UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-37477
TELADOC, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
04-3705970 |
(State of incorporation) |
|
(I.R.S. Employer Identification No.) |
|
|
|
2 Manhattanville Road, Suite 203 |
|
|
Purchase, New York |
|
10577 |
(Address of principal executive office) |
|
(Zip code) |
(203) 635-2002
(Registrants telephone number including area code)
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 o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
o |
Accelerated filer |
o |
Non-accelerated filer |
x |
Smaller reporting company |
o |
|
|
|
(Do not check if a smaller reporting company) |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x
As of August 10, 2015, the Registrant had 38,389,131 shares of Common Stock outstanding.
TELADOC, INC.
QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2015
|
|
Page |
|
|
|
1 | ||
1 | ||
|
1 | |
|
2 | |
|
3 | |
|
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and 2015 |
4 |
|
5 | |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | |
35 | ||
35 | ||
36 | ||
36 | ||
37 | ||
61 | ||
62 | ||
62 | ||
63 | ||
64 |
FINANCIAL INFORMATION
TELADOC, INC.
(In thousands, except share and per share data)
|
|
As of |
|
As of June 30, |
|
Pro Forma |
| |||
|
|
|
|
(Unaudited) |
|
(Unaudited) |
| |||
Assets |
|
|
|
|
|
|
| |||
Current assets: |
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
$ |
46,436 |
|
$ |
15,423 |
|
$ |
183,067 |
|
Accounts receivable, net of allowance of $1,785 and $2,814, respectively |
|
6,839 |
|
8,954 |
|
8,954 |
| |||
Due from officer |
|
253 |
|
|
|
|
| |||
Prepaid expenses and other current assets |
|
1,122 |
|
5,604 |
|
1,457 |
| |||
Deferred taxes |
|
12 |
|
78 |
|
78 |
| |||
Total current assets |
|
54,662 |
|
30,059 |
|
193,556 |
| |||
Property and equipment, net |
|
1,065 |
|
4,154 |
|
4,154 |
| |||
Goodwill |
|
28,454 |
|
56,260 |
|
56,260 |
| |||
Intangible assets, net |
|
7,530 |
|
16,203 |
|
16,203 |
| |||
Other assets |
|
296 |
|
265 |
|
265 |
| |||
Total assets |
|
$ |
92,007 |
|
$ |
106,941 |
|
$ |
270,438 |
|
Liabilities, convertible preferred stock and stockholders (deficit) equity |
|
|
|
|
|
|
| |||
Current liabilities: |
|
|
|
|
|
|
| |||
Accounts payable |
|
$ |
2,210 |
|
$ |
6,962 |
|
$ |
6,962 |
|
Accrued expenses and other current liabilities |
|
3,918 |
|
12,791 |
|
12,791 |
| |||
Accrued compensation |
|
3,358 |
|
5,088 |
|
5,088 |
| |||
Long-term bank and other debt-current portion |
|
833 |
|
1,250 |
|
1,250 |
| |||
Total current liabilities |
|
10,319 |
|
26,091 |
|
26,091 |
| |||
Other liabilities |
|
2,767 |
|
6,625 |
|
6,625 |
| |||
Deferred taxes |
|
494 |
|
939 |
|
939 |
| |||
Long term bank and other debt |
|
25,196 |
|
31,408 |
|
31,408 |
| |||
Commitments and contingencies |
|
|
|
|
|
|
| |||
Convertible preferred stock, $0.001 par value; 50,479,286 shares authorized as of December 31, 2014 and June 30, 2015; 50,452,939 shares issued as of December 31, 2014 and June 30, 2015; no shares issued and outstanding pro forma; liquidation preference of $117,914 as of December 31, 2014 and June 30, 2015 |
|
117,914 |
|
117,914 |
|
|
| |||
Redeemable common stock, $0.001 par value; 113,294 common shares issued and outstanding; no shares issued and outstanding pro forma |
|
2,852 |
|
2,852 |
|
|
| |||
Stockholders (deficit) equity: |
|
|
|
|
|
|
| |||
Common stock, $0.001 par value; 75,000,000 shares authorized as of December 31, 2014 and June 30, 2015; 2,037,999 shares and 3,274,827 shares issued and outstanding as of December 31, 2014 and June 30, 2015; 38,326,062 shares issued and outstanding pro forma |
|
2 |
|
3 |
|
38 |
| |||
Additional paid-in capital |
|
4,953 |
|
23,366 |
|
307,594 |
| |||
Accumulated deficit |
|
(72,490 |
) |
(102,257 |
) |
(102,257 |
) | |||
Total stockholders (deficit) equity |
|
(67,535 |
) |
(78,888 |
) |
205,375 |
| |||
Total liabilities, convertible preferred stock and stockholders (deficit) equity |
|
$ |
92,007 |
|
$ |
106,941 |
|
$ |
270,438 |
|
See accompanying notes to unaudited consolidated financial statements.
TELADOC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data, unaudited)
|
|
Quarters Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
2014 |
|
2015 |
|
2014 |
|
2015 |
| ||||
Revenue |
|
$ |
10,289 |
|
$ |
18,283 |
|
$ |
19,695 |
|
$ |
34,771 |
|
Cost of revenue |
|
2,027 |
|
4,793 |
|
4,008 |
|
10,074 |
| ||||
Gross profit |
|
8,262 |
|
13,490 |
|
15,687 |
|
24,697 |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Advertising and marketing |
|
1,436 |
|
4,730 |
|
3,954 |
|
9,071 |
| ||||
Sales |
|
3,033 |
|
4,397 |
|
5,178 |
|
8,079 |
| ||||
Technology and development |
|
2,064 |
|
3,203 |
|
3,256 |
|
6,109 |
| ||||
General and administrative |
|
4,033 |
|
16,488 |
|
7,377 |
|
28,456 |
| ||||
Depreciation and amortization |
|
554 |
|
923 |
|
968 |
|
1,826 |
| ||||
Loss from operations |
|
(2,858 |
) |
(16,251 |
) |
(5,046 |
) |
(28,844 |
) | ||||
Interest (expense) income, net |
|
(349 |
) |
(642 |
) |
(404 |
) |
(1,210 |
) | ||||
Net loss before taxes |
|
(3,207 |
) |
(16,893 |
) |
(5,450 |
) |
(30,054 |
) | ||||
Income tax (benefit) provision |
|
(7 |
) |
171 |
|
65 |
|
(287 |
) | ||||
Net loss |
|
(3,200 |
) |
(17,064 |
) |
(5,515 |
) |
(29,767 |
) | ||||
Preferred stock dividend |
|
(1,055 |
) |
|
|
(2,085 |
) |
|
| ||||
Net loss available to common stockholders |
|
$ |
(4,255 |
) |
$ |
(17,064 |
) |
$ |
(7,600 |
) |
$ |
(29,767 |
) |
Net loss per share, basic and diluted |
|
$ |
(2.15 |
) |
$ |
(7.20 |
) |
$ |
(4.47 |
) |
$ |
(13.13 |
) |
Weighted-average shares used to compute basic and diluted net loss per share |
|
1,974,697 |
|
2,370,113 |
|
1,700,737 |
|
2,266,959 |
| ||||
Pro forma net loss per share, basic and diluted |
|
|
|
$ |
(0.46 |
) |
|
|
$ |
(0.80 |
) | ||
Weighted-average shares used to compute basic and diluted pro forma net loss per share |
|
|
|
37,308,054 |
|
|
|
37,204,901 |
|
See accompanying notes to unaudited consolidated financial statements.
TELADOC, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS (DEFICIT) EQUITY
(In thousands, except share data, unaudited)
|
|
Convertible |
|
Redeemable |
|
|
|
|
|
Additional |
|
|
|
Total |
| ||||||||||
|
|
Preferred Stock |
|
Common Stock |
|
Common Stock |
|
Paid-In |
|
Accumulated |
|
Stockholders |
| ||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
(Deficit)Equity |
| ||||||
Balance as of December 31, 2014 |
|
50,452,939 |
|
$ |
117,914 |
|
113,294 |
|
$ |
2,852 |
|
2,037,999 |
|
$ |
2 |
|
$ |
4,953 |
|
$ |
(72,490 |
) |
$ |
(67,535 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
185,795 |
|
|
|
261 |
|
|
|
261 |
| ||||||
Issuance of stock in acquisition |
|
|
|
|
|
|
|
|
|
1,051,033 |
|
1 |
|
16,774 |
|
|
|
16,775 |
| ||||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,378 |
|
|
|
1,378 |
| ||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,767 |
) |
(29,767 |
) | ||||||
Balance as of June 30, 2015 |
|
50,452,939 |
|
$ |
117,914 |
|
113,294 |
|
$ |
2,852 |
|
3,274,827 |
|
$ |
3 |
|
$ |
23,366 |
|
$ |
(102,257 |
) |
$ |
(78,888 |
) |
See accompanying notes to unaudited consolidated financial statements.
TELADOC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
Six Months Ended June 30, |
| ||||
|
|
2014 |
|
2015 |
| ||
Cash flows used in operating activities: |
|
|
|
|
| ||
Net loss |
|
$ |
(5,515 |
) |
$ |
(29,767 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
968 |
|
1,826 |
| ||
Allowance for doubtful accounts |
|
537 |
|
958 |
| ||
Stock-based compensation |
|
309 |
|
1,378 |
| ||
Deferred income taxes |
|
65 |
|
(287 |
) | ||
Accretion of interest |
|
14 |
|
81 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
|
(3,546 |
) |
(2,639 |
) | ||
Due from officer |
|
|
|
253 |
| ||
Prepaid expenses and other current assets |
|
(34 |
) |
(358 |
) | ||
Other assets |
|
(85 |
) |
32 |
| ||
Accounts payable |
|
693 |
|
3,748 |
| ||
Accrued expenses and other current liabilities |
|
836 |
|
4,066 |
| ||
Accrued compensation |
|
674 |
|
1,648 |
| ||
Other liabilities |
|
(3 |
) |
1,466 |
| ||
Net cash used in operating activities |
|
(5,087 |
) |
(17,595 |
) | ||
Cash flows used in investing activities: |
|
|
|
|
| ||
Purchase of property and equipment |
|
(579 |
) |
(3,466 |
) | ||
Purchase of internal software |
|
(394 |
) |
(849 |
) | ||
Acquisition of business, net of cash acquired |
|
(13,844 |
) |
(13,545 |
) | ||
Net cash used in investing activities |
|
(14,817 |
) |
(17,860 |
) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from the exercise of stock options and warrants |
|
596 |
|
261 |
| ||
Proceeds from borrowing under bank and other debt |
|
16,700 |
|
6,800 |
| ||
Payment of deferred offering costs |
|
|
|
(2,411 |
) | ||
Repayment of term loan |
|
|
|
(208 |
) | ||
Net cash provided by financing activities |
|
17,296 |
|
4,442 |
| ||
Net decrease in cash and cash equivalents |
|
(2,608 |
) |
(31,013 |
) | ||
Cash and cash equivalents at beginning of year |
|
3,212 |
|
46,436 |
| ||
Cash and cash equivalents at end of year |
|
$ |
604 |
|
$ |
15,423 |
|
Interest paid: |
|
$ |
192 |
|
$ |
920 |
|
See accompanying notes to unaudited consolidated financial statements.
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Description of Business
Teladoc, Inc. was incorporated in the State of Texas in June 2002 and changed its state of incorporation to the State of Delaware in October 2008. Unless the context otherwise requires, Teladoc, Inc., together with its subsidiaries, is referred to herein as Teladoc or the Company. The Companys principal executive offices are located in Dallas, Texas and Purchase, New York. Teladoc is the nations largest telehealth company.
The Company completed the acquisitions of Consult A Doctor, Inc. (CADR) in 2013, AmeriDoc, LLC (AmeriDoc) in 2014, Compile, Inc. d/b/a BetterHelp (BetterHelp) in 2015 and Stat Health Services Inc. (StatDoc) in 2015, four companies engaged in telehealth activities similar to those of Teladoc. Upon the effective date of each respective merger, each entity merged with and into Teladoc.
On July 7, 2015, Teladoc closed on its initial public offering (the IPO) in which the Company issued and sold 9,487,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $19.00 per share. The Company received net proceeds of $163.5 million after deducting underwriting discounts and commissions of $12.6 million as well as other offering expenses of $4.1 million. On July 7, 2015, all of the Companys then-outstanding convertible preferred stock converted into an aggregate of 25.5 million shares of common stock and all of the Companys redeemable common stock converted into 113,294 shares of common stock. The unaudited pro forma balance sheet at June 30, 2015, the pro forma net loss per share, basic and diluted, and weighted-average shares used to compute basic and diluted pro forma net loss per share on the consolidated statements of operations for the quarter and six months ended June 30, 2015, reflects that aforementioned IPO activity as if occurred on June 30, 2015.
The Company believes that the unaudited pro forma financial information at June 30, 2015 provides material information to investors as the historical reported amounts were significantly impacted by the closing of the IPO.
Note 2. Basis of Presentation and Principles of Consolidation
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. In the opinion of the Companys management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company at the dates and for the periods indicated. The interim results for the quarter and six months ended June 30, 2015 are not necessarily indicative of results for the full 2015 fiscal year or any other future interim periods. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Companys final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 30, 2015 (the Prospectus).
The unaudited consolidated financial statements include the results of Teladoc, a professional association and six professional corporations: Teladoc Physicians, P.A., Teladoc Physicians, P.C. formed and operated in Alaska; Teladoc Physicians, P.C. formed and operated in California; Teladoc Physicians, P.C. formed and operated in Colorado; Teladoc Physicians, P.C. formed and operated in Michigan; Teladoc Physicians, P.C. formed and operated in New Jersey; and Teladoc Physicians, P.C. formed and operated in New York (collectively, the Association).
Teladoc Physicians, P.A. is party to a Services Agreement by and among it and the six professional corporations noted above pursuant to which each professional corporation provides services to Teladoc Physicians, P.A. Each professional corporation is established pursuant to the requirements of its respective domestic jurisdiction governing the corporate practice of medicine.
The Company holds a variable interest in the Association which contracts with physicians and other health professionals in order to provide services to Teladoc. The Association is considered a variable interest entity (VIE) since it
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
does not have sufficient equity to finance its activities without additional subordinated financial support. An enterprise having a controlling financial interest in a VIE, must consolidate the VIE if it has both power and benefitsthat is, it has (1) the power to direct the activities of a VIE that most significantly impact the VIEs economic performance (power) and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). The Company has the power and rights to control all activities of the Association and funds and absorbs all losses of the VIE.
Total revenue and net loss for the VIE were $1.4 million and $(0.8) million, respectively, for the quarter ended June 30, 2014 and $3.1 million and $(1.4) million, respectively, for the quarter ended June 30, 2015. Total revenue and net loss for the VIE were $2.8 million and $(1.3) million, respectively, for the six months ended June 30, 2014 and $6.4 million and $(3.9) million, respectively, for the six months ended June 30, 2015. The VIEs total assets were $2.1 million and $1.6 million at December 31, 2014 and June 30, 2015, respectively. Total liabilities for the VIE were $11.2 million and $14.5 million at December 31, 2014 and June 30, 2015, respectively. The VIEs total stockholders deficit was $9.1 million and $12.9 million at December 31, 2014 and June 30, 2015, respectively.
All intercompany transactions and balances have been eliminated.
On June 17, 2015, the Company filed a Certificate of Amendment to the Companys Certificate of Incorporation to effect a one-for-2.2859 reverse stock split of all outstanding shares of common stock with the Secretary of State of the State of Delaware. The Certificate of Amendment provides that every 2.2859 shares of the Companys issued and outstanding common stock automatically combine into one issued and outstanding share of the Companys common stock. The Certificate of Amendment did not change the par value of the Companys common stock and preferred stock. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split.
There have been no changes to the significant accounting policies described in the Prospectus that have had a material impact on the consolidated financial statements and related notes.
