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Teladoc Health, Inc. - Quarter Report: 2022 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2022

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)

(203635-2002

(Registrant’s telephone number including area

code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

TDOC

The New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.

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 27, 2022, the Registrant had 161,927,087 shares of Common Stock outstanding.

Table of Contents

TELADOC HEALTH, INC.

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2022

TABLE OF CONTENTS

Page
Number

PART I

Financial Information

2

Item 1.

Financial Statements

2

Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021

2

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the quarters and nine months ended September 30, 2022 and 2021

3

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the quarters and nine months ended September 30, 2022 and 2021

4

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2022 and 2021

5

Notes to Unaudited Condensed 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

32

Item 4.

Controls and Procedures

33

PART II

Other Information

34

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 6.

Exhibits

35

Exhibit Index

35

Signatures

36

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PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

TELADOC HEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

September 30,

December 31,

    

2022

    

2021

Assets

Current assets:

Cash and cash equivalents

$

899,631

$

893,480

Short-term investments

0

2,537

Accounts receivable, net of allowance of $15,311 and $12,384, respectively

 

201,701

 

168,956

Inventories

59,344

73,079

Prepaid expenses and other current assets

 

126,912

 

87,387

Total current assets

 

1,287,588

 

1,225,439

Property and equipment, net

 

27,270

 

27,234

Goodwill

 

4,846,001

 

14,504,174

Intangible assets, net

 

1,854,263

 

1,910,278

Operating lease - right-of-use assets

45,187

46,780

Other assets

 

43,656

 

20,703

Total assets

$

8,103,965

$

17,734,608

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

70,783

$

47,257

Accrued expenses and other current liabilities

 

177,111

 

102,933

Accrued compensation

 

63,211

 

91,941

Deferred revenue-current

90,210

75,569

Advances from financing companies

10,086

13,313

Total current liabilities

 

411,401

 

331,013

Other liabilities

 

1,632

 

1,492

Operating lease liabilities, net of current portion

41,080

41,773

Deferred revenue, net of current portion

3,146

3,834

Advances from financing companies, net of current portion

7,855

9,291

Deferred taxes, net

 

51,742

 

75,777

Convertible senior notes, net

1,534,448

1,225,671

Commitments and contingencies (Note 10)

Stockholders’ equity:

Common stock, $0.001 par value; 300,000,000 shares authorized; 162,195,790 shares and 160,469,325 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

 

162

 

160

Additional paid-in capital

 

17,299,981

 

17,473,336

Accumulated deficit

 

(11,198,216)

 

(1,421,454)

Accumulated other comprehensive loss

(49,266)

(6,285)

Total stockholders’ equity

 

6,052,661

 

16,045,757

Total liabilities and stockholders’ equity

$

8,103,965

$

17,734,608

See accompanying notes to unaudited condensed consolidated financial statements.

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TELADOC HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

Quarter Ended September 30,

Nine Months Ended September 30,

 

    

2022

2021

2022

2021

 

Revenue

$

611,402

    

$

521,658

    

$

1,769,131

    

$

1,478,472

Expenses:

Cost of revenue (exclusive of depreciation and amortization, which is shown separately below)

185,619

 

169,041

 

555,114

 

475,273

Operating expenses:

Advertising and marketing

 

178,920

 

111,078

 

477,094

 

303,738

Sales

 

54,634

 

62,602

 

170,893

 

191,251

Technology and development

 

87,815

 

80,250

 

256,053

 

239,017

General and administrative

 

112,542

 

103,016

 

328,333

 

319,404

Acquisition, integration, and transformation costs

1,594

 

4,340

8,993

 

22,084

Depreciation and amortization

 

62,008

 

51,907

 

180,312

 

151,907

Goodwill impairment

0

0

9,630,000

0

Total expenses

683,132

582,234

11,606,792

1,702,674

Loss from operations

 

(71,730)

 

(60,576)

 

(9,837,661)

 

(224,202)

Loss on extinguishment of debt

0

 

850

0

 

43,728

Other expense (income), net

1,571

376

2,607

(5,493)

Interest expense, net

 

1,346

 

18,895

 

11,163

 

61,493

Net loss before provision for income taxes

 

(74,647)

 

(80,697)

 

(9,851,431)

 

(323,930)

Provision for income taxes

 

(1,171)

 

3,643

 

(1,971)

 

93,878

Net loss

(73,476)

(84,340)

(9,849,460)

(417,808)

Other comprehensive loss, net of tax:

Currency translation adjustment and other

(19,402)

(13,423)

(42,981)

(19,650)

Comprehensive loss

$

(92,878)

$

(97,763)

$

(9,892,441)

$

(437,458)

Net loss per share, basic and diluted

$

(0.45)

$

(0.53)

$

(61.09)

$

(2.68)

 

 

 

 

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

161,727,962

159,435,165

161,217,033

155,926,680

See accompanying notes to unaudited condensed consolidated financial statements.

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TELADOC HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data, unaudited)

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Accumulated

Comprehensive

Stockholders’

   

Shares

   

Amount

   

Capital

   

Deficit

   

Gain (Loss)

   

Equity

Balance as of June 30, 2022

161,892,008

$

162

$

17,239,092

$

(11,124,740)

$

(29,864)

$

6,084,650

Exercise of stock options

125,039

0

666

0

0

666

Issuance of common stock upon vesting of restricted stock units

178,743

0

0

0

0

0

Stock-based compensation

0

0

60,223

0

0

60,223

Other comprehensive loss, net of tax

0

0

0

0

(19,402)

(19,402)

Net loss

0

0

0

(73,476)

0

(73,476)

Balance as of September 30, 2022

162,195,790

$

162

$

17,299,981

$

(11,198,216)

$

(49,266)

$

6,052,661

Balance as of December 31, 2021

160,469,325

$

160

$

17,473,336

$

(1,421,454)

$

(6,285)

$

16,045,757

Cumulative effect adjustment due to adoption of ASU 2020-06 (see Note 2)

0

0

(363,731)

72,698

0

(291,033)

Exercise of stock options

552,400

1

5,645

0

0

5,646

Issuance of common stock upon vesting of restricted stock units

1,025,363

1

(1)

0

0

0

Issuance of stock under employee stock purchase plan

148,609

0

4,225

0

0

4,225

Issuance of common stock for 2025 Notes

93

0

7

0

0

7

Equity portion of extinguishment of 2025 Notes

0

0

(2)

0

0

(2)

Stock-based compensation

0

0

180,502

0

0

180,502

Other comprehensive loss, net of tax

0

0

0

0

(42,981)

(42,981)

Net loss

0

0

0

(9,849,460)

0

(9,849,460)

Balance as of September 30, 2022

162,195,790

$

162

$

17,299,981

$

(11,198,216)

$

(49,266)

$

6,052,661

Balance as of June 30, 2021

159,462,978

$

159

$

17,314,749

$

(1,326,129)

$

12,291

$

16,001,070

Exercise of stock options

216,882

1

5,174

0

0

5,175

Issuance of common stock upon vesting of restricted stock units

235,674

0

0

0

0

0

Issuance of common stock for 2025 Notes

98,217

0

14,868

0

0

14,868

Equity portion of extinguishment of 2025 Notes

0

0

(10,079)

0

0

(10,079)

Stock-based compensation

0

0

74,311

0

0

74,311

Other comprehensive loss, net of tax

0

0

0

0

(13,423)

(13,423)

Net loss

0

0

0

(84,340)

0

(84,340)

Balance as of September 30, 2021

160,013,751

$

160

$

17,399,023

$

(1,410,469)

$

(1,132)

$

15,987,582

Balance as of December 31, 2020

150,281,099

$

150

$

16,857,797

$

(992,661)

$

18,518

$

15,883,804

Exercise of stock options

2,123,935

3

22,953

0

0

22,956

Issuance of common stock upon vesting of restricted stock units

1,490,879

1

(1)

0

0

0

Issuance of stock under employee stock purchase plan

82,088

0

10,539

0

0

10,539

Issuance of common stock for 2022 Notes

1,058,373

1

270,111

0

0

270,112

Equity portion of extinguishment of 2022 Notes

0

0

(224,081)

0

0

(224,081)

Issuance of common stock for 2025 Notes

5,182,656

5

920,514

0

0

920,519

Equity portion of extinguishment of 2025 Notes

0

0

(668,507)

0

0

(668,507)

Recovery of excess common stock issued for acquisition

(205,279)

0

(40,329)

0

0

(40,329)

Stock-based compensation

0

0

250,027

0

0

250,027

Other comprehensive loss, net of tax

0

0

0

0

(19,650)

(19,650)

Net loss

0

0

0

(417,808)

0

(417,808)

Balance as of September 30, 2021

160,013,751

$

160

$

17,399,023

$

(1,410,469)

$

(1,132)

$

15,987,582

See accompanying notes to unaudited condensed consolidated financial statements.

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TELADOC HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

Nine Months Ended September 30,

 

    

2022

2021

 

Operating activities:

    

    

    

    

Net loss

$

(9,849,460)

$

(417,808)

Adjustments to reconcile net loss to net cash provided by operating activities:

Goodwill impairment

9,630,000

0

Depreciation and amortization

 

180,312

 

151,907

Depreciation of rental equipment

2,185

2,500

Amortization of right-of-use assets

9,266

8,185

Provision for allowances

 

8,867

 

11,353

Stock-based compensation

 

167,098

 

240,971

Deferred income taxes

 

(5,942)

 

91,414

Accretion of interest

2,496

46,843

Loss on extinguishment of debt

 

0

 

40,631

Gain on sale of investment

0

(5,901)

Other, net

3,677

38

Changes in operating assets and liabilities:

Accounts receivable

 

(45,267)

 

(19,407)

Prepaid expenses and other current assets

 

(39,177)

 

(34,566)

Inventory

13,709

(2,661)

Other assets

 

(22,854)

 

(3,432)

Accounts payable

 

24,067

 

(11,115)

Accrued expenses and other current liabilities

 

70,046

 

15,880

Accrued compensation

 

(32,028)

 

(17,352)

Deferred revenue

12,311

20,002

Operating lease liabilities

(8,111)

(8,202)

Other liabilities

 

2,548

 

1,502

Net cash provided by operating activities

 

123,743

 

110,782

Investing activities:

Capital expenditures

 

(10,285)

 

(5,611)

Capitalized software

 

(108,588)

 

(35,402)

Proceeds from marketable securities

2,507

50,000

Proceeds from the sale of investment

0

10,901

Acquisitions of businesses, net of cash acquired

 

0

 

(75,944)

Other, net

2,514

3,150

Net cash used in investing activities

 

(113,852)

 

(52,906)

Financing activities:

Net proceeds from the exercise of stock options

 

5,646

 

22,956

Repurchase of 2022 Notes

 

0

 

(139)

Proceeds from advances from financing companies

6,807

10,677

Payment against advances from financing companies

(11,470)

(12,053)

Proceeds from employee stock purchase plan

 

3,386

 

13,996

Cash received for withholding taxes on stock-based compensation, net

594

3,109

Other, net

(2,847)

(4,224)

Net cash provided by financing activities

 

2,116

 

34,322

Net increase in cash and cash equivalents

 

12,007

 

92,198

Foreign exchange difference

(5,856)

(1,694)

Cash and cash equivalents at beginning of the period

 

893,480

 

733,324

Cash and cash equivalents at end of the period

$

899,631

$

823,828

Income taxes paid

$

901

$

3,114

Interest paid

$

8,688

$

10,380

See accompanying notes to unaudited condensed consolidated financial statements.

