Accolade(ACCD) - 2021 Q3 - Quarterly Report

FORM 10-Q Filing Information Accolade, Inc. filed its Quarterly Report on Form 10-Q for the period ended November 30, 2020, as a non-accelerated filer and emerging growth company - Accolade, Inc. filed its Quarterly Report on Form 10-Q for the period ended November 30, 2020. The company is incorporated in Delaware and is classified as a non-accelerated filer and an emerging growth company[2] Securities Registered Pursuant to Section 12(b) of the Act | Title of each class | Trading symbol | Name of each exchange on which registered | | :----------------------------------- | :------------- | :---------------------------------------- | | Common Stock, $0.0001 par value per share | ACCD | The Nasdaq Stock Market LLC | - As of December 31, 2020, 55,321,179 shares of the registrant's common stock were outstanding[2] Special Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to risks and uncertainties, with no obligation to update them - This report contains forward-looking statements about Accolade, Inc. and its industry, involving substantial risks and uncertainties. These statements are based on current expectations and projections about future events and trends, and actual results may differ materially due to various factors, including those discussed in the 'Risk Factors' section[6][7][9] - The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the report date, except as required by law[9] PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Accolade, Inc. and its subsidiaries, including the Balance Sheets, Statements of Operations, Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit), Statements of Cash Flows, and accompanying notes. These statements provide a snapshot of the company's financial position, performance, and cash flows for the reported periods Condensed Consolidated Balance Sheets This section presents the unaudited condensed consolidated balance sheets, providing a snapshot of the company's assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (In thousands) | Item | November 30, 2020 | February 29, 2020 | | :---------------------------------------- | :---------------- | :---------------- | | Assets | | | | Cash and cash equivalents | $418,938 | $33,155 | | Total current assets | $444,513 | $48,935 | | Total assets | $467,495 | $73,248 | | Liabilities & Equity | | |\ | Total current liabilities | $73,439 | $69,958 | | Loans payable, net | — | $21,144 | | Total liabilities | $79,208 | $97,021 | | Total stockholders' equity (deficit) | $388,287 | $(256,795) | - Cash and cash equivalents significantly increased from $33.155 million to $418.938 million, primarily due to public offerings[13] - Total assets grew substantially from $73.248 million to $467.495 million[13] - Total stockholders' equity shifted from a deficit of $(256.795) million to a positive $388.287 million, reflecting the impact of public offerings and preferred stock conversion[13] Condensed Consolidated Statements of Operations This section presents the unaudited condensed consolidated statements of operations, detailing the company's revenues, expenses, and net loss for the reported periods Condensed Consolidated Statements of Operations (In thousands, except per share data) | Item | Three months ended Nov 30, 2020 | Three months ended Nov 30, 2019 | Nine months ended Nov 30, 2020 | Nine months ended Nov 30, 2019 | | :---------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $38,444 | $29,652 | $111,126 | $88,066 | | Cost of revenue (excl. D&A) | $22,743 | $17,538 | $66,052 | $51,737 | | Total operating expenses | $32,190 | $29,554 | $87,092 | $83,337 | | Loss from operations | $(16,489) | $(17,440) | $(42,018) | $(47,008) | | Net loss | $(16,595) | $(18,297) | $(45,926) | $(49,226) | | Net loss per share, basic and diluted | $(0.32) | $(3.17) | $(1.50) | $(9.20) | - Revenue increased by 30% for the three months ended November 30, 2020, and by 26% for the nine months ended November 30, 2020, compared to the prior year periods[14] - Net loss decreased for both the three-month and nine-month periods, from $(18.297) million to $(16.595) million and from $(49.226) million to $(45.926) million, respectively[14] - Net loss per share significantly improved from $(3.17) to $(0.32) for the three-month period and from $(9.20) to $(1.50) for the nine-month period, largely due to an increase in weighted-average common shares outstanding following public offerings[14] Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) This section presents the unaudited condensed consolidated statements of convertible preferred stock and stockholders' equity (deficit), illustrating changes in equity components, including preferred stock conversion and public offerings - The company's convertible preferred stock was fully converted into common stock upon the closing of the IPO in July 2020, eliminating preferred stock from the balance sheet[21][73] - Additional paid-in capital increased substantially from $64.071 million at February 29, 2020, to $755.076 million at November 30, 2020, primarily due to proceeds from IPO and follow-on public offerings[21][74] - Accumulated deficit increased from $(320.868) million to $(366.794) million, reflecting ongoing net losses[21] Condensed Consolidated Statements of Cash Flows This section presents the unaudited condensed consolidated statements of