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, 2022 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. We also offer expert medical opinion services to employer customers and virtual primary care and mental health support, both directly to consumers and to employer customers. Our innovative platform combines open, cloud-based intelligent technology with multimodal support from a team of empathetic and knowledgeableAccolade Health Assistants and 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. 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 has historically been 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 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). 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. Following our acquisition of PlushCare inJune 2021 , we began offering virtual primary care and mental health services directly to consumers and commercial customers. 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. Additionally, we announced new solution bundles incorporating all of our existing solutions to reflect the evolution and maturation of our offering portfolio. With these changes, our current offerings include:
Accolade Expert MD - Expert medical consultations that connect patients to
? highly qualified condition-specific specialists for both adult and pediatric
care
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? Accolade Care - Integrated primary care and mental health support
Core and Plus - A benefits navigation and care solution designed to work with
our customers' existing benefits ecosystem, incorporating elements of all
Accolade solutions including Advocacy, Accolade Expert MD, Accolade Care, and
? the Accolade partner ecosystem. Different offering configurations may also
include member services, provider services, and an expanded set of clinical
programs that address case and disease management to maximize member engagement
and return on investment
Accolade One - A value-based option that includes all of the Accolade solutions
? and the Accolade partner ecosystem with a pricing structure that includes a
higher portion of revenues associated with outcomes-based measures
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 product, technology, sales, and distribution. As ofFebruary 28, 2022 , we had over 600 employer customers comprising more than 10 million members. Our customers represent a diversified set of industries, including media, technology, financial services, transportation, energy, and retail. Additionally, as ofFebruary 28, 2022 , we had more than 100,000 consumers subscribed to virtual primary care services through our PlushCare solution. For the three months endedNovember 30, 2022 , our total revenue was$90.9 million , representing 9% year-over-year growth compared to total revenue of$83.5 million for the three months endedNovember 30, 2021 . For the nine months endedNovember 30, 2022 , our total revenue was$264.1 million , representing 22% year-over-year growth compared to total revenue of$216.3 million for the nine months endedNovember 30, 2022 . For the three months endedNovember 30, 2022 and 2021, our net income (loss) was$(39.9) million and$22.5 million , respectively. For the nine months endedNovember 30, 2022 and 2021, our net income (loss) was$(429.2) million and$(88.6) million , respectively. Net loss for the nine months endedNovember 30, 2022 included a goodwill impairment charge of$299.7 million .
Our Business Model
We provide our solutions primarily to employers that deploy Accolade offerings to our members and to consumers who directly purchase our PlushCare virtual primary care services. 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 advocacy 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 expert medical opinion services, which are typically charged on a PMPM or case rate basis, and virtual primary care and mental health support, which are typically priced on a fee per visit basis for consumers and a visit fee basis or PMPM plus visit fee basis for employer customers. The primary cost of delivering our service includes the personnel costs of Accolade Health Assistants and 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
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(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 success 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
has enabled us to unbundle aspects of our core navigation capability to create
various offerings for our customers, while integrating capabilities from our
recent acquisitions to deliver our Personalized 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.
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. 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
ongoing COVID-19 pandemic 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. We may experience increased member
attrition to the extent our existing customers reduce their respective
workforces in response
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to changes in 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. 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.
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 and Retention 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 Accolade ExpertMD and Accolade Care solutions as well as Accolade partner ecosystem programs. We plan to continue to invest in sales and marketing in order to grow our customer base and increase sales to existing customers. 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 and integrate new offerings and applications on top of our existing technology stack that target specific challenges faced by our customers. Our open technology platform is instrumental for integration of the capabilities acquired through our acquisitions of 2nd.MD and PlushCare. 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. The new solutions are in their early stages of implementation, with initial customer launches inJanuary 2022 .
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 90% of the
aggregate maximum potential revenue under our contracts (measured on the
corresponding calendar year basis) in fiscal years 2022 and 2021, 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
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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.
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 health guidance solutions (advocacy), expert medical opinion services, virtual primary care services, and mental health support 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 services directly to consumers. Our advocacy 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. Our expert medical opinion services are typically charged on a PMPM or case rate basis, and our virtual primary care and mental health support services are typically priced on a fee per visit basis for consumers and a visit fee basis or PMPM plus visit fee basis for employer customers.
