American Well Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report. In addition to historical consolidated financial information, the following discussion and analysis and information contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Special Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors.” Overview We are a leading telehealth company enabling digital delivery of care for healthcare’s key stakeholders. We empower our clients at the enterprise level with the core technology and services necessary to successfully develop and distribute telehealth programs that meet their strategic, operational, and social objectives under their own brands. The Amwell Platform is a complete digital care delivery solution that equips our health system, health plan and innovator, including government, clients with the tools to enable new models of care for their patients and members. Our scalable technology embeds with our clients’ existing offerings and clinical workflows, spanning the continuum of care and enabling care delivery across a wide variety of clinical, retail, school and home settings. Our client-focused approach drives our success as one of the largest telehealth companies. As of December 31, 2020, we powered the digital care programs of 58 health plans, which support over 36,000 employers and collectively represent more than 80 million covered lives, as well as 158 of the nation’s largest health systems, encompassing more than 2,000 hospitals. Since inception, we have powered over 8.6 million telehealth visits for our clients, including more than 5.9 million in the year ended December 31, 2020. Our Business Model The Amwell Platform is a complete digital care delivery solution that equips our health system, health plan and innovator partners with the tools to enable new models of care for their patients and members. We sell the Amwell Platform on a subscription basis, which with our modular platform architecture allows our clients to introduce innovative telehealth use cases over time, expanding our subscription revenue opportunity. To support the Amwell Platform, we offer professional services on a fee-for-service basis and a range of patient and provider access Carepoints that support hospital and home use cases and access to AMG, our affiliated medical group that provides clinical services on a fee-for-service basis. The combination of the platform, services and Carepoints allows our clients to deploy telehealth solutions across their full enterprise, deepening their relationships with existing and new patients and members through improved care access and coordination, cost, and quality. Our contracts are typically three years in length but may be longer for our largest strategic customer partners. Key Factors Affecting Our Performance We believe our future growth, success and performance are dependent on many factors, including those set forth below. While these factors present significant opportunities for us, they also represent the challenges that we must successfully address in order to grow our business and improve our results of operations. Telehealth Utilization Telehealth utilization is a key driver of our business. A client’s overall utilization of its telehealth platform provides an important measure of the value they derive. Telehealth utilization drives our business in three important ways. First, to the extent a client succeeds with its telehealth program and sees good usage, they are more likely to renew and potentially expand their contract with us. Second, our health systems agreements typically include a certain number of visits conducted by their own providers annually and provide that as certain volume thresholds are exceeded, its annual license fees will rise to reflect this growing value. Third, to the extent that clients utilize provider services from AMG, Amwell derives revenue from clinical fees. We expect that our future revenues will be driven by the growing adoption of telehealth and our ability to maintain and grow market share within that market. In the year ended December 31, 2019, our clients completed a total of 1.1 million visits on the Amwell Platform, while in the year ended December 31, 2020, clients significantly expanded their use of the Amwell Platform with 5.9 million completed visits. During the COVID-19 crisis, utilization of the platform achieved levels not seen before, evident by a larger number of clients’ own providers using the Amwell Platform. AMG providers accounted for 27% of total visits performed versus 66% of total visits performed on the Amwell Platform during the years ended December 31, 2020 and 2019, respectively. 57 New Use Patterns and Functionality Looking past COVID-19, we can see that some effects of the current period may be felt beyond the immediate crisis. In particular, we are seeing the growing awareness among consumers of the availability and efficacy of telehealth for many healthcare needs and we are seeing more widespread hands-on experience among providers in delivering care via telehealth. It remains unclear the extent to which the currently more relaxed regulatory environment, favorable reimbursement policies, and leniency with respect to cross-state provider licensure will become normative. However, we believe that the current experience is more likely to be favorable to telehealth and Amwell’s business than otherwise over the longer term. New Client Acquisition We believe our ability to add net new health system and health plan clients is a key indicator of our increasing market adoption and future revenue potential. We maintain dedicated direct sales teams for both health systems and health plans focused on selling solutions that meet each of their respective needs. Our direct sales teams sell our full suite of technology, services and Carepoints. Channel partners also play an important role in marketing and selling our products to our customer base, primarily focusing on the Amwell Platform and Carepoints. Channel partners reduce our sales cycle and lower customer acquisition costs. For example, through our EHR channel partners we are able to natively embed our technology into existing health system technology infrastructure which, as a competitive differentiator, may lead to a higher win rate. In addition, because of the technology integration, an EHR partner sale may accelerate our ability to launch the technology and ultimately recognize revenue. Carepoint channel partners primarily consist of value-added resellers that have established relationships with health systems and health plans. We typically generate lower revenues in connection with sales obtained through these channel partner agreements. Client Expansion and Retention Health system contracts are initially priced based on the size of the system and their projected visit activity. The contract value is typically expected to grow as the health system increases the number of providers on the platform and the number of consultations performed through the platform or adds the ability to deliver new use cases across their enterprise whether by the health system’s own providers or through AMG. When a client chooses to adopt a new use case, Amwell configures a module for its Amwell Platform instance. A module represents a unique patient or provider workflow, documentation requirement, or technology integration and associated services. Our platform modules currently support over 100 active use cases with new modules continually being developed as virtual care continues to expand into new areas. We expand business with health plans when they expand the number of members who have access to our Amwell Platform