Teladoc Health, Inc.: Form 10-Q for the period ended Sep 30, 2023

Special Note Regarding Forward-Looking Statements

Many statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as “anticipates,” “believes,” “suggests,” “targets,” “projects,” “plans,” “expects,” “future,” “intends,” “estimates,” “predicts,” “potential,” “may,” “will,” “should,” “could,” “would,” “likely,” “foresee,” “forecast,” “continue” and other similar words or phrases, as well as statements in the future tense to identify these forward-looking statements. These forward-looking statements and projections are contained throughout this Form 10-Q, including the section entitled” “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this Form 10-Q, you should understand that these statements are not guarantees of performance or results. 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. Factors that may materially affect such forward-looking statements and projections include, but are not limited to, the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) and in our other reports and U.S. Securities and Exchange Commission (“SEC”) filings. These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.

Overview

Teladoc, Inc. was incorporated in the State of Texas in June 2002 and changed its state of incorporation to the State of Delaware in October 2008. Effective August 10, 2018, Teladoc, Inc. changed its corporate name to Teladoc Health, Inc. Unless the context otherwise requires, Teladoc Health, Inc., together with its subsidiaries, is referred to herein as “Teladoc Health,” the “Company,” or “we.” The Company’s principal executive office is located in Purchase, New York. Teladoc Health is the global leader in whole person virtual care focusing on forging a new healthcare experience with better convenience, outcomes, and value around the world.

Teladoc Health was founded on a simple, yet revolutionary idea: that everyone should have access to the best healthcare, anywhere in the world on their terms. Today, we have a vision of making virtual care the first step on any healthcare journey, and we are delivering on this mission by providing whole person virtual care that includes primary care, mental health, chronic condition management, and more.

Key Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including the following:

As it relates to the Integrated Care segment:

Number of U.S. Integrated Care Members. U.S. Integrated Care members represent the number of unique individuals who have paid access and visit fee only access to our suite of integrated care services in the U.S. at the end of the applicable period. Our revenue growth rate and long-term profitability are affected by our ability to increase cross selling capability among our existing members over time because we derive a substantial portion of our revenue from access and other fees via Client contracts that provide members access to our professional provider network in exchange for a contractual based periodic fee. Therefore, we believe that our ability to add new members and retain existing members, and to increase utilization and penetration further into existing and new health plan Clients is a key indicator of our increasing market adoption, the growth of our business, and our future revenue potential. We further believe that increasing our membership is an integral objective that will provide us with the ability to continually innovate our services and support initiatives that will enhance members’ experiences. U.S. Integrated Care members increased by 8.3 million to 90.2 million at September 30, 2023, compared to the same period in 2022.

Chronic Care Program Enrollment. Chronic care program enrollment represents the total number of enrollees across our suite of chronic care programs at the end of a given period. Our chronic care program enrollments are one of the key components of our whole person virtual care platform that we believe positions us to drive greater engagement with our platforms and increased revenue. Chronic care program enrollment increased by 13% to 1.122 million at September 30, 2023, compared to 0.993 million at September 30, 2022.

Average Monthly Revenue Per U.S. Integrated Care Member. Average monthly revenue per U.S. Integrated Care member measures the average monthly amount of global revenue that we generate from a U.S. Integrated Care member for a particular period. It is calculated by dividing the total revenue generated from the Integrated Care segment by the average number of U.S. Integrated Care members during the applicable period. Approximately 20% of total Integrated Care revenues relates to international and hospital and health systems for which membership is not considered as a management metric. We believe that our ability to increase the revenue generated from each member over time is also a key indicator of our increasing market adoption, the growth of our business, and future revenue potential. Average monthly revenue per U.S. Integrated Care member increased to $1.41 in the three months ended September 30, 2023, from $1.40 in the same period in 2022, primarily due to increasing chronic care revenues over the course of the year. Average monthly revenue per U.S. Integrated Care member decreased to $1.40 in the nine months ended September 30, 2023 from $1.42 in the same period in 2022, primarily due to the impact of new members onboarded over the course of the year. The change in average monthly revenue versus the indicated prior period is reflective of the growth and timing of onboarding new members and the mix of their fees.

