tdoc_Q3_2018

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

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

 

For the quarterly period ended September  30, 2018

 

or

 

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

 

For the transition period from                      to                     

 

Commission File Number: 001-37477

 


 

TELADOC HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3705970

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

2 Manhattanville Road, Suite 203

 

 

Purchase, New York

 

10577

(Address of principal executive office)

 

(Zip code)

 

(203) 635-2002

(Registrant’s telephone number including area code)

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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  ☒  No  ☐

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company     ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of October 30, 2018, the Registrant had 70,106,558 shares of Common Stock outstanding.

 

 

 


 

Table of Contents

TELADOC HEALTH, INC.

 

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2018

 

TABLE OF CONTENTS

 

 

 

Page
Number

 

 

 

PART I 

Financial Information

2

Item 1. 

Financial Statements

2

 

Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

2

 

Consolidated Statements of Operations (unaudited) for the quarters and nine months ended September 30, 2018 and 2017

3

 

Consolidated Statements of Comprehensive Loss (unaudited) for the quarters and nine months ended September 30, 2018 and 2017

4

 

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and 2017

5

 

Notes to Unaudited Consolidated Financial Statements

6

Item 2. 

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

23

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. 

Controls and Procedures

36

PART II 

Other Information

37

Item 1. 

Legal Proceedings

37

Item 1A. 

Risk Factors

37

Item 6. 

Exhibits 

37

Exhibit Index 

38

Signatures 

41

 

 

 

 

 

 

1


 

Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

TELADOC HEALTH, INC.

 

CONSOLIDATED BALANCE SHEETS

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

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2018

    

2017

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

457,554

 

$

42,817

Short-term investments

 

 

14,974

 

 

79,489

Accounts receivable, net of allowance of $3,103 and $2,422, respectively

 

 

39,965

 

 

27,094

Prepaid expenses and other current assets

 

 

10,760

 

 

6,839

Total current assets

 

 

523,253

 

 

156,239

Property and equipment, net

 

 

9,717

 

 

8,963

Goodwill

 

 

744,062

 

 

498,520

Intangible assets, net

 

 

256,834

 

 

159,811

Other assets

 

 

1,316

 

 

858

Total assets

 

$

1,535,182

 

$

824,391

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

4,821

 

$

3,884

Accrued expenses and other current liabilities

 

 

32,586

 

 

19,357

Accrued compensation

 

 

20,786

 

 

17,089

Total current liabilities

 

 

58,193

 

 

40,330

Other liabilities

 

 

5,601

 

 

4,882

Deferred taxes

 

 

34,964

 

 

12,906

Convertible senior notes, net

 

 

408,653

 

 

207,370

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value; 150,000,000 and 100,000,000 shares authorized as of September 30, 2018 and December 31, 2017, respectively; 70,034,851 shares and 61,534,101 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

70

 

 

61

Additional paid-in capital

 

 

1,415,840

 

 

866,330

Accumulated deficit

 

 

(383,782)

 

 

(311,577)

Accumulated other comprehensive income (loss)

 

 

(4,357)

 

 

4,089

Total stockholders’ equity

 

 

1,027,771

 

 

558,903

Total liabilities and stockholders’ equity

 

$

1,535,182

 

$

824,391

 

See accompanying notes to unaudited consolidated financial statements.

2


 

Table of Contents

TELADOC HEALTH, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

Revenue

    

$

110,962

    

$

68,650

    

$

295,166

    

$

156,139

    

 

Cost of revenue

 

 

34,167

 

 

16,742

 

 

88,707

 

 

38,907

 

 

Gross profit

 

 

76,795

 

 

51,908

 

 

206,459

 

 

117,232

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and marketing

 

 

21,668

 

 

14,328

 

 

61,554

 

 

39,222

 

 

Sales

 

 

16,303

 

 

11,393

 

 

44,645

 

 

26,705

 

 

Technology and development

 

 

13,577

 

 

9,964

 

 

40,829

 

 

24,013

 

 

Legal

 

 

254

 

 

105

 

 

843

 

 

725

 

 

Regulatory

 

 

553

 

 

777

 

 

1,648

 

 

2,771

 

 

Acquisition and integration related costs

 

 

1,588

 

 

8,526

 

 

8,957

 

 

10,639

 

 

Gain on sale

 

 

(1,430)

 

 

 —

 

 

(5,500)

 

 

 —

 

 

General and administrative

 

 

30,314

 

 

21,938

 

 

80,455

 

 

52,299

 

 

Depreciation and amortization

 

 

9,746

 

 

6,418

 

 

26,045

 

 

11,693

 

 

Loss from operations

 

 

(15,778)

 

 

(21,541)

 

 

(53,017)

