What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-01 · 126 added, 189 removed, 266 unchanged (54% of the section changed)

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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 180.

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 +79 for our fertility benefits solution and +81 for our integrated pharmacy benefits solution, Progyny Rx.

We currently have contracts to provide coverage to approximately 2.7 million employees and their partners (known in our industry as covered lives), who we refer to as our members.

We launched our fertility benefits solution in 2016 with our first five employer clients, and we have grown our current base of clients to over 265 with at least 1,000 covered lives.

We currently have contracts to provide coverage to approximately 4.0 million employees and their partners (known in our industry as covered lives), whom 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 +81 for our fertility benefits solution and +79 for our integrated pharmacy benefits solution, Progyny Rx as of December 31, 2021.

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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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).

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 (such as, in the case of in vitro fertilization, or IVF, preimplantation genetic testing).

We currently offer 19 different Smart Cycle treatment bundles, which may be used in various combinations depending on the member’s need.

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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.

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.

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

Pharmacy Benefits 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.

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 serve over 180 employers in the United States across more than 30 industries.

We currently have contracts to serve over 265 employers with at least 1,000 covered lives in the United States across more than 30 industries.

Our current clients, who are industry leaders across both high-growth and mature industries and who range in size from approximately 1,000 to 500,000 employees, represent approximately 4.0 million covered lives under contract.

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PEPM fees represented 1% and 2% of our total revenue for the years ended December 31, 2021 and 2020, respectively.

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.

Our revenue in a given year is determined by the level and mix of the utilization of our fertility benefits and Progyny Rx solutions by our members as well as the number of members enrolled in our clients’ benefits plans.

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

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Our addressable market is primarily large self-insured employers.

There are approximately 8,000 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 2.7 million lives under contract represents a low single digit percent of our total market opportunity.

There are approximately 8,000 employers in the United States (excluding 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 4.0 million covered lives under contract represents a low 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.

We also increase brand awareness and adoption with 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.

In particular, we are focused on expanding the number of clients with

more than 2,500 covered lives.

As of December 31, 2021 and 2020, we served 191 and 135 clients, respectively, representing 2,935,000 and 2,335,000 members, respectively.

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

Public and private sector policies and initiatives to reduce the transmission of COVID-19 have varied significantly across the United States, but as of December 31, 2020, a significant percentage of the U.S.

population remained subject to meaningful restrictions on activities, which included school closures, limitations on large gatherings and other policies to promote or enforce physical distancing.

As described below, these restrictions 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.

Employee safety is our first priority, and as a result, we have implemented a remote working policy for all of our employees.

Although we have re-opened our corporate offices for a small group of employees, while implementing additional safety measures including testing, masks and social distancing protocols, the majority of our employees continue to work remotely.

As described below, 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 to our revenue.

Employee safety is our first priority, and as a result, we had implemented a remote working policy for all of our employees.

We have recently re-opened our corporate offices to employees on a hybrid basis, while implementing additional safety measures and protocols.

We are also working closely with all of our clients, members, providers and other external business partners.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and monitor liquidity, as necessary, and ensure that our business can continue to operate during these uncertain times.

In the year ended December 31, 2020, the COVID-19 pandemic had a material negative impact on our revenue growth.

In particular, the outbreak and preventative measures taken to contain COVID-19, especially in the first half of 2020, negatively impacted our members’ access to care due to a temporary unavailability of the full range of fertility treatments at our provider clinics.

On March 17, 2020, the American Society for Reproductive Medicine, or ASRM, issued guidelines recommending the suspension of new treatment cycles.

As a result, the significant majority of our members were unable to complete diagnostics or initiate new treatment cycles, and our volumes declined precipitously as of that date.

ASRM continues to update its guidelines to reaffirm those provided on May 11, 2020, providing fertility clinics with a path for the safe and gradual resumption of patient care.

Additionally, most state and local governments have eased stay-at-home orders and allowed for the resumption of non-emergent medical procedures.