As it relates to the BetterHelp segment:

BetterHelp Paying Users. BetterHelp paying users represent the average number of global monthly paying users of our BetterHelp therapy services during the applicable period. We believe that our ability to add new paying users and retain existing users is a key indicator of the increasing market adoption of BetterHelp, the growth of that business, and future revenue potential. Our ability to reach new potential paying users through various advertising channels helped us to increase BetterHelp paying users by 5% to 0.459 million for the three months ended September 30, 2023, compared to 0.437 million for the three months ended September 30, 2022, and increased by 14% to 0.467 million for the nine months ended September 30, 2023, compared to 0.409 million for the nine months ended September 30, 2022.

As it relates to the Company:

Seasonality. Our business has historically been subject to seasonality. In our Integrated Care segment, a concentration of our new Client contracts have an effective date of January 1 as a result of many Clients’ introduction of new services at the start of each calendar year. Therefore, while membership increases, utilization and enrollment rates are dampened until service delivery ramps up over the course of the year. As a result of seasonal cold and flu trends, we historically have experienced our highest level of visit and other fee revenue during the first and fourth quarters of each year.

Due to the higher cost of customer acquisition during the end-of-year holiday season, our BetterHelp segment has historically reduced marketing activity during the fourth quarter. As a result of this dynamic, we have typically experienced fewer new member additions and the strongest operating income performance in the fourth quarter. Conversely, as marketing activity typically resumes at the start of the year, we typically experience the weakest operating income performance during the first quarter as new customer acquisition and revenue growth lags marketing spend.

Critical Accounting Estimates and Policies

Our discussion and analysis of our results of operations, liquidity and capital resources are based on our condensed consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, business combinations, goodwill and other intangible assets, income taxes, and other items. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our results of operations and financial position. For a discussion of our critical accounting policies and estimates see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2022 Form 10-K. In addition, the following updates our discussion of impairment testing therein as of September 30, 2023.

Goodwill Impairment Charge

There were no impairment charges recorded for goodwill or definite-lived intangible assets for the three and nine months ended September 30, 2023. As of the last goodwill testing period, the excess of reporting unit value over carrying value was significant for the remaining unimpaired goodwill, which was the portion of goodwill assigned to the BetterHelp segment on the October 1, 2022 testing date.

At June 30, 2022, we performed an impairment assessment using updated valuation assumptions as compared to those used for the March 31, 2022 impairment assessment. The discount rate was increased for a company risk premium to reflect the then-current perception of risks of achieving projected cash flows and, to a lesser extent, to reflect further increases in interest rates and market volatility. Additionally, revenue market multiples were lowered based upon an updated analysis of a consistent peer group. The June 30, 2022 assessment did not result in an impairment of definite-lived intangible assets or other long-lived assets, but did result in an additional $3.0 billion non-deductible goodwill impairment charge (or $18.78 per basic and diluted share). As a result, a $9.6 billion non-deductible goodwill impairment charge (or $59.73 per basic and diluted share) was recognized for the nine months ended September 30, 2022. The non-cash impairment charges had no impact on the provision for income taxes.

Non-GAAP Financial Measures

To supplement our financial information presented in accordance with GAAP, we use earnings before interest, provision for income taxes, depreciation, and amortization (“EBITDA”), Adjusted EBITDA, and free cash flow, which are non-GAAP financial measures, to clarify and enhance an understanding of past performance. We believe that the presentation of these financial measures enhances an investor’s understanding of our financial performance, and are commonly used by investors to evaluate our performance and that of our competitors. We further believe that these financial measures are useful financial metrics to assess our operating performance and financial and business trends from period-to-period by excluding certain items that we believe are not representative of our core business, and that free cash flow reflects an additional way of viewing our liquidity that, when viewed together with GAAP results, provides management, investors, and other users of our financial information with a more complete understanding of factors and trends affecting our cash flows. We use these non-GAAP financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We utilize Adjusted EBITDA as a key measure of our performance.

EBITDA consists of net loss before interest income; interest expense; other income, net, including foreign exchange gain or loss; provision for income taxes; depreciation and amortization; and goodwill impairment. Adjusted EBITDA consists of net loss before interest income; interest expense; other income, net, including foreign exchange gain or loss; provision for income taxes; depreciation and amortization; goodwill impairment; stock-based compensation; restructuring costs; and acquisition, integration, and transformation costs.

Free cash flow is net cash (used in) provided by operating activities less capital expenditures and capitalized software development costs.

