Industry Challenges
Employers are faced with three major challenges relating to providing fertility benefits to their employee bases:
| the lack of a comprehensive fertility benefits solution that optimizes their fertility treatment expenditures; |
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| the need to reduce the significant maternity and neonatal intensive care unit, or NICU, expenses, and the workplace impact, resulting from multiple births caused by fertility treatments; and |
| the desire to find innovative ways to attract and retain highly sought-after talent. |
Employers are seeing an increasing demand for fertility and family building benefits solutions from their employees, yet the programs offered by their conventional health insurance carriers do not successfully address these core challenges.
Lack of Effective Fertility Benefits Solutions
The conventional fertility benefits options available to employers have been designed to control the utilization of services (and expenditures) by employees rather than to optimize outcomes. As such, their plan designs have included restrictive features, such as lifetime dollar maximums, mandated step therapy protocols and limited or no coverage for advanced diagnostics and procedures. In addition, these plan designs have failed to provide access to premier fertility specialists, robust patient support and the ability to dispense fertility medication in a timely manner. Given the evolution of fertility science, such conventional plans have not kept pace and have generated suboptimal clinical outcomes, as well as greater upfront treatment costs and maternity and NICU expenses. This in turn leads to inefficient utilization of employers’ expenditures on their fertility benefits programs.
When conventional fertility benefits coverage is restrictively structured with a lifetime dollar maximum, the patient often makes poor clinical decisions that ultimately result in greater costs for the employer. Because the dollar maximum can easily be exhausted in the midst of a fertility treatment cycle, patients may elect to transfer multiple embryos because they are under financial pressure and mistakenly believe that it will optimize their chance of becoming pregnant. According to a 2015 survey conducted by Reproductive Medicine Associates of New Jersey among 1,000 nationally representative U.S. adults aged 25 to 40, or the 2015 RMANJ Report, 94% of respondents who are actively trying to have a child believe that they must use multiple embryos to increase their chance of having a child through in vitro fertilization, or IVF. The common use of multiple embryo transfer belies the fact that this procedure greatly increases the risk of multiple births and health complications among the mother and babies. One of the most common complications associated with multiples is preterm births. Preterm births, which significantly escalate healthcare costs, including maternity care, labor and delivery costs and NICU expenses. According to a study published in the American Journal of Obstetrics & Gynecology that analyzed the total costs of care over 400,000 deliveries between 2005 and 2010, as adjusted for inflation, the maternity and perinatal healthcare costs attributable to a set of twins are approximately $150,000$153,000 on average, more than four times the comparable costs attributable to singleton births of approximately $35,000,$36,000, and often exceed this average. In the case of triplets, the costs escalate significantly and average $560,000,$577,000, sometimes extending upwards of $1.0 million.
Conventional health insurance carriers also often mandate step therapy protocols and restrict access to use of advanced diagnostics and procedures, which exacerbates the inefficient utilization of dollars available under the lifetime dollar maximum and wastes valuable time on less effective treatments. A patient with mandated fertility step therapy protocol may be required to undergo three to six cycles of intrauterine insemination, or IUI, which has an average success rate range of 5% to 15%, takes place over three to six months and can cost up to $4,000 per cycle (or an aggregate of approximately $12,000 to $24,000), according to FertilityIQ. Multiple rounds of mandated IUI is likely to exhaust the patient’s lifetime dollar maximum fertility benefits and waste valuable time before more effective IVF treatment can be pursued. Additionally, conventional fertility benefits programs generally do not cover certain advanced diagnostics and procedures that have been demonstrated to increase the likelihood of a healthy live birth. In addition to restrictive plan designs, the success of conventional fertility programs is also limited because many of the nation’s top fertility specialists do not broadly participate in conventional health insurance carriers’ networks.
The fertility process is a long, rigorous journey, both emotionally and physically. Conventional benefits programs also lack any meaningful care coordination, education or patient support. Patients and their dependents have no help in understanding the complex choices they are faced with and discerning between treatment alternatives. For example, patients are often uneducated on the health risks and financial implications associated with preterm multiple births caused by the transfer of multiple embryos. There is also limited emotional support when patients face setbacks or
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unexpected outcomes as the current system ignores the emotional burden of patients embarking on the path to pregnancy through assisted reproductive technology, or ART, treatments and the impact that burden has on employee productivity and the workplace. In the 2015 RMANJ Report, 55% of surveyed individuals believe infertility to be more stressful than unemployment, and 61% believe infertility to be more stressful than divorce. Another study published by European Society of Human Reproduction and Embryology reported that 50% of women with infertility reported feeling depressed most or all of the time. The current system places the heavy burden of coping with the infertility journey completely on the patient, without adequate resources for emotional and educational support.