Most of our clinics resumed their full range of services towards the end of the second quarter of 2020, which led to an increase in benefits utilization as compared to the end of the first quarter and the beginning of the second quarter.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, future results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including, without limitation, new information that may emerge concerning COVID-19, the timing, extent, trajectory and duration of the pandemic;

the availability, distribution and effectiveness of vaccines;

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.

The outbreak and preventative measures taken to contain COVID-19, especially in the first half of 2020, negatively impacted our members’ access to care due to a temporary unavailability of the full range of fertility treatments at our provider clinics.

In March 2020, the American Society for Reproductive Medicine, or ASRM, issued guidelines recommending suspension of fertility services.

Those guidelines were lifted in May 2020, which has enabled our clinics to resume care with enhanced safety protocols for patient safety.

COVID-19, including variants, and related restrictions continued to have a negative impact on our revenue growth for the three months and year ended December 31, 2021.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, future results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including, without limitation, new information that may emerge concerning COVID-19 and variants, the timing, extent, trajectory and duration of the pandemic;

the availability, distribution and effectiveness of vaccines as well as vaccine hesitancy;

the imposition of protective public safety measures;

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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.

Revenue is recognized when Smart Cycle services are completed for a member.

Revenue is also accrued for authorized Smart Cycle services rendered based on member appointments scheduled with a fertility specialist in our network but for which no claim has yet been reported, net of expected changes and cancellations of services.

Pharmacy Benefits Solution Revenue

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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 is recognized when the drugs are dispensed.

Revenue from these arrangements is 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 on January 1, 2018.

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and (3) vendor rebates.

Fertility Benefit Services

Fertility benefit services costs include:

Fertility Benefits Services

Fertility benefits services costs include:

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

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

and (3) and related information technology support costs.

and (3) related information technology support costs.

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

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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.

Our contractual arrangements with pharmacy program partners 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.

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

We anticipate that we will incur additional costs for employees and professional fees and insurance and related third-party consulting services on an ongoing basis as a public company and to support growth in the business.

Other Income (Expense), net

Other income (expense) includes investment income, interest income (expense) and preferred stock warrant valuation adjustment.

Benefit (Provision) for Income Taxes

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.

Other Income, net

Other income (expense) includes investment income as well as interest income and expense.

Benefit for Income Taxes

We are subject to income taxes in the United States.

As of each reporting date, management considered new 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 in the current year we achieved three years of cumulative income, along with our projections of profitability , management determined that there is sufficient positive evidence to conclude that it is more likely than not that the net deferred tax assets of $38.0 million are realizable and have therefore released substantially all of our valuation allowance.

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

Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes.

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.

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, 2021.

Results of Operations

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Income from operations

Other income (expense), net

Income (loss) before income taxes

Benefit (provision) for income taxes

Net income (loss)

Other income, net

Income before income taxes

Benefit for income taxes

Adjusted EBITDA (2)

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Total stock‑based compensation expense

(2) Adjusted EBITDA is a non-GAAP financial measure defined by us as net income, adjusted to exclude depreciation and amortization, stock-based compensation expense, other income (expense), net, interest income, net, benefit for income taxes, and settlement cost and legal fees associated with a vendor arbitration.

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 GAAP.

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

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Income from operations

Other income (expense), net

Income (loss) before income taxes

Benefit (provision) for income taxes

Net income (loss)

Other income, net

Income before income taxes

Benefit for income taxes

Adjusted EBITDA

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

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

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

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

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

(7) it does not include settlement cost and legal fees associated with a vendor arbitration;

and (8) it does not include non-deferred costs associated with our initial public offering, or 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.

and (6) it does not include settlement cost and legal fees associated with a vendor arbitration.

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 from continuing operations and other U.S.

GAAP results.

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

We calculate Adjusted EBITDA as net income, adjusted to exclude depreciation and amortization, stock-based compensation expense, other income (expense), net, interest income, net, benefit for income taxes, and settlement cost and legal fees associated with a vendor arbitration.

