DeferredTaxAssetsDeferredIncome

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 March 31, 2023

☐

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

For the transition period from

Commission File Number: 001-37477

TELADOC HEALTH, INC.

(Exact name of registrant as specified in its charter)

Delaware		04-3705970
(State of incorporation)		(I.R.S. Employer Identification No.)

2 Manhattanville Road, Suite 203
Purchase, New York		10577
(Address of principal executive office)		(Zip code)

(203) 635-2002

(Registrant’s telephone number including area

code)

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 April 26, 2023, the Registrant had 163,670,601 shares of Common Stock outstanding.

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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)


	March 31,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	888,579	$	918,182
Accounts receivable, net of allowance for doubtful accounts of $6,106 and $4,324, respectively		215,981		210,554
Inventories		45,801		56,342
Prepaid expenses and other current assets		136,346		130,310
Total current assets		1,286,707		1,315,388
Property and equipment, net		29,791		29,641
Goodwill		1,073,190		1,073,190
Intangible assets, net		1,815,948		1,836,765
Operating lease - right-of-use assets		39,518		41,831
Other assets		63,993		48,540
Total assets	$	4,309,147	$	4,345,355
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	38,625	$	47,690
Accrued expenses and other current liabilities		184,642		168,693
Accrued compensation		50,900		81,554
Deferred revenue-current		95,930		90,457
Advances from financing companies		11,247		11,375
Total current liabilities		381,344		399,769
Other liabilities		1,749		1,618
Operating lease liabilities, net of current portion		35,927		38,042
Deferred revenue, net of current portion		4,117		3,872
Advances from financing companies, net of current portion		8,037		8,082
Deferred taxes, net		50,613		50,939
Convertible senior notes, net		1,536,134		1,535,288
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.001 par value; 300,000,000 shares authorized; 163,919,394 shares and 162,840,360 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		164		163
Additional paid-in capital		17,409,574		17,358,645
Accumulated deficit		(15,077,515)		(15,008,287)
Accumulated other comprehensive loss		(40,997)		(42,776)
Total stockholders’ equity		2,291,226		2,307,745
Total liabilities and stockholders’ equity	$	4,309,147	$	4,345,355

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 March 31,
	2023		2022
Revenue	$	629,244	$	565,350
Expenses:
Cost of revenue (exclusive of depreciation and amortization, which is shown separately below)		190,107		187,025
Operating expenses:
Advertising and marketing		176,790		133,600
Sales		54,490		58,329
Technology and development		86,985		87,412
General and administrative		114,145		104,923
Acquisition, integration, and transformation costs		5,944		4,507
Restructuring costs		8,102		0
Depreciation and amortization		69,783		58,933
Goodwill impairment		0		6,600,000
Total expenses		706,346		7,234,729
Loss from operations		(77,102)		(6,669,379)
Other income, net		(4,907)		(724)
Interest (income) expense, net		(3,648)		5,480
Loss before provision for income taxes		(68,547)		(6,674,135)
Provision for income taxes		681		388
Net loss		(69,228)		(6,674,523)
Other comprehensive income (loss), net of tax:
Currency translation adjustment and other		1,779		(5,139)
Comprehensive loss	$	(67,449)	$	(6,679,662)

Net loss per share, basic and diluted	$	(0.42)	$	(41.58)

Weighted-average shares used to compute basic and diluted net loss per share		162,922,691		160,532,301

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 December 31, 2022	162,840,360	$	163	$	17,358,645	$	(15,008,287)	$	(42,776)	$	2,307,745
Exercise of stock options	28,127		0		296		0		0		296
Issuance of common stock upon vesting of restricted stock units	1,050,907		1		(1)		0		0		0
Stock-based compensation	0		0		50,634		0		0		50,634
Other comprehensive income, net of tax	0		0		0		0		1,779		1,779
Net loss	0		0		0		(69,228)		0		(69,228)
Balances as of March 31, 2023	163,919,394	$	164	$	17,409,574	$	(15,077,515)	$	(40,997)	$	2,291,226

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	0		0		(363,731)		72,698		0		(291,033)
Exercise of stock options	267,586		0		3,585		0		0		3,585
Issuance of common stock upon vesting of restricted stock units	697,602		1		(1)		0		0		0
Stock-based compensation	0		0		63,963		0		0		63,963
Other comprehensive loss, net of tax	0		0		0		0		(5,139)		(5,139)
Net loss	0		0		0		(6,674,523)		0		(6,674,523)
Balance as of March 31, 2022	161,434,513	$	161	$	17,177,152	$	(8,023,279)	$	(11,424)	$	9,142,610