The conventional pharmacy delivery infrastructure is not designed to address the uniqueness of fertility treatment, which requires highly coordinated and timely delivery of medication. Conventional benefits managers require extensive and multiple authorizations and have inconsistent approval processes, which can complicate and delay the provision of medications that are essential to fertility treatment. We believe that with conventional benefits programs, authorization and delivery times of one to two weeks are typical. If medications are not received on time, patients may have to wait a month or longer to commence another round of fertility treatment, wasting valuable time and money. In
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addition, the storage, preparation and administration of fertility medication is complex and requires extensive self-administered injections, yet most fertility benefits programs offer limited guidance and clinical support to patients around these issues. Additionally, fertility medications are often self-administered injectable drugs, and the effectiveness of a patient’s treatment may be compromised by improper storage and/or incorrect administration of their medications if the patient is not provided access to education and support.
Because of the unique challenges of infertility, including the high costs and complexity of treatment and the variability of outcomes across fertility specialists, conventional benefits solutions have been unable to optimize outcomes and efficiently utilize employers’ dollars committed to fertility. As a result, employers are facing increased demand for an expensive benefits program without the availability of an effective solution in the conventional managed care environment.
Costs Associated with Multiple Births and Poor Fertility Treatment Outcomes
Regardless of whether an employer chooses to cover fertility treatments, they end up bearing the significant medical costs associated with unanticipated multiple births and miscarriages, as well as the associated impacts on the workplace. The high number of multiple embryo transfers that conventionally occurs during IVF leads to a significant number of multiple births, which in turn is a primary cause of dangerous and expensive preterm births, the most common complication resulting from multiple births, which lead to extensive maternity and NICU costs. In addition to multiple birth rates, the relatively higher miscarriage rate associated with IVF treatment also results in significant additional medical costs for employers and their employees, as well as emotional and physical strain on patients. As a result of these suboptimal treatment outcomes, employers also bear the related costs of increased employee absenteeism at the workplace, which is common with instances of multiples births. Employers may not be fully aware of the causal effect and ultimate impact of suboptimal fertility care under the current solutions offered by the conventional benefits programs since these programs do not collect outcomes data from their fertility specialists and therefore cannot accurately report on their program’s performance in a timely manner.
Ability to Attract and Retain Talent
Employers are facing increasing competition to attract and retain talent as the labor market is at historically low unemployment levels.talent. As a result, employers are enhancing their value proposition to employees by evaluating and providing benefits that are most in demand. Family building solutions are an increasing area of focus for employees, and in turn, employers.
Our Market Opportunity
We believe we have a significant opportunity to provide employers with a superior comprehensive solution that addresses the unique challenges and complexities of fertility treatment and related fertility pharmacy services.
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Our core market for fertility benefits management is substantial and growing rapidly with strong tailwinds from major societal and cultural shifts, such as people starting families later in life, the growth in non-traditional paths to parenthood and other health-related burdens which have impacted the ability to have children. In addition, we believe that continued de-stigmatization of infertility, along with increased financial support from employers, will continue to drive better access to, and stronger demand for, fertility treatment services, thereby further enabling the expansion of our addressable market.
We estimate that the market for fertility treatments in the United States was approximately $6.7$7.0 billion in 2017,2018, based on data published by the CDC regarding the number of treatment cycles and FertilityIQ’s estimate of the average cost per cycle. We estimate the potential size of the U.S. fertility market to be at least twice as large because this figure excludes those individuals who do not seek treatment for infertility. According to a recent study by Reproductive Medicine Associates of New York, approximately 50% of people suffering from infertility do not seek treatment. Furthermore, when comparing the United States to other countries, the percentage of babies born utilizing ART is materially lower, at less than 2% in the United States (where fertility treatment is not adequately covered), compared to approximately 10% in Denmark and 5% in Japan (where there is more public health funding for fertility treatment).
We contract with employers to provide fertility and family building benefits to their employees and covered dependents. We believe our addressable market consists of the approximately 8,000 self-insured employers in the United States. These 8,000 employers have a minimum of 1,000 employees, representing approximately 69 million potential covered lives in total. Our current member base of 2.12.7 million lives under contract represents only 3%a low single digit percent of our total market opportunity.
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Regardless of whether or not these self-insured employers currently provide a fertility benefit, we believe they are prospective clients of Progyny. Further, 35% of our clients had no prior fertility coverage before adopting Progyny and 92%95% of our clients enhanced their coverage when they switched to Progyny. Overall, we believe our market opportunity is substantial and is continuing to grow as a result of the rising demand for fertility benefits solutions, the lack of adequate offerings in the market today and the increasing awareness of the challenges of infertility we are driving.