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

Net income (loss) from continuing operations

(in thousands)

Depreciation and amortization

Stock‑based compensation expense

Interest (income) expense, net

Convertible preferred stock warrant valuation adjustment

(Benefit) provision for income taxes

Other (income) expense, net

Interest income, net

Benefit for income taxes

Settlement cost and legal fees associated with a vendor arbitration

Non-deferred IPO Costs

Adjusted EBITDA

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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 Progyny Rx benefit.

Progyny Rx revenue growth outpaced the fertility benefits revenue as 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 year ended December 31, 2020 was negatively impacted by COVID-19.

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

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, 2021 and 2020 was negatively impacted by COVID-19.

Cost of Services

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Gross profit increased by $42.1 million, or 60%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Gross margin increased 50 basis points for the year ended December 31, 2020 compared to year ended December 31, 2019, primarily due to higher revenues which triggered favorable contractual terms with our pharmacy dispensing and manufacturing partners, the net favorable impact of regular contract renewals with our providers along with continued efficiencies gained across our care management services.

Gross margin increased 210 basis points for the year ended December 31, 2021 compared to year ended December 31, 2020, primarily due to favorable new terms with our pharmacy program partners, the net impact of regular contract renewals with our providers as well as continued efficiencies gained across our care management services.

Operating Expenses

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Sales and marketing expense increased by $5.2 million, or 34%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase was primarily due to a $3.2 million increase in personnel-related costs (including a $1.2 million increase in stock-based compensation) relating to additional headcount and commissions for sales and marketing functions, which was partially offset by lower travel and other overhead costs due to COVID-19.

This increase was primarily due to a $4.4 million increase in personnel-related costs (including a $3.4 million increase in stock-based compensation) relating to additional headcount, employee equity grants, and commissions for sales and marketing functions, and a $0.8 million increase in other related sales and marketing expenses.

General and Administrative Expense

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General and administrative expense increased by $12.9 million, or 28%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase was primarily due to a $8.0 million increase in settlement cost and legal fees for a vendor arbitration, a $6.4 million increase in personnel-related costs (including a $4.1 million increase in stock-based compensation) as a result of additional headcount for general and administrative functions, a $4.0 million increase in bad debt expense, a $3.5 million increase in insurance costs, and a $0.9 million increase in other related general and administrative expenses.

Other Income (Expense), Net

This increase was primarily due to a $16.9 million increase in personnel-related costs (including a $11.6 million increase in stock-based compensation) as a result of additional headcount and employee equity grants, a $4.2 million increase in bad debt expense, and a $1.1 million increase in other related general and administrative expenses, which was partially offset by a $9.3 million decrease in settlement cost and legal fees for a vendor arbitration.

See Note 14 – Commitments and Contingencies – in the notes to the consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K for further details regarding the vendor arbitration.

Other Income, Net

(dollars in thousands)

Other income (expense), net

Other income (expense), net improved by $18.6 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the impact in 2019 of a $18.2 million charge related to the fair value adjustment of the preferred stock warrants and an increase of $0.4 million in investment and interest income for the year ended December 31, 2020.

The preferred stock warrants were converted to common stock warrants as of the IPO and therefore were no longer subject to a mark to market adjustment.

Benefit (Provision) for Income Taxes

Other income, net

Other income, net decreased by $0.2 million, or 71%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to decreases in income on investments.

Benefit for Income Taxes

(dollars in thousands)

Benefit (provision) for income taxes

For the year ended December 31, 2020, we recorded a benefit for income taxes of $37.8 million primarily as a result of the release of substantially all of our valuation allowance on our deferred tax assets as we concluded there was sufficient positive evidence that it is more likely than not that the deferred tax assets are realizable.

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

Benefit for income taxes

For the year ended December 31, 2021, we recorded a benefit for income taxes of $33.3 million, primarily due to equity compensation activity that occurred during the period.

During the year ended December 31, 2020, we recorded a benefit for income taxes of $37.8 million, primarily as a result of the release of substantially all of our valuation allowance on our deferred tax assets as we concluded there was sufficient positive evidence that it is more likely than not that the deferred tax assets are realizable.