and AMG services or through offering new clinical programs to eligible plan members. In many cases health plans pay Amwell incremental subscription fees for adding new members to the Amwell Platform, and for each clinical program that is deployed, which over time increases the annual contract value per health plan, a key indicator of the growth of our business. We believe our ability to grow subscription revenue in our existing health plan client base is an indicator of the long-term value of our customer relationships. Active Providers An important indicator of the value of our Amwell Platform to our clients is the number of non-AMG providers that are active on the Amwell Platform. We define “Active Providers” as providers that have delivered a visit on the Amwell Platform at least once in the last 12 months. Active Providers demonstrate the prevalence of telehealth within our clients in both home and hospital environments. We believe Active Providers is a measure of our success in delivering on our mission of enabling access to care. We expect that the number of Active Providers will increase over time as a result of several factors: • the number of modules and use cases deployed within health systems • the adoption of telehealth by providers across the spectrum of care • the number of programs offered through health plans • the continued improvement in the regulatory environment for telehealth, including reimbursement for telehealth services 58 • the ongoing consumerization of healthcare Invest in Growth We expect to continue to focus on long-term revenue growth through investments in technology development and sales and marketing efforts. In addition, we believe additional investments in platform modules and clinical programs will allow us to continue to penetrate our products and services further in to our existing client relationships. Accordingly, in the short term we expect these activities to increase our net losses, but in the long term we anticipate that these investments will positively impact our results of operations. Regulatory Environment Our operations are subject to comprehensive United States federal, state and local and international regulation in the jurisdictions in which we do business. Our ability to operate profitably will depend in part upon our ability, and that of our affiliated providers, to maintain all necessary licenses and to operate in compliance with applicable laws and rules. The COVID-19 pandemic has resulted in a reduction of regulatory and reimbursement barriers for telehealth, including removing the originating site restrictions for fee for service Medicare; the expansion of Medicare and commercial reimbursement for telehealth and an easing of state licensure policies for providers. However, it is uncertain how long the relaxed policies will remain in effect, and there can be no guarantee that once the COVID-19 pandemic is over that such restrictions will not be reinstated or changed in a way that adversely affects our business. For additional discussion of this factor, see “Item 1A. Risk Factors—Risks Related to Government Regulation.” Business Combinations In July 2018, we acquired all of the outstanding stock of Avizia. This acquisition brought a comprehensive acute care capability, including a hospital-based cart lineup and custom software workflows for more than forty clinical specialties, including telestroke and tele-behavioral health. This acquisition enhanced options available to clients across Amwell’s diverse telehealth ecosystem, including health systems, health plans and innovators, enabling clients to choose one comprehensive single platform solution. The aggregate consideration for this transaction was $137.8 million, and included $65.3 million paid in cash and $72.5 million in equity comprised of 1,115,934 shares of Series C preferred stock at a price of $65.00 per share. The acquisition was a stock purchase and the goodwill resulting from this acquisition is not deductible for tax purposes. The results of operations of Avizia have been included within our operations from the date of acquisition. In November 2019, we acquired all of the outstanding stock of Aligned Telehealth. This acquisition combines Aligned’s ability to access an affiliated network of psychiatrists and advanced practice psychiatric nurses, with the Company’s health system and health plan client relationships to address the mounting challenges of psychiatric clinician shortages, fragmented care and societal stigmas impeding adequate behavioral health access and treatment. The aggregate consideration for this transaction was $82.9 million, and included $48.7 million paid in cash and $34.3 million in equity comprised of 456,667 shares of Series C preferred stock at a price of $75.00 per share. The agreement also included a component of contingent earnout consideration to be earned if certain financial performance metrics were achieved. There was no payout related to this consideration. The acquisition was a stock purchase and the goodwill resulting from this acquisition is not deductible for tax purposes. The results of operations of Aligned have been included within our operations from the date of acquisition. Seasonality Visit volumes typically follow the annual flu season, rising during quarter four and quarter one and falling in the summer months. The future impact of COVID-19 on seasonality is unknown as there could be additional surges and demand on telehealth visits. While we sell to and implement our solutions to clients year-round, we experience some seasonality in terms of when we enter into agreements with our clients and when we launch our solutions to members. 59 Key Metrics We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business: Active Providers: Years Ended December 31, 2020 2019 AMG 4,500 1,800 Platform 68,000 5,100 Total Active Providers 72,500 6,900 Active Providers : providers that have delivered a visit on the Amwell Platform at least once in the last 12 months AMG : providers from our affiliated Amwell Medical Group Platform : our Health Plan and Health System customer’s own providers (non-AMG providers) that are active on the Amwell Platform Health Systems: Years Ended December 31, 2020 2019 2018 Average Number of Health System Clients 149 138 92 Total Health System Subscription Revenue $ 49.8 million $ 38.8 million $ 27.3 million Average Annual Contract Value $ 334 thousand $ 282 thousand $ 296 thousand Health System : A health system is an Amwell Platform client whose primary business case is the delivery of care by its providers. A typical health system client has many hospitals within its system. The average number of health system clients is calculated by averaging the number of such clients under contract at the beginning and end of each fiscal year. Health System Subscription Revenue: Health System subscription revenue consists of all platform-related fees for a health system, including subscription licenses, fees related to software modules, and overage charges, and primarily represents the fee to access our platform over the contractual period. Subscription revenue may include immaterial amounts from non-health system clients whose business model acts similarly to those clients. Average Annual Contract Value: Average annual contract value is defined as total health system subscription revenue for the fiscal period divided by average number of health system clients. Health Plans: Years Ended December 31, 2020 2019 2018 Average Number of Health Plan Clients 57 56 52 Total Health Plan Subscription Revenue $ 34.9 million $ 30.6 million $ 23.6 million Average Annual Contract Value $ 612 thousand $ 546 thousand $ 453 thousand Health Plan : A health plan is an Amwell Platform client whose primary business case is managing the healthcare financial risk of its membership. The average number of health plan clients is calculated by averaging the number of such clients under contract at the beginning and end of each fiscal year. Health Plan Subscription Revenue: Health Plan subscription revenue consists of all platform-related fees for a health plan, including subscription licenses, per member/per month charges and fees related to clinical programs, and primarily represents the fee to access our platform over the contractual period. Subscription revenue may include immaterial amounts from non-health plan clients whose business model acts similarly to those clients. 60 Average Annual Contract Value: Annual contract value is defined as total health plan subscription revenue for the fiscal period divided by average number of health plan clients. Visits: Years Ended December 31, 2020 2019 2018 AMG Visits (thousands) 1,595 759 551 Total Visit Revenue $ 117.2 million $ 40.7 million $ 26.5 million Revenue per Visit $ 73 $ 54 $ 48 AMG Visit : An AMG visit is a case completed by our AMG affiliate providers and visit revenue reflects fee-for-service revenue to AMG for the visit. Non-GAAP Financial Measures In addition to our financial results determined in accordance with GAAP, we believe adjusted EBITDA, a non-GAAP measure, is useful in evaluating our operating performance. We use adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measure as a tool for comparison. A reconciliation is provided below for our non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business. Adjusted EBITDA Adjusted EBITDA is a key performance measure that our management uses to assess our operating performance. Because adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes and in evaluating acquisition opportunities. We calculate adjusted EBITDA as net loss adjusted to exclude (i) interest income and other income, net, (ii) tax benefit and expense, (iii) depreciation and amortization, (iv) stock-based compensation expense, (v) initial public offering expenses, (vi) acquisition-related expenses and (vii) other items affecting our results that we do not view as representative of our ongoing operations, including direct and incremental expenses associated with the COVID-19 pandemic. We had no such other items during the years ended December 31, 2020, 2019 and 2018. The following table presents a reconciliation of adjusted EBITDA from the most comparable GAAP measure, net loss, for each of the years ended December 31, 2020, 2019 and 2018: Years Ended December 31, (in thousands) 2020 2019 2018 Net loss $ (228,626 ) $ (88,366 ) $ (52,312 ) Add: Depreciation and amortization 10,153 7,761 5,330 Interest and other income, net (1,632 ) (5,535 ) (2,794 ) (Benefit) expense from income taxes 639 (803 ) — Stock-based compensation 118,358 12,135 7,669 Initial public offering expenses 2,039 127 3,098 Acquisition-related (income) expenses (48 ) 2,020 1,298 COVID-19-related expenses (1) 6,076 — — Litigation expense 352 — — Adjusted EBITDA $ (92,689 ) $ (72,661 ) $ (37,711 ) 61 (1) COVID-19-related expenses include non-recurring provider bonus payments, emergency hosting licensing fees and non-medical provider temporary labor costs related to on-boarding non-AMG providers incurred in response to the initial outbreak of the COVID-19 virus as Amwell attempted to scale quickly to meet unusually high patient and non-AMG provider demand. Some of the limitations of adjusted EBITDA include (i) adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and adjusted EBITDA does not reflect these capital expenditures. Our IPO and acquisition-related expenses, including legal, accounting and other professional expenses, reflect cash expenditures and we expect such expenditures for acquisitions to recur from time to time. Our adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate adjusted EBITDA in the same manner as we calculate the measure, limiting its usefulness as a comparative measure. In evaluating adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. Adjusted EBITDA should not be considered as an alternative to loss before benefit from income taxes, net loss, earnings per share, or any other performance measures derived in accordance with U.S. GAAP. When evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results. Components of Results of Operations Revenue The Company has demonstrated continued revenue growth as a direct result of the acceptance of telehealth, our penetration of the market, and the successful integration of recent acquisitions. Revenue performance is reflective of the strong foundation that has been built, focused around health plans, health systems, our provider network and a consistently increasing visit base. We generate revenues from the use of the Amwell Platform in the form of recurring subscription fees for use of our platform, and related services and Carepoint sales. We also generate revenue from the performance of AMG patient visits. Cost of Revenues, Excluding Amortization of Intangible Assets Cost of revenue primarily consists of hosting fees paid to our hosting providers, costs incurred in connection with our professional services, technical and hosting support, and costs for running our affiliated provider network operations team. These costs primarily include employee-related expenses (including salaries, bonuses, benefits, stock-based compensation and travel). Cost of revenues are primarily driven by the size of our provider network and the hosting and technical support required to service our platform customers. Our business models are designed to be scalable and to leverage fixed costs to generate higher revenues. While we currently expect increased investments to support accelerated growth, we also expect increased efficiencies and economies of scale. Our quarterly cost of revenues as a percentage of revenues is expected to fluctuate from period to period depending on the interplay of these aforementioned factors. Operating Expenses Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Research and Development Expenses Research and development expenses include personnel and related expenses for software and hardware engineering, information technology infrastructure, security and compliance and product development (inclusive of stock-based compensation for our research and development employees). Research and development expenses also include the periodic outsourcing of similar functions to third party specialists. Due to the quarantine and isolation strategies employed by governmental authorities, health systems and health plans to deal with the COVID-19 pandemic, a significant portion of healthcare was forced to be delivered virtually. Our health plan and health system customers believe that overall utilization of telemedicine and care delivered virtually will continue to increase during and after the COVID-19 crisis. By partnering with our customers during the crisis, we understand the increased volume and additional types of care they intend to deliver virtually on our platform. We originally expected this increase in volume, evolution and advancement of telemedicine usage to occur over the next few years but we have now adjusted our research and development strategies to match the views of our customer partners, thus accelerating the expansion of our platform volume capacity and the development of additional 62 functionality through new programs and modules. While an increase in the research and development expense is expected in the near-term