The following discussion and analysis of the financial condition and results of operations ofSharecare, Inc. (for purposes of this section, "the Company," "Sharecare ," "we," "us" and "our") should be read together with the Company's audited financial statements as of and for the years endedDecember 31, 2021 , 2020 and 2019, together with the related notes thereto, included in our Annual Report on Form 10-K filed with theSEC onMarch 31, 2022 , andSharecare's unaudited interim financial statements as ofJune 30, 2022 and for the three and six months endedJune 30, 2022 and 2021, together with the related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements.
Caution Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements regarding, among other things, the plans, strategies and prospects, both business and financial, ofSharecare . These statements are based on the beliefs and assumptions of our management. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words "believes," "estimates," "expects," "forecasts," "may," "will," "should," "seeks," "plans," "scheduled," "anticipates," "possible," "continue," "might," "potential" or "intends" or similar expressions. Forward-looking statements contained in this report include, but are not limited to, statements regarding our expectations as to:
•our ability to realize the expected benefits of the Business Combination;
•our business, operations and financial performance, including: •expectations with respect to our financial and business performance, including financial projections and business metrics and any underlying assumptions thereunder; •future business plans and growth opportunities, including revenue opportunities available from new or existing clients and expectations regarding the enhancement of platform capabilities and addition of new solution offerings; •developments and projections relating to our competitors and the digital healthcare industry; •the impact of the COVID-19 pandemic on our business and the actions we may take in response thereto; •our expectations regarding anticipated and future partnerships or other relationships with third parties and future acquisitions, as well as potential strategic reviews we may conduct; •our future capital requirements and sources and uses of cash, including potential share repurchases and our ability to obtain additional capital in the future and fully access our Revolving Facility; and •our ability to recognize performance-based revenue;
• our status as an EGC and our intention to take advantage of the accommodations available for EGCs under the JOBS law;
•our success in retaining or recruiting, or changes required in, our officers, key employees, or directors, including our ability to increase our headcount as we expand our business; and •the other estimates and matters described in this Quarterly Report on Form 10-Q under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements are based on information available as of the date of this report, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Important factors could cause actual results to differ materially from those indicated or implied by forward-looking statements include, but are not limited to, those set forth in this report and in the "Risk Factors" section of our Annual Report on Form 10-K filed with theSEC onMarch 31, 2022 . Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results may vary in material respects from those expressed or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements. 21
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Insight
We are a leading digital healthcare platform company that helps members consolidate and manage various components of their health in one place, regardless of where they are on their health journey. Our comprehensive platform is a health and well-being digital hub that unifies elements of individual and community health into one experience in order to enable members to live better, longer lives. We are driven by our philosophy that we are "All Together Better" as well as our goal to turn individual progress into community transformation. Given a unique blend of expertise across technology, media, and healthcare, we have, through a number of strategic acquisitions and integration of key technologies and capabilities over the last ten years, built our platform into what we believe is the most comprehensive and seamless experience currently available in the digital healthcare space. Our business combines business-to-business and direct-to-consumer sales models and functions on a more distinctive business-to-business-to-person model. Focusing on the individual, we aim to provide a solution that we believe is more comprehensive than other digital platforms by bringing together scientifically validated clinical programs and engaging content to deliver a personalized experience for our members, whether they come to us by way of the workplace, the exam room, or the living room. We derive net revenue from multiple stakeholders and while we are focused on the individual's unique experience, our platform is purpose-built to seamlessly connect stakeholders to the health management tools they need to drive engagement, establish sustained participation, increase satisfaction, reduce costs, and improve outcomes. As we expand our offerings and look to further develop our technologies, we continue to consider the distinct needs of each client channel as well as opportunities to better connect and cross-sell while we grow and integrate our solutions into one seamless platform.
Our unique platform can be broken down into three customer channels:
•Enterprise: Our enterprise channel includes a range of clients - from large employers and healthcare systems to government agencies and health plans - that use our platform to engage with their populations, dynamically measure the impact of that engagement, and efficiently deliver health and wellness services. •Provider: Our suite of data- and information-driven solutions for healthcare providers are tailored to improve productivity and efficiency and enhance patient care and management while upholding the latest compliance, security, and privacy standards. •Life Sciences: Our robust platform and suite of digital products and medical expert knowledge provides members with personalized information, programs, and resources to improve their health and well-being, and affords sponsors the opportunity to integrate their brands intoSharecare's consumer experience in a highly contextual, relevant, and targeted environment.
Recent developments affecting comparability
Impact of COVID-19
We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. With the emergence of COVID-19 variants and increased vaccination rates, the status of ongoing measures varies widely depending on the country and locality.
The pandemic has not had a material adverse impact on our consolidated financial position, results of operations and cash flows related to this matter. Due to the wider economic impact, clients may face liquidity issues and may be slower to pay or withdraw from their commitments altogether. However, the long-term financial impact related to the pandemic remains uncertain.
