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Item 5. Market for Registrant’s Common Equity

2021-03-01 compared with 2020-03-10 · 51 added, 475 removed, 42 unchanged (93% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock has been listed on the Nasdaq Global Select Market under the symbol “PGNY”

since October 25, 2019.

Our common stock has been listed on the Nasdaq Global Select Market under the symbol “PGNY” since October 25, 2019.

Prior to that time, there was no public market for our stock.

Holders of Record

As of February 27, 2020, there were approximately 151 stockholders of record of our common stock.

Because many of our shares of common stock are held in “street name”

by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

As of January 31, 2021, there were approximately 67 stockholders of record of our common stock.

Because many of our shares of common stock are held in “street name” by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

Dividend Policy

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Our restricted stock units are subject to vesting and the underlying shares of common stock are issued when the restricted stock units vest.

In the fourth quarter of, 2020, we withheld shares through net settlements (where the award holder receives the net of the shares vested, after surrendering a portion of the shares back to the Company for tax withholding) for certain restricted stock units that vested.

The following table provides a summary of shares surrendered back to the Company for tax withholding on restricted stock units that vested under our equity incentive plans in the three months ended December 31, 2020:

Total Number of

Shares Repurchased (1)

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Dollar Amount of Shares That May Yet Be Purchased Under the Program

October 1, 2020 through October 31, 2020

November 1, 2020 through November 30, 2020

December 1, 2020 through December 31, 2020

Total shares repurchased

(1) Represents shares withheld on net settlements of restricted stock units that vested under our equity incentive plans.

Stock Performance Graph

This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Progyny, Inc.

This performance graph shall not be deemed "soliciting material"

or to be "filed"

with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Progyny, Inc.

under the Securities Act or the Exchange Act.

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Measurement points are from October 24, 2019 (the date our common stock began trading on Nasdaq) through December 31, 2020.

Recent Sales of Unregistered Securities

From October 1, 2019 to the filing of our registration statement on Form S-8 on October 25, 2019, we (i) granted stock options to purchase an aggregate of 358,799 shares of our common stock at exercise prices ranging from $9.59 to $13 per share to a total of 19 employees under our 2017 Equity Incentive Plan and (ii) issued an aggregate of 1,243,698 shares of common stock upon the exercise of outstanding stock options under our 2017 Equity Incentive Plan, at exercise prices ranging from of $0.90 to $1.50 to a total of 16 employees, for an aggregate purchase price of $1.2 million and (iii) issued an aggregate of 115,946 shares of common stock upon the exercise of outstanding stock options under our 2008 Equity Incentive Plan, at exercise prices ranging from of $0.86 to $1.45 to a total of 6 employees, for an aggregate purchase price of $0.1 million.

The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder or Rule 701 promulgated under the Securities Act as transactions by an issuer not involving a public offering or under benefit plans and contracts relating to compensation as provided under Rule 701.

The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions.

Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business, or other relationships, to information about us.

Cumulative Total Returns since Initial Public Offering

Company/Index

Progyny, Inc.

S&P 500 Health Care

NASDAQ Composite

Use of Proceeds

On October 29, 2019, in connection with our IPO, we issued and sold 6,700,000 shares of our common stock and certain of our selling stockholders offered and sold 4,800,000 shares of our common stock at a price to the public of $13.00 per share resulting in net proceeds to us of $77.6 million, after deducting the underwriting discount of $5.9 million and offering expenses of $3.6 million.

All of the shares issued and sold in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No.

333-233965), which was declared effective by the SEC on October 24, 2019.

The net proceeds of $77.6 million from our IPO have been invested in investment grade, interest-bearing instruments.

There has been no material change in the expected use of the net proceeds from our IPO as described in our final prospectus, filed with the SEC on October 25, 2019 pursuant to Rule 424(b) relating to our Registration Statement.

At December 31, 2019, $0.9 million of expenses incurred in connection with our IPO had not yet been paid.

SELECTED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2019, 2018 and 2017 and the selected consolidated balance sheet data as of December 31, 2019, 2018 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The selected consolidated statement of operations data for the years ended December 31, 2020, 2019 and 2018 and the consolidated balance sheet data as of December 31, 2020 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The consolidated statements of operations data for the year ended December 31, 2017 and the consolidated balance sheet data as of December 31, 2018 and December 31, 2017 have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and the accompanying notes and the information in Part II, Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations”

and Part II, Item 8.

“Financial Statements and Supplementary Data”

of this Annual Report on Form 10-K.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8.

“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Our historical results are not necessarily indicative of the results to be expected for any other period in the future.