cash flows, summarizing the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (In thousands) | Cash Flow Activity | Nine months ended Nov 30, 2020 | Nine months ended Nov 30, 2019 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(35,628) | $(23,983) | | Net cash used in investing activities | $(1,932) | $(2,675) | | Net cash provided by financing activities | $423,343 | $23,611 | | Net increase (decrease) in cash | $385,783 | $(3,047) | | Cash and cash equivalents, end of period | $418,938 | $39,654 | - Net cash used in operating activities increased by $11.6 million, primarily due to changes in accounts receivable and unbilled revenue, partially offset by accrued compensation[24][178] - Net cash provided by financing activities surged to $423.3 million from $23.6 million, driven by net proceeds from public offerings ($439.5 million) and debt borrowings, offset by debt repayments[24][180] - The company experienced a significant net increase in cash and cash equivalents of $385.783 million, ending the period with $418.938 million[24] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements (1) Background This note provides an overview of Accolade, Inc.'s business, recent public offerings, and the current impact of COVID-19 - Accolade, Inc. provides personalized, technology-enabled solutions to help people navigate healthcare and workplace benefits, primarily serving employers across the United States[27] - The company completed its Initial Public Offering (IPO) on July 7, 2020, raising $231.228 million in net proceeds, and a follow-on public offering on October 26, 2020, raising $208.046 million in net proceeds[29][30] - While COVID-19 has caused market disruption, Accolade has not experienced significant financial impact to date, but continues to monitor potential adverse effects on its business and operations[28] (2) Basis of Presentation and Summary of Significant Accounting Policies This note details the accounting principles, consolidation methods, and significant accounting policies applied in the financial statements - The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP and include all wholly-owned subsidiaries, with intercompany balances eliminated[33][34] - The company capitalizes costs for internal-use software development, amortizing them over 3 years. Capitalized costs were $374 thousand for the nine months ended November 30, 2020, compared to $0 in the prior year[35][36] - Acquired technology from the MD Insider acquisition in July 2019 is amortized on a straight-line basis over two years[37] Significant Customer Revenue Concentration | Customer | Three months ended Nov 30, 2020 | Three months ended Nov 30, 2019 | Nine months ended Nov 30, 2020 | Nine months ended Nov 30, 2019 | | :----------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Customer 1 | 17% | 27% | 17% | 27% | | Customer 2 | 10% | 12% | 11% | 12% | | Customer 3 | 10% | 11% | 10% | 11% | | Total | 37% | 50% | 38% | 50% | - The company has significant customer concentration, with three customers accounting for 37% and 38% of total revenue for the three and nine months ended November 30, 2020, respectively[40] - New accounting pronouncements for Leases (ASC 842), Credit Losses (ASC 326), and Internal Use Software (ASU 2018-15) are being evaluated, with ASC 842 and ASU 2018-15 effective for fiscal year ending February 28, 2023 and 2022 respectively, and no material impact expected from ASC 326[43][45][46][47] (3) Revenue This note describes the company's revenue recognition policies, primary revenue streams, and remaining performance obligations - Revenue is primarily earned from personalized health guidance solutions, priced on a recurring per-member-per-month (PMPM) fee, which includes both fixed and variable components based on performance metrics and healthcare cost savings[48] - The company's services are generally considered 'stand ready' performance obligations, with revenue recognized over time based on the number of eligible members[49] Expected Revenue from Remaining Performance Obligations (In thousands) | Fiscal year ending February 28(29) | Amount | | :--------------------------------- | :-------- | | Remainder of 2021 | $42,174 | | 2022 | $126,168 | | 2023 | $46,607 | | 2024 | $14,026 | | Total | $228,975 | - Deferred contract acquisition costs (sales commissions and implementation costs) are capitalized and amortized over an estimated customer life of five years[55][56][60] (4) Acquisition of MD Insider This note details the acquisition of MD Insider, including the purchase price and earnout conditions - On July 31, 2019, Accolade acquired MD Insider (MDI), a provider of machine learning-enabled physician performance transparency, for an aggregate purchase price of $6.488 million, primarily paid through common stock issuance[61] - An earnout of 100,607 additional shares of common stock was contingent on completing a platform solution, which was earned by July 1, 2020, and largely issued by November 30, 2020[61] (5) Fair Value Measurements This note provides information on the fair value of financial assets, primarily cash equivalents, and their classification within the fair value hierarchy Fair Value of Financial Assets (In thousands) | Assets | November 30, 2020 (Level 1) | February 29, 2020 (Level 1) | | :------------------------- | :-------------------------- | :-------------------------- | | Money