net of issuance costs | ||||||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | ||||||||
| Cash and cash equivalents at beginning of year | ||||||||
| Cash and cash equivalents at end of year | $ | $ | ||||||
| 2021 | 2020 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the year for taxes | $ | $ | ||||||
| Cash paid during the year for interest | ||||||||
| Supplemental schedule of non-cash investing and financing transactions: | ||||||||
| Purchase of property and equipment reflected in accounts payable and accrued expenses at year end | $ | $ | ||||||
| Assets acquired under capital lease arrangements | ||||||||
| Accretion of contingently redeemable preferred stock | ||||||||
| Redemption of Series H preferred stock through issuance of common stock | ||||||||
| Exercise of stock options | ||||||||
| Exercise of warrants | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Notes to Consolidated Financial Statements
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Healthcare Merger Corp. (“HCMC”) was incorporated in Delaware in September 2019 and formed as a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. Specialists On Call, Inc. was formed on July 14, 2004, as a Delaware C-Corporation doing business as SOC Telemed (“Legacy SOC Telemed”). On October 30, 2020, we completed the acquisition of Legacy SOC Telemed by and among us, Sabre Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of HCMC, Sabre Merger Sub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of HCMC, and Legacy SOC Telemed. The transactions contemplated by the merger agreement between HCMC and Legacy SOC Telemed are collectively referred as the “Merger Transaction” or “Merger and Recapitalization”. As part of the Merger Transaction, HCMC changed its name from Healthcare Merger Corp. to SOC Telemed, Inc. See Note 4, Business Combinations, for additional information.
SOC Telemed, Inc. and Subsidiaries and Affiliates (collectively, the “Company”, “SOC Telemed”, and “SOC”) is the leading provider of telemedicine services and technology to U.S. hospitals and healthcare systems. We provide technology enabled clinical solutions which include teleNeurology, telePsychiatry, teleCritical Care, telePulmonology, teleCardiology and other specialties. We are committed to improving patient care by providing advanced, real-time telemedicine and the highest quality critical consultation services by connecting specialist physicians with on-site providers 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 patients and the shortage of specialist physicians. The Company operates as a single operating and reportable segment.
As discussed in Note 4, Business Combinations, on March 26, 2021, the Company consummated the acquisition of Access Physicians Management Services Organization, LLC (“Access Physicians” or “AP”), a multi-specialty acute telemedicine provider.
As discussed in Note 27, Subsequent Events, on February 2, 2022, the Company entered into a definitive agreement to be acquired by affiliates of investment funds advised by Patient Square Capital, L.P. (“Patient Square Capital”), a dedicated health care investment firm. The transaction is expected to close in the second quarter of 2022, subject to the satisfaction or waiver of customary closing conditions, including the adoption and approval of the transaction agreement by SOC Telemed stockholders. If the transaction is consummated, SOC Telemed’s Class A common stock and public warrants will no longer be listed on any public market. Because the transaction is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented herein assume the continuation of SOC Telemed, Inc. as a public company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SOC Telemed, 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” or “GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”).
As of December 31, 2021 and 2020, SOC Telemed, Inc. is party to administrative services agreements, management services agreements or similar arrangements (collectively, “Administrative Agreements”) in California, Georgia, Kansas (in 2021, only), New Jersey, and Texas by and among its subsidiaries and the professional corporations pursuant to which each professional corporation provides services to SOC Telemed, Inc. Each professional corporation is established pursuant to the requirements of its respective domestic jurisdiction governing the corporate practice of medicine. As discussed in Note 5, Variable Interest Entities, SOC Telemed, Inc. holds a variable interest in the professional corporations and, accordingly, the professional corporations are considered variable interest entities (“VIE” or “VIEs”) which are denominated Affiliates for consolidation purposes.
The Company also consolidates its wholly owned subsidiaries (NeuroCall, JSA, Access Physicians and Tele-Physicians Practice Maryland) as discussed in Note 5, Variable Interest Entities.
The accompanying consolidated financial statements include the accounts of the Company. All intercompany balances and transactions are eliminated upon consolidation.
The
Merger Transaction was accounted for as a reverse recapitalization as Legacy SOC Telemed was determined to be the accounting acquirer
under Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business Combinations. This determination
was primarily based on Legacy SOC Telemed comprising the ongoing operations of the combined entity, Legacy SOC Telemed’s senior
management comprising the majority of the senior management of the combined company, and the prior shareholders of Legacy SOC Telemed
having a majority of the voting power of the combined entity. In connection with the Merger Transaction, the outstanding shares of Legacy
SOC Telemed preferred stock was redeemed for cash and shares of the Company’s Class A common stock and the outstanding shares of
Legacy SOC Telemed common stock were converted into Class A common stock of the Company, representing a recapitalization, and the net
assets of the Company were acquired at historical cost, with no goodwill or intangible assets recorded. Operations and assets and liabilities
of the Company prior to the Merger Transaction in these financial statements are those of Legacy SOC Telemed. As a result, these financial
statements represent the continuation of Legacy SOC Telemed and the historical shareholders’ deficit exclusive of common stock
and loss per share of Legacy SOC Telemed prior to the Merger Transaction have been retrospectively adjusted for the Merger Transaction
using an exchange ratio of
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COVID – 19 Outbreak
The 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 certain developments, including the duration and spread of the pandemic and the emergence of new variants of COVID-19.
While not currently known, the full impact of COVID-19 could have a material impact on the operations of our business. For the year ended December 31, 2021, the Company’s variable revenues, excluding the consolidated revenues of Access Physicians, increased relative to the same period in 2020 as a result of the higher volume of consultations due to recovery from the COVID-19 pandemic with corresponding impacts on our cost of revenues due to increased demand for consultations. 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 COVID-19 outbreak.
Going Concern Consideration
Under Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued.
As
of December 31, 2021, the Company has experienced negative cash flows and losses from operations each year since inception and has an
accumulated deficit of $
The Company has historically funded its operations through the issuance of preferred stock, long-term debt and secondary offerings. Until such time, if ever, as the Company can generate substantial revenues and positive operating cash flows, the Company will likely finance its cash needs through a combination of public or private equity offerings or debt financings. The Company may not be able to obtain funding on acceptable terms, or at all. If the Company is unable to raise additional funds as and when needed, it would have a negative impact on the Company’s financial condition, which may require the Company to delay, reduce or eliminate certain activities and reduce or eliminate discretionary operating expenses, which could constrain the Company’s ability to pursue its business strategies.
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.
For
the year ended December 31, 2021, the Company has one major customer that accounted for approximately
67
Business Combinations
The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the Company are included as of the respective acquisition date. The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase consideration over the value of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to the fair value of acquired intangible assets. The Company may adjust the preliminary purchase price allocation, as necessary, for up to one year after the acquisition closing date if it obtains more information regarding asset valuations and liabilities assumed. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity at the date of purchase of three months or less to be cash equivalents.
Accounts Receivable
The Company carries its accounts receivable at net realizable value. The Company maintains an allowance for doubtful accounts for the estimated losses resulting from the inability of the Company’s customers to pay their invoices. The allowance for doubtful accounts is calculated based on a specific reserve for identified at risk balances considering the Company’s history of write-offs and collections as well as current credit conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventory
Inventoried materials primarily consist of telemedicine equipment, which are substantially finished goods. The Company reports inventory at the lower of average cost and net realizable value. Net realizable value is based on the selling price. Inventories are assessed on a periodic basis for potential obsolete and slow-moving inventory with write-downs being recorded when identified. Write-downs are measured as the difference between cost of the inventory and net realizable value based upon assumptions about future demand and charged to cost of revenue in the consolidated statement of operations. At the point of the loss recognition, a new lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. The cost of property and equipment acquired under capital lease arrangements represents the lesser of the present value of the minimum lease payments or the fair value of the leased asset as of the inception of the lease. Depreciation expense is computed using the straight-line method over the estimated useful lives of the related assets as follows:
| Software | |
| Computer Equipment | |
| Furniture and Fixtures | |
| Telemedicine Equipment | |
| Leasehold Improvements |
Depreciation
of leasehold improvements is computed using the shorter of the remaining lease term or the economic life. Telemedicine equipment consists
of computer equipment and monitors, optical equipment, and accessories that allow doctors and others in separate locations to communicate
and collaborate with each other. Depreciation expense for telemedicine equipment and software is included within cost of revenues, while
depreciation for all other assets is included within selling, general and administrative expenses in the statements of operations. Upon
installation of the telemedicine equipment at the customer’s location, the Company retains title to the equipment, which is held
and used by the customer and thus is retained on the Company’s books or financed through operating and capital leases with third
parties. Telemedicine equipment that has not yet been installed is not depreciated. At December 31, 2021 and 2020 the Company has
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Expenditures for major renewals and improvements are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred and included within selling, general and administrative expenses in the statements of operations.
Capitalized Software Costs
The
Company capitalizes the cost of developing internal-use software, consisting primarily of personnel and related expenses (including stock-based
compensation and employee taxes and benefits) for employees and third parties who devote time to their respective projects. The Company
also capitalizes avoidable interest costs as the amount of interest that could have been avoided if funds were used to pay off the debt
instead of developing the asset. Capitalized interest costs were less than
Intangibles Assets
All
intangible assets were acquired in connection with the acquisitions of NeuroCall Holdings, LLC and its subsidiaries (“NeuroCall”)
on January 31, 2017, JSA Health Corporation (“JSA Health” or “JSA”) on August 14, 2018, and Access Physicians
and its subsidiaries on March 26, 2021 and are amortized over their estimated useful lives based on the pattern of economic benefit derived
from each asset.
Impairment of Goodwill
Goodwill is tested for impairment on an annual basis as of December 31 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 market cap determined from the public stock price, multiple of revenue 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.
The Company’s annual goodwill impairment tests performed on December 31, 2021 and 2020 resulted in no impairment charges for the years ended December 31, 2021 and 2020.
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 years ended December 31, 2021 and 2020.
69
Stock-Based Compensation
The Company accounts for all employee stock-based payments in accordance with the provisions of Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation. This model requires companies to measure the cost of stock-based awards to employees based on the grant-date fair value of the award using an option pricing model, and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. An award’s value is expensed over the award’s requisite service period, which is generally the vesting period, on a straight-line basis or on a graded basis as determined by the underlying award, net of estimated pre-vesting forfeitures. The Company has estimated forfeitures based on historical experience and revises the rates, as necessary, if actual forfeitures differ from initial estimates.
The
Company estimates the grant-date fair value of options using the Black-Scholes model. The Company estimates the grant-date fair value
of Performance Stock Units using a Monte Carlo simulation. The fair value of Restricted Stock Units is the Company’s stock price
on the grant date. Assumptions used when valuing options using the Black-Scholes model and Performance Stock Units using a Monte Carlo
Simulation include: the underlying stock price, expected stock volatility, expected term, expected dividend yield, and the risk-free
interest rate. Expected stock volatility is determined using weekly average historical stock prices of comparable public companies’
common stock for a period generally equal to the expected term of the options. Expected option term is determined by computing the weighted
average of an award’s contractual and vesting terms, also known as the simplified method. The Company does not have a history of
declaring dividends on its common stock and does not expect to in the near term, therefore, the dividend yield is
Long Term Debt
The Company is party to certain long-term debt arrangements. The Company capitalizes costs related to the issuance of debt under the provisions of ASC Subtopic 835-30, Interest – Imputation of Interest. Debt issuance costs and discounts related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt liability and are subsequently amortized to interest expense at an effective interest rate over the life of the related loan. Debt issuance costs related to line-of-credit arrangements are presented in the consolidated balance sheets as an asset and are subsequently amortized ratably over the term of the line-of-credit arrangement. Amortization of debt issuance costs is included as a component of interest expense in the Company’s consolidated statements of operations. Cash interest payments due are paid as determined in the agreements. Interest is expensed monthly. Paid in-kind interest (“PIK”) is accrued monthly at the contracted rate over the period of the loan and included in the principal balance.
Contingent Shares Issuance Liabilities and Puttable Option Liabilities
The Company recognizes derivatives as either an asset or liability measured at fair value in accordance with ASC 815, Derivatives and Hedging. The puttable options were the Company’s derivative financial instruments and were recorded in the consolidated balance sheets at fair value. The Company does not enter into derivative transactions for speculative or trading purposes. Contingent shares issuance liabilities reflect the Company’s liability to provide a variable number of shares to HCMC’s sponsor and its permitted transferees, if certain publicly traded stock prices are met at various points in time. The liability was recorded at fair value at the date of the Merger Transaction and is revalued at each reporting period using a Monte Carlo simulation that factors in the current price of the Company’s Class A common stock, the estimated likelihood of a change in control, and the vesting criteria of the award.
Contingently Redeemable Preferred Stock
The redemption provisions of the Company’s Series H, I and J preferred stock were outside the Company’s control, and as such the Company has recorded its contingently redeemable preferred stock outside of stockholders’ deficit. The Company’s outstanding contingently redeemable preferred stock was issued at a discount to its redemption price. The discount reflects stock issuance costs which were recorded as a reduction of the preferred share balance as well as cumulative dividends on the Series H, I and J preferred stock. The Company accreted its contingently redeemable preferred stock to the stock’s redemption value over the period from issuance to the earliest redemption date, such that the carrying amount of the securities equaled the redemption value inclusive of accrued but unpaid dividends at the earliest redemption date. The accretion to redemption value for the Company’s Series H, I and J preferred stock were recorded as a charge to additional paid-in capital, in the absence of retained earnings, with a corresponding increase to contingently redeemable preferred stock.
Revenue Recognition
The Company recognizes revenue using a five-step model:
| 1) | Identify the contract(s) with a customer; |
| 2) | Identify the performance obligation(s) in the contract; |
70
| 3) | Determine the transaction price; |
| 4) | Allocate the transaction price to the performance obligations in the contract; and |
| 5) | Recognize revenue when (or as) it satisfies a performance obligation. |
The Company enters into service contracts with hospitals or hospital systems, physician practice groups, and other users. Under the contracts, the customers 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 customers also pay a variable consultation fee for the additional service. Under certain contracts, the Company receives payments from patients, third-party payers and others for services rendered. The third-party payers pay the Company based on contracted rates or the entities’ billed charges. Payments received from third-party payers are generally less than billed charges. The Company monitors its revenue and receivables from third-party payers and records an estimated contractual allowance to properly account for the differences between billed and reimbursed amounts. Revenue from third-party payers is presented net of an estimated provision for contractual adjustments. 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, customers generally make upfront nonrefundable payments to the Company when contracting for Company training, maintenance, equipment and implementation services.
Our customer contracts typically range in length from 1 to 3 years, with an automatic renewal process. We either invoice our customers for the monthly fixed fee in advance or at the end of the month, depending on the terms of the contract. Our contracts typically contain cancellation clauses with advance notice, therefore, we do not believe that we have any material outstanding commitment for future revenues beyond one year from the end of a reporting period.
Revenues
are recognized when the Company satisfies its performance obligation to provide on-demand telemedicine consultation services. The consultations
covered by the fixed monthly fee and obligation to provide on-demand consultations represented
Upfront
nonrefundable fees do not result in the transfer of a promised goods or service to the customer, therefore, the Company defers this revenue
and recognizes it over the average customer life of 48 months. Deferred revenue consists of the unamortized balance of nonrefundable
upfront fees and maintenance fees which are classified as current and non-current based on the timing of when the Company expects to
recognize revenue. The Company recognized $
Telemedicine Carts (Access Physicians)
Customers who enter into telemedicine physician service contracts with Access Physicians are sold a telemedicine cart with a computer and camera in order to facilitate meetings between patients, on-site health professionals, and remote physicians. Satisfaction of this performance obligation occurs upon delivery to the customer when control is transferred. Access Physicians then recognizes the cart revenue at a point in time, upon delivery. The Company has assurance-type warranties that do not result in separate performance obligations.
Advertising
Advertising
costs include public relations, trade shows, market research, and general promotional items and are expensed as incurred. The Company
has recorded advertising expenses of $
Income Taxes
The Company follows the asset and liability method of accounting for income taxes under ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
71
The Company recognizes interest and penalties associated with tax matters as part of income tax expenses and includes accrued interest and penalties with the related tax liability in the consolidated balance sheets.
Significant
judgement is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a regular basis. Its
evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax
authorities during the course of audits, and effective settlement of audit issues. The Company accounts for uncertain tax positions by
recognizing a tax benefit or liability at the largest amount that, in its judgement, is more than
Contingencies
In accordance with ASC 450, Accounting for Contingencies, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgement is required to determine both the probability and the estimated amount. The Company reviews contingencies at least quarterly and adjusts accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. At this time, the Company has no accrual related to lawsuits, claims, investigations and proceedings.
Use of estimates and judgements
The preparation of the 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 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 and revenue expected to be received from third-party payers, (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) market cap determined from the multiple of revenue and from discounted 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 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 cannot be predicted, including the duration and spread of the pandemic and the emergence of new variants of COVID-19. The Company’s 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 in the section below to reflect this election.
The Company is also a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. The Company will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of the Class A common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) annual revenues exceeded $100 million during such completed fiscal year and the market value of the Class A common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter.
To the extent the Company takes advantage of such reduced disclosure obligations, it may also make the comparison of its financial statements with other public companies difficult or impossible.
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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.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the revised guidance requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. 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 revised guidance is required to be applied retrospectively to each prior reporting period presented or modified retrospectively applied with the cumulative effect of initially applying it recognized at the date of initial application. The Company adopted this standard on January 1, 2020 utilizing the modified retrospective approach. The Company underwent a process of identifying the various types of revenue streams, performed an evaluation of the components of the associated contractual arrangements and determined that the adoption of the new standard did not have a material impact on the consolidated financial statements.
Accounting pronouncements issued but not yet adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference to LIBOR or another reference rate expected to be discontinued by reference rate reform. The Company will be adopting this guidance for the annual reporting period ending December 31, 2022. The Company is currently evaluating the impact of adopting the standard on its 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. The guidance is effective for fiscal years beginning after December 15, 2021. 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. The Company developed and substantially completed an implementation plan which includes updating our policies and controls and developing disclosures. The Company will adopt ASU 2016-02 retrospectively at the beginning of the period of adoption, January 1, 2022, through a cumulative adjustment to accumulated deficit and the recognition of a lease liability and corresponding right-of-use asset. The Company will elect the following transition related practical expedients; not to reassess whether any expired or existing contracts are or contain leases, not to reassess lease classification as determined under ASC 840, Leases, and, not to reassess initial direct costs for any existing lease. The Company will recognize a lease liability and right-of-use asset and add additional disclosures to the consolidated financial statements as required under ASU 2016-02. The lease liability and right-of-use asset are immaterial to the Company’s 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 accumulated deficit 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 does not expect the pronouncement to have a material effect on the consolidated financial statements.