Given the volatility of the circumstances surrounding the pandemic,Sharecare has evaluated potential risks to its business plan. Further economic slowdown could delaySharecare's sales objectives for new business for its digital product. In addition,Sharecare may be impacted by currency fluctuations, as theU.S. Dollar has gained strength during the pandemic, with the biggest impact thus far being to the Brazilian Real.
Main factors and trends affecting our operating performance
Our financial condition and results of operations have been, and will continue
to be, affected by a number of factors, including our success with respect to
the following:
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•Expanding our Footprint. We believe that our current client base represents a small fraction of potential clients that could benefit from our highly differentiated solutions. We will continue to invest in our sales and marketing efforts and leverage our partner relationships to continue to acquire new clients, including individuals, providers, employers, health plans, government organizations, and communities.
• Develop our relationships with existing customers. We also believe there is significant opportunity to generate growth by maintaining and expanding our relationships with existing customers, including:
•increasing engagement and enrollment of eligible members with our existing enterprise clients through continued sales and marketing efforts, including targeted next-generation digital modeling and marketing, and capitalizing on insights from claims ingestion (the process by which we receive and process information from our clients), population risk stratification and incentives management; •promoting our marketplace of existing targeted digital therapeutics to close gaps in care in high-cost areas (with incremental fee per enrollee), which we believe represents a$1 billion revenue opportunity within our currently contracted clients; and
•expanding our relationships with our top 25 supplier customers with the ability to extend our supplier products and services to over 7,000 additional healthcare sites.
•Offering Additional Solutions. We believe there is significant opportunity to cross-sell our provider solutions to existing accounts, including deploying our value-based care and payment integrity solutions to approximately 6,000 health system clients. •Growing our Platform. We are constantly evaluating the marketplace for ways to broaden and enhance our client and member experience, improve clinical results, and increase revenue through product innovation, partnerships, and acquisitions. We intend to continue to leverage our expertise through adding digital therapeutics partnerships as well as the acquisition of products and services that are directly relevant to our existing clients. Additionally, we believe our strong and embedded client relationships provide us with unique perspectives into their evolving needs and the needs of their populations. •Evolving our Products to Cater to an Evolving Industry. As the digital healthcare industry grows, we closely monitor evolving consumer trends and organizations' needs so that we may adapt our platform to better suit our clients' demands. SinceMarch 2020 , the COVID-19 pandemic greatly accelerated the demand for virtual care solutions and resulted in rapid growth and increased adoption of digital health technologies, whichSharecare was in a unique position to undertake. By building on our deep expertise in handling and managing mass health data, we launched a suite of distinct but complementary digital tools and programs to address the evolving emotional, educational, clinical, and operational challenges introduced by the pandemic. We intend to continue to look for opportunities to leverage our platform and expertise to provide first-mover solutions to evolving and future demands in the digital healthcare industry. •Acquisitions. We believe that our proven track record of successful acquisitions coupled with the flexibility and capabilities of our platform positions us to continue opportunistically pursuing attractive M&A opportunities. We believe this potential is further accentuated by our multiple client channels and constantly expanding member base. Future acquisitions could drive value and growth in a host of ways, including access to new customers and potential cross-sell opportunities; unlocking new customer channels or geographies; adding new solutions to serve our existing client base; and adding new capabilities to enhance our existing solution offering or the efficiency of our platform. In addition, we believe our acquisition track record demonstrates our ability to realize synergies and optimize performance of potential M&A partners. 23
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Components of our operating results
Revenue
The enterprise channel provides employers and health plans with health management programs for large populations, including digital engagement, telephonic coaching, incentives, biometrics, digital therapeutics, home health offerings, and subscriptions to theSharecare platform. Revenue is recognized on a per member per month ("PMPM") basis or as services are provided. Provider revenue is primarily based on health document requests filled in the health data services business line, as well as subscription fees for various technology related services that assist providers with performance and maximizing reimbursement. Life sciences revenue is generated mostly through ad sponsorships toSharecare's extensive member database.
Revenue costs
Costs of revenue primarily consists of costs incurred in connection with delivering our various revenue generating activities, including personnel related expenses. Costs are primarily driven by volumes related to requests, engagement, and incentive fulfillment. The major components that make up our cost of revenue are personnel costs to support program delivery as well as customer service along with share-based compensation for employees engaged in delivering products and services to customers, data management fees related to file processing, and variable fees to deliver specific services that may require third party vendors, direct marketing, fulfillment, transaction fees, or other costs that can be reduced to offset a decline in revenue. Because our growth strategy includes substantial opportunity to scale low-personnel cost products, we would anticipate future revenue to grow at a faster rate than cost of revenue as those low-personnel cost products mature. Costs of revenue do not include depreciation or amortization, which are accounted for separately.
Sales and marketing expenses
Sales and marketing expenses consist primarily of employee-related expenses, including salaries, benefits, commissions, employment taxes, travel, and share-based compensation costs for our employees engaged in sales, account management, marketing, public relations and related support. In addition, these expenses include marketing sponsorships and engagement marketing spend. These expenses exclude any allocation of occupancy expense and depreciation and amortization. We expect our sales and marketing expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related account management, marketing, public relations and related support personnel to capture an increasing amount of our market opportunity and upsell/cross-sell within our existing client base. As we scale our sales and marketing personnel in the short- to medium-term, we expect these expenses to increase in both absolute dollars and as a percentage of revenue.