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TELADOC HEALTH, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Description of Business

Teladoc Health, Inc., together with its subsidiaries, is referred to herein as “Teladoc Health,” or the “Company,” and is the global leader in whole person virtual care, forging a new healthcare experience with better convenience, outcomes, and value. The Company’s mission is to empower all people everywhere to live their healthiest lives by transforming the healthcare experience.

The Company 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. The Company’s principal executive office is located in Purchase, New York.

On October 30, 2020, the Company completed the merger with Livongo Health, Inc. (“Livongo”), a transformational opportunity to improve the delivery, access and experience of chronic healthcare for individuals around the world.

On July 1, 2020, the Company completed the acquisition of InTouch Technologies, Inc. (“InTouch”), a leading provider of enterprise telehealth solutions for hospitals and health systems.

Note 2. Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2022 and 2021, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the condensed consolidated results of operations, financial position and cash flows of Teladoc Health for the periods presented. However, the financial results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) have been omitted or condensed pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The information in this report should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”), which includes a complete set of footnote disclosures, including the Company’s significant accounting policies.

These financial statements include the results of Teladoc Health, as well as three professional associations and twelve professional corporations (collectively, the “THMG Association”). All intercompany transactions and balances have been eliminated.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Teladoc Health Medical Group, P.A., formerly Teladoc Physicians, P.A. (“THMG”), is party to a Services Agreement by and among it and the professional associations and professional corporations pursuant to which each professional association and professional corporation provides services to THMG. Each professional association and 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 THMG Association, which contracts with physicians and other health professionals in order to provide services to the Company. The THMG 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 THMG Association and funds and absorbs all losses of the VIE and appropriately consolidates the THMG Association.

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Total revenue and net income (loss) for the VIE were $57.5 million and ($1.1) million, and $58.8 million and $1.0 million, for the quarters ended September 30, 2022 and 2021, respectively. Total revenue and net income (loss) for the VIE were $176.9 million and ($3.9) million, and $169.6 million and ($0.2) million, for the nine months ended September 30, 2022 and 2021, respectively. The VIE’s total assets, all of which were current, were $51.0 million and $58.5 million at September 30, 2022 and December 31, 2021, respectively. The VIE’s total liabilities, all of which were current, were $91.0 million and $94.6 million at September 30, 2022 and December 31, 2021, respectively. The VIE’s total stockholders’ deficit was $40.0 million and $36.1 million at September 30, 2022 and December 31, 2021, respectively.

Business Combinations

The Company accounts for its business combinations using the acquisition method of accounting. The purchase price is attributed to the fair value of the assets acquired and liabilities assumed. 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 the purchase price of acquisition over the fair value of the identifiable net assets of the acquiree is recorded as goodwill. The results of businesses acquired in a business combination are included in the Company’s condensed consolidated financial statements from the date of acquisition.

When the Company issues stock-based or cash awards to an acquired company’s stockholders, the Company evaluates whether the awards are consideration or compensation for post-acquisition services. The evaluation includes, among other things, whether the vesting of the awards is contingent on the continued employment of the acquired company’s stockholders beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post-acquisition services and recognized as expense over the requisite service period.

Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions, and competition. In connection with determination of fair values, the Company may engage a third-party valuation specialist to assist with the valuation of intangible and certain tangible assets acquired and certain obligations assumed. Acquisition-related transaction costs incurred by the Company are not included as a component of consideration transferred but are accounted for as an operating expense in the period in which the costs are incurred.

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 condensed consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business and economic factors, and various other assumptions that the Company believes are necessary 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 Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s condensed consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as the Company’s operating environment evolves. The Company believes that estimates used in the preparation of these condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates.

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 condensed consolidated financial statements.

Significant estimates and assumptions by management affect areas including the carrying value and useful life of long-lived assets (including intangible assets), the carrying value of goodwill, the capitalization and amortization of software development costs, deferred device and contract costs, sales and bad debt allowances, and the accounting for business combinations. Other significant areas include revenue recognition (including performance guarantees), the

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accounting for income taxes, contingences, litigation and related legal accruals, the accounting for stock-based compensation awards, and other items as described in the Summary of Significant Accounting policies in this Quarterly Report and in the 2021 Form 10-K.

Recently Adopted Accounting Standards

In August 2020, the financial accounting standards board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the conversion option separation model for convertible debt that can be settled in cash and by eliminating the measurement model for beneficial conversion features. Convertible instruments that continue to be subject to separation models are (1) those with conversion options that are required to be accounted for as bifurcated derivatives and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. This ASU also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards.

The Company adopted ASU 2020-06 as of January 1, 2022, under the modified retrospective transition method, and, accordingly, its prior period financial statements were not restated. Upon adoption of ASU 2020-06, the conversion feature of the Company’s convertible senior notes is no longer reported as a component of equity. Instead, the previously-separated equity component is now combined with the liability component, thereby eliminating the amortization of the debt discount arising from the conversion option separation model. As such, the Company currently anticipates a reduction of approximately $58 million in non-cash interest to be recorded on its convertible senior notes for the year ended December 31, 2022, as compared to the year ended December 31, 2021. To reflect the adoption of ASU 2020-06, the Company recorded an increase to convertible senior notes of $306.3 million and decreases to additional paid-in capital, accumulated deficit and net deferred tax liabilities of $363.7 million, $72.7 million and $15.3 million, respectively, as of January 1, 2022.

Recently Issued Accounting Standards

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820)—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” to clarify that an equity security subject to a contractual sale restriction does not take that restriction into consideration when measuring its fair value and to require specific disclosures related to such an equity security. ASU 2022-03 is effective for annual reporting periods, including interim periods, beginning after December 15, 2023, with early adoption permitted. The provisions of ASU 2022-03 are to be applied prospectively with any adjustments made to earnings on the date of adoption. The adoption of ASU 2022-03 is not expected to have a material impact on the Company’s financial statements.

In September 2022, the FASB issued ASU 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50) – Disclosure of Supplier Finance Program Obligations,” to provide guidance on disclosure requirements for supplier finance programs and improve information transparency by requiring the disclosure of key terms of the program, amounts outstanding that remain unpaid, a description of where those amounts are presented in the balance sheet, and a rollforward of any outstanding obligations. ASU 2022-04 is effective for annual reporting periods, including interim periods therein, beginning after December 15, 2022, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating what the impact of adopting ASU 2022-04 may have on its financial statements.

Note 3. Revenue, Deferred Revenue, and Deferred Device and Contract Costs

The Company generates access fees from customers, consisting of employers, health plans, hospitals and health systems, insurance companies, and financial services companies (collectively “Clients”), as well as individual members, accessing its professional provider network, hosted virtual healthcare platform, and chronic care management platforms. Visit fee revenue is generated for general medical, expert medical service, and other specialty visits. In addition, other revenue is primarily associated with virtual healthcare device equipment included with its hosted virtual healthcare platform. Access revenue accounted for 88% and 86% of the Company’s revenue for the quarters ended September 30,

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2022 and 2021, respectively. Access revenue accounted for 88% and 85% of the Company’s revenue for the nine months ended September 30, 2022 and 2021, respectively.

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

Quarter Ended

Nine Months Ended 

September 30,

September 30,

    

2022

    

2021

    

2022

    

2021

    

Access Fees Revenue

U.S.

$

465,692

$

386,181

$

1,337,264

$

1,085,325

International

74,387

62,737

212,882

176,764

Total

540,079

448,918

1,550,146

1,262,089

Visit Fee Revenue

U.S.

62,766

 

59,863

 

191,479

 

176,187

International

2,800

2,690

8,748

9,131

Total

65,566

62,553

200,227

185,318

Other

U.S.

5,555

9,583

17,856

29,617

International

202

604

902

1,448

Total

5,757

10,187

18,758

31,065

Total Revenues

$

611,402

$

521,658

$

1,769,131

$

1,478,472

During the fourth quarter of 2021, the Company refined its definition of international revenues to reflect all international revenues based on location of the customer. Previously, Direct-to-Consumer (“DTC”) activities were primarily reflected based on the location of operations. In addition, certain activities related to the Company’s international operations are now reflected in visit revenues versus access fee revenues. Prior period amounts have been recast to conform with current presentation.

Deferred Revenue

Deferred revenue represents billed, but unrecognized revenue, and is comprised of fees received in advance of the delivery or completion of the services and amounts received in instances when revenue recognition criteria have not been met. Deferred revenue associated with upfront payments for a device is amortized ratably over the expected member enrollment period. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent deferred revenue.

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. Deferred revenue, current plus long-term, was $93.4 million at September 30, 2022 and $76.9 million at September 30, 2021. The net increase of $14.0 million and $21.8 million in the deferred revenue balance for the nine months ended September 30, 2022 and 2021, respectively, was primarily driven by BetterHelp, the Company’s DTC mental health product, InTouch, and Livongo, 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. Revenue recognized during the quarters ended September 30, 2022 and 2021 that was included in deferred revenue at the beginning of the periods was $59.5 million and $47.2 million, respectively. Revenue recognized during the nine months ended September 30, 2022 and 2021 that was included in deferred revenue at the beginning of the periods was $68.2 million and $48.5 million, respectively.

The Company expects to recognize $64.5 million and $23.8 million of revenue in the remainder of 2022 and 2023, respectively, related to future performance obligations that are unsatisfied or partially unsatisfied as of September 30, 2022.