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3. SEGMENT INFORMATION
The Company’s Chief Operating Decision Maker (“CODM”), its Chief Executive Officer (“CEO”), reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating its financial performance. Accordingly, the Company has determined that it operates in a single reportable segment: health services management. All of the Company’s operations and assets are located in the United States, and all of its revenues are attributable to United States customers.
4. BUSINESS COMBINATIONS
Merger with Healthcare Merger Corp. in October 2020
On
October 30, 2020, HCMC, a special purpose acquisition company, consummated a business combination with Legacy SOC Telemed pursuant to
an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, HCMC merged with Legacy SOC Telemed,
with Legacy SOC Telemed being treated as the accounting acquirer, and the Merger Transaction reflected as a reverse recapitalization,
with HCMC treated as the accounting acquiree. Under this method of accounting, the consolidated financial statements of Legacy SOC Telemed
are the historical financial statements of the Company. The net assets of HCMC were stated at historical costs, with no goodwill or other
intangible assets recorded in accordance with U.S. GAAP, and are consolidated with Legacy SOC Telemed’s financial statements on
the closing date of the Merger Transaction. The shares and net loss per share available to holders of Legacy SOC Telemed’s common
stock prior to the Merger Transaction have been retroactively restated as shares reflecting the exchange ratio of
As a result of the Merger Transaction, Legacy SOC Telemed shareholders received aggregate consideration of $720.6 million, consisting of:
| ● | $64.6 million in cash at the closing of the Merger Transaction from HCMC; |
| ● | $168.0 million in cash proceeds from a private placement (“PIPE”) of Class A Common stock that closed concurrently with the Merger Transaction; and |
In
addition,
Acquisition of Access Physicians in March 2021
On
March 26, 2021, SOC Telemed Inc. completed the acquisition (the “Acquisition”) of
The
total purchase price for this transaction approximated $
The
purchase consideration included
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Access
Physician’s directors and some executive employees held Profits Interest Units (“PIUs”) that were subject to accelerated
vesting in connection with the acquisition. Since a portion of these PIUs relate to services rendered to Access Physicians prior to the
acquisition, a portion of the replacement SOC equity awards’ fair value was included in the purchase price.
As
presented above, the acquisition of Access Physicians includes a contingent consideration arrangement (the “Earnout”) that
requires additional consideration to be paid by SOC to the sellers of
The
acquisition of Access Physicians also includes a second contingent consideration arrangement (the “Deferred Payment”).
Transaction
costs for the acquisition approximated $
The following table summarizes the consideration transferred to acquire Access Physicians and the amounts of identified assets acquired and liabilities assumed at the acquisition date (in thousands):
| Fair value of consideration transferred | ||||
| Cash | $ | |||
| Common stock | ||||
| Net working capital settlement | ||||
| Contingent consideration | ||||
| Total | $ | |||
| Recognized amounts of identifiable assets acquired and liabilities assumed | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Inventories | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Capitalized software costs | ||||
| Intangible assets | ||||
| Deposits and other assets | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Identifiable assets acquired and liabilities assumed, net | $ | |||
| Goodwill | $ | |||
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The fair values of the identifiable assets acquired and liabilities assumed are provisional pending completion of the final valuation procedures for those components.
The
amount allocated to goodwill is primarily attributed to the expected synergies and other benefits arising from the transaction. The transaction
was determined to be a stock deal for tax purposes. SOC plans to make a Section 754 election that provides the buyer of a partnership
interest with a step-up (or step-down) to fair market value in the acquirer’s pro-rata share of the underlying assets. Any deductions
resulting from this step-up (or step-down) are specifically allocated to the buyer. Therefore,
The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows (in thousands):
| Intangible assets acquired | Fair value | Valuation Technique | ||||
| $ | ||||||
| $ | ||||||
| $ | ||||||
The
acquired business contributed Revenues of $
| Pro
forma (unaudited) | ||||||||
| Year
Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | $ | ||||||
| Net loss | ( | ) | ( | ) | ||||
SOC Telemed recorded two adjustments directly attributable to the business combination for interest expense on loans acquired and transaction costs. These adjustments were included in the reported pro forma net loss.
These pro forma amounts have been calculated after applying SOC Telemed’s accounting policies and adjusting the results of Access Physicians to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to capitalized software costs and intangible assets had been applied from January 1, 2020, with the consequential tax effects.
The unaudited pro forma financial information above has been prepared for informational purposes only and is not necessarily indicative of what the Company’s consolidated results actually would have been if the acquisition had been completed at the beginning of the respective periods. In addition, the unaudited pro forma information above does not attempt to project the Company’s future results.
5. VARIABLE INTEREST ENTITIES
SOC Telemed, Inc. holds a variable interest in Tele-Physicians, P.C. (d/b/a California Tele-Physicians), Tele-Physicians, P.C. (d/b/a Georgia Tele-Physicians), Tele-Physicians, P.C. (d/b/a New Jersey Tele-Physicians), and Tele-Physicians, P.A. (d/b/a Texas Tele-Physicians) (collectively, the “Tele-Physicians Practices”) which contract with physicians in order to provide services to the customers. SOC Telemed, Inc. and the Tele-Physicians Practices have entered into a management services agreement with each other. Under these agreements, SOC Telemed, 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, SOC Telemed, 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 SOC Telemed, Inc.
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NeuroCall and JSA Health are wholly owned subsidiaries and as such are consolidated by SOC Telemed, Inc. JSA Health comprises four entities: JSA Health Corporation (“Corporate”), JSA Health California LLC (“LLC”), JSA Health California PC (“CAPC”), and JSA Health Texas PLLC (“PLLC”). CAPC and PLLC are medical practices (the “JSA Medical Practices”) and Corporate and LLC provide management services to the JSA Medical Practices (the “JSA 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 JSA Medical Practices which contract with physicians in order to provide services to Corporate and LLC. The JSA 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 SOC Telemed, Inc. and the Tele-Physician Practices. Therefore, each of the JSA Medical Practices are consolidated with JSA Health.
Access Physicians is a wholly owned subsidiary and as such is consolidated by SOC Telemed, Inc. Access Physicians comprises four entities: Access Physicians Management Services Organization, LLC (“AP”), Access Physicians, PLLC (“AP PLLC”), AP US 9, PC (“US 9”), and AP US 14, PA (“US 14”). AP PLLC, US 9, and US 14 are medical practices (the “AP Medical Practices”) and AP provides management services to the AP Medical Practices. More specifically, AP PLLC, US 9, and US 14 have entered into a management services agreement with AP. As a result, AP holds variable interests in the AP Medical Practices which contract with physicians in order to provide services to AP. The AP Medical Practices are considered VIEs since they do not have sufficient equity to finance their activities without additional subordinated financial support. Under the management services agreements, Access Physicians has the power and rights to direct all non-clinical activities of the professional corporations and funds and absorbs all losses of the VIEs. These relationships are similar to the relationships between SOC Telemed, Inc. and the Tele-Physician Practices. Therefore, each of the AP Medical Practices are consolidated with Access Physicians.
SOC Telemed, 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. SOC Telemed, 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.
6. 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 included puttable option liabilities, contingent shares issuances, and contingent consideration. As of December 31, 2021 and 2020, the Company’s outstanding liabilities consisted of contingent shares issuances. The impact of revaluing the contingent shares issuance liabilities and puttable option liabilities is recorded within other income (expense) within the consolidated statements of operations.
As
a result of the merger with HCMC on October 30, 2020, the Company measured its contingent shares issuance liabilities at fair value determined
at Level 3. In order to capture the market conditions associated with the contingent shares issuance liabilities, the Company applied
an approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over
each one of the components of the contingent shares issuance liabilities’ contractual lives based on the appropriate probability
distributions and making assumptions about potential changes in control of the Company. The fair value was determined by taking the average
of the fair values under each Monte Carlo simulation trial. As a result, $
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As
a result of the Acquisition in March 2021, as described in Note 4, Business Combinations, the Company measured its contingent consideration
at fair value determined at Level 3. The fair value of the contingent consideration recognized on the acquisition date of $
Puttable option liabilities’ fair value are computed using the Black-Scholes model. Refer to Note 15, Puttable Option Liabilities, for further details.
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 years ended December 31, 2021 and 2020.
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis (in thousands):
| Fair
Value Measurements as of December 31, 2021 Using: | ||||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Contingent shares issuance liabilities | $ | $ | $ | $ | $ | |||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Fair
Value Measurements as of December 31, 2020 Using: | ||||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Contingent shares issuance liabilities | $ | $ | $ | $ | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||
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, 2019 | $ | |||||||
| Shares expired unexercised | ( | ) | ( | ) | ||||
| Change in fair value | ||||||||
| Shares exercised | ( | ) | ( | ) | ||||
| Balance, December 31, 2020 | $ | |||||||
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The following table represents a reconciliation of contingent consideration fair value measurements using the significant unobservable inputs (Level 3) (in thousands):
| Contingent Consideration | ||||
| Balance as of December 31, 2020 | $ | |||
| Contingent consideration liability recorded in the opening balance sheet | ||||
| Change in fair value of contingent consideration recognized in statements of operations | ( | ) | ||
| Balance as of December 31, 2021 | $ | |||
The following table represents a reconciliation of the contingent shares issuance liabilities fair value measurements using the significant unobservable inputs (Level 3) (in thousands):
| Contingent shares issuance liabilities | ||||
| Balance as of December 31, 2019 | $ | |||
| Contingent shares issuance liabilities | ||||
| (Gain) recognized in statements of operations | ( | ) | ||
| Balance as of December 31, 2020 | $ | |||
| (Gain) recognized in statements of operations | ( | ) | ||
| Balance as of December 31, 2021 | $ | |||
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 2021 and 2020 prepaid expenses and other currents assets consisted of the following (in thousands):
| 2021 | 2020 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Prepaid replacement awards – Note 4 | ||||||||
| Short term deposits | ||||||||
| Other current assets | ||||||||
| $ | $ | |||||||
Prepaid expenses include prepayments related to information technology, insurance, and conferences. The prepaid replacement awards represent cash paid to Access Physicians for settlement of profit interest units.
8. PROPERTY AND EQUIPMENT
At December 31, 2021 and 2020 property and equipment consisted of the following (in thousands):
| 2021 | 2020 | |||||||
| Telemedicine equipment | $ | $ | ||||||
| Software | ||||||||
| Work in progress | ||||||||
| Computer equipment | ||||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| $ | $ | |||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Telemedicine
equipment includes $
For
the years ended December 31, 2021 and 2020 depreciation expense for all assets except telemedicine equipment was $
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9. CAPITALIZED SOFTWARE COSTS
At December 31, 2021 and 2020 capitalized software costs consisted of the following (in thousands):
| December 31, 2021 | Useful Life | Gross Value | Accumulated Depreciation | Net Carrying Value | ||||||||||||
| Capitalized software development costs | $ | $ | ( | ) | $ | |||||||||||
| December 31, 2020 | Useful Life | Gross Value | Accumulated Depreciation | Net Carrying Value | ||||||||||||
| Capitalized software development costs | $ | $ | ( | ) | $ | |||||||||||
The
software development costs capitalized were $
10. GOODWILL
At December 31, 2021 and December 31, 2020 goodwill consisted of the following (in thousands):
| 2021 | 2020 | |||||||
| Beginning balance | $ | $ | ||||||
| Business combinations - Note 4 | ||||||||
| Balance at | $ | $ | ||||||
The Company performed its annual impairment test on December 31, 2021. There was no impairment identified for the years ended December 31, 2021 and 2020.
11. INTANGIBLE ASSETS
At December 31, 2021 and 2020 intangible assets consisted of the following (in thousands):
| December 31, 2021 | Useful Life | Gross Value | Accumulated Amortization | Net Carrying Value | Weighted Average Remaining Useful Life (in years) | |||||||||||||
| Hospital contracts relationships | $ | $ | ( | ) | $ | |||||||||||||
| Non-compete agreements | ( | ) | ||||||||||||||||
| Trade names | ( | ) | ||||||||||||||||
| Intangible assets, net | $ | $ | ( | ) | $ | |||||||||||||
| December 31, 2020 | Useful Life | Gross Value | Accumulated Amortization | Net Carrying Value | Weighted Average Remaining Useful Life (in years) | |||||||||||||
| Hospital contracts relationships | $ | $ | ( | ) | $ | |||||||||||||
| Non-compete agreements | ( | ) | ||||||||||||||||
| Trade names | ( | ) | ||||||||||||||||
| Intangible assets, net | $ | $ | ( | ) | $ | |||||||||||||
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The
amortization expense for intangible assets was $
Periodic amortization that will be charged to expense over the remaining life of the intangible assets as of December 31, 2021 is as follows (in thousands):
| Years ending December 31, | Amortization Expense | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| $ | ||||
12. DEBT
In
order to consummate the Acquisition and support the combined business thereafter, SOC Telemed entered into a term loan facility with
SLR Investment Corp. (“Solar”) and a related-party subordinated financing with SOC Holdings LLC, an affiliate of Warburg
Pincus, for $
Solar Term Loan Facility
The table below represents the components of outstanding debt (in thousands):
| 2021 | 2020 | |||||||
| Term loan facility, effective interest rate 9.31%, due 2026 | $ | $ | - | |||||
| Less: Unamortized discounts, fees and issue costs | ( | ) | ||||||
| Balance at | $ | $ | - | |||||
In
March 2021
| Original Amount | Available as of December 31, 2021 (in thousands) | Original Trailing Six-Month Net Revenue Milestone | ||||||||
| Term A1 Loan | $ | $ | ||||||||
| Term A2 Loan | ||||||||||
| Term B Loan* | ||||||||||
| Term C Loan | ||||||||||
| $ | $ | |||||||||
| * | In accordance with the terms in the term loan agreement, the amount available under the Term B Loan increased to $ |
The term loan facility also provides for an uncommitted term loan in the principal amount of up to $25.0 million (“Term D Loan”), which availability is subject to the sole and absolute discretionary approval of the lenders and the satisfaction of certain terms and conditions in the term loan agreement.
On
November 10, 2021, the Company entered into an amendment to the term loan agreement, pursuant to which the net revenue milestone for
the Term B Loan was reduced from $
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The
term loan facility bears interest at a rate per annum equal to
Until May 1, 2024, the Company will pay only interest monthly. However, the term loan agreement has an interest-only extension clause which offers to SOC the option to extend the interest-only period for six months until November 1, 2024, after having achieved two conditions: (i) a minimum of six months of positive EBITDA prior to January 31, 2024; and (ii) being in compliance with the revenue financial covenant, as described in this note. In either case, the maturity date is April 1, 2026.
The following reflects the contractually required payments of principal under the term loan facility (in thousands):
| Years ending December 31, | Amount (in thousands) | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
The
term loan agreement includes two financial covenants requiring (i) the maintenance of minimum liquidity level of at least $5.0 million
at all times; and (ii) minimum net revenues measured quarterly on a trailing twelve-month basis of at least $81.8 million on March 31,
2022, $88.2 million on June 30, 2022, $94.5 million on September 30, 2022, $100.9 million on December 31, 2022, and then 60% of projected
net revenues in accordance with an annual plan to be submitted to the lenders commencing on March 31, 2023, and thereafter.
The term loan agreement contains a material adverse change provision which permits the lenders to accelerate the scheduled maturities of the obligations under the term loan facility. The conditions which would permit this acceleration are not objectively determinable or defined within the agreement.
The term loan facility is guaranteed by all of the Company’s wholly owned subsidiaries, including the entities acquired pursuant to the Acquisition, subject to customary exceptions. The term loan facility is secured by first priority security interests in substantially all of the Company’s assets, subject to permitted liens and other customary exceptions.
On
June 4, 2021, Term A2 Loan of the term loan facility was partially repaid for a total of $
The Company recognized the following interest expense related to the Solar term loan facility for the year ended December 31, 2021 (in thousands):
| 2021 | ||||
| Interest expense | $ | |||
| Amortization of loan origination costs | ||||
| Amortization of payoff fee | ||||
| Prepayment premium | ||||
| $ | ||||
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The
Company determines the fair value of the term loan facility 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 amount was approximately $
CRG Term Loan Agreement (only in 2020)
In
June 2016, the Company entered into a Term Loan Agreement with CRG Servicing LLC (“CRG”). In addition to the principal and
paid-in-kind interest balances, the Company was also liable for a final payoff fee of
Interest
expense related to the long-term debt agreements, including acceleration of the amortization of debt issuance costs and discount and
prepayment premium, for the year ended December 31, 2020, was $
On
October 30, 2020, the Term Loan was extinguished in connection with the closing of the Merger Transaction. Refer to Note 4 for further
discussion on the Merger Transaction. As a result, the amortization of the balance of $
Related party - Unsecured Subordinated Promissory Note
On March 26, 2021, the Company entered into a subordinated financing agreement (the “Unsecured Subordinated Promissory Note” or “Subordinated Note”) with a significant stockholder, SOC Holdings LLC (“SOC Holdings”), an affiliate of Warburg Pincus. SOC Holdings constitutes a related party of the Company, pursuant to ASC 850, Related Parties.
The
Company borrowed the aggregate principal amount of $
The
terms of the Subordinated Note state that if equity was raised for an amount greater than $
The terms of the Subordinated Note are summarized as follows:
| ● | The Subordinated Note bore interest at a rate per annum equal to the greater of (a) |
| ● | All outstanding principal and interest under the Subordinated Note were due and payable on the Maturity Date; |
| ● | Interest was computed on the basis of a year of 365/366 days, as applicable, and was added to the principal amount of the Subordinated Note on the last day of each calendar month. |
The
Company incurred less than $
Interest
expense related to paid-in kind interest of $
Related party - Convertible Bridge Notes Payable (only in 2020)
On September 1, 2020, Legacy SOC Telemed entered into a convertible bridge note purchase agreement (the “Bridge Notes”, the “Bridge Note Agreement”) with its controlling stockholder, SOC Holdings LLC (“SOC Holdings” and “the Lead Investor”). SOC Holdings constitutes a related party of the Company, pursuant to ASC 850, Related Parties. Under the Bridge Note Agreement, Legacy SOC Telemed was permitted to borrow aggregate principal of up to $8.0 million, pursuant to an initial closing and potential additional closings 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 Bridge Notes bore an annual interest rate of 13% paid “in-kind”, compound quarterly based on a 365 day per year. For the year ended December 31, 2020, interest expense of less than $0.1 million was recognized.
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On October 30, 2020, the Bridge Notes were extinguished in connection with the closing of the Merger Transaction. Refer to Note 4 for further discussion on the Merger Transaction. As a result, the amortization of the balance of less than $0.1 million of debt issuance costs as of October 30, 2020 was accelerated and recognized as interest expenses on the statement of operations for the year ended December 31, 2020.
