Teladoc Health 10Q 2021 Q3 Quarterly report

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37477

TELADOC HEALTH, INC.

(Exact name of registrant as specified in its charter)

Delaware		04-3705970
(State of incorporation)		(I.R.S. Employer Identification No.)

2 Manhattanville Road, Suite 203
Purchase, New York		10577
(Address of principal executive office)		(Zip code)

(203) 635-2002

(Registrant’s telephone number including area

code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	TDOC	The New York Stock Exchange

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 ⌧ No ◻

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.:


Large accelerated filer	⌧	Accelerated filer	◻	Non-accelerated filer	◻	Smaller reporting company	☐
Emerging growth company	☐

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. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ⌧

As of October 27, 2021, the Registrant had 160,086,661 shares of Common Stock outstanding.

Table of Contents

TELADOC HEALTH, INC.

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2021

TABLE OF CONTENTS

		Page Number

PART I	Financial Information	2
Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	2
	Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the quarters and nine months ended September 30, 2021 and 2020	3
	Consolidated Statements of Stockholders’ Equity (unaudited) for the quarters and nine months ended September 30, 2021 and 2020	4
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2021 and 2020	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II	Other Information	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 6.	Exhibits	38
Exhibit Index		38
Signatures		40

Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

TELADOC HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data, unaudited)


	September 30,		December 31,
	2021		2020

Assets
Current assets:
Cash and cash equivalents	$	823,828	$	733,324
Short-term investments		2,538		53,245
Accounts receivable, net of allowance of $11,277 and $6,412, respectively		178,072		169,281
Inventories		56,937		56,498
Prepaid expenses and other current assets		95,941		47,259
Total current assets		1,157,316		1,059,607
Property and equipment, net		27,027		28,551
Goodwill		14,470,399		14,581,255
Intangible assets, net		1,932,012		2,020,864
Operating lease - right-of-use assets		47,935		46,647
Other assets		17,890		18,357
Total assets	$	17,652,579	$	17,755,281
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	34,655	$	46,030
Accrued expenses and other current liabilities		106,252		83,657
Accrued compensation		75,891		94,593
Deferred revenue-current		72,865		52,356
Advances from financing companies		12,442		13,453
Current portion of long-term debt		0		42,560
Total current liabilities		302,105		332,649
Other liabilities		1,328		1,616
Operating lease liabilities, net of current portion		42,729		43,142
Deferred revenue, net of current portion		4,075		2,449
Advances from financing companies, net of current portion		9,561		9,926
Deferred taxes		93,824		102,103
Convertible senior notes, net		1,211,375		1,379,592
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 300,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 160,013,751 shares and 150,281,099 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		160		150
Additional paid-in capital		17,399,023		16,857,797
Accumulated deficit		(1,410,469)		(992,661)
Accumulated other comprehensive (loss) gain		(1,132)		18,518
Total stockholders’ equity		15,987,582		15,883,804
Total liabilities and stockholders’ equity	$	17,652,579	$	17,755,281

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

TELADOC HEALTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data, unaudited)


	Quarter Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	521,658	$	288,812	$	1,478,472	$	710,641
Expenses:
Cost of revenue (exclusive of depreciation and amortization, which is shown separately below)		169,041		104,725		475,273		267,887
Operating expenses:
Advertising and marketing		111,078		52,302		303,738		132,395
Sales		62,602		23,483		191,251		60,110
Technology and development		80,250		29,958		239,017		72,244
Acquisition, integration and transformation costs		4,340		25,395		22,084		30,686
General and administrative		103,016		59,742		319,404		162,699
Depreciation and amortization		51,907		12,932		151,907		32,535
Total expenses		582,234		308,537		1,702,674		758,556
Loss from operations		(60,576)		(19,725)		(224,202)		(47,915)
Loss on extinguishment of debt		850		1,227		43,728		8,978
Other expense (income), net		376		252		(5,493)		827
Interest expense, net		18,895		16,970		61,493		38,849
Net loss before taxes		(80,697)		(38,174)		(323,930)		(96,569)
Income tax expense (benefit)		3,643		(2,290)		93,878		(5,400)
Net loss		(84,340)		(35,884)		(417,808)		(91,169)
Other comprehensive (loss) gain, net of tax:
Cumulative translation adjustment		(13,423)		16,285		(19,650)		11,610
Comprehensive loss	$	(97,763)	$	(19,599)	$	(437,458)	$	(79,559)

Net loss per share, basic and diluted	$	(0.53)	$	(0.43)	$	(2.68)	$	(1.17)

Weighted-average shares used to compute basic and diluted net loss per share		159,435,165		83,607,902		155,926,680		77,821,073

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

TELADOC HEALTH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data, unaudited)


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Gain (Loss)		Equity
Balance as of June 30, 2021	159,462,978	$	159	$	17,314,749	$	(1,326,129)	$	12,291	$	16,001,070
Exercise of stock options	216,882		1		5,174		0		0		5,175
Issuance of common stock upon vesting of restricted stock units	235,674		0		(0)		0		0		0
Issuance of common stock for conversion/exchange of 2025 Notes	98,217		0		14,868		0		0		14,868
Equity portion of extinguishment of 2025 Notes	0		0		(10,079)		0		0		(10,079)
Stock-based compensation	0		0		74,311		0		0		74,311
Other comprehensive loss, net of tax	0		0		0		0		(13,423)		(13,423)
Net loss	0		0		0		(84,340)		0		(84,340)
Balance as of September 30, 2021	160,013,751	$	160	$	17,399,023	$	(1,410,469)	$	(1,132)	$	15,987,582

Balance as of December 31, 2020	150,281,099	$	150	$	16,857,797	$	(992,661)	$	18,518	$	15,883,804
Exercise of stock options, net	2,123,935		3		22,953		0		0		22,956
Issuance of common stock upon vesting of restricted stock units	1,490,879		1		(1)		0		0		0
ESPP	82,088		0		10,539		0		0		10,539
Issuance of common stock for 2022 Convertible Notes	1,058,373		1		270,111		0		0		270,112
Issuance of common stock for 2025 Notes	5,182,656		5		920,514		0		0		920,519
Recovery of excess common stock issued for acquisition (see Note 4)	(205,279)		(0)		(40,329)		0		0		(40,329)
Equity portion of extinguishment of 2025 Notes	0		0		(668,507)		0		0		(668,507)
Equity portion of extinguishment of 2022 Notes	0		0		(224,081)		0		0		(224,081)
Stock-based compensation	0		0		250,027		0		0		250,027
Other comprehensive loss, net of tax	0		0		0		0		(19,650)		(19,650)
Net loss	0		(0)		0		(417,808)		0		(417,808)
Balance as of September 30, 2021	160,013,751	$	160	$	17,399,023	$	(1,410,469)	$	(1,132)	$	15,987,582

Balance as of June 30, 2020	79,099,433	$	79	$	1,879,573	$	(562,810)	$	(21,913)	$	1,294,929
Exercise of stock options	400,555		0		7,113		0		0		7,113
Issuance of common stock upon vesting of restricted stock units	49,396		0		(0)		0		0		0
Issuance of common stock for conversion/redemption of 2022 Notes	950		0		187		0		0		187
Equity portion of extinguishment of 2022 Notes	0		0		(44)		0		0		(44)
Issuance of common stock for conversion/exchange of 2025 Notes	187,346		0		37,780		0		0		37,780
Equity portion of extinguishment of 2025 Notes	0		0		(29,326)		0		0		(29,326)
Issuance of common stock in acquisition	4,620,665		5		918,813		0		0		918,818
Stock-based compensation	0		0		21,178		0		0		21,178
Other comprehensive gain, net of tax	0		0		0		0		16,285		16,285
Net loss	0		0		0		(35,884)		0		(35,884)
Balance as of September 30, 2020	84,358,345	$	84	$	2,835,274	$	(598,694)	$	(5,628)	$	2,231,036

Balance as of December 31, 2019	72,761,941	$	73	$	1,538,716	$	(507,525)	$	(17,239)	$	1,014,025
Exercise of stock options, net	1,999,518		1		40,625		0		0		40,626
Issuance of common stock upon vesting of restricted stock units	801,575		1		(1)		0		0		0
ESPP	35,901		0		2,473		0		0		2,473
Issuance of common stock for 2022 Convertible Notes	3,951,399		4		694,047		0		0		694,051
Issuance of common stock for 2025 Notes	187,346		0		37,780		0		0		37,780
Issuance of common stock in acquisition	4,620,665		5		918,813		0		0		918,818
Equity portion of extinguishment of 2022 Notes	0		0		(715,195)		0		0		(715,195)
Equity portion of extinguishment of 2025 Notes	0		0		(29,326)		0		0		(29,326)
Equity component of 2027 Notes, net of issuance costs	0		0		285,601		0		0		285,601
Stock-based compensation	0		0		61,741		0		0		61,741
Other comprehensive gain, net of tax	0		0		0		0		11,611		11,611
Net loss	0		0		0		(91,169)		0		(91,169)
Balance as of September 30, 2020	84,358,345	$	84	$	2,835,274	$	(598,694)	$	(5,628)	$	2,231,036

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

TELADOC HEALTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)


	Nine Months Ended September 30,
	2021		2020
Cash flows provided by operating activities:
Net loss	$	(417,808)	$	(91,169)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		151,907		32,535
Depreciation of rental equipment		2,500		851
Amortization of right-of-use assets		8,185		4,643
Allowance for doubtful accounts		11,353		2,320
Stock-based compensation		240,971		61,151
Deferred income taxes		91,414		(4,096)
Accretion of interest		46,843		29,459
Loss on extinguishment of debt		40,631		8,978
Gain on sale of investment		(5,901)		0
Other, net		38		216
Changes in operating assets and liabilities:
Accounts receivable		(19,407)		(16,450)
Prepaid expenses and other current assets		(34,566)		(5,906)
Inventory		(2,661)		(2,392)
Other assets		(3,432)		140
Accounts payable		(11,115)		6,584
Accrued expenses and other current liabilities		15,880		17,269
Accrued compensation		(17,352)		9,329
Deferred revenue		20,002		15,348
Operating lease liabilities		(8,202)		(4,360)
Other liabilities		1,502		(3,025)
Net cash provided by operating activities		110,782		61,425
Cash flows used in investing activities:
Capital expenditures		(5,611)		(2,872)
Capitalized software development costs		(35,402)		(14,515)
Proceeds from marketable securities		50,000		0
Proceeds from the sale of investment		10,901		0
Acquisitions of business, net of cash acquired		(75,944)		(159,663)
Other, net		3,150		0
Net cash used in investing activities		(52,906)		(177,050)
Cash flows provided by financing activities:
Net proceeds from the exercise of stock options		22,956		40,627
Proceeds from issuance of 2027 Notes		0		1,000,000
Payment of issuance costs of 2027 Notes		0		(24,070)
Repurchase of 2022 Notes		(139)		(228,153)
Proceeds from advances from financing companies		10,677		1,924
Payment against advances from financing companies		(12,053)		(4,427)
Proceeds from employee stock purchase plan		13,996		2,473
Cash received for withholding taxes on stock-based compensation, net		3,109		326
Other, net		(4,224)		0
Net cash provided by financing activities		34,322		788,700
Net increase in cash and cash equivalents		92,198		673,075
Foreign exchange difference		(1,694)		(129)
Cash and cash equivalents at beginning of the period		733,324		514,353
Cash and cash equivalents at end of the period	$	823,828	$	1,187,299

Income taxes paid	$	3,114	$	786

Interest paid	$	7,973	$	5,612

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

Note 1. Organization and Description of Business

Teladoc, Inc. was incorporated in the State of Texas in June 2002 and changed its state of incorporation to the State of Delaware in October 2008. Effective August 10, 2018, Teladoc, Inc. changed its corporate name to Teladoc Health, Inc. Unless the context otherwise requires, Teladoc Health, Inc., together with its subsidiaries, is referred to herein as “Teladoc Health” or the “Company”. The Company’s principal executive office is located in Purchase, New York. Teladoc Health is a global leader in providing virtual healthcare services with a focus on high quality, lower costs, and improved outcomes around the world.