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
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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 nine months ended
November 30, November 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Revenue $ 90,946 $ 83,450 $ 264,117 $ 216,265
Cost of revenue, excluding depreciation and
amortization(1) 50,412 45,156 147,857 125,426
Operating expenses:
Product and technology(1) 24,254 22,846 77,265 61,297
Sales and marketing(1) 25,023 24,616 75,573 63,134
General and administrative(1) 20,037 21,464 61,295 69,636
Depreciation and amortization 11,602 11,250 34,749 30,967
Goodwill impairment - - 299,705 -
Change in fair value of contingent
consideration - (68,428) - (38,282)
Total operating expenses 80,916 11,748 548,587 186,752
Income (loss) from operations (40,382) 26,546 (432,327) (95,913)
Interest income (expense), net 386 (743) (484) (2,137)
Other income (expense) 201 25 21 (19)
Income (loss) before income taxes (39,795) 25,828 (432,790) (98,069)
Income tax benefit (expense) (77) (3,325) 3,573 9,501
Net income (loss) $ (39,872) $ 22,503 $ (429,217) $ (88,568) (1) The stock-based compensation expense included above was as follows:
For the three months ended For the nine months ended
November 30, November 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Cost of revenue $ 1,247 $ 949 $ 3,645 $ 2,331
Product and technology 5,930 5,303 19,045 13,491
Sales and marketing 4,513 3,608 12,772 9,035
General and administrative 6,216 8,517 19,347 20,970Total stockbased compensation$ 17,906 $ 18,377
$ 54,809 $ 45,827 40 Table of Contents
The following table sets forth our consolidated statements of operation data expressed as a percentage of revenue:
For the three months ended For the nine months ended
November 30, November 30,
2022 2021 2022 2021Revenue 100 % 100 % 100 % 100 % Cost of revenue, excluding depreciation and amortization 55 % 54 % 56 % 58 % Operating expenses: Product and technology 27 % 27 % 29 % 28 % Sales and marketing 28 % 29 % 29 % 29 % General and administrative 22 % 26 % 23 % 32 % Depreciation and amortization 13 % 13 % 13 % 14 % Goodwill impairment - % - % 113 % - % Change in fair value of contingent consideration - % (82) % - % (18) % Total operating expenses 89 % 14 % 208 % 86 % Income (loss) from operations (44) % 32 % (164) % (44) % Interest income (expense), net 0 % (1) % (0) % (1) % Other income (expense) 0 % 0 % 0 % (0) % Income (loss) before income taxes (44) % 31 % (164) % (45) % Income tax benefit (expense) (0) % (4)
% 1 % 4 % Net income (loss) (44) % 27 % (163) % (41) %
Comparison of Three and Nine Months Ended
Revenue
For the three months ended
November 30, Changes
2022 2021 Amount %
(in thousands, except percentages)
Revenue $ 90,946 $ 83,450 $ 7,496 9 %
Revenue increased $7.5 million , or 9%, to $90.9 million for the three months
ended November 30, 2022 , as compared to $83.5 million for the three months ended
November 30, 2021 . The increase was attributable to revenues derived from growth
in the number of customers served during the third quarter of fiscal 2023 as
compared to the prior year's corresponding period. Revenue from access fees
increased $0.9 million , or 1%, to $70.0 million for the three months ended
November 30, 2022 as compared to $69.1 million for the three months ended
November 30, 2021 . Revenue from utilization-based fees increased $6.6 million ,
or 46%, to $21.0 million for the three months ended November 30, 2022 as
compared to $14.4 million for the three months ended November 30, 2021 .
