SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended February 28, 2021 29, 2024 |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission File Number:
001-39348
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization) | |
01-0969591
(I.R.S. Employer
Identification No.) |
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1201 Third Avenue,, Suite 1700
Seattle,, WA98101
(Address of principal executive offices including zip code) | |
Registrant’s telephone number, including area code:
(206) (206) 926-8100
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol | Name of each exchange on which registered |
Common Stock, $0.0001 par value per share | ACCD | The Nasdaq Stock Market LLC
(The Nasdaq Global Select Market)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻x No ⌧o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻o No ⌧x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧x No ◻o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧x No ◻o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | x | | ◻ | | Accelerated filer | o | | ◻
| Non-accelerated filer | o
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| Smaller reporting company | o
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| Emerging growth company | o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐o Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐x If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ☒x The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately
$960.2$926.1 million as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on The Nasdaq Global Select Market reported for such date. Excludes an aggregate of
20,700,9187,428,455 shares of the registrant’s common stock held as of such date by officers, directors and stockholders that the registrant has concluded are or were affiliates of the registrant. Exclusion of such shares should not be construed to indicate that the holder of any such shares possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.
As of April
30, 2021, 58,670,77319, 2024, 78,356,908 shares of the registrant’s common stock were outstanding.
Documents Incorporated by Reference
Part III incorporates information by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, in connection with the registrant’s
20212024 Annual Meeting of Stockholders.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
This Annual Report on Form 10-K contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as
“anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,”"anticipate," "believe," "contemplate," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "will," or
“would”"would" or the negative of these words or other similar terms or expressions. Forward-looking statements include information related to our financial performance and possible or assumed future results of operations and expenses, our outlook, business strategies and plans, business environment, market size, product capabilities, timing of new product releases, the impact of our focus areas and key initiatives, and potential future growth. Forward-looking statements include all statements that are not historical facts.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled
“Risk Factors”"Risk Factors" and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that
“we believe”"we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Annual Report on Form 10-K. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
Investing in our securities involves a high degree of risk. Below is a summary of material factors that make an investment in our securities speculative or risky. Importantly, this summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, as well as other risks that we face, can be found under the heading “Item 1A—Risk Factors”,Factors,” below.
| • | We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to achieve or maintain profitability. | |
| • | We derive a significant portion of our revenue from our largest customers. Our largest customer, Comcast Cable, accounted for 16% and 24% of our revenue for the fiscal years ended February 28(29), 2021 and 2020, respectively. The loss of any of these customers, or renegotiation of any of our contracts with these customers, could negatively impact our results. |
•We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to achieve or maintain profitability.
•We derive a significant portion of our revenue from our largest customers. The loss of any of these customers, or renegotiation of any of our contracts with these customers, could negatively impact our results.
•We have a limited operating history with some of our current offerings which makes it difficult to evaluate our current and future business prospects and increases the risk of your investment.
•Our business, results of operations, and financial condition may fluctuate on a quarterly and annual basis, which may result in a decline in our stock price if such fluctuations result in a failure to meet any projections that we may provide or the expectations of securities analysts or investors.
•Our sales cycle can be long and unpredictable and requires considerable time and expense. As a result, our sales, revenue, and cash flows are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly.
•Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality and due to the fact that a portion of our revenue is subject to the achievement of performance metrics and healthcare cost savings.
•If we fail to effectively manage our growth and organizational change, our mission-driven culture could be impacted, and our business could be harmed.
•If we are unable to attract, integrate, and retain additional qualified personnel, especially for Accolade Care Advocates, clinical, including primary care physicians and medical specialists, and various product and technology roles, our business could be adversely affected.
•We have and may again in the future acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations, and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could have an adverse effect on our business, financial condition, and results of operations.
•We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share our business and operating results will be harmed.
•Macroeconomic factors including inflation and geopolitical risk may result in decreases to the workforces of, or benefits spending by, our customers which would impact our operational and financial performance.
•If we fail to comply with healthcare laws and regulations, we could face substantial penalties and our business could be harmed.
•Unstable market and economic conditions may have serious adverse consequences on our business, financial condition, results of operations, and stock price.
| • | We have a limited operating history with our current offerings, which makes it difficult to evaluate our current and future business prospects and increases the risk of your investment. | |
| • | Our business, results of operations, and financial condition may fluctuate on a quarterly and annual basis, which may result in a decline in our stock price if such fluctuations result in a failure to meet any projections that we may provide or the expectations of securities analysts or investors. | |
| • | Our sales cycle can be long and unpredictable and requires considerable time and expense. As a result, our sales, revenue, and cash flows are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly. | |
| • | Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality and due to the fact that a portion of our revenue is subject to the achievement of performance metrics and healthcare cost savings. | |
| • | If we fail to effectively manage our growth and organizational change, our mission-driven culture could be impacted, and our business could be harmed. |
| • | If we are unable to attract, integrate, and retain additional qualified personnel, especially for Accolade Health Assistant, clinical, and various product and technology roles, our business could be adversely affected. | |
| • | We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations, and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could have an adverse effect on our business, financial condition, and results of operations. | |
| • | We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share our business and operating results will be harmed. |
| • | The Coronavirus Disease 2019 (COVID-19) pandemic may significantly disrupt our operations and negatively impact our business, financial condition, and results of operations. | |
| • | If we fail to comply with healthcare laws and regulations, we could face substantial penalties and our business could be harmed. |
At Accolade, we envision a world where every person can live their “healthiest life” — a concept that encompasses physical, emotional, financial, and professional wellness. Our mission is to empower people through expertise, empathy, and technology to make the best decisions for their health and well-being.
Accolade enables our members to receive the right healthcare for their individual needs. We
call it Personalized Healthcare. Accolade solutions are personal, data driven, and value based to provide
personalized, technology-enabled solutionsa healthcare experience that
helphelps 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 commercial customers (which includes employers, health plans, and governmental entities) and virtual primary care and mental health support, both directly to consumers and to commercial customers. Our innovative platform,
which we call our True Health Engine, combines open, cloud-based intelligent technology with multimodal support from a team of empathetic and knowledgeable Accolade
Health AssistantsCare Advocates and clinicians,
(includingincluding registered nurses, physician medical directors,
andpharmacists, behavioral health
specialists).specialists, women’s health specialists, case management specialists, expert medical opinion providers, and 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
platformTrue Health Engine dramatically improves the member experience, encourages better health outcomes, and lowers costs for both our members and our customers.
The U.S. healthcare system is complex and places significant strain on consumers, who struggle to effectively use their healthcare and benefits, make informed decisions about their health, and navigate the fragmented network of providers and third-party benefit programs.
The COVID-19 global pandemic has only servedHealthcare consumers face challenges finding providers and scheduling appointments, physicians oftentimes do not have complete data to
further exacerbateunderstand the
complexitylongitudinal needs of each patient, and
frustration faced by consumers,access to appropriate care and the quality of available care varies widely based on a number of reasons commonly referred to as
they seek information about the availabilityHealth Equity, including economic, social, and
accuracy of virus and antibody testing, seek information about vaccinations, or face limits on their abilitygeographic. Collectively, we refer to
access traditional care safely. Partly as a result of these challenges
as the
payersPhysician Gap. We designed our solutions to close this Physician Gap by following a clinical model that emphasizes both contextual and concordant care – healthcare that takes into account a person’s lifelong healthcare experience delivered by a team of
healthcare,people who understand their individual need. This approach also takes into account the numerous social determinants of health, such as social, economic, race, and geographic barriers that impact the quality and accessibility of healthcare. Healthcare payors, including managed care companies, the government, employers, and consumers, face significant and rising costs. For large employers in particular, the direct costs are substantial: the total annual employer cost for healthcare is estimated at more than $10,000 per employee. Employers also bear indirect costs in the form of absenteeism, decreased productivity, and diminished morale, all potentially intensified during times when their employees are forced to work remotely due to threats to public health. Despite the significant and growing spend on care, health outcomes are not improving, and misaligned incentives among key constituents thwart meaningful change. A suboptimal consumer experience persists.
We believe the most effective way to improve health outcomes and control cost is to
close the Physician Gap and help consumers make better, data-driven healthcare and benefits-related decisions. Based on this belief, we have developed a differentiated platform to support and influence consumer decision-making that is built on a foundation of mission-driven people and purpose-built technology:
| ● | Accolade Health Assistants. Our Accolade Health Assistants are highly trained professionals who develop trusted relationships with our members and serve as their primary and ongoing point of contact for all issues related to healthcare and benefits. |
| ● | Clinicians. Our clinicians include registered nurses, physician medical directors, pharmacists, behavioral health specialists, and women’s health specialists. Our nurses have deep expertise across a wide variety of specializations. Further, through our acquisition of 2nd.MD described below, we contractually engage physicians to provide second opinion consultation services. We do not currently provide medical care or establish patient relationships with our members, however that may change following our acquisition of PlushCare, as further described below. |
•Accolade Care Advocates. Our Accolade Care Advocates are highly trained professionals, enabled by advanced data and technology, who develop trusted ongoing relationships with our members and serve as their personal contact for all issues related to healthcare and benefits.
•Clinicians. Our clinicians include registered nurses, physician medical directors, pharmacists, behavioral health specialists, women’s health specialists, case management specialists, expert medical opinion providers, and primary care physicians.
•Technology. Our technology platform was designed to deliver highly personalized member experiences at scale, leveraging data and machine learning to derive actionable insights, optimize our care teams’ workflows, and accelerate the pace of our innovation. We ingest and link disparate data points to Accolade-generated data to create a 360-degree member view which our Accolade Care Advocates and clinicians access in our purpose-built member CRM tool, InView. Our secure, open technology platform supports our continuous innovation and the development of additional capabilities to benefit our members.
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Trusted Partner Ecosystem. In addition to Accolade’s owned solutions, we have assembled a roster of high-quality partners whose condition-specific solutions are complementary to our services and deliver additional value to our members and customers. The Trusted Partner Ecosystem encompasses partnerships in areas that we believe matter to our customers because medical spend in them is high, such as diabetes or musculoskeletal care, and/or having services related to them is viewed favorably in terms of attracting and retaining talent (e.g., fertility care, LGBTQIA+ affirming care). Accolade vets Trusted Partners along clinical, data security, financial, and operational dimensions. Ultimately, customers can streamline selection, procurement, and implementation when working with our Trusted Partners. We believe what sets our Trusted Partner Ecosystem apart from other point solution marketplaces is that we enable a set of integrated features that support incremental, appropriate utilization of the Trusted Partners' services. | ● | Technology. Our technology platform was designed to deliver highly personalized member experiences at scale, leveraging data and machine learning to derive actionable insights, optimize our care teams’ workflows, and accelerate the pace of our innovation. We ingest and link disparate data points to Accolade-generated data to create a 360-degree member view which our Accolade Health Assistants and clinicians access in our purpose-built member CRM tool, InView. Our secure, open technology platform supports our continuous innovation and the development of additional capabilities to benefit our members. |
Developing trusted relationships positions us to positively influence members’ healthcare and benefits-related decision-making and ultimately deliver on our value proposition.
Through trusted, ongoing engagement, we can meaningfully influence member decisions and help increase valuable healthcare utilization (e.g., primary care visits, prescription refills) and reduce wasteful healthcare utilization (e.g., unnecessary emergency room visits, hospital readmissions, excessive inpatient stays). We further enhance the member experience by educating members on relevant, available benefits, such as wellness programs and telemedicine. In raising awareness of these benefits and seamlessly integrating them into our platform, we can significantly increase their utilization rates.
Our investments in a scalable technology platform have enabled us to
acquire complementary services and implement a multi-offering strategy that meets the diverse needs of our existing and prospective customers. Buyers of our offerings have varying priorities and appetites for change to their existing health and benefits packages, and we have therefore developed a solutions portfolio that is designed to support a range of
integrationscapabilities and services for employers of all sizes.
Our most comprehensive offering, Accolade Total Health and Benefits, is a population health solution that provides fully integrated healthcare navigation and benefits management and can be tailored to the unique needs of a given employer’s subpopulation. Our technology platform has enabled us to unbundle aspects of this comprehensive offering to create two additional standalone offerings: Accolade Total Benefits and Accolade Total Care. We have further leveraged our technology platform to develop add-on offerings, such as Accolade Boost and our Trusted Supplier Program — as well as, recently, Accolade COVID Response Care and Mental Health Integrated Care — that target specific challenges faced by our customers.Recent Acquisitions
In March 2021, we acquired Innovation Specialists, LLC d/b/a 2nd.MD (2nd.MD), a leading expert second opinion consultation and health care decision support company based in Houston, TX. 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.
In April 2021, we entered into a definitive agreement to acquire PlushCare, Inc., a leading provider of virtual primary care and mental health treatment. 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 purchase price of up to $450 million will consist of $40 million in cash, $340 million in Accolade common stock, and up to an additional $70 million payable in Accolade common stock upon the achievement of defined revenue milestones following the closing. The transaction is expected to close in early June, subject to customary closing conditions.
Our operational and financial success is based on the following key strengths:
Commitment to a differentiated member engagement model. We fundamentally believe in engaging the entire member population to have a sustainable impact on health outcomes and cost. This stands in contrast to the historic industry norm of engaging only the highest-cost, sickest patients with the most complex needs. To do this, we have built
a platform to engage with each customer’s eligible member population, build trusted relationships with members, and leverage those relationships to deliver important healthcare interventions when they matter the most.
Highly qualified and empathetic team with deep clinical experience. Our engagement model integrates “human touch” with a proprietary technology platform to encourage better outcomes for our members. While the right mix of experience and skills is critical, all care team members must demonstrate empathy to be hired, and maintain it to be retained. Long-term strategic partner to our customers. We are engaged by employers to solve real issues around the design, coordination, and utilization of their employee benefits programs. Because we help their employees live their healthiest lives, our customers view us as a strategic partner that can provide population health insights and help them manage healthcare benefit costs and complexity, including, crucially, how to ensure the safety of employees returning to the workplace during a pandemic.complexity.
Significant investment in our purpose-built, scalable technology platform. Our offerings are built on an open, cloud-based intelligent platform designed to deliver a highly personalized member experience. Our platform is built for scale — architected to deliver repeatable results and high service levels at a sustainable cost to serve — and leverages extensive data ingestion capabilities and artificial intelligence to derive predictive analytics, deliver targeted population health insights, and recommend the right care intervention for our members at the right time.
Attractive operating model supported by a PMPMper-member-per-month (PMPM) recurring revenue model, providing a high degree of visibility. As of February 28, 2021,29, 2024, we had 112over 1,200 commercial customers that collectively purchase access to our solutions for more than 2.114 million members. We principally generate revenue from our customers on a recurring PMPM fee basis, with contracts averaginggenerally three years in length, which together provide us with significant revenue visibility. Our ability to deliver significant and measurable return on investment for our customers in the form of improved clinical and financial outcomes has led to a gross dollar retention of 99%89%, 99%87%, and 95%98% for the fiscal years ended February 28(29), 2021, 2020,2024, 2023, and 2019,2022, respectively.Deeply experienced management team dedicated to cultivating a mission-driven culture. Our senior leadership team has extensive healthcare, technology, and business-scaling expertise from decades of leadership experience at world-class organizations. Our senior management team has a long track record of working together, both at Accolade and at previous firms, with some members of our senior leadership team having worked together for over 20 years. We share our mission with the dedicated and passionate people that we employ, and our culture is a driving factor in our ability to attract and retain top talent.
Key elements of our growth strategy include:
Grow our customer base. We believe there is a substantial opportunity to further grow our customer base in our large and under-penetrated market that includes thousands of self- and fully-insured employers in the United States with 500 employees or more.States. Our sales and marketing team draws on advanced demand-generation strategies to reach and educate the market about our offerings and increase the opportunities to grow our customer base. We maintain a cohort of highly referenceable customers in support of new customer acquisition. Retain and expand relationships with our customers. By delivering measurable outcomes to our customers, we can achieve strong customer retention, which enables us to expand and deepen these relationships. Accolade Boost, our Trusted Supplier Program, Accolade COVID Response CareOur expert medical opinion and Mental Health Integrated Care are examples of new add-onvirtual primary care offerings that target specific challenges faced by our customers, complement our existingadvocacy solutions and can be sold as standalone solutions or provide cross-sell opportunities to drive incremental revenue. As we build upon our trusted partner status with these customers, we have the opportunity to cross-sell our additional capabilities. In addition, we believe we will be able to upsell a portion of those customers purchasing eithercapabilities, as well as services offered by our Accolade Total Benefits or Accolade Total Care offerings to moreecosystem partners.
comprehensive offerings, namely Accolade Total Health and Benefits, as they see tangible cost and engagement benefits from their initial purchases.
Invest in technology. We have made significant investments in our technology platform to expand 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 and artificial intelligence, 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.
Continue to develop new offerings. We are constantly innovating to enhance our model and develop new offerings, including our recently introduced standalone offerings, Accolade Total BenefitsCare and Accolade Total Care.Connect. 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 applications on top of our existing technology stack, such as Accolade Boost, our Trusted Supplier Program, Accolade COVID Response Care and Mental Health Integrated Care. In addition, in July 2019, we acquired MD Insider in order to enhance our offerings by gaining access to experiential and performance insights on providers across the healthcare system. 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. In March 2021, we acquired 2nd.MD in order to provide our members with an expert medical consultation and medical decision support service that allows members to access board-certified national experts across the country for high-value medical consultations in a real-time video call or by phone. The 2nd.MD service provides a 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. Expand into adjacent markets. We see significant additional opportunity in adjacent markets, including expanding with the TRICARE population and working with other government-sponsored health plans, such as TRICARE, Medicare Advantage and Managed Medicaid (as well as traditional Medicare and Medicaid), along with those administered by Veterans Affairs. Our technology platform and broad range of healthcare services is also enabling us to expand our opportunities with health plans, including their individual and family plans and fully-insured commercial customers. Our focus and experience in the navigation and coordination of benefits and healthcare, coupled with our technology investments, position us to take advantage of emerging healthcare trends surrounding care coordination and value-based care initiatives. We believe that we can leverage our existing platform and scalable solutions to successfully expand into these markets. Opportunistically pursue partnerships. We have historically integrated new and complementary capabilities into our offerings by forming strategic partnerships and other relationships with third parties. We believe our partners choose us because of our entrepreneurial and collaborative culture, and dedication to continuous innovation. For example, in March 2019 we partneredinnovation, and track record of exceptionally high member engagement rates. We develop and maintain partnerships with Humanaa number of healthcare companies to formoffer our customers a joint go-to-market strategybroader range of services and our members a more seamless healthcare experience on the back of the core Accolade engagement model. These partnerships include:
•Health plans, such as United Healthcare, Aetna, Blue Shield of California, and Priority Health. These plans offer various combinations of our services to enrich their value proposition to their customers;
•Condition-specific point solutions that integratesleverage our respective capabilitiesdistribution infrastructure to create a differentiated healthcare and benefits experience for employees and employers. In addition, in February 2020, we entered into a strategic relationshipconnect with Change Healthcare Holdings LLC (Change Health) to increase each party’s capabilities for serving itsmore employer customers and members. More recently,a member engagement model to connect with more qualified participants. These partners’ interventions enhance the positive impact that we announced a partnership with Ginger, the leaderhave on members’ health and customers’ spend by serving as extensions of our clinical model; and,
•Technology partners including vendors which specialize in on-demand mental healthcare, to bring to market Mentalartificial intelligence, whose capabilities augment our own, and chronic and clinical solutions providers such as Virta Health, Integrated Care, an offering that expands our members’ access to mental health coaching, virtual therapy,Sword Health, Hinge Health, Lyra Health, Employer Direct Healthcare, Carrum Health, and virtual psychiatry and deeply integrates these services with the physical health support provided by the Accolade care team.FOLX.
We believe health outcomes are improved and overall healthcare spend is lowered when personalized care guidance and coordination are effectively delivered. Our clinical philosophy governs the ways we help members as they contemplate and consume care. Increasing healthcare spend is a lagging indicator of the need for support — our engagement model seeks to engage all members, regardless of healthcare spend or the complexity of medical needs, and support them as early as possible in their care journeys.
We have developed a continuum of offerings to address the market’s varied perspectives on how best to improve healthcare and benefits utilization, along with buyers’ varying appetites for change. All of our offerings have been built on the same technology stack, meaning each is capable of fully leveraging our integrated platform — combining people and technology to deliver value to our customers. We can unpack and combine our capabilities into differentiated bundles, while maintaining scale and efficiency by operating on a single platform.
Overview of Accolade’s Multi-offering Strategy
Accolade Total Health
We offer our solutions as standalone or bundled offerings, combining the capabilities of Accolade’s historical navigation and Benefits is our most comprehensive offering. We have also introduced two additional offerings, Accolade Total Benefits and Accolade Total Care, which package components of Accolade Total Health and Benefits into more targeted, lower-costadvocacy solutions with simpler implementations. 2nd.MD’sour primary care, mental health, and expert medical consultation service also may be offered on a standalone basis or incorporated as a capability into one or moreopinion services, augmented by artificial intelligence, machine learning, and data-driven recommendations. Our offerings include:
•Plus and Connect – A benefits navigation and care solution designed to work with our customers’ existing benefits ecosystem, incorporating elements of Accolade’s core offerings.all Accolade Total Benefits
solutions including Advocacy, Accolade Total Benefits is designed for employers with low employee adoption of healthcare and benefits programs that have a preference for keeping their existing carrier arrangement fully intact.Expert MD, Accolade Total Benefits tackles the challenge of low adoption by making information and access to benefits readily available, digestible, and actionable.
Accolade Total Care,
Accolade Total Care is designed for employers that are focused on influencing the actual interactions between employees and their providers and are also interested in care management services, but that do not want to disrupt their existing arrangement with their carrier. Accolade Total Care builds on our Accolade Total Benefits offering by adding more personalized support for employees and their enrolled dependents to guide them to the best care options and providers within the scope of their benefits.
Accolade Total Health and Benefits
Accolade Total Health and Benefits offers our full suite of solutions: the simplified, synthesized experience of Accolade Total Benefits and the high-touch clinical guidance of Accolade Total Care, along with comprehensive population health management. Accolade Total Healthpartner ecosystem. Different offering configurations may also include member services, provider services, and Benefits is for employers who are willing to adjust their historical arrangements with their carriers in order to authorize Accolade to deliver member and provider services. In Accolade Total Health and Benefits, Accolade is deeply embedded into the flow of members’ healthcare consumption and is well-positioned to adapt to members’ evolving needs. Accolade Total Health and Benefits includes a hostan expanded set of clinical programs including treatment decisionthat address case and disease management to maximize member engagement and return on investment.
•Accolade Expert MD – Expert medical consultations that connect patients to highly qualified condition-specific specialists for both adult and pediatric care
•Accolade Care and PlushCare – Integrated primary care and mental health support chronic care, maternity management, complex case management,
•Trusted Partner Ecosystem - In addition to Accolade’s owned solutions, we have assembled a roster of high-quality partners whose condition-specific solutions are complementary to our services and behavioral health support.Accolade has developedcapable of delivering additional add-on solutions, including Accolade Boost, the Trusted Supplier Program,value to our members and integrated care programs, such as Mental Health Integrated Carecustomers or capabilities that directly address the pronounced need among our employer customers for help with overall benefits management.
meet specific customer needs.
With great conviction that technology can help scale and optimize the Accolade engagement model, we began making substantial investments to create an industry-leading, open, cloud-based platform in 2016. This technology platform, built utilizing artificial intelligence, microservices, and data analytics, enables us to deliver personalized experiences to our full member population throughout their healthcare journeys. We have established a highly
experienced Product & Technology organization comprised of over 220 individuals. Our technology teamthat has extensive experience in machine learning, artificial intelligence, data science, engineering, and product management.
In order to fuel our machine learning processes, we have made a concerted effort to source what we view as a massive, powerful, and differentiated data set. We pair Accolade data (encounter and activation history, conditions/medications/procedures, barriers to care, assessment responses, care plans) with the data we ingest from:
| ● | our employer customers (eligibility and membership data); |
| ● | carriers and pharmacy benefits managers (claims data, plus benefit plan and formulary details); |
| ● | providers (verification of benefits and eligibility checks, pre-authorizations, and utilization management discharge instructions); |
| ● | the Centers for Medicare & Medicaid Services (CMS) and commercial insurers (billions of claims, comprehensive provider directories, and price data); and |
| ● | ecosystem partners (registrations, interactions, assessments/care plans). |
•our commercial customers (eligibility and membership data);
•carriers and pharmacy benefits managers (claims data, plus benefit plan and formulary details);
•providers (verification of benefits and eligibility checks, pre-authorizations, and utilization management discharge instructions);
•the Centers for Medicare & Medicaid Services (CMS) and commercial insurers (billions of claims, comprehensive provider directories, and price data); and
•ecosystem partners (registrations, interactions, assessments/care plans).
With this combination of data, we are able to apply machine learning tactics to generate predictive insights about our members. For example, we calculate various scores for members that quantify their relationship with us, overall health status, and their propensity to take a desired action. These scoring techniques inform recommended actions for our Accolade
Health AssistantsCare Advocates and clinicians that are surfaced to InView, as well as recommendations delivered directly to our members as part of our activation capabilities and/or self-service.
Our Go-to-Market Strategy
We employ a multipronged go-to-market strategy to drive adoption of our solutions. We have strategically curated our offerings portfolio to ensure we have a compelling value proposition at an appropriate price point that resonates with each specific customer segment.
Sales Organization. We principally sell our solutions through our direct salesforce and distribution agreements with healthcare industry third parties, such as large and regional health plans and governmental entities. We have invested meaningfully in creating a scaled and focused team to capture the new customer growth opportunities.opportunities across different customer sizes, verticals, and geographies. Our field sales professionals are organized by account size, region, and existing versus prospective customers. This organizational structure enables us to deliver context-specific, tailored messaging that resonates with each customer segment. Our sales team possesses deep domain expertise in health benefits management and boasts long-term relationships with key decision makers within our prospective customer organizations. We also have a sales team solely focused on our health plan distribution relationships. We believe the effectiveness of our sales organization is evidenced by growing adoption of our platform by large strategic customers, as well as strongmore recent traction with enterprise and mid-market customers where we see meaningful additional revenue opportunity. Customer PartnershipsSuccess Organization. Our customer partnershipssuccess team provides strategic insights, point solutions recommendations, and day-to-day account support to our customers. The team is focused on deepening existing customer relationships and cross-selling new offerings where appropriate. This organization is comprised of dedicated customer support teams to serve each customer’s specific needs and also focuses on deepening existing customer relationships through sales of our new offerings. Strategic Partnerships. We selectively form partnerships to further drive customer acquisition and adoption of our personalized, technology-enabled solutions platform. For example, in March 2019,2022, we partneredannounced partnerships with HumanaBlue Shield of California and formed a joint go-to-market strategy, which we launched in two initial geographic markets. In October 2019, concurrent with a $20 million preferred stock investment from Humana, we expanded our partnership to add a broader base of solutions targeting self- and fully insured customer prospects and significantly expand our target geographic markets.
In addition, in February 2020, we entered into a strategic relationship with ChangePriority Health to increase each party’s capabilities for serving its customers and members. The arrangement includes the joint developmentprovide our services as part of new and improved capabilities and service agreementstheir employer-focused virtual first health plan offerings. These relationships allow us to expand datasets available to Accolade for various analytics to better support members. In connection with the Change Health transaction, we issued Change Health 251,211 shares of our common stock as partial consideration for the relationship, subject to vesting requirements.
reach a wider customer audience through regionally-focused organizations.
We believe the breadth of our go-to-market and distribution strategy enables us to reach customers of nearly every size across markets.
We generate customer leads, accelerate sales opportunities, and drive brand awareness through our marketing programs. Our marketing programs target benefits and finance executives, senior business leaders, health professionals, brokers, consultants, third-party administrators, and suppliers.
In addition to our direct sales organization, we maintain relationships with a range of third parties including brokers, benefits consultants, third-party administrators, and
trusted suppliers.Trusted Partner Ecosystem. These partners supplement our direct sales force and help sell our offerings into select end markets by way of warm introductions and advice as we field prospective customers’ requests for proposals. We have developed strong relationships with our partners and have a well-established reputation within our partner community. We proactively educate our partners on our solutions and value proposition to ensure we are appropriately represented to prospective customers.
We believe no single competitor offers a similarly comprehensive platform combining personalized, technology-enabled solutions with highly trained professionals. However, we have experienced and expect to continue to experience competition from a number of companies, including those who are well-established and may have greater resources, and
those who may become meaningful competitors in the future. Our competitors generally fall into
threetwo categories: large health plans that provide member and provider services
such as the Blue Cross Blue Shield health plans (e.g., Anthem), Cigna, UnitedHealth Group, and
Aetna; traditional advocacy and navigation companies, such as Quantum Health and
Health Advocate; and an emerging cohort of companies that traditionally provided adjacent and/or exclusively digital services and are increasingly adding some version of navigation support to their offering, most notably Grand Rounds, Amino, Alight (Compass), and Castlight. WeIncluded Health.We believe the primary competitive factors for our industry include:
| ● | level of member engagement; |
| ● | ability to influence members to improve health and financial outcomes; |
| ● | level of customer and member satisfaction; |
| ● | ease of integration with employer benefits programs; |
| ● | breadth and depth of platform functionality; |
| ● | modern and open technology supporting integration with third-party applications; |
| ● | ability to recruit and retain skilled employees and clinicians; |
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level of member engagement;
•ability to influence members to improve health and financial outcomes;
•
level of customer and member satisfaction; | ● | access to and ability to derive insights from large, disparate data sets; |
| ● | advanced analytics capabilities to create personalized recommendations; |
| ● | brand awareness and reputation; |
| ● | regulatory compliance; and |
| ● | ability to rapidly innovate and respond to changing customer needs and legislative developments. |
•ease of integration with employer benefits programs;•price;
•breadth and depth of platform functionality;
•modern and open technology supporting integration with third-party applications;
•ability to recruit and retain skilled employees and clinicians;
•access to and ability to derive insights from large, disparate data sets;
•advanced analytics capabilities to create personalized recommendations;
•brand awareness and reputation;
•regulatory compliance; and
•ability to rapidly innovate and respond to changing customer needs and legislative developments.
While certain of our competitors may have greater resources, recognition, larger customer bases, or longer-standing offerings, we believe that we compete favorably against our competitors based on these criteria. We believe that our platform dramatically improves member experience, encourages better health outcomes, and lower costs for both our members and our customers. As our market grows and continues to evolve through technology or regulatory-driven changes, we expect it will continue to attract interest from existing larger companies who may be able to invest more resources in solutions development and sales and marketing while leveraging their existing relationships, as well as interest from new entrants, who could introduce new solutions.
We believe that our intellectual property rights are valuable and important to our business. We rely on trademarks, patents, copyrights, trade secrets, intellectual property assignment agreements, confidentiality procedures, nondisclosure agreements, and employee nondisclosure and invention assignment agreements to establish and protect our proprietary rights.
These intellectual property rights and procedures may not prevent others from creating a competitive technology platform or otherwise competing with us. We may be unable to obtain, maintain, and enforce the intellectual property rights on which our business depends, and assertions by third parties that we violate their intellectual property rights could have a material adverse effect on our business, financial condition, and results of operations.
We continually review our product and technology efforts to assess the existence and patentability of new intellectual property, and have been granted several patents in the United States and
continue tomay prosecute
several pendingadditional patent applications in the
United States.future. We have several registered trademarks in the United States.
HIPAA and Other Privacy and Security Requirements
Numerous state, federal, local, and federalforeign laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, and other processing of PHIpersonal or sensitive data (including protected
health information (PHI) and PII.personally identifiable information (PII)). These laws and regulations include the Health Insurance Portability and Accountability Act (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), the Federal Trade Commission Act, the Telephone Consumer Protection Act of 1991 (TCPA), the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM), and the California Consumer Privacy Act of 2018 (CCPA), as amended by the California Privacy Rights Act (CPRA). In addition, several states within the United States have enacted or proposed data privacy laws, including Virginia, Colorado, Utah, and Connecticut. Additionally, we are, or may become, subject to various U.S. federal and state consumer protection laws which require us to publish statements that accurately and fairly describe how we handle personal data and choices individuals may have about the way we handle their personal data.
For example, HIPAA establishes a set of national privacy and security standards for the protection of PHI by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and individuals and entities that perform services for them which involve the use, or disclosure of, individually identifiable health information, known as business associates and their subcontractors. We are considered a business associate under HIPAA. As such, we could be subject to periodic audits for compliance with the HIPAA Privacy and Security Standards by HHSthe U.S. Department of Health and Human Services (HHS) and our customers. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims. HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $100 per violation and are not to exceed $50,000 per violation, subject to a cap of $1.5 million for violations of the same
standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs, and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
In addition, HHS is required under HIPAA to establish a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the Civil Monetary Penalty fine paid by the violator, which is yet to be publicly proposed or implemented. HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals. HIPAA specifies that such notifications must be made
“withoutwithout unreasonable delay and
in no case later than 60 calendar dayswithin a certain time period after discovery of the breach.
” If Depending on the number of patients affected by a breach,
affects 500 patients or more, it
mustmay be required to be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting
500a certain number of patients
or more in the same state or jurisdiction must also be reported to the local media.
If a breach involves fewer than 500 people,For breaches affecting smaller numbers of patients, the covered entity must record it in a log and notify HHS at least annually.
Likewise,
California enacted legislation in 2018 that has been dubbed the
first “GDPR-like” law in the United States. Known as the California Consumer Privacy Act (CCPA), itCCPA creates
new individual privacy rights for consumers
(as that word is broadly defined in the law) and places increased privacy and security obligations on entities handling personal data of consumers or households.
In effect since January 1, 2020, theThe CCPA
requiresimposes obligations on covered companies to provide
newspecific disclosures
related to
a company’s collection, use, and disclosure of personal data and to respond to certain requests from California
consumers, provide such consumers new waysresidents, related to
opt-outtheir personal data. The CPRA, effective January 1, 2023, expands the CCPA by giving California residents the ability to limit use of certain
salessensitive personal data, establishing restrictions on personal data retention, expanding the types of
personal information,data breaches that are subject to the CCPA’s private right of action, and
allow forestablishing a new
cause of action for data breaches. It remains unclear what, if any, modifications will be madeCalifornia Privacy Protection Agency to
implement and enforce the
draft regulations that have been released or how the CCPA will be interpreted. As currently written, the CCPA could impact our business activities depending on how it is interpreted.new law.
There are numerous other federal, state, and foreign laws and regulations that protect the confidentiality, privacy, availability, integrity, and security of PHI and other types of PII. These laws and regulations in many cases are more restrictive than, and may not be preempted by, HIPAA and its implementing rules. These laws and regulations are often uncertain, contradictory, and subject to changed or differing interpretations, and we expect new laws, rules, and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and our customers and potentially exposes us to additional expense, adverse publicity and liability. While we have implemented
Foreign data privacy and security
measureslaws (including but not limited to the EU General Data Protection Regulation (EU GDPR) and the UK GDPR) impose significant and complex compliance obligations on entities that are subject to those laws. As one example, the EU GDPR applies to any company established in
an effortthe European Economic Area (EEA) and to
complycompanies established outside the EEA that process personal data in connection with
applicable laws and regulations relatingthe offering of goods or services to
privacy and data
protection, some PHI and other PIIsubjects in the EEA or
confidential information is transmitted to us by third parties, who may not implement adequate security and privacy measures, and it is possible that laws, rules and regulations relating to privacy,the monitoring of the behavior of data
protection, or information security may be interpreted and appliedsubjects in
a manner that is inconsistent with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have violated such laws, rules, or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business.the EEA.
Our business activities are subject to a complex set of regulations and rigorous enforcement, including by the Food and Drug Administration (FDA), U.S. Department of Justice, U.S. Department of Health and Human Services (HHS),HHS, Office of the Inspector General and Office of Civil Rights, and numerous other federal and state governmental authorities. In addition, our employees, consultants and
commercial partners may engage in misconduct or other
improper activities, including non-compliance with regulatory standards and requirements. Federal and state healthcare laws and regulations that may affect our ability to conduct business include:
| ● | HIPAA, as amended by HITECH, and its implementing regulations, which impose certain requirements relating to the privacy, security, and transmission of protected health information on certain healthcare providers, health plans and healthcare clearinghouses, their business associates as well as their covered subcontractors that access or otherwise process individually identifiable health information on their behalf; HIPAA also created criminal liability for knowingly and willfully falsifying or concealing a material fact or making a materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; |
| ● | state laws governing professional licensure, the corporate practice of medicine and other healthcare professions and related fee-splitting laws; |
| ● | the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the CMS programs, including Medicare and Medicaid; |
| ● | the federal civil false claims laws, including the federal False Claims Act, and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government; |
| ● | federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; |
| ● | the federal Physician Payments Sunshine Act, or Open Payments, created under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, (collectively, the Affordable Care Act), and its implementing regulations, which requires manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to CMS information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding its payments and other transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives during the previous year; |
| ● | Federal Food, Drug, and Cosmetic Act (FDCA), which requires, among other things, manufacturers of medical devices, including certain software technology companies, to comply with requirements related to pre-market clearances, approved labeling, medical device adverse event reporting, and on-going post-market monitoring and quality assurance; |
| ● | state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; and |
| ● | federal and state laws and regulations regarding: (i) the corporate practice of medicine and other health care professions, the provision of management or administrative services in connection with practice of medicine and other health care professions, employment of professionals by non-professionals, |
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HIPAA, as amended by HITECH, and its implementing regulations, which impose certain requirements relating to the privacy, security, and transmission of protected health information on certain healthcare providers, health plans and healthcare clearinghouses, their business associates as well as their covered subcontractors that access or otherwise process individually identifiable health information on their behalf; HIPAA also created criminal liability for knowingly and willfully falsifying or concealing a material fact or making a materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;
•state laws governing professional licensure, the corporate practice of medicine and other healthcare professions and related fee-splitting laws;
•
the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the CMS programs, including Medicare and Medicaid; | | professional fee splitting; (ii) professional licensing and standards of professional conduct; (iii) the provision of telemedicine, telehealth or other health care services, including medical record retention requirements; and (iv) the billing, submission, or collection of claims or payments for healthcare services. |
•the federal civil false claims laws, including the federal False Claims Act, and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government;•federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
•the federal Physician Payments Sunshine Act, or Open Payments, created under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, (collectively, the Affordable Care Act), and its implementing regulations, which requires manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to CMS information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors) other healthcare professionals (such as physician assistants and nurse practitioners), and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;
•Federal Food, Drug, and Cosmetic Act (FDCA), which requires, among other things, manufacturers of medical devices, including certain software technology companies, to comply with requirements related to pre-market clearances, approved labeling, medical device adverse event reporting, and on-going post-market monitoring and quality assurance;
•state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; and
•federal and state laws and regulations regarding: (i) the corporate practice of medicine and other health care professions, the provision of management or administrative services in connection with practice of medicine and other health care professions, employment of professionals by non-professionals, professional fee splitting; (ii) professional licensing and standards of professional conduct; (iii) the provision of telemedicine, telehealth or other health care services, including medical record retention requirements; and (iv) the billing, submission, or collection of claims or payments for healthcare services.
The Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act. Further, our operations may subject us to various laws relating to the licensure and corporate practice of a health care profession. These laws, in particular, vary greatly by state and are subject to broad interpretations by regulators.
Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our activities could be subject to challenge under one or more of such laws. Any action brought against us for violations of these laws or regulations, even if successfully defended, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. We may be subject to private “qui tam” actions brought by individual whistleblowers on behalf of the federal or state governments, with potential liability under the federal False Claims Act including mandatory treble damages and significant per-claim penalties.
If our operations are found to be in violation of any of the federal or state laws described above or any other current or future fraud and abuse or other healthcare laws and regulations that apply to us, we may be subject to penalties, including significant criminal, civil, and administrative penalties, damages and fines, disgorgement, additional reporting requirements, and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws, imprisonment and exclusion from participation in government programs, such as Medicare and Medicaid, as well as contractual damages, curtailment of our business activities, and reputational harm.
Additionally, in the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed reforms of the healthcare system in an effort to contain costs, improve quality, and expand access to care, including the proposed modification to some of the aforementioned laws. We expect there to continue to be a number of healthcare-related legislative initiatives that may significantly affect the healthcare
industry, particularly in light of the new presidential administration.industry. These reform initiatives may, among other things, result in modifications to the aforementioned laws and/or the implementation of new laws affecting the healthcare industry.
Employees and Human Capital Resources
Our employees are critical to our success. We share our mission with the dedicated and passionate people that we employ, and our culture is a driving factor in our ability to attract and retain top talent. We foster a culture of transparency and alignment whereby we educate our employees on how their contributions each day drive us toward the achievement of our mission. We work together to solve complex problems, and we strive to “do well and do good.”
Our Board of Directors and Board committees provide oversight on certain human capital matters, including our Inclusion and Diversity programs and initiatives, and are updated periodically by our executive management and our People and Culture team. Our People and Culture team is principally tasked with identifying and recruiting a highly skilled, empathetic and diverse workforce aligned with our mission of changing healthcare and supporting our members and customers. Diversity and inclusion, inclusive of pay equity, is a focus of our human capital management programs, as is enabling high levels of employee engagement and professional development and advancement.
We regularly conduct anonymous surveys to seek feedback from our employees on a variety of topics, including but not limited to, their engagement with and joy in their roles, whether they intend to remain at the company, confidence in company leadership, career growth opportunities and improvements on how we can make the company a more desirable place to work and grow. The results are shared with our employees and reviewed by senior leadership, who analyze areas of progress or deterioration and prioritize actions and activities in response to such survey results.
As of
March 31, 2021,February 29, 2024, we had
a workforce of approximately
1,720 employees, including approximately 320 employees through our acquisition of 2nd.MD.2,400 people. Our
largest group of employees are in our front line care teams comprised of our Accolade Health Assistants, Clinicians (including nurses, pharmacists, and medical directors), and other service and operations team members. Otheremployee groups are comprised as follows:
Front Line Care, Product and Technology, Field Operations, including sales and marketing, Solutions and Growth, and General and Administration roles.
Our three largest offices are located in Seattle, Washington, Plymouth Meeting, Pennsylvania, and Scottsdale, Arizona. We also have concentrations of employees in Santa Monica, California, Atlanta, Georgia,supplement our workforce with contractors and Prague, Czech Republic, as well as a number of employees who work from home in various States. None of our employees is represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
consultants depending on business need.
Our largest group of employees inis our front line care teams,team, including our Accolade Health AssistantsCare Advocates and clinicians who serve our members and customers, who are highly trained professionals who develop trusted relationships with our members and serve as their primary and ongoing point of contact for myriad issues related to healthcare and benefits as part of our services. We employ individuals who demonstrate empathy and problem solving skills, and we hire from diverse professional backgrounds, including social work, teaching, customer care, and benefits. Our Accolade Health AssistantsCare Advocates are trained in our proprietary engagement approach and leverage our integrated technology platform to provide data informed, personalized health and benefits support to members in friendly, straightforward terms. Our clinicians include registered nurses, physician medical directors, pharmacists, behavioral health specialists, and women’s health specialists, and have
deep expertise across a wide variety of specializations. Our nurses work with our other clinicians to help members demystify their care needs through personalized, evidence based, and data driven protocols.
Our two largest offices and co-headquarters locations are located in Seattle, Washington and Plymouth Meeting, Pennsylvania. We
doalso have concentrations of employees in various cities throughout the United States and Prague, Czech Republic, as well as a number of employees who work from home in various states. None of our employees is represented by a labor union. We have not
currently provide medical care or establish patient relationshipsexperienced any work stoppages, and we consider our relations with our
members.employees to be good.
We seek to retain our employees through appropriate incentives. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives. Our Board of Directors, and particularly, our Compensation Committee, in consultation with executive management and our People and Culture team, are responsible for reviewing our total rewards packages, including compensation and health and welfare benefits.
As part of our total rewards programs, our employees are eligible to receive benefits including:
| ● | Comprehensive health benefits for all employees working an average of 30 hours or more per week, including medical, dental and vision plans with employer contributions. |
| ● | Various employee assistance and health-related programs to provide our employees access to important health resources, including telehealth, mental health programs, and the Accolade for Accolade program that enables our employees to receive the Accolade service. |
| ● | Comprehensive parental leave with up to 9 weeks of maternity leave, 9 weeks of bonding leave, and 4 weeks of phase-back time for all employee parents for new births, adoptions and foster placements. |
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Comprehensive health benefits for all full-time employees who regularly works 30 hours or more per week, including medical, dental and vision plans with employer contributions.
•Various employee assistance and health-related programs to provide our employees access to important health resources, including telehealth, mental health programs, expert medical opinion, family planning, and the Accolade for Accolade program that enables our employees to receive the Accolade service.
•
Comprehensive parental leave with up to 9 weeks of maternity leave, 9 weeks of bonding leave, and 4 weeks of phase-back time for all employee parents for new births, adoptions and foster placements. | ● | Paid time off program, including an employee and family sick time program. |
| ● | A COVID-19 program, including waived copays for telehealth visits related to COVID-19 and a Caregiver program to provide adapted schedules and leave to support working caregivers. |
| ● | A 401(k) plan with pre- and post-tax contributions and an employer match, pre-tax commuter benefit, and access to a financial support navigation service. |
•Paid time off program, including an employee and family sick time program.•Waived copays for telehealth visits and a Caregiver program to provide adapted schedules and leave to support working caregivers.
•A 401(k) plan with pre- and post-tax contributions and an employer match, pre-tax commuter benefit, and access to a financial support navigation service.
We continually evaluate our total rewards programs to provide our employees a compelling suite of benefits aligned with their needs.
We were formed under the laws of the state of Delaware in January 2007 under the name Accretive Care LLC, and we converted to a Delaware corporation under the name Accolade, Inc. in June 2010. Our principal executive offices are located at 1201 Third Avenue, Suite 1700, Seattle, WA 98101, and we have co-headquarters at 660 West Germantown Pike, Suite 500, Plymouth Meeting, PA 19462. Our telephone number is (206) 926-8100. Our website address is www.accolade.com.
We are required to file reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to those reports, are available free of charge on our website at http://www.accolade.com. Information found on, or accessible through, our website is not part of, and is not incorporated into, this Annual Report on Form 10-K. These reports are posted as soon as reasonably practicable after we file them electronically with the SEC at http://www.sec.gov.
You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. Our business, results of operations, financial condition, and prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, results of operations, financial condition, and prospects could be materially and adversely affected. Unless otherwise indicated, references in these risk factors to our business being harmed will include harm to our business, reputation, brand, financial condition, results of operations, and prospects. In such event, the market price of our common stock could decline. Risks Related to Our Business and Industry
We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to achieve or maintain profitability.
We have incurred net losses in every periodmost periods since our inception. We incurred net losses of $50.7 million, $51.4 million, $56.5 million for the fiscal years ended February 28(29), 2021, 2020,inception and 2019, respectively.continue to have an accumulated deficit. We expect our costs will increase substantially in the foreseeable future and our losses will continue as we expect to invest significant additional funds towards growing our business and operating as a public company and as we continue to invest in increasing our customer base, expanding our operations, hiring additional employees, and developing future offerings. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue
sufficiently to offset these higher expenses. We are unable to accurately predict when, or if, we will be able to achieve profitability. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. To date, we have financed our operations principally from the sale of our equity, revenue from sales of our offerings, and the incurrence of indebtedness. Our cash flow from operations was negative for each of the last three fiscal years, ended February 28(29), 2021, 2020, and 2019, and we may not generate positive cash flow from operations in any given period. If we are not able to achieve or maintain positive cash flow in the long term, we may require additional financing, which may not be available on favorable terms or at all and/or which wouldmay be dilutive to our stockholders. If we are unable to successfully address these risks and challenges as we encounter them, our business may be harmed. Our failure to achieve or maintain profitability or positive cash flow could negatively impact the value of our common stock.
We derive a significant portion of our revenue from our largest customers. The loss of any of these customers, or renegotiation of any of our contracts with these customers, could negatively impact our results.
Historically we have relied on a limited number of customers for a significant portion of our revenue.
Our three largest customers (American Airlines, Comcast Cable, and Lowe’s) in the aggregate comprised 38% of our revenue for the fiscal year ended February 28, 2021, and our future revenue may be similarly concentrated. Our largest customer, Comcast Cable, accounted for 16%, 24%, and 35% of our revenue for the fiscal years ended February 28(29), 2021, 2020, and 2019, respectively. The loss of any of our largest customers or the renegotiation of any of our largest customer contracts
has in the past, and could
in the future, adversely affect our results of operations.
AlthoughThe loss of a significant customer, if we
are not able to replace such revenue from other existing or new customers, could harm our business and our financial results. We typically enter into three-year contracts with our customers
after a specified period,and certain of these contracts, including existing contracts with some of our largest customers, are terminable for convenience by our customers after an initial period and a notice period has passed. In the ordinary course of business, including in connection with renewals or extensions of these agreements, we engage in active discussions and renegotiations with our customers in respect of the solutions we provide and the terms of our customer agreements, including our fees. In addition, as our
customers’customers' businesses respond to market dynamics and financial pressures, and as our customers make decisions with respect to the health and other benefits they provide to their employees, our customers may seek to renegotiate or terminate their agreements with
us, or may stage competitive request for proposal processes, any of which could result in the loss or reduced profitability of such customers’ agreements with us.