On January 4, 2021, the Company completed the acquisition of the UK-based telemedicine provider Consultant Connect Limited (“Consultant Connect”). Consultant Connect provides a platform that specializes in facilitating healthcare professional-to-professional advice and guidance in the United Kingdom.

On October 30, 2020, the Company completed the merger with Livongo Health, Inc. (“Livongo”), a transformational opportunity to improve the delivery, access and experience of healthcare for consumers around the world. Livongo is pioneering a new category in healthcare, called Applied Health Signals, which is transforming the management of chronic conditions.

On July 1, 2020, the Company completed the acquisition of InTouch Technologies, Inc. (“InTouch”), a leading provider of enterprise telehealth solutions for hospitals and health systems.

Note 2. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2021 and 2020, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated results of operations, financial position and cash flows of Teladoc Health for the periods presented. However, the financial results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been omitted or condensed pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The information in this report should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2020, which includes a complete set of footnote disclosures, including the Company’s significant accounting policies.

These financial statements include the results of Teladoc Health, as well as 3 professional associations and 13 professional corporations (collectively, the “Association”). All intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation.

Teladoc Health Medical Group, P.A., formerly Teladoc Physicians, P.A. is party to several Services Agreements by and among it and the professional associations and professional corporations pursuant to which each professional association and professional corporation provides services to Teladoc Health Medical Group, P.A. Each professional association and professional corporation is established pursuant to the requirements of its respective domestic jurisdiction governing the corporate practice of medicine.

The Company holds a variable interest in the Association which contracts with physicians and other health professionals in order to provide services to the Company. The Association is considered a variable interest entity (“VIE”) since it does not have sufficient equity to finance its activities without additional subordinated financial support. An enterprise having a controlling financial interest in a VIE must consolidate the VIE if it has both power and benefits—that is, it has (1) the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance (power) and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). The Company has the power and rights to control all activities of the Association and funds and absorbs all losses of the VIE and appropriately consolidates the Association.

Total revenue and net income (loss) for the VIE were $56.2 million and $0.1 million, and $48.9 million and $(0.7) million, for the quarters ended September 30, 2021 and 2020, respectively. Total revenue and net income (loss)

Table of Contents

for the VIE were $161.9 million and $(3.0) million, and $149.1 million and $0.1 million, for the nine months ended September 30, 2021 and 2020, respectively. The VIE’s total assets, all of which were current, were $31.0 million and $28.7 million at September 30, 2021 and December 31, 2020, respectively. Total liabilities, all of which were current for the VIE, were $71.0 million and $65.8 million at September 30, 2021 and December 31, 2020, respectively. The VIE’s total stockholders’ deficit was $40.1 million and $37.1 million at September 30, 2021 and December 31, 2020, respectively.

Business Combinations

The Company accounts for its business combinations using the acquisition method of accounting. The purchase price is attributed to the fair value of the assets acquired and liabilities assumed. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date. The excess of the purchase price of acquisition over the fair value of the identifiable net assets of the acquiree is recorded as goodwill. The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of acquisition.

When the Company issues stock-based or cash awards to an acquired company’s stockholders, the Company evaluates whether the awards are consideration or compensation for post-acquisition services. The evaluation includes, among other things, whether the vesting of the awards is contingent on the continued employment of the acquired company’s stockholders beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post-acquisition services and recognized as expense over the requisite service period.

Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions and competition. In connection with determination of fair values, the Company may engage a third-party valuation specialist to assist with the valuation of intangible and certain tangible assets acquired and certain assumed obligations. Acquisition-related transaction costs incurred by the Company are not included as a component of consideration transferred but are accounted for as an operating expense in the period in which the costs are incurred.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions that the Company believes are necessary to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent assets and liabilities. The Company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment evolves. The Company believes that estimates used in the preparation of these consolidated financial statements are reasonable; however, actual results could differ materially from these estimates.

Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.

Significant estimates and assumptions by management affect areas including the allowance for doubtful accounts, the carrying value of long-lived assets (including goodwill and intangible assets), capitalization and amortization of software development costs, the finalization of purchase accounting adjustments, Client performance guarantees, the calculation of a contingent liability in connection with an acquisition earn-out, the provision for income taxes and related deferred tax accounts, revenue recognition, contingencies, and other items as described in the Summary of Significant Accounting policies in this Quarterly Report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).

Table of Contents

Recently Issued Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“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 simplifies the accounting for convertible instruments by eliminating the conversion option separation model for convertible debt that can be settled in cash and by eliminating the measurement model for beneficial conversion features. Convertible instruments that continue to be subject to separation models are (1) those with conversion options that are required to be accounted for as bifurcated derivatives and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. This ASU also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This standard becomes effective for the Company on January 1, 2022 and may be early adopted during an interim period of 2021. The Company will adopt the standard on January 1, 2022 and is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.

Summary of Significant Accounting Policies

The following sections reflect updates to the summary of significant accounting policies described in the 2020 Form 10-K. In addition, on an ongoing basis, the Company will continue to closely monitor for any significant impact to its estimates and assumptions as a result of the COVID-19 pandemic, especially on the allowance for doubtful accounts.

Acquisition, Integration and Transformation Costs

Acquisition, integration and transformation costs include investment banking, financing, legal, accounting, consultancy, integration, fair value changes related to contingent consideration and certain other transaction costs related to mergers and acquisitions. It also includes costs related to certain business transformation initiatives focused on integrating and optimizing various operations and systems, including enhancing our customer relationship management (CRM) and enterprise resource planning (ERP) systems, incurred in connection with our acquisition and integration activities.

General and Administrative Costs

General and Administrative costs consist of all operating expenses not included in the other operating expense categories and now include legal and regulatory costs for all current and historical periods presented.

Other Expense (Income), Net

Other expense (income), net includes the impact of foreign currency remeasurement, realized and unrealized gains on investment securities and all other non-operating items not included in other financial statement lines.

Note 3. Revenue, Deferred Revenue, Deferred Costs and Other

The Company generates access fees from Clients accessing its professional provider network, hosted virtual healthcare platform and chronic care management platforms. Visit fee revenue is generated for general medical, expert medical service and other specialty visits. In addition, other revenue is primarily associated with virtual healthcare device equipment included with its hosted virtual healthcare platform. Access revenue accounted for 87% and 78% of our revenue for the quarters ended September 30, 2021 and 2020. Access revenue accounted for 86% and 77% of our revenue for the nine months ended September 30, 2021 and 2020, respectively.

Table of Contents

The following table presents the Company’s revenues disaggregated by revenue source (in thousands):


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Access Fees Revenue
U.S.	$	413,594	$	194,622	$	1,161,084	$	454,582
International		37,989		31,997		112,699		91,261
Total		451,583		226,619		1,273,783		545,843

Visit Fee Revenue
U.S.		59,863		50,948		173,399		152,944
International		116		96		368		705
Total		59,979		51,044		173,767		153,649

Other
U.S.		9,583		10,299		29,617		10,299
International		513		850		1,305		850
Total		10,096		11,149		30,922		11,149

Total Revenues	$	521,658	$	288,812	$	1,478,472	$	710,641

International revenues primarily reflect the location of the customer, except for direct to consumer activities which primarily reflect the location of operations to service customers.

Deferred Revenue

Deferred revenue represents billed, but unrecognized revenue, and is comprised of fees received in advance of the delivery or completion of the services and amounts received in instances when revenue recognition criteria have not been met. Deferred revenue associated with upfront payments for a device is amortized ratably over the expected Member enrollment period. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent deferred revenue.

For certain services, payment is required for future months before the service is delivered to the Member. The Company records deferred revenue when cash payments are received in advance of the Company’s performance obligation to provide services. Deferred revenue, current plus long-term, was $76.9 million at September 30, 2021 and $51.6 million at September 30, 2020. The net increase of $21.8 million and $36.8 million in the deferred revenue balance for the nine months ended September 30, 2021 and 2020, respectively, is primarily driven by InTouch and Livongo as well as the direct-to-consumer behavioral health product and cash payments received or due in advance of satisfying the Company’s performance obligations, offset by revenue recognized that were included in the deferred revenue balance at the beginning of the period. The Company anticipates that it will satisfy most of its performance obligation associated with the deferred revenue within the prospective fiscal year. Revenue recognized during the quarters ended September 30, 2021 and 2020 that was included in deferred revenue at the beginning of the periods was $47.2 million and $18.9 million, respectively. Revenue recognized during the nine months ended September 30, 2021 and 2020 that was included in deferred revenue at the beginning of the periods was $48.5 million and $10.6 million, respectively.

We expect to recognize $48.5 million and $15.4 million of revenue in 2021 and 2022, respectively, related to future performance obligations that are unsatisfied or partially unsatisfied as of September 30, 2021.

Table of Contents

Deferred Costs and Other

Deferred costs and other, consist of deferred device cost and deferred contract cost, which are classified as a component of Prepaid expenses and other current assets or Other assets depending on term, consist of the following as of September 30, 2021 (in thousands):


	As of		As of
	September 30,		December 31,
	2021		2020
Deferred costs and other, current	$	20,243	$	3,468
Deferred costs and other, noncurrent		7,788		2,179
Total deferred costs and other	$	28,031	$	5,647

Deferred costs and other activity are as follows (in thousands):


	Deferred Costs and Other
Beginning balance as of December 31, 2020	$	5,647
Additions		34,554
Cost of revenue recognized		(12,170)
Ending balance as of September 30, 2021	$	28,031

Note 4. Business Acquisitions

On January 4, 2021, the Company completed the acquisition of the UK-based telemedicine provider Consultant Connect for cash consideration of $56.3 million, net of cash acquired. Consultant Connect provides a platform that specializes in facilitating healthcare professional-to-professional advice and guidance in the United Kingdom. As part of purchase accounting, the Company recognized intangibles related to customer relationships, technology and the brand of $9.8 million, $1.9 million, and $0.6 million, respectively; and goodwill of $47.3 million. The acquisition was considered a stock acquisition for tax purposes and accordingly, the goodwill resulting from this acquisition is not tax deductible.

On October 30, 2020, the Company completed the acquisition of Livongo through a merger in which Livongo became a wholly-owned subsidiary of the Company. Upon completion of the merger, each share of Livongo’s common stock converted into the right to receive 0.5920 shares of Teladoc Health’s common stock and $4.24 in cash, without interest. In addition, in connection with the closing of the merger, Livongo paid a special cash dividend equal to $7.09 per share of Livongo’s common stock to shareholders of Livongo as of a record date of October 29, 2020. The total initial consideration calculated on upon deal closing was $13,938.0 million, consisting of $401.0 million of net cash, $555.4 million related to the conversion feature of the Livongo Notes guaranteed by the Company and 60.4 million shares of Teladoc Health’s common stock valued at approximately $12,981.6 million on October 30, 2020. The acquisition was considered a stock acquisition for tax purposes and accordingly, the goodwill resulting from this acquisition is not tax deductible. The total acquisition related costs were $59.0 million and included transaction costs for investment bankers, other professional fees and income taxes for accelerated grants and were recognized in the Company’s consolidated statement of operations in acquisition, integration and transformation costs.

In the first quarter of 2021, the Company identified 205,279 of additional shares of Teladoc Health common stock that were included as part of the merger consideration (“Excess Shares”) and 85,481 of additional shares of Teladoc Health common stock that were not withheld from the merger consideration for withholding tax purposes (“Withholding Shares”). In addition, the Company identified $5.6 million of merger-related cash payments related to the Excess Shares (“Cash Overpayments”). The Company has recovered and cancelled all 205,279 of the Excess Shares and expects to recover the Cash Overpayments in the form of cash. The Company expects to apply the cash value of the Withholding Shares to offset future employment tax obligations of the Company. As a result, the total adjusted consideration was $13,876.9 million, consisting of $380.2 million of net cash, $555.4 million related to the conversion feature of the Livongo Notes guaranteed by the Company and 60.2 million shares of Teladoc Health’s common stock valued at approximately $12,941.3 million. The Company does not expect to incur any material charges or expenses related to the recovery of the Withholding Shares and the Cash Overpayments. Accordingly, the Company recorded, in the first quarter of fiscal year 2021, an increase to receivables in current other assets of $20.8 million, a decrease to consolidated stockholders’ equity of $40.3 million and a decrease to goodwill of $61.1 million.

Table of Contents

In the first quarter of 2021, the Company recognized a discrete non-cash income tax charge substantially reflecting an additional valuation allowance on excess stock compensation benefits and other state deferred tax assets associated with the Livongo merger which resulted in a $106.5 million measurement period reduction to goodwill.

In the third quarter of 2021, the Company recorded a $5.0 million increase to goodwill reflecting a final adjustment to its measurement date tax valuation allowances and a $6.3 million increase to goodwill to reflect the cost to replace certain devices becoming obsolete due to provider upgrades to telecommunications networks known at the date of the Livongo merger.

On July 1, 2020, the Company completed the acquisition of InTouch through a merger in which InTouch became a wholly-owned subsidiary of the Company. The aggregate merger consideration paid was $1,078.5 million, net of cash acquired of $1.1 million, which was comprised of 4.6 million shares of Teladoc’s common stock valued at $918.8 million on July 1, 2020, and $160.7 million of cash. InTouch is a leading provider of enterprise telehealth solutions for hospitals and health systems. The acquisition was considered a stock acquisition for tax purposes and accordingly, the goodwill resulting from this acquisition is not tax deductible. The total acquisition related costs were $12.5 million and included transaction costs for investment bankers and other professional fees and were recognized in the Company’s consolidated statement of operations in acquisition, integration and transformation costs.

The acquisitions described above were accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. The results of the acquisitions were included within the consolidated financial statements commencing on the aforementioned acquisition dates.

The following table summarizes the fair value estimates of the assets acquired and liabilities assumed for the Livongo and InTouch acquisitions. The Company, with the assistance of a third-party valuation expert, estimated the fair value of the acquired tangible and intangible assets with significant estimates such as revenue projections.

The allocation of the consideration transferred to the assets acquired and the liabilities assumed for the Livongo merger remains preliminary and therefore can be revised as a result of additional information obtained due to the finalization of the valuation inputs and assumptions as well as completing the assessment of the tax attributes of the business combination. As discussed further in Note 15, the Company recognized a non-cash income tax charge during the nine months ended September 30, 2021, substantially reflecting the recording of a valuation allowance on stock compensation benefits associated with the Livongo merger. Additional adjustments that could have a material impact on the Company’s results of operations and financial position may be recorded within the measurement period, which will not exceed one year from the acquisition date.

Table of Contents

Identifiable assets acquired and liabilities assumed (in thousands):


	Livongo		InTouch
Purchase price, net of cash acquired	$	13,876,931	$	1,069,759
Less:
Accounts receivable		80,084		16,986
Short term investment		52,500		0
Inventory		24,299		8,492
Property and equipment, net		8,952		11,366
Right of use assets		15,056		4,965
Other assets		17,337		2,541
Client relationships		1,050,000		164,580
Technology		300,000		29,190
Trademarks		250,000		32,630
Advances from financing companies		0		(26,012)
Accounts payable		(119,302)		(5,589)
Deferred revenue		(997)		(20,729)
Convertible notes		(453,417)		0
Deferred taxes		(37,980)		(30,102)
Lease liabilities		(18,834)		(5,495)
Other liabilities		(46,606)		(13,042)
Goodwill	$	12,755,839	$	899,978

The amount allocated to goodwill reflects the benefits Teladoc Health expects to realize from the growth of the respective acquisitions’ operations, cost savings, and various synergies.

The Company’s pro forma revenue and net loss for the quarters and nine months ended September 30, 2020 below have been prepared as if Livongo and InTouch had been purchased on January 1, 2020. As such, the Company made pro-forma adjustments related to deferred revenue, deferred costs, amortization of intangible assets, interest expense, stock-based compensation, acquisition costs and transaction expenses for the purpose of this presentation.


	Unaudited Pro Forma
	Quarter Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2020		2020
Revenue	$	395,519	$	1,026,957
Net loss	$	(93,149)	$	(778,287)

The unaudited pro forma financial information above is not necessarily indicative of what the Company’s consolidated results actually would have been if the acquisitions had been completed at the beginning of the respective periods. In addition, the unaudited pro forma information above does not attempt to project the Company’s future results.

Note 5. Inventories

Inventories consisted of the following (in thousands):


	As of September 30,		As of December 31,
	2021		2020
Raw materials and purchased parts	$	21,836	$	19,591
Work in process		501		1,431
Finished goods		34,600		35,476
Total inventories	$	56,937	$	56,498

Table of Contents

Note 6. Intangible Assets, Net

Intangible assets, net consist of the following (in thousands):


									Weighted
									Average
									Remaining
	Useful			Accumulated		Net Carrying			Useful Life
	Life	Gross Value		Amortization		Value			(Years)
September 30, 2021
Client relationships	2 to 20 years	$	1,467,396	$	(174,523)	$	1,292,873		14.8
Non-compete agreements	1.5 to 5 years		5,008		(5,008)		0
Trademarks	3 to 15 years		326,594		(38,075)		288,519		9.7
Patents	3 years		200		(200)		0
Capitalized software development costs	3 to 5 years		97,779		(35,717)		62,062		2.7
Technology	5 to 7 years		342,039		(53,481)		288,558		5.9
Intangible assets, net		$	2,239,016	$	(307,004)	$	1,932,012		12.3
December 31, 2020
Client relationships	2 to 20 years	$	1,460,648	$	(100,844)	$	1,359,804	`	15.4
Non-compete agreements	1.5 to 5 years		5,097		(4,872)		225		0.4
Trademarks	3 to 15 years		326,786		(15,576)		311,210		10.5
Patents	3 years		200		(200)		0
Capitalized software development costs	3 to 5 years		52,518		(24,771)		27,747		2.8
Technology	5 to 7 years		338,150		(16,272)		321,878		6.6
Intangible assets, net		$	2,183,399	$	(162,535)	$	2,020,864		13.1

Amortization expense for intangible assets net of foreign currency remeasurement for intangible assets was $49.6 million and $11.7 million for the quarters ended September 30, 2021 and 2020, respectively. Amortization expense, net of foreign currency remeasurement for intangible assets was $145.3 million and $29.6 million for the nine months ended September 30, 2021 and 2020, respectively.

Note 7. Goodwill

Goodwill consists of the following (in thousands):


	As of September 30,		As of December 31,
	2021		2020
Beginning balance as of December 31, 2020 and 2019, respectively	$	14,581,255	$	746,079
Additions associated with acquisitions		61,157		13,812,198
Purchase consideration adjustments (see Note 4)		(55,801)		0
Deferred tax adjustments (see Note 4)		(101,536)		0
Cumulative translation adjustment		(14,676)		22,978
Ending balance as of September 30, 2021 and December 31, 2020, respectively	$	14,470,399	$	14,581,255

Table of Contents

Note 8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):


	As of September 30,		As of December 31,
	2021		2020
Professional fees	$	2,726	$	4,717
Consulting fees/provider fees		16,253		23,167
Client performance guarantees		8,817		7,215
Interest payable		5,811		2,049
Income tax payable		1,385		1,627
Insurance		6,272		3,139
Marketing		5,733		2,815
Operating lease liabilities - current		13,148		11,438
Earnout		0		4,514
Acquisition & Integration		4,212		1,036
Franchise and Sales Taxes		5,802		2,099
Device Replacement Cost		6,263		0
Other		29,831		19,841
Total	$	106,252	$	83,657

Note 9. Fair Value Measurements

The carrying value of the Company’s cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued liabilities approximates fair value due to their short-term nature.

The Company measures its financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active

markets.

Level 2—Include other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs that are supported by little or no market activity.

The Company measures its cash equivalents at fair value on a recurring basis. The Company classifies its cash equivalents within Level 1 because they are valued using observable inputs that reflect quoted prices for identical assets in active markets and quoted prices directly in active markets.

The Company’s investments in equity securities without readily determinable fair values are accounted for under the measurement alternative of the FASB ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, with any changes to fair value recognized within other expense (income), net each reporting period. Under the measurement alternative, equity investments without readily determinable fair values are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar securities of the same issuer; value is generally determined based on a market approach as of the transaction date.

The Company measures its short-term investments at fair value on a recurring basis and classifies such as Level 2. They are valued using observable inputs that reflect quoted prices directly or indirectly in active markets. The short-term investments amortized cost approximates fair value.

The Company measured its contingent consideration at fair value on a recurring basis and classifies such as Level 3. The Company estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using the weighted probability of the possible payments.

Table of Contents

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):


	September 30, 2021
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	823,828	$	0	$	0	$	823,828
Short-term investments	$	0	$	2,538	$	0	$	2,538


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	733,324	$	0	$	0	$	733,324
Short-term investments	$	0	$	53,245	$	0	$	53,245
Equity securities without readily determinable fair values	$	0	$	5,000	$	0	$	5,000
Contingent liability	$	0	$	0	$	4,514	$	4,514

There were no transfers between fair value measurement levels during the quarters or nine months ended September 30, 2021 and 2020.

The change in fair value of the Company’s equity securities without readily determinable fair values was as follows:


Fair value and historical cost basis at December 31, 2020	$	5,000
Upward adjustment due to observable price change in identical securities		5,901
Sale of investment		(10,901)
Fair value at September 30, 2021	$	0

The change in fair value of the Company’s contingent liability is recorded in acquisition, integration and transformation costs in the consolidated statements of operations. The contingent liability is based on future revenue and profitability expectations. The following table reconciles the beginning and ending balance of the Company’s Level 3 contingent liability (in thousands):


Fair value at December 31, 2020	$	4,514
Payments		(4,367)
Change in fair value		0
Currency translation adjustment		(147)
Fair value at September 30, 2021	$	0

Note 10. Leasing Operations

The Company has operating leases for facilities, hosting co-location facilities and certain equipment under non-cancelable leases in the United States and various international locations. The leases have remaining lease terms of 1 to 7 years, with options to extend the lease term from 1 to 5 years. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the arrangement covering the right to use property, plant or equipment for a stated period of time. For new and amended leases beginning in 2020 and after, the Company will separately allocate the lease (e.g., fixed lease payments for right-to-use land, building, etc.) and non-lease components (e.g., common area maintenance) for its leases.

Table of Contents

Operating Leases

The Company leases office space under non-cancelable operating leases in the United States and various international locations. As of September 30, 2021, the future minimum lease payments under non-cancelable operating leases were as follows (in thousands):


	As of
Operating Leases:	September 30, 2021
2021	$	14,594
2022		14,872
2023		10,927
2024		7,233
2025		6,028
2026 and thereafter		13,997
Total future minimum payments	$	67,651

The Company rents its systems to certain qualified customers under arrangements that qualify as either sales-type lease or operating lease arrangements. Leases have terms that generally range from two to five years.

Note 11. Convertible Senior Notes

Outstanding Convertible Senior Notes

As of September 30, 2021, the Company had three series of convertible senior notes outstanding. The issuances of such notes originally consisted of (i) $1 billion aggregate principal amount of 1.25% convertible senior notes due 2027 (the “2027 Notes”), issued on May 19, 2020 for net proceeds to the Company of $975.9 million after deducting offering costs of approximately $24.1 million, (ii) $287.5 million aggregate principal amount of 1.375% convertible senior notes due 2025 (the “2025 Notes”), issued on May 8, 2018 for net proceeds to the Company of $279.1 million after deducting offering costs of approximately $8.4 million, and (iii) $550.0 million aggregate principal amount of 0.875% convertible senior notes due 2025 that were issued by Livongo on June 4, 2020 for which the Company has agreed to guarantee Livongo’s obligations (the “Livongo Notes;” and together with the 2027 Notes, the 2025 Notes and the 2022 Notes (as defined below), the “Notes”). On June 27, 2017, the Company issued, at par value, $275 million aggregate principal amount of 3% convertible senior notes due 2022 (the “2022 Notes”), which were redeemed during the quarter ended March 31, 2021 as described below.

The following table presents certain terms of the Notes that were outstanding as of September 30, 2021:



	2027 Notes			2025 Notes			Livongo Notes
Interest Rate Per Year		1.25	%		1.375	%		0.875	%
Fair Value as of September 30, 2021 (in millions)	$	970.5		$	2.1		$	710.6
Maturity Date		June 1, 2027			May 15, 2025			June 1, 2025
Optional Redemption Date		June 5, 2024			May 22, 2022			June 5, 2023
Conversion Date		December 1, 2026			November 15, 2024			March 1, 2025
Conversion Rate Per $1,000 Principal Amount as of September 30, 2021		4.1258			18.6621			13.94
Remaining Contractual Life as of September 30, 2021		5.7 years			3.6 years			3.7 years

All of the Notes are unsecured obligations of the Company and rank senior in right of payment to the Company’s indebtedness that is expressly subordinated in right of payment to such Notes; equal in right of payment to the Company’s liabilities that are not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries.

Table of Contents

Holders may convert all or any portion of their Notes in integral multiples of $1,000 principal amount, at their option, at any time prior to the close of business on the business day immediately preceding the applicable conversion date only under the following circumstances:

●

during any quarter (and only during such quarter), if the last reported sale price of the shares of Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equal to 130% of the conversion price for the applicable Notes on each applicable trading day;

●

during the 5 business day period after any 10 consecutive trading day period (or 5 consecutive trading day period in the case of the Livongo Notes) in which the trading price was less than 98% of the product of the last reported sale price of Company’s common stock and the conversion rate for the applicable Notes on each such trading day;

●

upon the occurrence of specified corporate events described under the applicable indenture; or

●

if the Company calls the applicable Notes for redemption, at any time until the close of business on the second business day immediately preceding the redemption date.

On or after the applicable conversion date, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of such Notes, regardless of the foregoing circumstances.

The 2027 Notes and the 2025 Notes are convertible into shares of the Company’s common stock at the applicable conversion rate shown in the table above. The Livongo Notes are convertible at the applicable conversion rate shown in the table above into “units of reference property,” each of which is comprised of 0.5920 of a share of the Company’s common stock and $4.24 in cash, without interest. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock (or units of reference property, in the case of the Livongo Notes) or a combination thereof, at the Company’s election. If the Company elects to satisfy the conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s common stock or units of reference property, the amount of cash and shares of the Company’s common stock or units of reference property, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 25 consecutive trading days observation period (or 40 days in the case of the Livongo Notes).

The Company may redeem for cash all or part of the Notes, at its option, on or after the applicable optional redemption date shown in the table above (and prior to the 41st scheduled trading day immediately preceding the maturity date in the case of the Livongo Notes) if the last reported sale price of its common stock exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any. In addition, calling any 2027 Note or 2025 Note for redemption on or after the applicable optional redemption date will constitute a make-whole fundamental change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note, if it is converted in connection with the redemption, will be increased in certain circumstances as described in the applicable indenture. If Livongo undergoes a fundamental change (as defined in the applicable indenture) at any time prior to the maturity date, holders will have the right, at their option, to require Livongo to repurchase for cash all or any portion of their Livongo Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Livongo Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

In accounting for the issuance of the 2027 Notes, 2025 Notes and the 2022 Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the applicable Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense from the issuance date to the applicable maturity date. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component related to the 2027 Notes, 2025 Notes and 2022 Notes was $286 million,

Table of Contents

$91.4 million and $62.4 million, respectively, net of issuance costs which were recorded in additional paid-in capital on the accompanying condensed consolidated balance sheet. The Company carries the liability component of the Livongo Notes at face value less unamortized debt discount on its condensed consolidated balance sheets and provides the fair value for disclosure purposes only. The Company has reserved an aggregate of 8.7 million shares of common stock for the Notes.

In accounting for the transaction costs related to the issuance of the 2027 Notes, 2025 Notes and 2022 Notes, the Company allocated the total costs incurred to the liability and equity components of the Notes based on their relative values. Transaction costs attributable to the liability component are being amortized to interest expense over the seven-year term of the Notes (or five-and-a-half year term in the case of the 2022 Notes), and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity.

The liability components of the Notes consist of the following (in thousands):


	As of September 30,		As of December 31,
2027 Notes	2021		2020
Principal	$	1,000,000	$	1,000,000
Less: Debt discount, net (1)		(260,324)		(287,916)
Net carrying amount	$	739,676	$	712,084

2025 Notes
Principal	$	882	$	276,788
Less: Debt discount, net (1)		(215)		(65,923)
Net carrying amount	$	667	$	210,865

Livongo Notes
Principal	$	550,000	$	550,000
Less: Debt discount, net (1)		(78,968)		(93,357)
Net carrying amount	$	471,032	$	456,643

2022 Notes
Principal	$	0	$	46,762
Less: Debt discount, net (1)		0		(4,202)
Net carrying amount	$	0	$	42,560

(1)

Included in the accompanying consolidated balance sheet within convertible senior notes and amortized to interest expense over the expected life of the Notes using the effective interest rate method.

The Company estimates the fair value of its Notes utilizing market quotations for debt that have quoted prices in active markets. Since the Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities.

Table of Contents

The following table sets forth total interest expense recognized related to the Notes (and in the case of the Livongo Notes, subsequent to the acquisition of Livongo) (in thousands):


	Quarters Ended							Nine Months Ended
	September 30,							September 30,
2027 Notes:		2021			2020			2021		2020
Contractual interest expense	$	3,125		$	3,125		$	9,375		$	4,618
Amortization of debt discount		9,370			8,989			27,592			12,911
Total	$	12,495		$	12,114		$	36,967		$	17,529
Effective interest rate of the liability component		3.4	%		3.4	%		3.4	%		3.4	%

	Quarters Ended						Nine Months Ended
	September 30,						September 30,
2025 Notes:		2021			2020			2021		2020
Contractual interest expense	$	10		$	971		$	1,080		$	2,947
Amortization of debt discount		48			3,170			4,546			9,379
Total	$	58		$	4,141		$	5,626		$	12,326
Effective interest rate of the liability component		4.7	%		7.9	%		4.7	%		7.9	%

	Quarters Ended						Nine Months Ended
	September 30,						September 30,
Livongo Notes:	2021							2021
Contractual interest expense	$	1,203					$	3,609
Amortization of debt discount		4,858						14,389
Total	$	6,061					$	17,998
Effective interest rate of the liability component		5.2	%					5.2	%

	Quarters Ended						Nine Months Ended
	September 30,						September 30,
2022 Notes:		2021			2020			2021		2020
Contractual interest expense	$	0		$	351		$	116		$	3,696
Amortization of debt discount		0			650			316			6,940
Total	$	0		$	1,001		$	432		$	10,636
Effective interest rate of the liability component					10.0	%		3.0	%		10.0	%

Exchanges and Conversions of Convertible Senior Notes Due 2025

In August 2021, the Company entered into privately negotiated agreements with certain holders of the 2025 Notes to exchange approximately $5.1 million aggregate principal amount of 2025 Notes for an aggregate of 95,347 shares of the Company’s common stock in private placement transactions pursuant to Section 4(a)(2) of the Securities Act. In addition, certain holders of the 2025 Notes converted their 2025 Notes in exchange for approximately 5.2 million shares of the Company’s common stock during the nine months ended September 30, 2021. As a result of the exchanges and conversions, the Company recorded a charge associated with the loss on extinguishment of debt net of transaction fees of $0.8 million and $40.3 million during the quarter and nine months ended September 30, 2021, respectively.

Redemption and Conversions of Convertible Senior Notes Due 2022

In March 2021, the Company completed a redemption of all of the then outstanding 2022 Notes in exchange for approximately $0.1 million in cash (including accrued and unpaid interest). Prior to that redemption, certain holders of the 2022 Notes converted their 2022 Notes in exchange for 1.1 million shares of the Company’s common stock during the quarter ended March 31, 2021. As a result of the redemption and conversions, the Company recorded a charge associated with the loss on extinguishment of debt of $3.4 million during the quarter ended March 31, 2021.

Table of Contents

Note 12. Advances from Financing Companies

The Company utilizes a third-party financing company to provide certain Clients with a rental option. The principal portion of these up-front payments are reported as advances from financing companies in the accompanying consolidated balance sheet. Interest rates applicable to the outstanding advances as of September 30, 2021 ranged from 3.35% to 9.89%.

Client lease payments to third party financing companies will reduce the advances from financing companies as of September 30, 2021 by year as follows (in thousands):


	As of September 30,
	2021
2021	$	3,763
2022		11,718
2023		5,491
2024		1,031
	$	22,003

Note 13. Legal Matters

From time to time, Teladoc Health is involved in various litigation matters arising in the normal course of business, including the matters described below. The Company consults with legal counsel on those issues related to litigation and seeks input from other experts and advisors with respect to such matters. Estimating the probable losses or a range of probable losses resulting from litigation, government actions and other legal proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve discretionary amounts, present novel legal theories, are in the early stages of the proceedings, or are subject to appeal. Whether any losses, damages or remedies ultimately resulting from such matters could reasonably have a material effect on our business, financial condition, results of operations, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages (if any) and the structure and type of any such remedies. As of the date of these financial statements, Teladoc Health’s management does not expect any litigation matter to have a material adverse impact on its business, financial condition, results of operations or cash flows.

