American Well Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations, including descriptions of our business plan and strategies, are forward-looking statements. These statements often include words such as “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” or the negative of these terms, and other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Important factors that may materially affect such forward-looking statements and projections include the following: • weak growth and increased volatility in the telehealth market; • our history of losses and the risk we may not achieve profitability; • inability to adapt to rapid technological changes; • our ability to successfully launch our new Converge telehealth platform without significant cost overruns or disruptions to our business and our customers’ acceptance of this new platform; • our limited number of significant clients and the risk that we may lose their business; • increased competition from existing and potential new participants in the healthcare industry; • changes in healthcare laws, regulations or trends and our ability to operate in the heavily regulated healthcare industry; • compliance with regulations concerning personally identifiable information and personal health industry; • slower than expected growth in patient adoption of telehealth and in platform usage by either clients or patients; • inability to grow our base of affiliated and non-affiliated providers sufficient to serve patient demand; • our ability to comply with federal and state privacy regulations and the significant liability that could result from a cybersecurity breach or our failure to comply with such regulations; • our ability to establish and maintain strategic relationships with third parties; • the impact of the COVID-19 pandemic on our business or on our ability to forecast our business’s financial outlook; • the risk that the insurance we maintain may not fully cover all potential exposures; and • inability to remediate material weaknesses or maintain effective internal control over financial reporting. The foregoing list of factors is not exhaustive and does not necessarily include all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. The information in this Quarterly Report should be read carefully in conjunction with other uncertainties and potential events described in our Form 10-K filed with the SEC on March 26, 2021 (the “Form 10-K”). The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report. Except as required by law or regulation, we do not undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances 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 22 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 March 31, 2021, we powered the digital care programs of over 55 health plans, which support over 36,000 employers and collectively represent more than 80 million covered lives, as well as over 150 of the nation’s largest health systems, encompassing more than 2,000 hospitals. Since inception, we have powered over 10 million telehealth visits for our clients, including 1. 6 million in the three months ended March 31, 2021. Healthcare today faces many challenges. Choice and access can be limited, care delivery is fragmented and inefficient, and costs continue to rise and shift to consumers while health outcomes have not improved. The healthcare industry is evolving to meet these challenges with innovative care models and new regulatory frameworks to promote more effective outcomes. As healthcare’s key stakeholders demand innovative technology solutions that streamline care delivery, lower costs, expand access and improve outcomes, we believe there is significant opportunity for transformation. We believe Amwell makes this digital care transformation possible for the healthcare ecosystem. The Amwell Platform enables care delivery across the full healthcare continuum – from primary and urgent care in the home to high acuity specialty consults, such as telestroke and telepsychiatry, in the hospital. We support both on-demand and scheduled consultations and offer 40 pre-packaged care modules and programs that power over 100 unique use cases today. Our platform can be fully embedded into our clients’ patient/member portals and provider workflows. Providers can launch telehealth directly from their native EHRs, with seamless integration to their payer eligibility and claims systems. Providers, patients and members can access this care through a full range of Carepoints ™ , including via mobile, web, phone and our proprietary kiosks and carts that support multi-way video, phone or secure messaging interactions. As of March 31, 2021, over 80,000 of our active providers use the Amwell Platform to serve their patients and members. When needed, we augment and extend our clients’ clinical capabilities with AMG, a nationwide clinical network of over 5,000 multi-disciplinary providers covering 50 states with 24/7/365 coverage. Amwell exists to empower healthcare’s leading players, who have earned the deep trust of their patients and members over decades, and does not aim to compete with or replace them. We help our clients white-label and embed telehealth within their existing healthcare offerings for their patients and members. Thus, we enable our provider customers to offer a seamless experience that blends online convenience when needed with in-person care by known, trusted providers as part of a complete care program that offers patients continuity of care. In this way, providers can use our telehealth platform as an effective augmentation and not a replacement of their traditional care delivery. 