 

 

(50,835)

 

 

Amortization of warrants and loss on extinguishment of debt

 

 

 —

 

 

1,457

 

 

 —

 

 

1,457

 

 

Interest expense, net

 

 

7,666

 

 

8,202

 

 

19,449

 

 

9,678

 

 

Net loss before taxes

 

 

(23,444)

 

 

(31,200)

 

 

(72,466)

 

 

(61,970)

 

 

Income tax (benefit) provision

 

 

(180)

 

 

130

 

 

(261)

 

 

429

 

 

Net loss

 

$

(23,264)

 

$

(31,330)

 

$

(72,205)

 

$

(62,399)

 

 

Net loss per share, basic and diluted

 

$

(0.34)

 

$

(0.55)

 

$

(1.12)

 

$

(1.15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic and diluted net loss per share

 

 

68,247,655

 

 

56,493,054

 

 

64,363,943

 

 

54,435,343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

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TELADOC HEALTH, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS 

(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended September 30,

 

Nine Months Ended September 30,

 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

Net loss

 

$

(23,264)

 

$

(31,330)

 

$

(72,205)

 

$

(62,399)

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net change in unrealized gains on available-for-sale securities

 

 

11

 

 

(6)

 

 

52

 

 

(6)

 

 

Cumulative translation adjustment

 

 

(1,840)

 

 

3,913

 

 

(8,498)

 

 

3,913

 

 

Other comprehensive income (loss), net of tax

 

 

(1,829)

 

 

3,907

 

 

(8,446)

 

 

3,907

 

 

Comprehensive loss

 

$

(25,093)

 

$

(27,423)

 

$

(80,651)

 

$

(58,492)

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

 

 

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TELADOC HEALTH, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

Cash flows used in operating activities:

    

 

    

    

 

    

 

Net loss

 

$

(72,205)

 

$

(62,399)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26,045

 

 

11,693

 

Allowance for doubtful accounts

 

 

1,535

 

 

1,343

 

Stock-based compensation

 

 

31,086

 

 

13,628

 

Deferred income taxes

 

 

(1,907)

 

 

225

 

Accretion of interest

 

 

13,593

 

 

3,262

 

Amortization of warrants and loss on extinguishment of debt

 

 

 —

 

 

1,457

 

Gain on sale

 

 

(5,500)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,535)

 

 

(3,186)

 

Prepaid expenses and other current assets

 

 

(1,656)

 

 

(2,717)

 

Other assets

 

 

(327)

 

 

(89)

 

Accounts payable

 

 

(357)

 

 

(782)

 

Accrued expenses and other current liabilities

 

 

7,561

 

 

9,432

 

Accrued compensation

 

 

1,991

 

 

967

 

Other liabilities

 

 

340

 

 

 —

 

Net cash used in operating activities

 

 

(7,336)

 

 

(27,166)

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,732)

 

 

(2,043)

 

Purchase of internal-use software

 

 

(2,758)

 

 

(1,473)

 

Purchase of marketable securities

 

 

(12,141)

 

 

(119,670)

 

Proceeds from marketable securities

 

 

79,470

 

 

45,820

 

Sale of assets

 

 

5,500

 

 

 —

 

Acquisition of business, net of cash acquired

 

 

(282,487)

 

 

(379,355)

 

Net cash used in investing activities

 

 

(215,148)

 

 

(456,721)

 

Cash flows provided by financing activities:

 

 

 

 

 

 

 

Net proceeds from the exercise of stock options

 

 

26,198

 

 

6,996

 

Proceeds from issuance of convertible notes

 

 

279,147

 

 

263,722

 

Proceeds from borrowing under bank and other debt

 

 

 —

 

 

166,679

 

Repayment of debt

 

 

 —

 

 

(46,191)

 

Proceeds from issuance of common stock

 

 

330,856

 

 

123,928

 

Proceeds from employee stock purchase plan

 

 

1,423

 

 

1,265

 

Proceeds from cash received for withholding taxes on stock-based compensation, net

 

 

539

 

 

495

 

Net cash provided by financing activities

 

 

638,163

 

 

516,894

 

Net increase in cash and cash equivalents

 

 

415,679

 

 

33,007

 

Foreign exchange difference

 

 

(942)

 

 

97

 

Cash and cash equivalents at beginning of the period

 

 

42,817

 

 

50,015

 

Cash and cash equivalents at end of the period

 

$

457,554

 

$

83,119

 

 

 

 

 

 

 

 

 

Income taxes paid

 

$

238

 

$

 —

 

 

 

 

 

 

 

 

 

Interest paid

 

$

4,125

 

$

4,727

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

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TELADOC HEALTH, 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. Effective August 10, 2018, Teladoc, Inc. changed its corporate name to Teladoc Health, Inc. Unless the context otherwise requires, Teladoc Health, Inc., together with its subsidiaries, is referred to herein as “Teladoc” or the “Company”. The Company’s principal executive offices are located in Purchase, New York, Lewisville, Texas and Barcelona, Spain. Teladoc is the global leader in providing virtual healthcare services with a focus on high quality, lower costs, and improved outcomes around the world.