On May 14, 2018, a purported class action complaint (Thomas v. Best Doctors, Inc.) was filed in the United States District Court for the District of Massachusetts against the Company’s wholly owned subsidiary, Best Doctors, Inc. The complaint alleges that on or about May 16, 2017, Best Doctors violated the U.S. Telephone Consumer Protection Act (the “TCPA”) by sending unsolicited facsimiles to plaintiff and certain other recipients without the recipients’ prior express invitation or permission. The lawsuit seeks statutory damages for each violation, subject to trebling under the TCPA, and injunctive relief. The Company will vigorously defend the lawsuit and any potential loss is currently deemed to be immaterial.

On December 12, 2018, a purported securities class action complaint (Reiner v. Teladoc Health, Inc., et.al.) was filed in the United States District Court for the Southern District of New York (the “SDNY”) against the Company and certain of the Company’s officers and a former officer. The complaint is brought on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of the Company’s common stock during the period March 3, 2016 through December 5, 2018. The complaint asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly false or misleading statements and omissions with respect to, among other things, the alleged misconduct of one of the Company’s previous executive officers. The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys’ fees. On November 30, 2020, the SDNY granted the Company’s motion to dismiss the complaint, but granted the plaintiff the opportunity to refile, which refiling was made on December 30, 2020. The Company subsequently filed a motion to dismiss the lawsuit, which was granted with prejudice by the SDNY on September 29, 2021.

In addition, on June 21, 2019, a stockholder derivative lawsuit (Kreutter v. Gorevic, et al.) was filed in the SDNY against certain current and former directors and officers of the Company. The derivative lawsuit alleges that the named directors and officers breached their fiduciary duties to the Company in connection with factual assertions

Table of Contents

substantially similar to those in the purported securities class action complaint described above. On September 17, 2021, the Company’s motion to dismiss the lawsuit was granted with prejudice by the SDNY.

On August 27, 2021, a purported securities class action complaint (City of Hialeah Employees’ Retirement System v. Teladoc Health, Inc., et.al.) was filed in the Circuit Court of Cook County, Illinois against the Company and certain of the Company’s current and former officers and directors. The complaint is brought on behalf of a purported class consisting of all persons who acquired shares of Teladoc Health common stock issued in the Livongo merger. The complaint asserts violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 based on allegedly false or misleading statements and omissions with respect to the registration statement and prospectus filed in connection with the Livongo merger. The complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys’ fees, rescission or a rescissory measure of damages and equitable or other relief. The Company believes that these claims are without merit, and the Company and its named current and former officers and directors intend to defend the Company vigorously.

Note 14. Common Stock and Stockholders’ Equity

Capitalization

Effective October 30, 2020, the authorized number of shares of the Company’s common stock was increased from 150,000,000 to 300,000,000 shares.

Warrants

The Company had 0 warrants outstanding as of September 30, 2021 or December 31, 2020.

Stock Plans

The Company’s 2015 Incentive Award Plan, 2017 Employment Inducement Incentive Award Plan and Livongo Acquisition Incentive Award Plan (collectively, the “Plans”) provide for the issuance of incentive and non-statutory options and other equity-based awards to its employees and non-employee service providers.

In connection with the closing of the Livongo merger, the Company assumed the Livongo Health, Inc. 2019 Equity Incentive Plan, the Livongo Health, Inc. Amended and Restated 2014 Stock Incentive Plan and the Livongo Health, Inc. Amended and Restated 2008 Stock Incentive Plan (collectively, the “Assumed Plans”). At the effective time of the Livongo merger on October 30, 2020, each outstanding Livongo equity award issued under the Assumed Plans was converted into a corresponding award with respect to the Company’s common stock, with the number of shares underlying such award adjusted based on the “Equity Award Adjustment Ratio” (as defined below), and remained outstanding in accordance with the terms that were applicable to such award prior to the Livongo merger. The exercise price of each outstanding Livongo stock option was also adjusted based on the Equity Award Adjustment Ratio. The “Equity Award Adjustment Ratio” means the quotient determined by dividing (i) the volume weighted average closing price of Livongo common stock on the four trading days ending on October 29, 2020, by (ii) the volume weighted average closing price of the Company’s common stock on the New York Stock Exchange on the four trading days beginning on October 29, 2020.

All stock-based awards to employees are measured based on the grant-date fair value or replacement grant date fair value in relation to the Livongo transaction, and are generally recognized on a straight line basis in the Company’s consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award (generally requiring a four-year vesting period for each stock option and a three-year vesting period for each restricted stock unit (“RSU”)).

Stock Options

Options issued under the Plans are exercisable for periods not to exceed ten years, and vest and contain such other terms and conditions as specified in the applicable award document. Options to buy common stock are issued under the Plans, with exercise prices equal to the closing price of shares of the Company’s common stock on the New York Stock Exchange on the date of award. The Company had 12,574,026 shares available for grant at September 30, 2021.

Table of Contents

Activity under the Plans was as follows (in thousands, except share and per share amounts and years):


				Weighted-
		Weighted-		Average
	Number of	Average		Remaining	Aggregate
	Shares	Exercise		Contractual	Intrinsic
	Outstanding	Price		Life in Years	Value
Balance at December 31, 2020	5,826,685	$	17.19	5.31	$	1,064,944
Stock option grants	35,740	$	162.38	N/A
Stock options exercised	(2,120,943)	$	10.79	N/A	$	(409,182)
Stock options forfeited	(90,583)	$	30.03	N/A
Balance at September 30, 2021	3,650,899	$	21.96	5.57	$	386,390
Vested or expected to vest at September 30, 2021	3,650,899	$	21.96	7.10	$	35,607
Exercisable at September 30, 2021	3,243,849	$	18.84	5.37	$	350,848

The total grant-date fair value of stock options granted during the quarters ended September 30, 2021 and 2020 were $3.0 million and $10.7 million, respectively. The total grant-date fair value of stock options granted during the nine months ended September 30, 2021 and 2020 were $5.8 million and $11.2 million, respectively.

The Company estimates the fair value of stock options granted using the Black Scholes option pricing model.

The assumptions used in the Black-Scholes option-pricing model are determined as follows:

Volatility. The expected volatility was derived from the historical stock volatilities of the Company’s stock volatility over a period equivalent to the expected term of the stock option grants.

Expected Term. The expected term represents the period that the stock-based awards are expected to be outstanding. When establishing the expected term assumption, the Company utilizes historical data.

Risk-Free Interest Rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with terms similar to the expected term on the options.

Dividend Yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, it used an expected dividend yield of 0.

Forfeiture rate. The Company recognizes forfeitures as they occur.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions and fair value per share:


	Nine Months Ended September 30,
	2021		2020
Volatility		56.52% - 58.14%		46.1% - 56.0%
Expected term (in years)		4.1		4.1
Risk-free interest rate		0.31% - 0.70%		0.27%-1.64%
Dividend yield		0		0
Weighted-average fair value of underlying stock options	$	72.46	$	49.21

The Company determined that a Monte Carlo valuation model is most suitable for valuation of options for the replaced and replacement awards from the Livongo merger, for the following reasons:

●

Options are deeply in-the-money, as such don’t qualify as “plain-vanilla” options.

●

With the merger, the exercise pattern of the replaced and replacement options might be different from a regular “plain-vanilla” option that assumes the exercise of the option at the end of the option expiration time. A lattice approach can be used to directly model the effect of different expected periods before exercise on the fair-value-based measure of the option, whereas it is assumed under the Black-Scholes-Merton model that exercise occurs at the end of the option’s expected term.

For the quarters ended September 30, 2021 and 2020, the Company recorded compensation expense related to stock options of $23.3 million and $3.4 million, respectively. For the nine months ended September 30, 2021 and 2020,

Table of Contents

the Company recorded compensation expense related to stock options granted of $77.1 million and $11.5 million, respectively.

As of September 30, 2021, the Company had $40.4 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 0.9 years.

Restricted Stock Units

The fair value of RSUs is determined on the date of grant. The Company records compensation expense in the consolidated statement of operations on a straight-line basis over the vesting period for RSUs. The vesting period for employees and members of the Board of Directors ranges from one to four years.

Activity under RSUs was as follows:


		Weighted-Average
		Grant Date
	RSUs	Fair Value Per RSU
Balance at December 31, 2020	3,550,595	$	162.11
Granted	650,335	$	192.86
Vested and issued	(1,222,550)	$	131.65
Forfeited	(681,510)	$	183.98
Balance at September 30, 2021	2,296,870	$	175.60
Vested and unissued at September 30, 2021	13,755	$	50.90
Non-vested at September 30, 2021	2,283,115	$	175.60

The total grant-date fair value of RSUs granted during the quarters ended September 30, 2021 and 2020 were $23.1 million and $11.9 million, respectively. The total grant-date fair value of RSUs granted during the nine months ended September 30, 2021 and 2020 were $125.0 million and $54.9 million, respectively.

For the quarters ended September 30, 2021 and 2020, the Company recorded stock-based compensation expense related to RSUs of $42.8 million and $11.3 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded stock-based compensation expense related to RSUs of $142.6 million and $32.0 million, respectively.

As of September 30, 2021, the Company had $343.6 million in unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted-average period of approximately 2.2 years.

Performance Stock Units

Stock-based compensation costs associated with our performance stock units (“PSUs”) are initially determined using the fair market value of the Company's common stock on the date the awards are approved by the Compensation Committee of the Board of Directors (service inception date). The vesting of these PSUs is subject to certain performance conditions and a service requirement ranging from 1-3 years. Until the performance conditions are met, stock compensation costs associated with these PSUs are re-assessed each reporting period based upon the estimated performance attainment on the reporting date. The ultimate number of PSUs that are issued to an employee is the result of the actual performance of the Company at the end of the performance period compared to the performance conditions and can range from 50% to 225% of the initial grant. Stock compensation expense for PSUs is recognized on an accelerated tranche by tranche basis for performance-based awards. Forfeitures are accounted for at the time they occur consistent with Company policy.

Table of Contents

Activity under PSUs was as follows:


		Weighted-Average
		Grant Date
	Shares	Fair Value Per PSU
Balance at December 31, 2020	429,319	$	76.60
Granted	531,309	$	132.66
Vested and issued	(268,201)	$	74.33
Forfeited	(26,730)	$	153.05
Balance at September 30, 2021	665,697	$	119.07
Vested and unissued at September 30, 2021	0	$	0
Non-vested at September 30, 2021	665,697	$	119.07

The total grant-date fair value of PSUs granted during the quarter ended September 30, 2021 was $2.5 million and 0 PSUs were granted during the quarter ended September 30, 2020. The total grant-date fair value of PSUs granted during the nine months ended September 30, 2021 and 2020 were $70.4 million and $13.1 million, respectively.

For the quarters ended September 30, 2021 and 2020, the Company recorded stock-based compensation expense related to PSUs of $4.2 million and $5.9 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded stock-based compensation expense related to PSUs of $16.7 million and $16.8 million, respectively.

As of September 30, 2021, the Company had $22.5 million in unrecognized compensation cost related to non-vested PSUs, which is expected to be recognized over a weighted-average period of approximately 2.4 years.