13. ACCRUED EXPENSES
At December 31, 2021 and 2020 accrued expenses consisted of the following (in thousands):
| Current liabilities | 2021 | 2020 | ||||||
| Accrued compensation | $ | $ | ||||||
| Accrued bonuses | ||||||||
| Accrued professional and service fees | ||||||||
| Accrued other expenses | ||||||||
| $ | $ | |||||||
14. CAPITAL LEASES
The
Company was obligated under certain capital leases for telemedicine equipment which expired in 2020 (Note 8, Property and Equipment).
The implicit interest rates on these leases were approximately
The
Company entered into capital leases for computer equipment during the year ended December 31, 2021. As of December 31, 2021, the
remaining lease payments under capital leases which reflect the present value of future minimum lease payments was $
15. PUTTABLE OPTION LIABILITIES
The changes in fair value for contracts related to puttable options were recorded in the statements of operations. The Company does not offset derivative assets and derivative liabilities in its consolidated balance sheets.
In
connection with the Series G financing in 2014 the Company amended the terms of
As a result of the closing of the Merger Transaction on October 30, 2020, all puttable options were exercised. Refer to Note 6, Fair Value of Financial Instruments for further discussion. Therefore, as of December 31, 2021 and 2020 there were no outstanding puttable option liabilities.
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16. CONTINGENTLY REDEEMABLE PREFERRED STOCK
The
Company had three outstanding series of redeemable preferred stock. In connection with the closing of the Merger Transaction on October
30, 2020, the Series I and J Contingently Redeemable Preferred Stock were redeemed for $
| As
of December 31, 2020 (in thousands, except share and per share amounts) | ||||||||||||||||
| Liquidation Preference as of 10/30/2020 | Redemption through issuance of Cash | Redemption through issuance of Class A Common Stock | Number of Class A Common Shares Issued (*) | |||||||||||||
| Series H | $ | $ | $ | |||||||||||||
| Series I | ||||||||||||||||
| Series J | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| (*) | Securities of the surviving company: SOC Telemed, Inc. |
Series H Preferred Stock
During
2015 and 2016, the Company issued
The rights and privileges of the Series H redeemable preferred stock were as follows:
| ● | Voting - The preferred stockholders were entitled to vote together with the holders of common stock, on all matters submitted to stockholders for a vote. Each preferred stockholder was entitled to a number of votes equal to the number of shares of common stock into which each share of preferred stock is convertible at the time of such vote. |
| ● | Dividends - The preferred stockholders were entitled to receive cumulative dividends at |
No
dividends on any other series of preferred stock or common stock shall be declared or paid unless all holders of the Series H preferred
stock participate on an as-converted basis. There were no declared dividends. Cumulative dividends were accreted and recorded as an increase
to the contingently redeemable preferred stock. As of December 31, 2019, total unpaid accumulated dividends due the Series H preferred
stockholders was $
| ● | Liquidation - In the event of any liquidation, dissolution or winding-up of the Company, the Series H preferred stockholders were entitled to distributions equal to the greater of (a) their initial purchase price per share plus accrued and unpaid dividends (all amounts are prior and in preference to any distribution of any assets to the holders of common stock) plus, upon liquidation, the Series H preferred stockholders were also entitled to participate in the distribution of assets to the common stockholders on an as-converted basis; or (b) the Series H Minimum Value defined as the Series H initial purchase price accreted from the date of issuance at an annual rate of |
A
liquidation, dissolution or winding-up of the Company is defined to include (a) the acquisition of the Company by another entity by means
of any transaction or series of related transactions (including without limitation, any reorganization, merger or consolidation, or sale
of stock); or (b) a sale of all or substantially all the assets of the Company; unless the Company’s stockholders of record as
constituted immediately prior to such acquisition or sale, hold at least 50% of the fully diluted equity (including at least 50% of the
voting power) of the surviving or acquired entity.
| ● | Conversion - Each share of Series H preferred stock was convertible at any time, at the option of the holder, into common stock. The preferred stock was convertible on a one-to-one basis into common stock, subject to certain anti-dilution adjustments including reset provisions that take effect when subsequent shares are issued at per-share prices lower than the then-current conversion rate, as defined in the terms of the preferred stock agreements and restated Certificate of Incorporation. In addition, the preferred stock would automatically convert to common stock upon the closing of an initial public offering of the Company’s common stock in which the pre-money valuation of the corporation equals or exceeds $ |
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| ● | Redemption - The preferred stock was subject to redemption, at the election of at least a majority of the holders, any time after September 30, 2022 at their initial purchase price, plus accrued but unpaid dividends. The redemption date was deferred in conjunction with the CRG Term Loan Agreement (see Note 12). Upon request, the Company was required to redeem all issued and outstanding shares of the preferred stock in two equal installments, one 90 days and the other 455 days following receipt by the Company of notice of the request by the stockholders. |
Series I Preferred Stock
During
2017 and 2018, the Company issued
The rights and privileges of the Series I redeemable preferred stock were as follows:
| ● | Voting - Series I preferred stockholders were not permitted to vote in any actions to be taken by the stockholders of the Corporation, including any action with respect to the election of directors to the Board of Directors of the Corporation. |
| ● | Dividends - The preferred stockholders were entitled to receive cumulative dividends at the per annum rate of |
As
of December 31, 2019, there were no declared dividends. Cumulative dividends were accreted and recorded as an increase to the contingently
redeemable preferred stock. As of December 31, 2019, total unpaid accumulated dividends due the Series I preferred stockholders
was $
| ● | Liquidation - In the event of any liquidation, dissolution or winding-up of the Company, the Series I preferred stockholders were entitled to distributions equal to their initial purchase price per share plus accrued and unpaid dividends (all amounts were prior and in preference to any distribution of any assets to the holders of the other series of preferred stock and common stock). Upon liquidation, the Series I preferred stockholders were not entitled to participate in the distribution of assets to the common stockholder. In connection with the closing of the Merger Transaction on October 30, 2020, the Series I was redeemed. As of December 31, 2019 the Series I liquidation preference was $ |
A
liquidation, dissolution or winding-up of the Company was defined to include (a) the acquisition of the Company by another entity by
means of any transaction or series of related transactions (including without limitation, any reorganization, merger or consolidation,
or sale of stock); or (b) a sale of all or substantially all the assets of the Company; unless the Company’s stockholders of record
as constituted immediately prior to such acquisition or sale, hold at least
| ● | Conversion - Series I preferred stock was non-convertible into common stock except for mandatory conversion upon an initial public offering. Upon an initial public offering of the common stock, all shares of Series I Preferred Stock would be converted automatically into a number of shares of common stock as determined by multiplying the number of shares of Series I Preferred Stock to be so converted by the Series I Original Issue Price plus the value of any unpaid Series I Preferred Stock accrued dividends, and dividing the result by the price per share offered to the public in a Qualified Public Offering. |
| ● | Redemption - The preferred stock was not redeemable except that the Company shall have the option to redeem all or any portion of the Series I preferred stock on any date or dates following the issuances of Series I preferred stock. The Series I preferred stock to be redeemed on the redemption date would have been redeemed by paying for each share in cash an amount equal to the original issue prices plus the value of the accrued dividends as of the redemption date. The majority investor in the Series I transaction also controls the Board of Directors. Therefore, the redemption provisions were outside of the Company’s control. |
Series J Preferred Stock
During
2019, the Company issued
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The rights and privileges of the Series J redeemable preferred stock were as follows:
| ● | Voting - Series J preferred stockholders were not permitted to vote in any actions to be taken by the stockholders of the Corporation, including any action with respect to the election of directors to the Board of Directors of the Corporation. |
| ● | Dividends - The preferred stockholders were entitled to receive cumulative dividends at the per annum rate of |
There have been no declared dividends.
Cumulative dividends have been accreted and recorded as an increase to the contingently redeemable preferred stock. As of December 31,
2019, total unpaid accumulated dividends due the Series J preferred stockholders was less than $
| ● | Liquidation - In the event of any liquidation, dissolution or winding-up of the Company, the Series J preferred stockholders are entitled to distributions equal to their initial purchase price per share plus accrued and unpaid dividends (all amounts are prior and in preference to any distribution of any assets to the holders of the other series of preferred stock and common stock). Upon liquidation, the Series J preferred stockholders are not entitled to participate in the distribution of assets to the common stockholder. In connection with the closing of the Merger Transaction on October 30, 2020, the Series J preferred stock was |
A liquidation, dissolution or winding-up
of the Company is defined to include (a) the acquisition of the Company by another entity by means of any transaction or series of related
transactions (including without limitation, any reorganization, merger or consolidation, or sale of stock); or (b) a sale of all or substantially
all the assets of the Company; unless the Company’s stockholders of record as constituted immediately prior to such acquisition
or sale, hold at least
| ● | Conversion - Series J preferred stock is non-convertible into common stock except for mandatory conversion upon an initial public offering. Upon initial public offering of the common stock, all shares of Series J Preferred stock will be converted automatically into a number of shares of common stock as determined by multiplying the number of shares of Series J Preferred Stock to be so converted by the Series J Original Issue Price plus the value of any unpaid Series J Preferred Stock accrued dividends, and dividing the result by the price per share offered to the public in a Qualified Public Offering. |
| ● | Redemption - The preferred stock is not redeemable except that the Company shall have the option to redeem all or any portion of the Series J preferred stock on any date or dates following the issuances of Series J preferred stock. The Series J preferred stock to be redeemed on the redemption date shall be redeemed by paying for each share in cash an amount equal to the original issue prices plus the value of the accrued dividends as of the redemption date. The majority investor in the Series J transaction also controls the Board of Directors. Therefore, the redemption provisions are outside of the Company’s control. |
17. CONTINGENT SHARES ISSUANCE LIABILITIES
The table below represents the components of outstanding contingent shares issuance liabilities (in thousands):
| 2021 | 2020 | |||||||
| Contingent sponsor earnout shares | $ | $ | ||||||
| Private placement warrants | ||||||||
| Balance as at | $ | $ | ||||||
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Contingent Sponsor Earnout Shares
On October 30, 2020, as a result of the Merger
Transaction, SOC modified the terms of
In order to capture the market conditions associated with the Sponsor Earnout Shares, the Company applied an approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the Sponsor Earnout Shares’ contractual life based on the appropriate probability distributions. The fair value was determined by taking the average of the fair values under each Monte Carlo simulation trial.
As part of the closing of the Merger Transaction,
and in accordance with the employment agreement with the Company’s former CEO, an award equal to
The remaining
Private Placement Warrants
On October 30, 2020, as a result of the Merger
Transaction, SOC effectively granted
In order to capture the market conditions associated with the private placement warrants, the Company applied an approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the warrant’s contractual life based on the appropriate probability distributions. The fair value was determined by taking the average of the fair values under each Monte Carlo simulation trial.
The private placement warrants were recorded as
a noncurrent liability as contingent shares issuance liabilities. The estimated liability granted on October 30, 2020 was $
18. STOCKHOLDERS’ EQUITY
Pursuant to the Company’s restated Certificate
of Incorporation, the Company authorized the issuance of
88
In June 2021, the Company completed a public offering
of
On October 30, 2020, as part of the Merger Transaction
(as disclosed in Note 4) all outstanding shares of Legacy SOC Telemed common stock was converted into Class A common stock of SOC Telemed,
Inc. using an exchange ratio of
As part of the Merger Transaction the following events occurred impacting Legacy SOC Telemed common stock:
| ● | Treasury stock was retired. |
| ● | Series H preferred stock was partially redeemed in exchange for Class A common stock resulting in 10,600,347 shares of Class A common stock being issued to the previous Series H preferred stockholders. |
| ● | All vested stock options under the Legacy SOC Telemed 2014 Equity Incentive Plan were exercised into Class A common stock resulting in 2,643,694 shares of Class A common stock. |
| ● | All outstanding warrants to purchase shares of Legacy SOC Telemed common stock were exercised into Class A common stock resulting in 1,169,452 shares of Class A common stock. |
| ● | The Company issued 11,468,485 shares of Class A common stock and the Sponsor Earnout Shares to the former stockholders of HCMC for $ 64.6 million in cash. |
| ● | The Company issued 16,800,000 Class A common shares for $168,000,000 through the PIPE, as discussed in Note 4. |
Apart from the above Merger Transaction related activity, common warrants of Legacy SOC Telemed were exercised during 2020 resulting in 40,795 new shares of Legacy SOC Telemed common stock shares being issued prior to the Merger Transaction.
Warrants to Acquire Common Stock
Warrants to purchase shares of Legacy SOC Telemed
common stock and their exercise prices were converted using an exchange ratio of
2015 Common Warrants
During 2015 in connection with the Series H financing,
the Company converted
All 2015 common warrants were exercised during 2020, as part of the Merger Transaction. Therefore, there were no 2015 common warrants remaining as of December 31, 2021 and 2020.
2017 and 2018 Series I Common Warrants
During 2017, in conjunction with the Series I
financing, the Company issued
During 2018,
All 2017 and 2018 Series I Common Warrants were exercised during 2020, as part of the Merger Transaction. Therefore, there were no Series I Common warrants remaining as of December 31, 2021 and 2020.
89
2019 and 2020 Series J Common Warrants
During 2019 in conjunction with the Series J financing,
the Company issued
During 2020,
All 2019 and 2020 Series J Common Warrants were exercised during 2020, as part of the Merger Transaction. Therefore, there were no Series J Common Warrants remaining as of December 31, 2021 and 2020.
2020 Common Warrants
On October 30, 2020, as part of the Merger Transaction,
the Company issued
At December 31, 2021 and 2020, respectively all
19. STOCK-BASED COMPENSATION
Each unvested stock option that was outstanding
immediately prior to the Merger Transaction was converted into an option to purchase a number of shares of Class A common stock on terms
substantially identical to those in effect prior to the Merger Transaction, except for adjustments to the underlying number of shares
and the exercise price based on the exchange ratio of
Under the Company’s 2014 Equity Incentive
Plan (the “2014 Plan”), officers, employees and consultants could be granted options to purchase shares of authorized but
unissued Legacy SOC Telemed common stock. Options granted under the 2014 Plan were qualified as incentive stock options or non-qualified
stock options. Qualified incentive stock options could only be granted to employees. As part of the Merger Transaction the 2014 Plan was
terminated and a new 2020 Equity Incentive Plan (the “2020 Plan”) was approved by the Company’s Board of Directors (the
“Board”) and the Company’s stockholders on October 30, 2020. As a result of the termination no additional grants can
be issued under the 2014 Plan.
In accordance with the automatic share increase
provision in the 2020 Plan, the total number of shares of Class A common stock reserved for awards will automatically be increased on
the first day of each fiscal year beginning with the 2021 fiscal year in an amount equal to the lesser of
The Company has granted a total of
As part of the Merger Transaction, the Board and
the Company’s stockholders approved the SOC Telemed, Inc. Employee Stock Purchase Plan (the “ESPP”) on October 30, 2020.
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Employees have purchased a total of
The term of the offerings under the ESPP are for
a 6-month period. The offer made to eligible employees and service providers was accepted by 90 participants. The ESPP grant was fair
valued as at the grant date using the Black-Scholes pricing model. The Company recognized $
The Board establishes the options’ exercise prices, or the methodology used in determining the options’ exercise prices. The Board also establishes the vesting, expiration, and restrictions related to the options granted. Each option has an individual vesting period which varies per option subject to approval from Board of Directors. Generally, options expire after ten years or earlier if the optionee terminates their business relationship with the Company.
No stock options were granted for the years ended December 31, 2021 or December 31, 2020. The fair value of each grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
| 2021 (1) | 2020 (2) | |||||||
| Weighted-average volatility | % | |||||||
| Expected dividends | % | |||||||
| Expected term (in years) | ||||||||
| Risk-free interest rate | % | |||||||
| (1) | No new grants issued for the year ended December 31, 2021. |
| (2) | No new grants issued for the year ended December 31, 2020. These assumptions relate to option modifications in 2020. |
During the year ended December 31, 2019,
the Company granted options that would vest upon satisfying a performance condition, which was a liquidity event defined as a change in
control. Since the Merger Transaction did not meet the definition of a change in control, the Company modified options to purchase
During the year ended December 31, 2020 the Company
modified two option grants such that the period to exercise the options was extended from July 2020 to January 2021. As a result of this
modification the Company recognized incremental stock compensation expense of $
In connection with the Merger Transaction several awards were granted to Executives of the Company:
| ● | A “Transaction Award” was authorized on August 18, 2020 to the former interim-CEO of the Company. The award was granted in the form of RSUs and equaled | |
| ● | A “Base Full Value Award” was promised to the former CEO of the Company with the award value of
On February 16, 2021 the award for the former CEO was modified and the stock-based compensation liabilities for the Base Full Value Award were replaced by new RSUs and PSUs granted on February 16, 2021. The Company revalued the cash liability award as of the modification date and recorded an additional cash liability of $ |
91
| ● | The former CEO of the Company was deemed granted an award of PSUs equal to |
The Company granted
| Number of RSUs | Weighted- Average Fair Value | ||||||||
| Outstanding RSUs at December 31, 2019 | |||||||||
| Granted | $ | ||||||||
| Vested | ( | ) | |||||||
| Forfeited | |||||||||
| Outstanding RSUs at December 31, 2020 | $ | ||||||||
| Granted | |||||||||
| Vested | ( | ) | |||||||
| Forfeited | ( | ) | |||||||
| Outstanding RSUs at December 31, 2021 | $ | ||||||||
| Expected RSUs to vest as of December 31, 2021 | |||||||||
The intrinsic value of the outstanding RSUs was
$
The Company granted
| Number of PSUs | Weighted- Average Fair Value | |||||||
| Outstanding PSUs at December 31, 2020 | ||||||||
| Granted | $ | |||||||
| Vested | ||||||||
| Forfeited | ( | ) | ||||||
| Outstanding PSUs at December 31, 2021 | $ | |||||||
| Expected PSUs to vest as of December 31, 2021 | ||||||||
The fair value of each grant made for year ended December 31, 2021 was estimated on the grant date using the Monte Carlo simulation with the following assumptions:
| Year Ended December 31, | ||||||||
| 2021 | 2020 (1) | |||||||
| Current Stock Price | $ | |||||||
| Expected volatility | % | |||||||
| Expected term (in years) | ||||||||
| Risk-free interest rate | % | |||||||
| (1) | No PSUs were issued for the year ended December 31, 2020. |
92
The Company recognized $
As of December 31, 2021, the Company had $
The following table summarizes stock option activity of the 2014 Plan for the years ended December 31, 2021 and 2020:
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding stock options at December 31, 2019 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited or expired | ( | ) | ||||||||||
| Outstanding stock options at December 31, 2020 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited or expired | ( | ) | ||||||||||
| Outstanding stock options at December 31, 2021 | ||||||||||||
| Vested or expected stock options to vest at December 31, 2021 | ||||||||||||
| Exercisable at December 31, 2021 | $ | |||||||||||
The intrinsic value of the outstanding options
was $
Access Physicians Replacement Awards
As discussed in Note 4, Business Combinations,
expense for the replacement awards that were not fully vested prior to the date of the Acquisition will continue to be recognized over
the remaining service period of 12 months post-acquisition date. For the year ended December 31, 2021, $2.1 million was recognized as
expense of which $
20. EMPLOYEE RETIREMENT PLANS
The Company sponsors a 401(k) defined contribution
retirement plan for the benefit of its employees, substantially all of whom are eligible to participate after meeting minimum qualifying
requirements. Contributions to the plan are at the discretion of the Company. For the years ended December 31, 2021 and 2020, the
Company contributed $
21. 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, RSUs, PSUs, warrants, Sponsor Earnout Shares, unvested common stock, shares to be purchased through the ESPP and contingently redeemable preferred stock, 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. As a result of the Merger, the Company has retrospectively adjusted the weighted-average number of shares of common stock outstanding prior to October 30, 2020 by multiplying them by the exchange ratio of 0.4047 used to determine the number of shares of Class A common stock into which they converted.
