SHARECARE, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
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, 2020 , 2019 and 2018, andSharecare's unaudited interim financial statements as ofSeptember 30, 2021 and for the three and nine months endedSeptember 30, 2021 and 2020 in each case 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. Cautionary Statement Regarding Forward-Looking Statements Some of the statements and information in this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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: a.our business, operations and financial performance, including: i.future business plans and growth opportunities, including revenue opportunity available from new or existing clients and expectations regarding the enhancement of platform capabilities and addition of new solution offerings; ii.developments and projections relating to our competitors and the digital healthcare industry; iii.the impact of the COVID-19 pandemic on our business and the actions we may take in response thereto; iv.our future acquisitions, partnerships or other relationships with third parties; v.our future capital requirements as we expand our business following consummation of the Business Combination and sources and uses of cash, including our ability to obtain additional capital in the future and fully access our Revolving Facility; and vi.our ability to recognize performance-based revenue; b.our status as an EGC and our intention to take advantage of accommodations available to EGCs under the JOBS Act; c.our success in retaining or recruiting, or changes required in, our officers key employees or directors, including our ability to increase our headcount as we expand our business following the consummation of the Business Combination; and d.the other estimates and matters described in this Quarterly Reports 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/A filed with theSEC onMay 11, 2021 , our Quarterly Report on From 10-Q filed with theSEC onMay 26, 2021 , our Current Report on Form 8-K filed with theSEC onJuly 8, 2021 and in our other filings with theSEC . 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. Overview 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 27 -------------------------------------------------------------------------------- Table of Contents 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 division as well as opportunities to better connect and cross-sell while we grow and integrate our solutions into one seamless platform. Our one platform can be disaggregated into three different client 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. •Consumer Solutions: 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 COVID-19 Impact The continued global impact of COVID-19 has resulted in various emergency measures to combat the spread of the virus. With the development of variants and increased vaccination rates, the status of ongoing measures varies widely depending on the country and locality. WhileSharecare is an essential business for its customers, the pandemic has not had a significant negative impact to its consolidated financial position, results of operations, and cash flows related to this matter, as a result of the broader economic impact and the prolonged disruption to the economy, customers may be facing liquidity issues and may be slower to pay or altogether withdraw from their commitments; however, the ultimate financial impact related to the pandemic is still unknown. Given the volatility of the circumstances surrounding the pandemic,Sharecare has evaluated potential risks to its business plan. The economic slowdown could delaySharecare's sales objectives for new business for its digital product; the decline in non-urgent medical appointments could lessen the demand for medical record transfers in the ROI business; andBlue Zone communities may see a decrease in spending due to social distancing. 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. Key Factors and Trends Affecting our Operating Performance Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including our success with respect to the following: •Expanding our Footprint. We believe that our current client base represents a small fraction of potential clients that could benefit from our highly differentiated solutions. We will continue to invest in our sales and marketing 28 -------------------------------------------------------------------------------- Table of Contents efforts and leverage our partner relationships to continue to acquire new clients, including individuals, providers, employers, health plans, government organizations, and communities. •Expanding our Existing Client Relationships. We also believe that there is significant opportunity to generate growth by maintaining and expanding our relationships with existing clients, including: •increasing engagement and enrollment of eligible members at 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 provider clients with an opportunity to extend our provider products and services to more than 4,000 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 uniquely 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. 