Business Combinations
The Company accounts for its business combinations using the acquisition method of accounting. The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities assumed by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date. The excess of (i) the total costs of acquisition over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions that the Company believes are necessary to consider to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent assets and liabilities. The Company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in the Companys business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Companys consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Companys operating environment evolves.
Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Significant estimates and assumptions by management affect the allowance for doubtful accounts, the carrying value of long-lived assets (including goodwill and intangible assets), the carrying value, capitalization and amortization of software development costs, the calculation of a contingent liability in connection with an earn-out, the provision for income taxes and related deferred tax accounts, certain accrued liabilities, revenue recognition, contingencies, litigation and related legal accruals and the value attributed to employee stock options and other stock-based awards.
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Net Loss Per Share
Basic and Diluted Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock of the Company outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock of the Company, including the Preferred Stock and outstanding stock options and warrants, to the extent dilutive. As a result of the Companys net loss position, basic and diluted net loss per share was the same for each period presented as all preferred stock, warrants and options would be anti-dilutive.
The following table presents the calculation of basic and diluted net loss per share for the Companys common stock (in thousands, except net loss per share data):
|
|
Quarters Ended |
|
Six Months Ended |
| ||||||||
|
|
2014 |
|
2015 |
|
2014 |
|
2015 |
| ||||
Net loss |
|
$ |
(3,200 |
) |
$ |
(17,064 |
) |
$ |
(5,515 |
) |
$ |
(29,767 |
) |
Preferred stock dividends |
|
(1,055 |
) |
|
|
(2,085 |
) |
|
| ||||
Net loss available to common stockholders |
|
$ |
(4,255 |
) |
$ |
(17,064 |
) |
$ |
(7,600 |
) |
$ |
(29,767 |
) |
Weighted-average shares used to compute basic and diluted net loss per share |
|
1,975 |
|
2,370 |
|
1,701 |
|
2,267 |
| ||||
Net loss per share, basic and diluted |
|
$ |
(2.15 |
) |
$ |
(7.20 |
) |
$ |
(4.47 |
) |
$ |
(13.13 |
) |
Unaudited Pro Forma Net Loss per Share
The holders of a majority of the outstanding shares of the Preferred Stock (voting as a single class on an as-converted basis, including holders of at least a majority of the outstanding shares of Series F Preferred Stock) approved the automatic conversion of the Preferred Stock into common stock of the Company upon the closing of an initial public offering of the common stock of the Company at a per share price of at least $12.00 (prior to underwriting discounts and commissions) that results in aggregate proceeds to the Company of at least $75.0 million (net of underwriting discounts and commissions).
Pro forma basic and diluted net loss per share were computed to give effect to the IPO in which the Company issued and sold 9,487,500 shares of common stock and the conversion of the Preferred Stock into common stock of the Company using the if-converted method as though the conversion and reclassification had occurred as of the beginning of the first period presented or the original date of issuance, if later.
The following table presents the calculation of basic and diluted pro forma net loss per share (in thousands, except net loss per share data):
|
|
Quarter Ended, |
|
Six Months Ended, |
| ||
|
|
June 30, 2015 |
|
June 30, 2015 |
| ||
Net loss available to common stockholders |
|
$ |
(17,064 |
) |
$ |
(29,767 |
) |
Pro forma net loss per share, basic and diluted |
|
$ |
(0.46 |
) |
$ |
(0.80 |
) |
Pro forma net loss per share weighted average shares |
|
37,308 |
|
37,205 |
| ||
|
|
|
|
|
| ||
Basic net loss per share weighted average shares |
|
2,370 |
|
2,267 |
| ||
Shares sold in IPO |
|
9,488 |
|
9,488 |
| ||
Preferred conversion |
|
25,450 |
|
25,450 |
| ||
Pro forma net loss per share weighted average shares |
|
37,308 |
|
37,205 |
|
Segment Information
The Companys chief operating decision maker, its Chief Executive Officer (CEO), reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating its financial performance. Accordingly, the Company has determined that it operates in a single reporting segmenthealth services.
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
The Company offers two types of subscription access revenue contracts: (i) contracts that provide for a fixed monthly charge for access and unlimited visits per Member, as defined below, and (ii) contracts that provide for a fixed monthly charge for access and a contractually defined cost for each visit. Any visit fee revenue that is not included in the subscription access revenue is recognized when the service has been provided to the Member.
The Company recognizes a substantial portion of its revenue from contracts that provide employers and health plans (Clients) with subscription access to the Companys network of physicians and other healthcare professionals (Providers) on a subscription basis for a fixed monthly fee which entitles the Clients employees and their beneficiaries (Members) to unlimited consultations (visits). The contracts are generally for a one-year term and have an automatic renewal feature for additional years.
The Company commences revenue recognition for the subscription access service on the date that the services are made available to the Client and its Members, which is considered the implementation date, provided all of the following criteria are met:
· there is an executed subscription agreement;
· the Member has access to the service;
· collection of the fees is reasonably assured; and
· the amount of fees to be paid by the Client and Member is fixed and determinable.
Subscription Access Revenue
Subscription access revenue recognition commences on the date that the Companys services are made available to the Client, which is considered the implementation date, provided all of the other criteria described above are met. Revenue is recognized over the term of the Client contract and is based on the terms in the Client contracts, which can provide for a variable periodic fee based upon the actual number of Members.
Revenue From Visit Fees
Revenue from visits is comprised of all revenue that is earned in connection with the completion of a visit. The Company recognizes revenue as the visits are completed.
The Companys contracts do not generally contain refund provisions for fees earned related to services performed. However, certain of the Companys contracts include performance guarantees that are based upon minimum employee or Member utilization and guarantees by the Company for specific service level performance of the Companys services. The Company defers revenue recognition when subscription access revenue is refundable until the end of the respective contractual period when the performance guarantees are met. The Company issued credits amounting to approximately $0.1 million for both of the quarters ended June 30, 2014 and 2015, and $0.2 million for both of the six months ended June 30, 2014 and 2015.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Companys assessment of the collectability of accounts. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice and the collection history of each customer to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective asset as follows:
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Computer equipment |
|
3 years |
Furniture and equipment |
|
5 years |
Leasehold improvements |
|
Shorter of the lease term or the estimated useful lives of the improvements |
Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the consolidated statement of operations in the period realized.
Internal-Use Software
Internal-use software is included in intangible assets and is amortized on a straight-line basis over 3 years.
For development costs related to software development tools that enable the Companys Members and Providers to interact, the Company capitalizes costs incurred during the application development stage. Costs related to minor upgrades, minor enhancements and maintenance activities are expensed as incurred.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment annually on October 1 or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Companys impairment tests are based on a single operating segment and reporting unit structure. The goodwill impairment test involves a two- step process. The first step involves comparing the fair value of the Companys reporting unit to its carrying value, including goodwill. The fair value of the reporting unit is estimated using a discounted cash flows analysis. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value.
Companys annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the consolidated financial statements.
Other intangible assets resulted from business acquisitions and include Client relationships, non-compete agreements, software and trademarks. Client relationships are amortized over a period 10 years for CADR, AmeriDoc and StatDoc, and 2 years for BetterHelp, in relation to expected future cash flows. Non-compete agreements are amortized over a period of 3 to 5 years using the straight-line method, software is amortized over a period of 5 years using the straight-line method and trademarks are amortized over a period of 3 years using the straight-line method.
Stock-Based Compensation
All stock-based compensation is measured based on the grant date fair value of the awards and recognized on a straight-line basis over the period during which the employee is required to perform services in exchange for the award (generally requiring a four-year vesting period for each award). The Company estimates the fair value of employee stock options using the Black-Scholes option-pricing model.
Income Taxes
The Company accounts for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax bases and tax credit and net operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse.
The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
The Company recognizes and measures uncertain tax positions using a two- step approach. The first step is to evaluate the tax position taken or expected to be taken by determining if the weight of available evidence indicates that it is more likely
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a regular basis. Its evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of audit and effective settlement of audit issues.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the revised guidance requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The revised guidance is effective for the Company beginning in the quarter ending March 31, 2018; early adoption is allowed. The revised guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application.
The Company has not yet determined the impact the revised guidance will have on its consolidated financial statements. In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the potential impact of this guidance on its financial disclosures and results.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial StatementsGoing Concern. This guidance addresses managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. Managements evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. ASU 2014-15 is effective for interim or annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect to early adopt this guidance and is currently evaluating the impact of the adoption of this guidance on its financial disclosures and results.
In April 2015, the FASB issued ASU 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The revised guidance is effective for the Company beginning in the quarter ending March 31, 2016 and is required to be applied retrospectively. Early adoption is permitted. The Company is currently evaluating the potential impact of this guidance on its financial disclosures and results.
Note 3. Business Acquisitions
On May 1, 2014, the Company completed the acquisition of AmeriDoc, a company engaged in telehealth activities similar to Teladoc, through the purchase of 100% of AmeriDocs outstanding members interests for $17.2 million, net of cash acquired, including a $3.5 million promissory note and adjustments for working capital in the amount of $0.2 million. AmeriDoc was acquired to help the Company expand its initial investment in the local and regional insurance broker markets to reach clients that previously did not have access to the Companys services. Upon the effective date of the merger, AmeriDoc merged with and into Teladoc. The acquisition was considered an asset acquisition for tax purposes and as such, the goodwill resulting from this acquisition is tax deductible. The total associated transaction costs of the acquisition were $0.2 million.
On January 23, 2015, the Company completed the acquisition of BetterHelp, through a merger in which BetterHelp became a wholly-owned subsidiary of the Company. The merger consideration paid by the Company in connection with this
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
acquisition consisted of (i) $3.5 million in cash at closing and adjustments for working capital deficiency in the amount of $0.2 million and (ii) earn-out payments equal to 15% of the annual net revenue of the BetterHelp business (but not the Companys other business) for three years following closing. The Company computed the value of these future payments from internally produced revenue projections and recorded a contingent liability in the amount of $2.4 million which is considered as additional purchase consideration. The Company also issued an unsecured, subordinated promissory note in the amount of $1.0 million, with all principal and interest at a rate of 5% per annum being payable on the third anniversary of the closing to the selling shareholders and another executive of BetterHelp. If the employment of the promissory note holders is terminated, then they forfeit their right to receive the promissory note. As such, the Company has determined the promissory note to be compensatory and is accruing the expense over the service term. BetterHelp was acquired to help the Company expand its operations in the direct-to-consumer and behavioral health sector. The acquisition was considered a stock acquisition for tax purposes and as such, the goodwill resulting from this acquisition is not tax deductible. The total associated transaction costs of the acquisition were $0.1 million.
On June 17, 2015, the Company completed the acquisition of StatDoc through a merger in which StatDoc became a wholly-owned subsidiary of the Company. The aggregate merger consideration paid by the Company in connection with the acquisition was $30.1 million, which was comprised of $13.3 million of cash and $16.8 million of the Companys common stock (or 1,051,033 shares), subject to post-closing working capital adjustments as defined in the Agreement and Plan of Merger governing the acquisition. Fair value of the common stock was determined based on market data from similar healthcare enterprises. StatDoc is a telemedicine provider, focused on managed care, health system and self-insured clients. The acquisition was considered a stock acquisition for tax purposes and as such, the goodwill resulting from this acquisition is not tax deductible. The total associated transaction costs of the acquisition were $0.3 million.
The three acquisitions described above were accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. The results of AmeriDoc were included within the consolidated financial statements commencing May 1, 2014. The results of BetterHelp were included within the consolidated financial statements commencing January 23, 2015. The results of StatDoc were included within the consolidated financial statements commencing June 17, 2015.
The following table summarizes the preliminary (for StatDoc and BetterHelp) and final (AmeriDoc) fair value estimates of the assets acquired and liabilities assumed at each acquisition date. The Company, with the assistance of third-party valuation expert, estimated the fair value of the acquired tangible and intangible assets.
Identifiable assets acquired and liabilities assumed (in thousands):
|
|
StatDoc |
|
BetterHelp |
|
AmeriDoc |
| |||
Purchase price |
|
$ |
30,052 |
|
$ |
5,749 |
|
$ |
17,214 |
|
Less: |
|
|
|
|
|
|
| |||
Cash |
|
361 |
|
89 |
|
57 |
| |||
Accounts receivable |
|
423 |
|
11 |
|
458 |
| |||
Other assets |
|
70 |
|
4 |
|
18 |
| |||
Client relationships |
|
3,220 |
|
141 |
|
2,980 |
| |||
Non-compete agreements |
|
1,070 |
|
910 |
|
520 |
| |||
Internal software |
|
2,960 |
|
780 |
|
|
| |||
Trademarks |
|
|
|
140 |
|
|
| |||
Accounts payable |
|
(609 |
) |
(6 |
) |
(43 |
) | |||
Deferred tax |
|
|
|
(666 |
) |
|
| |||
Other liabilities |
|
(563 |
) |
(340 |
) |
(257 |
) | |||
Goodwill |
|
$ |
23,120 |
|
$ |
4,686 |
|
$ |
13,481 |
|
The amount allocated to goodwill reflects the benefits Teladoc expects to realize from the growth of the respective acquisitions operations.
The Companys unaudited pro forma revenue and net loss for the quarters ended June 30, 2014 and 2015 and for the six months ended June 30, 2014 and 2015 below have been prepared as if AmeriDoc, BetterHelp and StatDoc had been purchased on January 1, 2014.
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Pro Forma |
| ||||||||||
|
|
Quarters Ended |
|
Six Months Ended |
| ||||||||
(in thousands) |
|
2014 |
|
2015 |
|
2014 |
|
2015 |
| ||||
Revenue |
|
$ |
11,612 |
|
$ |
19,166 |
|
$ |
22,985 |
|
$ |
36,596 |
|
Net loss |
|
$ |
(5,221 |
) |
$ |
(18,860 |
) |
$ |
(9,777 |
) |
$ |
(32,813 |
) |
The pro forma financial information above is not necessarily indicative of what the Companys consolidated results actually would have been if the acquisitions had been completed at the beginning of the respective periods. In addition, the pro forma information above does not attempt to project the Companys future results. Subsequent to the acquisitions, the associated revenue and net loss are not significant to the Companys results of operations.
Note 4. Intangible Assets, Net
Intangible assets, net consist of the following (in thousands):
|
|
Gross Value |
|
Accumulated |
|
Net Carrying |
|
Weighted |
| |||
December 31, 2014 |
|
|
|
|
|
|
|
|
| |||
Client relationships |
|
$ |
6,790 |
|
$ |
(1,565 |
) |
$ |
5,225 |
|
8.5 |
|
Non-compete agreements |
|
1,430 |
|
(474 |
) |
956 |
|
2.9 |
| |||
Software |
|
1,885 |
|
(536 |
) |
1,349 |
|
2.8 |
| |||
Intangible assets, net |
|
$ |
10,105 |
|
$ |
(2,575 |
) |
$ |
7,530 |
|
|
|
June 30, 2015 |
|
|
|
|
|
|
|
|
| |||
Client relationships |
|
$ |
10,151 |
|
$ |
(2,295 |
) |
$ |
7,856 |
|
8.8 |
|
Non-compete agreements |
|
3,410 |
|
(817 |
) |
2,593 |
|
2.8 |
| |||
Trademarks |
|
140 |
|
(21 |
) |
119 |
|
2.6 |
| |||
Software |
|
6,473 |
|
(838 |
) |
5,635 |
|
4.0 |
| |||
Intangible assets, net |
|
$ |
20,174 |
|
$ |
(3,971 |
) |
$ |
16,203 |
|
|
|
Amortization expense for intangible assets was $0.5 million and $0.7 million for the quarters ended June 30, 2014 and 2015, respectively and $0.8 million and $1.4 million for the six months ended June 30, 2014 and 2015, respectively. Periodic amortization that will be charged to expense over the remaining life of the intangible assets as of June 30, 2015 is as follows (in thousands):
Years Ending December 31, |
|
|
| |
2015 (July 1st to December 31st) |
|
$ |
2,099 |
|
2016 |
|
3,950 |
| |
2017 |
|
3,382 |
| |
2018 |
|
2,485 |
| |
2019 |
|
1,694 |
| |
Thereafter |
|
2,593 |
| |
|
|
$ |
16,203 |
|
Note 5. Goodwill
Goodwill consists of the following (in thousands):
|
|
As of December |
|
As of June 30, |
| ||
|
|
2014 |
|
2015 |
| ||
Beginning balance |
|
$ |
14,786 |
|
$ |
28,454 |
|
Additions |
|
13,267 |
|
27,806 |
| ||
Net working capital adjustments (CADR and AmeriDoc acquisitions) |
|
401 |
|
|
| ||
Goodwill |
|
$ |
28,454 |
|
$ |
56,260 |
|
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
As of December 31, |
|
As of June 30, |
| ||
|
|
2014 |
|
2015 |
| ||
Professional fees |
|
$ |
963 |
|
$ |
1,744 |
|
Consulting/customer service fees |
|
1,118 |
|
738 |
| ||
Escrow for acquisition |
|
|
|
2,640 |
| ||
Legal fees |
|
389 |
|
4,805 |
| ||
Other |
|
1,448 |
|
2,864 |
| ||
Total |
|
$ |
3,918 |
|
$ |
12,791 |
|
Note 7. Fair Value Measurements
The Company measures its financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2Include other inputs that are directly or indirectly observable in the marketplace.