Employee Stock Purchase Plan

In July 2015, the Company adopted the 2015 Employee Stock Purchase Plan (“ESPP”) in connection with its initial public offering. A total of 926,109 shares of common stock were reserved for issuance under this plan as of September 30, 2021. The Company’s ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. Under the ESPP, the Company may specify offerings with durations of not more than 27 months and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of its common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock at the beginning of an offering period or on the date of purchase.

During the quarters ended September 30, 2021 and 2020, the Company did not issue any shares under the ESPP. During the nine months ended September 30, 2021 and 2020, the Company issued 82,088 shares and 35,901 shares, respectively under the ESPP. As of September 30, 2021, 517,015 shares remained available for issuance.

For the quarters ended September 30, 2021 and 2020, the Company recorded stock-based compensation expense related to the ESPP of $1.4 million and $0.6 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded stock-based compensation expense related to the ESPP of $4.6 million and $1.4 million, respectively.

As of September 30, 2021, the Company had $0.6 million in unrecognized compensation cost related to the ESPP, which is expected to be recognized over a weighted-average period of approximately 0.1 year.

Table of Contents

Total compensation costs for stock-based awards were recorded as follows (in thousands):


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Cost of revenue (exclusive of depreciation and amortization, which is shown separately)	$	2,162	$	128	$	6,310	$	128
Advertising and marketing		5,244		1,644		15,141		4,447
Sales		17,518		3,275		57,638		9,465
Technology and development		22,910		2,622		77,335		7,285
General and administrative		23,867		13,239		84,547		39,826
Total stock-based compensation expense (1)	$	71,701	$	20,908	$	240,971	$	61,151

(1)	Excluding the amount capitalized related to internal software development projects.

Note 15. Income Taxes

As a result of the Company’s history of net operating losses (“NOL”), the Company had historically provided for a full valuation allowance against its deferred tax assets for assets that are not more-likely-than-not to be realized, which was partially released in the quarter ended December 31, 2020. The Company’s income tax expense for the quarter and nine months ended September 30, 2021 was $3.6 million and $93.9 million, respectively.

For the quarter ended September 30, 2021, the Company recognized an additional discrete non-cash income tax charge reflecting an additional valuation allowance on excess stock compensation and other state deferred tax assets associated with the Livongo merger.

For the nine months ended September 30, 2021, the Company recognized a discrete non-cash income tax charge substantially reflecting an additional valuation allowance on excess stock compensation benefits and other state deferred tax assets associated with the Livongo merger. This was recorded in the first quarter, and was partially offset by tax benefits on current period losses.

The Company’s income tax benefit for the quarter and nine months ended September 30, 2020 of $(2.3) million and $(5.4) million, respectively, was primarily related to the release of an uncertain tax provision, amortization of acquired intangibles, and stock compensation deductions.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

Many statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as “anticipates,” “believes,” “suggests,” “targets,” “projects,” “plans,” “expects,” “future,” “intends,” “estimates,” “predicts,” “potential,” “may,” “will,” “should,” “could,” “would,” “likely,” “foresee,” “forecast,” “continue” and other similar words or phrases, as well as statements in the future tense to identify these forward-looking statements. These forward-looking statements and projections are contained throughout this Form 10-Q, including the section entitled” “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Form 10-Q, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include, but are not limited to, the section entitled “Risk Factors” in the 2020 Form 10-K and in our other reports and SEC filings. These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.

Overview

Teladoc Health solutions are transforming the access, cost and quality dynamics of healthcare delivery for all of our market participants. Members rely on Teladoc Health to remotely access affordable, on-demand healthcare whenever and wherever they choose. Our Clients on behalf of their employees or beneficiaries as well as direct-to consumer individuals (D2C) purchase our solutions to reduce their healthcare spending and offer convenient, affordable, high-quality healthcare to their employees or beneficiaries. Our network of physicians and other healthcare professionals, or our providers have the ability to generate meaningful income and deliver their services more efficiently with no administrative burden.

COVID-19 Update

We believe that favorable existing macro trends were accelerated by the impacts of the COVID-19 pandemic, driving greater consumer trial and use of virtual care, and increased adoption by employers, health plans, hospitals and health systems, and health care providers. In combination with the expansion of our capabilities, we believe that these trends present significant opportunities for virtual healthcare to address the most pressing, universal healthcare challenges through trusted solutions, such as ours, that deliver convenient, high quality care; empower consumers to manage and improve their health; and enable providers to offer their best care for their patients.

We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. The outbreak of COVID-19 in 2020 increased utilization of our telehealth services, but it is uncertain whether such increase in demand will continue. While the COVID-19 pandemic has not had a material adverse impact on our financial

Table of Contents

condition and results of operations to date, the future impact on our operational and financial performance will depend on certain developments, including the duration and spread of the pandemic, impact on our Clients and Members, impact on our sales cycles, and effect on our vendors, all of which are uncertain and cannot be predicted. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to our operations and the operations of our third-party suppliers, along with any related global slowdown in economic activity, may result in decreased revenues, decreased collections, and increased costs. Further, the economic effects of the COVID-19 pandemic have financially constrained some of our prospective and existing Clients’ healthcare spending, which may negatively impact our ability to acquire new Clients and our ability to renew subscriptions with or sell additional solutions to our existing Clients. We also may experience increased Member attrition to the extent our existing Clients reduce their respective workforces in response to economic conditions. In addition, due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our revenue until future periods. It is possible that the COVID-19 pandemic, the measures taken by the governments and businesses affected and any resulting economic impact may materially and adversely affect our business, results of operations, cash flows and financial positions as well as our customers.

We have also taken measures in response to the COVID-19 pandemic, and we may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities or that we determine are in the best interests of our employees, Clients, Members, and stockholders. The effects of these operational modifications are unknown and may not be realized until future reporting periods.

Acquisition History

We have scaled and intend to continue to scale our platform through the pursuit of selective acquisitions. We have completed multiple acquisitions since our inception, which we believe have expanded our distribution capabilities and broadened our service offerings.

On January 4, 2021, we completed the acquisition of the UK-based telemedicine provider Consultant Connect for an aggregate consideration of $56.3 million, net of cash acquired. Consultant Connect provides a platform that specializes in facilitating healthcare professional-to-professional advice and guidance in the United Kingdom.

On October 30, 2020, we completed the merger with Livongo. Upon completion of the merger, each share of Livongo’s common stock converted into the right to receive 0.5920 shares of Teladoc Health’s common stock and $4.24 in cash, without interest. In addition, in connection with the closing of the merger, Livongo paid a special cash dividend equal to $7.09 per share to shareholders of Livongo as of a record date of October 29, 2020. The total consideration was $13,876.9 million consisting of $380.2 million of net cash, $555.4 million related to the conversion feature of the Livongo Notes guaranteed by the Company and 60.2 million shares of Teladoc Health’s common stock valued at approximately $12,941.3 million on October 30, 2020. Livongo is a leading provider to empower people with chronic conditions to live better and healthier lives.

On July 1, 2020, we completed the acquisition of InTouch for aggregate consideration of $1,069.8 million, which was comprised of 4.6 million shares of our common stock valued at $903.3 million on July 1, 2020, and $166.5 million of net cash. InTouch is a leading provider of enterprise telehealth solutions for hospitals and health systems.

Revenue

We have a demonstrated track record of driving growth both organically and through acquisitions. For the quarter ended September 30, 2021, we increased revenue by 81% to $521.7 million, including the impact from acquired businesses. For the nine months ended September 30, 2021 we increased revenue by 108% to $1,478.5 million, including the impact from acquired businesses. Excluding the impact of the acquisitions, revenue increased 32% and 44% for the quarter and nine months ended September 30, 2021, respectively, reflecting the acceleration of the adoption of virtual care stemming from the COVID-19 pandemic and the Company’s broad momentum to transform the healthcare experience.

For the quarter ended September 30, 2021, 87%, 11% and 2% of our revenue was derived from access fees, visit fees and other revenue, respectively, and for the nine months ended September 30, 2021, 86%, 12% and 2% of our revenue was derived from access fees, visit fees, and other revenue, respectively. For the quarter ended September 30, 2020, 78%, 18% and 4% of our revenue was derived from access fees, visit fees and other revenue, respectively,

Table of Contents

and for the nine months ended September 30, 2020, 77%, 22% and 1% of our revenue were derived from access fees, visit fees, and other revenue, respectively. We believe our continued strong access fee revenue is mainly representative of the value proposition we provide the broader healthcare system.

Key Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including the following:

Number of Members. Our revenue growth rate and long-term profitability are affected by our ability to increase our number of Members because we derive a substantial portion of our revenue from access and other fees via Client contracts that provide Members access to our professional provider network primarily in exchange for contractual based periodic fees or access fees derived from our D2C Members. Therefore, we believe that our ability to add new Members is a key indicator of our increasing market adoption, the growth of our business and future revenue potential, and that increasing our Membership is an integral objective that will provide us with the ability to continually innovate our services and support initiatives that will enhance Members’ experiences. U.S. Paid Membership was 52.5 million at September 30, 2021.

Number of Visits. We also recognize revenue in connection with the completion of a general medical visit, expert medical service, and other specialty visits for contracts where the service is not part of access fees. Visit fee revenue is driven primarily by the number of Clients, the number of Members in a Client’s population, Member utilization of our provider network services and the contractually negotiated prices of our services. We believe that increasing our current Member utilization rate and increasing penetration further into existing and new health plan Clients is a key objective in order for our Clients to realize tangible healthcare savings with our service. Visits increased by 37%, or 1.1 million, to approximately 3.9 million for the quarter ended September 30, 2021 compared to the same period in 2020. Visits increased by 39%, or 3.0 million, to approximately 10.6 million for the nine months ended September 30, 2021 compared to the same period in 2020.

Number of Platform-Enabled Sessions. A platform-enabled session is a unique instance in which our licensed software platform has facilitated a virtual voice or video encounter between a care provider and our Client’s patient, or between care providers. We believe platform-enabled sessions are an indicator of the value our Clients derive from the platform they license from us in order to facilitate virtual care. Over time, we expect platform-enabled sessions to outpace overall revenue growth as telehealth becomes a bigger part of our Clients’ care delivery strategy. Our Clients completed 1.0 million and 3.1 million platform-enabled sessions during the quarter and nine months ended September 30, 2021, respectively.

Seasonality. We typically experience the strongest increases in consecutive quarterly revenue during the fourth and first quarters of each year, which coincides with traditional annual benefit enrollment seasons. In particular, as a result of many Clients’ introduction of new services at the very end of the current year, or the start of each year, a high concentration of our new Client contracts has an effective date of January 1. Therefore, while Membership increases, utilization is dampened until service delivery ramps up over the course of the year. Additionally, our business has become more diversified across services, channels, and geographies. We continue to see a diversification of Client start dates, resulting from our health plan expansions, cross sales of new services, international growth, and mid-market employer growth, all of which are not constrained by a calendar year start.

As a result of national seasonal cold and flu trends, we typically experience our highest level of visit fees during the first and fourth quarters of each year. Conversely, the second quarter of the year has historically been the period of lowest utilization of our provider network services relative to the other quarters of the year. However, during the COVID-19 pandemic in 2021 and 2020, we did not experience the typical seasonality associated with national cold and flu outbreaks. See “Risk Factors—Risks Related to Our Business—Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock” included in our Form 10-K for the year ended December 31, 2020 filed with the SEC.

