ACCOLADE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year endedFebruary 28, 2021 included in the Annual Report on Form 10-K. Our fiscal year ends on the last day of February, and our fiscal quarters end onMay 31 ,August 31 ,November 30 , and the last day of February. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
We provide personalized, technology-enabled solutions that help people better understand, navigate, and utilize the healthcare system and their workplace benefits. Our customers are primarily employers that deploy Accolade solutions in order to provide employees and their families (our "members") a single place to turn for their health, healthcare, and benefits needs. Our innovative platform combines open, cloud-based intelligent technology with multimodal support from a team of empathetic and knowledgeable Accolade Health Assistants and clinicians (including nurses, physician medical directors, and behavioral health specialists). With the completion of our acquisition of PlushCare, we also offer virtual primary care and mental health support directly to consumers along with our enterprise customers. We leverage our integrated capabilities, connectivity with providers and the broader healthcare ecosystem, and longitudinal data to engage across the entire member population, rather than focusing solely on high-cost claimants or those with chronic conditions. Our goal is to build trusted relationships with our members that ultimately position us to deliver personalized recommendations and interventions. We believe that our platform dramatically improves the member experience, encourages better health outcomes, and lowers costs for both our members and our customers.Accolade Total Health and Benefits is our most comprehensive offering and most closely aligns to our "Premier" solution on which the company was founded and from which the majority of our revenues are derived today. Our technology platform has enabled us to unbundle aspects of this comprehensive offering to create two additional standalone offerings: Accolade Total Benefits (focused on member benefits engagement) and Accolade Total Care (focused on guiding members to high-quality, cost-effective providers). In addition, following our acquisition of 2nd.MD inMarch 2021 , we began offering customers expert medical consultation (primarily for high-complexity, high-cost conditions) as a standalone service as well as a capability that can be incorporated into other core offerings. We have further leveraged our technology platform to develop add-on offerings and to integrate acquired solutions that target specific challenges faced by our customers. InSeptember 2021 , we announced new solutions and new naming for the solutions described above. The new solutions - Accolade One and Accolade Care - combine the capabilities of Accolade's historical navigation and advocacy solutions with our acquired primary care, mental health, and expert medical opinion services, augmented by artificial intelligence, machine learning, and data-driven recommendations. The new solutions are in their early stages of implementation with Accolade Care available for customers today and Accolade One scheduled for general availability in calendar year 2022. Additionally, we announced rebranding of our existing solutions to reflect the evolution and maturation of our offering portfolio. With these changes,Accolade Total Health and Benefits, Accolade Total Care, and Accolade Total Benefits have been bundled under the Accolade Advocacy umbrella, and 2nd.MD has been rebranded as Accolade ExpertMD. We were founded in 2007 and launched our initial offering in 2009. We have seen significant growth in recent years since the changes to our executive management team in 2015 and the subsequent investments we have made in 31 Table of Contents product, technology, sales, and distribution. Our customers represent a diversified set of industries, including media, technology, financial services, transportation, energy, and retail. Additionally, we serve consumers directly through our PlushCare solution.
In
InOctober 2020 , we closed a follow-on public offering of 5,750,000 shares of our common stock at an offering price of$38.50 per share, including 750,000 shares issued pursuant to the underwriters' option to purchase additional shares, resulting in aggregate net proceeds to us of$208.0 million , after deducting underwriting discounts and commissions of$12.7 million and net offering expenses of approximately$0.6 million . InMarch 2021 , we acquired 2nd.MD, a leading expert second opinion consultation and health care decision support company based inHouston, Texas . 2nd.MD provides a service that allows members to access board-certified national experts across the country for high-value consultations in a real-time video call or by phone in order to provide the member with a rapid second opinion on their medical condition enabling the member to make more informed decisions regarding significant and high-cost care decisions, such as whether to have surgery or elect to have a specific treatment. Under the terms of the agreement, the Company provided cash consideration of$228.0 million and issued 2,822,242 shares of our common stock. We will issue up to 1,889,441 additional shares of our common stock upon achievement of defined milestones following the closing. InJune 2021 , we acquired PlushCare, a leading provider of virtual primary care and mental health support. The addition of a primary care team will extend our ability to improve clinical health outcomes for members and deliver additional cost savings for employers. Under the terms of the agreement, the Company provided cash consideration of$33.9 million and issued 7,144,393 shares of our common stock. We will issue additional shares of common stock, cash, and restricted stock units equal to up to$70.0 million upon achievement of defined revenue milestones following the closing. InSeptember 2021 , we acquired substantially all the assets ofHealthReveal, Inc. (HealthReveal). HealthReveal is a clinical artificial intelligence company focused on ensuring patients receive optimal, personalized chronic care to preempt adverse outcomes. Under the terms of the agreement, the Company provided 252,808 shares of common stock as consideration. The Company will issue additional shares of common stock valued up to$1.3 million following the closing subject to the resolution of certain matters. For the three months endedAugust 31, 2021 , our total revenue was$73.3 million , representing 99% year-over-year growth compared to total revenue of$36.8 million for the three months endedAugust 31, 2020 . For the six months endedAugust 31, 2021 , our total revenue was$132.8 million , representing 83% year-over-year growth compared to total revenue of$72.7 million for the six months endedAugust 31, 2020 . For the three months endedAugust 31, 2021 and 2020, our net losses were$62.4 million and$15.4 million , respectively. For the six months endedAugust 31, 2021 and 2020, our net losses were$111.1 million and$29.3 million , respectively.