Level 3Unobservable inputs that are supported by little or no market activity.
The Company measures its cash equivalents at fair value on a recurring basis. The Company classifies its cash equivalents within Level 1 because they are valued using observable inputs that reflect quoted prices for identical assets in active markets.
The Company measures its contingent consideration at fair value on a recurring basis and classifies such as Level 3. The Company estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using the weighted probability of the possible payments.
The following tables present information about the Companys assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):
|
|
December 31, 2014 |
| |||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||
Cash and cash equivalents |
|
$ |
46,436 |
|
$ |
|
|
$ |
|
|
|
|
June 30, 2015 |
| |||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||
Cash and cash equivalents |
|
$ |
15,423 |
|
$ |
|
|
$ |
|
|
Contingent liability |
|
$ |
|
|
$ |
|
|
$ |
2,531 |
|
There were no transfers between fair value measurement levels during the six months ended June 30, 2015.
The following table reconciles the beginning and ending balance of the Companys Level 3 contingent liability:
Fair value at inception |
|
$ |
2,391 |
|
Payments earned |
|
(197 |
) | |
Change in fair value (included in general and administrative expenses) |
|
337 |
| |
Fair value at June 30, 2015 |
|
$ |
2,531 |
|
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Long Term Bank and Other Debt
Long-term bank and other debt consist of the following (in thousands):
|
|
As of December 31, |
|
As of June 30, |
| ||
|
|
2014 |
|
2015 |
| ||
SVB Revolving Advance facility |
|
$ |
4,700 |
|
$ |
11,500 |
|
SVB Term Loan facility |
|
5,000 |
|
4,792 |
| ||
SVB Mezzanine Term Loan less debt discount of $171 and $134 for warrants |
|
12,829 |
|
12,866 |
| ||
Subordinated Promissory Note |
|
3,500 |
|
3,500 |
| ||
Total |
|
26,029 |
|
32,658 |
| ||
Less: current portion |
|
(833 |
) |
(1,250 |
) | ||
Long term bank and other debt |
|
$ |
25,196 |
|
$ |
31,408 |
|
Long term bank and other debt are stated at amortized cost, which approximates fair value.
In May 2014, the Company entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank (SVB) that provided for a Revolving Advance facility and a Term Loan facility (the Amended Term Loan facility). The Revolving Advance facility provides for borrowings up to $12.0 million based on 300% of the Companys monthly recurring revenue, as defined therein. Borrowings under the Revolving Advance facility were $4.7 million at December 31, 2014, and the facility carries interest at a rate of 0.75% above the prime rate per annum and matures in April 2016. Interest payments are payable monthly in arrears. The Company entered into an amendment to the Revolving Advance Facility in March 2015 that extended its maturity to April 2017. In May 2015, the Company increased the borrowings to $11.5 million.
The Amended Term Loan facility provides for borrowings up to $5.0 million. As of December 31, 2014 and June 30, 2015, the Company had utilized the total $5.0 million available under this facility. The Amended Term Loan facility carries interest at a rate of 1.00% above the prime rate per annum. Interest payments are payable monthly in arrears. Payments on the Amended Term Loan facility commenced in May 2015 and continue with 47 equal monthly payments of principal plus interest.
In May 2014, the Company entered into a Subordinated Loan and Security Agreement with SVB that provided for Mezzanine Term Loans totaling $13.0 million. The total $13.0 million drawdown of the mezzanine facility was completed in September 2014. The mezzanine facility carries interest at a rate of 10.00% per annum and matures in May 2017. Interest payments are payable monthly in arrears. In connection with entry into the mezzanine facility, the Company granted two affiliates of SVB warrants to purchase an aggregate of 131,239 shares of common stock of the Company at an exercise price of $2.95 per share. The warrants are immediately exercisable and have a 10-year term. The Company also granted SVB a security interest in significantly all of the Companys assets. The mezzanine facility has been used to fund the expansion of the Companys business.
The Company incurred approximately $0.2 million of loan origination costs in connection with the above facilities and amortized approximately $6,000 and $18,000 of these costs during the quarters ended June 30, 2014 and 2015, respectively, and $6,000 and $37,000 during the six months ended June 30, 2014 and 2015, respectively.
Effective with the purchase of AmeriDoc, the Company executed a Subordinated Promissory Note in the amount of $3.5 million payable to the seller of AmeriDoc on April 30, 2015. The Subordinated Promissory Note carries interest at a rate of 10.00% annual interest and is subordinated to the SVB Facilities. In March 2015, the Company, the seller of AmeriDoc and SVB executed an Amended and Restated Subordinated Promissory Note that extended the maturity of the Promissory Note to April 30, 2017.
The Company was in compliance with all debt covenants at December 31, 2014 and June 30, 2015.
Note 9. Related Party Transaction
In May 2013, the Company issued a loan to an officer of the Company in the amount of $0.3 million. This loan was repaid in full to the Company during February 2015. This was a non-cash transaction, whereby the loan proceeds were used to exercise options to purchase 312,474 shares of common stock options of the Company at an exercise price of $0.80 per share. The loan carried an interest rate of 2% per annum and was due and payable upon the earlier of (i) May 13, 2017 and (ii) the
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
occurrence of a Change of Control as defined in the promissory note evidencing the loan. The officer was required to make monthly interest payments. At December 31, 2014, the balance of the loan was $0.3 million.
Note 10. Lease Abandonment Charge
In connection with the Companys abandonment of facilities in Dallas, Texas and Greenwich, Connecticut, the Company incurred $0.2 million and $0.7 million, in lease abandonment charges during the quarter and six months ended June 30, 2015, respectively, included within general and administrative expenses in the consolidated statement of operations. There were no lease abandonments in 2014. The following table details the associated liability. The current portion of the liability of $0.4 million was recorded in accrued expenses and other current liabilities and the non-current portion of the liability of $0.3 million was recorded in other liabilities in the consolidated balance sheet (in thousands):
Balance January 1, 2015 |
|
$ |
|
|
Charged to expense |
|
716 |
| |
Paid or otherwise settled |
|
(55 |
) | |
Balance June 30, 2015 |
|
$ |
661 |
|
Note 11. Commitments and Contingencies
Legal Matters
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of its business.
Teladoc is plaintiff in three lawsuits in the Texas courts against the Texas Medical Board (the TMB). In the first suit, Teladoc v. TMB and Leshikar, on December 31, 2014, the Austin Court of Appeals granted Teladocs request for summary judgment, invalidating the TMBs prior assertion that Teladocs doctors do not form proper professional relationships with Teladocs members in the course of telehealth consultations such as would support the prescription of medications. The TMB has filed a petition for review with the Texas Supreme Court to ask that Court if it will allow the TMB to appeal the Court of Appealss decision. In the second suit, Teladoc v. TMB and Freshour, on February 2, 2015, the Travis County District Court granted Teladocs request for a temporary injunction restraining the TMB from enforcing an emergency rule it issued on January 16, 2015 purporting to amend the Texas Administrative Code so as to require a face-to-face examination of a patient before a Texas physician may lawfully prescribe medication. This suit is set for trial on November 9, 2015. In the third suit, Teladoc et al. v. TMB et al., the United States District Court for the Western District of Texas, Austin Division, held a hearing on May 22, 2015 on Teladocs motion for preliminary injunction of the rule amendments the TMB adopted on April 10, 2015 that seek to effect substantively identical restrictions as the issues in the two prior lawsuits. On May 29, 2015, the court granted Teladocs request for a preliminary injunction of the rule amendments, pending ultimate trial on the amendments validity. The Court has set a trial date of February 13, 2017. On July 30, 2015, the TMB filed a motion to dismiss the suit. No hearing on this motion to dismiss has been set. Given the nature and status of these lawsuits, the Company cannot yet determine the amount or reasonable range of a potential loss, if any, though it does not believe a material loss is probable in connection with any of the lawsuits.
Business in the State of Texas accounted for approximately $6.3 million (or 18%) and $10.0 million (or 23%) of the Companys consolidated revenue for the six months ended June 30, 2015 and during the year ended December 31, 2014, respectively. If the TMBs revisions go into effect as written and Teladoc is unable to adapt its business model in compliance with the TMB rule, its ability to operate its business in the State of Texas could be materially adversely affected, which would have a material adverse effect on its business, financial condition and results of operations.
The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and estimable. In this regard, the Company establishes accrual estimates for various lawsuits, claims, investigations and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the loss can be reasonably estimated. At June 30, 2015, the Company has established accruals for certain of its lawsuits, claims, investigations and proceedings based upon estimates of the most likely outcome in a range of loss or the minimum amounts in a range of loss if no amount within a range is a more likely estimate. The Company does not believe that at June 30, 2015 any reasonably possible losses in excess of the amounts accrued would be material to the unaudited consolidated financial statements.
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Convertible Preferred Stock (the Preferred Stock)
The Preferred Stock consists of the following:
December 31, 2014 and June 30, 2015 |
|
Shares |
|
Shares |
|
Common |
|
Liquidation |
| |
Series A |
|
418,634 |
|
418,634 |
|
1,628,498 |
|
$ |
5,232,925 |
|
Series A-1 |
|
53,957 |
|
53,957 |
|
282,689 |
|
918,955 |
| |
Series B |
|
263,839 |
|
263,839 |
|
1,790,050 |
|
5,768,378 |
| |
Series C-1 |
|
18,287,483 |
|
18,267,759 |
|
7,991,497 |
|
15,253,579 |
| |
Series D |
|
12,339,204 |
|
12,339,204 |
|
5,397,962 |
|
18,600,005 |
| |
Series E |
|
6,227,169 |
|
6,227,169 |
|
2,724,165 |
|
15,000,005 |
| |
Series F |
|
12,889,000 |
|
12,882,377 |
|
5,635,580 |
|
57,139,783 |
| |
|
|
50,479,286 |
|
50,452,939 |
|
25,450,441 |
|
$ |
117,913,630 |
|
As of December 31, 2014 and June 30, 2015, the significant terms applicable to the Series A through Series F Preferred Stock were as follows:
Dividend Rights
Prior to the issuance of the Series F Preferred Stock, the Series AE Preferred Stock accrued cumulative dividends at the per annum rate of 7.5% of the respective original purchase price (as previously adjusted for a reverse stock split and, with respect to the Series A, A-1 and B Preferred Stock, anti-dilution protection) for each such series of Preferred Stock. Such dividends were payable when, as and if declared by the Companys board of directors, but prior and in preference to any dividend on the common stock of the Company. In connection with the issuance of the Series F Preferred Stock, all such accrued and accumulated dividends (which totaled approximately $13.8 million at August 31, 2014) were converted into Series F Preferred Stock at a rate of $0.50 of Series F Preferred Stock per $1.00 in accrued dividends, resulting in the issuance of approximately 1,554,000 shares of Series F Preferred Stock on September 10, 2014. There are no longer any accrued or unpaid dividends on the Preferred Stock, and no such dividends are required to accrue or be declared by the Company.
Conversion Rights
Each share of Preferred Stock is convertible, at any time and at the option of the holder of such share, into shares of the common stock of the Company, at the following ratios (subject to adjustment as described below):
Series of Preferred Stock |
|
Original |
|
Conversion |
|
Number of Shares of |
| ||
Series F |
|
$ |
4.4355 |
|
$ |
10.1391 |
|
0.4375 |
|
Series E |
|
$ |
2.4088 |
|
$ |
5.5063 |
|
0.4375 |
|
Series D |
|
$ |
1.5074 |
|
$ |
3.4458 |
|
0.4375 |
|
Series C-1 |
|
$ |
0.835 |
|
$ |
1.909 |
|
0.4375 |
|
Series B |
|
$ |
12.95 |
|
$ |
1.909 |
|
6.7846 |
|
Series A-1 |
|
$ |
10.00 |
|
$ |
1.909 |
|
5.2391 |
|
Series A |
|
$ |
7.425 |
|
$ |
1.909 |
|
3.8900 |
|
The holders of a majority of the outstanding shares of the Preferred Stock (voting as a single class on an as-converted basis, including holders of at least a majority of the outstanding shares of Series F Preferred Stock) approved the automatic conversion of the Preferred Stock into common stock of the Company upon the closing of an initial public offering of the common stock of the Company at a per share price of at least $12.00 (prior to underwriting discounts and commissions) that results in aggregate proceeds to the Company of at least $75.0 million (net of underwriting discounts and commissions).
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Subject to limited exceptions, the conversion price for each series of the Preferred Stock was subject to an adjustment to reduce dilution in the event that the Company issued additional equity securities at a purchase price less than the applicable conversion price for such series of the Preferred Stock.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the assets of the Company available for distribution will be distributed to the Companys stockholders in the following order of priority:
1. First, the holders of Series F Preferred Stock will receive an amount per share equal to the sum of (i) the original issue price for the Series F Preferred Stock ($4.4355), plus (ii) any declared but unpaid dividends on the Series F Preferred Stock (the Series F Liquidation Amount).
2. Second, the holders of Series E, D and C-1 Preferred Stock (pari passu) will receive an amount per share equal to the sum of (i) the original issue price for the Series E Preferred Stock ($2.4088), Series D Preferred Stock ($1.507391) or Series C-1 Preferred Stock ($0.835), as applicable, plus (ii) any declared but unpaid dividends on the Series E Preferred Stock, Series D Preferred Stock or Series C-1 Preferred Stock, as applicable (the Series E Liquidation Amount, the Series D Liquidation Amount, and the Series C-1 Liquidation Amount, respectively).
3. Third, the holders Series B Preferred Stock will receive an amount per share equal to the sum of (i) 1.23 times the original issue price (adjusted for a prior reverse stock split and anti-dilution protection) for the Series B Preferred Stock ($17.775), plus (ii) any declared but unpaid dividends on the Series B Preferred Stock (the Series B Liquidation Amount).
4. Fourth, the holders of Series A and A-1 Preferred Stock (pari passu) will receive an amount per share equal to the greater of (x) the sum of (i) 1.25 times the original issue price (adjusted for a prior reverse stock split and anti-dilution protection) for the Series A Preferred Stock ($10.00) or Series A-1 Preferred Stock ($13.625), as applicable, plus (ii) any declared but unpaid dividends on the Series A Preferred Stock or Series A-1 Preferred Stock, as applicable, and (y) the aggregate amount that would have been payable in respect of number of common stock issued upon conversion of Series A and Series A-1 immediately prior to liquidation, dissolution or winding up of the Company, the Series A Liquidation Amount and the Series A-1 Liquidation Amount, respectively).
