10-Q 1 tdoc-20160930x10q.htm 10-Q tdoc_Current_Folio_10Q

 

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, 2016

 

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, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3705970

(State of incorporation)

 

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

 

 

 

2 Manhattanville Road, Suite 203

 

 

Purchase, New York

 

10577

(Address of principal executive office)

 

(Zip code)

 

(203) 635-2002

(Registrant’s telephone number including area code)

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No  ☐

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

(Do not check if a smaller reporting company)

 

 

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

 

As of October 25, 2016, the Registrant had 46,032,476 shares of Common Stock outstanding.

 

 

 


 

TELADOC, INC.

 

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2016

 

TABLE OF CONTENTS

 

 

 

Page
Number

 

 

 

PART I 

Financial Information

Item 1. 

Financial Statements

 

Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015

 

Consolidated Statements of Operations (unaudited) for the quarter and nine months ended September 30, 2016 and 2015

 

Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the quarter and nine months ended September 30, 2016 and 2015

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the nine months ended September 30, 2016 

 

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015

 

Notes to Unaudited Consolidated Financial Statements

Item 2. 

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

19 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

32 

Item 4. 

Controls and Procedures

32 

PART II 

Other Information

33 

Item 1. 

Legal Proceedings

33 

Item 1A. 

Risk Factors

33 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

33 

Item 6. 

Exhibits

34 

Signatures 

35 

Exhibit Index 

36 

 

 

 

 

i


 

PART I

FINANCIAL INFORMATION

ITEM1. Financial Statements 

 

TELADOC, INC.  

 

CONSOLIDATED BALANCE SHEETS

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

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2016

    

2015

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

44,032

 

$

55,066

Short-term investments

 

 

30,916

 

 

82,282

Accounts receivable, net of allowance of $2,923 and $1,812, respectively

 

 

12,904

 

 

12,134

Prepaid expenses and other current assets

 

 

3,380

 

 

2,096

Total current assets

 

 

91,232

 

 

151,578

Property and equipment, net

 

 

7,124

 

 

6,259

Goodwill

 

 

188,136

 

 

56,342

Intangible assets, net

 

 

26,386

 

 

15,265

Other assets

 

 

390

 

 

293

Total assets

 

$

313,268

 

$

229,737

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

785

 

$

2,213

Accrued expenses and other current liabilities

 

 

9,733

 

 

8,197

Accrued compensation

 

 

7,781

 

 

6,326

Long-term bank and other debt-current portion

 

 

2,000

 

 

1,250

Total current liabilities

 

 

20,299

 

 

17,986

Other liabilities

 

 

6,655

 

 

6,775

Deferred taxes

 

 

1,545

 

 

1,185

Long term bank and other debt, net

 

 

42,469

 

 

25,227

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value; 75,000,000 shares authorized as of September 30, 2016 and December 31, 2015; 46,029,639 shares and 38,524,922 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

 

 

46

 

 

38

Additional paid-in capital

 

 

432,711

 

 

309,078

Accumulated deficit

 

 

(190,465)

 

 

(130,510)

Accumulated other comprehensive income (loss)

 

 

8

 

 

(42)

Total stockholders’ equity

 

 

242,300

 

 

178,564

Total liabilities and stockholders’ equity

 

$

313,268

 

$

229,737

 

See accompanying notes to unaudited consolidated financial statements.

1


 

TELADOC, INC.  

 

CONSOLIDATED STATEMENTS OF OPERATIONS 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenue

    

$

32,381

    

$

19,973

    

$

85,757

    

$

54,745

 

Cost of revenue

 

 

7,112

 

 

4,488

 

 

21,946

 

 

14,563

 

Gross profit

 

 

25,269

 

 

15,485

 

 

63,811

 

 

40,182

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and marketing

 

 

9,046

 

 

5,284

 

 

24,900

 

 

14,356

 

Sales

 

 

7,662

 

 

5,111

 

 

18,792

 

 

13,190

 

Technology and development

 

 

5,867

 

 

3,941

 

 

15,921

 

 

10,050

 

Legal

 

 

1,033

 

 

1,421

 

 

3,348

 

 

7,812

 

Regulatory

 

 

817

 

 

740

 

 

2,437

 

 

1,750

 

Acquisition related costs

 

 

6,196

 

 

15

 

 

6,959

 

 

551

 

General and administrative

 

 

12,298

 

 

10,077

 

 

35,215

 

 

30,595

 

Depreciation and amortization

 

 

2,607

 

 

1,491

 

 

5,673

 

 

3,317

 

Loss from operations

 

 

(20,257)

 

 

(12,595)

 

 

(49,434)

 

 

(41,439)

 

Amortization of warrants and loss on extinguishment of debt

 

 

8,454

 

 

 —

 

 

8,454

 

 

 —

 

Interest expense, net

 

 

873

 

 

489

 

 

1,707

 

 

1,699

 

Net loss before taxes

 

 

(29,584)

 

 

(13,084)

 

 

(59,595)

 

 

(43,138)

 

Income tax (provision) benefit

 

 

(188)

 

 

(162)

 

 

(360)

 

 

125

 

Net loss

 

$

(29,772)

 

$

(13,246)

 

$

(59,955)

 

$

(43,013)

 

Net loss per share, basic and diluted

 

$

(0.65)

 

$

(0.37)

 

$

(1.46)

 

$

(3.15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

45,860,269

 

 

36,099,556

 

 

41,071,474

 

 

13,668,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

2


 

TELADOC, INC.  

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME 

(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net loss

    

$

(29,772)

    

$

(13,246)

    

$

(59,955)

    

$

(43,013)

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net change in unrealized (losses) gains on available-for-sale securities

 

 

(17)

 

 

4

 

 

50

 

 

4

 

Other comprehensive income, net of tax

 

 

(17)

 

 

4

 

 

50

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(29,789)

 

$

(13,242)

 

$

(59,905)

 

$

(43,009)

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

3


 

TELADOC, INC.  

 

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

    

Income (Loss)

    

Equity

 

Balance as of December 31, 2015

 

38,524,922

 

$

38

 

$

309,078

 

$

(130,510)

 

$

(42)

 

$

178,564

 

Exercise of stock options

 

530,562

 

 

1

 

 

2,208

 

 

 —

 

 

 —

 

 

2,209

 

Stock-based compensation, including employee stock purchase plan

 

 —

 

 

 —

 

 

5,198

 

 

 —

 

 

 —

 

 

5,198

 

Warrants issued

 

 —

 

 

 —

 

 

7,717

 

 

 —

 

 

 —

 

 

7,717

 

Issuance of stock in acquisition

 

6,955,796

 

 

7

 

 

108,260

 

 

 —

 

 

 —

 

 

108,267

 

Issuance of stock

 

18,359

 

 

 —

 

 

250

 

 

 —

 

 

 —

 

 

250

 

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

50

 

 

50

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(59,955)

 

 

 —

 

 

(59,955)

 

Balance as of September 30, 2016

 

46,029,639

 

$

46

 

$

432,711

 

$

(190,465)

 

$

8

 

$

242,300

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

4


 

 

 

TELADOC, INC.  

 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Cash flows used in operating activities:

    

 

    

    

 

    

 

Net loss

 

$

(59,955)

 

$

(43,013)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,673

 

 

3,317

 

Allowance for doubtful accounts

 

 

1,970

 

 

1,418

 

Stock-based compensation, including employee stock purchase plan

 

 

5,198

 

 

2,096

 

Deferred income taxes

 

 

360

 

 

(125)

 

Accretion of interest

 

 

29

 

 

241

 

Amortization of warrants

 

 

7,717

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,515)

 

 

(3,415)

 

Prepaid expenses and other current assets

 

 

(1,116)

 

 

(1,320)

 

Other assets

 

 

(18)

 

 

13

 

Accounts payable

 

 

(2,265)

 

 

(769)

 

Accrued expenses and other current liabilities

 

 

(462)

 

 

600

 

Accrued compensation

 

 

614

 

 

2,516

 

Other liabilities

 

 

20

 

 

4,064

 

Net cash used in operating activities

 

 

(43,750)

 

 

(34,377)

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,118)

 

 

(5,481)

 

Purchase of internal software

 

 

(852)

 

 

(1,174)

 

Purchase of marketable securities

 

 

(44,187)

 

 

(100,556)

 

Proceeds from the liquidation/maturity of marketable securities

 

 

95,604

 

 

2,509

 

Acquisition of business, net of cash acquired

 

 

(37,013)

 

 

(17,767)

 

Net cash provided by (used in) investing activities

 

 

12,434

 

 

(122,469)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net proceeds from the exercise of stock options

 

 

2,209

 

 

326

 

Proceeds from issuance of common stock under IPO

 

 

 —

 

 

163,118

 

Proceeds from issuance of common stock

 

 

250

 

 

 —

 

Proceeds from borrowing under bank and other debt

 

 

29,490

 

 

6,800

 

Repayment of bank loan and other debt

 

 

(11,667)

 

 

(5,770)

 

Net cash provided by financing activities

 

 

20,282

 

 

164,474

 

Net increase (decrease) in cash and cash equivalents

 

 

(11,034)

 

 

7,628

 

Cash and cash equivalents at beginning of the period

 

 

55,066

 

 

46,436

 

Cash and cash equivalents at end of the period

 

$

44,032

 

$

54,064

 

Interest paid

 

$

1,734

 

$

1,368

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

5


 

Table of Contents

TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Description of Business

Teladoc, Inc. was incorporated in the State of Texas in June 2002 and changed its state of incorporation to the State of Delaware in October 2008. Unless the context otherwise requires, Teladoc, Inc., together with its subsidiaries, is referred to herein as “Teladoc” or the “Company”. The Company’s principal executive offices are located in Purchase, New York and Dallas, Texas. Teladoc is the nation’s largest telehealth company.

On July 7, 2015, Teladoc closed on its initial public offering (the “IPO”) in which the Company issued and sold 9,487,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $19.00 per share. The Company received net proceeds of $163.1 million after deducting underwriting discounts and commissions of $12.6 million as well as other offering expenses of $4.5 million. On July 7, 2015, all of the Company’s then-outstanding convertible preferred stock converted into an aggregate of 25.5 million shares of common stock and all of the Company’s redeemable common stock converted into 113,294 shares of common stock.

The Company completed the acquisitions of HY Holdings, Inc. d/b/a HealthiestYou Corporation (“HealthiestYou”), in 2016, Compile, Inc. d/b/a BetterHelp (“BetterHelp”) and Stat Health Services Inc. (“StatDoc”) in 2015, three companies engaged in telehealth activities similar to those of Teladoc. Additionally in 2015, the Company acquired certain assets from Gateway to Provider Access, Inc. (“Gateway”) which was engaged in marketing, selling and administering the Company’s services through other third parties. Upon the effective date of each respective merger, each entity merged with and into Teladoc.

