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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, 2021

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, 2021, 66,958,380 shares of the registrant’s common stock were outstanding.

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ACCOLADE, INC.

INDEX

PAGE
NUMBER

Special Note Regarding Forward Looking Information and Risk Factor Summary

2

PART I FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of November 30, 2021 and February 28, 2021

4

Condensed Consolidated Statements of Operations for the three and nine months ended November 30, 2021 and 2020

5

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three and nine months ended November 30, 2021 and 2020

6

Condensed Consolidated Statements of Cash Flows for the nine months ended November 30, 2021 and 2020

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4.

Controls and Procedures

48

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

50

Item 1A.

Risk Factors

50

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

88

Item 3.

Defaults Upon Senior Securities

88

Item 4.

Mine Safety Disclosures

88

Item 5.

Other Information

88

Item 6.

Exhibits

89

1

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY

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.

RISK FACTOR SUMMARY

Investing in our securities involves a high degree of risk. Below is a summary of material factors that make an investment in our securities speculative or risky. Importantly, this summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, as well as other risks that we face, can be found under the heading “Item 1A – Risk Factors”, below.

We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to achieve or maintain profitability.
We derive a significant portion of our revenue from our largest customers. Our largest customer, Comcast Cable, accounted for 16% and 24% of our revenue for the fiscal years ended February 28(29), 2021 and 2020, respectively, and accounted for 9% of our revenue for the three months ended November 30, 2021. Additionally, our three largest customers, including Comcast, accounted for 38% of our revenue for the fiscal year ended February 28, 2021, and accounted for 17% of our revenue for the three

2

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months ended November 30, 2021. The loss of any of these customers, or renegotiation of any of our contracts with these customers, could negatively impact our results.
We have a limited operating history with our current offerings, which makes it difficult to evaluate our current and future business prospects and increases the risk of your investment.
Our business, results of operations, and financial condition may fluctuate on a quarterly and annual basis, which may result in a decline in our stock price if such fluctuations result in a failure to meet any projections that we may provide or the expectations of securities analysts or investors.
Our sales cycle can be long and unpredictable and requires considerable time and expense. As a result, our sales, revenue, and cash flows are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly.
Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality and due to the fact that a portion of our revenue is subject to the achievement of performance metrics and healthcare cost savings.
If we fail to effectively manage our growth and organizational change, our mission-driven culture could be impacted, and our business could be harmed.
If we are unable to attract, integrate, and retain additional qualified personnel, especially for Accolade Health Assistants, clinical, including primary care physicians and medical specialists, and various product and technology roles, our business could be adversely affected.
We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations, and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could have an adverse effect on our business, financial condition, and results of operations. For example, in March 2021 we acquired Innovation Specialists LLC d/b/a 2nd.MD (2nd.MD) and in June 2021 we acquired PlushCare, Inc. (PlushCare).
We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share our business and operating results will be harmed.
The Coronavirus Disease 2019 (COVID-19) pandemic may significantly disrupt our operations and negatively impact our business, financial condition, and results of operations.
If we fail to comply with healthcare laws and regulations, we could face substantial penalties and our business could be harmed.

3

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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 28, 

    

2021

    

2021

Assets

Current assets:

Cash and cash equivalents

$

365,982

$

433,884

Accounts receivable, net

 

21,641

9,112

Unbilled revenue

 

4,262

2,725

Current portion of deferred contract acquisition costs

 

2,957

2,210

Current portion of deferred financing fees

 

93

Prepaid and other current assets

 

12,714

5,957

Total current assets

 

407,556

453,981

Property and equipment, net

 

11,965

9,227

Goodwill

 

579,581

4,013

Intangible assets, net

 

255,129

604

Deferred contract acquisition costs

 

7,425

6,067

Other assets

 

1,696

1,618

Total assets

$

1,263,352

$

475,510

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

5,744

$

7,390

Accrued expenses

 

7,875

4,845

Accrued compensation

 

36,297

35,379

Deferred rent and other current liabilities

 

2,666

567

Due to customers

 

6,302

5,015

Current portion of deferred revenue

 

43,134

25,879

Contingent consideration liabilities

82,584

Total current liabilities

 

184,602

79,075

Convertible notes, net of unamortized issuance costs

 

