Accolade(ACCD) - 2023 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements and Risk Factor Summary This section outlines the inherent uncertainties of forward-looking statements and summarizes key business risks - Forward-looking statements are based on current expectations and projections, but actual results may differ materially due to various risks and uncertainties outlined in the report[5] - The company has a history of net losses, anticipates increasing expenses, and may not be able to achieve or maintain profitability[8] - A significant portion of revenue is derived from largest customers; the loss or renegotiation of these contracts could negatively impact results[8] - Limited operating history with current and acquired offerings (e.g., 2nd.MD, PlushCare) makes evaluating current and future business prospects difficult[9] - Business results and financial condition may fluctuate quarterly and annually due to factors like seasonality, performance metrics, and healthcare cost savings[9][10] - Intense competition, failure to effectively manage growth, and inability to attract/retain qualified personnel could adversely affect the business[10][11] - The evolving effects of the COVID-19 pandemic and associated global economic instability may have further adverse effects on operations[11] Part I Financial Information Item 1. Financial Statements (Unaudited) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands): | Metric | Nov 30, 2022 | Feb 28, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $325,637 | $365,853 | | Total current assets | $366,231 | $409,137 | | Goodwill | $278,191 | $577,896 | | Total assets | $913,791 | $1,285,529 | | Total current liabilities | $116,616 | $111,753 | | Loans payable, net | $281,914 | $280,666 | | Total liabilities | $427,838 | $429,735 | | Total stockholders' equity | $485,953 | $855,794 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except share and per share data): | Metric | 3 Months Ended Nov 30, 2022 | 3 Months Ended Nov 30, 2021 | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $90,946 | $83,450 | $264,117 | $216,265 | | Cost of revenue, excluding D&A | $50,412 | $45,156 | $147,857 | $125,426 | | Total operating expenses | $80,916 | $11,748 | $548,587 | $186,752 | | Income (loss) from operations | $(40,382) | $26,546 | $(432,327) | $(95,913) | | Net income (loss) | $(39,872) | $22,503 | $(429,217) | $(88,568) | | Basic Net income (loss) per share | $(0.56) | $0.34 | $(6.07) | $(1.41) | | Diluted Net income (loss) per share | $(0.56) | $0.31 | $(6.07) | $(1.41) | Condensed Consolidated Statements of Stockholders' Equity (Deficit) Changes in Stockholders' Equity (Deficit) (in thousands): | Metric | Feb 28, 2022 | May 31, 2022 | Aug 31, 2022 | Nov 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Common stock amount | $7 | $7 | $7 | $7 | | Additional paid-in capital | $1,350,431 | $1,371,966 | $1,390,296 | $1,409,807 | | Accumulated deficit | $(494,644) | $(837,466) | $(883,989) | $(923,861) | | Total stockholders' equity | $855,794 | $534,507 | $506,314 | $485,953 | - The accumulated deficit significantly increased from $(494.6) million at February 28, 2022, to $(923.9) million at November 30, 2022, primarily due to net losses[23] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands): | Metric | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(38,146) | $(60,066) | | Net cash used in investing activities | $(4,815) | $(263,081) | | Net cash provided by financing activities | $2,745 | $255,245 | | Net decrease in cash and cash equivalents | $(40,216) | $(67,902) | | Cash and cash equivalents, end of period | $325,637 | $365,982 | - Net cash used in operating activities decreased by $21.9 million, from $(60.1) million in the prior year to $(38.1) million for the nine months ended November 30, 2022[25] - Net cash used in investing activities significantly decreased by $258.3 million, from $(263.1) million in the prior year to $(4.8) million, primarily due to lower acquisition-related cash payments in 2022[25] - Net cash provided by financing activities decreased by $252.5 million, from $255.2 million in the prior year to $2.7 million, mainly due to proceeds from Convertible Senior Notes issuance in 2021[25] Notes to Condensed Consolidated Financial Statements (1) Background - Accolade provides personalized, technology-enabled solutions to help people better understand, navigate, and utilize the healthcare system and their workplace benefits, primarily serving employer customers[28] - The company also offers