What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-01 · 72 added, 75 removed, 328 unchanged (31% of the section changed)

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001-39100) under the heading “ Management’s Discussion and Analysis of Financial Condition and Results of Operations – Comparison of Years Ended December 31, 2022 and 2021 .”

We envision a world where anyone who wants to have a child can do so.

Our mission is to make dreams of parenthood come true through healthy, timely and supported fertility journeys.

Through our differentiated approach to benefits plan design, patient education and support and active network management, our clients’ employees are able to pursue the most effective treatment from the best physicians and achieve optimal outcomes.

We believe in a world where everyone can realize dreams of family and ideal health.

Our mission is to empower healthier, supported journeys through transformative fertility, family building and women's health benefits.

Through our differentiated approach to benefits plan design, patient education and support and active network management, our clients’ employees are able to pursue the most effective treatment across life's milestones from the best physicians and achieve optimal outcomes.

Progyny is a leading benefits management company specializing in fertility and family building benefits solutions in the United States.

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We have achieved this growth by demonstrating that our purpose-built, data-driven and disruptive platform consistently delivers superior clinical outcomes in a cost-efficient manner while driving exceptional client and member satisfaction.

We have retained substantially all of our clients since inception, and our member satisfaction over that same time period is evidenced by our most recent industry-leading Net Promoter Score, or NPS, of +82 for our fertility benefits solution and +79 for our integrated pharmacy benefits solution, Progyny Rx as of December 31, 2022.

We have retained substantially all of our clients since inception, and our member satisfaction over that same time period is evidenced by our industry-leading Net Promoter Score, or NPS, of +80 for our fertility benefits solution and +80 for our integrated pharmacy benefits solution, Progyny Rx as of December 31, 2023.

Our members experience healthier pregnancies and superior rates of pregnancy and live births, as well as reduced rates of miscarriages and multiple births, saving valuable time and money and limiting personal and professional disruption.

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Members, in consultation with their Patient Care Advocates, or PCAs, can choose their preferred provider clinics within our network and utilize the specific Smart Cycle treatment bundles necessary for the treatment pathway they determine throughout their fertility journey.

In addition, we provide care management services as part of our fertility benefits solution, which include active management of our selective network of high-quality fertility specialists, real-time member eligibility and treatment authorization, member-facing digital solutions, detailed quarterly reporting for our clients supported by our dedicated account management teams and end-to-end comprehensive concierge member support provided by our in-house staff of PCAs.

In addition, we provide care management services as part of our fertility benefits solution, which include active management of our selective network of high-quality fertility specialists, real-time member eligibility and treatment authorization, member-facing digital solutions, detailed quarterly reporting for our clients supported by our dedicated client success teams and end-to-end comprehensive concierge member support provided by our in-house staff of PCAs.

Clients can also add adoption and surrogacy reimbursement programs as part of this solution.

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Progyny Rx provides our members with access to the medications needed during their fertility treatment.

As part of this solution, we provide care management services, which include our formulary plan design, simplified authorization, assistance with prescription fulfillment and

timely delivery of the medications by our network of specialty pharmacies, as well as medication administration training, pharmacy support services and continuing PCA support.

As part of this solution, we provide care

management services, which include our formulary plan design, simplified authorization, assistance with prescription fulfillment and timely delivery of the medications by our network of specialty pharmacies, as well as medication administration training, pharmacy support services and continuing PCA support.

We currently serve over 450 employers with at least 1,000 covered lives in the United States across more than 40 industries.

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Member and Client Base.

Our addressable market is primarily large self-insured employers.

There are approximately 8,000 employers in the United States (excluding but not limited to quasi-governmental entities, such as universities, school systems, and labor unions) who have a minimum of 1,000 employees, representing approximately 75 million potential covered lives in total.

Our current member base of approximately 5.4 million covered lives under contract represents a mid-single digit percent of our initial market opportunity.