For the nine months ended
November 30, Changes
2022 2021 Amount %
(in thousands, except percentages)
Revenue $ 264,117 $ 216,265 $ 47,852 22 %
Revenue increased $47.9 million , or 22%, to $264.1 million for the nine months
ended November 30, 2022 , as compared to $216.3 million for the nine months ended
November 30, 2021 . The increase was attributable primarily to revenues derived
from the PlushCare acquisition (which occurred in the second quarter of fiscal
2022) and growth in the number of customers served during the nine months ended
November 30, 2022 , as compared to the prior year's corresponding period. Revenue
from access fees increased $20.0 million , or 11%, to $206.0 million for the nine
months ended November 30, 2022 as compared to $186.0 million for the nine months
ended November 30, 2021 . Revenue from utilization-based fees increased $27.9
million , or 92%, to $58.1 million for the nine months ended November 30, 2022 as
compared to $30.3 million for the nine months ended November 30, 2021 .
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Cost of revenue, excluding depreciation and amortization
For the three months ended
November 30, Changes
2022 2021 Amount %
(in thousands, except percentages)
Cost of revenue, excluding depreciation and
amortization $ 50,412 $
45,156
Cost of revenue, excluding depreciation and amortization increased$5.3 million , or 12%, to$50.4 million for the three months endedNovember 30, 2022 , as compared to$45.2 million for three months endedNovember 30, 2021 . The increase was primarily driven by$3.3 million in increased personnel and related costs to serve the customer base and$1.5 million in increased costs associated with third-party services and solutions from trusted suppliers. For the nine months ended November 30, Changes 2022 2021 Amount % (in thousands, except percentages) Cost of revenue, excluding depreciation and amortization$ 147,857 $
125,426
Cost of revenue, excluding depreciation and amortization, increased$22.4 million , or 18%, to$147.9 million for the nine months endedNovember 30, 2022 , as compared to$125.4 million for the nine months endedNovember 30, 2021 . The increase was primarily driven by$15.5 million in increased personnel and related costs to serve the customer base and$3.6 million associated with third-party services and solutions from trusted suppliers. Operating expenses For the three months ended November 30, Changes 2022 2021 Amount % (in thousands, except percentages) Operating expenses: Product and technology$ 24,254 $ 22,846 $ 1,408 6 % Sales and marketing 25,023 24,616 407 2 % General and administrative 20,037 21,464 (1,427) (7) % Depreciation and amortization 11,602 11,250 352 3 % Change in fair value of contingent consideration - (68,428) 68,428 N/A Total operating expenses$ 80,916 $ 11,748 $ 69,168 589 % Product and technology. Product and technology expense increased$1.4 million , or 6%, to$24.3 million for the three months endedNovember 30, 2022 , as compared to$22.8 million for the three months endedNovember 30, 2021 . The increase was primarily driven by increases in personnel and related costs of$0.5 million and stock-based compensation of$0.6 million . Sales and marketing. Sales and marketing expense increased$0.4 million , or 2%, to$25.0 million for the three months endedNovember 30, 2022 , as compared to$24.6 million for the three months endedNovember 30, 2021 . The increase was primarily driven by an increase in stock-based compensation of$0.9 million , partially offset by timing of marketing event costs which were lower in the fiscal third quarter of 2023 by$0.3 million . General and administrative. General and administrative expense decreased$1.4 million , or 7%, to$20.0 million for the three months endedNovember 30, 2022 , as compared to$21.5 million for the three months endedNovember 30, 2021 . The decrease was primarily due to a decrease in stock-based compensation of$2.3 million , partially offset by increases in professional fees of$0.6 million . 42 Table of Contents
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. The
contingent consideration was reclassified to equity in the fourth quarter of
fiscal 2022.
For the nine months ended
November 30, Changes
2022 2021 Amount %
(in thousands, except percentages)
Operating expenses:
Product and technology $ 77,265 $ 61,297 $ 15,968 26 %
Sales and marketing 75,573 63,134 12,439 20 %
General and administrative 61,295 69,636 (8,341) (12) %
Depreciation and amortization 34,749 30,967 3,782 12 %
Goodwill impairment 299,705 - 299,705 N/A
Change in fair value of contingent
consideration - (38,282) 38,282 N/A
Total operating expenses $ 548,587 $ 186,752 $ 361,835 194 %
Product and technology. Product and technology expense increased $16.0
million , or 26%, to $77.3 million for the nine months ended November 30, 2022 ,
as compared to $61.3 million for the nine months ended November 30, 2021 . The
increase was primarily driven by increases in personnel and related costs of
$7.9 million , which included $1.2 million of severance costs associated with
workforce realignment actions taken by management, and stock-based compensation
expense of $5.6 million .