 

Note 2. Basis of Presentation and Principles of Consolidation

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company at the dates and for the periods indicated. The interim results for the quarter and nine months ended September 30, 2016 are not necessarily indicative of results for the full 2016 fiscal year or any other future interim periods. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form 10-K for the fiscal year ended December 31, 2015. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S.GAAP are not required in these financial statements and have been condensed or ommitted. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company’s 2015 Annual Report on Form 10-K.

The unaudited consolidated financial statements include the results of Teladoc, two professional associations, twenty two professional corporations and a service corporation: Teladoc Physicians, P.A., Teladoc Behavioral Health, P.A., Teladoc Physicians, P.C. formed and operated in Alaska; Teladoc Physicians, P.C. formed and operated in California; Teladoc Physicians, P.C. formed and operated in Colorado; Teladoc Physicians, P.C. formed and operated in Michigan; Teladoc Physicians, P.C. formed and operated in New Jersey; Teladoc Physicians, P.C. formed and operated in New York; Teladoc Physicians, P.C. formed and operated in North Carolina; Teladoc Behavioral Health, P.C. formed and operated in Alaska; Teladoc Behavioral Health Alabama, P.C. formed and operated in Alabama; Teladoc Behavioral Health California, P.C. formed and operated in California; Teladoc Behavioral Health Colorado, P.C. formed and operated in Colorado; Teladoc Behavioral Health Illinois, P.C. formed and operated in Illinois; Teladoc Behavioral Health Louisiana, P.C. formed and operated in Louisiana; Teladoc Behavioral Health Massachusetts, P.C. formed and operated in Massachusetts; Teladoc Behavioral Health Michigan, P.C. formed and operated in Michigan; Teladoc Behavioral Health Nebraska, P.C. formed and operated in Nebraska; Teladoc Behavioral Health New Jersey, P.C. formed and operated in New Jersey; Consult Psychiatry, P.C. formed and operated in New York; Teladoc Behavioral Health North Carolina, P.C. formed and operated in North Carolina; Teladoc Behavioral Health Rhode Island, P.C. formed and operated in Rhode Island; Teladoc Behavioral Health Virginia, P.C. formed and operated in Virginia;

6


 

Table of Contents

TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Teladoc Behavioral Health Arizona, PC. Formed and operated in Arizona and Teladoc Behavioral Health Wisconsin, S.C. formed and operated in Wisconsin (collectively, the “Association”).

Teladoc Physicians, P.A. is party to several Services Agreements by and among it and the professional corporations noted above pursuant to which each professional corporation provides services to Teladoc Physicians, P.A. Each professional corporation is established pursuant to the requirements of its respective domestic jurisdiction governing the corporate practice of medicine.

The Company holds a variable interest in the Association which contracts with physicians and other health professionals in order to provide services to Teladoc. The Association is considered a variable interest entity (“VIE”) since it does not have sufficient equity to finance its activities without additional subordinated financial support. An enterprise having a controlling financial interest in a VIE, must consolidate the VIE if it has both power and benefits—that is, it has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (power) and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). The Company has the power and rights to control all activities of the Association and funds and absorbs all losses of the VIE.

Total revenue and net loss for the VIE were $4.5 million and $(2.2) million, respectively, for the quarter ended September 30, 2016 and $2.9 million and $(1.0) million, respectively, for the quarter ended September 30, 2015. Total revenue and net loss for the VIE were $15.5 million and $(5.7) million, respectively, for the nine months ended September 30, 2016 and $9.3 million and $(4.9) million, respectively, for the nine months ended September 30, 2015. The VIE’s total assets were $2.2 million and $2.4 million at September 30, 2016 and December 31, 2015, respectively. Total liabilities for the VIE were $24.3 million and $18.7 million at September 30, 2016 and December 31, 2015, respectively. The VIE’s total stockholders’ deficit was $22.1 million and $16.4 million at September 30, 2016 and December 31, 2015, respectively.

All intercompany transactions and balances have been eliminated. 

 

There have been no changes to the significant accounting policies described in the Form-10-K that have had a material impact on the consolidated financial statements and related notes.

Reclassifications

 

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

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the revised guidance requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The revised guidance is effective for the Company beginning in the quarter ending March 31, 2018; early adoption is allowed. The revised guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company is currently evaluating the transition method that will be elected and the potential effect the revised guidance will have on the consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern. This guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are

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Table of Contents

TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

issued. ASU 2014-15 is effective for interim or annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on the consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16,  Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments (Topic 805). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted, and is to be applied on a prospective basis. For the quarter and nine months ended September 30, 2016, there was no impact of the adoption of this standard on the consolidated financial statements. 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of this standard on the consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes the accounting for share-based payments. Under the new guidance, excess tax benefits associated with share-based payment awards will be recognized in the income statement when the awards vest or settle, rather than in stockholders’ equity. In addition, it will increase the number of shares an employer can withhold to cover income taxes on share-based payment awards and still qualify for the exemption to liability classification. The new guidance will be effective for the Company starting in the first quarter of fiscal 2017. Early adoption is permitted in any annual or interim period. The Company is currently in the process of evaluating the impact of the adoption of this standard on the consolidated financial statements.