If we were to include quasi-governmental entities in our potential addressable market, we believe our market penetration is even lower.

Our addressable market is primarily large self-insured employers, as well as labor populations under the Labor Management Relations Act of 1947 (also known as the Taft-Hartley Act) and federal government populations.

There are approximately 8,000 employers in the United States who have a minimum of 1,000 employees, who together with Taft-Hartley labor populations and federal government populations, represents approximately 106 million potential covered lives in total.

Our current member base of approximately 6.4 million covered lives under contract represents a mid-single digit percent of our total market opportunity.

We intend to continue to drive new client acquisition by investing significantly in sales and marketing to engage, educate and drive awareness of the unmet need around fertility solutions among benefits executives.

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Importantly, as we have continued to grow, we have meaningfully diversified our client base across more than 40 different industries currently from just two industries when we launched our fertility benefits solution in 2016.

expanding our client base within each industry and have an industry-specific strategy that enables us to most effectively target our addressable market.

We are expanding our client base within each industry and have an industry-specific strategy that enables us to most effectively target our addressable market.

Because our clients within an industry compete with each other for employees, we believe our solutions are increasingly viewed as an important way for them to differentiate from, or remain competitive with, one another.

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Impact of COVID-19 on our Business

The COVID-19 pandemic has significantly impacted various markets around the world, including the United States.

Restrictions related to COVID-19, including variants, and our responses to them have significantly impacted and may continue to impact how our members use our services, access our providers, and how our employees work and provide services to our clients and members, resulting in an impact on our revenue.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to monitor liquidity, as necessary, and ensure that our business can continue

to operate during these uncertain times.

COVID-19, including variants, and related restrictions continued to have a negative impact on our revenue growth for the twelve months ended December 31, 2022.

The COVID-19 pandemic significantly impacted various markets around the world, including the United States.

Restrictions related to COVID-19, including variants, and our responses to them significantly impacted and may continue to impact how our members use our services, access our providers, and how our employees work and provide services to our clients and members, resulting in an impact on our revenue.

COVID-19, including variants, and related restrictions had

a negative impact on our revenue growth in the past, including for the twelve months ended December 31, 2022.

To the extent that the markets we serve experience increased cases of COVID-19, including variants, state or local governments may reinstitute measures to control its spread, which could again negatively impact our members’ access to care, which could in turn impact our business.

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Revenue related to the dispensing of prescription drugs by the specialty pharmacies in our network includes the prescription fees negotiated with our clients, including the portion that we collect directly from members (deductibles, co-insurance and co-payments).

The contractual fees agreed to with our clients are inclusive of the cost of the prescription drug from our specialty providers, less any applicable discounts, as well as the related clinical and care management services.

The contractual fees agreed to with our clients are inclusive of the cost of the prescription drug from our specialty providers, less any applicable discounts (or rebates), as well as the related clinical and care management services.

Revenue from these arrangements is recognized when the drugs are dispensed.

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Our cost of services has three primary components:

(1) fertility benefit services;

(2) pharmacy benefit services;

(1) fertility benefits services;

(2) pharmacy benefits services;

and (3) vendor rebates.

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(1) fees paid to provider clinics within our network, labs and anesthesiologists;

(2) costs incurred (including salaries, bonuses, benefits, stock-based compensation, other related costs,

and an allocation of our general overhead, depreciation and amortization) for those employees associated with our care management service functions:

(2) costs incurred (including salaries, bonuses, benefits, stock-based compensation expense, other related costs, and an allocation of our general overhead, depreciation and amortization) for those employees associated with

our care management service functions:

Provider Account Management, PCA, Provider Relations and Claims Processing teams;

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(1) the fees for prescription drugs dispensed and clinical services provided during the reporting period by our specialty pharmacy partners;

(2) costs incurred (including salaries, bonuses, benefits, stock-based compensation, other related costs, and an allocation of our general overhead, depreciation and amortization) for those employees associated with our care management service functions:

PCA, Provider Relations and Claims Processing teams;

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We expect that gross profit and gross margin will continue to be affected by various factors including the geographic location where treatments are performed, as well as pricing with each of our clients, provider clinics, labs, specialty pharmacies and pharmaceutical companies, all of which are negotiated separately, have different contracting start and end dates and durations which are not coterminous with each other.