In particular, in connection with the COVID-19 pandemic, macroeconomicMacroeconomic factors
including heightened inflation and geopolitical tension may affect our
customers’customers' desire to renew their
contracts, or if theycontracts. If customers undergo layoffs or reductions in force then our membership numbers would
decrease, which would reduce our revenues. For example, customers in the airline industry have had significant headcount reductions, which have resulted in, and are likely to continue to result in a reduction
of revenues associated with these customers. We may not experience the impact of changes to our customers’ headcount immediately because employees that are on furlough or are receiving continuing health coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act (COBRA) may still have access to our services during such period and be included in our
member count, althoughbase and variable fee per-member-per-month (PMPM) and reduce our
member counts will be reduced upon completion of these members’ COBRA access, and there can be no guarantee that all such members will elect COBRA in lieu of alternative healthcare options.revenues. In addition, there is substantial uncertainty about further
economic disruption
as initial fiscal stimulus programs enddue to macroeconomic factors, including heightened inflation and
the COVID-19 pandemic continues to disrupt the economy.geopolitical tension. Any of these
and other macroeconomic factors could result in reductions to the fees and changes to the scope of offerings contemplated by our original customer contracts and consequently could negatively impact our business.
During the second calendar quarter of 2020, we agreed to deferred payment plans with certain of our customers in industries most severely impacted by the COVID-19 pandemic. Because we rely on a limited number of customers for a significant portion of our revenue, delayed payments by a few of our largest customers could result in a reduction in, and greater volatility of, our free cash flow and available cash. We also depend on the creditworthiness of these customers. If the financial condition of
one or more of our largest customers
decline,declines, our credit risk could increase.
In one case, a smaller customer has filed for Chapter 11 bankruptcy and terminated its health plan and associated Accolade services as of October 31, 2020. Should one or more of our largest customers declare bankruptcy, it could adversely affect the collectability of our accounts receivable and affect our bad debt reserves, net income, free cash flow, and available cash.
We have a limited operating history with our current offerings, which makes it difficult to evaluate our current and future business prospects and increases the risk
management team makes it difficult to effectively assess or forecast our future prospects. For example, we recently began offering Accolade Total Benefits and Accolade Total Care, and our sales efforts with respect to these offerings may not be as successful as our sales of Accolade Total Health and Benefits and our historical primary offering. You should consider our business and prospects in light of the risks and difficulties we encounter or may encounter. These risks and difficulties include our ability to cost-effectively acquire new customers, retain existing customers and expand the scope of solutions we sell to new and existing customers. Furthermore, in pursuit of our growth strategy, we may enter into new partnerships to further penetrate our targeted markets and adoption of our solutions, but it is uncertain whether these efforts will be successful. If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above, our business may be harmed.
Our business, results of operations, and financial condition may fluctuate on a quarterly and annual basis, which may result in a decline in our stock price if such fluctuations result in a failure to meet any projections that we may provide or the expectations of securities analysts or investors.
Our operating results have in the past and could in the future vary significantly from quarter-to-quarter and year-to-year and may fail to match our past performance, our projections or the expectations of securities analysts because of a variety of factors, many of which are outside of our control and, as a result, should not be relied upon as an indicator of future performance. As a result, we may not be able to accurately forecast our operating results and growth rate. Any of these events could cause the market price of our common stock to fluctuate. Factors that may contribute to the variability of our operating results include:
| ● | our ability to attract new customers and engage new members, and retain and engage with existing customers and members; |
| ● | achievement of performance metrics and the realization of savings in healthcare spend by our customers resulting from the utilization of our solutions; |
| ● | the upfront costs in our customer, member and trusted supplier relationships; |
| ● | the enrollment cycles and employee benefit practices of our customers; |
| ● | the financial condition of our current and potential customers; |
| ● | changes in our sales and implementation cycles; |
| ● | introductions and expansions of our offerings, or challenges with their introduction; |
| ● | changes in our pricing or fee structures or those of our competitors; |
| ● | the timing and success of new offering introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors; |
| ● | increases in operating expenses that we may incur to grow and expand our operations and to remain competitive; |
| ● | our ability to successfully expand our business; |
| ● | breaches of information security or privacy; |
| ● | changes in stock-based compensation expenses; |
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our ability to attract new customers and engage new members, and retain and engage with existing customers and members;
•achievement of performance metrics and the realization of savings in healthcare spend by our customers resulting from the utilization of our solutions;
•the upfront costs in our customer, member and Trusted Partner Ecosystem relationships;
•the enrollment cycles and employee benefit practices of our customers;
•the financial condition of our current and potential customers;
•changes in our sales and implementation cycles;
•introductions and expansions of our offerings, or challenges with their introduction;
•changes in our pricing or fee structures or those of our competitors;
•the timing and success of new offering introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors;
•increases in operating expenses that we may incur to grow and expand our operations and to remain competitive;
•our ability to successfully expand our business;
•breaches of information security or privacy;
•changes in stock-based compensation expenses;
•the amount and timing of operating costs and capital expenditures related to the expansion of our business;
•adverse litigation judgments, settlements, or other litigation-related costs;
•changes in the structure of healthcare provider and payment systems;
•changes in the legislative or regulatory environment, including with respect to healthcare, privacy, or data protection, or enforcement by government regulators, including fines, orders, or consent decrees;
•the cost and potential outcomes of ongoing or future regulatory investigations or examinations, or of future litigation;
•changes in our effective tax rate;
•our ability to make accurate accounting estimates and appropriately recognize revenue for our existing and future offerings;
•changes in accounting standards, policies, guidance, interpretations, or principles;
•instability in the financial markets;
•
general economic conditions, both domestic and international; | ● | the amount and timing of operating costs and capital expenditures related to the expansion of our business; |
| ● | adverse litigation judgments, settlements, or other litigation-related costs; |
| ● | changes in the structure of healthcare provider and payment systems; |
| ● | changes in the legislative or regulatory environment, including with respect to healthcare, privacy, or data protection, or enforcement by government regulators, including fines, orders, or consent decrees; |
| ● | the cost and potential outcomes of ongoing or future regulatory investigations or examinations, or of future litigation; |
| ● | changes in our effective tax rate; |
| ● | our ability to make accurate accounting estimates and appropriately recognize revenue for our existing and future offerings; |
| ● | changes in accounting standards, policies, guidance, interpretations, or principles; |
| ● | instability in the financial markets; |
| ● | general economic conditions, both domestic and international; |
| ● | volatility in the global financial markets; |
| ● | political, economic, and social instability, including terrorist activities and outbreaks of public health threats, such as coronavirus, influenza, or other highly communicable diseases or viruses, and any disruption these events may cause to the global economy; and |
| ● | changes in business or macroeconomic conditions. |
•uncertain credit and global financial markets;•political, economic, and social instability, including terrorist activities, the ongoing conflict between Ukraine and Russia, conflicts in the Middle East, and outbreaks of public health threats, such as coronavirus, influenza, or other highly communicable diseases or viruses, and any disruption these events may cause to the global economy; and
•changes in business or macroeconomic conditions.
The impact of one or more of the foregoing and other factors may cause our operating results to vary significantly. As such, we believe that quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.
Our sales cycle can be long and unpredictable and requires considerable time and expense. As a result, our sales, revenue, and cash flows are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly.
The timing of our sales, revenue, and cash flows is difficult to predict because of the length and unpredictability of our sales cycle. The sales cycle for our solutions from initial contact to launch varies widely by potential customer. Some of our potential customers, especially in the case of our prospective strategic and enterprise customers, undertake a significant and prolonged evaluation process, including to determine whether our solutions meet the specific needs of their group health plan, employee benefits programs, corporate budgets, and other goals, which frequently involves evaluation of not only our solutions but also an evaluation of other available solutions. Such evaluations have in the past resulted in extended sales cycles that, due to changes in corporate objectives, leadership involved in the selection process, and other factors, may result in delayed or suspended decision-making in awarding the sale. In addition, our sales cycle may become more lengthy and difficult as a result of the travel restrictionsmacroeconomic factors, including heightened inflation and business interruptions caused by the COVID-19 outbreak, or if prospective customers slow down their decision-making about purchases due to the economic effects of COVID-19.geopolitical tension. During the sales cycle, we expend significant time and money on sales and marketing activities, which lowers our operating margins, particularly if no sale occurs. For example, there may be unexpected
delays in a potential customer’scustomer's internal procurement processes, which involve intensive financial, operational, and security reviews, and for which our solutions represent a significant purchase. In addition, the significance and timing of our offering enhancements, and the introduction of new products by our competitors, may also affect our potential customers’customers' purchases. For all of these reasons, it is difficult to predict whether a sale will be completed, the particular period in which a sale will be completed, or the period in which revenue from a sale will be recognized.
Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality.
We believe there are significant seasonal factors that may cause us to record higher revenue in some quarters compared with others. We believe this variability is largely due to our focus on the healthcare industry. For example, with respect to our customers, in particular our
Accolade Total Heath and Benefits customers with contract years commencing at the beginning of a calendar year, we record a disproportionate amount of revenue from such customers during the fourth quarter of our fiscal year relative to the first three quarters of our fiscal year. This timing is caused, in part, by the measurement, achievement, and associated revenue recognition of performance metrics and healthcare costs savings components of certain of our customer contracts during the fourth quarter of each fiscal year.
While we believe we have visibility intoOur growth rate and the
seasonalityimpact of
our business, our rapid growth rateacquisitions over the last several years may have made seasonal fluctuations more difficult to detect. If our rate of growth slows over time, seasonal or cyclical variations in our operations may become more pronounced, and our business may be harmed.
The recognition of a portion of our revenue is subject to the achievement of performance metrics and healthcare cost savings and may not be representative of revenue for future periods.
We price the majority of our services based upon a per-member-per-month (PMPM)PMPM fee times the number of eligible members, typically with a portion of the PMPM fee fixed (base PMPM fee) and the remainder of the fee variable (variable PMPM fee). Revenue from variable PMPM fees can be earned through either, or a combination of, the achievement of certain performance metrics or the realization of healthcare savings resulting from the utilization of our services. Although we have typically achieved these performance metrics and realization in savings of healthcare spend, resulting in our earning over 95%90% of the aggregate maximum potential revenue under our customer contracts (measured on the corresponding calendar year basis in fiscal years 2021, 2020,2024, 2023, and 2019)2022), our revenue and financial results in the future may be variable based on whether we earn this performance-based revenue. For example, lower healthcare utilization could result in lower
engagement with Accolade services than expected and put our ability to meet certain performance metrics at risk. In addition, since our customers typically pay the full PMPM fee 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. Under U.S. generally accepted accounting principles (GAAP), we recognize revenue when control of the promised services is transferred to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those services. The majority of the fees we earn are considered to be variable consideration under GAAP. We typically invoice our customers on a periodic basis for the base PMPM fees and variable PMPM fees in advance of performing the services, and these advances are classified as deferred revenue on our consolidated balance sheet until such time that the associated revenue can be recognized.
As of February 28, 2021, we had $26.3 million of deferred revenue recorded as a liability on our consolidated balance sheet. Due to the need for us to satisfy performance metrics and healthcare savings requirements, deferred revenue at any particular date may not be representative of actual revenue for any current or future period.
If we fail to effectively manage our growth and organizational change, our mission-driven culture could be impacted, and our business could be harmed.
We have experienced, and may continue to experience, growth and organizational change, which has placed, and may continue to place, significant demands on our management, operational, and financial resources. For example, our headcount has grown from 759 as of February 28, 2017 to approximately 1,720 as of March 31, 2021,resources, including the addition of approximately 320 additionalneed to hire new employees throughto support our acquisition of 2nd.MD. Most of our employees have been with us for fewer than three years as a result of our rapid growth. We believe that our mission-driven culture has been an important contributor to our success, which we believe fosters empathy, innovation, teamwork, and passion for
providing high levels of customer satisfaction and member engagement. If we fail to successfully integrate, develop, and motivate new employees, it could harm our mission-driven culture. In addition, as we grow and develop the infrastructure of a public company, we may find it difficult to maintain the important aspects of our mission-driven culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, maintain our performance, or execute on our business strategy.
In addition, from time to time, we implement organizational changes to pursue greater efficiency and realign our business and strategic priorities. For example, during the year ended February 28, 2023, we initiated several measures to accelerate the integration of recent acquisitions through strategic reductions in our workforce, including increasing hiring in lower cost regions to support our growth, scale, and profitability objectives. Additional risks associated with the continuing impact of the organizational changes include employee attrition beyond our intended reduction and adverse effects on employee morale, diversion of management attention, adverse effects to our reputation as an employer (which could make it more difficult for us to hire new employees in the future), and potential failure or delays to meet operational and growth targets due to the loss of qualified employees. If we do not realize the expected benefits of our organizational changes on a timely basis or at all, our business, results of operations, and financial condition could be adversely affected.
To manage our current and anticipated future growth and organizational change effectively, we must also continue to maintain, and may need to enhance, our information technology infrastructure and financial and accounting systems and controls, as well as manage expanded operations in geographically distributed locations, which will place additional demands on our resources and operations. Failure to manage our growth and organizational change effectively could lead us to over-invest or under-invest in technology and operations; result in weaknesses in our infrastructure, systems, or controls; give rise to operational mistakes, losses, or loss of productivity or business opportunities; reduce customer or member satisfaction; limit our ability to respond to competitive pressures; and result in loss of team members and reduced productivity of remaining team members. Our growth and organization change could require significant capital expenditures and may divert financial resources and management attention from other projects, such as the development of new or enhanced solutions or the acquisition of suitable businesses or technologies. If our management is unable to effectively manage our growth and organizational change, our expenses may increase more than expected, our revenue could decline or may grow more slowly than expected, and we may be unable to implement our business strategy.
If we are unable to attract, integrate, and retain additional qualified personnel, especially for Accolade
Health Assistant,Care Advocates, clinical,
including primary care physicians and medical specialists, and various product and technology roles, our business could be adversely affected.
Our future success depends in part on our ability to identify, attract, integrate, and retain empathetic and knowledgeable Accolade Health AssistantsCare Advocates and clinicians, as well as highly qualified and motivated product developers and engineers, who embody our mission-driven culture. We seek to employ Accolade Health AssistantsCare Advocates and clinicians who demonstrate empathy and problem-solving skills and hire from diverse professional backgrounds, including social work, teaching, customer care, and benefits. Our Accolade Expert MD service relies on the attraction of and engagement with medical specialists to support its business operations, and PlushCare, via the associated medical practices, seeks to engage high quality primary care physicians. We have from time to time in the past experienced, and may in the future experience, difficulty in hiring and retaining employees with appropriate qualifications. In addition, we may experience employee turnover as a result of our organizational changes. Qualified individuals in the regions where we have offices are in high demand, and we may incur significant costs to attract them. For example, the market for software engineers in the Seattle
area is particularly competitive. In addition, with a current shortage of certain qualified nurses in many areas of the United States, competition for the hiring of these professionals remains intense.
Similarly, with the expansion of adoption of telehealth generally, and specifically virtual primary care, competition remains intense for qualified primary care physicians. We compete for qualified individuals with numerous other companies, many of whom have greater financial and other resources than we do.
During the COVID-19 pandemic, we may experience turnover, with our nurses potentially choosing to take more lucrative hospital work while the pandemic is ongoing. In addition, in the future, we may experiment with different staffing and scheduling models to help attract and retain qualified personnel, including hiring
more individuals
thatwho work remotely, incorporating more flexible work schedules, or deploying a temporary workforce. If we fail to effectively manage our hiring needs or successfully integrate new hires, our employee morale and retention could suffer. Any of these events could also adversely affect our customer and member satisfaction and harm our business.
Attracting, integrating, and retaining personnel will require us to invest in and commit significant financial, operational, and management resources to grow and change in these areas without undermining the mission-driven culture that has been critical to our growth so far. For example, newly hired Accolade Health AssistantsCare Advocates and clinicians require significant training and, in many cases, take significant time before they achieve full productivity. We train Accolade Health AssistantsCare Advocates and clinicians in our proprietary engagement approach and integrated technology platform to provide data-informed, personalized health and benefit support to members in friendly, straightforward terms. This new hire training process lasts approximately two months,one month, including classroom sessions and supervised live call training. If we do not achieve the benefits anticipated from these investments, or if the realization of these benefits is delayed, our results of operations may be adversely affected and our reputation could suffer.
We may also incur significant costs to attract and retain qualified personnel, including significant expenditures related to salaries and benefits and compensation expenses related to equity awards, and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training them. Additionally, we have granted certain, but not all of, our employees equity-based awards under our equity incentive plans and expect to continue this practice. However, if we do not grant equity awards, or if we reduce the value of the equity awards we grant, we may not be able to attract and retain key personnel. Volatility in the price of our common stock underlying equity awards may adversely affect our ability to attract or retain key personnel. If we grant more equity awards to attract and retain key personnel, the expenses associated with such additional equity awards could affect our results of operations.
Further,
as of February 29, 2024, approximately 50% of our U.S. based labor force
areis hourly employees, including Accolade
Health AssistantsCare Advocates and certain clinicians, who are paid wage rates that currently are above the applicable U.S. federal and state minimum wage requirements. These employees are classified as non-exempt
and overtime eligible under U.S. federal and state law. If we fail to effectively manage these hourly employees, then we may face claims alleging violations of wage and hour employment laws, including claims of back wages, unpaid overtime pay, and missed meal and rest periods.
For example, we previously entered into a settlement agreement in early 2019 related to a matter brought by a class of our Accolade Health Assistants employed from August 2014 through August 2017 alleging misclassification of exemption status and a failure to pay appropriate overtime wages. Any such employee litigation could be attempted on a class or representative basis. Such litigation can be expensive and time-consuming regardless of whether the claims against us are valid or whether we are ultimately determined to be liable and could divert
management’smanagement's attention from our business. We also could be adversely affected by negative publicity, litigation costs resulting from the defense of these claims, and the diversion of time and resources from our operations.
Although we have historically maintained a good relationship with ourOur employees
our employees could
also unionize or any of our employees could engage in a strike, work stoppage, or other slowdown that would adversely affect our operations and could result in higher labor costs, which would harm our business.
Our goodwill has been subject to impairment and may be subject to further impairment in the future.
Annually, and upon the identification of a triggering event, management is required to perform an evaluation of the recoverability of goodwill. Triggering events potentially warranting an interim goodwill impairment test include, among other factors, declines in historical or projected revenue, operating income, or cash flows, and sustained declines in our stock price or market capitalization, considered both in absolute terms and relative to peers. As a result of sustained decreases in our stock price and market capitalization, we conducted an impairment test of our goodwill and intangible assets as of May 31, 2022. As a result of this testing, we recorded a non-cash goodwill impairment charge of $299.7 million during the first quarter of fiscal 2023. No impairments were recorded to goodwill or intangible assets during the year ended February 29, 2024. 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, or our cost of, or access to, capital, which could harm our business. See Note 4 to our consolidated financial statements for more details.
We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share our business and operating results will be harmed.
The market for our offerings is underpenetrated, competitive, and characterized by rapidly evolving technology standards, customer and member needs, and the frequent introduction of new products and services. Our competitors range from smaller niche companies to large, well-financed health plans. As costs fall and technology improves, increased market saturation may change the competitive landscape in favor of competitors with greater scale than we currently possess. We compete on the basis of several factors, including level of member engagement, ability to influence members to improve health and financial incomes, customer and member satisfaction, and price. Some of our competitors have greater name recognition, longer operating histories, and significantly greater resources than we do. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements.
In addition to new niche vendors who offer stand-alone products and services, we also face competition from health plans, which may have existing systems in place
atwith customers in our target market. These competitors may now or in the future, offer or promise products or services similar to ours and
which offer ease of integration with existing systems
and which
may leverage existing customer and vendor relationships.
In addition, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, our trusted suppliers,Trusted Partner Ecosystem, or other third parties, technologies, or services to increase the availability of their products to the marketplace. For example, our current competitors may persuade our trustedTrusted Partner Ecosystem suppliers to terminate their relationship with us and engage exclusively with our competitors. Accordingly, new competitors or alliances may emerge that have greater market share, larger customer bases, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. Further, in light of these advantages, even if our
offerings are more effective than the product or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our solutions.
Our partners, including our
trusted suppliers
in our Trusted Partner Ecosystem, could become our competitors by offering similar services. Some of our partners may begin to offer services in the same or similar manner as we do. For example, a
trusted supplier
included in our Trusted Partner Ecosystem may expand their business model from a point solution into an engagement model similar to ours. Although there are many potential opportunities for, and applications of, these services, our partners may seek opportunities or target new customers in areas that may overlap with those that we have chosen to pursue. In such cases, we may potentially compete against our partners. Competition from our partners may adversely affect our business and results from operations. In addition, some of the terms of our partner relationships may include exclusivity or other restrictive clauses. Any agreements with partners that include exclusivity or other restrictive provisions may limit our ability to partner with or provide services to potential customers or other third parties, which could harm our business.
We also compete on the basis of price. We may be subject to pricing pressures as a result of, among other things, competition within the industry, practices of managed care organizations, government action, and financial stress experienced by our customers.
Many customers stage regular request for proposal processes as a matter of procurement policy, which enables competitors to bid aggressively to try to capture such customers’ business, and such competitors may submit bids incorporating pricing or other terms that we are unable or unwilling to match. If our pricing experiences significant downward pressure, our business will be less profitable, and our results of operations will be adversely affected. We cannot be certain that we will be able to retain our current customers or expand our customer base in this competitive environment. If we do not retain current customers or expand our customer base, or if we have to renegotiate existing contracts, our business will be harmed.
Moreover, we expect that competition will continue to increase as a result of consolidation in both the healthcare information technology and healthcare industries. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors or one of
the suppliers in our
trusted suppliers,Trusted Partner Ecosystem, the change in the competitive landscape could also adversely affect our ability to compete effectively and could harm our business. In addition, as the healthcare industry consolidates, competition to provide services to this segment will become more intense. These healthcare industry participants may try to use their market power to negotiate price reductions for our existing and future offerings. If we reduce our prices because of consolidation in the healthcare industry, our revenue would decrease, which could harm our business.
The growth of our business relies, in part, on the growth and success of our customers and the number of members with access to our offerings, which are difficult to predict and are affected by factors outside of our control.
We enter into agreements with our customers under which our fees are generally dependent upon the number of their employees enrolled in in-scope health plans and those
employees’employees' enrolled dependents each month. If the number of members covered by one or more of our
customers’customers' health and other benefits programs were to decline, such decrease would lead to a decrease in our revenue.
In particular, as a result of the current economic downturn, we believe that some of our customers may experience layoffs or other reductions in their workforce, which for our customers in industries more severely impacted by the COVID-19 pandemic may be significant. Any reductions in headcount for our customers may result in a decrease in our revenue. Some of our fees are also subject to credits if certain performance criteria are not met, which in some cases depend on the behavior of our members, such as their continued engagement with our existing and future offerings, and other factors outside of our control. The recognition of a portion of our revenue is subject to achievement of performance metrics and healthcare cost savings and may not be representative of revenue for future periods. In addition, some of our
customers’customers' members may request to opt out of our service, which could cause our customers to only pay for those members that have not opted out, and as a result, may result in
utilization-basedusage-based pricing, which could lead to a decrease in revenue from that customer and harm our business.
We may be unable to successfully execute on our growth initiatives, business strategies, or operating plans.
We are continually executing on growth initiatives, strategies, and operating plans designed to enhance our business and extend our existing and future offerings to address evolving needs. For example, we recently developed add-on offerings that target specific challenges faced by our customers, including Accolade COVID Response Care, Accolade Boost, the Trusted Supplier Program, and Mental Health Integrated Care.Partner Ecosystem. The anticipated benefits from these
efforts are based on several assumptions that may prove to be inaccurate. Moreover, we may not be able to successfully complete these growth initiatives, strategies, and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve, or it may be more costly to do so than we anticipate. A variety of risks could cause us not to realize some or all of the expected benefits. These risks include, among others, delays in the anticipated timing of activities related to such growth initiatives, strategies, and operating plans, increased difficulty and cost in implementing these efforts, including difficulties in complying with new regulatory requirements, the incurrence of other unexpected costs associated with operating our business, and lack of acceptance by our customers. Moreover, our continued implementation of these programs may disrupt our operations and performance. As a result, we cannot assure youguarantee that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies, and operating plans adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business may be harmed.
We
have and may
again in the future acquire other companies or technologies, which could divert our
management’smanagement's attention, result in dilution to our stockholders, and otherwise disrupt our operations, and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could have an adverse effect on our business, financial condition, and results of operations.
We
have and may
again in the future seek to acquire or invest in businesses, applications, services, or technologies that we believe could complement or expand our existing and future offerings, enhance our technical capabilities, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. In addition, we have limited experience in acquiring other businesses and may have difficulty integrating acquired businesses.
For example, in July 2019, we acquired MD Insider and, in March 2021, we acquired 2nd.MD, which we are in the process of integrating with our offerings. If we acquire additional businesses, we may not be able to integrate the acquired operations and technologies successfully, or effectively manage the combined business following the acquisition. Integration may prove to be difficult due to the necessity of integrating personnel with disparate business backgrounds and
who are accustomed to different corporate cultures.
We also may not achieve the anticipated benefits from any acquired business due to a number of factors, including:
| ● | •inability to integrate or benefit from acquired technologies or services in a profitable manner; •unanticipated costs or liabilities, including legal liabilities, associated with the acquisition; •difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; •difficulty converting the customers of the acquired business into our current and future offerings and contract terms, including disparities in the revenue model of the acquired company;
|
| ● | unanticipated costs or liabilities, including legal liabilities, associated with the acquisition; |
| ● | difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; |
| ● | difficulty converting the customers of the acquired business into our current and future offerings and contract terms, including disparities in the revenue model of the acquired company; |
| ● | diversion of management’s attention or resources from other business concerns; |
| ● | adverse effects on our existing business relationships with customers, members, or strategic partners as a result of the acquisition; |
| ● | the potential loss of key employees; and |
| ● | use of substantial portions of our available cash to consummate the acquisition. |
24
•
diversion of management's attention or resources from other business concerns;
•adverse effects on our existing business relationships with customers, members, or strategic partners as a result of the acquisition;
•
the potential loss of key employees; and•use of substantial portions of our available cash to consummate the acquisition.
We may issue equity securities or incur indebtedness to pay for any such acquisition or investment, which could adversely affect our business, results of operations, or financial condition. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the
per shareper-share value of our common stock to decline. In addition, a significant portion of the purchase price of any companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment
at least annually.annually and upon the identification of a triggering event, such as sustained declines in our stock price or market capitalization. In the future, if our acquisitions do not yield expected returns, we may be required to
takeincur charges to our results of operations based on this impairment assessment process, which could adversely affect our results of operations.
If we do not continue to innovate and provide offerings that are useful to customers and members that achieve and maintain market acceptance, we may not remain competitive, and our revenue and results of operations could suffer.
Our success depends on our ability to keep pace with technological developments, satisfy increasingly sophisticated customer and member requirements, and achieve and maintain market acceptance on our existing and future offerings in the rapidly evolving market for healthcare and benefits in the United States. In addition, market acceptance and adoption of our existing and future offerings
dependsdepend on the acceptance by employers, payors, health plans, and government entities as to the distinct features, cost savings, and other perceived benefits of our existing and future offerings as compared to competitive solutions. Our competitors are constantly developing products and services that may become more efficient or appealing to our customers or members. As a result, we must continue to invest significant resources in research and development in order to enhance our existing offerings and introduce new offerings that customers and members will want, while offering our existing and future offerings at competitive prices. If we are unable to predict customer and member preferences or industry changes, or if we are unable to modify our existing and future offerings on a timely or cost-effective basis, we may lose customers. If we are not successful in demonstrating to existing and potential customers the benefits of our existing and future offerings, or if we are not able to achieve the support of employers, healthcare providers, and insurance carriers for our existing and future offerings, our revenue may decline or we may fail to increase our revenue in line with our forecasts. Our results of operations also would suffer if our innovations are not responsive to the needs of our customers and members, are not timed to match the corresponding market opportunity, or are not effectively brought to market, including as the result of delayed releases or releases that are ineffective or have errors or defects.
The growth of our business and future success relies in part on our partnerships and other relationships with third parties and our business could be harmed if we fail to maintain or expand these relationships.
We selectively form partnerships and engage with
a range ofnumerous third parties, including brokers, agents, benefits consultants, carriers, third-party administrators,
trusted suppliers
in our Trusted Partner Ecosystem, and co-marketing and co-selling partners to grow our customer base and adoption of our offerings.
For example, in March 2019, we partnered with Humana and formed a joint go-to-market strategy, which we launched in two initial geographic markets. In October 2019, concurrent with an equity investment from Humana, we expanded our partnership to add a broader base of solutions targeting self- and fully-insured customer prospects and significantly expand our target geographic markets. We may fail to retain and expand these partnerships and other third-party relationships for various reasons, and any such failure could harm our relationship with our customers, our reputation and brand, our prospects, and our business.
In order to grow our business, we anticipate that we will continue to depend on our relationships with our partners. As we seek to form additional partnerships and other third-party relationships, it is uncertain whether these efforts will be successful, or that these relationships will result in increased customer or member use of our solutions or increased revenue. In the event that we are unable to effectively utilize, maintain, and expand these partnerships and other third-party relationships, our revenue growth could slow. Additionally, our partnerships and other third-party relationships may demand, or demand greater, referral fees or commissions.
If the estimates and assumptions we use to determine the size of our total addressable market are inaccurate, our future growth rate may be impacted and our business would be harmed.
Market estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. The principal assumptions relating to our market opportunity include the number of self- and fully-insured employers in the United States with 500 employees or more. Our market opportunity is also based on the assumption that our existing and future offerings will be more attractive to our customers and potential customers than competing solutions. If these assumptions prove inaccurate, our business, financial condition, and results of operations could be adversely affected.
We depend on our senior management team, and the loss of one or more of these employees, or an inability to attract and retain qualified key personnel, could adversely affect our business.
Our success depends, in part, on the skills, working relationships and continued services of Rajeev Singh (Chief Executive Officer), other senior management team members and other key personnel. We do not currently maintain key-person insurance on the lives of any of our key personnel. From time to time, there may be changes in our senior management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.
While we have entered into offer letters or employment agreements with certain of our executive officers, all of our employees are “at-will” employees, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment rights. In order to retain valuable employees, in addition to salary and cash incentives, we may provide equity awards that vest over time or based on performance. The value to employees of equity awards that vest over time or based on performance will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract offers from other organizations. The departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to hire other personnel to manage and operate our business, and there can be no assurance that we would be able to employ a suitable replacement for the departing individual, or that a replacement could be hired on terms that are favorable to us. In addition, volatility or lack of performance in our stock price may affect our ability to attract and retain replacements should key personnel depart. If we are not able to retain
any of our key personnel, our business could be harmed.
If we are not able to maintain and enhance our reputation and brand recognition, our business and results of operations will be harmed.
We believe that maintaining and enhancing our reputation and brand recognition is critical to our relationships with our existing customers and partners, including suppliers in our trusted suppliers,Trusted Partner Ecosystem, and to our ability to attract new customers and partners. The promotion of our brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Brand promotion and marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of customers, members, and partners, and failure to maintain high-quality support, could harm our reputation and brand and make it substantially more difficult for us to attract new customers and trustedTrusted Partner Ecosystem suppliers or form new partnerships. Additionally, the performance of third parties with whom we have a relationship, including suppliers in our trusted suppliers,Trusted Partner Ecosystem, may also affect our brand and reputation, particularly if our customers and members do not have a positive experience with suppliers in our trusted suppliersTrusted Partner Ecosystem or other third parties. In addition, our sales process is highly dependent on the reputation of our offerings and business and on positive recommendations from our existing customers. If we do not successfully maintain and enhance our reputation and brand recognition, our business may not grow and we could lose our relationships with existing and prospective customers, which would harm our business.
Any failure to offer high-quality customer and member support services could adversely affect our relationships with our customers and partners and our operating results.
Our customers and members depend on our support to assist members with their healthcare and other benefits needs. We may be unable to accurately predict our
members’members' demand for services or respond quickly enough to accommodate short-term increases in customer or member demand for services. Increased customer or member demand for services, without a corresponding increase in productivity or revenue, could increase costs and adversely affect our operating results. Any failure to maintain high-quality support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our solutions to existing and prospective customers, our relationships with third parties and our ability to form new partnerships, and our business and operating results.
If our existing customers do not continue to renew their contracts with us, renew at lower fee levels, decline to purchase additional offerings from us, or terminate their contracts for convenience, our business could be harmed.
We expect to derive a significant portion of our revenue from the renewal of existing customers’customers' contracts and sales of additional solutions to existing customers. As part of our growth strategy, for instance, we haveare recently focused on expanding our solutions among current customers. For example, we recently launched Accolade Boost, which leverages our technology platform’s decision influence models to identify member population segments for multichannel messaging to encourage additional engagement and member utilization of benefit programs, and our Trusted Supplier Program, which simplifies a customer’s vetting and procurement processes for point solutions (including financial, information security, and clinical audits). More recently, we launched Accolade COVID Response Care, a service that helps employers manage their return to work programs, and Mental Health Integrated Care, which expands our members’ access to mental health coaching, virtual therapy, and virtual psychiatry and deeply integrates these services with the physical health support provided by the Accolade care team. Achieving a high customer retention rate and selling additional
applications and solutions are critical to our future business, revenue growth, and results of operations. Factors that may affect our retention rate and our ability to sell additional applications and solutions include the following:
●•the price, performance, and functionality of our existing and future offerings;
●•the availability, price, performance, and functionality of competing solutions;
●•our ability to develop and sell complementary applications and solutions;
●•changes in healthcare laws, regulations, or trends; and
●•the business environment of our customers.
We typically enter into contracts with our customers with a stated initial term of three years and various termination rights, which if invoked may cause such contracts to be terminated before the term expires. For example, after a specified period, certain of these contracts are terminable for convenience by our customers after a notice period has passed, including existing contracts with some of our largest customers. Approximately one third of our customer contracts are up for renewal between nowMacroeconomic factors including heightened inflation and each of the end of fiscal year 2022, during fiscal year 2023 and during fiscal year 2024. In connection with the COVID-19 pandemic, macroeconomic factorsgeopolitical tension may affect our customers’customers' desire to renew their contracts, or even if they do renew, if they undergo layoffs or reductions in force, then our membership numbers would decrease which would reduce our revenues. Some of our largest customers are airlines, and this industry may be particularly susceptible to the current economic factors if there is not additional government assistance. If any of our contracts with our customers is terminated, we may not be able to recover all fees due under the terminated contract, which may adversely affect our operating results. Should any of our customers terminate their relationship with us after implementation of our solutions has begun, we not only would lose our time, effort, and resources invested in that implementation, but also we would have lost the opportunity to leverage those resources to build a relationship with
other customers over that same period of time. Our customers may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these customers and may decrease our annual revenue. Mergers and acquisitions involving our customers have in the past and may in the future lead to non-renewal or termination of our contracts with those customers or by the acquiring or combining companies. If our customers fail to renew their contracts, renew their contracts upon less favorable terms or at lower fee levels, or fail to purchase new solutions from us, our revenue may decline or our future revenue growth may be constrained.
The healthcare industry is rapidly evolving and the market for technology-enabled solutions that empower healthcare consumers is relatively immature and unproven. If we are not successful in promoting the benefits of our existing and future offerings, our growth may be limited.
The market for our solutions is subject to rapid and significant changes. The market for technology-enabled solutions that empower healthcare consumers is characterized by rapid technological change, new product and service introductions, increasing consumer financial responsibility, consumerism and engagement, and the entrance of non-traditional competitors. In addition, there may be a limited-time opportunity to achieve and maintain a significant share of this market due in part to the rapidly evolving nature of the healthcare and technology industries and the substantial resources available to our existing and potential competitors. The market for technology-enabled solutions that empower healthcare consumers is relatively new and unproven, and it is uncertain whether this market will achieve and sustain high levels of demand and market adoption. In order to remain competitive, we are continually involved in a number of projects to compete with new market entrants by developing new offerings, growing our customer base, and expanding into adjacent markets. For example, the Accolade
Boost solution and our Trusted
Supplier ProgramPartner Ecosystem solutions are examples of add-on offerings we have
recently deployed to complement our traditional offerings and generate additional value to our customers. These projects carry risks, such as cost overruns, delays in delivery, performance problems, and lack of acceptance by our customers. If we cannot adapt to rapidly evolving industry standards, technology, and increasingly sophisticated customers and their employees, our existing technology could become undesirable, obsolete, or harm our reputation.
We must continue to invest significant resources in our personnel and technology in a timely and cost-effective manner in order to enhance our existing offerings and introduce new offerings that existing customers and potential new customers will want. If our new or modified offerings are not responsive to the preferences of customers and their employees, emerging industry standards, or regulatory changes, are not appropriately timed with market opportunity, or are not effectively brought to market, we may lose existing customers or be unable to obtain new customers, and our results of operations may suffer.
Our success also depends, to a substantial extent, on the ability of our existing and future offerings to increase member engagement and our ability to demonstrate the value of our existing and future offerings to customers. If our existing customers do not recognize or acknowledge the benefits of our existing and future offerings or our offerings do not increase member engagement, then the market for our solutions might not develop at all, or it might develop more slowly
than we expect, either of which could adversely affect our operating results. In addition, we have limited insight into trends that might develop and affect our business, which could lead to errors in our predicting and reacting to relevant business, legal, and regulatory trends and healthcare reform. If any of these events occur, it could harm our business.
Our marketing efforts for the direct-to-consumer virtual primary care portion of our business may not be successful or may become more expensive, either of which could increase our costs and adversely affect our business, financial condition, results of operations and cash flows.
Direct-to-consumer virtual primary care and mental health support represents a material portion of our overall business. We spend significant resources marketing this service. We rely on relationships for our direct-to-consumer virtual business with a wide variety of third parties, including Internet search providers such as Google, social networking platforms such as Facebook, Internet advertising networks, co-registration partners, retailers, distributors, television advertising agencies and direct marketers, to source new members and to promote or distribute our services and products. In addition, in connection with the launch of new services or products for our direct-to-consumer virtual primary care and mental health support business, we may spend a significant amount of resources on marketing. If our marketing activities are inefficient or unsuccessful, if important third-party relationships or marketing strategies, such as Internet search engine marketing and search engine optimization, become more expensive or unavailable, or are suspended, modified or terminated, for any reason, including, without limitation, resulting from a change in consumer sentiment, or laws, rules or regulations regarding the use of web advertising technologies such as cookies or other tracking technologies, if there is an increase in the proportion of consumers visiting our websites or purchasing our services by way of marketing channels with higher marketing costs as compared to channels that have lower or no associated marketing costs or if our marketing efforts do not result in our services being prominently ranked in Internet search listings, our business, financial condition, results of operations and cash flows could be materially and adversely impacted.
We have been and may in the future become subject to litigation, which could harm our business.
Our business entails the risk of liability claims against us, and we have been and may in the future become subject to litigation. Claims against us may be asserted by or on behalf of a variety of parties, including our customers, our members, vendors of our customers, government agencies, our current or former employees, or our stockholders. We expect there to be an increase in litigation related to employer practices and healthcare in connection with the COVID-19 pandemic, and our risk may increase especially in light of our new offering, Accolade COVID Response Care. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, covered by adequate insurance. Although weus. We carry professional errors and omissionsliability insurance in
amounts that we believe are appropriate in light of the risks attendant to our business, but successful claims could result in substantial damage awards that exceed the limits of our insurance coverage. In addition, any determination that wecertain non-medical services are acting in the capacity of a healthcare provider, or exercising undue influence or control over a healthcare provider, may subject us to claims not covered by our professional errors and omissionsliability insurance coverage, or could result in significant sanctions against us and our clinicians, additional compliance requirements, expense, and liability to us. If our medical care services are found to cause harm to an individual or otherwise constitute malpractice, we may be subject to claims exceeding our coverage limits and cause reputational harm. If we make errors in the billing and the coding for such services, we may be subject to claims exceeding our coverage limits and cause reputational harm. In addition, professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our solutions. As a result, adequate professional liability insurance may not be available to us or to our partners in the future at acceptable costs or at all. We generally intend to defend ourselves vigorously; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of some of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby harming our business and per share trading price of our common stock. For example, fines or assessments could be levied against us under domestic or foreign data privacy laws (such as HIPAA, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the General Data Protection Regulation (GDPR),GDPR, or the California Consumer Privacy Act of 2018 (CCPA))CCPA) or under authority of privacy enforcing governmental entities (such as the Federal Trade Commission (FTC),FTC, or the U.S. Department of Health and Human Services (HHS)) or as a result of private actions, such as class actions based on data breaches or based on private rights of action (such as that contained in the CCPA). Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured and adversely impact our ability to attract directors and officers. In addition, such litigation could result in increased scrutiny by government authorities having authority over our business, such as the FTC, the HHS, Office for Civil Rights (OCR), and state attorneys general.
Security breaches,
If our information technology systems or data, or those of third parties upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of
data,revenue or profits; loss of customers or sales; and other
disruptions could compromise sensitive information related to our business, customers, members, or partners, or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.adverse consequences.
In the ordinary course of our business, we
may collect, store, use, and disclose
sensitive data, including protected health information (PHI),(collectively, process) proprietary, confidential, and
other types of personal data or personally identifiable information (PII). We also process and store, and use additional third parties to process and store, sensitive information, including
personal data (such as health-related data), intellectual property, and
other proprietary business information, including that of our customers and members.trade secrets. We manage and maintain our technology platform and data utilizing a combination of on-site systems, mobile applications, managed data center systems, and cloud-based computing center systems. We are highly dependent on information technology networks, mobile applications, and systems, including the Internet, to securely process, transmit, and store this critical information.
This is particularly true as our workforce is currently working remotely due to the COVID-19 pandemic. Security breaches of this infrastructure, including physical or electronic break-ins, computer viruses, attacks by hackers, and similar breaches, and employee or contractor error, negligence, or malfeasance, can create system disruptions, shutdowns, or unauthorized disclosure or modifications of confidential information, causing member health information to be accessed or acquired without authorization or to become publicly available. We utilize third-party service providers,
including business associates as defined under HIPAA, for important aspects of the collection, storage, and transmission of customer and member information, and other confidential and sensitive information, and therefore rely on third parties to manage functions that have material cybersecurity risks. Our technology platform also utilizes artificial intelligence
(AI) and machine learning
(ML) technology to provide services, and this technology
ismay be susceptible to cybersecurity threats, as PHI, PII, and other confidential and sensitive information may be integrated into the platform. Because of the sensitivity of the PHI, other PII, and other confidential information we and our service providers
collect, store, transmit, and otherwise process, the security of our technology platform and other aspects of our solutions, including those provided or facilitated by our third-party service providers, are important to our operations and business strategy.
While we use various information security techniques and tools designed to secure our platforms, and require our third party service providers to adhere to substantially similar standards, our ability to monitor these third parties’ cybersecurity practices is limited, and these third parties may not have adequate information security measures in place.
Cyberattacks, malicious Internet-based activity, online and offline fraud, and similar activities threaten the confidentiality, integrity, and availability of our sensitive information and information technology systems, and those of the third parties upon which we rely. These threats are prevalent, continue to increase, and are increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors, “hacktivists,” organized criminal threat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors. Some actors now engage and are expected to continue to engage in cyberattacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as computer viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), credential harvesting, personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, system disruptions, shutdowns, or unauthorized disclosure or modifications of confidential information, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, and other similar threats.
Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our services) or the third-party information technology systems that support us and our services. Our hybrid workforce poses increased risks to our information technology systems and data, as many of our employees work from home on at least a partial schedule and utilize network connections, computers, and devices outside our premises or network, while at home, in transit, or in public locations. Future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Furthermore, we may discover security issues that were not found during due diligence of such acquired or integrated entities, and it may be difficult to integrate companies into our information technology environment and security program.
Any of the previously identified or similar threats could cause a security incident or other interruption. A security incident or other interruption could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to data. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our services.
We may expend significant resources or modify our business activities in an effort to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security
measures, industry standards or reasonable security measures to protect our information technology systems and data. We take certain administrative, physical, and technological safeguards to address these risks, such as by requiring outsourcing subcontractors and partners, including trusted suppliers in our Trusted Partner Ecosystem, who handle customer and member information for us to enter into agreements that contractually obligate those subcontractors and partners to comply with applicable privacy laws, such as HIPAA, and otherwise use reasonable efforts to safeguard PHI, other PII, and other
sensitive information. For those subcontractors and partners who handle PHI on our behalf, we enter into business associate agreements as required by HIPAA. Measures taken to protect our systems, those of our subcontractors and partners, or the PHI, other PII, or other sensitive datainformation we, our subcontractors, or our partners process or maintain, may not adequately protect us from the risks associated with the collection, storage, and transmission of such information.
Although
There can be no assurance that the security measures we
take stepshave implemented to
protect against security incidents and help protect confidential and other sensitive information (including PHI and PII)
from unauthorized access or disclosure, our information technology and infrastructure has been in the past and maywill be
vulnerable in the future to attacks by hackers or viruses, failures, or breaches due to third-party action, employee negligence or error, malfeasance, or other incidents or disruptions. A security incident or privacy violation that we experience (or that occurs at a subcontractor, trusted supplier, or customer) that leads to disclosure or unauthorized use or modification of, or that prevents access to or otherwise impacts the confidentiality, security, or integrity of, member information, including PHI or other PII, or other sensitive information we, our subcontractors, or our partners maintain or otherwise process, could harm our reputation, compel us to comply with breach notification laws, cause us to incur significant costs for remediation, fines, penalties, notification to customers, affected individuals, including regulatory authorities and the media, and for measures intended to repair or replace systems or technology and to prevent future occurrences, potential increases in insurance premiums, handling of contractual claims (including breach of contract or breach of confidentiality issues), and require us to verify the accuracy of database contents, resulting in increased costs or loss of revenue. In the event of a security breach, we may also be subject to private causes of action and/or statutory penalties under certain state laws, such as the CCPA, which provides a private right of action for data breaches of certain unencrypted or unredacted personal information and establishes statutory penalties for violations of the law. If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures, or if it is perceived that we have been unable to do so, our operations could be disrupted, weeffective. We may be unable to
provide accessdetect vulnerabilities in our information technology systems or remediate them in a timely manner or without adversely impacting or interrupting our operations. Such vulnerabilities could be exploited because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. These vulnerabilities may pose material risks to our
technology platform, and we could suffer a loss of customers, members, or trusted suppliers or a decrease in the use of our existing and future offerings, andbusiness. Further, we may
suffer loss of reputation, adverse impacts on customer, member, partner,experience delays in developing and
investor confidence, financial loss, governmental investigations or other actions, regulatory or contractual penalties, and other claims and liability. In addition, health plans, benefits administrators, customers, members, and our trusted suppliers may then refusedeploying remedial measures designed to
provide data to us, or restrict our ability to useaddress any such
data, in which event our business could be harmed.identified vulnerabilities. In addition, security incidents and other inappropriate access to, or acquisition or processing of, information can be difficult to detect or may occur outside of our network (such as in our supply chain or at our customers or trusted suppliers)suppliers in our Trusted Partner Ecosystem), and any delay in identifying or responding to such incidents or in providing any notification of such incidents may lead to increased harm. Any such breach or interruption of our systems, or the systems of any of our third-party information technology partners, could compromise our networks or data security processes and sensitive information could be inaccessible or could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. Any such interruption in access, improper access, disclosure, or other loss of information could result in legal claims or proceedings, liability under laws and regulations that protectgovern protections of personal information. Despite our efforts to identify and address vulnerabilities in our information technology systems (including our products), our efforts may not be successful.
Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the
privacy of member informationdisclosures or
otherthe failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may include: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing data (including personal
information, such as HIPAA, CCPA, or GDPR, and regulatory penalties.Unauthorized access, loss, or dissemination could also disruptdata); litigation (including class claims); indemnification obligations; negative publicity; harm to our reputation; monetary fund diversions; interruptions in our operations including(including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause customers to stop using our services, deter new customers from using our services, and negatively impact our ability to performgrow and operate our services, provide member assistance services, conduct researchbusiness.
Our contracts may not contain limitations of liability, and development activities, collect, process,even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and prepare company financial information, provide information about our current and future solutions, and engage in other member and clinician education and outreach efforts. Any such breach could also result in the compromise of our trade secrets and other proprietary information, which could adversely affect our business and competitive position. Additionally, actual, potential, or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Although wesecurity obligations. We maintain insurance covering certain security and privacy damages and claim expenses, webut may not carry insurance or maintain coverage sufficient to compensate for all liability and, in any event, insurance coverage would not address the reputational damage that could result from a security incident. We cannot be sure that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims. Additionally, our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations.
If we fail to provide accurate and timely information, or if our personnel, including Accolade Health AssistantsCare Advocates and clinicians, our content, or any other element of our existing and future offerings is associated with faulty administrative or clinical decisions or treatment, we could have liability to customers or members, which could adversely affect our results of operations.
