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Indaba Capital Issues Letter to Tabula Rasa's Independent Directors Regarding the Urgent Need for Management Changes and a Board Refresh
[July 20, 2022]

Indaba Capital Issues Letter to Tabula Rasa's Independent Directors Regarding the Urgent Need for Management Changes and a Board Refresh


Indaba Capital Management L.P. (together with its affiliates, "Indaba" or "we"), which is the largest shareholder of Tabula Rasa HealthCare Inc. (NASDAQ: TRHC) ("Tabula Rasa" or the "Company") with an ownership interest of approximately 19.99% of the Company's outstanding shares, today issued an open letter to the independent members of the Company's Board of Directors (the "Board"): Samira K. Beckwith, Jan Berger, MD, MJ, Dennis K. Helling, PharmD, ScD, Kathy O'Brien, Michael Purcell, Rear Admiral Pamela Schweitzer, PharmD (retired) and A. Gordon Tunstall.

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Independent Directors,

As you know, Indaba is Tabula Rasa's largest shareholder and holds nearly five times the number of shares owned by the current Board. We feel our sizable ownership interest and strong alignment with fellow shareholders position us to help you fix the Company's abysmal corporate governance, dysfunctional boardroom and sustained underperformance. This is why we sought to collaborate with you following the 2022 Annual Meeting of Shareholders, whereat there were resounding "withhold" votes for Chief Executive Officer and Chairman Dr. Calvin H. Knowlton, President and Director Dr. Orsula V. Knowlton and Lead Independent Director A. Gordon Tunstall.1 Unfortunately, our private interactions with you over the past several weeks indicate the Board is far more focused on protecting the Knowltons and Mr. Tunstall than facilitating long-overdue governance improvements sought by shareholders.

Your apparent deference to conflicted insiders and unwillingness to engage in good faith have now forced us to go public with our demands for a management change and meaningful director refreshment. In addition to keeping in place an ineffective husband-and-wife management team, you have tolerated a so-called Lead Independent Director with lengthy ties to the Knowltons. The fact that Mr. Tunstall was a long-serving director of the Knowltons' former business, excelleRx, Inc., should disqualify him from such a role altogether. Fundamentally, we view it as a dereliction of duty for independent directors to overlook such interlocks and enable one of the Knowltons' long-time associates, Mr. Tunstall, to lead them. It is equally alarming that you recently empowered the Knowltons and Mr. Tunstall to drive interactions with us that were intended to rid the Company of conflicts of interest and potential self-dealing.

We seriously question how you - as independent directors, with fiduciary obligations to all shareholders - can uphold the status quo after what has transpired in recent years:

  • Insular Governance Policies - The Company has established and maintained anti-shareholder governance, including a classified Board, multiple executive directors on the Board, no independent Chairman, no ability for shareholders to act by written consent or call special meetings, and a supermajority requirement to adopt, amend or repeal bylaws. These are the hallmarks of a Board that is more committed to entrenchment than value creation.

  • Concerning Interlocks - The Company appears to be overrun by cronyism and nepotism based on the numerous appointments and hires of family members and associates of the Knowltons, including Mr. Tunstall. It is also deeply concerning that one of Mr. Tunstall's affiliates was retained by the Company in 2016 to help it obtain a credit facility. It speaks volumes about Tabula Rasa's corporate culture that a sitting director was able to simultaneously collect Board compensation and have one of his businesses paid by the Company. We believe shareholders are entitled to receive full disclosure regarding the approval process for this related-party transaction.

  • Misalignment with Shareholders - Insiders, including the Knowltons and Mr. Tunstall, have been selling and/or pledging millions of dollars in shares. Notably, Mr. Tunstall appears to have sold approximately $2.5 million in shares since 2019. It is all the more troubling that many of these sales seem to have occurred shortly before or after changes to the Company's guidance.