5. Following the payment in full of the amounts described above, the remaining assets of the Company will be distributed to the holders of Series F, E, D, C-1 and B Preferred Stock and common stock of the Company (but not Series A or A-1 Preferred Stock) pro rata based on the number of such shares held by each stockholder on an as-converted to common stock basis (as applicable, the Participation Amount). Notwithstanding the above:
a. If the aggregate of the Series F Liquidation Amount and the Participation Amount payable with respect to the Series F Preferred Stock exceeds the sum of (i) 1.5 times the original issue price for the Series F Preferred Stock ($4.4355), plus (ii) any declared but unpaid dividends thereon (collectively, the Maximum Series F Liquidation Amount), then holders of Series F Preferred Stock will instead receive the greater of (x) the Maximum Series F Liquidation Amount, or (y) the amount that such holders would receive if all shares of Series F Preferred Stock had been converted into common stock of the Company immediately prior to the liquidation, dissolution or winding up of the Company.
b. If the aggregate of the Series E Liquidation Amount and the Participation Amount payable with respect to the Series E Preferred Stock exceeds the sum of (i) 3 times the original issue price for the Series E Preferred Stock ($2.4088), plus (ii) any declared but unpaid dividends thereon (collectively, the Maximum Series E Liquidation Amount), then holders of Series E Preferred Stock will instead receive the greater of (x) the Maximum Series E Liquidation Amount, or (y) the amount that such holders would receive if all shares of Series E Preferred Stock had been converted into common stock of the Company immediately prior to the liquidation, dissolution or winding up of the Company.
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Subject to limited exceptions, unless waived by holders of at least (i) a majority of the outstanding shares of Preferred Stock (voting together as a single class on an as-converted to common stock basis), and (ii) a majority of the outstanding Series F Preferred Stock, a merger, combination, consolidation, or sale of voting control of the Company or sale or transfer of substantially all of the assets of the Company, in each case in which the Companys stockholders do not own a majority of the voting shares of the surviving or acquiring corporation, will be deemed to be a liquidation event. If such deemed liquidation event is structured as a merger, combination, consolidation or sale of voting control, the proceeds of such transaction must be distributed to the stockholders in the order described above. If, alternatively, the deemed liquidation event is structured as a sale of assets, and the Company does not dissolve within 90 days after such deemed liquidation event, the holders of Preferred Stock may elect (pursuant to a procedure and in an order of priority similar to that described under Redemption below) to have their shares redeemed by the Company in exchange applicable Liquidation Amount described above.
Protective Provisions
Subject to limited exceptions and certain additional restrictions, so long as at least three million shares of Preferred Stock remain outstanding, the Company may not do any of the following without the consent of holders of a majority of the Preferred Stock (voting together as a single class on an as-converted to common stock basis):
a. increase the authorized number of shares of any series of Preferred Stock or common stock of the Company;
b. issue or obligate itself to issue shares of any additional class or series of capital stock unless the same ranks junior to the existing Preferred Stock;
c. effect any transaction or series of related transactions resulting in the consummation of a merger, combination, consolidation or other reorganization of the Company with or into any third party, the transfer of all or substantially all of the assets of the Company to a third party, or any other change of control or recapitalization;
d. subject to limited exceptions, purchase or redeem any shares of capital stock of the Company;
e. amend, alter or repeal any provision of the Certificate of Incorporation or the Bylaws of the Company;
f. sell or otherwise dispose of any of the Companys or its subsidiaries material assets, other than (A) in the ordinary course of business or (B) to wholly-owned subsidiaries of the Company or its subsidiaries;
g. liquidate, dissolve or wind-up the business and affairs of the Company;
h. pay or declare any dividend other than as set forth in the Certificate of Incorporation of the Company;
i. increase the number of shares of common stock or stock options of the Company authorized to be issued to employees or directors of, or consultants or advisors to, the Company or any of its subsidiaries;
j. change the size of the Companys board of directors;
k. alter the rights or preferences of the Preferred Stock;
l. issue any shares of Preferred Stock;
m. subject to limited exceptions, issue any shares of common stock of the Company other than issuances approved by the Companys board of directors (including the approval of the director appointed by the holders of Series D Preferred Stock and the director appointed by the holders of Series F Preferred Stock).
Additionally, for so long as at least twenty-five percent (25%) of the number of shares of any series of Preferred Stock remain issued and outstanding, the Company may not (i) take any action that materially and adversely alters the rights of such series of the Preferred Stock unless substantially similar action is taken with respect to all of the other series of the Preferred Stock or (ii) create any additional class or series of capital stock which ranks senior or pari passu to such series of the Preferred Stock, in each such case without the consent of the holders of a majority (which majority must, in certain cases, include the consent of certain named institutional investors) of the outstanding shares of the respective, affected series of the Preferred Stock, voting as a separate class.
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Redemption
On and after September 1, 2019, the holders of shares Preferred Stock may require that such shares be redeemed by the Company out of lawfully available funds, as follows:
1) First, the holders of at least a majority of the Series F Preferred Stock (voting as a separate class) may require that all shares of Series F Preferred Stock be redeemed at a price equal to the sum of (i) the original issue price for the Series F Preferred Stock ($4.4355), plus (ii) any declared or accrued but unpaid dividends thereon.
2) Second, and provided that all shares of Series F Preferred Stock have been redeemed by the Company, the Companys Series E, D and C-1 Preferred Stock (acting pari passu but as separate classes), may be redeemed as follows:
a) The holders of at least a majority of the Series E Preferred Stock (voting as a separate class) may require that all shares of Series E Preferred Stock be redeemed at a price equal to the sum of (i) the original issue price for the Series E Preferred Stock ($2.4088), plus (ii) any declared or accrued but unpaid dividends thereon.
b) The holders of at least a majority of the Series D Preferred Stock (voting as a separate class) may require that all shares of Series D Preferred Stock be redeemed at a price equal to the sum of (i) the original issue price for the Series D Preferred Stock ($1.5074), plus (ii) any declared or accrued but unpaid dividends thereon.
c) The holders of at least a majority of the Series C-1 Preferred Stock (voting as a separate class) may require that all shares of Series C-1 Preferred Stock be redeemed at a price equal to the sum of (i) the original issue price for the Series C-1 Preferred Stock ($0.835), plus (ii) any declared or accrued but unpaid dividends thereon.
3) Third, and provided that all shares of Series F, D, E and C-1 Preferred Stock have been redeemed, the holders of a majority of the Series B Preferred Stock may require that all shares of Series B Preferred Stock be redeemed at a price equal to (i) 1.23 times the original issue price (adjusted for a prior reverse stock split and anti-dilution protection) for the Series B Preferred Stock ($17.775), plus (ii) any declared but unpaid dividends thereon.
4) Fourth, and provided that all shares of Series F, D, E, C-1 and B Preferred Stock (as well as certain shares of Common Stock held by the holders of Series B Preferred Stock) have been redeemed, the holders of a majority of the Series A and A-1 Preferred Stock (voting together as a single class) may require that all shares of Series A and A-1 Preferred Stock be redeemed at a price equal to the sum of (i) 1.25 times the original issue price (adjusted for a prior reverse stock split and anti-dilution protection) for the Series A Preferred Stock ($10.00) or Series A-1 Preferred Stock ($13.625), as applicable, plus (ii) any declared but unpaid dividends on the Series A Preferred Stock or Series A-1 Preferred Stock, as applicable.
All shares of the Preferred Stock have been presented outside of permanent stockholders deficit, because there are redemption events outside of the Companys control.
Note 13. Common Stock and Stockholders (Deficit) Equity
Capitalization
Subject to limited exceptions, the Company may issue common stock subject to approval by (i) the board of directors of the Company (including the approval of the director appointed by the holders of Series D Preferred Stock and the director appointed by the holders of Series F Preferred Stock), or (ii) holders of a majority of the Preferred Stock (voting together as a single class on an as-converted to common stock basis). The aggregate number of shares of common stock that the Company will have authority to issue is 32,179,448 shares of common stock, having a par value of $0.001 per share.
On June 17, 2015, the Company filed a Certificate of Amendment to the Companys Certificate of Incorporation to effect a one-for-2.2859 reverse stock split of all outstanding shares of common stock with the Secretary of State of the State of
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Delaware. The Certificate of Amendment provides that every 2.2859 shares of the Companys issued and outstanding common stock automatically combine into one issued and outstanding share of the Companys common stock. The Certificate of Amendment did not change the par value of the Companys common stock and preferred stock. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split. In addition, the Certificate of Amendment increased the number of authorized shares of the Companys common stock to 75,000,000 shares and the number of authorized shares of the Companys preferred stock to 50,479,286 shares.
Additionally, the holders of a majority of the outstanding shares of the Preferred Stock (voting as a single class on an as-converted basis, including holders of at least a majority of the outstanding shares of Series F Preferred Stock) approved the automatic conversion of the Preferred Stock into common stock of the Company upon the closing of an initial public offering of the common stock of the Company at a per share price of at least $12.00 (prior to underwriting discounts and commissions) that results in aggregate proceeds to the Company of at least $75.0 million (net of underwriting discounts and commissions). On July 7, 2015, all of the Companys then-outstanding convertible preferred stock converted into an aggregate of 25.5 million shares of common stock and all of the Companys redeemable common stock converted into 113,294 shares of common stock.
Redeemable Common Stock
The holders of at least a majority of the Preferred Stock have agreed that, following the redemption of all the Preferred Stock, the total 59,048 shares of Series A Common Stock will be subject to a redemption price equal to the greater of (i) the sum of (A) 2.25 times 2.2859 times the Series A Investors Common Stock price, plus (B) any dividends declared but unpaid thereon and (ii) the Series A Investors Common Stock appraised value.
The holders of at least a majority of the Preferred Stock have agreed that, following the redemption of all the Preferred Stock, the total 54,246 shares of Series B Common Stock will be subject to a redemption price equal to the greater of (1) the sum of (A) 2.25 times 2.2859 times the Series B Investors Common Stock price, plus (B) any dividends declared but unpaid thereon and (ii) the Series B Investors Common Stock appraised value. The Company has recorded the Series B Common Stock $2.1 million redemption value and the Series A Common Stock $0.8 million value together in mezzanine equity in the accompanying consolidated balance sheets.
Warrants
On May 2, 2014, the Company issued 131,239 common stock warrants to purchase an aggregate of 131,239 shares of its common stock at an exercise price of $2.95 per share to two entities affiliated with SVB. The common stock warrants were immediately exercisable upon issuance and have a 10-year term. The fair value of the common stock warrants on the date of issue was approximately $0.2 million which was recorded as an increase to additional paid in capital and as a debt discount.
Stock Plan and Stock Options
The Companys Second Amended and Restated Stock Incentive Plan (the Plan) provides for the issuance of incentive and nonstatutory options to its employees and non-employees. Options issued under the Plan are exercisable for periods not to exceed ten years, vest over four years and are issued at the fair value of the shares of common stock on the date of grant as determined by the Companys board of directors, which obtains periodic third-party valuations to assist their determination process.
The Plan provides for the early exercise of stock options for certain individuals as determined by their respective option agreements.
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Activity under the Plan is as follows (in thousands, except share and per share amounts and years):
|
|
Shares |
|
Number of |
|
Weighted- |
|
Weighted- |
|
Aggregate |
| ||
Balance at December 31, 2014 |
|
741,971 |
|
2,875,106 |
|
$ |
3.73 |
|
8.38 |
|
$ |
6,758 |
|
Increase in Plan authorized shares |
|
306,892 |
|
|
|
|
|
|
|
|
| ||
Stock option grants |
|
(1,006,316 |
) |
1,006,316 |
|
$ |
9.75 |
|
|
|
|
| |
Stock options exercised |
|
|
|
(185,795 |
) |
$ |
1.41 |
|
|
|
|
| |
Stock options cancelled |
|
105,981 |
|
(105,981 |
) |
$ |
5.26 |
|
|
|
|
| |
Stock options expired |
|
33,596 |
|
(33,596 |
) |
$ |
8.66 |
|
|
|
|
| |
Balance at June 30, 2015 |
|
182,124 |
|
3,556,050 |
|
$ |
5.39 |
|
8.87 |
|
$ |
34,168 |
|
Vested or expected to vest June 30, 2015 |
|
|
|
3,246,008 |
|
$ |
5.28 |
|
8.83 |
|
$ |
31,521 |
|
Exercisable as of June 30, 2015 |
|
|
|
577,790 |
|
$ |
1.62 |
|
7.30 |
|
$ |
7,731 |
|
The total grant-date fair value of stock options granted during the quarter and six months ended June 30, 2015 was $3.3 million and $5.2 million, respectively.
Stock-Based Compensation
All stock-based awards to employees are measured based on the grant-date fair value of the awards and are generally recognized in the Companys consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award (generally requiring a four-year vesting period for each award). The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. Compensation cost is generally recognized over the vesting period of the applicable award using the straight-line method.
Given the absence of a public trading market prior to June 30, 2015, the Companys board of directors considered numerous objective and subjective factors to determine the fair value of its common stock at each grant date. These factors included, but were not limited to, (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) the prices for the Preferred Stock sold to outside investors; (iii) the rights, preferences and privileges of the Preferred Stock relative to the common stock; (iv) the lack of marketability of the common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of the Company, given prevailing market conditions.
The assumptions used in the Black-Scholes option-pricing model were determined as follows:
Volatility. Since the Company does not have a trading history for its common stock, the expected volatility was derived from the historical stock volatilities of several unrelated public companies within its industry that it considers to be comparable to its business over a period equivalent to the expected term of the stock option grants.
Risk-Free Interest Rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Expected Term. The expected term represents the period that the stock-based awards are expected to be outstanding. When establishing the expected term assumption, the Company used the simplified method because the Company does not have adequate historical data.
Dividend Yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, it used an expected dividend yield of zero.
Forfeiture rate. The Company uses historical data to estimate pre- vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions and fair value per share:
TELADOC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Six Months Ended June 30, |
| ||
|
|
2014 |
|
2015 |
|
Volatility |
|
53.7% |
|
49.6% 51.0% |
|
Expected life (in years) |
|
7.0 |
|
7.0 |
|
Risk-free interest rate |
|
2.3% |
|
1.58% 2.06% |
|
Dividend yield |
|
|
|
|
|
Weighted-average fair value of underlying common stock |
|
$1.65 |
|
$5.15 |
|
Total compensation costs charged as an expense for stock-based awards, including stock options, recognized in the components of operating expenses are as follows (in thousands):
|
|
Quarters Ended |
|
Six Months Ended |
| ||||||||
|
|
2014 |
|
2015 |
|
2014 |
|
2015 |
| ||||
Administrative and marketing |
|
$ |
6 |
|
$ |
23 |
|
$ |
12 |
|
$ |
41 |
|
Sales |
|
21 |
|
95 |
|
48 |
|
165 |
| ||||
Technology and development |
|
11 |
|
52 |
|
25 |
|
92 |
| ||||
General and administrative |
|
110 |
|
397 |
|
225 |
|
1,080 |
| ||||
Total stock-based compensation expense |
|
$ |
148 |
|
$ |
567 |
|
$ |
310 |
|
$ |
1,378 |
|
As of June 30, 2015, the Company had $7.9 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 3.5 years.
Note 14. Income Taxes
As a result of the Companys history of net operating losses, the Company has provided for a full valuation allowance against its deferred tax assets for assets that are not more-likely-than-not to be realized. A deferred tax provision was recognized for the quarter ended June 30, 2015 and for the six months ended June 30, 2014, primarily attributable to the timing differences with respect to the treatment of the amortization of tax deductible goodwill. For the quarter ended June 30, 2014 and six months ended June 30, 2015, an income tax benefit was realized as a result of acquisition activity partially offset by the aforementioned timing differences.