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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):
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Preferred stock dividends | ( | ) | ||||||
| Numerator for Basic and Dilutive EPS –Loss available to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Common stock | ||||||||
| Series I and Series J Common Warrants | ||||||||
| Denominator for Basic and Dilutive EPS – Weighted-average common stock outstanding | ||||||||
| Basic net loss per share | $ | ( | ) | $ | ( | ) | ||
| Diluted net loss per share | $ | ( | ) | $ | ( | ) | ||
Since the Company was in a net loss position for all periods presented, net loss per share attributable to common stockholders was the same on a basic and diluted basis, as the inclusion of all potential common equivalent shares outstanding would have been anti-dilutive. Anti-dilutive common equivalent shares were as follows:
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Outstanding common warrants | ||||||||
| Outstanding options to purchase common stock | ||||||||
| Unvested Sponsor Earnout Shares | ||||||||
| Unvested RSUs | ||||||||
| Unvested PSUs | ||||||||
| Unvested common stock – business combination – Note 4 | ||||||||
| Shares to be purchased through ESPP | ||||||||
| Total anti-dilutive common equivalent shares | ||||||||
As discussed in Note 27, Subsequent Events, on February 2, 2022, the Company entered into a definitive agreement to be acquired by affiliates of investment funds advised by Patient Square Capital, a dedicated health care investment firm. If the transaction is consummated, SOC Telemed’s Class A common stock and public warrants will no longer be listed on any public market, which will have an impact on the number of potential common equivalent shares outstanding.
22. COMMITMENTS AND CONTINGENCIES
Commitments
In 2021,
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There was no sublease income for the years ended December 31, 2021 and 2020.
The following reflects the future minimum non-cancelable lease payments required under the above operating leases (in thousands):
| Years ending December 31, | Amount | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 and thereafter | |||||
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.
23. 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 provision for income taxes for the years ended December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||
| Current: | ||||||||
| Federal | $ | $ | ||||||
| State | ( | ) | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | |||
| Deferred: | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| $ | $ | |||||||
| Income tax benefit (expense) | $ | $ | ( | ) | ||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statements purposes and the amounts used for income tax purposes.
Components of the Company’s net deferred tax asset balance are as follows at December 31 (in thousands):
| 2021 | 2020 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Deferred revenue | ||||||||
| Stock options and warrants | ||||||||
| Restricted stock units | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets before deferred tax liabilities | ||||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets | ( | ) | ( | ) | ||||
| Property and equipment | ( | ) | ||||||
| Capitalized software costs and other | ( | ) | ( | ) | ||||
| Partnership basis | ( | ) | ||||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
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The Company’s tax rate reconciliation for the years ended December 31 is as follows:
| 2021 | 2020 | |||||||
| Statutory US federal rate | % | % | ||||||
| Stock-based compensation | ( | )% | % | |||||
| Sec.162(m) | ( | )% | ( | )% | ||||
| State and local income taxes | % | % | ||||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Change in fair value of contingent shares issuance liabilities and contingent consideration | % | % | ||||||
| Other | % | ( | )% | |||||
| Effective tax rate | % | ( | )% | |||||
As of December 31, 2021, the Company had approximately
$297.3 million of gross federal net operating loss carryforwards and $
In general, under Section 382 of the U.S. Internal
Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations
on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. A Section 382 “ownership
change” generally occurs if one or more stockholders or groups of stockholders who own at least
The Company has performed a tax analysis for the years ended December 31, 2021 and 2020 and believes there are no material uncertain tax positions. There is no unrecognized income tax benefit for the years ended December 31, 2021 and 2020, and the Company does not anticipate any material changes in its unrecognized tax benefits in the next twelve months.
The Company is subject to taxation in the U.S. and various state and local jurisdictions. Due to its net operating loss carryforwards, the Company’s income tax returns generally remain subject to examination by federal and most state tax and local tax authorities from tax year 2005 forward.
On March 27, 2020, the United States enacted the
Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act is an emergency economic stimulus package that includes spending
and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES
Act provides sweeping tax changes in response to the COVID 19 pandemic, some of the more significant provisions which are expected to
impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing
the loss carryback period for certain losses to
24. RELATED-PARTY TRANSACTIONS
Contingent Sponsor Earnout Shares
On October 30,2020, the Company modified the terms
of the
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Preferred stock and debt
In 2020, Legacy SOC Telemed issued
On August 14, 2020, two entities affiliated with
WP signed a support letter committing funds up to $
Legacy SOC Telemed also entered into a convertible
bridge note purchase agreement with certain previous Legacy SOC Telemed stockholders which permitted Legacy SOC Telemed to borrow aggregate
principal in the amount of $
As discussed in Note 12, Debt, and Note 16, Contingently Redeemable Preferred Stock, all existing debt and preferred stock owned by our controlling stockholders was liquidated in connection with the closing of the Merger Transaction on October 30, 2020.
As discussed in Note 12, Debt, in order to consummate
the Acquisition and support the combined business thereafter, SOC Telemed entered into a related-party Subordinated Note with a significant
stockholder, SOC Holdings, an affiliate of Warburg Pincus, for $
On June 4, 2021, the Subordinated Note was extinguished in connection with the issuance of Class A common stock. Refer to Notes 12, Debt, and 18, Stockholders’ Equity, for further discussion.
25. RESTRUCTURING PLAN
On October 28, 2021, the Board of Directors of
the Company approved certain strategic, operational and organizational plans to improve productivity and reduce complexity in the way
the Company manages its business. In connection with these actions, the Company reduced non-clinical headcount by approximately
26. VALUATION AND QUALIFYING ACCOUNTS
The table below details the activity of the allowance for doubtful accounts and deferred tax asset valuation allowance for the years ended December 31, 2021 and 2020 (in thousands):
| Balance at the beginning of the period | Additions | Deductions | Balance at the end of the period | |||||||||||||
| Year ended December 31, 2020 | ||||||||||||||||
| Allowance for doubtful accounts | $ | ( | ) | $ | ||||||||||||
| Deferred tax asset valuation allowance | ( | ) | ||||||||||||||
| Year ended December 31, 2021 | ||||||||||||||||
| Allowance for doubtful accounts | $ | ( | ) | $ | ||||||||||||
| Deferred tax asset valuation allowance | ( | ) | ||||||||||||||
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27. SUBSEQUENT EVENTS
The Company evaluated its financial statements for subsequent events through March 30, 2022, 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.
Acquisition by Patient Square Capital
On February 2, 2022, the Company entered into a definitive agreement to be acquired by affiliates of investment funds advised by Patient Square Capital, a dedicated health care investment firm.
Under the terms of the transaction agreement,
at the effective time of the transaction, each share of the Company’s Class A common stock outstanding immediately prior to the
effective time (subject to certain exceptions) will be canceled and automatically converted into the right to receive $
The transaction agreement provides certain termination
rights for both the Company and Patient Square Capital, and further provides that upon termination of the transaction agreement under
certain circumstances, the Company would be required to pay Patient Square Capital a termination fee of approximately $
The transaction is subject to the satisfaction or waiver of customary closing conditions, including the adoption and approval of the transaction agreement by SOC Telemed stockholders. A special meeting of the Company’s stockholders to consider and vote on a proposal to adopt and approve the transaction agreement is scheduled to be held on April 4, 2022.
The parties expect the transaction to close in the second quarter of 2022. If the transaction is consummated, SOC Telemed’s Class A common stock and public warrants will no longer be listed on any public market.
Legal Proceedings
Between February 28, 2022, and March 17, 2022, three purported stockholders of the Company filed complaints in federal courts against the Company and members of the Company’s Board of Directors in connection with the proposed transaction described above: Gamez v. SOC Telemed, Inc., et al., Case No. 1:22-cv-01661 (S.D.N.Y.) (filed February 28, 2022); Campbell v. SOC Telemed, Inc., et al., Case No. 1:22-cv-01333 (E.D.N.Y.) (filed March 10, 2022); and Danieli v. SOC Telemed, Inc., et al., Case No. 1:22-cv-00340 (D. Del.) (filed March 17, 2022). The complaints assert federal securities claims under Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 thereunder for alleged failures to disclose material information in the preliminary proxy statement or the definitive proxy statement filed by the Company with the SEC in connection with the proposed transaction described above, which allegedly rendered them false and misleading. Specifically, the complaints allege, among other things, that the preliminary proxy statement or the definitive proxy statement failed to disclose material information regarding the sales process conducted by the Company, the Company’s financial projections and the financial analyses by the Company’s financial advisor, William Blair & Company, L.L.C. (“William Blair”). The Campbell complaint also alleges that the definitive proxy statement failed to disclose potential conflicts of interest involving William Blair. The complaints seek, among other things, an order enjoining the proposed transaction; rescinding the proposed transaction if it closes and setting it aside or awarding damages; directing the Board of Directors to disseminate a proxy statement that discloses certain information requested by the plaintiffs; awarding costs, including attorneys’ and experts’ fees; and awarding such other relief as the respective court deems proper. The Company has also received five demand letters from purported stockholders of the Company challenging the proposed transaction and alleging similar insufficiencies in the disclosures in the definitive proxy statement. The defendants believe the complaints are without merit. The Company cannot predict the outcome of or estimate the loss or range of loss from these matters.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2021, because of the material weaknesses in our internal control over financial reporting described below.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal over control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2021, because of the material weaknesses in our internal control over financial reporting described below.
In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting for the fiscal year in which the acquisition occurred while integrating the acquired operations. Management’s evaluation of internal control over financial reporting excluded the internal control activities of Access Physicians which are included in the consolidated financial statements of SOC Telemed and constituted approximately 31% of total revenues for the year ended December 31, 2021, and approximately 3% of total assets as of December 31, 2021.
Material Weaknesses in Internal Control Over Financial Reporting
Prior to the Merger Transaction, Legacy SOC Telemed operated as a private company with limited accounting and financial reporting personnel and other resources with which to address its internal controls and procedures. We identified material weaknesses in our internal control over financial reporting related to the design of its control environment. 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. Our management has concluded that, as of December 31, 2021, our internal control over financial reporting was ineffective due to the following material weaknesses:
| ● | We determined that we had a material weakness related to the design of our control environment because we did not (i) maintain a sufficient complement of personnel with an appropriate degree of knowledge, experience, and training, commensurate with its accounting and reporting requirements; (ii) 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) design and maintain effective controls over segregation of duties with respect to creating and posting manual journal entries. |
| ● | We determined that we had a material weakness related to informational technology (“IT”) general controls because we did not design and maintain effective controls over IT general controls for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain (i) program change management controls for financial systems to ensure that information technology and data changes affecting financial IT applications and underlying accounts records are identified, tested, authorized, and implemented appropriately; and (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel. |
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The material weakness related to the control environment did not result in adjustments to the financial statements for the year ended December 31, 2021. The IT deficiencies did not result in a material misstatement to the financial statements; however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, we have determined these deficiencies in the aggregate constitute a second material weakness. Additionally, each of the above material weaknesses could result in a misstatement of the Company’s account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
With the oversight of senior management and our audit committee, we have implemented 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; (iv) the establishment of formalized internal controls to maintain segregation of duties between control operators; (v) the implementation of additional program change management policies and procedures, control activities, and tools to ensure changes affecting IT applications and underlying accounting records are identified, authorized, tested, and implemented appropriately; and (vi) the enhancement of the design and operation of user access control activities and procedures to ensure that access to IT applications and data is adequately restricted to appropriate Company personnel. We believe the measures described above, which continues the implementation of a remediation plan commenced by Legacy SOC Telemed prior to the Merger Transaction, will remediate the material weaknesses 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.
Changes in Internal Control Over Financial Reporting
We have been engaged in the process of the design and implementation of our internal control over financial reporting in a manner commensurate with the scale of our operations following the Merger Transaction. Except with respect to the changes in connection with such design and implementation and the implementation of the initiatives to remediate the material weaknesses noted above, there has been no change in our internal control over financial reporting during the fiscal quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption established by the JOBS Act for “emerging growth companies.”
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers and Directors
The following table sets forth certain information, including ages as of December 31, 2021, of our executive officers and members of the Board:
| Name | Age | Position(s) | ||||
| Executive Officers | ||||||
| Dr. Christopher M. Gallagher | 42 | Chief Executive Officer and Director | ||||
| David R. Fletcher | 61 | Interim Chief Financial Officer | ||||
| David Mikula | 52 | Chief Operating Officer | ||||
| Dr. R. Jason Hallock | 50 | Chief Medical Officer | ||||
| Eunice J. Kim | 48 | General Counsel and Corporate Secretary | ||||
| Non-Executive Directors | ||||||
| Steven J. Shulman(2)(3) | 70 | Chairman of the Board | ||||
| Dr. Bobbie Byrne(1) | 54 | Director | ||||
| Thomas J. Carella(2)(3) | 46 | Director | ||||
| Gyasi C. Chisley(1) | 46 | Director | ||||
| Joseph P. Greskoviak | 56 | Director | ||||
| Amr Kronfol(2)(3) | 41 | Director | ||||
| Anne M. McGeorge(1) | 61 | Director | ||||
| (1) | Member of the audit committee. |
| (2) | Member of the compensation committee. |
| (3) | Member of the nominating and corporate governance committee. |
Executive Officers
Christopher M. Gallagher, M.D., FACC has served as our Chief Executive Officer since September 2021 and as a member of the Board since the Acquisition. Dr. Gallagher previously served as President of Access Physicians, a division of SOC Telemed, since the Acquisition and as the Chief Executive Officer of Access Physicians since its founding in 2013 through to the Acquisition. Prior to joining Access Physicians, Dr. Gallagher served as the Chief Medical Officer at CHRISTUS Mother Frances Hospital — Sulphur Springs from October 2012 through May 2017. Dr. Gallagher is board-certified in internal medicine and cardiovascular disease. He trained at UT Southwestern for both his Internal Medicine residency and Cardiology Fellowship and earned his Doctor of Medicine from Texas Tech University School of Medicine. He is a fellow in the American College of Cardiology and member of the American Association of Cardiovascular and Pulmonary Rehabilitation, American Medical Association, and Texas Medical Association. We believe that Dr. Gallagher is well-qualified to serve as a director due to his extensive operational and executive management experience in the healthcare industry.
David R. Fletcher has served as our interim Chief Financial Officer since October 2021. Since 2012, Mr. Fletcher has been a financial consultant focusing on interim chief financial officer and interim senior financial executive roles at healthcare services, technology, and services industry companies, sponsored by leading private equity firms. Prior to serving in these roles, he served as Chief Financial Officer Partner of Tatum, a Randstad company, a professional and interim services firm, from 2009 to 2012, and was acting Chief Financial Officer for Flotek Industries, Inc. and as acting Chief Financial Officer with Envela Corp., among other interim financial executive roles, during his tenure. Prior to that, from 2007 to 2008, he served concurrently as Executive Vice President and Chief Financial Officer of three publicly traded companies: American Realty Investors, Inc., Transcontinental Realty Investors Inc., and Income Opportunity Realty Investors. Previously, Mr. Fletcher was Executive Vice President and Chief Financial Officer of a wholly owned subsidiary of Tarragon Corporation. Mr. Fletcher was previously employed as a senior manager with Deloitte LLP and as a commercial real estate loan officer with Bank of America. Mr. Fletcher holds an M.B.A. with a concentration in finance from the McCombs Graduate School of Business at The University of Texas at Austin, graduating as a Sord Scholar. Mr. Fletcher also holds a B.B.A. degree from The University of Iowa.
David Mikula has served as our Chief Operating Officer since September 2021. Mr. Mikula previously served as Chief Operating Officer of Access Physicians, a division of SOC Telemed, since the Acquisition and as the Chief Operating Officer of Access Physicians from December 2017 through to the Acquisition. Prior to that, Mr. Mikula served as the Chief Development Officer at Amedisys, Inc., a home health, hospice and personal care company, from January 2017 through November 2017. From November 2009 to January 2017, he served in variety of capacities at Kindred Healthcare, LLC, a post-acute healthcare services provider, including Chief Operating Officer from November 2015 through January 2016 and Senior Vice President Operations from January 2016 through January 2017. Mr. Mikula holds a B.S. in finance from Texas State University and an M.B.A. from Baylor University.
R. Jason Hallock, M.D., MMM has served as our Chief Medical Officer since the closing of the Merger Transaction and previously held the same position with Legacy SOC Telemed since December 2019. Prior to joining SOC Telemed, from July 2013 to November 2019, Dr. Hallock held various positions at US Acute Care Solutions, a provider of physician-owned emergency medicine, hospitalist and observation services, including System Chief of Lifebridge Health Emergency Services from July 2017 to January 2019 and Chief of Emergency Services of Union Hospital of Cecil from July 2014 to February 2018. Dr. Hallock holds a B.A. in human biology and anthropology from the University of Pennsylvania, an M.D. from the University of Connecticut and an M.M.M. from the University of Southern California.
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Eunice J. Kim has served as our General Counsel and Corporate Secretary since the closing of the Merger Transaction and previously held the same positions with Legacy SOC Telemed since October 2020. Prior to joining SOC Telemed, from 2004 to June 2020, Ms. Kim served in a variety of roles at NortonLifeLock Inc. (formerly known as Symantec Corporation), a cybersecurity software company, including most recently as Vice President, Legal and Assistant Secretary from August 2016 to June 2020. Prior to joining Symantec Corporation, she was an associate at Coudert Brothers LLP, a global law firm. Ms. Kim holds a B.A. in English and biochemistry from Smith College and a J.D. from Boston College Law School.