Our Solutions
We are redefining effective fertility and family building benefits through our purpose-built, data-driven and disruptive platform through which we offer our fertility benefits and Progyny Rx solutions. Our innovative and comprehensive fertility solution has proven to be simultaneously beneficial for our clients, our members and our network of fertility specialists. 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 fertility specialists and achieve optimal outcomes in a cost-efficient manner, while our clients and members achieve savings in upfront treatment costs as well as reduced maternity and NICU expenses.
Fertility Benefits Solution
Differentiated Benefits Plan Design
The innovative Smart Cycle is our easy-to-understand fertility benefits design. Our Smart Cycle plan design allows members equitable access to the treatment they need and is designed to drive superior outcomes and reduce both upfront treatment expenses and subsequent costs. Everything needed for a comprehensive fertility treatment is contained within a Smart Cycle treatment bundle, including all necessary diagnostic testing and access to the latest technology (e.g., in the case of IVF treatment, preimplantation genetic testing). We currently offer 17 different Smart Cycle treatment bundles, which may be used independently or in combination depending on the member’s need. Each Smart Cycle 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 unlimited cumulative Smart Cycles units. Members can choose their preferred provider clinics within our network and utilize their Smart Cycles for whichever treatments they and their fertility specialists determine to be necessary throughout their fertility journey.
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The Smart Cycle structure allows our members, together with the advice of their fertility specialists and the support of their PCAs, to select the Smart Cycle treatment bundles that align with their unique treatment needs and their intended family building pathway, without having to follow the “one size fits all” protocols common to conventional health insurance carriers, and without the worry that their desired treatment approach will not be authorized or covered for the full treatment cycle. Our comprehensive Smart Cycles, which are our proprietary treatment bundles, are assessed regularly by our Medical Advisory Board, and include access to the latest science and technologies, enabling our network of fertility specialists to utilize best practices.
Our superior clinical outcomes driven by our Smart Cycle plan design include higher rates of pregnancy and live births, as well as lower miscarriage rates and fewer multiple births.
Personalized Concierge-Style Member Support Services
Our fertility benefits solution provides members with access to significant support services that are crucial to the success of the fertility and family building journey. Before the fertility treatment process begins, and throughout every step of the fertility journey, we deliver high-touch member support services through a dedicated PCA.PCA, who is paired to a member and interacts with them an average of 15 times over the course of their treatment. Our PCAs have deep fertility expertise and provide extensive clinical education, guidance and emotional support to our members. Additionally, we have an in-house clinical staff, comprised of professionals with substantial expertise in reproductive
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endocrinology, fertility nursing, clinical psychology and social work that design our PCA training curriculum and direct our comprehensive member experience.
Our comprehensive member portal, accessible via any desktop or mobile device, further supports the member experience by providing key educational resources and easy-to-access benefits information to our members. Our members can use the portal to securely message their PCA or access a curated library of videos, articles, podcasts and webinars on fertility and family building. The portal also offers digital solutions that help our members address the emotional effects that are often associated with infertility, including loss, self-blame, anxiety and depression.
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Additionally, the portal can be used to review plan coverage, benefit utilization, claim details and account balances. We believe our platform provides our members with best-in-class support services to help them navigate their fertility and family building journeys.
Selective Network of High-Quality Fertility Specialists
We have utilized our deep industry knowledge and the insights derived from our data analytics platform to establish and actively manage a national network of the leading fertility specialists in the country. Our members receive access to our selective Center of Excellence network of high-quality providers that includes approximately 800900 fertility specialists who practice at approximately 600over 650 provider clinic locations throughout the United States. Our network includes 2246 of the top 2550 fertility practice groups by volume in the United States according to 20172018 CDC data, which was published in 20192020 and is the most recent data available. Fertility specialists who are invited to join our network must meet and maintain rigorous credentialing standards and quality thresholds that we set for inclusion in our network to ensure that our members receive the highest quality of care.
Our fertility specialist network is unique in that approximately 30% of our provider clinics do not broadly participate in conventional health insurance carrier networks, meaning they contract with us and no more than one other health insurance carrier. Our national network serves members in virtually every state, (two states have no practicing reproductive endocrinologists), providing extensive geographic coverage to our national employers.
Progyny Rx, an Integrated Pharmacy Benefits Solution
Progyny Rx is our integrated pharmacy benefits solution that can be added by clients that utilize our fertility benefits solution. This solution provides our members with access to the medications needed during their 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. Our single treatment and medication authorization process reduces the administrative burden, creating an efficient pharmacy solution for our members and their fertility specialists. Progyny Rx reduces dispensing and delivery time to two days to eliminate the risk of missed treatment cycles. Our single medication authorization and delivery process ensures that our members will not miss or delay cycles. We provide phone-based, clinical education and support seven days a week to ensure that our members understand any necessary medication storage requirements and administration techniques, including injection training. To further support those members that require additional education, we also offer a library of on-demand videos. Given the importance of the timely use of medication to the success of fertility treatments, and the
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complexity involved in administering the medications, we believe Progyny Rx provides a differentiated and effective pharmacy solution for our clients and their employees.
