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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 May 31, 2020

OR

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: 001-39348

ACCOLADE, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

01-0969591
(I.R.S. Employer
Identification No.)

1201 Third Avenue, Suite 1700
Seattle, WA 98101
(Address of principal executive offices
including zip code)

Registrant’s telephone number, including area code: (206926-8100

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

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

ACCD

The Nasdaq Stock Market LLC

(The Nasdaq Global Select Market)

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

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 July 31, 2020, 49,143,591 shares of the registrant’s common stock were outstanding.

Table of Contents

ACCOLADE, INC.

INDEX

PAGE
NUMBER

Special Note Regarding Forward Looking Information

3

PART I FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of May 31, 2020 and February 29, 2020

4

Condensed Consolidated Statements of Operations for the three months ended May 31, 2020 and 2019

5

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit for the three months ended May 31, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the three months ended May 31, 2020 and 2019

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 3.

Defaults Upon Senior Securities

69

Item 4.

Mine Safety Disclosures

69

Item 5.

Other Information

69

Item 6.

Exhibits

69

2

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as "anticipate," "believe," "contemplate," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "will," or "would" or the negative of these words or other similar terms or expressions. Forward-looking statements include information related to our financial performance and possible or assumed future results of operations and expenses, our outlook, business strategies and plans, business environment, market size, product capabilities, timing of new product releases, the impact of our focus areas and key initiatives, and potential future growth. Forward-looking statements include all statements that are not historical facts.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

3

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ACCOLADE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (unaudited)

(In thousands, except share and per share data)

May 31, 

February 29, 

Assets

    

2020

    

2020

Current assets:

Cash and cash equivalents

$

77,682

$

33,155

Accounts receivable

 

2,971

294

Unbilled revenue

 

234

895

Current portion of deferred contract acquisition costs

 

1,395

1,368

Current portion of deferred financing fees

 

279

279

Prepaid and other current assets

 

14,193

12,944

Total current assets

 

96,754

48,935

Property and equipment, net

 

12,598

13,625

Goodwill

 

4,013

4,013

Acquired technology, net

 

1,692

2,054

Deferred contract acquisition costs

 

4,103

3,876

Other assets

 

1,322

745

Total assets

$

120,482

$

73,248

Liabilities, convertible preferred stock and stockholders’ deficit

Current liabilities:

Accounts payable

$

4,940

$

5,273

Accrued expenses

 

4,375

6,580

Accrued compensation

 

26,627

23,838

Deferred rent and other current liabilities

 

729

674

Due to customers

 

4,278

4,674

Current portion of deferred revenue

 

34,444

28,919

Total current liabilities

 

75,393

69,958

Loans payable, net of unamortized issuance costs

 

72,524

21,144

Deferred rent and other noncurrent liabilities

 

5,614

5,523

Deferred revenue

 

426

396

Total liabilities

 

153,957

97,021

Convertible preferred stock :

Preferred stock; 19,513,996 shares authorized; 19,513,939 issued and outstanding at May 31, 2020 and February 29, 2020, respectively (liquidation value of $239,244 at May 31, 2020)

233,022

233,022

Commitments (note 11)

Stockholders’ deficit

Common stock par value $0.0001; 65,000,000 shares authorized; 6,381,257 and 6,033,450 shares issued and outstanding at May 31, 2020 and February 29, 2020, respectively

 

2

2

Additional paid-in capital

 

68,329

64,071

Accumulated deficit

 

(334,828)

(320,868)

Total stockholders’ deficit

 

(266,497)

(256,795)

Total liabilities, convertible preferred stock and stockholders’ deficit

$

120,482

$

73,248

See accompanying notes to consolidated financial statements.

4

Table of Contents

ACCOLADE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

(In thousands, except share and per share data)

Three months ended May 31, 

    

2020

    

2019

Revenue

$

35,894

$

28,763

Cost of revenue, excluding depreciation and amortization

 

22,239

 

17,435

Operating expenses:

Product and technology

 

11,370

 

11,246

Sales and marketing

 

7,315

 

7,662

General and administrative

 

5,667

 

5,563

Depreciation and amortization

 

1,928

 

2,160

Total operating expenses

 

26,280

 

26,631

Loss from operations

 

(12,625)

 

(15,303)

Interest expense, net

 

(1,282)

 

(543)

Other expense

 

(15)

 

(34)

Loss before income taxes

 

(13,922)

 

(15,880)

Income tax expense

 

(38)

 

(23)

Net loss

$

(13,960)

$

(15,903)

Net loss per share, basic and diluted

$

(1.86)

$

(3.22)

Weighted-average common shares outstanding, basic and diluted

 

7,524,016

 

4,945,593

See accompanying notes to consolidated financial statements.

5

Table of Contents

ACCOLADE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (unaudited)

(In thousands, except shares)

Convertible Preferred stock

  

  

Stockholders' Deficit

Common stock

Additional

Accumulated

 

    

Shares

    

Amount

Shares

    

Amount

    

paid-in capital

    

deficit

    

Total

Balance February 28, 2019

18,640,901

$

214,664

3,616,549

$

1

$

38,881

$

(269,503)

$

(230,621)

Exercise of stock options and common stock warrants

90,322

356

356

Stock-based compensation expense

1,436

1,436

Net loss

(15,903)

(15,903)

Balance, May 31, 2019

18,640,901

$

214,664

3,706,871

$

1

$

40,673

$

(285,406)

$

(244,732)

Balance February 29, 2020

19,513,939

$

233,022

6,033,450

$

2

$

64,071

$

(320,868)

$

(256,795)

Exercise of stock options and common stock warrants

 

347,807

 

 

2,999

 

 

2,999

Stock-based compensation expense

 

 

 

1,259

 

 

1,259

Net loss

 

 

 

 

(13,960)

 

(13,960)

Balance, May 31, 2020

19,513,939

$

233,022

6,381,257

$

2

$

68,329

$

(334,828)

$

(266,497)

See accompanying notes to consolidated financial statements.

6

Table of Contents

ACCOLADE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

Three months ended May 31, 

    

2020

    

2019

Cash flows from operating activities:

Net loss

$

(13,960)

$

(15,903)

Adjustments to reconcile net loss to net cash used in

Operating activities:

Depreciation and amortization expense

 

1,928

2,160

Amortization of deferred contract acquisition costs

 

393

228

Noncash interest expense

 

141

90

Stock-based compensation expense

 

1,259

1,436

Changes in operating assets and liabilities:

Accounts receivable and unbilled revenue

 

(2,016)

(43)

Accounts payable and accrued expenses

 

(1,683)

(52)

Deferred contract acquisition costs

 

(647)

(345)

Deferred revenue and due to customer

 

5,159

2,521

Accrued compensation

 

2,789

(5,572)

Deferred rent and other liabilities

 

146

(134)

Other assets

 

(1,826)

(1,266)

Net cash used in operating activities

 

(8,317)

(16,880)

Cash flows from investing activities:

Capitalized software development costs

 

(289)

Purchases of property and equipment

 

(249)

(109)

Net cash used in investing activities

 

(538)

(109)

Cash flows from financing activities:

Proceeds from stock option and warrant exercises

 

2,937

345

Proceeds from borrowings on debt

 

51,166

Payments of initial public offering costs

 

(721)

Net cash provided by financing activities

 

53,382

345

Net increase (decrease) in cash and cash equivalents

 

44,527

(16,644)

Cash and cash equivalents, beginning of period

 

33,155

42,701

Cash and cash equivalents, end of period

$

77,682

$

26,057

Supplemental cash flow information:

Interest paid

$

586

$

601

Fixed assets included in accounts payable

$

42

$

16

Other receivable related to stock option exercises

$

234

$

11

Income taxes paid

$

13

$

Offering costs included in prepaid and other current assets and accounts payable and accrued expenses

$

2,474

$

See accompanying notes to consolidated financial statements.