All of the Companys operations, and resulting deferred tax assets, were generated in the United States.
Note 15. Subsequent Events
On July 7, 2015, Teladoc closed on its initial public offering (the IPO) in which the Company issued and sold 9,487,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $19.00 per share. The Company received net proceeds of $163.5 million after deducting underwriting discounts and commissions of $12.6 million as well as other offering expenses of $4.1 million. On July 7, 2015, all of the Companys then-outstanding convertible preferred stock converted into an aggregate of 25.5 million shares of common stock and all of the Companys redeemable common stock converted into 113,294 shares of common stock.
On July 15, 2015, the Company reduced its indebtedness under the Revolving Advance facility with a $5.0 million principal repayment.
On July 24, 2015, two entities affiliated with SVB exercised their warrants to purchase 59,281 shares of common stock at an exercise price of $2.95 per share.
On July 31, 2015, the Company acquired certain assets from Gateway to Provider Access, Inc. (Gateway) for $1.5 million, subject to post-closing working capital adjustments as defined in the purchase agreement. Gateway is engaged in the marketing, selling and administering the Companys services through other third parties.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. All statements other than statements of historical fact are, or may be, forward-looking statements. These forward-looking statements are not historical facts, but rather are based on current expectations, estimate, assumptions and projections about our industry, business and future financial results. We use words such as anticipates, believes, plans, expects, future, intends, may, will, should, estimates, predicts, potential, would, likely, foresee, continue and other similar words or phrases, as well as statements in the future tense to identify these forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of important factors, including those set forth below.
· Our business could be adversely affected by ongoing legal challenges to our business model or by new state actions restricting our ability to provide the full range of our services in certain states;
· We are dependent on our relationships with affiliated professional entities, which we do not own, to provide physician services, and our business would be adversely affected if those relationships were disrupted;
· Evolving government regulations may require increased costs or adversely affect our results of operations;
· We conduct business in a heavily regulated industry and if we fail to comply with these laws and government regulations, we could incur penalties or be required to make significant changes to our operations or experience adverse publicity, which could have a material adverse effect on our business, financial condition, and results of operations;
· We have a history of cumulative losses, which we expect to continue, and we may never achieve or sustain profitability;
· The impact of recent healthcare reform legislation and other changes in the healthcare industry and in healthcare spending on us is currently unknown, but may adversely affect our business, financial condition and results of operations;
· A significant portion of our revenue comes from a limited number of Clients, the loss of which would have a material adverse effect on our business, financial condition and results of operations;
· The telehealth market is immature and volatile, and if it does not develop, if it develops more slowly than we expect, if it encounters negative publicity or if our solution does not drive Member engagement, the growth of our business will be harmed;
· If the number of individuals covered by our employer, health plan and other Clients decreases, or the number of applications or services to which they subscribe decreases, our revenue will likely decrease;
· Our growth depends in part on the success of our strategic relationships with third parties;
· Our business and growth strategy depend on our ability to maintain and expand a network of qualified Providers. If we are unable to do so, our future growth would be limited and our business, financial condition and results of operations would be harmed;
· We may become subject to medical liability claims, which could cause us to incur significant expenses and may require us to pay significant damages if not covered by insurance;
· Rapid technological change in our industry presents us with significant risks and challenges;
· A decline in the prevalence of employer-sponsored healthcare or the emergence of new technologies may render our solution obsolete or require us to expend significant resources in order to remain competitive;
· If our new applications and services are not adopted by our Clients, or if we fail to continue to innovate and develop new applications and services that are adopted by our Clients, our revenue and results of operations will be adversely affected;
· We rely on data center providers, Internet infrastructure, bandwidth providers, third-party computer hardware and software, other third parties and our own systems for providing services to our Clients and Members, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with Clients, adversely affecting our brand and our business;
· We could incur substantial costs as a result of any pending or future claim of infringement of another partys intellectual property rights;
· If our arrangements with our Providers or our Clients are found to violate state laws prohibiting the corporate practice of medicine or fee splitting, our business, financial condition and our ability to operate in those states could be adversely impacted;
· If our Providers are characterized as employees, we would be subject to employment and withholding liabilities;
· Any future litigation against us could be costly and time-consuming to defend;
· We will incur significantly increased costs and devote substantial management time as a result of operating as a public company;
· Certain state tax authorities may assert that we have a state nexus and seek to impose state and local income taxes which could adversely affect our results of operations;
· Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations;
· Our proprietary software may not operate properly, which could damage our reputation, give rise to claims against us or divert application of our resources from other purposes, any of which could harm our business, financial condition and results of operations;
· In order to support the growth of our business, we may need to incur additional indebtedness under our current credit facilities or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all;
· Failure to adequately expand our direct sales force will impede our growth;
· We may be unable to successfully execute on our growth initiatives, business strategies or operating plans;
· Our use and disclosure of personally identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our client base, membership base and revenue;
· Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock;
· If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase and we may be unable to implement our business strategy;
· We incur significant upfront costs in our Client relationships, and if we are unable to maintain and grow these Client relationships over time, we are likely to fail to recover these costs, which could have a material adverse effect on our business, financial condition and results of operations;
· If our existing Clients do not continue or renew their contracts with us, renew at lower fee levels or decline to purchase additional applications and services from us, it could have a material adverse effect on our business, financial condition and results of operations;
· Our sales and implementation cycle can be long and unpredictable and requires considerable time and expense, which may cause our results of operations to fluctuate;
· We operate in a competitive industry, and if we are not able to compete effectively, our business, financial condition and results of operations will be harmed;
· If we cannot implement our solution for Clients or resolve any technical issues in a timely manner, we may lose Clients and our reputation may be harmed;
· We depend on our senior management team, and the loss of one or more of our executive officers or key employees or an inability to attract and retain highly skilled employees could adversely affect our business;
· If we fail to develop widespread brand awareness cost-effectively, our business may suffer;
· Our marketing efforts depend significantly on our ability to receive positive references from our existing Clients;
· Any failure to protect our intellectual property rights could impair our ability to protect our technology and our brand;
· We may acquire other companies or technologies, which could divert our managements 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 a material adverse effect on our business, financial condition and results of operations;
· Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use or similar taxes which could adversely affect our results of operations;
· Economic uncertainties or downturns in the general economy or the industries in which our Clients operate could disproportionately affect the demand for our solution and negatively impact our results of operations;
· The estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all;
· Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations;
· Future sales to Clients outside the United States or with international operations may expose us to risks inherent in international sales that, if realized, could adversely affect our business;
· We have an unremediated material weakness in internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could result in our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline; and
· We are an emerging growth company, and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
The foregoing list of factors is not exhaustive, and does not necessarily include all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. The information in this Quarterly Report should be read carefully in conjunction with other uncertainties and potential events described in our registration statements on Form S-1 (File No.333-204577) filed with the Securities and Exchange Commission (the SEC) and our other filings with the SEC. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report. Except as required by law or regulation, we do not undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances.
Overview
We are the nations first and largest telehealth platform, delivering on-demand healthcare anytime, anywhere, via mobile devices, the internet, video and phone. Our solution connects consumers, or our Members, with our over 1,100 board-certified physicians and behavioral health professionals who treat a wide range of conditions and cases from acute diagnoses such as upper respiratory infection, urinary tract infection and sinusitis to dermatological conditions, anxiety and smoking cessation. Over 11 million unique Members now benefit from access to Teladoc 24 hours a day, seven days a week, 365 days a year, at a cost of $40 per visit. Our solution is delivered with a median response time of less than ten minutes from the time a Member requests a telehealth visit to the time they speak with a Teladoc physician. We completed approximately 274,000 telehealth visits in the first six months of 2015 and approximately 300,000 telehealth visits in 2014.
The Teladoc solution is transforming the access, cost and quality dynamics of healthcare delivery for all of our market participants. Our Members rely on Teladoc to remotely access affordable, on-demand healthcare whenever and wherever they choose. Employers and health plans (our Clients) purchase our solution to reduce their healthcare spending while at the same time offering convenient, affordable, high-quality healthcare to their employees or beneficiaries. Our network of physicians and other healthcare professionals (our Providers) have the ability to generate meaningful income and deliver their services more efficiently with no administrative burden. We believe the value proposition of our solution is evidenced by our overall Member satisfaction rate, which has exceeded 95% over the last six years, and a 104% annual net dollar retention rate among our Clients on average over the last three years. We further believe any consumer, employer or health plan or practitioner interested in a better approach to healthcare is a potential Teladoc Member, Client or Provider.
We generate revenue from our Clients on a contractually recurring, per-Member-per-month, subscription access fee basis, which provides us with significant revenue visibility. In addition, under the majority of our Client contracts, we generate additional revenue on a per-telehealth visit basis, through a visit fee. Subscription access fees are paid by our Clients on behalf of their employees, dependents and other beneficiaries, while visit fees are paid by either Clients or Members. We generated $18.3 million and $10.3 million in revenue for the quarters ended June 30, 2015 and 2014, respectively, representing 78% year-over-year growth and $34.7 million and $19.7 million for the six months ended June 30, 2015 and 2014, respectively, representing 77% year-over-year growth. We had net losses of $17.1 million and $3.2 million for the quarters ended June 30, 2015 and 2014, respectively, and $29.8 million and $5.5 million for the six months ended June 30, 2015 and 2014, respectively. For the quarter ended June 30, 2015, 83% and 17% of our revenue was derived from subscription access fees and visit fees, respectively, and for the six months ended June 30, 2015, 81% and 19% of our revenue was derived from subscription access fees and visit fees, respectively.
In July 2015, we successfully closed on our IPO in which the Company issued and sold 9,487,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $19.00 per share. We received net proceeds of $163.5 million after deducting underwriting discounts and commissions of $12.6 million as well as other offering expenses of $4.1 million. On July 7, 2015, all of the Companys then-outstanding convertible preferred stock
converted into an aggregate of 25.5 million shares of common stock and all of the Companys redeemable common stock converted into 113,295 shares of common stock.
Acquisition History
We have scaled and intend to continue to scale our platform through the pursuit of selective acquisitions. We have completed four acquisitions detailed below over the last two years, which we believe have expanded our distribution capabilities and broadened our service offering.
In August 2013, we acquired Consult A Doctor for $16.6 million, net of cash acquired. In May 2014, we acquired AmeriDoc for $17.2 million, net of cash acquired. Both of these acquired businesses specialized in providing telehealth solutions to small- and medium-sized businesses through broker distribution channels. These acquisitions added new distribution opportunities that we believe are an important element of our growth strategy.
In January 2015, we completed the acquisition of BetterHelp, a provider of direct-to-consumer, behavioral health services, for $3.3 million net of cash acquired, and a $1.0 million promissory note and we have agreed to make annual payments to the sellers equal to 15% of the total net revenue generated by the BetterHelp business for each of the next three years. We believe this acquisition will help us broaden our service into the direct-to-consumer and behavioral health sector.
On June 17, 2015, we completed our acquisition of StatDoc for aggregate consideration of $30.1 million, comprised of $13.3 million of cash and $16.8 million of our common stock (or 1,051,033 shares), subject to post-closing working capital adjustments as defined in the Agreement and Plan of Merger governing the acquisition. StatDoc is a telemedicine provider, focused on managed care, health system and self-insured clients.
Key Factors Affecting Our Performance
Number of Members. Our revenue growth rate and long-term profitability are affected by our ability to increase our number of Members because we derive a substantial portion of our revenue from subscription access fees via Client contracts that provide Members access to our professional Provider network in exchange for a contractual based monthly fee. Revenue is driven primarily by the number of Clients, the number of Members in a Clients population, the number of services contracted for by a Client and the contractually negotiated prices of our services and the negotiated pricing that is specific to that particular Client. We believe that increasing our membership is an integral objective that will provide us with the ability to continually innovate our services and support initiatives that will enhance Member experiences and lead to increasing or maintaining our existing annual net dollar retention rate.
Number of Visits. We also realize revenue in connection with the completion of a visit. Accordingly, our visit revenue, or visit fees, increase as the number of visits increase. Visit fee revenue is driven primarily by the number of Clients, the number of Members in a Clients population, Member utilization of our Provider network services and the contractually negotiated prices of our services. We believe that increasing our current Member utilization rate is a key objective in order for our Clients to realize tangible healthcare savings with our service.
Annual Net Dollar Retention Rate. We disclose annual net dollar retention rate as a supplemental measure of our organic revenue growth. We believe annual net dollar retention rate is an important metric that provides insight into the long-term value and stability of our subscription agreements and our ability to retain and grow revenue from our existing Clients. Because we typically enter into annual contracts with our Clients, a large percentage of our Client agreements have reached the end of their original terms and, as a result, we have observed significant renewal rates. We observed a 104% annual net dollar retention rate among our Clients on average over the last three years. We calculate annual net dollar retention rate as the aggregate annualized subscription contract value as of the last day of a calendar year from our Clients that have been under contract with us for at least 12 months divided by the aggregate annualized subscription contract value from all our Clients as of the last day of the prior calendar year. We calculate the annualized subscription contract value for each Client by multiplying the monthly recurring revenue of such Client by 12. For the purposes of annual net dollar retention rate, we count health plan Clients separately from each self-insured employer Client that contracts with us through a health plan relationship.
Seasonality. We typically experience the strongest increases in consecutive quarterly revenue during the fourth and first quarters of each year, which coincides with traditional annual benefit enrollment seasons. In particular, as a result of many Clients introduction of new services at the very end of the current year, or the start of each year, the majority of our new Client contracts have an effective date of January 1. Additionally, as a result of national seasonal cold and flu trends, we experience our highest level of visit fees during the first and fourth quarters of each year when compared to other quarters of the year. Conversely, the second quarter of the year has historically been the period of lowest utilization of our Provider network services relative to the other quarters of the year. See Risk FactorsRisks Related to Our BusinessOur quarterly results may fluctuate significantly, which could adversely impact the value of our common stock. included elsewhere in this quarterly report on Form 10-Q.
Components of Results of Operations
Revenue
We generate in excess of 80% of our revenue from our Clients who purchase access to our professional Provider network for their employees, dependents and other beneficiaries. Our Client contracts include a per-Member-per-month subscription access fee as well as a visit fee for each completed visit, which is either paid to us by the Client, the Member or both parties. Accordingly, we generate subscription access revenue from our subscription access fees and visit revenue from our visit fees.
Subscription access revenue accounted for approximately 83% and 86% of our total revenue during the quarters ended June 30, 2015 and 2014, respectively, and 81% and 86% during the six months ended June 30, 2015 and 2014, respectively. Subscription access revenue is driven primarily by the number of Clients, the number of Members in a Clients population, the number of services contracted for by a Client and the contractually negotiated prices of our services. Visit fee revenue is driven primarily by the number of Clients, the number of Members in a Clients population, Member utilization of our professional Provider network services and the contractually negotiated prices of our services.
We recognize subscription access fees monthly when the following criteria are met: (i) there is an executed subscription agreement, (ii) the Member has access to the service, (iii) collection of the fees is reasonably assured and (iv) the amount of fees to be paid by the Client and Member is fixed and determinable. Our agreements generally have a term of one year. The majority of Clients renew their contracts with us following their first year of services. We generally invoice our Members in advance on a monthly basis. Visit fees are recognized as incurred and billed in arrears.
Warranties and Indemnification
Our arrangements generally include certain provisions for indemnifying Clients against liabilities if there is a breach of a Clients data or if our service infringes a third partys intellectual property rights. To date, we have not incurred any material costs as a result of such indemnifications.
We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the persons service as a director or officer, including any action by us, arising out of that persons services as our director or officer or that persons services provided to any other company or enterprise at our request. We maintain director and officer liability insurance coverage that would generally enable us to recover a portion of any future amounts paid. We may also be subject to indemnification obligations by law with respect to the actions of our employees under certain circumstances and in certain jurisdictions.