29 -------------------------------------------------------------------------------- Table of Contents Components of Our Results of Operations 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 toSharecare platforms. 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. Consumer solutions revenue is generated mostly through ad sponsorships toSharecare's extensive member database. Costs of Revenue 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, 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, security, product development and share-based 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 expenses exclude any allocation of occupancy expense and depreciation and amortization. We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development of our technology platform. Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period partially due to the timing and extent of our technology and development expenses. General and Administrative Expenses General and administrative expenses include personnel and related expenses for our executive, finance, legal, and human resources departments plus all indirect staff in the divisions not attributable to Sales, Marketing or Product and Technology. They also include professional fees, share-based compensation, and all 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 other costs associated with continuing to grow our business. However, we expect our general and administrative expenses to remain steady as a percentage of our total revenue over the near-term. Our general and 30 -------------------------------------------------------------------------------- Table of Contents administrative expenses may fluctuate as a percentage of our total revenue from period to period partially due to the timing and extent of our general and administrative expenses. Depreciation and Amortization Depreciation and amortization consists primarily of depreciation of fixed assets, amortization of software, amortization of capitalized software development costs and amortization of acquisition-related intangible assets. Interest expense Interest expense primarily relates to interest incurred on our long-term debt and the amortization of debt issuance costs. Other Expense Other expense primarily relates to changes in fair value of contingent consideration and warrant liabilities. Results of Operations Comparison of the Three Months EndedSeptember 30, 2021 and 2020 The following table presents our unaudited Consolidated Statement of Operations for the three-months endedSeptember 30, 2021 and 2020, and the percentage change between the two periods: Three Months Ended September 30, (in thousands) 2021 2020 $ Change % Change Revenue$ 105,618 $ 80,236 $ 25,382 32 % Costs and operating expenses: Costs of revenue (exclusive of amortization and depreciation below) 51,255 36,905 14,350 39 % Sales and marketing 12,492 6,338 6,154 97 % Product and technology 16,334 10,459 5,875 56 % General and administrative 46,307 15,402 30,905 201 % Depreciation and amortization 8,751 6,056 2,695 45 % Total costs and operating expenses 135,139 75,160 59,979 80 % Income (loss) from operations (29,521) 5,076 (34,597) 682 % Other income (expense) Interest income 20 8 12 150 % Interest expense (12,836) (8,102) (4,734) (58) % Loss on extinguishment of debt (1,148) - (1,148) 100 % Other income (expense) (86) 41 (127) 310 % Total other expense (14,050) (8,053) (5,997) (74) % Net loss before taxes and loss from equity method investment (43,571) (2,977) (40,594) (1364) % Income tax (expense) benefit 507 467 40 (9) % Loss from equity method investment - (3,902) 3,902 100 % Net loss (43,064) (6,412)$ (36,652) (572) % Net (loss) income attributable to non-controlling interest in subsidiaries 51 (104) 155 (149) % Net loss attributable to Sharecare, Inc.$ (43,115) $ (6,308) $ (36,807) (583) % 31
-------------------------------------------------------------------------------- Table of Contents Revenue Revenue increased$25.4 million , or 32%, from$80.2 million for the three months endedSeptember 30, 2020 to$105.6 million for the three months endedSeptember 30, 2021 , respectively. Overall, we saw gains from new product lines (digital therapeutics and health security programs), newly acquired product lines as well as organic growth in existing lines for an increase of$32.7 million . Offsetting this growth were negative impacts related to COVID-19 and the expected attrition of one contract related to a previous acquisition, accounting for a combined reduction of$47.5 million . The channel revenue changed as follows: Enterprise channel increased by$16.8 million (from$46.0 million for 2020 to$62.8 million for 2021), the Provider channel increased by$5.0 million (from$19.2 million for 2020 to$24.1 million for 2021) and the Consumer channel increased by$3.6 million (from$15.1 million for 2020 to$18.7 million for 2021). Increases in the Enterprise channel (37%) were attributable to a combination of new product and client gains in the digital, digital therapeutics, health security and community programs, offset by the impact of COVID-19 and expected contract attrition from a previous acquisition. The Provider