market funds | $208,286 | $21,332 | | United States Treasury bills | $199,990 | — | | Certificates of deposit | — | $5,000 | - The company's cash equivalents are primarily held in highly liquid Level 1 instruments, such as money market funds and U.S. Treasury bills, indicating low credit risk[39][63] (6) Debt Facility This note outlines the company's debt facilities, including the repayment of the Term Loan and the status of the Revolving Credit Facility - The Term Loan facility, which had an outstanding balance of $24.5 million, was terminated in July 2020, with all outstanding principal, accrued interest, and fees repaid[68][172] - Interest expense for the three months ended November 30, 2020, decreased by 96% to less than $0.1 million due to the Term Loan repayment[169] - The 2019 Revolving Credit Facility provides up to $80 million, with $78.666 million available as of November 30, 2020, after accounting for letters of credit. No amounts were outstanding as of November 30, 2020[69][72][173] - The 2019 Revolver was amended in August, September, and November 2020 to revise revenue covenants, modify cash allocation requirements, and increase capacity[72][176] (7) Convertible Preferred Stock and Stockholders' Equity (Deficit) This note details the conversion of preferred stock and the impact of public offerings on stockholders' equity - All outstanding convertible preferred stock converted into 29,479,521 shares of common stock upon the IPO closing on July 7, 2020, resulting in no preferred stock outstanding[73][74] - The company issued 11,526,134 shares of common stock in its IPO for net proceeds of $231.228 million and an additional 5,750,000 shares in a follow-on offering for net proceeds of $208.046 million[74] (8) Equity-based Compensation and Warrants This note describes the company's equity incentive plans, stock-based compensation expense, and the treatment of warrants - The 2020 Equity Incentive Plan was adopted in July 2020, authorizing grants of up to 4,300,000 shares, with 3,933,889 shares available for future grants as of November 30, 2020[75] Stock-Based Compensation Expense (In thousands) | Category | Three months ended Nov 30, 2020 | Three months ended Nov 30, 2019 | Nine months ended Nov 30, 2020 | Nine months ended Nov 30, 2019 | | :--------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $352 | $75 | $679 | $250 | | Product and technology | $1,060 | $460 | $2,212 | $1,312 | | Sales and marketing | $702 | $340 | $1,494 | $1,162 | | General and administrative | $832 | $689 | $1,925 | $2,171 | | Total stock-based compensation | $2,946 | $1,564 | $6,310 | $4,895 | - Total stock-based compensation expense increased to $2.946 million for the three months and $6.310 million for the nine months ended November 30, 2020, compared to prior year periods[77] - All outstanding common stock warrants were automatically net exercised upon the IPO closing in July 2020, resulting in 1,401,836 shares issued and no warrants outstanding as of November 30, 2020[84] - The 2020 Employee Stock Purchase Plan (ESPP) was adopted in July 2020, allowing eligible employees to purchase common stock at a discount. $651 thousand in compensation expense was recognized for the three and nine months ended November 30, 2020[85][86] (9) Income Taxes This note provides information on income tax expense, the impact of U.S. losses, and the expected effects of the CARES Act - Income tax expense for the three and nine months ended November 30, 2020, was $29 thousand and $85 thousand, respectively, primarily related to local tax in the Czech Republic[92] - The company's U.S. losses did not result in a tax benefit due to a full valuation allowance[92] - The CARES Act is not expected to have a material tax expense or benefit impact on the company in the current or subsequent periods[91] (10) Net Loss Per Share Attributable to Common Stockholders This note details the calculation of net loss per share and the treatment of potentially dilutive securities Net Loss Per Share Attributable to Common Stockholders | Item | Three months ended Nov 30, 2020 | Three months ended Nov 30, 2019 | Nine months ended Nov 30, 2020 | Nine months ended Nov 30, 2019 | | :---------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(16,595) | $(18,297) | $(45,926) | $(49,226) | | Weighted-average common shares outstanding | 51,578,863 | 5,776,478 | 30,635,348 | 5,351,313 | | Net loss per share, basic and diluted | $(0.32) | $(3.17) | $(1.50) | $(9.20) | - All potentially dilutive securities were antidilutive due to net losses in all periods presented[94] Potentially Dilutive Securities Excluded from Diluted EPS (Shares) | Item | November 30, 2020 | November 30, 2019 | | :---------------------------- | :---------------- | :---------------- | | Stock options | 9,303,810 | 9,069,217 | | Unvested restricted stock units | 85,310 | — | | Common stock warrants | — | 317,882 | | Total | 9,389,120 | 9,387,099 | (11) Commitments This note outlines the company's legal claims and settlement agreements in the ordinary course of business - The company is involved in various legal claims in the ordinary course of business, with management believing their ultimate disposition will not materially adversely affect financial position or liquidity[96] - A settlement agreement for $1.1 million related to a class-action suit for unpaid overtime