Additionally, staffing levels necessary to deliver our care management services will continue to grow as we continue to add clients and their associated members.

Additionally, staffing levels and the related personnel costs, including stock-based compensation expense, and other costs necessary to deliver our care management services will continue to grow as we continue to add clients and their associated members.

Operating Expenses

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Sales and Marketing Expense

Sales and marketing expense consists primarily of employee related costs, including salaries, bonuses, commissions, benefits, stock-based compensation, other related costs, and an allocation of our general overhead, depreciation and amortization for those employees associated with sales and marketing.

Sales and marketing expense consists primarily of employee related costs, including salaries, bonuses, commissions, benefits, stock-based compensation expense, other related costs, and an allocation of our general overhead, depreciation and amortization for those employees associated with sales and marketing.

These expenses also include third-party consulting services, advertising, marketing, promotional events, and brand awareness activities.

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General and Administrative Expense

General and administrative expense consists primarily of employee related costs, including salaries, bonuses, benefits, stock-based compensation, other related costs, and an allocation of our general overhead, depreciation and amortization for those employees associated with general and administrative services such as executive, legal, human resources, information technology, accounting, and finance.

General and administrative expense consists primarily of employee related costs, including salaries, bonuses, benefits, stock-based compensation expense, other related costs, and an allocation of our general overhead, depreciation and amortization for those employees associated with general and administrative services such as executive, legal, human resources, information technology, accounting, and finance.

These expenses also include third-party consulting services and facilities costs.

We anticipate that we will incur additional general and administrative expenses on an ongoing basis as a public company and to support growth in the business.

We anticipate that we will incur additional general and administrative expenses on an ongoing basis to support the growth of our business.

Other Income, net

Other income, net includes investment income and losses as well as interest income and expense.

Benefit for Income Taxes

Other income, net primarily includes interest income and expense, as well as investment income and losses.

Provision (Benefit) for Income Taxes

We are subject to income taxes in the United States.

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evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

As of December 31, 2020, in part because we had achieved three years of cumulative income, along with our projections of profitability , management determined that there was sufficient positive evidence to conclude that it was more likely than not that the net deferred tax assets of $38.0 million were realizable and therefore released substantially all of our valuation allowance.

We continue to maintain this position as of December 31, 2022.

We believe there is sufficient positive evidence to conclude that it is more likely than not that the net deferred tax assets are realizable.

Results of Operations

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Income before income taxes 70,691 24,441

Benefit for income taxes 5,917 33,334

Provision (benefit) for income taxes 8,654 (5,917)

Net income $ 62,037 $ 30,358

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Total stock‑based compensation expense $ 122,611 $ 100,748

(2) Adjusted EBITDA is a non-GAAP financial measure that we define as net income, adjusted to exclude depreciation and amortization, stock-based compensation expense, other income (expense), net, interest income, net, and benefit for income taxes.

(2) Adjusted EBITDA is a non-GAAP financial measure that we define as net income, adjusted to exclude depreciation and amortization, stock-based compensation expense, other income, net, interest income, net, and provision (benefit) for income taxes.

See “Management’s Discussion and Analysis of Financial Condition and Result of Operations – Non-GAAP Financial Measure – Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net income, the most directly comparable measure calculated in accordance with U.S.

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Income before income taxes 6.5 % 3.1 %

Benefit for income taxes 0.8 % 6.6 %

Provision (benefit) for income taxes 0.8 % (0.8) %

Net income 5.7 % 3.9 %

Adjusted EBITDA 17.2 % 16.0 %

percentages shown in the table may not foot due to rounding.