Our Accolade Health AssistantsCare Advocates and clinicians, our member web portal, and our mobile application all use our technology platform to support our members in making healthcare and benefits-related decisions. In addition, our Accolade Health AssistantsCare Advocates and clinicians use our technology platform to help guide interactions with members. Our technology platform applies artificial intelligenceAI and machine learningML tactics to generate predictive insights about our members, which are then translated into recommended interventions for our Accolade Health AssistantsCare Advocates and clinicians and used to enhance our member self-service capabilities. Our services, including personalized recommendations and interventions, center around engagement with our members to provide members with better understanding of their benefits, assist with access to care, and provide options for choosing quality providers and care; we do not provide medical care or establish patient relationships with our members.care. For example, our Accolade Health AssistantsCare Advocates can leverage our technology platform to
provide quotes to a member about that
member’smember's healthcare benefits, including in-network services, balance billing, or claims quotes. If we fail to provide accurate and timely information regarding these benefits or if the data generated by our technology platform (including the artificial intelligence and machine learning components) are inaccurate, fail, or are subject to security incidents, this could lead to claims against us that could result in substantial costs to us or cause demand for our solutions to decline. If our Accolade
Health Assistants,Care Advocates, clinicians, or technology platform guide people to care settings and providers resulting in faulty clinical decisions or treatment, then our customers or our members could assert claims against us that could result in substantial costs to us, harm our reputation in the industry, and cause demand for our existing and future offerings to decline. For example, our nurses have access to extensive intelligence on provider quality and cost, which allows them to present various options to members when they are selecting a primary care physician or specialist. If the member relies on this provider recommendation, and that provider subsequently makes faulty clinical decisions or treatment recommendations, we could be subject to claims by such member. In addition, if our Accolade
Health AssistantsCare Advocates or clinicians make recommendations outside of our standard protocol that result in faulty clinical decisions or treatments, then our customers or our members could assert claims against us.
In May 2020, we announced a new offering, Accolade COVID Response Care, to provide a comprehensive solution for current and ongoing needs of our customers as they reopen and rebuild their businesses. We may be subject to increased liability exposure from our customers or their members as we assist our customers in managing our customers’ return to workplace programs, including programs related to diagnostic and antibody testing. Accordingly, there is the potential for increased liability exposure to Accolade, including as related to an employer’s decision not to permit an employee to return to the workplace based on our service or if one of our customers has an outbreak of COVID-19 despite using our solution to plan their reopening.
The assertion of such claims and ensuing litigation, regardless of its outcome, could result in substantial cost to us, divert
management’smanagement's attention from operations, damage our reputation, and decrease market acceptance of our existing and future offerings. We maintain general liability and
professional liability insurance coverage, but this coverage may not continue to be available on acceptable terms, may not be available in sufficient amounts to cover one or more large claims against us, or may not provide coverage if our Accolade
Health AssistantsCare Advocates or clinicians were to engage in the unlicensed practice of medicine. In addition, the insurer might disclaim coverage as to any future claim. One or more large claims could exceed our available insurance coverage. Adequate professional liability insurance may not be available to our clinicians or to us in the future at acceptable costs or at all. Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us, and divert the attention of our management and our providers from our operations, which may harm our business. In addition, any claims may adversely affect our business or reputation.
Our technology platform may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. From time to time, we have discovered defects or errors in our software, and such defects or errors can be expected to appear in the future. Defects and errors that are not timely
detected and remedied could expose us to risk of liability to customers and members and cause delays in introduction of new solutions, result in increased costs and diversion of development resources, require design modifications, or decrease market acceptance or customer satisfaction with our solutions. If any of these risks occur, they could harm our business.
Further, in March 2021, we acquired 2nd.MD, which providesWe also provide a service that allows members to access board-certified national specialists across the country for second opinion 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 better understand a diagnosis and treatment options to help them make more informed decisions on their healthcare regarding significant and high-cost care decisions. While we believe that these specialists do not create a physician-patient relationship with the member and are not practicing medicine in these engagements, if the information provided is not accurate or timely, we could incur liability, which could adversely affect our operations.
We also act as a managed service provider to several medical practices that provide virtual primary care and mental health support to individuals. The physicians employed by or contracted with PlushCare of California or other PlushCare associated medical practices could misdiagnose or treat a patient, and/or the services and technology provided by PlushCare to the medical practices could malfunction, which could cause us to incur liability, which could adversely affect our operations.
Increased regulatory scrutiny and issues relating to the responsible use of our technologies, including AI in our offerings, may result in reputational or financial harm and liability.
Concerns relating to the responsible use of new and evolving technologies, such as AI, in our products and services may result in reputational or financial harm and liability and may cause us to incur costs to resolve such issues. Various federal and state level legislation may impact the use of evolving technologies such as AI. We are increasingly building AI capabilities into our products and services. Such legislation and/or industry or customer resistance to the use of AI due to emerging legal, social, and ethical issues presents risks and challenges that could affect its adoption, and therefore our business and ability to scale. If we implement and use AI in a manner that violates such legislation, including various privacy and discrimination laws, customer policies, or causes direct harm to our members, we may experience brand or reputational harm, competitive harm or legal liability. Complying with multiple regulations from different jurisdictions related to AI, including any U.S. regulation adopted in response to the Biden administration’s Executive Order on AI, could increase our cost of doing business, may change the way that we operate in certain jurisdictions, or may impede our ability to offer certain products and services in certain jurisdictions if we are unable to comply with regulations. Changes in AI-related regulation could disproportionately impact and disadvantage us as we expand our deployment of AI, and require us to change our business practices, which may negatively impact our financial results. Our failure to address concerns and regulation relating to the responsible use of AI by us or our third party service providers could undermine public confidence in AI and slow adoption of AI in our products and services or cause reputational or financial harm.
We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties, and our own systems for providing solutions to our customers, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with customers, adversely affecting our brand and our business.
Our ability to deliver our solutions is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. We currently host our technology platform, serve our customers and members, and support our operations primarily using third-party data centers and telecommunications solutions, including cloud infrastructure services such as Amazon Web Services (AWS) and Google Cloud. We also use a third-party call center for off-hours clinical support. We do not have control over the operations of the facilities of our data and call center providers, AWS, or Google Cloud. These facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures, and similar events. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions in our solution. The facilities also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct. Any errors, failures, interruptions, or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with customers and adversely affect our business and could expose us to third-party liabilities.
For some of these services, we may not maintain redundant systems or facilities. Our technology platform’splatform's continuing and uninterrupted performance is critical to our success. Members may become dissatisfied by any system failure that interrupts our ability to provide our solutions to them. We may not be able to easily switch our AWS and Google Cloud operations to another cloud service provider if there are disruptions or interference with our use of AWS or Google Cloud. Sustained or repeated system failures would reduce the attractiveness of our technology platform to customers and members and result in contract terminations, thereby reducing revenue. Moreover, negative publicity arising from these types of disruptions could damage our reputation and may adversely impact use of our existing and future offerings. We may not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any events that cause interruptions in our service. Neither our third-party data and call center providers nor AWS or Google Cloud have an obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with these providers on commercially reasonable terms, if our agreements with our providers are prematurely terminated, or if in the future we add additional data or call center providers or cloud service providers, we may experience costs or downtime in connection with the transfer to, or the addition of, new providers. If these providers were to increase the cost of their services, we may have to increase the price of our existing and future offerings, and our business may be harmed.
The COVID-19 pandemic may significantly disrupt our operations and negatively impact our business, financial condition, and results of operations.
Our business, financial condition, and results of operations could be materially and adversely affected by the effects of a widespread outbreak of a contagious disease, including the COVID-19 pandemic. In March 2020, the World Health Organization declared COVID-19 a global pandemic. This pandemic has led to orders to shelter in place, travel restrictions, and mandated business closures and has adversely affected financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours, and has continued for significantly longer than originally expected, resulting in greater potential impacts on the economy and our business. We have taken measures in response to the COVID-19 pandemic, including temporarily closing our offices and implementing a work from home policy for our workforce and suspending employee travel and in-person meetings. We may experience increased demand on our Accolade Health Assistants and clinical specialists if our members are impacted by a contagious disease in large numbers. This increased demand could result in our failing to meet certain performance metrics set forth in contracts with our customers. Collectively or alone, these conditions could cause (1) increased absenteeism among our workforce (including resulting from sick time or increased use of Family Medical Leave Act and other leave) that could negatively affect our ability to provide our service despite our deployment of business continuity and disaster recovery plans enabling our workforce to work fully remotely from our offices, and/or (2) our customers or prospective customers decreasing headcount, benefits, or budgets, which could decrease corporate spending on our products and services, resulting in delayed sales cycles, a decrease in new customer acquisition, and/or loss of customers. Any layoffs or reductions in employee headcounts by our employer customers would result in a reduction in our base and variable PMPM fees. If our existing customers do not continue to renew their contracts with us, renew at lower fee levels, decline to purchase additional offerings from us, or terminate their contracts for convenience, our business could be harmed. While these risks may be offset by the value that Accolade can provide to customers and members during a health crisis, the impact on our business is still highly uncertain.
Risks Related to Governmental Regulation
Changes in the health insurance market, ERISA laws, state insurance laws, or other laws could harm our business.
The market for private health insurance in the United States is evolving and, as our customers are primarily employers that deploy our offerings to employees and their families, our future financial performance will depend in part on the growth in this market. Changes and developments in the health insurance system in the United States could reduce demand for our existing and future offerings and harm our business. For example, there has been an ongoing national debate relating to the healthcare reimbursement system in the United States. Some elected officials have introduced proposals that would create a new single payor national health insurance program for all United States residents; others have proposed more incremental approaches, such as creating a new public health insurance plan option as a supplement to private sources of coverage. In the event that laws, regulations or rules that eliminate or reduce private sources of health insurance or require such benefits to be taxable are adopted, the subsequent impact on the workplace benefits provided by our customers may in turn have an adverse effect on our business and results of operations.
In addition, changes in laws or regulations regarding the Employee Retirement Income Security Act of 1974 (ERISA), changes in state insurance laws, or other changes in laws could materially impact the self-insured employer healthcare and benefits markets, or the markets in which our other existing or potential customers procure and provide benefits.
If we fail to comply with healthcare laws and regulations, we could face substantial penalties and our business could be harmed.
Our existing and future offerings, as well as our business activities, including our relationships with our commercial partners and customers, are or may be in the future subject to a complex set of regulations and rigorous
enforcement, including by the HHS, Office of the Inspector General and Office of Civil Rights, U.S. Food and Drug Administration (FDA), U.S. Department of Justice, and numerous other federal and state governmental authorities. There is also rapidly changing COVID-19 guidance from the Centers for Disease Control and Prevention (CDC), state health organizations, the U.S. Equal Employment Opportunity Commission, the Department of Labor, the Occupational Safety and Health Administration, and others, especially as it relates to our new offering, Accolade COVID Response Care. In addition, ourOur employees, consultants, and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements. Certain aspects of our business model may also trigger scrutiny under healthcare and related laws. Federal and state healthcare and related laws and regulations that may now or in the future affect our ability to conduct business include:
| ● | laws that regulate how businesses operate online, including measures relating to privacy and data security and how such information is communicated to customers (a) under the FTC•’s unfair and deceptive trade practice authority from the FTC Act and (b) from state attorneys general under state consumer protection laws and data privacy laws; |
| ● | federal and state laws governing (i) the corporate practice of medicine and other healthcare professions and related fee-splitting laws, including the provision of management or administrative services in connection with practice of medicine and other health care professions, employment of professionals by non-professionals; (ii) professional licensing and standards of professional conduct; (iii) the provision of telemedicine, telehealth or other health care services, including medical record retention requirements; and (iv) the billing, submission, or collection of claims or payments for healthcare services; |
| ● | the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Centers for Medicare and Medicaid Services (CMS) programs, including Medicare and Medicaid; |
| ● | the federal civil false claims laws, including the federal False Claims Act, and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government; |
| ● | federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; |
| ● | the federal Physician Payments Sunshine Act, or Open Payments, created under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the Affordable Care Act), and its implementing regulations, which requires certain manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to CMS information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members and, beginning in 2022, certain transfers of value made in the prior year to additional health care providers, including physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives; and |
| ● | state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers. |
In addition, we are subject to laws that regulate how businesses operate online, including measures relating to privacy and data security and how such information is communicated to customers (a) under the FTC’sFTC's unfair and deceptive trade practicespractice authority from the FTC Act, and the FTC breach notification rule, (b) under the OCR’s investigative powers regulating HIPAA, and (c) from state attorneys general under state consumer protection laws and data privacy laws.
laws, including, without limitation, changes in laws, rules, and regulations related to the use of cookies and tracking technologies on the internet;
•federal and state laws governing (i) the corporate practice of medicine and other healthcare professions and related fee-splitting laws, including the provision of management or administrative services in connection with practice of medicine and other health care professions, employment of professionals by non-professionals; (ii) professional licensing and standards of professional conduct; (iii) the provision of telemedicine, telehealth or other health care services, including medical record retention requirements; and (iv) the billing, submission, or collection of claims or payments for healthcare services;
•the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Centers for Medicare and Medicaid Services (CMS) programs, including Medicare and Medicaid;
•the federal civil false claims laws, including the federal False Claims Act, and federal Civil Monetary Penalties Law, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government;
•federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
•the federal Physician Payments Sunshine Act, or Open Payments, created under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the Affordable Care Act), and its implementing regulations, which requires certain manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children's Health Insurance Program to report annually to CMS information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other healthcare professionals (e.g. physician assistants and nurse practitioners), and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members; and
•state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.
The Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act.
Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our activities could be subject to challenge under one or more of such laws. For example, there is a risk that regulatory authorities in some states may find that certain of our contractual relationships with healthcare providers are in violation of state anti-kickback, corporate practice of health care professions, or fee-splitting laws. Any
action brought against us for violations of these laws or regulations, even if successfully defended, could cause us to incur significant legal expenses and divert our
management’smanagement's attention from the operation of our business. We may be subject to private “qui tam” actions brought by individual whistleblowers on behalf of the federal or state governments, with potential liability under the federal False Claims Act including mandatory treble damages and significant per-claim penalties.
Although we have adopted policies and procedures designed to comply with these laws and regulations and conduct internal reviews of our compliance with these laws, our compliance is also subject to governmental review. The growth of our business and sales organization may increase the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our
management’smanagement's attention from the operation of our business. If our operations are found to be in violation of any of the federal, state and foreign laws described above or any other current or future fraud and abuse or other healthcare laws and regulations that apply to us, we may be subject to penalties, including significant criminal, civil and administrative penalties, damages and fines, disgorgement, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws, imprisonment for individuals and exclusion from participation in government programs, such as Medicare and Medicaid, as well as contractual damages and reputational harm. We could also be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.
Our use, disclosure,
In our virtual care business, we are dependent on our relationships with affiliated professional entities, which we do not own, to provide physician services, and other processingour business would be adversely affected if those relationships were disrupted or if our arrangements with our providers or our members are found to violate state laws prohibiting the corporate practice of PIImedicine or fee splitting.
The laws of many states, including states in which our members are located, prohibit us from exercising control over the medical judgments or decisions of physicians and PHI isfrom engaging in certain financial arrangements, such as splitting professional fees with physicians. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion, and are subject to HIPAAchange and to evolving interpretations by state boards of medicine and state attorneys general, among others. We enter into agreements with professional associations, PlushCare of California, Inc. (a California professional corporation) and others, which enter into contracts with our providers pursuant to which they render professional medical services. In addition, we enter into contracts with our members to deliver professional services in exchange for fees. These contracts include management services agreements with our affiliated physician organizations pursuant to which the physician organizations reserve exclusive control and responsibility for all aspects of the practice of medicine and the delivery of medical services. Although we seek to substantially comply with applicable state prohibitions on the corporate practice of medicine and fee splitting, changes in, or subsequent interpretations of, the corporate practice of medicine laws could circumscribe our business operations, and state officials who administer these laws or other federal,third parties may successfully challenge our existing organization and contractual arrangements. If such a claim were successful, we could be subject to civil and criminal penalties and could be required to restructure or terminate the applicable contractual arrangements. A determination that these arrangements violate state and foreign privacy and security regulations, andstatutes, or our failureinability to successfully restructure our relationships with our providers to comply with those regulationsthese statutes, could eliminate our ability to acquire members located in certain states from the market for our services, which would have a materially adverse effect on our business, financial condition and results of operations. State corporate practice of medicine doctrines also often impose penalties on physician themselves for aiding the corporate practice of medicine, which could discourage physicians from participating in our network of providers.
We do not own PlushCare of California, Inc. (a California professional corporation) or
other medical groups with which we contract. These medical groups are 100% physician owned and independent. The professional corporations with which we contract are owned by Dr. James Wantuck, one of our affiliated providers, and the professional corporations are owned by physicians licensed in their respective states. While we expect that these relationships will continue, we cannot guarantee that they will. A material change in our relationship with the medical groups that support our virtual care services, whether resulting from a dispute among the entities, a change in government regulation, or the loss of these affiliations, could impair our ability to
adequately secure the information we holdprovide services to our members and could
result in significant liability or reputational harm and, in turn,have a material adverse effect on our
customer base, member basebusiness, financial condition and
revenue.Numerousresults of operations. In addition, the arrangement in which we have entered to comply with state corporate practice of medicine doctrines could subject us to additional scrutiny by federal and state regulatory bodies regarding federal and state fraud and abuse laws. Any scrutiny, investigation, or litigation with regard to such arrangements with the medical groups could have a material adverse effect on our business, financial condition and results of operations.
We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, contractual obligations, policies and other obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse business consequences.
In the ordinary course of business, we process personal data and other sensitive information, including proprietary and confidential business information, trade secrets, intellectual property, sensitive third-party information, personal data, benefit plan eligibility information, and health information (including medical claims and other health records). Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of personal data by us and third parties who may process data on our behalf.
In the United States, state, federal, and internationallocal governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, consumer protection laws (e.g. Section 5 of the Federal Trade Commission Act, and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity,state consumer protection laws regulating unfair or deceptive trade practices) and other processing of PHI and PII.applicable laws (e.g., wiretapping laws). These laws and regulations include HIPAA, which establishes a set of national privacy and security standards for the protection of PHI by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and individuals and entities that perform services for them which involve the use, or disclosure of, individually identifiable health information, known as business associates and their subcontractors. WeAs a healthcare technology company, we are considered a business associate under HIPAA, and our associated medical practices are considered HIPAA covered entities. As such, we execute business associate agreements with our customers, subcontractors, and trusted suppliers.suppliers in our Trusted Partner Ecosystem. HIPAA requires covered entities and business associates, such as us, and their covered subcontractors to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information.
Some of our business activities require that we or our partners obtain permissions consistent with HIPAA to provide certain marketing and data aggregation services as well as those activities that require the creation and use of de-identified information. Similarly, our new offering, Accolade COVID Response Care requires us to obtain express authorizations from members, which may result in an increased risk of compliance with such authorizations. We may also require large sets of de-identified information to enable us to continue to develop and enhance our data and analytics platform. If we or our partners are unable to secure these rights, or if there is a future change in law, we may face limitations on the use of PHI and our ability to provide marketing services and use de-identified information, which could harm our business or subject us to potential government actions or penalties. Also, there are ongoing public policy discussions regarding whether the standards for de-identified, anonymous or pseudonomized health information are sufficient, and the risk of re-identification sufficiently small, to adequately protect patient privacy. These discussions may lead to further restrictions on the use of such information or create additional regulatory burdens. There can be no assurance that these initiatives or future initiatives will not adversely affect our ability to access and use data or to develop or market current or future services.
Additionally, through our third party telehealth partners, we provide COVID-19 testing services to consumers on behalf of certain of our employer customers. Such testing services and the related contract tracing activities related to such testing may be subject to the aforementioned laws, including HIPAA.
In addition, we could be subject to periodic audits for compliance with the HIPAA Privacy and Security Standards by HHS and our customers. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims. HIPAA imposes mandatory penalties for certain
violations. Penalties for violations
of HIPAA and
its implementing regulations start at $100 per violation and are not to exceed $50,000 per violation, subject to a cap of $1.5 million for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and
attorneys’attorneys' fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
In addition to HIPAA, numerous other federal, state,CAN-SPAM and foreign laws and regulations protect the confidentiality, privacy, availability, integrity, and security of PHITCPA impose specific requirements on communications with customers. For example, the TCPA imposes various consumer consent requirements and other typesrestrictions on certain telemarketing activity and other communications with consumers by phone, fax, or text message. TCPA violations can result in significant financial penalties, including penalties or criminal fines imposed by the Federal Communications Commission (FCC) or fines of PII.up to $1,500 per violation imposed through private litigation or by state authorities. Furthermore, the CCPA applies to personal information of consumers, business representatives, and employees, and requires businesses to provide specific disclosures in privacy notices and honor requests from California residents to exercise certain privacy rights. The CCPA provides for civil penalties of up to $7,500 per violation and allows private litigants affected by certain data breaches to recover significant statutory damages. In addition, the case of our European subsidiary, Accolade mayCPRA, effective January 1, 2023, expands the CCPA by adding a new right for individuals to correct their personal information and establishing a new California Privacy Protection Agency to implement and enforce the CPRA. Other states have obligations under GDPR and related EUenacted data privacy laws, including Virginia, Colorado, Utah, and regulationsConnecticut, all of which become effective in 2023. Additionally, several states and localities have enacted measures related to the use transfer,of AI and ML in products and services.
Additional data privacy and security laws have been proposed at the federal, state, and local levels in recent years, which could further complicate compliance efforts.
Outside the United States, an increasing number of laws, regulations, and industry standards apply to data privacy and security. In Canada, the Personal Information Protection and Electronic Documents Act (PIPEDA) and various related provincial laws, as well as Canada’s Anti-Spam Legislation (CASL), may apply to our operations. Additionally, the EU GDPR and the UK GDPR impose strict requirements for processing the personal data of individuals. For example, under the EU GDPR, government regulators may impose temporary or definitive bans on data processing, as well as fines of up to 20 million euros or 4% of annual global revenue, whichever is greater. Further, individuals, classes of data subjects or consumer protection organizations authorized at law to represent their interests may initiate private litigation related to our processing of employee-relatedtheir personal data. TheseFurthermore, in Europe, there is a proposed regulation related to AI and ML that, if adopted, could impose onerous obligations related to the use of AI-related systems. We may have to change our business practices to comply with such obligations. In addition to data privacy and security laws, we may be contractually subject to data privacy and security obligations, including industry standards adopted by industry groups and may become subject to new data privacy and security obligations in the future. Certain privacy laws, such as the GDPR and the CCPA, also require our customers to impose specific contractual restrictions on their service providers.
Additionally, regulators are increasingly scrutinizing companies that process children’s data. Numerous laws, regulations, and legally-binding codes, such as the Children’s Online Privacy Protection Act (COPPA), California’s Age Appropriate Design Code (effective July 2024), the CCPA and CPRA, other U.S. state comprehensive privacy laws, the EU and UK GDPR, and the UK Age Appropriate Design Code, impose various obligations on companies that process children’s data, including by requiring certain consents to process such data and extending certain rights to children and their parents with respect to that data. Some of these obligations have wide ranging applications, including for services that do not intentionally target child users (defined in some circumstances as a user under the age of 18 years old). Additionally, under various privacy laws and regulations in many casesother obligations, we may be more restrictive than,required to obtain certain consents to process personal data. Our inability or failure to do so could result in adverse consequences.
In the ordinary course of business, we may transfer personal data from Europe and may notother jurisdictions to the United States or other countries. Europe and other jurisdictions have enacted laws requiring data to be preempted by, HIPAA and its implementing rules. These laws and regulations may also require additional compliance obligations relating tolocalized or limiting the transfer of personal data between Accoladeto other countries. In particular, the EEA and its subsidiaries. For example, the European CourtUK have significantly restricted the transfer of Justice recently invalidatedpersonal data to the EU-U.S. Privacy Shield as a basis for transfersUnited States and other countries whose privacy laws it believes are inadequate. Other jurisdictions may adopt similarly stringent interpretations of their data localization and cross-border data transfer laws. Although there are currently various mechanisms that may be used to transfer personal data from the EUEEA and UK to the U.S.United States in compliance with law, such as the EEA and raised questions aboutUK’s standard contractual clauses, these mechanisms are subject to legal challenges, and there is no assurance that we can satisfy or rely on these measures to lawfully transfer personal data to the continued validityUnited States.
If there is no lawful manner for us to transfer personal data from the EEA, the UK, or other jurisdictions to the United States, or if the requirements for a legally-compliant transfer are too onerous, we may face significant adverse consequences, including the interruption or degradation of
oneour operations, the need to relocate part of or all of our business or data processing activities to other jurisdictions at significant expense, increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other third parties, and injunctions against processing or transferring personal data necessary to operate our business. Additionally, companies that transfer personal data out of the
primary alternativesEEA and UK to other jurisdictions, particularly to the
EU-U.S. Privacy Shield, namelyUnited States, are subject to increased scrutiny from regulators, individual litigants, and activist groups. Some European regulators have ordered certain companies to suspend or permanently cease certain transfers out of Europe for allegedly violating the
European Commission’s Standard Contractual Clauses. At present, there are few, if any, viable alternatives to the EU-U.S. Privacy Shield and the Standard Contractual Clauses.GDPR’s cross-border data transfer limitations. Inability to transfer personal
informationdata from the
European Union,EEA, Switzerland or
United KingdomUK to the United States or elsewhere, may restrict our activities in those jurisdictions and limit our ability to provide our products and services in those jurisdictions. Our response to these requirements globally may not meet the expectations of individual customers, affected data subjects, or other stakeholders, which could reduce the demand for our services. Some customers or other service providers may respond to these evolving laws and regulations by asking us to make certain privacy or data-related contractual commitments that we are unable or unwilling to make. This could lead to the loss of current or prospective customers or other business relationships.
There is a risk that regulatory authorities may determine that we have not implemented our compliance obligations in a timely or appropriate manner. Penalties for noncompliance under GDPR and
Obligations related EU privacy laws may include significant monetary fines. In particular, under the GDPR, fines of up to 20 million Euros or up to 4% of the annual global revenue of the noncompliant company, whichever is greater, could be imposed for violations of certain of
the GDPR’s requirements. These laws and regulations are often uncertain, contradictory, and subject to changed or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future.
Such new regulations and legislative actions (or changes in interpretation of existing laws or regulations regarding data privacy and security together with applicable industry standards) may increase our costs of doing business. In this regard, we expect that there will continue to be new laws, regulations,are quickly changing, becoming increasingly stringent, and industry standards relating to privacy and data protection in the United States, the EU and other jurisdictions, such as the CCPA which has been characterized as the first “GDPR-like” privacy statute to be enacted in the United States, and we cannot determine how broadly or narrowly regulators will interpret and enforce such new laws, regulations, and standards and the corresponding impact it may have on our business. Although we are modifying our data collection, use and processing practices and policies in an effort to comply with the law, there is a risk that the California Attorney General does not find our practices or policies to be compliant with the CCPA, which would potentially subject us to civil penalties or an inability to use information collected from California consumers. In addition, such laws and regulations could restrict our ability to store and process personal data (in particular, our ability to use certain data for purposes such as risk or fraud avoidance, marketing, or advertising due to the expansive definition of personal information under CCPA), our ability to control our costs by using certain vendors or service providers, or impact our ability to offer certain services in certain jurisdictions. Further, the CCPA requires covered companies to provide new disclosures to California consumers, provide such consumers new ways to opt-out of certain sales of personal information (which may not fall under the CCPA HIPAA exemption), and allow for a new cause of action for data breaches. Additionally, such laws and regulations are often inconsistent and may be subject to amendment or re-interpretation, which may cause us to incur significant costs and expend significant effort to ensure compliance. Given that requirements may be inconsistent and evolving, our response to these requirements may not meet the expectations of our customers or their employees, which could thereby reduce the demand for our services. Finally, some customers may respond to these evolving laws and regulations by asking us to make certain privacy or data-related contractual commitments that we are unable or unwilling to make. This could lead to the loss of current or prospective customers or other business relationships.
creating regulatory uncertainty. This complex, dynamic legal landscape regarding data privacy data protection, and information security creates significant compliance issues for us and our customers and potentially exposes us to additional expense, adverse publicity and liability. Although we take stepsAdditionally, these obligations may be subject to help protect confidentialdiffering applications and other sensitive information from unauthorized accessinterpretations, which may be inconsistent or disclosure,in conflict among jurisdictions. Preparing for and complying with these obligations requires us to devote significant resources (including, without limitation, financial and time-related resources). These obligations may
necessitate changes to our information
technologytechnologies, systems, and
infrastructure has been in the pastpractices and
may be vulnerable in the future to
attacks by hackers or viruses, failures, or breaches due to third-party action, employee negligence or error, malfeasance, or other incidents or disruptions. For example, we have been the targetthose of
phishing attacks seeking confidential information regarding our employees, which resulted in the disclosure of employee confidential information on one occasion. Furthermore, while we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data protection, some PHI and other PII or confidential information is transmitted to us byany third parties
who may not implement adequate security and privacy measures, and it is possible that
laws, rules and regulations relating to privacy,process personal data
protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business.We outsource important aspects of the storage and transmission of customer and member information, and thus, rely on third parties to manage functions that have material cyber-security risks. A breach of privacy or security of such information by a subcontractor may result in an enforcement action against us. We attempt to address these risks by requiring outsourcing subcontractors who handle such information to sign business associate agreements contractually requiring those subcontractors to adequately safeguard such information. However, we cannot be assured that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of such information on our behalf by our subcontractors.
Complying withbehalf. In addition, these various laws and regulations could cause us to incur substantial costs orobligations may require us to change our business practices, systemsmodel.
Although we endeavor to comply with all applicable data privacy and security obligations, we may at times fail (or be perceived to have failed) to do so. Moreover, despite our efforts, our personnel or third parties upon whom we rely may fail to comply with such obligations, which could negatively impact our business operations and compliance proceduresposture. For example, any failure by a third-party processor to comply with applicable law, regulations, or contractual obligations could result in a manner adverse effects, including inability to operate our business and proceedings against us by governmental entities or others. If we fail, or are perceived to have failed, to address or comply with data privacy and security obligations, we could face significant consequences. These consequences may include, but are not limited to, government enforcement actions (e.g., investigations, fines, penalties, audits, inspections, and similar); litigation (including class-related claims), additional reporting requirements and/or oversight, bans on processing personal data, orders to destroy or not use personal data, and imprisonment of company officials. While we are unaware of regulatory audits, investigations, or actions relating to our business.privacy practices, various entities in the healthcare technology industry, including the PlushCare medical practices, have received and responded to a “compliance review” from the U.S. Department of Health and Human Services, Office for Civil Rights (OCR) related to the utilization of digital website trackers, such as Meta’s Pixel. The compliance review is focused on whether the use of such trackers collects and discloses protected health information for visitors to a healthcare-related website to third parties, such as Meta and Google.
In addition to data privacy and security laws, we are contractually subject to industry standards adopted by industry groups and may become subject to such obligations in the future. For example, if we are subject to the Payment Card Industry Data Security Standard (PCI DSS) the PCI DSS requires companies to adopt certain measures to ensure the security of cardholder information, including using and maintaining firewalls, adopting proper password protections for certain devices and software, and restricting data access. Noncompliance with PCI DSS can result in penalties ranging from $5,000 to $100,000 per month by credit card companies, litigation, damage to our reputation, and revenue losses. We also rely on vendors to process payment card data, who may be subject to PCI DSS, and our business may be negatively affected if our vendors are fined or suffer other consequences as a result of PCI DSS noncompliance. We also publish statements to our customers and members that describe how we handle and protect PHI and personal data (for example, through our privacy policies connected with our website, mobile applications and other digital tools). If federal or state regulatory authorities, such as the FTC or state attorneys general, or private litigants consider any portion of these statements to be untrue, deficient, lacking in transparency, deceptive, unfair, or misrepresentative of our practices, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including costs of responding to investigations, defending against litigation, settling claims, and complying with regulatory or court orders.
Any of the foregoing consequences could
seriously harmhave a material adverse effect on our
reputation, business and our financial
results.condition, including but not limited to: interruptions or stoppages in our business operations; interruptions or stoppages of data collection needed to train our algorithms; inability to process personal data or to operate in certain jurisdictions; limited ability to develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or revision or restructuring of our operations. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our existing and future offerings. Any of the foregoing consequences could harm our business.
Our employment and use of nurses, physician medical directors and our other clinicians and our engagement of physicians may subject us to licensing and other regulatory risks.
Our employment and use of nurses, physician medical directors, and our other clinicians and our engagement of physicians may subject us to state and other licensing and regulatory risks. In addition, our subcontracts with clinicians to provide telehealth services related to COVID-19 testing may also subject us to certain licensing and regulatory risks. For example, there may be restrictions on the ability of our employed and contracted clinicians to provide services to our members residing in states outside of the state or states in which such clinicians are licensed or registered. The services provided by our clinicians may be subject to review by state or other regulatory bodies. In addition, any activities conducted by our clinicians that are in violation of practice rules could subject us to fines or other penalties. While we do not believe that we provide medical care or establish patient relationships with our members, our clinicians could be found to be in violation of applicable laws. Further, in March 2021, we acquired 2nd.MD, which provides a service that allows members to access board-certified national specialists across the country for second opinion consultations in a real-time video call or by phone. This provides the member with a rapid second opinion on their medical condition, enabling the member to better understand a diagnosis and treatment options, which helps them make more informed decisions on their healthcare regarding significant and high-cost care decisions. While weWe believe that these experts do not create a physician-patient relationship with the member and are not practicing medicine, but state medical boards may disagree with our position, which could result in significant liability and may require the restructuring of such operations. Our associated medical practices employ and engage clinicians as permitted under state law, and maintain physician-patient relationships with members. Further, if one of our clinicians is
found to be acting outside the scope of their professional license or otherwise violated the applicable
state’sstate's practice laws, such activity could result in disciplinary action against the clinician by the applicable licensing agency. The definition of what constitutes the practice of medicine, nursing or other health professions varies by state.
In addition, there is a risk that we may be found in violation of the prohibition of the corporate practice of a health profession under certain state laws, which may result in the imposition of civil or criminal penalties. Certain states prevent corporations from being licensed as practitioners and prohibit physicians from practicing medicine in partnership with non-physicians, such as business corporations. Activities other than those directly related to the delivery of healthcare may be considered an element of the practice of medicine in certain states. These laws, which vary by state, may also prevent the sharing of professional services income with non-professional or business interests. Any determination that we are acting in the capacity as a healthcare provider, exercising undue influence or control over a healthcare provider or impermissibly sharing fees with a healthcare provider, may result in significant sanctions against us and our clinicians, including civil and criminal penalties and fines, additional compliance requirements, expense, and liability to us, and require us to change or terminate some portions of our contractual arrangements or business.
Evolving government regulations may require increased costs or adversely affect our results of operations.
In a regulatory climate that is uncertain, our operations may be subject to direct and indirect adoption, expansion, or reinterpretation of various laws and regulations. Compliance with these future laws and regulations may require us to change our practices at an undeterminable and possibly significant initial monetary and annual expense. These additional monetary expenditures may increase future overhead, which could harm our business. For example,
since the Affordable Care Act was enacted, there have been executive, judicial and Congressional challenges to certain aspects of the law. For example, President Trump signed several Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, prior sessions of Congress considered legislation to repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, several bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017 (Tax Act), included a provision which repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual“individual mandate.”
The Bipartisan Budget Act of 2018, among other things, amended the Affordable Care Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the
“donut“donut hole.
” In addition, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the
“Cadillac”“Cadillac” tax on high-cost employer-sponsored health coverage and medical device tax that were mandated by the Affordable Care Act and, effective January 1, 2021, also eliminated the health insurer tax. On
December 14, 2018,June 17, 2021, the U.S. Supreme Court dismissed a
Texas U.S. District Court Judge ruledchallenge on procedural grounds that
argued the Affordable Care Act is unconstitutional in its entirety because the
“individual mandate”“individual mandate” was repealed by
Congress as part of the Tax Act. Additionally, on December 18, 2019,Congress. Further, prior to the U.S.
Court of Appeals for the 5th Circuit upheld the DistrictSupreme Court ruling,
that that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. The United States Supreme Court is currently reviewing this case, although it is unclear when a decision will be made. On February 10, 2021, the Biden administration withdrew the federal government’s support for overturning the Affordable Care Act. Although the Supreme Court has not yet ruled on the constitutionality of the Affordable Care Act, on January 28, 2021, President Biden issued an executive order
to initiatethat initiated a special enrollment period for purposes of obtaining health insurance coverage through the Affordable Care Act marketplace, which began on February 15, 2021 and
will remainremained open through August 15, 2021. The executive order also
instructsinstructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the Affordable Care Act.
In addition, on August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law, which among other things, extends enhanced subsidies for individuals purchasing health insurance coverage in the Affordable Care Act marketplaces through plan year 2025. The IRA also eliminates the “donut hole” under the Medicare Part D program beginning in 2025 by significantly lowering the beneficiary maximum out-of-pocket cost and creating a new manufacturer discount program. It is possible that the Affordable Care Act will be subject to judicial or Congressional challenges in the future. It is unclear how
the Supreme Court ruling, otherany such
litigationchallenges and
theany additional healthcare reform measures of the Biden administration will impact the Affordable Care Act. We continue to evaluate the potential impact of
the Affordable Care Act and its possible repeal or replacementsuch healthcare reform measures on our business.
There could be laws and regulations applicable to our business that we have not identified or that, if changed, may be costly to us, and we cannot predict all the ways in which implementation of such laws and regulations may affect us. In the states in which we operate, we believe we are in compliance with all applicable material regulations, but, due to the uncertain regulatory environment, certain states may determine that we are in violation of their laws and regulations. In the event that we must remedy such violations, we may be required to modify our existing and future offerings and solutions in such states in a manner that undermines our existing and future
offerings’offerings' attractiveness to partners, customers or members, we may become subject to fines or other penalties or, if we determine that the requirements to operate in compliance in such states are overly burdensome, we may elect to terminate our operations in such states. In each case, our revenue may decline and our business, financial condition, and results of operations could be adversely affected.
Additionally, the introduction of new solutions may require us to comply with additional, yet undetermined, laws and regulations. Compliance may require obtaining appropriate state medical board licenses or certificates, increasing our security measures and expending additional resources to monitor developments in applicable rules and ensure compliance. The failure to adequately comply with these future laws and regulations may delay or possibly prevent our existing and future offerings from being offered to partners, customers and members, which could significantly harm our business. In addition, it is possible that additional governmental action is taken in response to the COVID-19 pandemic. For example, COVID-19 relief legislation suspended the reductions to Medicare payments to providers of 2% per fiscal year from May 1, 2020 through December 31, 2021. Further, we expect that additional healthcare reform measures will
be adopted in the future, particularly in light of the new presidential administration, which could impact our business. For example, itIn addition, Congress is possible thatconsidering additional governmental action is taken in response to the COVID-19 pandemic.
health reform measures.
Individuals may claim our outbound engagement techniques, including outbound telephone calls and digital outreach, are not compliant with HIPAA or federal marketing laws.
Several federal laws are designed to protect consumers from various types and modes of marketing. HIPAA prohibits certain types of marketing to individuals using PHI, except for certain treatment and healthcare operations, including communications made to describe a health-related product or service (or payment for such product or service) that is provided by, or included in, a plan of benefits. Our solutions may be subject to review by
HHS or OCR and deemed in violation of HIPAA, which could subject us to
significant fines or other penalties. In addition, the
Telephone Consumer Protection Act (TCPA),TCPA, is a federal statute that protects consumers from unwanted telephone calls and faxes. Since its inception, the
TCPA’sTCPA's purview has extended to text messages sent to consumers. We may communicate with and perform outreach to members through multiple modes of communication, including phone, email, and secure messaging. We must ensure that our solutions that leverage telephone and secure messaging comply with TCPA regulations and agency guidance. While we strive to adhere to strict policies and procedures, the
Federal Communications Commission (FCC),FCC, as the agency that implements and enforces the TCPA, may disagree with our interpretation of the TCPA and subject us to penalties and other consequences for noncompliance. Determination by a court or regulatory agency that our solutions violate the TCPA could subject us to civil penalties, could invalidate all or portions of some of our customer contracts, could require us to change or terminate some portions of our offerings, could require us to refund portions of our fees, and could have an adverse effect on our business. Even an unsuccessful challenge by consumers or regulatory authorities of our activities could result in adverse publicity and could require a costly response from us. Other laws focus on unsolicited email, such as the
Controlling the Assault of Non-Solicited Pornography and MarketingCAN-SPAM Act,
of 2003, (CAN-SPAM Act), which establishes requirements for the transmission of commercial email messages and specifies penalties for unsolicited commercial email messages that follow a
recipient’srecipient's opt-out request or deceive the receiving consumer.
In addition, some of our marketing activities require that we obtain permissions consistent with HIPAA and applicable state health information privacy laws. If we are unable to secure such permissions, or if there is a future change in law, we may face limitations on the use of such information, which may harm our business.
Our direct-to-consumer virtual care business leverages revenue from member subscriptions, which, if we do not comply with various state and federal laws relating to the collection of auto-renewing subscription fees, could result in significant liability or reputational harm and, in turn, a material adverse effect on our member base and revenue.
Various state and federal laws require disclosures to be made to consumers prior to collecting periodic subscription fees that will automatically renew without further action by the consumer. One such example is the California Automatic Renewal Law (California ARL) pursuant to which PlushCare, Inc. and PlushCare of California were recently sued by a purported class (Robbins v. PlushCare, Inc. et al.) in the United States District Court for the Northern District of California alleging, inter alia, that PlushCare violated the California ARL by failing to provide adequate disclosures to members. In fiscal 2024, we agreed to and paid a settlement of $3.7 million, which was partially reimbursed through third-party insurance and remaining indemnification from selling shareholders of PlushCare, Inc.
Direct-to-consumer virtual care represents a material portion of our overall business. If we are required to change our automatically renewing subscription fee practices, our business, financial condition, results of operations and cash flows could be materially and adversely impacted.
The FDA may in the future determine that our technology solutions are subject to the Federal Food, Drug, and Cosmetic Act, and we may face additional costs and risks as a result.
There is a risk that our existing and future offerings, including the operational/technical component of our business model, such as our decision support software incorporating machine learning,
meetsmeet the definition of a medical device under the
Federal Food, Drug, and Cosmetic Act (FDCA).FDCA. Medical devices are subject to extensive regulation by the FDA under the FDCA. Under the FDCA, medical devices include any instrument, apparatus, machine, contrivance, or other similar or related articles that is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease. FDA regulations govern among other things, product development, testing, manufacture, packaging, labeling, storage, clearance or approval, advertising and promotion, sales and distribution, and import and export.
Failure to appropriately seek FDA approval or noncompliance with applicable FDA requirements can result in, among other things, public warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the FDA to grant marketing approvals, withdrawal of marketing approvals, a recommendation by the FDA to disallow us from entering into government contracts, and criminal prosecutions. The FDA also has the authority to request repair, replace, or refund of the cost of any device.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added, or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.
We do not collect sales and use, value-added, and similar taxes in all jurisdictions in which we have sales, based on our understanding that such taxes are not applicable. Sales and use, value-added, and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, or jurisdictions in which we collect sales tax may assert that we have under-collected sales tax, either of which could result in tax assessments, penalties, and interest, and we may be required to collect such taxes in the future. Although our customer contracts typically provide that our customers must pay all applicable sales and similar taxes, our customers may be reluctant to pay back-taxes and associated interest and penalties, or we may determine that it would not be commercially feasible to seek reimbursement from such customers, in which event any such tax assessments, penalties, and interest, or future requirements may adversely affect our results of operations.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of February
28, 2021,29, 2024, we had U.S. federal net operating loss carryforwards (NOLs)
, of
$306.5$501.6 million and state NOLs of
$285.5$448.5 million. Under the Tax Act, as modified by the
CARESCoronavirus Aid, Relief, and Economic Security Act
(CARES Act), unused NOLs for the tax year ended February 28, 2018 and prior tax years will carry forward to offset future taxable income, if any, until such unused losses expire. Unused losses generated in
taxabletax years beginning after December 31, 2017, which would be our tax year
endingended February 28, 2018 and thereafter, pursuant to the Tax Act, will not expire and may be carried forward indefinitely but will only be deductible in the case of NOLs arising in taxable years ending after 2020 to the extent of 80% of current year taxable income in any given year. It is uncertain if and to what extent various states will conform to the Tax Act, as modified by the CARES Act. As a result, if we earn net taxable income in future years, our NOLs arising in tax years
endingended February 28, 2018 and earlier may expire prior to being used, and our NOLs generated in later tax years will be subject to a percentage
limitation in tax years beginning after 2020. In addition, under the CARES Act, corporate taxpayers may carryback net operating losses originating in taxable years beginning after 2017 and before 2021 for up to five years, which was not previously allowed under the Tax Act.limitation. Under Sections 382 and 383 of the Code, if a corporation undergoes an
“ownership“ownership change,
” the
corporation’scorporation’s ability to use its pre-change NOLs and other tax attributes and to offset its post-change income and taxes may be limited. In general, an
“ownership change”“ownership change” occurs if there is a cumulative change in our ownership by
“5% stockholders”“5% stockholders” that exceed 50 percentage points over a rolling three-year period. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after our initial public offering or as a result of future events, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. The existing NOLs of one of our subsidiaries may be subject to limitations arising from ownership changes prior to, or in connection with, their acquisition by us. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. For
example, California recently suspended the ability to use NOLs and certain tax research credits for a period of time to offset taxable income for California state tax purposes in taxable periods beginning after 2019 and before 2023. For these reasons, we may not be able to utilize some portion of our NOLs, none of which are currently reflected on our balance sheet, even if we attain profitability.
Risks Related to our Intellectual Property
Failure to protect or enforce our intellectual property rights could harm our business and results of operations.
Our intellectual property includes our processes, methodologies, algorithms, applications, technology platform, software code, website content, user interfaces, graphics, registered and unregistered copyrights, trademarks, trade dress, databases, domain names, and patents and patent applications. We believe that our intellectual property is an essential
asset of our business. If we do not adequately protect our intellectual property, our brand and reputation could be harmed and competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business, negatively affect our position in the marketplace, limit our ability to commercialize our technology, and delay or render impossible our achievement of profitability. A failure to protect our intellectual property in a cost-effective and meaningful manner could have a material adverse effect on our ability to compete. We regard the protection of our trade secrets, copyrights, trademarks, trade dress, databases, domain names, and patents as critical to our success.
We strive to protect our intellectual property rights by relying on federal, state, and common law rights and other rights provided under foreign laws. These laws are subject to change at any time and could further restrict our ability to protect or enforce our intellectual property rights. In addition, the existing laws of certain foreign countries in which we operate may not protect our intellectual property rights to the same extent as do the laws of the United States.
We generally enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with other parties, with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, we may not be successful in executing these agreements with every party who has access to our confidential information or contributes to the development of our intellectual property.
The agreements that we execute may be breached, and we may not have adequate remedies for any such breach. These contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our intellectual property or deter independent development of similar intellectual property by others.
Obtaining and maintaining effective intellectual property rights is expensive, including the costs of monitoring unauthorized use of our intellectual property and defending our rights. We make business decisions about when to seek patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select may ultimately prove to be inadequate. We strive to protect certain of our intellectual property rights through filing applications for trademarks, patents, and domain names in a number of jurisdictions, a process that is expensive and may not be successful in all jurisdictions. However, there is no assurance that any resulting patents or other intellectual property rights will adequately protect our intellectual property, or provide us with any competitive advantages. Moreover, we cannot guarantee that any of our pending patent or trademark applications will issue or be approved. Even where we have intellectual property rights, they may later be found to be unenforceable or have a limited scope of enforceability. In addition, we may not seek to pursue such protection in every jurisdiction. The United States Patent and Trademark Office also requires compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent application process and after a patent has issued. Noncompliance with such requirements and processes may result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to develop and commercialize substantially similar and competing applications, which would harm our business.
We believe it is important to maintain, protect and enhance our brands. Accordingly, we pursue the registration of domain names and our trademarks and service marks in the United States. Third parties may challenge our use of our trademarks, oppose our trademark applications, or otherwise impede our efforts to protect our intellectual property in certain jurisdictions. In the event that we are unable to register our trademarks in certain jurisdictions, we could be forced to rebrand our solutions, which would result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors and others could also attempt to capitalize on our brand recognition by using domain names or business names similar to ours. Domain names similar to ours have been registered in the United States and elsewhere. We may be unable to prevent third parties from acquiring or using domain names and other trademarks that infringe on, are similar to, or otherwise decrease the value of, our brands, trademarks, or service marks. We also may incur significant costs in enforcing our trademarks against those who attempt to imitate our brand and other valuable trademarks and service marks.
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. We may not be able to detect infringement or unauthorized use of our intellectual property rights, and defending or enforcing our intellectual property rights, even if successfully detected, prosecuted, enjoined, or remedied, could result in the expenditure of significant financial and managerial resources. Litigation has in the past and may be necessary in the future to enforce our intellectual property rights, protect our proprietary rights, or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could harm our business. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, countersuits, and adversarial proceedings such as oppositions, inter partes review, post-grant review, re-examination, or other post-issuance proceedings, that attack the validity and enforceability of our intellectual property rights. An adverse determination of any litigation proceedings could put our patents at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Further, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. If we fail to maintain, protect, and enhance our intellectual property rights, our business may be harmed and the market price of our common stock could decline.
Our competitors also may independently develop similar technology that does not infringe on or misappropriate our intellectual property rights. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Effective patent, trademark, copyright, and trade secret protection may not be available to us in every country in which our solutions or technology are developed. Further, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights are uncertain. The laws in the United States and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property could result in competitors offering solutions that incorporate our most technologically advanced features, which could seriously reduce demand for existing and future offerings.
Third parties may initiate legal proceedings alleging that we are infringing or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could harm our business.
Our success depends in part on our ability to develop and commercialize our offerings and use our proprietary technology without infringing the intellectual property or proprietary rights of third parties. Intellectual property disputes can be costly to defend and may cause our business, operating results, and financial condition to suffer. As the market for healthcare in the United States expands and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our offerings and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Whether merited or not, we may face allegations that we, our partners, our licensees, or parties indemnified by us have infringed or otherwise violated the patents, trademarks, copyrights, or other intellectual property rights of third parties. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties.
Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. We may also face allegations that our employees have misappropriated the intellectual property or proprietary rights of their former employers or other third parties. We have in the past initiated, and it may in the future be necessary for us to initiate, litigation to defend ourselves in order to determine the scope, enforceability, and validity of third-party intellectual property or proprietary rights, or to establish our respective rights. Regardless of whether claims that we are infringing patents or other intellectual property rights have merit, such claims can be time-consuming, divert management’smanagement's attention and financial resources, and can be costly to evaluate and defend. Results of any such litigation are difficult to predict and may require us to stop commercializing or using our solutions or technology, obtain licenses, modify our solutions and technology while we develop non-infringing substitutes, or incur substantial damages, settlement costs, or
face a temporary or permanent injunction prohibiting us from marketing or providing the affected solutions. If we require a third-party license, it may not be available on reasonable terms or at all, and we may have to pay substantial royalties, upfront fees, or grant cross-licenses to intellectual property rights for our solutions. We may also have to redesign our solutions so that they do not infringe third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and time, during which our technology and solutions may not be available for commercialization or use. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not obtain a third-party license to the infringed technology, license the technology on reasonable terms, or obtain similar technology from another source, our revenue and earnings could be adversely impacted.
From time to time, we have been and may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual property. Some third parties may be able to sustain the costs of complex litigation more effectively than we can because they have substantially greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock. Moreover, any uncertainties resulting from the initiation and continuation of any legal proceedings could have a material adverse effect on our ability to raise the funds necessary to continue our operations. Assertions by third parties that we violate their intellectual property rights could therefore harm our business.
Our use of open source software could adversely affect our ability to offer our solutions and subject us to possible litigation.
We use open source software in connection with our existing and future offerings. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third-parties certain rights of further use. By the terms of certain open source licenses, we
could be required to release the source code of our proprietary software and to make our proprietary software available under open source licenses, if we combine and/or distribute our proprietary software with open source software in certain manners. Although we monitor our use of open source software, we cannot be sure that all open source software is reviewed prior to use in our proprietary software, that our programmers have not incorporated open source software into our proprietary software, or that they will not do so in the future. Additionally, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts.
There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our existing and future offerings to our customers and members. In addition, the terms of open source software licenses may require us to provide software that we develop using such open source software, to others, including our competitors, on unfavorable license terms. As a result of our current or future use of open source software, we may face claims or litigation, be required to release our proprietary source code, pay damages for breach of contract, re-engineer our technology, discontinue sales in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources away from our development efforts, any of which could harm our business.
Any restrictions on our ability to obtain or use data could harm our business.
Our business depends in part on data provided to us by, among other sources, health plans, benefits administrators, data warehouses, electronic data interchange (EDI) transaction data providers, and suppliers in our trusted suppliers.Trusted Partner Ecosystem. Any errors or defects in any third-party data or other technology could result in errors in our existing and future offerings that could harm our business and damage our reputation and cause losses in revenue, and we could be required to spend significant amounts of additional resources to fix any problems. In addition, certain of our offerings, including Accolade Total Care and Accolade Total Health and Benefits, depend on maintaining our data and analytics technology platform, which is populated with data provided by third parties. While our existing agreements with these data providers have
multiple-year terms, these providers could become our competitors in the future. Any loss of the right to use of data provided by any health plan providers, benefits administrators, or other entities that provide us data, could result in delays in producing or delivering our solutions until equivalent data, other technology, or intellectual property is identified and integrated, which delays could harm our business. In this situation we would be required to either redesign our solutions to function with technology, data, or intellectual property available from other parties or to develop these components ourselves, which would result in increased costs. Furthermore, we might be forced to limit the features available in our existing or future offerings. If we fail to maintain or renegotiate any of these technology or intellectual property licenses, we could face significant delays and diversion of resources in attempting to develop similar or replacement offerings or to license and integrate a functional equivalent of the technology or intellectual property. The occurrence of any of these events may harm our business.
In addition, some of our business activities require that we obtain permissions consistent with HIPAA to provide certain marketing and data aggregation solutions as well as those activities that require the creation and use of de-identified information. We also require large sets of de-identified information to enable us to continue to develop and enhance our data and analytics platform. If we are unable to secure these rights, or if there is a future change in law, we may face limitations on the use of PHI and our ability to use de-identified information that could harm our business. There is also a risk that we may fail to properly de-identify PHI and/or PII under applicable state laws, some of which impose different standards for de-identification than those imposed by HIPAA.
Risks Related to Ownership of Our Common Stock
We
are an “emerging growth company,” and our election to comply with the reduced disclosure requirements as a public company may make our common stock less attractive to investors.For as long as we remain an “emerging growth company,” as definedhave in the JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies,” including not being required to comply with the independent auditor attestation requirements of Section 404 the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensationpast experienced a material weakness in our periodic reportsinternal controls over financial reporting, and proxy statements, being permitted to provide fewer years of audited financial statements, and exemptions fromif we experience additional material weaknesses in the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We would cease to be an “emerging growth company” upon the earliest to occur of: (i) the last day of the fiscal year in whichfuture or if we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have, in any three-year period, issued more than $1.0 billion in non-convertible debt securities; and (iv) February 28, 2026 (the last day of the fiscal year ending after the fifth anniversary of our initial public offering). We may choose to take advantage of some but not all of these reduced reporting burdens, and we have taken advantage of certain reduced reporting burdens in this Annual Report on Form 10-K. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold stock. In addition, the JOBS Act also provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. We have elected to take advantage of this extended transition period under the JOBS Act. As a result, our operating results and consolidated financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards as of the public company effectiveness dates. It is possible that some investors will find our common stock less attractive as a result, which may result in a less active trading market for our common stock and higher volatility in our stock price. Investors may find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile and may decline.
If weotherwise fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), the Sarbanes-Oxley Act, and the rules and regulations of the applicable listing standards of Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly and place significant strain on our personnel, systems, and resources.Nasdaq Stock Market (Nasdaq). The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develophave developed and refinerefined our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting, which includes hiring additional accounting and financial personnel to implement such processes and controls. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. If any of these new or improvedour controls and systems do not perform as
expected, we may experience material weaknesses in our controls.
OurIt is possible that our current controls and any new controls that we develop may become inadequate
in the future because of changes in conditions in our business.
Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future.Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and
further ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq. We are required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. We are required to provide an annual management report on the effectiveness of our internal control over financial reporting,
commencing withand our
second annual report on Form 10-K. Our independent registered public accounting firm is
notalso required to formally attest to the effectiveness of our internal control over financial
reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, ourreporting. Our independent registered public accounting firm may issue
a reportreports that
isare adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or
operating.operating, or if it is not satisfied with our remediation of any identified material weaknesses. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock.
Sales of substantial amounts of our common stock in the public markets, or the perception that such sales could occur, could reduce the price that our common stock might otherwise attain.
Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate.
Stockholders owning an aggregate of up to approximately 6.1 million shares are entitled, under our registration rights agreement, to require us to register shares owned by them for public sale in the United States.
Moreover, we have in the past and may in the future grant rights to some of our stockholders that require us to register the resale of our common stock or other securities on behalf of these stockholders and/or facilitate public offerings of our securities held by these stockholders, including in connection with potential future acquisition or capital-raising transactions. For example, in connection with our acquisition of 2nd.MD, we entered into a registration rights agreement with 2nd.MD’s existing security holders, pursuant to which we agreed that we would register the shares of common stock issued to such security holders in the merger. On March 15, 2021, pursuant to the registration rights agreement, we filed a registration statement with the SEC to register for resale up to 2,495,441 shares of our common stock held by 2nd.MD’s existing security holders.
Sales of our shares as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our common stock to fall and make it more difficult for you to sell shares of our common stock.
In order to support the growth of our business, we may need to incur additional indebtedness under our current credit facility or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all.
Our operations have consumed substantial amounts of cash since inception, and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, develop new applications and solutions, enhance our existing solutions, enhance our operating infrastructure, and potentially acquire complementary businesses and technologies.
Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including the need to:
| ● | finance unanticipated working capital requirements; |
| ● | develop or enhance our technological infrastructure and our existing solutions; |
| ● | fund strategic relationships, including joint ventures and co-investments; |
| ● | fund additional implementation engagements; |
| ● | respond to competitive pressures; and |
| ● | acquire complementary businesses, technologies, products, or services. |
•finance unanticipated working capital requirements;
•develop or enhance our technological infrastructure and our existing solutions;
•fund strategic relationships, including joint ventures and co-investments;
•fund additional implementation engagements;
•respond to competitive pressures; and
•acquire complementary businesses, technologies, products, or services.
Accordingly, we may need to engage in equity or debt financings to secure additional funds. Additional financing may not be available on terms favorable to us, or at all. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing
secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business.
If securities or industry analysts publish reports that are interpreted negatively by the investment community or publish negative or inaccurate research reports about our business, our share price and trading volume could decline.
The trading market for our common stock depends, to some extent, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts or the information contained in their reports. Securities and industry analysts may cease to publish research on our business or publish negative coverage. If one or more analysts commence coverage of us and publish research reports that are interpreted negatively by the investment community, or have a negative tone regarding our business, financial condition, operating performance, industry, or end-markets, or downgrade our common stock, our share price could decline. In addition, if a
majoritysignificant number of these analysts ceases coverage of our company or fails to regularly publish reports about us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, the terms of our credit agreement with Comerica Bank and the related collateral documents contain, and any future indebtedness would likely contain, prohibitions on our paying any cash dividends without the consent of the lenders. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management, and may limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of rendering more difficult, delaying, or preventing a change of control or changes in our management. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions:
| ● | creating a classified board of directors whose members serve staggered three-year terms; |
| ● | authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock; |
| ● | limiting the liability of, and providing indemnification to, our directors and officers; |
| ● | specifying that special meetings of our stockholders can be called only by our board of directors, the Chair of our board of directors, or our Chief Executive Officer; |
| ● | requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; |
| ● | prohibiting cumulative voting in the election of directors; |
| ● | providing that our directors may be removed only for cause and by a two-thirds majority vote of the stockholders; |
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creating a classified board of directors whose members serve staggered three-year terms;
•authorizing "blank check" preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;
•
limiting the liability of, and providing indemnification to, our directors and officers; | ● | providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and |
| ● | requiring the approval of our board of directors or the holders of at least 66% of our outstanding shares of capital stock to amend our amended and restated bylaws and certain provisions of our amended and restated certificate of incorporation. |
•specifying that special meetings of our stockholders can be called only by our board of directors, the Chair of our board of directors, or our Chief Executive Officer;•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;
•prohibiting cumulative voting in the election of directors;
•providing that our directors may be removed only for cause and by a two-thirds majority vote of the stockholders;
•providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
•requiring the approval of our board of directors or the holders of at least 66% of our outstanding shares of capital stock to amend our amended and restated bylaws and certain provisions of our amended and restated certificate of incorporation.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, institutional stockholder representative groups, stockholder activists, and others may disagree with our corporate governance provisions or other practices, including anti-takeover provisions, such as those listed above. We generally will consider recommendations of institutional stockholder representative groups, but we will make decisions based on what our board and management believe to be in the best long-termlong-
term interests of our company and stockholders; however, these groups could make recommendations to our stockholders against our practices or our board members if they disagree with our positions.
Finally, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any
“interested”“interested” stockholder for a period of three years following the date on which the stockholder became an
“interested”"interested" stockholder.
Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of our common stock in an acquisition.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America, will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our
stockholders’stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America, will be the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
| ● | any derivative action or proceeding brought on our behalf; |
| ● | any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders; |
| ● | any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws; |
| ● | any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; |
| ● | any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware; or |
| ● | any action asserting a claim governed by the internal affairs doctrine. |
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any derivative action or proceeding brought on our behalf;
•any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders;
•
any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws;•any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws;
•any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware; or
•any action asserting a claim governed by the internal affairs doctrine.
This provision would not apply to suits brought to enforce a duty or liability created by the Securities Act or the Exchange Act or any claim for which the U.S. federal courts have exclusive jurisdiction. Our amended and restated certificate of incorporation will provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
These exclusive-forum provisions may limit a
stockholder’sstockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If any other court of competent jurisdiction were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business. For example, the Court of Chancery of the State of Delaware determined that a provision stating that U.S. federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable. However, this decision was recently reviewed and ultimately overturned by the Delaware Supreme Court in March 2020.
Our issuance of additional capital stock in connection with financings, acquisitions, investments, our stock incentive plans, or otherwise will dilute all other stockholders.
We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors, and consultants under our stock incentive plans. We also may raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in complementary companies, products, or technologies and issue equity securities to pay for any such acquisition or
investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.
Risks Related to
Ownership of Our Debt
Our credit agreement contains certain restrictions that may limit our ability to operate our business.
The terms of our existing credit agreement with Comerica Bank and the related collateral documents contain, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability, and the ability of our subsidiaries, to take actions that may be in our best interests, including, among others, disposing of assets, entering into change of control transactions, mergers or acquisitions, incurring additional indebtedness, granting liens on our assets, declaring and paying dividends, and agreeing to do any of the foregoing. These agreements require us to satisfy a specified minimum liquidity level at all times and to achieve certain minimum covenant revenue, as defined, on a trailing six-month basis. Our ability to meet financial covenants can be affected by events beyond our control, including as a result of the economic downturn caused by the COVID-19 pandemic,downturns, and we may not be able to continue to meet these covenants. A breach of any of these covenants or the occurrence of other events (including a material adverse effect) specified in these agreements and/or the related collateral documents would result in an event of default under such agreements. Upon the occurrence of an event of default, Comerica Bank as administrative agent for the revolving lenders could elect to declare all amounts outstanding, if any, under the credit agreement to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, Comerica Bank as administrative agent for the revolving lenders could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets as collateral under the loan documents. If Comerica Bank as administrative agent for the revolving lenders accelerates the repayment of borrowings, if any, we may not have sufficient funds to repay our existing debt.
We have a significant amount of debt and may incur additional debt in the future. We may not have sufficient cash flow from our business to pay our substantial debt when due.
Our ability to pay our debt when due or to refinance our indebtedness, including the 0.50% Convertible Senior Notes due 2026,
we issued in March 2021 (the Notes), depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not
continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. In
addition,most instances it is at our discretion to settle the Notes for cash or the distribution of common stock; however, any required repurchase of the Notes for cash as a result of a fundamental change would lower our current cash on hand such that we would not have those funds available for us in our business. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt instruments, some of which may be secured debt. We are not restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that could have the effect of diminishing our ability to make payments on the Notes when due. Furthermore, the indenture prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes and the indenture. These and other provisions in the indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to holders of the Notes.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes offered hereby, could have a material effect on our reported financial results.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which changes the accounting for the convertible debt instruments described above. The standard eliminates beneficial conversion feature and cash conversion models resulting in more convertible instruments being accounted for as a single unit; and simplifies classification of debt on the balance sheet and earnings per share calculation. Additionally, the treasury stock method for calculating earnings per share will no longer be allowed for convertible debt instruments whose principal amount may be settled using shares. Rather, the if-converted method will be required. Application of the “if converted” method may reduce our reported diluted earnings per share. However, if the principal amount of the convertible debt instrument being converted is required to be paid in cash and only the excess is permitted to be settled in shares, the if-converted method will produce a similar result as the treasury stock method prior to the adoption of ASU 2020-06 for such convertible debt instrument. These amendments will be effective for public companies for fiscal years beginning after December 15, 2021, with early adoption permitted, but no earlier than fiscal years beginning after December 15, 2020. We early adopted the ASU effective March 1, 2021.
Transactions relating to our Notes may affect the value of our common stock.
The conversion of some or all of the Notes would dilute the ownership interests of existing stockholders to the extent we satisfy our conversion obligation by delivering shares of our common stock upon any conversion of such Notes. Our Notes may become in the future convertible at the option of their holders under certain circumstances. If holders of our Notes elect to convert their notes, we may settle our conversion obligation by delivering to them a significant number of shares of our common stock, which would cause dilution to our existing stockholders. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
In addition, in connection with the issuance of the Notes, we entered into capped call transactions with certain financial institutions (Option Counterparties). The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion or settlement of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.
Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition, or results of operations.
The
New income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us. For example, the Tax Act,
the CARES Act, and the IRA enacted many significant changes to the U.S. tax laws. Future guidance from the Internal Revenue Service and other tax authorities with respect to
the Tax Actsuch legislation may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation.
In addition, in response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020, and subsequently in December 2020, the Continued Assistance for Unemployed Workers Act of 2020 (CARES Act II) was signed into law, extending certain provisions of the CARES Act and making other changes to the Tax Act. The CARES Act and CARES Act II modify certain of the changes made by the Tax Act. Changes in corporate tax rates, the realization of net deferred tax assets relating to our U.S. operations, and the deductibility of expenses under the Tax Act
as amended by the CARES Act and CARES Act II, or future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense. The foregoing items, as well as any other future changes in tax laws, could have a material adverse effect on our business, cash flow, financial condition, or results of operations. In addition, it is uncertain if and to what extent various states will conform to the Tax Act,
as amended by the CARES Act,
and CARES Act II,the IRA, or any newly enacted federal tax legislation.
Unstable market and economic conditions, including adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, may have serious adverse consequences on our business, financial condition, results of operations, and stock price.
The global credit and financial markets have recently experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, increased interest rates, inflationary pressures, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. The financial markets and global economy may also be adversely affected by the current or anticipated impact of military conflict, including the conflict between Russia and Ukraine, conflicts in the Middle East, terrorism, or other geopolitical events. Sanctions imposed by the United States and other countries in response to such conflicts, including the ones in Ukraine and the Middle East, may also adversely impact the financial markets and the global economy, and any economic countermeasures by affected countries and others could exacerbate market and economic instability. There can be no assurance that further deterioration in the credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment, or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance, and stock price and could require us to delay or abandon critical development plans. Accordingly, there is a risk that one or more of our customers, current service providers, or other partners may be adversely impacted by, or may not survive, an economic downturn, which could directly affect our ability to attain our operating goals on schedule and on budget.
In addition, actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties, or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. If any of our lenders or counterparties to any such instruments were to be placed into receivership, we may be unable to access such funds.
We regularly maintain cash balances at third-party financial institutions in excess of the FDIC insurance limit. Although we assess our banking relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect us, the financial institutions with which we have arrangements
directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit, or liquidity agreements, or arrangements, disruptions, or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions or financial services industry companies with which we have financial or business relationships, but could also include factors involving financial markets or the financial services industry generally.
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all
Natural or man-made disasters, events outside our reasonable control, and other similar events may significantly disrupt our operations and negatively impact our business, financial condition, and results of operations.
Our offices, third-party data and call centers, or cloud infrastructure services may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, fires, floods, nuclear disasters,
pandemics, acts of terrorism or other criminal activities, or other events or business continuity problems outside our reasonable control such as a general and widespread failure of the Internet or telecommunications or outbreaks of public health threats, such as
the novel coronavirus,
influenza, or other highly communicable diseases or viruses, which may render it difficult or impossible for us to operate our business for some period of time. Any disruptions in our operations related to the repair or replacement of our offices, third-party data and call centers, or cloud infrastructure services could negatively impact our business and results of operations and harm our reputation. Insurance may not be sufficient to compensate for losses that may occur. Any such losses or damages could harm our business.
We have incurred and will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our business, results of operations, and financial condition.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), the listing standards of the Nasdaq Stock Market (Nasdaq) and other applicable securities rules and regulations. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems and resources. For example, the Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and results of operations. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management's attention may be diverted from other business concerns, which could harm our business, results of operations, and financial
condition. Although we have already hired additional employees and engaged outside consultants to assist us in complying with these requirements, we will need to hire more employees in the future or may need to engage additional outside consultants, which will increase our operating expenses. In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. These factors could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. As a result of disclosure of information in our public company filings, our business and financial condition will become more visible, which may result in pricing pressure from customers or an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, results of operations, and financial condition.
The trading price of our common stock could be volatile, and you could lose all or part of your investment. Our stock price has been volatile since our initial public offering, and it is likely that the trading price of our common stock may fluctuate substantially, depending on a number of factors, including those described in this "Risk Factors" section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
| ● | price and volume fluctuations in the overall stock market from time to time; |
| ● | volatility in the market prices and trading volumes of healthcare technology company stocks; |
| ● | changes in operating performance and stock market valuations of other healthcare technology companies generally, or those in our industry in particular; |
| ● | sales of shares of our common stock by us or our stockholders; |
| ● | failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; |
| ● | the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections; |
| ● | new product announcements by us or our competitors; |
| ● | the public's reaction to our press releases, other public announcements, and filings with the SEC; |
| ● | changes in how customers perceive the benefits of our solutions, and future offerings; |
| ● | changes in the structure of healthcare payment systems; |
53
•
price and volume fluctuations in the overall stock market from time to time;
•volatility in the market prices and trading volumes of healthcare technology company stocks;
•changes in operating performance and stock market valuations of other healthcare technology companies generally, or those in our industry in particular;
•sales of shares of our common stock by us or our stockholders;
•failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections;
•new product announcements by us or our competitors;
•the public's reaction to our press releases, other public announcements, and filings with the SEC;
•changes in how customers perceive the benefits of our solutions, and future offerings;
•changes in the structure of healthcare provider and payment systems;
•rumors and market speculation involving us, our customers, our competitors, or other companies in our industry;
•actual or anticipated changes in our results of operations or fluctuations in our results of operations;
•actual, rumored, or anticipated developments in our business, our competitors' businesses, or the competitive landscape generally;
•litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
•developments or disputes concerning our intellectual property or other proprietary rights;
•any significant data breach involving our technology platform or data stored by us or on our behalf;
•announced or completed acquisitions of businesses, commercial relationships, strategic partnerships, products, services, significant contracts or customers, or technologies by us or our competitors;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•changes in accounting standards, policies, guidelines, interpretations, or principles;
•“flash crashes,” “freeze flashes,” or other glitches that disrupt trading on the securities exchange on which we are listed;
•any significant change in our management; and
•general economic, social, or political conditions and slow or negative growth of our markets.
| ● | rumors and market speculation involving us or other companies in our industry; |
| ● | actual or anticipated changes in our results of operations or fluctuations in our results of operations; |
| ● | actual or anticipated developments in our business, our competitors' businesses, or the competitive landscape generally; |
| ● | litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; |
| ● | developments or disputes concerning our intellectual property or other proprietary rights; |
| ● | any significant data breach involving our technology platform or data stored by us or on our behalf; |
| ● | announced or completed acquisitions of businesses, commercial relationships, products, services, or technologies by us or our competitors; |
| ● | new laws or regulations or new interpretations of existing laws or regulations applicable to our business; |
| ● | changes in accounting standards, policies, guidelines, interpretations, or principles; |
| ● | “flash crashes,” “freeze flashes,” or other glitches that disrupt trading on the securities exchange on which we are listed; |
| ● | any significant change in our management; and |
| ● | general economic conditions and slow or negative growth of our markets. |
Accordingly, we cannot assure you of the liquidity of an active trading market, your ability to sell your shares of our common stock when desired, or the prices that you may obtain for your shares of our common stock. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares of our common stock and may impair our ability to acquire or make investments in complementary companies, products, or technologies by using shares of our common stock as consideration.
In addition, if the market for healthcare technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, or results of operations. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company's securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management's attention and resources from our business. This could harm our business.
If securities or industry analysts publish reports that are interpreted negatively by the investment community or publish negative or inaccurate research reports about our business, our share price and trading volume could decline.
The trading market for our common stock depends, to some extent, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts or the information contained in their reports. Securities and industry analysts may cease to publish research on our business or publish negative coverage. If one or more analysts commence coverage of us and publish research reports that are interpreted
negatively by the investment community, or have a negative tone regarding our business, financial condition, operating performance, industry, or end-markets, or downgrade our common stock, our share price could decline. In addition, if a majority of these analysts cease coverage of our company or fails to regularly publish reports about us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Risk Management and Strategy
We believe cybersecurity is critical to our mission to help every person live their healthiest life. Our customers, members, partners, and employees trust Accolade to maintain a secure environment for their health information. We process and maintain sensitive data on our customers and members in the form of PHI and PII and we maintain intellectual property of our solutions and PII of our employees. Because of the sensitivity of this data, we are subject to various cybersecurity threats that could adversely affect our business, customers, and members through impacts to the confidentiality, integrity, and availability of our systems.
As part of our enterprise risk management ("ERM") program, we maintain a cybersecurity program in an effort to reduce the risk of a breach of our systems or information. Our cybersecurity program includes policies and controls which are regularly reviewed through internal assessments. We have an active HITRUST certification for our expert medical opinion offering and Service Organization Control ("SOC") 2 Type II security compliance reports that are issued by third-party entities for our other offerings. We have controls in place intended to assess our cybersecurity readiness and prevent unauthorized access to our critical systems, including, for example, vulnerability scanning of our systems, detection and blocking of potentially malicious email, multifactor authentication, and security review of our vendors. We also actively engage with the law enforcement community, industry groups, and key vendors to maintain awareness of the evolving threat environment. We have a documented cybersecurity response plan for identification and assessment of cybersecurity incidents, including an escalation process for management to assess the materiality of an incident.
Despite our cybersecurity program, we cannot guarantee that we will not be subject to a material cybersecurity incident. For a description of the risks from cybersecurity threats that may materially affect the Company, and how they may do so, see Item 1A-"Risk Factors" included elsewhere in this Annual Report on Form 10-K. As of the date of this Annual Report, we have determined that there have been no cybersecurity incidents which materially impacted our business, financial condition, or results of operations.
Governance
Our board of directors maintains oversight of our risk management and the audit committee of our board of directors maintains primary responsibility related to overseeing our cybersecurity risk. One member of our audit committee has experience in cybersecurity and provides perspective regularly. We maintain a cybersecurity program to identify, assess, and manage our cybersecurity threats that is led by our Chief Information Security Officer ("CISO") and General Counsel / Chief Compliance Officer. These individuals regularly engage with the audit committee and other members of senior management to discuss cybersecurity risks.
We have co-headquarters in Seattle, Washington at 1201 Third Avenue, Suite 1700, Seattle, WA 98101 and Plymouth Meeting, Pennsylvania at 660 West Germantown Pike, Suite 500, Plymouth Meeting, PA 19462. Our Seattle headquarters is leased pursuant to a lease that expires in 2030. Our Plymouth Meeting headquarters space is leased pursuant to a lease that expires in 2027. We also have offices located in Scottsdale, ArizonaHouston, Texas; San Francisco, California; El Paso, Texas; and Prague, Czech Republic, pursuant to leases that expire in 2024 and 2021, respectively.at various dates through 2031. We believe that our properties are
generally suitable to meet our needs for the foreseeable future. In addition, to the extent we require additional space in the future, we believe that it would be readily available on commercially reasonable terms.
Item 3. Legal Proceedings
We are from time
The information set forth in Note 14, “Commitments and Contingencies,” to time subjectour consolidated financial statements included in this Form 10-K is incorporated by reference to and are presently involved in, litigation and other legal proceedings. We believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material effect on our business, financial condition or operating results.this Item 3.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the Nasdaq Global Select Market under the symbol “ACCD.” Trading began on our common stock on July 2, 2020. Prior to that time, there was no public market for our common stock. There were
128184 stockholders of record as of
April 30, 2021.February 29, 2024. Certain shares are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Our ability to pay dividends on our common stock is restricted by our credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to applicable laws, and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
Recent
Unregistered Sales of
UnregisteredEquity Securities
In December 2020,
During the year ended February 29, 2024, we
issued an aggregate of 793 shares of common stock to two accredited investors as consideration pursuant to an acquisition.Neither of the foregoing transactions involveddid not issue or sell any underwriters, underwriting discounts or commissions, or any public offering. The sales of the aboveunregistered securities were deemed to be exempt from registration under the Securities Actnot previously disclosed in
reliance on Section 4(a)(2) of the Securities Act (and Regulation D or Regulation S promulgated thereunder). The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed on the share certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.
Use of Proceeds from Public Offering of Common Stock
On July 7, 2020, we closed on our initial public offering (IPO) in which we issued and sold 11,526,134 shares (inclusive of the underwriters’ over-allotment option to purchase 1,503,408 shares) of common stock at a price of $22.00 per share pursuant to a Registration StatementQuarterly Report on Form S-1. The aggregate net proceeds to us from the offering were $231.2 million, after deducting underwriting discounts and commissions10-Q or in a Current Report on Form 8-K.
Purchases of $17.8 million and net offering expensesEquity Securities
None.
The following graph shows the cumulative total stockholder return on our common stock compared with the Nasdaq Composite Index, and the
S&P MidCap 400Nasdaq Health Care Index. The comparison begins on July 2, 2020, the date on which our common stock first began trading on the Nasdaq Global Select Market, and assumes an initial investment of $100.
Our management cautions that the stock price performance shown in this graph should not be considered indicative of potential future stock price performance.
The information under “Stock Performance Graph” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of Accolade, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in those filings.
Item 6.
Selected Financial DataNot applicable.
[Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of our operations should be read together with our consolidated financial statements, including the related notes thereto, appearing at the end of this filing. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K.
Discussion and analysis of our fiscal year 2019,2022, as well as the year-over-year comparison of our 2020fiscal 2023 financial performance to 2019,fiscal 2022, have been omitted from this section and may be found under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Final ProspectusAnnual Report on Form 10-K for our initial public offering (our IPO) dated as of July 1, 2020the fiscal year ended February 28, 2023 and filesfiled with the Securities and Exchange Commission (the SEC) pursuant to Rule 424(b)(4) on July 2, 2020.April 28, 2023. Our fiscal year ends on the last day of February, and our fiscal quarters end on May 31, August 31, November 30, and the last day of February.
We provide
an advocacy-led, nationwide care delivery service comprised of 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”“members”) a single place to turn for their health, healthcare, and benefits needs.
We also offer expert medical opinion services to commercial customers (which includes employers, health plans, and governmental entities) and virtual primary care and mental health therapy, both directly to consumers and to commercial customers. Our innovative platform combines open, cloud-based intelligent technology with multimodal support from a team of empathetic and knowledgeable Accolade
Health AssistantsCare Advocates and clinicians,
(includingincluding primary care physicians, registered nurses, physician medical directors,
andpharmacists, behavioral health
specialists).specialists, women’s health specialists, case management specialists, and expert medical opinion providers. 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.
We offer our solutions as standalone or bundled offerings. Our solution portfolio combines the capabilities of Accolade’s historical navigation and advocacy solutions with our primary care, mental health, and expert medical opinion services, augmented by artificial intelligence, machine learning, and data-driven recommendations. Our offerings include:
•Plus and Connect – A benefits navigation and care solution designed to work with our customers’ existing benefits ecosystem, incorporating elements of all Accolade Total Healthsolutions including Advocacy, Accolade Expert MD, Accolade Care, and Benefits is our most comprehensivethe Accolade partner ecosystem. Different offering configurations may also include member services, provider services, and most closely alignsan expanded set of clinical programs that address case and disease management to maximize member engagement and return on investment
•Accolade Expert MD – Expert medical consultations that connect patients to highly qualified condition-specific specialists for both adult and pediatric care
•Accolade Care and PlushCare – Integrated primary care and mental health support delivered for both commercial customers and direct consumers
•Trusted Partner Ecosystem - In addition to Accolade’s owned solutions, we have assembled a roster of high-quality partners whose condition-specific solutions are complementary to our “Premier” solution on which the company was foundedservices and from which the majoritycapable of delivering additional value to 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)members and Accolade Total Care (focused on guiding members to high-quality, cost-effective providers). We have further leveraged our technology platform to develop add-on offerings, such as Accolade Boost, our Trusted Supplier Program, Accolade COVID Response Care, and Mental Health Integrated Carecustomers or capabilities that targetmeet specific challenges faced by our customers. Through our acquisition of Innovation Specialists, LLC d/b/a 2nd.MD (2nd.MD) we also acquired the capability to provide an expert medical consultation and medical decision support service, which may be provided as a standalone service or with elements incorporated into our core offerings.customer needs. 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 of February
28, 2021,29, 2024, we had
112over 1,200 commercial customers comprising more than
2.114 million members. Our customers
come from acrossrepresent a diversified set of industries, including
media, technology, financial
services, transportation, energy, and retail.In July 2020, we closed our IPO
services, healthcare, manufacturing, transportation, education, retail, and the public sector. Additionally, as of February 29, 2024, we had more than 150,000 consumers subscribed to virtual primary care services through our PlushCare solution.
In October 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.
For the fiscal years ended February 28(29), 20212024 and 2020,2023, our total revenue was $170.4$414.3 million and $132.5$363.1 million, respectively, representing 29%14% year-over-year growth for fiscal year 20212024 compared to fiscal year 2020.2023. For the fiscal years ended February 28(29), 20212024 and 2020,2023, our net losses were $50.7$99.8 million and $51.4$459.7 million, respectively.
Net loss for the fiscal year ended February 28, 2023 included a goodwill impairment charge of $299.7 million due to sustained decreases in our stock price and market capitalization in the first quarter of fiscal 2023. Refer to the section below under Critical Accounting Policies and Estimates titled “Accounting for Goodwill and Other Intangible Assets” and Note 4 to our consolidated financial statements for more details.
We provide our solutions primarily to employers that deploy Accolade offerings to our
members.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, and virtual primary care services to the members of our
employer customers’commercial 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 services which are typically priced on a fee per visit basis for consumers and a visit fee basis or PMPM plus visit fee basis for commercial customers.
The primary cost of delivering our service includes the personnel costs of Accolade
Health Assistants,Care Advocates and clinicians, including registered nurses, physician medical directors, pharmacists, behavioral health specialists,
women’swomen's health specialists,
and case management specialists,
expert medical opinion providers and 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
customers.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
(CFOs,(human resource officers, CFOs, benefits executives,
benefits consultants, and
benefits 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 partnershipssuccess 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
in our Trusted Partner Ecosystem, 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.
For example, in March 2019, we partnered with Humana and formed a joint go-to-market strategy, which we launched in two initial geographic markets. In October 2019, concurrent with a $20 million preferred stock investment from Humana, we expanded our partnership to add a broader base of solutions targeting self- and fully-insured customer prospects and significantly expand our target geographic markets. 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.
For example, ourOur technology platform has enabled us to unbundle aspects of
Accolade Total Health and Benefitsour core navigation capability to create
two additional standalone offerings: Accolade Total Benefits and Accolade Total Care. We have further leveraged our technology platform to develop add-onvarious offerings
that target specific challenges faced byfor our customers,
including Accolade Boostwhile integrating capabilities from our recent acquisitions to deliver our Personalized Healthcare solution that combines our core navigation with expert medical consultations and
our Trusted Supplier Program — as well as very recently, Accolade COVID Response Care and Mental Health Integrated Care.virtual primary care. 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,
Business Environment 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,Trends
While macroeconomic factors including inflation and
the degree to which perceptions of, and interest in, Accolade solutionsgeopolitical risk have
evolved during this unprecedented time.In mid-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 relatively 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 outbreakthese factors on our operational and financial performance will depend on certain developments, including the durationU.S. unemployment and spread of the outbreak,economic growth, changes in interest rates, 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 ofChanging macroeconomic factors may affect our customers' desire to renew their contracts. If our customers across a variety of industries. While some have faced headwinds, others have experienced growth, andundergo layoffs or reductions in force, our membership count from existing customers has remained steady in the aggregate since the start of the 2020 calendar year. However, wenumbers would decrease, which would reduce our revenues. We may experience increased member attrition to the extent our existing customers reduce their respective workforces in response to the currentchanges in economic conditions. Any layoffs or reductions in employee headcounts by our employercommercial customers would result in a reduction in our base and variable PMPM fees. In one case, a smallWhen customer filed for Chapter 11 bankruptcy and terminated its health plan and associated Accolade services as of October 31, 2020. In addition, our airline customers have had significant headcount reductions which have resulted in, and are likely to continue to result in, a reduction of revenues associated with these customers. Weoccur, we may not experience the impact of changes to our customers’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 have also
engaged with our airline customers to act as a partner in managing their cash needs during the COVID-19 pandemic, resulting in modified payment terms in fiscal 2021.
We believe our value proposition now resonates with an even broadera broad 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 have 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 disruptionsemployers. Disruptions to traditional care consumption ignited by the COVID-19 pandemic 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’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.
We measure our performance through several metrics, including but not limited to customer satisfaction, member engagement, and care advocate availability. As gauged by these core performance metrics, service levels have been high, and member engagement and satisfaction have remained strong.
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
add-on offerings, suchAccolade Expert MD and Accolade Care solutions as well as Accolade
Boost, Trusted Supplier Program, COVID Response Care and Mental Health Integrated Care.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
which we have demonstrated with the recent roll-out of two new offerings, Accolade Total Benefits and Accolade Total Care, as well asthat target specific challenges faced by our
new add-on offerings, Accolade Boost, our Trusted Supplier Program, Accolade COVID Response Care, and Mental Health Integrated Care. 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.customers.
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%90% of the aggregate maximum potential revenue under our contracts (measured on the corresponding calendar year basis) in fiscal years 20212024 and 2020,2023, 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,Care Advocates, 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
Seasonality
There are seasonal factors that may cause us to record higher revenue in some quarters compared with others. We have historically
relied onrecorded a
limited numberdisproportionate amount of
customers for a significant portionrevenue during the fourth quarter 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 fiscal year
ended February 28, 2021, we hadrelative to the first three
customers that each accounted for more than 10%quarters of our
totalfiscal year. This timing is caused, in part, by the measurement, achievement, and associated revenue
recognition of performance metrics and
in aggregate those three customers represented 38%healthcare costs savings components of
our total revenue. For the fiscal year ended February 29, 2020, we had four customers that each accounted for more than 10% of our total revenue, and in aggregate those four customers represented 59% of our total revenue. 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. Mostcertain of our customer contracts
during the fourth quarter of each fiscal year. Additionally, services launch on January 1 for the majority of our commercial customer contracts which is during our fiscal fourth quarter. While we believe we have
a three-year term,visibility into the seasonality of our business, our rapid growth rate and
someacquisitions over the last several years have
rightsmade seasonal fluctuations more difficult to
terminate prior to the end of the term.detect.
We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate
our future performance. | | | | | | |
| | February 28(29), |
| | 2021 | | 2020 |
Annual Contract Value (in millions) | | $ | 211.5 | | $ | 161.4 |
Customer Count | | | 112 | | | 54 |
| | | | | |
| | Year Ended |
| | February 28(29), |
| | 2021 | | 2020 | |
Gross Dollar Retention | | 99 | % | 99 | % |
| | | | | | | | | | | |
| February 28(29), |
| 2024 | | 2023 |
| Annual Contract Value (in millions) | $ | 351.0 | | $ | 309.1 |
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| Gross Dollar Retention | 89 | % | | 87 | % |
Annual Contract Value (ACV) — We believe ACV provides investors with useful information on period-to-period performance as evaluated by management, comparison with our past financial performance, and a view toward potential future financial performance. To calculate ACV, we treat each type of contract as detailed below.
ACV for advocacy customers represents the annualized value of our in-force contracts as of the measurement date, including base contractual revenue and the amount of performance-based variable revenue we expect to realize in the following fiscal year based on the number of members as of the measurement date and using a straight-line averaging of PMPM fees over the lives of the contracts. ACV also includes expert medical opinion and commercial virtual primary care
customers. Pricing for these customers is either PMPM or per case/visit. For contracts with PMPM pricing, we calculate ACV as the number of members multiplied by the applicable annualized rate. For contracts with case/visit rate pricing, we calculate ACV as the expected usage during the following fiscal year multiplied by the applicable per case/visit rate. We do not include any consumer subscription revenue or consumer virtual primary care visit fees in ACV, as these arrangements are generally terminable within 30 days by the consumer.
Over the past two complete fiscal years, we have realized in excess of 95%90% of the maximum contract value across our book of business. The ACV amounts included above reflect approximately 95% of the total revenue opportunity, consistent with the percentages realized in fiscal years 2021 and 2020 (calculated onrecent years. We also include the corresponding calendar year basis). We believe ACV provides investors with useful information on period-to-periodexpected revenue share to be earned from ecosystem product partner arrangements.
performance as evaluated by management, comparison with our past financial performance, and a view toward potential future financial performance.
As required by GAAP, we recognize performance-based revenue over the minimum term of the applicable contract. In some cases, especially with regard to revenue associated with the realization of healthcare cost savings, revenue may be recognized in a fiscal period later than the period in which the required metric was achieved. Conversely, a fiscal period's revenue may include the recognition of revenue related to the achievement in prior periods of performance metrics and healthcare cost savings. For purposes of calculating ACV, we assume that all customer contracts expiring during the following fiscal year will renew on the same terms.
Customer Count — We believe that our ability to increase our number of customers is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. We have successfully demonstrated a history of growing our customer base. As of February 28, 2021, we had 112 customers. We define the number of customers as of the measurement date as the number of companies that we are currently providing services to and that we have no reason to believe such services will be terminated, or that have entered into a contract with us for which the term has not ended and for which we have no reason to believe the customer intends to terminate or not renew the contract.
Gross Dollar Retention Rate (GDR) — Our ability to increase revenue depends in large part on our ability to retain our existing customers and their associated ACV. We typically enjoy a high rate of customer retention. For example, our GDR was 99% for both of the fiscal years ended February 28(29), 2021 and 2020. We monitor GDR specifically as it relates to our employer customers, as our employer customers represent our primary strategic focus and today account for approximately 89% of our ACV.focus. We calculate GDR for a period by starting with the sum of the ACV from all employer customers as of the beginning of such period (beginning of period ACV); we then subtract the ACV associated with terminated employer customers during the period and divide the result by the beginning of period ACV.
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 on May 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, and virtual primary care services to the members of our commercial customers' health plans and to members of fully insured plans offered via health insurance companies. Access fees for these services are priced primarily using a recurring PMPM fee, typically with a portion of the fee calculated as the product of a fixed rate times the number of members, and a variable PMPM fee calculated as the product of a variable rate times the number of members. The fees associated with variable PMPM charges are earned through the achievement of performance metrics and/or the realization of healthcare cost savings resulting from use of our services. We also earn revenue from providing virtual primary care services directly to consumers on a monthly or yearly fixed fee subscription basis. Our expert medical opinion and virtual primary care services typically also include a variable rate charged based on utilization for commercial customers (i.e. case rate or fee-per-visit). As a result, a portion of our total 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.
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, certain member outreach costs, and other expenses related to delivery and implementation of our personalized technology-enabled solutions, expert medical opinion services, and virtual primary care services. We expect cost of revenue, excluding depreciation and amortization, to increase along with revenue growth over time but decrease as a percentage of revenue.
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. Over time, we expect product and technology expenses to decrease as a percentage of revenue.
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. Sales and marketing expenses also include advertising and digital media costs associated with our efforts to acquire new consumer customers and build awareness for our direct to consumer offering. 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 relatively 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. Over time, we expect general and administrative expenses to decrease as a percentage of revenue.
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.
Goodwill impairment. Goodwill impairment represents impairment charges incurred as a result of goodwill impairment testing.
Results of Operations
The following table presents a summary of our consolidated statements of operations for the periods indicated:
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| | | |
| (in thousands) |
| Revenue | $ | 414,292 | | $ | 363,142 |
Cost of revenue, excluding depreciation and amortization(1) | 222,232 | | 198,905 |
| Operating expenses: | | | |
Product and technology(1) | 99,159 | | 101,347 |
Sales and marketing(1) | 100,066 | | 99,113 |
General and administrative(1) | 62,124 | | 81,209 |
| Depreciation and amortization | 45,164 | | 46,377 |
| Goodwill impairment | — | | 299,705 |
| Total operating expenses | 306,513 | | 627,751 |
| Loss from operations | (114,453) | | | (463,514) | |
| Interest income, net | 5,952 | | 255 |
| Other income (expense) | 9,931 | | | (15) | |
| Loss before income taxes | (98,570) | | | (463,274) | |
| Income tax benefit (expense) | (1,235) | | 3,624 |
| Net loss | $ | (99,805) | | | $ | (459,650) | |
(1)The stock-based compensation expense included above was as follows:
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| | | |
| (in thousands) |
| Cost of revenue, excluding depreciation and amortization | $ | 4,309 | | | $ | 4,794 | |
| Product and technology | 29,991 | | | 24,995 | |
| Sales and marketing | 14,243 | | | 17,275 | |
| General and administrative | 12,398 | | | 25,580 | |
| Total stock‑based compensation | $ | 60,941 | | | $ | 72,644 | |
The following table sets forth our consolidated statements of operation data expressed as a percentage of revenue:
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| Revenue | 100 | % | | 100 | % |
| Cost of revenue, excluding depreciation and amortization | 54 | % | | 55 | % |
| Operating expenses: | | | |
| Product and technology | 24 | % | | 28 | % |
| Sales and marketing | 24 | % | | 27 | % |
| General and administrative | 15 | % | | 22 | % |
| Depreciation and amortization | 11 | % | | 13 | % |
| Goodwill impairment | — | % | | 83 | % |
| Total operating expenses | 74 | % | | 173 | % |
| Loss from operations | (28) | % | | (129) | % |
| Interest income (expense), net | 1 | % | | — | % |
| Other income (expense) | 2 | % | | — | % |
| Loss before income taxes | (24) | % | | (128) | % |
| Income tax benefit (expense) | — | % | | 1 | % |
| Net loss | (24) | % | | (127) | % |
Comparison of Fiscal Years Ended February 28(29), 2024 and 2023
Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), | | Changes |
| 2024 | | 2023 | | Amount | | % |
| (in thousands, except percentages) |
| Revenue | $ | 414,292 | | | $ | 363,142 | | | $ | 51,150 | | | 14 | % |
Revenue increased $51.2 million, or 14%, to $414.3 million for the fiscal year ended February 29, 2024, referred to as fiscal 2024, as compared to $363.1 million for the fiscal year ended February 28, 2023, referred to as fiscal 2023. The increase was attributable to revenues derived from growth in the number of customers served and higher utilization of our services during fiscal 2024 as compared to the prior year. Revenue from usage-based fees increased $34.8 million, or 44%, to $113.8 million for fiscal 2024 as compared to $79.0 million for fiscal 2023. Revenue from access fees increased $16.3 million, or 6%, to $300.5 million for fiscal 2024 as compared to $284.1 million for fiscal 2023. The increase in access fee revenue reflects revenues associated with new customers, partially offset by the loss of a significant customer which represented $22.8 million of revenue in the prior year.
Cost of revenue, excluding depreciation and amortization
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), | | Changes |
| 2024 | | 2023 | | Amount | | % |
| (in thousands, except percentages) |
| Cost of revenue, excluding depreciation and amortization | $ | 222,232 | | | $ | 198,905 | | | $ | 23,327 | | | 12 | % |
Cost of revenue, excluding depreciation and amortization increased $23.3 million, or 12%, to $222.2 million for fiscal 2024, as compared to $198.9 million for fiscal 2023. The increase was attributable primarily to $19.6 million in increased personnel and related costs to serve the customer base, $5.0 million in increased costs associated with third-party services and solutions from trusted suppliers, partially offset by $2.1 million in decreased member outreach costs, reflecting leverage of technology-driven efficiencies in order to digitize member outreach programs.
Operating expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), | | Changes |
| 2024 | | 2023 | | Amount | | % |
| (in thousands, except percentages) |
| Operating expenses: | | | | | | | |
| Product and technology | $ | 99,159 | | | $ | 101,347 | | | $ | (2,188) | | | (2) | % |
| Sales and marketing | 100,066 | | | 99,113 | | | 953 | | | 1 | % |
| General and administrative | 62,124 | | | 81,209 | | | (19,085) | | | (24) | % |
| Depreciation and amortization | 45,164 | | | 46,377 | | | (1,213) | | | (3) | % |
| Goodwill impairment | — | | | 299,705 | | | (299,705) | | | (100) | % |
| Total operating expenses | $ | 306,513 | | | $ | 627,751 | | | $ | (321,238) | | | (51) | % |
Product and technology. Product and technology expense decreased $2.2 million, or 2%, to $99.2 million for fiscal 2024, as compared to $101.3 million for fiscal 2023. The decrease was primarily driven by $6.3 million in decreased personnel and related costs, which included a $2.0 million decrease in severance costs associated with workforce realignment actions taken by management. The decrease was also driven by $2.5 million in higher capitalized software development costs associated with expanding our product offering features and scalability of our technology platform, and was partially offset by $5.0 million in increased stock-based compensation expense and $1.6 million increased software costs associated with tool expansion supporting our integrated product offering and evolution.
Sales and marketing. Sales and marketing expense increased $1.0 million, or 1%, to $100.1 million for fiscal 2024, as compared to $99.1 million for fiscal 2023. The increase was primarily driven by $12.0 million in marketing programs and consumer customer acquisition costs, partially offset by $8.7 million in decreased personnel and related costs, which included $2.1 million of decreased severance costs associated with workforce realignment actions taken by management, and $3.0 million in decreased stock-based compensation expense.
General and administrative. General and administrative expense decreased $19.1 million, or 24%, to $62.1 million for fiscal 2024, as compared to $81.2 million for fiscal 2023. The decrease was primarily due to $13.2 million in decreased stock-based compensation expense, $5.5 million in decreased personnel and related costs, which included $1.7 million of decreased severance costs associated with workforce realignment actions taken by management, and $1.2 million in decreased acquisition and integration-related charges, partially offset by $1.6 million increased software costs related to growth in the business and tool expansion.
Depreciation and amortization. Depreciation and amortization expense decreased $1.2 million, or 3%, to $45.2 million for fiscal 2024, as compared to $46.4 million for fiscal 2023. The decrease was primarily due to certain intangible assets becoming fully amortized during fiscal 2024.
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.
Interest income (expense), net
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), | | Changes |
| 2024 | | 2023 | | Amount | | % |
| (in thousands, except percentages) |
| Interest income, net | $ | 5,952 | | | $ | 255 | | | $ | 5,697 | | | 2,234 | % |
Interest income, net increased $5.7 million, or 2,234%, to $6.0 million for fiscal 2024, as compared to $0.3 million for fiscal 2023. The increase was primarily due to an additional $5.4 million of interest income generated from our cash and cash equivalents during fiscal 2024 as compared to fiscal 2023, primarily due to higher market interest rates.
Other income (expense), net
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), | | Changes |
| 2024 | | 2023 | | Amount | | % |
| (in thousands, except percentages) |
| Other income (expense), net | $ | 9,931 | | | $ | (15) | | | $ | 9,946 | | | 66,307 | % |
Other income (expense), net increased $9.9 million, or 66,307%, to $9.9 million for fiscal 2024, as compared to $0.0 million for fiscal 2023. The increase was primarily due to a net gain of $9.3 million on the repurchase and cancellation of convertible notes during fiscal 2024 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.
| | | | | | | |
| | Year Ended | |
| | February 28(29), | |
| | 2021 | | 2020 | |
|
| | (in thousands, except percentages) |
Adjusted Gross Profit | | $ | 77,633 | | $ | 59,140 | |
Adjusted Gross Margin | | | 45.6 | % | | 44.6 | % |
Adjusted EBITDA | | $ | (26,939) | | $ | (33,119) | |
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| (in thousands, except percentages) |
| Adjusted Gross Profit | $ | 197,055 | | $ | 170,056 |
| Adjusted Gross Margin | 47.6% | | 46.8% |
| Adjusted EBITDA | $ | (7,491) | | | $ | (36,505) | |
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.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 is a non-GAAP financial measure that we define as net
lossincome (loss) adjusted to exclude interest expense
(net)(income),
net, income tax expense (benefit), depreciation and amortization, stock-based compensation,
and acquisition and integration-related
costs.costs, goodwill impairment, change in fair value of contingent consideration, severance costs, and other expense (income). Severance costs include severance payments related to the realignment of our resources. Other expense (income) includes debt extinguishment gain or loss and 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:
| | | | | | | |
| | Year Ended | |
| | February 28(29), | |
| | 2021 | | 2020 | |
|
| | (in thousands, except percentages) |
Revenue | | $ | 170,358 | | $ | 132,507 | |
Less: | | | | | | | |
Cost of revenue, excluding depreciation and amortization | | | (93,673) | | | (73,685) | |
Gross profit, excluding depreciation and amortization | | | 76,685 | | | 58,822 | |
| | | | | | | |
Add: | | | | | | | |
Stock-based compensation, cost of revenue | | | 948 | | | 318 | |
Adjusted Gross Profit | | $ | 77,633 | | $ | 59,140 | |
Gross margin, excluding depreciation and amortization | | | 45.0 | % | | 44.4 | % |
Adjusted Gross Margin | | | 45.6 | % | | 44.6 | % |
Gross
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| (in thousands, except percentages) |
| Revenue | $ | 414,292 | | $ | 363,142 |
| Cost of revenue, excluding depreciation and amortization | (222,232) | | (198,905) |
| Amortization of acquired intangible assets, cost of revenue | (28,048) | | (28,075) |
| Depreciation of property and equipment, cost of revenue | (5,213) | | (3,677) |
| GAAP gross profit | $ | 158,799 | | $ | 132,485 |
| GAAP gross margin | 38.3 | % | | 36.5 | % |
| | | |
| GAAP gross profit | $ | 158,799 | | $ | 132,485 |
| Amortization of acquired intangible assets, cost of revenue | 28,048 | | 28,075 |
| Depreciation of property and equipment, cost of revenue | 5,213 | | 3,677 |
| Stock‑based compensation, cost of revenue | 4,309 | | 4,794 |
| Severance costs, cost of revenue | 686 | | 1,025 |
| Adjusted Gross Profit | $ | 197,055 | | $ | 170,056 |
| Adjusted Gross Margin | 47.6% | | 46.8% |
GAAP gross margin excluding depreciation and amortization, for the fiscal years ended February 28(29), 2021 and 20202024 increased to 45.0%38.3% from 44.4%, respectively,36.5% for fiscal 2023. Adjusted Gross Margin for fiscal 2024 increased to 47.6% from 46.8% for fiscal 2023. The increases in GAAP gross margin and Adjusted Gross Margin for the fiscal years ended February 28(29), 2021 and 2020 increased to 45.6% from 44.6%, respectively. These increases were driven primarily by (i) increases in revenue associated with our offering mix and (ii) cost efficiencies realized through enhancementsresulting from initiatives to optimize staffing costs and service delivery by leveraging technology to automate elements of our technology platformservice delivery and workflows for the fiscal year ended February 28, 2021.member experience processes, and by hiring certain roles in lower cost geographies.
The following table presents, for the periods indicated, a reconciliation of our Adjusted EBITDA to our net loss:
| | | | | | |
| | Year Ended |
| | February 28(29), |
| | 2021 | | 2020 |
|
| | (in thousands) |
Net Loss | | $ | (50,652) | | $ | (51,365) |
Adjusted for: | | | | | | |
Interest expense, net | | | 3,724 | | | 2,925 |
Income tax provision | | | 4 | | | 129 |
Depreciation and amortization | | | 8,212 | | | 8,516 |
Stock-based compensation | | | 9,576 | | | 6,002 |
Acquisition and integration-related costs | | | 2,050 | | | 567 |
Other expense | | | 147 | | | 107 |
Adjusted EBITDA | | $ | (26,939) | | $ | (33,119) |
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 on May 31, August 31, November 30, and the last day of February.
Revenue
We earn revenue from providing personalized technology-enabled solutions 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 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.
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.
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 promotional costs, customer conferences, public relations, other marketing events, and allocated overhead costs. Personnel expenses include salaries,
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| (in thousands) |
| Net loss | $ | (99,805) | | | $ | (459,650) | |
| Adjusted for: | | | |
| Interest expense (income), net | (5,952) | | | (255) | |
| Income tax (benefit) expense | 1,235 | | (3,624) |
| Depreciation and amortization | 45,164 | | 46,377 |
| Stock‑based compensation | 60,941 | | 72,644 |
Acquisition and integration‑related costs(1) | (7) | | | 1,218 |
| Goodwill impairment | — | | | 299,705 | |
Severance costs(2) | 864 | | | 7,065 | |
Other expense (income)(3) | (9,931) | | | 15 | |
| Adjusted EBITDA | $ | (7,491) | | | $ | (36,505) | |
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 software for financial and human capital management, corporate insurance costs, and allocated overhead costs. We expect general and administrative expenses to increase in absolute dollars as we incur increased 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.
Results of Operations
The following table presents a summary of our consolidated statements of operations for the periods indicated:
| | | | | | |
| | | | | | |
| | Year Ended |
| | February 28(29), |
| | 2021 | | 2020 |
|
| | (in thousands) |
Revenue | | $ | 170,358 | | $ | 132,507 |
Cost of revenue, excluding depreciation and amortization(1) | | | 93,673 | | | 73,685 |
Operating expenses: | | | | | | |
Product and technology(1) | | | 49,955 | | | 42,306 |
Sales and marketing(1) | | | 33,711 | | | 30,050 |
General and administrative(1) | | | 31,584 | | | 26,154 |
Depreciation and amortization | | | 8,212 | | | 8,516 |
Total operating expenses | | | 123,462 | | | 107,026 |
Loss from operations | | | (46,777) | | | (48,204) |
Interest expense, net | | | (3,724) | | | (2,925) |
Other expense | | | (147) | | | (107) |
Loss before income taxes | | | (50,648) | | | (51,236) |
Income tax expense | | | (4) | | | (129) |
Net loss | | $ | (50,652) | | $ | (51,365) |
| (1) | The stock-based compensation expense included above was as follows: |
| | | | | | |
| | Year Ended |
| | February 28(29), |
| | 2021 | | 2020 |
|
| | (in thousands) |
Cost of revenue, excluding depreciation and amortization | | $ | 948 | | $ | 318 |
Product and technology | | | 3,387 | | | 1,674 |
Sales and marketing | | | 2,376 | | | 1,482 |
General and administrative | | | 2,865 | | | 2,528 |
Total stock-based compensation | | $ | 9,576 | | $ | 6,002 |
The following table sets forth our consolidated statements of operation data expressed as a percentage of revenue:
| | | | | |
| | Year Ended | |
| | February 28(29), | |
| | 2021 | | 2020 | |
Revenue | | 100 | % | 100 | % |
Cost of revenue, excluding depreciation and amortization | | 55 | % | 56 | % |
Operating expenses: | | | | | |
Product and technology | | 29 | % | 32 | % |
Sales and marketing | | 20 | % | 23 | % |
General and administrative | | 19 | % | 20 | % |
Depreciation and amortization | | 5 | % | 6 | % |
Total operating expenses | | 72 | % | 81 | % |
Loss from operations | | (28) | % | (36) | % |
Interest expense, net | | (2) | % | (2) | % |
Other expense | | 0 | % | 0 | % |
Loss before income taxes | | (30) | % | (39) | % |
Income tax expense | | 0 | % | 0 | % |
Net loss | | (30) | % | (39) | % |
Comparison of Fiscal Years Ended February 28(29), 2021 and 2020
Revenue
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | February 28(29), | | Changes | |
| | 2021 | | 2020 | | Amount | | % | |
|
| | (in thousands, except percentages) | |
Revenue | | $ | 170,358 | | $ | 132,507 | | $ | 37,851 | | 29 | % |
Revenue increased $37.9 million, or 29%, to $170.4 million for the fiscal year ended February 28, 2021, referred to as fiscal 2021, as compared to $132.5 million for the fiscal year ended February 29, 2020, referred to as fiscal 2020. The increase was attributable primarily to growth in the number of customers served during fiscal 2021, as compared to fiscal 2020.
Cost of revenue, excluding depreciation and amortization
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | February 28(29), | | Changes | |
| | 2021 | | 2020 | | Amount | | % | |
|
| | (in thousands, except percentages) | |
Cost of revenue, excluding depreciation and amortization | | $ | 93,673 | | $ | 73,685 | | $ | 19,988 | | 27 | % |
Cost of revenue, excluding depreciation and amortization increased $20.0 million, or 27%, to $93.7 million for fiscal 2021, as compared to $73.7 million for fiscal 2020. The increase was primarily due to an increase in personnel and related costs to serve the customer base which grew in fiscal 2021, as well as an increase in employee bonus compensation, as compared to fiscal 2020.
Cost of revenue, excluding depreciation and amortization, as a percentage of revenue for fiscal 2021 and 2020 decreased to 55% from 56% of total revenue, respectively. This decrease was driven primarily by cost efficiencies relative to revenue realized through continuing to scale our business in fiscal 2021.
Operating expenses
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | February 28(29), | | Changes | |
| | 2021 | | 2020 | | Amount | | % | |
|
| | (in thousands, except percentages) | |
Operating expenses: | | | | | | | | | | | | |
Product and technology | | $ | 49,955 | | $ | 42,306 | | $ | 7,649 | | 18 | % |
Sales and marketing | | | 33,711 | | | 30,050 | | | 3,661 | | 12 | % |
General and administrative | | | 31,584 | | | 26,154 | | | 5,430 | | 21 | % |
Depreciation and amortization | | | 8,212 | | | 8,516 | | | (304) | | (4) | % |
Total operating expenses | | $ | 123,462 | | $ | 107,026 | | $ | 16,436 | | 15 | % |
Product and technology. Product and technology expense increased $7.6 million, or 18%, to $50.0 million for fiscal 2021, as compared to $42.3 million for fiscal 2020. The increase was primarily due to the addition of personnel in product development and product management in support of the development of new and existing offerings in connection with the expansion of our business, as well as an increase in employee bonus compensation, offset by a decrease in travel and entertainment expense.
Sales and marketing. Sales and marketing expense increased $3.7 million, or 12%, to $33.7 million for fiscal 2021, as compared to $30.1 million for fiscal 2020. The increase was primarily due to an increase in the size of our direct sales force, account management, marketing, and supporting functions associated with the expansion of our business, as well as an increase in employee bonus compensation, offset by a decrease in travel and entertainment expense.
General and administrative. General and administrative expense increased $5.4 million, or 21%, to $31.6 million for fiscal 2021, as compared to $26.2 million for fiscal 2020. The increase was primarily due to the addition of personnel, preparation for our IPO, and ongoing operations as a public company after our IPO, as well as an increase in third-party consulting costs to support the expansion of our business and an increase in employee bonus compensation, offset by a decrease in travel and entertainment expense.
Depreciation and amortization. Depreciation and amortization expense decreased $0.3 million, or 4%, to $8.2 million for fiscal 2021, as compared to $8.5 million for fiscal 2020. The decrease was primarily due to certain capitalized software becoming fully depreciated during fiscal 2021, resulting in less depreciation expense as compared to the prior period.
Interest expense, net
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | February 28(29), | | Changes | |
| | 2021 | | 2020 | | Amount | | % | |
|
| | (in thousands, except percentages) | |
Interest expense, net | | $ | (3,724) | | $ | (2,925) | | $ | (799) | | (27) | % |
Interest expense, net increased $0.8 million, or 27%, to $3.7 million for fiscal 2021, as compared to $2.9 million for fiscal 2020. The increase primarily reflected the increase in our debt borrowings during fiscal 2021 as compared to fiscal 2020 along with expenses incurred in terminating our Term Loan Facility in July 2020.
Liquidity and Capital Resources
We had cash and cash equivalents of $433.9$185.7 million and marketable securities of $51.3 million as of February 28, 2021. Our29, 2024 totaling an aggregate of $237.0 million of cash, cash equivalents, and marketable securities. Our cash equivalents are comprised primarily of cash and money market accounts held at banks.banks and U.S. treasury bills with original maturities of less than
three months. Marketable securities are comprised of U.S. government debt, commercial paper, and U.S. agency debt with original maturities greater than three months. Management believes the Company's cash, cash equivalents, and marketable securities, plus customer revenues and advances and available borrowings under its debt facility, are sufficient to fund its operations through at least the next 12 months from the issuance of this Annual Report on Form 10-K.
Our Debt Arrangements
We had no outstanding debt
In March 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 of March 29, 2021 (the Indenture), between us and U.S. Bank National Association, as trustee. During the year ended February 28,29, 2024, we entered into separate, privately negotiated transactions with certain holders of the Notes to repurchase $76.5 million aggregate principal amount of the Notes for an aggregate cash repurchase price of $66.2 million. We subsequently cancelled the repurchased Notes. After the cancellation, $211.0 million aggregate principal amount of the Notes remained outstanding. The Notes bear interest at a rate of 0.50% per annum, payable semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021. During July 2020, we terminatedThe Notes mature on April 1, 2026, unless earlier converted, redeemed or repurchased. The Notes are convertible into cash, shares of our Term Loan Facility. common stock or a combination of cash and shares of our common stock, at our election.
We currently have a revolving credit facility (2019 Revolver), which we entered into in July 2019.
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 on December 31, 2022. During July 2020, we repaid the Term Loan in full, including all outstanding interest and fees, and the Term Loan was terminated.
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 beare at LIBORthe Bloomberg Short-Term Bank Yield Index rate (BSBY) plus 350 basis points or the lending institution’s base rateBase 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. During November 2020, the Company entered into an amendment to the 2019 Revolver, increasing the borrowing capacity to the maximum of $80.0 million. We also have an outstanding letterletters of credit to serve as an office landlord security depositdeposits in the amount of $1.1$1.2 million. This letterThese letters of credit isare secured through the revolving credit facility thus reducing theand reduce our borrowing capacity. The capacity of the revolving credit facility to $78.9 million.
During March 2020, we borrowed the available capacitywas $72.6 million as of $48.7 to increase the Company’s cash position given the uncertainty in the overall business environment due to the COVID-19 pandemic. DuringFebruary 29, 2024. On July 2020, subsequent to our IPO, we repaid the 2019 Revolver in full, including all outstanding interest. The 2019 Revolver expires in July 2021 and may be automatically extended for an additional 12 months if we meet certain revenue thresholds defined under the credit agreement. The Company has achieved those revenue thresholds, and the 12-month extension shall occur upon delivery of our fiscal 2021 audited financial statements to the 2019 Revolver agent, provided that no default or event of default, as defined, shall have occurred and be continuing.
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. On August 21, 2020,19, 2022, we entered into an amendment to extend the 2019 Revolver which revisedterm until July 19, 2024, documented the terms oftransition from the revenue covenant and imposed minimumprior LIBOR and Base Rate levels. On September 11, 2020, we entered into another amendmentinterest rate index to the 2019 Revolver which modified the allocation requirementsBSBY rate, and established new minimum covenant revenue targets. The term will automatically be extended to July 19, 2025 if we have at least $200.0 million in consolidated net cash as of the Company’s cash to be held at each of the two lenders participating in the 2019 Revolver. On November 6, 2020, we entered into another amendment to the 2019 Revolver which increased the capacity from $50.0 million to $80.0 million, subject to the achievement of certain milestones as defined in the amendment. On March 2, 2021, we entered into another amendment to the 2019 Revolver in association with the acquisition of 2nd.MD and amended certain covenants. On March 23, 2021, we entered into another amendment to the 2019 Revolver in association with the convertible senior notes offering.
May 31, 2024.
We were in compliance with all such applicable covenants as of February
28, 2021,29, 2024, and believe we are in compliance as of the date of this Annual Report on Form 10-K. 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.
On March
Material Cash Requirements
As of February 29, 2021,2024, our material cash requirements from known contractual and other obligations, which we issued an aggregate of $287.5expect 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 $211.0 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 of March 29, 2021 (the “Indenture”), between us and U.S. Bank National Association, as trustee. The Notes will bear interest at a rate of 0.50% per annum, payable semiannually in arrearsmatures on April 1, 2026. See Our Debt Arrangements above and October 1Note 9 to our consolidated financial statements for more details.
•Operating leases – We have entered into operating leases, primarily for office space. See Note 6 to our consolidated financial statements for more details.
•Other purchase obligations – We have entered into certain arrangements that include obligations to make significant future purchases. The majority of each year, beginning on October 1, 2021. The Notes will mature on April 1, 2026, unless earlier converted, redeemed or repurchased. The Notesthese purchases are convertible intonot expected to be made over the next 12 months. See Note 14 to our consolidated financial statements for more details.
•Other material cash sharesrequirements – In addition to the above, our material cash requirements also include compensation and benefits expenses for our employees, severance for terminated employees, expenses for software and third-party services, and other miscellaneous expenses.
The following table summarizes our cash flows for the periods indicated:
| | | | | | |
| | Year Ended |
| | February 28(29), |
| | 2021 | | 2020 |
|
| | (in thousands) |
Net cash used in operating activities | | $ | (25,232) | | $ | (34,247) |
Net cash used in investing activities | | | (2,423) | | | (3,521) |
Net cash provided by financing activities | | | 428,384 | | | 28,222 |
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| (in thousands) |
| Net cash used in operating activities | $ | (16,169) | | | $ | (40,705) | |
| Net cash used in investing activities | (63,629) | | | (7,228) | |
| Net cash provided (used) by financing activities | (55,567) | | | 3,163 | |
Net cash used in operating activities decreased by
$9.0$24.5 million to
$25.2$16.2 million during fiscal
20212024 from
$34.2$40.7 million during fiscal
2020, primarily related to a change in accrued compensation and other assets partially offset by changes in accounts receivable and unbilled revenue. The change in accrued compensation is2023, primarily due to
increased performance of the
settlement of our annual bonuses related to thebusiness including growth in revenues and gross profit which, combined with certain measures we initiated in fiscal
year ended February 29, 20202023 through
the issuance of fully vested stock options in lieu of cash payments in June 2020. The change in other assets is primarily due to the receipt of receivables related to an employee withholding tax associated with the exercise of stock and the reclassification of offering costs related to our IPO to additional paid-in capital. The change in accounts receivable and unbilled revenue is primarily due to an increase in accounts receivable at February 28, 2021 due to the modification of payment terms with our airline customers, as well as the increase in accounts receivable related to an increasestrategic reductions in the
number of customers at February 28, 2021 as compared to February 29, 2020.Company's workforce, resulted in a reduction in cash used in operating activities.
Net cash used in investing activities
decreasedincreased by
$1.1$56.4 million to
$2.4$63.6 million during fiscal
20212024 from
$3.5$7.2 million during fiscal
2020,2023, primarily due to
a decrease$51.1 million of cash invested in
property and equipment purchases during fiscal 2021, as compared to fiscal 2020.marketable securities.
Net cash
flows fromprovided (used) by financing activities
amounteddecreased by $58.7 million to
$428.4$(55.6) million during fiscal
2021, mainly reflecting the net cash proceeds of $439.52024 from $3.2 million
as a result of our IPO and follow-on offering and proceeds from debt borrowings of $51.2during fiscal 2023, primarily due to $65.8 million
paid to repurchase convertible notes, partially offset by
debt repayments of $73.2 million.Contractual Obligations
The following table summarizes our contractual obligations as of February 28, 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) | | $ | 6,587 | | $ | 13,202 | | $ | 11,454 | | $ | 15,726 | | $ | 46,969 |
Fees on revolving credit facility(2) | | | 77 | | | — | | | — | | | — | | | 77 |
Data license in connection with joint development agreement | | | 215 | | | 475 | | | 260 | | | — | | | 950 |
(1) | Includes the lease of our (a) corporate co-headquarters in Plymouth Meeting, Pennsylvania, which expires in June 2027, subject to certain early termination rights, (b) corporate co-headquarters in Seattle, Washington, which expires in September 2030, subject to certain early termination rights, (c) office space in Scottsdale, Arizona, which expires |
$5.0 million in increased proceeds from stock option exercises. | in April 2024, subject to certain early termination rights, (d) office space in Prague, Czech Republic, which expires in November 2021, and (e) office space in Santa Monica, California, which expires in February 2023. |
(2) | The Company met certain revenue thresholds defined under the 2019 Revolver credit agreement which will result in a 12-month extension through July 2022 upon delivery of the audited financial statements to the 2019 Revolver agent, provided that no default or event of default, as defined, shall have occurred and be continuing. Additional fees will be incurred through that date. |
We did not have any other contractual obligations, except as discussed above.
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 variable interest 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 Note 13 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these 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.
We define our critical accounting policies as those accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations. as well as the specific manner in which we apply those principles. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements located elsewhere in this Annual Report on Form 10-K. We have listed below our critical accounting estimates that we believe to have the greatest potential impact on our consolidated financial statements. Historically, our assumptions, judgments, and estimates relative to our critical accounting estimates have not differed materially from actual results.
The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
We earngenerate revenue by providing customers access to our advocacy, expert medical opinion, and virtual primary care services, as well as through usage of our expert medical opinion and virtual primary care services. Contracts with customers that include expert medical opinion or virtual primary care services may contain either an access fee, a usage-based fee, or both.
In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, we recognize revenue when control of the promised services is transferred to our customers, in an amount that reflects the
consideration to which we expect to be entitled in exchange for those services. Accordingly, we determine revenue recognition through the following steps:
•identification of the contract, or contracts with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contracts; and
•recognition of revenue when, or as, the Company satisfies a performance obligation.
At contract inception, we assess the type of services being provided and assess the performance obligations in the contract. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on overall pricing objectives, taking into consideration market conditions and other factors, using an expected cost plus margin approach. We considered the variable consideration allocation exception in ASC 606 and concluded that such exception for allocating variable consideration to distinct performance obligations or distinct time periods within a series was not met primarily due to variability in per-member-per-month (PMPM) pricing.
The majority of fees earned by providing personalized health guidance solutionsus is considered to members. Our solutions allowbe variable consideration due to both the uncertainty regarding the total number of members, consultations or visits for which we will invoice the customer, as well as the variable PMPM fees that are dependent upon the achievement of performance metrics and/or healthcare cost savings. Performance metrics are measured monthly, quarterly, or annually, and with respect to interactthe achievement of healthcare cost savings targets, annually (typically measured on a calendar year basis). Accordingly, at contract inception and on an ongoing basis, as part of our estimate of the transaction price, we determine whether any such fees should be constrained, and we include the estimated consideration for those fees to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur (and is therefore considered to be unconstrained). On an ongoing basis, we reassess our estimates for variable consideration, which can change based upon our assessment of the achievement of performance metrics and healthcare cost savings, as well as the number of members, consultations, or visits.
Access Fees
We generate revenue primarily from contracts with
customers to access our
Accolade Health Assistantsadvocacy, expert medical opinion, and
clinicians through various means of communication, including telephony and secure messaging via our mobile application and member web portal.virtual primary care services. We price
our personalized health guidance solutionsaccess fees primarily using a recurring PMPM fee, typically with a portion of the fee calculated as the product of a fixed rate times the number of
eligible members (fixed PMPM fee), plus a variable PMPM fee calculated as the product of a variable rate times the number of
eligible members (variable PMPM fee). The fees associated with the variable PMPM fee can be earned through the achievement of performance metrics and/or the realization of healthcare cost savings resulting from the
utilizationuse of our services.
Collectively, the fixed PMPM fee and variable PMPM fee are referred to as the total PMPM fee. Our PMPM pricing varies by contract. In
addition, our revenuecertain contracts, the maximum total PMPM fee varies during the contract term (total PMPM rate increases or decreases annually), while in other contracts, the total PMPM maximum fee is
dependent onconsistent over the
number of members each monthterm, yet the fixed and
the timing of revenue recognition discussed under “Key Metrics — Annual Contract Value.” As a result, we may report higher revenuevariable portions vary. For example, in certain
quarters relative to others. While we believe we have visibility intocontracts the
seasonalityfixed PMPM fee increases on an annual basis while the variable PMPM fee decreases on an annual basis, resulting in the same total PMPM fee throughout the term of
our business on a customer-by-customer basis, our rapid growth over the
periods discussed in this Annual Report on Form 10-K may have made seasonal fluctuations more difficult to detect. If our rate of growth slows over time, seasonal or cyclical variations in our operations may become more pronounced,contract. The PMPM fees for expert medical opinion and
the comparability of our results of operations between periodsvirtual primary care services may be
materially affected.Under ASC 606, we recognize revenue when control oftiered based upon the promised services is transferredcustomer’s utilization.
Access to our
customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those services. Accordingly, we determine revenue recognition by applying the following steps: | ● | identification of the contract, or contracts, with a customer; |
| ● | identification of the performance obligations in the contract; |
| ● | determination of the transaction price; |
| ● | allocation of the transaction price to the performance obligations in the contract; and |
| ● | recognition of revenue when, or as, we satisfyservices represents a single stand-ready performance obligation. |
At contract inception, we assess the type of services being provided and assess the performance obligations in the contract. Our contracts for personalized health guidance solutions include stand ready services and reporting performance obligations. Our contracts include stand readystand-ready services to provide eligible participants with access to our services and to perform an unspecified quantity of interactions with members during the contract period. Accordingly, our services are generally viewed as stand readystand-ready performance obligations comprised of a series of distinct daily services that are substantially the same and have the same pattern of transfer. For the stand ready services,Generally, we satisfy these performance obligations over time and recognize revenue related to our services as the services are provided using a measure of progress based upon the actual number of members eligible for the service during the respective period as a percentage of the estimated members expected to be eligible for the service over the term of the contract.
We include consideration for our revenue related to the achievementbelieve a measure of performance metrics and the realization of healthcare cost savings when it is probable that a significant reversal of cumulative revenue will not occur. We estimate revenue using the most likely amount that we will receive. Estimates are based on our historical experience and best judgment at the time. Our estimates related to variable consideration are updated quarterly, and the total transaction price and revenue recognized are adjusted accordingly.
Contracts with Multiple Performance Obligations
Some of our contracts include multiple performance obligations. We account for performance obligations separately if they are capable of being distinct within the context of the contract. In these circumstances, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on overall pricing objectives, taking into consideration market conditions and other factors.
Specifically, some contracts contain an additional performance obligation, pre-launch open enrollment, for which the performance obligation is satisfied before the launch of our primary offering. For contracts that include pre-launch open enrollment support, we recognize related revenue over the pre-launch open enrollment periodprogress based on the number of eligible participants.
members is the most appropriate measurement of control of the services being transferred to the customer as the amount of internal resources necessary to stand ready is directly correlated to the number of members who can use the services.
For the majority of expert medical opinion services, we satisfy these performance obligations over time and recognize revenue in the amount of consideration for which we have the right to invoice using the as-invoiced practical
expedient. Access fees also include access to our virtual primary care services sold directly to consumers on a monthly or yearly fixed fee subscription basis. For these services, we satisfy these stand-ready performance obligations over time and recognize revenue ratably over the subscription period.
Usage-based fees
We also generate revenue when members use the expert medical opinion and virtual primary care services that are billed based on usage. Many, but not all, contracts with customers contain usage-based fees. For any usage-based fees, we satisfy these performance obligations over time and recognize revenue in the amount of consideration for which we have the right to invoice using the as-invoiced practical expedient for any consultations or visits sold to commercial customers as well as any non-insured consultations or visits related to virtual primary care services sold directly to consumers. For any consultations or visits that are paid through insurance claims, we recognize revenue as the consultations and visits occur in an amount that reflects the consideration that is expected based upon then-current prices and historical experience from insurance payors. In prior periods, the Company referred to usage-based fees as "utilization-based fees."
We estimate the fair value of our stock options using the Black-Scholes option pricing model. This requires the input of subjective assumptions, including the fair value of our underlying common stock
(prior to our IPO), the expected term of stock options, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock, the most critical of which, prior to our IPO, was the estimated fair value of common stock. The assumptions used in our option pricing model represent our best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. The resulting fair value, net of actual forfeitures, is recognized on a straight-line basis over the period during which an employee is required to provide service in exchange for the award.
These assumptions
Prior to our IPO, our board of directors periodically estimated the fair value of the Company’s common stock considering, among other things, contemporaneous valuations of our preferred and common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issues as Compensation. Since the closing of the IPO, our board of directors has determined the per share fair value of the Company’s common stock based on the closing price as reported by the Nasdaq Global Select Market on the date of grant.
The subjective assumption used in the Black-Scholes option pricing model, other than the fair value of our common stock are(prior to our IPO), is estimated as follows:
. Since a public market for our common stock did not exist prior to our IPO in July 2020 and, therefore, we do not have an extensive trading history of our common stock, we estimated the expected volatility based on the volatility of similar publicly-held entities (guideline companies) over a period equivalent to the expected term of the awards. In evaluating the similarity of guideline companies to us, we considered factors such as industry, stage of life cycle, size, and financial leverage. We intend to continue to consistently apply this process using the same or similar guideline companies to estimate the expected volatility until sufficient historical information regarding the volatility of the share price of our common stock becomes available. | ● | Expected volatility. Since a public market for our common stock did not exist prior to our IPO in July 2020 and, therefore, we do not have an extensive trading history of our common stock, we estimated the expected volatility based on the volatility of similar publicly-held entities (guideline companies) over a period equivalent to the expected term of the awards. In evaluating the similarity of guideline companies to us, we considered factors such as industry, stage of life cycle, size, and financial leverage. We intend to continue to consistently apply this process using the same or similar guideline companies to estimate the expected volatility until sufficient historical information regarding the volatility of the share price of our common stock becomes available. |
| ● | Expected term. We estimate the expected term using the simplified method, as we do not have sufficient historical exercise activity to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The simplified method calculates the average period the stock options are expected to remain outstanding as the midpoint between the vesting date and the contractual expiration date of the award. |
| ● | Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for maturities corresponding with the expected term of the option. |
| ● | Expected dividend yield. We have never declared or paid any dividends and do not presently plan to pay dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero. |
We are required to estimate the fair value of the common stock underlying our stock-based awards when performing fair value calculations.
Historically for all periods prior to our IPO, given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, we exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock including:
| ● | contemporaneous valuations performed at periodic intervals by unrelated third-party specialists; |
| ● | rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock; |
| ● | our actual operating and financial performance; |
| ● | relevant precedent transactions involving our capital stock; |
| ● | likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business; |
| ● | market multiples of comparable companies in our industry; |
| ● | industry information such as market size and growth; |
| ● | illiquidity of stock-based awards involving securities in a private company; and |
| ● | macroeconomic conditions. |
In valuing our common stock prior to our IPO, our board of directors determined the enterprise value of our company using both the income approach and market approach valuation methods. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on the cost of capital at a company’s stage of development. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s financial results to estimate the enterprise value of the subject company.
The resulting equity values derived by the income approach and market approach were then allocated between share classes by a hybrid of the Probability Weighted Expected Return Method (PWERM) and the Option Pricing Method (OPM). The hybrid method was selected to consider various outcomes for our company including an initial public offering or continuing as a private company. The values of the share classes under an initial public offering scenario were based on the expected pricing and timing of the anticipated event according to the PWERM. Conversely, the OPM was used to estimate the value of the share classes assuming we stayed private.
The PWERM estimates the value of the various equity classes based upon analysis of the future value for the enterprise under different potential outcomes including sale, merger, IPO, and dissolution. For each scenario, the value determined for the enterprise is allocated to each class of stock based upon the assumption that each class will maximize its value. The values determined for each class of stock under each scenario are weighted by the probability of each scenario and then discounted to a present value.
The OPM treats common stock and convertible preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the convertible preferred stock. Under this method, the common stock has value only if the funds available for distribution exceed the value of liquidation preference at the time of a liquidity event. If the total equity value exceeds the total liquidation preference of the convertible preferred stock, the preferred stock will receive a payout in cash in the case of a liquidation event or in common stock in the case of an IPO, and the preferred stock will then convert to common stock. Any incremental value above the total liquidation preference would be shared based on the converted ownership interests.
In the application of this method, the convertible features of the preferred equity classes, common options and warrants outstanding are considered.
After the equity value is determined and allocated to the various classes of shares, a discount for lack of marketability (DLOM) is applied to the various outcomes to arrive at the fair value of the common stock. A DLOM is applied based on the theory that as a private company, an owner of the stock has limited opportunities to sell this stock and any such sale would involve significant transaction costs, thereby reducing overall fair market value.
Application of these valuation approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.
Following our IPO, our board of directors relies on the closing price of our common stock as reported on the date of grant to determine the fair value of our common stock.
Accounting for Goodwill and Other Intangible Assets
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. As of February 28, 2021, we had $4.0 million of goodwill recorded on our consolidated balance sheet. 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. No indicators
During the three months ended November 30, 2023, the Company determined that the decline in the price of its stock, which resulted in a corresponding decline in market capitalization, constituted a triggering event. The Company evaluated whether changes in the Company's market capitalization indicated that the carrying value of goodwill was impaired. As a result of this evaluation, the Company determined that there was no impairment were identifiedas of November 30, 2023. The Company also performed its annual evaluation of the recoverability of goodwill during the fiscalfourth quarter and concluded that there was no impairment.
No impairments were recorded to goodwill or intangible assets during the year ended February 29, 2024. As a result of sustained decreases in our stock price and market capitalization, we conducted an impairment test of our goodwill as of May 31, 2022. As a result of this testing, we recorded a $299.7 million non-cash goodwill impairment charge (equivalent to $4.20 per basic and diluted share) during the year ended February 28, 2021 that required us2023. Our May 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 perform an interim assessmentthe 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.
While we cannot predict if or
recoverability test.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, quarterly, or sooner should events or changes in circumstances indicate 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 conclusion 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.
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 consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. We will 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 IPO), (ii) the last day of the first fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the first 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. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and any reference herein to “emerging growth company” has the meaning ascribed to it in the JOBS Act.
We have elected to take advantage of certain of the reduced disclosure obligations in this Annual Report on Form 10-K and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
We had cash and cash equivalents of $433.9$185.7 million and $33.2marketable securities of $51.3 million as of February 28(29), 202129, 2024, totaling an aggregate of $237.0 million of cash, cash equivalents, and 2020, respectively.marketable securities as of February 29, 2024, and we had cash and cash equivalents of $321.1 million as of February 28, 2023. Our cash equivalents are comprised primarily of cash certificates of deposit and money market accounts held at banks.banks and U.S. treasury bills with original maturities of less than three months. Our marketable securities are comprised of U.S. government debt, commercial paper, and U.S. agency debt with original maturities greater than three months. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.
In addition, our 2019 Revolver has a variable interest rate which, if drawn upon, would subject us to risks associated with changes in that interest rate. During fiscal 2024, we had no borrowings under the 2019 Revolver.
Foreign Currency Exchange Risk
We have in the past and may in the future be exposed to foreign currency exchange risks in the ordinary course of our business, but that exposure is not currently material to our business or results of operations.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements filed as part of this Annual Report on Form 10-K beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Evaluation of
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of February 28, 2021.29, 2024. Based on the evaluation of our disclosure controls and procedures as of February 28, 2021,29, 2024, our Chief Executive Officer and Chief Financial Officer concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding
Our management is responsible for establishing and maintaining adequate internal control over financial reporting or an attestation reportas defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of external financial statements in accordance with U.S. generally accepted accounting principles.
Our management, including our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of February 29, 2024. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management, including our Chief Executive Officer and our Chief Financial Officer, concluded that we maintained effective internal control over financial reporting as of February 29, 2024.
KPMG LLP, the Company’s independent registered public accounting firm,
as permitted in this transition period underwas appointed by the
rulesBoard of
the SEC for newly public companies.Directors and ratified by our Company’s stockholders to render an opinion regarding our internal control over financial reporting, which appears below.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Annual Report on Form 10-Kquarter ended February 29, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Accolade, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Accolade, Inc. and subsidiaries' (the Company) internal control over financial reporting as of February 29, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 29, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of February 29, 2024 and February 28, 2023, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended February 29, 2024, and the related notes (collectively, the consolidated financial statements), and our report dated April 25, 2024 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 25, 2024
Item 9B. Other Information
None.
On February 12, 2024, Stephen Barnes, our Chief Financial Officer, adopted a trading plan intended to satisfy the affirmative defense conditions under Rule 10b5-1(c) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The plan is for the exercise of up to 78,000 non-qualified stock options and the sale of the number of shares of common stock as is necessary to cover exercise costs, fees, and tax withholding obligations incurred in connection with the exercise (the Sell-to-Cover Shares). The plan terminates on the earlier of (1) the date all non-qualified stock options under the plan are exercised and related Sell-to-Cover Shares are sold and (2) December 13, 2024.
On February 22, 2024, Colin McHugh, our Chief Accounting Officer, adopted a trading plan intended to satisfy the affirmative defense conditions under Rule 10b5-1(c) of the Exchange Act. The plan is for the sale of up to 15,602 shares of our common stock. The plan terminates on the earlier of (1) the date all shares under the plan are sold and (2) July 12, 2024.
On February 26, 2024, Richard Eskew, our Executive Vice President, General Counsel, and Chief Compliance Officer, adopted a trading plan intended to satisfy the affirmative defense conditions under Rule 10b5-1(c) of the Exchange Act. The plan is for (1) the sale of up to 6,474 shares of our common stock in amounts determined in accordance with a formula set forth in the plan, (2) the exercise and sale of stock options up to 18,925 shares, and (3) the exercise of up to options up to 30,250 shares. The plan terminates on the earlier of the date all the shares under the plan are sold or exercised, as applicable, and November 22, 2024.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
The information required by Part III is omitted from this report because we will file a definitive proxy statement within 120 days after the end of our fiscal year pursuant to Regulation 14A for our
20212024 Annual Meeting of Stockholders, or the
20212024 Proxy Statement, and the information to be included in the
20212024 Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this
Item 10 will be provideditem is incorporated by reference to the information set forth in the sections titled “Proposal 1: Election of Directors,” “Executive Officers,” “Information Regarding the Board of Directors and Corporate Governance,” and “Delinquent Section 16(a) Reports,” if applicable, in our 20212024 Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year. That information is incorporated herein by reference.Statement.
Item 11. Executive Compensation
The information required by this
Item 11 will be provideditem is incorporated by reference to the information set forth in the sections titled “Executive Compensation—Compensation Discussion and Analysis” and “Director Compensation” in our
20212024 Proxy
Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year. That information is incorporated herein by reference.Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this
Item 12 will be provideditem is incorporated by reference to the information set forth in the sections titled “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in our
20212024 Proxy
Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year. That information is incorporated herein by reference.Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this
Item 13 will be provideditem is incorporated by reference to the information set forth in the sections titled “Transactions With Related Persons” and “Information Regarding the Board and Corporate Governance – Board Independence” in our
20212024 Proxy
Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year. That information is incorporated herein by reference.Statement.
Item 14. Principal Accountant Fees and Services
The information required by this
Item 14 will be provideditem is incorporated by reference to the information set forth in the sections titled “Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm—Principal Accountant Fees and Services” in our
20212024 Proxy
Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year. That information is incorporated herein by reference.Statement.
Item 15. Exhibit and Financial Statement Schedules
The following documents are filed as part of this report:
| 1. | The consolidated financial statements of Accolade, Inc. and subsidiaries are included beginning from the section titled “Index to Consolidated Financial Statements” commencing on page F-1. |
| 2. | All financial statement schedules have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information. |
77
1.
The consolidated financial statements of Accolade, Inc. and subsidiaries are included beginning from the section titled “Index to Consolidated Financial Statements” commencing on page F-1.
2.All financial statement schedules have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information.
3.The list of exhibits filed with this Annual Report on Form 10-K is set forth in the Exhibit Index preceding the signature page and is incorporated herein by reference or filed with this Annual Report on Form 10-K, in each case as indicated herein (numbered in accordance with Item 601 of Regulation S-K).
| | | | | | | | | | | | | | | | | | | | |
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
2.1† | | 8-K | 001-39348 | 2.1 | March 4, 2021 | |
2.2† | Agreement and Plan of Merger, dated April 22, 2021, by and among Registrant, Panda Merger Sub, Inc., PlushCare, Inc., and Fortis Advisors LLC, as stockholder representative, as amended | 8-K | 001-39348 | 2.1 | June 10, 2021 | |
| 3.1 | | 8-K | 001-39348 | 3.1 | July 10, 2020 | |
| 3.2 | | S-1/A | 333-236786 | 3.4 | February 28, 2020 | |
| 4.1 | | S-1 | 333-236786 | 4.1 | February 28, 2020 | |
| 4.2 | | S-1 | 333-236786 | 4.2 | February 28, 2020 | |
| 4.3 | | 8-K | 001-39348 | 4.1 | March 29, 2021 | |
| 4.4 | | 8-K | 001-39348 | 4.2 | March 29, 2021 | |
| 4.5 | | 10-K | 001-39348 | 4.6 | May 7, 2021 | |
| 10.1* | | S-1 | 333-236786 | 10.1 | June 16, 2020 | |
| 10.2* | | S-1 | 333-236786 | 10.2 | June 16, 2020 | |
| 10.3* | | S-1 | 333-236786 | 10.3 | June 16, 2020 | |
| 10.4* | | S-1 | 333-236786 | 10.4 | February 28, 2020 | |
| 10.5* | | S-1 | 333-236786 | 10.5 | February 28, 2020 | |
| 10.6* | | S-1 | 333-254291 | 10.6 | March 15, 2021 | |
| | | | | | | | | | | | | | | | | | | | |
| 10.7* | | S-1 | 333-236786 | 10.7 | February 28, 2020 | |
| 10.8* | | 10-Q | 001-39348 | 10.1 | July 1, 2022 | |
| 10.9 | | S-1 | 333-236786 | 10.11 | February 28, 2020 | |
| 10.10+ | | 8-K | 001-39348 | 10.1 | August 25, 2020 | |
| 10.11 | | 10-Q | 001-39348 | 10.8 | October 14, 2020 | |
| 10.12 | | 8-K | 001-39348 | 10.1 | November 9, 2020 | |
| 10.13+ | | 8-K | 001-39348 | 10.1 | March 4, 2021 | |
| 10.14 | | 10-K | 001-39348 | 10.13 | May 7, 2021 | |
| 10.15 | | 8-K | 001-39348 | 10.1 | June 1, 2021 | |
| 10.16 | | 10-Q | 001-39348 | 10.1 | October 6, 2023 | |
| 10.17 | | S-1 | 333-236786 | 10.14 | February 28, 2020 | |
| 10.18 | | S-1 | 333-236786 | 10.15 | February 28, 2020 | |
| 10.19 | | S-1 | 333-236786 | 10.16 | February 28, 2020 | |
| 10.20 | | S-1 | 333-236786 | 10.17 | February 28, 2020 | |
| | | | | | | | | | | | | | | | | | | | |
| 10.21 | | S-1 | 333-236786 | 10.18 | February 28, 2020 | |
| 10.22 | | S-1 | 333-236786 | 10.19 | February 28, 2020 | |
| 10.23 | | S-1 | 333-236786 | 10.20 | February 28, 2020 | |
| 10.24 | | S-1 | 333-236786 | 10.21 | February 28, 2020 | |
| 10.25 | | S-1 | 333-236786 | 10.22 | February 28, 2020 | |
| 10.26 | | S-1 | 333-236786 | 10.31 | February 28, 2020 | |
| 10.27* | | S-1 | 333-254291 | 10.31 | March 15, 2021 | |
| 10.28* | | S-1/A | 333-254291 | 10.32 | April 1, 2021 | |
| 10.29* | | S-1/A | 333-254291 | 10.33 | March 15, 2021 | |
| 21.1 | | | | | | X |
| 23.1 | | | | | | X |
| 24.1 | Power of Attorney (included on signature page) | | | | | X |
| 31.1 | | | | | | X |
| 31.2 | | | | | | X |
| | 3. | The list of exhibits filed with this Annual Report on Form 10-K is set forth in the Exhibit Index preceding the signature page and is incorporated herein by reference or filed with this Annual Report on Form 10-K, in each case as indicated herein (numbered in accordance with Item 601 of Regulation S-K).
| | | | | | |
Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
2.1† | Agreement and Plan of Merger by and among the Registrant, Maestro Merger Sub, LLC, Innovation Specialists LLC D/B/A 2nd.MD and Shareholder Representative Services, LLC dated January 14, 2021 | 8-K | 001-39348 | 3.1 | March 4, 2021 | |
3.1 | Amended and Restated Certificate of Incorporation of the Registrant | 8-K | 001-39348 | 3.1 | July 10, 2020 | |
3.2 | Amended and Restated Bylaws of the Registrant | S-1 | 333-236786 | 3.4 | February 28, 2020 | |
4.1 | Form of common stock certificate of the Registrant | S-1 | 333-236786 | 4.1 | February 28, 2020 | |
4.2 | Fifth Amended and Restated Registration Rights Agreement by and among the Registrant and Certain of Its Stockholders, dated October 2, 2019 | S-1 | 333-236786 | 4.2 | February 28, 2020 | |
4.3 | Registration Rights Agreement by and among the Registrant and certain of its stockholders, dated March 3, 2021 | 8-K | 001-39348 | 4.1 | March 4, 2021 | |
4.4 | Indenture, dated as of March 29, 2021, by and between the Registrant and U.S. Bank National Association, as Trustee. | 8-K | 001-39348 | 4.1 | March 29, 2021 | |
4.5 | Form of Global Note, representing the Registrant’s 0.50% Convertible Senior Notes due 2026 (included as Exhibit A to the Indenture filed as Exhibit 4.4 to this 10-K). | 8-K | 001-39348 | 4.2 | March 29, 2021 | |
4.6 | Description of the Registrant’s Securities | | | | | X |
10.1* | Accolade, Inc. Amended and Restated 2007 Stock Option Plan, and forms of agreements thereunder | S-1 | 333-236786 | 10.1 | June 16, 2020 | |
10.2* | Accolade, Inc. 2020 Equity Incentive Plan and forms of agreement thereunder | S-1 | 333-236786 | 10.2 | June 16, 2020 | |
10.3* | Accolade, Inc. 2020 Employee Stock Purchase Plan | S-1 | 333-236786 | 10.3 | June 16, 2020 | |
10.4* | Form of Indemnification Agreement entered into by and between the Registrant and each director and executive officer | S-1 | 333-236786 | 10. | February 28, 202 | |
10.5* | Employment Agreement by and between the Registrant and Rajeev Singh dated October 2015 | S-1 | 333-236786 | 10.5 | February 28, 2020 | |
10.6* | Offer Letter by and between the Registrant and Stephen Barnes dated December 1, 2014 | S-1 | 333-254291 | 10.6 | March 15, 2021 | |
10.7* | Offer Letter by and between the Registrant and Robert Cavanaugh dated October 26, 2015 | S-1 | 333-236786 | 10.7 | February 28, 2020 | |
10.8 | Credit Agreement by and among the Registrant, Comerica Bank and Western Alliance Bank dated July 19, 2019 | S-1 | 333-236786 | 10.11 | February 28, 2020 | |
10.9+ | First Amendment to Credit Agreement dated August 21, 2020 by and among the Registrant, Comerica Bank and Western Alliance Bank | 8-K | 001-39348 | 10.1 | August 25, 202 | |
10.10 | Second Amendment to Credit Agreement dated September 11, 2020 by and among the Registrant, Comerica Bank and Western Alliance Bank | 10-Q | 001-39348 | 10.8 | October 14, 2020 | |
10.11 | Third Amendment to Credit Agreement dated November 6, 2020 by ad among the Registrant, Comerica Bank and Western Alliance Bank | 8-K | 001-39348 | 10.1 | November 9, 2020 | |
10.12+ | Fourth Amendment to Credit Agreement dated March 2, 2021 by and among the Registrant, Comerica Bank and Western Alliance Bank | 8-K | 001-39348 | 10.1 | March 4, 2021 | |
10.13 | Fifth Amendment to Credit Agreement dated March 23, 2021 by and among the Registrant, Comerica Bank and Western Alliance Bank | | | | | X |
10.14 | Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated February 22, 2007 | S-1 | 333-236786 | 10.1 | February 28, 2020 | |
10.15 | First Amendment to Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated July 24, 2008 | S-1 | 333-236786 | 10.15 | February 28, 2020 | |
10.16 | Second Amendment to Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated March 3, 2009 | S-1 | 333-236786 | 10.16 | February 28, 2020 | |
10.17 | Third Amendment to Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated August 5, 2010 | S-1 | 333-236786 | 10.17 | February 28, 2020 | |
10.18 | Fourth Amendment to Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated August 10, 2011 | S-1 | 333-236786 | 10.18 | February 28, 2020 | |
10.19 | Fifth Amendment to Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated January 31, 2012 | S-1 | 333-236786 | 10.19 | February 28, 2020 | |
10.20 | Sixth Amendment to Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated March 7, 2012 | S-1 | 333-236786 | 10.20 | February 28, 2020 | |
10.21 | Seventh Amendment to Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated October 23, 2012 | S-1 | 333-236786 | 10.21 | February 28, 2020 | |
10.22 | Eighth Amendment to Lease by and between the Registrant and Brandywine Operating Partnership, L.P. dated December 1, 2017 | S-1 | 333-236786 | 10.22 | February 28, 2020 | |
10.23+ | Amended and Restated Services Agreement by and between the Registrant and Comcast Cable Communications Management, LC dated June 29, 2015 | S-1 | 333-236786 | 10.23 | February 28, 2020 | |
10.24+ | Amendment to Exhibits F and G to the Amended and Restated Services Agreement by and between the Registrant and Comcast Cable Communications Management, LLC dated August 25, 2016 | S-1 | 333-236786 | 10.24 | February 28, 2020 | |
10.25+ | Amendment to Exhibit C to the Amended and Restated Services Agreement by and between the Registrant and Comcast Cable Communications Management, LLC dated October 27, 2016 | S-1 | 333-236786 | 10.25 | February 28, 2020 | |
10.26+ | Amendment and Restatement of Exhibits F and G to the Amended and Restated Services Agreement by and between the Registrant and Comcast Cable Communications Management, LLC dated September 18, 2017 | S-1 | 333-236786 | 10.26 | February 28, 2020 | |
10.27+ | Renewal and Amendment to the Amended and Restated Services Agreement by and between the Registrant and Comcast Cable Communications Management, LLC dated October 20, 2017 | S-1 | 333-236786 | 10.27 | February 28, 2020 | |
10.28+ | Amendment 2 to the Amended and Restated Services Agreement by and between the Registrant and Comcast Cable Communications Management, LLC dated July 1, 2019 | S-1 | 333-236786 | 10.29 | February 28, 2020 | |
10.29+ | Amendment to the Amended and Restated Services Agreement by and between the Registrant and Comcast Cable Communications Management, LLC dated August 12, 2019 | S-1 | 333-236786 | 10.30 | February 28, 2020 | |
10.30+ | Second Renewal and Amendment to the Amended and Restated Services Agreement by and between the Registrant and Comcast Cable Communications Management, LLC dated June 19, 2020 | S-1 | 333-236786 | 10.32 | June 24, 2020 | |
10.31 | Office Lease by and Between the Registrant and 1201 Tab Owner, LLC dated May 28, 2019 | S-1 | 333-236786 | 10.31 | February 28, 2020 | |
10.32* | Amended and Restated Non-Employee Director Compensation Policy | S-1 | 333-254291 | 10.31 | March 15, 2021 | |
10.33* | Master Services Agreement by and between United Healthcare Services, Inc. and Innovation Specialists, LLC d/b/a 2nd.MD dated December 19, 2016. | S-1/A | 333-254291 | 10.32 | April 1, 2021 | |
10.34* | Statement of Work No. 3 to the Master Services Agreement by and Between United Healthcare Services, Inc. and Innovation Specialists, LLC d/b/a 2nd.MD dated September 1, 2019. | S-1/A | 333-254291 | 10.33 | March 15, 2021 | |
21.1 | Subsidiaries of the Registrant | | | | | X |
23.1 | Consent of KPMG LLP, independent registered public accounting firm | | | | | X |
24.1 | Power of Attorney (included on signature page) | | | | | X |
31.1 | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | X |
** Indicates management contract or compensatory plan.
†We have omitted schedules and similar attachments to the subject agreement pursuant to Item 601 of Regulation S-K. We will furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
+Portions of this exhibit have been omitted in accordance with Item 601(b)(10) of Regulation S-K. We will furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request. ˄This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on May 7, 2021.April 25, 2024.
|
| ACCOLADE, INC. | |
| ACCOLADE, INC.
By: | /s/ Rajeev Singh |
|
Chief Executive Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Rajeev Singh and Stephen Barnes, and each one of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in their name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
|
Signature | | |
| | |
| | |
/s/ Rajeev Singh | Chief Executive Officer and DirectorChairman of the Board (Principal Executive Officer) | May 7, 2021
April 25, 2024 |
Rajeev Singh |
|
|
| | |
| /s/ Stephen Barnes | (Principal Financial and Accounting Officer) | May 7, 2021
April 25, 2024 |
Stephen Barnes |
|
|
| | |
/s/ J. Michael ClineColin McHugh | Director
Chief Accounting Officer (Principal Accounting Officer) | May 7, 2021
April 25, 2024 |
J. Michael Cline
| Colin McHugh
|
|
| | |
/s/ William H. Frist, Sr.Jeffrey Brodsky | Director | May 7, 2021
April 25, 2024 |
William H. Frist, Sr.
|
|
Jeffrey Brodsky |
| | |
| /s/ Michael Hilton | Director | April 25, 2024 |
| Michael Hilton |
| | |
| /s/ Jeffrey Jordan | Director | May 7, 2021
April 25, 2024 |
Jeffrey Jordan |
|
|
| | |
| /s/ Cindy Kent | Director | May 7, 2021
April 25, 2024 |
Cindy Kent |
|
|
| | |
| /s/ Peter Klein | Director | May 7, 2021
April 25, 2024 |
Peter Klein |
|
|
| | |
| /s/ Dawn Lepore | Director | May 7, 2021
April 25, 2024 |
Dawn Lepore |
|
|
| | |
/s/ Thomas NeffElizabeth Nabel | Director | May 7, 2021
April 25, 2024 |
Thomas Neff
| Elizabeth Nabel
|
|
| | |
| /s/ Patricia Wadors | Director | May 7, 2021
April 25, 2024 |
Patricia Wadors |
|
|
ACCOLADE, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Accolade, Inc. and subsidiaries (the Company) as of February
28, 202129, 2024 and February
29, 2020,28, 2023, the related consolidated statements of operations
convertible preferred stock and
comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended February
28, 2021,29, 2024, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February
28, 202129, 2024 and February
29, 2020,28, 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended February
28, 2021,29, 2024, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 29, 2024 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 25, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence over revenue
As discussed in Note 2(l) to the consolidated financial statements, the Company generates revenue by providing customers access to its advocacy, expert medical opinion, and virtual primary care services, as well as through usage of its expert medical opinion and virtual primary care services. The Company’s revenue includes multiple revenue streams and certain aspects of the Company’s processes and information technology (IT) systems differ among the revenue streams. As discussed in Note 3, the Company recorded $414,292 thousand of revenue for the year ended February 29, 2024
.
We identified the evaluation of the sufficiency of audit evidence over revenue as a critical audit matter. Evaluating the sufficiency of audit evidence required a high degree of subjective auditor judgment and specialized skills and knowledge due to the number of revenue streams with unique revenue processes and IT applications involved. This
included determining the revenue streams over which procedures were performed and evaluating the nature and extent of evidence obtained over each revenue stream.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over revenue. For each revenue stream where procedures were performed, we evaluated the design and tested the operating effectiveness of certain internal controls related to the revenue process, including IT related controls. We involved IT professionals with specialized skills and knowledge, who assisted in testing certain general IT and application controls used by the Company in its revenue processes. For a sample of transactions, we assessed the recorded revenue by comparing the amounts recognized to underlying documentation. We evaluated the sufficiency of the audit evidence obtained over revenue by assessing the results of procedures performed.
We have served as the
Company'sCompany’s auditor since 2008.
Philadelphia, Pennsylvania
May 7, 2021
ACCOLADE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
| | | | | | |
| | | | | | |
| | February 28(29), |
| | 2021 | | 2020 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 433,884 | | $ | 33,155 |
Accounts receivable, net | | | 9,112 | | | 294 |
Unbilled revenue | | | 2,725 | | | 895 |
Current portion of deferred contract acquisition costs | | | 2,210 | | | 1,368 |
Current portion of deferred financing fees | | | 93 | | | 279 |
Prepaid and other current assets | | | 5,957 | | | 12,944 |
Total current assets | | | 453,981 | | | 48,935 |
Property and equipment, net | | | 9,227 | | | 13,625 |
Goodwill | | | 4,013 | | | 4,013 |
Acquired technology, net | | | 604 | | | 2,054 |
Deferred contract acquisition costs | | | 6,067 | | | 3,876 |
Other assets | | | 1,618 | | | 745 |
Total assets | | $ | 475,510 | | $ | 73,248 |
Liabilities, convertible preferred stock and stockholders’ equity (deficit) | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 7,390 | | $ | 5,273 |
Accrued expenses | | | 4,845 | | | 6,580 |
Accrued compensation | | | 35,379 | | | 23,838 |
Deferred rent and other current liabilities | | | 567 | | | 674 |
Due to customers | | | 5,015 | | | 4,674 |
Current portion of deferred revenue | | | 25,879 | | | 28,919 |
Total current liabilities | | | 79,075 | | | 69,958 |
Loans payable, net of unamortized issuance costs | | | — | | | 21,144 |
Deferred rent and other noncurrent liabilities | | | 5,192 | | | 5,523 |
Deferred revenue | | | 395 | | | 396 |
Total liabilities | | | 84,662 | | | 97,021 |
Convertible preferred stock: | | | | | | |
Preferred stock par value $0.0001; 25,000,000 shares authorized; 0 and 19,513,939 issued and outstanding at February 28(29), 2021 and 2020, respectively | | | — | | | 233,022 |
Commitments (note 13) | | | | | | |
Stockholders’ equity (deficit) | | | | | | |
Common stock par value $0.0001; 500,000,000 shares authorized; 55,699,052 and 6,033,450 shares issued and outstanding at February 28(29), 2021 and 2020, respectively | | | 6 | | | 2 |
Additional paid‑in capital | | | 762,362 | | | 64,071 |
Accumulated deficit | | | (371,520) | | | (320,868) |
Total stockholders’ equity (deficit) | | | 390,848 | | | (256,795) |
Total liabilities, convertible preferred stock and stockholders’ equity (deficit) | | $ | 475,510 | | $ | 73,248 |
| | | | | | | | | | | |
| February 28(29), |
| 2024 | | 2023 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 185,718 | | | $ | 321,083 | |
| Marketable securities | 51,315 | | | — | |
| Accounts receivable, net | 21,800 | | | 23,435 | |
| Unbilled revenue | 5,902 | | | 3,260 | |
| Current portion of deferred contract acquisition costs | 4,369 | | | 4,022 | |
| Prepaid and other current assets | 15,808 | | | 14,149 | |
| Total current assets | 284,912 | | | 365,949 | |
| Property and equipment, net | 19,140 | | | 14,763 | |
| Operating lease right-of-use assets | 28,340 | | | 29,525 | |
| Goodwill | 278,191 | | | 278,191 | |
| Intangible assets, net | 165,407 | | | 203,202 | |
| Deferred contract acquisition costs | 9,608 | | | 9,815 | |
| Other assets | 2,553 | | | 1,624 | |
| Total assets | $ | 788,151 | | | $ | 903,069 | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 13,749 | | | $ | 10,155 | |
| Accrued expenses and other current liabilities | 10,736 | | | 11,744 | |
| Accrued compensation | 23,392 | | | 39,346 | |
| Due to customers | 18,552 | | | 15,694 | |
| Current portion of deferred revenue | 34,770 | | | 35,191 | |
| Current portion of operating lease liabilities | 6,651 | | | 7,284 | |
| Total current liabilities | 107,850 | | | 119,414 | |
| Loans payable, net of unamortized issuance costs | 208,482 | | | 282,323 | |
| Operating lease liabilities | 26,077 | | | 27,189 | |
| Other noncurrent liabilities | 156 | | | 203 | |
| Deferred revenue | 121 | | | 154 | |
| Total liabilities | 342,686 | | | 429,283 | |
| Commitments and contingencies (Note 14) | | | |
| Stockholders’ equity | | | |
| Common stock par value $0.0001; 500,000,000 shares authorized; 78,070,781 and 73,089,075 shares issued and outstanding at February 28(29), 2024 and 2023, respectively | 8 | | | 7 | |
| Additional paid‑in capital | 1,499,603 | | | 1,428,073 | |
| Accumulated other comprehensive loss | (47) | | | — | |
| Accumulated deficit | (1,054,099) | | | (954,294) | |
| Total stockholders’ equity | 445,465 | | | 473,786 | |
| Total liabilities and stockholders’ equity | $ | 788,151 | | | $ | 903,069 | |
See accompanying notes to consolidated financial statements.
ACCOLADE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
and Comprehensive Loss
(In thousands, except share and per share data)
| | | | | | | | | |
| | Fiscal Year Ended February 28(29), |
| | 2021 | | 2020 | | 2019 |
Revenue | | $ | 170,358 | | $ | 132,507 | | $ | 94,811 |
Cost of revenue, excluding depreciation and amortization | | | 93,673 | | | 73,685 | | | 60,568 |
Operating expenses: | | | | | | | | | |
Product and technology | | | 49,955 | | | 42,306 | | | 35,708 |
Sales and marketing | | | 33,711 | | | 30,050 | | | 23,456 |
General and administrative | | | 31,584 | | | 26,154 | | | 19,665 |
Depreciation and amortization | | | 8,212 | | | 8,516 | | | 9,391 |
Total operating expenses | | | 123,462 | | | 107,026 | | | 88,220 |
Loss from operations | | | (46,777) | | | (48,204) | | | (53,977) |
Interest expense, net | | | (3,724) | | | (2,925) | | | (2,374) |
Other expense | | | (147) | | | (107) | | | (90) |
Loss before income taxes | | | (50,648) | | | (51,236) | | | (56,441) |
Income tax expense | | | (4) | | | (129) | | | (55) |
Net loss | | $ | (50,652) | | $ | (51,365) | | $ | (56,496) |
Net loss per share, basic and diluted | | $ | (1.72) | | $ | (9.13) | | $ | (12.17) |
Weighted‑average common shares outstanding, basic and diluted | | | 29,370,594 | | | 5,626,713 | | | 4,641,256 |
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Revenue | $ | 414,292 | | $ | 363,142 | | $ | 310,021 |
| Cost of revenue, excluding depreciation and amortization | 222,232 | | 198,905 | | 169,019 |
| Operating expenses: | | | | | |
| Product and technology | 99,159 | | 101,347 | | 83,664 |
| Sales and marketing | 100,066 | | 99,113 | | 86,765 |
| General and administrative | 62,124 | | 81,209 | | 99,106 |
| Depreciation and amortization | 45,164 | | 46,377 | | 42,608 |
| Goodwill impairment | — | | | 299,705 | | — | |
| Change in fair value of contingent consideration | — | | | — | | | (45,416) |
| Total operating expenses | 306,513 | | 627,751 | | 266,727 |
| Loss from operations | (114,453) | | | (463,514) | | | (125,725) | |
| Interest income (expense), net | 5,952 | | | 255 | | | (2,905) | |
| Other income (expense) | 9,931 | | | (15) | | | (133) | |
| Loss before income taxes | (98,570) | | | (463,274) | | | (128,763) | |
| Income tax benefit (expense) | (1,235) | | 3,624 | | 5,639 | |
| Net loss | $ | (99,805) | | | $ | (459,650) | | | $ | (123,124) | |
| Net loss per share, basic and diluted | $ | (1.33) | | | $ | (6.45) | | | $ | (1.93) | |
| Weighted‑average common shares outstanding, basic and diluted | 74,906,938 | | 71,279,831 | | 63,823,270 |
| | | | | |
| Other comprehensive loss: | | | | | |
| Unrealized loss on marketable securities, net | $ | (47) | | $ | — | | | $ | — | |
| Comprehensive loss | $ | (99,852) | | $ | (459,650) | | $ | (123,124) |
See accompanying notes to consolidated financial statements.
ACCOLADE, INC. AND SUBSIDIARIES
Consolidated Statements of
Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except shares)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Stockholders’ Equity (Deficit) |
| | Convertible | | | | | | | | Additional | | | | | | |
| | Preferred Stock | | | Common stock | | paid‑in | | Accumulated | | | |
| | Shares | | Amount | | | Shares | | Amount | | capital | | deficit | | Total |
Balance, March 1, 2018 | | 16,545,536 | | $ | 167,010 | | | 3,242,319 | | $ | 1 | | $ | 29,310 | | $ | (213,007) | | $ | (183,696) |
Sale of Series E preferred stock, net | | 2,095,365 | | | 47,654 | | | — | | | — | | | — | | | — | | | — |
Issuance of common stock warrants in connection with sale of Series E preferred stock | | — | | | — | | | — | | | — | | | 2,279 | | | | | | 2,279 |
Issuance of common stock in lieu of bonus payment | | — | | | — | | | 121,143 | | | — | | | 569 | | | — | | | 569 |
Exercise of stock options and common stock warrants | | — | | | — | | | 253,087 | | | — | | | 1,002 | | | — | | | 1,002 |
Stock‑based compensation expense | | — | | | — | | | — | | | — | | | 5,721 | | | — | | | 5,721 |
Net loss | | — | | | — | | | — | | | — | | | — | | | (56,496) | | | (56,496) |
Balance, February 28, 2019 | | 18,640,901 | | $ | 214,664 | | | 3,616,549 | | $ | 1 | | $ | 38,881 | | $ | (269,503) | | $ | (230,621) |
Sale of Series F preferred stock, net | | 873,038 | | | 18,358 | | | — | | | — | | | — | | | — | | | — |
Issuance of common stock warrants in connection with sale of Series F preferred stock | | — | | | — | | | — | | | — | | | 1,585 | | | — | | | 1,585 |
Issuance of common stock in connection with acquisition | | — | | | — | | | 289,320 | | | — | | | 6,164 | | | — | | | 6,164 |
Issuance of common stock warrants in connection with July 2019 debt | | — | | | — | | | — | | | — | | | 779 | | | — | | | 779 |
Issuance of common stock in connection with joint development agreement | | — | | | — | | | 251,211 | | | — | | | 3,869 | | | | | | 3,869 |
Exercise of stock options and common stock warrants | | — | | | — | | | 1,876,370 | | | 1 | | | 6,791 | | | — | | | 6,792 |
Stock‑based compensation expense | | — | | | — | | | — | | | — | | | 6,002 | | | — | | | 6,002 |
Net loss | | — | | | — | | | — | | | — | | | — | | | (51,365) | | | (51,365) |
Balance, February 29, 2020 | | 19,513,939 | | $ | 233,022 | | | 6,033,450 | | $ | 2 | | $ | 64,071 | | $ | (320,868) | | $ | (256,795) |
Exercise of stock options and common stock warrants and vesting of restricted stock units | | — | | | — | | | 1,342,801 | | | — | | | 9,272 | | | | | | 9,272 |
Issuance of common stock in initial public offering, net of issuance costs of $4,596 | | — | | | — | | | 11,526,134 | | | 1 | | | 231,227 | | | — | | | 231,228 |
Conversion of preferred stock into common stock | | (19,513,939) | | | (233,022) | | | 29,479,521 | | | 2 | | | 233,020 | | | — | | | 233,022 |
Automatic exercise of warrants into common stock in connection with initial public offering | | — | | | — | | | 1,401,836 | | | — | | | — | | | — | | | — |
Issuance of common stock in follow-on public offering, net of issuance costs of $600 | | — | | | — | | | 5,750,000 | | | 1 | | | 208,046 | | | — | | | 208,047 |
Issuance of stock options to satisfy bonus obligation | | — | | | — | | | — | | | — | | | 5,735 | | | — | | | 5,735 |
Issuance of common stock in connection with 2019 acquisition | | — | | | — | | | 97,812 | | | — | | | 156 | | | — | | | 156 |
Issuance of common stock in connection with the employee stock purchase plan | | — | | | — | | | 67,498 | | | — | | | 1,259 | | | — | | | 1,259 |
Stock‑based compensation expense | | — | | | — | | | — | | | — | | | 9,576 | | | | | | 9,576 |
Net loss | | — | | | — | | | — | | | — | | | — | | | (50,652) | | | (50,652) |
Balance, February 28, 2021 | | — | | $ | — | | | 55,699,052 | | $ | 6 | | $ | 762,362 | | $ | (371,520) | | $ | 390,848 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | Additional
paid‑in
capital | | Accumulated Other Comprehensive Loss | | Accumulated
deficit | | Total |
| Shares | | Amount | | | | |
| Balance, February 28, 2021 | 55,699,052 | | $ | 6 | | | $ | 762,362 | | | $ | — | | | $ | (371,520) | | | $ | 390,848 | |
| Issuance of common stock in connection with acquisitions | 10,219,443 | | 1 | | | 456,592 | | | — | | | — | | | 456,593 | |
| Issuance of replacement awards in connection with acquisitions | — | | — | | | 6,729 | | | — | | | — | | | 6,729 | |
| Contingent share earnout in connection with acquisitions | — | | — | | | 73,481 | | | — | | | — | | | 73,481 | |
| Exercise of stock options and vesting of restricted stock units | 1,039,144 | | — | | | 8,522 | | | — | | | — | | | 8,522 | |
| Purchase of capped calls | — | | — | | | (34,503) | | | — | | | — | | | (34,503) | |
| Issuance of common stock in connection with the employee stock purchase plan | 140,838 | | — | | | 4,309 | | | — | | | — | | | 4,309 | |
| Stock‑based compensation expense | — | | — | | | 72,939 | | | — | | | — | | | 72,939 | |
| Net loss | — | | — | | | — | | | — | | | (123,124) | | | (123,124) | |
| Balance, February 28, 2022 | 67,098,477 | | $ | 7 | | | $ | 1,350,431 | | | $ | — | | | $ | (494,644) | | | $ | 855,794 | |
| Settlement of acquisition-related contingent consideration | 3,304,729 | | — | | | — | | | — | | | — | | | — | |
| Exercise of stock options and vesting of restricted stock units | 2,125,524 | | — | | | 2,071 | | | — | | | — | | | 2,071 | |
| Issuance of common stock in connection with the employee stock purchase plan | 560,345 | | — | | | 2,927 | | | — | | | — | | | 2,927 | |
| Stock‑based compensation expense | — | | — | | | 72,644 | | | — | | | — | | | 72,644 | |
| Net loss | — | | — | | | — | | | — | | | (459,650) | | | (459,650) | |
| Balance, February 28, 2023 | 73,089,075 | | $ | 7 | | | $ | 1,428,073 | | | $ | — | | | $ | (954,294) | | | $ | 473,786 | |
| Exercise of stock options and vesting of restricted stock units | 4,375,007 | | 1 | | | 7,010 | | | — | | | — | | | 7,011 | |
| Issuance of common stock in connection with the employee stock purchase plan | 512,235 | | — | | | 3,579 | | | — | | | — | | | 3,579 | |
| Release of indemnity shares in connection with acquisition | 94,464 | | — | | | — | | | — | | | — | | | — | |
| Stock‑based compensation expense | — | | — | | | 60,941 | | | — | | | — | | | 60,941 | |
| Other comprehensive loss | — | | — | | | — | | | (47) | | | — | | | (47) | |
| Net loss | — | | — | | | — | | | — | | | (99,805) | | | (99,805) | |
| Balance, February 29, 2024 | 78,070,781 | | $ | 8 | | | $ | 1,499,603 | | | $ | (47) | | | $ | (1,054,099) | | | $ | 445,465 | |
See accompanying notes to consolidated financial statements.
ACCOLADE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | |
| | Fiscal Year Ended February 28(29), |
| | 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | | | | |
Net loss | | $ | (50,652) | | $ | (51,365) | | $ | (56,496) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | |
Depreciation and amortization expense | | | 8,212 | | | 8,516 | | | 9,391 |
Amortization of deferred contract acquisition costs | | | 1,657 | | | 985 | | | 794 |
Noncash interest expense | | | 2,252 | | | 834 | | | 425 |
Noncash bonus | | | — | | | 5,884 | | | 569 |
Loss on disposal of equipment | | | — | | | 299 | | | — |
Stock‑based compensation expense | | | 9,576 | | | 6,002 | | | 5,721 |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable and unbilled revenue | | | (10,648) | | | (683) | | | 6,522 |
Accounts payable and accrued expenses | | | 2,991 | | | 5,838 | | | 1,515 |
Deferred contract acquisition costs | | | (4,690) | | | (2,399) | | | (2,499) |
Deferred revenue and due to customers | | | (2,700) | | | 2,286 | | | 16,192 |
Accrued compensation | | | 16,356 | | | (1,671) | | | 2,381 |
Deferred rent and other liabilities | | | (505) | | | 220 | | | (555) |
Other assets | | | 2,919 | | | (8,993) | | | (508) |
Net cash used in operating activities | | | (25,232) | | | (34,247) | | | (16,548) |
Cash flows from investing activities: | | | | | | | | | |
Capitalized software development costs | | | (374) | | | — | | | (1,943) |
Purchases of property and equipment | | | (1,991) | | | (3,315) | | | (1,175) |
Net cash paid in acquisition of MD Insider | | | — | | | (206) | | | — |
Earnout payments to MD Insider | | | (58) | | | — | | | — |
Net cash used in investing activities | | | (2,423) | | | (3,521) | | | (3,118) |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from public offerings, net of underwriters' discounts and commissions and offering costs | | | 439,410 | | | — | | | — |
Proceeds from sale of preferred stock, net | | | — | | | 19,943 | | | 49,933 |
Proceeds from stock purchases under employee stock purchase plan | | | 2,379 | | | — | | | — |
Proceeds from stock option and warrant exercises | | | 9,348 | | | 6,619 | | | 1,002 |
Proceeds from borrowings on debt | | | 51,166 | | | 1,660 | | | 3,000 |
Repayments of debt principal | | | (73,166) | | | — | | | (5,000) |
Payments related to debt retirement | | | (753) | | | — | | | — |
Principal payments under capital leases | | | — | | | — | | | (102) |
Net cash provided by financing activities | | | 428,384 | | | 28,222 | | | 48,833 |
Net increase (decrease) in cash and cash equivalents | | | 400,729 | | | (9,546) | | | 29,167 |
Cash and cash equivalents, beginning of period | | | 33,155 | | | 42,701 | | | 13,534 |
Cash and cash equivalents, end of period | | $ | 433,884 | | $ | 33,155 | | $ | 42,701 |
Supplemental cash flow information: | | | | | | | | | |
Interest paid | | $ | 2,296 | | $ | 2,391 | | $ | 2,609 |
Issuance of stock options in lieu of cash bonus | | $ | 5,735 | | $ | — | | $ | 569 |
Fixed assets included in accounts payable | | $ | 232 | | $ | 45 | | $ | 93 |
Other receivable related to stock option exercises | | $ | 97 | | $ | 173 | | $ | — |
Income taxes paid | | $ | 149 | | $ | 55 | | $ | — |
Common stock issued in connection with acquisition | | $ | 156 | | $ | 6,164 | | $ | — |
Offering costs included in prepaid assets and accounts payable and accrued expenses | | $ | — | | $ | 3,042 | | $ | — |
Common stock issued in connection with joint development agreement | | $ | — | | $ | 3,869 | | $ | — |
Common stock warrants issued in connection with debt | | $ | — | | $ | 779 | | $ | — |
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (99,805) | | | $ | (459,650) | | | $ | (123,124) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
| Goodwill impairment | — | | 299,705 | | — |
| Depreciation and amortization expense | 45,164 | | 46,377 | | 42,608 |
| Amortization of deferred contract acquisition costs | 5,437 | | 3,698 | | 2,945 |
| Change in fair value of contingent consideration | — | | — | | (45,416) | |
| Deferred income taxes | — | | | (3,997) | | | (6,132) | |
| Noncash interest expense (income) | 1,540 | | 1,660 | | 1,673 |
| Accretion of discounts/premiums on marketable securities, net | (215) | | — | | — |
| Stock‑based compensation expense | 60,941 | | 72,644 | | 72,939 |
| Gain on repurchase of convertible notes | (9,268) | | | — | | | — | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable and unbilled revenue | (1,007) | | 4,106 | | (11,829) | |
| Accounts payable and accrued expenses | 3,380 | | 1,131 | | (1,899) | |
| Deferred contract acquisition costs | (5,575) | | | (7,314) | | | (4,148) | |
| Deferred revenue and due to customers | 2,404 | | 3,634 | | 13,986 |
| Accrued compensation | (15,953) | | 157 | | (2,519) | |
| Other liabilities | (607) | | 1,627 | | (106) | |
| Other assets | (2,605) | | | (4,483) | | | (1,328) | |
| Net cash used in operating activities | (16,169) | | | (40,705) | | | (62,350) | |
| Cash flows from investing activities: | | | | | |
| Capitalized software development costs | (7,547) | | | (5,123) | | | (1,096) | |
| Purchases of property and equipment | (4,935) | | | (2,105) | | | (2,521) | |
| Purchase of marketable securities | (51,147) | | — | | (99,998) | |
| Sale of marketable securities | — | | — | | 99,998 |
| Cash paid for acquisitions, net of cash acquired | — | | — | | (259,996) | |
| Net cash used in investing activities | (63,629) | | | (7,228) | | | (263,613) | |
| Cash flows from financing activities: | | | | | |
| Payments for repurchase of convertible notes | (65,808) | | — | | — |
| Payments for debt extinguishment costs | (355) | | — | | — |
| Proceeds from employee stock purchase plan | 3,579 | | 2,927 | | 4,703 |
| Proceeds from stock option exercises | 7,017 | | 2,064 | | 8,600 |
| Payment of contingent consideration for acquisition | — | | (1,828) | | | — |
| Payments of equity issuance costs | — | | — | | (60) | |
| Payment of debt issuance costs | — | | — | | (8,368) | |
| Payment for purchase of capped calls | — | | — | | (34,443) | |
| Proceeds from borrowings on debt | — | | — | | 287,500 |
| Net cash provided (used) by financing activities | (55,567) | | 3,163 | | 257,932 |
| Net decrease in cash and cash equivalents | (135,365) | | | (44,770) | | | (68,031) | |
| Cash and cash equivalents, beginning of period | 321,083 | | 365,853 | | 433,884 |
| Cash and cash equivalents, end of period | $ | 185,718 | | $ | 321,083 | | $ | 365,853 |
| Supplemental cash flow information: | | | | | |
| Interest paid | $ | 1,640 | | $ | 1,640 | | $ | 930 |
| Fixed assets included in accounts payable | $ | 28 | | $ | 771 | | $ | 161 |
| Other receivable related to stock option exercises | $ | 6 | | $ | 13 | | $ | 4 |
| Income taxes paid | $ | 402 | | $ | 157 | | $ | 122 |
| Common stock issued in connection with acquisitions | $ | — | | $ | — | | $ | 455,586 |
| Replacement awards issued in connection with acquisitions | $ | — | | $ | — | | $ | 6,729 |
See accompanying notes to consolidated financial statements.
Accolade, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except share and per share data)
Accolade, Inc.
was initially organized as a limited liability company under(Accolade or together with its subsidiaries, the
name Accretive Care LLC in Delaware on January 23, 2007. On June 14, 2010, the company converted from a limited liability company to a Delaware corporation and changed its name to Accolade, Inc. Accolade’s offices and operations are in Seattle, Washington; Plymouth Meeting, Pennsylvania; Scottsdale, Arizona; Santa Monica, California; and Prague, Czech Republic.On February 6, 2016, Accolade established a wholly owned subsidiary in the Czech Republic and on July 31, 2019, Accolade acquired all the equity interestsCompany) provides an advocacy-led, nationwide care delivery service comprised of a Delaware corporation (together with Accolade, the Company), and their results of operations have been included in the consolidated financial statements since those respective dates.
The Company provides personalized, technology-enabled solutions that help people better understand, navigate, and utilize the healthcare system and their workplace benefits. The Company’s customers are primarily employers that contract withdeploy Accolade solutions in order to provide their employees and their employees’ families (the members) a single place to turn for their health, healthcare, and benefits needs. The service isCompany also offers expert medical opinion services to commercial customers (which includes employers, health plans, and governmental entities) and virtual primary care both directly to consumers and to commercial customers. These services are designed to driveimprove the member experience, encourage better healthcare outcomes, and increased satisfaction for the participants while loweringlower costs for the payor. The Company provides its services to customers throughout the United States.
both members and customers. Accolade is co-headquartered in Seattle, Washington and Plymouth Meeting, Pennsylvania.
The Company has incurred net losses and cumulative negative cash flows from operations since inception. To date, the Company’s operations have been funded by capital raised from investors, debt facilities, and revenues in the normal course of business. Management believes that the Company’s cash and cash equivalents, plus customer revenues and advances and available borrowings under its debt facility, are sufficient to fund its operations through at least the next 12 months from the issuance of these consolidated financial statements. Additional financing may be required for the Company to successfully implement its long-term strategy. There can be no assurance that additional financing, if needed, can be obtained on terms acceptable to the Company.
Subsequent to February 28, 2021, the Company paid approximately $236,200 related to the acquisition of Innovation Specialists LLC d/b/a 2nd.MD (2nd.MD), including related expenses, and received $244,900 in proceeds, net of estimated expenses (including capped calls), in an offering of convertible senior notes. See note 16 for further details.(c)COVID-19
Due to the government-imposed quarantines and other public health safety measures put into place in March 2020, COVID-19 has caused disruption in the markets where the Company sells its offerings and related services. Although the Company has not experienced any significant financial impact as a result of the COVID-19 pandemic, there continues to be uncertainty as to the extent to which the COVID-19 pandemic may adversely impact its business and operations, and the Company will continue to closely monitor for any changes to the Company’s operations and the operations of our customers.
(d)Initial Public Offering
On July 7, 2020, the Company closed its initial public offering of common stock (IPO) in which the Company issued and sold 11,526,134 shares (inclusive of the underwriters’ over-allotment option to purchase 1,503,408 shares) of common stock at $22.00 per share. The Company received net proceeds of $231,228 after deducting underwriting
discounts and commissions, as well as offering costs of $4,596. Upon the closing of the IPO, all shares of outstanding convertible preferred stock converted into 29,479,521 shares of common stock, and an additional 1,401,836 shares of common stock were issued upon the automatic net exercise of warrants then outstanding.
(e)Follow-on Public Offering
On October 26, 2020, the Company closed a follow-on public offering of common stock in which the Company issued and sold 5,750,000 shares (inclusive of the underwriters’ over-allotment option to purchase 750,000 shares) of common stock at $38.50 per share. The Company received net proceeds of $208,046 after deducting underwriting discounts and commissions, as well as offering costs of $600, all of which were paid as of February 28, 2021.
(2) Summary of Significant Accounting Policies
(a)
Basis of Presentation and Principles of ConsolidationAccolade’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the Company’s accounts and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company has various administrative service agreements (ASA) with professional medical corporations established in California, Illinois, Wyoming, and New Jersey (PC). The PCs employ or contract with medical providers who provide services via the Company’s technology platform. The ASAs are evergreen and are terminable by the parties for breach or bankruptcy. Through the ASAs, the Company provides non-clinical administrative services to the PCs and manages the economic activities that most significantly affect PCs. The PCs retain control over the provision of medical services and the PC’s clinical personnel.
(b)The PCs are variable interest entities (VIE) to the Company. Under Accounting Standards Codification Subtopic 810 – Consolidation, the Company is considered the PC’s primary beneficiary because the Company has the power to direct the activities that most significantly impact the VIE’s economic performance and absorbs the residual benefits and losses from the VIE’s operations. Consequently, the Company consolidates the operations of the PCs. PC assets were $31,148 as of February 29, 2024 which consisted primarily of amounts receivable from PlushCare, Inc. PC liabilities were $15,276 as of February 29, 2024 and consisted primarily of amounts due to Accolade, Inc. and accrued compensation.
The PCs and the Company are independent entities, and as such creditors of the PCs do not have recourse against the Company in the event of default by the PCs. Additionally, the PCs’ non-cash assets are available to the Company to satisfy obligations or for other corporate purposes.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the fair value of assets acquired and liabilities assumed for business combinations, unbilled revenues and deferred revenues, certain accrued expenses, stock-based compensation, assessment of the useful life and recoverability of long-lived assets, income taxes, disclosure of contingent assets and liabilities at the date of the consolidated financial statements,
assessment of the recoverability of goodwill, and the reported amounts of revenues and expenses during the reporting period. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, the Company’s financial statements will be affected.
(c)
Comprehensive LossFor the fiscal years ended February 28(29), 2021, 2020, and 2019, there was no difference between comprehensive loss and net loss.
(d)Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, including cash equivalents,
marketable securities, accounts receivable, unbilled revenue, other current assets, accounts payable, and accrued expenses approximates fair value due to the short-term nature of those instruments.
The Company measures financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
| ● | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are |
•Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 — Inputs that are generally unobservable and typically reflect the Company’s estimate of assumptions that market participants would use in pricing the asset or liability. | | observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3 — Inputs that are generally unobservable and typically reflect the Company’s estimate of assumptions that market participants would use in pricing the asset or liability. |
(d) Cash and Cash Equivalents(e)
| Cash and Cash Equivalents
|
Cash and cash equivalents is comprised of cash in banks and highly liquid investments, including certificates of deposit with a maturity date of less than 90 days, and money marketU.S. treasury funds,bills purchased with an original maturity of three months or less. Cash equivalents consist of investments in money market funds for which the carrying amount approximates fair value, due to the short maturities of these instruments.
(e) Marketable Securities
The Company classifies its marketable securities as available-for-sale, which include securities with original maturities of greater than three months. These securities are carried at fair market value and unrealized gains and losses are recorded to accumulated other comprehensive loss. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield.
(f)
Accounts Receivable and Unbilled RevenueAccounts receivable are recorded at the invoiced amount and do not bear interest. The Company does not have any off-balance-sheet credit exposure related to its customers. The Company records unbilled revenue for services performed on contracts for amounts not yet billed to customers.
(g)
Property and EquipmentProperty and equipment are recorded at cost.
Equipment acquired under capital leases is recorded at the present value of the minimum lease payments. Property and equipment are depreciated on a straight-line basis over their estimated useful lives.
Useful lives for property and equipment are as follows:
| | | | | |
Property and Equipment | | Estimated Useful Life |
Office equipment and furniture | | | | 7 | years |
Computer equipment | | 3 | - | 5 | years |
Computer software | | 3 | - | 5 | years |
Leasehold improvements | | Lesser of estimated useful life or remaining lease term |
| | | | | | | | |
| Property and Equipment | | Estimated Useful Life |
| Office equipment and furniture | | 7 years |
| Computer equipment | | 3-5 years |
| Computer software | | 3-5 years |
| Leasehold improvements | | Lesser of estimated useful life or remaining lease term |
(h)
Capitalized Internal-Use Software CostsCosts related to software acquired, developed, or modified solely to meet the Company’s internal requirements, including
for tools that enable the Company’s employees to interact with members and their providers, with no substantive plans to market such software at the time of development, are capitalized. Costs incurred during the preliminary planning and evaluation stage of the project and during the post-implementation operational stage are expensed as incurred. Costs related to minor upgrades, minor enhancements, and maintenance activities are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. Internal-use software is included in property and equipment and is amortized on a straight-line basis over 3 years.
For the fiscal years ended February 28(29),
2021, 2020,2024, 2023, and
2019,2022, the Company capitalized
$374, $3,005,$6,938, $5,709, and
$1,943,$1,096, respectively, for internal-use software. Amortization expense related to capitalized internal-use software during the fiscal years ended February 28(29),
2021, 2020,2024, 2023, and
2019, $4,560, $4,533,2022 was $2,761, $1,196, and
$5,836,$2,387, respectively.
(i)
Impairment of Long-Lived AssetsThe Company reviews long-lived assets, such as property and equipment and acquired technology,finite-lived intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. There were 0no long-lived asset impairment charges recorded during the fiscal years ended February 28(29), 2021, 2020,2024, 2023, and 2019.
2022.
(j)
Intangible AssetsAs part
The Company has acquired intangible assets through various acquisitions. Intangible assets are recorded at fair value on the date of
the acquisition
of MDI (Note 3), the Company acquired an intangible asset in the form of acquired technology in the amount of $2,900. This intangible asset isand are subject to amortization
and is being amortized onover the
straight-line basis over its estimated useful
lifelives of
two years. The Company recognized $1,450each asset. Estimates of fair value and
$846 in amortization expense duringuseful lives are based on historical factors, current circumstances, and the
fiscal years ended February 28(29), 2021experience and
2020, respectively.judgment of management. Estimates and assumptions used to value intangible assets are evaluated by management on an ongoing basis.
Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed. Goodwill is not amortized, but is subject to
an annual impairment test.evaluations of its recoverability annually and upon the identification of a triggering event. The Company has a single reporting unit and all goodwill relates to that reporting unit.
The Company performs its annualan impairment analysis of goodwill impairment test on an annual basis in the fourth quarter of each fiscal year or more frequently if changes in circumstances or the occurrence of events suggest that an impairment exists. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded. A goodwill impairment loss was recorded during the first quarter of fiscal 2023. See Note 4 for further information. The Company did not recognize a goodwill impairment charge in the fiscal year ended February 29, 2024.
(l) Revenue and Deferred Revenue
Revenue Recognition
The Company generates revenue by providing customers access to its advocacy, expert medical opinion, and virtual primary care services, as well as through usage of its expert medical opinion and virtual primary care services. Contracts with customers that include expert medical opinion or virtual primary care services may contain either an access fee, a usage-based fee, or both.
In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, the Company recognizes revenue when control of the promised services is transferred to its customers, in an amount that reflects the consideration to which it expects to be entitled in exchange for those services. Accordingly, the Company determines revenue recognition through the following steps:
•identification of the contract, or contracts with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contracts; and
•recognition of revenue when, or as, the Company satisfies a performance obligation.
At contract inception, the Company assesses the type of services being provided and assesses the performance obligations in the contract. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on overall pricing objectives, taking into consideration market conditions and other factors, using an expected cost plus margin approach. The Company considered the variable consideration allocation exception in ASC 606 for its advocacy contracts and concluded that such exception for allocating variable consideration to distinct performance obligations or distinct time periods within a series was not met primarily due to variability in its per-member-per-month (PMPM) pricing.
The majority of fees earned by the Company are considered to be variable consideration due to both the uncertainty regarding the total number of members, consultations or visits for which the Company will invoice the customer, as well as the variable PMPM fees that are dependent upon the achievement of performance metrics and/or healthcare cost savings. Performance metrics are measured monthly, quarterly, or annually, and with respect to the achievement of healthcare cost savings targets, annually (typically measured on a calendar year basis). Accordingly, at contract inception and on an ongoing basis, as part of the Company’s estimate of the transaction price, the Company determines whether any such fees should be constrained, and the Company includes the estimated consideration for those fees to the extent that
it is probable that a significant reversal of cumulative revenue recognized will not occur (and is therefore considered to be unconstrained). Consideration related to the
implied fair valueCompany’s achievement of healthcare cost savings is typically constrained until the end of the
reporting unit’s goodwill is less than the carrying valueapplicable calendar year due to uncertainty related to factors outside of the
reporting unit’s goodwill.The Company’s annual goodwill impairment test resulted in 0 impairment charges incontrol. Consideration related to other performance metrics is typically not constrained based on the fiscal years ended February 28(29), 2021Company’s prior success of achieving such metrics. On an ongoing basis, the Company reassesses its estimates for variable consideration, which can change based upon its assessment of the achievement of performance metrics and 2020.
(l)Revenue and Deferred Revenue
healthcare cost savings, as well as the number of members, consultations, or visits.
Access Fees
The Company
earnsgenerates revenue
primarily from
itscontracts with customers
by providing personalized health guidance solutions to
members. Theaccess the Company’s
solutions allow its members to interact with its Accolade Health Assistantsadvocacy, expert medical opinion, and
clinicians through various means of communication, including telephony and secure messaging via its mobile application and member portal.virtual primary care services. The Company prices
its personalized health guidance solutionsaccess fees primarily using a recurring
per-member-per-monthPMPM fee,
(PMPM), typically with a portion of the fee calculated as the product of a fixed rate times the number of
eligible members (fixed PMPM fee), plus a variable PMPM fee calculated as the product of a variable rate times the number of
eligible members (variable PMPM fee). The fees associated with the variable PMPM fee can be earned through the achievement of performance metrics and/or the realization of healthcare cost savings resulting from
the utilizationuse of the Company’s services. Collectively, the fixed PMPM fee and variable PMPM fee are referred to as the total PMPM fee. The Company’s PMPM pricing varies by contract. In certain contracts, the maximum total PMPM fee varies during the contract term (total PMPM rate increases or decreases annually), while in other contracts, the total PMPM maximum fee is consistent over the term, yet the fixed and variable portions vary. For example, in certain contracts the fixed PMPM fee increases on an annual basis while the variable PMPM fee decreases on an annual basis, resulting in the same total PMPM fee throughout the term of the contract.
In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers,
The PMPM fees for expert medical opinion and virtual primary care services may be tiered based upon the Company recognizes revenue when control ofcustomer’s utilization.
Access to the
promisedCompany’s services
is transferred to its customers, in an amount that reflects the consideration to which it expects to be entitled in exchange for those services. Accordingly, the Company determines revenue recognition through the following steps: | ● | identification of the contract, or contracts, with a customer; |
| ● | identification of the performance obligations in the contract; |
| ● | determination of the transaction price; |
| ● | allocation of the transaction price to the performance obligations in the contract; and |
| ● | recognition of revenue when, or as, the Company satisfies a performance obligation |
At contract inception, the Company assesses the type of services being provided and assesses therepresent a single stand-ready performance obligations in the contract. The Company’s contracts for personalized health guidance solutions include stand ready services as discussed in the following sentence and reporting performance obligations.obligation. The Company’s contracts include stand readystand-ready services to provide eligible participants with access to the Company’s services and to perform an unspecified quantity of interactions with members during the contract period. Accordingly, the Company’s services are generally viewed as stand readystand-ready performance obligations comprised of a series of distinct daily services that are substantially the same and have the same pattern of transfer. For the stand readyadvocacy services, the Company satisfies these performance obligations over time and recognizes revenue related to its services as the services are provided using a measure of progress based upon the actual number of members eligible for the service during the respective period as a percentage of the estimated members expected to be eligible for the service over the term of the contract. The Company believes a measure of progress based on the number of members is the most appropriate measurement of control of the services being transferred to the customer as the amount of internal resources necessary to stand readystand-ready is directly correlated to the number of members who can use the services. In addition,
For the majority of expert medical opinion services, the Company satisfies these performance obligations over time and recognizes revenue in the amount of consideration for which it has the right to invoice using the as-invoiced practical expedient. Access fees also include access to the Company’s contracts may include additional add-onvirtual primary care services as separatesold directly to consumers on a monthly or yearly fixed fee subscription basis. For these services, the Company satisfies these stand-ready performance obligations over time and recognizes revenue ratably over the subscription period.