was approved and paid in April 2020[97] (12) Change Healthcare Joint Development Agreement This note describes the joint development and data licensing agreement with Change Healthcare and related equity issuance - In February 2020, Accolade entered into a joint development agreement (JDA) and a five-year data licensing agreement with Change Healthcare to support its Total Care and Provider Services product offerings[99][100] - Accolade issued 251,211 restricted shares of common stock to Change Healthcare, valued at $3.869 million, with a portion vesting immediately and the remainder upon product development milestones[101] - The equity value allocated to the JDA and data licensing agreement ($3.005 million) was capitalized as internally developed software and other assets, amortized over three years[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Accolade's financial condition and results of operations, highlighting key business developments, the impact of COVID-19, factors affecting performance, and a detailed comparison of financial results for the three and nine months ended November 30, 2020 and 2019. It also includes discussions on liquidity, capital resources, contractual obligations, and critical accounting policies Overview This section provides a high-level summary of Accolade's business model, offerings, customer base, and key financial highlights - Accolade provides personalized, technology-enabled solutions to help employees and their families navigate healthcare and workplace benefits, leveraging an open, cloud-based intelligent platform with multimodal support from Health Assistants and clinicians[105] - The company's offerings include Accolade Total Health and Benefits (most comprehensive), Accolade Total Benefits, Accolade Total Care, and add-on offerings like Accolade Boost, Trusted Supplier Program, Accolade COVID Response Care, and Mental Health Integrated Care[106][117] - As of October 19, 2020, Accolade served 94 customers and over 2.0 million members across various industries[107] Key Financial Highlights (In millions) | Metric | Three months ended Nov 30, 2020 | Three months ended Nov 30, 2019 | Nine months ended Nov 30, 2020 | Nine months ended Nov 30, 2019 | | :---------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Revenue | $38.4 | $29.7 | $111.1 | $88.1 | | Net Loss | $(16.6) | $(18.3) | $(45.9) | $(49.2) | - Revenue grew 30% year-over-year for the three months and 26% for the nine months ended November 30, 2020, while net losses decreased in both periods[108] Our Business Model This section details Accolade's revenue model, cost structure, go-to-market strategy, and focus on product and technology innovation - Accolade's revenue model is based on recurring per-member-per-month (PMPM) fees, comprising a base fee and a performance-based component tied to metrics and healthcare cost savings[109] - Primary costs include personnel for Health Assistants and clinicians, software, and allocated overhead. The company expects support costs per member to decline due to economies of scale and technology enhancements[110] - The go-to-market strategy involves a direct salesforce segmented by account size and strategic alliances, such as the partnership with Humana, to drive customer acquisition and adoption[111][116] - Significant investment in product and technology innovation is focused on enhancing personalized health guidance solutions and expanding market segments, leading to continuous platform improvement and new offerings[117] COVID-19 Update This section discusses the company's response to the COVID-19 pandemic, its operational adjustments, and potential future impacts - Accolade transitioned its 1,250 employees to remote work in March 2020, maintaining high service levels and strong member engagement and satisfaction[119] - While the pandemic has not materially impacted financial condition, future impacts are uncertain, with potential risks including increased member attrition due to customer workforce reductions (e.g., airline customers) and modified payment terms[120] - Accolade has served as a critical resource during COVID-19, reaching over 400,000 members with educational resources and assisting over 50,000 with COVID-specific concerns[121] - The company developed 'Accolade COVID Response Care' to help employers with reopening workplaces, including support for education, testing, contact tracing, and return-to-work clearance[123] Factors Affecting Our Performance This section identifies key drivers of Accolade's performance, including customer growth, retention, innovation, and revenue variability - Growth is driven by expanding the customer base and deepening existing relationships through cross-selling add-on offerings like Accolade Boost and COVID Response Care[125] - Customer retention is critical, dependent on delivering measurable outcomes and achieving high member engagement rates (consistently over 50% family engagement in recent fiscal years)[126] - Innovation in current and future solutions, leveraging the open technology platform, is key to meeting evolving customer and member needs and expanding market segments[127][129] - A portion of revenue is variable, subject to achieving performance metrics and healthcare cost savings. While the company has historically earned over 95% of maximum potential revenue, future results may vary[130] - Continued