Non-GAAP Financial Measure – Adjusted EBITDA

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GAAP results.

We calculate Adjusted EBITDA as net income, adjusted to exclude depreciation and amortization, stock-based compensation expense, other income (expense), net, interest income, net, and benefit for income taxes.

We calculate Adjusted EBITDA as net income, adjusted to exclude depreciation and amortization, stock-based compensation expense, other income, net, interest income, net, and provision (benefit) for income taxes.

The following table presents a reconciliation of Adjusted EBITDA to net income for each of the periods indicated:

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Stock‑based compensation expense 122,611 100,748

Other (income) expense, net (286) 366

Other income, net (5,203) (286)

Interest income, net (3,304) (814)

Benefit for income taxes (5,917) (33,334)

Provision (benefit) for income taxes 8,654 (5,917)

Adjusted EBITDA $ 187,076 $ 125,690

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Progyny Rx went live with only a select number of clients on January 1, 2018 and has continued to add both new and existing fertility benefit solution clients since its initial launch.

Our revenue growth for the years ended December 31, 2022 and 2021 was negatively impacted by COVID-19.

Our revenue for the year ended December 31, 2022 was negatively impacted by COVID-19.

Cost of Services

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Cost of services increased by $230.2 million, or 37%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in medical treatment and pharmacy prescription costs associated with fertility treatments delivered.

This increase in cost of services was also attributable to an increase in personnel-related costs primarily due to incremental headcount as well as a $16.9 million increase in stock-based compensation expense.

This increase in cost of services was also attributable to an increase in personnel-related costs primarily due to incremental headcount as well as an $8.6 million increase in stock-based compensation expense.

Gross Profit and Gross Margin

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Gross profit increased by $71.5 million, or 43%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Gross margin decreased 110 basis points for the year ended December 31, 2022 compared to year ended December 31, 2021, primarily due to an increase in stock-based compensation expense for employees supporting our care management service functions, partially offset by ongoing efficiencies realized in the delivery of our care management services.

Gross margin increased 60 basis points for the year ended December 31, 2023 compared to year ended December 31, 2022, primarily due to ongoing efficiencies realized in the delivery of our care management services, partially offset by the impact of planned cost containment efforts that were shared with our clients.

Operating Expenses

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Sales and marketing expense increased by $13.8 million, or 30%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

This increase was primarily due to a $23.4 million increase in personnel-related costs attributable to an increase in stock-based compensation expense of $15.7 million, incremental headcount and an increase in sales commissions, as well as a $2.1 million increase in other related sales and marketing expenses.

This increase was primarily due to an $11.3 million increase in personnel-related costs attributable to an increase in stock-based compensation expense of $5.9 million, incremental headcount and an increase in sales commissions, as well as a $2.5 million increase in other related sales and marketing expenses.

General and Administrative Expense

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General and administrative expense increased by $18.8 million, or 19%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

This increase was primarily due to a $35.3 million increase in personnel-related costs including an increase in stock-based compensation expense of $34.4 million as well as a $4.0 million increase in bad debt expense, partially offset by $0.6 million decrease in other related general and administrative expenses.

This increase was primarily due to a $9.7 million increase in personnel-related costs including an increase in stock-based compensation expense of $7.4 million, a $6.1 million increase in bad debt expense driven by our revenue growth, as well as a $3.0 million increase in other related general and administrative expenses.

Other Income, Net

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(dollars in thousands)

Other income, net $ 1,100 $ 95 NM

Other income, net $ 8,507 $ 1,100 673 %

Other income, net increased by $7.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to increases in investment and interest income.

Benefit for Income Taxes

Provision (Benefit) for Income Taxes

2023 2022 % Change

(dollars in thousands)

Benefit for income taxes $ 5,917 $ 33,334 (82) %

For the year ended December 31, 2022, we recorded a benefit for income taxes of $5.9 million, as compared to a benefit for income taxes of $33.3 million for the year ended December 31, 2021, primarily due to a decrease in discrete tax benefits related to equity compensation activity that occurred during the current year period.