Concentrations of Risk and Significant Clients
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed federally insured limits.
During the quarter ended June 30, 2015 and 2014 and the six months ended June 30, 2015 and 2014, all of our revenue was generated by Clients located in the United States. No Client represented over 10% of revenue for the quarters or the six months ended June 30, 2015 or 2014.
As of June 30, 2015 and December 31, 2014, no Client accounted for more than 10% of accounts receivable.
Cost of Revenue
Cost of revenue primarily consists of fees paid to our Providers, costs incurred in connection with our Provider network operations, which include employee-related expenses (including salaries and benefits) and costs related to our contracted third-party call center and insurance, which includes coverage for medical malpractice claims. Cost of revenue is driven primarily by the number of visits completed in each period. Many of the elements of the cost of revenue are relatively variable and semi-variable, and can be reduced in the near-term to offset any decline in our revenue. Our business and operational models are designed to be highly scalable and leverage variable costs to support revenue-generating activities. While we currently expect to grow our headcount to build our Provider network operations center and to enhance our sales and technology capabilities, we believe our increased investment in automation and integration capabilities and economies of scale
in our Provider network operations center operating model, will position us to grow our revenue at a greater rate than our cost of revenue.
Gross Profit
Our gross profit is our total revenue minus our total cost of revenue, and our gross margin is our gross profit expressed as a percentage of our total revenue. Our gross margin has been and will continue to be affected by a number of factors, including the fees we charge our Clients, the number of visits we complete and the costs of running our Provider network operations center. We expect our annual gross margin to remain relatively steady over the near term, although our quarterly gross margin is expected to fluctuate from period to period depending on the interplay of these factors.
Advertising and Marketing Expenses
Advertising and marketing expenses consist primarily of personnel and related expenses for our marketing staff, including costs of communications materials that are produced to generate greater awareness and utilization among our Clients and Members. Marketing costs also include third-party independent research, trade shows and brand messages, public relations costs and stock-based compensation for our advertising and marketing employees. Our advertising and marketing expenses exclude any allocation of occupancy expense as well as depreciation and amortization.
We expect our advertising and marketing expenses to increase for the foreseeable future as we continue to increase the size of our advertising and marketing operations and expand into new products and markets. Our advertising and marketing expenses will fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our advertising and marketing expenses. We will continue to invest in advertising and marketing by hiring additional personnel and promoting our brand through a variety of marketing and public relations activities.
Sales Expenses
Sales expenses consist primarily of employee-related expenses, including salaries, benefits, commissions, employment taxes, travel and stock-based compensation costs for our employees engaged in sales, account management and sales support. Our sales expenses exclude any allocation of occupancy expense as well as depreciation and amortization.
We expect our sales expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related account management and sales support personnel to capture an increasing amount of our market opportunity. As we scale our sales and related account management and sales support personnel in the short- to medium-term, we expect these expenses to increase in both absolute dollars and as a percentage of revenue. We will continue to invest in sales by hiring additional sales and account management and sales support personnel.
Technology and Development Expenses
Technology and development expenses include personnel and related expenses for software engineering, information technology infrastructure, security and compliance and product development. Technology and development expenses also include outsourced software engineering services, the costs of operating our on-demand technology infrastructure and stock-based compensation for our technology and development employees. Our technology and development expenses exclude any allocation of occupancy expense as well as depreciation and amortization.
We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development of our technology platform. Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses. Historically, the majority of our technology and development expenses has been expensed.
General and Administrative Expenses
General and administrative expenses include personnel and related expenses of, and professional fees incurred by, our executive, finance, legal and human resources departments. They also include stock-based compensation and all facilities costs including, utilities, communications and facilities maintenance. Our general and administrative expenses exclude any allocation of depreciation and amortization.
We expect our general and administrative expenses to increase for the foreseeable future following the completion of this offering due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company, as well as other costs associated with continuing to grow our business. However, we expect our general and
administrative expenses to remain steady as a percentage of our total revenue over the near-term. Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of fixed assets, amortization of capitalized software development costs and amortization of acquisition-related intangible assets.
Interest (Expense) Income
Interest (expense) income consists of interest costs associated with our bank and other debt.
Income Tax Provision (Benefit)
We account for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax bases and tax credit and NOLs. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse. We assess the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized. We have also recorded deferred tax liabilities arising principally from the difference between treatment of the goodwill between tax and financial accounting book purposes. We have provided a full valuation allowance for our deferred tax assets at June 30, 2015 and December 31, 2014, due to the uncertainty surrounding the future realization of such assets. As of June 30, 2015 and December 31, 2014, we have approximately $91.9 million and $54.1 million, respectively, of federal NOLs available to offset future taxable income. If not utilized, the federal NOLs begin to expire in 2024. See Risk FactorsRisks Related to Our BusinessOur ability to use our net operating losses to offset future taxable income may be subject to certain limitations. included elsewhere in this quarterly report on Form 10-Q.
Consolidated Results of Operations
The following table sets forth our consolidated statement of operations data for the three and six months ended June 30, 2015 and 2014 and the dollar and percentage change between the respective periods:
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||||||||||||
|
|
2015 |
|
2014 |
|
|
|
|
|
2015 |
|
2014 |
|
|
|
|
| ||||||
|
|
$ |
|
$ |
|
Variance |
|
%(a) |
|
$ |
|
$ |
|
Variance |
|
%(a) |
| ||||||
Revenue |
|
$ |
18,283 |
|
$ |
10,289 |
|
$ |
7,994 |
|
78 |
% |
$ |
34,771 |
|
$ |
19,695 |
|
$ |
15,076 |
|
77 |
% |
Cost of revenue |
|
4,793 |
|
2,027 |
|
2,766 |
|
137 |
% |
10,074 |
|
4,008 |
|
6,066 |
|
151 |
% | ||||||
Gross profit |
|
13,490 |
|
8,262 |
|
5,228 |
|
63 |
% |
24,697 |
|
15,687 |
|
9,010 |
|
57 |
% | ||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Advertising and marketing |
|
4,730 |
|
1,436 |
|
3,294 |
|
229 |
% |
9,071 |
|
3,954 |
|
5,117 |
|
129 |
% | ||||||
Sales |
|
4,397 |
|
3,033 |
|
1,364 |
|
45 |
% |
8,079 |
|
5,178 |
|
2,901 |
|
56 |
% | ||||||
Technology and development |
|
3,203 |
|
2,064 |
|
1,139 |
|
55 |
% |
6,109 |
|
3,256 |
|
2,853 |
|
88 |
% | ||||||
General and administrative |
|
16,488 |
|
4,033 |
|
12,455 |
|
309 |
% |
28,456 |
|
7,377 |
|
21,079 |
|
286 |
% | ||||||
Total operating expenses |
|
28,818 |
|
10,566 |
|
18,252 |
|
173 |
% |
51,715 |
|
19,765 |
|
31,951 |
|
162 |
% | ||||||
EBITDA(1) |
|
(15,328 |
) |
(2,304 |
) |
(13,024 |
) |
565 |
% |
(27,018 |
) |
(4,078 |
) |
(22,941 |
) |
563 |
% | ||||||
Depreciation and amortization |
|
923 |
|
554 |
|
369 |
|
67 |
% |
1,826 |
|
968 |
|
858 |
|
89 |
% | ||||||
Loss from operations |
|
(16,251 |
) |
(2,858 |
) |
(13,393 |
) |
469 |
% |
(28,844 |
) |
(5,046 |
) |
(23,798 |
) |
472 |
% | ||||||
Interest (expense) income, net |
|
(642 |
) |
(349 |
) |
(293 |
) |
84 |
% |
(1,210 |
) |
(404 |
) |
(806 |
) |
200 |
% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss before taxes |
|
(16,893 |
) |
(3,207 |
) |
(13,686 |
) |
427 |
% |
(30,054 |
) |
(5,450 |
) |
(24,604 |
) |
451 |
% | ||||||
Income tax provision (benefit) |
|
171 |
|
(7 |
) |
178 |
|
2610 |
% |
(287 |
) |
65 |
|
352 |
|
543 |
% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
|
$ |
(17,064 |
) |
$ |
(3,200 |
) |
$ |
(13,864 |
) |
433 |
% |
$ |
(29,767 |
) |
$ |
(5,515 |
) |
$ |
(24,252 |
) |
440 |
% |
(1) EBITDA consists of net income (loss) before interest, taxes, depreciation and amortization. See additional information regarding EBITDA at the end of this Managements Discussion and Analysis of Financial Condition and Results of Operations.
We completed our acquisitions of AmeriDoc on May 1, 2014, BetterHelp on January 23, 2015 and StatDoc on June 17, 2015. The results of operations of AmeriDoc, BetterHelp and StatDoc since the respective acquisition dates have been included in our unaudited consolidated financial statements included in this Quarterly Report from the date of their acquisition.
Revenue. Total revenue was $18.3 million for the quarter ended June 30, 2015, compared to $10.3 million during the quarter ended June 30, 2014, an increase of $7.9 million, or 78%. Total revenue was $34.7 million for the six months ended June 30, 2015, compared to $19.7 million during the six months ended June 30, 2014, an increase of $15.0 million, or 77%. The increase in revenue for both periods was substantially driven by an increase in new Clients and the number of new Members generating additional subscription access fees. The increase in subscription access fees was due to the addition of new Clients, as the number of Members increased by 39% from June 30, 2014 to June 30, 2015. We experienced 148,696 visits, representing $3.2 million of visit fees for the quarter ended June 30, 2015, compared to 61,379 visits, representing $1.4 million of visit fees during the quarter ended June 30, 2014, an increase of $1.8 million, or 127%. We also experienced 274,018 visits, representing $6.4 million of visit fees for the six months ended June 30, 2015, compared to 126,622 visits, representing $2.8 million of visit fees during the six months ended June 30, 2014, an increase of $3.6 million, or 128%.
Cost of Revenue. Cost of revenue was $4.8 million for the quarter ended June 30, 2015 compared to $2.0 million for the quarter ended June 30, 2014, an increase of $2.8 million, or 137%. Cost of revenue was $10.1 million for the six months ended June 30, 2015 compared to $4.0 million for the six months ended June 30, 2014, an increase of $6.1 million, or 151%. The increase for both periods was primarily due to increased telehealth visits resulting in increased provider fees, increased cost associated with our third-party call center, and hiring of additional personnel to manage our physician network operations.
Gross Profit. Gross profit was $13.5 million, or 74% as a percentage of revenue, for the quarter ended June 30, 2015 compared to $8.3 million, or 80%, as a percentage of revenue, for the quarter ended June 30, 2014, an increase of $5.2 million, or 63%. Gross profit was $24.7 million, or 71% as a percentage of revenue, for the six months ended June 30, 2015 compared to $15.7 million, or 80%, as a percentage of revenue, for the six months ended June 30, 2014, an increase of $9.0 million, or 57%. The increase for the quarter and six months ended June 30, 2015 was primarily due to the aforementioned revenue and cost of revenue growth. Additionally, increased visit volume, resulting in greater mix of visit revenue to total revenue and their associated costs negatively impacted gross profit for the period compared to the six months ended June 30, 2014.
Advertising and Marketing Expenses. Advertising and marketing expenses were $4.7 million for the quarter ended June 30, 2015 compared to $1.4 million for the quarter ended June 30, 2014, an increase of $3.3 million, or 229%. This increase primarily consisted of increased independent research initiatives, sponsorship of professional organizations and trade shows of $2.6 million, increased staffing of $0.4 million and other expenses of $0.3 million. Advertising and marketing expenses were $9.1 million for the six months ended June 30, 2015 compared to $4.0 million for the six months ended June 30, 2014, an increase of $5.1 million, or 129%. This increase primarily consisted of increased independent research initiatives, sponsorship of professional organizations and trade shows of $3.8 million, increased staffing of $0.7 million and other expenses of $0.6 million.
Sales Expenses. Sales expenses were $4.4 million for the quarter ended June 30, 2015 compared to $3.0 million for the quarter ended June 30, 2014, an increase of $1.4 million, or 45%. This increase primarily consisted of increased staffing and sales commissions of $1.2 million. Sales expenses were $8.1 million for the six months ended June 30, 2015 compared to $5.2 million for the six months ended June 30, 2014, an increase of $2.9 million, or 56%. This increase primarily consisted of increased staffing and sales commissions of $2.2 million, increased travel and entertainment expenses of $0.4 million and an increase to other sales expenses of $0.3 million.
Technology and Development Expenses. Technology and development expenses were $3.2 million for the quarter ended June 30, 2015 compared to $2.1 million for the quarter ended June 30, 2014, an increase of $1.1 million, or 55%. This increase resulted primarily from hiring additional personnel totaling $1.5 million, offset by reduction in professional fees as a result of replacement of full time employees on the ongoing project to improve and optimize our technology platform. Technology and development expenses were $6.1 million for the six months ended June 30, 2015 compared to $3.3 million for the six months ended June 30, 2014, an increase of $2.8 million, or 88%. This increase resulted primarily from hiring additional personnel totaling $2.7 million.
General and Administrative Expenses. General and administrative expenses were $16.5 million for the quarter ended June 30, 2015 compared to $4.0 million for the quarter ended June 30, 2015, an increase of $12.5 million, or 309%. This increase was driven primarily by an increase in employee-related expenses of approximately $3.5 million as a result of growth in total employee headcount to 407 at June 30, 2015 as compared to 149 at June 30, 2014. Additionally, costs incurred in our physician network operations center in connection with enhancing our Member services increased by $0.7 million and
professional fees, principally legal, increased by $6.9 million for the quarter ended June 30, 2015 as compared to the quarter ended June 30, 2014. Severance costs, lease costs associated with abandoned facilities and bad debt expenses, increased to $2.6 million for the quarter ended June 30, 2015 from $1.3 million for the quarter ended June 30, 2014, an increase of $1.3 million. General and administrative expenses were $28.5 million for the six months ended June 30, 2015 compared to $7.4 million for the six months ended June 30, 2015, an increase of $21.1 million, or 286%. This increase was driven in part by an increase in employee-related expenses of approximately $6.8 million as a result of growth in total employee headcount to 407 at June 30, 2015 as compared to 149 at June 30, 2014. Additionally, costs incurred in our physician network operations center in connection with enhancing our Member services increased by $1.9 million and professional fees, principally legal, increased by $9.8 million for the six months ended June 30, 2015 as compared to June 30, 2014. Severance costs, lease costs associated with abandoned facilities and bad debt expenses, increased to $4.8 million for the six months ended June 30, 2015 from $2.2 million for the six months ended June 30, 2014, an increase of $2.6 million.
Depreciation and Amortization. Depreciation and amortization was $0.9 million for the quarter ended June 30, 2015 compared to $0.5 million for the quarter ended June 30, 2014, an increase of $0.4 million, or 67%. Depreciation and amortization was $1.8 million for the six months ended June 30, 2015 compared to $1.0 million for the six months ended June 30, 2014, an increase of $0.8 million, or 89%. This increase in both periods was due to an increase of amortization expense of primarily acquisition-related intangible assets that grew from $10.2 million at December 31, 2014 to $20.2 million at June 30, 2015 and an increase of depreciation expense on an increased base of depreciable fixed assets that grew from $2.3 million at December 31, 2014 to $4.8 million at June 30, 2015.
Interest Expense. Interest expense was approximately $0.6 million for the three months ended June 30, 2015 compared to $0.3 million for the three months ended June 30, 2014, an increase of $0.3 million. Interest expense was approximately $1.2 million for the six months ended June 30, 2015 compared to $0.4 million for the six months ended June 30, 2014, an increase of $0.8 million. The increase in interest expense for both periods reflects higher outstanding debt. Interest expense consists of interest costs associated with our bank and other debt.