channel increase (26%) was attributable to continued demand recovery compared to the prior year, along with increased volumes and new customers. The Consumer channel increase (24%) was due to adding new customer brands and increased pharmaceutical advertising spend. Costs of Revenue Costs of revenue increased$14.4 million , or 39%, from$36.9 million for the three months endedSeptember 30, 2020 to$51.3 million for the three months endedSeptember 30, 2021 . The increase was due to increased sales. The percentage increase in costs of revenue was higher than the percentage increase in revenue primarily resulting from increased staffing and growth as the prior period was impacted by COVID-19 related cost reductions. Sales and Marketing Sales and marketing expense increased$6.2 million , or 97%, from$6.3 million for the three months endedSeptember 30, 2020 to$12.5 million for the three months endedSeptember 30, 2021 . New headcount along with return of compensation to pre-COVID-19 levels accounted for$2.6 million of the increase. Variable compensation increased$1.2 million , primarily related to commissions tied to the increasing sales. Consultant expenses of$1.3 million were incurred to advance engagement metrics across our client base and support ramping new business. The remainder of the increase is attributable to non-recurring stock-based compensation and severance expenses of$0.5 million and a sponsorship credit that occurred in the prior period. Product and Technology Product and technology expenses increased$5.9 million , or 56%, from$10.5 million for the three months endedSeptember 30, 2020 to$16.3 million for the three months endedSeptember 30, 2021 . The increase was primarily attributable to new resources related to growth and acquisitions along with platform and security expenses to support additional staff and customers, specifically the new health security programs that started in 2021. General and Administrative General and administrative expense increased$30.9 million , or 201%, from$15.4 million for the three months endedSeptember 30, 2020 to$46.3 million for the three months endedSeptember 30, 2021 . Non-cash stock compensation expense accounted for$9.3 million of the increase. In addition, non-recurring fees increased by$15.4 million , primarily as a result of the Business Combination and our other acquisition activity. The other increases are attributable to additional resources needed to support growth and public company compliance initiatives, along with increased insurance and legal expense tied to being a public company. Depreciation and Amortization Depreciation and amortization increased$2.7 million , or 45%, from$6.1 million for the three months endedSeptember 30, 2020 to$8.8 million for the three months endedSeptember 30, 2021 . The increase was primarily related to acquisition-related intangibles as well as placing platform-related developed software into service. Interest Expense Interest expense increased$4.7 million , from$8.1 million for the three months endedSeptember 30, 2020 to$12.8 million for the three months endedSeptember 30, 2021 . The increase is attributable to the write-off of deferred financing fees 32 -------------------------------------------------------------------------------- Table of Contents on convertible debt of$12.1 million , offset by lower interest expense in the three months endedSeptember 30, 2021 due to the retirement of debt and lower outstanding loan balances. Comparison of the Nine Months EndedSeptember 30, 2021 and 2020 The following table presents our unaudited Consolidated Statement of Operations for the nine-months endedSeptember 30, 2021 and 2020, and the percentage change between the two periods: Nine Months Ended September 30, (in thousands) 2021 2020 $ Change % Change Revenue$ 293,686 $ 240,392 $ 53,294 22 % Costs and operating expenses: Costs of revenue (exclusive of amortization and depreciation below) 144,283 117,153 27,130 23 % Sales and marketing 36,047 24,227 11,820 49 % Product and technology 52,600 31,606 20,994 66 % General and administrative 85,060 53,085 31,975 60 % Depreciation and amortization 22,601 19,103 3,498 18 % Total costs and operating expenses 340,591 245,174 95,417 39 % Loss from operations (46,905) (4,782) (42,123) 881 % Other income (expense) Interest income 49 61 (12) (20) % Interest expense (26,941) (23,525) (3,416) 15 % Loss on extinguishment of debt (1,148) - (1,148) 100 % Other expense (20,815) (270) (20,545) 7609 % Total other expense (48,855) (23,734) (25,121) 106 % Net loss before taxes and loss from equity method investment (95,760) (28,516) (67,244) 236 % Income tax (expense) benefit 520 694 (174) (25) % Loss from equity method investment - (3,902) 3,902 (100) % Net loss$ (95,240) $ (31,724) $ (63,516) 200 % Net (loss) income attributable to non-controlling interest in subsidiaries (31) (372) 341 (92) % Net loss attributable to Sharecare, Inc.