Our use of these non-GAAP terms may vary from that of others in our industry, and other companies may calculate such measures differently than we do, limiting their usefulness as comparative measures.

Non-GAAP measures have important limitations as analytical tools and you should not consider them in isolation, and they should not be considered as an alternative to net loss before provision for income taxes, net loss, net loss per share, net cash from operating activities or any other measures derived in accordance with GAAP. Some of these limitations are:

• EBITDA and Adjusted EBITDA eliminate the impact of the provision for income taxes on our results of operations, and they do not reflect goodwill impairment, interest income, interest expense or other income, net;
• Adjusted EBITDA does not reflect restructuring costs. Restructuring costs may include certain lease impairment costs, certain losses related to early lease terminations, and severance;
• Adjusted EBITDA does not reflect significant acquisition, integration, and transformation costs. Acquisition, integration and transformation costs include investment banking, financing, legal, accounting, consultancy, integration, fair value changes related to contingent consideration and certain other transaction costs related to mergers and acquisitions. It also includes costs related to certain business transformation initiatives focused on integrating and optimizing various operations and systems, including upgrading our customer relationship management (“CRM”) and enterprise resource planning (“ERP”) systems. These transformation cost adjustments made to our results do not represent normal, recurring, operating expenses necessary to operate the business but rather, incremental costs incurred in connection with our acquisition and integration activities; and
• Adjusted EBITDA does not reflect the significant non-cash stock compensation expense which should be viewed as a component of recurring operating costs.

In addition, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect any expenditures for such replacements.

We compensate for these limitations by using these non-GAAP measures along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include net loss, net loss per share, net cash provided by operating activities, and other performance measures.

In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of these non-GAAP measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

Condensed Consolidated Results of Operations

The following table sets forth our condensed consolidated statements of operations data for the three months ended September 30, 2023 and 2022 and the dollar and percentage change between the respective periods (dollars in thousands except for per share data):

n/m – not meaningful

(1) Non-GAAP Financial Measures

The following table sets forth our condensed consolidated statements of operations data for the nine months ended September 30, 2023 and 2022 and the dollar and percentage change between the respective periods (dollars in thousands except for per share data):

n/m – not meaningful

(1) Non-GAAP Financial Measures

The following is a reconciliation of net loss, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022 (in thousands):

Revenue. Total revenue was $660.2 million for the three months ended September 30, 2023, compared to $611.4 million during the three months ended September 30, 2022, an increase of $48.8 million, or 8%. This increase in revenue was driven substantially by the generation of additional access fees by our membership base in both our Integrated Care and BetterHelp segments. Total access fees were $582.1 million for the three months ended September 30, 2023 compared to $540.1 million for the three months ended September 30, 2022, an increase of $42.0 million, or 8%. Other revenue, which predominately includes visit fees and, to a lesser extent, revenue from the sales of our telehealth solutions for hospitals and health systems, was $78.2 million for the three months ended September 30, 2023 compared to $71.3 million for the three months ended September 30, 2022, an increase of $6.8 million, or 10%, primarily related to the sales of our telehealth solutions for hospitals and health systems. For the three months ended September 30, 2023, 88% of our revenue was derived from access fees and 12% was derived from other revenue, consistent with the three months ended September 30, 2022. By geography, U.S. revenue grew 7% to $569.3 million and International revenue grew 17% to $90.9 million compared to the three months ended September 30, 2022.

For the nine months ended September 30, 2023, the increase of total revenue was 10%, growing to $1,941.9 million compared to $1,769.1 million for the nine months ended September 30, 2022. This growth was driven substantially by the generation of additional access fees by our membership base, primarily from our BetterHelp segment. Revenue from access fees was $1,708.6 million for the nine months ended September 30, 2023 compared to $1,550.1 million for the nine months ended September 30, 2022, an increase of $158.5 million, or 10%. Other revenue was $233.3 million for the nine months ended September 30, 2023 compared to $219.0 million for the nine months ended September 30, 2022, an increase of $14.3 million, or 7%, and related to the sales of our telehealth solutions for hospitals and health systems and higher visits. For the nine months ended September 30, 2023, 88% of our revenue was derived from access fees and 12% of was derived from other revenue, consistent with the nine months ended September 30, 2022. By geography, U.S. revenue grew 8% to $1,672.8 million and International revenue grew 21% to $269.1 million compared to the nine months ended September 30, 2022.