On July 26, 2018, Teladoc completed a follow-on public offering (the “July Offering”) in which the Company issued and sold 5,000,000 shares of common stock, at an issuance price of $66.28 per share. The Company received net proceeds of $330.9 million after deducting offering expenses of $0.5 million.

On May 31, 2018, the Company completed the acquisition of Advance Medical-Health Care Management Services, S.A. (“Advance Medical”), a leading global virtual healthcare provider. See Note 5 “Business Acquisition” for additional information.

On May 8, 2018, the Company issued, at par value, $287.5 million aggregate principal amount of 1.375% convertible senior notes due 2025 (the “2025 Notes”). The 2025 Notes bear cash interest at a rate of 1.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The 2025 Notes will mature on May 15, 2025. The net proceeds to the Company from the offering were $279.1 million after deducting offering costs of approximately $8.4 million.

On December 4, 2017, Teladoc completed a follow on public offering (the “December Offering”) in which the Company issued and sold 4,096,600 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $35.00 per share. The Company received net proceeds of $134.7 million after deducting underwriting discounts and commissions of $8.2 million as well as other offering expenses of $0.5 million.

On July 14, 2017, the Company completed the acquisition of Best Doctors Holdings, Inc. (“Best Doctors”), an expert medical consultation company focused on improving health outcomes for the most complex, critical and costly medical issues. See Note 5 “Business Acquisition” for additional information.

On June 27, 2017, the Company issued, at par value, $275 million aggregate principal amount of 3% convertible senior notes due 2022 (the “2022 Notes”). The 2022 Notes bear cash interest at a rate of 3% per year, payable semi-annually in arrears on June 15 and December 15 of each year. The 2022 Notes will mature on December 15, 2022. The net proceeds to the Company from the offering were $263.7 million after deducting offering costs of approximately $11.3 million.

On January 24, 2017, Teladoc completed a follow on public offering (the “Follow-On Offering”) in which the Company issued and sold 7,887,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $16.75 per share. The Company received net proceeds of $123.9 million after deducting underwriting discounts and commissions of $7.6 million as well as other offering expenses of $0.6 million.

 

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 Company’s 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 nine months ended September 30, 2018 are not necessarily indicative of results for the full 2018 calendar year or any

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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 Company’s Form 10-K for the year ended December 31, 2017.

The unaudited consolidated financial statements include the results of Teladoc, its wholly owned subsidiaries, two professional associations and twenty two professional corporations and a service corporation (collectively, the “Association”).

Teladoc Physicians, P.A. is party to several services agreements by and among it and the professional corporations 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 does not have sufficient equity to finance its activities without additional subordinated financial support. An enterprise having a controlling financial interest in a VIE, must consolidate the VIE if it has both power and benefits—that is, it has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (power) and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). The Company has the power and rights to control all activities of the Association and funds and absorbs all losses of the VIE.

Total revenue and net loss for the VIE were $11.6 million and $(4.5) million, respectively, for the quarter ended September 30, 2018 and $6.9 million and $(1.3) million, respectively, for the quarter ended September 30, 2017. Total revenue and net loss for the VIE were $40.6 million and $(2.5) million, respectively, for the nine months ended September 30, 2018 and $22.6 million and $(5.7) million, respectively, for the nine months ended September 30, 2017. The VIE’s total assets were $7.2 million and $4.5 million at September 30, 2018 and December 31, 2017, respectively. Total liabilities for the VIE were $41.7 million and $36.5 million at September 30, 2018 and December 31, 2017, respectively. The VIE’s total stockholders’ deficit was $34.5 million and $32.0 million at September 30, 2018 and December 31, 2017, respectively.

The functional currency for each of the Company’s foreign subsidiaries is the local currency. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the weighted average exchange rate during the period. Cumulative translation gains or losses are included in stockholders’ equity as a component of accumulated other comprehensive income (loss).

The Company operates in a single reportable segment – health services. Revenue earned by foreign operations outside of the United States were $24.5 million and $8.7 million for the quarter ended September 30, 2018 and 2017, respectively. Revenue earned by foreign operations outside of the United States were $50.4 million and $8.7 million for the nine months ended September 30, 2018 and 2017, respectively. Long-lived assets from foreign operations totaled $419.1 million as of September 30, 2018 and $163.3 million as of December 31, 2017.

All intercompany transactions and balances have been eliminated. 

The Company adopted ASU 2014-09, Revenue from Contracts with Customers during the quarter ended March 31, 2018. See Note 3 “Revenue” for further information. Additionally, the Company has included “Gain on Sale” in the consolidated statement of operations which consists of the gain on sale of assets of certain client contracts. There have been no other changes to the significant accounting policies described in the 2017 Form 10-K that have had a material impact on the consolidated financial statements and related notes.

Recently Issued Accounting Pronouncements

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation,  which currently only includes share-based payments to employees, to include

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

share-based payments issued to nonemployees for goods or services and the accounting is substantially aligned.  The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. This standard is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted as long as ASU No. 2014-09 has been adopted by the Company. The Company has elected to early adopt this standard as of July 1, 2018 and the adoption of ASU No. 2018-07 had no impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of fiscal 2019; early adoption is permitted. The Company is currently in the process of assessing the population for the new standard and evaluating the impact of the adoption of this standard on its consolidated financial statements. The Company anticipates the most significant impact will be from the recognition of right of use assets and lease liabilities for operating leases on the consolidated balance sheets and does not expect a material impact to the consolidated statements of operations.

 

Note 3. Revenue

The Company generates virtual healthcare service revenue from contracts with clients who purchase access to the Company’s professional provider network or medical experts for their employees, dependents and other beneficiaries. The Company’s client contracts include a per-member-per-month subscription access fee as well as certain contracts that generate additional revenue on a per-telehealth visit basis for general medical and other specialty visits and expert medical service on a per case basis. The Company also has certain contracts that generate revenue based solely on a per telehealth visit basis for general medical and other specialty visits. For the Company’s direct-to-consumer behavioral health product, members purchase access to the Company’s professional provider network for a subscription access fee. Accordingly, the Company generates subscription access revenue from subscription access fees and visit fee revenue for general medical, expert medical service and other specialty visit. 

The Company’s agreements generally have a term of one year. The majority of clients renew their contracts following their first year of services. Revenues are recognized when the Company satisfies its performance obligation to stand ready to provide telehealth services which occurs when the Company’s clients and members have access to and obtain control of the telehealth service. The Company generally bills for the telehealth services on a monthly basis with payment terms generally being 30 days. There are not significant differences between the timing of revenue recognition and billing. Consequently, the Company has determined that client contracts do not include a financing component. Revenue is recognized in an amount that reflects the consideration that is expected in exchange for the service and this may include a variable transaction price as the number of members may vary from the initial billing. Based on historical experience, the Company estimates this amount which is recorded as a component of revenue.     

Subscription access revenue accounted for approximately 87% and 88% of our total revenue for the quarters ended September 30, 2018 and 2017, respectively. Subscription access revenue accounted for approximately 84% and 85% of our total revenue for the nine months periods ended September 30, 2018 and 2017, respectively.  

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended 

 

 

 

September 30,

 

September 30,

 

 

    

2018

    

2017

    

2018

    

2017

    

Subscription Access Fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 U.S.

 

$

72,521

 

$

51,956

 

$

198,607

 

$

123,775

 

 International

 

 

24,040

 

 

8,375

 

 

49,480

 

 

8,375

 

Visit Fee Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 U.S.

 

 

11,330

 

 

8,066

 

 

37,334

 

 

23,736

 

 International

 

 

562

 

 

253

 

 

987

 

 

253

 

Visit Fee Only Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 U.S.

 

 

2,509

 

 

 —

 

 

8,758

 

 

 —

 

     Total Revenues

 

$

110,962

 

$

68,650

 

$

295,166

 

$

156,139

 

As of September 30, 2018, accounts receivable, net of allowance for doubtful accounts, were $40.0 million. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specific account information and other currently available evidence. 

For certain services, payment is required for future months before the service is delivered to the Member. The Company records deferred revenue when cash payments are received in advance of the Company’s performance obligation to provide services. The net increase of $4.0 million in the deferred revenue balance for the nine months ended September 30, 2018 is primarily driven by the acquisition of Advance Medical and cash payments received or due in advance of satisfying the Company’s performance obligations, offset by revenue recognized that were included in the deferred revenue balance at the beginning of the period. The Company anticipates that it will satisfy most of its performance obligation associated with the deferred revenue within the prospective fiscal year.

The Company’s contracts do not generally contain refund provisions for fees earned related to services performed. However, the Company’s direct-to-consumer behavioral health service provides for member refunds. Based on historical experience, the Company estimates the expected amount of refunds to be issued which are recorded as a reduction of revenue. The Company issued refunds of approximately $0.6 million and $2.2 million  for the quarter and nine months ended September 30, 2018, respectively. 

Additionally, certain of the Company’s contracts include client performance guarantees that are based upon minimum Member utilization and guarantees by the Company for specific service level performance of the Company’s services. If client performance guarantees are not being realized, the Company records, as a reduction to revenue, an estimate of the amount that will be due at the end of the respective client’s contractual period. For the quarter and nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods for the aforementioned changes in transaction price or client performance guarantees, were not material.

The Company has elected the optional exemption to not disclose the remaining performance obligations of its contracts since substantially all of its contracts have a duration of one year or less and the variable consideration expected to be received over the duration of the contract is allocated entirely to the wholly unsatisfied performance obligations.

 

Note 4. Lease Abandonment

In connection with the Company’s abandonment of a facility in Boston, Massachusetts, the Company incurred $1.5 million in lease abandonment charges during the quarter ended March 31, 2018, which is included within acquisition and integration related costs in the consolidated statement of operations. The following table details the associated liability. The current portion of the liability of $0.5 million was recorded in accrued expenses and other

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

current liabilities and the non-current portion of the liability of $0.4 million was recorded in other liabilities in the consolidated balance sheet (in thousands):

 

 

 

 

 

 

Balance January 1, 2018

    

$

 —

 

Charged to expense

 

 

1,479

 

Paid or settled

 

 

(583)

 

Balance September 30, 2018

 

$

896

 

 

 

Note 5. Business Acquisitions

On May 31, 2018, the Company completed the acquisition of Advance Medical through a merger in which Advance Medical became a wholly-owned subsidiary of the Company. The aggregate merger consideration paid was $351.7 million, net of cash acquired of $8.8 million, which was comprised of 1,344,387 shares of Teladoc’s common stock valued at $68.6 million on May 31, 2018, and $291.9 million of cash. Advance Medical is a leading global virtual healthcare provider offering a portfolio of virtual healthcare and expert medical service solutions. The acquisition was considered a stock acquisition for tax purposes and accordingly, the goodwill resulting from this acquisition is not tax deductible. The total acquisition related costs were $5.7 million and included transaction costs for investment bankers and other professional fees. 

On July 14, 2017, the Company completed the acquisition of Best Doctors through a merger in which Best Doctors became a wholly-owned subsidiary of the Company. The aggregate merger consideration paid was $445.5 million, net of cash acquired of $13.7 million, which was comprised of 1,855,078 shares of Teladoc’s common stock valued at $66.2 million on July 14, 2017, and $375.0 million of cash, subject to post-closing working capital adjustments in the amount of $4.3 million. Best Doctors provides technology innovations and services to help employers, health plans and provider organizations to ensure that their members combat medical uncertainty with access to the best medical minds. The acquisition was considered a stock acquisition for tax purposes and accordingly, the goodwill resulting from this acquisition is not tax deductible. The total acquisition related costs of the acquisition were $9.1 million and included transaction costs for investment bankers and other professional fees.

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

The following table summarizes the fair value estimates of the assets acquired and liabilities assumed at the respective acquisition dates. The Company, with the assistance of a third-party valuation expert, estimated the fair value of the acquired tangible and intangible assets.

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Identifiable assets acquired and liabilities assumed (in thousands):

 

 

 

 

 

 

 

 

 

    

Advance Medical

    

BestDoctors

 

Purchase price, net of cash acquired

 

$

351,694

 

$

445,535

 

Less:

 

 

 

 

 

 

 

Accounts receivable

 

 

8,553

 

 

11,205

 

Property and equipment, net

 

 

1,326

 

 

2,650

 

Other assets

 

 

3,675

 

 

2,483

 

Client relationships

 

 

100,763

 

 

112,810

 

Non-compete agreements

 

 

1,540

 

 

 —

 

Internal-use software

 

 

617

 

 

8,480

 

Trademarks

 

 

16,190

 

 

24,920

 

Favorable leases

 

 

203

 

 

 —

 

Accounts payable

 

 

(361)

 

 

(393)

 

Deferred taxes

 

 

(23,489)

 

 

(11,800)

 

Other liabilities

 

 

(8,499)

 

 

(12,337)

 

Goodwill

 

$

251,176

 

$

307,517

 

The amount allocated to goodwill reflects the benefits Teladoc expects to realize from the growth of the respective acquisitions operations.