future periods, the corresponding future revenue growth is expected to result in lower expenses as a percentage of revenue. Our research and development expenses may also fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our research and development expenses. Amwell is accelerating its multiyear technology investment in 2021. The purpose of this acceleration is to accommodate significant growth in market demand for increasingly broad and sophisticated telehealth enablement infrastructure following COVID-19. We expect our increased spend on R&D to continue into 2021 and potentially for the entire year, perhaps at elevated levels versus those experienced in the latter part of 2020. Sales and Marketing Expenses Sales expenses consist primarily of employee-related expenses, including salaries, benefits, commissions, travel and stock-based compensation costs for our employees engaged in sales. We expect our sales expenses to increase as we continue to invest in the expansion of our business. We expect to hire additional sales personnel and related account management and sales support personnel to properly service our growing client base and to identify and capitalize on new strategic market opportunities. Marketing expenses consist primarily of personnel and related expenses (inclusive of stock-based compensation) for our marketing staff, including costs of communications materials that are produced to generate greater awareness and utilization of our platform among our clients and their users. Marketing costs also include third-party independent research, participation in trade shows, brand messaging, and public relations costs. Our sales and marketing expenses will fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our advertising and marketing expenses. General and Administrative Expenses General and administrative expenses include personnel and related expenses, and professional fees incurred by finance, legal, human resources, information technology, our executives, and executive administration staff. They also include stock-based compensation for employees in these departments and expenses related to auditing, consulting, legal, and corporate insurance. We expect our general and administrative expenses to increase for the foreseeable future due to costs that we incur as a new public company, as well as other costs associated with continuing to grow our business. However, we expect our general and administrative expenses to decrease as a percentage of our total revenue over the next several years. Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses. Depreciation and Amortization Expense Depreciation and amortization expense includes the amortization of intangible assets and depreciation related to our fixed assets. Amortization of intangible assets consists of the amortization of acquisition-related intangible assets, which are customer relationships, contractor relationships, technology and trade names. Interest Income and Other Income (Expense), Net The balance of interest income and other income (expense), net, consists predominantly of interest income on our money-market and short-term investments. We did not incur material interest expenses in the period as there were no outstanding debts or notes payables. Provision for (Benefit from) Income Taxes The income tax provision and benefit were primarily due to state and foreign income tax expense, and benefit related to release of the valuation allowance as a result of our acquisitions. Deferred tax assets are reduced by a valuation allowance to the extent management believes it is not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. 63 Management makes estimates and judgments about future taxable income based on assumptions that are consistent with our plans and estimates. 64 Consolidated Results of Operations The following table sets forth our summarized consolidated statement of operations data for the years ended December 31, 2020, 2019 and 2018 and the dollar and percentage change between the respective periods: Years Ended December 31, Change 2020 vs. 2019 Change 2019 vs. 2018 (in thousands) 2020 2019 2018 Change % Change % Revenue $ 245,265 $ 148,857 $ 113,955 $ 96,408 65 % $ 34,902 31 % Costs and operating expenses: Costs of revenue, excluding deprecitaion and amortization of intangible assets 156,790 79,976 58,612 76,814 96 % 21,364 36 % Research and development 84,412 53,941 36,273 30,471 56 % 17,668 49 % Sales and marketing 55,095 47,672 31,629 7,423 16 % 16,043 51 % General and administrative 166,246 54,211 37,217 112,035 207 % 16,994 46 % Depreciation and amortization expense 10,153 7,761 5,330 2,392 31 % 2,431 46 % Total costs and operating expenses 472,696 243,561 169,061 229,135 94 % 74,500 44 % Loss from operations (227,431 ) (94,704 ) (55,106 ) (132,727 ) 140 % (39,598 ) 72 % Interest income and other income (expense), net 1,632 5,535 2,794 (3,903 ) (71 )% 2,741 98 % Loss before benefit from income taxes and loss from equity method investment (225,799 ) (89,169 ) (52,312 ) (136,630 ) 153 % (36,857 ) 70 % Benefit (expense) from income taxes (639 ) 803 — (1,442 ) (180 )% 803 N/A Loss from less than majority owned JV (2,188 ) — — (2,188 ) N/A — N/A Net loss (228,626 ) (88,366 ) (52,312 ) (140,260 ) 159 % (36,054 ) 69 % Net (loss) income attributable to noncontrolling interest (4,194 ) (1,176 ) 362 (3,018 ) 257 % (1,538 ) (425 )% Net loss attributable to American Well Corporation $ (224,432 ) $ (87,190 ) $ (52,674 ) $ (137,242 ) 157 % $ (34,516 ) 66 % Revenue For the year ended December 31, 2020, the increase in revenue was substantially driven by an increase in visit revenue volume ($76.5 million increase). Visit revenue has increased due to the impact of the COVID-19 crisis. Revenue increase was also attributable to new clients using our platform and existing clients adding additional modules to their platform subscriptions, such as our COVID-19 module. We believe that the strength of our technology platform will continue to serve as the foundation for our revenue growth. Subscription revenue from health systems was $49.8 million for the year ended December 31, 2020, compared to $38.8 million during December 31, 2019, an increase of $11.0 million, or 28%. Revenue earned from AMG patient visits increased by $76.5 million, or 188%, from $40.7 million for the year ended December 31, 2019 to $117.2 million in the December 31, 2020. The increase was primarily driven by increased utilization across our health system and health plan clients primarily from the COVID-19 pandemic as well as overall increased acceptance of telemedicine. AMG visits constituted 27% of the total visits for the year ended December 31, 2020, compared to 66% for the year ended December 31, 2019. Revenue earned from services and Carepoints was $29.7 million for the year ended December 31, 2020, compared to $24.5 million during December 31, 2019, an increase of $5.2 million, or 21%. The increase in services and Carepoints revenue was largely due to the overall increased volume of Carepoints sales and partially the result of timing with respect to the performance of services and the timing of delivery of Carepoints. For the year ended December 31, 2019, the increase in revenue was predominately the result of new clients using the platform as the average number of health system and health plan clients on our platform increased by 50, to 194 as of December 31, 2019 from 144 as of December 31, 2018, a 35% increase. We believe that the strength of our technology platform will continue to serve as the foundation for our revenue growth. Subscription revenue from health system clients was $38.8 million for the year ended December 31, 2019, compared to $27.3 million during the year ended December 31, 2018, an increase of $11.5 million, or 42%. This increase was substantially driven by a 50% increase in the average number of subscription clients increasing from 92 to 138. Subscription revenue from health plan clients was $30.6 million for the year ended December 31, 2019, compared to $23.6 million during the year ended December 31, 2018, an increase of $7.0 million, or 30%. This increase was driven by an 8% increase in the average number of subscription clients, increasing from 52 to 56, and increases in the health plan client average contract value increasing 21%. The total number of paid AMG patient visits increased 38%, by 208,000, from 551,000 in the year ended December 31, 2018 to 759,000 in the year ended December 31, 2019. This increase was primarily driven by increased utilization across our health system and health plan clients. AMG visits constituted 66% of the total visits for the year ended December 31, 2019, compared to 73% for the year ended December 31, 2018. 