280,259

Deferred rent and other noncurrent liabilities

 

9,492

5,192

Deferred revenue

 

299

395

Total liabilities

 

474,652

84,662

Commitments and Contingencies (note 11)

Stockholders’ equity

Common stock par value $0.0001; 500,000,000 shares authorized; 66,906,311 and 55,699,052 shares issued and outstanding at November 30, 2021 and February 28, 2021, respectively

 

7

6

Additional paid-in capital

 

1,248,781

762,362

Accumulated deficit

 

(460,088)

(371,520)

Total stockholders’ equity

 

788,700

390,848

Total liabilities and stockholders’ equity

$

1,263,352

$

475,510

See accompanying notes to condensed consolidated financial statements.

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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, 

    

2021

    

2020

    

2021

    

2020

Revenue

$

83,450

$

38,444

$

216,265

$

111,126

Cost of revenue, excluding depreciation and amortization

 

45,156

 

22,743

 

125,426

 

66,052

Operating expenses:

Product and technology

 

22,846

 

13,018

 

61,297

 

36,624

Sales and marketing

 

24,616

 

8,644

 

63,134

 

23,841

General and administrative

 

21,464

 

8,414

 

69,636

 

20,537

Depreciation and amortization

 

11,250

 

2,114

 

30,967

 

6,090

Change in fair value of contingent consideration

(68,428)

(38,282)

Total operating expenses

 

11,748

 

32,190

 

186,752

 

87,092

Income (loss) from operations

 

26,546

 

(16,489)

 

(95,913)

 

(42,018)

Interest expense, net

 

(743)

 

(35)

 

(2,137)

 

(3,663)

Other income (expense)

 

25

 

(42)

 

(19)

 

(160)

Income (loss) before income taxes

 

25,828

 

(16,566)

 

(98,069)

 

(45,841)

Income tax benefit (expense)

 

(3,325)

 

(29)

 

9,501

 

(85)

Net income (loss)

$

22,503

$

(16,595)

$

(88,568)

$

(45,926)

Net income (loss) per share

Basic

$

0.34

$

(0.32)

$

(1.41)

$

(1.50)

Diluted

$

0.31

$

(0.32)

$

(1.41)

$

(1.50)

Weighted-average common shares outstanding

Basic

 

65,418,728

 

51,578,863

 

62,684,823

 

30,635,348

Diluted

 

71,490,045

 

51,578,863

 

62,684,823

 

30,635,348

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

ACCOLADE, INC. AND SUBSIDIARIES

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

(In thousands, except shares)

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 condensed 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)

Stockholders' Equity (Deficit)

Common stock

Additional

Accumulated

 

    

Shares

    

Amount

    

paid-in capital

    

deficit

    

Total

Balance, February 28, 2021

55,699,052

6

762,362

(371,520)

390,848

Issuance of common stock in connection with acquisition

2,822,242

 

116,187

 

 

116,187

Issuance of replacement awards in connection with acquisition

 

1,520

 

 

1,520

Exercise of stock options and vesting of restricted stock units

236,982

 

 

2,141

 

 

2,141

Purchase of capped calls

(34,503)

(34,503)

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

50,516

1,948

1,948

Stock-based compensation expense

 

 

7,675

 

 

7,675

Net loss

 

 

 

(48,707)

 

(48,707)

Balance, May 31, 2021

58,808,792

$

6

$

857,330

$

(420,227)

$

437,109

Issuance of common stock in connection with acquisition

7,144,393

1

330,337

330,338

Issuance of replacement awards in connection with acquisition

5,209

5,209

Exercise of stock options and vesting of restricted stock units

394,815

3,491

3,491

Stock-based compensation expense

19,775

19,775

Net loss

(62,364)

(62,364)

Balance, August 31, 2021

66,348,000

$

7

$

1,216,142

$

(482,591)

$

733,558

Issuance of common stock in connection with acquisition

252,808

10,068

10,068

Exercise of stock options and vesting of restricted stock units

215,181

1,833

1,833

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

90,322

2,361

2,361

Stock-based compensation expense

18,377

18,377

Net income

22,503

22,503

Balance, November 30, 2021

66,906,311

$

7

$

1,248,781

$

(460,088)

$

788,700

See accompanying notes to condensed 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, 

    