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Deferred Device and Contract Costs

Deferred device and contract costs are classified as a component of Prepaid expenses and other current assets or Other assets, depending on term, and consisted of the following (in thousands):

As of September 30,

As of December 31,

    

2022

2021

Deferred device and contract costs, current

$

30,762

$

22,304

Deferred device and contract costs, noncurrent

$

9,488

$

6,249

Total deferred device and contract costs

$

40,250

$

28,553

Deferred costs and other activity were as follows (in thousands):

    

Deferred Device and Contract Costs

Beginning balance as of December 31, 2021

$

28,553

Additions

$

41,109

Cost of revenue recognized

$

(29,412)

Ending balance as of September 30, 2022

$

40,250

Note 4. Inventories

Inventories consisted of the following (in thousands):

As of September 30,

As of December 31,

 

    

2022

    

2021

 

Raw materials and purchased parts

$

27,565

$

28,540

Work in process

1,187

597

Finished goods

36,803

49,146

Inventory reserve

 

(6,211)

 

(5,204)

Total inventories

$

59,344

$

73,079

Note 5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

As of September 30,

As of December 31,

    

2022

    

2021

Prepaid expenses

$

59,141

$

38,255

Deferred device and contract costs, current

 

30,762

22,304

Other receivables

24,468

21,168

Other current assets

12,541

5,660

Total prepaid expenses and other current assets

$

126,912

$

87,387

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Note 6. Intangible Assets, Net and Certain Cloud Computing Costs

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

Weighted

Average

    

    

Remaining

 

Useful

    

    

Accumulated

    

Net Carrying

Useful Life

Life

Gross Value

Amortization

Value

 

(Years)

September 30, 2022

Client relationships

 

2 to 20 years  

 

$

1,451,374

$

(267,063)

$

1,184,311

13.9

Trademarks

2 to 15 years  

324,098

(84,385)

239,713

7.1

Software

 

3 to 5 years  

 

 

252,095

(61,709)

190,386

2.9

Technology

5 to 7 years

343,025

(103,172)

239,853

4.8

Intangible assets, net

$

2,370,592

$

(516,329)

$

1,854,263

10.7

December 31, 2021

Client relationships

 

2 to 20 years  

 

$

1,465,926

$

(199,866)

$

1,266,060

14.5

Trademarks

3 to 15 years  

326,392

(45,555)

280,837

9.5

Software

 

3 to 5 years  

 

 

126,188

(40,767)

85,421

2.7

Technology

5 to 7 years

343,262

(65,302)

277,960

5.6

Intangible assets, net

$

2,261,768

$

(351,490)

$

1,910,278

12.0

Amortization expense for intangible assets net of foreign currency remeasurement for intangible assets was $58.2 million and $49.6 million for the quarters ended September 30, 2022 and 2021, respectively. Amortization expense for intangible assets net of foreign currency remeasurement for intangible assets was $171.5 million and $145.3 million for the nine months ended September 30, 2022 and 2021, respectively.

In January 2022, the Company embarked upon a two-year migration strategy that integrates and moves selected consumer brands under Teladoc Health, which will serve as the primary business-to-business-to-consumer brand that meets all consumer healthcare needs. The evolution of brand names resulted in the weighted average life of the trademarks decreasing from 9.5 years to 7.5 years as of January 1, 2022, and an acceleration of amortization expense being expensed over 2022 and 2023. This change resulted in additional amortization expense of $5.8 million (or $0.04 per basic and diluted share) and $17.4 million (or $0.11 per basic and diluted share) for the quarter and nine months ended September 30, 2022, respectively.

Refer to Note 7 to the condensed consolidated financial statements for the results of impairment testing of the Company’s intangible assets, including goodwill.

Net cloud computing costs are recorded in other assets within the Company’s balance sheet. As of September 30, 2022 and December 31, 2021, those costs were $21.8 million and $2.6 million, respectively. The associated expense for cloud computing costs, which are recorded in general and administration expense, was $0.6 million and less than $0.1 million for the quarter ended September 30, 2022 and 2021, respectively. The associated expense for cloud computing costs was $1.1 million and $0.1 million for the nine months ended September 30, 2022 and 2021, respectively.

Note 7. Goodwill

Goodwill consisted of the following (in thousands):

As of September 30,

As of December 31,

    

2022

    

2021

Beginning balance as of December 31, 2021 and 2020, respectively

$

14,504,174

$

14,581,255

Impairment

(9,630,000)

0

Additions associated with acquisitions

0

64,269

Purchase consideration adjustments net of deferred tax impacts

0

(122,306)

Currency translation adjustment

 

(28,173)

 

(19,044)

Ending balance as of September 30, 2022 and December 31, 2021

$

4,846,001

$

14,504,174

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The Company has experienced a pair of triggering events in 2022 due to sustained decreases in the Company’s share price, prompting impairment assessments of goodwill and long-lived assets including definite-lived intangibles, first as of March 31, 2022, and again as of June 30, 2022.

Both impairment assessments in 2022 reflected a 75%/25% allocation between the income and market approaches. The Company believes the 75% weighting to the income approach continues to be appropriate as it more directly reflects the Company’s future growth and profitability expectations. The table below indicates changes in the most significant inputs to the Company’s impairment analysis on each testing date since its last annual test.

Testing dates

Discount Rate

Peer Group Revenue Multiples
(current year/subsequent year)

% Excess of Reporting Unit Fair Value over Carrying Value

December 1, 2021

10.5%

7.0x/5.5x

15.0%

March 31, 2022

12.0%

3.5x/3.0x

0% post impairment

June 30, 2022

16.0%

2.0x/1.8x

0% post impairment

In March 2022, the Company updated the forecasted future cash flows used in the impairment assessment, including revenues, margin, and capital expenditures to reflect current conditions. Other changes in valuation assumptions included increases in interest rates and market volatility, resulting in a higher discount rate, and selection of lower revenue multiples based upon an assessment of a relevant peer group. As a result of this review, the Company did not identify an impairment to its definite-lived intangible assets or other long-lived assets, but the Company recorded a $6.6 billion non-deductible goodwill impairment charge (or $41.11 per basic and diluted share) for the quarter ended March 31, 2022. The non-cash charges had no impact on the provision for income taxes.

As of June 30, 2022, the Company updated valuation assumptions. The discount rate was increased for a company risk premium to reflect the current perception of risks of achieving projected cash flows and, to a lesser extent, to reflect further increases in interest rates and market volatility. Additionally, revenue market multiples were lowered based upon an updated analysis of a consistent peer group. The assessment did not result in an impairment of definite-lived intangible assets or other long-lived assets, but resulted in an additional $3.0 billion non-deductible goodwill impairment charge (or $18.78 per basic and diluted share). For the nine months ended September 30, 2022, a $9.6 billion non-deductible goodwill impairment charge (or $59.73 per basic and diluted share) was recognized. The non-cash charges had no impact on the provision for income taxes.

In the event there are further adverse changes in the Company’s projected cash flows and/or further changes in key assumptions, including but not limited to an increase in the discount rate, lower market multiples, lower revenue growth, lower margin, and/or a lower terminal growth rate, the Company may be required to record additional non-cash impairment charges to its goodwill, other intangibles, and/or long-lived assets. Such non-cash charges could have a material adverse effect on the Company’s condensed consolidated statement of operations and balance sheet in the reporting period of the charge. Following the June 2022 impairment, there is no excess of reporting unit fair value over the carrying amount, so any further decrease in estimated fair value would result in an additional impairment charge. The assessment is most sensitive to broader market conditions, including the discount rate and market multiples, and to the Company’s estimated future cash flows.

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Note 8. Accrued Expenses and Other Current Liabilities

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

As of September 30,

As of December 31,

    

2022

    

2021

 

Professional fees

$

13,424

$

7,124

Consulting fees/provider fees

 

17,243

19,010

Client performance guarantees

4,896

3,034

Interest payable

5,810

1,480

Income tax payable

4,511

3,098

Insurance

8,568

3,884

Marketing

39,075

2,958

Operating lease liabilities – current

12,864

12,687

Franchise and sales taxes

11,454

9,965

Device replacement cost

5,925

6,263

Accrued rebates

12,581

4,619

Staff augmentation

7,582

1,858

Other

 

33,178

26,953

Total

$

177,111

$

102,933

Note 9. Fair Value Measurements

The carrying value of the Company’s cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued liabilities approximates fair value due to their short-term nature.

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’s short-term investments held as of December 31, 2021 consisted primarily of a certificate of deposit held at a financial institution. The amortized cost of these investments, which are classified as Level 2, approximated their fair value.

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, 2022

    

Level 1

    

Level 2

    

Total

Cash and cash equivalents

$

899,631

$

0

$

899,631

December 31, 2021

    

Level 1

    

Level 2

    

Total

Cash and cash equivalents

$

893,480

$

0

$

893,480

Short-term investments

$

0

$

2,537

$

2,537

There were no transfers between fair value measurement levels during any of the periods presented.

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Note 10. Leases

The Company has operating leases for facilities, hosting co-location facilities, and certain equipment under non-cancelable leases in the U.S. and various international locations. The leases have remaining lease terms of less than 1 year to 10 years, with options to extend the lease term from 1 to 6 years. At the inception of an arrangement, the Company determines whether the arrangement is, or contains, a lease based on the terms covering the right to use property, plant or equipment for a stated period of time. For new and amended leases beginning in 2020 and after, the Company separately allocates the lease (e.g., fixed lease payments for right-to-use land, building, etc.) and non-lease components (e.g., common area maintenance) for its leases.

Operating Leases

The Company leases office space under non-cancelable operating leases in the U.S. and various international locations. The future minimum lease payments under non-cancelable operating leases were as follows (in thousands):

    

As of September 30,

Operating Leases:

2022

Remainder of 2022

$

4,339

2023

 

15,979

2024

10,856

2025

8,295

2026

7,224

2027 and thereafter

17,695

Total future minimum payments

64,388

Less: imputed interest

(10,444)

Present value of lease liabilities

 

$

53,944

Accrued expenses and other current liabilities

$

12,864

Operating lease liabilities, net of current portion

$

41,080

The Company rents certain information systems to selected qualified customers under arrangements that qualify as either sales-type lease or operating lease arrangements. Leases have terms that generally range from 2 to 5 years.

The Company recorded lease abandonment and exit costs of $3.7 million for both the quarter and nine months ended September 30, 2022, which primarily consisted of lease impairments and related charges due to the abandonment and/or exit of excess leased office space. However, the lease liabilities related to these spaces remain an outstanding obligation of the Company as of September 30, 2022.

Note 11. Convertible Senior Notes

Outstanding Convertible Senior Notes

As of September 30, 2022, the Company had three series of convertible senior notes outstanding. The issuances of such notes originally consisted of (i) $1.0 billion aggregate principal amount of 1.25% convertible senior notes due 2027 (the “2027 Notes”), issued on May 19, 2020 for net proceeds to the Company of $975.9 million after deducting offering costs of approximately $24.1 million, (ii) $287.5 million aggregate principal amount of 1.375% convertible senior notes due 2025 (the “2025 Notes”), issued on May 8, 2018 for net proceeds to the Company of $279.1 million after deducting offering costs of approximately $8.4 million, and (iii) $550.0 million aggregate principal amount of 0.875% convertible senior notes due 2025 that were issued by Livongo on June 4, 2020 for which the Company has agreed to guarantee Livongo’s obligations (the “Livongo Notes;” and together with the 2027 Notes, the 2025 Notes and the 2022 Notes (as defined below), the “Notes”). On June 27, 2017, the Company issued, at par value, $275.0 million aggregate principal amount of 3% convertible senior notes due 2022 (the “2022 Notes”), which were redeemed during the quarter ended March 31, 2021 as described below.