expert medical opinion services and virtual primary care and mental health support directly to consumers and employer customers[28] (2) Basis of Presentation and Summary of Significant Accounting Policies - Accolade's consolidated financial statements are prepared in accordance with U.S. GAAP and include the company's accounts and those of its wholly-owned subsidiaries, including Variable Interest Entities (VIEs) like professional medical corporations (PCs) acquired through PlushCare[30][31][32] - Capitalized internal-use software costs for the three months ended November 30, 2022, were $1.9 million, a significant increase from $263 thousand in the prior year[37] - For the nine months, these costs were $3.4 million, up from $619 thousand[37] - No long-lived asset impairment charges were recorded during the three and nine months ended November 30, 2022 and 2021[38] - Goodwill is subject to an annual impairment test, and a goodwill impairment loss was recorded during the first quarter of fiscal 2023[40][42] - Revenue is recognized when control of promised services is transferred to customers, with the majority of fees considered variable consideration dependent on performance metrics and/or healthcare cost savings[43][46] - The company adopted Topic 842 (Leases) on February 28, 2022, recognizing operating lease right-of-use assets and corresponding liabilities on its consolidated balance sheet[57] (3) Revenue Revenue Disaggregated by Source (in thousands): | Revenue Source | 3 Months Ended Nov 30, 2022 | 3 Months Ended Nov 30, 2021 | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Access fees | $69,965 | $69,063 | $205,968 | $185,968 | | Utilization-based fees | $20,981 | $14,387 | $58,149 | $30,297 | | Total | $90,946 | $83,450 | $264,117 | $216,265 | - Total revenue increased by 9% to $90.9 million for the three months and 22% to $264.1 million for the nine months ended November 30, 2022, driven by growth in customers and the PlushCare acquisition[215][216] - Utilization-based fees showed significant growth, increasing by 46% for the three months and 92% for the nine months ended November 30, 2022[68][215][216] - Capitalized sales commissions were $2.1 million for the three months and $5.6 million for the nine months ended November 30, 2022, amortized over an estimated five-year customer life[72][73] (4) Acquisitions - The acquisition of 2nd.MD in March 2021 involved a total consideration of $420.1 million, resulting in $208.3 million in goodwill[76][85] - The acquisition of PlushCare in June 2021 had a total consideration of $414.0 million, with $365.6 million recognized as goodwill[90][100] - The acquisition of HealthReveal in September 2021 was accounted for as an asset acquisition, with developed technology recorded at $10.0 million[103][104] - Acquisition and integration-related costs for the nine months ended November 30, 2022, were $439 thousand, significantly lower than $13.2 million in the prior year, primarily due to litigation inherited from PlushCare[105] (5) Goodwill and Intangible Assets Changes in Goodwill (in thousands): | Metric | Amount | | :--- | :--- | | Balance, Feb 28, 2022 | $577,896 | | Impairment | $(299,705) | | Balance, Nov 30, 2022 | $278,191 | - A non-cash goodwill impairment charge of $299.7 million was recorded during the first quarter of fiscal 2023 due to sustained decreases in the company's stock price and market capitalization[108] Intangible Assets as of November 30, 2022 (in thousands): | Asset | Gross Value | Accumulated Amortization | Net Carrying Value | Weighted Average Remaining Useful Life (Years) | | :--- | :--- | :--- | :--- | :--- | | Customer relationships | $124,050 | $(13,374) | $110,676 | 18.1 | | Technology | $111,526 | $(39,280) | $72,246 | 3.2 | | Supplier-based network | $25,000 | $(8,750) | $16,250 | 3.3 | | Trade name | $13,700 | $(2,140) | $11,560 | 8.4 | | Non-compete agreement | $9,300 | $(6,458) | $2,842 | 0.8 | | Total | $283,576 | $(70,002) | $213,574 | | - Amortization expense for intangible assets was $10.4 million for the three months and $31.1 million for the nine months ended November 30, 2022[111] (6) Leases - The company has operating leases for offices and certain equipment with remaining terms of up to 8 years, and no finance leases during the reported periods[112] Total Lease Cost (in thousands): | Metric | 3 Months Ended Nov 30, 2022 | 3 Months Ended Nov 30, 2021 | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $1,890 | $1,805 | $5,728 | $5,374 | | Variable lease cost | $642 | $435 | $1,609 | $1,216 | | Total lease cost | $2,532 | $2,240 | $7,337 | $6,590 | - As of November 30, 2022, the weighted-average remaining lease term is 5.5 years, and the weighted-average discount rate is 4.9%[115] (7) Fair Value Measurements Fair Value of Financial Assets (in thousands): | Asset | Level 1 (Nov 30, 2022) | Level 2 (Nov 30, 2022) | Level 3 (Nov 30, 2022) | Fair Value (Nov 30, 2022) | | :--- | :--- | :--- | :--- | :--- | | Money market funds | $147,029 | $— | $— | $147,029 | | United States treasury bills | $— | $— | $— | $— | - The estimated fair value of the convertible senior notes was $206.4 million as of November 30, 2022, classified as Level 2 within the fair value hierarchy[119] (8) Debt Convertible Senior Notes (in thousands): | Metric | Nov 30, 2022 | Feb 28, 2022 | | :--- | :--- | :--- | | Principal | $287,500 | $287,500 | | Unamortized issuance costs | $(5,586) | $(6,834) | | Net carrying amount | $281,914 | $280,666 | - The company issued $287.5 million of 0.50% Convertible Senior Notes due 2026 in March 2021, with an effective interest rate of 1.1%[123][131] - A revolving credit facility (2019 Revolver) provides capacity to borrow up to $80.0 million, with $1.2 million in outstanding letters of credit as of November 30, 2022, reducing available capacity to $78.8 million[135] - The 2019 Revolver term was extended to July 19, 2024, with an automatic extension to July 19, 2025, if the company has at least $200.0 million in consolidated net cash by May 31, 2024[137] (9) Stock-based Compensation Stock-based Compensation Expense (in thousands): | Expense Category | 3 Months Ended Nov 30, 2022 | 3 Months Ended Nov 30, 2021 | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Cost of revenue | $1,247 | $949 | $3,645 | $2,331 | | Product and technology | $5,930 | $5,303 | $19,045 | $13,491 | | Sales and marketing | $4,513 | $3,608 | $12,772 | $9,035 | | General and administrative | $6,216 | $8,517 | $19,347 | $20,970 | | Total stock-based compensation | $17,906 | $18,377 | $54,809 | $45,827 | - Total stock-based compensation expense increased to $54.8 million for the nine months ended November 30, 2022, from $45.8 million in the prior year[141] - Unrecognized compensation expense for stock options is approximately $17.7 million (weighted average period of 1.9 years), for PlushCare stock options is $3.6 million (1.5 years), and for restricted stock units is $71.8 million (2.5 years)[143][147][149] - The Employee Stock Purchase Plan (ESPP) resulted in $938 thousand in compensation expense for the nine months ended November 30, 2022, with employees purchasing 560,345 shares[154][155] (10) Income Taxes - For the nine months ended November 30, 2022, the company recorded an income tax benefit of $(3.6) million, primarily due to the reversal of a deferred tax liability associated with goodwill from the 2nd.MD acquisition[160] - The effective tax rate for the nine months ended November 30, 2022, was 0.8%, compared to 9.7% in the prior year[160] (11) Net Income (Loss) Per Share Attributable to Common Stockholders Net Income (Loss) Per Share Attributable to Common Stockholders (in thousands, except per share data): | Metric | 3 Months Ended Nov 30, 2022 | 3 Months Ended Nov 30, 2021 | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(39,872) | $22,503 | $(429,217) | $(88,568) | | Basic Net income (loss) per share | $(0.56) | $0.34 | $(6.07) | $(1.41) | | Diluted Net income (loss) per share | $(0.56) | $0.31 | $(6.07) | $(1.41) | - Potentially dilutive securities (stock options, RSUs, contingent shares, convertible notes) were excluded from diluted net loss per share for periods with net losses, as their inclusion would be antidilutive[162][164] (12) Commitments and Contingencies - The company had accruals of $3.7 million related to legal matters as of November 30, 2022[165] - A class action complaint (Robbins v. PlushCare, Inc. et al.) against PlushCare alleges violations of California automatic renewal laws; a tentative settlement has been reached, with the majority of liability covered by third-party insurance and indemnification from selling shareholders[166] - Remaining future purchase commitments under an agreement primarily for cloud computing services totaled $34.1 million as of November 30, 2022[170] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations Overview - Accolade provides personalized, technology-enabled solutions for healthcare navigation and workplace benefits, leveraging AI, machine learning, and multimodal support from health assistants and clinicians[174] - The