Non-Executive Directors
Steven J. Shulman has served as Chairman of the Board since the closing of the Merger Transaction, previously served as HCMC’s Chief Executive Officer and one of its directors since its inception and has over 45 years of experience leading and acquiring businesses in the healthcare industry. Mr Shulman is currently the Chairman of Magellan Health, Inc. where he previously served as Chief Executive Officer from 2002 to 2008 and spearheaded its turnaround and restructuring following bankruptcy. Mr. Shulman also currently serves as Chairman of Quartet Health, Inc., a healthcare technology company which connects primary care and mental health providers, a position he has held since 2014; Chairman of CareCentrix, Inc., a post-acute managed care company, a position he has held since 2008; Co-Chairman of Healthmap Solutions Inc., a health management company focused on progressive diseases, since 2018; and a Director of Walgreens Boots Alliance, Inc., an integrated healthcare, pharmacy and retail leader, since 2022. He is also the Managing Partner at Shulman Family Ventures, Inc., a healthcare-focused private equity firm, a position he has held since 2008. In the last five years, he has served as a Director of several other privately-held companies, including VillageMD, a primary care medical management company, MedImpact, the largest privately held prescription drug benefits management company, Healthmarkets, a healthcare distribution and specialty insurance company, Pager, a digital health company and Facet Technologies, an OEM of lancets and lancing devices for diabetics. From 2013 to 2018, Mr. Shulman served as Chairman of the Board of R1 RCM Inc., a technology-enabled revenue cycle management service for healthcare providers and from 2013 to 2014 as Chairman of Health Management Associates, Inc., a hospital company. He served as an Operating Partner at Water Street Healthcare Partners, LLC from 2008 until 2015 and Tower Three Partners LLC from 2008 until 2013. He also served as Chairman and Chief Executive Officer of Internet Healthcare Group, LLC from 2000 to 2002 and as Chairman, President and Chief Executive Officer of Prudential Healthcare, Inc. from 1997 to 1999. Prior to that, Mr. Shulman served in senior executive positions at Value Health, Inc., a specialty managed care company he founded and took public, including as a Director and as President of the Pharmacy and Disease Management Group. He also previously held senior executive positions at each of Cigna Corporation, including as President of the East Central Division, and Kaiser Permanente, an integrated managed-care company, including as Director, Medical Economics. He received his Bachelor’s degree in Economics and Master’s degree in Health Services Administration from the State University of New York at Stony Brook. We believe that Mr. Shulman is well-qualified to serve as a director due to his extensive operational, investment and board experience in the healthcare industry.
Dr. Barbara “Bobbie” P. Byrne has served as a member of the Board since the closing of the Merger Transaction. Dr. Byrne has served as Chief Information Officer at Advocate Aurora Health, a not-for-profit healthcare system, since 2017. Prior to joining Advocate Aurora Health, Dr. Byrne served as Chief Medical Officer of Edward-Elmhurst Health, a hospital system in Illinois, from January 2017 to July 2017 and as its Chief Information Officer from December 2009 to January 2017. Dr. Byrne previously served as the Clinical Director at the Certification Commission for Healthcare Information Technology from April 2009 to December 2009 and as the Senior Vice President, Clinical Solutions for Eclipsys, Inc. (now Allscripts, Inc.) from 2005 to April 2009. Since January 2020, Dr. Byrne has served on the board of directors of Spok Holdings, Inc., a provider of communications solutions for the healthcare and public safety sectors. Dr. Byrne holds a B.A. in history from Northwestern University, an M.B.A. from the Kellogg School of Management at Northwestern University and an M.D. from Northwestern University. We believe that Dr. Byrne is well-qualified to serve as a director due to her extensive operational and executive management experience in the healthcare industry.
Thomas J. Carella has served as a member of the Board since the closing of the Merger Transaction and previously served on Legacy SOC Telemed’s board of directors since February 2017. Mr. Carella has served as a Managing Director at Warburg Pincus, a private equity firm, since September 2016. Prior to joining Warburg Pincus, Mr. Carella was a Partner in the Merchant Banking Division of Goldman Sachs where he was global head of the division’s private equity activities in the healthcare sector. In addition to his board role at SOC Telemed, Mr. Carella serves on the board of directors of Alignment Healthcare, CityMD/Summit Medical Group, Polyplus Transfection SA, Vertice Pharma and WebPT. Mr. Carella has previously served on numerous boards, including Outset Medical, Inc., a medical technology company, from April 2019 to January 2021, and T2 Biosystems, Inc., a diagnostics company, from March 2013 to March 2016. Mr. Carella holds a B.A. from Harvard College and an M.B.A. from Harvard Business School. We believe that Mr. Carella is well-qualified to serve as a director due to his extensive investment and board experience in the healthcare industry.
Gyasi C. Chisley has served as a member of the Board since May 2021. Mr. Chisley has served as the President and Chief Executive Officer, Hospitals and Clinics at Cancer Treatment Centers of America Global, Inc., which includes the Cancer Treatment Centers of America Comprehensive Cancer Care Network of Hospitals and Outpatient Care Centers, since 2019. Prior to that, Mr. Chisley served as Chief Strategy Officer and Senior Vice President, Strategy and Payment Policy/Innovation for UnitedHealthcare from 2016 to 2019. Prior to UnitedHealthcare, Mr. Chisley held executive leadership roles at Methodist Healthcare North and Methodist Le Bonheur Healthcare in Memphis, Tennessee, from 2013 to 2016, and within the Mercy Health network (formerly Catholic Health Partners) headquartered in Cincinnati, Ohio, from 2010 to 2013. Mr. Chisley holds a dual B.S. in Psychology and Biology from Morehouse College and an MHSA/M.B.A. from the University of Michigan. We believe that Mr. Chisley is well-qualified to serve as a director due to his extensive executive leadership and management experience in the healthcare industry.
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Joseph P. Greskoviak has served as Vice Chair of the Board since March 2021 and as a member of the Board since the closing of the Merger Transaction. Since 2012, Mr. Greskoviak has held various positions at Press Ganey, a provider of patient experience measurement, performance analytics and strategic advisory solutions for health care organizations, including Vice Chairman since March 2020, Chief Executive Officer from December 2018 to March 2020, and President and Chief Operating Officer from 2012 to December 2018. Prior to joining Press Ganey, Mr. Greskoviak worked at MedAssets, where he served as President of its spend and clinical resource management business (now part of Vizient) from 2010 to 2012. Mr. Greskoviak holds a B.A. in political science from DePaul University. We believe that Mr. Greskoviak is well-qualified to serve as a director due to his extensive executive leadership and management experience in the healthcare industry.
Amr Kronfol has served as a member of the Board since the closing of the Merger Transaction and previously served on Legacy SOC Telemed’s board of directors since June 2015. Mr. Kronfol joined Warburg Pincus, a private equity firm, in July 2009 and has been a Managing Director since 2018, focusing on investment activities at the intersection of healthcare and technology. Mr. Kronfol has served on numerous boards, including Silk Road Medical, AmRest, Modernizing Medicine, Qualifacts, WebPT and Helix. Mr. Kronfol holds an A.B. in computer science from Princeton University and an M.B.A. from The Wharton School at the University of Pennsylvania. We believe that Mr. Kronfol is well-qualified to serve as a director due to his extensive investment and board experience in the healthcare industry.
Anne M. McGeorge has served as a member of the Board since the closing of the Merger Transaction. Ms. McGeorge has over 35 years of experience providing strategic guidance and operational oversight to health care organizations. Ms. McGeorge has served as an Operating Partner of Havencrest Healthcare, a private equity investment firm specializing in the healthcare industry, since January 2018 and as an adjunct professor at the University of North Carolina at Chapel Hill since August 2005. Since June 2019, Ms. McGeorge has served on the board of directors and as the chair of the audit committee of Magenta Therapeutics, a clinical-stage biotechnology company. Since February 2021, Ms. McGeorge has also served on the board of directors and as the chair of the audit committee of CitiusTech, a privately held health care technology services company. Prior to her retirement in July 2017, Ms. McGeorge served as Managing Partner of Grant Thornton LLP’s Health Care Industry Practice from 2006 to July 2017 and as Global Managing Partner for Grant Thornton International’s Health Care Industry Practice from 2015 to July 2017. Ms. McGeorge was formerly a partner at Deloitte LLP from 2002 to 2005 and at Arthur Andersen LLP from 1994 to 2002. Ms. McGeorge holds a B.B.A. in accounting from the College of William & Mary and an M.S. in accounting from the University of Virginia. We believe that Ms. McGeorge is well-qualified to serve as a director due to her extensive experience providing auditing and financial services for the healthcare industry.
Composition of the Board
Our business and affairs are organized under the direction of the Board. The Board currently consists of eight members. Subject to the terms of the Investor Rights Agreement and our certificate of incorporation and by-laws, the number of directors will be fixed by the Board.
Upon the closing of the Merger Transaction, we entered into the Investor Rights Agreement with SOC Holdings LLC pursuant to which, among other things, SOC Holdings LLC has the right to designate (i) up to five of nine directors for as long as it beneficially owns at least 50% of the issued and outstanding shares of Class A common stock, (ii) up to three of nine directors for so long as it beneficially owns at least 35% but less than 50% of the issued and outstanding shares of Class A common stock, (iii) up to two of seven directors for so long as it beneficially owns at least 15% but less than 35% of the issued and outstanding shares of Class A common stock and (iv) up to one of seven directors for so long as it beneficially owns at least 5% but less than 15% of the issued and outstanding shares of Class A common stock. SOC Holdings LLC has been deemed to have designated Messrs. Carella and Kronfol for election to the Board. See “Certain Relationships and Related Transactions, and Director Independence — Certain Relationships and Related Party Transactions — Investor Rights Agreement” under Part III, Item 13 of this report.
In connection with the Acquisition, we entered into the Board Nomination Rights Agreement with Dr. Gallagher pursuant to which, among other things, for so long as Dr. Gallagher beneficially owns at least 75% of the shares of our Class A common stock that he acquired at the closing of the Acquisition and remains employed by us, Dr. Gallagher is entitled to serve as a member of the Board. See “Certain Relationships and Related Transactions, and Director Independence — Certain Relationships and Related Party Transactions — Board Nomination Rights Agreement” under Part III, Item 13 of this report.
Process for Nominations to the Board
There have been no material changes to the procedures by which stockholders may recommend nominees to the Board since we last provided disclosure of such procedures in our definitive proxy statement for the 2021 annual meeting of the Company’s stockholders filed with the SEC on May 10, 2021.
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Audit Committee
Effective upon the closing of the Merger Transaction, the Board established a standing audit committee. The members of our audit committee consist of Dr. Byrne, Mr. Chisley and Ms. McGeorge, each of whom meets the requirements for independence under the listing standards of Nasdaq and SEC rules and regulations. The chair of the audit committee is Ms. McGeorge, who is an “audit committee financial expert” within the meaning of SEC regulations. See “— Executive Officers and Directors — Non-Executive Directors — Anne M. McGeorge” above for a description of Ms. McGeorge’s relevant experience.
Code of Business Conduct and Ethics
The Board has adopted a code of business conduct and ethics that applies to our directors, officers, and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The code of business conduct and ethics is available on the investor relations portion of our website at www.soctelemed.com. In addition, we intend to post on our website all disclosures that are required by law or the listing standards of Nasdaq concerning any amendments to, or waivers from, any provision of the code.
Delinquent Section 16(a) Reports
Section 16 of the Securities Exchange Act of 1934 requires our directors, executive officers and any persons who own more than 10% of our Class A common stock to file initial reports of ownership and reports of changes in ownership with the SEC. Based solely on its review of the copies of such forms furnished to the Company and written representations from the directors and executive officers, the Company believes that all Section 16(a) filing requirements were timely met in 2021, except that the initial statement of beneficial ownership on Form 3 for Mr. Mikula was filed late due to processing delays.
Item 11. Executive Compensation.
Executive Compensation
Our named executive officers for the fiscal year ended December 31, 2021, were:
| ● | Christopher M. Gallagher, our Chief Executive Officer; |
| ● | David Mikula, our Chief Operating Officer; |
| ● | R. Jason Hallock, our Chief Medical Officer; |
| ● | John W. Kalix, our former Chief Executive Officer; and |
| ● | Hai Tran, our former President and Chief Operating Officer. |
2021 Summary Compensation Table
The following table provides information regarding the total compensation awarded to, earned by and paid to the named executive officers for the periods presented.
| Name and Principal Position | Fiscal Year |
Salary ($) |
Bonus ($) |
Stock Awards(1) ($) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation(2) ($) |
All Other Compensation(3) ($) |
Total ($) |
|||||||||||||||||||||||
| Christopher M. Gallagher(4) | 2021 | 417,307 | — | 2,076,629 | — | 168,750 | — | 2,662,686 | |||||||||||||||||||||||
| Chief Executive Officer | |||||||||||||||||||||||||||||||
| David Mikula(5) | 2021 | 314,566 | — | 865,262 | — | 97,312 | — | 1,277,140 | |||||||||||||||||||||||
| Chief Operating Officer | |||||||||||||||||||||||||||||||
| R. Jason Hallock | 2021 | 320,000 | — | 920,489 | — | 96,000 | 8,622 | 1,345,111 | |||||||||||||||||||||||
| Chief Medical Officer | 2020 | 317,538 | 268,228 | — | — | 125,440 | 10,486 | 721,692 | |||||||||||||||||||||||
| John W. Kalix(6) | 2021 | 331,155 | — | 11,787,725 | — | 47,149 | 291,260 | 12,457,289 | |||||||||||||||||||||||
| Former Chief Executive Officer | 2020 | 190,385 | — | — | — | 112,500 | 15,946 | 318,830 | |||||||||||||||||||||||
| Hai Tran(7) | 2021 | 269,599 | — | 2,301,231 | — | 62,021 | 136,193 | 2,769,044 | |||||||||||||||||||||||
| Former President and Chief Operating Officer | 2020 | 377,516 | — | — | 4,630,463 | 282,975 | 1,489 | 5,292,443 | |||||||||||||||||||||||
| (1) | Stock and option awards are reported at aggregate grant date fair value in the year granted, computed in accordance with ASC Topic 718, “Compensation — Stock Compensation” (“ASC Topic 718”), disregarding forfeiture assumptions. For information on the assumptions used in valuing these awards, see Note 19, Stock-Based Compensation, to our consolidated financial statements included elsewhere in this report. |
| (2) | The amounts in this column represent annual performance-based cash bonuses earned by the named executive officers based on the achievement of certain corporate performance objectives in 2021. These amounts were paid to the named executive officers in early 2022. |
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| (3) | The amounts in this column represent (i) with respect to Dr. Hallock, the value of group term life coverage paid by SOC Telemed in the amount of $745 and 401(k) contributions paid by SOC Telemed in the amount of $7,877; (ii) with respect to Mr. Kalix, relocation reimbursement in the amount of $132,637, a car allowance in the amount of $4,604, the value of group term life coverage paid by SOC Telemed in the amount of $498, 401(k) contributions paid by SOC Telemed in the amount of $11,600, and severance of $141,921; and (iii) with respect to Mr. Tran, the value of group term life coverage paid by SOC Telemed in the amount of $1,031, 401(k) contributions paid by SOC Telemed in the amount of $10,703 and severance of $124,459. |
| (4) | Dr. Gallagher was appointed Chief Executive Officer of SOC Telemed in September 2021 and previously served as President of Access Physicians, a division of SOC Telemed, since the Acquisition in March 2021. |
| (5) | Mr. Mikula was appointed Chief Operating Officer of SOC Telemed in September 2021 and previously served as Chief Operating Officer of Access Physicians, a division of SOC Telemed, since the Acquisition in March 2021. |
| (6) | Mr. Kalix’s employment as Chief Executive Officer of SOC Telemed terminated in September 2021. |
| (7) | Mr. Tran’s employment as President and Chief Operating Officer of SOC Telemed terminated in September 2021. |
Executive Incentive Bonus Plan
On October 30, 2020, the Board considered and approved the Executive Incentive Bonus Plan (the “Bonus Plan”), an annual cash bonus plan that became effective at the closing of the Merger Transaction. The purpose of the Bonus Plan is to motivate and reward eligible officers and employees for their contributions toward the achievement of certain performance goals of the Company. The Bonus Plan is administered by the compensation committee of the Board, or such other committee as may be designated by the Board from time to time. Awards under the Bonus Plan may be subject to cash bonus targets and/or corporate performance metrics for a specific performance period or fiscal year pursuant to the terms of the Bonus Plan. Unless otherwise determined by the plan administrator, participants must be actively employed and in good standing with the Company on the date the award is paid. The plan administrator may terminate the Bonus Plan at any time, provided such termination shall not affect the payment of any awards accrued under the Bonus Plan prior to the date of the termination.
Agreements with Our Named Executive Officers
We have entered into employment agreements with each of our named executive officers. The employment agreements generally provide for at-will employment and set forth the executive officer’s initial base salary, bonus opportunities and eligibility for employee benefits. In addition, each of the executive officers is subject to confidentiality obligations and has agreed to assign to us any inventions developed during the term of their employment.
In connection with the closing of the Merger Transaction, the compensation committee of the Board approved the entering into of a standard form of employment agreement and severance and change in control agreement with each of our executive officers, which form agreements codified the terms of each executive’s employment, and in some instances clarified those terms and provide for certain enhanced benefits. The form agreements also provide greater consistency among executives’ employment and severance terms and compliance with Section 409A of the Internal Revenue Code of 1986, as amended. Dr. Hallock and Mr. Tran each entered into our standard form of employment agreement and severance and change in control agreement in January 2021, and an amended form of severance and change in control agreement in February 2021. Dr. Gallagher and Mr. Mikula each entered into our standard form of employment agreement and severance and change in control agreement in December 2021, effective as of November 2021. Each of the employment agreements provides for at-will employment during an initial three-year term and maintains the executive officer’s current annual base salary and annual target cash incentive bonus as a proportion of base salary upon the achievement of certain performance goals determined by the Board or the compensation committee. The employment agreements further provide that the executive officers are eligible to participate in employee benefit plans maintained by SOC Telemed.
The individual terms of the employment agreements, including the historical employment agreements, other than the severance benefits under the standard form of severance and change in control agreement, with each of our named executive officers are summarized below. Additional terms contained in the employment agreements regarding equity grants and relocation assistance are also discussed below. A description of our standard form of severance and change in control agreement, as amended, and the severance benefits to which our named executive officers are entitled in the event of a change in control or certain terminations of their employment with us is provided below under the heading “— Potential Payments upon Termination or Change in Control.”