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The following table presents certain terms of the Notes that were outstanding as of September 30, 2022:

2027 Notes

    

2025 Notes

    

Livongo Notes

    

Principal Amount Outstanding as of September 30, 2022 (in millions)

$

1,000.0

$

0.7

$

550.0

Interest Rate Per Year

1.25

%  

1.375

%  

0.875

%

Fair Value as of September 30, 2022 (in millions) (1)

$

731.3

$

0.3

$

458.7

Fair Value as of December 31, 2021 (in millions) (1)

$

940.0

$

1.3

$

605.0

Maturity Date

June 1, 2027

May 15, 2025

June 1, 2025

Optional Redemption Date

June 5, 2024

May 22, 2022

June 5, 2023

Conversion Date

December 1, 2026

November 15, 2024

March 1, 2025

Conversion Rate Per $1,000 Principal Amount as of September 30, 2022

4.1258

18.6621

13.94

Remaining Contractual Life as of September 30, 2022

4.7 years

2.6 years

2.7 years

(1)The Notes are classified as Level 2 within the fair value hierarchy, as defined in Note 9.

All of the Notes are 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 such Notes; equal in right of payment to the Company’s liabilities that are 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 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 the applicable conversion date only under the following circumstances:

during any quarter (and only during such quarter), if the last reported sale price of the shares of 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 quarter is greater than or equal to 130% of the conversion price for the applicable Notes on each applicable trading day;
during the five business day period after any ten consecutive trading day period (or five consecutive trading day period in the case of the Livongo Notes) in which the trading price was less than 98% of the product of the last reported sale price of Company’s common stock and the conversion rate for the applicable Notes on each such trading day;
upon the occurrence of specified corporate events described under the applicable indenture; or
if the Company calls the applicable Notes for redemption, at any time until the close of business on the second business day immediately preceding the redemption date.

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

The 2027 Notes and the 2025 Notes are convertible into shares of the Company’s common stock at the applicable conversion rate shown in the table above. 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 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 due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 25 consecutive trading day observation period.

The Livongo Notes are convertible at the applicable conversion rate shown in the table above into “units of reference property,” each of which is comprised of 0.5920 of a share of the Company’s common stock and $4.24 in cash, without interest. Upon conversion, the Company will pay or deliver, as the case may be, cash, units of reference

15

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property, or a combination thereof, at the Company’s election. If the Company elects to satisfy the conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and units of reference property, the amount of cash and units of reference property, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 consecutive trading day observation period.

For each Note series, the Company may redeem for cash all or part of the Notes, at its option, on or after the applicable optional redemption date shown in the table above (and prior to the 41st scheduled trading day immediately preceding the maturity date in the case of the Livongo Notes) 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 Notes to be redeemed, plus accrued and unpaid interest, if any. In addition, calling any 2027 Note or 2025 Note for redemption on or after the applicable optional redemption date will constitute a make-whole fundamental change with respect to that 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 applicable indenture. If Livongo undergoes a fundamental change (as defined in the applicable indenture) at any time prior to the maturity date, holders will have the right, at their option, to require Livongo to repurchase for cash all or any portion of their Livongo Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Livongo Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Following the adoption of ASU 2020-06 on January 1, 2022 as described in Note 2, the Company accounts for each Note series at amortized cost within the liability section of its condensed consolidated balance sheets. The Company has reserved an aggregate of 8.7 million shares of common stock for the Notes.

The net carrying values of the Notes consisted of the following (in thousands):

As of September 30,

As of December 31,

2027 Notes

    

2022

    

2021

Principal

$

1,000,000

$

1,000,000

Less: Debt discount, net (1)

(16,269)

(250,846)

Net carrying amount

983,731

749,154

2025 Notes

Principal

725

730

Less: Debt discount, net (1)

(8)

(166)

Net carrying amount

717

564

Livongo Notes

Principal

550,000

550,000

Less: Debt discount, net (1)

0

(74,047)

Net carrying amount

550,000

475,953

Total net carrying amount

$

1,534,448

$

1,225,671

(1)Included in the accompanying condensed consolidated balance sheet within convertible senior notes and amortized to interest expense over the expected life of the Notes using the effective interest rate method.

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

Quarters Ended

Nine Months Ended 

September 30,

September 30,

2027 Notes:

    

2022

2021

2022

2021

Contractual interest expense

$

3,125

$

3,125

$

9,375

$

9,375

Amortization of debt discount

 

838

9,370

 

2,502

 

27,592

Total

$

3,963

$

12,495

$

11,877

$

36,967

Effective interest rate

 

1.6

%  

3.4

%  

1.6

%  

 

3.4

%  

Quarters Ended

Nine Months Ended 

September 30,

September 30,

2025 Notes:

2022

2021

2022

2021

Contractual interest expense

$

2

$

10

$

7

$

1,080

Amortization of debt discount

 

1

48

 

2

 

4,546

Total

$

3

$

58

$

9

$

5,626

Effective interest rate

1.8

%  

4.7

%  

1.8

%  

4.7

%  

Quarters Ended

Nine Months Ended 

September 30,

September 30,

Livongo Notes:

2022

2021

2022

2021

Contractual interest expense

$

1,203

$

1,203

$

3,609

$

3,609

Amortization of debt discount

 

0

4,858

 

0

 

14,389

Total

$

1,203

$

6,061

$

3,609

$

17,998

Effective interest rate

0.9

%  

5.2

%  

0.9

%  

5.2

%  

Exchanges and Conversions of Convertible Senior Notes Due 2025

In June 2021, the Company entered into privately negotiated agreements with certain holders of the 2025 Notes to exchange approximately $206.4 million aggregate principal amount of 2025 Notes for an aggregate of approximately 3.9 million shares of the Company’s common stock in private placement transactions pursuant to Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”). In addition, certain holders of the 2025 Notes converted their 2025 Notes in exchange for 1.2 million shares of the Company’s common stock during the nine months ended September 30, 2021. As a result of the exchanges and conversions, the Company recorded a charge associated with the loss on extinguishment of debt, net of transaction fees, of $31.4 million and $39.5 million during the quarter and nine months ended September 30, 2021, respectively.

Redemption of Convertible Senior Notes Due 2022

In March 2021, the Company completed a redemption of all of the then outstanding 2022 Notes in exchange for approximately $0.1 million in cash (including accrued and unpaid interest). Prior to that redemption, certain holders of the 2022 Notes converted their 2022 Notes in exchange for 1.1 million shares of the Company’s common stock during the quarter ended March 31, 2021. As a result of the redemption and conversions, the Company recorded a charge associated with the loss on extinguishment of debt of $3.4 million during the quarter ended March 31, 2021.

Note 12. Advances from Financing Companies

The Company utilizes a third-party financing company to provide certain Clients with a rental option. The principal portion of these up-front payments are reported as advances from financing companies in the accompanying condensed consolidated balance sheets. Interest rates applicable to the outstanding advances as of September 30, 2022 ranged from 3.35% to 8.50%.

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Client lease payments to third party financing companies will reduce the advances from financing companies as of September 30, 2022 by year as follows (in thousands):

    

As of September 30,

    

2022

Remainder of 2022

$

3,375

2023

9,708

2024

4,290

2025

568

Total

$

17,941

Note 13. Legal Matters

From time to time, Teladoc Health is involved in various litigation matters arising in the normal course of business, including the matters described below. The Company consults with legal counsel on those issues related to litigation and seeks input from other experts and advisors with respect to such matters. Estimating the probable losses or a range of probable losses resulting from litigation, government actions, and other legal proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve discretionary amounts, present novel legal theories, are in the early stages of the proceedings, or are subject to appeal. Whether any losses, damages, or remedies ultimately resulting from such matters could reasonably have a material effect on the Company’s business, financial condition, results of operations, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages (if any) and the structure and type of any such remedies. As of the date of these financial statements, Teladoc Health’s management does not expect any litigation matter to have a material adverse impact on its business, financial condition, results of operations, or cash flows.

On May 14, 2018, a purported class action complaint (Thomas v. Best Doctors, Inc.) was filed in the United States District Court for the District of Massachusetts against the Company’s wholly owned subsidiary, Best Doctors, Inc. The complaint alleges that on or about May 16, 2017, Best Doctors violated the U.S. Telephone Consumer Protection Act (the “TCPA”) by sending unsolicited facsimiles to plaintiff and certain other recipients without the recipients’ prior express invitation or permission. The lawsuit seeks statutory damages for each violation, subject to trebling under the TCPA, and injunctive relief. On May 27, 2022, the Court entered an order preliminarily approving the terms of a tentative settlement reached by the parties and conditionally certified the settlement class. The Company will continue to vigorously defend the lawsuit and any potential loss is currently deemed to be immaterial.

On August 27, 2021, a purported securities class action complaint (City of Hialeah Employees’ Retirement System v. Teladoc Health, Inc., et.al.) was filed in the Circuit Court of Cook County, Illinois against the Company and certain of the Company’s current and former officers and directors. The complaint was brought on behalf of a purported class consisting of all persons who acquired shares of Teladoc Health common stock issued in the Livongo merger. The complaint asserted violations of Sections 11, 12(a)(2) and 15 of the Securities Act based on allegedly false or misleading statements and omissions with respect to the registration statement and prospectus filed in connection with the Livongo merger. The complaint sought certification as a class action, unspecified compensatory damages plus interest and attorneys’ fees, rescission or a rescissory measure of damages and equitable or other relief. On January 18, 2022, the case was voluntarily dismissed without prejudice in the Circuit Court of Cook County, Illinois and on January 26, 2022, was refiled in the Supreme Court of the State of New York. The refiled case includes substantially the same allegations. The Company believes that these claims are without merit, and the Company and its named current and former officers and directors intend to defend the lawsuit vigorously, including through the filing of a motion to dismiss the complaint on April 8, 2022.

On June 6, 2022, a purported securities class action complaint (Schneider v. Teladoc Health, Inc., et. al.) was filed in the United States District Court for the Southern District of New York against the Company and certain of the Company’s officers. The complaint was brought on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of the Company’s common stock during the period October 28, 2021 through April 27, 2022. The complaint asserted violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder based on allegedly false or misleading statements and omissions with respect to, among other things, the Company’s business, operations, and prospects. The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys’ fees. On August 2, 2022, a duplicative purported securities class action complaint (De Schutter v. Teladoc Health, Inc., et.al.) was filed in the United States

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District Court for the Eastern District of New York. The claims and parties in De Schutter were substantially similar to those in Schneider. The De Schutter case was transferred on consent to the Southern District court, and the Schneider and De Schutter actions have now been consolidated under the caption In re Teladoc Health, Inc. Securities Litigation. On August 23, 2022, the court appointed Leadersel Innotech ESG as lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995. The lead plaintiff filed an amended complaint on September 30, 2022, on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of the Company’s common stock during the period February 24, 2021 to July 27, 2022. The Company believes that these claims are without merit, and the Company and its named officers intend to defend the lawsuit vigorously.