Sales and marketing. Sales and marketing expense increased $12.4 million , or
20%, to $75.6 million for the nine months ended November 30, 2022 , as compared
to $63.1 million for the nine months ended November 30, 2021 . The increase was
primarily driven by increases in digital marketing costs of $5.7 million ,
stock-based compensation expense of $3.7 million , and $1.0 million of severance
costs associated with workforce realignment actions taken by management.
General and administrative. General and administrative expense decreased $8.3
million , or 12%, to $61.3 million for the nine months ended November 30, 2022 ,
as compared to $69.6 million for the nine months ended November 30, 2021 . The
decrease was primarily due to decreases in acquisition and integration-related
costs of $12.8 million and a decrease in stock-based compensation expense of
$1.6 million , partially offset by increases in personnel and related costs of
$4.0 million , which included $1.0 million of severance costs associated with
workforce realignment actions taken by management.
Depreciation and amortization. Depreciation and amortization expense
increased
Goodwill impairment. This operating expense represents the impairment charge taken as a result of the goodwill impairment test performed during the first quarter of fiscal 2023. 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. The contingent consideration was reclassified to equity in the fourth quarter of fiscal 2022. 43 Table of Contents Interest expense, net For the three months ended November 30, Changes 2022 2021 Amount % (in thousands, except percentages)
Interest income (expense), net
Interest income (expense), net increased$1.1 million , or 152%, to$0.4 million for the three months endedNovember 30, 2022 , as compared to$(0.7) million for the three months endedNovember 30, 2021 . The increase was primarily due to an additional$1.2 million of interest income generated from our cash and cash equivalents during the three months endedNovember 30, 2022 compared to the
prior year period.
For the nine months ended
November 30, Changes
2022 2021 Amount %
(in thousands, except percentages)
Interest income (expense), net
Interest income (expense), net increased$1.7 million , or 77%, to$(0.5) million for the nine months endedNovember 30, 2022 , as compared to$(2.1) million for the nine months endedNovember 30, 2021 . The increase was primarily due to an additional$2.1 million of interest income generated from our cash and cash equivalents during the nine months endedNovember 30, 2022 compared to the prior year period.
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 nine months ended
November 30, November 30,
2022 2021 2022 2021
(in thousands, except percentages) (in thousands, except percentages)Adjusted Gross Profit $ 41,781$ 39,243 $ 120,019$ 93,170 Adjusted Gross Margin 45.9 %
47.0 % 45.4 % 43.1 % Adjusted EBITDA $ (10,222)$ (11,944) $ (39,337)$ (44,193)
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 and severance costs. 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 income
(loss) adjusted to exclude interest expense (income), net, income tax expense
(benefit), depreciation and amortization, stock-based compensation, acquisition
and integration-related costs, goodwill impairment, change in fair value of
contingent consideration, severance costs, and other expense (income). We
consider severance costs to include severance payments related to the
realignment
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of our resources. Other expense (income) includes foreign exchange gain or loss. 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 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 nine months ended
November 30, November 30,
2022 2021 2022 2021
(in thousands, except percentages) (in thousands, except percentages)
Revenue $ 90,946 $ 83,450 $ 264,117 $ 216,265
Less:
Cost of revenue, excluding depreciation
and amortization (50,412) (45,156) (147,857) (125,426)
Gross profit, excluding depreciation and
amortization 40,534 38,294 116,260 90,839
Add:
Stockbased compensation, cost of revenue 1,247 949 3,645 2,331 Severance costs, cost of revenue - - 114 - Adjusted Gross Profit $ 41,781$ 39,243 $ 120,019 $ 93,170 Gross margin, excluding depreciation and amortization 44.6 % 45.9 % 44.0 % 42.0 % Adjusted Gross Margin 45.9 % 47.0 % 45.4 % 43.1 %