65 Costs of Revenue, Excluding Depreciation and Amortization of Intangible Assets For the year ended December 31, 2020, the increase in cost of revenue was primarily due to an increase of $50.8 million in provider related costs, with some portion of these provider costs due to increased visit volumes. Some portion of these provider costs were above typical levels due to the COVID-19 emergency rapid expansion of active providers. The increase in visit volume also resulted in the need to utilize a significantly higher level of non-clinical contractor resources to properly service visit demand. The Company experienced a $14.1 million increase in employee-related expense (primarily in the form of variable compensation and stock compensation expense). Hardware costs increased $6.0 million related to the increase in sale of devices. There was also an increase of $5.5 million in third party software. As a percentage of revenue, cost of revenues has increased as a result of the shift in revenue mix. The impact of COVID-19 has increased our visit revenue, which generates a lower gross margin contribution. For the year ended December 31, 2019, the increase in cost of revenue was primarily due to an increase of $4.6 million in employee-related expense (inclusive of stock compensation expense) and a $16.8 million increase in other costs, primarily provider related costs, combined with implementation and hosting related expenses. With respect to employee-related expense, our total administrative employee headcount dedicated to servicing AMG increased to 158 on December 31, 2019, as compared to 145 on December 31, 2018. As a percentage of revenue, cost of revenues have remained relatively consistent year over year. Research and Development Expenses Research and development expenses increased for the year ended December 31, 2020, compared the year ended December 31, 2019, which was primarily driven by an increase of $11.4 million in employee-related costs (inclusive of stock compensation expense). The increase in research and development expense was further driven by a $15.8 million increase in consulting services used by the research and development group. There was also an increase in product development costs of $1.3 million. Research and development expenses increased for the year ended December 31, 2019, compared the year ended December 31, 2018, which was primarily driven by an increase of $11.6 million from employee-related costs (inclusive of stock compensation expense). The increase in research and development expense was further driven by a $5.8 million increase in third party consulting related spend. In 2019 and 2020, the Company has initiated a focused effort to invest in the area of research and development. The Amwell platform as well as its embedded modules, programs and Carepoints will evolve to offer the ecosystem highly innovative, valuable and differentiating capabilities that will be delivered in a staged release process through 2021. We believe that our accelerated investment will have a multiyear positive impact on our future results. This increased investment focused primarily on the hiring of highly technically skilled resources to execute on our growth strategy. This increase in the research and development employee base is expected to result in increased research and development expense in future periods. However, the corresponding growth and revenue is expected to result in a lower expense as a percentage of revenue. Total research and development employee headcount increased to 289 on December 31, 2020, as compared to 223 on December 31, 2019 and 209 on December 31, 2018. Sales and Marketing Expenses Sales and marketing expenses increased for the year ended December 31, 2020, compared to the year ended December 31, 2019, which primarily consisted of a $9.7 million increase in employee-related costs (inclusive of commissions and stock compensation expense). The increase also consisted of an increase in third party software costs of $1.5 million and subcontracting expense of $0.8 million. The increase was offset by a decrease in marketing and promotional items of $2.9 million and travel expenses of $2.1 million due to travel being restricted during the COVID-19 pandemic. Sales and marketing expenses increased for the year ended December 31, 2019, compared to the year ended December 31, 2018, which primarily consisted of direct marketing spend, a $9.0 million increase in employee-related costs including commissions (inclusive of stock compensation expense) and, to a lesser extent, an increase $1.3 million in trade show and sponsorship expenses. Total sales and marketing employee headcount increased to 185 on December 31, 2020, as compared to 149 on December 31, 2019 and 121 on December 31, 2018. 66 General and Administrative Expenses General and administrative expenses increased for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase was driven by stock-based compensation expense of $100.6 million (predominantly related to restricted stock units granted to the co-CEOs). Additionally, the increases consisted of employee-related costs (excluding stock compensation expense) of approximately $11.0 million and increased insurance cost of $1.5 million. The increase in expenses was partially offset by savings in consulting expenses of $1.5 million (as the Company required less reliance on outside third parties) and a decrease of $0.7 million for meals and travel expenses as the Company was working remotely for the majority of the year. General and administrative expenses increased for the year ended December 31, 2019, compared to the year ended December 31, 2018. The increase was driven in part by increases in employee-related costs (including bonuses and stock compensation expense) of approximately $12.2 million, consulting of $3.3 million, service support agreements of $1.5 million and acquisition and integration costs of $0.7 million. Each of these expenses were partially offset by savings in non-compensation related administrative expenses. General and administrative expenses, excluding the increase in stock-based compensation, are expected to continue to increase (in absolute dollars) in future periods as we continue to grow in size and complexity while at the same time recognizing the full year impact of the regulatory and compliance costs associated with being a publicly traded company. Total general and administrative employee headcount increased to 159 on December 31, 2020, as compared to 156 on December 31, 2019 and 112 on December 31, 2018. Depreciation and Amortization