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Christopher M. Gallagher
In connection with the closing of the Acquisition, SOC Telemed assumed the employment agreement entered into between Access Physicians and Dr. Gallagher in November 2019, pursuant to which Dr. Gallagher served as President of Access Physicians, a division of SOC Telemed, since the Acquisition and subsequently as the Chief Executive Officer of SOC Telemed since September 2021. The agreement, which has since been superseded, as noted herein, provided for a three-year employment term, with a $250,000 annual salary, a target bonus equal to 50% of annual salary, and vacation and general benefit plan eligibility. The superseded employment agreement also provided for six months’ base salary and COBRA continuation upon a termination by Dr. Gallagher’s employer without “Cause” or by Dr. Gallagher for “Good Reason” (each term as defined therein). The severance payments and benefits described above were each contingent upon Dr. Gallagher’s delivery of a general release of claims in favor of the Company, compliance with non-solicitation and non-competition restrictions each lasting for one year following a separation for any reason, and compliance with indefinite confidentiality obligations following such separation.
As described above, in December 2021, Dr. Gallagher entered into a new employment agreement and severance and change in control agreement, in each case substantially in the Company’s standard form, which employment agreement establishes Dr. Gallagher’s initial annual base salary of $450,000, and provides that it will be increased to $500,000 effective January 1, 2022. The employment agreement also provides for eligibility for an annual target cash incentive bonus of up to 50% of his annual base salary for 2021 (100% for periods after 2022) upon the achievement of certain performance goals determined by the Board or the compensation committee of the Board, and to participate in the employee benefit plans maintained by the Company. Pursuant to the agreement, Dr. Gallagher was granted under the 2020 Plan time-based RSUs for 1,080,000 shares of Class A common stock, with a four-year vesting schedule subject to his continuous service, and performance-based RSUs for 720,000 shares of Class A common stock to vest in three equal installments on December 5 of each of 2022, 2023 and 2024, provided that the applicable stock-price performance goal has been achieved by such date (and, if not, on the date the applicable performance goal is subsequently achieved), subject to his continued employment on each applicable vesting date and the achievement of the applicable performance criteria. The agreement also entitles Dr. Gallagher to receive in 2023 a mix of time- and performance-based RSUs pursuant to the 2020 Plan with a target value based on the product of (x) 50% multiplied by (y) the appropriate grant date fair value of such award as determined in the compensation committee’s sole discretion, subject to Dr. Gallagher’s continued employment at the date of the grant on each applicable vesting date and the achievement of the applicable performance criteria.
Dr. Gallagher also entered into a severance and change in control agreement in December 2021, effective as of November 2021. Pursuant to the severance and change in control agreement, if Dr. Gallagher’s employment is terminated by us without “Cause” or Dr. Gallagher resigns for “Good Reason” in each case not in connection with the a “Change in Control” of the Company (each term as defined in his severance and change in control agreement), Dr. Gallagher will be entitled to receive (i) twelve-months’ continuation of his annual base salary, (ii) any cash incentive compensation bonus earned with respect to the immediately preceding fiscal year, which remains unpaid on the termination date, (iii) a lump sum severance payment equal to the cash incentive compensation bonus he would have received in respect of the fiscal year in which his termination occurs, determined based on actual performance levels and prorated, and (iv) up to twelve months of COBRA coverage at our sole expense. If Dr. Gallagher’s employment is terminated by us without Cause or if Dr. Gallagher resigns for Good Reason in each case during the one month period prior to (and in connection with) or the one year period following a Change in Control of the Company, Dr. Gallagher will be entitled to receive (i) a lump sum severance payment equal to one times his annual base salary, (ii) any cash incentive compensation bonus earned with respect to the immediately preceding fiscal year, which remains unpaid on the termination date, (iii) up to one year of COBRA coverage at our sole expense, (iv) a lump sum severance payment equal to the cash incentive compensation bonus he would have received in respect of the fiscal year in which his termination occurs, determined based on target performance levels and not prorated, and (v) full acceleration of vesting of all time-based equity awards. If Dr. Gallagher’s employment terminates due to his death or disability, then in lieu of the above he or his estate will receive (i) any cash incentive compensation bonus earned with respect to the immediately preceding fiscal year, which remains unpaid, (ii) a lump sum severance payment equal to the cash incentive compensation bonus he would have been entitled to receive in respect of the fiscal year in which his termination occurs, determined based on target performance levels and prorated, and (iii) an extended exercise period of up to one year with respect to any vested stock options held as of his separation date. The severance payments and benefits described above are each contingent upon Dr. Gallagher’s delivery of a general release of claims in favor of the Company, compliance with non-solicitation and non-competition restrictions each lasting for one year following a separation for any reason, and compliance with indefinite confidentiality and non-disparagement obligations following a separation for any reason.
David Mikula
In connection with the closing of the Acquisition, SOC Telemed assumed the employment agreement entered into between Access Physicians and Mr. Mikula in November 2019, pursuant to which Mr. Mikula served as Chief Operating Officer of Access Physicians, a division of SOC Telemed, since the Acquisition and subsequently as the Chief Operating Officer of SOC Telemed since September 2021. The agreement, which has since been superseded, as noted herein, provided for a three-year employment term, with a $330,000 annual salary, a target bonus equal to 30% of annual salary, a special $100,000 cash bonus, commission eligibility, and vacation and general benefit plan eligibility. The superseded employment agreement also provided for twelve months’ base salary and COBRA continuation upon a termination by Mr. Mikula’s employer without “Cause” or by Mr. Mikula’s for “Good Reason” (each term as defined therein). The severance payments and benefits described above were each contingent upon Mr. Mikula’s delivery of a general release of claims in favor of the Company, compliance with non-solicitation and non-competition restrictions each lasting for one year following a separation for any reason, and compliance with indefinite confidentiality obligations following such separation.
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As described above, in December 2021, Mr. Mikula entered into a new employment agreement and severance and change in control agreement, in each case substantially in the Company’s standard form, which employment agreement establishes Mr. Mikula’s initial annual base salary of $390,000 retroactive to September 1, 2021, and eligibility for annual target cash incentive bonus of up to 60% of his annual base salary, retroactive to September 1, 2021, upon the achievement of certain performance goals determined by the Board or the compensation committee of the Board, and to participate in the employee benefit plans maintained by the Company. Pursuant to the employment agreement, Mr. Mikula was granted under the 2020 Plan time-based RSUs for 450,000 shares of Class A common stock, with a four-year vesting schedule subject to his continuous service, and performance-based RSUs for 300,000 shares of Class A common stock to vest in three equal installments on December 5 of each of 2022, 2023 and 2024, provided that the applicable stock-price performance goal has been achieved by such date (and, if not, on the date the applicable performance goal is subsequently achieved), subject to his continued service on each applicable vesting date and the achievement of the applicable performance criteria.
Mr. Mikula also entered into a severance and change in control agreement in December 2021, effective as of November 2021. Pursuant to the severance and change in control agreement, if Mr. Mikula’s employment is terminated by us without “Cause” or Mr. Mikula resigns for “Good Reason” in each case not in connection with a “Change in Control” of the Company (each term as defined in his severance and change in control agreement), Mr. Mikula will be entitled to receive (i) six-months’ continuation of his annual base salary if separation occurs before May 1, 2023, or twelve-months’ continuation of his annual base salary if separation occurs after May 1, 2023, (ii) any cash incentive compensation bonus earned with respect to the immediately preceding fiscal year, which remains unpaid on the termination date, (iii) a lump sum severance payment equal to the cash incentive compensation bonus he would have received in respect of the fiscal year in which his termination occurs, determined based on actual performance levels and prorated, and (iv) up to six months of COBRA coverage at our sole expense if separation occurs before May 1, 2023 (or up to twelve months of COBRA coverage if separation occurs thereafter). If Mr. Mikula’s employment is terminated by us without Cause or if Mr. Mikula resigns for Good Reason in each case during the one month period prior to (and in connection with) or the one year period following a Change in Control of the Company, Mr. Mikula will be entitled to receive (i) a lump sum severance payment equal to one times his annual base salary, (ii) any cash incentive compensation bonus earned with respect to the immediately preceding fiscal year, which remains unpaid on the termination date, (iii) up to one year of COBRA coverage at our sole expense, (iv) a lump sum severance payment equal to the cash incentive compensation bonus he would have received in respect of the fiscal year in which his termination occurs, determined based on target performance levels and not prorated, and (v) full acceleration of vesting of all time-based equity awards. If Mr. Mikula’s employment terminates due to his death or disability, then in lieu of the above he or his estate will receive (i) any cash incentive compensation bonus earned with respect to the immediately preceding fiscal year, which remains unpaid on the termination date, (ii) a lump sum severance payment equal to the cash incentive compensation bonus he would have been entitled to receive in respect of the fiscal year in which his termination occurs, determined based on target performance levels and prorated, and (iii) an extended exercise period of up to one year with respect to any vested stock options held as of his separation date. The severance payments and benefits described above are each contingent upon Mr. Mikula’s delivery of a general release of claims in favor of the Company, compliance with non-solicitation and non-competition restrictions each lasting for one year following a separation for any reason, and compliance with indefinite confidentiality and non-disparagement obligations following a separation for any reason.
R. Jason Hallock
In October 2019, Dr. Hallock entered into an employment agreement to serve as Chief Medical Officer of Legacy SOC Telemed commencing in December 2019. The agreement has no specific term, provides for at-will employment and sets forth Dr. Hallock’s initial annual base salary of $320,000 and an annual target cash incentive bonus of 40% of his annual base salary upon the achievement of certain operational performance objectives determined by the Board. Dr. Hallock is also entitled to receive incentive stock options pursuant to the 2014 Plan. The agreement also provides that Dr. Hallock is eligible to participate in employee benefit plans maintained by SOC Telemed. If Dr. Hallock’s employment is terminated by SOC Telemed without “cause” (and other than due to death or disability) or if Dr. Hallock resigns for “good reason,” subject to certain obligations, including delivery of a general release of claims in favor of SOC Telemed, Dr. Hallock is entitled to receive, as severance benefits, 6-months’ continuation of his annual base salary and six months of COBRA coverage.
In connection with the closing of the Merger Transaction, Dr. Hallock entered into an agreement in October 2020 by which he waived his rights to the incentive stock options described above in exchange for (a) a cash payment equal to the aggregate spread that would have existed under such options, had they been granted as contemplated and to the extent they would have been vested as of the closing date of the Merger Transaction, and (b) an issuance of a mix of time- and performance-based RSUs pursuant to the 2020 Plan with a target value equal to $1,500,000, subject to Dr. Hallock’s continued service on each applicable vesting date. The award of RSUs was granted in February 2021.
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As described above, in January 2021, Dr. Hallock entered into a new employment agreement and severance and change in control agreement, and an amended severance and change in control agreement in February 2021, in each case substantially in the Company’s standard form, which employment agreement codified Dr. Hallock’s initial annual base salary of $320,000, the annual target cash incentive bonus of 40% of his annual base salary upon the achievement of certain operational performance objectives determined by the Board or compensation committee, a guaranteed bonus of at least 80% of the target bonus with respect to the calendar 2020 cash bonus period and provided for the foregoing award of RSUs.
John W. Kalix
In June 2020, Mr. Kalix entered into an employment agreement to initially serve as President of Legacy SOC Telemed and then transition to the position of Chief Executive Officer within six months of his start date in July 2020. In connection with the closing of the Merger Transaction, Mr. Kalix was appointed as our Chief Executive Officer. In February 2021, Mr. Kalix entered into a first amendment to his employment agreement. The employment agreement, as amended, has since been terminated. The employment agreement had no specific term, provided for at-will employment and set forth Mr. Kalix’s prior initial annual base salary of $450,000, an annual target cash incentive bonus of 50% of his annual base salary upon the achievement of certain objective and/or subjective criteria determined by the Board or compensation committee, a guaranteed bonus of at least 50% of the target bonus with respect to the calendar 2020 cash bonus period and a cash bonus payment in the event of a change of control of SOC Telemed (other than in connection with the Merger Transaction). The employment agreement also provided that Mr. Kalix was eligible to participate in employee benefit plans maintained by SOC Telemed and includes relocation benefits entitling him to receive reimbursement for certain relocation and temporary housing expenses incurred of up to $100,000, grossed up for all applicable taxes. If Mr. Kalix’s employment was terminated by SOC Telemed without “cause,” if his employment was terminated as a result of disability or death or if he resigned for “good reason,” each term as defined in his employment agreement, subject to certain obligations, including signing and not revoking a separation agreement and release of claims, he or his estate, as the case may be, was entitled to receive termination benefits, including (a) severance pay comprising 12-months’ continuation of his annual base salary, (b) reimbursement of premiums for COBRA coverage during the applicable period of severance pay and (c) payment of the guaranteed bonus (if then unpaid); and if such separation occurred within one month prior to and in connection with a “change in control” of SOC Telemed, as such term was defined in his employment agreement, or within twelve months following a change in control of SOC Telemed, the severance period described above would be 18 months instead of 12 months and Mr. Kalix would receive one-and-one-half times his target cash incentive bonus with respect to the year in which his separation occurs.
In addition, pursuant to the employment agreement, as amended, upon the closing of the Merger Transaction, Mr. Kalix became entitled to receive a grant of restricted stock or RSUs equal to three percent of the fully diluted ownership of SOC Telemed (the “Base Full Value Award”), which grant of time- and performance-based RSUs was made in February 2021 pursuant to the 2020 Plan, subject to Mr. Kalix’s continued service on each applicable vesting date and the achievement of the applicable performance criteria. Mr. Kalix was further eligible to receive a grant of restricted stock or RSUs in an amount equal to fifteen percent of the Sponsor Earnout Shares, if any, that vest in accordance with the terms of the Merger Agreement and pursuant to the Sponsor Agreement (the “Sponsor Award”). If Mr. Kalix’s employment terminated due to his death or disability, he (or his estate) would remain vested in the portion of shares underlying the Base Full Value Award that was vested as of the date of termination, and if his employment was terminated by SOC Telemed without “cause” (and not due to his death or disability) or if he resigned for “good reason,” subject to certain obligations, including signing and not revoking a separation agreement and release of claims, Mr. Kalix would be entitled to receive accelerated vesting of the time-based vesting portion of the Base Full Value Award that would have vested over the one-year period following his separation and the performance-based vesting portion of such award that has been earned but not vested as of such date, had he remained in employment through such date; and if such separation occurs within one month prior to and in connection with a change in control of SOC Telemed, or within twelve months following a change in control of SOC Telemed, accelerated vesting of the remainder of the Base Full Value Award, the performance-based vesting component of which would convert to time-based vesting in such change in control. Furthermore, if any portion of the Sponsor Earnout Shares were earned within six months following the date of termination and such termination was not due to his death or disability, Mr. Kalix would vest in, and receive the portion of the Sponsor Award that he would have received had his employment continued.
On September 1, 2021, Mr. Kalix’s employment as Chief Executive Officer of the Company was terminated without “cause” and he became entitled to receive 12-months’ continuation of his annual base salary and reimbursement of premiums for COBRA coverage during the applicable period of severance, and he resigned from the Board.
Hai Tran
In January 2015, Mr. Tran entered into an employment agreement to serve as Chief Financial Officer of Legacy SOC Telemed commencing in March 2015. The employment agreement has since been terminated. The employment agreement had no specific term, provided for at-will employment and sets forth Mr. Tran’s initial annual base salary of $350,000 and an annual target cash incentive bonus of 50% of his annual base salary upon the achievement of certain operational performance objectives determined by the Board or compensation committee. Mr. Tran also received incentive stock options pursuant to the 2014 Plan. The employment agreement also provided that Mr. Tran was eligible to participate in employee benefit plans maintained by SOC Telemed. If Mr. Tran’s employment was terminated by SOC Telemed without “cause” (and other than due to death or disability) or if Mr. Tran resigned for “good reason,” each term as defined in his employment agreement, subject to certain obligations, including delivery of a general release of claims in favor of SOC Telemed, Mr. Tran was entitled to receive, as severance benefits, 12-months’ continuation of his annual base salary and a pro-rated, cash lump-sum payment in an amount equal to the bonus he would have earned in respect of the fiscal year in which termination occurred.
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In October 2020, Mr. Tran entered into a side letter agreement regarding his outstanding stock option grants of Legacy SOC Telemed common stock granted in June 2018, and each of which would have vested only upon a “change in control” (as defined in the 2014 Plan) of Legacy SOC Telemed. The side letter provided that these options would instead vest on November 15, 2021, subject to Mr. Tran’s continued service through such date and subject to accelerated vesting upon a prior termination by SOC Telemed without “cause” (as defined in the side letter). Upon a change in control of SOC Telemed prior to November 15, 2021, the vesting of the options described above would accelerate, subject to Mr. Tran’s continued service through such date. All separation payments and benefits pursuant to this side letter were contingent upon Mr. Tran executing and not revoking a release of claims in favor of SOC Telemed.
In connection with Mr. Tran’s appointment as President and Chief Operating Officer, Mr. Tran entered into a letter agreement in December 2020 providing for an issuance of a mix of time- and performance-based RSUs pursuant to the 2020 Plan with a target value equal to $3,750,000, subject to Mr. Tran’s continued service on each applicable vesting date and the achievement of the applicable performance criteria. The award of RSUs was granted in February 2021.
As described above, in January 2021, Mr. Tran entered into a new employment agreement and severance and change in control agreement, and an amended severance and change in control agreement in February 2021, in each case substantially in the Company’s standard form, which employment agreement codified Mr. Tran’s initial annual base salary of $350,000, increased the annual target cash incentive bonus to 75% of his annual base salary upon the achievement of certain operational performance objectives determined by the Board or compensation committee and provided for the foregoing award of RSUs. Such new employment agreement has since been terminated.
On September 1, 2021, Mr. Tran’s employment as President and Chief Operating Officer of the Company was terminated without “cause” and he became entitled to receive 12-months’ continuation of his annual base salary and reimbursement of premiums for COBRA coverage during the applicable period of severance.