company has evolved its offerings to include Accolade Expert MD, Accolade Care (integrated primary care and mental health), Core and Plus (benefits navigation), and Accolade One (value-based option)[176][178] - Total revenue for the three months ended November 30, 2022, was $90.9 million (9% year-over-year growth), and for the nine months, it was $264.1 million (22% year-over-year growth)[179] - Net loss for the nine months ended November 30, 2022, was $(429.2) million, including a $299.7 million goodwill impairment charge[179] Our Business Model - Revenue is primarily earned from recurring per-member-per-month (PMPM) fees for advocacy solutions, often with a performance-based component, and fee-per-visit or PMPM plus visit fee for virtual primary care and mental health[180] - Primary costs include personnel for health assistants and clinicians, software tools, and allocated overhead, with support costs per member expected to decline due to economies of scale[181] - The go-to-market strategy involves a direct salesforce, strategic alliances, and partnerships with brokers and consultants to drive customer acquisition and cross-selling[182][184][187] - Investments in product and technology focus on enhancing personalized health guidance and expanding market segments, including integrating acquired solutions like 2nd.MD and PlushCare[188] COVID-19 Update - The COVID-19 pandemic has not had a material adverse impact on financial condition and results of operations to date, with high service levels and strong member engagement maintained[190] - The company developed 'Accolade COVID Response Care' to help employers manage safe workplace reopening and address increased healthcare costs and mental health needs[194] - Potential risks include increased member attrition if existing customers reduce their workforces, leading to a reduction in base and variable PMPM fees[191][193] Factors Affecting Our Performance - Growth and retention of the customer base, including cross-selling Accolade ExpertMD and Accolade Care, are key performance drivers, requiring continued investment in sales and marketing[196] - Adoption of current and future solutions, including new integrated offerings like Accolade One and Accolade Care, is crucial for market expansion and meeting customer needs[197] - Achievement of performance-based revenue, which is variable and subject to performance metrics and healthcare cost savings, can cause revenue and financial results to fluctuate[198] - Continued investments in technology, including machine learning and predictive analytics, aim to improve operational efficiencies and health outcomes, though development may be costly or delayed[201] Basis of Presentation and Components of Revenue and Expenses - The company operates as a single reportable segment, with a fiscal year ending in February[202] - Revenue sources include personalized health guidance, expert medical opinion, virtual primary care, and mental health support, with pricing based on recurring PMPM fees or fee-per-visit[203] - Cost of revenue primarily consists of personnel costs for Accolade Health Assistants and clinicians, software tools, and allocated overhead[204] - Operating expenses include Product and Technology, Sales and Marketing, and General and Administrative, all expected to increase in absolute dollars but potentially decrease as a percentage of revenue over time[205][206][208] - Depreciation and amortization are primarily from capital investments and definite-lived intangibles; Goodwill impairment represents charges from impairment testing[209] Results of Operations Consolidated Statements of Operations Data (as a percentage of revenue): | Metric | 3 Months Ended Nov 30, 2022 | 3 Months Ended Nov 30, 2021 | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | 100% | 100% | 100% | 100% | | Cost of revenue, excl. D&A | 55% | 54% | 56% | 58% | | Product and technology | 27% | 27% | 29% | 28% | | Sales and marketing | 28% | 29% | 29% | 29% | | General and administrative | 22% | 26% | 23% | 32% | | Depreciation and amortization | 13% | 13% | 13% | 14% | | Goodwill impairment | —% | —% | 113% | —% | | Change in fair value of contingent consideration | —% | (82)% | —% | (18)% | | Total operating expenses | 89% | 14% | 208% | 86% | | Income (loss) from operations | (44)% | 32% | (164)% | (44)% | | Net income (loss) | (44)% | 27% | (163)% | (41)% | - Revenue increased by 9% to $90.9 million for the three months and 22% to $264.1 million for the nine months ended November 30, 2022, driven by customer growth