Our Business Model
We provide our solutions primarily to employers that deploy Accolade offerings to our members. We earn revenue from providing personalized health guidance solutions, expert medical opinion services, virtual primary care services, and mental health support to the members of our employer customers' health plans and to members of fully insured plans offered via health insurance companies. Our solutions are priced based on a recurring per-member-per-month (PMPM) fee, typically consisting of both a base fee and a performance-based fee component. As a result, generally, a portion of our potential revenue is variable, subject to our achievement of performance metrics and the realization of savings in healthcare spend by our customers resulting from the utilization of our solutions. We typically achieve a substantial portion of the contractual performance metrics and realization in savings of healthcare spend. We also
provide
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expert medical opinion services, which are typically charged on a PMPM or case rate basis, and virtual primary care and mental health support directly to consumers, which are typically priced on a fee per visit basis.
The primary cost of delivering our service includes the personnel costs of Accolade Health Assistants, clinicians, including registered nurses, physician medical directors, pharmacists, behavioral health specialists, women's health specialists, case management specialists, expert medical opinion providers and virtual primary care physicians, as well as software and tools for telephony, workforce management, business analytics, allocated overhead costs, and other expenses related to delivery and implementation of our solutions. As we support more customers with an increasing number of members over time, we expect that our support costs per member will decline due to economies of scale and improved operational efficiencies driven by continued enhancements of our technology platform and capabilities. We have experienced and expect to continue to achieve operational efficiencies realized from continued enhancements of our technology platform and capabilities. We employ a multipronged go-to-market strategy to increase adoption of our solutions to new and existing customers. We principally sell our solutions through our direct salesforce which is stratified by account size (i.e., strategic (more than 35,000 employees), enterprise (5,000 to 35,000 employees), and mid-market (500 to 5,000 employees)), region, and existing versus prospective customer. Our sales team possesses deep domain expertise in health benefits management and brings substantial experience selling to key decision makers within our current and prospective customer organizations (human resource officers, CFOs, benefits executives, consultants, and brokers). We believe the effectiveness of our sales organization is evidenced by growing adoption of our platform by large strategic customers, recent traction with enterprise and mid-market customers and demonstrated demand for add-on offerings from existing customers. We have chosen to invest significantly in growing our customer base, and plan to continue both adding new customers and expanding our relationships with existing customers, which we believe will allow us to increase margins over time. When a customer renews their contract or purchases additional solutions or enhancements, the value realized from that customer increases because we generally do not incur significant incremental acquisition or implementation costs for the renewal or expansion. We believe that as our customer base grows and a higher percentage of our revenue is attributable to renewals and upsells or cross-sells to existing customers, relative to acquisition of new customers, associated sales and marketing expenses and other upfront costs will decrease as a percentage of revenue. In addition, we have strategically curated our offering portfolio to ensure we have a compelling value proposition at an appropriate price point that resonates with each identified customer segment. Based on our experience, the opportunity to cross-sell is meaningfully enhanced once a customer has been on-boarded onto our platform and has benefited from a measurable and compelling return on their investment. Our customer partnerships team provides strategic insights, point solution recommendations, and day-to-day account support to our customers. They are focused on existing customer retention, cross-sell, and upsell. We maintain relationships with a range of third parties, including brokers, agents, benefits consultants, carriers, third-party administrators, trusted suppliers, and co-marketing and co-selling partners. These third parties provide an important source of referrals for our sales organization. We also selectively form strategic alliances to further drive customer acquisition and adoption of our solutions. We believe the breadth of our go-to-market and distribution strategy enables us to reach customers of nearly every size and across markets. We have demonstrated a consistent track record of product and technology innovation over time as evidenced by continuous improvement of our platform and new offerings. This innovation is driven by feedback we receive from our customers, industry experts, and the market generally. Our technology platform enabled us to unbundle aspects of our core navigation capability to create various offerings for our customers, while integrating capabilities from our recent acquisitions of 2nd.MD and PlushCare to deliver ourPersonalized Healthcare solution that combines our core navigation with expert medical consultations and virtual primary care and mental health support. Our investments in product and technology have been focused on increasing the value we provide via our personalized member health guidance solutions and expanding the market segments we can serve with a portfolio of offerings and associated price points. 33 Table of Contents COVID-19 Update COVID-19 has created uncertainty for Accolade's employees, members, and customers. We consider the impact of the pandemic on our business by evaluating the health of our operations, any changes to our revenue outlook, and the degree to which perceptions of and interest in Accolade solutions have evolved during this unprecedented time. Inmid-March 2020 , we closed our offices and enabled our employees to work remotely using our secure technologies to continue to meet the needs of our customers, their members, and our business. We measure our performance through several key metrics, including but not limited to customer satisfaction, member engagement, and health assistant availability. As gauged by these core performance metrics, service levels have been high, and member engagement and satisfaction have remained strong. To ensure we could address our members' many COVID-19-related concerns, our operations and clinical leaders trained our frontline teams on evidence-based guidelines and continue to equip them with relevant resources to help them ably serve under these exceptional circumstances. While the COVID-19 pandemic has not had a material adverse impact on our financial condition and results of operations to date, the future impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our marketing efforts, and any decreases of workforce or benefits spending by our customers, all of which are uncertain and cannot be predicted. We have a diverse set of customers across a variety of industries. While some have faced headwinds, others have experienced growth, and our membership count from existing customers has remained steady in the aggregate since the start of the calendar year. However, we may experience increased member attrition to the extent our existing customers reduce their respective workforces in response to the current economic conditions. Any layoffs or reductions in employee headcounts by our employer customers would result in a reduction in our base and variable PMPM fees. In addition, our airline customers incurred significant headcount reductions during calendar year 2020. When customer headcount reductions occur, we may not experience the impact of changes to our customers' headcounts immediately because employees that are on furlough or are receiving continued health coverage pursuant to COBRA may still have access to our services during such periods and would be included in our member count. During fiscal 2021, we engaged with our airline customers to act as a partner in helping manage their cash needs during the COVID-19 pandemic, resulting in modified payment terms in fiscal 2021. All payments due from our airline customers as a result of such modifications have been collected. We believe our value proposition now resonates with an even broader audience of employers as they turn their focus to safely reopening their workplaces and managing the ongoing health and well-being of employees and their families. To directly address the former, we developed Accolade COVID Response Care, a solution that allows employers of all sizes to leverage Accolade's platform to support employee education, testing, care plans, contact tracing, and return-to-work clearance. On the latter, we believe that the current disruptions to traditional care consumption have reinforced the need for navigation services, and that projected increases in healthcare costs (due to some combination of COVID-19-related testing and care, complications stemming from neglected non-COVID conditions, pent-up demand for elective services, and strain on individuals' mental health) prompt the need for solutions such as ours that bend the cost curve, and improve health outcomes, by driving good utilization up and wasteful utilization down.