The Company’s unaudited pro forma revenue and net loss for the quarters ended September 30, 2018 and 2017 and for the nine months ended September 30, 2018 and 2017 below have been prepared as if Advance Medical and Best Doctors had been purchased on January 1, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited Pro Forma

 

Unaudited Pro Forma

 

 

 

Quarters Ended

 

Nine Months Ended 

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2018

 

2017

 

2018

 

2017

 

Revenue

    

$

110,962

    

$

88,338

    

$

324,831

    

$

254,075

 

Net loss

 

$

(23,264)

 

$

(32,209)

    

$

(69,434)

    

$

(69,433)

 

The unaudited pro forma financial information above is not necessarily indicative of what the Company’s consolidated results actually would have been if the acquisitions had been completed at the beginning of the respective periods. In addition, the unaudited pro forma information above does not attempt to project the Company’s future results. The Company recorded $19.2 million of revenue and $(1.1) million of net loss from Advance Medical for the quarter ended September 30, 2018. The Company recorded $25.4 million of revenue and $(1.0) million of net loss from Advance Medical for the nine months ended September 30, 2018.

 

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 6. Intangible Assets, Net

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

    

Useful

    

 

 

    

Accumulated

    

Net Carrying

    

Remaining

 

 

 

Life

 

Gross Value

 

Amortization

 

Value

 

Useful Life

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client relationships

 

2 to 20 years  

 

$

235,134

 

$

(29,723)

 

$

205,411

 

13.8

 

Non-compete agreements

 

1.5 to 5 years

 

 

5,010

 

 

(3,590)

 

 

1,420

 

2.6

 

Trademarks

 

3 to 15 years  

 

 

42,235

 

 

(3,389)

 

 

38,846

 

14.0

 

Patents

 

3 years  

 

 

200

 

 

(122)

 

 

78

 

1.1

 

Internal-use software and others

 

1.8 to 5 years

 

 

24,024

 

 

(12,945)

 

 

11,079

 

1.7

 

Intangible assets, net

 

 

 

$

306,603

 

$

(49,769)

 

$

256,834

 

13.3

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client relationships

 

2 to 10 years  

 

$

136,362

 

$

(14,711)

 

$

121,651

 

9.3

 

Non-compete agreements

 

1.5 to 5 years

 

 

3,480

 

 

(3,143)

 

 

337

 

0.8

 

Trademarks

 

3 to 15 years  

 

 

26,454

 

 

(1,502)

 

 

24,952

 

14.2

 

Patents

 

3 years  

 

 

200

 

 

(72)

 

 

128

 

1.9

 

Internal-use software

 

2 to 5 years

 

 

20,312

 

 

(7,569)

 

 

12,743

 

1.7

 

Intangible assets, net

 

 

 

$

186,808

 

$

(26,997)

 

$

159,811

 

9.4

 

Amortization expense for intangible assets was $8.9 million and $5.3 million for the quarters ended September 30, 2018 and 2017, respectively.

Amortization expense for intangible assets was $22.9 million and $9.2 million for the nine months ended September 30, 2018 and 2017, respectively.

 

 

 

Note 7. Goodwill

Goodwill consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

As of September 30,

 

 

As of December 31,

 

 

    

2018

    

2017

 

Beginning balance

 

$

498,520

 

$

188,184

 

Additions associated with acquisitions

 

 

251,176

 

 

307,517

 

Cumulative translation adjustment

 

 

(5,634)

 

 

2,819

 

Goodwill

 

$

744,062

 

$

498,520

 

 

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 Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the consolidated financial statements.

 

 

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8. Accrued Expenses and Other Current Liabilities

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

 

 

 

 

 

 

 

 

 

 

    

As of September 30,

    

As of December 31,

 

 

    

2018

    

2017

 

Professional fees

 

$

3,343

 

$

1,325

 

Consulting fees/provider fees

 

 

4,205

 

 

4,028

 

Client performance guarantees

 

 

2,722

 

 

2,617

 

Legal fees

 

 

519

 

 

759

 

Interest payable

 

 

4,068

 

 

367

 

Income tax payable

 

 

3,136

 

 

 —

 

Lease abandonment obligation - current

 

 

482

 

 

 —

 

Marketing

 

 

2,458

 

 

524

 

Earnout and compensation

 

 

 —

 

 

722

 

Printing and postage

 

 

 —

 

 

302

 

Deferred revenue

 

 

8,062

 

 

4,111

 

Other

 

 

3,591

 

 

4,602

 

Total

 

$

32,586

 

$

19,357

 

 

 

Note 9. 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 instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

 

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

markets.

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

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

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

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

The Company measured its contingent consideration at fair value on a recurring basis and classified 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 Company’s assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

 

$

457,554

 

$

 —

 

$

 —

 

$

457,554

Short-term investments

 

$

 —

 

$

14,974

 

$

 —

 

$

14,974

 

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

 

$

39,051

 

$

3,766

 

$

 —

 

$

42,817

Short-term investments

 

$

 —

 

$

79,489

 

$

 —

 

$

79,489

Contingent liability (included in accrued expenses and other current liabilities and other liabilities)

 

$

 —

 

$

 —

 

$

666

 

$

666

There were no transfers  between fair value measurement levels during the quarter and nine months ended September 30, 2018 and 2017.