$ (95,209) $ (31,352) $ (63,857) 204 % Revenue Revenue increased$53.3 million , or 22%, from$240.4 million for the nine months endedSeptember 30, 2020 to$293.7 million for the nine months endedSeptember 30, 2021 , respectively. Overall, we saw gains from new product lines (digital therapeutics and health security programs) and newly acquired products as well as organic growth in existing lines for an increase of$78.0 million . Offsetting this growth was the negative impact related to COVID-19 and the expected attrition of one contract related to a previous acquisition, accounting for a combined reduction of$24.3 million . The COVID-19 impact is primarily attributable to overall concern about the economy that affected long-term contract decisions. Currency translation fluctuations, mostly from ourBrazil operations, negatively impacted revenues by$0.5 million . The channel revenue changed as follows: Enterprise channel increased by$33.9 million (from$142.4 million for 2020 to$176.4 million for 2021), the Provider channel increased by$6.8 million (from$59.5 million for 2020 to$66.3 million for 2021) and the Consumer channel increased by$12.6 million (from$38.5 million for 2020 to$51.0 million for 2021). Increases in the Enterprise channel (24%) were attributable to a combination of new product and client gains in the digital, digital therapeutics, health security and community programs, offset by the impact of COVID-19 and expected contract attrition from a previous acquisition. The Provider channel increase (11%) was attributable to continued demand recovery compared to the prior year, along with increased volumes and new customers. The Consumer channel increase (33%) was due to adding new customer brands and increased pharmaceutical advertising spend. 33 -------------------------------------------------------------------------------- Table of Contents Costs of Revenue Costs of revenue increased$27.1 million , or 23%, from$117.2 million for the nine months endedSeptember 30, 2020 to$144.3 million for the nine months endedSeptember 30, 2021 . The increase was due to increased sales. The percentage increase in costs of revenue was higher than the percentage increase in revenue primarily resulting from increased staffing and growth as the prior period was impacted by COVID-19 related cost reductions. Sales and Marketing Sales and marketing expense increased$11.8 million , or 49%, from$24.2 million for the nine months endedSeptember 30, 2020 to$36.0 million for the nine months endedSeptember 30, 2021 . The increase was due to multiple factors but primarily related to$6.3 million in higher salaries and commissions as we ramp revenue and sales efforts and$4.2 million consulting expense to advance engagement metrics and provide sales and marketing support for growth and new product roll out. Also contributing to the increase was$0.9 million in non-cash stock option expense and$0.3 million of non-recurring expense related to our transition to being a public company. Product and Technology Product and technology expenses increased$21.0 million , or 66%, from$31.6 million for the nine months endedSeptember 30, 2020 to$52.6 million for the nine months endedSeptember 30, 2021 . The largest variance was non-cash stock compensation expense of$10.8 million for the nine months endedSeptember 30, 2021 , which was, mostly related to the acquisition of doc.ai. The continued investment in product and tech staffing and outside contract services accounted for$6.1 million of the increase, of which$3.6 million is from doc.ai. The remaining increase is related to platform and consulting fees as we ramp new technologies and volume increases related to the revenue ramp. General and Administrative General and administrative expense increased$32.0 million , or 60%, from$53.1 million for the nine months endedSeptember 30, 2020 to$85.1 million for the nine months endedSeptember 30, 2021 . The increase was due mostly to non-recurring costs of becoming a public company and acquisition expenses of$16.6 million and non-cash stock compensation expense of$7.4 million . Staffing increases and business insurance increases, both tied to being a public company accounted for the remainder of the increase. Depreciation and Amortization Depreciation and amortization increased$3.5 million , or 18%, from$19.1 million for the nine months endedSeptember 30, 2020 to$22.6 million for the nine months endedSeptember 30, 2021 . 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 Expense Interest expense increased$3.4 million , from$23.5 million for the nine months endedSeptember 30, 2020 to$26.9 million for the nine months endedSeptember 30, 2021 . The increase is attributable to the write-off of deferred financing fees on convertible debt in connection with its settlement, offset by a reduction in interest expense due to the retirement of debt and lower loan balances during the nine months endedSeptember 30, 2021 . Other Expense Other expense increased$20.5 million , from$0.3 million for the nine months endedSeptember 30, 2020 to$20.8 million for the nine months endedSeptember 30, 2021 . This increase is comprised mostly 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 withU.S. 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 measure, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. In 34 -------------------------------------------------------------------------------- Table of Contents particular, we believe that the use of adjusted EBITDA, adjusted net income (loss), and adjusted earnings (loss) per share (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 withU.S. 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 measure as a tool for comparison. The reconciliations of adjusted EBITDA, adjusted net income (loss), and adjusted EPS to net income (loss), the most directly comparable financial measures stated in accordance withU.S. 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 and to evaluate our performance. We calculate adjusted EBITDA as net income (loss) adjusted to exclude (i) depreciation and amortization, (ii) interest income, (iii) interest expense, (iv) loss on extinguishment of debt, (v) other expense (income) (non-operating), (vi) loss from equity method investment, (vii) income tax (benefit) expense, (viii) share-based compensation, (ix) severance, (x) warrants issued with revenue contracts, and (xi) transaction and closing costs. We do not view the items excluded as representative of our ongoing operations. The following table presents a reconciliation of adjusted EBITDA from the most comparable GAAP measure, net loss, for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net loss$ (43,064) $ (6,412) $ (95,240) $ (31,724) Add: Depreciation and amortization 8,751 6,056 22,601 19,103 Interest income (20) (8) (49) (61) Interest expense 12,836 8,102 26,941 23,525 Loss on extinguishment of debt 1,148 - 1,148 - Other expense (income) 86 (41) 20,815 270 Loss from equity method investments - 3,902 - 3,902 Income tax benefit (507) (467) (520) (694) Share-based compensation 11,130 630 25,517 6,443 Severance 700 506 965 2,303 Warrants issued with revenue contracts(a) 21 91 59 354 Transaction and closing costs 16,822 965 18,844 1,153 Adjusted EBITDA(b)$ 7,903 $ 13,324 $ 21,081 $ 24,574 ____________ (a)Represents the non-cash value of warrants issued to clients for meeting specific revenue thresholds. (b)Includes non-cash amortization associated with contract liabilities recorded in connection with acquired businesses. Adjusted Net Income (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. 35 -------------------------------------------------------------------------------- Table of Contents 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) loss from equity method investments, (v) share-based compensation, (vi) severance, (vii) warrants issued with revenue contracts, (viii) transaction and closing costs, and (ix) the related income tax adjustments. We do not view the items excluded as representative of our ongoing operations. Adjusted EPS 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 (loss), as defined above, divided by the number of weighted average common shares outstanding - basic and diluted. We do not view the items excluded as representative of our ongoing operations. The following table presents a reconciliation of adjusted net income (loss) and adjusted EPS from the most comparable GAAP measure, net loss, for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands , except share numbers and per share amounts): Three Months Ended Nine Months Ended September 30, 2021 September 30, 2021 2021 2020 2021 2020
Net loss attributable to
(6,308)
Add: Amortization of acquired intangible assets (a)
1,425 943 3,653 2,982 Amortization of deferred financing fees 12,135 2,195 15,466 5,616 Change in fair value of warrant liability and contingent consideration 63 30 21,719 302 Loss from equity method investments - 3,902 - 3,902 Share-based compensation 11,130 630 25,517 6,443 Severance 700 506 965 2,303 Warrants issued with revenue contracts 21 91 59 354 Transaction and closing costs 16,822 965 18,844 1,153 Adjusted net income (loss) (b) $ (819) $
2 954
Weighted-average common shares outstanding, basic and diluted 334,982,150 222,927,484 263,558,268 220,150,504 Loss per share$ (0.13) $
(0.03)
Adjusted earnings (loss) per share
$ 0.00 $
0.01
(a)Represents non-cash expenses related to the amortization of intangibles in connection with acquired businesses. (b)The income tax effect of the Company's non-GAAP reconciling items are offset by valuation allowance adjustments of the same amount because the Company is in a full valuation allowance position for all periods presented. Liquidity and Capital Resources We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations and other commitments, with cash flows from operations and other sources of funding. Our ability to expand and grow our business will depend on many factors, including our working capital needs and the evolution of our operating cash flows. We had$325.9 million in cash and cash equivalents as ofSeptember 30, 2021 . Our principal commitments as ofSeptember 30, 2021 , consist of operating leases and purchase commitments. See Note 12 toSharecare's consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 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, 36 -------------------------------------------------------------------------------- Table of Contents i.e., the 12 months from the date of this Quarterly Report on Form 10-Q. Our long-term liquidity needs include cash necessary to support our business growth. 