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. Total subscription fees received from Health System, Health Plan and Innovator clients were $24.6 million and $21.8 million for the three months ended March 31, 2021 and 2020, respectively. Health Systems For our health system customers, the Amwell Platform’s primary function is to facilitate consultations between patients and providers affiliated with the health system. Our typical contracts with health systems are mainly the platform subscription, but also include services delivered by AMG to complement the health system provider resources, services for technology integration, marketing and Carepoints. Subscription fees are recurring and are determined based on the initial forecasted number of overall consultations throughout the entire health system on the Amwell Platform and net patient revenue of the health system. Subscriptions include a maximum number of consultations that can be delivered on the platform and similar to a cellular phone plan, when consultations exceed the contractual maximum, overages result in higher subscription fees in the following annual period. As the 23 health system expands its use of the Amwell Platform through additional modules, there is a corresponding increase in subscription fees. To supplement a health system’s own network of healthcare providers, health systems often choose to purchase clinical services from AMG to deliver care for certain specialties such as telepsychiatry, behavioral health therapy and general urgent care, or to simply operate as backup providers on nights and weekends. AMG services are provided on a fee-for-service basis. Health Plans For our health plan clients, the Amwell Platform functions to provide better access to care, better coordination of care and the ability to direct care referrals to providers owned or affiliated with the respective health plan. All of these functions lower the overall cost of care for health plan clients: improved population access to needed services reduces unneeded ED usage and better coordination of care can improve outcomes and lower the overall cost of care. Currently, our typical health plan contract includes a recurring subscription fee based on the number of members who have access to our platform plus additional subscription fees associated with the various programs we offer the health plan. Our health plan clients mainly purchase clinical services for their members through AMG. They may also maintain relationships with other in network provider organizations to deliver care on the Amwell Platform on their behalf. These visit consultations are charged on a fee-for-service basis and range in price based on the type of consultation and the specialty of the provider. Innovators Amwell has a number of unique customers that use our platform in various ways to support their products. For example, we support: (i) Philips’ sleep apnea products and programs, (ii) a joint-venture with Cleveland Clinic and Amwell, (iii) Meuhedet’s advanced, hybrid-virtual international health plan. Our contracts with our innovator customers vary from simple subscription fee-only contracts, where an innovator customer embeds our technology within their product, to broad subscription fee and services contracts that resemble a blend of our health system and health plan profile contracts. Visits Amwell’s clinical affiliate AMG has built a network of over 5,000 providers who are registered and credentialed to deliver care on the Amwell Platform. This clinical network is designed and operated in a way that allows us to meet the aggregate visit demand requirements of our health plan and health system clients, spanning a broad mix of specialties including, for example, internal medicine, Family Medicine, Psychiatry, Gynecology, Anesthesiology, Nutritionist, Sleep Medicine, Pain Management, Psychology, Pulmonology, Urology, Health Coach, Orthopedic Surgery, Case Manager, Emergency Medicine, Gastroenterology, Nephrology, Pediatrician, Lactation Consultant, Social Worker, Vascular Surgery. AMG earns fee-for-service revenue for each episode of care delivered on the Amwell Platform by its providers with fees varying by physician specialty or clinical program. These clinical fees vary significantly from $59 to more than $800 per consultation or case based on the specialty and may require an additional module subscription, as in the case of telepsychiatry. Fees received from AMG-related visits were $27.8 million and $26.5 million for the three months ended March 31, 2021 and 2020, respectively. Services & Carepoints We offer a full suite of paid, supporting services to our clients to enable their telehealth offerings, including professional services to facilitate telehealth implementation, workflow design, systems integration and service expansion. To help our clients promote adoption and utilization, we offer patient and provider engagement services through our internal digital engagement agency. Our customers often deploy telemedicine through a variety of our proprietary Carepoints, which are medical carts and kiosks designed for various clinical and community settings. These Carepoints enable providers to deliver digital care into clinical care locations, such as the ED and clinics, as well as into community settings such as retail stores, community centers, employer sites, skilled nursing facilities and schools. Carepoints consist of hardware integrated into our Platform but can also be deployed independent of our software solution. Our Carepoints are designed by our product development teams and manufactured through partner and contract relationships. 24 Fees received from the provision of services and Carepoints were $5.2 million and $5.5 million for the three months ended March 31, 2021 and 2020, respectively. 