Provision (benefit) for income taxes $ 8,654 $ (5,917) (246) %

For the year ended December 31, 2023, we recorded a provision for income taxes of $8.7 million, as compared to a benefit for income taxes of $5.9 million for the year ended December 31, 2022, primarily due to higher operating profit as well as a decrease in tax benefits for equity compensation, including discrete tax benefits, in the current year period.

Liquidity and Capital Resources

As of December 31, 2023, we had $97.3 million of cash and cash equivalents and $273.8 million of marketable securities.

Since inception, we have financed our operations primarily through sales of our solutions and the net proceeds we have received from sales of equity securities, including our IPO.

Since inception, we have financed our operations primarily through sales of our solutions and the net proceeds we have received from sales of equity securities, including our initial public offering.

Our cash and cash equivalents and working capital are affected by the timing of payments to third party providers and collections from clients and have increased as our revenue has increased.

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Accordingly, our working capital, and its impact on cash flow from operations, can fluctuate materially from period to period.

We believe that our existing cash and cash equivalents, including the proceeds from our IPO, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

We believe that our existing cash and cash equivalents, including the proceeds from our marketable securities, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

We also expect these sources of existing cash and cash equivalents will be sufficient to fund our long-term contractual obligations and capital needs.

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Moreover, our future capital requirements will depend on many factors, including sales of our solutions and client renewals, the timing and the amount of cash received from clients, the expansion of our sales and marketing activities and the continuing market adoption of our solutions.

Other than the impact on our revenue growth and the related cash flows resulting from the various restrictions on activities due to the COVID-19 pandemic, our sources and uses of cash were not otherwise materially impacted by the COVID-19 pandemic in the three months and year ended December 31, 2022 and, to date, we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic.

Based on the information currently available to us, we do not expect the COVID-19 pandemic to have a material impact on our liquidity.

We will continue to monitor and assess the impact the COVID-19 pandemic, including variants, may have on our business and financial results.

In addition, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which could reduce our ability to access capital and could negatively affect our liquidity in the future.

If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations.

Other than the prior impact on our revenue growth and the related cash flows resulting from the various restrictions on activities due to the COVID-19 pandemic, as of December 31, 2023, our sources and uses of cash were not otherwise significantly impacted by the COVID-19 pandemic and, to date, based on the information currently available to us, we have not identified and do not expect any material liquidity deficiencies as a result of the COVID-19 pandemic.

For additional information on the various risks posed by the COVID-19 pandemic, please refer to Part I, Item 1A.

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If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.

In June 2018, we entered into an agreement with Silicon Valley Bank to replace our then-outstanding term loan with a revolving line of credit of up to $15.0 million, which was amended in April 2019, January 2020, June 2020 and February 2021.

The line of credit matured on June 8, 2021.

The following table summarizes our cash flows from continuing operations for the periods presented:

The following table summarizes our cash flows from operations for the periods presented:

(in thousands)

Cash provided by operating activities $ 188,814 $ 80,395

Cash (used in) provided by investing activities (43,866) 8,766

Cash used in investing activities (200,525) (43,866)

Cash used in financing activities (11,072) (7,864)

Net increase in cash and cash equivalents $ 28,665 $ 21,108

Effect of exchange rate changes on cash and cash equivalents 1 —

Net (decrease) increase in cash and cash equivalents $ (22,782) $ 28,665

Operating Activities

Net cash provided by operating activities was $188.8 million for the year ended December 31, 2023, primarily consisting of net income of $62.0 million adjusted for certain non-cash items, which included $122.6 million of stock-based compensation expense, $19.9 million of bad debt expense, $3.7 million of deferred tax expense, and $2.3 million of depreciation and amortization.