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data)

(1)   Background

(a) Business

Accolade, Inc. was initially organized as a limited liability company under the name Accretive Care LLC in Delaware on January 23, 2007. On June 14, 2010, the company converted from a limited liability company to a Delaware corporation and changed its name to Accolade, Inc.  Accolade’s offices and operations are in Seattle, Washington; Plymouth Meeting, Pennsylvania; Scottsdale, Arizona; Santa Monica, California; and Prague, Czech Republic.

On February 6, 2016, Accolade established a wholly owned subsidiary in the Czech Republic and on July 31, 2019, Accolade acquired all the equity interests of a Delaware corporation (together with Accolade, the Company), and their results of operations have been included in the consolidated financial statements since those respective dates.

The Company provides personalized, technology-enabled solutions that help people better understand, navigate, and utilize the healthcare system and their workplace benefits. The Company’s customers are primarily employers that contract with Accolade to provide their employees and their employees’ families (the members) a single place to turn for their health, healthcare, and benefits needs. The service is designed to drive better healthcare outcomes and increased satisfaction for the participants while lowering costs for the payor. The Company provides its services to customers throughout the United States.

(b)  COVID-19

Due to the government-imposed quarantines and other public health safety measures put into place in March 2020, COVID-19 has caused disruption in the markets where we sell our offerings and related services. Although the Company has not experienced any significant impact as a result of the COVID-19 pandemic, the Company will continue to closely monitor for any changes to the Company’s operations and the operations of our customers.  

(c)  Initial Public Offering

On July 7, 2020, the Company closed its initial public offering of common stock (IPO) in which the Company issued and sold 11,526,134 shares (inclusive of the underwriters’ over-allotment option to purchase 1,503,408 shares) of common stock at $22.00 per share. The Company received net proceeds of $235,825 after deducting underwriting discounts and commissions and before deducting estimated offering costs of approximately $4,440, of which $3,330 was included in prepaid and other current assets as of May 31, 2020. Upon the closing of the IPO, all shares of outstanding convertible preferred stock converted into 29,479,483 shares of common stock, and an additional 1,401,836 shares of common stock were issued upon the automatic net exercise of warrants that were outstanding as of May 31, 2020.

The shares and proceeds from the IPO and the conversion of outstanding redeemable convertible stock into shares of common stock are not reflected in the consolidated financial statements as of and for the three months ended May 31, 2020.

(2)   Basis of Presentation and Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited financial statements for the year ended February 29, 2020 appearing in the Company’s Final Prospectus for our IPO, dated as of July 1, 2020 and filed with the Securities and Exchange Commission (the SEC) pursuant to Rule 424(b)(4) on July 2, 2020.  Since the date of those audited financial statements, there have been no changes to the Company’s significant accounting policies, other than those detailed below.

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(a)  Basis of Presentation and Principles of Consolidation

Accolade’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the Company’s accounts and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(b)  Unaudited Interim Financial Statements

The accompanying consolidated financial statements and the related footnote disclosures are unaudited. The unaudited consolidated interim financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s interim consolidated financial position as of May 31, 2020 and the results of its operations and its cash flows for the three months ended May 31, 2020 and 2019. The results for the three months ended May 31, 2020, are not necessarily indicative of results to be expected for the year ending February 28, 2021, any other interim periods, or any future year or period. The Company’s management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited financial statements and accompanying notes for the year ended February 29, 2020.

(c)  Capitalized Internal-Use Software Costs

Costs related to software acquired, developed, or modified solely to meet the Company’s internal requirements, including tools that enable the Company’s employees to interact with members and their providers, with no substantive plans to market such software at the time of development, are capitalized. Costs incurred during the preliminary planning and evaluation stage of the project and during the post-implementation operational stage are expensed as incurred.

Costs related to minor upgrades, minor enhancements, and maintenance activities are expensed as incurred. Costs incurred during the application development stage of the project are capitalized.

Internal-use software is included in property and equipment and is amortized on a straight-line basis over 3 years.

For the three months ended May 31, 2020 and 2019, the Company capitalized $289 and $0, respectively, for internal-use software. Amortization expense related to capitalized internal-use software during the three months ended May 31, 2020 and 2019 was $1,011 and $1,377, respectively.

(d)  Intangible Assets

As part of the acquisition of MD Insider, Inc. (MDI) in July 2019 (Note 4), the Company acquired an intangible asset in the form of acquired technology in the amount of $2,900. This intangible asset is subject to amortization and is being amortized on the straight-line basis over its estimated useful life of two years. The Company recognized $362 in amortization expense during the three months ended May 31, 2020.

(e)  Concentration of Credit Risk

Financial instruments that potentially subject us to credit risk consist principally of cash and cash equivalents. The Company maintains its cash primarily with domestic financial institutions of high credit quality, which may exceed federal deposit insurance corporation limits. The Company invests its cash equivalents in highly rated money market funds. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents and performs periodic evaluations of the credit standing of such institutions.

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Significant customers are those which represent 10% or more of the Company’s revenue during the period. For each significant customer, revenue as a percentage of total revenue was as follows:

 

For the three months ended May 31, 

    

2020

    

2019

Customer 1

 

20

%  

28

%

Customer 2

 

11

%  

11

%

Customer 3

 

11

%  

13

%

Total

 

42

%

52

%

Accounts receivable outstanding related to these customers at May 31, 2020 was as follows:

May 31, 2020

Customer 1

$

Customer 2

 

1,716

Customer 3

132

(f)  Deferred Offering Costs

The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financing as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs will be recorded in stockholders’ deficit as a reduction of additional paid-in-capital generated as a result of the offering.  Deferred offering costs were $3,330 and $3,042 at May 31, 2020 and February 29, 2020, respectively, and are included within prepaid and other current assets on the accompanying consolidated balance sheets.

(g)  New Accounting Pronouncements Not Yet Adopted

Leases: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which affect certain aspects of the previously issued guidance. In December 2018, the FASB issued ASU No. 2018-20, Narrow-Scope Improvements for Lessor, Leases (Topic 842), which provides guidance on sales tax and other taxes collected from lessees. In March 2019, the FASB issued ASU No. 2019-01, Codification Improvements to Topic 842, Leases, which affect certain aspects of the previously issued guidance. Amendments include an additional transition method that allows entities to apply the new standard on the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings, as well as a new practical expedient for lessors. The guidance (collectively ASC 842) will require lessees to put all leases on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements in a manner similar to current practice. ASC 842 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASC 842 is effective for the Company for fiscal year ended February 28, 2022. Early adoption is permitted. The Company is evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

Credit Losses: In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces the current expected credit loss (CECL) model, which will require entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings. ASU 2016-13 is effective for the Company for fiscal year ended February 28, 2023. Early adoption is permitted. The Company is evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

Internal Use Software: In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation

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costs incurred to develop or obtain internal-use-software. This ASU is effective for the year ending February 28, 2022, and interim periods within the year ending February 28, 2023. Early adoption is permitted. The Company is evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

(3) Revenue

The Company earns revenue from its customers by providing personalized health guidance solutions to members. The Company’s solutions allow its members to interact with its Accolade Health Assistants and clinicians through various means of communication, including telephony and secure messaging and via its mobile application and member portal. The Company prices its personalized health guidance solutions using a recurring per-member-per-month fee (PMPM), typically with a portion of the fee calculated as the product of a fixed rate times the number of members (fixed PMPM fee), plus a variable PMPM fee calculated as the product of a variable rate times the number of members (variable PMPM fee). The fees associated with the variable PMPM fee can be earned through the achievement of performance metrics and/or the realization of healthcare cost savings resulting from the utilization of the Company’s services. Collectively, the fixed PMPM fee and variable PMPM fee are referred to as the total PMPM fee. The Company’s PMPM pricing varies by contract. In certain contracts, the maximum total PMPM fee varies during the contract term (total PMPM rate increases or decreases annually), while in other contracts, the total PMPM maximum fee is consistent over the term, yet the fixed and variable portions vary. For example, in certain contracts the fixed PMPM fee increases on an annual basis while the variable PMPM fee decreases on an annual basis, resulting in the same total PMPM fee throughout the term of the contract.

At contract inception, the Company assesses the type of services being provided and assesses the performance obligations in the contract. The Company’s contracts for personalized health guidance solutions generally include two performance obligations: stand ready services as discussed in the following sentence and reporting. The Company’s contracts include stand ready services to provide eligible participants with access to the Company’s services and to perform an unspecified quantity of interactions with members during the contract period. Accordingly, the Company’s services are generally viewed as stand ready performance obligations comprised of a series of distinct daily services that are substantially the same and have the same pattern of transfer. For the stand ready services, the Company satisfies these performance obligations over time and recognizes revenue related to its services as the services are provided using a measure of progress based upon the actual number of members eligible for the service during the respective period as a percentage of the estimated members expected to be eligible for the service over the term of the contract. The Company believes a measure of progress based on the number of members is the most appropriate measurement of control of the services being transferred to the customer as the amount of internal resources necessary to stand ready is directly correlated to the number of members who can use the services. In addition, the Company’s contracts may include additional add-on services as separate performance obligations that are also considered stand ready services. These add-on services have the same pattern of transfer and revenue recognition as discussed above.

As of May 31, 2020, $166,095 of revenue is expected to be recognized from remaining performance obligations and is expected to be recognized as follows:

Fiscal year ending February 28(29),

Remainder of 2021

$

95,911

2022

 

51,829

2023

 

15,655

2024

 

2,700

Total

$

166,095

The expected revenue includes variable fee estimates for the non-cancellable term of the Company’s contracts. The expected revenue does not include amounts of variable consideration that are constrained.

Significant changes in the deferred revenue balances during the three months ended May 31, 2020 and 2019 were the result of recognized revenue of $21,689 and $16,805, respectively, that were previously included in deferred revenue.

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Revenue related to performance obligations satisfied in prior periods that was recognized during the three months ended May 31, 2020 and 2019 was $1,479 and $395, respectively. These amounts relate to prior changes in estimates that were due to the inclusion of consideration that was previously constrained related to the Company’s achievement of healthcare cost savings.

Cost to obtain and fulfill a contract

The Company capitalizes sales commissions paid to internal sales personnel that are both incremental to the acquisition of customer contracts and recoverable. These costs are recorded as deferred contract acquisition costs in the accompanying consolidated balance sheets. The Company capitalized commission costs of $503 and $294 for the three months May 31, 2020 and 2019, respectively. The Company defers costs based on its sales compensation plans only if the commissions are incremental and would not have occurred absent the customer contract. Payments to direct sales personnel are typically made in two increments as follows: 75% upon signature of the contract, with the remaining 25% upon customer launch. The Company does not pay commissions on contract renewals.

Deferred commissions paid on the initial acquisition of a contract are amortized ratably over an estimated period of benefit of five years, which is the estimated customer life. The Company determined the period of amortization for deferred commissions by taking into consideration current customer contract terms, historical customer retention, and other factors. Amortization is included in sales and marketing expenses in the accompanying consolidated statements of operations and totaled $233 and $157 for the three months ended May 31, 2020 and 2019, respectively. The Company periodically reviews deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the estimated period of benefit. There were no impairment losses recorded during the periods presented.

For certain customer contracts, the Company may incur direct and incremental costs related to customer set-up and implementation. The Company recorded deferred implementation costs of $144 and $51 for the three months ended May 31, 2020 and 2019, respectively. These implementation costs are deferred and amortized over the expected useful life of the Company’s customers, which is five years. Amortization is included in cost of revenues in the Company’s consolidated statements of operations and totaled $160 and $71 for the three months ended May 31, 2020 and 2019, respectively.

(4)   Acquisition of MD Insider

On July 31, 2019, the Company acquired the outstanding equity interests of MDI. Based in California, MDI is a provider of machine learning-enabled physician performance transparency.  The aggregate purchase price consideration of $6,488 was paid primarily through the issuance of up to 462,691 shares of the Company’s common stock, of which 289,320 were issued as of February 29, 2020, with the remaining shares issuable subject to certain working capital and indemnity adjustments (if applicable). Shareholders were eligible to receive 100,607 additional shares of the Company’s common stock upon the completion of a platform solution, as defined in the purchase agreement (MDI Earnout). The deadline to complete the cost transparency platform solution in order to qualify for the MDI Earnout was initially March 1, 2020, and was subsequently extended to July 1, 2020, by which time it had been earned. During August 2020, the Company issued 96,487 shares of common stock in connection with the MDI Earnout, with the remaining 4,120 shares of common stock expected to be issued during the remainder of fiscal 2021.  The MDI Earnout was accounted for as an equity classified instrument and is not subject to remeasurement in subsequent periods.

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(5)   Fair Value Measurements

The following table sets forth the fair value of the Company’s financial assets and within the fair value hierarchy:

May 31, 2020

    

Level 1  

    

Level 2  

    

Level 3  

    

Fair Value  

Assets

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

58,107

$

$

 

$

58,107

Certificates of deposit

$

10,005

$

$

 

$

10,005

February 29, 2020

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Assets

  

  

  

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

21,332

$

$

$

21,332

Certificates of deposit

$

5,000

$

$

 

$

5,000

Also, the carrying value of the Company’s debt approximates fair value based on interest rates available for debt with similar terms at May 31, 2020, and February 29, 2020.

(6)   Debt Facility

(a)  Term Loan and Revolving Credit Facility

Term Loan

On January 30, 2017, the Company entered into two debt facilities, one of which was a $20,000 term loan (the Term Loan) and the other a $20,000 revolving credit facility (the 2017 Revolver).

During July 2019, the Company amended the Term Loan, terminated the 2017 Revolver and entered into a new revolving credit facility (the 2019 Revolver).

Under the terms of the Term Loan, the Company was permitted to borrow up to an aggregate principal amount of $20,000, with the total amount of available borrowings subject to certain monthly recurring revenue calculations.

Interest on the outstanding balance was payable monthly at a rate of 11.75%. Principal payments were scheduled to be made monthly beginning January 31, 2019, in equal installments calculated as 1/24th of the outstanding balance on December 31, 2018. However, the Company had the ability to extend the interest only period for an additional twelve months, subject to an additional fee and other conditions, which would extend the maturity date from December 31, 2020 to December 31, 2021. The Company committed to extend this interest only period, and the maturity date was extended to December 31, 2021. As a result, principal payments were scheduled to start January 2020. During July 2019, an amendment was entered into which eliminated monthly payments, with principal to be paid in full in December 2022.

During July 2019, the Company amended the existing Term Loan agreement (Amendment 1), which resulted in an additional $2,000 of availability, increasing total availability to $22,000. Pursuant to the Amendment 1, interest on the outstanding balance was payable monthly at a rate of 10.00% per annum and interest payable-in-kind accrued at a rate of 2.00% per annum, compounded monthly, and was due at maturity. Additionally, the Company was required to pay an exit fee equal to 1% of the aggregate principal borrowings at the time of maturity (end of term charge).

During May 2020, the Company entered into an additional amendment (Amendment 2) to the existing Term Loan agreement, which resulted in an additional $2,500 of availability, increasing total availability to $24,500. Pursuant to Amendment 2, interest on the outstanding balance was payable monthly at a rate of 8.00% per annum and interest payable-in-kind accrued at a rate of 4.50% per annum, compounded monthly, and was due at maturity. Additionally, the Company

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was required to pay a prepayment fee equal to 2% of the aggregate principal borrowings if prepayment occurred on or prior to December 31, 2020, and 0.50% if prepayment occurred after December 31, 2020 but on or prior to maturity (prepayment fee), plus the end of term charge. As of May 31, 2020, there was $432 of accrued interest payable-in-kind. All outstanding principal, unpaid interest and interest payable-in-kind were due at maturity.

Amendment 2 was accounted for as a debt modification, and all new lender fees were recorded as additional debt discount and third-party costs incurred in connection with the amendment were expensed as incurred.

During the three months ended May 31, 2020 and 2019, the Company recorded interest expense of $794 and $669, respectively, related to the Term Loan of which $81 and $69, respectively, related to the amortization of the debt discount.

As of May 31, 2020, and February 29, 2020, $24,500 and $22,000 was outstanding under the Term Loan, respectively. During July 2020, the Company repaid the amount outstanding in its entirety along with the end of term charge and prepayment fee. Concurrently with this prepayment, the Term Loan agreement was terminated.

Revolving Credit Facility

The 2017 Revolver was a 24-month senior secured $20,000 revolving line of credit, with borrowing availability subject to certain monthly recurring revenue calculations. On April 20, 2018, the Company amended the 2017 Revolver, which modified the revenue covenants, required the Company to exercise the extension of the interest only payment period of the Term Loan through December 2019 and in the event the Company raised proceeds in the aggregate of at least $45,000 as part of a financing event, extended the term of the 2017 Revolver to January 30, 2020. This financing event occurred, and, accordingly, the term of the 2017 Revolver was extended.

Interest on the outstanding balance of the 2017 Revolver was due monthly at a rate of the lending institution’s prime referenced rate plus 1.00%, with the prime reference rate defined as the greater of (i) the lending institution’s prime rate and (ii) the 30-day LIBOR plus 2.50%. Principal and interest were due at maturity.

During July 2019, the Company terminated the 2017 Revolver and entered into a new revolving credit facility (the 2019 Revolver) with a syndicate of two banks, of which one was the lender under the 2017 Revolver. Under the 2019 Revolver, the Company has the capacity to borrow up to $50,000 on a revolving facility, and to the extent certain customer bookings thresholds are achieved, the capacity on the 2019 Revolver may increase by an additional amount of up to $30,000 (resulting in total potential availability of $80,000). Availability of borrowings on the 2019 Revolver is calculated as a multiple of the Company’s eligible monthly recurring revenues (as defined in the 2019 Revolver). As of May 31, 2020 and February 29, 2020, the Company had outstanding letters of credit to serve as office landlord security deposits in the amount of $1,334. These letters of credit are secured through the revolving credit facility, thus reducing the capacity of the revolving credit facility to $48,666. As of May 31, 2020, and February 29, 2020, $48,666 and $0 was outstanding, respectively.

During July 2020, the Company repaid all outstanding amounts, including interest, on the 2019 Revolver. No amounts are outstanding as of August 13, 2020.

The 2019 Revolver has a term of 24 months, and there is an automatic extension of an additional 12-month period should the Company achieve certain revenues, as defined. The interest rate on the outstanding borrowings are at LIBOR plus 350 basis points or Base Rate (as defined) plus 250 basis points, and interest payments are to be made in installments of one, two, or three months as chosen by the Company.

The 2019 Revolver was accounted for as a debt modification to which all new lender and third-party fees were deferred. Issuance costs of $543, including the fair value of warrants issued, were capitalized and are being amortized to interest expense over the remainder of the 2019 Revolver term. During the three months ended May 31, 2020 and 2019, the Company recorded interest expense of $557 and $6, respectively, related to the revolving credit facility of which $60 and $6, respectively, related to the amortization of deferred financing fees. As of May 31, 2020 and 2019, the balance of

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Table of Contents

deferred financing fees was $302 and $17, respectively, and is recorded in other assets in the accompanying consolidated balance sheets.

Both the Term Loan and 2019 Revolver are collateralized by substantially all of the assets of the Company.

Current and long-term debt consisted of the following at May 31, 2020 and February 29, 2019:

    

May 31, 2020

    

February 29, 2020

Current - Interest payable – 2019 Revolver

$

455

$

Long-term

 

  

 

  

2019 Revolver

$

48,666

$

Term loan - principal outstanding

$

24,500

$

22,000

Interest payable-in-kind

 

432

 

273

Unamortized issuance costs

$

(1,074)

 

(1,129)

 Total long-term

$

72,524

$

21,144

(7)   Stockholders’ Equity

(a)  Convertible Preferred Stock

As of May 31, 2020, the authorized, issued and outstanding convertible preferred stock and their principal terms were as follows:

    

Par

    

Shares

    

Shares issued and

    

Carrying

    

Liquidation

Series

value

authorized

outstanding

amount

value

A-1

$

0.0001

 

3,560,000

 

3,559,995

$

10,000

$

10,000

A-2

 

0.0001

 

2,579,999

 

2,579,994

 

10,000

 

10,000

B

 

0.0001

 

4,058,736

 

4,058,731

 

16,944

 

16,944

C

 

0.0001

 

601,160

 

601,151

 

7,000

 

7,000

D

 

0.0001

 

1,751,874

 

1,751,871

 

30,000

 

30,000

E

 

0.0001

 

6,089,189

 

6,089,159

 

140,720

 

145,300

F

 

0.0001

 

873,038

 

873,038

 

18,358

 

20,000

 

19,513,996

 

19,513,939

$

233,022

$

239,244

On July 7, 2020, upon the closing of our IPO, all shares of our outstanding convertible preferred stock converted into 29,479,483 shares of common stock.

(8)   Stock Options and Warrants

(a) Stock Options

In 2010, the Company adopted the Amended and Restated 2007 Stock Option Plan as amended (the Option Plan), which authorized the Company to grant shares of common stock to eligible employees, directors, and consultants to the Company in the form of restricted stock and stock options. As of May 31, 2020, the Company was authorized to issue up to 14,138,788 shares of common stock pursuant to the Option Plan. The amount, terms of grants, and exercisability provisions are determined by the board of directors. The term of the options may be up to 10 years and options generally vest over four years, with one quarter of the options vesting one year after grant and the remainder vesting on a monthly basis over three years. As of May 31, 2020, there were 1,768,851 shares of common stock available for future grants under the Option Plan.

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Table of Contents

The following table summarizes the amount of stock-based compensation included in the consolidated statements of operations:

Three months ended May 31, 

    

2020

    

2019

Cost of revenue

$

109

$

72

Product and technology

 

434

 

361

Sales and marketing

 

303

 

347

General and administrative

 

413

 

656

Total stock-based compensation

$

1,259

$

1,436

The weighted average grant date fair value for stock options granted during the three months ended May 31, 2020 was $9.62. The Company did not grant any stock options during the three months ended May 31, 2019. The fair value of our option grants is estimated at the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

    

Three Months Ended May 31,

2020

Estimated fair value of common stock

$

15.40

Exercise price

$

15.40

Expected volatility

70

%

Expected term (in years)

6.25

Risk-free interest rate

0.54

%

Dividend yield

The following is a summary of stock option activity under the Option Plan:

    

    

Weighted 

    

Weighted 

    

average 

remaining 

Aggregate 

exercise

contractual life

 

intrinsic

 

Stock Options

  price

  in years

value

Balance, February 29, 2020

 

7,996,056

 

$

6.19

 

Granted

 

253,100

 

15.40

 

  

 

  

Exercised

 

(187,807)

 

4.25

 

  

 

  

Forfeited

 

(58,251)

 

6.07

 

  

 

  

Balance, May 31, 2020

 

8,003,098

 

$

6.53

 

6.7

years  

$

87,800

Vested and expected to vest as of May 31, 2020

8,003,098

$

6.53

6.7

years  

$

87,800

Exercisable as of May 31, 2020

 

4,908,687

$

4.55

 

5.4

years  

$

63,568

The aggregate intrinsic value of stock options exercised was $2,094 for three months ended May 31, 2020.   As of May 31, 2020, approximately $13,323 of unrecognized compensation expense related to our stock options is expected to be recognized over a weighted average period of 2.0 years.

During June 2020, the Company issued 525,907 fully-vested stock options in lieu of cash payments related to the Company’s fiscal 2020 bonus.

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(b)  Common Stock Warrants

The following tables summarize the activity for the Company’s warrants for the periods presented as well as the number of warrants outstanding and related terms at May 31, 2020:

    

Common Stock

    

    

    

Exercise

    

Expiration

Warrants

Exercisable

Price

Date

Balance, February 29, 2020

 

1,653,268

 

  

 

  

 

  

Issued

 

 

  

 

  

 

  

Exercised

 

(160,000)

 

  

 

  

 

  

Balance, May 31, 2020

 

1,493,268

 

1,493,268

$

0.0005 - $23.75

 

April 2020 - October 2029

    

Number of Warrants

    

    

    

    

Outstanding at May 31,

Exercise

Expiration

 

2020

 

Price

 

Date

Series E holders

 

1,129,114

$

0.0005

 

July 2026 - March 2028

Series F holders

 

85,000

$

0.0005

 

October 2029

Lenders

 

279,154

$

0.005 - $23.75

 

Nov 2022 - July 2029

Total

 

1,493,268

 

  

 

  

On June 29, 2015, the Company issued a warrant to its initial customer to purchase up to 200,000 common shares. Based on the vesting provisions and the remaining period over which the warrant is exercisable, the maximum number of shares that could vest pursuant to the warrant was 160,000 shares of common stock, all of which were exercised in March 2020.

In connection with the Term Loan amendment, the Company issued a warrant to purchase up to 86,600 shares of the Company’s common stock (the 2019 Term Loan Warrant) at an exercise price of $9.60 per share. The 2019 Term Loan Warrant vested 100% upon issuance and has a ten-year term, ending July 19, 2029. The Company calculated the fair value of the 2019 Term Loan Warrant using the Black-Scholes option pricing model, and the fair value of the 2019 Term Loan Warrant was determined to be $528. This amount was recorded as a debt discount and is being amortized ratably over the Term Loan period.

In connection with the 2019 Revolver, the Company issued the lender warrants to purchase up to 36,363 and 12,631 shares of the Company’s common stock (the 2019 Revolver Warrants) at an exercise price of $13.75 and $23.75 per share, respectively. The 2019 Revolver Warrants vested 100% upon issuance and have a ten-year term, ending July 19, 2029. The Company calculated the   fair value of the 2019 Revolver Warrants using the Black-Scholes option pricing model, and the fair value of the 2019 Revolver Warrants was determined to be $251.

On July 7, 2020, upon the closing of our IPO, 1,401,836 shares of common stock were issued upon the automatic net exercise of all warrants that were outstanding as of May 31, 2020.

(9)   Income Taxes

The provision for income taxes consists of provisions for federal, state and foreign income taxes. The effective tax rates for the periods ended May 31, 2020 and May 31, 2019, reflect the Company’s expected tax rate on reported income from continuing operations before income tax and tax adjustments. The Company operates in a global environment with significant operations in the U.S. and operations in the Czech Republic. Accordingly, the consolidated income tax rate is a composite rate reflecting the Company’s earnings and the applicable tax rates in the various jurisdictions where the Company operates.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid

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income taxes. The CARES Act also allows for retroactive accelerated income tax depreciation on certain leasehold improvement assets and changes to the limitations on business interest deductions for tax years beginning in 2019 and 2020 which increases the allowable business interest deduction from 30% to 50% of adjusted taxable income. The Company does not expect a material tax expense or tax benefit as a result of the CARES Act in the current period or subsequent periods.

For the three months ended May 31, 2020 and 2019, the Company recorded income tax expense of $38 and $23, respectively, which resulted in effective tax rates of (0.3%) and (0.1%), respectively. The tax expense relates to the local tax expense recorded for the Czech Republic. The Company's U.S. losses were not benefitted due to the U.S. full valuation allowance.

(10)   Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of basic and diluted net loss per share attributable to Accolade’s common stockholders:

Three months ended

May 31, 

2020

2019

Net loss

    

$

(13,960)

    

$

(15,903)

Weighted-average shares used in computing net loss per share

7,524,016

4,945,593

Net loss per share attributable to common stockholders, basic and diluted

$

(1.86)

 

$

(3.22)

As the Company has reported net loss for each of the periods presented, all potentially dilutive securities are antidilutive. The following potential outstanding shares of common stock were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:

Three months ended

May 31, 

    

2020

    

2019

Stock options

8,003,098

8,031,350

Common stock warrants

 

157,882

 

182,288

Total

 

8,160,980

 

8,213,638

(11)   Commitments

(a)  Legal Proceedings

The Company is involved in various claims, inquiries and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial position or liquidity.

On August 1, 2017, certain former and current employees filed a suit against the Company seeking back wages for unpaid overtime as a result of alleged misclassification by the Company under the Pennsylvania Minimum Wage Act and the Federal Fair Labor Standards Act.  During March 2019, a settlement agreement (the Settlement Agreement) was executed by both parties in the amount of $1,100 (the Settlement). The Settlement Agreement was ultimately approved by the Court and the Company paid the Settlement during April 2020.

(c)  Employment Agreements

Certain officers of the Company have employment agreements providing for severance, continuation of benefits, and other specified rights in the event of termination without cause, including in the event of a change of control of the Company, as defined in the agreements.

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(12)   Change Healthcare Joint Development Agreement

In February 2020, the Company entered into a joint development agreement, or JDA, and a data licensing agreement with Change Healthcare Holdings, or Change Healthcare, whereby Change Healthcare will be a strategic partner in providing various services to support the Company’s Total Care and Provider Services product offerings. Pursuant to the terms of the JDA, Change Healthcare is providing intellectual property (IP), technical know-how, and advisory services to the Company as it develops price transparency products under the JDA that will be utilized by the Company in several of its product offerings. Either party is permitted to sell the price transparency product within each party’s respective service offerings. Each party is entitled to a royalty from the other party in connection with any net sales associated with the price transparency product that was developed under the JDA, not to exceed $2,500 in cumulative royalty payments.

Concurrent with entering into the JDA, the Company entered into a five-year data licensing agreement with Change Healthcare who is one of the largest commercially available data set providers of de-identified claims in the United States. The licensing agreement includes annual increases in fees and the option to renew and extend beyond the initial five-year period. The annual licensing fees are subject to increases and decreases and contingent upon the achievement of performance objectives as defined in the data licensing agreement. Upfront payments for data licenses are deferred and will be amortized into cost of revenue, as they pertain to the delivery of the Company’s product offerings.

Upon entering into the JDA and data licensing agreement, the Company issued 251,211 restricted shares of its common stock to Change Healthcare at an estimated fair value of $15.40 per share, or $3,869 in aggregate value. Pursuant to the terms of the restricted share agreement, 150,727 of the shares vested immediately and the remaining 100,484 restricted shares will vest upon the achievement of certain product development milestones, as defined. During July 2020, 75,363 of these shares vested upon the achievement of certain milestones.  The aggregate equity value was allocated to the JDA and data licensing agreement based on the relative fair value of the IP and technical know-how contributed by Change Healthcare within the JDA and the discounted pricing received from Change Healthcare within the data licensing agreement. Equity value allocated to the JDA and data licensing agreement is capitalized and deferred as internally developed software and other assets within the Company’s consolidated balance sheet, respectively, with an offsetting increase to additional paid-in capital. Costs that are capitalized and classified as internally developed software will be amortized within depreciation and amortization in the Company’s consolidated statement of operations.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10- Q and our audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended February 29, 2020 included in the Final Prospectus for our initial public offering (our IPO) dated as of July 1, 2020  and filed with the Securities and Exchange Commission, (the SEC), pursuant to Rule 424(b)(4) on July 2, 2020. Our fiscal year ends on the last day of February, and our fiscal quarters end on May 31, August 31, November 30, and the last day of February.

This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

Overview

We provide personalized, technology-enabled solutions that help people better understand, navigate, and utilize the healthcare system and their workplace benefits. Our customers are primarily employers that deploy Accolade in order to provide employees and their families (our "members") a single place to turn for their health, healthcare, and benefits needs. Our innovative platform combines open, cloud-based intelligent technology with multimodal support from a team of empathetic and knowledgeable Accolade Health Assistants and clinicians (including nurses, physician medical directors, and behavioral health specialists). We leverage our integrated capabilities, connectivity with providers and the broader healthcare ecosystem, and longitudinal data to engage across the entire member population, rather than focusing solely on high-cost claimants or those with chronic conditions. Our goal is to build trusted relationships with our members that ultimately position us to deliver personalized recommendations and interventions. We believe that our platform dramatically improves the member experience, encourages better health outcomes, and lowers costs for both our members and our customers.

Accolade Total Health and Benefits is our most comprehensive offering and most closely aligns to our "Premier" solution on which the company was founded and which the majority of our customers are using today. Within the last year, we have introduced two new offerings, Accolade Total Benefits (formerly Accolade Connect) and Accolade Total Care, which package components of the Accolade Total Health and Benefits into more targeted, lower cost solutions with simpler implementations.

We were founded in 2007 and launched our initial offering in 2009. We have seen significant growth in recent years since the changes to our executive management team in 2015 and the subsequent investments we have made in product, technology, sales, and distribution. As of July 1, 2020, we had 60 customers comprising more than 1.7 million members. Our customers come from across industries, including media, technology, financial services, transportation, energy, and retail.

For the three months ended May 31, 2020, our total revenue was $35.9 million, representing 25% year-over-year growth compared to total revenue of $28.8 for the three months ended May 31, 2019. For the three months ended May 31, 2020 and May 31, 2019, our net losses were $14.0 million and $15.9 million, respectively.

Our Business Model

We provide our solutions primarily to employers that deploy Accolade offerings to our members. We earn revenue from providing personalized health guidance solutions to the members of our employer customers' health plans and to members of fully insured plans offered via health insurance companies. Our solutions are priced based on a recurring

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per-member-per-month (PMPM) fee, typically consisting of both a base fee and a performance-based fee component. As a result, generally, a portion of our potential revenue is variable, subject to our achievement of performance metrics and the realization of savings in healthcare spend by our customers resulting from the utilization of our solutions. We typically achieve a substantial portion of the contractual performance metrics and realization in savings of healthcare spend.

The primary cost of delivering our service includes the personnel costs of Accolade Health Assistants, clinicians, including registered nurses, physician medical directors, pharmacists, behavioral health specialists, and women's health specialists, as well as software and tools for telephony, business analytics, allocated overhead costs, and other expenses related to delivery and implementation of our solutions. As we support more customers with an increasing number of members over time, we expect that our support costs per member will decline due to economies of scale and improved operational efficiencies driven by continued enhancements of our technology platform and capabilities. We have experienced and expect to continue to achieve operational efficiencies realized from continued enhancements of our technology platform and capabilities.

We employ a multipronged go-to-market strategy to increase adoption of our solutions to new and existing customers. We principally sell our solutions through our direct salesforce which is stratified by account size (i.e., strategic (more than 35,000 employees), enterprise (5,000 to 35,000 employees), and mid-market (500 to 5,000 employees)), region, and existing versus prospective customer. Our sales team possesses deep domain expertise in health benefits management and brings substantial experience selling to key decision makers within our current and prospective customer organizations (CFOs, benefits executives, benefits consultants, and benefits brokers). We believe the effectiveness of our sales organization is evidenced by growing adoption of our platform by large strategic customers, recent traction with enterprise and mid-market customers and demonstrated demand for add-on offerings from existing customers.

We have chosen to invest significantly in growing our customer base, and plan to both continue adding new customers as well as expanding our relationships with existing customers, which we believe will allow us to increase margins over time. When a customer renews their contract or purchases additional solutions or enhancements, the value realized from that customer increases because we generally do not incur significant incremental acquisition or implementation costs for the renewal or expansion. We believe that as our customer base grows and a higher percentage of our revenue is attributable to renewals and upsells or cross-sells to existing customers, relative to acquisition of new customers, associated sales and marketing expenses and other upfront costs will decrease as a percentage of revenue.

In addition, we have strategically curated our offering portfolio to ensure we have a compelling value proposition at an appropriate price point that resonates with each identified customer segment. Based on our experience, the opportunity to cross-sell is meaningfully enhanced once a customer has been on-boarded onto our platform and has benefited from a measurable and compelling return on their investment. Our customer partnerships team provides strategic insights, point solution recommendations, and day-to-day account support to our customers. They are focused on existing customer retention, cross-sell, and upsell.

We maintain relationships with a range of third parties, including brokers, agents, benefits consultants, carriers, third-party administrators, trusted suppliers, and co-marketing and co-selling partners. These third parties provide an important source of referrals for our sales organization. We also selectively form strategic alliances to further drive customer acquisition and adoption of our solutions. For example, in March 2019, we partnered with Humana and formed a joint go-to-market strategy, which we launched in two initial geographic markets. In October 2019, concurrent with a $20 million preferred stock investment from Humana, we expanded our partnership to add a broader base of solutions targeting self- and fully-insured customer prospects and significantly expand our target geographic markets. We believe the breadth of our go-to-market and distribution strategy enables us to reach customers of nearly every size and across markets.

We have demonstrated a consistent track record of product and technology innovation over time as evidenced by continuous improvement of our platform and new offerings. This innovation is driven by feedback we receive from our customers, industry experts, and the market generally. For example, our technology platform has enabled us to unbundle aspects of Accolade Total Health and Benefits to create two additional standalone offerings: Accolade Total Benefits and Accolade Total Care. We have further leveraged our technology platform to develop add-on offerings that target specific challenges faced by our customers, including Accolade Boost and our Trusted Supplier Program — as well as very

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recently, Accolade COVID Response Care. Our investments in product and technology have been focused on increasing the value we provide via our personalized member health guidance solutions and expanding the market segments we can serve with a portfolio of offerings and associated price points.

COVID-19 Update

COVID-19 has placed Accolade's employees, members, and customers in uncharted waters. We consider the impact of the pandemic on our business by evaluating the health of our operations, any changes to our revenue outlook, and the degree to which perceptions of and interest in Accolade solutions have evolved during this unprecedented time.

In mid-March 2020, our 1,250 employees went fully remote using our secure technologies to continue to meet the needs of our business. As gauged by core performance metrics, service levels have been high (and without disruption), and member satisfaction has remained strong. To ensure we could confidently address our members' many COVID-19-related concerns, our operations and clinical leaders trained our frontline teams on evidence-based guidelines and continue to equip them with relevant resources to help them ably serve under these exceptional circumstances.

While the COVID-19 pandemic has not had a material adverse impact on our financial condition and results of operations to date, the future impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our marketing efforts, and any decreases of workforce or benefits spending by our customers, all of which are uncertain and cannot be predicted. We have a diverse set of customers across a variety of industries. While some have faced headwinds, others have experienced growth, and our membership count from existing customers has remained steady in the aggregate since the start of the calendar year. In addition, we launched a new customer, the Defense Health Agency, at the outset of May, boosting our total membership base. However, we may experience increased member attrition to the extent our existing customers reduce their respective workforces in response to the current economic conditions. Any layoffs or reductions in employee headcounts by our employer customers would result in a reduction in our base and variable PMPM fees. Though we have not experienced a material decrease in member numbers to date, certain industries that our major customers are in have indicated that major layoffs will likely occur during the fall 2020. That acknowledged, we may not experience the impact of changes to our customers' headcount immediately because employees that are on furlough or are receiving continuing health coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act (COBRA) may still have access to our services during such period and be included in our member count.

While the full effects of COVID-19 on the prospects of Accolade's business are not yet known, we do know that we have served as a critical resource to our members during this difficult time. As of early June, we had reached more than 400,000 members with educational resources focused on COVID prevention, assisted more than 25,000 with COVID-specific concerns, and clinically assessed approximately 2,000 for infection, ultimately directing them toward the most appropriate course of care.

We believe our value proposition now resonates with an even broader audience of employers as they turn their focus to safely reopening their workplaces and managing the ongoing health and well-being of employees and their families. To directly address the former, we have developed Accolade COVID Response Care, a solution that allows employers of all sizes to leverage Accolade's platform to support employee education, testing, care plans, contact tracing, and return-to-work clearance. On the latter, we believe that the current disruptions to traditional care consumption have reinforced the need for navigation services, and that projected spikes in healthcare costs (due to some combination of COVID-19-related testing and care, complications stemming from neglected non-COVID conditions, pent-up demand for elective services, and strain on individuals' mental health) prompt the need for solutions such as ours that bend the cost curve, and improve health outcomes, by driving good utilization up and wasteful utilization down.

Factors Affecting Our Performance

The following factors have been important to our business and we expect them to impact our business, results of operations, and financial condition in future periods:

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Growth of Our Customer Base

We believe there is a substantial opportunity to further grow our customer base in our large and under-penetrated market through our sales and marketing strategy. Across our existing customer base and as we acquire new customers, we intend to expand and deepen these relationships. As we build trust through our proven model, we seek to cross-sell our add-on offerings, such as Accolade Boost and our Trusted Supplier Program. We plan to continue to invest in sales and marketing in order to grow our customer base and increase sales to existing customers. Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas.

Customer Retention

Our ability to increase revenue depends in large part on our ability to retain our existing customers. Customer retention is dependent on delivering measurable outcomes to the customer related to their employees' benefits utilization and, for certain offerings, overall healthcare cost savings. To achieve these outcomes, we must engage with a meaningful portion of our customers' employee populations. We have consistently achieved and sustained annual engagement rates of greater than 50% across our member population. For the fiscal years ended February 28(9), 2018, 2019, and 2020, we achieved 55%, 56%, and 54% family engagement, respectively, measured for the corresponding calendar year.  The aggregate impact of this deep engagement across a customer's employee population is improved healthcare and benefits awareness, knowledge, and decision-making, a healthier and more engaged workforce, and healthcare cost savings. We become a trusted partner to our customers and gain the opportunity to support them on their population health strategies and benefits procurement. This position allows us to identify additional solutions that may meet our customers' needs, which, when implemented, result in additional opportunities for member engagement and better health outcomes. Achieving a high customer retention rate and selling additional offerings are critical to our future business, revenue growth, and results of operations.

Adoption of Current and Future Solutions

We are constantly innovating to enhance our model and develop new offerings. Our ability to act as a trusted advisor to our members and customers positions us to identify new opportunities for additional offerings that can meet their existing and emerging needs. Our open technology platform also allows us to efficiently add new offerings and applications on top of our existing technology stack, which we have demonstrated with the recent roll-out of two new offerings, Accolade Total Benefits and Accolade Total Care, as well as our new add-on offerings, Accolade Boost, our Trusted Supplier Program, and Accolade COVID Response Care. We believe that as we expand our customer base and enter into new markets, we will be adept at identifying and deploying innovative new solutions whether developed internally or through acquisitions.

Achievement of Performance-Based Revenue

In most of our contracts, a portion of our potential fee is variable, subject to our achievement of performance metrics and the realization of savings in healthcare spend by our customers resulting from the utilization of our solutions and thus we might record higher revenue in some quarters compared to others. Examples of performance metrics included in our customer contracts are achievement of specified member engagement levels, member satisfaction levels, and various operational metrics. Although we have earned over 95% of the aggregate maximum potential revenue under our contracts (measured on the corresponding calendar year basis) in fiscal years 2018, 2019, and 2020, our revenue and financial results in the future may vary as a result of our ability to earn this performance-based revenue. In addition, because our customers typically pay both the base PMPM fees and variable PMPM fees in advance on a periodic basis, any required refund as a result of our failure to earn the performance-based revenue could have a negative impact on cash flows.

Investments in Technology

Significant investments in our technology platform have enhanced our capabilities with respect to how we engage with our members and deliver our solutions and care interventions. By leveraging our technology in areas such as machine learning, predictive analytics, and multimodal communication, we believe we can generate more efficiencies in our

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operating model while simultaneously improving our ability to deliver better health outcomes and lower costs for both our members and our customers. We will continue to invest in our technology platform to empower our Accolade Health Assistants, our clinicians, and our members to further improve and optimize efficiencies in our operating model. However, our investments in our technology platform may be more expensive or take longer to develop than we expect and may not result in operational efficiencies.

Customer Concentration

We have historically relied on a limited number of customers for a significant portion of our total revenue. If we do not retain some or all of those customers, it could have a material negative impact on future results. For the three months ended May 31, 2020, we had three customers that each accounted for more than 10% of our total revenue, and in aggregate those three customers represented 42% of our total revenue. The loss of any of our largest customers, the renegotiation of any of our largest customer contracts or a significant decrease in the employee headcount of our largest customers could adversely affect our results of operations. In the ordinary course of business, we engage in active discussions and renegotiations with our customers in respect to the solutions we provide and the terms of our customer agreements, including our fees. Most of our customer contracts have a three-year term, and some have rights to terminate prior to the end of the term.

Certain Non-GAAP Financial Measures

We use the following non-GAAP financial measures to help us evaluate trends, establish budgets, measure the effectiveness and efficiency of our operations, and determine employee incentives.

For the three months ended

May 31, 

    

2020

    

2019

 

(in thousands, except percentages)

 

Adjusted Gross Profit

$

13,764

$

11,400

 

Adjusted Gross Margin

38.3

%

39.6

%

Adjusted EBITDA

$

(9,438)

$

(11,707)

 

Adjusted Gross Profit and Adjusted Gross Margin

Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of revenue, excluding depreciation and amortization, and excluding stock-based compensation. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We expect Adjusted Gross Margin to continue to improve over time to the extent that we are able to gain efficiencies through technology and successfully cross-sell and upsell our current and future offerings. However, our ability to improve Adjusted Gross Margin over time is not guaranteed and will be impacted by the factors affecting our performance discussed above and the risks outlined in the section titled “Risk Factors.” We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors, as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other nonrecurring operating expenses.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted to exclude interest expense (net), income tax expense (benefit), depreciation and amortization, stock-based compensation, and acquisition and integration-related costs. We believe Adjusted EBITDA provides investors with useful information on period-to-period performance as evaluated by management and comparison with our past financial performance. We believe Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry, as this measure generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance.

Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA have certain limitations, including that they exclude the impact of certain non-cash charges, such as depreciation and amortization, whereas underlying assets

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may need to be replaced and result in cash capital expenditures, and stock-based compensation expense, which is a recurring charge. These non-GAAP financial measures may also not be comparable to similarly titled measures of other companies because they may not calculate such measures in the same manner, limiting their usefulness as comparative measures. In evaluating these non-GAAP financial measures, you should be aware that in the future we expect to incur expenses similar to the adjustments in this presentation. Our presentation of non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or nonrecurring items. When evaluating our performance, you should consider these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable GAAP measures set forth in the reconciliation tables below and our other GAAP results. The following table presents, for the periods indicated, the calculation of our Adjusted Gross Profit and Adjusted Gross Margin:

For the three months ended

May 31, 

2020

    

2019

 

(in thousands, except percentages)

 

Revenue

$

35,894

$

28,763

 

Less:

  

  

 

Cost of revenue, excluding depreciation and amortization

(22,239)

(17,435)

 

Gross profit, excluding depreciation and amortization

 

13,655

 

11,328

Add:

 

  

 

  

Stock‑based compensation, cost of revenue

 

109

 

72

Adjusted Gross Profit

$

13,764

$

11,400

Gross margin, excluding depreciation and amortization

 

38.0

%  

 

39.4

%

Adjusted Gross Margin

 

38.3

%  

 

39.6

%

Gross margin, excluding depreciation and amortization, for the three months ended May 31, 2020 and 2019, decreased from 39.4% to 38.0%, respectively, and Adjusted Gross Margin for the three months ended May 31, 2020 and 2019, decreased from 39.6% to 38.3%, respectively. These decreases were driven primarily by the incremental cost of revenues in the three months ended May 31, 2020, associated with customer launches as compared to the three months ended May 31, 2019.  Because we incur costs related to hiring staff in advance of new customer launches prior to recognizing any associated revenue, we experience compression of gross margin, excluding depreciation and amortization, and Adjusted Gross Margin during the respective pre-launch periods.  The decreases were offset by continued increases in PMPM revenue associated with our offering mix and cost efficiencies realized through enhancements of our technology platform and workflows.

The following table presents, for the periods indicated, a reconciliation of our Adjusted EBITDA to our net loss:

For the three months ended

May 31, 

2020

    

2019

(in thousands)

Net Loss

$

(13,960)

$

(15,903)

Adjusted for:

 

  

 

  

Interest expense, net

 

1,282

 

543

Income tax provision

 

38

 

23

Depreciation and amortization

 

1,928

 

2,160

Stock‑based compensation

 

1,259

 

1,436

Other expense

 

15

 

34

Adjusted EBITDA

$

(9,438)

$

(11,707)

Basis of Presentation and Components of Revenue and Expenses

We operate our business through a single reportable segment. We operate on a fiscal year ending at the end of February of each year, and our fiscal quarters end on May 31, August 31, November 30, and the last day of February.

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Revenue

We earn revenue from providing personalized technology-enabled solutions to the members of our employer customers' health plans and to members of fully insured plans offered via health insurance companies. Our solutions are priced based on a recurring PMPM fee and frequently include both a base PMPM fee based on eligible members and a performance-based component. As a result, a portion of our potential fee is typically variable, subject to our achievement of performance metrics, the realization of savings in healthcare spend by our customers resulting from the utilization of our solutions, and the number of eligible members during the respective period.

Cost of Revenue, Excluding Depreciation and Amortization

Our cost of revenue, excluding depreciation and amortization, consists primarily of personnel costs including salaries, wages, overtime, bonuses, stock-based compensation expense and benefits, as well as software and tools for telephony, business analytics, allocated overhead costs, and other expenses related to delivery and implementation of our personalized technology-enabled solutions.

Operating Expenses

Product and technology.    Product and technology expenses include costs to build new offerings, add new features to our existing solutions, and to manage, operate, and ensure the reliability and scalability of our existing technology platform. Product and technology expenses consist of personnel expenses, including salaries, bonuses, stock-based compensation expense, and benefits for employees and contractors for our engineering, product, and design teams, and allocated overhead costs, as well as costs of software and tools for business analytics, data management, and IT applications that are not directly associated with delivery of our solutions to customers. We expect product and technology expenses to increase in absolute dollars but decrease as a percentage of revenue over time.

Sales and marketing.    Sales and marketing expenses consist of personnel expenses, including sales commissions for our direct sales force, as well as promotional costs, customer conferences, public relations, other marketing events, and allocated overhead costs. Personnel expenses include salaries, bonuses, stock-based compensation expense, and benefits for employees and contractors. We expect sales and marketing expense to increase in absolute dollars but remain stable as a percentage of revenue over time.

General and administrative.    General and administrative expenses consist of personnel expenses and related expenses for our executive, finance and accounting, human resources, legal, and corporate organizations. Personnel expenses include salaries, bonuses, stock-based compensation expense, and benefits for employees and contractors. In addition, general and administrative expenses include external legal, accounting, and other professional fees, and allocated overhead costs. We expect general and administrative expenses to increase in absolute dollars as we incur costs associated with being a public company, but decrease as a percentage of revenue over time.

Depreciation and amortization.    Depreciation and amortization expenses are primarily attributable to our capital investments and consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized internal-use software costs.

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Results of Operations

The following table presents a summary of our consolidated statements of operations for the periods indicated:

For the three months ended

May 31, 

    

2020

    

2019

(in thousands)

Revenue

$

35,894

$

28,763

Cost of revenue, excluding depreciation and amortization(1)

 

22,239

 

17,435

Operating expenses:

 

  

 

  

Product and technology(1)

 

11,370

 

11,246

Sales and marketing(1)

 

7,315

 

7,662

General and administrative(1)

 

5,667

 

5,563

Depreciation and amortization

 

1,928

 

2,160

Total operating expenses

 

26,280

 

26,631

Loss from operations

 

(12,625)

 

(15,303)

Interest expense, net

 

(1,282)

 

(543)

Other expense

 

(15)

 

(34)

Loss before income taxes

 

(13,922)

 

(15,880)

Income tax expense

 

(38)

 

(23)

Net loss

$

(13,960)

$

(15,903)

(1)The stock-based compensation expense included above was as follows:

For the three months ended

May 31, 

2020

    

2019

(in thousands)

Cost of revenue, excluding depreciation and amortization

$

109

$

72

Product and technology

 

434

 

361

Sales and marketing

 

303

 

347

General and administrative

 

413

 

656

Total stock‑based compensation

$

1,259

$

1,436

The following table sets forth our consolidated statements of operation data expressed as a percentage of revenue:

For the three months ended