Potential Payments upon Termination or Change in Control
The severance and change in control agreements of our named executive officers provide for the following benefits in the event of qualifying termination with or without a “change in control” of the Company (as defined in the standard form of severance and change in control agreement), and in connection with an executive officer’s death or disability:
| ● | Qualifying termination without a change in control. The executive officer will be entitled to receive (i) six-months’ continuation of the executive officer’s annual base salary, (ii) a lump sum severance payment equal to the cash incentive compensation bonus the executive officer would have received in respect of the fiscal year in which the executive officer’s termination occurs, determined based on actual performance levels and prorated, and (iii) up to six months of COBRA coverage at the Company’s sole expense. |
| ● | Qualifying termination during the one-month period prior to (and in connection with) or the one-year period following a change in control. The executive officer will be entitled to receive (i) a lump sum severance payment equal to one times the executive officer’s annual base salary, (ii) a lump sum severance payment equal to the cash incentive compensation bonus the executive officer would have received in respect of the fiscal year in which such termination occurs, determined based on target performance levels and not prorated, (iii) up to one year of COBRA coverage at the Company’s sole expense, and (iv) accelerated vesting of all unvested time-based vesting awards. The treatment of any unvested performance-based equity award held by the executive officer will be subject to and governed by the provisions set forth in the award agreement evidencing such equity award. |
| ● | Termination in connection with death or disability. The executive officer or the executive officer’s estate will receive (i) a lump sum severance payment equal to the cash incentive compensation bonus the executive officer would have been entitled to receive in respect of the fiscal year in which the executive officer’s termination occurs, determined based on target performance levels and prorated, and (ii) an extended exercise period of up to one year with respect to any vested stock options held as of such separation date. |
The severance payments and benefits described above are each contingent upon the executive officer’s delivery of a general release of claims in favor of the Company, compliance with non-solicitation and non-competition restrictions each lasting for one year following a separation for any reason, and compliance with indefinite confidentiality and non-disparagement obligations following a separation for any reason.
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Outstanding Equity Awards at 2021 Fiscal Year-End
The following table provides information regarding outstanding equity compensation plan awards held by the named executive officers as of December 31, 2021.
| Stock Awards | ||||||||||||||||
| Name | Number of Shares or Units of Stock That Have Not Vested(1) (#) | Market Value of Shares or Units of Stock That Have Not Vested(2) ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(3) (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested(2) ($) | ||||||||||||
| Christopher M. Gallagher | 1,080,000 | (4) | 1,382,400 | — | — | |||||||||||
| — | — | 720,000 | (5) | 921,600 | ||||||||||||
| David Mikula | 450,000 | (4) | 576,000 | — | — | |||||||||||
| — | — | 300,000 | (5) | 384,000 | ||||||||||||
| R. Jason Hallock | 88,670 | (6) | 113,498 | — | — | |||||||||||
| — | — | 59,113 | (7) | 75,665 | ||||||||||||
| (1) | The units in this column represent time-based RSUs granted under the 2020 Plan pursuant to an RSU award agreement that remained unvested as of December 31, 2021. |
| (2) | Each RSU represents the right to receive a share of our Class A common stock. The market value of our Class A common stock is based on the per share price of $1.28, which was the last reported sale price of our Class A common stock on December 31, 2021. |
| (3) | The units in this column represent performance-based RSUs (“PSUs”) granted under the 2020 Plan pursuant to a PSU award agreement that remained unvested as of December 31, 2021. |
| (4) | The RSU award was granted on December 20, 2021, of which 1/4th will vest on December 5 of each of 2022, 2023, 2024 and 2025, respectively, subject to continuous service through the applicable vesting date. |
| (5) | The PSU award was granted on December 20, 2021, and generally vests in three equal installments on December 5 of each of 2022, 2023 and 2024, respectively, provided that the applicable performance goal has been achieved by such date (and, if not, on the date the applicable performance goal is subsequently achieved), subject to continuous service through the applicable vesting date. The applicable performance goal for each tranche will be satisfied if our Class A common stock achieves a specified per share market price for such tranche for at least 20 trading days during any 30 consecutive day period from the date of grant. If the applicable performance goals have not been achieved by December 5, 2024, all unvested PSUs will be forfeited. |
| (6) | The RSU award was granted on January 28, 2021, of which 1/4th will vest on February 15 of each of 2022, 2023, 2024 and 2025, respectively, subject to continuous service through the applicable vesting date. |
| (7) | The PSU award was granted on January 28, 2021, and generally vests in three equal installments on February 15 of each of 2022, 2023 and 2024, respectively, provided that the applicable performance goal has been achieved by such date (and, if not, on the date the applicable performance goal is subsequently achieved), subject to continuous service through the applicable vesting date. The applicable performance goal for each tranche will be satisfied if our Class A common stock achieves a specified per share market price for such tranche for at least 20 trading days during any 30 consecutive day period from the date of grant. If the applicable performance goals have not been achieved by August 15, 2024, all unvested PSUs will be forfeited. |
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Director Compensation Table for Fiscal Year 2021
The following table shows compensation information for our Outside Directors (as defined below) for the year ended December 31, 2021. Dr. Gallagher, our Chief Executive Officer, and Mr. Kalix, our former Chief Executive Officer, did not receive any compensation during 2021 for serving as a director. Compensation information for Dr. Gallagher and Mr. Kalix is included in the “2021 Summary Compensation Table” set forth above under the caption “— Executive Compensation.”
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | All Other Compensation ($) | Total ($) | ||||||||||||
| Steven J. Shulman(2) | 60,632 | 425,020 | (3) | — | 485,652 | |||||||||||
| Dr. Bobbie Byrne | 50,000 | 393,054 | (4) | — | 443,054 | |||||||||||
| Thomas J. Carella | 48,750 | 393,054 | (4) | — | 441,804 | |||||||||||
| Gyasi C. Chisley(5) | 26,521 | 323,178 | (6) | — | 349,699 | |||||||||||
| Joseph P. Greskoviak | 50,000 | 536,172 | (7) | — | 586,172 | |||||||||||
| Amr Kronfol | 48,750 | 393,054 | (4) | — | 441,804 | |||||||||||
| Anne M. McGeorge | 60,000 | 393,054 | (4) | — | 453,054 | |||||||||||
| (1) | Amounts shown do not reflect compensation actually received by the director, and there can be no assurance that these amounts will ever be realized by the director. Instead, the amount shown is the grant date fair value of the RSU awards granted during the year ended December 31, 2021, computed in accordance with ASC Topic 718, disregarding forfeiture assumptions. For information on the assumptions used in valuing these awards, see Note 19, Stock-Based Compensation, to our consolidated financial statements included elsewhere in this report. |
| (2) | Mr. Shulman served as a member of the audit committee from January 2021 to May 2021. |
| (3) | Represents the grant date aggregate fair value of 64,005 RSU awards, consisting of (i) 37,320 RSU awards granted on January 5, 2021, of which 1/3rd will vest on January 5 of each of 2022, 2023 and 2024, respectively, subject to continuous service through the applicable vesting date; and (ii) an aggregate of 26,685 RSU awards granted on June 3, 2021, which will vest in full on the first to occur of (x) the one-year anniversary of the grant date and (y) the date of our next annual meeting of stockholders, subject to continuous service through such vesting date. |
| (4) | Represents the grant date aggregate fair value of 58,387 RSU awards, consisting of (i) 37,320 RSU awards granted on January 5, 2021, of which 1/3rd will vest on January 5 of each of 2022, 2023 and 2024, respectively, subject to continuous service through the applicable vesting date; and (ii) 21,067 RSU awards granted on June 3, 2021, which will vest in full on the first to occur of (x) the one-year anniversary of the grant date and (y) the date of our next annual meeting of stockholders, subject to continuous service through such vesting date. |
| (5) | Mr. Chisley was appointed to the Board and as a member of the audit committee in May 2021. |
| (6) | Represents the grant date aggregate fair value of 44,150 RSU awards granted on May 4, 2021, of which 1/3rd will vest on May 4 of each of 2022, 2023 and 2024, respectively, subject to continuous service through the applicable vesting date. |
| (7) | Represents the grant date aggregate fair value of 79,185 RSU awards, consisting of (i) 37,320 RSU awards granted on January 5, 2021, of which 1/3rd will vest on January 5 of each of 2022, 2023 and 2024, respectively, subject to continuous service through the applicable vesting date; (ii) an aggregate of 15,883 RSU awards granted on March 19, 2021, which will vest in full on the one-year anniversary of the grant date; and (iii) an aggregate of 25,982 RSU awards granted on June 3, 2021, which will vest in full on the first to occur of (x) the one-year anniversary of the grant date and (y) the date of our next annual meeting of stockholders, subject to continuous service through such vesting date. |
Non-Employee Director Compensation
In connection with the closing of the Merger Transaction, the Board approved the Company’s Director Compensation Policy (as subsequently amended, the “Director Compensation Policy”), pursuant to which each member of the Board who is not an employee of the Company (each such member, an “Outside Director”) will be compensated for his or her Board service. In accordance with the Director Compensation Policy, each Outside Director will receive an annual cash retainer equal to $40,000 and any Outside Director serving as (i) the chairperson of the Audit Committee, who is currently Ms. McGeorge, will receive an additional annual cash retainer equal to $20,000, (ii) a member of the Audit Committee (other than the chairperson) will receive an additional annual cash retainer equal to $10,000, (iii) the chairperson of the Compensation Committee, who is currently Mr. Shulman, will receive an additional annual cash retainer equal to $10,000, (iv) a member of the Compensation Committee (other than the chairperson) will receive an additional annual cash retainer equal to $5,000, (v) the chairperson of the Nominating and Corporate Governance Committee, who is currently Mr. Shulman, will receive an additional annual cash retainer equal to $7,500, and (vi) a member of the Nominating and Corporate Governance Committee (other than the chairperson) will receive an additional annual cash retainer of $3,750, in each case, payable on a quarterly basis in arrears.
Annual Grant for Continuing Outside Directors and Certain New Outside Directors. After each annual meeting of the Company’s stockholders, each continuing Outside Director and each new Outside Director who commenced service at least six months before such annual meeting (or, with respect to the first annual meeting following the closing of the Merger Transaction, who commenced service prior to December 31, 2020) will be granted an award of RSUs under the 2020 Plan having an RSU Value (as defined in the Director Compensation Policy) of $150,000, which award will vest in full on the first to occur of (i) the one-year anniversary of the grant date or (ii) the date of the next annual meeting, subject to the Outside Director’s continued service as a member of the Board through such vesting date.
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Annual Grant for Chair of the Board and Vice Chair of the Board. After each annual meeting of the Company’s stockholders, an Outside Director appointed by the Board as Chair of the Board or Vice Chair of the Board will be granted an award of RSUs under the 2020 Plan having an RSU Value of $40,000 or $35,000, respectively, which award will vest in full on the first to occur of (i) the one-year anniversary of the grant date or (ii) the date of the next annual meeting, subject to the Outside Director’s continued service as the Chair of the Board or the Vice Chair of the Board, as applicable, through such vesting date.
Initial Grant for New Outside Directors. Each Outside Director who served on the Board at the closing of the Merger Transaction or who is initially elected or appointed to the Board after the closing of the Merger Transaction will be automatically granted, on the first practicable date following such Outside Director’s initial election or appointment, pursuant to the 2020 Plan, an award of RSUs having an RSU Value equal to $300,000, which award will vest in equal annual installments over the three-year period following the grant date, subject to the Outside Director’s continued service as a member of the Board through each such vesting date.
While the Company currently expects to provide its Outside Directors with cash and equity compensation consistent with the Director Compensation Policy, the Company also currently expects to review its Outside Director cash and equity compensation policies from time to time and such policies may be subject to change.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information with respect to the beneficial ownership of our Class A common stock as of February 25, 2022, for:
| ● | each person or group of affiliated persons known by us to beneficially own more than 5% of the outstanding shares of our Class A common stock; |
| ● | each of our named executive officers and directors; and |
| ● | all of our current executive officers and directors, as a group. |
We have determined beneficial ownership in accordance with the rules and regulations of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Except as indicated by the footnotes below, we believe, based on information furnished to us, that the persons and entities named in the table below have sole voting and sole investment power with respect to all shares that they beneficially own, subject to applicable community property laws.
The beneficial ownership percentages set forth in the table below are based on 101,332,284 shares of Class A common stock issued and outstanding as of February 25, 2022. In computing the number of shares beneficially owned by a person and the percentage ownership of such person, we deemed to be outstanding (i) all shares subject to options or warrants held by the person that are currently exercisable, or exercisable within 60 days of February 25, 2022, and (ii) all shares subject to RSUs held by the person that are currently releasable, or releasable within 60 days of February 25, 2022. However, except as described above, we did not deem such shares outstanding for the purpose of computing the percentage ownership of any other person.
Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o SOC Telemed, Inc., 2411 Dulles Corner Park, Suite 475, Herndon, Virginia 20171.
| Shares Beneficially Owned | ||||||||
| Name and Address of Beneficial Owner | Number (#) | Percent (%) | ||||||
| Greater than 5% Beneficial Owners: | ||||||||
| SOC Holdings LLC | 33,874,965 | 33.4 | % | |||||
| Entities associated with Millennium Management LLC | 5,507,669 | 5.4 | % | |||||
| Named Executive Officers and Directors: | ||||||||
| Dr. Christopher M. Gallagher | 3,717,922 | 3.7 | % | |||||
| David Mikula | 496,576 | * | ||||||
| Dr. R. Jason Hallock | 22,168 | * | ||||||
| Steven J. Shulman | 1,786,940 | 1.8 | % | |||||
| Dr. Bobbie Byrne | 12,440 | * | ||||||
| Thomas J. Carella | 60,414 | * | ||||||
| Gyasi C. Chisley | — | * | ||||||
| Joseph P. Greskoviak | 12,440 | * | ||||||
| Amr Kronfol | 71,147 | * | ||||||
| Anne M. McGeorge | 12,440 | * | ||||||
| All executive officers and directors as a group (12 individuals) | 6,214,655 | 6.1 | % | |||||
| * | Represents beneficial ownership of less than one percent. |
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| (1) | As reported on a Schedule 13D/A filed by Warburg Pincus & Co. (“WP”) on February 4, 2022. SOC Holdings LLC is controlled by WPXI Finance, LP (“WPXIF”) and Warburg Pincus XI Partners, L.P. (“WPXI Partners”). WPXIF is a subsidiary of Warburg Pincus Private Equity XI, L.P. (“WPXI”). WPXI Partners and WPXI are collectively referred to as the “WPXI Funds.” WPXI GP, L.P. (“WPXIF GP”) is the managing general partner of WPXIF. WPXI is the general partner of WPXIF GP. Warburg Pincus XI, L.P. (“WP XI GP”) is the general partner of each of WPXI and WPXI Partners. WP Global LLC (“WP Global”) is the general partner of WP XI GP. Warburg Pincus Partners II, L.P. (“WPP II”) is the managing member of WP Global. Warburg Pincus Partners GP LLC (“WPP GP LLC”) is the general partner of WPP II. WP is the managing member of WPP GP LLC. Warburg Pincus LLC (“WP LLC”) is the manager of the WPXI Funds. Investment and voting decisions with respect to the shares held by SOC Holdings LLC are made by a committee comprised of three or more individuals and all members of such committee disclaim beneficial ownership of the shares. The business address of SOC Holdings LLC and the Warburg Pincus entities is c/o Warburg Pincus LLC, 450 Lexington Avenue, New York, New York 10017. Thomas J. Carella and Amr Kronfol, each a Managing Director of Warburg Pincus, are members of the Board, and neither has voting or dispositive power with respect to any of the shares held by SOC Holdings LLC and each disclaims beneficial ownership of such shares except to the extent of his respective pecuniary interest therein. All indirect holders of the above referenced shares disclaim beneficial ownership of all applicable shares except to the extent of their pecuniary interest therein. |
| (2) | As reported on a Schedule 13G/A filed by Integrated Core Strategies (US) LLC on February 14, 2022, each of Millennium Management LLC, Millennium Group Management LLC and Israel A. Englander may be deemed to have shared voting and dispositive power with respect to 5,507,669 shares as of December 31, 2021. The business address of these entities and Mr. Englander is c/o Millennium Management LLC, 399 Park Avenue, New York, NY 10022. |
| (3) | Represents (i) 3,316,679 shares held directly and (ii) 401,243 shares held of record by Gallagher 2020 Children’s Trust, for which Dr. Gallagher serves as a trustee. |
| (4) | Represents (i) 1,060,726 shares, (ii) 606,214 Sponsor Earnout Shares and (iii) 120,000 shares underlying warrants issued in a private placement concurrent with the initial public offering of HCMC that are currently exercisable. |
| (5) | Represents (i) 44,644 shares and (ii) 15,770 shares issuable pursuant to stock options exercisable within 60 days of February 25, 2022. |
| (6) | Represents (i) 55,378 shares and (ii) 15,769 shares issuable pursuant to stock options exercisable within 60 days of February 25, 2022. |
| (7) | Interests shown include (i) 6,063,116 shares held by the Company’s executive officers and directors, (ii) 120,000 shares underlying the private placement warrants held by Mr. Shulman that are currently exercisable, and (iii) 31,539 shares issuable pursuant to stock options exercisable within 60 days of February 25, 2022. |
Equity Compensation Plan Information
We have three equity compensation plans under which our equity securities are authorized for issuance: the SOC Telemed, Inc. 2020 Equity Incentive Plan (the “2020 Plan”), the Specialists On Call, Inc. 2014 Equity Incentive Plan (the “2014 Plan”) and the SOC Telemed, Inc. 2020 Employee Stock Purchase Plan (as amended and restated, the “ESPP”). The following table summarizes equity compensation plan information for the 2020 Plan, the 2014 Plan and the ESPP as a group as of December 31, 2021:
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
| Equity compensation plans approved by security holders(1) | 5,289,597 | $ | 1.78 | 9,485,355 | (2) | |||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 5,289,597 | $ | 1.78 | 9,485,355 | ||||||||
| (1) | Includes the 2020 Plan, the 2014 Plan and the ESPP, each as described in Note 19, Stock-Based Compensation, to our consolidated financial statements included elsewhere in this report. |
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| (2) | Includes 7,863,792 shares of Class A common stock that remain available for issuance under the 2020 Plan and 1,621,563 shares of Class A common stock that remain available for purchase under the ESPP. The 2020 Plan is a successor to the 2014 Plan, which we assumed in the Merger Transaction. All outstanding stock awards granted under the 2014 Plan as in effect immediately prior to the closing of the Merger Transaction continue to be subject to the terms and conditions as set forth in the agreements evidencing such stock awards and the terms of the 2014 Plan as in effect immediately prior to the closing of the Merger Transaction. Any shares of Class A common stock that are subject to outstanding awards under the 2014 Plan that are issuable upon the exercise of stock awards that expire or become unexercisable for any reason without having been exercised in full will generally be available for future grant and issuance under the 2020 Plan. In addition, the 2020 Plan provides for an automatic increase in the number of shares reserved for issuance thereunder on the first day of each fiscal year beginning with the 2021 fiscal year for the remaining term of the 2020 Plan equal to the lesser of (i) 5% of the outstanding shares on the last day of the immediately preceding fiscal year and (ii) such number of shares determined by the Board. On January 1, 2022, the number of shares reserved for issuance under the 2020 Plan was automatically increased by 5,057,479 shares. The ESPP also provides for an automatic annual increase in the number of shares reserved for issuance thereunder on the first day of each fiscal year beginning with the 2021 fiscal year and ending on (and including) the first day of the 2031 fiscal year in an amount equal to the lesser of (i) 1% of the total number of shares of Class A common stock outstanding on the last day of the calendar month prior to the date of such automatic increase and (ii) 1,000,000 shares of Class A common stock, unless the Board determines prior to the first day of any fiscal year that there will be no increase in the share reserve for such fiscal year or that the increase in the share reserve for such fiscal year will be a lesser number of shares of Class A common stock. On January 1, 2022, the number of shares reserved for issuance under the ESPP was automatically increased by 1,000,000 shares. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Party Transactions
Other than compensation arrangements for our directors and executive officers, which are described in Part III, Item 11 of this report, the following describes transactions since January 1, 2020, and each currently proposed transaction in which:
| ● | we have been or are to be a participant; |
| ● | the amounts involved exceeded or will exceed $120,000; and |
| ● | any of our directors, executive officers, or holders of more than 5% of our outstanding capital stock, or any immediate family member of, or person sharing the household with, any of these individuals or entities, had or will have a direct or indirect material interest. |
Subordinated Note
On March 26, 2021, we issued an Unsecured Subordinated Promissory Note in principal amount of $13.5 million (the “Subordinated Note”) in favor of SOC Holdings LLC, an affiliate of Warburg Pincus and our largest stockholder, for proceeds of $11.5 million. The proceeds of the Subordinated Note were used to finance a portion of the closing cash consideration for the Acquisition. The unpaid balance of the Subordinated Note accrued interest at an escalating rate per annum initially equal to 7.47% until September 30, 2021, plus the greater of LIBOR and 0.13%, with such interest added to the principal amount of the Subordinated Note on a monthly basis. The maturity date of the Subordinated Note was the earliest to occur of September 28, 2026, and the occurrence of a change of control. The Subordinated Note was fully subordinated to the Term Loan Facility and could only be repaid in accordance with the terms of the Term Loan Agreement. The Subordinated Note further provided that we must repay a portion of the principal amount outstanding under the Term Loan Facility and the balance of the Subordinated Note from the proceeds of any offering by us of our equity securities. On June 4, 2021, we used a portion of the proceeds from our public offering that was completed in June 2021 to make a payment of $13.7 million to repay the balance of the Subordinated Note. See Note 12, Debt, in our consolidated financial statements included elsewhere in this report for further information.