Product and technology expenses
Product and technology expenses include personnel and related expenses for software engineering, information technology infrastructure, business intelligence, technical account management, project management, safety, product development and equity compensation. Product and technology expenses also include indirect hosting and related costs to support our technology, outsourced software and engineering services. Our technology and development costs exclude any allocation of occupancy costs and depreciation and amortization.
We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development of our technology platform. Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period partially due to the timing and extent of our technology and development expenses.
General and administrative expenses
General and administrative expenses include personnel and related expenses for
our executive, finance, legal, and human resources departments plus all indirect
staff in the divisions not attributable to service delivery, sales and
marketing, or product and technology. They also include professional fees,
share-based compensation, rent, utilities and maintenance related costs. Our
general and administrative expenses exclude any allocation of depreciation and
amortization.
We expect our general and administrative expenses to increase for the
foreseeable future following the completion of the Business Combination due to
the additional legal, accounting, insurance, investor relations, and other costs
that we will incur as a public company, as well as costs associated with
continuing to grow our business. Our general and administrative expenses may
fluctuate as a percentage of our total revenue from period to period partially
due to the timing and extent of our general and administrative expenses.
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Depreciation and amortization
Amortization mainly includes the amortization of fixed assets, the amortization of software, the amortization of capitalized software development costs and the amortization of intangible assets related to acquisitions.
Interest expense
Interest expense primarily relates to interest and fees incurred on our line of credit and amortization of debt issuance costs.
Other income (expenses)
Other income (expense) is mainly related to changes in the fair value of contingent consideration and liabilities related to warrants.
Operating results
Comparison of the three months ended
The following table presents our unaudited Consolidated Statement of Operations for the three-months endedJune 30, 2022 and 2021, and the percentage change between the two periods: Three Months Ended June 30, (in thousands) 2022 2021 $ Change % Change Revenue$ 103,823 $ 98,459 $ 5,364 5 % Costs and operating expenses: Costs of revenue (exclusive of amortization and depreciation below) 53,238 48,634 4,604 9 % Sales and marketing 14,155 12,046 2,109 18 % Product and technology 17,680 15,812 1,868 12 % General and administrative 43,491 19,197 24,294 127 % Depreciation and amortization 10,901 7,167 3,734 52 % Total costs and operating expenses 139,465 102,856 36,609 36 % Loss from operations (35,642) (4,397) (31,245) 711 % Other income (expense): Interest income 102 21 81 386 % Interest expense (539) (7,095) 6,556 (92) % Other income (expense) 6,827 (8,851) 15,678 177 % Total other income (expense) 6,390 (15,925) 22,315 140 % Loss before income tax benefit (expense) (29,252) (20,322) (8,930) 44 % Income tax benefit (expense) (269) 98 (367) (374) % Net loss (29,521) (20,224) (9,297) 46 % Net income (loss) attributable to noncontrolling interest in subsidiaries (496) 24 (520) (2167) % Net loss attributable to Sharecare, Inc.$ (29,025) $ (20,248) $ (8,777) 43 % Revenue Revenue increased$5.4 million , or 5%, from$98.5 million for the three months endedJune 30, 2021 to$103.8 million for the three months endedJune 30, 2022 . Overall, we saw growth from recently acquired product lines as well as organic growth in existing lines for an increase of$16.5 million . Offsetting this growth were negative impacts related to suspended services from health security products of$11.1 million . 25
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The channel revenue changed as follows: enterprise channel decreased by$0.1 million (from$60.0 million for 2021 to$59.9 million for 2022), the provider channel increased by$4.3 million (from$22.1 million for 2021 to$26.4 million for 2022) and the life sciences channel increased by$1.2 million (from$16.3 million for 2021 to$17.5 million for 2022). The enterprise channel was mostly unchanged in total a decrease of 0.2% but included growth in our home health care and AI businesses, offset by the impact of the suspension of health security products. The provider channel increase of 19% was attributable to increased volumes and new customers in the medical record audit product line. The life sciences channel increased 8% from the growth in marketing spend by pharma customers. Costs of Revenue Costs of revenue increased$4.6 million , or 9%, from$48.6 million for the three months endedJune 30, 2021 to$53.2 million for the three months endedJune 30, 2022 . The increase was due to increased sales. The percentage increase in costs of revenue was higher than the percentage increase in revenue primarily from shifts in product mix, with increases in home health care, medical record audits and pharma marketing, offset by a decrease in health security.
Sales and Marketing
Sales and marketing expense increased$2.1 million , or 18%, from$12.0 million for the three months endedJune 30, 2021 to$14.2 million for the three months endedJune 30, 2022 . The increase was attributable to staffing increases of$0.6 million , severance and reorganization costs of$0.4 million , additional marketing sponsorships and advertising costs of$1.0 million , and share-based compensation expense of$0.5 million . The increases were partially offset by reduced external consultant expenses of$0.5 million incurred in 2021 to advance engagement metrics across our client base and support ramping of new business.