Cost of Revenue (exclusive of depreciation and amortization, which is shown separately below). Cost of revenue was $186.0 million for the three months ended September 30, 2023, essentially flat compared to $185.6 million for the three months ended September 30, 2022. On a year-to-date basis, cost of revenue increased by $11.5 million, or 2%, to $566.6 million. For both periods, higher costs associated with the growth in revenue was offset by lower consultation costs, reflecting various operation optimization efforts to reduce provider costs, overall product mix, and lower amortization of device costs.

Advertising and Marketing Expenses. Advertising and marketing expenses were $186.2 million for the three months ended September 30, 2023 compared to $178.9 million for the three months ended September 30, 2022, an increase of $7.2 million, or 4%, driven mainly by higher digital and media advertising costs. On a year-to-date basis, advertising and marketing expenses increased by $64.6 million, or 14%, to $541.7 million. The increase was substantially driven by higher digital and media advertising costs related to BetterHelp.

Sales Expenses. Sales expenses were $52.3 million for the three months ended September 30, 2023 compared to $54.6 million for the three months ended September 30, 2022, a decrease of $2.3 million, or 4%. The decrease was primarily driven by lower employee compensation and lower costs related to sales conferences and events, partially offset by higher commission costs. On a year-to-date basis, sales expenses decreased by $10.6 million, or 6%, to $160.3 million. The decrease was primarily driven by lower employee compensation and lower commission costs, partially offset by higher costs related to sales conferences and events.

Technology and Development Expenses. Technology and development expenses were essentially unchanged at $84.3 million for the three months ended September 30, 2023 compared to $84.6 million for the three months ended September 30, 2022. This reflects higher infrastructure, hosting, and software license costs associated with running operations and ongoing projects and services to continuously improve and optimize our products and services, offset by lower employee compensation costs, professional fees, and contract labor costs. On a year-to-date basis, technology and development expenses increased by $7.9 million, or 3% to $258.6 million. The increase was primarily driven by higher infrastructure, hosting and software license costs, partially offset by lower professional fees and contract labor costs and lower recruiting and employee-related costs. For the three months ended September 30, 2023 and 2022, research and development costs, which exclude amounts reflected as capitalized software, were $31.8 million and $27.1 million, respectively. For the nine months ended September 30, 2023 and 2022, research and development costs were $95.4 million and $78.7 million, respectively.

General and Administrative Expenses. General and administrative expenses increased $3.6 million, or 3%, to $115.7 million for the three months ended September 30, 2023 compared to $112.1 million for the three months ended September 30, 2022. The increase was primarily driven by higher employee compensation costs, legal costs, corporate and other costs, and bad debt reserves, partially offset by lower professional fees, occupancy costs, and therapist onboarding costs. On a year-to-date basis, general and administrative expenses increased $25.7 million, or 8%, to $355.7 million. The increase was primarily driven by higher employee compensation costs, bad debt expenses, credit card charges, and other non-income taxes, partially offset by lower therapist onboarding costs, other professional fees, and occupancy costs.

Acquisition, Integration, and Transformation Costs. Acquisition, integration, and transformation costs were $5.8 million and $16.8 million for the three and nine months ended September 30, 2023, respectively, and primarily consisted of costs to integrate and upgrade the CRM and ERP ecosystem. For the three and nine months ended September 30, 2022, acquisition, integration, and transformation costs were $1.6 million and $9.0 million, respectively, and primarily consisted of costs to integrate and upgrade the CRM and ERP ecosystem.

Restructuring Costs. Restructuring costs for the three months ended September 30, 2023 were $0.4 million and consisted of adjustments for estimates related to the reduction of office space and severance. Restructuring costs for the nine months ended September 30, 2023 were $16.0 million and consisted of losses related to the reduction of office space and severance. For both the three and nine months ended September 30, 2022, restructuring costs were $3.7 million and also consisted of losses related to the reduction of office space and severance.

Depreciation and Amortization.

The following tables show depreciation and amortization broken down by components for the periods indicated (in thousands):

Depreciation and amortization increased 52% for the three months ended September 30, 2023 and increased 33% for the nine months ended September 30, 2023, both compared to the prior year periods.