Expense Depreciation expense increased by $0.3 million and amortization expense increased by $2.0 million, for the year ended December 31, 2020, compared to the year ended December 31, 2019, which was primarily driven by a $2.0 million increase in amortization as a result of the amortization of acquired intangible assets related to the Aligned Acquisition in November 2019. Depreciation and amortization expenses for the year ended December 31, 2019 increased compared to the year ended December 31, 2018, which was primarily driven by a $2.3 million increase in amortization as a result of the amortization of acquired intangible assets related to the Avizia Acquisition in July 2018. Interest Income and Other Income (Expense), net For the year ended December 31, 2020, interest income and other expenses consist entirely of interest income and gains from our cash equivalents and short-term investments. Interest income and other expense for the year ended December 31, 2019, consists entirely of interest income from our cash equivalents and short-term investments. Benefit (Expense) from Income Taxes Income tax expense was $0.6 million for the year ended December 31, 2020, compared to an income tax benefit of $0.8 million during December 31, 2019. The increase is driven primarily by expense associated with foreign stock compensation awards. Loss from Equity Method Investment The Company and Cleveland Clinic partnered to form a joint venture in 2019 with initial funding in January 2020, under the name CCAW, JV LLC, to provide broad access to comprehensive and high acuity care services via telehealth. The Company does not have a controlling financial interest in CCAW, JV LLC, but it does have the ability to exercise significant influence over the operating and financial policies of CCAW, JV LLC. Therefore, the Company accounts for its investments in CCAW, JV LLC using the equity method of accounting. During the year ended December 31, 2020, the Company recognized a loss of $2.2 million as its proportionate share of the joint venture results of operations. 67 Consolidated Quarterly Results of Operations The following table sets forth our unaudited quarterly statements of operations data for each of the quarters indicated. The unaudited quarterly statements of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of such data. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for any quarter are not necessarily indicative of results to be expected for a full year or any other period. The following quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report. Three Months Ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 Revenue $ 33,667 $ 35,414 $ 34,744 $ 45,032 $ 53,714 $ 68,568 $ 62,551 $ 60,432 Costs and operating expenses: Costs of revenue, excluding depreciation and amortization of intangible assets 18,605 17,395 19,060 24,916 33,027 43,826 42,116 37,821 Research and development 13,253 12,314 13,602 14,772 14,936 17,637 25,275 26,564 Sales and marketing 11,189 11,453 11,309 13,721 13,874 12,346 13,758 15,117 General and administrative 11,825 13,710 14,654 14,022 15,342 80,082 43,113 27,709 Depreciation and amortization expense 1,894 1,906 1,868 2,093 2,286 2,509 2,576 2,782 Total costs and operating expenses 56,766 56,778 60,493 69,524 79,465 156,400 126,838 109,993 Loss from operations (23,099 ) (21,364 ) (25,749 ) (24,492 ) (25,751 ) (87,832 ) (64,287 ) (49,561 ) Interest income and other income (expense), net 1,584 1,677 1,286 988 847 308 255 222 Loss before benefit (expense) from income taxes and loss from equity method investment (21,515 ) (19,687 ) (24,463 ) (23,504 ) (24,904 ) (87,524 ) (64,032 ) (49,339 ) Benefit (expense) from income taxes — (370 ) 392 781 — (252 ) (78 ) (309 ) Loss from equity method investment — — — — (320 ) (444 ) (486 ) (938 ) Net loss (21,515 ) (20,057 ) (24,071 ) (22,723 ) (25,224 ) (88,220 ) (64,596 ) (50,586 ) Net (loss) income attributable to non- controlling interest (384 ) (444 ) (56 ) (292 ) (843 ) (1,562 ) (1,515 ) (274 ) Net loss attributable to American Well Corporation $ (21,131 ) $ (19,613 ) $ (24,015 ) $ (22,431 ) $ (24,381 ) $ (86,658 ) $ (63,081 ) $ (50,312 ) Net loss per share attributable to common stockholders, basic and diluted (1) $ (0.51 ) $ (0.47 ) $ (0.57 ) $ (0.53 ) $ (0.58 ) $ (1.99 ) $ (0.92 ) $ (0.21 ) Weighted-average common shares outstanding, basic and diluted 41,636,972 41,843,957 41,933,597 42,150,956 42,383,251 43,484,313 68,499,106 240,664,561 ( 1 ) Basic and diluted net loss per share attributable to common stockholders are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted per share information. Liquidity and Capital Resources The following table presents a summary of our cash flow activity for the periods set forth below: Years December 31, 2020 2019 2018 Consolidated Statements of Cash Flows Data: Net cash used in operating activities $ (112,464 ) $ (81,892 ) $ (74,006 ) Net cash (used in) provided by investing activities (66,757 ) 119,999 (245,933 ) Net cash provided by financing activities 983,116 46,639 278,181 Total $ 803,895 $ 84,746 $ (41,758 ) Sources of Financing Our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $1,041.6 million as of December 31, 2020, which were held for a variety of growth initiatives and investments as well as working capital purposes. Our cash, cash equivalents and short-term investments are comprised of money market funds and marketable securities including U.S. Treasury bills. 68 In September 2020, we completed our initial public offering, or IPO, and issued and sold 45,681,499 shares of Class A common stock at an offering price of $18.00 per share, including 4,459,277 shares of Class A common stock pursuant to the exercise in full of the underwriters' option to purchase additional shares. We received net proceeds of $ 767.6 million, after deducting underwriting discounts and commissions of $ 49 .3 million and estimated deferred offering costs of approximately $4. 9 million. In conjunction with the IPO we closed on the Google LLC private placement and issued 5,555,555 shares of Class C common stock for proceeds of $99.1 million, net of offering costs of $0.9 million. Prior to our IPO, the Company funded its operations primarily through private placements of its convertible preferred stock as well as through revenues generated through customer contracts. As shown in the accompanying consolidated financial statements, the Company incurred a loss from operations of $227.4 million and a net loss of $228.6 million for year ended December 31, 2020 and had an accumulated deficit of $582.4 million as of December 31, 2020. The Company has no debt as of December 31, 2020 and expects to generate operating losses in future years. We believe that our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months from the issuance date of the financial statements. Our future capital requirements will depend on many factors including our growth rate, contract renewal activity, number of consultations on our platform, the timing and extent of spending to support product development efforts, our expansion of sales and marketing activities, the introduction of new and enhanced services offerings, and the continuing market acceptance of telehealth services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be adversely affected. Cash Used in Operating Activities For the year ended December 31, 2020, cash used in operating activities was $112.5 million. The primary driver of this use of cash was our net loss of $228.6 million. The net loss for the year was reflective of the investments made back into the Company (from both a personnel and technology perspective), partially offset by the overall growth of our business including an increase in new clients and expansion of business with existing clients. The net loss was partially offset by non-cash expenses of $134.6 million (primarily stock-based compensation of $118.4 million and depreciation and amortization of $10.2 million). For the year ended December 31, 2019, cash used in operating activities was $81.9 million. The primary driver of this use of cash was our net loss of $88.4 million. The net loss for the year was reflective of the investments made back into the Company (from both a personnel and technology perspective), partially offset by the overall growth of our business including an increase in new clients and expansion of business with existing clients. The net loss was partially offset by non-cash expenses of $21.0 million (primarily stock-based compensation of $12.1 million and depreciation and amortization of $7.8 million). For the year ended December 31, 2018, cash used in operating activities was $74.0 million. The primary driver of this use of cash was our net loss of $52.3 million. The cash used for operating activities was primarily driven by the overall growth of our business including an increase in new clients (through organic growth and the Avizia Acquisition) and expansion of business by existing clients. The net loss was partially offset by non-cash charges totaling $15.1 million, which was primarily comprised of stock-based compensation of $7.7 million and depreciation and amortization expense of $5.3 million. Cash Provided by Investing Activities Cash used in investing activities was $66.8 million for the year ended December 31, 2020. Cash used in investing activities consisted of $159.6 million in purchases of investments, partially offset by $99.1 million in proceeds from maturities of investments. Further, cash used in investing activities included a $2.9 million investment in the CCAW, JV LLC joint venture with Cleveland Clinic and $3.3 million in the purchases of property and equipment. 69 Cash provided by investing activities was $120.0 million for the year ended December 31, 2019. Cash provided by investing activities consisted of $246.0 million in proceeds from maturities of investments, partially offset by $78.9 million in purchases of investments. The Company used $45.8 million in connection with the acquisition of Aligned (in addition to Series C stock consideration). Further, cash used in investing activities included $1.3 million in the purchases of property and equipment. Cash used in investing activities was $245.9 million for the year ended December 31, 2018. Cash used in investing activities consisted of $355.2 million in purchases of investments and $175.6 million in proceeds from the sale of securities. Further, the Company used $64.4 million (in addition to Series C stock consideration) in connection with the acquisition of Avizia and $1.9 million for the purchases of property and equipment. Cash Provided by Financing Activities Cash provided by financing activities for the year ended December 31, 2020, was $983.1 million. Cash provided by financing activities consisted of $146.0 million of cash proceeds from our issuance of Series C Convertible Preferred Stock, net of issuance costs, $772.9 million of cash proceeds from our IPO, net of underwriting commissions and $99.1 million cash proceeds from the issuance of Class C common stock to Google, LLC in a private placement offering. These proceeds were offset by cash payments for the purchase of treasury stock of $37.6 million. Cash provided by financing activities for the year ended December 31, 2019, was $46.6 million. Cash provided by financing activities consisted of $45.8 million of cash proceeds from our issuance of Series C Convertible Preferred Stock, net of issuance costs, and $1.0 million of proceeds from the exercise of employee stock options. Cash provided by financing activities for the year ended December 31, 2018, was $278.2 million. Cash provided by financing activities consisted of $280.4 million of cash proceeds from our issuance of Series C Convertible Preferred Stock, net of issuance costs, and $0.6 million of proceeds from the exercise of employee stock options. Cash provided by financing activities was partially offset by $2.9 million used to repurchases Series A Convertible Preferred Stock. Indebtedness & Lines of Credit In January 2011, the Company entered into a credit agreement (the “Line of Credit”) with a financial institution that provides for maximum borrowings in one or more advances of an amount up to $5.0 million. Borrowings under the Line of Credit accrue interest at the London Interbank Offered Rate plus 1.25%. Borrowings are repayable immediately upon demand by the financial institution. In November 2017, the Line of Credit was amended to increase the maximum borrowings to $7.0 million. As of December 31, 2020, 2019 and 2018, the Company had no outstanding borrowings under the Line of Credit. During any period that the Line of Credit is in effect, the Company can request the financial institution issue a letter of credit with a maximum maturity not to exceed twelve months. Any letters of credit issued by the financial instrument reduce the maximum borrowings available under the Line of Credit. As of December 31, 2020, the maximum borrowing available to the Company is $5.9 million based on the outstanding letters of credit of $1.1 million that have been issued by the financial institution. Contractual Obligations and Commitments The following summarizes our contractual obligations as of December 31, 2020: Payment Due by Period Total Less than 1 Year 1 to 3 Years 4 to 5 Years More than 5 Years Operating Leases $ 7,739 $ 6,497 $ 1,242 $ — $ — Purchase Obligations 12,177 5,580 6,597 Total $ 19,916 $ 12,077 $ 7,839 $ — $ — Our existing office and hosting facilities lease agreements provide us with the option to renew and generally provide for rental payments on a graduated basis. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations and if we exercised the office and hosting facilities lease options. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. 70 Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions that the Company believes are necessary to consider to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent assets and liabilities. The Company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s 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. Changes in estimates are made when circumstances warrant. Such changes in estimates are reflected in the reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, business combinations, goodwill and intangible assets and stock-based compensation. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. See Note 2 to our consolidated financial statements appearing at the end of this Annual Report for a description of our other significant accounting policies. Revenue Recognition The Company generates revenue from contracts with customers who purchase access to the Company’s hosted telehealth platform which includes access to the Company’s network of medical professionals. The Company also provides implementation and post go-live professional services for its telehealth platform. Access to the platform, includes the ability for customers to access the AMG network of medical professionals, as well as, in certain cases, support and maintenance and other professional services. The typical contract term is three years. Most of the Company’s contracts are non-cancelable over the contractual term. Customers typically have the right to terminate their contracts for cause if the Company fails to perform in accordance with the contractual terms. For customers who purchase access to the Amwell Platform, the Company hosts a dedicated instance of the telehealth platform, white-labeled under the customer’s own name, branding, and with customized workflows and operating choices. Certain implementation services are required in order for the customer to drive its intended benefit. These implementation services generally span several months and are not performed by another entity. We recognize revenue from contracts with customers using the five-step method described in Note 2 in our consolidated financial statements. At contract inception, we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We combine contracts entered into at or near the same time with the same customer if we determine that the contracts are negotiated as a package with a single commercial objective; the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or the services promised in the contracts are a single performance obligation. 71 In general, we satisfy the majority of our performance obligations over time as we transfer the promised services to our customers. We review the contract terms and conditions to evaluate the timing and amount of revenue recognition; the related contract balances; and our remaining performance obligations. These evaluations require significant judgment that could affect the timing and amount of revenue recognized. Deferred revenues consist of the unearned portion of billed fees for our enterprise software access fees and related services, which is subsequently recognized as revenue in accordance with our revenue recognition policy. The Company estimates the amount of revenue it expects to recognize during the twelve-month period following the financial statement date which is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. Business Combinations The Company accounts for business combinations using the acquisition method of accounting. Application of this method of accounting requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill. Transaction costs related to business combinations are expensed as incurred. Determining the fair value of assets acquired and liabilities assumed and the allocation of the purchase price requires management to use significant judgment and estimates, especially with respect to intangible assets. Critical estimates in valuing certain identifiable assets include, but are not limited to, the selection of valuation methodologies, estimates of future revenue and cash flows, expected long-term market growth, future expected operating expenses, costs of capital and appropriate discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, the Company may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, which could last up to one year after the transaction date, all adjustments are recorded in the consolidated statements of operations and comprehensive loss. Goodwill and Intangible Assets Amortization of acquired intangible assets is the result of the consolidation of NTN which occurred in 2016, the acquisition of Avizia which occurred in 2018 and the acquisition of Aligned which occurred in 2019. As a result of these transactions, contractor and customer relationships, acquired technology, and trade name were identified as intangible assets, and are amortized over their estimated useful lives. We recognize the excess of the purchase price over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized but is tested for impairment annually on November 30 or more frequently if events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable. Our goodwill impairment tests are performed at the enterprise level given our single reporting unit. The fair value of the reporting unit is estimated using quoted market prices in active markets of our stock and compared to the carrying value. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value with the maximum impairment being equal to the carrying value of goodwill. A charge is reported as impairment of goodwill in the consolidated statements of operations and comprehensive loss. Stock-Based Compensation We measure all stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We generally issue stock option awards and restricted stock units with only service-based vesting conditions and record the expense for these awards using the straight-line method. Stock option awards and restricted stock units issued to the co-CEOs prior to the IPO or as a result of the IPO (“IPO RSUS”) are expensed when granted as the requisite future service of the awards is not substantive for accounting purposes. 72 We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. The assumptions and estimates are as follows: • Fair Value of Class A Common Stock —The absence of an active market for our common stock prior to our IPO required us to estimate the fair value of our common stock. See “—Common Stock Valuations” below. • Expected Term —The expected term represents the period that the stock-based awards are expected to be outstanding. We determine the expected term using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. For stock options granted to non-employees, the expected term equals the remaining contractual term of the option from the vesting date. • Expected Volatility —As we had no trading history for our common stock, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in our industry that are either similar in size, stage, or financial leverage, over a period equivalent to the expected term of the awards. • Risk-Free Interest Rate —The risk-free interest rate is calculated using the average of the published interest rates of U.S. Treasury zero-coupon issues with maturities that are commensurate with the expected term. • Dividend Yield —The dividend yield assumption is zero, as we have no history of, or plans to make, dividend payments. The restricted stock units issued to the co-CEOs as a result of the IPO had the fair value estimated using a binomial lattice approach. The main inputs to valuing the IPO RSUs include the fair value of Class A common stock ($9.96 post-split), expected volatility (60%) and the expected date of the IPO (September 30, 2020). Common Stock Valuations Prior to the completion of our IPO, the fair value of the common stock underlying our stock awards was determined by our board of directors. The valuations of our common stock prior to the completion of our IPO were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors: • contemporaneous valuations performed by third-party valuation firms; • the prices, rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock; • the prices of convertible preferred stock sold by us to third-party investors in arms-length transactions; • the lack of marketability of our common stock; • our actual operating and financial performance; • current business conditions and projections; • our stage of development; • the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions; • recent secondary stock transactions; • the market performance of comparable publicly-traded companies; and • U.S. market conditions. Following our IPO, we rely on the closing price of our Class A common stock as reported on the date of grant to determine the fair value of our Class A common stock, as shares of our Class A common stock are traded in the public market. 73 Recently Issued and Adopted Accounting Pronouncements Refer to Note 2 of our consolidated financial statements included elsewhere in this Annual Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report. Emerging Growth Company Status We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.