    We find it equally notable that the Knowltons were recently able to pledge a substantial portion of their shareholdings, despite the Company's insider trading policy that prohibits pledging transactions outside of "unusual circumstances" pre-approved by the Board. The Knowltons seem to have benefited from the forced sale of their pledged shares when the Company's share price was above $13. Unfortunately for shareholders, it appears the Knowltons' sales contributed to a precipitous decline in share price to around $2.60 today. We struggle to understand how you could have approved this pledging arrangement - whether in advance or after the fact - when the resulting forced sales were so likely to have a devastating impact on the Company and the shareholders owed a fiduciary duty.

  • Questionable Disclosures Around a Possible Sale - Based on Indaba's recent communications with the Company's leadership, we believe management may be actively exploring a sale without adequate disclosure or running a proper process. It does not appear that a committee of independent directors has been formed to evaluate strategic alternatives. At the very least, the market should be immediately informed of any potential sale efforts in accordance with the U.S. Securities and Exchange Commission's fair disclosure regulations so the Knowltons are not able to quietly orchestrate a deal that disproportionally benefits them while shares are trading at unprecedentedly low levels. If true, we question why the independent directors would allow management to pursue a questionable sale rather than engage with its largest shareholder on potential governance improvements.

  • Sustained Value Destruction - The Company's total shareholder returns are negative across every relevant time horizon, with its share price down approximately 80% since the 2016 initial public offering and down more than 80% since the Knowltons' initial forced sale of their shares.

  • Ongoing Balance Sheet Deterioration and Misallocation of Capital - The Company has burned more than $250 million of capital in recent years on acquisitions, leading to balance sheet erosion and liquidity issues, only to then realize that many of these businesses must now be sold - often at a loss. We also have concerns about what appears to be excessive and reckless spending on corporate overhead.

  • Operational Mismanagement - We contend the Company has jeopardized its CareVention HealthCare business (the PACE business), which is seeing declining margins due to management's seeming lack of focus.

In light of these issues, we are once again calling on you - the Company's independent directors - to take actions that are in shareholders' best interests. These include:

  1. Terminating the Knowltons from their executive positions in light of their value-destructive actions, highly questionable share pledging and persistent disregard for sound corporate governance.

  2. Demanding the resignations of Dr. Calvin H. Knowlton, who recently received a 48% "withhold" vote, Dr. Orsula V. Knowlton, who recently received a 53% "withhold" vote, and Mr. Tunstall, who recently received a 51% "withhold" vote, in line with the recent recommendation from Institutional Shareholder Services, Inc. We note that the Knowltons will both be required to resign from the Board if they are terminated as officers of the Company.

  3. Publicly committing to de-staggering the Board, maintaining separate Chair and Chief Executive Officer positions and modernizing the Company's overall governance philosophy.

  4. Working with us to appoint to the Board at least two new and independent directors with governance credibility and relevant skillsets, including a principal of Indaba.

  5. Forming a committee entirely comprised of truly independent directors to run a viable and well-disclosed review of strategic alternatives. This committee should be chaired by a principal of Indaba in order to protect against conflicts of interest, instill confidence in shareholders' minds and show credibility to prospective acquirers.

Each of you has a duty to act in the best interests of shareholders - not conflicted insiders - and to act with urgency as the Company remains in a free fall. We believe Tabula Rasa has great potential to produce significantly better results and enhanced value for shareholders if it has the benefit of proper governance and oversight. We expect to promptly hear from a Company representative other than the Knowltons or Mr. Tunstall about resuming a productive dialogue that advances the aforementioned initiatives. If not, we intend to take any actions that we deem appropriate and necessary to hold the Board members accountable and protect shareholders' interests.

Sincerely,





Derek Schrier

Managing Partner
Indaba Capital Management, L.P.

     

Alex Lerner

Partner

Indaba Capital Management, L.P.


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About Indaba Capital

Indaba was founded in 2010 to invest in corporate equity and debt. Based in San Francisco, Indaba manages approximately $1.5 billion in assets. Learn more at www.IndabaCapital.com.

1 These results did not even include votes from Indaba, which now has a nearly 20% ownership position.


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