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. COVID-19 has dramatically accelerated telehealth adoption seen in both overall volumes and embracement of delivering higher acuity care in a virtual medium. Peak COVID-19 pandemic visit growth reflected several factors. Many patients needed assessment for respiratory or other COVID-19-like symptoms and sought to be assessed for possible referral to hospital or testing facilities. In addition, many patients, especially those with health vulnerabilities, sought to avoid going into brick and mortar facilities – and indeed our health systems’ clients preferred wherever possible to treat patients remotely at home for non-COVID-19 related ongoing healthcare needs. Finally, we saw significant expansion of reimbursement for telehealth during the COVID-19 crisis, which made telehealth more affordable for many people. We continue to experience these levels of telehealth adoption and usage of our platform and products. In the three months ended March 31, 2021, our clients completed 1.6 million visits on the Amwell Platform verses 0.7 million for the same period in 2020. In addition to overall increased visit volumes, utilization of the platform continues to expand evident by a larger number of clients’ own providers using the Amwell Platform. During the three months ended March 31, 2021 our clients’ own providers performed over 80% of the total visits performed on the Amwell Platform versus 50% of total visits performed on the Amwell Platform during the three months ended March 31, 2020. Comparatively, throughout 2019 and through February 2020, or pre-COVID-19, AMG providers typically performed more than 60% of the total overall visits on the Amwell Platform. Total Overall Quarterly Visits Quarter Ended Overall Visits Performed by Customer Providers March 31, 2021 1,575,000 80 % December 31, 2020 1,550,000 75 % September 30, 2020 1,400,000 75 % June 30, 2020 2,200,000 75 % March 31, 2020 725,000 50 % December 31, 2019 350,000 35 % September 30, 2019 250,000 40 % 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 25 • the continued improvement in the regulatory environment for telehealth, including reimbursement for telehealth services • the ongoing consumerization of healthcare Total Active Providers Quarter Ended Total Active Providers Customer Providers AMG March 31, 2021 81,000 76,000 5,000 December 31, 2020 72,000 68,000 4,000 September 30, 2020 62,000 58,000 4,000 June 30, 2020 57,000 53,000 4,000 March 31, 2020 24,000 22,000 2,000 December 31, 2019 7,000 5,000 2,000 September 30, 2019 6,000 4,000 2,000 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.” 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. 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) public offering expenses, (vi) acquisition-related income and expenses, (vii) litigation expenses related to the defense of our patents in the patent infringement claim filed by Teladoc and (viii) 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 three months ended March 31, 2021 and 2020. 26 The following table presents a reconciliation of adjusted EBITDA from the most comparable GAAP measure, net loss, for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, (in thousands) 2021 2020 Net loss $ (39,805 ) $ (25,224 ) Add: Depreciation and amortization 2,506 2,286 Interest income and other income (expense), net (61 ) (847 ) Expense from income taxes 309 — Stock-based compensation 8,642 4,458 Public offering expenses 1,223 151 Acquisition-related income — 17 COVID-19-related expenses (1) — 1,413 Litigation expense 739 — Adjusted EBITDA $ (26,447 ) $ (17,746 ) (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. (2) Public offering expenses include non-recurring expenses incurred in relation to our initial public offering for the three months ended March 31, 2020 and our secondary offering for the three months ended March 31, 2021. 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 public offering 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 Statement 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 27 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 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. We are accelerating our multiyear technology investment in 2021 to accommodate the anticipated significant growth in market demand for increasingly broad and sophisticated telehealth enablement infrastructure following COVID-19. 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. 28 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 Income Taxes The income tax provision and benefit were primarily due to state and foreign income tax expense. 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. Management makes estimates and judgments about future taxable income based on assumptions that are consistent with our plans and estimates. 29 Consolidated Results of Operations The following table sets forth our summarized condensed consolidated statement of operations data for the three months ended March 31, 2021, and 2020 and the dollar and percentage change between the respective periods: Three Months Ended March 31, (in thousands) 2021 2020 Change % Revenue $ 57,599 $ 53,714 $ 3,885 7 % Costs and operating expenses: Costs of revenue, excluding depreciation and amortization of intangible assets 35,705 33,027 2,678 8 % Research and development 23,040 14,936 8,104 54 % Sales and marketing 13,732 13,874 (142 ) (1 )% General and administrative 21,354 15,342 6,012 39 % Depreciation and amortization expense 2,506 2,286 220 10 % Total costs and operating expenses 96,337 79,465 16,872 21 % Loss from operations (38,738 ) (25,751 ) (12,987 ) 50 % Interest income and other income (expense), net 61 847 (786 ) (93 )% Loss before expense from income taxes and loss from equity method investment (38,677 ) (24,904 ) (13,773 ) 55 % Expense from income taxes (309 ) — (309 ) (N/A) Loss from equity method investment (819 ) (320 ) (499 ) 156 % Net loss (39,805 ) (25,224 ) (14,581 ) 58 % Net loss attributable to non-controlling interest (617 ) (843 ) 226 (27 )% Net loss attributable to American Well Corporation $ (39,188 ) $ (24,381 ) $ (14,807 ) 61 % Revenue For the three months ended March 31, 2021, the increase in revenue was substantially driven by an increase in subscription revenue from $21.8 million for the three months ended March 31, 2020 to $24.6 million during the three months ended March 31, 2021, an increase of 2.8 million, or 13%. Subscription revenue grew as a result of new customers subscribing to the platform and existing customers expanding their use of the platform through increasing the number of members, they provided access to the platform, increased number of programs, increased modules and increased volume of care delivered on our platform by our customers’ own providers. Visit revenue earned from AMG patient visits increased by $1.3 million, or 5%, from $26.5 million in the three months ended March 31, 2020 to $27.8 million in the three months ended March 31, 2021. The increases were primarily driven by increased utilization across our health system and health plan clients as well as overall increased acceptance of telemedicine. AMG paid visits constituted 20% of the total visits for the three months ended March 31, 2021, compared to 50% for the three months ended March 31, 2020. Costs of Revenue, Excluding Amortization of Acquired Intangible Assets For the three months ended March 31, 2021, the increase in cost of revenue was primarily due to an increase of $1.0 million in provider related costs, with some portion of these provider costs due to increased visit volumes. 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 also experienced a $1.6 million increase in third party software primarily related to the cost of hosting the platform. Research and Development Expenses For the three months ended March 31, 2021, the increase was primarily driven by an increase of $4.4 million in employee-related costs (inclusive of stock compensation expense). The increase in research and development expense was further driven by a $3.7 million increase in consulting services primarily driven by increased spend related to our new Converge telehealth platform. 30 Sales and Marketing Expenses For the three months ended March 31, 2021, the increase primarily consisted of $2.0 million in employee-related costs (inclusive of commissions and stock compensation expense). The increase was offset by reduced travel expenses of $0.6 million and reduced marketing expenses of $0.8 million. General and Administrative Expenses For the three months ended March 31, 2021, the increase was driven by an increase stock-based compensation expense of $1.8 million (predominantly related to the increased value of our stock and an increase in awards issued). Additionally, the increases consisted of employee-related costs (excluding stock compensation expense) of approximately $1.5 million. The increase in general and administrative expenses was further driven by a $1.9 million increase in insurance costs for our directors and officers and $1.4 million in increased legal costs. 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. Depreciation and Amortization Expense Depreciation expense increased by $0.2 million and amortization expense remained consistent for the three months ended March 31, 2021. Interest Income and Other Income (Expense), net For the three months ended March 31, 2021 and 2020, interest income and other expenses consist entirely of interest income and gains from our cash equivalents and short-term investments. Expense from Income Taxes Income tax expense was $0.3 million for the three months ended March 31, 2021, compared to no income tax expense for the three months ended March 31, 2020. Loss from Equity Method Investment The Company and Cleveland Clinic partnered to form a joint venture, 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 three months ended March 31, 2021, the Company recognized a loss of $0.8 million as its proportionate share of the joint venture results of operations. During the three months ended March 31, 2020, the Company recognized a loss of $0.3 million as its proportionate share of the joint venture results of operations. Liquidity and Capital Resources The following table presents a summary of our cash flow activity for the periods set forth below: Three Months Ended March 31, 2021 2020 Consolidated Statements of Cash Flows Data: Net cash used in operating activities $ (41,139 ) $ (32,093 ) Net cash (used in) provided by investing activities (2,696 ) 5,640 Net cash (used in) provided by financing activities (1,699 ) 12,566 Total $ (45,534 ) $ (13,887 ) Sources of Financing Our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $996.4 million and $1,041.6 million as of March 31, 2021 and December 31, 2020, respectively, which were held for a variety of growth initiatives and 31 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. In September 2020, we received net proceeds of $767.6 million associated with the issuance of 45,681,499 shares of Class A common stock from our IPO, after deducting underwriting discounts and commissions of $49.3 million and 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 condensed consolidated financial statements, the Company incurred a loss from operations of $38.7 million and a net loss of $39.8 million for the three months ended March 31, 2021 and had an accumulated deficit of $668.9 million as of March 31, 2021. The Company has no debt as of March 31, 2021 or 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. 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 March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020, the maximum borrowing available to the Company was $6.2 million and $5.9 million based on the outstanding letters of credit of $0.8 million and $1.1 million that have been issued by the financial institution. Three months ended March 31, 2021, vs. three months ended March 31, 2020 Cash Used in Operating Activities For the three months ended March 31, 2021, cash used in operating activities was $41.1 million. The primary driver of this use of cash was our net loss of $39.8 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 $12.7 million (primarily stock-based compensation of $8.6 million and depreciation and amortization of $2.5 million). For the three months ended March 31, 2020, cash used in operating activities was $32.1 million. The primary driver of this use of cash was our net loss of $25.2 million. The net loss for the year was reflective of the expenses incurred with our response to COVID-19 and our continued investments made back into the Company’s infrastructure, partially offset by the revenue growth. The net loss was partially offset by non-cash expenses of $7.7 million (primarily stock-based compensation of $4.5 million and depreciation and amortization of $2.3 million). 32 Cash Used in/ Provided by Investing Activities Cash used in investing activities was $2.7 million for the three months ended March 31, 2021. Cash provided by investing activities consisted of a $2.5 million investment in the CCAW, JV LLC joint venture with Cleveland Clinic and $0.1 million in the purchases of property and equipment. Cash provided by investing activities was $5.6 million for the three months ended March 31, 2020. Cash provided by investing activities consisted of $29.8 million in purchases of investments, offset by $39.6 million in proceeds from the maturities of investments. Further, cash provided by investing activities included a $2.9 million investment in the CCAW, JV LLC joint venture with Cleveland Clinic and $1.3 million in the purchases of property and equipment. Cash Used in/Provided by Financing Activities Cash used in financing activities for the three months ended March 31, 2021, was $1.7 million. Cash provided by financing activities consisted of $9.3 million of proceeds from the exercise of employee stock options. These proceeds were offset by cash payments for the purchase of treasury stock of $9.4 million. Cash provided by financing activities for the three months ended March 31, 2020, was $12.6 million. Cash provided by financing activities consisted of $12.6 million of cash proceeds from our issuance of Series C Convertible Preferred Stock, net of issuance costs. 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. Contractual Obligations and Commitments As of March 31, 2021, there have been no material changes from the contractual obligations and commitments previously disclosed in our Form 10-K. Critical Accounting Policies and Estimates Our condensed consolidated financial statements and the related notes thereto are prepared in accordance with GAAP. The preparation of condensed consolidated 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 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 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. Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, to our condensed consolidated financial statements in our Form 10-K and Note 2, Summary of Significant Accounting Policies to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no significant changes to these policies during the three months ended March 31, 2021. Recently Issued Accounting Pronouncements Adopted For more information on recently issued accounting pronouncements, see Note 2 to our condensed consolidated financial statements covered under Part I, Item 1 of this Quarterly Report on Form 10-Q. 33 New Accounting Pronouncements Not Yet Adopted For more information on new accounting pronouncements not yet adopted, see Note 2 to our condensed consolidated financial statements covered under Part I, Item 1 in this Quarterly Report on Form 10-Q. Emerging Growth Company Status We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (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. Item 3. Qualitative and Quantitative Disclosure about Market Risk Interest Rate Risk We had cash and cash equivalents totaling $896.4 million, and $941.6 million as of March 31, 2021 and December 31, 2020, respectively. The Company also held investments totaling $100.0 million and $100.0 million as of March 31, 2021, and December 31, 2020, respectively. These amounts were primarily invested in money markets and U.S. Treasury bills. The cash and cash equivalents are held for a variety of growth and investments as well as working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars. We do not believe that an increase or decrease of 100 basis points in interest rates would have a material effect on our business, financial condition or results of operations. However, our cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. Fluctuations in the value of our money market funds caused by a change in interest rates (gains or losses on the carrying value) are recorded in other income and are realized only if we sell the underlying securities. Foreign Currency Exchange Risk To date, a substantial majority of our revenue from customer arrangements has been denominated in U.S. dollars. We have limited operations outside the United States. As of March 31, 2021 and December 31, 2020, we had one foreign subsidiary. The functional currency of our foreign subsidiary is the U.S. dollar. The Company also has a branch with a functional currency of the New Israeli Shekel, however activity in the New Israeli Shekel is not considered significant. Accordingly, we believe we do not have a material exposure to foreign currency risk. We may choose to focus on international expansion, which may increase our exposure to foreign currency exchange risk in the future. Inflation Risk We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last two years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition or results of operations.