The change in fair value of the Company’s contingent liability is recorded in general and administrative expenses in the consolidated statements of operations. The following table reconciles the beginning and ending balance of the Company’s Level 3 contingent liability:

 

 

 

 

 

    

 

    

Balance at December 31, 2017

 

$

666

Payments

 

 

(744)

Change in fair value

 

 

78

Fair value at September 30, 2018

 

$

 —

 

 

 

Note 10. Revolving Credit Facility

On July 14, 2017 and concurrent with the consummation of the Best Doctors acquisition, the Company entered into a $175.0 million Senior Secured Term Loan Facility (the “New Term Loan Facility”) and a $10.0 million Senior Secured Revolving Credit Facility (the “New Revolving Credit Facility”). The New Term Loan Facility was used to fund the purchase of Best Doctors and the New Revolving Credit Facility is available for working capital and other general corporate purposes. In December 2017, the Company used the proceeds from the December Offering and cash on hand and repaid all the outstanding amounts under the $175.0 million New Term Loan Facility. The Company has maintained the New Revolving Credit Facility and, as described above, there was no amount outstanding as of September 30, 2018 and December 31, 2017.

The Company was in compliance with all debt covenants at September 30, 2018 and December 31, 2017.

 

Note 11. Convertible Senior Notes

 

Convertible Senior Notes Due 2025

On May 8, 2018, the Company issued, at par value, $287.5 million aggregate principal amount of 1.375% convertible senior notes due 2025. The 2025 Notes bear cash interest at a rate of 1.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The 2025 Notes will mature on May 15, 2025. The net proceeds to the Company from the offering were $279.1 million after deducting offering costs of approximately $8.4 million.

The 2025 Notes are senior unsecured obligations of the Company and rank senior in right of payment to the Company’s indebtedness that is expressly subordinated in right of payment to the 2025 Notes; equal in right of payment to the Company’s liabilities that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries.

Holders may convert all or any portion of their 2025 Notes in integral multiples of $1,000 principal amount, at their option, at any time prior to the close of business on the business day immediately preceding November 15, 2024 only under the following circumstances:

·

during any calendar quarter commencing after the calendar quarter ending on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of the shares of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

·

during the five business day period after any ten consecutive trading day period (the ‘‘measurement period’’) in which the trading price (as defined in the indenture governing the 2025 Notes (the “2025 Notes Indenture”)) per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

·

upon the occurrence of specified corporate events described under the 2025 Notes Indenture; or

·

if the Company calls the 2025 Notes for redemption, at any time until the close of business on the second business day immediately preceding the redemption date as described under the 2025 Notes Indenture.

On or after November 15, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes, regardless of the foregoing circumstances.

The conversion rate for the 2025 Notes was initially, and remains, 18.6621 shares of the Company’s common stock per $1,000 principal amount of the 2025 Notes, which is equivalent to an initial conversion price of approximately $53.58 per share of the Company’s common stock. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s election. If the Company elects (or is deemed to have elected) to satisfy the conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of the Company’s common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 25 trading day observation period (as defined in the 2025 Notes Indenture).

The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after May 22, 2022 if the last reported sale price of its common stock exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest, if any. In addition, calling any 2025 Note for redemption on or after May 22, 2022 will constitute a make-whole fundamental change (as defined in the 2025 Notes Indenture) with respect to that 2025 Note, in which case the conversion rate applicable to the conversion of that Note, if it is converted in connection with the redemption, will be increased in certain circumstances as described in the 2025 Notes Indenture.

In accounting for the issuance of the 2025 Notes, the Company separated the 2025 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2025 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense from the issuance date to November 15, 2024 (the first date on which the Company may be required to repurchase the 2025 Notes at the option of the holder). The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component related to the 2025 Notes was $91.4 million, net of issuance costs which was recorded in additional paid-in capital on the accompanying consolidated balance sheet.

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

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TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The 2025 Notes consist of the following (in thousands):

 

 

 

 

 

 

 

As of September 30,

Liability component

    

2018

Principal

 

$

287,500

Less: Debt discount, net (1)

 

 

(95,659)

Net carrying amount

 

$

191,841


(1)

Included in the accompanying consolidated balance sheets within convertible senior notes and amortized to interest expense over the expected life of the 2025 Notes using the effective interest rate method.