2021

    

2020

Cash flows from operating activities:

Net loss

$

(88,568)

$

(45,926)

Adjustments to reconcile net loss to net cash used in

Operating activities:

Depreciation and amortization expense

 

30,967

6,090

Amortization of deferred contract acquisition costs

 

1,938

1,187

Change in fair value of contingent consideration

(38,282)

Deferred income taxes

(9,658)

Noncash interest expense

 

1,239

1,395

Stock-based compensation expense

 

45,827

6,310

Changes in operating assets and liabilities, net of effect of acquisitions:

Accounts receivable and unbilled revenue

 

(5,743)

(15,577)

Accounts payable and accrued expenses

 

(1,881)

569

Deferred contract acquisition costs

 

(3,304)

(4,187)

Deferred revenue and due to customers

 

16,316

4,281

Accrued compensation

 

(4,494)

9,372

Deferred rent and other liabilities

 

(1,047)

(324)

Other assets

 

(3,376)

1,182

Net cash used in operating activities

 

(60,066)

(35,628)

Cash flows from investing activities:

Purchase of marketable securities

(99,998)

Sale of marketable securities

99,998

Capitalized software development costs

 

(619)

(374)

Purchases of property and equipment

 

(2,297)

(1,500)

Earnout payments to MD Insider

(58)

Cash paid for acquisitions, net of cash acquired

(260,165)

Net cash used in investing activities

 

(263,081)

(1,932)

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

 

7,042

5,176

Payments of equity issuance costs

(60)

Payment of debt issuance costs

(8,368)

Payment for purchase of capped calls

(34,443)

Proceeds from stock purchases under employee stock purchase plan

3,574

1,442

Proceeds from borrowings on debt

 

287,500

51,166

Repayments of debt principal

(73,166)

Payments related to debt retirement

(753)

Net cash provided by financing activities

 

255,245

423,343

Net increase (decrease) in cash and cash equivalents

 

(67,902)

385,783

Cash and cash equivalents, beginning of period

 

433,884

33,155

Cash and cash equivalents, end of period

$

365,982

$

418,938

Supplemental cash flow information:

Interest paid

$

880

$

2,246

Fixed assets included in accounts payable

$

123

$

185

Other receivable related to stock option exercises

$

521

$

249

Income taxes paid

$

103

$

149

Common stock issued in connection with acquisitions

$

455,586

$

Replacement awards issued in connection with acquisitions

$

6,729

$

Bonus settled in the form of stock options

$

$

5,735

Debt issuance and offering costs included in accounts payable and accrued expenses

$

$

68

See accompanying notes to condensed 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

Accolade, Inc. (Accolade or together with its subsidiaries, 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 Company also offers expert medical opinion services to employer customers through the acquisition of Innovation Specialists LLC d/b/a 2nd.MD (2nd.MD). With the acquisition of PlushCare, Inc. (PlushCare), the Company offers virtual primary care and mental health support, both directly to consumers and to employer customers. These services are 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. Accolade is co-headquartered in Seattle, Washington and Plymouth Meeting, Pennsylvania.

(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 28, 2021 appearing in the Company’s Annual Report on Form 10-K and filed with the Securities and Exchange Commission (the SEC) on May 7, 2021.  

(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.

Through the acquisition of PlushCare, the Company has various administrative service agreements (ASA) with professional medical corporations established in California, Illinois, Wyoming, and New Jersey (PC). The PCs employ or contract with medical providers who provide services via the Company’s technology platform. The ASAs are evergreen and are terminable by the parties for breach or bankruptcy. Through the ASAs, the Company provides non-clinical administrative services to the PCs and manages the economic activities that most significantly affect PCs. The PCs retain control over the provision of medical services and the PC’s clinical personnel.

The PCs are variable interest entities (VIE) to the Company. Under Accounting Standards Codification Subtopic 810 – Consolidation, the Company is considered the PC’s primary beneficiary because the Company has the power to direct the activities that most significantly impact the VIE’s economic performance and absorbs the residual benefits and losses from the VIE’s operations. Consequently, the Company consolidates the operations of the PCs. PC assets were $14,750 as of November 30, 2021. These assets consisted primarily of cash of $11,596 and accounts receivable of $3,097, which may only be used to settle the obligations of the PCs. PC liabilities were $2,809 as of November 30, 2021.