During the three months ended September 30, 2023, we initiated a strategy to transition the majority of our chronic condition management Clients and members to the Teladoc Health brand on a phased basis, with a smaller subset continuing to be served under the Livongo trade name beyond 2024. In connection with the brand strategy, we accelerated the amortization associated with the Livongo trademark, increasing amortization expense in the years ending December 31, 2023 and 2024, with corresponding reductions thereafter. The change in accounting estimate resulted in additional amortization expense for acquired intangibles of $18.6 million, or $0.11 per basic and diluted share for both the three and nine months ended September 30, 2023.

Goodwill Impairment. No goodwill impairment charge was recognized during either the three or nine months ended September 30, 2023. In the prior year, non-cash goodwill impairment charges of $9,630.0 million for the nine months ended September 30, 2022 were recognized, following goodwill impairment testing performed as a result of sustained decreases in our publicly quoted share price. The non-cash charges had no impact on the provision for income taxes.

Interest Income. Interest income consisted of interest earned on cash and cash equivalents. Interest income was $12.6 million for the three months ended September 30, 2023 compared to $4.8 million for the three months ended September 30, 2022. Interest income was $33.1 million for the nine months ended September 30, 2023 compared to $6.2 million for the nine months ended September 30, 2022. The increases for both three and nine months periods were primarily driven by higher interest rate yields and, to a lesser extent, an increase in cash and cash equivalent balances.

Interest Expense. Interest expense consisted of interest costs and the amortization of debt discounts primarily associated with the convertible senior notes. Interest expense was $5.6 million for the three months ended September 30, 2023 compared to $6.1 million for the three months ended September 30, 2022. Interest expense was $16.7 million and $17.4 million for the nine months ended September 30, 2023 and 2022, respectively.

Other Expense (Income), net. Other expense (income), net was an expense of $1.8 million for the three months ended September 30, 2023 compared to an expense of $1.6 million for the three months ended September 30, 2022, primarily reflecting losses on foreign currency exchange rate fluctuations. Other expense (income), net was an income of $2.9 million for the nine months ended September 30, 2023 compared to an expense of $2.6 million for the nine months ended September 30, 2022, primarily reflecting a gain on the partial sale of a business.

Provision for Income Taxes. We recorded income tax benefits of $2.5 million for the three months ended September 30, 2023 compared to benefits of $1.2 million for the three months ended September 30, 2022 and income tax benefits of $2.8 million for the nine months ended September 30, 2023 compared to benefits of $2.0 million for the nine months ended September 30, 2022.

Segment Information

The following tables set forth the results of operations for the relevant segments for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):

Integrated Care total revenues increased by $31.6 million, or 9%, to $374.4 million for the three months ended September 30, 2023 on higher chronic care results, as well as higher telemedicine product revenue, including higher revenues from our virtual primary case offering, Primary360. Integrated Care total revenues increased by $67.6 million, or 7%, to $1,084.4 million for the nine months ended September 30, 2023 on higher chronic care results, as well as higher telemedicine product revenue, including higher revenues from our Primary360 offering.

Integrated Care Adjusted EBITDA increased by $23.9 million, or 62%, to $62.8 million for the three months ended September 30, 2023, primarily reflecting higher gross profit, partially offset by higher advertising and marketing expenses. Integrated Care Adjusted EBITDA increased by $44.4 million, or 49%, to $135.9 million for the nine months ended September 30, 2023, primarily reflecting higher gross profit, partially offset by higher general administrative and technology and development expenses.

BetterHelp total revenues increased by $20.7 million, or 8%, to $285.8 million for the three months ended September 30, 2023, primarily driven by a 5% increase in average monthly paying users. BetterHelp total revenues increased by $114.8 million, or 15%, to $857.5 million for the nine months ended September 30, 2023, driven by a 14% increase in average monthly paying users.

BetterHelp Adjusted EBITDA increased by $14.8 million, or 133%, to $26.0 million for the three months ended September 30, 2023, primarily reflecting higher gross profit, partially offset by higher technology and development costs, advertising and marketing costs, and general and administrative expenses. BetterHelp Adjusted EBITDA increased by $16.5 million, or 27%, to $77.8 million for the nine months ended September 30, 2023, primarily reflecting higher gross profit, partially offset by higher advertising and marketing costs and, to a lesser extent, higher general and administrative, and technology and development expenses.