Liquidity and Capital Resources
The following table presents a summary of our cash flow activity for the periods set forth below:
|
|
Six Months Ended |
| ||||
|
|
2015 |
|
2014 |
| ||
Consolidated Statements of Cash Flows Data |
|
|
|
|
| ||
Net cash used in operating activities |
|
$ |
(17,595 |
) |
$ |
(5,087 |
) |
Net cash used in investing activities |
|
(17,860 |
) |
(14,817 |
) | ||
Net cash provided by financing activities |
|
4,442 |
|
17,296 |
| ||
Total |
|
$ |
(31,013 |
) |
$ |
(2,608 |
) |
Our principal sources of liquidity were cash and cash equivalents totaling $15.4 million as of June 30, 2015, which were held for working capital purposes. Our cash and cash equivalents are comprised of money market funds.
Since our inception, we have financed our operations primarily through private sales of equity securities and to a lesser extent, bank borrowings. In July 2015, we received $163.5 million of net cash proceeds associated with the issuance of 9,487,500 shares of common stock in conjunction with our IPO, after deducting underwriting discounts and commissions of $12.6 million as well as other offering expenses of $4.1 million.
Cash Used in Operating Activities
For the six months ended June 30, 2015, cash used in operating activities was $17.6 million. The negative cash flows resulted primarily from our net loss of $29.8 million, partially offset by depreciation and amortization of $1.8 million, allowance for doubtful accounts of $1.0 million, stock-based compensation of $1.4 million, deferred income tax of $0.3 million, as well as the effect of changes in working capital and other balance sheet accounts resulting in cash inflows of approximately $8.3 million, all of which was due to growth.
For the six months ended June 30, 2014, cash used in operating activities was $5.1 million. The cash used primarily related to our net loss of $5.5 million and the effect of changes in working capital and other balance sheet accounts resulting in
cash outflows of approximately $1.5 million, partially offset by depreciation and amortization of $1.0 million, allowance for doubtful accounts of $0.5 million, deferred income taxes of $0.1 million, and stock-based compensation of $0.3 million.
The increase for both periods in cash used in operating activities was primarily the result of additional headcount, increased marketing expenses, costs incurred to improve and optimize our technology platform, increased in our physician network operations, increased legal fees and office-related charges to support the growth of our business.
Cash Used in Investing Activities
Cash used in investing activities was $17.9 million for the six months ended June 30, 2015. Cash used in investing activities consisted of the acquisitions of BetterHelp and StatDoc, which required payments of $3.3 million and $10.2 million net of cash acquired, respectively, and of purchases of property and equipment totaling $3.5 million and investments in internally developed capitalized software of $0.8 million.
Cash used in investing activities was $14.8 million for the six months ended June 30, 2014. Cash used in investing activities consisted of the acquisition of AmeriDoc, which required initial cash payments of $13.8 million, and of purchases of property and equipment totaling $0.6 million and investments in internally developed capitalized software of $0.4 million.
Cash Provided by Financing Activities
Our primary financing activities have consisted of private sales of preferred stock and bank and other borrowings.
Cash provided by financing activities for the six months ended June 30, 2015 was $4.4 million. Cash provided by financing activities consisted of an additional $6.8 million borrowed under the Revolving Advance facility and $0.3 million of proceeds from the exercise of employee stock options. Cash used in financing activities consisted of $2.4 million of IPO related expenses and the repayment of $0.2 million under the Amended Term Loan facility.
Cash provided by financing activities was $17.3 million for the six months ended June 30, 2014. Cash provided by financing activities was primarily attributable to the issuance of preferred stock of $16.7 million and $0.6 million of proceeds from the exercise of employee stock options.
Looking Forward
As a result of our recent IPO, we received $163.5 million of net cash proceeds in July 2015. Additionally in July 2015 we made a $5.0 million repayment on our Revolving Advance facility. We anticipate negative EBITDA results through the end of 2017.
We believe that our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, contract renewal activity, number of visits, the timing and extent of spending to support product development efforts, our expansion of sales and marketing activities, the introduction of new and enhanced services offerings and the continuing market acceptance of telehealth. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be adversely affected.
Indebtedness
In May 2014, we entered into an Amended and Restated Loan and Security Agreement with SVB that provided for a Revolving Advance facility and a Term Loan facility, or the Amended Term Loan facility. The Revolving Advance facility provides for borrowings up to $12.0 million based on 300% of our monthly recurring revenue. The facility carries interest at a rate of 0.75% above the prime rate per annum and had an initial maturity of April 2016. Interest payments are payable monthly in arrears. We entered into an Amendment to the Revolving Advance facility in March 2015 that extended its maturity to April 2017.
The Amended Term Loan facility provides for borrowings up to $5.0 million. The Amended Term Loan facility carries interest at a rate of 1.00% above the prime rate per annum. Interest payments are payable monthly in arrears. Payments
on the Amended Term Loan facility commenced in May 2015 and continue with 47 equal month payments of principal plus interest.
In May 2014, we entered into a Subordinated Loan and Security Agreement with SVB that provided for Mezzanine Term Loans totaling $13.0 million. The total $13.0 million drawdown of the mezzanine facility was completed in September 2014. The mezzanine facility carries interest at a rate of 10.00% per annum and matures in May 2017. Interest payments are payable monthly in arrears. In connection with entry into the mezzanine facility, we granted two affiliates of SVB warrants to purchase an aggregate of 131,239 shares of our common stock at an exercise price of $2.95 per share. The warrants are immediately exercisable and have a ten-year term. On July 24, 2015, two entities affiliated with SVB exercised their warrants to purchase 59,281 shares of common stock at an exercise price of $2.95 per share. We also granted SVB a security interest in significantly all of our assets. The mezzanine facility has been used to fund the expansion of our business.
The Company incurred approximately $0.2 million of loan origination costs in connection with the above facilities and amortized approximately $18,000 and $6,000 of these costs during the quarters ended June 30, 2015 and 2014, respectively, and $37,000 and $6,000 during the six months ended June 30, 2015 and 2014.
Effective with the purchase of AmeriDoc, we executed a subordinated promissory note in the amount of $3.5 million payable to the seller of AmeriDoc on April 30, 2015. The subordinated promissory note carries interest at a rate of 10.00% annual interest and is subordinated to the SVB Facilities. In December 2014, we, the seller of AmeriDoc and SVB executed an amended and restated subordinated promissory note, or the AmeriDoc Promissory Note, that extended the maturity of the Promissory Note to April 30, 2017.
The Company was in compliance with all debt covenants at December 31, 2014 and June 30, 2015.
Contractual Obligations and Commitments
The following summarizes our contractual obligations as of June 30, 2015:
|
|
Payment Due by Period |
| |||||||||||||
|
|
Total |
|
Less than |
|
1 to 3 |
|
4 to 5 |
|
More than |
| |||||
|
|
(in thousands) |
| |||||||||||||
Operating leases |
|
$ |
11,048 |
|
$ |
1,563 |
|
$ |
3,557 |
|
$ |
1,867 |
|
$ |
4,061 |
|
Obligations under SVB Facilities and AmeriDoc Promissory Note |
|
32,792 |
|
1,250 |
|
30,500 |
|
1,042 |
|
|
| |||||
Interest associated with long-term debt |
|
4,230 |
|
2,266 |
|
1,943 |
|
21 |
|
|
| |||||
Total |
|
$ |
48,070 |
|
$ |
5,079 |
|
$ |
36,000 |
|
$ |
2,930 |
|
$ |
4,061 |
|
Our existing office and hosting co-location facilities lease agreements provide us with the option to renew and generally provide for rental payments on a graduated basis. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations and if we exercised the office and hosting co-location facilities lease options. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. For abandoned facilities, the above contractual obligation schedule does not reflect any realized or potential subleases.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.
EBITDA
To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use the following additional non-U.S. GAAP financial measures to clarify and enhance an understanding of past performance: EBITDA. We believe that the presentation of this financial measure enhances an investors understanding of our financial performance. We further believe that this financial measure is a useful financial metric to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. We use certain financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We utilize EBITDA as the primary measure of segment performance.
EBITDA consists of net income (loss) before interest, taxes, depreciation and amortization. We believe that making such adjustment provides investors meaningful information to understand our results of operations and ability to analyze financial and business trends on a period-to-period basis.
We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the term EBITDA may vary from that of others in our industry. EBITDA should not be considered as an alternative to net loss before taxes, net loss, earnings per share or any other performance measures derived in accordance with U.S. GAAP as measures of performance.
EBITDA has an important limitation as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
EBITDA:
· does not reflect the significant interest expense on our debt; and
· eliminates the impact of income taxes on our results of operations; and
· although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any expenditures for such replacements; and
· other companies in our industry may calculate EBITDA differently than we do, limiting the usefulness of EBITDA as comparative measures.
We compensate for these limitations by using EBITDA along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. Such U.S. GAAP measurements include gross profit, net loss, net loss per share and other performance measures.
In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
The following table reconciles net loss to EBITDA for the periods presented:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
(in thousands) |
| ||||||||||
Net loss |
|
$ |
(17,064 |
) |
$ |
(3,200 |
) |
$ |
(29,767 |
) |
$ |
(5,515 |
) |
Add (deduct): |
|
|
|
|
|
|
|
|
| ||||
Interest expense (income), net |
|
642 |
|
349 |
|
1,210 |
|
404 |
| ||||
Provision for income taxes (benefit) |
|
171 |
|
(7 |
) |
(287 |
) |
65 |
| ||||
Depreciation expense |
|
215 |
|
77 |
|
428 |
|
130 |
| ||||
Amortization expense |
|
708 |
|
477 |
|
1,398 |
|
838 |
| ||||
EBITDA |
|
$ |
(15,328 |
) |
$ |
(2,304 |
) |
$ |
(27,018 |
) |
$ |
(4,078 |
) |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have floating rate debt with our Term Loan facility and Revolving Advance facility, and cash equivalents that are subject to interest rate volatility, which is our principal market risk. A 25 basis point change in the weighted average interest rate relating to the Term Loan facility and Revolving Advance facility as of June 30, 2015, which are subject to variable interest rates based on the prime rate, would yield a change of approximately $40,730 in annual interest expense. We do not expect cash flows to be affected to any significant degree by a sudden change in market interest rates.
Item 4. Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective at the reasonable assurance level as of June 30, 2015. This conclusion is due to the following material weakness in our internal control over financial reporting.
During 2014, management identified a material weakness in our internal control over financial reporting relating to the breadth of our internal accounting team. Specifically, we did not have a sufficient number of accounting personnel to effectively design and operate proper internal controls over financial reporting. We are taking steps to remediate this material weakness.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are subject to legal proceedings, claims and litigation arising in the ordinary course of our business.
Teladoc is plaintiff in three lawsuits in the Texas courts against the Texas Medical Board (the TMB). In the first suit, Teladoc v. TMB and Leshikar, on December 31, 2014, the Austin Court of Appeals granted Teladocs request for summary judgment, invalidating the TMBs prior assertion that Teladocs doctors do not form proper professional relationships with Teladocs members in the course of telehealth consultations such as would support the prescription of medications. The TMB has filed a petition for review with the Texas Supreme Court to ask that Court if it will allow the TMB to appeal the Court of Appealss decision. In the second suit, Teladoc v. TMB and Freshour, on February 2, 2015, the Travis County District Court granted Teladocs request for a temporary injunction restraining the TMB from enforcing an emergency rule it issued on January 16, 2015 purporting to amend the Texas Administrative Code so as to require a face-to-face examination of a patient before a Texas physician may lawfully prescribe medication. This suit is set for trial on November 9, 2015. In the third suit, Teladoc et al. v. TMB et al., the United States District Court for the Western District of Texas, Austin Division, held a hearing on May 22, 2015 on Teladocs motion for preliminary injunction of the rule amendments the TMB adopted on April 10, 2015 that seek to effect substantively identical restrictions as the issues in the two prior lawsuits. On May 29, 2015, the court granted Teladocs request for a preliminary injunction of the rule amendments, pending ultimate trial on the amendments validity. The Court has set a trial date of February 13, 2017. On July 30, 2015, the TMB filed a motion to dismiss the suit. No hearing on this motion to dismiss has been set. Given the nature and status of these lawsuits, the Company cannot yet determine the amount or reasonable range of a potential loss, if any, though it does not believe a material loss is probable in connection with any of the lawsuits.
Business in the State of Texas accounted for approximately $10.0 million (or 23%) and $6.3 million (or 18%) of the Companys consolidated revenue during the year ended December 31, 2014 and for the six months ended June 30, 2015, respectively. If the TMBs revisions go into effect as written and Teladoc is unable to adapt its business model in compliance with the TMB rule, its ability to operate its business in the State of Texas could be materially adversely affected, which would have a material adverse effect on its business, financial condition and results of operations.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the Special Note Regarding Forward-Looking Statements section in Part I, Item 2, of this Quarterly Report on Form 10-Q.
Our business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors, in its entirety, in addition to other information contained in or incorporated by reference into this Quarterly Report on Form 10-Q and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.
Risks Related to Our Business
Our business could be adversely affected by ongoing legal challenges to our business model or by new state actions restricting our ability to provide the full range of our services in certain states.
Our ability to conduct business in each state is dependent upon the states treatment of telemedicine (and of remote healthcare delivery in general, such as the permissibility of, and requirements for, physician cross-coverage practice) under such states laws, rules and policies governing the practice of medicine, which are subject to changing political, regulatory and other influences. Cross-coverage regulation refers to the state rules under which one doctor is permitted to treat the regular patients of another doctor remotely. Some state medical boards have established new rules or interpreted existing rules in a manner that limits or restricts our ability to conduct our business as currently conducted in other states. Some of these actions have resulted in litigation and the suspension of our operations in certain states.
For instance, the Texas Medical Board, or the TMB, asserted in 2011 that our Providers do not form the required relationships with our Members in the course of telehealth visits that would support the prescription of medications. As a result of this position, we initiated two lawsuits against the TMB, both of which are pending in Texas state courts. On December 31, 2014, the Austin Court of Appeals granted our request for summary judgment in the first suit, invalidating the TMBs prior position that our operations do not comply with the current TMB regulations governing the practice of medicine. This Court of Appeals decision may be subject to an appellate hearing in the Texas Supreme Court. In the second suit, we filed a request for a temporary injunction to restrain the TMB from communicating, implementing and enforcing an emergency rule it issued on January 16, 2015, purporting to amend the Texas Administrative Code to require an in-person examination of a patient before a Texas physician may lawfully prescribe medication. On February 2, 2015, the Travis County District Court granted our request for a temporary injunction, which remains in effect and prohibits the TMB from communicating, implementing and enforcing the emergency rule. The TMBs subsequent passage of the rule described below may have mooted one or both of these cases, but they remain active. We are currently unable to make a reasonable estimate of when either of these cases will be resolved, whether we will ultimately prevail, or the amount or range of loss that could result from an unfavorable outcome in either action.
On April 10, 2015, the TMB adopted revisions to the rules governing medical practice that would require, in most instances, in-person examinations prior to prescribing medications. Our present business model does not include in-person examinations of our Members before prescribing medications. We challenged these rule amendments on April 29, 2015 by filing a lawsuit against the TMB in the United States District Court for the Western District of Texas, Austin Division requesting that they be enjoined as unlawful under the Sherman Antitrust Act and the Commerce Clause of the U.S. Constitution, and a related hearing was held on May 22, 2015 on our motion for preliminary injunction. On May 29, 2015, this court granted our request for a preliminary injunction of the rule amendments, pending ultimate trial on the amendments validity, and on July 30, 2015, the TMB filed a motion to dismiss the suit. The court has set a trial date of February 13, 2017. Accordingly, for so long as the preliminary injunction remains in place, the rule amendments as proposed will not go into effect in Texas.
Business in the State of Texas accounted for approximately $6.3 million, or 18%, and $10.0 million, or 23%, of our revenue during the six months ended June 30, 2015 and the year ended December 31, 2014, respectively. If the TMBs rule revisions go into effect as written and we are unable to adapt our business model in compliance with the TMB rule, our ability to operate our business in the State of Texas could be materially adversely affected, which would have a material adverse effect on our business, financial condition and results of operations.