 

 

Note 3. Business Acquisitions

On July 1, 2016, the Company completed the acquisition of HealthiestYou through a merger in which HealthiestYou became a wholly-owned subsidiary of the Company. The aggregate merger consideration paid was $151.5 million, which was comprised of 6,955,796 shares of Teladoc’s common stock valued at $108.3 million on July 1,2016,  and $43.2 million of cash, subject to post-closing working capital adjustments as defined in the merger agreement.  HealthiestYou is a leading telehealth consumer engagement technology platform for the small to mid-sized employer market. HealthiestYou provides end-users with access to telemedicine services including through a web-based portal and a mobile application. Solutions provided by HealthiestYou include 24/7 access to telephone, e-mail, and video conferencing with doctors as well as the convenience of procedure price comparisons, prescription medicine price comparisons, health plan information and benefits eligibility, and location information for wellness service providers. The acquisition was considered a stock acquisition for tax purposes and as such, the goodwill resulting from this acquisition is not tax deductible. The total acquisition related costs of the acquisition were $6.9 million and included transaction costs for banker and other professional fees as well as contract termination costs for certain HealthiestYou third party providers. The contract termination costs of $5.7 million were previously accrued by HealthiestYou and reflected in HealthiestYou’s financial statements as of June 30, 2016. These expenses are also reflected in the Company’s third quarter results as the Company benefited from the termination of these contracts and they represent a non-cash charge.

On July 31, 2015, the Company acquired certain assets from Gateway for $1.5 million, subject to post-closing working capital adjustments as defined in the purchase agreement. Gateway is engaged in the marketing, selling and administering the Company’s services through other third parties and as a result, the acquisition price in excess of the net assets acquired, which were less than $0.1 million, was allocated to client relationships. The acquisition transaction costs were less than $0.1 million. The acquisition was considered an asset acquisition for tax purposes.

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TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

On June 17, 2015, the Company completed the acquisition of StatDoc through a merger in which StatDoc became a wholly-owned subsidiary of the Company. The aggregate merger consideration paid by the Company in connection with the acquisition was $30.1 million, which was comprised of $13.3 million of cash and $16.8 million of the Company’s common stock (or 1,051,033 shares), subject to post-closing working capital adjustments as defined in the Agreement and Plan of Merger governing the acquisition. During the quarter ended September 30, 2015, the post-closing working capital adjustment was finalized favorably to the Company in the amount of less than $0.1 million. Fair value of the common stock was determined based on market data from similar healthcare enterprises. StatDoc is a telemedicine provider, focused on managed care, health system and self-insured clients. The acquisition was considered a stock acquisition for tax purposes and as such, the goodwill resulting from this acquisition is not tax deductible. The total transaction costs of the acquisition were $0.3 million.

On January 23, 2015, the Company completed the acquisition of BetterHelp, through a merger in which BetterHelp became a wholly‑owned subsidiary of the Company. The consideration paid by the Company in connection with this acquisition consisted of (i) $3.3 million net of cash acquired and (ii) earn‑out payments equal to a percentage of the annual net revenue of the BetterHelp business for four years following closing. The Company computed the value of these future payments from internally produced revenue projections and recorded a contingent liability in the amount of $2.4 million which is considered as additional purchase consideration. The Company also issued an unsecured, subordinated promissory note in the amount of $1.0 million, with all principal and interest at a rate of 5% per annum being payable on the third anniversary of the closing to the selling shareholder and another executive of BetterHelp. If the employment of the promissory note holders is terminated, then they forfeit their right to receive the promissory note. As such, the Company has determined the promissory note to be compensatory and is accruing the expense over the service term. In December 2015, the Company agreed to pay the $1.0 million promissory note plus interest in January 2016 and, as a result, accelerated the expense in 2015. BetterHelp was acquired to help the Company expand its operations in the direct‑to‑consumer behavioral health sector. The acquisition was considered a stock acquisition for tax purposes and as such, the goodwill resulting from this acquisition is not tax deductible. The total transaction costs of the acquisition were $0.2 million.

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

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TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the fair value estimates of the assets acquired and liabilities assumed at each acquisition date. For the recent HealthiestYou acquisition, the fair value estimates of the assets acquired and liabilities assumed are preliminary. The Company, with the assistance of a third-party valuation expert, estimated the fair value of the acquired tangible and intangible assets.

Identifiable assets acquired and liabilities assumed (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

HealthiestYou

    

StatDoc

    

BetterHelp

 

Purchase price

 

$

151,484

 

$

29,991

 

$

5,749

 

Less:

 

 

 

 

 

 

 

 

 

 

Cash

 

 

6,204

 

 

360

 

 

89

 

Accounts receivable

 

 

1,225

 

 

419

 

 

11

 

Other assets

 

 

1,537

 

 

70

 

 

4

 

Client relationships

 

 

10,930

 

 

3,220

 

 

141

 

Non-compete agreements

 

 

70

 

 

1,070

 

 

910

 

Internal software

 

 

2,220

 

 

2,960

 

 

780

 

Trademarks

 

 

1,180

 

 

 —

 

 

140

 

Accounts payable

 

 

(837)

 

 

(609)

 

 

(6)

 

Deferred tax

 

 

 —

 

 

 —

 

 

(666)

 

Other liabilities

 

 

(2,839)

 

 

(701)

 

 

(340)

 

Goodwill

 

$

131,794

 

$

23,202

 

$

4,686

 

The amount allocated to goodwill reflects the benefits Teladoc expects to realize from the growth of the respective acquisitions operations. Operating results from the date of their respective acquisitions  are included in the accompanying unaudited consolidated financial statements.

The Company’s unaudited pro forma revenue and net loss for the quarters ended September 30, 2016 and 2015 and for the nine months ended September 30, 2016 and 2015 below have been prepared as if HealthiestYou, StatDoc and BetterHelp had been purchased on January 1, 2015. Unaudited pro forma financial statement results including the results of Gateway would not differ materially from the Company’s historically reported financial statement results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited Pro Forma

 

Unaudited Pro Forma

 

 

 

Quarters Ended

 

Year Ended 

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2016

 

2015

 

2016

 

2015

 

Revenue

    

$

32,381

    

$

22,604

    

$

94,546

    

$

63,373

 

Net loss

 

$

(29,772)

 

$

(13,943)

 

$

(62,789)

 

$

(49,333)

 

The pro forma financial information above is not necessarily indicative of what the Company’s consolidated results actually would have been if the acquisitions had been completed at the beginning of the respective periods. In addition, the pro forma information above does not attempt to project the Company’s future results.

 

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TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 4. Intangible Assets, Net

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

    

Useful

    

 

 

    

Accumulated

    

Net Carrying

    

Remaining

 

 

 

Life

 

Gross Value

 

Amortization

 

Value

 

Useful Life

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client relationships

 

2 to 10 years

 

$

22,581

 

$

(5,143)

 

$

17,438

 

8.7

 

Non-compete agreements

 

1.5 to 5 years

 

 

3,480

 

 

(2,144)

 

 

1,336

 

1.8

 

Trademarks

 

3 years

 

 

1,320

 

 

(177)

 

 

1,143

 

2.7

 

Internal software

 

3 to 5 years

 

 

8,724

 

 

(2,255)

 

 

6,469

 

2.8

 

Intangible assets, net

 

 

 

$

36,105

 

$

(9,719)

 

$

26,386

 

6.6

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client relationships

 

2 to 10 years

 

$

11,651

 

$

(3,219)

 

$

8,432

 

7.9

 

Non-compete agreements

 

3 to 5 years

 

 

3,410

 

 

(1,360)

 

 

2,050

 

2.3

 

Trademarks

 

3 years

 

 

140

 

 

(44)

 

 

96

 

2.1

 

Internal software

 

3 to 5 years

 

 

5,662

 

 

(975)

 

 

4,687

 

3.8

 

Intangible assets, net

 

 

 

$

20,863

 

$

(5,598)

 

$

15,265

 

5.9

 

Amortization expense for intangible assets was $2.0 million and $1.2 million for the quarters ended September 30, 2016 and 2015, respectively and $4.1 million and $2.6 million for the nine months ended September 30, 2016 and 2015, respectively.

 

 

Note 5. Goodwill

Goodwill consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

As of September 30,

    

As of December 31,

 

 

    

2016

    

2015

 

Beginning balance

 

$

56,342

 

$

28,454

 

Additions associated with acquisitions

 

 

131,794

 

 

27,888

 

Goodwill

 

$

188,136

 

$

56,342

 

 

 

Note 6. Accrued Expenses and Other Current Liabilities

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

 

 

 

 

 

 

 

 

 

    

As of September 30,

    

As of December 31,

 

 

    

2016

    

2015

 

Professional fees

 

$

531

 

$

411

 

Consulting fees/customer service fees/provider fees

 

 

932

 

 

869

 

Legal fees

 

 

1,560

 

 

1,056

 

Interest payable

 

 

344

 

 

287

 

Marketing

 

 

1,637

 

 

53

 

Earnout and compensation

 

 

1,116

 

 

2,449

 

Lease abandonment

 

 

145

 

 

433

 

Deferred revenue

 

 

810

 

 

831

 

Other

 

 

2,658

 

 

1,808

 

Total

 

$

9,733

 

$

8,197

 

 

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TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 7. Fair Value Measurements

 

The Company measures its financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

 

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

markets.

 

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

 

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

 

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

 

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

The Company measures its contingent consideration at fair value on a recurring basis and classifies such as Level 3. The Company estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using the weighted probability of the possible payments.

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Cash and cash equivalents

 

$

44,032

 

$

 —

 

$

 —

 

$

44,032

Short-term investments

 

$

 —

 

$

30,916

 

$

 —

 

$

30,916

Contingent liability (included in other liabilities)

 

$

 —

 

$

 —

 

$

3,374

 

$

3,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash and cash equivalents

 

$

55,066

    

$

 —

    

$

 —

    

$

55,066

 

Short-term investments

 

$

 —

    

$

82,282

    

$

 —

    

$

82,282

 

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

    

$

 —

    

$

 —

    

$

3,408

    

$

3,408

 

There were no transfers  between fair value measurement levels during the nine months ended September 30, 2016 and 2015.

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

 

 

 

 

 

    

 

    

Balance at December 31, 2015

 

$

3,408

Change in fair value

 

 

(34)

Fair value at September 30, 2016

 

$

3,374

 

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TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 8. Long Term Bank and Other Debt

Long‑term bank and other debt consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

As of September 30,

    

As of December 31,

 

 

    

2016

    

2015

 

SVB Mezzanine Term Loan less debt discount of $0 and $190

 

$

25,000

 

$

12,810

 

SVB Term Loan Facility

 

 

 —

 

 

4,167

 

SVB Revolving Advance Facility

 

 

 —

 

 

6,500

 

SVB Line of Credit Facility less debt discount of $76 and $0

 

 

17,414

 

 

 —

 

Subordinated Promissory Note

 

 

2,000

 

 

3,000

 

Interest payable

 

 

55

 

 

 —

 

Total

 

 

44,469

 

 

26,477

 

Less: current portion of Subordinated Promissory Note/SVB Term Loan Facility

 

 

(2,000)

 

 

(1,250)

 

Long term bank and other debt

 

$

42,469

 

$

25,227

 

Long term bank and other debt are stated at amortized cost, which approximates fair value.

 

In July 2016, the Company entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank (“SVB”) that provided for a $25 million Mezzanine Term Loan and a $25 million Line of Credit Facility. The Mezzanine Term Loan carries interest at a rate of 6.25% above the WSJ Prime Rate with a WSJ Prime Rate floor of 3.5% and matures in July 2019. Interest payments are payable monthly in arrears. The Company incurred a $250,000 loan origination fee and will be liable for a final payment fee of $750,000 payable at maturity or upon prepayment of the Mezzanine Term Loan. In connection with entry into the Mezzanine Term Loan, the Company granted two affiliates of SVB warrants to purchase an aggregate of 798,694 shares of common stock of the Company at an exercise price of $13.50 per share. The warrants are immediately exercisable and have a 10-year term. The fair value of the common stock warrants on the date of issue was approximately $7.7 million. The Company also granted SVB a security interest in significantly all of the Company’s assets. The Mezzanine Term Loan has been used to fund the expansion of the Company’s business.

 

The Company determined that the Mezzanine Term Loan represents an extinguishment of the original Mezzanine Term Loan and as a result recorded a one-time charge of $8.5 million. The amortization of warrants and loss on extinguishment of debt includes the write-off of fees paid to SVB, deferred debt costs associated with the original Mezzanine Term Loan and the $7.7 million non-cash fair value of the aforementioned warrants.

 

The Line of Credit Facility provides for borrowings up to $25 million based on 300% of the Company’s monthly recurring revenue, as defined. In addition, there is an additional $25 million Uncommitted Incremental Facility permitted under the Line of Credit Facility. The Line of Credit Facility carries interest at a rate of 0.50% above the WSJ Prime Rate and matures in July 2019. The Company incurred an initial $75,000 loan origination fee and is responsible for additional $75,000 in annual fees on the anniversary of the Line of Credit Facility. The Company will also be liable for a $50,000 loan arrangement fee if and when the Company utilizes the Uncommitted Incremental Facility.

Additonally, the Company determined that the original Amended Term Loan Facility and Revolving Advance Facility were modified as part of the July 2016 refinancing and as a result, less than $0.1 million of previous deferred loan costs will continue to be amortized to interest expense through July 2019.

 

The following information describes the Company’s debt agreements before the refinancing in July 2016.

In May 2014, the Company entered into an Amended and Restated Loan and Security Agreement with SVB that provided for a Revolving Advance Facility and a Term Loan Facility (the “Amended Term Loan Facility”). The Revolving Advance Facility provided for borrowings up to $12.0 million based on 300% of the Company’s monthly recurring revenue, as defined therein. Borrowings under the Revolving Advance Facility were $6.5 million at

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TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2015. The Revolving Advance Facility carried interest at a rate of 0.75% above the prime rate per annum. Interest payments were payable monthly in arrears.

The Amended Term Loan Facility provides for borrowings up to $5.0 million. As of December 31, 2015, the Company had utilized the total $5.0 million available under this Amended Term Loan Facility. The Amended Term Loan Facility carried interest at a rate of 1.00% above the prime rate per annum. Interest payments were payable monthly in arrears. Payments on the Amended Term Loan Facility commenced in May 2015 and continued with equal monthly payments of principal plus interest through the July 2016 refinancing date.

In May 2014, the Company entered into a Subordinated Loan and Security Agreement with SVB that provided for a Mezzanine Term Loan totaling $13.0 million. The total $13.0 million drawdown of the Mezzanine Facility was completed in September 2014. The Mezzanine Term Loan carried interest at a rate of 10.00% per annum. Interest payments were payable monthly in arrears. In connection with entry into the Mezzanine Term Loan, the Company granted two affiliates of SVB warrants to purchase an aggregate of 131,239 shares of common stock of the Company at an exercise price of $2.95 per share. The warrants were immediately exercisable and have a 10‑year term. The Company also granted SVB a security interest in significantly all of the Company’s assets. The Mezzanine Term Loan was used to fund the expansion of the Company’s business.

Effective with the purchase of AmeriDoc, LLC (“AmeriDoc”) in 2014, the Company executed a Subordinated Promissory Note in the amount of $3.5 million payable to the seller of AmeriDoc on April 30, 2015. The Subordinated Promissory Note carries interest at a rate of 10.00% annual interest and is subordinated to the SVB Facilities. In March 2015, the Company, the seller of AmeriDoc and SVB executed an Amended and Restated Subordinated Promissory Note that extended the maturity of the Amended and Restated Subordinated Promissory Note to April 30, 2017. In November 2015, the Company executed the Second Amended and Restated Subordinated Promissory Note with a revised annual interest rate of 7% commencing on January 1, 2016 and extended the maturity of the Second Amended and Restated Subordinated Promissory Note to April 30, 2018 with a seller put option effective on April 30, 2017. The Company repaid $1.0 million and $0.5 million of principal on this Second Amended and Restated Subordinated Promissory Note during 2016 and 2015, respectively. As a result of the seller put option, the Company has classified the $2.0 million outstanding balance to current liability as of September 30, 2016.

The Company was in compliance with all debt covenants at September 30, 2016 and December 31, 2015.

 

Note 9. Lease Abandonment Charge

In connection with the Company’s abandonment of facilities in Dallas, Texas and Greenwich, Connecticut, the Company incurred none and $0.7 million, in lease abandonment charges during the quarter and nine months ended September 30, 2015, respectively, included within general and administrative expenses in the consolidated statement of operations. There were no lease abandonments in 2016. The following table details the associated liability which is included in accrued expenses in the consolidated balance sheet (in thousands):

 

 

 

 

 

Balance January 1, 2016

    

$

474

 

Paid or settled

 

 

(329)

 

Balance September 30, 2016

 

$

145

 

 

 

Note 10. Commitments and Contingencies

Legal Matters

 

The Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of its business. At September 30, 2016, the Company was party to the following legal proceedings:

On April 29, 2015, the Company filed a lawsuit against the Texas Medical Board (the ‘‘TMB’’) in the United States District Court for the Western District of Texas, Austin Division alleging that the TMB’s adoption on April 10, 2015 of an amendment to 22 T.A.C. 190.8(1)(L) that would require a prior in-person examination for a doctor validly to

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TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

prescribe any controlled substance to a patient in Texas constitutes a violation, inter alia, of the Sherman Antitrust Act. The District Court held a hearing on May 22, 2015 on Teladoc’s motion for preliminary injunction of the effectiveness of such amendment, which otherwise was scheduled to take effect on June 3, 2015. On May 29, 2015, the District Court issued the preliminary injunction requested by Teladoc and enjoined the effectiveness of such rule amendment pending trial. On July 30, 2015, the TMB filed a motion to dismiss the suit, and the District Court denied this motion on December 14, 2015. On January 8, 2016, the TMB provided notice of its intent to appeal the District Court’s denial of its motion to dismiss to the U.S. Court of Appeals for the Fifth Circuit, which was filed on June 17, 2016 and was subsequently withdrawn by the TMB on October 17, 2016. On January 14, 2016, the District Court granted the parties’ joint motion to stay the trial case pending the aforementioned appeal. Accordingly, no trial date has been set.

Business in the State of Texas accounted for approximately $11.1 million (or 13%) and $12.6 million (or 16%) of the Company’s consolidated revenue for the nine months ended September 30, 2016 and during the year ended December 31, 2015, respectively. If the TMB’s proposed rule amendments go into effect as written and Teladoc is unable to adapt its business model in compliance with the revised rule, its ability to operate its business in the State of Texas could be materially adversely affected, which would have a material adverse effect on its business, financial condition and results of operations.

On June 8, 2015, American Well Corporation filed a complaint against Teladoc in the United States District Court for the District of Massachusetts alleging that certain of its operating platform’s technology infringes one of American Well’s patents, which patent Teladoc is seeking to invalidate pursuant to a petition for inter partes review that Teladoc filed with the U.S. Patent and Trademark Office’s Patent Trial and Appeals Board in March 2015. On June 13, 2016, the District Court dismissed the complaint against Teladoc on the basis that the intellectual property claims American Well sought to protect were not of patentable subject matter. On July 15, 2016, American Well filed notice with the District Court of its intent to appeal the court’s decision.

Other than as stated the Company is not a party to any material legal proceeding, and it is not aware of any pending or threatened litigation that would have a material adverse effect on its business, results of operations, cash flows or financial condition should such litigation be resolved unfavorably.

The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and estimable. In this regard, the Company establishes accrual estimates for various lawsuits, claims, investigations and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the loss can be reasonably estimated. At September 30, 2016, the Company has established accruals for certain of its lawsuits, claims, investigations and proceedings based upon estimates of the most likely outcome in a range of loss or the minimum amounts in a range of loss if no amount within a range is a more likely estimate. The Company does not believe that at September 30, 2016 any reasonably possible losses in excess of the amounts accrued would be material to the unaudited consolidated financial statements.

 

Note 11. Common Stock and Stockholders’ Equity

Capitalization

On July 7, 2015, Teladoc closed on its IPO in which the Company issued and sold 9,487,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $19.00 per share. The Company received net proceeds of $163.1 million after deducting underwriting discounts and commissions of $12.6 million as well as other offering expenses of $4.5 million. 

On June 17, 2015, the Company filed a Certificate of Amendment to the Company’s Certificate of Incorporation to effect a reverse stock split of all outstanding shares of common stock which provided that every 2.2859 shares of the Company’s issued and outstanding common stock automatically combine into one issued and outstanding share of the Company’s common stock. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split. In addition, the Certificate of Amendment increased the number of authorized shares of the Company’s common stock to 75,000,000 shares and the

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Table of Contents

TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

number of authorized shares of the Company’s preferred stock to 50,479,286 shares. On July 7, 2015, all of the Company’s then-outstanding convertible preferred stock converted into an aggregate of 25.5 million shares of common stock and all of the Company’s redeemable common stock converted into 113,294 shares of common stock.

Warrants

In July 2016,  in conjunction with the debt refinancing of the Mezzanine Term Loan, the Company issued 798,694 common stock warrants to purchase an aggregate of 798,694 shares of its common stock at an exercise price of $13.50 per share to two entities affiliated with SVB. The common stock warrants were immediately exercisable upon issuance and have a 10-year term. The fair value of the common stock warrants on the date of issue was approximately $7.7 million which was recorded as an increase to additional paid in capital. The Company determined that the July 2016 Mezzanine Term Loan represents an extinguishment of the original Mezzanine Term Loan and as a result recorded a one-time charge to write off the $7.7 million non-cash fair value of the warrants during the quarter ended September 30, 2016. These warrants are outstanding as of September 30, 2016.

Stock Plan and Stock Options

The Company’s 2015 Incentive Award Plan (the “Plan”) provides for the issuance of incentive and nonstatutory options and other equity-based awards to its employees and non‑employees. Options issued under the Plan are exercisable for periods not to exceed ten years and vest generally over a four year period. Prior to becoming a public enterprise, pursuant to the Company’s Second Amended and Restated Stock Incentive Plan which is now retired, the Company historically issued incentive and non-statutory stock options with exercise prices equal to the fair value of the Company’s common stock on the date of grant, as determined by the Company’s board of directors informed by third-party valuation. Subsequent to becoming a public enterprise, only options to buy common stock have been issued under the Plan, with exercise prices equal to the closing price of shares of the Company’s common stock on the New York Stock Exchange on the trading day immediately preceding the date of award.

Activity under the Plan is as follows (in thousands, except share and per share amounts and years):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

 

    

Weighted-

    

 

 

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

Shares

 

Number of

 

Average

 

Remaining

 

Aggregate

 

 

 

Available

 

Shares

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

for Grant

 

Outstanding

 

Price

 

Life in Years

 

Value

 

Balance at December 31, 2015

 

1,986,390

 

3,851,095

 

$

7.62

 

8.54

 

$

41,894

 

Increase in Plan authorized shares

 

1,940,154

 

 —

 

$

 —

 

 —

 

$

 —

 

Stock option grants

 

(3,118,611)

 

3,118,611

 

$

14.02

 

 —

 

$

500

 

Stock options exercised

 

 —

 

(530,562)

 

$

4.21

 

 —

 

$

6,169

 

Stock options expired

 

155,328

 

(155,328)

 

$

10.63

 

 —

 

$

911

 

Balance at September 30, 2016

 

963,261

 

6,283,816

 

$

11.02

 

8.72

 

$

47,913

 

Vested or expected to vest September 30, 2016

 

 

 

5,897,962

 

$

10.89

 

8.69

 

$

45,711

 

Exercisable as of September 30, 2016

 

 

 

1,447,418

 

$

5.65

 

7.36

 

$

18,767

 

The total grant‑date fair value of stock options granted during the quarter and nine months ended September 30, 2016 was $7.4 million and $19.6 million, respectively.

Stock‑Based Compensation

All stock‑based awards to employees are measured based on the grant‑date fair value of the awards and are generally recognized in the Company’s consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award (generally requiring a four‑year vesting period for each award on a straight line basis). The Company estimates the fair value of stock options granted using the Black‑Scholes option‑pricing model.

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Table of Contents

TELADOC, INC.  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Given the absence of a public trading market prior to July 2015, the Company’s board of directors considered numerous objective and subjective factors to determine the fair value of its common stock at each grant date. These factors included, but were not limited to, (i) contemporaneous valuations of common stock performed by unrelated third‑party specialists; (ii) the prices for the Preferred Stock sold to outside investors; (iii) the rights, preferences and privileges of the Preferred Stock relative to the common stock; (iv) the lack of marketability of the common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or a merger or acquisition of the Company, given prevailing market conditions.

The assumptions used in the Black‑Scholes option‑pricing model were determined as follows:

Volatility.  Since the Company does not have a trading history prior to July 2015 for its common stock, the expected volatility was derived from the historical stock volatilities of several unrelated public companies within its industry that it considers to be comparable to its business over a period equivalent to the expected term of the stock option grants.

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

Expected Term.  The expected term represents the period that the stock‑based awards are expected to be outstanding. When establishing the expected term assumption, the Company used the “simplified” method because the Company does not have adequate historical data.

Dividend Yield.  The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, it used an expected dividend yield of zero.

Forfeiture rate.  The Company uses historical data to estimate pre‑ vesting option forfeitures and record stock‑based compensation expense only for those awards that are expected to vest.

The fair value of each option grant was estimated on the date of grant using the Black‑Scholes option‑pricing model with the following assumptions and fair value per share:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

 

Volatility

 

 

44.7% – 46.3%

 

 

49.4% – 51.0%

 

Expected life (in years)

 

 

6.0

 

 

7.0

 

Risk-free interest rate

 

 

1.09% - 1.91%

 

 

1.58% - 2.06%

 

Dividend yield

 

 

 

 

 

Weighted-average fair value of underlying common stock

 

$

6.27

 

$

6.95

 

 

Total compensation costs charged as an expense for stock‑based awards, including stock options, recognized in the components of operating expenses are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,