Product and technology
Product and technology spending increased
General and administrative
General and administrative expense increased$24.3 million , or 127%, from$19.2 million for the three months endedJune 30, 2021 to$43.5 million for the three months endedJune 30, 2022 . Non-cash share-based compensation expense accounted for$15.6 million of the increase. In addition, non-recurring, reorganization, and severance fees increased by$4.1 million . The other increases are attributable to additional and acquisition-related staffing costs of$1.5 million needed to support growth and public company compliance initiatives, cost increases of$1.1 million tied to increased travel, technology spend and medical claims, along with increased insurance and legal expense of$2.3 million tied to being a public company. Offsetting these increases, was a reduction in facility lease expense attributable to exiting facilities and lease expiration of$0.7 million .
Depreciation and amortization
Depreciation and amortization increased$3.7 million , or 52%, from$7.2 million for the three months endedJune 30, 2021 to$10.9 million for the three months endedJune 30, 2022 . The increase was primarily related to acquisition-related intangibles as well as placing platform-related developed software into service.
Interest charges
Interest expense decreased$6.6 million , from$7.1 million for the three months endedJune 30, 2021 to$0.5 million for the three months endedJune 30, 2022 . The decrease is attributable to the retirement of debt in 2021 in connection with the consummation of the Business Combination.
Other income (expenses)
Other income and expense fluctuated$15.7 million from$8.9 million of expense for the three months endedJune 30, 2021 to$6.8 million of income for the three months endedJune 30, 2022 . This activity was mostly related to non-cash, mark-to-market adjustments to contingent consideration and warrant liabilities where the adjustment is tied to the change in the per 26
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trading price of the Company’s common shares. See Note 1 to
consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Comparison of the six months ended
The following table presents our unaudited Consolidated Statement of Operations for the six-months endedJune 30, 2022 and 2021, and the percentage change between the two periods: Six Months Ended June 30, (in thousands) 2022 2021 $ Change % Change Revenue$ 204,533 $ 188,661 $ 15,872 8 % Costs and operating expenses: Costs of revenue (exclusive of amortization and depreciation below) 104,730 93,028 11,702 13 % Sales and marketing 28,666 23,556 5,110 22 % Product and technology 37,101 36,266 835 2 % General and administrative 99,489 38,752 60,737 157 % Depreciation and amortization 20,778 13,850 6,928 50 % Total costs and operating expenses 290,764 205,452 85,312 42 % Loss from operations (86,231) (16,791) (69,440) 414 % Other income (expense) Interest income 131 29 102 352 % Interest expense (1,031) (14,105) 13,074 (93) % Other income (expense) 19,672 (20,730) 40,402 195 % Total other income (expense) 18,772 (34,806) 53,578 154 % Loss before income tax benefit (expense) (67,459) (51,597) (15,862) 31 % Income tax benefit (expense) (361) 14 (375) (2679) % Net loss (67,820) (51,583) (16,237) 31 % Net loss attributable to noncontrolling interest in subsidiaries (594) (82) (512) 624 % Net loss attributable to Sharecare, Inc.$ (67,226) $ (51,501) $ (15,725) 31 % Revenue Revenue increased$15.9 million , or 8%, from$188.7 million for the six months endedJune 30, 2021 to$204.5 million for the six months endedJune 30, 2022 , respectively. Overall, we saw growth from recently acquired product lines as well as organic growth in existing lines for an increase of$36.5 million . Offsetting this growth were negative impacts related to suspended services from health security products of$20.6 million . The channel revenue changed as follows: enterprise channel increased by$5.6 million (from$114.1 million for 2021 to$119.7 million for 2022), the provider channel increased by$8.9 million (from$42.2 million for 2021 to$51.1 million for 2022) and the life sciences channel increased by$1.4 million (from$32.4 million for 2021 to$33.8 million for 2022). The enterprise channel increased by 5%, including growth in our home health care and AI businesses, offset by the impact of the suspension of health security products. The provider channel increase of 21% was attributable to increased volumes and new customers in both the medical record and audit product lines. The life sciences channel increased 4% from the growth in marketing spend by pharma customers.
Revenue costs
Costs of revenue increased$11.7 million , or 13%, from$93.0 million for the six months endedJune 30, 2021 to$104.7 million for the six months endedJune 30, 2022 . The increase was primarily due to sales growth. The percentage increase in costs of revenue was higher than the percentage increase in revenue primarily from shifts in product mix, with increases in home health care, medical record audits and pharma marketing, offset by a decrease in health security. 27
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Sales and Marketing
Sales and marketing expense increased$5.1 million , or 22%, from$23.6 million for the six months endedJune 30, 2021 to$28.7 million for the six months endedJune 30, 2022 . The increase was attributable to staffing increases of$2.0 million , severance and reorganization costs of$0.9 million , additional marketing sponsorships and advertising costs of$1.9 million , increased travel and conference expenses of$0.6 million and share-based compensation expense of$1.6 million . The increases were partially offset by reduced sales consultant expenses of$1.8 million incurred in 2021 to advance engagement metrics across our client base and support ramping of new business.