investments in technology, including machine learning and predictive analytics, aim to improve operational efficiencies and health outcomes[131] - Customer concentration remains a risk, with three customers accounting for 37-38% of total revenue for the three and nine months ended November 30, 2020. The loss or renegotiation of contracts with large customers could significantly impact results[132] Certain Non-GAAP Financial Measures This section presents and reconciles non-GAAP financial measures used by management to evaluate the company's operational performance Non-GAAP Financial Measures (In thousands, except percentages) | Metric | Three months ended Nov 30, 2020 | Three months ended Nov 30, 2019 | Nine months ended Nov 30, 2020 | Nine months ended Nov 30, 2019 | | :---------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Adjusted Gross Profit | $16,053 | $12,189 | $45,753 | $36,579 | | Adjusted Gross Margin | 41.8% | 41.1% | 41.2% | 41.5% | | Adjusted EBITDA | $(11,429) | $(13,828) | $(29,618) | $(35,131) | - Adjusted Gross Profit increased by 31.7% for the three months and 25.1% for the nine months ended November 30, 2020[134] - Adjusted Gross Margin increased to 41.8% for the three months ended November 30, 2020 (from 41.1%), driven by personnel cost efficiencies and reduced travel, but decreased to 41.2% for the nine months (from 41.5%) due to incremental costs for customer launches[134][139][141] - Adjusted EBITDA improved, reducing losses from $(13.828) million to $(11.429) million for the three months and from $(35.131) million to $(29.618) million for the nine months ended November 30, 2020[134] - Adjusted Gross Profit and Adjusted EBITDA are non-GAAP measures used by management to evaluate performance, excluding non-cash expenses like depreciation, amortization, and stock-based compensation[135][136] Basis of Presentation and Components of Revenue and Expenses This section outlines the company's reporting segment, fiscal year, and the composition of its revenue and operating expenses - The company operates as a single reportable segment, with a fiscal year ending in February and quarters ending in May, August, and November[144] - Revenue is derived from personalized technology-enabled solutions, primarily through recurring PMPM fees that include both base and performance-based components[145] - Cost of revenue (excluding D&A) includes personnel costs, software, tools, and allocated overhead for solution delivery and implementation[146] - Operating expenses are categorized into Product and technology (expected to increase in absolute dollars but decrease as a percentage of revenue), Sales and marketing (expected to increase in absolute dollars but remain stable as a percentage of revenue), General and administrative (expected to increase in absolute dollars due to public company costs but decrease as a percentage of revenue), and Depreciation and amortization[147][148][149][150][151] Results of Operations This section provides a detailed analysis of Accolade's revenue and expense trends for the reported periods, highlighting key changes and drivers Consolidated Statements of Operations (Percentage of Revenue) | Item | Three months ended Nov 30, 2020 | Three months ended Nov 30, 2019 | Nine months ended Nov 30, 2020 | Nine months ended Nov 30, 2019 | | :---------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | 100% | 100% | 100% | 100% | | Cost of revenue (excl. D&A) | 59% | 59% | 59% | 59% | | Product and technology | 34% | 37% | 33% | 38% | | Sales and marketing | 22% | 27% | 21% | 26% | | General and administrative | 22% | 29% | 18% | 23% | | Depreciation and amortization | 5% | 7% | 5% | 7% | | Total operating expenses | 84% | 100% | 78% | 95% | | Loss from operations | (43)% | (59)% | (38)% | (53)% | | Net loss | (43)% | (62)% | (41)% | (56)% | - Revenue increased by $8.8 million (30%) for the three months and $23.1 million (26%) for the nine months ended November 30, 2020, primarily due to customer base growth[156][157] - Cost of revenue (excluding D&A) increased by $5.2 million (30%) for the three months and $14.3 million (28%) for the nine months, consistent with revenue growth and increased personnel costs to serve a larger customer base[159][160] - Product and technology expenses increased by 18% for the three months and 9% for the nine months, driven by personnel additions for new offerings, partially offset by reduced travel[162][166] - Sales and marketing expenses increased by 9% for the three months and 3% for the nine months, due to growth in the direct sales force and supporting functions, offset by reduced travel[163][167] - General and administrative expenses slightly decreased by 2% for the three months but increased by 2% for the nine months, influenced by reduced hiring/travel expenses, offset by public company insurance and personnel additions[165][168] - Depreciation and amortization expense increased by 4% for the three months but decreased by 5% for the nine months, due to new equipment depreciation and certain software becoming fully depreciated[165][168] - Interest expense, net, decreased by 96% for the three months due to Term Loan repayment but increased by 77% for the nine months due to accelerated deferred financing costs from Term Loan termination and prior debt borrowings[169][170] Liquidity and Capital Resources This section discusses