7 unchanged sentences

Total operating expenses

(Loss) income from operations

Other expense:

Interest expense, net

Income (loss) from operations

Other income (expense):

Interest income (expense), net

Convertible preferred stock warrant valuation adjustment

Total other expense, net

(Loss) income from continuing operations, before tax

Total other income (expense), net

Income (loss), before income taxes

Benefit (provision) for income taxes

Net (loss) income from continuing operations

Net income (loss) from continuing operations

Net income from discontinued operations, net of taxes (3)

Net (loss) income and comprehensive (loss) income

Net (loss) income attributable to common stockholders

Net (loss) income per share attributable to common stockholders, basic and diluted

Net income (loss)

Net income (loss) attributable to common stockholders

Net income (loss) per share attributable to common stockholders:

Continuing operations

Discontinued operations (3)

Total net (loss) income per share attributable to common stockholders, basic and diluted

Weighted‑average shares used in computing net (loss) income per share:

Total net income (loss) per share attributable to common stockholders basic

Continuing operations

Discontinued operations (3)

Total net income (loss) per share attributable to common stockholders diluted

Weighted‑average shares used in computing net income (loss) per share:

Effective January 1, 2020, we adopted new accounting pronouncements as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 2, "Summary of Significant Accounting Policies."

Prior year data remains unchanged.

(2) Includes stock-based compensation expense as follows:

3 unchanged sentences

General and administrative

Total stock‑based compensation expense

(3) See Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information about a certain divestiture.

See Note 14 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of the calculations of our basic and diluted earnings per share attributable to common stockholders, pro forma earnings per share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.

(4) See Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of the calculations of our basic and diluted earnings per share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.

Consolidated Balance Sheet Data:

Cash and cash equivalents

Marketable securities

Working capital (1)

Convertible preferred stock warrant liability

Total stockholders’

equity (deficit)

Total stockholders’ equity (deficit)

(1) Working capital is defined as current assets less current liabilities.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K.

In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs.

Our actual results could differ materially from those expressed or implied by such forward-looking statements.

Important factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in Part I, Item 1A.

“Risk Factors”

of this Annual Report on Form 10-K.

A discussion of the year ended December 31, 2018 compared to the year ended December 31, 2017 has been reported previously in our final prospectus filed with the SEC on October 25, 2019 pursuant to Rule 424(b)(4) (File No.

333-233965), or the Prospectus, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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.

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

Our clients include many of the nation’s most prominent employers across a broad array of industries.

We launched our fertility benefits solution in 2016 with our first five employer clients, and we have grown our base of clients to over 130.

We currently provide coverage to approximately 2.1 million employees and their partners (known in our industry as covered lives), who we refer to as our members.

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 +72 for our fertility benefits solution and +80 for our integrated pharmacy benefits solution, Progyny Rx.

Fertility Benefits Solution.

Our fertility benefits solution includes providing members with access to effective and cost-efficient fertility treatments through our Smart Cycle plan design.

Smart Cycles are proprietary treatment bundles designed by us to include those medical services available to our members through our selective network of high-quality fertility specialists.

Medical services under our Smart Cycles include everything needed for a comprehensive fertility treatment cycle, including all necessary diagnostic testing and access to the latest technology (e.g., in the case of IVF, preimplantation genetic testing).

We currently offer 17 different Smart Cycle treatment bundles, which may be used in various combinations depending on the member’s need.

Each Smart Cycle treatment bundle has a separate unit value (i.e., some have fractional values and some have whole values).

Our clients contract to purchase a cumulative Smart Cycle unit value per eligible member.

These can range from one to an unlimited unit value.

Members, in consultation with their 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.

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

We went live with our integrated pharmacy benefits solution in 2018.

Progyny Rx can only be purchased by clients that purchase our fertility benefits solution.

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.

We currently serve over 130 self-insured employers in the United States across more than 25 industries.

Our current clients, who are industry leaders across both high-growth and mature industries and who range in size from 1,000 to 250,000 employees, represent approximately 2.1 million covered lives.

Revenue Model

Our clients primarily contract with us to provide our fertility benefits solution and, where added on by our clients, our Progyny Rx solution.

Our revenue has both a utilization-based component and a population-based component, as follows:

Utilization Component.

Clients pay us for the fertility benefits and Progyny Rx solutions utilized by their employees.

With respect to the fertility benefits solution, we bill clients for Smart Cycles in accordance with our bundled case rates, which vary by the type of fertility service rendered and clinic location.

Case rates include all third-party fertility specialists, anesthesiology and laboratory services, as well as all of our care management services.

With respect to Progyny Rx, we bill the client for the fertility medication dispensed to their employees in connection with the authorized fertility treatments.

Medication fees also include our formulary management, drug utilization review and cost containment services and other care management services.

Population-Based Component.

Clients who purchase our fertility benefits solution also typically pay us a per employee per month fee, or PEPM fee, which is population-based.

This allows us to provide access to our PCAs for fertility and family building education and guidance and other digital tools to all of our members, regardless of whether they ultimately pursue fertility treatment.

PEPM fees represented 1% of our total revenue for the years ended December 31, 2019 and 2018.

Our revenue in a given year is determined by both the utilization of our fertility benefits and Progyny Rx solutions by our members and the number of members enrolled in our clients’

benefits plans.

Each year, we contract directly with new clients for our fertility benefits solution and, where added by the client, our Progyny Rx solution.

Given that the majority of our clients contract with us for a January 1 st benefits plan start date, our sales cycle follows the conventional healthcare benefits cycle, which largely concludes by the end of October of the prior year to allow for benefits education and annual open enrollment to occur in November.

For some clients that are considering a start date later in the year, the sales cycle can extend through the next year.

Similarly, for existing clients, any changes in plan designs are typically elected by the end of October so that clients can inform their employees of the benefits during the open enrollment period ahead of a January 1st plan year start.

Key Operational and Business Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.

Member and Client Base.

Our addressable market is large self-insured employers.

There are approximately 8,000 self-insured employers in the United States (excluding quasi-governmental entities, such as universities and school systems, and labor unions) who have a minimum of 1,000 employees, representing approximately 69 million potential covered lives in total.

Our current member base of approximately 2.1 million represents only 3% 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.

We also increase brand awareness and adoption with self-insured employers by leveraging our strong relationships with benefits consultants.

In particular, we are focused on expanding the number of clients with more than 2,500 covered lives.

December 31, 2019 and 2018 we serve 87 and 33 clients, respectively, representing 1,517,000 and 720,200 members, respectively.

Importantly, as we have continued to grow, we have meaningfully diversified our client base across more than 25 different industries currently from just two industries when we launched our fertility benefits solution in 2016.

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.

Additionally, we believe that our expanding presence has resulted in a heightened awareness of the need to offer fertility benefits and has informed the market of the value we provide to our clients and our members, which we believe also helps facilitate growth.

In addition, we are continuously utilizing our established client relationships to evaluate other potential fertility solutions that could benefit our members and simultaneously drive growth.

Our ability to attract new clients will depend on a number of factors, including the effectiveness and pricing of our solutions, offerings of our competitors, the effectiveness of our marketing efforts to drive awareness and the demand for fertility benefits solutions overall.

We define a client as an organization for which we have an active contract in the period indicated.

We count each organization we contract with as a single client including divisions, segments or subsidiaries of larger organizations to the extent we contract separately with them.

As of December 31,

Client Tier (Members)

2,501 - 10,000

10,001 - 50,000

Greater than 50,000

Benefits Utilization.

A key driver of our revenue is the number of members we serve and the rate at which they utilize their fertility benefits.

As our client base has grown, our membership has grown from approximately 110,000 members in 2016 when we launched our fertility benefits solution to 1.5 million members at December 31, 2019.

The following table highlights the number of ART cycles performed for Progyny members and the member utilization rates for each of the periods presented.

Year Ended December 31,

Assisted Reproductive Treatment (ART) Cycles (1)

Utilization - All Members (2)

Utilization - Female Only (2)

Represents the number of ART cycles performed, including IVF with a fresh embryo transfer, IVF freeze all cycles/embryo banking, frozen embryo transfers and egg freezing.

Represents the member utilization rate for all services, including but not limited to, ART cycles, initial consultations, IUIs and genetic testing.

The utilization rate for all members includes all unique members (female and male) who utilize the benefit during that period while the utilization rate for female only includes only unique females who utilize the benefit during that period.

For the purposes of calculating utilization rates in any given period, the results reflect the number of unique members utilizing the benefit for that period.

Individual periods cannot be combined as member treatments may span multiple periods.

Components of Results of Operations

Revenue includes fertility benefits solution revenue, pharmacy benefits solution revenue and PEPM fees.

Fertility Benefits Solution Revenue

Fertility benefits solution revenue primarily represents utilization of our fertility benefits solution.

Our client contracts are typically for a three-year term and pricing for this solution is established for each Smart Cycle treatment bundle, based in part on when the client first became a client and the number of members covered under the solution.

Fertility benefits solution revenue includes amounts we receive directly from members, including deductibles, co-insurance and co-payments associated with the treatments under the fertility benefits solution.

Revenue is recognized based on the negotiated price with our clients and includes the portion to be paid directly by the member.

Revenue is recognized when the Smart Cycle is completed for a member.

Revenue is also accrued for authorized Smart Cycles rendered based on member appointments scheduled with a fertility specialist in our network but for which no claim has yet been reported, net of an allowance for appointment cancellations.

Pharmacy Benefits Solution Revenue

Pharmacy benefits solution revenue primarily represents utilization of Progyny Rx.

For clients who contract for the fertility benefits solution, we offer an add-on, separate, fully integrated pharmacy benefits solution designed by us.

Progyny Rx provides our members with access to our formulary plan design, simplified authorization, prescription fulfillment and timely delivery of the medications used during treatment through our network of specialty pharmacies, as well as provides our members with medication administration training and other pharmacy support services.

Prescription drugs are dispensed by our contracted mail order specialty pharmacies.

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.

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

This solution was introduced in the marketplace in the third quarter of 2017 and went live with a select number of clients in January 1, 2018.

Per employee per month (PEPM) fee

Clients who purchase our fertility benefits solution also pay us a population based PEPM fee which provides access to our PCAs for fertility and family building education and guidance and other digital tools for all of our covered members, regardless of whether or not they ultimately pursue fertility treatment.

We earn a PEPM fee for the majority of our clients.

Revenue from the PEPM fee is billed and recognized monthly based upon the contractual fee and the number of employees at that specific client for that month.

Cost of Services

Our cost of services has three primary components:

(1) fertility benefit services;

(2) pharmacy benefit services;

and (3) vendor rebates.

Fertility Benefit Services

Fertility benefit services costs include:

(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:

Provider Account Management, PCA and Provider Relations teams;

and (3) and related information technology support costs.

Our contracts with provider clinics are typically for a term of one to two years.

Pharmacy Benefits Services

Pharmacy benefits services costs include:

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

PCA and Provider Relations teams;

and (3) related information technology support costs.

Contracts with the specialty pharmacies are typically for a term of one year.

Vendor Rebates

We receive a rebate on certain medications purchased by our specialty pharmacies.

Our contractual arrangements with pharmaceutical manufacturers provide for us to receive a rebate from established list prices, which is paid subsequent to dispensing.

These rebates are recorded as a reduction to cost of services when prescriptions are dispensed.

Gross Profit and Gross Margin

Gross profit is total revenue less total cost of services.

Gross margin is gross profit expressed as a percentage of total revenue.

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.

Operating Expenses

Our operating expenses consist of sales and marketing and general and administrative expenses.

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.

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

We expect sales and marketing expense to continue to increase in absolute dollars as we continue to invest and grow our business.

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.

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

We anticipate that we will incur additional costs (including a step up in public company related expenses) for employees and professional fees and insurance and related third-party consulting services on an ongoing basis as a public company.

Other Expense, net

Other expense includes interest expense and stock warrant valuation adjustment.

Benefit (Provision) for Income Taxes

We are subject to income taxes in the United States.

As of December 31, 2019, and 2018, we recorded a full valuation allowance for our deferred tax assets based on our historical loss and the uncertainty regarding our ability to project future taxable income.

In future periods, if we conclude we have future taxable income sufficient to recognize the deferred tax assets, we may reduce or eliminate the valuation allowance.

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of revenue for those periods:

(in thousands)

Consolidated Statements of Operations Data:

Cost of services (1)

Operating expenses:

Sales and marketing (1)

General and administrative (1)

Total operating expenses

Income (loss) from operations

Other expense, net

(Loss) Income before income taxes

Benefit (provision) for income taxes

Net (loss) income from continuing operations

Adjusted EBITDA

Includes stock‑based compensation expense as follows:

Cost of services

Sales and marketing

General and administrative

Total stock‑based compensation expense

Consolidated Statements of Operations Data, as a percentage of revenue:

Cost of services

Operating expenses:

Sales and marketing

General and administrative

Total operating expenses

Income (loss) from operations

Other expense, net

Income (loss) before income taxes

Benefit (provision) for income taxes

Net (loss) income from continuing operations

Adjusted EBITDA

Non-GAAP Financial Measure –

Adjusted EBITDA

Adjusted EBITDA is a supplemental financial measure that is not required by, or presented in accordance with U.S.

We believe that Adjusted EBITDA, when taken together with our U.S.

GAAP financial results, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis 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 measure used by management in assessing the health of our business, determining incentive compensation, evaluating our operating performance, and for internal planning and forecasting purposes.

Adjusted EBITDA 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 U.S.

Some of the limitations of Adjusted EBITDA include:

(1) it does not properly reflect capital commitments to be paid in the future;

(2) 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;

(3) it does not consider the impact of stock-based compensation expense;

(4) it does not reflect other non-operating expenses, including interest expense, net;

(5) it does not consider the impact of any stock warrant valuation adjustment;

(6) it does not reflect tax payments that may represent a reduction in cash available to us;

(7) it does not include legal fees that may be payable in connection with a vendor arbitration;

and (8) it does not include non-deferred costs associated with the IPO.

In addition, 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.

Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net income (loss) from continuing operations and other U.S.

GAAP results.

We calculate Adjusted EBITDA as net loss from continuing operations, adjusted to exclude depreciation and amortization, stock-based compensation expense, net interest expense, convertible preferred stock warrant valuation adjustment, provision (benefit) for income taxes, legal fees associated with a vendor arbitration and non-deferred IPO costs.

The following table presents a reconciliation of Adjusted EBITDA to net loss from continuing operations for each of the periods indicated:

Net (loss) income from continuing operations

Depreciation and amortization

Stock‑based compensation expense

Interest expense, net

Convertible preferred stock warrant valuation adjustment

Provision (benefit) for income taxes

Legal fees associated with a vendor arbitration

Non-deferred IPO Costs

Adjusted EBITDA

Comparison of Years Ended December 31, 2019 and 2018

(dollars in thousands)

Revenue increased by $124.3 million, or 118%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase is primarily due to a $89.8 million or 90% increase in revenue from our fertility benefits solution and a $34.4 million or 614% increase in revenue from our Progyny Rx solution.

The increase in revenue from our fertility benefits solution was primarily due to the increase in the number of clients and covered lives.

The increase in revenue from our Progyny Rx solution was also driven by the number of clients and covered lives that added the Progyny Rx benefit.

The growth outpaces the fertility benefits revenue due to the fact that Progyny Rx was introduced in the marketplace in the third quarter of 2017 and went live with a select number of clients in January 1, 2018.

Our revenue growth in 2019 benefited from having Progyny Rx available for the full selling season in 2018 to both new and existing clients.

Cost of Services

(dollars in thousands)

Cost of services

Cost of services increased by $98.2 million, or 114%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase is primarily due to a $93.0 million increase in medical treatment and pharmacy prescription costs associated with the fertility treatments delivered and a $5.2 million increase in personnel and overhead costs for our care management services teams and an increase in costs of adjudicating claims.

Gross Profit and Gross Margin

(dollars in thousands)

Gross profit increased by $26.1 million, or 134%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Gross margin increased 140 basis points for the year ended December 31, 2019 compared to year ended December 31, 2018 primarily due to increased operating efficiencies.

Operating Expenses

Sales and Marketing Expense

(dollars in thousands)

Sales and marketing

Sales and marketing expense increased by $4.6 million, or 63%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase was primarily due to a $3.6 million increase in personnel related costs (including a $0.4 million increase in stock based compensation) due to additional headcount and commissions for sales and marketing functions.

General and Administrative Expense

(dollars in thousands)

General and administrative

General and administrative expense increased by $8.3 million, or 53%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase was primarily due to a $3.6 million increase in personnel-related costs (including a $1.1 million increase in stock based compensation) due to additional headcount for general and administrative functions, $1.5 million increase in legal costs (including $1.3 million increase in legal costs associated with a vendor arbitration), $0.8 million increase in bad debt, and $2.4 million increase in other related general and administrative expenses including incremental costs related to being a public company.

Other Expense, Net

(dollars in thousands)

Other expense, net

Other expense, net increased by $14.8 million, or 430%, for 2019 compared to 2018.

This increase was primarily due to a charge related to the fair value adjustment of the preferred stock warrant of $15.2 million, offset by a

$0.4 million in lower interest expense.

The preferred stock warrants were converted to common stock warrants in connection with the IPO and will no longer be marked to market.

Benefit (Provision) for Income Taxes

(dollars in thousands)

Benefit (provision) for income taxes

For the year ended December 31, 2019 we recorded a provision for state taxes of $12,000.

There is no provision or benefit for federal income taxes recorded for the year ended December 31, 2019.

For the year ended December 31, 2018, we recorded a benefit for income taxes of $1.8 million as a result of the intraperiod tax allocation rules offsetting an equivalent provision for taxes associated with the sale of the discontinued operations of our early embryo viability assessment business.

Liquidity and Capital Resources

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 as further detailed below.

As of December 31, 2019, our principal sources of liquidity were $80.4 million of cash and cash equivalents and $15 million of cash available on the revolving line of credit with Silicon Valley Bank.

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.

In particular, during the ramp up and onboarding of new clients who typically begin their benefits plan year as of January 1st, our accounts receivable has historically increased more than our accounts payable, accrued expenses and other current liabilities in the early part of each calendar year.

Historically, these timing impacts have reversed throughout the remainder of the fiscal year.

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

On October 29, 2019, we completed our IPO in which we issued and sold 6,700,000 shares of common stock at a public offering price of $13.00 per share.

We received net proceeds of $77.5 million from the IPO, after deducting underwriters’

discounts and commissions of $5.9 million and offering costs of $3.7 million.

We believe that our existing cash and cash equivalents, cash flow from operations and the cash available on the revolving line of credit will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

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.

We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies.

We may be required to seek additional equity or debt financing.

In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all.

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 that will mature on June 8, 2021.

The available revolving line of credit is based upon an advance rate of 80% of “eligible”

accounts receivable and may be used to fund our working capital and other general corporate needs.

Eligible accounts receivable includes accounts billed with aging 90 days or less and excludes accounts receivable due for member copayments, coinsurance, and deductibles.

When we hold unrestricted cash balances greater than $5.0 million, interest accrues at a floating rate per annum equal to the greater of prime rate or 4.75%.

If the unrestricted cash balance is less than $5.0 million, interest accrues at a floating rate per annum equal to the greater of prime rate plus 0.5% or 4.75%, with interest payable monthly.

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

(in thousands)

Cash (used in) provided by operating activities

Cash (used in) investing activities

Cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents from continuing operations

Operating Activities

Net cash used in operating activities was $1.5 million for the year ended December 31, 2019, primarily consisting of a $8.6 million net loss from continuing operations adjusted for certain non-cash items, which include $5.1 million of stock based compensation expense, a $18.2 million change in fair value of warrant liabilities, $2.1 million of depreciation and amortization, and $1.6 million from bad debt expense.

Changes in operating assets and liabilities resulted in cash used in operating activities from increases in accounts receivable of $25.3 million and prepaid assets and other assets of $4.5 million, offset by cash provided by operating activities from increases in accounts payable of $3.5 million and accrued expenses and other current liabilities of $6.4 million.

These changes are a result of the impact of revenue growth combined with the timing of payments to third party providers and collections from clients.

Net cash provided by operating activities was $2.3 million for the year ended December 31, 2018, primarily consisting of $0.7 million of net income, adjusted for certain non-cash items, which include $3.0 million of stock-based compensation, $2.9 million change in fair value of warrant liabilities, $1.9 million of depreciation and amortization, and $0.8 million from bad debt expense and the loss from discontinued operations of $5.8 million.

The non-cash adjustments were partially offset by a $1.8 million increase in deferred tax benefits resulting from the sale of a discontinued business.

Changes in operating assets and liabilities resulted in cash used in operating activities from increases in accounts receivable of $12.8 million, offset by cash provided by operating activities from increases in accounts payable of $10.4 million and accrued expenses and other current liabilities of $2.8 million.

These changes are as a result of the impact of revenue growth combined with the timing of payments to third party providers and collections from clients.

Investing Activities

Net cash used in investing activities from continuing operations was $3.0 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively, consisting of purchases of computers, software, and leasehold improvements.

Leasehold improvements of $2.0 million during 2019 were associated with the buildout of our new corporate office which was occupied in February 2020.

Financing Activities

Net cash provided by financing activities was $84.5 million for the year ended December 31, 2019, primarily consisting of $78.4 million in proceeds from the issuance of common stock in our IPO ($0.9 million of IPO costs were not paid yet as of December 31, 2019), $6.5 million from stock option exercises, and $0.1 million from warrant exercises, partially offset by $0.3 million in net payments on our revolving line of credit with Silicon Valley Bank, and repurchases of common stock of $0.2 million.

Net cash used by financing activities was $8.7 million for the year ended December 31, 2018 primarily due to repayment of $5.4 million term loan and $3.7 million of treasury stock purchases of common and preferred stock from existing shareholders partially offset by $0.3 million in net borrowings on our revolving line of credit with Silicon Valley Bank.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2019:

Payments Due By Period

(in thousands)

Operating lease commitments

The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts.

The table does not include obligations under agreements that we can cancel without a significant penalty.

In September 2019, we entered into a sublease agreement for our corporate offices in New York, New York.

The sublease is for a 25,212 square foot office and will expire in May 2029.

Pursuant to the sublease, we will pay the base rent of approximately $1.3 million per year through the end of the fifth lease year and approximately $1.4 million per year thereafter through the expiration date.

Off‑Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported amounts of assets, liabilities, revenue and expenses, and related disclosures.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

We evaluate our estimates and assumptions on an ongoing basis.

Actual results may differ from these estimates.

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

For additional information about our critical accounting policies and estimates, see Note 1 –

Business and Basis of Presentation and Note 2 - Summary of Significant Accounting Policies in the notes to the consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.

Revenue Recognition

Our revenue is recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We apply the following five-step model to recognize revenue from contracts with our clients:

Identification of the contract, or contracts, with a client

Identification of the performance obligations in the contract

Determination of the transaction price

Allocation of the transaction price to the performance obligations in the contract

Recognition of revenue when, or as, a performance obligation is satisfied

Our contracts typically have a stated term of three years and include contractual termination options after the first year, allowing the client to terminate the contract with 30 to 90 days’

Fertility Benefits Revenue

We primarily generate revenue through our fertility benefits solution, in which we provide our clients and their employees and partners, or our members, with fertility benefits.

As part of the fertility benefits solution, we provide access to effective and cost-efficient fertility treatments, referred to as Smart Cycles, as well as other related services.

Smart Cycles are our proprietary treatment bundles that include certain medical services available to members through our proprietary, credentialed network of provider clinics.

In addition to access to our Smart Cycle treatment bundles and access to our network of provider clinics, the fertility benefits solution includes other comprehensive services, which we refer to as care management services, such as active management of the provider clinic network, real-time member eligibility and treatment authorization, member-facing digital tools throughout the Smart Cycle and detailed quarterly reporting all supported by client facing account management and end-to-end comprehensive member support provided by our in house staff of PCAs.

The promises within our fertility benefits contract with a client represent a single performance obligation because we provide a significant service of integrating our Smart Cycles and access to the fertility treatment services provided by provider clinics with the other comprehensive services into the combined fertility benefits solution that the client contracted to receive.

Our fertility benefits solution is a stand-ready obligation that is satisfied over the contract term.

Our contracts include the following sources of consideration, which are all variable:

a PEPM administration fee (in most, but not all contracts) and a fixed rate per Smart Cycle.

The PEPM administration fee is allocated between the fertility benefits solution and the pharmacy benefits solution based on standalone selling price, estimated using an expected cost plus margin method.

We allocate the variable consideration related to the fixed rate per Smart Cycle to the distinct period during which the related services were performed as those fees relate specifically to our efforts to provide our fertility benefits solution to our clients in the period and represent the consideration we are entitled to for the fertility benefits services provided.

As a result, the fixed rate per Smart Cycle is included in the transaction price and recognized in the period in which the Smart Cycle is provided to the member.

Our contracts also include potential service level agreement refunds related to outcome based service metrics.

These service level refunds, which are determined based on results of a full plan year, if met, are based on a percentage of the PEPM fee paid by clients.

We estimate the variable consideration related to the total PEPM administration fee, less estimated refunds related to service level agreements, and recognize the amounts allocated to the fertility benefits solution ratably over the contract term.

Our estimate of service level agreement refunds, have not historically resulted in significant adjustments to the transaction price.

Clients are invoiced on a monthly basis for the PEPM administration fee.

We invoice our clients and members for their respective portions of the fixed rate per Smart Cycle bundle when all treatment services within a Smart Cycle are completed by the provider clinic.

Once an invoice is issued, payment terms are typically between 30 to 60 days.

We assess whether we are the principal or the agent for each arrangement with a client, since fertility treatment services are provided by a third party—the provider clinics.

We are the principal in our arrangements with clients and therefore present revenue gross of the amounts paid to the provider clinics because we control the specified service (the fertility benefits solution) before it is transferred to the client.

We integrate the fertility treatment services provided by the provider clinics into the overall fertility benefits solution that the client contracted to receive.

In addition, we define the scope of the potential services to be performed by the provider clinics and monitor the performance of the provider clinics.

Furthermore, we are primarily responsible for fulfilling the promise to the client and have discretion in setting the pricing, as we separately negotiate agreements with the provider clinics, which establish pricing for each treatment service.

Pricing of services from provider clinics is independent from the fees charged to clients.

Pharmacy Benefits Revenue

For clients that have the fertility benefits solution, we offer, as an add-on, our pharmacy benefits solution, which is a separate, fully integrated pharmacy benefit.

As part of the pharmacy benefits solution, we provide care management services, which include our formulary plan design, prescription fulfillment, simplified authorization and timely delivery of the medications used during treatment through our network of specialty pharmacies, and clinical services consisting of member assessments, UnPack It calls, telephone support, online education, medication administration training, pharmacy support services and continuing PCA support.

The pharmacy-related promises represent a single performance obligation because we provide a significant service of integrating the formulary plan design, prescription fulfillment, clinical services and PCA support into the combined pharmacy benefits solution that the client contracted to receive.

The pharmacy benefits solution is a stand-ready obligation that is satisfied over the contract term.

Our contracts include the following sources of consideration, all of which are variable:

a PEPM administration fee (in most, but not all contracts) and a fixed fee per fertility drug.

As described above, the PEPM administration fee, less estimated refunds related to service level agreements, is allocated to the pharmacy benefits solution and recognized ratably over the contract term.

We allocate the variable consideration related to the fixed fee per fertility drug to the distinct period during which the related services were performed, as those fees relate specifically to our efforts to provide our pharmacy benefits solution to clients in the period and represents the consideration we are entitled to for the pharmacy benefits services provided.

As a result, the fixed fee per fertility drug is included in the transaction price and recognized in the period in which we are entitled to consideration from a client, which is when a prescription is filled and delivered to the members.

As stated above, clients are invoiced on a monthly basis for the PEPM administration fee.

We invoice the client and the member for their respective portions of the fixed fee per fertility drug, when the prescription services are completed by the specialty pharmacy.

Once an invoice is issued, payment terms are typically between 30 to 60 days.

We assess whether we are the principal or the agent for each arrangement with a client, as prescription fulfillment and clinical services are provided by a third party—the specialty pharmacies.

We are the principal in our arrangements with clients, and therefore present revenue gross of the amounts paid to the specialty pharmacies.

We control the specified service (the pharmacy benefits solution) before it is transferred to the client.

We integrate the prescription fulfillment and clinical services provided by the pharmacies and PCAs into the overall pharmacy benefits solution that the client contracted to receive.

In addition, we define the scope of the potential services to be performed by the specialty pharmacies and monitor the performance of the specialty pharmacies.

Furthermore, we are primarily responsible for fulfilling the promise to the client and have discretion in setting the pricing, as we separately negotiate agreements with pharmacies, which establish pricing for each drug.

Pricing of fertility drugs is independent from the fees charged to clients.

Accrued Receivable and Accrued Claims Payable

Accrued receivables for those fertility benefits claims are estimated based on historical experience for each period based on the fertility benefits services provided but for which a claim has not been received from the provider clinic.

At the same time, cost of services and accrued claims payables (included within accrued expense and other current liabilities) are estimated based on the amount to be paid to the provider clinics and historical gross margin achieved.

Estimates are adjusted to actual at the time of billing.

Adjustments to original estimates have been not been material.

Stock-Based Compensation

We estimate the fair value of stock options granted to employees and directors using the Black-Scholes option-pricing model, which 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.

Effective January 1, 2018, we changed our accounting policy to account for forfeitures as they occur.

Prior to January 1, 2018, forfeitures were

estimated at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates.

The fair value of the shares of common stock underlying the stock options has historically been determined by our Board of Directors as there was no public market for the common stock.

The Board of Directors determines the fair value of our common stock by considering a number of objective and subjective factors, including:

the valuation of comparable companies, sales of redeemable convertible preferred stock to unrelated third parties, our operating and financial performance, the lack of liquidity of common stock and general and industry specific economic outlook, amongst other factors.

We selected companies with comparable characteristics to us, including enterprise value, risk profiles and position within the industry and with historical share price information sufficient to meet the expected term of the stock options.

The following assumptions were used to calculate the fair value of stock options granted to employees:

Expected volatility

48.6% - 49.0%

48.1% - 48.9%

Expected term (years)

Risk‑free interest rate

Expected dividend yield

Common Stock Valuations

The fair value of the common stock underlying our stock-based awards has historically been determined by our Board of Directors, with input from management and contemporaneous third-party valuations.

We believe that our Board of Directors has the relevant experience and expertise to determine the fair value of our common stock.

Prior to our IPO, the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our Board of Directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date.

These factors include:

the prices of common or preferred stock sold to third-party investors by us and in secondary transactions;

lack of marketability of our common stock;

our actual operating and financial performance;

current business conditions and projections;

hiring of key personnel and the experience of our management;

our history and the introduction of new services;

our stage of development;

likelihood of achieving a liquidity event, such as an IPO or a merger or acquisition of the company given prevailing market conditions;

the market performance of comparable publicly traded companies;

and global capital market conditions.

In valuing our common stock, our Board of Directors determined the equity value of our business using various valuation methods including combinations of income and market approaches with input from management.

The income approach estimates value based on the expectation of future cash flows that a company will generate.

These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of

comparable publicly traded companies in our industry or similar business operations as of each valuation date and is adjusted to reflect the risks inherent in our cash flows.

For each valuation, the equity value determined by the income and market approaches was then allocated to the common stock using either the option pricing method, or OPM, or a hybrid method.

The hybrid method is a hybrid of the probability weighted expected return method, or PWERM, and OPM.

The option pricing method is based on a binomial lattice model, which allows for the identification of a range of possible future outcomes, each with an associated probability.

The OPM is appropriate to use when the range of possible future outcomes is difficult to predict and thus creates highly speculative forecasts.

PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise.

This method is particularly useful when discrete future outcomes can be predicted at a relatively high confidence level with a probability distribution.

Discrete future outcomes considered under the PWERM include an IPO, as well as non-IPO market-based outcomes.

In determining the fair value of the enterprise using the PWERM, we developed assumptions for an IPO liquidity event and the various outcomes that it could yield.

With the OPM model, we assumed a stay private scenario.

Our valuations prior to March 2019 were based on the OPM.

Beginning March 31, 2019, we valued our common stock based on a hybrid method of the PWERM and the OPM.

Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events.

Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

Since our IPO, our Board of Directors determines the fair value of each share of underlying common stock based on the closing price of our common stock, on the date of grant, as reported by Nasdaq.

Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Recently Adopted Accounting Pronouncements

For a full discussion of recently adopted accounting pronouncements, see Note 2 –

Summary of Significant Accounting Policies, in the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act.

The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards.

This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies.

We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (1) are no longer an emerging growth company or (2) 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 new or revised accounting pronouncements as of public company effective dates.

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 5. Market for Registrant’s Common Equity