The PCs and the Company are independent entities, and as such creditors of the PCs do not have recourse against the Company in the event of default by the PC. Additionally, the PC’s non-cash assets are available to the Company to satisfy obligations or for other corporate purposes.

(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, 2021, the results of its operations for the three and nine months ended November 30, 2021 and 2020, and

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

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

its cash flows for the nine months ended November 30, 2021 and 2020. The results for the three and nine months ended November 30, 2021 are not necessarily indicative of results to be expected for the year ending February 28, 2022, 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 consolidated financial statements and accompanying notes for the year ended February 28, 2021.

(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, 2021 and 2020, the Company capitalized $619 and $374, respectively, for internal-use software. Amortization expense related to capitalized internal-use software during the three months ended November 30, 2021 and 2020 was $290 and $1,214, respectively. Amortization expense related to capitalized internal-use software during the nine months ended November 30, 2021 and 2020 was $2,096 and $3,345, respectively.  

(d)  Intangible Assets

The Company has acquired intangible assets in the form of developed technology, customer relationships, trade names, supplier-based network, and non-compete agreements through various acquisitions. Intangible assets are recorded at fair value on the date of acquisition and are subject to amortization over the estimated useful lives of each asset. Estimates of fair value and useful lives are based on historical factors, current circumstances, and the experience and judgment of management. Estimates and assumptions used to value intangible assets are evaluated by management on an ongoing basis.

The caption “Acquired technology, net” included on the balance sheet in previous filings was changed to “Intangible assets, net” as of May 31, 2021.

(e)  Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, and marketable securities. The Company maintains its cash primarily with domestic financial institutions of high credit quality, which may exceed federal deposit insurance corporation limits. The Company invests its cash equivalents in highly rated money market funds. Marketable securities are comprised of United States treasury bills with original maturities greater 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, cash equivalents, and marketable securities and performs periodic evaluations of the credit standing of such institutions.

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

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

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, 

    

2021

    

2020

2021

    

2020

Customer 1

 

8.8

%  

17.3

%

9.9

%  

17.3

%

Customer 2

 

4.1

%  

10.4

%

5.0

%  

11.2

%

Customer 3

 

4.4

%  

10.0

%

4.8

%  

10.5

%

Total

 

17.3

%

37.7

%

19.7

%

39.0

%

Accounts receivable outstanding related to these customers at November 30, 2021 was as follows:

November 30, 2021

Customer 1

$

2,575

Customer 2

Customer 3

 

1,551

(f)  Marketable securities

The Company classifies its marketable securities as available-for-sale, which include U.S. treasury bills with original maturities of greater than three months. These securities are carried at fair market value. The total unrealized gain related to the marketable securities was inconsequential during the three and nine months ended November 30, 2021.

(g) Variable Interest Entities

An entity is generally considered a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations, or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights.

In determining whether the Company is the primary beneficiary of a VIE, the Company reviews governing contracts, formation documents, and any other contractual arrangements for any relevant terms and determines the activities that have the most significant impact on the VIE and who has the power to direct those activities. The Company then determines whether it is the primary beneficiary based on its power to direct the most significant activities of the VIE and/or whether it has a financial interest that is potentially significant. Determining the primary beneficiary requires significant judgment. The Company continuously analyzes entities in which it holds variable interests, including when there is a reconsideration event, to determine whether such entities are VIEs and whether such potential VIEs should be consolidated or deconsolidated.

(h)  New Accounting Pronouncements Not Yet Adopted

Leases: In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

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

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 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, 2022, and interim periods within the fiscal year ending February 28, 2023. Early adoption is permitted. The Company expects to adopt this guidance using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application, March 1, 2021. The Company expects that this standard will have a material effect on its consolidated financial statements. While the Company continues to assess all of the effects of the adoption, it currently estimates that the most significant impact upon adoption will be to record operating lease liabilities, and corresponding right-of-use assets, on its consolidated balance sheet based on the present value of the remaining minimum rental payments. The adoption will also require significant new disclosures about the Company’s leasing activities.

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, 2022. 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.

(i)  Recently Adopted Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The Company early adopted the ASU effective March 1, 2021 using the modified retrospective method of adoption and is applying this ASU to the convertible debt transaction entered into in March 2021.