Product and technology
Product and technology expenses increased$0.8 million , or 2%, from$36.3 million for the six months endedJune 30, 2021 to$37.1 million for the six months endedJune 30, 2022 . The continued investment in product and tech staffing and outside contract services accounted for$5.1 million of the increase, and platform fees increased by$1.6 million as we deploy new technologies and volumes increase related to the revenue ramp. Severance and reorganization expenses also increased by$2.3 million . Offsetting the increases is a reduction in stock-based compensation expenses of$8.2 million related to the prior year acquisition of doc.ai.
General and administrative
General and administrative expense increased$60.7 million , or 157%, from$38.8 million for the six months endedJune 30, 2021 to$99.5 million for the six months endedJune 30, 2022 . Non-cash share-based compensation expense accounted for$43.3 million of the increase. In addition, non-recurring, reorganization and severance fees increased by$9.1 million . The other increases are attributable to additional and acquisition-related staffing costs of$5.3 million needed to support growth and public company compliance initiatives, cost increases of$0.9 million tied to increased travel, technology spend and medical claims, along with increased insurance and legal expense of$4.3 million tied to being a public company. Offsetting these increases, we reduced facility lease expense by$1.1 million and outside consulting costs by$1.4 million .
Depreciation and amortization
Depreciation and amortization increased$6.9 million , or 50%, from$13.9 million for the six months endedJune 30, 2021 to$20.8 million for the six months endedJune 30, 2022 . The increase was related to our continued investment in product enhancements and new products, as well as amortization incurred on recently acquired intangible assets.
Interest charges
Interest expense decreased$13.1 million , from$14.1 million for the six months endedJune 30, 2021 to$1.0 million for the six months endedJune 30, 2022 . The decrease is attributable to the retirement of debt in 2021 in connection with the consummation of the Business Combination.
Other income (expenses)
Other income and expense fluctuated$40.4 million , from$20.7 million of expense for the six months endedJune 30, 2021 to$19.7 million of income for the six months endedJune 30, 2022 . This increase is comprised mostly of non-cash, mark-to-market adjustments tied to the change in the per share price of the Company's common stock.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with GAAP, we
believe the non-GAAP measures adjusted EBITDA, adjusted net income (loss), and
adjusted earnings (loss) per share ("adjusted EPS") are useful in evaluating our
operating performance. We use adjusted EBITDA, adjusted net income (loss), and
adjusted EPS to evaluate our ongoing operations and for internal planning and
forecasting purposes. We believe that these non-GAAP financial measures, when
taken together with the corresponding GAAP financial measures, provide
meaningful supplemental information regarding our performance by excluding
certain items that may not be indicative of our business, results of operations,
or outlook. In particular, we believe that the use of adjusted EBITDA, adjusted
net income (loss), and adjusted EPS is helpful to our investors as they are
metrics used by management in assessing the health of our business and our
operating performance. However, non-GAAP financial information is presented for
supplemental informational purposes only, has limitations as an analytical tool,
and should not be considered in isolation or as a substitute for financial
information presented in accordance with GAAP. In addition, other companies,
including companies in our industry, may calculate
similarly-titled non-GAAP measures differently or may use other measures to
evaluate their performance, all of which could reduce the usefulness of
our non-GAAP financial measures as a tool for comparison. The reconciliations of
adjusted EBITDA, adjusted net income (loss), and adjusted EPS to
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net income (loss), the most directly comparable financial measure stated in accordance with GAAP, are provided below. Investors are encouraged to review the reconciliations and not to rely on any single financial measure to evaluate our business. Adjusted EBITDA Adjusted EBITDA is a key performance measure that management uses to assess our operating performance. Because adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes. We calculate adjusted EBITDA as net income (loss) adjusted to exclude (i) depreciation and amortization, (ii) interest income, (iii) interest expense, (iv) income tax (benefit) expense, (v) other (income) expense (non-operating), (vi) share-based compensation, (vii) severance, (viii) warrants issued with revenue contracts, (ix) net costs associated with exiting contracts, and (x) transaction and closing costs. We do not view the items excluded as representative of our ongoing operations. The following table presents a reconciliation of adjusted EBITDA from the most comparable GAAP measure, net loss, for the three and six months endedJune 30, 2022 and 2021 (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net loss$ (29,521) $ (20,224) $ (67,820) $ (51,583) Add: Depreciation and amortization 10,901 7,167 20,778 13,850 Interest income (102) (21) (131) (29) Interest expense 539 7,095 1,031 14,105 Income tax (benefit) expense 269 (98) 361 (14) Other (income) expense (6,827) 8,851 (19,672) 20,730 Share-based compensation 18,177 2,360 51,287 14,386 Severance 411 200 770 265 Warrants issued with revenue contracts(a) 14 (1) 34 38 Net costs associated with exiting contracts(b) 1,249 - 2,923 - Transaction and closing costs(c)(d) 7,025 1,319 14,397 2,022 Adjusted EBITDA(e)$ 2,135 $ 6,648 $ 3,958 $ 13,770 ____________ (a)Represents the non-cash value of warrants issued to clients for meeting specific revenue thresholds. (b)For the six months endedJune 30, 2022 , previously undisclosed first quarter net costs were included for comparability purposes and to display trends associated with exiting contracts during the period. (c)For the three months endedJune 30, 2022 , represents costs related to the Business Combination, transaction and post-closing costs related to acquisitions, and other non-operating, non-recurring costs including$2.7 million of other non-operating, non-recurring costs,$3.1 million of reorganizational costs, and$1.2 million of acquisition-related expense. (d)For the six months endedJune 30, 2022 , represents costs related to the Business Combination, transaction and post-closing costs related to acquisitions, and other non-operating, non-recurring costs including$5.9 million of other non-operating, non-recurring costs,$5.3 million of reorganizational costs, and$3.2 million of acquisition-related expense. (e)Includes non-cash amortization associated with contract liabilities recorded in connection with acquired businesses.
Adjusted net profit (loss)
Adjusted net income (loss) is a key performance measure that management uses to assess our operating performance. Because adjusted net income (loss) facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes and to evaluate our performance. We calculate adjusted net income (loss) as net income (loss) attributable toSharecare, Inc. adjusted to exclude (i) amortization of acquired intangibles, (ii) amortization of deferred financing fees, (iii) change in fair value of warrant liability and contingent consideration, (iv) share-based compensation, (v) severance, (vi) warrants issued with revenue contracts, (vii) net costs associated with exiting contracts, (viii) transaction and closing costs, and (ix) the related income tax adjustments. We do not view the items excluded as representative of our ongoing operations. 29
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Adjusted EPS
Adjusted EPS is a key performance measure that management uses to assess our operating performance. Because adjusted EPS facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes and to evaluate our performance.
We calculate Adjusted EPS as Adjusted net income, as defined above, divided by the weighted average number of common shares outstanding – basic and diluted. We do not consider the excluded items to be representative of our ongoing operations.
The following table presents a reconciliation of adjusted net loss and adjusted EPS from the most comparable GAAP measure, net loss, for the three and six months endedJune 30, 2022 and 2021 (in thousands, except share numbers and per share amounts): Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021
Net loss attributable to
(20,248)
Add: Amortization of acquired intangible assets(a)
1,631 1,160 3,263 2,228 Amortization of deferred financing fees 70 1,656 138 3,331 Change in fair value of warrant liability and contingent consideration (6,374) 9,908 (18,742) 21,656 Share-based compensation 18,177 2,360 51,287 14,386 Severance 411 200 770 265 Warrants issued with revenue contracts(b) 14 (1) 34 38 Net costs associated with exiting contracts(c) 1,249 - 2,923 - Transaction and closing costs(d)(e) 7,025 1,319 14,397 2,022 Adjusted net loss(f)$ (6,822) $
(3,646)
Weighted-average common shares outstanding, basic and diluted 347,334,401 228,721,591 346,122,333 225,493,435 Loss per share$ (0.08) $ (0.09) $ (0.19) $ (0.23) Adjusted loss per share$ (0.02) $ (0.02) $ (0.04) $ (0.03) ____________ (a)Represents non-cash expenses related to the amortization of intangibles in connection with acquired businesses. (b)Represents the non-cash value of warrants issued to clients for meeting specific revenue thresholds. (c)For the six months endedJune 30, 2022 , previously undisclosed first quarter net costs were included for comparability purposes and to display trends associated with exiting contracts during the period. (d)For the three months endedJune 30, 2022 , represents costs related to the Business Combination, transaction and post-closing costs related to acquisitions, and other non-operating, non-recurring costs including$2.7 million of other non-operating, non-recurring costs,$3.1 million of reorganizational costs, and$1.2 million of acquisition-related expense. (e)For the six months endedJune 30, 2022 , represents costs related to the Business Combination, transaction and post-closing costs related to acquisitions, and other non-operating, non-recurring costs including$5.9 million of other non-operating, non-recurring costs,$5.3 million of reorganizational costs, and$3.2 million of acquisition-related expense. (f)The income tax effect of the Company's non-GAAP reconciling items are offset by valuation allowance adjustments of the same amount given that the Company was in a full valuation allowance position for the periods presented.
Cash and capital resources
We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations and other commitments, with cash flows from operations and other sources of funding. Our ability to expand and grow our business will depend on many factors, including our working capital needs and the evolution of our operating cash flows.