Accolade's cash position, debt facilities, and cash flow activities, emphasizing the impact of recent public offerings - Accolade had $418.9 million in cash and cash equivalents as of November 30, 2020, a significant increase from $33.2 million at February 29, 2020[171][192] - The Term Loan Facility was fully repaid and terminated in July 2020, resulting in no outstanding debt as of November 30, 2020[172] - The 2019 Revolving Credit Facility provides up to $80 million, with $78.7 million available as of November 30, 2020, after accounting for letters of credit. The company repaid $48.7 million borrowed in March 2020 under this facility in July 2020[173][175] - Net cash used in operating activities increased to $35.6 million for the nine months ended November 30, 2020, from $24.0 million in the prior year, mainly due to changes in accounts receivable and accrued compensation[178] - Net cash provided by financing activities dramatically increased to $423.3 million for the nine months, primarily from $439.5 million in net proceeds from IPO and follow-on offerings[180] Contractual Obligations This section details the company's contractual commitments, including operating lease obligations and data license agreements Contractual Obligations as of November 30, 2020 (In thousands) | Type of Obligation | Less than 1 year | Years 2-3 | Years 4-5 | More than 5 years | Total | | :------------------------------------------------------ | :--------------- | :-------- | :-------- | :---------------- | :------ | | Operating lease obligations | $6,559 | $13,155 | $11,666 | $17,190 | $48,570 | | Fees on debt | $118 | — | — | — | $118 | | Data license in connection with joint development agreement | $211 | $468 | $321 | — | $1,000 | - Operating lease obligations primarily relate to corporate co-headquarters and office spaces, with maturities extending up to September 2030[183] Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet arrangements beyond those disclosed in contractual obligations - The company did not have any relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements, other than those reflected in contractual obligations[185] Critical Accounting Policies and Estimates This section notes that there have been no significant changes to critical accounting policies and estimates since the IPO prospectus - There have been no significant changes in critical accounting policies and estimates during the nine months ended November 30, 2020, compared to those described in the IPO prospectus[186] Recently Issued and Adopted Accounting Pronouncements This section refers to Note 2 in the accompanying Notes to condensed consolidated financial statements - For information on recently issued accounting pronouncements, refer to Note 2 in the accompanying Notes to condensed consolidated financial statements[187] Emerging Growth Company Status This section explains Accolade's status as an emerging growth company and the associated reduced disclosure obligations - Accolade is an 'emerging growth company' under the JOBS Act, allowing it to take advantage of reduced disclosure obligations and an extended transition period for complying with new or revised accounting standards[188][191] - The company will remain an emerging growth company until the earliest of February 28, 2026, achieving $1.07 billion in annual revenue, qualifying as a large accelerated filer, or issuing over $1.0 billion in non-convertible debt[188] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, specifically interest rate risk and foreign currency exchange risk, and management's assessment of their potential impact on financial condition - Accolade has minimal exposure to interest rate risk due to the short-term nature of its cash equivalents, which are primarily in money market accounts and U.S. Treasury bills[192] - Foreign currency exchange risk is not currently material to the company's business or results of operations[193] Item 4. Controls and Procedures This section details the company's disclosure controls and procedures and internal control over financial reporting, including management's evaluation of their effectiveness and any changes during the reporting period - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of November 30, 2020[195] - There were no changes in internal control over financial reporting during the period that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[196] - Management acknowledges the inherent limitations of control systems, which can only provide reasonable, not absolute, assurance against errors and fraud[198] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, defaults, and exhibits related to the company's operations and governance Item 1. Legal Proceedings This section states that the company is involved in various legal proceedings in the ordinary course of business, but management believes none will have a material adverse effect on its financial condition or operating results - Accolade is subject to various claims and legal actions in the ordinary course of business, but management does not expect them to have a material adverse effect on the company's financial position or operating results[200] Item 1A. Risk Factors This section outlines significant risks and uncertainties that could materially and adversely affect Accolade's business, results of operations, financial condition, and