On August 9, 2022, a verified shareholder derivative complaint (Vaughn v. Teladoc Health, Inc., et.al.) was filed in the United States District Court for the Southern District of New York against the Company as a nominal defendant and certain of the Company’s officers and directors. The complaint asserts violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, and waste of corporate assets in connection with factual assertions similar to those in the purported securities class action complaints described above. The complaint seeks damages to the Company allegedly sustained as a result of the acts and omissions of the named officers and directors and seeks an order directing the Company to reform and improve the Company’s corporate governance. On September 6, 2022, a duplicative verified stockholder derivative complaint (Hendry v. Teladoc Health, Inc., et. al) was filed in the United States District Court for the Southern District of New York. The claims and parties in Hendry were substantially similar to those in Vaughn.

Note 14. Common Stock and Stockholders’ Equity

Stock Plans

The Company’s 2015 Incentive Award Plan, 2017 Employment Inducement Incentive Award Plan and Livongo Acquisition Incentive Award Plan (collectively, the “Plans”) provide for the issuance of incentive and non-statutory options and other equity-based awards to its employees and non-employee service providers. The Company had 15,095,263 shares available for grant at September 30, 2022.

All stock-based awards to employees are measured based on the grant-date fair value, or replacement grant date fair value in relation to the Livongo transaction, and are generally recognized on a straight line basis in the Company’s condensed 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 stock option and a three-year vesting period for each restricted stock unit (“RSU”)).

Stock Options

Options issued under the Plans are exercisable for periods not to exceed 10 years, and vest and contain such other terms and conditions as specified in the applicable award document. Options to buy common stock are issued under the Plans, with exercise prices equal to the closing price of shares of the Company’s common stock on the New York Stock Exchange on the date of award.

Stock option activity under the Plans was as follows (in thousands, except share and per share amounts and years):

    

    

Weighted-

    

 

Weighted-

Average

 

Number of

Average

Remaining

Aggregate

 

Shares

Exercise

Contractual

Intrinsic

 

Outstanding

Price

Life in Years

Value

 

Balance at December 31, 2021

3,426,978

$

22.88

 

5.32

$

242,569

Stock option grants

1,407,809

$

34.33

 

N/A

Stock options exercised

(552,400)

$

10.22

 

N/A

$

(23,208)

Stock options forfeited

(69,761)

$

57.38

 

N/A

Balance at September 30, 2022

4,212,626

$

27.81

 

6.25

$

23,805

Vested or expected to vest at September 30, 2022

4,212,626

$

27.81

 

6.25

$

23,805

Exercisable at September 30, 2022

2,770,160

$

22.06

 

4.50

$

23,805

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The total grant-date fair value of stock options granted during the quarters ended September 30, 2022 and 2021 were $0.3 million and $3.0 million, respectively. The total grant-date fair value of stock options granted during the nine months ended September 30, 2022 and 2021 were $24.9 million and $5.8 million, respectively.

The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The Company recognizes forfeitures as they occur.

The assumptions used in the Black-Scholes option-pricing model are determined as follows:

Volatility. The expected volatility was derived from the historical stock volatilities of the Company’s stock volatility over a period equivalent to the expected term of the stock option grants.

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 utilizes historical data.

Risk-Free Interest Rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with terms similar to the expected term on the options.

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.

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:

Nine Months Ended September 30,

2022

2021

 

Volatility

56.69% - 67.95%

56.52% - 58.14%

Expected term (in years)

4.1

4.1

Risk-free interest rate

1.13% - 3.46%

0.31% - 0.70%

Dividend yield

0

0

Weighted-average fair value of underlying stock options

$

$17.72

$

$72.46

For the quarters ended September 30, 2022 and 2021, the Company recorded compensation expense related to stock options of $2.4 million and $23.3 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded compensation expense related to stock options of $18.0 million and $77.1 million, respectively.

As of September 30, 2022, the Company had $25.1 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2.8 years.

Restricted Stock Units

The fair value of RSUs is determined on the date of grant.

RSU activity under the Plans was as follows:

Weighted-Average

Grant Date

    

RSUs

    

Fair Value Per RSU

Balance at December 31, 2021

2,133,501

$

168.43

Granted

 

5,649,470

$

51.94

Vested and issued

(826,297)

$

155.01

Forfeited

(814,313)

$

112.22

Balance at September 30, 2022

 

6,142,361

$

70.72

Vested and unissued at September 30, 2022

23,878

$

92.15

Non-vested at September 30, 2022

6,118,483

$

70.77

The total grant-date fair value of RSUs granted during the quarters ended September 30, 2022 and 2021 was $18.8 million and $23.1 million, respectively. The total grant-date fair value of RSUs granted during the nine months ended September 30, 2022 and 2021 was $293.5 million and $125.0 million, respectively.

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For the quarters ended September 30, 2022 and 2021, the Company recorded stock-based compensation expense related to RSUs of $53.7 million and $42.8 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded stock-based compensation expense related to RSUs of $147.8 million and $142.6 million, respectively.

As of September 30, 2022, the Company had $351.8 million in unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted-average period of approximately 2.1 years.

Performance Stock Units

Stock-based compensation costs associated with the Company’s performance stock units (“PSUs”) are initially determined using the fair market value of the Company’s common stock on the date the awards are granted (service inception date). The vesting of these PSUs is subject to certain performance conditions and a service requirement ranging from 1 to 3 years. Stock-based compensation costs associated with these PSUs are re-assessed each reporting period based upon the estimated performance attainment on the reporting date until the performance conditions are met. The ultimate number of PSUs that are issued to an employee is the result of the actual performance of the Company at the end of the performance period compared to the performance targets and generally range from 25% to 200% of the initial grant. Stock compensation expense for PSUs is recognized on an accelerated tranche by tranche basis for performance-based awards. Forfeitures are accounted for at the time they occur consistent with Company policy.

PSU activity under the Plans was as follows:

Weighted-Average

Grant Date

    

Shares

    

Fair Value Per PSU

Balance at December 31, 2021

356,249

$

140.01

Granted

 

471,659

$

74.16

Vested and issued

(199,066)

$

109.37

Forfeited

(27,530)

$

90.44

Balance at September 30, 2022

 

601,312

$

103.44

Vested and unissued at September 30, 2022

0

$

0.00

Non-vested at September 30, 2022

601,312

$

103.44

The total grant-date fair value of PSUs granted during the quarter ended September 30, 2022 and 2021 was $0.0 million and $2.5 million, respectively. The total grant-date fair value of PSUs granted during the nine months ended September 30, 2022 and 2021 was $35.0 million and $70.4 million, respectively.

For the quarters ended September 30, 2022 and 2021, the Company recorded stock-based compensation expense related to PSUs of $3.1 million and $4.2 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded stock-based compensation expense related to PSUs of $12.5 million and $16.7 million, respectively.

As of September 30, 2022, the Company had $8.8 million in unrecognized compensation cost related to non-vested PSUs, which is expected to be recognized over a weighted-average period of approximately 1.3 years.

Employee Stock Purchase Plan

In July 2015, the Company adopted the 2015 Employee Stock Purchase Plan (“ESPP”) in connection with its initial public offering. A total of 1,019,726 shares of common stock were reserved for issuance under this plan as of September 30, 2022. The Company’s ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. Under the ESPP, the Company may specify offerings with durations of not more than 27 months and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of its common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock at the beginning of an offering period or on the date of purchase.

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During the quarters ended September 30, 2022 and 2021, the Company did not issue any shares under the ESPP. During the nine months ended September 30, 2022 and 2021, the Company issued 148,609 shares and 82,088 shares, respectively, under the ESPP. As of September 30, 2022, 422,022 shares remained available for issuance.

For the quarters ended September 30, 2022 and 2021, the Company recorded stock-based compensation expense related to the ESPP of $0.9 million and $1.4 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded stock-based compensation expense related to the ESPP of $2.0 million and $4.6 million, respectively.

As of September 30, 2022, the Company had $0.4 million in unrecognized compensation cost related to the ESPP, which is expected to be recognized over a weighted-average period of approximately 0.1 year.

Total compensation costs for stock-based awards were recorded as follows (in thousands):

Quarter Ended

Nine Months Ended 

 

September 30,

September 30,

    

2022

    

2021

    

2022

    

2021

    

 

Cost of revenue (exclusive of depreciation and amortization, which is shown separately)

$

675

$

2,162

$

4,994

$

6,310

Advertising and marketing

3,614

5,244

10,523

15,141

Sales

 

11,064

 

17,518

 

33,845

 

57,638

Technology and development

 

17,660

 

22,910

 

51,532

 

77,335

General and administrative

 

22,649

 

23,867

 

66,204

 

84,547

Total stock-based compensation expense (1)

$

55,662

$

71,701

$

167,098

$

240,971

(1)Excludes the amount capitalized related to internal software development projects.

Note 15. Provision for Income Taxes

The Company’s provision for income taxes were benefits of $1.2 million and $2.0 million for the quarter and nine months ended September 30, 2022, respectively.

The Company recorded income tax expenses for the quarter and nine months ended September 30, 2021 of $3.6 million and $93.9 million, respectively. The prior year included $87.0 million, recognized in the first quarter ended March 31, 2021, primarily related to the additional valuation allowance recorded on excess stock compensation associated with the Livongo merger.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

Many statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as “anticipates,” “believes,” “suggests,” “targets,” “projects,” “plans,” “expects,” “future,” “intends,” “estimates,” “predicts,” “potential,” “may,” “will,” “should,” “could,” “would,” “likely,” “foresee,” “forecast,” “continue” and other similar words or phrases, as well as statements in the future tense to identify these forward-looking statements. These forward-looking statements and projections are contained throughout this Form 10-Q, including the section entitled” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Form 10-Q, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties, and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include, but are not limited to, the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) and in our other reports and United States (“U.S.”) Securities and Exchange Commission (“SEC”) filings. These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.

Overview

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 Health,” the “Company,” or “we.” The Company’s principal executive office is located in Purchase, New York. Teladoc Health is the global leader in whole person virtual care focused on forging a new healthcare experience with better convenience, outcomes, and value around the world.

Teladoc Health was founded on a simple, yet revolutionary idea: that everyone should have access to the best healthcare, anywhere in the world on their terms. Today, we have a vision of making virtual care the first step on any healthcare journey, and we are delivering on this mission by providing whole person virtual care that includes primary care, mental health, chronic condition management, and more.