We have had
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We believe our operating cash flows, together with our cash on hand, which
includes the cash we obtained as a result of the Business Combination, will be
sufficient to meet our working capital and capital expenditure requirements in
the short-term, i.e., the 12 months from the date of this Quarterly Report on
Form 10-Q. Our long-term liquidity (i.e., more than 12 months from the date of
this Quarterly Report on Form 10-Q) needs include cash necessary to support our
business growth and contractual commitments. We believe that the potential
financing capital available to us in the future is sufficient to fund our
long-term liquidity needs, however, we are continually reviewing our capital
resources to determine whether we can meet our short- and long-term goals and we
may require additional capital to do so. We may also need additional cash
resources due to potential changes in business conditions or other developments,
including unanticipated regulatory developments, significant acquisitions, and
competitive pressures. We expect our capital expenditures and working capital
requirements to continue to increase in the immediate future as we seek to
expand our solution offerings. To the extent that our current resources are
insufficient to satisfy our cash requirements, we may need to seek additional
equity or debt financing. If the needed financing is not available, or if the
terms of financing are less desirable than we expect, we may be forced to
decrease our level of investment in new product offerings and related marketing
initiatives or to scale back our existing operations, which could have an
adverse impact on our business and financial prospects.
The following table summarizes our cash flow activities for the periods
presented:
Six Months Ended June 30,
(in thousands) 2022 2021
Net cash provided by (used in) operating activities $ (39,912) $ 80
Net cash used in investing activities $ (24,216) $ (18,458)
Net cash provided by financing activities $ 4,753 $ 38,641
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2022 was
$39.9 million , an increase of $40.0 million from $0.1 million of cash provided
by operating activities for the six months ended June 30, 2021 . Cash used during
this period included the $67.8 million net loss for the six months ended
June 30, 2022 , offset by non-cash items of $57.0 million , which were primarily
attributable to depreciation and amortization expense, amortization of contract
liabilities, lease right-of-use assets expense related to the adoption of ASU
2016-02, Leases, change in fair value of warrant liability and contingent
consideration, and share-based compensation. Changes in operating assets and
liabilities of $29.1 million resulted in net cash used. Uses of cash were
attributable to the pay down of accounts payable and accrued liabilities in the
ordinary course of business (including operating lease liabilities accounted for
under ASU 2016-02, Leases) and from the settlement of previously accrued legal
expenses, cyclical cash payments related to prepaid assets, and a reduction in
deferred revenue. These uses of cash were offset by cash provided by a decrease
in accounts receivable.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2022 was
$24.2 million compared to $18.5 million of net cash used in investing activities
for the six months ended June 30, 2021 . The increase in cash outflows was
primarily due to an increase in connection with software development for new
products and current product enhancements and purchases of property and
equipment offset by prior period cash paid in the acquisition of doc.ai.
Fundraising activities
Net cash provided by financing activities for the six months ended
has been
Net cash provided by financing activities for the six months endedJune 30, 2021 was$38.6 million , primarily due to cash received from the issuance of 4,453,750 shares (retroactively restated for the Reverse Recapitalization) of Series D redeemable convertible preferred stock in the amount of$50.0 million , proceeds from the exercise of common stock options and warrants of$2.3 million offset by the net repayment of our Senior Secured Credit Agreement of$13.3 million . 31
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Contractual obligations
No material changes have been made to contractual obligations since our Annual Report on Form 10-K was filed with the
Financing modalities
Senior Secured Credit Agreement
InMarch 2017 , we refinanced our existing debt through the execution of the Senior Secured Credit Agreement. The Senior Secured Credit Agreement provides for the Revolving Facility with total commitments of$60.0 million . Availability under the Revolving Facility is generally subject to a borrowing base based on a percentage of applicable eligible receivables. Borrowings under the Revolving Facility generally bear interest at a rate equal to, at the applicable Borrower's option, either (a) a base rate or (b) a rate based on LIBOR, in each case, plus an applicable margin. The applicable margin is based on a fixed charge coverage ratio and ranges from (i) 1.75% to 2.25% forU.S. base rate loans and (ii) 2.75% to 3.25% for LIBOR. The Senior Secured Credit Agreement matures onFebruary 10, 2023 . OnMay 11, 2022 , the Company and certain subsidiaries of the Company entered into the Amendment pursuant to which the minimum EBITDA financial covenant contained therein was amended for each fiscal quarter ending during the period fromMarch 31, 2022 throughSeptember 30, 2022 to account for the budgeted phasing of 2022 interim quarterly budgets.
The Senior Secured Credit Agreement contains a number of customary affirmative and negative covenants and we were in compliance with those covenants as of
Critical accounting estimates
Our financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, revenue recognition, the valuation of assets and liabilities acquired in business combinations, the valuation of common stock prior to the Business Combination, stock-based compensation, and income taxes. We base our estimates on historical experience, known trends, and other market-specific or other relevant factors that we believe to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results may differ from those estimates or assumptions. We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 1, toSharecare's consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Revenue recognition
Revenue is recognized when control of the promised good or service is transferred to the client, in an amount that reflects the consideration we expect to be entitled to in exchange for that good or service. Sales and usage-based taxes are excluded from revenue. We serve a diverse group of clients. We are the principal in all outstanding revenue arrangements except for CareLinx. CareLinx has B2C and B2B2C service lines for which CareLinx is the agent and we recognize the commission revenue based on the amount billed using the "as-invoiced" practical expedient.