Liquidity and Capital Resources

As of December 31, 2020, we had $70.3 million of cash and cash equivalents, $39.0 million of marketable securities, and $15.0 million of cash available on the revolving line of credit with Silicon Valley Bank.

As of December 31, 2021, we had $91.4 million of cash and cash equivalents and $28.0 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 as further detailed below.

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For additional information, See Note 1 – Business and Basis of Presentation to our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

We believe that our existing cash and cash equivalents, including the proceeds from our IPO, 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.

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.

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 revenues 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 ended December 31, 2020 and, to date, we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic.

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, 2021 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 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, reducing our ability to access capital, which could negatively affect our liquidity in the future.

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.

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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 that will mature on June 8, 2021, which agreement was amended in April 2019, January 2020, June 2020 and February 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 line of credit contains customary affirmative and negative covenants, as well as a financial covenant that requires us to achieve a specified minimum quarterly revenue as defined in the agreement.

As of December 31, 2020 and 2019, we were in compliance with all requirements and covenants of the revolving credit facility.

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:

(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

Cash provided by operating activities

Cash provided by (used in) investing activities

Cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Operating Activities

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 include $33.7 million of stock-based compensation expense, $33.3 million of deferred tax assets, $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.

Net cash provided by operating activities was $36.2 million for the year ended December 31, 2020, primarily consisting of net income of $46.5 million adjusted for certain non-cash items, which include $38.0 million of deferred tax assets, $12.8 million of stock-based compensation expense, $5.6 million of bad debt expense, and $1.9 million of depreciation and amortization.

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Net cash provided by operating activities for the year ended December 31, 2020 included the impact of the settlement cost and legal fees associated with a vendor arbitration of $8.9 million.

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.

Investing Activities

Net cash used in investing activities from continuing operations was $40.0 million and $3.0 million for the years ended December 31, 2020 and 2019, respectively.

During the year ended December 31, 2020, the net cash used primarily consisted of net investments of $39.0 million in marketable securities.

The remainder of the activity consists of purchases of computers, software, and leasehold improvements, including leasehold improvements associated with the buildout of our new corporate office which was occupied in February 2020.

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

For the year ended December 31, 2020, net cash used in investing activities was $40.0 million, primarily consisting of net investments of $39.0 million in marketable securities.

The remainder of the activity for the years ended December 31, 2021 and 2020 consisted of purchases of computers, software, including capitalized software development costs, and leasehold improvements, including leasehold improvements associated with the buildout of our new corporate office which was occupied in February 2020.

Financing Activities

Net cash used in financing activities was $13.7 million for the year ended December 31, 2021, consisting of payments of $18.0 million for employee taxes related to equity awards, partially offset by $2.9 million in proceeds from stock option exercises and $1.3 million in proceeds from contributions to our employee stock purchase plan.

Net cash used in financing activities was $6.2 million for the year ended December 31, 2020, consisting of payments of $8.9 million for employee taxes related to equity awards and $0.9 million for IPO costs, partially offset by $2.3 million in proceeds from stock option exercises and $1.2 million in proceeds from contributions to our employee stock purchase plan.

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, 2020), $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.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020:

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 commenced a sublease agreement for our corporate offices in New York, New York.

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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

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 the fourth quarter of 2023 for five years and approximately $1.5 million per year thereafter through the first quarter of 2035, the 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 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 expiration date.

Critical Accounting Estimates

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

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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 revenue recognition including accrued receivables and allowance for service changes and cancellations, accrued claims payable, stock-based compensation, and accounting for income taxes have the greatest potential impact on our financial statements.

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

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.

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

For additional information about our significant 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’ notice.

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

We estimate accrued receivables based on historical experience for those fertility benefit services provided but for which a claim has not been received from the provider clinic, which includes assumptions regarding the lag between the authorization date and service date.

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 Smart Cycle services are completed for a member.

Revenue is also accrued, which we refer to as accrued receivables, for authorized Smart Cycle services rendered based on member appointments scheduled with a fertility specialist in our network but for which no claim has yet been reported.

We include accrued receivables within accounts receivable on our consolidated balance sheet.