In addition, during 2014, we voluntarily suspended our business operations in the States of Arkansas and Idaho in response to formal and informal communications among us, our affiliated physicians, and the respective boards of medicine in each state. In each state, the board of medicine took the position that our business model did not meet the states applicable legal requirements in order for our affiliated physicians to prescribe medications for our Members. In March 2015, Idaho Governor Otter signed the Idaho Telehealth Access Act, which redefined telehealth services in Idaho in a manner that will allow us to resume operations in Idaho in July 2015. In addition, in April 2015, Arkansas enacted its own Telemedicine Act allowing a telehealth provider to establish a relationship with a patient through an in-person examination or through another manner adopted by rule of the Arkansas State Medical Board. We remain in active discussions with the relevant authorities in Arkansas to demonstrate the safety and benefits inherent to our business. Despite these discussions, we cannot guarantee that we will be able to resume operations in Arkansas.
It is possible that the laws and rules governing the practice of medicine in one or more states may change in a manner analogous to what occurred in Texas and Arkansas. If this were to happen, and we were unable to adapt our business model accordingly, our operations in such states would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations.
We are dependent on our relationships with affiliated professional entities, which we do not own, to provide physician services, and our business would be adversely affected if those relationships were disrupted.
There is a risk that state authorities in some jurisdictions may find that our contractual relationships with our physicians violate laws prohibiting the corporate practice of medicine. These laws generally prohibit the practice of medicine by lay persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing the physicians professional judgment. The extent to which each state considers particular actions or contractual relationships to constitute improper influence of professional judgment varies across the states and is subject to change and to evolving interpretations by state boards of medicine and state attorneys general, among others. As such, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis and we cannot guarantee that subsequent interpretation of the corporate practice of medicine laws will not further circumscribe our business operations. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage physicians from participating in our network of providers.
The corporate practice of medicine prohibition exists in some form, by statute, regulation, board of medicine or attorney general guidance, or case law, in at least 42 states, all of which we operate in, though the broad variation between state application and enforcement of the doctrine makes an exact count difficult. Due to the prevalence of the corporate practice of medicine doctrine, including in the states where we predominantly conduct our business, we contract for Provider services through a services agreement with Teladoc Physicians, P.A., or Teladoc PA, which is a 100% physician-owned independent entity that has agreements with several professional corporations, to contract with physicians and professional corporations that contract with physicians for the clinical and professional services provided to our Members. We do not own Teladoc PA or the professional corporations with which it contracts. Teladoc PA is owned by Dr. Timothy Howard, one of our Providers, and the professional corporations are owned by physicians licensed in their respective states. While we expect that these relationships will continue, we cannot guarantee that they will. A material change in our relationship with Teladoc PA, or among Teladoc PA and the contracted professional corporations, whether resulting from a dispute among the entities, a change in government regulation, or the loss of these affiliations, could impair our ability to provide services to our Members and could have a material adverse effect on our business, financial condition and results of operations. In addition, the arrangement in which we have entered to comply with state corporate practice of medicine doctrines could subject us to additional scrutiny by federal and state regulatory bodies regarding federal and state fraud and abuse laws. Any scrutiny, investigation, or litigation with regard to our arrangement with Teladoc PA could have a material adverse effect on our business, financial condition and results of operations.
Evolving government regulations may require increased costs or adversely affect our results of operations.
In a regulatory climate that is uncertain, our operations may be subject to direct and indirect adoption, expansion or reinterpretation of various laws and regulations. Compliance with these future laws and regulations may require us to change our practices at an undeterminable and possibly significant initial monetary and annual expense. These additional monetary expenditures may increase future overhead, which could have a material adverse effect on our results of operations.
We have identified what we believe are the areas of government regulation that, if changed, would be costly to us. These include: rules governing the practice of medicine by physicians; licensure standards for doctors and behavioral health professionals; laws limiting the corporate practice of medicine; cybersecurity and privacy laws; laws and rules relating to the distinction between independent contractors and employees; and tax and other laws encouraging employer-sponsored health insurance. There could be laws and regulations applicable to our business that we have not identified or that, if changed, may be costly to us, and we cannot predict all the ways in which implementation of such laws and regulations may affect us.
In the states in which we operate, we believe we are in compliance with all applicable regulations, but, due to the uncertain regulatory environment, certain states may determine that we are in violation of their laws and regulations. In the event that we must remedy such violations, we may be required to modify our services and products in such states in a manner that undermines our solutions attractiveness to Clients, Members or Providers, we may become subject to fines or other penalties or, if we determine that the requirements to operate in compliance in such states are overly burdensome, we may elect to terminate our operations in such states. In each case, our revenue may decline and our business, financial condition and results of operations could be materially adversely affected.
Additionally, the introduction of new services may require us to comply with additional, yet undetermined, laws and regulations. Compliance may require obtaining appropriate state medical board licenses or certificates, increasing our security measures and expending additional resources to monitor developments in applicable rules and ensure compliance. The failure to adequately comply with these future laws and regulations may delay or possibly prevent some of our products or services from being offered to Clients and Members, which could have a material adverse effect on our business, financial condition and results of operations.
We conduct business in a heavily regulated industry and if we fail to comply with these laws and government regulations, we could incur penalties or be required to make significant changes to our operations or experience adverse publicity, which could have a material adverse effect on our business, financial condition, and results of operations.
The healthcare industry is heavily regulated and closely scrutinized by federal, state and local governments. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payors, our contractual relationships with our Providers, vendors and Clients, our marketing activities and other aspects of our operations. Of particular importance are:
· the federal physician self-referral law, commonly referred to as the Stark Law, that, subject to limited exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain designated health services if the physician or a member of such physicians immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity, and prohibit the entity from billing Medicare or Medicaid for such designated health services;
· the federal Anti-Kickback Statute that prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration for referring an individual, in return for ordering, leasing, purchasing or recommending or arranging for or to induce the referral of an individual or the ordering, purchasing or leasing of items or services covered, in whole or in part, by any federal healthcare program, such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
· the criminal healthcare fraud provisions of HIPAA and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
· the federal False Claims Act that imposes civil and criminal liability on individuals or entities that knowingly submit false or fraudulent claims for payment to the government or knowingly making, or causing to be made, a false statement in order to have a false claim paid, including qui tam or whistleblower suits;
· reassignment of payment rules that prohibit certain types of billing and collection practices in connection with claims payable by the Medicare or Medicaid programs;
· similar state law provisions pertaining to anti-kickback, self-referral and false claims issues, some of which may apply to items or services reimbursed by any third-party payor, including commercial insurers;
· state laws that prohibit general business corporations, such as us, from practicing medicine, controlling physicians medical decisions or engaging in some practices such as splitting fees with physicians;
· laws that regulate debt collection practices as applied to our debt collection practices;
· a provision of the Social Security Act that imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments;
· federal and state laws that prohibit providers from billing and receiving payment from Medicare and Medicaid for services unless the services are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered; and
· federal and state laws and policies that require healthcare providers to maintain licensure, certification or accreditation to enroll and participate in the Medicare and Medicaid programs, to report certain changes in their operations to the agencies that administer these programs.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws may prove costly. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, overpayment recoupment loss of enrollment status and exclusion from the Medicare and Medicaid programs. The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Our failure to accurately anticipate the application of these laws and regulations to our business or any other failure to comply with regulatory requirements could create liability for us and negatively affect our business. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our managements attention from the operation of our business and result in adverse publicity.
To enforce compliance with the federal laws, the U.S. Department of Justice and the Department of Health and Human Services Office of Inspector General, or OIG, have recently increased their scrutiny of healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and can divert managements attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and mandatory minimum penalties of $5,500 to $11,000 per false claim or statement, healthcare providers often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers compliance with the healthcare reimbursement rules and fraud and abuse laws.
The laws, regulations and standards governing the provision of healthcare services may change significantly in the future. We cannot assure you that any new or changed healthcare laws, regulations or standards will not materially adversely affect our business. We cannot assure you that a review of our business by judicial, law enforcement, regulatory or accreditation authorities will not result in a determination that could adversely affect our operations.
We have a history of cumulative losses, which we expect to continue, and we may never achieve or sustain profitability.
We have incurred significant losses in each period since our inception. We incurred net losses of $6.0 million and $17.0 million for the years ended December 31, 2013 and 2014, respectively, and $5.5 million and $29.8 million for the six months ended June 30, 2014 and 2015, respectively. As of June 30, 2015, we had an accumulated deficit of $102.3 million. These losses and accumulated deficit reflect the substantial investments we made to acquire new Clients, build our proprietary network of healthcare providers and develop our technology platform. We intend to continue scaling our business to increase our client, member and provider bases, broaden the scope of services we offer and expand our applications of technology through which Members can access our services. Accordingly, we anticipate that cost of revenue and operating expenses will increase substantially in the foreseeable future. These efforts may prove more expensive than we currently anticipate and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain or increase profitability. Our prior losses, combined with our expected future losses, have had and will continue to have an adverse effect on our stockholders equity and working capital. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, and such capital may not be available on reasonable terms, if at all. See We may require additional capital to support business growth, and this capital may not be available to us on acceptable terms or at all.
The impact of recent healthcare reform legislation and other changes in the healthcare industry and in healthcare spending on us is currently unknown, but may adversely affect our business, financial condition and results of operations.
Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory and other influences. The PPACA made major changes in how healthcare is delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured population of the United States.
The PPACA, among other things, increased the number of individuals with Medicaid and private insurance coverage, implemented reimbursement policies that tie payment to quality, facilitated the creation of accountable care organizations that may use capitation and other alternative payment methodologies, strengthened enforcement of fraud and abuse laws and encouraged the use of information technology. Many of these changes require implementing regulations which have not yet been drafted or have been released only as proposed rules.
Such changes in the regulatory environment may also result in changes to our payor mix that may affect our operations and revenue. While the PPACA is expected to increase the number of persons with covered health benefits, we cannot accurately estimate the payment rates for any additional persons that are expected to be covered by health benefits. For example, the PPACAs expansion of Medicaid coverage could cause patients who otherwise would have selected private healthcare to participate in government sponsored healthcare programs, and Medicaid and other government programs typically reimburse providers at substantially lower rates than private payors. Our revenue may be adversely impacted if states pursue lower rates or cost-containment strategies as a result of any expansion of their existing Medicaid programs to include additional persons, particularly in states experiencing budget deficits. Exchanges created to facilitate coverage for new persons to be covered by health benefits may also place additional pricing pressure on all providers, regardless of payor. The full impact of many of the provisions under the PPACA is unknown at this time. For example, the PPACA established an Independent Payment Advisory Board that, beginning January 16, 2014, can recommend changes in payment for physicians under certain circumstances, which the Department of Health and Human Services, or HHS, generally would be required to implement unless Congress enacts superseding legislation. The PPACA also requires HHS to develop a budget-neutral, value-based payment modifier that provides for differential payment under the Medicare Physician Fee Schedule, or the MPFS, for physicians or groups of physicians that is linked to quality of care furnished compared to cost. Physicians in groups of 100 or more eligible professionals who submit claims to Medicare under a single tax identification number will be subject to the value modifier in 2015, based on their performance in calendar year 2013; the modifier will apply to all other physicians by 2017. HHS has not yet developed a value-based payment modifier option for hospital-based physicians. We cannot assure you that our Clients will not impose similar payment modifiers for services that we provide.
Physician payments under the MPFS are updated on an annual basis according to a statutory formula. Because application of the statutory formula for the update factor would have resulted in a decrease in total physician payments for the past several years, Congress has intervened with interim legislation to prevent the reductions. For 2014, CMS projected a rate reduction of 20.1% from 2013 levels and earlier estimates had projected a 24.4% reduction. A series of laws was enacted that delayed the scheduled reduction in physician payments and provided for a 0.5% increase through December 31, 2014, and a zero percent update from 2014 payment amounts to the 2015 Physician Fee Schedule through March 31, 2015.
President Obama signed the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, on April 16, 2015, which repealed and replaced the SGR formula for Medicare payment adjustments to physicians. MACRA provides a permanent
end to the annual interim legislative updates that had previously been necessary to delay or prevent significant reductions to payments under the Physician Fee Schedule. MACRA extended existing payment rates under PAMA through June 30, 2015, with a 0.5% update for July 1, 2015, through December 31, 2015 and for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. In addition, MACRA requires the establishment of the Merit-Based Incentive Payment System, beginning in 2019, under which physicians may receive performance-based payment incentives or payment reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities, and meaningful use of electronic health records. MACRA also requires CMS, beginning in 2019, to provide incentive payments for physicians and other eligible professionals that participate in alternative payment models, such as accountable care organizations, that emphasize quality and value over the traditional volume-based fee-for- service model. MACRA is still new and the manner in which it will be implemented is not certain, but at this time, we do not believe that this law will have a material effect on our future revenues.
In November 2012, CMS adopted a rule under the PPACA that generally allowed physicians in certain specialties who provide eligible primary care services to be paid at the Medicare reimbursement rates in effect in calendar years 2013 and 2014 instead of state-established Medicaid reimbursement rates, referred to as the Medicaid-Medicare Parity. Generally, state Medicaid reimbursement rates are lower than federally established Medicare rates. During 2013, state agencies were required to submit their state plan amendments, or SPAs, outlining how they will implement the rule, including frequency and timing of payments to CMS for review and approval. In December 2013, CMS indicated that all SPAs had been approved for enhanced Medicaid-Medicare Parity reimbursement through December 2014. Congress did not act before the end of the year to extend the Medicaid-Medicare Parity and the rule expired. Legislation has been proposed to retroactively extend Medicaid-Medicare Parity for calendar year 2015 but has not yet been enacted. Certain states have decided to fully or partially extend the Medicaid-Medicare Parity. It is unclear at this time how these limited state increases or the continued failure to extend the rule at the federal level will impact our business.
In addition, certain provisions of the PPACA authorize voluntary demonstration projects, which include the development of bundling payments for acute, inpatient hospital services, physician services and postacute services for episodes of hospital care. The Medicare Acute Care Episode Demonstration is currently underway at several healthcare system demonstration sites. Further, the PPACA may adversely affect payors by increasing medical costs generally, which could have an effect on the industry and potentially impact our business and revenue as payors seek to offset these increases by reducing costs in other areas. The full impact of these changes on us cannot be determined at this time.
Finally, other legislative changes have been proposed and adopted in the United States since the PPACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was enacted, which, among other things, created the Joint Select Committee on Deficit Reduction, or the Joint Committee, to recommend proposals in spending reductions to Congress. The Joint Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislations automatic reduction to several government programs. This included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments and other third-party payors will pay for healthcare products and services, which could adversely affect our business, financial condition and results of operations.
A significant portion of our revenue comes from a limited number of Clients, the loss of which would have a material adverse effect on our business, financial condition and results of operations.
Historically, we have relied on a limited number of Clients for a substantial portion of our total revenue. For the year ended December 31, 2014, one Client represented approximately 4.5% of our total revenue. No Client represented over 10% of revenue for the six months ended June 30, 2015. For the quarter and six months ended June 30, 2015, our top ten Clients by revenue accounted for 22.5% and 22.2% of our total revenue, respectively. For the quarter and six months ended June 30, 2014, our top ten Clients by revenue accounted for 28.3% and 30.2% of our total revenue, respectively. For the years ended December 31, 2014 and 2013, our top ten Clients by revenue accounted for 28.1% and 41.1% of our total revenue, respectively. We also rely on our reputation and recommendations from key Clients in order to promote our solution to potential new Clients. The loss of any of our key Clients, or a failure of some of them to renew or expand their subscriptions, could have a significant impact on the growth rate of our revenue, reputation and our ability to obtain new Clients. In addition, mergers and acquisitions involving our Clients could lead to cancellation or non-renewal of our contra