COVID-19 Update

We believe that favorable existing secular trends in the healthcare industry were accelerated by the impacts of the COVID-19 pandemic, driving greater consumer use of virtual care, and increased adoption by employers, health plans, hospitals and health systems, and healthcare providers. In combination with the expansion of our capabilities, we believe that these trends present significant opportunities for virtual healthcare to address the most pressing, universal healthcare challenges through trusted solutions, such as ours, that deliver convenient, affordable, and high-quality care; empower individuals to manage and improve their health; and enable providers to offer their best care for their patients.

We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. COVID-19 has increased utilization of our telehealth services, but it is uncertain whether such increase in demand will continue. While the COVID-19 pandemic has not had a material adverse impact on our financial condition and results of operations to date, the future impact on our operational and financial performance will depend on certain developments, including the duration and spread of the pandemic, impact on our customers, consisting of employers, health plans,

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hospitals and health systems, insurance companies, and financial services companies (collectively “Clients”), and members, impact on our sales cycles, and effect on our vendors, all of which are uncertain and cannot be predicted. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to our operations and the operations of our third-party suppliers, along with any global slowdown in economic activity, may result in decreased revenues, decreased collections, and increased costs. Further, the economic effects of the COVID-19 pandemic and economic conditions have financially constrained some of our prospective and existing Clients’ healthcare spending, which may negatively impact our ability to acquire new Clients and our ability to renew subscriptions with or sell additional solutions to our existing Clients. We also may experience increased member attrition to the extent our existing Clients reduce their respective workforces in response to economic conditions. In addition, due to our subscription-based business model, the effect of the COVID-19 pandemic or economic effects may not be fully reflected in our revenue until future periods. It is possible that the COVID-19 pandemic, the measures taken by the governments and businesses affected and any resulting economic impact may materially and adversely affect our business, results of operations, cash flows, and financial positions as well as our customers.

We have also taken measures in response to the COVID-19 pandemic, and we may take further actions that alter our business operations as may be required by federal, state, local, or foreign authorities or that we determine are in the best interests of our employees, Clients, members, and stockholders. The effects of these operational modifications are unknown and may not be realized until further reporting periods.

Acquisition History

We have scaled and intend to continue to scale our platform through the pursuit of selective acquisitions. We have completed multiple acquisitions since our inception, which we believe have expanded our distribution capabilities and broadened our service offerings.

On October 30, 2020, we completed the merger with Livongo. The total final consideration was $13,876.9 million, consisting of $380.2 million of net cash, $555.4 million related to the conversion feature of the Livongo Notes guaranteed by us and 60.2 million shares of our common stock valued at approximately $12,941.3 million on October 30, 2020. Livongo is a leading provider to empower people with chronic conditions to live better and healthier lives.

On July 1, 2020, we completed the acquisition of InTouch for aggregate consideration of $1,069.8 million, which was comprised of 4.6 million shares of our common stock valued at $903.3 million on July 1, 2020, and $166.5 million of net cash. InTouch is a leading provider of enterprise telehealth solutions for hospitals and health systems.

Net Income

For the quarter ended September 30, 2022, we recorded a loss of $73.5 million, or $0.45 per share. For the nine months ended September 30, 2022, we recorded a loss of $9,849.5 million, or $61.09 per share. The nine months ended September 30, 2022 included a non-cash goodwill impairment charge of $9,630.0 million. Refer to Critical Accounting Estimates and Policies: Goodwill Impairment Charge and Note 7, Goodwill, to our condensed consolidated financial statements for more information.

For the quarter and nine months ended September 30, 2021, we recorded a loss of $84.3 million and $417.8 million, respectively.

Refer to the condensed consolidated results of operations in the MD&A for other supplemental financial measures we use to assess our operating performance.

Key Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including the following:

Number of Members and Revenue per Member. Our revenue growth rate and long-term profitability are affected by our ability to increase cross selling capability among our existing members because we derive a substantial portion of our revenue from access and other fees via Client contracts that provide members access to our professional provider network in exchange for a contractual based periodic fee or access fees derived from our Direct-to-Consumer (“DTC”) members. Therefore, we believe that our ability to add new members, retain existing members, and increase the

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revenue generated from each member is a key indicator of our increasing market adoption, the growth of our business, and future revenue potential, and that increasing our membership and revenue per member is an integral objective that will provide us with the ability to continually innovate our services and support initiatives that will enhance members’ experiences. U.S. paid membership increased by 5.3 million to 57.8 million at September 30, 2022, compared to September 30, 2021. Average U.S. revenue per member measures the average amount of access revenue that we generate from a U.S. paid member for a particular period. It is calculated by dividing the U.S. access revenue generated from our U.S. paid members, excluding certain non-member based access fees, by the total average number of U.S. paid members during the applicable period. For the third quarter of 2022, average U.S. revenue per member was $2.61 compared to $2.40 for the same period in 2021. For the nine months ended September 30, 2022, average U.S. revenue per member was $2.58 compared to $2.27 for the same period in 2021.

Number of Visits and Utilization. We also recognize revenue in connection with the completion of a general medical visit, expert medical service, and other specialty visits for contracts where the service is not part of access fees. Visit fee revenue is driven primarily by the number of Clients, the number of members in a Client’s 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 and increasing penetration further into existing and new health plan Clients is a key objective in order for our Clients to realize tangible healthcare savings with our service. Visits increased by 14%, or 0.6 million, to approximately 4.6 million for the quarter ended September 30, 2022 compared to the same period in 2021. Visits increased by 25%, or 2.8 million, to approximately 13.7 million for the nine months ended September 30, 2022 compared to the same period in 2021. Utilization measures the ratio of visits to total U.S. paid members. It is calculated by dividing visits during a particular period (excluding visit fee only visits) by U.S. paid members in the applicable period and annualizing the result. Utilization increased by 128 basis points to approximately 22.3% for the quarter ended September 30, 2022, compared to 21.0% in the same period in 2021. Utilization increased by 401 basis points to approximately 23.2% for the nine months ended September 30, 2022, compared to 19.2% in the same period in 2021.

Number of Platform-Enabled Sessions. A platform-enabled session is a unique instance in which our licensed software platform has facilitated a virtual voice or video encounter between a care provider and our Client’s patient, or between care providers. We believe platform-enabled sessions are an indicator of the value our Clients derive from the platform they license from us in order to facilitate virtual care. Our Clients completed 1.0 million and 3.2 million platform-enabled sessions during the quarter and nine months ended September 30, 2022, respectively, compared to 1.0 million and 3.1 million during the quarter and nine months ended September 30, 2021, respectively.

Chronic Care Enrollment. Our chronic care programs are one of the key components of our whole person virtual care platform that we believe position us to drive greater engagement with our platforms and increased revenue. Chronic care enrollment measures the number of unique individuals enrolled in one or more of our chronic care programs. Chronic care enrollment increased by 9% to 0.8 million at September 30, 2022, compared to 0.7 million at September 30, 2021.

Seasonality. In the past, we have typically seen the strongest increases in consecutive quarterly revenue during the fourth and first quarters of each year, which coincides with traditional annual benefit enrollment seasons. However, as our business has become more diversified across services, channels, and geographies, we see a growing diversification of Client start dates, resulting from growth in mental health offerings, health plan expansions, cross sales of new services, international growth, and mid-market employer growth, all of which are not constrained by a calendar year start. See “Risk Factors—Risks Related to Our Business—Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock” included in the 2021 Form 10-K.

Critical Accounting Estimates and Policies

Our discussion and analysis of our results of operations, liquidity and capital resources are based on our condensed consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities.

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On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, business combinations, goodwill and other intangible assets, income taxes, and other items. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our results of operations and financial position. For a discussion of our critical accounting policies and estimates see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2021 Form 10-K. In addition, the following updates our discussion of impairment testing therein as of September 30, 2022.

Goodwill Impairment Charge

We have experienced a pair of triggering events in 2022 due to sustained decreases in our share price, prompting impairment assessments of goodwill and long-lived assets, including definite-lived intangibles, first as of March 31, 2022, and again as of June 30, 2022.

Both impairment assessments in 2022 reflected a 75%/25% allocation between the income and market approaches. We believe the 75% weighting to the income approach continues to be appropriate as it more directly reflects our future growth and profitability expectations. The table below indicates changes in the most significant inputs to our impairment analysis on each testing date since our last annual test.

Testing dates

Discount Rate

Peer Group Revenue Multiples
(current year/subsequent year)

% Excess of Reporting Unit Fair Value over Carrying Value

December 1, 2021

10.5%

7.0x/5.5x

15.0%

March 31, 2022

12.0%

3.5x/3.0x

0% post impairment

June 30, 2022

16.0%

2.0x/1.8x

0% post impairment

In March 2022, we updated the forecasted future cash flows used in the impairment assessment, including revenues, margin, and capital expenditures to reflect current conditions. Other changes in valuation assumptions included increases in interest rates and market volatility, resulting in a higher discount rate, and selection of lower revenue multiples based upon an assessment of a relevant peer group. As a result of this review, we did not identify an impairment to our definite-lived intangible assets or other long-lived assets, but we recorded a $6.6 billion non-deductible goodwill impairment charge (or $41.11 per basic and diluted share) for the quarter ended March 31, 2022. The non-cash charges had no impact on the provision for income taxes.

As of June 30, 2022, we updated valuation assumptions. The discount rate was increased for a company risk premium to reflect the current perception of risks of achieving projected cash flows and, to a lesser extent, to reflect further increases in interest rates and market volatility. Additionally, revenue market multiples were lowered based upon an updated analysis of a consistent peer group. The assessment did not result in an impairment of definite-lived intangible assets or other long-lived assets, but resulted in an additional $3.0 billion non-deductible goodwill impairment charge (or $18.78 per basic and diluted share). For the nine months ended September 30, 2022, a $9.6 billion non-deductible goodwill impairment charge (or $59.73 per basic and diluted share) was recognized. The non-cash charges had no impact on the provision for income taxes.

In the event there are further adverse changes in our projected cash flows and/or further changes in key assumptions, including but not limited to an increase in the discount rate, lower market multiples, lower revenue growth, lower margin, and/or a lower terminal growth rate, we may be required to record additional non-cash impairment charges to our goodwill, other intangibles, and/or long-lived assets. Such non-cash charges could have a material adverse effect on our condensed consolidated statement of operations and balance sheet in the reporting period of the charge. Following the June 2022 impairment, there is no excess of reporting unit fair value over the carrying amount, so any further decrease in estimated fair value would result in an additional impairment charge. The assessment is most sensitive to broader market conditions, including the discount rate and market multiples, and to our estimated future cash flows.