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: Nine Months Ended September 30, (in thousands) 2021 2020 Net cash (used in)/provided by operating activities$ (31,857) $ 9,309 Net cash used in investing activities (97,445) (15,180) Net cash provided by financing activities 432,780 6,091 Operating Activities Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$31.9 million , a decrease of$41.2 million from$9.3 million of cash provided by operating activities for the nine months endedSeptember 30, 2020 . Cash used during this period included the$95.2 million net loss for the nine months endedSeptember 30, 2021 , net of non-cash items and PIK interest payments totaling$74.9 million , and a decrease from changes in operating assets and liabilities of$11.6 million . The total cash used in operating activities includes non-operational acquisition and closing costs associated with becoming a public company of$16.8 million . Cash provided by operations during the prior period included the$31.7 million net loss for the nine months endedSeptember 30, 2020 and$13.1 million cash provided net of non-cash items. This result for the prior period was offset by cash used in changes in operating assets and liabilities of$3.8 million . The operating activity cash change over the prior period of$41.2 million was a function of PIK interest paid as part of the settlement of debt, deal costs associated with becoming a public company that affected net loss and changes in operating assets and liabilities, specifically an increase in accounts receivables offset by an increase in accounts payable and deferred revenue. Accounts receivable increased due to new customers related to health security programs. Accounts payable increased due to Business Combination related expenses. Deferred revenue increased related to new health security program and doc.ai related customers. Investing Activities Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$97.4 million compared to$15.2 million of net cash used in investing activities for the nine months endedSeptember 30, 2020 . The increase in cash outflows was primarily due to cash paid in the acquisitions of doc.ai and CareLinx and cash paid in connection with software development for new products and current product enhancements. Financing Activities Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$432.8 million , primarily due to cash received from the net proceeds from the Business Combination withFalcon Capital Acquisition Corp. of$426.2 million , proceeds from issuance of redeemable convertible preferred stock of$50.0 million , the draw down on our Senior Secured Credit Agreement of$20.0 million and proceeds from exercised common stock options of$3.5 million . Cash provided by financing activities were offset by$66.2 million for the repayment of debt. Net cash provided by financing activities for the nine months endedSeptember 30, 2020 was$6.1 million , which was primarily due to cash received from the draw down on our Senior Secured Credit Agreement (as defined herein), offset by the partial repayment of our outstanding indebtedness. 37 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations There were no material changes to contractual obligations since last presented in our latest annual report except for the Company settling substantially all of its existing indebtedness duringJuly 2021 , totaling$178.4 million in connection with the consummation of the Business Combination. The Company still maintains its Senior Secured Credit Agreement. Financing Arrangements Senior Secured Credit Agreement InMarch 2017 , we refinanced our existing debt through the execution of the Senior Secured Credit Agreement among the Borrowers, the Lenders and the Administrative Agent. The Senior Secured Credit Agreement provides for the Revolving Facility with total commitments of$60.0 million . Availability under the Revolving Facility is generally subject to a borrowing base based on a percentage of applicable eligible receivables. Borrowings under the Revolving Facility generally bear interest at a rate equal to, at the applicable Borrower's option, either (a) a base rate or (b) a rate based on LIBOR, in each case, plus an applicable margin. The applicable margin is based on a fixed charge coverage ratio and ranges from (i) 1.75% to 2.25% forU.S. base rate loans and (ii) 2.75% to 3.25% for LIBOR. The Credit Agreement matures onFebruary 10, 2023 . In connection with the consummation of the Business Combination, LegacySharecare , the other Borrowers, the Lenders and the Administrative Agent, entered into the Sixth Amendment. Pursuant to the Sixth Amendment, the Administrative Agent and Lenders provided certain consents with respect to the consummation of the Business Combination and related transactions and certain amendments were made to the terms of the Senior Secured Credit Agreement to reflect the Business Combination amd related transactions. The Company and certain other subsidiaries of Legacy Sharecare executed joinders to become a party to the Senior Secured Credit Agreement as required by the Sixth Amendment inJuly 2021 . The Senior Secured Credit Agreement contains a number of customary affirmative and negative covenants and we were in compliance with those covenants as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , there were$243 thousand of borrowings outstanding under the Revolving Facility. In connection with the consummation of the Business Combination, we repaid all outstanding amounts under the Senior Secured Credit Agreement. In the future, we may incur additional borrowings under the Senior Secured Credit Agreement. See Note 7 toSharecare's consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity or cash flows. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance withU.S. 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, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the periods presented. We evaluate our significant estimates on an ongoing basis, including, but not limited to, revenue recognition, the valuation of assets and liabilities acquired, and the useful lives of intangible assets acquired in business combinations and the valuation of common stock. We base our estimates on historical experience and various other assumptions that we believe to be 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 could differ from those estimates. 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 38 -------------------------------------------------------------------------------- Table of Contents from revenue. We do not have any contracts that include significant financing fees. We are the principal in all outstanding revenue arrangements. We serve a diverse group of clients. Enterprise 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 care health offerings, and subscriptions toSharecare platforms. Revenue is recognized on a per member per month ("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 up to ten years in length. Contracts with larger employer clients typically have two- to four-year terms. 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. The subscription to theSharecare digital platform also includes services such as marketing to the member population, configuration of the platform to be employer/provider specific and the set-up of challenges and incentives. These services are recognized over time as the services are performed. Any termination clauses may impact the contract duration.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. 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. In the event performance levels are not met by the end of the measurement period, typically one year, some or all of the performance-based fees are required to be refunded. During the settlement process under a contract, which generally occurs six to eight months after the end of a contract year, performance-based fees are reconciled and settled. Prior toJanuary 1, 2019 , performance-related adjustments (including any amounts recorded as revenue that were ultimately refunded), changes in estimates, or data reconciliation differences may have caused recognition or reversal of revenue in a current year that pertained to services provided during a prior year. Performance-related adjustments to revenue were not recognized (to the extent that performance-based services are provided, and the price is not fixed or determinable). Effective with the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), onJanuary 1, 2019 , performance-related revenue is recorded based on the most likely amount to be earned after applying the constraint that a significant reversal of revenue will not occur in future periods. 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 6-12 months. A limited number of contracts provide for certain performance-based fees that cannot be billed until after they are reconciled with the client. Provider 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- 39 -------------------------------------------------------------------------------- Table of Contents related services that assist providers with efficiency and productivity and enhanced patient care. Subscription fees are recognized ratably over the contractual period. Consumer Solutions Revenue Our consumer solutions channel generates revenue mostly through ad sponsorships and content delivery. Content delivery revenue is recognized when the content is delivered to the client and the transaction has met the other criteria listed above. Ad sponsorship revenue is recognized when the contractual page views or impressions are delivered to the client. 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. 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 over 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 Pronouncements See Note 1, toSharecare's consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Emerging Growth Company Accounting Election 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. Item 3.Quantitative and Qualitative Disclosures about Market Risk We have in the past and may in the future be exposed to certain market risks, including interest rate, foreign currency exchange, and financial instrument risks, in the ordinary course of our business. Currently, these risks are not material to our financial condition or results of operations, but they may be in the future. 40
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