business income
The enterprise channel provides employers and health plans with health management programs for large populations, including digital engagement, telephonic coaching, incentives, biometrics, digital therapeutics, home care health offerings, and subscriptions to theSharecare platform. Revenue is recognized on a PMPM basis or as services are provided. Member participation fees are generally determined by multiplying the contractually negotiated member rate by the number of members eligible for services during the month. Member participation rates are established during contract negotiations with clients, often based on a portion of the value the programs are expected to create. Contracts with health plans, health care systems and government organizations generally range from three to five years with several comprehensive strategic agreements extending for longer periods. Contracts with larger employer clients typically have two to four year terms. 32
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Health management program contracts often include a fee for the subscription of theSharecare digital platform and various other platforms under doc.ai, which may also be sold on a stand-alone basis. These services allow members to accessSharecare's proprietary mobile application with a comprehensive suite of health and wellness management programs, content, and tools. Revenue is recognized on a per member or a fixed fee basis as the services are provided.Sharecare's Blue Zones Project is a community well-being improvement initiative designed to change the way people experience the world around them by encouraging and promoting better lifestyle choices, such as commuting, eating, and social habits. Because healthier environments naturally nudge people toward healthier choices,Blue Zones Project focuses on influencing the Life Radius®, the area close to home in which people spend 90% of their lives.Blue Zones Project best practices use people, places, and policy as levers to transform those surroundings. These contracts normally include two performance obligations, the discovery period and the subsequent content delivery for each year of engagement. The revenue is recognized based on the relative standalone selling price of the performance obligations evenly over time. These contracts do not include termination clauses and often have two to four year terms.Sharecare's doc.ai unlocks the value of health data through licensing artificial intelligence modules and through the creation of products for a portfolio of clients including payors, pharma, and providers. These contracts generally include two performance obligations. The software license and maintenance/support are considered one series of distinct performance obligations and professional services is considered a separate distinct performance obligation. Revenue is recognized for all identified performance obligations as services are delivered.Sharecare's CareLinx is focused on connecting caregivers with facilities or individuals that are in need of additional support. These services are generally considered a series of distinct performance obligations. Revenue is recognized for all identified performance obligations as billed using the "as-invoiced" practical expedient. Certain contracts place a portion of fees at risk based on achieving certain performance metrics, such as cost savings, and/or clinical outcomes improvements (performance-based). We use the most likely amount method to estimate variable consideration for these performance guarantees. We include in the transaction price some or all of an amount of variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We utilize customer data in order to measure performance.
If performance levels are not achieved by the end of the assessment period, usually one year, some or all of the performance-based fees must be refunded. During the settlement process under a contract, which typically takes place six to eight months after the end of a contract year, performance-based fees are reconciled and settled.
Clients are generally billed monthly for the entire amount of the fees contractually due for the prior month's enrollment, which typically includes the amount, if any, that is performance-based and may be subject to refund should performance targets not be met. Fees for participation are typically billed in the month after the services are provided. Deferred revenues arise from contracts that permit upfront billing and collection of fees covering the entire contractual service period, generally six months to a year. A limited number of contracts provide for certain performance-based fees that cannot be billed until after they are reconciled with the client.
Supplier revenue
Our provider channel revenue is primarily based on the volume of health document
requests fulfilled and recognized upon satisfactory delivery to the client. In
addition, provider revenue is derived from subscription fees for various
technology-related services that assist providers with efficiency and
productivity and enhanced patient care. Subscription fees are recognized ratably
over the contractual period.
Life Sciences Revenue
Our life sciences channel generates revenue mostly through ad sponsorships and
content delivery. Content delivery revenue is recognized when the content is
delivered to the client. Ad sponsorship revenue is recognized when the
contractual page views or impressions are delivered and the transaction has met
the criteria for revenue recognition.
Certain customer transactions may contain multiple performance obligations that
may include delivery of content, page views, and ad sponsorship over time. To
account for each of these elements separately, the delivered elements must be
capable of being distinct and must be distinct in the context of the contract.
Revenue is allocated based on the stand-alone or unbundled selling price for
each performance obligation as the services are provided.
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Business combinations
We account for business acquisitions in accordance with ASC Topic 805, Business Combinations. We measure the cost of an acquisition as the aggregate of the acquisition date fair values of the assets transferred and liabilities assumed and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. We record goodwill for the excess of (i) the total costs of acquisition and fair value of any noncontrolling interests over (ii) the fair value of the identifiable net assets of the acquired business. The acquisition method of accounting requires us to exercise judgment and make estimates and assumptions based on available information regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies. We must also refine these estimates within a one-year measurement period, to reflect any new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Estimates and assumptions that we must make in estimating the fair value of future acquired technology, user lists, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed, which could materially impact our results of operation.
New accounting statements
See Note 1, for
Accounting Election for Emerging Growth Companies
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. Following the consummation of the Business Combination, we expect to remain an emerging growth company at least through the end of the 2022 fiscal year and expect to continue to take advantage of the benefits of the extended transition period. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions for emerging growth companies because of the potential differences in accounting standards used.
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