We also estimate an allowance for changes and cancellations based upon historical experience.

At the same time, we estimate cost of services and accrued claims payables based on the amount to be paid to the provider clinic and historical gross margin achieved on fertility benefit services.

We include accrued claims payable

within accrued expenses and other current liabilities on our consolidated balance sheet.

Claims payable are generally paid within 30 days based on contractual terms.

As of December 31, 2021 and 2020, accrued receivables were $30.2 million and $28.2 million, respectively.

At the same time, we estimate cost of services and accrued claims payables based on the amount to be paid to the provider clinic and expected gross margin on fertility benefit services.

Accrued claims payable of $20.0 million and $22.8 million as of December 31, 2021 and 2020, respectively, are included within accrued expenses and other current liabilities in the consolidated balance sheet.

Our estimates are adjusted to actual at the time of billing and these adjustments have historically 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.

Forfeitures and cancellations of awards are recognized as they occur.

Prior to our IPO on October 29, 2019, the fair value of the shares of common stock underlying the stock options had historically been determined by our Board of Directors as there was no public market for the common stock.

The Board of Directors determined 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.

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.

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.

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.

The risk-free interest rate is based on the yield of zero-coupon U.S.

Treasury securities for the period that is consistent with the expected term of the stock option.

The dividend yield is assumed to be none as we have not paid dividends, nor do we anticipate paying dividends.

The weighted-average estimated fair value of stock option awards granted in the year ended December 31, 2021 was $30.60.

Changes in these inputs could result in a significant change in the fair value of stock options.

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

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Expected dividend yield

Our outstanding stock-based awards as of December 31, 2021 are subject to service-based vesting and we recognize compensation expense over the vesting period of the award on a straight-line basis.

Forfeitures and cancellations of awards are recognized as they occur.

For the years ended December 31, 2021 and 2020, stock-based compensation expense was $33.7 million and $12.8 million, respectively.

As of December 31, 2021, we had $164.2 million and $86.5 million of unrecognized compensation costs related to unvested options and restricted stock units, respectively.

Both are expected to be expensed and vest over a weighted-average remaining period of approximately 3.6 years.

We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”).

We periodically review the recoverability of deferred tax assets recorded on the consolidated balance sheet and provides valuation allowances as deemed necessary to reduce such deferred tax assets to the amount that will, more likely than not, be realized.

We periodically review the recoverability of deferred tax assets recorded on the consolidated balance sheet and provide valuation allowances as deemed necessary to reduce such deferred tax assets to the amount that will, more likely than not, be realized.

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

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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.

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

The impact of tax law changes is recognized in periods when the change is enacted.

As of December 31, 2020, the Company achieved three years of cumulative income, along with projections of profitability, for which management determined that there is 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 have released the valuation allowance on our realizable deferred tax assets.

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, 2021.

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

The impact of tax law changes is recognized in periods when the change is enacted.

A two-step approach is applied pursuant to ASC 740 in the recognition and measurement of uncertain tax positions taken or expected to be taken in our tax return.

The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any

related appeals or litigation processes.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

Our policy is to recognize interest and penalty expenses associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.

As of December 31, 2021 and 2020, we had $71.3 million and $38.0 million of net deferred tax assets, respectively.

There was a valuation allowance of $0.2 million as of December 31, 2021 and 2020.

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

Prior to December 31, 2020, we were 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 elected to use the extended transition period under the JOBS Act until the earlier of the date we (1) were no longer an emerging growth company or (2) affirmatively and irrevocably opted out of the extended transition period provided in the JOBS Act.

Based on the market value of our common stock held by non-affiliates as of June 30, 2020, we ceased to qualify as an emerging growth company as of December 31, 2020.

As a result, the Company no longer is able to use the extended transition period for complying with new or revised accounting standards available to emerging growth companies and is required to adopt new or revised accounting standards as of the effective dates for public companies.

All new accounting pronouncements recently adopted as discussed in 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 were adopted in the fourth quarter of 2020 with an effective date of January 1, 2020.

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What changed 10-K

Item 7. Management’s Discussion and Analysis