Changes in operating assets and liabilities resulted in cash used in operating activities from an increase in prepaid expenses and other current assets of $22.9 million and accounts receivable of $21.7 million, partially offset by cash provided by operating activities from increases in accounts payable of $16.2 million, accrued expenses and other current liabilities of $10.4 million and other noncurrent assets and liabilities of $0.6 million.

These changes are a result of the impact of revenue growth and our operating results as well as new agreements with our pharmacy program partners, which include more favorable payment receipt terms and resulted in an additional receipt in the year ended December 31, 2023, and the timing of cash collections and payments to third parties, including a $20.0 million prepayment on the dispensing of certain medications from one of our pharmacy program partners in the year ended December 31, 2023.

Net cash provided by operating activities was $80.4 million for the year ended December 31, 2022, primarily consisting of net income of $30.4 million adjusted for certain non-cash items, which included $100.7 million of stock-based compensation expense, $13.8 million of bad debt expense, $6.6 million of deferred tax benefits, and $1.6 million of depreciation and amortization.

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These changes are a result of the impact of revenue growth and our operating results as well as the timing of cash collection and payments to third parties.

Net cash provided by operating activities was $26.0 million for the year ended December 31, 2021, primarily consisting of net income of $65.8 million adjusted for certain non-cash items, which included $33.7 million of stock-based compensation expense, $33.3 million of deferred tax benefits, $9.8 million of bad debt expense, and $1.3 million of depreciation and amortization.

Changes in operating assets and liabilities resulted in cash used in operating activities from an increase in accounts receivable of $68.7 million and other noncurrent assets and liabilities of $3.3 million, partially offset by cash provided by operating activities from increases in accounts payable of $17.8 million, accrued expenses and other current liabilities of $2.2 million, and prepaid expenses and other current assets of $0.7 million.

These changes are a result of the impact of revenue growth and our operating results as well as the timing of payments to third party providers and collections from customers.

Investing Activities

Net cash used by investing activities was $43.9 million for the year ended December 31, 2022, which primarily consisted of net cash used of $40.6 million for investments in marketable securities.

For the year ended December 31, 2021, net cash provided by investing activities was $8.8 million, primarily consisting of net proceeds of $10.9 million from marketable securities.

The remainder of the activity for the years ended December 31, 2022 and 2021 consisted of purchases of computers, software, including capitalized software development costs, and leasehold improvements, including leasehold improvements.

Net cash used in investing activities was $200.5 million and $43.9 million for the years ended December 31, 2023 and 2022, respectively, which primarily consisted of net investments in marketable securities of $196.9 million and $40.6 million, respectively.

The remainder of the activity for the years ended December 31, 2023 and 2022 consisted of purchases of computers, software, including capitalized software development costs, and leasehold improvements.

Financing Activities

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Net cash used in financing activities was $7.9 million for the year ended December 31, 2022, consisting of payments of $12.1 million for employee taxes related to equity awards, partially offset by $3.1 million in proceeds from stock option exercises and $1.2 million in proceeds from contributions to our employee stock purchase plan.

Share Repurchase Program

In February 2024, our Board of Directors authorized a share repurchase program of up to $100 million in shares of common stock.

Repurchases may be made in the form of open market repurchases, including through plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, depending on stock price, market conditions and

other factors, as determined by management.

There can be no assurance as to the number of shares to be repurchased by us, if any.

Operating Lease Commitments

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In February 2022, we entered into a lease agreement for additional space in our corporate offices in New York, New York, consisting of a 24,099 square foot office and a 21,262 square foot office, and also for continued occupancy of the 25,212 square foot office after the expiration of the current sublease.

For the 24,099 square foot office, we will pay the base rent of approximately $1.4 million per year starting in March 2024 for five years and approximately $1.5 million per year thereafter through the first quarter of 2035, the expected expiration date.