Amended and Restated Registration Rights Agreement
In connection with the closing of the Merger Transaction, we entered into an Amended and Restated Registration Rights Agreement, dated as of October 30, 2020 (the “Amended and Restated Registration Rights Agreement”), with the sponsor of the pre-Merger Transaction company, HCMC Sponsor LLC (the “Sponsor”), and SOC Holdings LLC. Under the Amended and Restated Registration Rights Agreement, we agreed to register the resale, pursuant to Rule 415 under the Securities Act of 1933, certain shares of our Class A common stock and other equity securities that are held by the parties thereto from time to time and their permitted transferees.
In addition, pursuant to the terms of the Amended and Restated Registration Rights Agreement and subject to certain requirements and customary conditions, including with regard to the number of demand rights that may be exercised, the Sponsor and SOC Holdings LLC and their respective permitted transferees may demand at any time or from time to time, that the we file a registration statement on Form S-1, or any similar long-form registration statement, or, if available, on Form S-3, to register the shares of Class A common stock and other equity securities held by such securityholders. The Amended and Restated Registration Rights Agreement also provides “piggy-back” registration rights to such securityholders, subject to certain requirements and customary conditions, and contains certain restrictions on transfer with respect to the shares of Class A common stock held by the Sponsor or its permitted transferees immediately following the closing of the Merger Transaction for certain time periods ranging from between 30 days to one year after the closing, subject to certain exceptions.
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Investor Rights Agreement
In connection with the closing of the Merger Transaction, we and SOC Holdings LLC entered into an Investor Rights Agreement, dated as of October 30, 2020 (the “Investor Rights Agreement”), pursuant to which, (a) for so long as SOC Holdings LLC, an entity affiliated with Warburg Pincus, holds at least fifty percent (50%) of the outstanding shares of our Class A common stock, it will have the right to designate up to five (5) directors for election to the Board, and the size of the Board will be set at nine (9) directors, (b) for so long as SOC Holdings LLC holds at least thirty-five percent (35%) but less than fifty percent (50%) of the outstanding shares of our Class A common stock, it will have the right to designate up to three (3) directors for election to the Board, and the size of the Board will be set at nine (9) directors, (c) for so long as SOC Holdings LLC holds at least fifteen percent (15%) but less than thirty-five percent (35%) of the outstanding shares of our Class A common stock, it will have the right to designate up to two (2) directors for election to the Board, and the size of the Board will be set at seven (7) directors and (d) for so long as SOC Holdings LLC holds at least five percent (5%) but less than fifteen percent (15%) of the outstanding shares of our Class A common stock, it will have the right to designate one (1) director for election to the Board, and the size of the Board will be set at seven (7) directors. Pursuant to the Investor Rights Agreement, we agreed to take all necessary and desirable actions within our control such that, as of the effective time of the consummation of the Merger and from time to time, the size of the Board will be set at either seven (7) directors or nine (9) directors (in accordance with the terms above), unless the Board takes authorized action to increase the size of the Board and SOC Holdings LLC approves such action. Messrs. Carella and Kronfol, each a Managing Director of Warburg Pincus, are members of the Board and are deemed to be director designees of SOC Holdings LLC.
Board Nomination Rights Agreement
In connection with the Acquisition, we and Dr. Gallagher entered into a Board Nomination Rights Agreement, dated as of March 26, 2021 (the “Board Nomination Rights Agreement”), pursuant to which we agreed to increase the size of the Board by one director and appointed Dr. Gallagher as a Class I Director (as defined in our certificate of incorporation) on March 30, 2021, to fill the vacancy thereby created. The Board Nomination Rights Agreement will terminate upon the earliest to occur after the date of the agreement of either of the following events: (i) Dr. Gallagher ceases to beneficially own at least 75% of the shares of Class A common stock that he received in his capacity as a seller at the closing of the acquisition or (ii) Dr. Gallagher’s employment with us is terminated for any reason. The Board Nomination Rights Agreement further provides that any shares of our Class A common stock and any securities convertible into or exchangeable for shares of our Class A common stock held by Dr. Gallagher will be subject to lock-up for three months following his resignation from the Board.
Sponsor Agreement
Concurrently with the execution of the Merger Agreement, the Sponsor and HCMC entered into a letter agreement dated as of July 29, 2020 (the “Sponsor Agreement”), pursuant to which, among other things, the Sponsor agreed to (a) waive certain anti-dilution rights set forth in HCMC’s existing charter that may result from the transactions contemplated by the Merger Agreement, (b) surrender to HCMC, immediately prior to the consummation of the Merger Transaction and for no consideration, up to 1,875,000 shares of HCMC’s then-outstanding Class B common stock (the “Sponsor Contingent Closing Shares”), with such number of surrendered shares being equal to the product of (i) 1,875,000 and (ii) the difference between (A) 1, minus (B) a fraction (not greater than 1 nor less than 0), the numerator of which is an amount equal to (w) HCMC’s cash as of the closing of the Merger Transaction, minus (x) the aggregate amount of cash proceeds that will be required to satisfy any stockholder redemptions, minus (y) the amount of HCMC’s transaction costs that remain unpaid at the closing of the Merger Transaction, minus (z) $250,000,000, and the denominator of which is $35,000,000, (c) subject to potential forfeiture 1,875,000 shares of HCMC’s then-outstanding Class B common stock (the “Sponsor Earnout Shares”) in accordance with the terms of the Merger Agreement, such that 50% of such shares will be forfeited if the volume-weighted average closing sale price of one share of our Class A common stock does not reach $12.50 for a period of at least 20 out of 30 consecutive trading days, and 50% of such shares will be forfeited if the volume-weighted average closing sale price of one share of our Class A common stock does not reach $15.00 for a period of at least 20 out of 30 consecutive trading days, in each case, prior to the seventh (7th) anniversary of the closing (subject to (i) early vesting in the event of certain change of control transactions and (ii) forfeiture in the event of a change of control transaction pursuant to which the Company’s stockholders have the right to receive consideration attributing a value of less than $10.00 per share) and (d) support the transactions contemplated by the Merger Agreement, including agreeing to vote in favor of the adoption of the Merger Agreement at the special meeting of stockholders held on October 30, 2020. In connection with the closing of the Merger Transaction, the Sponsor surrendered and forfeited to the Company the 1,875,000 Sponsor Contingent Closing Shares. Mr. Shulman, the Chairman of the Board of the Company and the Chief Executive Officer and a director of HCMC prior to the closing of the Merger Transaction, and Charles J. Ditkoff, the President and a director of HCMC prior to the closing of the Merger Transaction, were the managing members of the Sponsor prior to its dissolution in 2020.
Legacy SOC Telemed Financing Transactions
Equity Financings
In multiple closings during January 2020, March 2020 and June 2020, Legacy SOC Telemed sold an aggregate of 9,609 units, each unit consisting of one share of Series J preferred stock and a warrant to purchase 67 shares of common stock at an exercise price of $0.01 per share, at a purchase price of $1,000 per unit, to SOC Holdings LLC for an aggregate purchase price of approximately $9.6 million.
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Convertible Promissory Note Financing
In multiple closings during September 2020 and October 2020, Legacy SOC Telemed sold approximately $6.0 million aggregate principal amount of its subordinated convertible promissory notes to SOC Holdings LLC pursuant to a subordinated convertible promissory note purchase agreement, dated as of September 3, 2020. The notes accrued payment-in-kind interest at a rate of 13% per annum, would become immediately due and payable upon the closing of the Merger Transaction or other change of control, and otherwise become due and payable upon the written demand of SOC Holdings LLC upon the earlier of any time after June 30, 2023, and the occurrence, and during the continuance of, an event of default under the notes. Legacy SOC Telemed could voluntarily prepay the notes in whole or in part without penalty upon the approval of the majority of its disinterested directors. The notes entitled SOC Holdings LLC to elect, on behalf of all holders, to convert the principal amount of all outstanding notes into securities of the same type issued and sold by Legacy SOC Telemed for cash in its next equity financing or, in the event the Merger Agreement was terminated pursuant to its terms and the next equity financing was not consummated within three months after such termination, into units of Series J preferred stock and warrants as described above under “— Equity Financings.” The notes were repaid and extinguished in connection with the closing of the Merger Transaction.
Support Letter from Warburg Pincus
On August 14, 2020, WPXI Finance, LP and Warburg Pincus XI Partners, L.P., affiliates of Warburg Pincus and SOC Holdings LLC, issued a support letter to Legacy SOC Telemed for up to $15.0 million of funding to the extent needed so that Legacy SOC Telemed could meet its financial obligations through December 31, 2021. Following the initial closing of the financing described above under “— Convertible Promissory Note Financing,” the support letter was superseded and replaced by a new support letter dated September 23, 2020, pursuant to which WPXI Finance, LP and Warburg Pincus XI Partners, L.P. recommitted up to $15.0 million of funding to the extent needed so that Legacy SOC Telemed could meet its financial obligations through December 31, 2021. As a condition to the funding of the Subordinated Note described above under “— Subordinated Note,” the September support letter was terminated.
HCMC Advisory Services Agreement
HCMC agreed to pay MTS Health Partners L.P., an affiliate of the Sponsor, a fee in an amount equal to approximately $1.8 million for financial advisory services rendered in connection with HCMC’s identification, negotiation and consummation of its initial business combination. Charles J. Ditkoff, the President and a director of HCMC prior to the closing of the Merger Transaction, is a senior advisor to MTS Health Partners, L.P., and Dennis Conroy, the Chief Financial Officer of HCMC prior to the closing of the Merger Transaction, serves as Chief Operating and Financial Officer for MTS Health Partners, L.P. HCMC paid the fee to MTS Health Partners L.P. upon the consummation of the Merger Transaction.
Indemnification Agreements
Our certificate of incorporation contains provisions limiting the liability of directors, and our by-laws provide that we will indemnify the directors and executive officers to the fullest extent permitted under Delaware law. Our certificate of incorporation and by-laws also provide the Board with discretion to indemnify other employees and agents when determined appropriate by the Board. In addition, we have entered into indemnification agreements with each of our directors and executive officers. These indemnification agreements provide the directors and executive officers with contractual rights to indemnification and advancement for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of the Company’s directors or executive officers.
Policies and Procedures for Transactions with Related Parties
We have adopted a written related party transactions policy which sets forth our policies and procedures regarding the identification, review, consideration and approval or ratification of transactions with related parties. Our audit committee has the primary responsibility for reviewing and approving, ratifying or rejecting “transactions with related parties,” which are transactions between us and any related party in which the aggregate amount involved exceeds or may be expected to exceed $120,000, and in which the related party has, had or will have a direct or indirect material interest. For purposes of the policy, a “related party” is any executive officer, director, nominee for director or beneficial owner of more than 5% of any class of our voting securities, in each case since the beginning of the previous fiscal year, and their immediate family members. In approving, ratifying or rejecting any such transaction, our audit committee is to consider, among other things, the relevant facts and circumstances available and deemed relevant to our audit committee, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction.
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Director Independence
The Board conducts an annual review of the independence of our directors. The Board has undertaken a review of its composition, the composition of its committees, and the independence of each director and considered whether any director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based on information provided by each director concerning his or her background, employment and affiliations, including family relationships, the Board has determined that none of the members of the Board, other than Dr. Gallagher, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of Dr. Byrne, Ms. McGeorge and Messrs. Carella, Chisley, Greskoviak, Kronfol and Shulman is “independent,” as that term is defined under the listing standards of Nasdaq, and the Board consists of a majority of “independent directors,” as defined under the rules of the SEC and Nasdaq listing rules relating to director independence requirements. The Board also determined that each of Dr. Byrne, Mr. Chisley and Ms. McGeorge, who comprise our audit committee, and Mr. Shulman, Mr. Carella and Mr. Kronfol, who comprise our compensation committee, meets the requirements for independence for such committees under the listing standards of Nasdaq and SEC rules and regulations, as applicable. The Board determined that Dr. Gallagher is not “independent” because he currently serves as our Chief Executive Officer and has at all times during his tenure on the Board been an employee of the Company. Further, the Board determined that former director Mr. Kalix, who resigned from the Board in September 2021, was not “independent” during his tenure on the Board as a result of his concurrent employment as our former Chief Executive Officer. In making these determinations, the Board considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances the Board deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director, and the transactions involving them described above under the caption “— Certain Relationships and Related Party Transactions.”
Item 14. Principal Accountant Fees and Services.
We regularly review the services provided by and fees of our independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”). These services and fees are also reviewed with our audit committee annually. In accordance with standard policy, PwC periodically rotates the individuals who are responsible for our audit.
During the fiscal years ended December 31, 2021 and 2020, fees for services provided by PwC were as follows:
| 2021 | 2020(1)(2) | |||||||
| Audit Fees(3) | $ | 1,362,900 | $ | 2,190,900 | ||||
| Audit-Related Fees | - | — | ||||||
| Tax Fees | - | — | ||||||
| All Other Fees | - | — | ||||||
| Total | $ | 1,362,900 | $ | 2,190,900 | ||||
| (1) | Represents $158,333 in audit fees paid to PwC for services to SOC Telemed for the period from October 31, 2020, through December 31, 2020, following the Merger Transaction. |
| (2) | Represents $2,032,567 in audit fees paid to PwC for services to Legacy SOC Telemed for the period from January 1, 2020, through October 30, 2020, prior to the Merger Transaction. |
| (3) | Audit Fees consisted of fees for professional services rendered for the audits of our financial statements which were billed during the respective year, including the audits of our annual financial statements and reviews of our interim quarterly reports, and services provided in connection with SEC filings, including consents and comfort letters. |
Pre-Approval Policies and Procedures
The formal written charter for our audit committee requires that the audit committee pre-approve all audit and permissible non-audit services and related engagement fees and terms for services to be provided to us by our independent registered public accounting firm, other than de minimis non-audit services subsequently approved in accordance with applicable SEC rules.
The audit committee’s policy is to pre-approve any audit, audit-related, tax or permissible non-audit service to be provided by our independent registered public accounting firm. Our independent registered public accounting firm and management are required to periodically report to the audit committee regarding the extent of services provided by our independent registered public accounting firm in accordance with this pre-approval policy, and the fees for the services performed to date.
Following the Merger Transaction, all of the services listed in the table above provided by PwC were approved by our audit committee.
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Part IV
Item 15. Exhibit and Financial Statement Schedules.
The following documents are filed as part of this report:
| (1) | Financial Statements. The financial statements listed in the Index to Financial Statements under Part II, Item 8 of this report. |
| (2) | Financial Statement Schedules. None. |
| (3) | Exhibits. The following exhibits are filed, furnished or incorporated by reference as part of this report. |
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| † | Schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The registrant hereby agrees to furnish supplementally a copy of any omitted schedule to the SEC upon its request. |
| + | Certain exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The registrant hereby agrees to furnish supplementally a copy of any omitted schedule to the SEC upon its request. |
| # | Indicates a management contract or compensatory plan, contract or arrangement. |
| § | Portions of this exhibit have been redacted in accordance with Regulation S-K Item 601(a)(6). |
Item 16. Form 10-K Summary.
Not applicable.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SOC Telemed, Inc. | ||
| Date: March 30, 2022 | /s/ Christopher M. Gallagher | |
| Name: | Christopher M. Gallagher | |
| Title: | Chief Executive Officer | |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Christopher M. Gallagher, David Mikula and Eunice Kim, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be signed in one or more counterparts.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||
| /s/ Christopher M. Gallagher | Chief Executive Officer and Director | March 30, 2022 | ||
| Christopher M. Gallagher | (Principal Executive Officer) | |||
| /s/ David R. Fletcher | Interim Chief Financial Officer | March 30, 2022 | ||
| David R. Fletcher | (Principal Financial and Accounting Officer) | |||
| /s/ Steven J. Shulman | Director | March 30, 2022 | ||
| Steven J. Shulman | ||||
| /s/ Barbara P. Byrne | Director | March 30, 2022 | ||
| Barbara P. Byrne | ||||
| /s/ Thomas J. Carella | Director | March 30, 2022 | ||
| Thomas J. Carella | ||||
| /s/ Gyasi C. Chisley | Director | March 30, 2022 | ||
| Gyasi C. Chisley | ||||
| /s/ Joseph P. Greskoviak | Director | March 30, 2022 | ||
| Joseph P. Greskoviak | ||||
| /s/ Amr Kronfol | Director | March 30, 2022 | ||
| Amr Kronfol | ||||
| /s/ Anne M. McGeorge | Director | March 30, 2022 | ||
| Anne M. McGeorge |
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