Gross margin, excluding depreciation and amortization, for the three months endedNovember 30, 2022 and 2021, decreased to 44.6% from 45.9%, respectively, and Adjusted Gross Margin for the three months endedNovember 30, 2022 and 2021 decreased to 45.9% from 47.0%, respectively. The decreases in gross margin, excluding depreciation and amortization, and Adjusted Gross Margin are driven primarily by timing of revenue recognition with higher gross margins. Gross margin, excluding depreciation and amortization, for the nine months endedNovember 30, 2022 and 2021, increased to 44.0% from 42.0%, respectively, and Adjusted Gross Margin for the nine months endedNovember 30, 2022 and 2021, increased to 45.4% from 43.1%, respectively. The increases in gross margin, excluding depreciation and amortization, and Adjusted Gross Margin are driven primarily by higher margins in our virtual primary care offerings that were acquired during the second quarter of fiscal 2022 compared with the Company's other offerings. 45 Table of Contents
The following table presents, for the periods indicated, a reconciliation of our Adjusted EBITDA to our net income (loss):
For the three months ended For the nine months ended
November 30, November 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Net income (loss) $ (39,872) $ 22,503 $ (429,217) $ (88,568)
Adjusted for:Interest expense (income), net (386) 743 484 2,137 Income tax (benefit) expense 77 3,325 (3,573) (9,501) Depreciation and amortization 11,602 11,250 34,749 30,967 Stockbased compensation 17,906 18,377 54,809 45,827 Acquisition and integrationrelated costs(1) 439 311 439 13,208 Goodwill impairment - - 299,705 - Change in fair value of contingent consideration - (68,428) - (38,282) Severance costs(2) 213 - 3,288 - Other expense (income) (201) (25) (21) 19 Adjusted EBITDA$ (10,222) $ (11,944) $ (39,337) $ (44,193)
(1) For the three and nine months ended
integration-related costs represent expenses associated with litigation
inherited through the PlushCare acquisition. Refer to Note 12 in our
consolidated financial statements for further details. For the three and nine
months ended
represent banking, legal, accounting, and consulting fees related to
acquisitions.
(2) Severance costs represent expenses associated with workforce realignment
actions taken by management.
Liquidity and Capital Resources
We had cash and cash equivalents of
Our Debt Arrangements
As of
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 are at the Bloomberg Short-Term Bank Yield Index rate (BSBY) plus 350 basis points or Base Rate (as defined) plus 250 basis points, with the BSBY rate and Base Rate subject to minimum levels, 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 outstanding letters of credit to serve as office landlord security deposits in the amount of$1.2 million . These letters of credit are secured through the revolving credit facility, thus reducing the capacity of the revolving credit facility to$78.8 million . The 2019 Revolver expires inJuly 2024 . 46 Table of Contents
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 our 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 , we entered into another amendment to the 2019 Revolver in association with the acquisition of PlushCare which modified certain reporting covenants. OnJuly 19, 2022 , the Company entered into another amendment to the 2019 Revolver which extended the term untilJuly 19, 2024 , documented the transition from the LIBOR interest rate index to the BSBY rate, and established new minimum covenant revenue targets. The term will automatically be extended toJuly 19, 2025 if the Company has at least$200,000 in consolidated net cash as ofMay 31, 2024 . We were in compliance with all such applicable covenants as ofNovember 30, 2022 , 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.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
For the nine months ended
November 30,
2022 2021
(in thousands)
Net cash used in operating activities
(4,815) (263,081)
Net cash provided by financing activities 2,745 255,245
Operating Activities. Net cash used in operating activities decreased by $21.9
million to $38.1 million during the nine months ended November 30, 2022 from
$60.1 million during the nine months ended November 30, 2021 , primarily due to
growth in the business resulting in decreased net loss net of non-cash items
during the nine months ended November 30, 2021 that did not occur in the current
period.
Investing Activities. Net cash used in investing activities decreased by
$258.3 million to $4.8 million during the nine months ended November 30, 2022 ,
from $263.1 million during the nine months ended November 30, 2021 , primarily
due to cash paid for the acquisitions of 2nd.MD and PlushCare, totaling $260.2
million , during the nine months ended November 30, 2021 .
Financing Activities. Net cash provided by financing activities decreased by
$252.5 million to $2.7 million during the nine months ended November 30, 2022
from $255.2 million during the nine months ended November 30, 2021 primarily due
to the proceeds from the issuance of the Convertible Senior Notes of $287.5
million and payment for purchase of capped calls associated with the Convertible
Senior Notes of $(34.4) million during the nine months ended November 30, 2021 .
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Material Cash Requirements
As of November 30, 2022 , our material cash requirements from known contractual
and other obligations, which we expect to fund through available cash, future
cash generated from operations, and our existing financing arrangements, are as
follows:
Principal and interest obligations on convertible debt - As discussed in detail
? above, the
2026. See Our Debt Arrangements above and Note 8 to our consolidated financial
statements for more details.
Operating leases - We have entered into operating leases, primarily for office
? space. Liabilities associated with these leases totaled
Other purchase obligations - We have entered into certain arrangements that
? include obligations to make significant future purchases. The majority of these
purchases are not expected to be made over the next 12 months. See Note 12 to
our consolidated financial statements for more details.
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 "- Material Cash Requirements" above and in our 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. There have been no significant changes in our critical accounting policies and estimates during the nine months endedNovember 30, 2022 , as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year endedFebruary 28, 2022 filed with theSEC . We incurred a goodwill impairment charge during the nine months endedNovember 30, 2022 , which is detailed below.
Accounting for
Goodwill .Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. For the purposes of impairment testing, we have determined that we have one reporting unit. We perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If that is the case, we perform a quantitative impairment test. We test our goodwill for impairment on an annual basis in the fourth quarter of each fiscal year, or more frequently whenever an event or change in circumstances indicates that the asset may be impaired. In performing our evaluation, we assess qualitative factors such as overall financial performance of our reporting unit, anticipated changes in industry and market structure, and the competitive and regulatory environment. As a result of sustained decreases in our stock price and market capitalization, we conducted an impairment test of our goodwill as ofMay 31, 2022 in connection with the preparation of the condensed consolidated financial statements included in the first quarter Quarterly Report on Form 10-Q. As a result of this testing, we recorded a$299.7 48 Table of Contents
million non-cash goodwill impairment charge (equivalent to$4.24 per basic and diluted share for the nine months endedNovember 30, 2022 ) during the first quarter of fiscal 2023. OurMay 31, 2022 goodwill impairment test reflected an allocation of 70% and 30% between the income and market-based approaches, respectively. We believe the 70% weighting to the income-based approach is appropriate as it more directly reflects our future growth and profitability expectations. Significant inputs into the valuation models included the discount rate, revenue market multiples, and estimated future cash flows. We used a discount rate of 11% and guideline peer group and public transaction revenue multiples between 1.1x and 1.8x current and forward-looking revenues in the goodwill impairment test. Subsequent to the impairment, there was no excess of reporting unit fair value over carrying value. While we cannot predict if or when additional future goodwill impairments may occur, additional goodwill impairments could have material adverse effects on our operating income, net assets, and/or our cost of, or access to, capital. Realizability of Long-Lived Assets. We assess the realizability of our long-lived assets and related intangible assets, other than goodwill, upon the occurrence of events or changes in circumstances indicating that the carrying values of such assets may not be recoverable. We consider the following factors important in determining when to perform an impairment review: significant under-performance of a business or product line relative to budget; shifts in business strategies which affect the continued uses of the assets; significant negative industry or economic trends; and the results of past impairment reviews. When such events or changes in circumstances occur, we assess recoverability of these assets. We assess recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If impairment indicators were present based on our undiscounted cash flow models, which include assumptions regarding projected cash flows, we would perform a discounted cash flow analysis to assess impairments on long-lived assets. Variances in these assumptions could have a significant impact on our conclusions as to whether an asset is impaired or the amount of any impairment charge. Impairment charges, if any, result in situations where any fair values of these assets are less than their carrying values. As a result of sustained decreases in our stock price and market capitalization, we conducted an impairment test of our intangible assets as ofMay 31, 2022 . No impairments were recorded to intangible assets as a result of this testing. In addition to our recoverability assessments, we routinely review the remaining estimated useful lives of our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.
We will continue to evaluate the values of our long-lived assets in accordance with applicable accounting rules. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
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.
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