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Condensed Consolidated Results of Operations

The following table sets forth our condensed consolidated statement of operations data for the quarters and the nine months ended September 30, 2022 and 2021 and the dollar and percentage change between the respective periods (dollars in thousands except for per share data):

Quarter Ended September 30,

Nine Months Ended September 30,

2022

 

2021

 

    

2022

 

2021

 

    

$

$

Variance

%

$

$

Variance

%

Revenue

$

611,402

$

521,658

$

89,744

 

17

%  

$

1,769,131

$

1,478,472

$

290,659

 

20

%

Expenses:

Cost of revenue (exclusive of depreciation and amortization,
which is shown separately below)

185,619

 

169,041

 

16,578

 

10

%  

 

555,114

 

475,273

 

79,841

 

17

%

Operating expenses:

Advertising and marketing

 

178,920

 

111,078

 

67,842

 

61

%  

 

477,094

 

303,738

 

173,356

 

57

%

Sales

 

54,634

 

62,602

 

(7,968)

 

(13)

%  

 

170,893

 

191,251

 

(20,358)

 

(11)

%

Technology and development

 

87,815

 

80,250

 

7,565

 

9

%  

 

256,053

 

239,017

 

17,036

 

7

%

General and administrative

 

112,542

 

103,016

 

9,526

 

9

%  

 

328,333

 

319,404

 

8,929

 

3

%

Acquisition, integration, and transformation costs

1,594

4,340

(2,746)

 

(63)

%  

8,993

22,084

(13,091)

 

(59)

%

Depreciation and amortization

 

62,008

 

51,907

 

10,101

 

19

%  

 

180,312

 

151,907

 

28,405

 

19

%

Goodwill impairment

0

0

0

 

N/M

9,630,000

0

9,630,000

N/M

Total expenses

683,132

 

582,234

 

100,898

 

17

%  

 

11,606,792

 

1,702,674

 

9,904,118

 

N/M

Loss from operations

 

(71,730)

 

(60,576)

 

(11,154)

 

(18)

%  

 

(9,837,661)

 

(224,202)

 

(9,613,459)

 

N/M

Loss on extinguishment of debt

0

 

850

 

(850)

 

(100)

%  

 

0

 

43,728

 

(43,728)

 

(100)

%

Other expense (income), net

1,571

 

376

1,195

 

318

%  

 

2,607

 

(5,493)

 

8,100

 

147

%

Interest expense, net

 

1,346

 

18,895

 

(17,549)

 

(93)

%  

 

11,163

 

61,493

 

(50,330)

 

(82)

%

Net loss before provision for income taxes

 

(74,647)

 

(80,697)

 

6,050

 

7

%  

 

(9,851,431)

 

(323,930)

 

(9,527,501)

 

N/M

Provision for income taxes

 

(1,171)

 

3,643

 

(4,814)

 

N/M

 

(1,971)

 

93,878

 

(95,849)

 

N/M

Net loss

$

(73,476)

$

(84,340)

$

10,864

 

13

%  

$

(9,849,460)

$

(417,808)

$

(9,431,652)

 

N/M

Net loss per share, basic and diluted

$

(0.45)

$

(0.53)

$

0.08

15

%  

$

(61.09)

$

(2.68)

$

(58.41)

N/M

EBITDA (1)

$

(9,722)

$

(8,669)

$

(1,053)

(12)

%  

$

(27,349)

$

(72,295)

$

44,946

62

%  

Adjusted EBITDA (1)

$

51,211

$

67,372

$

(16,161)

(24)

%  

$

152,419

$

190,760

$

(38,341)

(20)

%  

(1)Non-GAAP Financial Measures

N/M – not meaningful

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The following is a reconciliation of net loss, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA for the quarters and nine months ended September 30, 2022 and 2021 (in thousands):

Quarter Ended

Nine Months Ended 

September 30,

September 30,

    

2022

    

2021

    

2022

    

2021

    

Net loss

$

(73,476)

$

(84,340)

$

(9,849,460)

$

(417,808)

Add:

Goodwill impairment

0

0

9,630,000

0

Loss on extinguishment of debt

0

850

0

43,728

Other expense (income), net

1,571

376

2,607

(5,493)

Interest expense, net

 

1,346

18,895

 

11,163

61,493

Provision for income taxes

 

(1,171)

3,643

 

(1,971)

93,878

Depreciation and amortization

 

62,008

51,907

 

180,312

151,907

EBITDA

(9,722)

(8,669)

(27,349)

(72,295)

Stock-based compensation

55,662

71,701

167,098

240,971

Acquisition, integration, and transformation costs

1,594

4,340

8,993

22,084

Lease abandonment and exit costs

3,677

0

3,677

0

Adjusted EBITDA

$

51,211

$

67,372

$

152,419

$

190,760

EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with GAAP, we use earnings before interest, provision for income taxes, depreciation, and amortization (“EBITDA”) and Adjusted EBITDA, which are non-GAAP financial measures, to clarify and enhance an understanding of past performance. We believe that the presentation of these financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful financial metrics to assess our operating performance and financial and business trends 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 Adjusted EBITDA as the primary measure of our performance.

EBITDA consists of net loss before interest; other expense (income), net, including foreign exchange gain or loss; provision for income taxes; depreciation and amortization; goodwill impairment; and loss on extinguishment of debt. Adjusted EBITDA consists of net loss before interest; other expense (income), net, including foreign exchange gain or loss; provision for income taxes; depreciation and amortization; goodwill impairment; loss on extinguishment of debt; stock-based compensation; lease abandonment and exit costs; and acquisition, integration, and transformation costs.

We believe the above financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the terms EBITDA and Adjusted EBITDA may vary from that of others in our industry. Neither EBITDA nor Adjusted EBITDA should be considered as an alternative to net loss before provision for income taxes, net loss, net loss per share or any other performance measures derived in accordance with GAAP.

EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

EBITDA and Adjusted EBITDA do not reflect goodwill impairment;

EBITDA and Adjusted EBITDA do not reflect the interest expense on our debt;

EBITDA and Adjusted EBITDA eliminate the impact of the provision for income taxes on our results of operations;

EBITDA and Adjusted EBITDA do not reflect the loss on extinguishment of debt;

EBITDA and Adjusted EBITDA do not reflect other expense (income), net;

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Adjusted EBITDA does not reflect significant lease abandonment and exit costs. Lease abandonment and exit costs may include certain lease impairment costs and certain losses related to early lease terminations;

Adjusted EBITDA does not reflect significant acquisition, integration, and transformation costs. Acquisition, integration and transformation costs include investment banking, financing, legal, accounting, consultancy, integration, fair value changes related to contingent consideration and certain other transaction costs related to mergers and acquisitions. It also includes costs related to certain business transformation initiatives focused on integrating and optimizing various operations and systems, including upgrading our customer relationship management (“CRM”) and enterprise resource planning (“ERP”) systems. These transformation cost adjustments made to our results do not represent normal, recurring, operating expenses necessary to operate the business but rather, incremental costs incurred in connection with our acquisition and integration activities;

Adjusted EBITDA does not reflect the significant non-cash stock compensation expense which should be viewed as a component of recurring operating costs; and

Other companies in our industry may calculate EBITDA, and Adjusted EBITDA differently than we do, limiting the usefulness of these measures as comparative measures.

In addition, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect any expenditures for such replacements.

We compensate for these limitations by using EBITDA and Adjusted EBITDA along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include 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 and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

Condensed Consolidated Results of Operations

Revenue. Total revenue was $611.4 million for the quarter ended September 30, 2022, compared to $521.7 million during the quarter ended September 30, 2021, an increase of $89.7 million, or 17%. This increase in revenue was driven substantially by the generation of additional access fees by our membership base, most significantly from our DTC mental health service, BetterHelp. Revenue from access fees was $540.1 million for the quarter ended September 30, 2022 compared to $448.9 million for the quarter ended September 30, 2021, an increase of $91.2 million, or 20%. Visit fee revenue increased 5% to $65.6 million and other revenue was $5.8 million, down 43%, primarily related to the completion of a long-term development services contract. U.S. revenue grew 17% to $534.0 million and International revenue grew 17% to $77.4 million. For the quarter ended September 30, 2022, 88%, 11%, and 1% of our revenue was derived from access fees, visit fees and other revenue, respectively, as compared to 86%, 12%, and 2%, respectively, for the quarter ended September 30, 2021.

Total revenue was $1,769.1 million for the nine months ended September 30, 2022, compared to $1,478.5 million during the nine months ended September 30, 2021, an increase of $290.6 million, or 20%. This increase in revenue was driven substantially by the generation of additional access fees by our membership base, most significantly from our DTC mental health service, BetterHelp. Revenue from access fees was $1,550.1 million for the nine months ended September 30, 2022 compared to $1,262.1 million for the nine months ended September 30, 2021, an increase of $288.1 million, or 23%. Visit fee revenue increased 8% to $200.2 million and other revenue was $18.8 million, down 40%, primarily related to the completion of a long-term development services contract. U.S. revenue grew 20% to $1,546.6 million and International revenue grew 19% to $222.5 million. For the nine months ended September 30, 2022, 88%, 11%, and 1% of our revenue was derived from access fees, visit fees and other revenue, respectively, as compared to 85%, 13%, and 2%, respectively, for the nine months ended September 30, 2021.

Cost of Revenue (exclusive of depreciation and amortization, which is shown separately below). Cost of revenue was $185.6 million for the quarter ended September 30, 2022 compared to $169.0 million for the quarter ended

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September 30, 2021, an increase of $16.6 million, or 10%. Cost of revenue increased by $79.8 million, or 17% on a year-to-date basis. The increases for both the quarter and year-to-date periods were primarily due to growth in visits associated with higher revenue which resulted in increased provider fees, as well as higher device-related costs, and, to a lesser extent, inventory obsolescence write-downs.

Advertising and Marketing Expenses. Advertising and marketing expenses were $178.9 million for the quarter ended September 30, 2022 compared to $111.1 million for the quarter ended September 30, 2021, an increase of $67.8 million, or 61%. On a year-to-date basis, advertising and marketing expenses increased by $173.4 million, or 57%. The increases for both the quarter and year-to-date periods were substantially driven by higher digital and media advertising costs related to BetterHelp.

Sales Expenses. Sales expenses were $54.6 million for the quarter ended September 30, 2022 compared to $62.6 million for the quarter ended September 30, 2021, a decrease of $8.0 million, or 13%. On a year-to-date basis, sales expenses decreased by $20.4 million, or 11%. The decrease for both the quarter and year-to-date periods were primarily driven by lower stock-based compensation and other employee related costs, partially offset by higher sales and partner commissions driven by increased revenues.

Technology and Development Expenses. Technology and development expenses were $87.8 million for the quarter ended September 30, 2022 compared to $80.3 million for the quarter ended September 30, 2021, an increase of $7.6 million, or 9%. The quarter reflects higher personnel costs and higher infrastructure, hosting and software license costs offset by lower stock-based compensation. On a year-to-date basis, technology and development expenses increased by $17.0 million, or 7%. The increase on a year-to-date basis primarily reflects additional personnel and staff augmentation costs; higher professional, recruiting and consulting fees; and higher infrastructure, hosting and software license costs. These increases were associated with ongoing projects and services to continuously improve and optimize our technology portfolio. Partially offsetting this increase was lower stock-based compensation. For the quarters ended September 30, 2022 and 2021, research and development costs, which exclude amounts reflected as capitalized software, were $26.1 million and $53.2 million, respectively. For the nine months ended September 30, 2022 and 2021, research and development costs were $75.8 million and $160.0 million, respectively.

General and Administrative Expenses. General and administrative expenses increased $9.5 million, or 9%, to $112.5 million for the quarter ended September 30, 2022 compared to $103.0 million for the quarter ended September 30, 2021. On a year-to-date basis, general and administrative expenses increased by $8.9 million, or 3%. For both the quarter and year-to-date periods, higher personnel expenses, professional fees, operating costs including therapist recruiting costs and call center activities, and other corporate expenses were primarily offset by lower stock-based compensation, legal expenses, and other taxes. General and administrative expenses also include lease abandonment and exit costs of $3.7 million in both the quarter and nine months ended September, 30, 2022.

Acquisition, Integration, and Transformation Costs. Acquisition, integration, and transformation costs were $1.6 million and $9.0 million for the quarter and nine months ended September 30, 2022, respectively, and primarily consisted of costs to integrate and upgrade our CRM and ERP ecosystem. For the quarter and nine months ended September 30, 2021, acquisition, integration, and transformation costs were $4.3 million and $22.1 million, respectively, and primarily consisted of acquisition and integration related costs.

Depreciation and Amortization. Depreciation and amortization was $62.0 million for the quarter ended September 30, 2022 compared to $51.9 million for the quarter ended September 30, 2021, an increase of 19%. Depreciation and amortization was $180.3 million for the nine months ended September 30, 2022 compared to $151.9 million for the nine months ended September 30, 2021, an increase of $28.4 million, or 19%. The higher expense was primarily due to additional amortization expense related to the acceleration of the amortization of certain trademarks, and, to a lesser extent, higher amortization associated with higher capitalized software development costs. As it relates to the acceleration of the useful lives for certain trademarks, this change related to our strategy to integrate and move certain consumer brands under the Teladoc Health brand. This acceleration of amortization resulted in decreasing the weighted average useful life of all trademarks at the date of the change from 9.5 years to 7.5 years. This change will increase annual amortization by approximately $23.2 million in 2022 and 2023.

Goodwill Impairment. We recorded non-cash goodwill impairment charges of $9,630.0 million in the nine months ended September 30, 2022, following goodwill impairment testings performed as a result of sustained decreases in our publicly quoted share price. The non-cash charges had no impact on the provision for income taxes. Refer to

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Critical Accounting Estimates and Policies: Goodwill Impairment Charge and Note 7, Goodwill, to our condensed consolidated financial statements.

Loss on Extinguishment of Debt. Losses on extinguishment of debt were $0.9 million and $43.7 million for the quarter and nine months ended September 30, 2021, respectively. They were primarily due to the exchanges and conversions of the 2025 Notes.

Other Expense (Income), Net. Other expense (income), net was an expense of $1.6 million for the quarter ended September 30, 2022 compared to an income of $0.4 million for the quarter ended September 30, 2021 and included foreign exchange remeasurements. Other expense (income), net was $2.6 million for the nine months ended September 30, 2022 compared to ($5.5) million for the nine months ended September 30, 2021. The difference was primarily due to a $5.9 million gain on sale of a non-marketable equity security.

Interest Expense, Net. Interest expense, net consists of interest costs and amortization of debt discount associated with advances from financing companies, our convertible senior notes, and interest income from cash and cash equivalents and short-term investments. Interest expense, net was $1.3 million and $18.9 million for the quarters ended September 30, 2022 and 2021, respectively. Interest expense, net was $11.2 million and $61.5 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease in interest expense substantially reflects the adoption of ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which resulted in the elimination of non-cash interest expense associated with the accretion of the recorded debt value to stated value. Refer to Note 11, Convertible Senior Notes, to the condensed consolidated financial statements. The associated non-cash expense was $13.5 million, or $0.08 per share, for the quarter ended September 30, 2021 and $43.8 million, or $0.28 per share, for the nine months ended September 30, 2021.

Provision for Income Taxes.   We recorded an income tax benefit of $1.2 million for the quarter ended September 30, 2022 compared to an expense of $3.6 million for the quarter ended September 30, 2021. We recorded an income tax benefit of $2.0 million for the nine months ended September 30, 2022 compared to an expense of $93.9 million for the nine months ended September 30, 2021. For the nine months ended September 30, 2021, we recognized a non-cash income tax discrete charge of $87.0 million in the first quarter ended March 31, 2021 for additional valuation allowance on excess stock compensation benefits associated with the Livongo merger.

Liquidity and Capital Resources

The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):

Nine Months Ended 

 

September 30,

 

    

2022

    

2021

 

Condensed Consolidated Statements of Cash Flows - Summary

Net cash provided by operating activities

$

123,743

$

110,782

Net cash used in investing activities

 

(113,852)

 

(52,906)

Net cash provided by financing activities

 

2,116

 

34,322

Total

$

12,007

$

92,198

Our principal source of liquidity was cash provided by operating activities, reflecting cash and cash equivalents comprised substantially of deposit accounts and money market funds, totaling $899.6 million as of September 30, 2022.

We believe that our existing cash and cash equivalents will be sufficient to meet our working capital, capital expenditure, and contractual obligation 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, the continuing market acceptance of telehealth, and our debt service obligations. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies, and intellectual property rights. We may be required to seek additional equity or debt financing to fund working capital, capital expenditures and acquisitions, and to settle debt obligations. 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, which would adversely affect our business, financial condition and results of operations.

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Historically, we have financed our operations primarily through sales of equity securities, debt issuance, and bank borrowings. See Note 11, “Convertible Senior Notes” of the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information on the Notes.

We routinely enter into contractual obligations with third parties to provide professional services, licensing, and other products and services in support of our ongoing business. The current estimated cost of these contracts is not expected to be significant to our liquidity and capital resources based on contracts in place as of September 30, 2022.

Cash Provided by Operating Activities

Cash flows provided by operating activities consisted of net loss adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $123.7 million for the nine months ended September 30, 2022 compared to $110.8 million for the nine months ended September 30, 2021. The year-over-year higher inflow was primarily driven by growth in the business and a change in the timing of payments.

Our primary uses of cash from operating activities are for the payment of cash compensation, provider fees, engagement marketing, DTC digital and media advertising, inventory, insurance, technology costs, interest expense and acquisition, integration, and transformation costs. Historically, our cash compensation is at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year.

Cash Used in Investing Activities

Cash used in investing activities was $113.9 million for the nine months ended September 30, 2022, driven primarily by payments for capitalized software development costs associated with ongoing projects and services to continuously improve and optimize our technology portfolio.

Cash used in investing activities was $52.9 million for the nine months ended September 30, 2021, primarily driven by cash paid for the acquisition of businesses and, to a lesser extent, capitalized software development costs, partially offset by proceeds from sale of short-term marketable securities and sale of an investment.

Cash Provided by Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2022 was $2.1 million, primarily consisting of the proceeds from the exercise of employee stock options, proceeds withheld from participants in the employee stock purchase plan, partially offset by net payments against advances from financing companies.

Cash provided by financing activities for the nine months ended September 30, 2021 was $34.3 million. Cash provided by financing activities primarily consisted of the proceeds from the exercise of employee stock options, proceeds withheld from participants in the employee stock purchase plan, partially offset by net payments against advances from financing companies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk and Foreign Exchange Risk

Cash equivalents that are subject to interest rate volatility represent our principal market risk. We do not expect cash flows to be affected to any significant degree by a sudden change in market interest rates as our Notes bear fixed interest rates. We do not enter into investments for trading or speculative purposes.

We operate our business primarily within the U.S. which accounts for approximately 87% of our revenues. We have not utilized hedging strategies with respect to our foreign exchange exposure as we believe it is not expected to have a material impact on our condensed consolidated financial statements.

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. We deposit our cash with financial institutions in the U.S. and in foreign countries,

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however, our deposits, at times, may exceed federally insured limits. Our cash equivalents are primarily invested in institutional money market funds.

No Client represented over 10% of revenues for the quarters or nine months ended September 30, 2022 or 2021.

No Client represented over 10% of accounts receivable at September 30, 2022 or December 31, 2021.

Item 4. Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

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 as of September 30, 2022, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2022, we implemented a new enterprise resource planning ("ERP") system for selected entities and transaction types included within our consolidated financial statements. As a result of this ERP system implementation, we revised certain existing internal controls, processes, and procedures. There are inherent risks in implementing an ERP system and, accordingly, we will continue to evaluate the design and operating effectiveness of these controls.

Other than this ERP system implementation, there were no changes during the quarter ended September 30, 2022 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal proceedings, claims and litigation arising in the ordinary course of our business. Descriptions of certain legal proceedings to which we are a party are contained in Note 13, “Legal Matters”, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and are incorporated by reference herein.

Item 1A. Risk Factors

For a discussion of potential risks and uncertainties related to our Company see the information in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

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.

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Item 6. Exhibits

Exhibit

Index

Incorporated by Reference

Exhibit
Number

  

Exhibit Description

  

Form

    

File No.

    

Exhibit

    

Filing
Date

    

Filed
Herewith

3.1

Seventh Amended and Restated Certificate of Incorporation of Teladoc Health, Inc.

8-K

001-37477

3.1

6/2/22

3.2

Sixth Amended and Restated Bylaws of Teladoc Health, Inc.

8-K

001-37477

3.2

6/2/22

10.1

Executive Employment Agreement, dated June 15, 2022, by and between Teladoc Health, Inc. and Michael Waters.

*

31.1

Chief Executive Officer—Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*

31.2

Chief Financial Officer—Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*

32.1

Chief Executive Officer—Certification pursuant to Rule13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

**

32.2

Chief Financial Officer—Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

**

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the

Inline XBRL document.

*

101.SCH

XBRL Taxonomy Extension Schema Document.

*

101.CAL

XBRL Taxonomy Calculation Linkbase Document.

*

101.DEF

XBRL Definition Linkbase Document.

*

101.LAB

XBRL Taxonomy Label Linkbase Document.

*

101.PRE

XBRL Taxonomy Presentation Linkbase Document.

*

104

Cover Page Interactive Data File – The Cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*     Filed herewith.

**   Furnished herewith.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TELADOC HEALTH, INC.

Date: November 2, 2022

By:

/s/ JASON GOREVIC

Name:

Jason Gorevic

Title:

Chief Executive Officer

Date: November 2, 2022

By:

/s/ MALA MURTHY

Name:

Mala Murthy

Title:

Chief Financial Officer

36