Usage-based fees
The Company also generates revenue when members use the expert medical opinion and virtual primary care services that are
also considered stand ready services. These add-on services havebilled based on usage. Many, but not all, contracts with customers contain usage-based fees. For any usage-based fees, the
same patternCompany satisfies these performance obligations over time and recognizes revenue in the amount of
transfer and revenue recognitionconsideration for which it has the right to invoice using the as-invoiced practical expedient for any consultations or visits sold to commercial customers as
discussed above.The Company’s personalized health guidance solutions also include a distinct performance obligationwell as any non-insured consultations or visits related to reporting, which is providedvirtual primary care services sold directly to the customer on a daily, monthly, and/consumers. For any consultations or quarterly basis and provides the customer with insights into various operational data and performance metrics. Although reporting is performed separately over regular intervals during the term of contract period,visits that are paid through insurance claims, the Company recognizes revenue as the consultations and visits occur in a similar pattern of recognitionan amount that reflects the consideration that is expected based upon then-current prices and using a similar measure of progress as its stand ready services because the reporting services are performed evenly throughout the term of the contract. Revenues related to reporting services were not material for the fiscal years ended February 28(29), 2021, 2020, and 2019.
Some contracts contain an additional performance obligation, pre-launch open enrollment, for which the performance obligation is satisfied before the launch of the Company’s primary service. For contracts that include pre-launch open enrollment support,historical experience from insurance payors. In prior periods, the Company recognizes related revenues over the pre-launch open enrollment period based on the number of eligible members.
The transaction price is allocatedreferred to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on overall pricing objectives, taking into consideration market conditions and other factors, using an expected cost plus margin approach. The Company considered the variable consideration allocation exception in ASC 606 and concluded that such exception for allocating variable consideration to distinct performance obligations or distinct time periods within a series was not met primarily due to variability in its PMPM pricing.
The majority ofusage-based fees earned by the Company are considered to be variable consideration due to both the uncertainty regarding the total number of members for which the Company will invoice the customer, as well as the variable PMPM fees that are dependent upon the achievement of performance metrics and/or healthcare cost savings. Performance metrics are measured monthly, quarterly, or annually, and with respect to the achievement of healthcare cost savings targets, annually (typically measured on a calendar year basis). Accordingly, at contract inception and on an ongoing basis, as part of the Company’s estimate of the transaction price, the Company determines whether any such fees should be constrained, and the Company includes the estimated consideration for those fees for which a significant reversal of cumulative revenue is not probable (and is therefore considered to be unconstrained). Consideration related to the Company’s achievement of healthcare cost savings is typically constrained until the end of the applicable calendar year due to uncertainty related to factors outside of the Company’s control. Consideration related to other performance metrics is typically not constrained based on the Company’s prior success of achieving such metrics. On an ongoing basis, the Company reassesses its estimates for variable consideration, which can change based upon its assessment of the achievement of performance metrics and healthcare cost savings, as well as the number of members.
"utilization-based fees." Deferred RevenueThe Company typically invoices its customers in advance of the services performed on a monthly or quarterly basis, and the amount invoiced typically represents the maximum total PMPM fee for the estimated number of eligible members over the applicable invoice period. The total PMPM fee covers both the stand ready services and reportingstand-ready services in the Company’s typical contracts (i.e., the performance obligations are not separately priced or invoiced). The maximum total PMPM fee that is invoiced includes both the fixed PMPM fee and the variable PMPM fee related to the performance metrics and/or the realization of healthcare cost savings that can be achieved during the period. These fees are classified as deferred revenue on the Company’s consolidated balance sheet until such time that revenue can be recognized. In the event the Company fails to satisfy any of the performance metrics and/or realization of healthcare cost savings that are billed in advance, the Company will refund the applicable portion of the fee or offset the amount against a future invoice. These amounts are included in Duedue to Customerscustomers on the Company’s consolidated balance sheet. The Company’s accounts receivable represent rights to consideration that are unconditional.
As of February 28, 2021, $211,458 of revenue is expected to be recognized from remaining performance obligations and is expected to be recognized as follows:
| | | |
Year Ending February 28(29), | | | |
2022 | | $ | 141,361 |
2023 | | | 49,988 |
2024 | | | 19,606 |
2025 | | | 503 |
Total | | $ | 211,458 |
The expected revenue includes variable fee estimates for the non-cancellable term of the Company’s contracts. The expected revenue does not include amounts of variable consideration that are constrained.
Significant changes to the contract liability balances during the fiscal years ended February 28(29), 2021 and 2020 were the result of revenue recognized as well as net cash received. During the fiscal years ended February 28(29), 2021 and 2020, significant changes in the deferred revenue balances were the result of recognized revenue of $28,919 and $22,407, respectively, that were included in deferred revenue. In addition, significant changes to the contract asset balances during the fiscal years ended February 28(29), 2021 and 2020 were the result of revenue recognized as well as transfers to accounts receivable. Contract assets relating to unbilled revenue are transferred to accounts receivable when the right to consideration becomes unconditional.
Revenue related to performance obligations satisfied in prior periods that was recognized during the years ended February28(29), 2021 and 2020 was $5,473 and $4,479, respectively. These changes in estimates were primarily due to the inclusion of consideration that was previously constrained related to the Company’s achievement of healthcare cost savings.
Cost to obtain and fulfill a contract
The Company capitalizes sales commissions paid to internal sales personnel that are both incremental to the acquisition of customer contracts and recoverable. These costs are recorded as deferred contract acquisition costs in the accompanying consolidated balance sheets. The Company capitalized commission costs of $3,501 and $1,495 for the years ended February 28(29), 2021 and 2020, respectively. The Company defers costs based on its sales compensation plans only if the commissions are incremental and would not have occurred absent the customer contract. Payments to direct sales personnel are typically made in 2 increments as follows: 75% upon signature of the contract, with the remaining 25% upon customer launch. The Company does not pay commissions on contract renewals.
Deferred commissions paid on the initial acquisition of a contract are amortized ratably over an estimated period of benefit of five years, which is the estimated customer life. The Company determined the period of amortization for deferred commissions by taking into consideration current customer contract terms, historical customer retention, and other factors. Amortization is included in sales and marketing expenses in the accompanying consolidated statements of operations and totaled $1,106, $665, and $377 for the fiscal years ended February 28(29), 2021, 2020, and 2019, respectively. The Company periodically reviews deferred contract acquisition costs to determine whether events or
changes in circumstances have occurred that could impact the estimated period of benefit. There were 0 impairment losses recorded during the periods presented.
For certain customer contracts, the Company may incur direct and incremental costs related to customer set-up and implementation. The Company recorded deferred implementation costs of $1,189 and $904 for the fiscal years ended February 28(29), 2021 and 2020, respectively. These implementation costs are deferred and amortized over the expected useful life of the Company’s customers, which is five years. Amortization is included in cost of revenues in the Company’s consolidated statements of operations and totaled $551, $320, and $417 for the fiscal years ended February 28(29), 2021, 2020, and 2019, respectively.
(m)Concentration of Credit Risk
Financial instruments that potentially subject
usthe Company to credit risk consist principally of cash,
cash equivalents, and
cash equivalents.marketable securities. The Company maintains its cash primarily with domestic financial institutions of high credit quality, which may exceed federal deposit insurance corporation limits. The Company invests its cash equivalents in highly rated money market
funds. The Company has not experienced any losses in such accounts.funds and U.S. treasury bills with original maturities of three months or less. Marketable securities are comprised of U.S. government debt, commercial paper, and U.S. agency debt with original maturities greater than three months. The Company believes it is not exposed to any significant credit risk on cash,
and cash equivalents, and
performmarketable securities and performs periodic evaluations of the credit standing of such institutions.
Significant customers are those which represent 10% or more
(n)
Stock-Based CompensationThe Company recognizes compensation cost for awards to employees, nonemployee directors, consultants, and advisors based on the grant date fair value of stock-based awards on a straight-line basis over the period during which an award holder is required to provide service in exchange for the award. The Company estimates the fair value of each employee stock option on the date of grant using the Black-Scholes option pricing model.
(o)
Cost of Revenue, excluding Depreciation and AmortizationCost of revenue, excluding depreciation and amortization, consists primarily of personnel costs including salaries, wages, overtime, bonuses, stock-based compensation expense, and benefits, as well as software and tools for telephony, business analytics, allocated overhead costs, and other expenses related to delivery and implementation of the Company’s personalized technology-enabled solutions.
(p)
Product and TechnologyProduct and technology expenses consist of personnel expenses, including salaries, bonuses, stock-based compensation expense, and benefits for employees and contractors for 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 the Company’s solutions to customers.
The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.
In evaluating the ability to realize deferred tax assets, the Company relies on taxable income in prior carryback years, the future reversals of existing taxable temporary differences, future taxable income, and tax planning strategies.
Consistent with the provisions of FASB ASC Topic 740, Income Taxes, the Company does not recognize a tax benefit for a tax position in its financial statements unless it has concluded that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position; and that the amount of tax benefit recognized is measured at the largest amount of the tax benefit that, in the Company’s judgment, is greater than 50% likely to be realized. U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing tax returns to determine whether the tax positions will more likely than not be sustained by the Company upon challenge by the applicable tax authority. Tax positions not deemed to meet the “more likely than not” threshold and that would result in a tax benefit or expense to the Company would be recorded as a tax benefit or expense in the current period. For the fiscal years ended February 28(29), 2021, 2020, and 2019, the Company did not recognize any amounts for unrecognized tax benefits. A reconciliation is not provided herein, as the beginning and ending amounts of unrecognized benefits are $0, with 0no additions, reductions, or settlements during the year. Tax years 2010 through present remain subject to examination by the U.S. and state taxing authorities.
The Company’s chief operating decision maker, its Chief Executive Officer, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating its financial performance. Accordingly, the Company has determined that it operates in a single reportable
operating segment.
As of February 28(29),
2021, 2020,2024, 2023, and
2019,2022, substantially all of Accolade’s long-lived assets were located in the United States, and all revenue was earned in the United States.
(s)
Deferred Offering Costs Leases
Whenever the Company enters into a new arrangement, it determines, at the inception date, whether the arrangement is or contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the right to direct the use of, and obtain substantially all the economic benefits from, the use of the underlying asset.
For each lease, the Company then determines the lease term, the present value of lease payments, and the classification of the lease as either an operating or finance lease. The Company capitalizeshas elected, for all of its leases, to not separate lease and non-lease components. The lease term is the period of the lease not cancellable by the Company, together with periods covered by: (i) renewal options the Company is reasonably certain legal, accountingto exercise, (ii) termination options the Company is reasonably certain not to exercise, and other third-party fees(iii) renewal or termination options that are directly associated with in-process equity financing as deferred offering costs until such financings are consummated. After consummationcontrolled by the lessor.
The present value of lease payments is calculated based on:
(1)Lease payments – Lease payments included in the measurement of the equity financing,lease asset or liability comprise the following: fixed payments (including in-substance fixed payments), and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.
(2)Discount rate – the discount rate is determined based on information available to the Company upon the commencement of the lease. Lessees are required to use the rate implicit in the lease whenever such rate is readily available; however, as the implicit rate in the Company’s leases is generally not readily determinable, the Company generally uses the incremental borrowing rate it would have to pay to borrow an amount equal to the lease payments, on a collateralized basis, over a timeframe similar to the lease term.
In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors, including the lessee’s and lessor’s rights, obligations, and economic incentives over the term of the lease.
The Company does not recognize leases with an initial term of 12 months or less on its consolidated balance sheets and recognizes these
payments in the consolidated statements of operations on a straight-line basis over the lease term. Certain leases contain variable payments which are based on usage or operating costs,
such as utilities and maintenance. These payments are not included in the measurement of the lease liability or corresponding right-of-use asset due to the uncertainty of the payment amount and are recorded
in stockholders’ deficit as
a reduction of additional paid-in-capital generated as a result of the offering. Should the equity financing no longer be considered probable of being consummated, all deferred offering costs would be charged to operating expenseslease expense in the
statement of operations. Deferred offering costs were $0 and $3,042 at February 28(29), 2021 and 2020, respectively, and are included within prepaid and other current assets on the accompanying consolidated balance sheet.period incurred.
(t)
New Recently Issued Accounting Pronouncements Not Yet AdoptedLeases:
In February 2016,November 2023, the Financial Accounting Standards Board (FASB) issued Accounting StandardStandards Update (ASU) 2016-02, Leases2023-07, Segment Reporting (Topic 842)280). In July 2018, the FASB issued ASU No. 2018-10, Codification ImprovementsThe new standard requires enhanced disclosures about significant segment expenses and other segment items and requires companies to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which affect certain aspectsdisclose all annual disclosures about segments in interim periods. The new standard also permits companies to disclose more than one measure of segment profit or loss, requires disclosure of the previously issued guidance. In December 2018, the FASB issued ASU No. 2018-20,
Narrow-Scope Improvements for Lessor, Leases (Topic 842), which provides guidance on sales taxtitle and other taxes collected from lessees. In March 2019, the FASB issued ASU No. 2019-01, Codification Improvements to Topic 842, Leases, which affect certain aspectsposition of the previously issued guidance. Amendments include an additional transition method that allows entitiesChief Operating Decision Maker, and requires companies with a single reportable segment to apply theprovide all disclosures required by Topic 280. The new standard on the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings, as well as a new practical expedient for lessors. The guidance (collectively ASC 842) will require lessees to put all leases on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements in a manner similar to current practice. ASC 842 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASC 842 is effective for the Company for fiscal year ended February 28,years beginning after December 15, 2023, and interim periods within the fiscal year ending February 29,years beginning after December 15, 2024. Early adoption is permitted.permitted and companies are required to apply the ASU retrospectively to all periods presented. The Company is currently evaluating the accounting, transitionimpact that the adoption of this standard will have on its financial statements and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
Credit Losses:related disclosures.
In
June 2016,December 2023, the FASB issued ASU
No. 2016-13 Financial Instruments — Credit Losses2023-09, Income Taxes (Topic 326)740): MeasurementImprovements to Income Tax Disclosures, which requires expanding disclosures of Credit Losses on Financial Instruments. ASU 2016-13 introduces the current expected credit loss (CECL) model, which will require entities to estimate an
expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings. ASU 2016-13 is effective for the Company for fiscal year ended February 28, 2024. Early adoption is permitted.entity's income tax rate reconciliation and income taxes paid. The
Company is evaluating the accounting, transition and disclosure requirements of thenew standard
and cannot currently estimate the financial statement impact of adoption.Goodwill: In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the impairment test. Under the new guidance, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The ASU is effective for annual and interim goodwill impairment tests performed in fiscal years endingperiods beginning after December 15, 2021. The Company adopted this guidance2024 and implemented its provisions for the annual goodwill impairment testing for the year ended February 28, 2021. The adoption of this guidance did not have a significant impact on the Company’s financial position, results of operations, or cash flows.
Internal Use Software: In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use-software. This ASU is effective for the fiscal year ending February 28, 2022, and interim periods within the fiscal year ending February 28, 2023. Earlyearly adoption is permitted. The Company is evaluating the accounting, transition and disclosure requirements of theUpon adoption, this standard and cannot currently estimate the financial statement impact of adoption.
In August 2020, the FASB issued ASU No. 2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contractswill result in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if converted method. The Company early adopted the ASU effective March 1, 2021 using the modified retrospective method of adoption. The Company will apply this ASU to the convertible debt transaction entered into in March 2021 (see Note 16).
(3) Acquisition of MD Insider (MDI)
On July 31, 2019, the Company acquired the outstanding equity interests of MDI. Based in California, MDI is a provider of machine learning-enabled physician performance transparency. The following table summarizes the purchase consideration paid to MDI:
| | | |
Consideration Paid | | | |
Cash consideration | | $ | 324 |
Fair value of equity issued | | | 5,114 |
Fair value of contingent consideration | | | 1,050 |
Total consideration paid | | $ | 6,488 |
The aggregate purchase price consideration of $6,488 was paid primarily through the issuance of up to 462,691 shares of the Company’s common stock, of which 387,132 were issued as of February 28, 2021, with the remaining shares issuable subject to certain working capital and indemnity adjustments (if applicable). Shareholders were eligible to receive 100,607 additional shares of the Company’s common stock upon the completion of a platform solution, as defined in the purchase agreement (MDI Earnout). The deadline to complete the cost transparency platform solution in order to qualify for the MDI Earnout was initially March 1, 2020, and was subsequently extended to July 1, 2020, by which time it had been earned. During August 2020, the Company issued 96,487 shares of common stock in connection with the MDI Earnout (which shares arerequired disclosures being included in the 387,132 shares issued as of February 28, 2021). The estimated fair value of the Company’s common stock and MDI Earnout was $5,114 and $1,050, respectively. The MDI Earnout was accounted for as an equity classified instrument and was not subject to remeasurement in subsequent periods.
The Company incurred a total of $567 in acquisition related costs that were expensed immediately and recorded in the Company’s consolidated statement of operations for the fiscal year ended February 29, 2020. The acquisition was not significant to the Company’sCompany's consolidated financial statements. The resultsCompany is currently evaluating the impact that the adoption of MDI’s operations since July 31, 2019this standard will have been included in the Company’s consolidatedon its financial statements. statements and related disclosures.
(3) Revenue
The following table summarizespresents the estimated fair valuesCompany’s revenues disaggregated by revenue source:
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Access fees | $ | 300,489 | | | $ | 284,144 | | | $ | 264,612 | |
| Usage-based fees | 113,803 | | | 78,998 | | | 45,409 | |
| Total | $ | 414,292 | | | $ | 363,142 | | | $ | 310,021 | |
As of February 29, 2024, revenue is expected to be recognized from remaining performance obligations as follows:
| | | | | |
| Year Ending February 28(29), | |
| 2025 | $ | 155,157 | |
| 2026 | 49,937 | |
| 2027 | 12,154 | |
| 2028 | 652 | |
| 2029 | 274 | |
| Total | $ | 218,174 | |
The expected revenue includes variable fee estimates for access fee revenue during the non-cancellable term of the
assets acquiredCompany’s contracts. The expected revenue does not include amounts of variable consideration that are constrained, direct-to-consumer revenues, and
liabilities assumed at the date of acquisition:
| | | |
Assets acquired: | | | |
Cash and cash equivalents | | $ | 118 |
Accounts receivable | | | 98 |
Prepaid expenses | | | 5 |
Goodwill | | | 4,013 |
Intangible assets | | | 2,900 |
Other assets | | | 17 |
Total assets acquired | | $ | 7,151 |
Liabilities assumed: | | | |
Accounts payable | | $ | 321 |
Accrued expenses and other current liabilities | | | 342 |
Total liabilities assumed | | $ | 663 |
Net assets acquired | | $ | 6,488 |
The purchase price was allocatedusage-based revenues.
Significant changes to the tangiblecontract liability balances during the fiscal years ended February 28(29), 2024 and identifiable intangible assets acquired2023 were the result of revenue recognized and liabilities assumed based on their estimated fair values as of the acquisition date. The identifiable intangible asset principally relates to technology and is subject to amortization on a straight-line basis over two years.net cash received. During the fiscal years ended February 28(29), 20212024 and 2020,2023, changes in the deferred revenue balances were the result of recognized revenue of $34,941 and $30,567, respectively, that were included in deferred revenue. In addition, significant changes to the contract asset balances during the fiscal years ended February 28(29), 2024 and 2023 were the result of revenue recognized and transfers to accounts receivable. Contract assets relating to unbilled revenue are transferred to accounts receivable when the right to consideration becomes unconditional.
Revenue related to performance obligations satisfied in prior periods that was recognized during the years ended February 28(29), 2024 and 2023 was $5,142 and $3,768, respectively. These changes in amounts were primarily due to the inclusion of consideration that was previously constrained related to the Company’s achievement of healthcare cost savings.
Cost to obtain and fulfill a contract
The Company capitalizes sales commissions paid to internal sales personnel that are both incremental to the acquisition of customer contracts and recoverable. These costs are recorded as deferred contract acquisition costs in the accompanying consolidated balance sheets. The Company capitalized commission costs of $3,913 and $6,016 for the years ended February 28(29), 2024 and 2023, respectively. The Company defers costs based on its sales compensation plans only if the commissions are incremental and would not have occurred absent the customer contract. Payments to direct sales personnel are typically made upon signature of the contract. The Company does not pay commissions on contract renewals.
Deferred commissions paid on the initial acquisition of a contract are amortized ratably over an estimated period of benefit of five years, which is the estimated customer life. The Company determined the period of amortization for deferred commissions by taking into consideration current customer contract terms, historical customer retention, and other factors. Amortization is included in sales and marketing expenses in the accompanying consolidated statements of operations and totaled $3,950, $2,695, and $2,080 for the fiscal years ended February 28(29), 2024, 2023, and 2022, respectively. The Company periodically reviews deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the estimated period of benefit. There were no impairment losses recorded during the periods presented.
For certain customer contracts, the Company may incur direct and incremental costs related to customer set-up and implementation. The Company recorded amortization expensedeferred implementation costs of $1,450$1,645 and $846,$1,303 for the fiscal years ended February 28(29), 2024 and 2023, respectively. These implementation costs are deferred and amortized over the expected useful life of the Company’s customers, which is five years. Amortization is included in cost of revenues in the Company’s consolidated statements of operations and totaled $1,486, $1,002, and $865 for the fiscal years ended February 28(29), 2024, 2023, and 2022, respectively.
(4) Goodwill and Intangible Assets
The remainingchanges in the carrying amount of goodwill are as follows:
| | | | | |
| Balance, February 28, 2022 | $ | 577,896 | |
| Impairment during the year ended February 28, 2023 | (299,705) | |
| Balance, February 28(29), 2023 and 2024 | $ | 278,191 | |
Annually, and upon the identification of a triggering event, management is required to perform an evaluation of the recoverability of goodwill. Triggering events potentially warranting an interim goodwill impairment test include, among other factors, declines in historical or projected revenue, operating income or cash flows, and sustained declines in the Company’s stock price or market capitalization, considered both in absolute terms and relative to peers. During the three months ended November 30, 2023, the Company determined that the decline in the price of its stock, which resulted in a corresponding decline in market capitalization, constituted a triggering event. The Company evaluated whether changes in the Company's market capitalization indicated that the carrying value of goodwill was impaired. As a result of this evaluation, the Company determined that there was no impairment as of November 30, 2023. The Company also performed its annual evaluation of the recoverability of goodwill during the fourth quarter and concluded that there was no impairment.
No impairments were recorded to goodwill or intangible
asset balance will be fully amortized inassets during the year ended February 29, 2024. During the year ended February 28,
2023, as a result of sustained decreases in the Company’s stock price and market capitalization, the Company conducted an impairment test of its goodwill and intangible assets as of May 31, 2022.
As a result of this testing, the Company recorded a non-cash goodwill impairment charge of $299,705 (equivalent to $4.20 per basic and diluted share for the year ended February 28, 2023) during the first quarter of fiscal 2023.
The Company’s May 31, 2022 goodwill impairment test reflected an allocation of 70% and 30% between income and market-based approaches, respectively. The Company believes the 70% weighting to the income-based approach is appropriate as it more directly reflects its future growth and profitability expectations. Significant inputs into the valuation models included the discount rate, revenue market multiples, and estimated future cash flows. Management 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.
While management cannot predict if or when additional future goodwill impairments may occur, additional goodwill impairments could have material adverse effects on the Company’s operating income, net assets, and/or the Company’s cost of, or access to, capital.
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of February 29, 2024 | | As of February 28, 2023 |
| Weighted Avg. Remaining Useful Life (years) | | Gross Value | | Accumulated Amortization | | Net Carrying Value | | Gross Value | | Accumulated Amortization | | Net Carrying Value |
| Customer relationships | 17.0 | | $ | 124,050 | | $ | (21,925) | | | $ | 102,125 | | $ | 124,050 | | $ | (15,353) | | | $ | 108,697 |
| Technology | 2.0 | | 111,526 | | (68,094) | | | 43,432 | | 111,526 | | (45,046) | | | 66,480 |
| Supplier-based network | 2.0 | | 25,000 | | (15,000) | | | 10,000 | | 25,000 | | (10,000) | | | 15,000 |
| Trade name | 7.2 | | 13,700 | | (3,850) | | | 9,850 | | 13,700 | | (2,483) | | | 11,217 |
| Non-compete agreement | 0.0 | | 9,300 | | (9,300) | | | — | | 9,300 | | (7,492) | | | 1,808 |
| | | $ | 283,576 | | $ | (118,169) | | | $ | 165,407 | | $ | 283,576 | | $ | (80,374) | | | $ | 203,202 |
Amortization expense for intangible assetassets was valued using$37,795, $41,488, and $36,590 during the estimated replacement cost method. This method requires several judgmentsyears ended February 28(29), 2024, 2023, and assumptions to determine2022, respectively.
Amortization expense over the fair valueremaining life of the intangible asset, including expected profits and opportunity costs. Goodwill related to the acquisition is attributable to the workforce of MDIassets will be recognized as well as the expected future growth into new and existing markets and is not deductible for income tax purposes.follows:
| | | | | | | | |
| Year Ending February 28(29), | | |
| 2025 | | $ | 34,143 | |
| 2026 | | 32,125 | |
| 2027 | | 9,403 | |
| 2028 | | 7,370 | |
| 2029 | | 7,370 | |
| Thereafter | | 74,996 | |
| | $ | 165,407 | |
(4)(5) Property and Equipment
Property and equipment consisted of the following:
| | | | | | |
| | February 28(29), |
| | 2021 | | 2020 |
Capitalized software development costs | | $ | 32,292 | | $ | 35,867 |
Computer software | | | 5,688 | | | 8,829 |
Computer equipment | | | 8,386 | | | 9,383 |
Office equipment, furniture, and leasehold improvements | | | 6,829 | | | 8,903 |
Office equipment and furniture under capital leases | | | 312 | | | 1,251 |
| | | 53,507 | | | 64,233 |
Less accumulated depreciation | | | (44,280) | | | (50,608) |
Total | | $ | 9,227 | | $ | 13,625 |
| | | | | | | | | | | |
| February 28(29), |
| 2024 | | 2023 |
| Capitalized software development costs | $ | 46,032 | | | $ | 39,097 | |
| Computer software | 6,077 | | | 6,026 | |
| Computer equipment | 14,200 | | | 12,363 | |
| Office equipment, furniture, and leasehold improvements | 11,728 | | | 12,120 | |
| 78,037 | | | 69,606 | |
| Less accumulated depreciation | (58,897) | | | (54,843) | |
| Total | $ | 19,140 | | | $ | 14,763 | |
Depreciation and amortization expense related to property and equipment was $6,762, $7,670,$7,369, $4,889, and $9,391 and$6,018 for the fiscal years ended February 28(29), 2024, 2023, and 2022, respectively.
(6) Leases
The Company adopted Accounting Standards Update 2016-02, Leases (Topic 842) on February 28, 2022, with an effective date of adoption of March 1, 2021, 2020,using the modified retrospective approach. The Company has operating leases for offices and 2019, respectively. Duringcertain equipment under non-cancelable leases in the fiscal yearUnited States and Czech Republic. These leases have
remaining terms of up to 7 years. The Company had no finance leases during the years ended February 28, 2021, the Company wrote off $3,95028(29), 2024, 2023, and 2022.
The components of
fully-depreciated capitalized software, $3,236 of fully-depreciated computer software, $2,206 of fully-depreciated computer equipment, $2,760 of fully-depreciated office equipment, furniture, and leasehold improvements, and $939 of fully-depreciated office equipment and furniture under capital leases.During the fiscal year ended February 29, 2020, the Company accelerated depreciationoperating lease cost recorded in the amountconsolidated statements of $1,634operations were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Operating lease cost | $ | 7,285 | | | $ | 7,575 | | | $ | 7,169 | |
| Variable lease cost | 2,253 | | | 2,042 | | | 1,691 | |
| Short-term lease cost | 465 | | | — | | | — | |
| Less: sublease income | (52) | | | — | | | — | |
| Total lease cost | $ | 9,951 | | | $ | 9,617 | | | $ | 8,860 | |
The following table sets forth the cash flows related to the retirementCompany’s leases:
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| Cash Flow Information | 2024 | | 2023 | | 2022 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 9,293 | | $ | 8,569 | | $ | 8,310 |
| Right-of-use assets obtained in exchange for lease obligations | | | | | |
| Operating leases | $ | 5,841 | | $ | 2,170 | | $ | 3,564 |
The following table sets forth the weighted-average remaining term and weighted-average discount rate for the Company’s leases as of software. Also during 2020,February 29, 2024:
| | | | | |
| Supplemental Information | February 29, 2024 |
| Weighted-average remaining lease term (years) | 5.0 |
| Weighted-average discount rate | 5.8 | % |
As of February 29, 2024, the Company wrote off $680future minimum lease payments under non-cancelable operating leases were as follows:
| | | | | | | | |
| Year Ending February 28(29), | | |
| 2025 | | $ | 8,580 | |
| 2026 | | 8,582 | |
| 2027 | | 7,361 | |
| 2028 | | 4,567 | |
| 2029 | | 3,730 | |
| Thereafter | | 4,925 | |
| Total lease payments | | 37,745 | |
| Less: Imputed interest | | (5,017) | |
| Total lease liabilities | | $ | 32,728 | |
(7) Accrued Expenses and
Accrued CompensationOther Current Liabilities
Accrued expenses
and other current liabilities consisted of the following:
| | | | | | | | | | | |
| February 28(29), |
| 2024 | | 2023 |
| Current portion of loans payable, net of unamortized issuance cost | $ | 438 | | | $ | 596 | |
| Professional and consulting fees | 2,715 | | | $ | 1,992 | |
| Taxes | 1,732 | | | $ | 528 | |
| Marketing | 544 | | | $ | 347 | |
Accrued litigation(1) | — | | | $ | 3,700 | |
| Software, hardware, and communication costs | 1,204 | | | $ | 464 | |
| Other | 4,103 | | | $ | 4,117 | |
| Total | $ | 10,736 | | | $ | 11,744 | |
(1) | | | | | | |
| | February 28(29), |
| | 2021 | | 2020 |
Accrued professional and consulting fees | | $ | 2,202 | | $ | 3,375 |
Accrued software, hardware, and communication costs | | | 400 | | | 228 |
Accrued litigation matter | | | — | | | 1,100 |
Accrued taxes | | | 1,074 | | | 512 |
Accrued other | | | 1,169 | | | 1,365 |
Total | | $ | 4,845 | | $ | 6,580 |
See note 13Note 14 for discussion regarding accrued litigation matter.
Accrued compensation at February 28(29), 2021 and 2020 includes $37 and $4,905, respectively, of payroll withholding taxes payable related to the exercise of nonqualified stock options during the preceding fiscal year. The Company has corresponding receivables for the same amounts, which are classified in prepaid and other current assets in the Company’s consolidated balance sheets.
Included in accrued compensation at February 29, 2020 is matters.$5,884 of accrued bonus expense related to bonuses earned during the fiscal year ended February 29, 2020. This bonus amount was settled in June 2020 through the issuance of fully vested stock options exercisable into shares of the Company’s common stock. The Company determined the amount of stock options to be issued by taking the cash bonus earned divided by the fair value of the Company’s common stock at May 31, 2020, which was $17.50. The Company then used the Black Scholes methodology to determine the fair value of the stock options granted, which resulted in a grant-date fair value of $10.88 per stock option. The fair value of the stock options issued was determined using an estimated fair value of common stock based upon a third party valuation, expected volatility of 78.4%, expected term of 5.0 years, and risk-free interest rate of 0.3%.
(6)(8) Fair Value Measurements
The following table sets forth the fair value of the Company’s financial assets
and within the fair value hierarchy:
| | | | | | | | | | | | |
| | February 28, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Fair Value |
Assets | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | |
Money market funds | | $ | 283,245 | | $ | — | | $ | — | | $ | 283,245 |
| | | | | | | | | | | | |
| | February 29, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Fair Value |
Assets | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | |
Money market funds | | $ | 21,332 | | $ | — | | $ | — | | $ | 21,332 |
Certificates of deposit | | $ | 5,000 | | $ | — | | $ | — | | $ | 5,000 |
| | | | | | | | | | | | | | | | | | | | | | | |
| February 29, 2024 |
| Level 1 | | Level 2 | | Level 3 | | Fair Value |
| Assets | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 34,351 | | $ | — | | $ | — | | $ | 34,351 |
| Marketable securities: | | | | | | | |
| United States government debt | $ | 24,431 | | $ | — | | $ | — | | $ | 24,431 |
| Commercial paper | $ | — | | $ | 17,134 | | $ | — | | $ | 17,134 |
| United States agency debt | $ | — | | $ | 9,750 | | $ | — | | $ | 9,750 |
| | | | | | | | | | | | | | | | | | | | | | | |
| February 28, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Fair Value |
| Assets | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 99,861 | | $ | — | | $ | — | | $ | 99,861 |
| United States treasury bills | $ | 39,995 | | $ | — | | $ | — | | $ | 39,995 |
The carryingestimated fair value of the convertible senior notes (Note 9) was $180,841 as of February 29, 2024, based on quoted market prices of the Company’s debt approximatesinstrument in markets that are not active and are classified as Level 2 within the fair value basedhierarchy. Considerable judgment is necessary to interpret the market data and develop an estimate of the fair value. Accordingly, the estimate is not necessarily indicative of the amount at which this instrument could be purchased, sold, or settled.
(9) Debt
(a) Convertible Senior Notes and Capped Call Options
Convertible Senior Notes
In March 2021, the Company completed a private convertible note offering, pursuant to an Indenture dated as of March 29, 2021 between the Company and U.S. Bank National Association, as trustee (the Indenture), and issued $287,500 of 0.50% Convertible Senior Notes due 2026 (the Notes) that mature in April 2026, unless earlier converted, redeemed or
repurchased. The Notes bear interest at a rate of 0.50% per annum, payable semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021 and are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. The Company incurred costs of $8,428 in connection with the Notes and the capped calls, of which $8,368 was allocated to the Notes and recorded as a debt discount and $60 was allocated to the capped call and recorded directly to additional paid-in capital. Net proceeds from the issuance of Notes were $279,132, and the Company used $34,443 of the net proceeds to pay the costs of the capped call transactions described below.
Pursuant to the terms of the Notes, a holder may convert all or any portion of its Notes at its option at any time prior to October 1, 2025 and only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on August 31, 2021, if the last reported sale price of the Company’s common stock for at least 20 trading days during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if the Company calls such Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events. On or after October 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances.
The initial conversion rate is 19.8088 shares of the Company’s common stock per $1 principal amount of Notes (equivalent to an initial conversion price of approximately $50.48 per share of the Company’s common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event or convert its Notes called (or deemed called) for redemption in connection with such notice of redemption, as the case may be.
The Company was not able to redeem the Notes prior to April 6, 2024. On or after April 6, 2024, the Company may redeem for cash all or any portion of the Notes (subject to the partial redemption limitation set forth in the Indenture), at its option, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest rates availableto, but excluding, the redemption date. No sinking fund is provided for the Notes.
Upon a fundamental change (as defined in the Indenture), holders may, subject to certain exceptions, require the Company to purchase their Notes in whole or in part for cash at a price equal to the principal amount of the Notes to be purchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date (as defined in the Indenture). In addition, upon a Make-Whole Fundamental Change (as defined in the Indenture), the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such Make-Whole Fundamental Change.
Under the Indenture, the Notes may be accelerated upon the occurrence of certain customary events of default. If certain bankruptcy and insolvency-related events of default with respect to the Company occur, the principal of, and accrued and unpaid interest on, all of the then outstanding Notes shall automatically become due and payable. The Indenture provides that the sole remedy for an event of default relating to certain failures by the Company to comply with reporting covenants, including timely filings, consists exclusively of the right to receive additional interest on the Notes.
As of February 29, 2024, none of the conditions of the Notes to early convert had been met. The Notes are the Company’s senior, unsecured obligations that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated to the Notes, rank equally in right of payment with the Company’s future senior unsecured indebtedness that is not so subordinated, effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables and preferred equity (to the extent the Company is not a holder thereof)) of the Company’s subsidiaries. The Notes contain both affirmative and negative covenants. As of February 29, 2024, the Company was in compliance with all covenants in the Notes.
The Company concluded the Notes are accounted for as debt, with similar terms atno bifurcation of the embedded conversion feature. Transaction costs were recorded as a direct deduction from the related debt liability in the consolidated balance sheet and are amortized to interest expense using the effective interest method over the term of the Notes. The effective interest rate for the Notes is 1.1%.
Partial Repurchase and Cancellation of Convertible Notes
During the year ended February
29, 2020. The Company had 0 outstanding debt at February 28, 2021.(7) Debt Facility
(a)Term Loan and Revolving Credit Facility
Term Loan
On January 30, 2017,2024, the Company entered into a $20,000 term loan facility (the Term Loan). Under the termsseparate, privately negotiated transactions with certain holders of the Term Loan, the Company was permittedNotes to borrow up to anrepurchase $76,459 aggregate principal amount of $20,000, with the total amountNotes for an aggregate cash repurchase price of available borrowings subject to certain monthly recurring revenue calculations.
Interest on$66,163, including third-party costs of $355 (the Repurchases). Following the outstanding balance was payable monthly at a rate of 11.75%. Principal payments were scheduled to be made monthly beginning January 31, 2019, in equal installments calculated as 1/24thRepurchases, the Company cancelled the repurchased Notes. The repurchase and cancellation of the outstanding balance on December 31, 2018. However, the Company had the ability to extend the interest only period for an additional twelve months, subject to an additional fee and other conditions, which would extend the maturity date from December 31, 2020 to December 31, 2021. The Company committed to extend this interest only period, and the maturity date was extended to December 31, 2021. As a result, principal payments were scheduled to start January 2020. During July 2019, an amendment (Amendment 1) was entered into which eliminated monthly payments, with principal to be paid in full in December 2022.
Amendment 1 resulted in an additional $2,000 of availability, increasing total availability to $22,000. Pursuant to Amendment 1, interest on the outstanding balance was payable monthly at a rate of 10.00% per annum and interest payable-in-kind accrued at a rate of 2.00% per annum, compounded monthly, and was due at maturity. Additionally, the Company was required to pay an exit fee equal to 1% of the aggregate principal borrowings at the time of maturity (end of term charge).
During May 2020, the Company entered into an additional amendment (Amendment 2) to the Term Loan agreement, which resulted in an additional $2,500 of availability, increasing total availability to $24,500. Pursuant to Amendment 2, interest on the outstanding balance was payable monthly at a rate of 8.00% per annum and interest payable-in-kind accrued at a rate of 4.50% per annum, compounded monthly, and was due at maturity. Additionally, the Company was required to pay a prepayment fee equal to 2% of the aggregate principal borrowings if prepayment occurred on or prior to December 31, 2020, and 0.50% if prepayment occurred after December 31, 2020 but on or prior to maturity (prepayment fee), plus the end of term charge. Amendment 2Notes was accounted for as a debt modification,extinguishment and
all new lender fees were recorded as additional debt discount the resulting gain of $9,268, net of related unamortized issuance costs of $1,078 and third-party costs incurred in connection with the amendment were expensed as incurred.
During July 2020, the Company terminated the Term Loan. The Company repaid the outstanding balance of $24,500 in its entirety, along with accrued interest in kind of $600,$50 that were written-off, has been recorded within other income (expense) on the endcondensed consolidated statement of term chargeoperations. After the cancellation, $211,041 aggregate principal amount of $251, and the prepayment feeNotes remained outstanding.
The net carrying amount of
$502.During the fiscalNotes was as follows:
| | | | | | | | | | | |
| February 28(29), |
| 2024 | | 2023 |
| Principal | $ | 211,041 | | | $ | 287,500 | |
| Unamortized issuance costs | (2,559) | | | (5,177) | |
| Net carrying amount | $ | 208,482 | | | $ | 282,323 | |
For the years ended February 28(29), 2021, 2020,2024, 2023, and 2019,2022, the Company recorded interest expense of $2,837, $2,858,$2,869, $3,094, and $2,844,$2,857 respectively, related to the Term Loan of which $1,045, $280,$1,540, $1,657, and $291,$1,534, respectively, related towas associated with the amortization of the debt discount. For
Capped Call
Concurrent with the year ended February 28, 2021, amortizationpricing of the debt discount included $502 relatedNotes, the Company entered into privately negotiated capped call transactions with two of the initial purchasers and/or their respective affiliates and another financial institution (the Option Counterparties). The capped call transactions are expected to offset the potential dilution to Accolade’s common stock as a result of any conversion of Notes, with such offset subject to a cap initially equal to $76.20 (which represented a premium of 100% over the last reported sale price of the Company’s common stock on March 24, 2021). The capped call transactions are separate transactions, entered into by the Company with the Option Counterparties, and are not part of the terms of the Notes.
As the capped call options are both legally detachable and separately exercisable from the Notes, the Company accounts for the capped call options separately from the Notes. The capped call options are indexed to the
prepayment feeCompany’s own common stock and
$251 relatedclassified in stockholders’ equity. As such, the premiums paid for the capped call options were included as a net reduction to
additional paid-in capital in the
end of term charge. The debt discount related to the Term Loan has been fully amortized at February 28, 2021.Long-term debt consisted of the following at February 29, 2020:
| | | |
| | February 29, |
| | 2020 |
Principal outstanding | | $ | 22,000 |
Interest payable‑in‑kind | | | 273 |
Unamortized issuance costs | | | (1,129) |
Total | | $ | 21,144 |
consolidated balance sheet.
(b) Revolving Credit Facility
The 2017 Revolver was a 24-month senior secured $20,000 revolving line of credit, with borrowing availability subject to certain monthly recurring revenue calculations. On April 20, 2018, the Company amended the 2017 Revolver, which modified the revenue covenants, required the Company to exercise the extension of the interest only payment period of the Term Loan through December 2019 and in the event the Company raised proceeds in the aggregate of at least $45,000 as part of a financing event, extended the term of the 2017 Revolver to January 30, 2020. This financing event occurred, and, accordingly, the term of the 2017 Revolver was extended.
Interest on the outstanding balance of the 2017 Revolver was due monthly at a rate of the lending institution's prime referenced rate plus 1.00%, with the prime reference rate defined as the greater of (i) the lending institution's prime rate and (ii) the 30-day LIBOR plus 2.50%. Principal and interest were due at maturity.
The Company incurred issuance and other third-party costs of $61 related to the 2017 Revolver, which were deferred and were being amortized ratably over the term of the 2017 Revolver.
During July 2019, the Company
terminated the 2017 Revolver and entered into a
new revolving credit facility
(the(as amended, the 2019 Revolver) with a syndicate of two
banks, of which one was the lender under the 2017 Revolver.banks. Under the 2019 Revolver, the Company
hadhas the capacity to borrow up to
$50,000$80,000 on a revolving
facility, and to the extent certain customer bookings thresholds were achieved, the capacity on the 2019 Revolver could increase by an additional amount of up to $30,000 (resulting in a total potential availability of $80,000).facility. Availability of borrowings on the 2019 Revolver is calculated as a multiple of the Company’s eligible monthly recurring revenues (as defined in the 2019 Revolver).
During November 2020, the Company entered into an amendment to the 2019 Revolver, increasing the borrowing capacity to the maximum of $80,000. 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.As of February 28(29), 2021 and 2020,29, 2024, the Company had outstanding letters of credit to serve as office landlord security deposits in the amount of $1,084 and $1,334, respectively. These letters of credit$1,208, which are secured through the revolving credit facility thus reducing theand reduce our borrowing capacity. The capacity of the revolving credit facility atwas $72,613 as of February 28, 2021 to $78,916. NaN29, 2024. No amounts arewere outstanding as of February 28, 2021.
29, 2024.The 2019 Revolver has a term of 24 months, and there is an automatic extension of an additional 12-month period should the Company achieve certain revenues, as defined. The Company has achieved those revenue thresholds, and the 12-month extension untilends on July 2022 shall occur upon the delivery of these audited financial statements to the 2019 Revolver agent, provided that no default or event of default, as defined, shall have occurred and be continuing.19, 2024. The interest rate on the outstanding borrowings are at LIBORthe Bloomberg Short-Term Bank Yield Index (BSBY) rate plus 350 basis points or Base Rate (as defined) plus 250 basis points, with the LIBORBSBY rate and Base Rate subject to minimum levels. Interest payments are to be made in installments of one, two, or three months as chosen by the Company.
The 2019 Revolver was accounted for as a debt modification to which all newCompany incurred lender and third-party fees were deferred. Issuance costs of $543, including the fair value of warrants issued, were capitalized and are being amortized to interest expense over the remainder ofwhen entering into the 2019 Revolver, term.all of which were deferred at the onset of the facility and have been fully amortized. During the fiscal years ended February 28(29), 2021, 2020, 2024, 2023,
and
2019,2022, the Company recorded interest expense of
$1,106, $273,$203, $203, and
$72,$296, respectively, related to the revolving credit facility of which
$279, $195,$0, $0, and
$31,$93, respectively, related to the amortization of deferred financing fees.
As of February 28(29), 2021 and 2020, the balance of deferred financing fees was $93 and $372, respectively, and is recorded in other assets in the accompanying consolidated balance sheets.On
August 21, 2020,July 19, 2022, the Company entered into an amendment to the 2019 Revolver which
revisedextended the
terms ofterm until July 19, 2024, documented the
transition from the LIBOR interest rate index to the BSBY rate, and established new minimum covenant revenue
covenant and imposed minimum LIBOR and Base Rate levels. On September 11, 2020,targets. The term will automatically be extended to July 19, 2025 if the Company
entered into another amendmenthas at least $200,000 in consolidated net cash as of
the 2019 Revolver which modified the amount of cash required to be held at each of the two lenders participating in the 2019 Revolver. On November 6, 2020, the Company entered into a third amendment to the 2019 Revolver, increasing the borrowing capacity to the maximum of $80,000. On March 2, 2021 and March 23, 2021, the Company entered into a fourth and fifth amendment, respectively, to the 2019 Revolver. See Note 16 for additional information.May 31, 2024.
The 2019 Revolver is collateralized by substantially all of the assets of the Company.
(8) Stockholders’ Equity (Deficit)
(a)Convertible Preferred Stock
On July 7, 2020, upon
(c) Letters of Credit
In addition to the
closingletters of
our IPO, all sharescredit outstanding under the 2019 Revolver, the Company had letters of
ourcredit outstanding
convertible preferred stock converted into 29,479,521 shares of common stock and, as of February
28, 2021, there were 0 shares of convertible preferred stock outstanding.As of February 29, 2020, the authorized, issued and outstanding convertible preferred stock and their principal terms were2024 to serve as follows:
| | | | | | | | | | | | | |
| | | | | Shares | | Issued and | | Carrying | | Liquidation |
Series | | Par value | | authorized | | outstanding | | amount | | value |
A‑1 | | $ | 0.0001 | | 3,560,000 | | 3,559,995 | | $ | 10,000 | | $ | 10,000 |
A‑2 | | | 0.0001 | | 2,579,999 | | 2,579,994 | | | 10,000 | | | 10,000 |
B | | | 0.0001 | | 4,058,736 | | 4,058,731 | | | 16,944 | | | 16,944 |
C | | | 0.0001 | | 601,160 | | 601,151 | | | 7,000 | | | 7,000 |
D | | | 0.0001 | | 1,751,874 | | 1,751,871 | | | 30,000 | | | 30,000 |
E | | | 0.0001 | | 6,089,189 | | 6,089,159 | | | 140,720 | | | 145,300 |
F | | | 0.0001 | | 873,038 | | 873,038 | | | 18,358 | | | 20,000 |
| | | | | 19,513,996 | | 19,513,939 | | $ | 233,022 | | $ | 239,244 |
During March 2018, the Company amended its Certificate of Incorporation to allow for additional Series E shares and issued 2,095,365 shares at $23.86195 per share during the period March through July 2018. The sales resultedoffice landlord security deposits in aggregate net cash proceeds of $49,933, after deducting $67 of issuance costs. In connection with this issuance, the Company issued warrants to purchase 541,159 shares of the Company’s common stock. The warrants had an exercise price of $0.0005 per share and a term of ten years. The Company calculated the issuance date fair value of the warrants using the Black-Scholes valuation methodology, which resulted in a fair value of $2,387. Accordingly, the Company
allocated the proceeds from the Series E preferred stock, on a relative fair value basis, resulting in $2,279 allocated to the warrants during the fiscal year ended February 28, 2019.
During October 2019, the Company amended its Certificate of Incorporation to allow for the issuance of Series F preferred stock and issued 873,038 shares at $22.9085 per share, resulting in net cash proceeds of $19,943, after deducting $57 of issuance costs. In connection with this issuance, the Company issued a warrant to purchase 85,000 shares of the Company’s common stock. The warrant had an exercise price of $0.0005 per share and a term of ten years. The Company calculated the issuance date fair value of the warrant using the Black-Scholes valuation methodology, which resulted in an approximate fair value of $1,590. Accordingly, the Company allocated the proceeds and associated issuance costs from the Series F preferred stock, on a relative fair value basis, resulting in $1,585 and $18,358 allocated to the warrant and to the Series F preferred stock, respectively, during year ended February 29, 2020. Also, concurrently with the Series F preferred stock issuance, the Company entered into a partnership with the Series F holder under which the Company’s products will be marketed and sold by the Series F holder as part of the Series F holder’s broader product offerings.
The preferred stock was convertible, at the option of the holder, at any time, into fully paid and nonassessable shares of common stock. The number of shares of common stock into which each share of preferred stock may be converted was determined by dividing the original issue price by the conversion price in effect on the date that the holder elects to convert the shares of preferred stock. The initial conversion price was equal to the original issue price. For the Series A through Series E preferred stock, in connection with an initial public offering of securities, immediately prior to the public offering, the preferred stockholders received for each share of preferred stock held a number of shares of common stock as was determined by dividing the preference amount (discussed below) by the price per common share in the public offering. These shares are in addition to shares of common stock otherwise issuable upon conversion of the preferred stock.
Each share was to be automatically converted into shares of common stock upon the earlier of (i) the consummation of a firm commitment underwritten public offering of common stock (or common stock of successor corporation) at a public offering price of not less than $47.7239 (adjusted for any recapitalization) resulting in net proceeds to the Company (or successor corporation) of not less than $75,000, and listed on a national securities exchange or traded on the NASDAQ or (ii) the date specified by the written consent of the requisite preferred stockholders. The preferred stockholders elected to convert their shares to common stock in connection with the IPO.
NaN dividend was to be declared or paid on any shares of any other series or class of shares of the Company unless and until such distribution was also ratably declared and paid on all of the outstanding preferred stock (based on as-if converted amounts) at the same time as such distribution was paid on such other equity interests. NaN dividends were declared or paid.
In the event of any liquidation, dissolution, or winding up of the Company, either voluntarily or involuntarily and in the event of a sale of the Company, as defined, the holders of the preferred stock would have been entitled to receive, prior and in preference to any distribution of any of the assets or funds of the Company to holders of the shares of common stock or any other shares by reason of their ownership of such shares, for each share of preferred stock the sum of (i) the original purchase price paid per each share of preferred stock (as adjusted for any stock dividends, combinations, splits, recapitalizations, and similar events) plus (ii) the amount of all accrued but unpaid dividends as discussed above (the sum is referred to as$1,407. The Company provided a payment guarantee which restricts the preference amount). In the event the assetsuse of the Company were not sufficient to distribute such amounts, each holder would receive their pro rata shareCompany's cash in this amount. These letters of amounts available to be distributed. After full payment of the preference amount has been made to the holders of the Series A-1, A-2, B, C, D, and E preferred stock as described above, the holders of the common stock and the Series A-1, A-2, B, C, D, and E preferred stock would be entitled to share ratably in all remaining assets and funds, if any, based upon the number of shares of common stock then held with each share of Series A-1, A-2, B, C, D, and E preferred stock treated as holding the number of shares of common stock into which such shares of Series A-1, A-2, B, C, D, and E preferred stock were then convertible.
The preferred stockholders had the right to 1 vote for each share of common stock into which their preferred stock could then be converted.
The preferred stock was subject to redemption under certain deemed liquidation events, as defined in the Company’s charter, and as such, the preferred stock was considered contingently redeemable for accounting purposes.
(b)Common Stock
Upon completion of the IPO, the Company issued and sold 11,526,134 shares of common stock at an issuance price of $22.00 per share resulting in net proceeds of $231,228, after deducting underwriting discounts, commissions, and offering costs. In addition, the Company issued 1,401,836 shares of common stock as a result of the automatic net exercise of warrants.
The Company closed its follow-on public offering on October 26, 2020, during which the Company issued and sold 5,750,000 shares of common stock at an issuance price of $38.50 per share resulting in net proceeds of $208,046 after deducting underwriting discounts, commissions, and offering costs.
(9)(10) Equity-based Compensation and Warrants
The following table summarizes the amount of stock-based compensation included in the consolidated statements of operations:
| | | | | | | | | |
| | Year Ended February 28(29), |
| | 2021 | | 2020 | | 2019 |
Cost of revenue | | $ | 948 | | $ | 318 | | $ | 255 |
Product and technology | | | 3,387 | | | 1,674 | | | 1,108 |
Sales and marketing | | | 2,376 | | | 1,482 | | | 1,199 |
General and administrative | | | 2,865 | | | 2,528 | | | 3,159 |
Total stock‑based compensation | | $ | 9,576 | | $ | 6,002 | | $ | 5,721 |
(a)Stock Options
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Cost of revenue, excluding depreciation and amortization | $ | 4,309 | | | $ | 4,794 | | | $ | 3,197 | |
| Product and technology | 29,991 | | | 24,995 | | | 18,744 | |
| Sales and marketing | 14,243 | | | 17,275 | | | 12,822 | |
| General and administrative | 12,398 | | | 25,580 | | | 38,176 | |
| Total stock‑based compensation | $ | 60,941 | | | $ | 72,644 | | | $ | 72,939 | |
In July 2020, the Company adopted the 2020 Equity Incentive Plan (the Incentive Plan), which authorized the Company to grant up to 4,300,000
shares of common stock to eligible employees, directors, and consultants to the Company in the form of stock options, restricted stock units, and other various equity awards, including any shares subject to stock options or other awards granted under the Company’s prior stock option plan that expire or terminate for any reason (other than being exercised in full) or are cancelled in accordance with the terms of the prior stock option plan. The Incentive Plan also includes an annual evergreen increase, and the amount, terms of grants, and exercisability provisions are determined by the board of directors. The term of an award may be up to 10 years and options generally vest over four years, with
one quarter of an award vesting one year after grant and the remainder vesting on a monthly basis over three
years.years. As of February 28, 2021,29, 2024, there
were 3,881,735was a total of 12,135,039 shares of common stock
authorized for issuance under the Incentive Plan, of which 1,447,521 were available for future
grants under the Incentive Plan.grants.
(a) Stock Options
The Company recognizes stock-based compensation based on the grant date fair value of the awards and recognizes that cost using the straight-line method over the requisite service period of the award. The fair value of options, which vest in accordance with service schedules, is estimated on the date of grant using the Black-Scholes option pricing model. ThePrior to the Company’s IPO in July 2020, the absence of an active market for the Company’s common stock required it to estimate the fair value of the Company’s common stock for purposes of granting stock options and for determining stock-based compensation expense for the periods presented. The Company obtained contemporaneous third-party valuations to assist in determining the estimated fair value of its common stock. These contemporaneous third-party valuations used the methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Expected volatilities are based on historical volatilities of comparable companies. The expected term of the options is based on the simplified method outlined in the SEC Staff accounting guidance, under which the Company estimates the term as the average of the option’s contractual term and the option’s weighted average vesting period. The risk-free rate represents the yield on U.S. Treasury bonds with maturity equal to the expected term of the granted option. The Company accounts for
forfeitures as they occur. All stock options outstanding at February 28, 202129, 2024 are expected to vest according to their specific schedules.
During the years ended February 28(29),
2021, 20202024, 2023, and
2019,2022, the Company recognized
$7,743, $6,002,$7,188, $11,798, and
$5,721,$10,374, respectively, of compensation expense related to stock options.
The Company did not capitalize any stock-based compensation expense to deferred costs for the years ended February 28(29), 20212024, 2023 and 2020.
2022. The weighted average grant date fair value for stock options granted during the years ended February 28(29), 2021, 20202024, 2023, and 2019,2022 was $11.42, $5.40,$9.22, $5.10, and $2.95,$28.59, respectively. The fair value of the Company’s option grants is estimated at the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:
| | | | | | |
| | Year Ended February 28(29), |
| | 2021 | | 2020 | | 2019 |
Estimated fair value of common stock | | $9.62-$31.27 | | $2.40-$3.35 | | $4.80-$9.55 |
Exercise price | | $15.40-$50.88 | | $4.70-$6.75 | | $9.60-$18.70 |
Expected volatility | | 68%-78% | | 46%-50% | | 50% |
Expected term (in years) | | 5.00-6.25 | | 6.25 | | 6.25 |
Risk‑free interest rate | | 0.30%-0.64% | | 2.65%-2.94% | | 1.67%-2.62% |
Dividend yield | | — | | — | | — |
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Estimated fair value of common stock | $9.22 | | $5.13-$8.54 | | $13.59-$31.95 |
| Exercise price | $14.25 | | $8.03-$14.05 | | $23.50-$53.38 |
| Expected volatility | 69% | | 64%-70% | | 63%-68% |
| Expected term (in years) | 6.08 | | 6.08 | | 6.08 |
| Risk‑free interest rate | 3.43% | | 2.71%-4.14% | | 1.29%-1.39% |
| Dividend yield | — | | — | | — |
The following is a summary of stock option activity under the Option Plan and Incentive Plan:
| | | | | | | | | | |
| | | | | | | Weighted | | | |
| | | | Weighted‑ | | Remaining | | Aggregate |
| | | | Average | | Contractual | | Intrinsic |
| | Stock Options | | Exercise Price | | Life In Years | | Value |
Balance, February 28, 2018 | | 6,970,591 | | | | | | | | |
Granted | | 1,635,115 | | | | | | | | |
Exercised | | (249,027) | | | | | | | | |
Forfeited | | (209,135) | | | | | | | | |
Balance, February 28, 2019 | | 8,147,544 | | | | | | | | |
Granted | | 2,084,046 | | $ | 10.80 | | | | | |
Exercised | | (1,843,001) | | $ | 3.70 | | | | | |
Forfeited | | (392,533) | | $ | 5.70 | | | | | |
Balance, February 29, 2020 | | 7,996,056 | | | | | | | | |
Granted | | 2,167,775 | | $ | 17.47 | | | | | |
Exercised | | (1,182,099) | | $ | 5.98 | | | | | |
Forfeited | | (257,963) | | $ | | | | | | |
Balance, February 28, 2021 | | 8,723,769 | | $ | 8.97 | | 7.0 | years | $ | 308,521,503 |
Vested and expected to vest as of February 28, 2021 | | 8,520,372 | | $ | 8.95 | | 7.0 | years | $ | 301,383,636 |
Exercisable as of February 28, 2021 | | 5,441,241 | | $ | 6.43 | | 5.8 | years | $ | 206,263,052 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted‑
Average
Exercise Price | | Weighted
Remaining
Contractual
Life In Years | | Aggregate
Intrinsic
Value |
| Balance, February 28, 2021 | 8,723,769 | | | | | | |
| Granted | 528,038 | | $ | 47.74 | | | | | |
| Exercised | (901,064) | | $ | 9.37 | | | | | |
| Forfeited | (304,951) | | $ | 14.87 | | | | | |
| Balance, February 28, 2022 | 8,045,792 | | | | | | |
| Granted | 915,081 | | $ | 8.06 | | | | | |
| Exercised | (346,518) | | $ | 5.45 | | | | | |
| Forfeited | (563,836) | | $ | 20.05 | | | | | |
| Balance, February 28, 2023 | 8,050,519 | | | | | | |
| Granted | 10,792 | | $ | 14.25 | | | | | |
| Exercised | (1,349,080) | | $ | 5.41 | | | | | |
| Forfeited | (540,578) | | $ | 19.36 | | | | | |
| Balance, February 29, 2024 | 6,171,653 | | | | 4.5 | | $ | 18,454 | |
| Vested and expected to vest as of February 29, 2024 | 6,171,653 | | $ | 10.87 | | | 4.5 | | $ | 18,454 | |
| Exercisable as of February 29, 2024 | 5,713,200 | | $ | 10.17 | | | 4.2 | | $ | 17,827 | |
The aggregate intrinsic value of stock options exercised was
$32,972, $22,033,$7,820, $1,801, and
$305$29,964 for the years ended February 28(29),
2021, 2020,2024, 2023, and
2019,2022 respectively. As of February
28, 2021,29, 2024, approximately
$22,736$5,036 of unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of
2.01.1 years.
During
(b) PlushCare Stock Options
In connection with the acquisition of PlushCare, Inc. (PlushCare) on June 2020,9, 2021, the Company issued 525,907 fully-vestedassumed all stock options that were awarded under the PlushCare Plan and that were outstanding as of the closing of the acquisition. These options were converted into options to purchase the Company’s common stock at a ratio determined in lieuthe purchase agreement. The Company has no intent to grant any further options under the PlushCare Plan beyond the options granted
and outstanding as of the Company's acquisition of PlushCare. The following is a summary of stock option activity under the PlushCare Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted
average
exercise
price | | Weighted
remaining
contractual life
in years | | Aggregate
intrinsic
value |
| Assumed, June 9, 2021 | 325,992 | | | | | | |
| Exercised | (50,506) | | $ | 1.20 | | | | |
| Forfeited | (7,765) | | $ | 2.88 | | | | |
| Balance, February 28, 2022 | 267,721 | | | | | | |
| Exercised | (111,456) | | $ | 1.65 | | | | |
| Forfeited | (2,657) | | $ | 2.61 | | | | |
| Balance, February 28, 2023 | 153,608 | | | | | | |
| Exercised | (98,492) | | $ | 1.54 | | | | |
| Forfeited | (1,847) | | $ | 2.88 | | | | |
| Balance, February 29, 2024 | 53,269 | | | | 5.1 | | $ | 453 |
| Vested and expected to vest as of February 29, 2024 | 53,269 | | $ | 1.74 | | 5.1 | | $ | 453 |
| Exercisable as of February 29, 2024 | 47,285 | | $ | 1.60 | | 4.9 | | $ | 409 |
For the years ended February 28(29), 2024, 2023, and 2022, the Company recognized $2,335, $4,367, and $4,161, respectively, in compensation expense related to the Company’s fiscal 2020 bonus withPlushCare stock options. As of February 29, 2024, approximately $212 of unrecognized compensation expense related to PlushCare stock options is expected to be recognized over a weighted average period of 0.7 years. The aggregate intrinsic value of $5,735. Thesestock options are included inexercised was $1,027, $1,127, and $1,596 for the table above.years ended February 28(29), 2024, 2023, and 2022, respectively.
(b)(c) Restricted Stock Units
The Company issued 191,415 time-basedTime-based restricted stock units during the year ended February 28, 2021. NaN restricted stock units were issued prior to fiscal year 2021. These time-based restricted stock units arehave generally been subject to a four-year vesting period withof onetwo quarterto four years. For two-year grants, one-eighth of an award vesting onegenerally vests quarterly for the first year after the grant andwith the remainder vesting ratably on a monthly basis over the subsequent year. For three-year grants, one-third of an award generally vests one year after grant with the remainder vesting ratably on a monthly basis over the subsequent two years. For four-year grants, one quarter of an award generally vests one year after grant and the remainder vests ratably on a monthly basis over the subsequent three years.
The following is a summary of activity for the
yearyears ended February
28, 2021:
28(29), 2024, 2023, and 2022: | | | | | |
| |
| Restricted Stock Units |
Balance, February 29, 2020
| | —
|
Granted
|
| 191,415
|
Vested
|
| (702)
|
Forfeited
|
| —
|
Balance, February 28, 2021 | 190,713
|
| Granted | 190,713
2,257,433 |
| Vested | (87,574) |
| Forfeited | (134,515) |
| Balance, February 28, 2022 | 2,226,057 |
| Granted | 4,470,526 |
| Vested | (1,667,550) |
| Forfeited | (762,043) |
| Balance, February 28, 2023 | 4,266,990 |
| Granted | 3,956,349 |
| Vested | (2,178,716) |
| Forfeited | (1,013,483) |
| Balance, February 29, 2024 | 5,031,140 |
For the yearyears ended February 28, 2021,28(29), 2024, 2023 and 2022, the Company recognized $842$35,449, $32,356 and $23,309, respectively, in restricted stock unit compensation expense, with $8,075$56,932 remaining of total unrecognized compensation costs related to these awards as of February 29, 2024. The total unrecognized costs are expected to be recognized over a weighted-average term of 2.0 years. The weighted-average grant date fair value of restricted stock units granted during the years ended February 28(29), 2024, 2023, and 2022 was $12.22, $8.76, and $44.40, respectively.
In connection with the PlushCare acquisition, the agreement provided for the issuance of time-based restricted stock units for 64,694 shares of common stock to existing PlushCare shareholders, upon the achievement of the contingent consideration revenue milestones. During the second quarter of fiscal 2023, 57,124 of these restricted stock units were issued. These restricted stock units are included in the table above.
During fiscal 2023, performance-based restricted stock units were approved to be issued as part of the Company’s fiscal 2023 corporate bonus program. In association with the Company’s fiscal 2023 corporate bonus payout, 747,687 fully-vested RSUs were issued in May 2023. During the year ended February 28, 2021.2023, the Company recorded $4,663 in stock-based compensation expense related to these performance-based restricted stock units.
(d) Performance Stock Units
During the year ended February 29, 2024, the Company granted performance stock units (PSUs) to the Company’s named executive officers. These PSUs will vest after the fiscal year ending February 28, 2026 based on achievement of performance metrics for revenue, Adjusted EBITDA, and Gross Dollar Retention for each of the fiscal years 2024, 2025, and 2026. Stock-based compensation costs associated with these PSUs are reassessed each reporting period based on estimated performance achievement. The number of PSUs that will be issued to executive officers at the end of the performance period will be between 0% and 200% of the grant based on the actual achievement of performance metrics.
The following is a summary of activity for the year ended February 29, 2024:
| | | | | |
| Performance Stock Units |
| Balance, February 28, 2023 | — |
| Granted | 276,480 |
| Vested | — |
| Forfeited | — |
| Balance, February 29, 2024 | 276,480 |
Expense for these awards is recognized using graded amortization. For the year ended February 29, 2024, the Company recognized $281 in PSU expense related to these awards with $3,972 remaining total unrecognized compensation costs related to these awards as of February 29, 2024. The total unrecognized costs are expected to be recognized over a weighted-average term of 2.3 years. The
weighted-averageweighted average grant date fair value of
restricted stock unitsPSUs granted during the year ended February
28, 202129, 2024 was
$46.52.(c)Common Stock Warrants
On June 29, 2015, the Company issued a warrant to its initial customer to purchase up to 200,000 common shares. Based on the vesting provisions and the remaining period over which the warrant was exercisable, the maximum number of shares that could vest pursuant to the warrant was 160,000 shares of common stock, all of which were exercised in March 2020.
In connection with the Term Loan amendment, the Company issued a warrant to purchase up to 86,600 shares of the Company’s common stock (the 2019 Term Loan Warrant) at an exercise price of $9.60 per share. The 2019 Term Loan Warrant vested 100% upon issuance and has a ten-year term, ending July 19, 2029. The Company calculated the fair value of the 2019 Term Loan Warrant using the Black-Scholes option pricing model, and the fair value of the 2019 Term Loan Warrant was determined to be $528. This amount was recorded as a debt discount and was amortized ratably over the Term Loan period.
In connection with the 2019 Revolver, the Company issued the lender warrants to purchase up to 36,363 and 12,631 shares of the Company’s common stock (the 2019 Revolver Warrants) at an exercise price of $13.75 and $23.75 per share, respectively. The 2019 Revolver Warrants vested 100% upon issuance and have a ten-year term, ending July 19, 2029. The Company calculated the fair value of the 2019 Revolver Warrants using the Black-Scholes option pricing model, and the fair value of the 2019 Revolver Warrants was determined to be $251.
$12.23. The following table summarizes the activity for the Company’s warrants for the periods presented:
| | |
|
| Common Stock
|
|
| Warrants
|
Balance, February 28, 2018
| | 928,945
|
Issued
| | 541,159
|
Exercised
| | (4,061)
|
Balance, February 28, 2019
| | 1,466,043
|
Issued
| | 220,594
|
Exercised
| | (33,369)
|
Balance, February 29, 2020
| | 1,653,268
|
Issued
| | —
|
Exercised
|
| (160,000)
|
Automatic exercise of warrants in connection with IPO
| | (1,493,268)
|
Balance, February 28, 2021
| | —
|
On July 7, 2020, upon the closing of our IPO, 1,401,836 shares of common stock were issued upon the automatic net exercise of all warrants that were outstanding as of the IPO date. There were 0 warrants outstanding as of February 28, 2021.
(d)(e) Employee Stock Purchase Plan
In July 2020, the Board of Directors adopted the Company’s ESPP, which became effective immediately prior to the effectiveness2020 Employee Stock Purchase Plan (the ESPP). As of the registration statement for the Company’s IPO. TheFebruary 29, 2024, there was a total of 3,058,760 shares of common stock initially reservedauthorized for issuance under the ESPP, is limited to of which 1,777,844 were available for future issuance.1,100,000 shares.
Under the ESPP, eligible employees can purchase the Company’s common stock through accumulated payroll deductions at such times as are established by the compensation committee. Eligible employees may purchase the Company’s common stock at 85%
of the lower of the fair market value of the Company’s common stock on the first day of the offering period or on the last day of the offering period. Eligible employees may contribute up to 15%
of their eligible compensation. Under the ESPP, a participant may not accrue rights to purchase more than $25,000$25,000 worth of the Company’s common stock for each calendar year in which such right is outstanding.
Employees who elect to participate in the ESPP commence payroll withholdings that accumulate through the end of the respective period. In accordance with the guidance in ASC 718-50 –Compensation – Stock Compensation, the ability to purchase shares of the Company’s common stock for 85% of the lower of the price on the first day of the offering
period or the last day of the offering period (i.e. the purchase date) represents an option and, therefore, the ESPP is a compensatory plan under this guidance. Accordingly, share-based compensation expense is determined based on the option’s grant-date fair value as estimated by applying the Black Scholes option-pricing model and is recognized over the withholding period. The Company recognized share-based compensation expense of $991$1,506, $1,332, and $1,749 during the
yearyears ended February
28, 202128(29), 2024, 2023, and 2022, respectively, related to the ESPP.
During the
yearyears ended February
28, 2021,28(29), 2024, 2023, and 2022, employees who elected to participate in the ESPP purchased a total of
67,498512,235, 560,345, and 140,838 shares of common stock,
respectively, resulting in cash proceeds to the Company of
$1,259.$3,579, $2,927, and $4,309, respectively. An additional $1,120$1,263 has been withheld via employee payroll deductions who have opted to participate in the next stock purchase plan period ending May
2021.(10)2024.
(f) Other
In connection with the acquisition of Innovation Specialists, LLC d/b/a 2nd.MD (2nd.MD) on March 3, 2021, several 2nd.MD individuals entered into agreements with the Company whereby these individuals are eligible to receive an aggregate of 608,332 shares that required continued employment with the Company. These shares are excluded from the above restricted stock units table. Included in the 608,332 shares are 281,531 shares that were also contingent upon the achievement of the contingent consideration milestones. These shares are considered compensatory in the post business combination periods due to the additional service requirement for these individuals. These shares vested 50% on the first anniversary of the acquisition date and 50% on the second anniversary of acquisition date. As a result of the achievement of certain revenue milestones (the contingent consideration milestones), a total of 256,418 of the eligible 281,531 shares were issued to such shareholders. As of February 29, 2024, there were no unvested shares outstanding. The Company recognized stock-based compensation expense of $4,015 and $23,138 during the years ended February 28, 2023 and 2022, respectively, including $8,981 of accelerated expense related to certain separation and transition agreements entered into during fiscal 2022.
In connection with the acquisition of PlushCare, certain PlushCare individuals entered into agreements with the Company whereby these individuals are eligible to receive an aggregate of 806,161 shares that require continued employment with the Company. These shares are excluded from the above restricted stock units table. These shares are considered compensatory in the post business combination periods due to the additional service requirement for these individuals. One third of these shares vested on the first anniversary of the acquisition date, one third vested on the second anniversary of acquisition date, and one third will vest on the third anniversary of the acquisition date. As of February 29, 2024, there were 268,720 unvested shares outstanding with a grant date fair value of $52.52 per share. The Company recognized stock-based compensation expense of $14,182, $14,113, and $10,208 during the years ended February 28(29), 2024, 2023, and 2022, respectively. The unamortized compensation expense of $3,905 will be recognized over a weighted average remaining period of 0.3 years.
(11) Defined Contribution Retirement Plan
The Company sponsors a defined contribution retirement plan named the Accolade, Inc. 401(k) Plan (401(k) Plan). Under the 401(k) Plan, eligible employees may contribute up to the maximum allowed by law. Eligible employees are eligible for Company matching contributions on the first quarter following their one-year anniversary date, which are dollar for dollar up to 3%3.5% of an employee’s eligible compensation, up to $100 in annual compensation. Employer contributions are vested over a period of four years of service. The 401(k) Plan includes an employer
discretionary profit-sharing contribution feature to allow the Company to make a contribution to eligible employees’ 401(k) Plan accounts. Profit sharing contributions are vested over a period of four years of service. The Company incurred expenses related to matching contributions totaling $1,599, $1,356,$2,903, $3,231, and $1,260 in 2021, 2020,$2,278 for the years ended February 28(29), 2024, 2023, and 2019,2022, respectively, which were funded subsequent to each respective year-end.
(11)
Income (loss) before income taxes consists of the following components:
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Domestic | $ | (99,594) | | | $ | (463,848) | | | $ | (129,569) | |
| Foreign | 1,024 | | | 574 | | | 806 | |
| Total | $ | (98,570) | | | $ | (463,274) | | | $ | (128,763) | |
Table ofContents | | | | | | | | | |
| | Year Ended February 28(29), |
| | 2021 | | 2020 | | 2019 |
Domestic | | $ | (50,934) | | $ | (51,794) | | $ | (56,585) |
Foreign | | | 286 | | | 558 | | | 144 |
Total | | $ | (50,648) | | $ | (51,236) | | $ | (56,441) |
Significant components of income taxes are as follows:
| | | | | | | | | |
| | Year Ended February 28(29), |
| | 2021 | | 2020 | | 2019 |
Current: | | | | | | | | | |
Federal | | $ | — | | $ | — | | $ | — |
State and Local | | | 37 | | | — | | | — |
Foreign | | | 141 | | | 129 | | | 55 |
Total Current | | | 178 | | | 129 | | | 55 |
Deferred: | | | | | | | | | |
Federal | | | — | | | — | | | — |
State and Local | | | — | | | — | | | — |
Foreign | | | (174) | | | — | | | — |
Total deferred | | | (174) | | | — | | | — |
Provision (benefit) for income taxes | | $ | 4 | | $ | 129 | | $ | 55 |
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Current: | | | | | |
| Federal | $ | 668 | | | $ | 156 | | | $ | 124 | |
| State and Local | 380 | | | 90 | | | 76 | |
| Foreign | 200 | | | 127 | | | 202 | |
| Total Current | 1,248 | | | 373 | | | 402 | |
| Deferred: | | | | | |
| Federal | — | | | (1,638) | | | (7,935) | |
| State and Local | — | | | (2,359) | | | 1,941 | |
| Foreign | (13) | | | — | | | (47) | |
| Total deferred | (13) | | | (3,997) | | | (6,041) | |
| Provision (benefit) for income taxes | $ | 1,235 | | | $ | (3,624) | | | $ | (5,639) | |
A reconciliation of income tax expense at the U.S. Federal statutory income tax rate to actual income tax provision is as follows:
| | | | | | | |
| | Year Ended February 28(29), | |
| | 2021 | | 2020 | | 2019 | |
Federal income tax expense at statutory tax rate | | 21.0 | % | 21.0 | % | 21.0 | % |
State income taxes, net of federal tax benefit | | 4.6 | | 7.5 | | 6.0 | |
Stock-based compensation | | (0.2) | | 3.9 | | (2.1) | |
Transaction costs | | 0.0 | | (0.2) | | 0.0 | |
Changes in valuation allowances | | (25.4) | | (31.4) | | (24.8) | |
Other | | 0.0 | | (1.0) | | (0.2) | |
Effective Income Tax Rate | | 0.0 | % | (0.2) | % | (0.1) | % |
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Federal income tax expense at statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal tax benefit | 3.1 | | | 2.8 | | | 4.5 | |
| Change in state rate | (1.8) | | | (2.1) | | | — | |
| Stock-based compensation | (20.9) | | | (0.3) | | | 0.8 | |
| Transaction costs | — | | | — | | | (1.1) | |
| Contingent consideration | — | | | — | | | 1.1 | |
| Goodwill impairment | — | | | (8.6) | | | — | |
| Changes in valuation allowances | (2.5) | | | (11.9) | | | (21.9) | |
| Other | (0.2) | | | (0.1) | | | — | |
| Effective Income Tax Rate | (1.3) | % | | 0.8 | % | | 4.4 | % |
Income tax
expense(expense) benefit for the fiscal years ended February 28(29),
2021, 2020,2024, 2023, and
20192022 differ from the U.S. statutory income tax rate primarily due to changes in valuation allowances, state income taxes,
goodwill impairment, and
stock-basedstock based compensation.
On December 22, 2017,
The tax expense for the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changesyear ended February 29, 2024 primarily relates to the U.S.profitability of the PCs and the Company's foreign subsidiary. The tax code, including, but not limited to: (i) reducingbenefit for the U.S. federal corporateyear ended February 28, 2023 relates to the partial release of the reversal of the deferred tax rate to 21 percent; (ii) eliminatingliability associated with the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (iii) creating a new limitation on deductible interest expense; (iv) changing rules related to uses and limitations of net operating carryforwards created
basis difference in tax years beginning after December 31, 2017; and (v) changinggoodwill from the U.S. federal taxation of earnings of foreign subsidiaries.
U.S. GAAP accounting for income taxes required that the Company record the impact of any tax law change on deferred income taxes2nd.MD acquisition. The goodwill impairment recorded in the first quarter that the tax law change was enacted. Due to the complexities involved in accounting for the enactment of the Tax Act, SEC Staff Accounting Bulletin (SAB) 118 allowedfiscal 2023 required the Company to providereverse that deferred tax liability in the amount of $3,899 and recognize a provisional estimate oftax benefit during the impacts of the Tax Act in its earnings for the fourth quarter and year endingended February 28, 2018. In connection with our adoption of the Tax Act and in consideration of SAB 118, there were no changes made to the provisional amounts recognized in connection with the enactment of the Tax Act. The accounting for the income tax effects of the Tax Act was complete as of February 28, 2019.
2023.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The Company makes significant judgments regarding the realizability of its deferred tax assets (principally net operating losses). The carrying value of deferred tax assets is based on the Company’s assessment that it is more likely than not that the Company will realize these
assets after consideration of all available positive and negative evidence. Significant components of the Company’s deferred tax assets and liabilities at February 28(29),
20212024 and
20202023 are as follows:
| | | | | | | | | | | |
| February 28(29), |
| 2024 | | 2023 |
| Deferred tax assets: | | | |
| Net operating loss and tax credit carryforwards | $ | 126,404 | | | $ | 113,740 | |
| Other accruals and reserves | 2,310 | | | 5,599 | |
| Stock‑based compensation | 10,550 | | | 32,741 | |
| Interest expense deduction limitation carryforward | 2,959 | | | 3,092 | |
| Intangibles | 9,271 | | | 6,248 | |
| Property, plant & equipment | 1,146 | | | 869 | |
| Capitalized research and development | 23,507 | | | 10,931 | |
| Lease liability | 8,170 | | | 10,086 | |
| Other | — | | | — | |
| Valuation allowance | (178,097) | | | (175,610) | |
| Deferred tax assets | 6,220 | | | 7,696 | |
| Deferred tax liabilities: | | | |
| Operating lease right-of-use assets | (5,989) | | | (7,478) | |
| Intangibles | — | | | — | |
| Deferred tax liabilities | (5,989) | | | (7,478) | |
| Net deferred taxes | $ | 231 | | | $ | 218 | |
| | | | | | |
| | February 28(29), |
| | 2021 | | 2020 |
Deferred tax assets: | | | | | | |
Net operating loss and tax credit carryforwards | | $ | 84,879 | | $ | 76,508 |
Other accruals and reserves | | | 6,107 | | | 3,413 |
Stock‑based compensation | | | 871 | | | 561 |
Deferred rent | | | 1,181 | | | 1,280 |
Interest expense deduction limitation carryforward | | | 2,312 | | | 1,549 |
Property, plant & equipment | | | 523 | | | 526 |
Other | | | 820 | | | 355 |
Valuation allowance | | | (96,516) | | | (83,640) |
Deferred tax assets | | | 177 | | | 552 |
Deferred tax liabilities: | | | | | | |
Intangibles | | | (3) | | | (552) |
Deferred tax liabilities | | | (3) | | | (552) |
Net deferred taxes | | $ | 174 | | $ | — |
Deferred tax liabilities are included in other noncurrent liabilities on the consolidated balance sheet. Net operating loss (NOL) carryforwards amounted to $307,398$501,600 and $453,323 for U.S. federal and $283,377$448,518 and $402,376 for U.S. states at February 28, 202128(29), 2024 and $272,804 and $258,875, respectively, at February 29, 2020.2023, respectively. These operating lossNOL carryforwards related to the 2010 through current 20202022 tax periods. At February 28, 2021, NaN29, 2024, none of the operating lossNOL carryforwards were subject to expiration until 2030. The operating lossNOL carryforwards expiring in years 2030 through 2037 make up $53,184$61,189 of the recorded deferred tax asset. The remaining deferred tax asset relating to operating lossNOL carryforwards of $31,695$64,782 have an indefinite expiration. In addition to operating lossNOL carryforwards, research and development tax credit carryforwards amounted to $401$432 for U.S. federal and U.S. states at February 28, 2021.29, 2024. These tax credit carryforwards will expire in 2036. Under Section 382 of the Internal Revenue Code, the yearly utilization of a corporation’s net operating lossNOL carryforwards may be limited following a change in ownership of greater than 50% (by value) over a three-year period. The yearly limitation is based on the value of the corporation immediately before the ownership change multiplied by the federal long-term tax-exempt rate. If a loss is not utilized in a year after an ownership change that yearly limit is carried forward to future years for the balance of the net operating lossNOL carryforward period. As of February 28, 2021,29, 2024, the Company did not incorporate a yearly limitation under Section 382.
382 as a recent study has not been completed.
Management assesses the available positive and negative evidence to estimate if a valuation allowance is required to be recorded against existing deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the Company’s brief operating history and the net losses
incurred since inception, management does not believe that it is more likely than not that the Company will realize the benefits of these deductible differences.differences in the U.S. As a result, a full valuation allowance has been provided at February 28, 2021 and February 29, 20202024 and 2023 for U.S. Federal and state tax purposes.
The
Company had previously maintainedfollowing is a
full valuation allowance associated with its Czech Republic entity. During the current year, due to the earnings historysummary of
its Czech Republic entity, the Company released the valuation allowance of its deferred tax assets. The changes in the valuation allowance were as follows:
| | | | | | |
| | Year Ending February 28(29), |
| | 2021 | | 2020 |
Balance at the beginning of the period | | $ | 83,640 | | $ | 61,902 |
Increase due to NOLs and temporary differences | | | 12,876 | | | 16,100 |
Increase due to acquisitions | | | — | | | 5,638 |
Balance at the end of the period | | $ | 96,516 | | $ | 83,640 |
NOL activity:
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| Balance at the beginning of the period | $ | 175,610 | | | $ | 125,810 | |
| Increase due to NOLs and temporary differences | 2,487 | | | 54,937 | |
| Decrease due to acquisitions | — | | | (5,137) | |
| Balance at the end of the period | $ | 178,097 | | | $ | 175,610 | |
The Company has recorded a deferred tax asset of
$2,312$2,959 for interest expense limited under the Tax Act at February
28, 2021.29, 2024. The interest expense limited has an unlimited carryforward period.
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over tax basis of the investments in foreign subsidiaries that is indefinitely reinvested outside the U.S. The foreign subsidiary is identified as a branch for U.S. tax purposes, and therefore, a gross temporary difference for investment basis differences is not applicable.
The Company had
0no material accrual for uncertain tax positions or interest or penalties related to income taxes on the Company’s consolidated balance sheets at February
28, 202128(29), 2024 and
February 29, 20202023 and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the consolidated statement of operations for the years ended February
28, 202128(29), 2024, 2023, and
February 29, 2020.On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act also allows for retroactive accelerated income tax depreciation on certain leasehold improvement assets and changes to the limitations on business interest deductions for tax years beginning in 2019 and 2020 which increases the allowable business interest deduction from 30% to 50% of adjusted taxable income. The Company does not expect a material tax expense or tax benefit as a result of the CARES Act in subsequent periods.
(12)(13) Net Loss Per Share Attributable to Common Stockholders
The following table sets forth the computation of basic and diluted net loss per common share:
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Net loss | $ | (99,805) | | | $ | (459,650) | | | $ | (123,124) | |
| Net loss per common share, basic and diluted | $ | (1.33) | | | $ | (6.45) | | | $ | (1.93) | |
| Weighted‑average shares used to compute net loss per common share, basic and diluted | 74,906,938 | | 71,279,831 | | 63,823,270 |
Table ofContents | | | | | | | | | |
| | Year Ended February 28(29), |
| | 2021 | | 2020 | | 2019 |
Net loss | | $ | (50,652) | | $ | (51,365) | | $ | (56,496) |
Net loss per common share, basic and diluted | | $ | (1.72) | | $ | (9.13) | | $ | (12.17) |
Weighted‑average shares used to compute net loss per common share, basic and diluted | | | 29,370,594 | | | 5,626,713 | | | 4,641,256 |
As the Company has reported net losses for each of the periods presented, all potentially dilutive securities are antidilutive. The following potential outstanding shares of common stock were excluded from the computation of diluted net loss per common share for the periods presented because including them would have been antidilutive:
| | | | | | |
| | Year Ended February 28(29), |
| | 2021 | | 2020 | | 2019 |
Stock options | | 8,723,769 | | 7,996,056 | | 8,147,544 |
Unvested restricted stock units | | 190,713 | | — | | — |
Common stock warrants | | — | | 317,861 | | 182,288 |
Total | | 8,914,482 | | 8,313,917 | | 8,329,832 |
(13) Commitments
(a)Leases
The Company leases its office premises in Pennsylvania, Washington, Arizona, California and the Czech Republic, pursuant to lease agreements that expire on various dates through 2030. The Company recognizes rent expense under such arrangements on a straight line basis. Rent expense was $6,304, $5,143, and $4,294 for the fiscal years ended February 28(29), 2021, 2020, and 2019, respectively. As of February 28(29), 2021 and 2020, the Company had security deposits of $468 and $477, respectively. The security deposits are included in other assets on the accompanying consolidated balance sheets.
On May 28, 2019, the Company entered into a new lease for its Seattle office space that expires in 2030. The new lease is subject to both certain early termination rights and an option to extend, as defined in the lease. The lease commencement date was October 1, 2019, and total future payments were $25,836. On December 30, 2019, the Company entered into a termination agreement for its prior Seattle office space, with a termination date of December 31, 2019. The Company paid $142 and, as a result of the termination, has 0 future obligations under the terms of the agreement.
The future aggregate minimum lease payments as of under all non-cancelable operating leases (including the Seattle lease discussed above) for the years noted are as follows:
| | | |
Year Ending February 28(29), | | | |
2022 | | $ | 6,587 |
2023 | | | 6,577 |
2024 | | | 6,625 |
2025 | | | 5,664 |
2026 | | | 5,790 |
Thereafter | | | 15,726 |
| | $ | 46,969 |
| | | | | | | | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 | | 2022 |
| Stock options | 6,224,922 | | | 8,204,127 | | | 8,313,513 | |
| Unvested restricted stock units | 5,031,140 | | | 4,266,990 | | | 2,226,057 | |
| Unvested performance stock units | 97,690 | | — | | | — | |
| Shares issued to 2nd.MD employees and subject to vesting | — | | | 274,224 | | | 326,801 | |
| Shares issued to PlushCare employees and subject to vesting | 268,720 | | | 537,401 | | | 806,161 | |
| Contingent shares in connection with PlushCare acquisition | — | | | 102,111 | | | 102,111 | |
| Indemnity shares held in escrow in connection with PlushCare acquisition | — | | | 27,342 | | | 27,342 | |
| Shares to be issued to HealthReveal shareholders upon expiration of indemnification period | — | | | 28,089 | | | 28,089 | |
| Convertible Senior Notes | 4,180,469 | | | 5,700,297 | | | 5,700,297 | |
| Total | 15,802,941 | | | 19,140,581 | | | 17,530,371 | |
(14) Commitments and ContingenciesThe Company is involved in various claims, inquiries and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial position or liquidity.
On August 1, 2017, certain former and current employeesMay 8, 2021, a purported class action complaint (Robbins v. PlushCare, Inc. et al.) was filed a suitin the United States District Court for the Northern District of California against the Company seeking back wages for unpaid overtimeCompany’s wholly owned subsidiary, PlushCare, Inc. The complaint, as a resultamended, alleges that certain of alleged misclassification by the Company under the Pennsylvania Minimum Wage ActPlushCare’s subscription payment practices violate California and other state automatic renewal laws and the Federal Fair Labor Standards Act. AsElectronic Funds Transfer Act, among other claims, arising from allegations that PlushCare failed to provide adequate disclosures to members. The lawsuit seeks restitution of February 28, 2018, based uponsubscription fees, statutory damages for each violation, subject to trebling, reasonable attorneys’ fees, and injunctive relief. Under the factsterms of the agreement to purchase PlushCare, the selling shareholders will indemnify Accolade for losses related to this matter, subject to a cap. The parties agreed to a settlement for $3,700. The court issued a final approval and circumstancesfinal judgment in July 2023. The Company paid the settlement in full in September 2023 pursuant to the terms of this suitthe court-approved settlement. The Company has been reimbursed by third-party insurance for a majority of the liability and the remainder of the liability was subject to indemnification and reimbursement from cash and stock escrows set up as well aspart of the resolutionCompany's acquisition of other such similar suits, the Company had determined that itPlushCare which was probable that it had a liability. Accordingly, the Company recorded a litigation expense and related accrued litigation expensesettled in the amountfourth quarter of $650. During March 2019, a settlement agreement (the Settlement Agreement) was executed by both parties in the amount of $1,100, (the Settlement). Accordingly, during the fiscal year ended February 28, 2019, the Company recorded additional litigation expense and related accrual in the amount of $450 related to the settlement of this matter. The Settlement was ultimately approved by the Court and the Company paid $1,100 during April 2020.(c)2024.
(b) Employment Agreements
Certain officers of the Company have employment agreements providing for severance, continuation of benefits, and other specified rights in the event of termination without cause, including in the event of a change of control of the Company, as defined in the agreements.
(14) Change Healthcare Joint Development Agreement
In
(c) Purchase Obligations
The Company has minimum required purchase commitments of $40,323 pursuant to an agreement primarily related to cloud computing services. Portions of the total purchase commitment are required to be met prior to the end of each contract year, September 30, in each of fiscal years 2023 through 2027. If total purchases in a contract year do not meet the portion of the commitment required for that year, the shortfall must be prepaid and can be used for future purchases through September 30, 2027. As of February
2020,29, 2024, the Company
entered into a joint development agreement, or JDA, and a data licensing agreement with Change Healthcare Holdings, or Change Healthcare, whereby Change Healthcare will be a strategic partner in providing various services to support the Company’s Total Care and Provider Services product offerings. Pursuant to the terms of JDA, Change Healthcare is providing intellectual property (IP), technical know-how, and advisory services to the Company as it develops price transparency products under the JDA that will be utilized by the Company in several of its product offerings. Either party is permitted to sell the price transparency product within each party’s respective service offerings. Each party is entitled to a royalty from the other party in connection with any net sales associated with the price transparency product that was developed under the JDA, not to exceed $2,500 in cumulative royalty payments.Thehas remaining future data license fee payments the Company owespurchase commitments under this agreement for the years noted are as follows:
| | | |
Year Ending February 28(29), | | | |
2022 | | $ | 215 |
2023 | | | 230 |
2024 | | | 245 |
2025 | | | 260 |
| | $ | 950 |
Concurrent with entering into the JDA, the Company entered into a five-year data licensing agreement with Change Healthcare who is one of the largest commercially available data set providers of de-identified claims in the United States. The licensing agreement includes annual increases in fees and the option to renew and extend beyond the initial five-year period. The annual licensing fees are subject to increases and decreases and contingent upon the achievement of performance objectives as defined in the data licensing agreement. Upfront payments for data licenses are deferred and are amortized into cost of revenue, as they pertain to the delivery of the Company’s product offerings.
Upon entering into the JDA and data licensing agreement, the Company issued 251,211 restricted shares of its common stock to Change Healthcare at an estimated fair value of $15.40 per share, or $3,869 in aggregate value.
$22,588.
Pursuant to the terms of the restricted share agreement, 150,727 of the shares vest immediately and the remaining 100,484 restricted shares vest upon the achievement of certain product development milestones, as defined. (15) Restructuring
During the year ended February 28, 2021,2023, the remaining 100,484 restricted shares vested uponCompany initiated certain measures to accelerate the achievementintegration of those milestones. recent acquisitions through strategic reductions in the Company’s workforce, including increasing hiring in lower cost regions to support its growth, scale, and profitability objectives. As a result, severance expense was recorded for the impacted employees.
The aggregate equity value was allocated to the JDA and data licensing agreement based on the relative fair value of the IP and technical know-how contributed by Change Healthcare within the JDA and the discounted pricing received from Change Healthcare within the data licensing agreement. The equity value allocated to the JDA and data licensing agreement infollowing table summarizes the amount of $3,005 was capitalized and deferred as internally developed software and other assetsseverance costs included in the consolidated statements of operations:
| | | | | | | | | | | |
| Year Ended February 28(29), |
| 2024 | | 2023 |
| Cost of revenue, excluding depreciation and amortization | $ | 686 | | $ | 1,025 |
| Product and technology | 102 | | 2,149 |
| Sales and marketing | (127) | | 1,948 |
| General and administrative | 203 | | 1,943 |
| Total severance costs | $ | 864 | | $ | 7,065 |
The following is a summary of the changes in severance liabilities related to the workforce reductions. These liabilities are included within
accrued compensation on the
Company’s consolidated balance
sheet, respectively, with an offsetting increase to additional paid-in capital. Costs that are capitalized and classified as internally developed software are amortized within depreciation and amortization in the Company’s consolidated statement of operations.(15) Related Party Transactions
Entities affiliated with one of the Company’s significant customers owned more than 5% of the Company’s outstanding stock during the years ended February 28(29), 2021, 2020, and 2019. As of February 28, 2021, these entities no longer own more than 5% of the Company’s outstanding stock. Revenues related to this customer were $27,300, $31,556, and $33,433 during the fiscal years ended February 28(29), 2021, 2020, and 2019, respectively. There were $2,325 and $0 in accounts receivable outstanding with this customer as of February 28(29), 2021 and 2020, respectively.
(16) Subsequent Events
Acquisition of 2nd.MD
On March 3, 2021, the Company acquired 2nd.MD, a Texas limited liability company. 2nd.MD is a leading expert medical opinion and medical decision support company based in Houston, TX. Under the terms of the Agreement and Plan of Merger, the Company provided cash consideration of $230,000 and issued 2,822,242 shares in Accolade common stock. The Company will issue up to an additional 2,170,972 shares of common stock upon achievement of defined revenue milestones following the closing. The Company is in the process of accounting for this transaction and expects to disclose the preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed in the Company’s subsequent Form 10-Q. For the year ended February 28, 2021, the Company incurred $2,050 in acquisition related costs that were expensed immediately and recorded in the Company’s consolidated statement of operations.
Offering of Convertible Senior Notes
On March 29, 2021, the Company issued an aggregate of $287,500 in convertible senior notes (the Notes), including the exercise in full by the initial purchasers of their option to purchase up to an additional $37,500 aggregate principal amount of the Notes pursuant to an Indenture dated as of March 29, 2021. The Notes are general unsecured obligations of Accolade and accrue interest payable semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021, at a rate of 0.50% per year. The Notes will mature on April 1, 2026, unless earlier converted, redeemed, or repurchased. The initial conversion rate is 19.8088 shares of Accolade common stock per $1 principal amount of the Notes. The Notes will be convertible into cash, shares of Accolade’s common stock, or a combination of cash and shares of Accolade’s common stock, at the Company’s election.
The Company may redeem for cash all or any portion of the Notes (subject to a partial redemption limitation), at its option, on or after April 6, 2024 if the latest reported sale price of Accolade’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which Accolade provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which Accolade provides notice of redemption, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
In connection with the pricing of the Notes, Accolade entered into capped call transactions with certain of the initial purchasers and/or their respective affiliates and another financial institution. The capped call transactions will
sheets: | | | | | |
| Balance as of March 1, 2022 | $ | — |
| Severance costs | 7,065 |
| Cash payments | (3,069) | |
| Balance as of February 28, 2023 | $ | 3,996 |
| Severance costs | 864 | |
| Cash payments | (4,860) | |
| Balance as of February 29, 2024 | $ | — |
cover, subject to customary adjustments, the number of shares of Accolade’s common stock that initially underlie the Notes. The capped call transactions are expected to offset the potential dilution to Accolade’s common stock as a result of the conversion of the Notes, with such offset subject to a cap initially equal to $76.20.
The net proceeds from the offering of the Notes was $279,300, after deducting the initial purchasers’ discount and estimated expenses payable by Accolade. The Company used $34,400 of the net proceeds from the Note offering to pay the costs of the capped call transactions in connection with the Note offering.
Amendments to Revolving Credit Facility
On March 2, 2021, the Company entered into an amendment to the 2019 Revolver in association with the acquisition of 2nd.MD to be completed and amended certain revenue covenants. On March 23, 2021, the Company entered into an amendment to the 2019 Revolver in association with the issuance of the Convertible Senior Notes.
Pending Acquisition of PlushCare
On April 23, 2021, the Company announced it has signed a definitive agreement to acquire PlushCare, Inc., a Delaware corporation (PlushCare). PlushCare is a leading provider of virtual primary care and mental health treatment based in San Francisco, CA. Under the terms of the agreement, the purchase price of up to $450,000 will consist of $40,000 in cash, $340,000 in Accolade common stock, and up to an additional $70,000 of Accolade common stock payable upon the achievement of defined revenue milestones following the closing.