and the PlushCare acquisition[215][216] - Cost of revenue, excluding depreciation and amortization, increased by 12% to $50.4 million for the three months and 18% to $147.9 million for the nine months, primarily due to increased personnel and third-party service costs[218][219] - Goodwill impairment of $299.7 million was recorded for the nine months ended November 30, 2022[226] - Interest income (expense), net, increased by $1.1 million for the three months and $1.7 million for the nine months, primarily due to higher interest income generated from cash and cash equivalents[227][228] Certain Non-GAAP Financial Measures Adjusted Gross Profit and Adjusted Gross Margin (in thousands, except percentages): | Metric | 3 Months Ended Nov 30, 2022 | 3 Months Ended Nov 30, 2021 | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Adjusted Gross Profit | $41,781 | $39,243 | $120,019 | $93,170 | | Adjusted Gross Margin | 45.9% | 47.0% | 45.4% | 43.1% | Adjusted EBITDA Reconciliation (in thousands): | Metric | 3 Months Ended Nov 30, 2022 | 3 Months Ended Nov 30, 2021 | 9 Months Ended Nov 30, 2022 | 9 Months Ended Nov 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(39,872) | $22,503 | $(429,217) | $(88,568) | | Interest expense (income), net | $(386) | $743 | $484 | $2,137 | | Income tax (benefit) expense | $77 | $3,325 | $(3,573) | $(9,501) | | Depreciation and amortization | $11,602 | $11,250 | $34,749 | $30,967 | | Stock-based compensation | $17,906 | $18,377 | $54,809 | $45,827 | | Acquisition and integration-related costs | $439 | $311 | $439 | $13,208 | | Goodwill impairment | $— | $— | $299,705 | $— | | Change in fair value of contingent consideration | $— | $(68,428) | $— | $(38,282) | | Severance costs | $213 | $— | $3,288 | $— | | Other expense (income) | $(201) | $(25) | $(21) | $19 | | Adjusted EBITDA | $(10,222) | $(11,944) | $(39,337) | $(44,193) | - Adjusted Gross Margin for the nine months ended November 30, 2022, increased to 45.4% from 43.1%, primarily due to higher margins in virtual primary care offerings acquired in fiscal 2022[236] - Adjusted EBITDA improved to $(10.2) million for the three months and $(39.3) million for the nine months ended November 30, 2022, compared to $(11.9) million and $(44.2) million in the prior year periods, respectively[230][238] Liquidity and Capital Resources - Cash and cash equivalents totaled $325.6 million as of November 30, 2022[239] - The company has $287.5 million in outstanding Convertible Senior Notes due 2026 and a revolving credit facility of up to $80.0 million, with $78.8 million available as of November 30, 2022[240][242] - Net cash used in operating activities decreased by $21.9 million to $38.1 million for the nine months ended November 30, 2022[246] - Net cash used in investing activities decreased significantly by $258.3 million to $4.8 million, primarily due to lower acquisition-related cash payments compared to the prior year[247] - Material cash requirements include $287.5 million principal on convertible debt, $36.2 million in operating lease liabilities, and $34.1 million in other purchase obligations (primarily cloud computing services)[248][249] Critical Accounting Policies and Estimates - No significant changes in critical accounting policies and estimates occurred during the nine months ended November 30, 2022, except for a goodwill impairment charge[252] - A $299.7 million non-cash goodwill impairment charge was recorded in the first quarter of fiscal 2023 due to sustained decreases in stock price and market capitalization[254] - The goodwill impairment test reflected a 70% weighting to the income-based approach and 30% to the market-based approach, using an 11% discount rate and revenue multiples between 1.1x and 1.8x[256] - The company assesses long-lived assets for impairment when indicators are present, but no intangible asset impairments were recorded as of May 31, 2022[257][258] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to interest rate and foreign currency exchange risks - The company had $325.6 million in cash and cash equivalents, primarily in money market accounts and short-term U.S. treasury bills, limiting material exposure to changes in the fair value of its investment portfolio due to interest rate changes[261] - Declines in interest rates would reduce future interest income[261] - Foreign currency exchange risk is not currently material to the business or results of operations[262] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and internal financial reporting controls - Management, with the participation of the CEO and CFO, evaluated disclosure controls and procedures as effective at the reasonable assurance level as of November 30, 2022[264] - No material changes in internal control over financial reporting occurred during the period covered by this report[265] - Control systems provide reasonable, not absolute, assurance and are subject to inherent limitations, including human error, collusion, or management override[266] Part II Other Information Item 1. Legal Proceedings This section refers to Note 12 for details on legal proceedings arising in the ordinary course of business - The company is involved in various claims, inquiries, and legal actions arising in the ordinary course of business, with descriptions provided in Note 12 of the financial statements[267] Item 1A. Risk Factors This section outlines significant risks that could adversely affect the company's business and financial condition Risks Related to Our Business and Industry - The company has a history of net losses and anticipates increasing expenses, making future profitability uncertain and potentially requiring additional dilutive financing[270] - Reliance on a significant portion of revenue from largest customers poses a risk; the loss or renegotiation of these contracts (e.g., Comcast termination) could negatively impact results[271][272] - Limited operating history with current and acquired offerings (2nd.MD, PlushCare) makes future prospects difficult to evaluate and increases investment risk[275] - Operating results and financial condition may fluctuate significantly due to factors like customer retention, performance-based revenue achievement, sales cycle length, seasonality, and investments in technology[276][277][279][281][282][283] - Failure to effectively manage growth, organizational change, and attract/retain qualified personnel (Health Assistants, clinicians, tech roles) could harm mission-driven culture and business[284][286] - Intense competition from niche companies, health plans, and consolidating industry players could limit market share and lead to pricing pressures[292][293][294][297][298] - Business growth relies on customer and member growth, which is difficult to predict and affected by external factors like headcount reductions or opt-outs[301][302] - Inability to successfully execute growth initiatives, integrate acquisitions (2nd.MD, PlushCare, HealthReveal), or realize anticipated benefits could divert management attention and disrupt operations[304][305][306][308][309] - Failure to innovate and achieve market acceptance for new offerings, or to maintain high-quality customer support, could harm competitiveness, revenue, and reputation[310][311][321] - Dependence on partnerships and third-party relationships for customer acquisition means failure to maintain or expand these could slow revenue growth[313][314] - Inaccurate market size estimates, loss of senior management, or inability to maintain brand recognition could adversely affect the business[315][316][318] - The evolving COVID-19 pandemic and associated global economic instability may lead to increased absenteeism, reduced corporate spending, delayed sales cycles, and potential employee churn[357][359][360] Risks Related to Governmental Regulation - Changes in the health insurance market, ERISA laws, state insurance laws, or other laws could reduce demand for offerings and harm the business[361][362][363] - Failure to comply with complex healthcare laws (e.g., Anti-Kickback Statute, False Claims Act, corporate practice of medicine) could lead to substantial penalties, fines, and reputational harm[364][365][367][368] - Dependence on relationships with affiliated professional entities for physician services (e.g., PlushCare) exposes the company to risks if these relationships are disrupted or violate state laws prohibiting corporate practice of medicine or fee splitting[369][370][372] - Stringent and evolving U.S. and foreign data privacy and security laws (HIPAA, CAN-SPAM, TCPA, CCPA, GDPR) create significant compliance issues, potential for regulatory actions, litigation, fines, and reputational harm[374][375][376][382][383][388][389] - The FDA may classify technology solutions as medical devices, leading to additional costs and regulatory risks under the Federal Food, Drug, and Cosmetic Act[407][408] - Taxing authorities may assert the company should have collected sales and use taxes, leading to potential liability for past or future sales[409][412] - The ability to use net operating loss carryforwards (NOLs) may be limited by ownership changes (Section 382 of the Code) or regulatory changes, even if profitability is attained[413] Risks Related to our Intellectual Property - Failure to protect or enforce intellectual property rights (patents, trademarks, copyrights, trade secrets) could harm the brand, allow competitors to use technologies, and erode competitive advantage[414][417][418][419][420][422] - Third parties may allege infringement of their intellectual property rights, leading to costly litigation, diversion of resources, and potential requirements to obtain licenses or redesign solutions[424][425][426][427][429] - Use of open source software could require the company to release proprietary source code or license it under unfavorable terms, potentially leading to litigation[430][431] - Restrictions on the ability to obtain or use third-party data (e.g., from health plans, benefits administrators) could harm the business by delaying solution delivery or limiting features[432][433] Risks Related to Ownership of Our Common Stock - Past material weaknesses in internal controls and potential future failures could impair the ability to produce timely and accurate financial statements, leading to restatements, loss of investor confidence, and delisting risk[434][435][436] - Sales of substantial amounts of common stock by existing stockholders, or the perception of such sales, could reduce the stock price[437][438][439] - The company does not intend to pay dividends, so returns depend on stock price appreciation, which is not guaranteed[445][447] - Anti-takeover provisions in charter documents and Delaware law could make acquisitions more difficult, limit stockholder influence, and potentially depress the market price of common stock[447][449] - Exclusive forum provisions in the certificate of incorporation could limit stockholders' ability to choose a favorable judicial forum for disputes[450][451][453] - Issuance of additional capital stock for financings, acquisitions, or incentive plans will dilute existing stockholders' ownership interests[454] Risks Related to Our Debt - Credit agreement restrictions impose significant operating and financial limitations, including minimum liquidity and revenue covenants, which if breached, could lead to acceleration of debt repayment and loss of collateral[456][457] - The company has significant debt ($287.5 million in Convertible Senior Notes) and may incur more, with no guarantee of sufficient cash flow to service it or refinance on favorable terms[458] - Transactions related to Convertible Senior Notes, including potential conversion into common stock, could dilute existing stockholders and encourage short selling, affecting stock value[460][461][464] General Risk Factors - Changes in tax laws or regulations (e.g., Tax Act, CARES Act) could adversely affect business operations, cash flow, and financial performance[465][466] - Natural or man-made disasters, or other events outside reasonable control (e.g., power outages, cyberattacks, public health threats), may significantly disrupt operations[467][468] - Complying with laws and regulations affecting public companies increases costs and demands on management, potentially diverting attention from business operations[469][471] - The trading price of common stock could be volatile due to various factors, including market fluctuations, operating performance, analyst reports, and general economic conditions, leading to potential investment loss[472][474][476] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no unregistered equity sales and no material change in the use of IPO proceeds - No unregistered sales of equity securities occurred during the period[477] - There has been no material change in the planned use of proceeds from the company's IPO, which generated $231.2 million net proceeds in July 2020[479] Item 3. Defaults Upon Senior Securities This section indicates no defaults upon senior securities occurred - No defaults upon senior securities were reported[479] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable - Mine safety disclosures are not applicable to the company[480] Item 5. Other Information This section states there is no other information to disclose - No other information is required to be disclosed[480] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q - The report includes various exhibits such as merger agreements (2nd.MD, PlushCare), amended charter documents, indenture for convertible senior notes, and certifications of principal officers[482]