Table of Contents

Critical Accounting Policies and Estimates

Our discussion and analysis of our results of operations, liquidity and capital resources are based on our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates and judgments, including those related to the allowance for doubtful accounts, the carrying value of long-lived assets (including goodwill and intangible assets), capitalization and amortization of software development costs, the finalization of purchase accounting adjustments, Client performance guarantees, the calculation of a contingent liability in connection with an acquisition earn-out, the provision for income taxes and related deferred tax accounts, revenue recognition, contingencies, and other items. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our results of operations and financial position. For a discussion of our critical accounting policies and estimates see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the year ended December 31, 2020 filed with the SEC.

Consolidated Results of Operations

The following table sets forth our consolidated statement of operations data for the quarters and nine months ended September 30, 2021 and 2020 and the dollar and percentage change between the respective periods (in thousands):


	Quarter Ended September 30,								Nine Months Ended September 30,
	2021		2020						2021		2020
	$		$		Variance		%		$		$		Variance		%
Revenue	$	521,658	$	288,812	$	232,846	81	%	$	1,478,472	$	710,641	$	767,831	108	%
Expenses:
Cost of revenue (exclusive of depreciation and amortization, which is shown separately below)		169,041		104,725		64,316	61	%		475,273		267,887		207,386	77	%
Operating expenses:
Advertising and marketing		111,078		52,302		58,776	112	%		303,738		132,395		171,343	129	%
Sales		62,602		23,483		39,119	167	%		191,251		60,110		131,141	218	%
Technology and development		80,250		29,958		50,292	168	%		239,017		72,244		166,773	231	%
Acquisition, integration and transformation costs		4,340		25,395		(21,055)	(83)	%		22,084		30,686		(8,602)	(28)	%
General and administrative		103,016		59,742		43,274	72	%		319,404		162,699		156,705	96	%
Depreciation and amortization		51,907		12,932		38,975	301	%		151,907		32,535		119,372	367	%
Total expenses		582,234		308,537		273,697	89	%		1,702,674		758,556		944,118	124	%
Loss from operations		(60,576)		(19,725)		(40,851)	207	%		(224,202)		(47,915)		(176,287)	368	%
Loss on extinguishment of debt		850		1,227		(377)	(31)	%		43,728		8,978		34,750	387	%
Other expense (income), net		376		252		124	49	%		(5,493)		827		(6,320)	N/M	%
Interest expense, net		18,895		16,970		1,925	11	%		61,493		38,849		22,644	58	%
Net loss before taxes		(80,697)		(38,174)		(42,523)	111	%		(323,930)		(96,569)		(227,361)	235	%
Income tax expense (benefit)		3,643		(2,290)		5,933	(259)	%		93,878		(5,400)		99,278	N/M	%
Net loss	$	(84,340)	$	(35,884)	$	(48,456)	135	%	$	(417,808)	$	(91,169)	$	(326,639)	358	%

Table of Contents

EBITDA and Adjusted EBITDA

The following is a reconciliation of net loss, the most directly comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA for the quarters and nine months ended September 30, 2021 and 2020 (in thousands):


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net loss	$	(84,340)	$	(35,884)	$	(417,808)	$	(91,169)
Add:
Loss on extinguishment of debt		850		1,227		43,728		8,978
Other expense (income), net		376		252		(5,493)		827
Interest expense, net		18,895		16,970		61,493		38,849
Income tax expense (benefit)		3,643		(2,290)		93,878		(5,400)
Depreciation and amortization		51,907		12,932		151,907		32,535
EBITDA(1)		(8,669)		(6,793)		(72,295)		(15,380)
Stock-based compensation		71,701		20,908		240,971		61,151
Acquisition, integration and transformation costs		4,340		25,395		22,084		30,686
Adjusted EBITDA(1)	$	67,372	$	39,510	$	190,760	$	76,457

(1)	Non-GAAP Financial Measures:

To supplement our financial information presented in accordance with U.S. GAAP, we use EBITDA and Adjusted EBITDA, which are non-U.S. GAAP financial measures, to clarify and enhance an understanding of past performance. We believe that the presentation of these financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful financial metrics to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. We use certain financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We utilize Adjusted EBITDA as the primary measure of our performance.

EBITDA consists of net loss before interest; other expense (income), net, including foreign exchange gain or loss; taxes; depreciation and amortization; and loss on extinguishment of debt. Adjusted EBITDA consists of net loss before interest; other expense (income), net, including foreign exchange gain or loss; taxes; depreciation and amortization; loss on extinguishment of debt; stock-based compensation; and acquisition, integration and transformation costs. We believe that making such adjustments provides investors meaningful information to understand our results of operations and the ability to analyze financial and business trends on a period-to-period basis.

We believe the above financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the terms EBITDA and Adjusted EBITDA may vary from that of others in our industry. Neither EBITDA nor Adjusted EBITDA should be considered as an alternative to net loss before taxes, net loss, loss per share or any other performance measures derived in accordance with U.S. GAAP.

EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

●

EBITDA and Adjusted EBITDA do not reflect the significant interest expense on our debt;

●

EBITDA and Adjusted EBITDA eliminate the impact of income taxes on our results of operations;

●

EBITDA and Adjusted EBITDA do not reflect the loss on extinguishment of debt;

●

EBITDA and Adjusted EBITDA do not reflect other expense (income), net;

●

Adjusted EBITDA does not reflect the significant acquisition, integration and transformation costs. Acquisition, integration and transformation costs include investment banking, financing, legal, accounting, consultancy, integration, fair value changes related to contingent consideration and certain other transaction costs related to mergers and acquisitions. It also includes costs related to certain business transformation

Table of Contents

initiatives focused on integrating and optimizing various operations and systems, including upgrading our customer relationship management (CRM) and enterprise resource planning (ERP) systems. These transformation cost adjustments made to our results do not represent normal, recurring, operating expenses necessary to operate the business but rather, incremental costs incurred in connection with our acquisition and integration activities;

●

Adjusted EBITDA does not reflect the significant non-cash stock compensation expense which should be viewed as a component of recurring operating costs; and

●

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting the usefulness of these measures as comparative measures.

In addition, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect any expenditures for such replacements.

We compensate for these limitations by using EBITDA and Adjusted EBITDA along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. Such U.S. GAAP measurements include net loss, net loss per share and other performance measures.

In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

Consolidated Results of Operations

The results of operations for completed acquisitions have been included in our unaudited consolidated financial statements included in this Quarterly Report from the date of each acquisition. For the purpose of excluding the impact of acquisitions, operating results from acquired businesses are excluded from overall Company results for four fiscal quarters following the acquisition date where indicated in the below discussion.

Revenue. Total revenue was $521.7 million for the quarter ended September 30, 2021, compared to $288.8 million during the quarter ended September 30, 2020, an increase of $232.8 million, or 81%. Excluding the impact from acquisitions, revenue increased 32%. This increase in revenue was driven primarily by the generation of additional access fees by our membership base, most significantly among behavorial health specialities. Revenue from U.S. subscription access fees was $413.6 million for the quarter ended September 30, 2021 compared to $194.6 million for the quarter ended September 30, 2020, an increase of $219.0 million, or 113%. In addition, revenue from international access fees was $38.0 million for the quarter ended September 30, 2021 compared to $32.0 million for the quarter ended September 30, 2020, an increase of $6.0 million, or 19%.

Total revenue was $1,478.5 million for the nine months ended September 30, 2021, compared to $710.6 million for the nine months ended September 30, 2020, an increase of $767.8 million, or 108%. Excluding the impact from acquisitions, revenue increased 44%. Similar to the quarterly results, these increases were driven primarily by the generation of additional access fees by our membership base, most significantly among behavorial health specialities. Revenue from U.S. access fees was $1,161.1 million for the nine months ended September 30, 2021 compared to $454.6 million for the nine months ended September 30, 2020, an increase of $706.5 million, or 155%. In addition, international access fees, visit fees and other revenues increased by $21.4 million, $20.1 million and $19.8 million, respectively, on a year-to-date basis.

Cost of Revenue (exclusive of depreciation and amortization, which is shown separately below). Cost of revenue (exclusive of depreciation and amortization, which is shown separately below) was $169.0 million for the quarter ended September 30, 2021 compared to $104.7 million for the quarter ended September 30, 2020, an increase of $64.3 million, or 61%. Cost of revenue increased by $207.4 million, or 77%, on a year-to-date basis. The increase for both the quarter and year-to-date periods were primarily due to the impact of acquisitions, growth in visits associated with higher revenue which resulted in increased provider fees, and increased physician network operation center costs.

Table of Contents

Advertising and Marketing Expenses. Advertising and marketing expenses were $111.1 million for the quarter ended September 30, 2021 compared to $52.3 million for the quarter ended September 30, 2020, an increase of $58.8 million, or 112%. The increase was driven by a $44.2 million increase in Member engagement initiatives, digital and media advertising, sponsorship of professional organizations and trade shows; the impact from acquisitions; and a $2.6 million impact driven by the hiring of additional personnel.

On a year-to-date basis, advertising and marketing expenses increased by $171.3 million, or 129%, driven by a $123.1 million increase in Member engagement initiatives, digital and media advertising, sponsorship of professional organizations and trade shows, the impact of acquisitions, and a $6.1 million impact driven by the hiring of additional personnel.

Sales Expenses. Sales expenses were $62.6 million for the quarter ended September 30, 2021 compared to $23.5 million for the quarter ended September 30, 2020, an increase of $39.1 million, or 167%. On a year-to-date basis, sales expense increased $131.1 million, or 218%. The increases for both the quarter and year-to-date periods substantially reflect the impact from acquisitions.

Technology and Development Expenses. Technology and development expenses were $80.3 million for the quarter ended September 30, 2021 compared to $30.0 million for the quarter ended September 30, 2020, an increase of $50.3 million, or 168%. On a year-to-date basis, technology and development expenses increased by $166.8 million, or 231%. In addition to substantially reflecting the impact of acquisitions, the increases for the quarter and year-to-date periods were driven by increases of $3.0 million and $12.0 million, respectively, due to the hiring of additional personnel and increases of $0.9 million and $10.3 million, respectively, due to ongoing projects to continuously improve our technology portfolio and other similar items.

Acquisition, Integration and Transformation Costs. Acquisition, integration and transformation costs include investment banking, financing, legal, accounting, consultancy, integration, fair value changes related to contingent consideration and certain other transaction costs related to mergers and acquisitions. It also includes costs related to certain internal business transformation initiatives focused on integrating and optimizing various operations and systems, including upgrading our customer relationship management (CRM) and enterprise resource planning (ERP) systems.

Acquisition, integration and transformation costs were $4.3 million for the quarter ended September 30, 2021 compared to $25.4 million for the quarter ended September 30, 2020, a decrease of $21.1 million, primarily driven by expenses incurred for the Livongo merger in the prior year. These costs also decreased by $8.6 million on a year-to-date basis due to the timing of expenditures to drive integration and transformation activities resulting from the InTouch, Livongo and Consultant Connect acquisitions.