Factors Affecting Our Performance
The following factors have been important to our business and we expect them to impact our business, results of operations, and financial condition in future periods: Growth of Our Customer Base
We believe there is a substantial opportunity to further grow our customer base
in our large and under-penetrated market through our sales and marketing
strategy. Across our existing customer base and as we acquire new customers, we
intend to expand and deepen these relationships. As we build trust through our
proven model, we seek to cross-sell our add-on offerings, such as Trusted
Supplier Program, COVID Response Care and Mental Health Integrated Care. We plan
to continue to invest in sales and marketing in order to grow our customer base
and increase sales to existing customers.
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Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas.
Adoption of Current and Future Solutions
We are constantly innovating to enhance our model and develop new offerings. Our ability to act as a trusted advisor to our members and customers positions us to identify new opportunities for additional offerings that can meet their existing and emerging needs. Our open technology platform also allows us to efficiently add new offerings and applications on top of our existing technology stack, which we have demonstrated with the roll-out of Accolade Total Benefits and Accolade Total Care, as well as our add-on offerings, Accolade Boost, our Trusted Supplier Program, Accolade COVID Response Care, and Mental Health Integrated Care that target specific challenges faced by our customers. We also offer expert medical consultation and medical decision support service, which may be provided as a standalone service or with elements incorporated into our core offerings. We believe that as we expand our customer base and enter into new markets, we will be adept at identifying and deploying innovative new solutions whether developed internally or through acquisitions. InSeptember 2021 , we announced two new solutions - Accolade One and Accolade Care - that combine some or all of the elements of Accolade's historical solutions and the acquired capabilities from 2nd.MD and PlushCare. We expect to begin selling these solutions during the current fiscal year with initial implementations in future years.
Achievement of Performance-Based Revenue
In most of our contracts, a portion of our potential fee is variable, subject to our achievement of performance metrics and the realization of savings in healthcare spend by our customers resulting from the utilization of our solutions and thus we might record higher revenue in some quarters compared to others. Examples of performance metrics included in our customer contracts are achievement of specified member engagement levels, member satisfaction levels, and various operational metrics. Although we have earned over 95% of the aggregate maximum potential revenue under our contracts (measured on the corresponding calendar year basis) in fiscal years 2021 and 2020, our revenue and financial results in the future may vary as a result of our ability to earn this performance-based revenue. In addition, because our customers typically pay both the base PMPM fees and variable PMPM fees in advance on a periodic basis, any required refund as a result of our failure to earn the performance-based revenue could have a negative impact on cash flows.
Investments in Technology
Significant investments in our technology platform have enhanced our capabilities with respect to how we engage with our members and deliver our solutions and care interventions. By leveraging our technology in areas such as machine learning, predictive analytics, and multimodal communication, we believe we can generate more efficiencies in our operating model while simultaneously improving our ability to deliver better health outcomes and lower costs for both our members and our customers. We will continue to invest in our technology platform to empower our Accolade Health Assistants, our clinicians, and our members to further improve and optimize efficiencies in our operating model. However, our investments in our technology platform may be more expensive or take longer to develop than we expect and may not result in operational efficiencies.
Customer Concentration
We have historically relied on a limited number of customers for a significant portion of our total revenue. If we do not retain some or all of those customers, it could have a material negative impact on future results. For the three months endedAugust 31, 2021 , we had no customers that accounted for more than 10% of our total revenue, and for the six months endedAugust 31, 2021 , we had one customer that accounted for more than 10% of our total revenue, with that customer representing 11% of our total revenues. The loss of any of our largest customers, the renegotiation of any of our largest customer contracts or a significant decrease in the employee headcount of our largest customers could adversely affect our results of operations. In the ordinary course of business, we engage in active discussions and renegotiations with our customers in respect to the solutions we provide and the terms of our customer agreements, including our fees. Most of our customer contracts have a three-year term, and some have rights to terminate prior to the end of the term. 35 Table of Contents
Certain Non-GAAP Financial Measures
We use the following non-GAAP financial measures to help us evaluate trends,
establish budgets, measure the effectiveness and efficiency of our operations,
and determine employee incentives.
For the three months ended For the six months ended
August 31, August 31,
2021 2020 2021 2020
(in thousands, except percentages) (in thousands, except percentages)
Adjusted Gross Profit $ 30,008 $ 15,935 $ 53,927 $ 29,699
Adjusted Gross Margin 40.9 % 43.3 % 40.6 % 40.9 % Adjusted EBITDA $ (19,445)$ (8,748) $ (32,249)$ (18,186)
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of revenue, excluding depreciation and amortization, and excluding stock-based compensation. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We expect Adjusted Gross Margin to continue to improve over time to the extent that we are able to gain efficiencies through technology and successfully cross-sell and upsell our current and future offerings. However, our ability to improve Adjusted Gross Margin over time is not guaranteed and will be impacted by the factors affecting our performance discussed above and the risks outlined in the section titled "Risk Factors." We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors, as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other nonrecurring operating expenses.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net loss
adjusted to exclude interest expense (net), income tax expense (benefit),
depreciation and amortization, stock-based compensation, acquisition and
integration-related costs, and change in fair value of contingent consideration.
We believe Adjusted EBITDA provides investors with useful information on
period-to-period performance as evaluated by management and comparison with our
past financial performance. We believe Adjusted EBITDA is useful in evaluating
our operating performance compared to that of other companies in our industry,
as this measure generally eliminates the effects of certain items that may vary
from company to company for reasons unrelated to overall operating performance.
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA have certain
limitations, including that they exclude the impact of certain non-cash charges,
such as depreciation and amortization, whereas underlying assets may need to be
replaced and result in cash capital expenditures, and stock-based compensation
expense, which is a recurring charge. These non-GAAP financial measures may also
not be comparable to similarly titled measures of other companies because they
may not calculate such measures in the same manner, limiting their usefulness as
comparative measures. In evaluating these non-GAAP financial measures, you
should be aware that in the future we expect to incur expenses similar to the
adjustments in this presentation. Our presentation of non-GAAP financial
measures should not be construed as an inference that our future results will be
unaffected by these expenses or any unusual or nonrecurring items. When
evaluating our performance, you should consider these non-GAAP financial
measures alongside other financial performance measures, including the most
directly comparable GAAP measures set forth in the reconciliation tables below
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and our other GAAP results. The following table presents, for the periods
indicated, the calculation of our Adjusted Gross Profit and Adjusted Gross
Margin:
For the three months ended For the six months ended
August 31, August 31,
2021 2020 2021 2020
(in thousands, except percentages) (in thousands, except percentages)
Revenue $ 73,288 $ 36,788 $ 132,815 $ 72,682
Less:
Cost of revenue, excluding depreciation
and amortization (44,334) (21,071) (80,270) (43,310)
Gross profit, excluding depreciation and
amortization 28,954 15,717 52,545 29,372
Add:
Stockbased compensation, cost of revenue 1,054 218 1,382 327 Adjusted Gross Profit $ 30,008$ 15,935 $ 53,927$ 29,699 Gross margin, excluding depreciation and amortization 39.5 % 42.7 % 39.6 % 40.4 % Adjusted Gross Margin 40.9 % 43.3 % 40.6 % 40.9 %
Gross margin, excluding depreciation and amortization, for the three months endedAugust 31, 2021 and 2020, decreased to 39.5% from 42.7%, respectively, and Adjusted Gross Margin for the three months endedAugust 31, 2021 and 2020, decreased to 40.9% from 43.3%, respectively. Gross margin, excluding depreciation and amortization, for the six months endedAugust 31, 2021 and 2020, decreased to 39.6% from 40.4%, respectively, and Adjusted Gross Margin for the six months endedAugust 31, 2021 and 2020, decreased to 40.6% from 40.9%, respectively. The decrease to gross margin and adjusted gross margin for the comparable three and six-month periods is driven primarily by investments in staffing frontline teams for growth, in addition to launching new product offerings such as Mental Health Integrated Care.
The following table presents, for the periods indicated, a reconciliation of our Adjusted EBITDA to our net loss:
For the three months ended For the six months ended
August 31, August 31,
2021 2020 2021 2020
(in thousands) (in thousands)
Net Loss $ (62,364) $ (15,371) $ (111,071) $ (29,331)
Adjusted for:
Interest expense, net 776 2,347 1,394 3,629
Income tax expense (benefit) (12,845) 18 (12,826) 56
Depreciation and amortization 11,021 2,049 19,717 3,977
Stockbased compensation 19,775 2,105 27,450 3,364
Acquisition and
integrationrelated costs 4,517 - 12,897 -
Change in fair value of contingent
consideration 19,686 - 30,146 -
Other expense (income) (11) 104 44 119
Adjusted EBITDA $ (19,445) $ (8,748) $ (32,249) $ (18,186) Basis of Presentation and Components of Revenue and Expenses
We operate our business through a single reportable segment. We operate on a fiscal year ending at the end of February of each year, and our fiscal quarters end onMay 31 ,August 31 ,November 30 , and the last day of February.
Revenue
We earn revenue from providing personalized technology-enabled solutions and
expert medical opinion services to the members of our employer customers' health
plans and to members of fully insured plans offered via health insurance
companies. We also earn revenue from providing virtual primary care services and
mental health support to consumers
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and members of enterprise customer health plans. Our solutions are priced based
on a recurring PMPM fee and frequently include both a base PMPM fee based on
eligible members and a performance-based component. As a result, a portion of
our potential fee is typically variable, subject to our achievement of
performance metrics, the realization of savings in healthcare spend by our
customers resulting from the utilization of our solutions, and the number of
eligible members during the respective period. We also provide expert medical
opinion services, which are typically charged on a PMPM or case rate basis, and
virtual primary care services directly to consumers, which are typically priced
on a fee per visit basis.
Cost of Revenue, Excluding Depreciation and Amortization
Our cost of revenue, excluding depreciation and amortization, consists primarily of personnel costs including salaries, wages, bonuses, stock-based compensation expense and benefits, as well as software and tools for telephony, workforce management, business analytics, allocated overhead costs, and other expenses related to delivery and implementation of our personalized technology-enabled solutions, expert medical opinion services, virtual primary care services,
and mental health support. Operating Expenses
Product and technology. Product and technology expenses include costs to build new offerings, add new features to our existing solutions, and to manage, operate, and ensure the reliability and scalability of our existing technology platform. Product and technology expenses consist of personnel expenses, including salaries, bonuses, stock-based compensation expense, and benefits for employees and contractors for our engineering, product, and design teams, and allocated overhead costs, as well as costs of software and tools for business analytics, data management, and IT applications that are not directly associated with delivery of our solutions to customers. We expect product and technology expenses to increase in absolute dollars but decrease as a percentage of revenue over time.
Sales and marketing. Sales and marketing expenses consist of personnel expenses, including sales commissions for our direct sales force and our market and business development workforce, as well as digital marketing costs, promotional costs, customer conferences, public relations, other marketing events, and allocated overhead costs. Personnel expenses include salaries, bonuses, stock-based compensation expense, and benefits for employees and contractors. We expect sales and marketing expense to increase in absolute dollars but remain stable as a percentage of revenue over time.
General and administrative. General and administrative expenses consist of
personnel expenses and related expenses for our executive, finance and
accounting, human resources, legal, and corporate organizations. Personnel
expenses include salaries, bonuses, stock-based compensation expense, and
benefits for employees and contractors. In addition, general and administrative
expenses include external legal, accounting, and other professional fees, as
well as tools for financial and human capital management, and allocated overhead
costs. We expect general and administrative expenses to increase in absolute
dollars as we incur costs associated with being a public company, but decrease
as a percentage of revenue over time.
Depreciation and amortization. Depreciation and amortization expenses are
primarily attributable to our capital investments and consist of fixed asset
depreciation, amortization of intangibles considered to have definite lives, and
amortization of capitalized internal-use software costs.
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Results of Operations
The following table presents a summary of our consolidated statements of operations for the periods indicated:
For the three months ended For the six months ended
August 31, August 31,
2021 2020 2021 2020
(in thousands) (in thousands)
Revenue $ 73,288 $ 36,788 $ 132,815 $ 72,682
Cost of revenue, excluding depreciation and
amortization(1) 44,334 21,071 80,270 43,310
Operating expenses:
Product and technology(1) 22,512 12,236 38,451 23,606
Sales and marketing(1) 24,009 7,881 38,518 15,196
General and administrative(1) 26,170 6,453 48,172 12,120
Depreciation and amortization 11,021 2,049 19,717 3,977
Change in fair value of contingent
consideration 19,686 - 30,146 -
Total operating expenses 103,398 28,619 175,004 54,899
Loss from operations (74,444) (12,902) (122,459) (25,527)
Interest expense, net (776) (2,347) (1,394) (3,629)
Other income (expense) 11 (104) (44) (119)
Loss before income taxes (75,209) (15,353) (123,897) (29,275)
Income tax benefit (expense) 12,845 (18) 12,826 (56)
Net loss $ (62,364) $ (15,371) $ (111,071) $ (29,331) (1) The stock-based compensation expense included above was as follows:
For the three months ended For the six months ended
August 31, August 31,
2021 2020 2021 2020
(in thousands) (in thousands)
Cost of revenue $ 1,054 $ 218 $ 1,382 $ 327
Product and technology 6,366 718 8,188 1,152
Sales and marketing 4,054 490 5,427 792
General and administrative 8,301 679 12,453 1,093
Total stockbased compensation $ 19,775 $ 2,105 $ 27,450 $ 3,364
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The following table sets forth our consolidated statements of operation data expressed as a percentage of revenue:
For the three months ended For the six months ended
August 31, August 31,
2021 2020 2021 2020
Revenue 100 % 100 % 100 % 100 %
Cost of revenue, excluding depreciation
and amortization 60 % 57 % 60 % 60 %
Operating expenses:
Product and technology 31 % 33 % 29 % 32 %
Sales and marketing 33 % 21 % 29 % 21 %
General and administrative 36 % 18 % 36 % 17 %Depreciation and amortization 15 % 6 % 15 % 5 % Change in fair value of contingent consideration 27 % - % 23 % - % Total operating expenses 141 % 78 % 132 % 76 % Loss from operations (102) % (35) % (92) % (35) % Interest expense, net (1) % (6) % (1) % (5) % Other income (expense) 0 % (0) % (0) % (0) % Loss before income taxes (103) % (42) % (93) % (40) %
Income tax benefit (expense) 18 % (0)
% 10 % (0) % Net loss (85) % (42) % (84) % (40) %
Comparison of Three and Six Months Ended
Revenue
For the three months ended
August 31, Changes
2021 2020 Amount %
(in thousands, except percentages)
Revenue $ 73,288 $ 36,788 $ 36,500 99 %
Revenue increased $36.5 million , or 99%, to $73.3 million for the three months
ended August 31, 2021 , as compared to $36.8 million for the three months ended
August 31, 2020 . The increase was attributable primarily to $12.1 million and
$12.7 million in revenues derived from the 2nd.MD and PlushCare acquisitions,
respectively, along with growth in the number of customers served during such
period, as compared to the prior year's corresponding period.
For the six months ended
August 31, Changes
2021 2020 Amount %
(in thousands, except percentages)
Revenue $ 132,815 $ 72,682 $ 60,133 83 %
Revenue increased $60.1 million , or 83%, to $132.8 million for the six months
ended August 31, 2021 , as compared to $72.7 million for the six months ended
August 31, 2020 . The increase was attributable primarily to $24.0 million and
$12.7 million in revenues derived from the 2nd.MD and PlushCare acquisitions,
respectively, along with growth in the number of customers served during such
period, as compared to the prior year's corresponding period.
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Cost of revenue, excluding depreciation and amortization
For the three months ended
August 31, Changes
2021 2020 Amount %
(in thousands, except percentages)
Cost of revenue, excluding depreciation
and amortization $ 44,334 $ 21,071 $ 23,263 110 %
Cost of revenue, excluding depreciation and amortization increased $23.3
million , or 110%, to $44.3 million for the three months ended August 31, 2021 ,
as compared to $21.1 million for three months ended August 31, 2020 . The
increase was attributable primarily to cost of revenue incurred by 2nd.MD and
PlushCare, which contributed revenues from the acquisition date as of March 3,
2021 and June 9, 2021 , respectively, through August 31, 2021 , as well as an
increase in personnel and related costs to serve the customer base which grew in
the second quarter of fiscal 2022, as compared to the second quarter of fiscal
2021.
For the six months ended
August 31, Changes
2021 2020 Amount %
(in thousands, except percentages)
Cost of revenue, excluding depreciation and
amortization $ 80,270 $ 43,310 $ 36,960 85 %
Cost of revenue, excluding depreciation and amortization increased $37.0
million , or 85%, to $80.3 million for the six months ended August 31, 2021 , as
compared to $43.3 million for six months ended August 31, 2020 . The increase was
attributable primarily to cost of revenue incurred by 2nd.MD and PlushCare,
which contributed revenues from the acquisition date as of March 3, 2021 and
June 9, 2021 , respectively, through August 31, 2021 , as well as an increase in
personnel and related costs to serve the customer base which grew in the first
and second quarters of fiscal 2022, as compared to the first and second quarters
of fiscal 2021.
Operating expenses
For the three months ended
August 31, Changes
2021 2020 Amount %
(in thousands, except percentages)
Operating expenses:
Product and technology $ 22,512 $ 12,236 $ 10,276 84 %
Sales and marketing 24,009 7,881 16,128 205 %
General and administrative 26,170 6,453 19,717 306 %
Depreciation and amortization 11,021 2,049 8,972 438 %
Change in fair value of contingent
consideration 19,686 - 19,686 N/A
Total operating expenses $ 103,398 $ 28,619 $ 74,779 261 %
Product and technology. Product and technology expense increased $10.3
million , or 84%, to $22.5 million for the three months ended August 31, 2021 , as
compared to $12.2 million for the three months ended August 31, 2020 . The
increase was primarily driven by increases in personnel added via the 2nd.MD and
PlushCare acquisitions, along with the addition of personnel in product
development and product management to support the development of new and
existing offerings in connection with the expansion of our business.
Sales and marketing. Sales and marketing expense increased $16.1 million , or
205%, to $24.0 million for the three months ended August 31, 2021 , as compared
to $7.9 million for the three months ended August 31, 2020 . The increase was
primarily driven by increases in personnel added via the 2nd.MD and PlushCare
acquisitions, digital marketing costs associated with customer acquisition spend
related to PlushCare, along with an increase in the size of our direct sales
force, account management, marketing, and supporting functions associated with
the expansion of our business.
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General and administrative. General and administrative expense increased$19.7 million , or 306%, to$26.2 million for the three months endedAugust 31, 2021 , as compared to$6.5 million for the three months endedAugust 31, 2020 . The increase was primarily due to$4.5 million of acquisition and integration-related costs for the 2nd.MD and PlushCare acquisitions, the addition of general and administrative costs from the 2nd.MD and PlushCare businesses, and costs to operate as a public company. Depreciation and amortization. Depreciation and amortization expense increased$9.0 million , or 438%, to$11.0 million for the three months endedAugust 31, 2021 , as compared to$2.0 million for the three months endedAugust 31, 2020 . The increase was primarily due to amortization of intangible assets acquired in the 2nd.MD and PlushCare transactions.
Change in fair value of contingent consideration. This operating expense
represents the change in the fair value of the contingent consideration
liabilities associated with the 2nd.MD and PlushCare acquisitions for the three
and six months ended
For the six months ended
August 31, Changes
2021 2020 Amount %
(in thousands, except percentages)
Operating expenses:
Product and technology $ 38,451 $ 23,606 $ 14,845 63 %
Sales and marketing 38,518 15,196 23,322 153 %
General and administrative 48,172 12,120 36,052 297 %
Depreciation and amortization 19,717 3,977 15,740 396 %
Change in fair value of contingent
consideration 30,146 - 30,146 N/A
Total operating expenses $ 175,004 $ 54,899 $ 120,105 219 %
Product and technology. Product and technology expense increased $14.8
million , or 63%, to $38.5 million for the six months ended August 31, 2021 , as
compared to $23.6 million for the six months ended August 31, 2020 . The increase
was primarily driven by increases in personnel added via the 2nd.MD and
PlushCare acquisitions, along with the addition of personnel in product
development and product management to support the development of new and
existing offerings in connection with the expansion of our business.
Sales and marketing. Sales and marketing expense increased $23.3 million , or
153%, to $38.5 million for the six months ended August 31, 2021 , as compared to
$15.2 million for the six months ended August 31, 2020 . The increase was
primarily driven by increases in personnel added via the 2nd.MD and PlushCare
acquisitions, digital marketing costs associated with customer acquisition spend
related to PlushCare, along with an increase in the size of our direct sales
force, account management, marketing, and supporting functions associated with
the expansion of our business.
General and administrative. General and administrative expense increased
$36.1 million , or 297%, to $48.2 million for the six months ended August 31,
2021 , as compared to $12.1 million for the six months ended August 31, 2020 . The
increase was primarily due to $12.9 million of acquisition and
integration-related costs for the 2nd.MD and PlushCare acquisitions along with
the addition of general and administrative costs from the 2nd.MD and PlushCare
businesses, as well as costs to operate as a public company.
Depreciation and amortization. Depreciation and amortization expense
increased
Change in fair value of contingent consideration. This operating expense
represents the change in the fair value of the contingent consideration
liabilities associated with the 2nd.MD and PlushCare acquisitions for the six
months ended
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Interest expense, net
For the three months ended
August 31, Changes
2021 2020 Amount %
(in thousands, except percentages)
Interest expense, net $ 776 $ 2,347 $ (1,571) (67) %
Interest expense, net decreased $1.6 million , or 67%, to $0.8 million for the
three months ended August 31, 2021 , as compared to $2.3 million for the three
months ended August 31, 2020 . The decrease was primarily due to a decrease in
our Term Loan and 2019 Revolver borrowings during the three months ended August
31, 2021 as compared to the three months ended August 31, 2020 , resulting from
our repayment of the Term Loan and 2019 Revolver borrowings during July 2020 ,
offset by expenses associated with the convertible notes issued during the
first
quarter of fiscal 2022.
For the six months ended
August 31, Changes
2021 2020 Amount %
(in thousands, except percentages)
Interest expense, net $ 1,394 $ 3,629 $ (2,235) (62) %
Interest expense, net decreased $2.2 million , or 62%, to $1.4 million for the
six months ended August 31, 2021 , as compared to $3.6 million for the six months
ended August 31, 2020 . The decrease was primarily due to a decrease in our Term
Loan and 2019 Revolver borrowings during the six months ended August 31, 2021 as
compared to the six months ended August 31, 2020 , resulting from our repayment
of the Term Loan and 2019 Revolver borrowings during July 2020 , offset by
expenses associated with the convertible notes issued during the first quarter
of fiscal 2022.
Liquidity and Capital Resources
We had cash and cash equivalents of$384.0 million as ofAugust 31, 2021 . Our cash equivalents are comprised primarily of money market accounts held at banks andUnited States treasury bills with original maturities of less than 90 days.
Our Debt Arrangements
As ofAugust 31, 2021 , we had$287.5 million in outstanding debt related to the Convertible Senior Notes issued inMarch 2021 . We currently also have a revolving credit facility (2019 Revolver), which we entered into inJuly 2019 . DuringJuly 2020 , we terminated our Term Loan Facility. OnMarch 29, 2021 , we issued an aggregate of$287.5 million principal amount of 0.50% Convertible Senior Notes due 2026 (the Notes), including the exercise in full by the initial purchasers of their option to purchase up to an additional$37.5 million aggregate principal amount of the Notes, pursuant to an Indenture dated as ofMarch 29, 2021 (the Indenture), between us andU.S. Bank National Association , as trustee. The Notes will bear interest at a rate of 0.50% per annum, payable semiannually in arrears onApril 1 andOctober 1 of each year, beginning onOctober 1, 2021 . The Notes will mature onApril 1, 2026 , unless earlier converted, redeemed or repurchased. The Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The 2019 Revolver provides for a senior secured revolving line of credit in the amount of up to$80.0 million , with borrowing availability subject to certain monthly recurring revenue calculations. The interest rate on any outstanding borrowings will be at LIBOR plus 350 basis points or the lending institution's base rate plus 250 basis points, subject to certain floors, and interest payments are to be made in installments of one, two, or three months as chosen by us. We also have an outstanding letter of credit to serve as an office landlord security deposit in the amount of$1.1 million . This letter of credit is secured through the revolving credit facility, thus reducing the capacity of the revolving credit facility to$78.9 million . 43 Table of Contents DuringMarch 2020 , we borrowed the available capacity of$48.7 million to increase our cash position given the uncertainty in the overall business environment due to the COVID-19 pandemic. DuringJuly 2020 , we repaid the 2019 Revolver in full, including all outstanding interest. The 2019 Revolver expires inJuly 2022 . The 2019 Revolver contains a liquidity covenant calculated based on cash on hand plus available borrowings under the 2019 Revolver, a revenue covenant and certain reporting covenants. OnAugust 21, 2020 , we entered into an amendment to the 2019 Revolver which revised the terms of the revenue covenant and imposed minimum LIBOR and Base Rate levels. OnSeptember 11, 2020 , we entered into another amendment to the 2019 Revolver which modified the allocation requirements of the Company's cash to be held at each of the two lenders participating in the 2019 Revolver. OnNovember 6, 2020 , we entered into another amendment to the 2019 Revolver which increased the capacity from$50.0 million to$80.0 million . OnMarch 2, 2021 , we entered into another amendment to the 2019 Revolver in association with the acquisition of 2nd.MD and amended certain revenue covenants. OnMarch 23, 2021 , we entered into another amendment to the 2019 Revolver in association with the convertible senior notes offering. OnMay 26, 2021 , the Company entered into another amendment to the 2019 Revolver in association with the acquisition of PlushCare which modified certain reporting covenants. We were in compliance with all such applicable covenants as ofAugust 31, 2021 , and believe we are in compliance as of the date of this Quarterly Report on Form 10-Q. We do not expect to need to draw on the 2019 Revolver, but our access to draw on the 2019 Revolver could be limited in the future if we do not have enough monthly recurring revenues to cover the borrowing availability calculations. The Term Loan was a secured credit facility that allowed us to borrow up to an aggregate principal amount of$24.5 million , with the total amount of available borrowings subject to certain monthly recurring revenue calculations. Interest on the outstanding balance was payable monthly at a rate of 8.00% per annum, plus 4.50% per annum deferred until the end of the term. The Term Loan was to mature onDecember 31, 2022 . DuringJuly 2020 , we repaid the Term Loan in full, including all outstanding interest and fees, and the Term Loan was terminated.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
For the six months ended
August 31,
2021 2020
(in thousands)
Net cash used in operating activities
(263,802) (1,413)
Net cash provided by financing activities 252,565 213,724
Operating Activities. Net cash used in operating activities increased by $15.3
million to $38.6 million during the six months ended August 31, 2021 from $23.4
million during the six months ended August 31, 2020 , primarily due to higher net
loss as well as changes in accrued compensation, partially offset by changes in
deferred revenue and due to customers along with increased non-cash adjustments
resulting from the acquisitions of 2nd.MD and PlushCare, namely the change in
fair value of contingent consideration, stock-based compensation expense, and
intangible amortization expense. The change in accrued compensation is primarily
due to the cash payout in May 2021 of employee annual bonuses related to the
fiscal year ended February 28, 2021 whereas annual bonuses related to the fiscal
year ended February 29, 2020 were paid in the form of stock options in lieu of
cash.
Investing Activities. Net cash used in investing activities increased by
$262.4 million to $263.8 million during the six months ended August 31, 2021 ,
from $1.4 million during the six months ended August 31, 2020 , primarily due to
cash paid for the acquisitions of 2nd.MD and PlushCare during the six months
ended August 31, 2021 .
Financing Activities. Net cash provided by financing activities increased by
$38.8 million to $252.6 million during the six months ended August 31, 2021 from
$213.7 million during the six months ended August 31, 2020 , primarily
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due to the issuance of the Convertible Senior Notes, partially offset by the
absence of proceeds from our IPO which occurred in the prior year period and the
purchase of capped calls associated with the Convertible Senior Notes.
Contractual Obligations
The following table summarizes our contractual obligations as ofAugust 31, 2021 : Payments due by period Less than More than 1 year Years 2 3 Years 4 5 5 years Total (in thousands)
Operating lease obligations(1)$ 8,370 $ 15,778
$ 13,004 $ 13,029 $ 50,181 Convertible Senior Notes - - 287,500 - 287,500 Interest and fees on debt(2) 1,629 2,875 2,875 - 7,379 Data license in connection with joint development agreement 223 490 130 - 843
(1) Includes the lease of our (a) corporate co-headquarters in
termination rights, (b) corporate co-headquarters in
which expires in
(c) office space in Houston, Texas, which expires in
office space in
certain early termination rights, (e) office space in
which expires in September 2027 , (f) office space in Santa Monica,
California , which expires in February 2023 , and (g) office space in San
Francisco, California , which expires in February 2022 .
(2) Interest on our Convertible Senior Notes is calculated at the applicable
fixed interest rate. Fees on our revolving credit facility are calculated as
25 basis points of the commitment amount, payable on a quarterly basis.
Off-Balance Sheet Arrangements
We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other purposes. We did not have any other off-balance sheet arrangements, except to the extent reflected under "- Contractual Obligations" above and in Notes 2 and 11 to our audited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. Business Combinations and Contingent Consideration was added as a critical accounting policy in our Quarterly Report on Form 10-Q for the period endedMay 31, 2021 . Other than the addition of Business Combinations and Contingent Consideration, there have been no significant changes in our critical accounting policies and estimates during the six months endedAugust 31, 2021 , as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year endedFebruary 28, 2021 filed with theSEC .
Business Combinations and Contingent Consideration
We account for acquisitions in a business combination under theU.S. GAAP business combinations guidance. This accounting requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Any excess purchase consideration over the fair value of the assets acquired and liabilities assumed is recorded as 45 Table of Contents goodwill. The results of acquired businesses are included in our consolidated financial statements from the date of acquisition. Acquisition-related costs are not considered part of the purchase consideration and are accounted for as operating expenses as incurred. We account for contingent consideration in accordance with applicable guidance provided within the business combination accounting rules. As part of our consideration for the 2nd.MD and PlushCare acquisitions, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in our consolidated statements of operations. Determining the fair value of assets acquired and liabilities assumed in a business combination requires significant management judgment and estimates, including determining appropriate discount rates and useful lives, selecting valuation methodologies, and estimating future revenues, expenses, and cash flows. In valuing the contingent consideration, the probability of the occurrence of future events is a critical estimate. We may engage third-party valuation specialists to assist with determining the fair value of assets acquired, liabilities assumed, and contingent consideration. These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the assets acquired and liabilities assumed differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for liabilities assumed.
Recently Issued and Adopted Accounting Pronouncements
For more information on recently issued accounting pronouncements, see Note 2 in the accompanying Notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012. We remain an emerging growth company until the earlier of (i)February 28, 2026 (the last day of the fiscal year following the fifth anniversary of our initial public offering), (ii) the last day of the fiscal year in which we have total annual gross revenue of at least$1.07 billion , (iii) the last day of the fiscal year in which we are deemed to be a "large accelerated filer", as defined in the rules under the Exchange Act, and (iv) the date on which we have issued more than$1.0 billion in non-convertible debt during the prior three-year period. Based on the market value of our common stock held by non-affiliates as ofAugust 31, 2021 , we will meet the conditions to be deemed a "large accelerated filer" as ofFebruary 28, 2022 and will consequently no longer be an emerging growth company as of that date. We have elected to take advantage of certain of the reduced disclosure obligations in this Quarterly Report on Form 10-Q and may elect to take advantage of other reduced reporting requirements in our future filings with theSEC . As a result, the information that we provide to our stockholders may be different from the information you might receive from other public reporting companies in which you hold equity interests. In particular, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act) for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period and, as a result, so long as we remain an emerging growth company, we will not be subject to the same implementation timing of new or revised accounting standards as other public companies that are not emerging growth companies until these standards apply to private companies unless we elect to early adopt as permitted by the relevant guidance for private companies. Based on the closing price of our common stock and the market value of our common stock held by non-affiliates as ofAugust 31, 2021 , we have determined that we will no longer be an emerging growth company as ofFebruary 28, 2022 . As a result, we will no longer be able to take advantage of reduced disclosure and other obligations that are available to emerging growth companies after that date. 46 Table of Contents
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