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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 November 30, 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 December 31, 2020, 55,321,179 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 November 30, 2020 and February 29, 2020

4

Condensed Consolidated Statements of Operations for the three and nine months ended November 30, 2020 and 2019

5

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three and nine months ended November 30, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the nine months ended November 30, 2020 and 2019

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

73

Item 3.

Defaults Upon Senior Securities

73

Item 4.

Mine Safety Disclosures

73

Item 5.

Other Information

73

Item 6.

Exhibits

73

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)

November 30, 

February 29, 

Assets

    

2020

    

2020

Current assets:

Cash and cash equivalents

$

418,938

$

33,155

Accounts receivable, net

 

15,432

294

Unbilled revenue

 

1,334

895

Current portion of deferred contract acquisition costs

 

2,048

1,368

Current portion of deferred financing fees

 

163

279

Prepaid and other current assets

 

6,598

12,944

Total current assets

 

444,513

48,935

Property and equipment, net

 

10,496

13,625

Goodwill

 

4,013

4,013

Acquired technology, net

 

967

2,054

Deferred contract acquisition costs

 

6,195

3,876

Other assets

 

1,311

745

Total assets

$

467,495

$

73,248

Liabilities, convertible preferred stock and stockholders’ equity (deficit)

Current liabilities:

Accounts payable

$

4,136

$

5,273

Accrued expenses

 

3,437

6,580

Accrued compensation

 

27,459

23,838

Deferred rent and other current liabilities

 

531

674

Due to customers

 

3,449

4,674

Current portion of deferred revenue

 

34,427

28,919

Total current liabilities

 

73,439

69,958

Loans payable, net of unamortized issuance costs

 

21,144

Deferred rent and other noncurrent liabilities

 

5,375

5,523

Deferred revenue

 

394

396

Total liabilities

 

79,208

97,021

Convertible preferred stock:

Preferred stock par value $0.0001; 25,000,000 shares authorized; 0 and 19,513,939 issued and outstanding at November 30, 2020 and February 29, 2020, respectively

233,022

Commitments (note 11)

Stockholders’ equity (deficit)

Common stock par value $0.0001; 500,000,000 shares authorized; 55,171,467 and 6,033,450 shares issued and outstanding at November 30, 2020 and February 29, 2020, respectively

 

5

2

Additional paid-in capital

 

755,076

64,071

Accumulated deficit

 

(366,794)

(320,868)

Total stockholders’ equity (deficit)

 

388,287

(256,795)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

$

467,495

$

73,248

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

ACCOLADE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

(In thousands, except share and per share data)

Three months ended November 30, 

Nine months ended November 30, 

    

2020

    

2019

    

2020

    

2019

Revenue

$

38,444

$

29,652

$

111,126

$

88,066

Cost of revenue, excluding depreciation and amortization

 

22,743

 

17,538

 

66,052

 

51,737

Operating expenses:

Product and technology

 

13,018

 

11,046

 

36,624

 

33,595

Sales and marketing

 

8,644

 

7,924

 

23,841

 

23,202

General and administrative

 

8,414

 

8,551

 

20,537

 

20,125

Depreciation and amortization

 

2,114

 

2,033

 

6,090

 

6,415

Total operating expenses

 

32,190

 

29,554

 

87,092

 

83,337

Loss from operations

 

(16,489)

 

(17,440)

 

(42,018)

 

(47,008)

Interest expense, net

 

(35)

 

(827)

 

(3,663)

 

(2,071)

Other expense

 

(42)

 

(18)

 

(160)

 

(98)

Loss before income taxes

 

(16,566)

 

(18,285)

 

(45,841)

 

(49,177)

Income tax expense

 

(29)

 

(12)

 

(85)

 

(49)

Net loss

$

(16,595)

$

(18,297)

$

(45,926)

$

(49,226)

Net loss per share, basic and diluted

$

(0.32)

$

(3.17)

$

(1.50)

$

(9.20)

Weighted-average common shares outstanding, basic and diluted

 

51,578,863

 

5,776,478

 

30,635,348

 

5,351,313

See accompanying notes to unaudited consolidated financial statements.

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ACCOLADE, INC. AND SUBSIDIARIES

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

Issuance of common stock in connection with acquisition

 

279,436

 

6,164

 

 

6,164

Issuance of common stock warrants in connection with July 2019 debt

 

 

779

 

 

779

Exercise of stock options and common stock warrants

 

415,420

 

 

1,428

 

 

1,428

Stock-based compensation expense

 

 

 

1,895

 

 

1,895

Net loss

 

 

 

 

(15,026)

 

(15,026)

Balance, August 31, 2019

18,640,901

$

214,664

4,401,727

$

1

$

50,939

$

(300,432)

$

(249,492)

Issuance of common stock in connection with acquisition

9,884

Sale of Series F preferred stock, net

873,038

18,358

Issuance of common stock warrants in connection with sale of Series F Preferred Stock

1,585

1,585

Exercise of stock options and common stock warrants

213,453

728

728

Stock-based compensation expense

1,564

1,564

Net loss

(18,297)

(18,297)

Balance, November 30, 2019

19,513,939

$

233,022

4,625,064

$

1

$

54,816

$

(318,729)

$

(263,912)

See accompanying notes to unaudited consolidated financial statements.

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ACCOLADE, INC. AND SUBSIDIARIES

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

In thousands, except shares) (continued)

Convertible Preferred stock

  

  

Stockholders' Equity (Deficit)

Common stock

Additional

Accumulated

 

    

Shares

    

Amount

Shares

    

Amount

    

paid-in capital

    

deficit

    

Total

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)

Exercise of stock options and common stock warrants

 

383,575

 

 

1,726

 

 

1,726

Issuance of common stock in initial public offering, net of issuance costs of $4,596

 

11,526,134

 

1

 

231,227

 

 

231,228

Conversion of preferred stock into common stock

(19,513,939)

 

(233,022)

29,479,521

 

2

 

233,020

 

 

233,022

Automatic exercise of warrants into common stock in connection with initial public offering

 

1,401,836

 

 

 

 

Issuance of stock options to satisfy bonus obligation

 

5,735

5,735

Issuance of common stock in connection with 2019 acquisition

 

97,019

 

 

156

 

 

156

Stock-based compensation expense

 

 

 

2,105

 

 

2,105

Net loss

 

 

 

 

(15,371)

 

(15,371)

Balance, August 31, 2020

$

49,269,342

$

5

$

542,298

$

(350,199)

$

192,104

Exercise of stock options

 

84,627

 

 

527

 

 

527

Issuance of common stock in follow-on public offering, net of issuance costs of $600

 

5,750,000

 

 

208,046

 

 

208,046

Issuance of common stock in connection with the employee stock purchase plan

 

67,498

 

 

1,259

 

 

1,259

Stock-based compensation expense

 

 

 

2,946

 

 

2,946

Net loss

 

 

 

 

(16,595)

 

(16,595)

Balance, November 30, 2020

$

55,171,467

$

5

$

755,076

$

(366,794)

$

388,287

See accompanying notes to unaudited consolidated financial statements.

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ACCOLADE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

Nine months ended November 30, 

    

2020

    

2019

Cash flows from operating activities:

Net loss

$

(45,926)

$

(49,226)

Adjustments to reconcile net loss to net cash used in

Operating activities:

Depreciation and amortization expense

 

6,090

6,415

Amortization of deferred contract acquisition costs

 

1,187

695

Noncash interest expense

 

1,395

533

Stock-based compensation expense

 

6,310

4,895

Changes in operating assets and liabilities:

Accounts receivable and unbilled revenue

 

(15,577)

123

Accounts payable and accrued expenses

 

569

4,408

Deferred contract acquisition costs

 

(4,187)

(1,551)

Deferred revenue and due to customers

 

4,281

10,832

Accrued compensation

 

9,372

187

Deferred rent and other liabilities

 

(324)

106

Other assets

 

1,182

(1,400)

Net cash used in operating activities

 

(35,628)

(23,983)

Cash flows from investing activities:

Capitalized software development costs

 

(374)

Purchases of property and equipment

 

(1,500)

(2,469)

Net cash acquired in acquisition of MD Insider

-

(206)

Earnout payments to MD Insider

(58)

Net cash used in investing activities

 

(1,932)

(2,675)

Cash flows from financing activities:

Proceeds from public offerings, net of underwriters' discounts and commissions and offering costs

439,478

Proceeds from stock option and warrant exercises

 

5,176

2,008

Proceeds from sale of Series F Preferred Stock, net.

-

19,943

Proceeds from stock purchases under employee stock purchase plan

1,442

Proceeds from borrowings on debt

 

51,166

1,660

Repayments of debt principal

(73,166)

Payments related to debt retirement

(753)

Net cash provided by financing activities

 

423,343

23,611

Net increase (decrease) in cash and cash equivalents

 

385,783

(3,047)

Cash and cash equivalents, beginning of period

 

33,155

42,701

Cash and cash equivalents, end of period

$

418,938

$

39,654

Supplemental cash flow information:

Interest paid

$

2,246

$

1,790

Income taxes paid

$

149

$

55

Fixed assets included in accounts payable

$

185

$

126

Other receivable related to stock option exercises

$

249

$

504

Offering costs included in accounts payable and accrued expenses

$

68

$

Bonus settled in the form of stock options

$

5,735

$

Common stock issued in connection with acquisition

$

$

6,164

Common stock warrants issued in connection with debt

$

$

779

See accompanying notes to unaudited consolidated financial statements.

8

Table of Contents

Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data)

(1)   Background

(a) Business

The entity 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 entity converted from a limited liability company to a Delaware corporation and changed its name to Accolade, Inc. (Accolade or together with its subsidiaries, the Company).  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, 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 the Company sells its offerings and related services. Although the Company has not experienced any significant financial impact as a result of the COVID-19 pandemic, there continues to be uncertainty as to the extent to which the COVID-19 pandemic may adversely impact its business and operations, and the Company will continue to closely monitor for any changes to the Company’s operations and the operations of our customers.  

(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 $231,228 after deducting underwriting discounts and commissions, as well as offering costs of $4,596.   Upon the closing of the IPO, all shares of outstanding convertible preferred stock converted into 29,479,521 shares of common stock, and an additional 1,401,836 shares of common stock were issued upon the automatic net exercise of warrants then outstanding.

(d)  Follow-on Public Offering

On October 26, 2020, the Company closed its follow-on public offering of common stock in which the Company issued and sold 5,750,000 shares (inclusive of the underwriters’ over-allotment option to purchase 750,000 shares) of common stock at $38.50 per share. The Company received net proceeds of $208,046 after deducting underwriting discounts and commissions of $12,729, as well as offering costs of $600, of which $532 was paid as of November 30, 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

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data) (continued)

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.

(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 November 30, 2020 and the results of its operations and its cash flows for the three and nine months ended November 30, 2020 and 2019. The results for the three and nine months ended November 30, 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 nine months ended November 30, 2020 and 2019, the Company capitalized $374 and $0, respectively, for internal-use software.  Amortization expense related to capitalized internal-use software during the three months ended November 30, 2020 and 2019 was $1,214 and $1,052, respectively.  Amortization expense related to capitalized internal-use software during the nine months ended November 30, 2020 and 2019 was $3,345 and $3,483, 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. Amortization expense related to the intangible asset was $363 during the three months ended November 30, 2020 and 2019, and $1,087 and $483 during the nine months ended November 30, 2020 and 2019, respectively.

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data) (continued)

(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 and United States Treasury bills with original maturities of less than 90 days. 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.

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

For the three months ended November 30, 

For the nine months ended November 30, 

    

2020

    

2019

2020

    

2019

Customer 1

 

17

%  

27

%

17

%  

27

%

Customer 2

 

10

%  

12

%

11

%  

12

%

Customer 3

 

10

%  

11

%

10

%  

11

%

Total

 

37

%

50

%

38

%

50

%

Accounts receivable outstanding related to these customers at November 30, 2020 was as follows:

November 30, 2020

Customer 1

$

1,642

Customer 2

 

45

Customer 3

8,196

(f)  Deferred Offering Costs

The Company capitalized certain legal, accounting and other third-party fees that were directly associated with both the IPO and follow-on offering as deferred offering costs until such transactions were completed in July 2020 and October 2020, respectively. Upon the completion of the IPO and follow-on offering, total deferred costs of $4,596 and $600, respectively, were recorded in stockholders’ equity (deficit) as a reduction of additional paid-in-capital related to each transaction. Deferred offering costs were $0 and $3,042 at November 30, 2020 and February 29, 2020, respectively, and were included within prepaid and other current assets on the accompanying consolidated balance sheet at February 29, 2020.

As of November 30, 2020, the Company paid $532 of the fees associated with the follow-on offering, with the remaining $68 paid subsequently.   All fees related to the IPO were paid by the Company prior to November 30, 2020.

(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. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective Dates for Certain Entities, which delayed the adoption period of Topic 842. The guidance (collectively ASC 842) will require lessees to put

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data) (continued)

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 its fiscal 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.

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 its fiscal year ending February 28, 2023. Early adoption is permitted. The Company does not believe that this standard will have a material impact on the Company’s consolidated financial statements and related footnote disclosures.

Internal Use Software: In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use-software. This ASU is effective for the Company’s fiscal year ending February 28, 2022, and interim periods within its fiscal 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

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data) (continued)

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 November 30, 2020, $228,975 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

$

42,174

2022

 

126,168

2023

 

46,607

2024

 

14,026

Total

$

228,975

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 nine months ended November 30, 2020 and 2019 were the result of recognized revenue of $26,639 and $20,166 respectively, that were previously included in deferred revenue.

Revenue related to performance obligations satisfied in prior periods that was recognized during the three months ended November 30, 2020 and 2019 was $1,508 and $1,182, respectively.  Revenue related to performance obligations satisfied in prior periods that was recognized during the nine months ended November 30, 2020 and 2019 was $4,522 and $2,266, 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 $860 and $449 for the three months ended November 30, 2020 and 2019, respectively. The Company capitalized commission costs of $3,362 and $973 for the nine months ended November 30, 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 $300 and $159 for the three months ended November 30, 2020 and 2019, respectively.  Amortization is included in sales and marketing expenses in the accompanying consolidated statements of operations and totaled $770 and $474 for the nine months ended November 30, 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 $515 and $390 for the three months ended November 30, 2020 and 2019, respectively.  The Company recorded deferred implementation costs of $825 and $578 for

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Table of Contents

Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data) (continued)

the nine months ended November 30, 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 $147 and $76 for the three months ended November 30, 2020 and 2019, respectively, and $417 and $221 for the nine months ended November 30, 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 386,339 and 289,320 were issued as of November 30, 2020 and February 29, 2020, respectively, with the remaining shares issuable subject to certain working capital and indemnity adjustments (if applicable). Shareholders were eligible to receive 100,607 additional shares of the Company’s common stock upon the completion of a platform solution, as defined in the purchase agreement (MDI Earnout). The deadline to complete the cost transparency platform solution in order to qualify for the MDI Earnout was initially March 1, 2020, and was subsequently extended to July 1, 2020, by which time it had been earned. During August 2020, the Company issued 96,487 shares of common stock in connection with the MDI Earnout (which shares are included in the 386,339 shares issued as of November 30, 2020), 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 was not subject to remeasurement in subsequent periods.

(5)   Fair Value Measurements

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

November 30, 2020

    

Level 1  

    

Level 2  

    

Level 3  

    

Fair Value  

Assets

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

208,286

$

$

 

$

208,286

United States Treasury bills

$

199,990

$

$

$

199,990

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 February 29, 2020.

(6)   Debt Facility

(a)  Term Loan and Revolving Credit Facility

Term Loan

On January 30, 2017, the Company entered into a $20,000 term loan facility (the Term Loan).  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.

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data) (continued)

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 (Amendment 1) was entered into which eliminated monthly payments, with principal to be paid in full in December 2022.

Amendment 1 resulted in an additional $2,000 of availability, increasing total availability to $22,000. Pursuant to 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 was required to pay a prepayment fee equal to 2% of the aggregate principal borrowings if prepayment occurred on or prior to December 31, 2020, and 0.50% if prepayment occurred after December 31, 2020 but on or prior to maturity (prepayment fee), plus the end of term charge.   Amendment 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 July 2020 the Company terminated the Term Loan. The Company repaid the outstanding balance of $24,500 in its entirety, along with accrued interest in kind of $600, the end of term charge of $251, and the prepayment fee of $502.  

During the three months ended November 30, 2020 and 2019, the Company recorded interest expense of $0 and $743, respectively.   During the nine months ended November 30, 2020 and 2019, the Company recorded interest expense of $2,837 and $2,108, respectively.   Included in interest expense for the nine months ended November 30, 2020, was $1,045 related to the remaining debt discount that was recorded as interest expense as a result of the termination, as well as $502 related to the prepayment fee and the remaining unamortized amount related to the end of term charge

Revolving Credit Facility

During July 2019, the Company entered into a revolving credit facility (the 2019 Revolver) with a syndicate of two banks. Under the 2019 Revolver, the Company has the capacity to borrow up to $80,000 on a revolving facility. Availability of borrowings on the 2019 Revolver is calculated as a multiple of the Company’s eligible monthly recurring revenues (as defined in the 2019 Revolver). As of November 30, 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 $78,666 as of November 30, 2020. No amounts are outstanding as of November 30, 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, with the LIBOR rate and Base Rate subject to minimum levels.  Interest payments are to be made in installments of one, two, or three months as chosen by the Company.

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data) (continued)

The Company incurred lender and third-party fees when entering into the 2019 Revolver, all of which were deferred at the onset of the facility. 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 November 30, 2020 and 2019, the Company recorded interest expense of $106 and $102, respectively, related to the revolving credit facility.  During the nine months ended November 30, 2020 and 2019, the Company recorded interest expense of $986 and $171, respectively. As of November 30, 2020 and 2019, the balance of deferred financing fees was $163 and $442, respectively, and is recorded in other assets in the accompanying consolidated balance sheets.

On August 21, 2020, the Company entered into an amendment to the 2019 Revolver which revised the terms of the revenue covenant and imposed minimum LIBOR and Base Rate levels. On September 11, 2020, the Company entered into another amendment to the 2019 Revolver which modified the allocation requirements of the Company’s cash to be held at each of the two lenders participating in the 2019 Revolver.  On November 6, 2020, the Company entered into another amendment to the 2019 Revolver which increased the capacity from a maximum of $50,000 to a maximum of $80,000, based on the achievement of certain growth metrics as defined in the amendment.    

The 2019 Revolver is collateralized by substantially all of the assets of the Company.

(7)   Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(a) Convertible Preferred Stock

On July 7, 2020, upon the closing of our IPO, all shares of our outstanding convertible preferred stock converted into 29,479,521 shares of common stock and, as of November 30, 2020, there were no shares of convertible preferred stock outstanding.

(b)  Common Stock

Upon completion of the IPO, the Company issued and sold 11,526,134 shares of common stock at an issuance price of $22.00 per share resulting in net proceeds of $231,228, after deducting underwriting discounts, commissions and offering costs. In addition, all outstanding shares of Convertible Preferred stock converted into 29,479,521 shares of common stock and the Company issued 1,401,836 shares of common stock as a result of the automatic net exercise of warrants (See Note 8).

The Company closed its follow-on public offering on October 26, 2020, during which the Company issued and sold 5,750,000 shares of common stock at an issuance price of $38.50 per share resulting in net proceeds of $208,046 after deducting underwriting discounts, commissions and offering costs.

.

(8)  Equity-based Compensation and Warrants

(a) Stock Options

In July 2020, the Company adopted the 2020 Equity Incentive Plan (the Incentive Plan), which authorized the Company to grant up to 4,300,000 shares of common stock to eligible employees, directors, and consultants to the Company in the form of stock options, restricted stock units, and other various equity awards, including any shares subject to stock options or other awards granted under the Company’s prior stock option plan that expire or terminate for any reason (other than being exercised in full) or are cancelled in accordance with the terms of the prior stock option plan. The Incentive Plan also includes an annual evergreen increase, and the amount, terms of grants, and exercisability provisions are determined by the board of directors. The term of an award may be up to 10 years and options generally vest over four years, with one quarter of an award vesting one year after grant and the remainder vesting on a monthly basis over three years. As of November 30, 2020, there were 3,933,889 shares of common stock available for future grants under the Incentive Plan.

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(in thousands except share and per share data) (continued)

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

Three months ended November 30, 

 

Nine months ended November 30, 

    

2020

    

2019

     

2020

    

2019

Cost of revenue

$

352

$

75

$

679

$

250

Product and technology

 

1,060

 

460

 

2,212

 

1,312

Sales and marketing

 

702

 

340

 

1,494

 

1,162

General and administrative

 

832

 

689

 

1,925

 

2,171

Total stock-based compensation

$

2,946

$

1,564

$

6,310

$

4,895

The following is a summary of stock option activity under the Incentive 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

 

2,163,775

 

17.41

 

  

 

  

Exercised

 

(656,009)

 

4.65

 

  

 

  

Forfeited

 

(200,012)

 

6.35

 

  

 

  

Balance, November 30, 2020

 

9,303,810

 

$

8.91

 

7.2

years  

$

400,103

Vested and expected to vest as of November 30, 2020

9,303,810

$

8.91

7.2

years  

$

400,103

Exercisable as of November 30, 2020

 

5,673,184

$

6.37

 

6.2

years