(3) Revenue

The Company earns revenue from its customers by providing personalized health guidance solutions, expert medical opinion services, virtual primary care services, and mental health support to members. The Company’s solutions allow its members to interact with its Accolade Health Assistants and clinicians as well as medical specialists and primary care physicians through various means of communication, including video, telephony, and secure messaging and via its mobile application and member portal. The Company prices its personalized health advocacy solutions primarily 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

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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)

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.

The Company prices its expert medical opinion services using a recurring PMPM fee or a per-consultation fixed case rate. The fees associated with the PMPM fee for expert medical opinion services may be tiered based upon the customer’s utilization percentages. Similar to the personalized health guidance solutions, a percentage of PMPM fees and per-consultation fixed case rate fees related to expert medical opinion services is typically variable and 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.

For the Company’s direct-to-consumer virtual primary care services, the Company charges members a fee on a monthly or yearly subscription fee basis. In addition, virtual primary care visits are billed on a per visit basis. Virtual primary care services provided to the Company’s enterprise customers are priced using a recurring PMPM fee, a per-consultation fixed case rate, or a combination of both. In certain engagements, the consideration for enterprise contracts is variable such that a percentage of PMPM fees and per-consultation fixed case rate fees related to virtual primary care services are earned through the achievement of performance metrics and/or the realization of healthcare cost savings resulting from the utilization of the Company’s services.

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 and expert medical opinion services generally include two performance obligations: stand ready services and reporting. In addition, the Company’s contracts for direct-to-consumer virtual primary care services generally include two performance obligations: stand ready services related to platform access as part of a subscription and stand ready services to provide consultations. The Company’s contracts for virtual primary care services provided to enterprise customers generally include one performance obligation of stand ready services to provide consultations. 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 related to personalized health guidance solutions, 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. For the stand ready services related to expert medical opinion services, the Company satisfies these performance obligations over time and recognizes revenue in the amount of consideration for which it has the right to invoice using the as-invoiced practical expedient. For the stand ready services related to virtual primary care services paid for on a subscription fee basis, the Company satisfies these performance obligations over time and recognizes revenue ratably over the subscription period. For stand ready services related to virtual primary care services paid for on a per consultation basis, this revenue is recognized as the services are delivered. Revenue related to virtual primary care services on a per consultation basis is recognized based upon then-current prices for any non-insured consultations or in an amount that reflects the consideration that is expected based upon then-current prices and historical experience from insurance payers for insured consultations. 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 patterns of transfer and revenue recognition as discussed above.

13

Table of Contents

Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

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

As of November 30, 2021, $277,968 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 2022

$

55,474

2023

 

126,404

2024

 

61,609

2025

 

34,086

2026

395

Total

$

277,968

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

Significant changes to the contract liability balances during the nine months ended November 30, 2021 and 2020 were the result of revenue recognized as well as net cash received and liabilities assumed associated with the acquisitions of 2nd.MD and PlushCare. Significant changes in the deferred revenue balances during the nine months ended November 30, 2021 and 2020 were the result of recognized revenue of $25,817 and $26,639, respectively, that were previously included in deferred revenue. In addition, significant changes to the contract asset balances during the three and nine months ended November 30, 2021 and 2020 were the result of revenue recognized as well as transfers to accounts receivable. Contract assets relating to unbilled revenue are transferred to accounts receivable when the right to consideration becomes unconditional.

Revenue related to performance obligations satisfied in prior periods that was recognized during the three months ended November 30, 2021 and 2020 was $1,330 and $1,508, respectively. Revenue related to performance obligations satisfied in prior periods that was recognized during the nine months ended November 30, 2021 and 2020 was $4,088 and $4,522, respectively. These amounts relate to the ratable recognition through the minimum contract term of performance obligations satisfied in prior periods 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 $916 and $860 for the three months ended November 30, 2021 and 2020, respectively, and $2,949 and $3,362 for the nine months ended November 30, 2021 and 2020, respectively. During the three months ended November 30, 2021, the Company wrote off previously deferred commissions of $484 related to a revision of the Company’s commission plan, which offset the amounts capitalized in the three and nine months ended November 30, 2021. The Company defers costs based on its sales compensation plans only if the commissions are incremental and would not have occurred absent the customer contract. Payments to direct sales personnel are typically made upon signature of the contract. The Company does not pay commissions on contract renewals.