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)


	Quarter Ended March 31,
	2023		2022
Cash flows from operating activities:
Net loss	$	(69,228)	$	(6,674,523)
Adjustments to reconcile net loss to net cash flows from operating activities:
Goodwill impairment		0		6,600,000
Depreciation and amortization		69,783		58,933
Depreciation of rental equipment		681		770
Amortization of right-of-use assets		3,056		3,173
Provision for allowances		9,034		4,591
Stock-based compensation		46,038		60,436
Deferred income taxes		(355)		(2,319)
Accretion of interest		845		826
Other, net		(3,522)		0
Changes in operating assets and liabilities:
Accounts receivable		(14,046)		(27,842)
Prepaid expenses and other current assets		(6,165)		(18,993)
Inventory		10,000		2,023
Other assets		(9,939)		(6,047)
Accounts payable		(9,132)		492
Accrued expenses and other current liabilities		15,452		11,706
Accrued compensation		(32,265)		(48,819)
Deferred revenue		5,648		7,479
Operating lease liabilities		(2,858)		(3,626)
Other liabilities		129		(7)
Net cash provided by (used in) operating activities		13,156		(31,747)
Cash flows from investing activities:
Capital expenditures		(2,363)		(3,913)
Capitalized software		(43,261)		(26,918)
Other, net		0		3,264
Net cash used in investing activities		(45,624)		(27,567)
Cash flows from financing activities:
Net proceeds from the exercise of stock options		296		3,585
Proceeds from advances from financing companies		3,375		2,232
Payment against advances from financing companies		(3,548)		(3,921)
Proceeds from employee stock purchase plan		2,731		3,680
Cash received for withholding taxes on stock-based compensation, net		496		103
Other, net		3		(2,863)
Net cash provided by financing activities		3,353		2,816
Net decrease in cash and cash equivalents		(29,115)		(56,498)
Foreign exchange difference		(488)		(538)
Cash and cash equivalents at beginning of the period		918,182		893,480
Cash and cash equivalents at end of the period	$	888,579	$	836,444

Income taxes paid	$	346	$	261

Interest paid	$	194	$	7

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 focusing on forging a new healthcare experience with better convenience, outcomes, and value around the world. 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.

Note 2. Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements for the quarters ended March 31, 2023 and 2022, 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, 2022 (the “2022 Form 10-K”), which includes a complete set of footnote disclosures, including the Company’s significant accounting policies.

These consolidated financial statements include the results of Teladoc Health, as well as two professional associations and 10 professional corporations (collectively, the “THMG Association”).

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 Teladoc Health. 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.

Total revenue and net loss for the VIE were $61.6 million and $0.0 million, and $60.1 million and ($2.3) million, for the quarters ended March 31, 2023 and 2022, respectively. The VIE’s total assets, all of which were current, were $157.6 million and $106.7 million at March 31, 2023 and December 31, 2022, respectively. The VIE’s total liabilities, all of which were current, were $206.2 million and $143.8 million at March 31, 2023 and December 31, 2022, respectively. The VIE’s total stockholders’ deficit was $48.6 million and $37.1 million at March 31, 2023 and December 31, 2022, respectively.

All intercompany transactions and balances have been eliminated.

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

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 the 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 the Condensed Consolidated Statement of Operations; if material, the effects of changes in estimates are disclosed in the Notes to Unaudited Condensed Consolidated Financial Statements.

Significant estimates and assumptions by management affect areas including the value and useful life of long-lived assets (including intangible assets), the value of goodwill, the capitalization and amortization of software development costs, deferred device and contract costs, allowances for sales and for doubtful accounts, and the accounting for business combinations. Other significant areas include revenue recognition (including performance guarantees), the accounting for income taxes, contingencies, 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 2022 Form 10-K.

Recently Adopted Accounting Standards

In September 2022, the financial accounting standards board issued Accounting Standards Update (“ASU”) 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50) – Disclosure of Supplier Finance Program

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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. The adoption of ASU 2022-04 did not have any impact on the Company’s financial information.

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

The Company generates access fees from customers, which primarily consist of employers, health plans, hospitals and health systems, insurance and financial services companies (collectively “Clients”), as well as individual members who utilize the Company’s solutions, 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 and is reported as a component of other revenue in the condensed consolidated financial statements. Revenue associated with virtual healthcare device equipment sales included with the Company’s hosted virtual healthcare platform is also reported in other revenue. Access fees revenue accounted for 88% and 87% of the Company’s total revenue for the quarters ended March 31, 2023 and 2022, respectively.

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


	Quarter Ended
	March 31,
	2023		2022
Revenue by Type
Access fees	$	550,870	$	491,337
Other		78,374		74,013
Total Revenue	$	629,244	$	565,350

Revenue by Geography
U.S. Revenue	$	541,662	$	491,200
International Revenue		87,582		74,150
Total Revenue	$	629,244	$	565,350

During the fourth quarter of 2022, the Company refined its definition of other revenue to capture revenues associated with visit fee, virtual healthcare device equipment sales, and its hosted virtual healthcare platform. Prior period amounts have been recast to conform with the 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 next 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 periods 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 $100.0 million at March 31, 2023 and $87.1 million at March 31, 2022. The net increase of $5.7 million and $7.6 million in the deferred revenue balance for the quarters ended March 31, 2023 and 2022, respectively, was primarily driven by increased cash payments received in advance of satisfying performance obligations primarily related to the services of the BetterHelp segment and, to a lesser extent, the Teladoc Health Integrated Care segment, offset by revenue recognized that was 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 quarter ended March 31, 2023 and 2022 that was included in deferred revenue at the beginning of the periods was $61.5 million and $51.6 million, respectively.

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The Company expects to recognize $87.8 million of revenue throughout the remainder of 2023 and $10.6 million of revenue in the year ending December 31, 2024 related to future performance obligations that are unsatisfied or partially unsatisfied as of March 31, 2023.

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 March 31,		As of December 31,
	2023		2022
Deferred device and contract costs, current	$	26,576	$	29,956
Deferred device and contract costs, noncurrent		17,033		8,404
Total deferred device and contract costs	$	43,609	$	38,360

Deferred device and contract costs were as follows (in thousands):


	Deferred Device and Contract Costs
Beginning balance as of December 31, 2022	$	38,360
Additions		16,572
Cost of revenue recognized		(11,323)
Ending balance as of March 31, 2023	$	43,609

Note 4. 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 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):


	March 31, 2023
	Level 1		Level 2		Total
Cash and cash equivalents	$	888,579	$	0	$	888,579


	December 31, 2022
	Level 1		Level 2		Total
Cash and cash equivalents	$	918,182	$	0	$	918,182

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

Note 5. Inventories

Inventories consisted of the following (in thousands):


	As of March 31,		As of December 31,
	2023		2022
Raw materials and purchased parts	$	26,403	$	30,126
Work in process		934		433
Finished goods		26,338		31,977
Inventory reserve		(7,874)		(6,194)
Total inventories	$	45,801	$	56,342

Note 6. Prepaid Expenses and Other Current Assets

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


	As of March 31,		As of December 31,
	2023		2022
Prepaid expenses	$	77,526	$	63,159
Deferred device and contract costs, current		26,576		29,956
Other receivables		25,099		25,091
Other current assets		7,145		12,104
Total prepaid expenses and other current assets	$	136,346	$	130,310

Note 7. Goodwill

Goodwill consisted of the following (in thousands):



		Teladoc Health Integrated Care		BetterHelp		Total
Balance as of December 31, 2022 and March 31, 2023	$	0	$	1,073,190	$	1,073,190

Goodwill is net of accumulated impairment losses of $13.4 billion, of which $12.3 billion was recognized prior to the Company reorganizing its reporting structure to include two reportable segments on October 1, 2022 and $1.1 billion was recognized on the goodwill assigned to the Teladoc Health Integrated Care segment.

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Note 8. Intangible Assets, Net and Certain Cloud Computing Costs

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


								Weighted
								Average
								Remaining
	Useful			Accumulated		Net Carrying		Useful Life
	Life	Gross Value		Amortization		Value		(Years)
March 31, 2023
Client relationships	2 to 20 years	$	1,459,719	$	(316,839)	$	1,142,880	13.3
Trademarks	2 to 15 years		325,368		(111,724)		213,644	6.9
Software	3 to 5 years		339,643		(94,838)		244,805	2.7
Technology	4 to 7 years		343,070		(128,451)		214,619	4.4
Intangible assets, net		$	2,467,800	$	(651,852)	$	1,815,948	10.1
December 31, 2022
Client relationships	2 to 20 years	$	1,458,384	$	(291,993)	$	1,166,391	13.5
Trademarks	2 to 15 years		325,171		(98,303)		226,868	7.0
Software	3 to 5 years		294,629		(78,373)		216,256	2.7
Technology	4 to 7 years		343,067		(115,817)		227,250	4.7
Intangible assets, net		$	2,421,251	$	(584,486)	$	1,836,765	10.4

Amortization expense for intangible assets was $66.9 million and $56.6 million for the quarters ended March 31, 2023 and 2022, respectively. Included in the total amortization expense was amortization for capitalized software development cost of $16.6 million and $6.7 million for the quarters ended March 31, 2023 and 2022, respectively.

Net cloud computing costs are recorded in other assets within the balance sheets. As of March 31, 2023 and December 31, 2022, those costs were $32.5 million and $25.4 million, respectively. The associated expense for cloud computing costs is amortized in general and administration expense and was $0.8 million and $0.3 million for the quarters ended March 31 2023 and 2022, respectively.

Note 9. Accrued Expenses and Other Current Liabilities

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


	As of March 31,		As of December 31,
	2023		2022
Professional fees	$	14,158	$	10,152
Consulting fees/provider fees		22,345		16,407
Client performance guarantees		6,909		4,145
Interest payable		5,811		1,480
Income tax payable		4,694		3,817
Insurance		5,125		5,981
Lease abandonment obligation - current		3,136		0
Marketing		40,427		35,055
Operating lease liabilities – current		12,958		13,592
Franchise and sales taxes		13,272		10,183
Accrued rebates		17,831		14,542
Staff augmentation		4,479		3,391
Other		33,497		49,948
Total	$	184,642	$	168,693

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Note 10. Convertible Senior Notes

Outstanding Convertible Senior Notes

As of March 31, 2023, 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 had agreed to guarantee Livongo’s obligations (the “Livongo Notes;” and together with the 2027 Notes and the 2025 Notes, the “Notes”). On January 1, 2023, the Company agreed to assume all of Livongo’s rights and obligations under the Livongo Notes and the applicable indenture, and Livongo was released from such obligations.

The following table presents certain terms of the Notes that were outstanding as of March 31, 2023:


	2027 Notes			2025 Notes			Livongo Notes
Principal Amount Outstanding as of March 31, 2023 (in millions)	$	1,000.0		$	0.7		$	550.0
Interest Rate Per Year		1.25	%		1.375	%		0.875	%
Fair Value as of March 31, 2023 (in millions) (1)	$	771.3		$	0.4		$	484.3
Fair Value as of December 31, 2022 (in millions) (1)	$	768.2		$	0.3		$	480.6
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 March 31, 2023		4.1258			18.6621			13.94
Remaining Contractual Life as of March 31, 2023		4.2 years			2.1 years			2.2 years

(1)

The Notes are classified as Level 2 within the fair value hierarchy, as defined in Note 4. “Fair Value Measurements.”

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

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


	As of March 31,		As of December 31,
2027 Notes	2023		2022
Principal	$	1,000,000	$	1,000,000
Less: Debt discount, net (1)		(14,584)		(15,430)
Net carrying amount		985,416		984,570

2025 Notes
Principal		725		725
Less: Debt discount, net (1)		(7)		(7)
Net carrying amount		718		718

Livongo Notes
Principal		550,000		550,000
Less: Debt discount, net (1)		0		0
Net carrying amount		550,000		550,000

Total net carrying amount	$	1,536,134	$	1,535,288

(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.

The Company estimates the fair value of its Notes utilizing market quotations for debt that have quoted prices in active markets. Since the Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities.

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


	Quarters Ended
	March 31,
2027 Notes		2023			2022
Contractual interest expense	$	3,125		$	3,125
Amortization of debt discount		844			831
Total	$	3,969		$	3,956
Effective interest rate		1.6	%		0.8	%

	Quarters Ended
	March 31,
2025 Notes		2023			2022
Contractual interest expense	$	2		$	3
Amortization of debt discount		1			1
Total	$	3		$	4
Effective interest rate		1.6	%		0.9	%

	Quarters Ended
	March 31,
Livongo Notes		2023			2022
Contractual interest expense	$	1,203		$	1,203
Amortization of debt discount		0			0
Total	$	1,203		$	1,203
Effective interest rate		1.3	%		0	%

		Page Number

PART I	Financial Information	2
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022	2
	Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the quarters ended March 31, 2023 and 2022	3
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the quarters ended March 31, 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the quarters ended March 31, 2023 and 2022	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	31
Item 4.	Controls and Procedures	32
PART II	Other Information	33
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 6.	Exhibits	34
Exhibit Index		34
Signatures		35


	As of March 31,
	2023
Remainder of 2023	$	8,908
2024		7,382
2025		2,903
2026		91
Total