The fair value of the 2025 Notes was approximately $491.9 million as of September 30, 2018. The Company estimates the fair value of its 2025 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2025 Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities, which are classified as Level 2 measurements within the fair value hierarchy. See Note 9, “Fair Value Measurements,” for definitions of hierarchy levels. As of September 30, 2018, the remaining contractual life of the 2025 Notes is approximately 6.6 years.

The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended 

 

 

September 30,

 

September 30,

 

    

2018

 

2018

Contractual interest expense

 

$

996

 

 

$

1,581

 

Amortization of debt discount

 

 

2,593

 

 

 

4,086

 

Total

 

$

3,589

 

 

$

5,667

 

Effective interest rate of the liability component

 

 

7.9

%  

 

 

7.9

%  

 

Convertible Senior Notes Due 2022

On June 27, 2017, the Company issued, at par value, $275 million aggregate principal amount of 3% convertible senior notes due 2022. The 2022 Notes bear cash interest at a rate of 3% per year, payable semi-annually in arrears on June 15 and December 15 of each year. The 2022 Notes will mature on December 15, 2022. The net proceeds to the Company from the offering were $263.7 million after deducting offering costs of approximately $11.3 million.

The 2022 Notes are senior unsecured obligations of the Company and rank senior in right of payment to the Company’s indebtedness that is expressly subordinated in right of payment to the 2022 Notes; equal in right of payment to the Company’s liabilities that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries.

Holders may convert all or any portion of their 2022 Notes in integral multiples of $1,000 principal amount, at their option, at any time prior to the close of business on the business day immediately preceding June 15, 2022 only under the following circumstances:

·

during any calendar quarter commencing after the calendar quarter ending on September 30, 2017 (and only during such calendar quarter), if the last reported sale price of the shares of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

·

during the five business day period after any ten consecutive trading day period (the ‘‘measurement period’’) in which the trading price (as defined in the indenture governing the 2022 Notes (the “2022 Notes Indenture”)) per $1,000 principal amount of 2022 Notes for each trading day of the measurement period

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

·

upon the occurrence of specified corporate events described under the 2022 Notes Indenture; or

·

if the Company calls the 2022 Notes for redemption, at any time until the close of business on the second business day immediately preceding the redemption date as described under the 2022 Notes Indenture.

On or after June 15, 2022, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2022 Notes, regardless of the foregoing circumstances.

The conversion rate for the 2022 Notes was initially, and remains, 22.7247 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes, which is equivalent to an initial conversion price of approximately $44.00 per share of the Company’s common stock. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s election. If the Company elects (or is deemed to have elected) to satisfy the conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of the Company’s common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 25 trading day observation period (as defined in the 2022 Notes Indenture).

The Company may redeem for cash all or any portion of the 2022 Notes, at its option, on or after December 22, 2020 if the last reported sale price of its common stock exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be the principal amount of the 2022 Notes to be redeemed, plus accrued and unpaid interest, if any. In addition, calling any 2022 Note for redemption on or after December 22, 2020 will constitute a make-whole fundamental change (as defined in the 2022 Notes Indenture) with respect to that 2022 Note, in which case the conversion rate applicable to the conversion of that Note, if it is converted in connection with the redemption, will be increased in certain circumstances as described in the 2022 Notes Indenture.

In accounting for the issuance of the 2022 Notes, the Company separated the 2022 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2022 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense from the issuance date to June 15, 2022 (the first date on which the Company may be required to repurchase the 2022 Notes at the option of the holder). The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component related to the 2022 Notes was $62.4 million, net of issuance costs which was recorded in additional paid-in capital on the accompanying condensed consolidated balance sheet.

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

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Table of Contents

TELADOC HEALTH, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The 2022 Notes consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

As of September 30,

 

As of December 31,

Liability component

    

2018

    

2017

Principal

 

$

275,000

 

$

275,000

Less: Debt discount, net (1)

 

 

(58,188)

 

 

(67,630)

Net carrying amount

 

$

216,812

 

$

207,370


(1)

Included in the accompanying consolidated balance sheets within convertible senior notes and amortized to interest expense over the expected life of the 2022 Notes using the effective interest rate method.

The fair value of the 2022 Notes was approximately $569.1 million as of September 30, 2018. The Company estimates the fair value of its 2022 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2022 Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities, which are classified as Level 2 measurements within the fair value hierarchy. See Note 9, “Fair Value Measurements,” for definitions of hierarchy levels. As of September 30, 2018, the remaining contractual life of the 2022 Notes is approximately 3.8 years.

The following table sets forth total interest expense recognized related to the 2022 Notes (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended September 30,

 

Nine Months Ended September 30,

 

2018

  

 

2017

    

    

2018

  

 

2017

    

Contractual interest expense

$

2,079