Liquidity and Capital Resources

The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):

Our principal source of liquidity is our cash and cash equivalents, which totaled $1,030.5 million as of September 30, 2023.

We believe that our existing cash and cash equivalents will be sufficient to meet our working capital, capital expenditure, and contractual obligation needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, contract renewal activity, number of visits, 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, the continuing market acceptance of telehealth, and our debt service obligations. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies, and intellectual property rights. We may be required to seek additional equity or debt financing to fund working capital, capital expenditures and acquisitions, and to settle debt obligations. 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, which would adversely affect our business, financial condition and results of operations.

Historically, we have financed our operations primarily through sales of equity securities, debt issuance, and bank borrowings.

See Note 10. “Convertible Senior Notes” of the notes to the condensed consolidated financial statements for additional information on our convertible senior notes.

We routinely enter into contractual obligations with third parties to provide professional services, licensing, and other products and services in support of our ongoing business. The current estimated cost of these contracts is not expected to be significant to our liquidity and capital resources based on contracts in place as of September 30, 2023.

Cash from Operating Activities

Cash flows provided by operating activities consisted of net loss adjusted for certain non-cash items and changes in assets and liabilities. Net cash provided by operating activities was $219.9 million for the nine months ended September 30, 2023 compared to net cash provided by operating activities of $123.7 million for the nine months ended September 30, 2022. The year-over-year improvement was primarily driven by growth in the business as well as lower incentive compensation payments, higher non-income tax refunds, and higher interest income.

The primary uses of cash from operating activities are for the payment of cash compensation, provider fees, engagement marketing, direct-to-consumer digital and media advertising, inventory, insurance, technology costs, interest expense and acquisition, integration, and transformation costs. Historically, cash compensation is at its highest level in the first quarter when discretionary employee compensation related to the previous fiscal year is paid.

Cash from Investing Activities

Cash used in investing activities was $119.8 million for the nine months ended September 30, 2023, and $113.9 million for the nine months ended September 30, 2022. Amounts for both periods substantially relate to payments for capitalized software development costs associated with ongoing projects to continuously improve and optimize our products and services.

Cash from Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2023 was $12.6 million and $2.1 million for the nine months ended September 30, 2022. The nine months ended September 30, 2022 was negatively affected by certain miscellaneous cash outflows that were not present in the current year-to-date period.

The following is a reconciliation of net cash provided by operating activities to free cash flow (in thousands, unaudited):

Free cash flow was a positive $100.1 million for the nine months ended September 30, 2023, compared to $4.9 million for the nine months ended September 30, 2022. The year-over-year increase was substantially driven by growth in operating cash flow as capitalized expenditures and capitalized software were essentially unchanged in the year-over-year period.

Interest Rate Risk and Foreign Exchange Risk

Cash equivalents that are subject to interest rate volatility represent our principal market risk. We do not expect cash flows to be affected to any significant degree by a sudden change in market interest rates as our convertible senior notes bear fixed interest rates. We do not enter into investments for trading or speculative purposes.

We operate our business primarily within the U.S. which accounts for approximately 86% of our revenues. We have not utilized hedging strategies with respect to our foreign exchange exposure as we believe it is not expected to have a material impact on our condensed consolidated financial statements.

Concentrations of Risk and Significant Clients

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We deposit our cash with financial institutions in the U.S. and in foreign countries, however, our deposits, at times, may exceed federally insured limits. Our cash equivalents are primarily invested in institutional money market funds.

No Client represented over 10% of consolidated revenues for the three or nine months ended September 30, 2023 or 2022.

Management’s Report on Internal Control over Financial Reporting

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During 2022, we implemented a new ERP system for selected entities and transaction types included within our consolidated financial statements. During the three months ended June 30, 2023 and September 30, 2023, we implemented this ERP system for additional entities and functions. As a result of these ERP system implementations, we revised certain existing internal controls, processes, and procedures. There are inherent risks in implementing an ERP system and, accordingly, we will continue to evaluate the design and operating effectiveness of these controls.

Other than these ERP system implementations, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For a discussion of potential risks and uncertainties related to our Company see the information in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the “Special Note Regarding Forward-Looking Statements” section in Part I, Item 2, of this Quarterly Report on Form 10-Q.