Deferred commissions are paid over the first year of a contract and 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 $489 and $300 for the three months ended November 30, 2021 and 2020, respectively, and $1,390 and $770 for the nine months ended November 30, 2021 and 2020, 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.

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

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

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 $524 and $515 for the three months ended November 30, 2021 and 2020, respectively, and $839 and $825 for the nine months ended November 30, 2021 and 2020, respectively. These implementation costs are deferred and amortized over the expected useful life of the Company’s customers, which is five years. Amortization is included in cost of revenues in the Company’s consolidated statements of operations and totaled $205 and $147 for the three months ended November 30, 2021 and 2020, respectively, and $548 and $417 for the nine months ended November 30, 2021 and 2020, respectively.

(4)   Acquisitions

Acquisition of HealthReveal

On September 30, 2021, the Company acquired substantially all the assets of HealthReveal, Inc. (HealthReveal). HealthReveal is a clinical artificial intelligence company focused on ensuring patients receive optimal, personalized chronic care to preempt adverse outcomes. Under the terms of the agreement, the Company issued 252,808 shares of common stock as consideration at closing. The Company will issue up to 28,089 additional shares of common stock that are subject to an indemnity holdback, and these shares will be released 18 months following the closing.

The Company accounted for this transaction as an asset acquisition based on an evaluation of the U.S. GAAP guidance for business combinations. The Company concluded that the developed technology acquired from HealthReveal comprised substantially all of the fair value of the gross assets acquired and that the assets acquired did not meet the definition of a business under the guidance for business combinations. The developed technology intangible asset was recorded at $9,976 on the acquisition date and will be amortized on a straight-line basis over 3 years.

Acquisition of PlushCare

On June 9, 2021, the Company acquired all the outstanding equity interests of PlushCare.  Based in San Francisco, California, PlushCare is a leading provider of virtual primary care and mental health support. The results of operations and financial position of PlushCare are included in the Company’s consolidated financial statements from the date of acquisition.

The preliminary consideration paid was comprised of cash, common stock, and contingent consideration as follows:

Consideration

    

  

Fair value of common stock issued

$

330,338

Fair value of contingent consideration

 

44,618

Cash consideration, net of cash acquired

33,860

Fair value of replacement awards

5,209

Total consideration

$

414,025

The aggregate purchase consideration of $414,025 was provided through cash of $33,860 (net of $17,837 cash acquired and $1,463 of debt repaid) and the issuance of 7,144,393 shares of the Company’s common stock, of which 854,717 are subject to future vesting and excluded from consideration paid. The contingent consideration represents a potential obligation for the Company to issue up to an additional 1,429,556 shares of its common stock and up to approximately $2,000 in cash upon the achievement of defined revenue milestones following the closing. Up to 109,821 shares of this contingent consideration will be withheld from being issued to the selling shareholders of PlushCare until the resolution of a pending litigation matter. See Note 11 for further details.

The estimated fair value of the replacement awards issued in the above table is comprised of 325,992 options to purchase Accolade common stock issued to PlushCare employees as of the acquisition date with an estimated fair value

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

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

of $16,663, of which $5,209 was attributable to pre-acquisition services. The remaining estimated value of $11,454 associated with the replacement awards is attributable to post-acquisition services and will be expensed over the future requisite service periods of the awards.

Certain key PlushCare employees entered into agreements with the Company whereby a portion of their shares issued at closing are subject to continuous employment with the Company and vest annually over a three-year period following the acquisition date. Upon voluntary termination of employment, any unvested shares will be forfeited. Due to the risk of forfeiture upon termination of employment, the 806,161 shares subject to forfeiture have been excluded from the purchase price and are accounted for as stock-based compensation expense in the post-business combination periods. Also, one PlushCare employee received 48,556 shares of unvested common stock. These shares vest on a pro rata basis monthly through May 2023.