prospects. These risks span operational, financial, regulatory, intellectual property, and stock ownership aspects Summary of Risk Factors This section provides an overview of the primary risks facing Accolade, including financial performance, customer concentration, and regulatory compliance - Key risks include a history of net losses and anticipated increasing expenses, potential inability to achieve or maintain profitability, and reliance on a significant portion of revenue from a limited number of large customers (e.g., Comcast Cable accounted for 17% of revenue for the nine months ended November 30, 2020)[202] - Other risks involve a limited operating history with current offerings, fluctuating quarterly/annual results due to seasonality and performance-based revenue, long and unpredictable sales cycles, and challenges in managing growth and organizational change[203][204][205] - The COVID-19 pandemic may significantly disrupt operations, and failure to comply with healthcare laws and regulations could lead to substantial penalties. The use of PII and PHI is subject to strict privacy and security regulations[205][206] Risks Related to Our Business and Industry This section details operational and industry-specific risks, such as profitability challenges, customer concentration, and competitive pressures - Accolade has a history of net losses and an accumulated deficit of $366.8 million as of November 30, 2020, and expects increased expenses for growth and public company operations, making future profitability uncertain[208] - The company's revenue is highly concentrated, with its four largest customers comprising 59% of revenue for fiscal year ended February 29, 2020, and Comcast Cable alone accounting for 17% for the nine months ended November 30, 2020. Loss or renegotiation of these contracts could severely impact results[210] - The COVID-19 pandemic poses risks of increased member attrition due to customer workforce reductions (e.g., airline industry), delayed sales cycles, and potential failure to meet performance metrics due to lower healthcare utilization[210][293] - The market for technology-enabled healthcare solutions is competitive and rapidly evolving. Failure to innovate, retain customers, or manage growth effectively could harm the business[233][249][221] - The company relies on its senior management team and qualified personnel (Health Assistants, clinicians, product/tech roles). Difficulty in attracting or retaining these individuals, or managing growth, could adversely affect operations and culture[225][226][255] - Dependence on Internet infrastructure, third-party data centers (AWS, Google Cloud), and call centers means any failures or interruptions could disrupt services, damage reputation, and lead to liabilities[288][289][290] - The company faces litigation risks, including claims related to faulty administrative/clinical decisions, data inaccuracies, or new offerings like Accolade COVID Response Care, which could result in substantial costs and reputational harm[271][282][283][284] Risks Related to Governmental Regulation This section outlines risks associated with healthcare laws, privacy regulations, and potential classification of solutions as medical devices - Changes in health insurance market, ERISA, or state insurance laws, including proposals for single-payer systems or changes to the Affordable Care Act, could reduce demand for Accolade's offerings[294][295][324] - Non-compliance with complex healthcare laws (HIPAA, Anti-Kickback Statute, False Claims Act, state laws) could lead to substantial penalties, fines, and reputational damage[296][297][299][304] - The use and disclosure of Protected Health Information (PHI) and Personally Identifiable Information (PII) are subject to HIPAA, GDPR, CCPA, and other privacy regulations. Failure to comply or adequately secure data could result in significant liability, fines (e.g., up to 20 million Euros or 4% of global revenue under GDPR), and reputational harm[305][306][310][312][313][317] - The employment of nurses, physician medical directors, and other clinicians may expose the company to state licensing and corporate practice of medicine risks, potentially leading to fines or operational changes[320][322][323] - Outbound engagement techniques (calls, digital outreach) may face claims of non-compliance with HIPAA or federal marketing laws like TCPA, potentially leading to penalties or contract invalidation[329] - There is a risk that Accolade's technology solutions, particularly decision support software with machine learning, could be classified as medical devices under the FDCA, subjecting the company to extensive FDA regulation and associated costs/risks[331][334] - Taxing authorities may assert that the company should have collected sales and use taxes, potentially leading to assessments, penalties, and increased costs[335] - The company's ability to use net operating loss carryforwards (NOLs) may be limited by ownership changes (Section 382) or regulatory changes (e.g., California's suspension of NOL use), even if profitability is achieved[336] Risks Related to our Intellectual Property This section addresses risks concerning the protection of intellectual property, potential infringement claims, and reliance on third-party data - Failure to adequately protect intellectual property (processes, algorithms, software, trademarks, patents) could harm Accolade's brand, competitive advantage, and ability to achieve profitability[338][339] - Intellectual property protection is expensive and not guaranteed in all jurisdictions. Agreements with employees and third parties may be breached, and independent development of similar IP by others is a risk[340][341][342] - Third parties may allege infringement of their intellectual property rights, leading to costly litigation, diversion of resources, potential injunctions, or the need to obtain expensive licenses or redesign solutions[349][351][354][355] - The use of open-source software carries risks, including potential requirements to release proprietary source code or face litigation if license terms are misinterpreted or violated[356][357] - Restrictions on obtaining or using third-party data (from health plans, benefits administrators, etc.) could harm the business by delaying solution delivery, increasing costs, or limiting features[358][360][361] Risks Related to Ownership of Our Common Stock This section covers risks for common stockholders, including market volatility, dilution, and anti-takeover provisions - As an 'emerging growth company,' Accolade's reduced disclosure requirements may make its common stock less attractive to investors, potentially leading to a less active trading market and higher stock price volatility[362][363] - Failure to maintain effective disclosure controls and internal control over financial reporting could impair the ability to produce timely and accurate financial statements, lead to restatements, and negatively impact investor confidence and stock price[364][366][367] - Sales of substantial amounts of common stock by existing stockholders (e.g., after lock-up expiration) could adversely affect the market price[368][369][371] - The credit agreement contains restrictive covenants (e.g., minimum liquidity, revenue covenants) that may limit business operations. A breach could lead to accelerated debt repayment and impact financial stability[372] - Executive officers, directors, and 5%+ stockholders collectively own approximately 41.2% of outstanding common stock, giving them substantial control over company matters and potentially limiting other stockholders' influence[373][374] - The company does not intend to pay dividends, so investment return depends on stock price appreciation. Future equity or debt financings may dilute stockholders or impose additional restrictive covenants[379][380][378] - Anti-takeover provisions in charter documents and Delaware law could make acquisitions more difficult and limit stockholders' ability to influence management or receive a premium for their shares[381][385] - Exclusive forum provisions in the certificate of incorporation may limit stockholders' ability to choose a favorable judicial forum for disputes, potentially discouraging lawsuits[386][388] - Future issuance of additional capital stock for financings, acquisitions, or incentive plans will dilute existing stockholders' ownership interests[389] General Risk Factors This section discusses broader risks such as changes in tax laws, natural disasters, and the costs of public company compliance - Changes in tax laws or regulations (e.g., Tax Act, CARES Act) could adversely affect the business, cash flow, and financial results, including the value of deferred tax assets and future tax expenses[390][391] - Natural or man-made disasters, or other events outside reasonable control (e.g., power outages, cyberattacks, public health threats), could disrupt operations and negatively impact the business and reputation[392][394] - Complying with laws and regulations for public companies increases legal, accounting, and financial compliance costs, strains resources, and diverts management attention, potentially harming business and financial condition[394][395] - The trading price of common stock could be volatile due to various factors, including market fluctuations, operating performance, analyst reports, and general economic conditions, potentially leading to investment losses[396][398][399] - Negative or inaccurate research reports from securities or industry analysts could cause the share price and trading volume to decline[401][402] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - Not applicable for unregistered sales of equity securities and use of proceeds[403] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities[404] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Not applicable for mine safety disclosures[404] Item 5. Other Information This section indicates that there is no other information to report - No other information to report[404] Item 6. Exhibits This section lists the exhibits filed or furnished with the Quarterly Report on Form 10-Q, including corporate governance documents, credit agreement amendments, and certifications - The exhibit index includes the Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, amendments to the Credit Agreement, and certifications from the Principal Executive Officer and Principal Financial Officer[405] SIGNATURES This section confirms the official signing of the report by the company's principal executive and financial officers - The report was duly signed on January 7, 2021, by Rajeev Singh, Chief Executive Officer and Director, and Stephen Barnes, Chief Financial Officer[411]