For the 21,262 square foot office, we will pay the base rent of approximately $1.3 million starting in the first quarter of 2025 for five years and approximately $1.4 million per year thereafter through the first quarter of 2035, the expected expiration date.

For our current 25,212 square foot office, we will pay the base rent of approximately $1.6 million per year beginning in June 2029 through the first quarter of 2035, the expected expiration date.

For the 24,099 square foot office, we will pay the base rent of approximately $1.4 million per year starting in April 2024 for five years and approximately $1.5 million per year thereafter through the fourth quarter of 2035, the expected expiration date.

For the 21,262 square foot office, we will pay the base rent of approximately $1.3 million starting in the fourth quarter of 2025 for five years and approximately $1.4 million per year thereafter through the fourth quarter of 2035, the expected expiration date.

For our current 25,212 square foot office, we will pay the base rent of approximately $1.6 million per year beginning in June 2029 through the fourth quarter of 2035, the expected expiration date.

Critical Accounting Estimates

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To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

We believe that the assumptions and estimates associated with our accrued receivables related to revenue recognition, accrued claims payable, stock-based compensation, and accounting for income taxes have the greatest potential impact on our financial statements.

We believe that the assumptions and estimates associated with our accrued receivables related to revenue recognition, accrued claims payable, stock-based compensation expense, and accounting for income taxes have the greatest potential impact on our financial statements.

Therefore, we consider these to be our critical accounting estimates.

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We recognize stock-based compensation expense based on the fair value of stock-based awards granted to employees and directors on the date of grant.

We estimate the fair value of each stock-based award on the measurement date using either the Black-Scholes option-pricing model for stock options and stock purchased under the employee stock purchase plan or the closing market price of our common stock for restricted stock units, including those with performance-based vesting criteria.

We estimate the fair value of each stock-based award on the measurement

date using either the Black-Scholes option-pricing model for stock options and stock purchased under the employee stock purchase plan or the closing market price of our common stock for restricted stock units, including those with performance-based vesting criteria.

The Black-Scholes option-pricing model requires the input of subjective assumptions, including (1) the expected stock price volatility, (2) the expected term of the award, (3) the risk-free interest rate and (4) expected dividends.

Due to the lack of historical and implied volatility data of our common stock, the expected stock price volatility is estimated based on the historical volatilities of the daily closing prices of a specified group of companies in our industry for a period equal to the expected term of the option.

We selected companies with comparable characteristics to our Company, including enterprise value, risk profiles and position within the industry, that have historical share price information sufficient to

meet the expected term of the stock option.

We selected companies with comparable characteristics to our Company, including enterprise value, risk profiles and position within the industry, that have historical stock price information sufficient to meet the expected term of the stock option.

The expected term of the award represents the period of time that options granted are expected to be outstanding and is calculated utilizing the simplified method, which is the mid-point between the vesting date and end of the contractual term for each option.

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Expected volatility 52.0% - 54.0%

49.3% - 53.3%

Expected term (years) 5.50 - 6.11

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Income tax expense consists of taxes currently payable and changes in deferred tax assets and liabilities calculated according to local tax rules.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets.

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In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

As of December 31, 2020, the Company achieved three years of cumulative income, along with projections of profitability, for which management determined that there was sufficient positive evidence to conclude that it is more likely than not that substantially all of the deferred tax assets will be realized.

As such, we released almost all of the valuation allowance on our realizable deferred tax assets.

Management maintains this position as of December 31, 2022.

We believe there is sufficient positive evidence to conclude that it is more likely than not that the net deferred tax assets were realizable as of December 31, 2023.

The amount of deferred tax provided is calculated using tax rates enacted at the balance sheet date.

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As of December 31, 2023 and 2022, we had $73.1 million and $77.9 million of net deferred tax assets, respectively.

There was a valuation allowance of $0.2 million as of December 31, 2022 and 2021.

There was a valuation allowance of $0.5 million and $0.3 million as of December 31, 2023 and 2022, respectively.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis