American Well Corporation (Amwell) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the same periods in 2019. Financial amounts below are in U.S. dollars. Amwell provides an enterprise telehealth platform, subscriptions, professional services and Carepoints, and clinical visits through its affiliated medical group, AMG.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $62.6 million | $34.7 million | $184.8 million | $103.8 million |
| Operating loss | $(64.3) million | $(25.7) million | $(177.9) million | $(70.2) million |
| Net loss | $(64.6) million | $(24.1) million | $(178.0) million | $(65.6) million |
| Adjusted EBITDA (non-GAAP) | $(26.2) million | $(20.3) million | $(57.3) million | $(55.8) million |
| Cash used in operating activities | Not provided separately | Not provided separately | $(87.9) million | $(66.6) million |
- Revenue mix, Q3: Platform subscriptions were $25.8 million, visits $28.5 million and services/Carepoints $8.3 million. Visit revenue rose sharply as platform use expanded during COVID-19; the Aligned Telehealth acquisition also contributed.
- Margins: Costs of revenue, excluding depreciation and amortization of intangible assets, were $42.1 million in Q3 and $119.0 million for the nine months. On that basis, gross margin was approximately 32.7% and 35.6%, respectively, versus 45.1% and 47.0% in the comparable 2019 periods. Amwell attributed the decline to revenue mix shifting toward lower-margin visits and elevated costs to scale provider capacity.
- Cash and liquidity: At September 30, cash and cash equivalents were $956.4 million and investments were $129.9 million, totaling $1,086.3 million. Total current assets were $1,143.6 million and current liabilities $106.6 million. Management said available cash, cash equivalents and investments should fund operating expenses and capital expenditures for at least 12 months.
- Debt: No outstanding borrowings at September 30. The company had a $7.0 million line of credit, with $5.9 million available after letters of credit.
- Per-share result: Q3 basic and diluted loss per share was $0.92, versus $0.57; the nine-month loss was $3.38 per share, versus $1.55. The company completed an 8.8-for-1 stock split and its IPO during the period.
Material changes versus comparable periods
- Revenue increased 80% in Q3 and 78% for the nine months year over year. Completed platform visits rose to 1.4 million in Q3 from 0.3 million, and to 4.3 million for the nine months from 0.8 million.
- AMG visit revenue increased to $28.5 million in Q3 from $7.2 million and to $90.9 million for the nine months from $25.7 million. AMG providers accounted for a smaller share of total visits as clients increasingly used their own providers.
- Operating expenses rose faster than revenue: total costs and operating expenses increased 110% in Q3 and 108% for the nine months. General and administrative expense included substantial stock-based compensation, chiefly related to co-CEO equity awards: total stock-based compensation was $34.4 million in Q3 and $106.5 million for the nine months.
- Operating cash use increased to $87.9 million for the nine months from $66.6 million. Financing cash flow was boosted by the September IPO and Google private placement.
Outlook, commentary, risks and unusual items
- Management expects operating losses to continue for the foreseeable future and described increased near-term investment in research and development, sales capacity and public-company costs. The filing does not provide numerical revenue or earnings guidance.
- The September IPO generated $768.5 million of net proceeds; a concurrent Google private placement generated $99.1 million net. The IPO also converted outstanding preferred stock into Class A common shares. The company repurchased approximately $24.2 million of shares from certain executives and employees to cover taxes related to equity vesting and repay related loans.
- Nine-month adjusted EBITDA included $5.9 million of COVID-19-related expenses, primarily provider bonuses, emergency hosting fees and temporary labor. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- COVID-19 drove unusually high telehealth utilization and temporarily eased reimbursement and licensing barriers. The duration of demand and regulatory changes is uncertain; restrictions could return or change adversely. Management said the pandemic had not significantly affected estimates and assumptions as of the filing.
- A related-party customer represented approximately 22% of revenue in Q3 and the nine-month period; the filing identifies Anthem as a major related-party customer. Customer concentration and related-party transactions merit attention.
- Teladoc filed a patent-infringement claim on October 12, 2020 concerning certain Amwell cart products and peripherals. Amwell said it believed the allegations lacked merit and intended to defend itself. The filing states Carepoints represented approximately 5% of 2019 revenue.
- Management concluded disclosure controls were not effective as of September 30 due to material weaknesses in financial reporting, including revenue accounting, tax review and period-end reporting controls. Remediation was underway, but the weaknesses were not yet considered remediated.
- Amwell has an agreement to make up to an additional $11.8 million in contributions to its Cleveland Clinic joint venture; the phases were not yet defined. It also disclosed a potential Aligned acquisition earn-out of up to $70 million tied to 2020 performance thresholds.
Investor verification priorities
- Assess whether the pandemic-driven visit surge, reimbursement environment and customer usage persist, and how they affect recurring subscription growth and revenue mix.
- Track gross margin and provider costs as visit volume scales, and separate recurring operating trends from substantial stock-based compensation and other adjustments.
- Reconcile cash burn with the stated 12-month liquidity outlook, including future capital needs, commitments and any additional Aligned earn-out.
- Review customer concentration, related-party revenue and the terms and economics of the Google relationship and Cleveland Clinic joint venture.
- Monitor the Teladoc litigation and any effect on Carepoints sales, product availability or costs.
- Confirm progress in remediating material weaknesses and evaluate the reliability of future financial reporting.