The estimated fair value of the contingent consideration associated with future revenue milestones was determined using a Monte Carlo simulation. The Monte Carlo simulation performs numerous simulations utilizing certain assumptions such as (i) projected eligible revenues, (ii) expected term, (iii) risk-free rate, (iv) risk-adjusted discount rate, (v) share volatility, and (vi) operational leverage ratio between revenues and earnings before interest, taxes, depreciation, and amortization (EBITDA). The fair value measurements for contingent consideration are based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. Changes in the assumptions used could materially change the estimated fair value of the contingent consideration. The estimated fair value of the contingent consideration was $38,593 as of November 30, 2021 and is subject to remeasurement until the contingency is resolved or expires. The estimated fair value of contingent consideration increased during the second fiscal quarter primarily due to an increase in forecasted revenues from the original projections and decreased in the third fiscal quarter primarily due to a decrease in the Company’s stock price. The Company records the change in fair value of its contingent consideration liabilities in the consolidated statements of operations. See Note 6 for further details.

The Company accounted for the acquisition of PlushCare under the U.S. GAAP business combinations guidance. This accounting requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The allocation of the purchase price to the assets acquired and liabilities assumed is based upon preliminary information and is subject to further adjustment within the measurement period (up to one year from the acquisition date).

During the three months ended November 30, 2021, the Company recorded a change in the fair value of contingent consideration related to PlushCare of $30,592, which includes a correction to the fair value of contingent consideration from the preliminary value recorded in the second fiscal quarter in the amount of $3,292. This correction resulted in an increase to recognized goodwill of $5,799, and would have resulted in less change in fair value of contingent consideration expense and net loss on the statement of operations of $3,292 during the three months ended August 31, 2021. The Company has concluded that this error was not material to the financial statements taken as a whole.

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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 preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Assets acquired:

    

  

Accounts receivable

$

2,547

Prepaid and other current assets

 

573

Property and equipment

298

Other noncurrent assets

932

Goodwill

 

367,282

Intangible assets(1)

 

Customer relationships

4,050

Technology

40,650

Trade name

10,300

Non-compete agreements

6,200

Total assets acquired

$

432,832

 

  

Liabilities assumed:

 

  

Accounts payable

$

1,532

Accrued expenses

193

Accrued compensation

2,117

Current portion of deferred revenue

1,212

Deferred tax liability

12,865

Other liabilities

888

Total liabilities assumed

$

18,807

 

  

Net assets acquired

$

414,025

(1)The weighted-average useful life of intangible assets acquired is approximately 5 years.

The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated fair values at the acquisition date. The identifiable intangible assets included customer relationships, technology, trade name, and non-compete agreements and are being amortized on a straight-line basis ranging from 2 years to 10 years. The valuation methods require several judgments and assumptions to determine the fair value of intangible assets, including growth rates, discount rates, customer attrition rates, expected levels of cash flows, and tax rate. Key assumptions used included revenue projections for fiscal 2022 through 2035, an attrition rate of 25% and 50%, a tax rate of 25%, a discount rate of 12.5%, a royalty rate of 3% and probabilities of competition between 70% and 90%.

The technology intangible asset was valued using the estimated replacement cost method. This method requires several judgments and assumptions to determine the fair value, including expected profits and opportunity cost. Goodwill is attributable to the workforce of PlushCare as well as expected future growth into new and existing markets and is not deductible for income tax purposes.

For the three months ended November 30, 2021, PlushCare contributed approximately $15,614 of revenue and approximately $(8,038) of net loss, which includes $7,596 of equity-based compensation expense related to PlushCare employees, to the Company’s operating results. For the nine months ended November 30, 2021, PlushCare contributed approximately $28,360 of revenue and approximately $(14,498) of net loss, which includes $12,753 of equity-based compensation expense related to PlushCare employees, to the Company’s operating results.

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Accolade, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

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

Acquisition of 2nd.MD

On March 3, 2021, the Company acquired all the outstanding equity interests of 2nd.MD.  Based in Houston, Texas, 2nd.MD is a leading expert medical opinion and medical decision support company. The results of operations and financial position of 2nd.MD are included in the Company’s consolidated financial statements from the date of acquisition.

The preliminary consideration paid was comprised of cash, common stock, and contingent consideration as follows:

Consideration

    

  

Cash consideration, net of cash acquired

$

226,135

Fair value of common stock issued

 

116,187

Fair value of replacement awards

1,520

Fair value of contingent consideration

 

76,248

Total consideration

$

420,090

The aggregate purchase consideration of