General and Administrative Expenses. General and administrative expenses were $103.0 million for the quarter ended September 30, 2021 compared to $59.7 million for the quarter ended September 30, 2020, an increase of $43.3 million, or 72%. The increase primarily reflects the impact of acquisitions. Other expenses, including office-related charges, bank charges, therapist recruiting, liability insurance, legal fees and related contingencies and bad debt expenses, increased a combined total of $16.6 million, reflecting the overall impact of growth on the business.

On a year-to-date basis, general and administrative expenses increased by $156.7 million, or 96%. The increase primarily reflects the impact of acquisitions and a $12.6 million increase in employee-related expenses reflecting the acceleration of the adoption of virtual care stemming from the COVID-19 pandemic. Other expenses, including office-related charges, bank charges, therapist recruiting, liability insurance, legal fees and related contingencies and bad debt expenses, increased a combined total of $50.0 million, reflecting the overall impact of growth on the business.

Depreciation and Amortization. Depreciation and amortization was $51.9 million for the quarter ended September 30, 2021 compared to $12.9 million for the quarter ended September 30, 2020, an increase of $39.0 million. Depreciation and amortization was $151.9 million for the nine months ended September 30, 2021 compared to $32.5 million, an increase of $119.4 million on a year-to-date basis. This increase was due to additional amortization and depreciation expense substantially related to intangible assets and fixed assets acquired from recent acquisitions.

Loss on Extinguishment of Debt. Loss on extinguishment of debt was $0.8 million for the quarter ended September 30, 2021 compared to $1.2 million for the quarter ended September 30, 2020, a decrease of $0.4 million. On a year-to-date basis, loss on extinguishment of debt increased by $34.8 million. This increase was primarily due to the exchanges and conversions of the 2025 Notes.

Table of Contents

Other Expense (Income), Net. Other expense (income), net was $0.4 million for the quarter ended September 30, 2021 compared to $0.3 million for the quarter ended September 30, 2020 and consisted primarily of foreign exchange remeasurements. Other expense (income), net was $(5.5) million for the nine months ended September 30, 2021, compared to $0.8 million for the nine months ended September 30, 2020. The year-to-date change consisted primarily of a $5.9 million gain on sale of a non-marketable equity security.

Interest Expense, Net. Interest expense, net consists of interest costs and amortization of debt discount associated with advances from financing companies, our convertible senior notes, interest income from cash and cash equivalents and short-term investments in marketable securities. Interest expense, net was $18.9 million and $17.0 million for the quarters ended September 30, 2021 and 2020, respectively. Interest expense, net was $61.5 million for the nine months ended September 30, 2021 compared to $38.8 million for the nine months ended September 30, 2020. The increase in interest expense primarily is associated with the 2027 Notes issued in May 2020 and Livongo Notes that the Company agreed to guarantee in October 2020.

Income tax expense (benefit). Income tax expense was $3.6 million for the quarter ended September 30, 2021 compared to $(2.3) million benefit for the quarter ended September 30, 2020. Income tax expense was $93.9 million for the nine months ended September 30, 2021 compared to $(5.4) million benefit for the nine months ended September 30, 2020. In the first quarter 2021, we recognized a non-cash income tax expense of $87.0 million, substantially reflecting the discrete charge for additional valuation allowance on excess stock compensation benefits associated with the Livongo merger.

Liquidity and Capital Resources

The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):


	Nine Months Ended
	September 30,
	2021		2020
Consolidated Statements of Cash Flows Data
Net cash provided by operating activities	$	110,782	$	61,425
Net cash used in investing activities		(52,906)		(177,050)
Net cash provided by financing activities		34,322		788,700
Total	$	92,198	$	673,075

Our principal sources of liquidity were cash and cash equivalents, comprised of money market funds and marketable securities, totaling $823.8 million, including restricted cash of $3.8 million as of September 30, 2021. Additionally, we had short-term marketable securities of $2.5 million as of September 30, 2021.

We believe that our existing cash and cash equivalents and short-term marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, contract renewal activity, number of visits, the timing and extent of spending to support product development efforts, our expansion of sales and marketing activities, the introduction of new and enhanced services offerings and the continuing market acceptance of telehealth. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be adversely affected.

Historically, we have raised additional financing primarily through sales of equity securities, convertible debt issuance and bank borrowings. See Note 11, “Convertible Senior Notes” of the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information on the Notes.

Cash Provided by Operating Activities

For the nine months ended September 30, 2021 cash flows provided by operating activities consisted of net loss adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $110.8 million for the nine months ended September 30, 2021 compared to cash provided by operating activities of $61.4 million for the prior year period. The year-over-year increase was primarily driven by higher revenues; offset by

Table of Contents

increased payments for bonuses and payroll taxes; an increase in prepaid expenses substantially related to deferred device costs; and other net working capital movements.

Our primary uses of cash from operating activities are for the payment of cash compensation expenses, provider fees, inventory, insurance, office expenses, technology costs, market data costs, legal and professional fees, interest expense and acquisition, integration and transformation costs. Historically, the payment of cash for compensation and benefits is at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year.

Cash Used in Investing Activities

Cash used in investing activities was $52.9 million for the nine months ended September 30, 2021. Cash used in investing activities consisted of acquisition of businesses of $75.9 million, net of cash acquired; investment in capital expenditures totaling $5.6 million; investments in capitalized software development costs of $35.4 million; partially offset by proceeds from short-term marketable securities of $50.0 million and sale of investment of $10.9 million.

Cash used in investing activities was $177.1 million for the nine months ended September 30, 2020. Cash used in investing activities consisted of the InTouch acquisiton of $159.7 million, purchases of property and equipment totaling $2.9 million and investments in internally developed capitalized software of $14.5 million.

Cash Provided by Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2021 was $34.3 million. Cash provided by financing activities primarily consisted of $23.0 million of proceeds from the exercise of employee stock options, $14.0 million of proceeds withheld from participants in the employee stock purchase plan, $10.7 million of proceeds from advances from financing companies, offset by $12.1 million from a net change in payments against advances from financing companies.

Cash provided by financing activities for the nine months ended September 30, 2020 was $788.7 million. Cash provided by financing activities consisted of $975.9 million of net cash proceeds from the issuance of the 2027 Notes, $40.6 million of proceeds from the exercise of employee stock options, $2.5 million of proceeds from employee stock purchase plan and $1.9 million of proceeds from advances from financing companies, offset by $228.2 million of cash used in the repurchase of 2022 Notes and $4.4 million from a net change in payments against advances from financing companies.

Contractual Obligations and Commitments

The following summarizes our contractual obligations as of September 30, 2021 (in thousands):


	Payment Due by Period
			Less than		1 to 3		4 to 5		More than
	Total		1 Year		Years		Years		5 Years
Operating leases	$	67,650	$	14,594	$	25,799	$	13,260	$	13,997
Non-cancelable purchase commitments		6,366		4,040		2,326		0		0
Debt obligations under the Convertible Notes		1,550,882		0		0		550,882		1,000,000
Interest associated with the Convertible Notes		88,790		17,325		34,916		28,216		8,333
Total	$	1,713,688	$	35,959	$	63,041	$	592,358	$	1,022,330

Our existing office and hosting co-location facilities lease agreements provide us with the option to renew and generally provide for rental payments on a graduated basis. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations and if we exercised the office and hosting co-location facilities lease options. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the transaction. Non-cancelable purchase commitments include inventory purchases, cloud-based software contracts and other goods and services. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Table of Contents

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market, or credit risk that could arise if we had engaged in those types of relationships.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk and Foreign Exchange Risk

Cash equivalents that are subject to interest rate volatility represent our principal market risk. We do not expect cash flows to be affected to any significant degree by a sudden change in market interest rates. We do not enter into investments for trading or speculative purposes.

We operate our business primarily within the United States and currently execute approximately 93% of our transactions in U.S. dollars. We have not utilized hedging strategies with respect to any foreign exchange exposure. This limited foreign currency translation risk is not expected to have a material impact on our consolidated financial statements.

Concentrations of Risk and Significant Clients

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. Although we deposit our cash with multiple financial institutions in the U.S. and in foreign countries, our deposits, at times, may exceed federally insured limits. Our short-term investments are comprised of a portfolio of diverse high credit rating instruments with maturity durations of one year or less.

No Client represented over 10% of revenues for the quarters or nine months ended September 30, 2021 or 2020.

No Client represented over 10% of accounts receivable at September 30, 2021 or December 31, 2020.

Revenues are reported by location of the client for our business to business activities and by location of where our operations are primarily located for direct to consumer activities. Revenue from Clients located in the United States for the quarters ended September 30, 2021 and 2020 were $483.0 million and $255.9 million, respectively. Revenue from Clients located outside the United States for the quarters ended September 30, 2021 and 2020 were $38.6 million and $32.9 million, respectively. Revenue from Clients located in the United States for the nine months ended September 30, 2021 and 2020 were $1,363.9 million and $617.8 million, respectively. Revenue from Clients located outside the United States for the nine months ended September 30, 2021 and 2020 were $114.5 million and $92.8 million, respectively.

Item 4. Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2021, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to provide

Table of Contents

reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal proceedings, claims and litigation arising in the ordinary course of our business. Descriptions of certain legal proceedings to which we are a party are contained in Note 13, “Legal Matters”, to our consolidated financial statements included in this Quarterly Report on Form 10-Q and are incorporated by reference herein.

Item 1A. Risk Factors

For a discussion of potential risks and uncertainties related to our Company see the information in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the “Special Note Regarding Forward-Looking Statements” section in Part I, Item 2, of this Quarterly Report on Form 10-Q.

Table of Contents

Item 6. Exhibits

Exhibit

Index

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed
Herewith

3.1

Sixth Amended and Restated Certificate of Incorporation of Teladoc Health, Inc.

8-K

001-37477

3.1

5/31/17

3.2

Certificate of Amendment of Sixth Amended and Restated Certificate of Incorporation of Teladoc, Inc.

8-K

001-37477

3.1

6/01/18

3.3

Second Certificate of Amendment of Sixth Amended and Restated Certificate of Incorporation of Teladoc Health, Inc.

8-K

001-37477

3.1

8/10/18

3.4

Certificate of Amendment of the Sixth Amended and Restated Certificate of Incorporation of Teladoc Health, Inc.

8-K

001-37477

3.1

10/30/20

3.5

Fifth Amended and Restated Bylaws of Teladoc Health, Inc.

8-K

001-37477

3.1

2/19/21

10.1

Teladoc Health, Inc. Senior Leader Severance Plan.

31.1

Chief Executive Officer—Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Chief Financial Officer—Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Chief Executive Officer—Certification pursuant to Rule13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Chief Financial Officer—Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the

Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document.

Table of Contents

101.CAL

XBRL Taxonomy Calculation Linkbase Document.

101.DEF

XBRL Definition Linkbase Document.

101.LAB

XBRL Taxonomy Label Linkbase Document.

101.PRE

XBRL Taxonomy Presentation Linkbase Document.

104

Cover Page Interactive Data File – The Cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

* Filed herewith.

** Furnished herewith.

Table of Contents

Signatures

Pursuant to the requirements 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.

	TELADOC HEALTH, INC.

Date: November 1, 2021	By:	/s/ JASON GOREVIC
	Name:	Jason Gorevic
	Title:	Chief Executive Officer

Date: November 1, 2021	By:	/s/ MALA MURTHY
	Name:	Mala Murthy
	Title:	Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Teladoc Health (TDOC) 10-Q2021 Q3 Quarterly report

Content analysis