Robust Data Collection Process.Process
We believe that we are the only fertility and family building benefits company to collect data in a timely manner directly from providers on adherence to treatment protocols and clinical outcomes, including single embryo transfer rates, pregnancy rates, miscarriage rates, live birth rates, multiple birth rates, practice patterns, treatment timelines and costs per birth. Our data is used to understand the utilization of our benefits, our provider clinics’ adherence to best practices and the outcomes produced by each clinic and across our network. This data informs decisions across our platform, from services covered to our fertility network standards. The insights from our data also enable us to actively manage our fertility specialist network and ensure that our fertility specialists are utilizing best practices and optimizing outcomes. The data collection process also includes extensive member surveys, which allow us to understand and improve our member satisfaction. Finally, our data allows us to provide our clients with unique and detailed quarterly reports in order to provide full transparency into the utilization of their benefit program, their expenditures and the outcomes delivered and value created. We believe that we effectively utilize our thorough data collection and analysis process and our unique and robust data set to continuously improve the client and member experience across our platform.
Prestigious Medical Advisory Board.Board
Our Medical Advisory Board is comprised of nationally recognized fertility specialists who are advancing fertility science and research. They are responsible for oversight of key clinical issues, including evaluating new fertility treatment diagnostics and procedures to ensure that our benefits design and overall program is comprehensive and is designed to drive to the best outcomes. This review ensures that we are evaluating and covering the latest and most effective fertility treatments and identifying opportunities to improve our plan design, member experience and fertility specialists network standards.
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Full Service Client Account Management.Management
We provide a dedicated account management team to ensure that we are delivering superior service. Our account managers support our clients’ day-to-day needs and resolve issues that arise. For example, to help our clients ensure that their employees are fully aware of the Progyny program, our account management teams work with our clients to create co-branded materials to support health fairs, open enrollment events and other employee communications. The account management team also attends open enrollment benefits fairs and other health fairs throughout the year and hosts virtual open enrollment webinars for members to attend live or on-demand. Our account management team also reviews all quarterly and annual program reports with our clients to reinforce the transparency we provide to clients into their expenditures and outcomes and to review and quantify the value created by our solutions. We believe our account management services, including our detailed client reporting, plays an important role in helping us maintain and strengthen our client relationships.
Ease of Integration for Our Clients.Clients
Once we are selected by an employer to manage their fertility and family building benefit, our solution is easy to implement as part of their broader pre-tax medical benefits package. Integrating our solution involves only a small commitment of our client's time (typically only six to ten hours over the course of six weeks). Facilitating the ease of integration is the fact that we have developed multiple integration solutions that allow us to integrate with any health plan or health insurance carrier, reducing significant time and expense for our clients. Our ability to integrate our solution with our clients' health insurance coverage allows our benefit to be offered to employees on a pre-tax basis, providing our members with significant savings in comparison to a post-tax reimbursement. We believe our ability to integrate our benefits solutions with all of the large national health insurance carriers is a differentiating factor within the industry.
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Surrogacy and Adoption Reimbursement Program
We also offer a surrogacy and adoption reimbursement program. We can manage the reimbursement of surrogacy and adoption expenses for those clients who offer such reimbursement benefits. For these programs, employers designate a specific lifetime dollar amount toward surrogacy and/or adoption services for their employees. We then administer the expense reimbursement to employees up to this dollar amount. We work with our clients to determine what expenses related to adoption and/or surrogacy will be covered under their plan, thereby alleviating their administrative burden. Examples of reimbursement expenses typically include agency fees, surrogacy fees, travel expenses and healthcare expenses for the surrogate.
Our Value Proposition
We believe that our competitive success is a function of our ability to concurrently: (1) provide tangible financial value to our clients; (2) deliver a better and more supported fertility journey to our members; and (3) provide value to, and work collaboratively with, the nation’s finest fertility specialists.
We Provide Measurable Value to Our Employer Clients
| Substantial and Measurable Financial Value. Our superior clinical outcomes drive savings in both upfront fertility treatment costs (due to our higher live birth rates) as well as subsequent maternity and NICU expenses for our clients (due to our lower multiple birth rates). |
| Progyny Rx Savings. Progyny Rx delivers unit cost savings of between 10% and 20% to our clients, and additional savings of approximately 8% based on a reduction in unnecessary quantities of medication dispensed. |
| Employee Productivity and Retention. Our solution addresses employee absenteeism, poor productivity, and the lack of employee retention driven by the stress of suffering from infertility (and undergoing fertility treatment) as well as the back-to-work issues related to multiple births. Our members are able to receive the most effective treatments more quickly and have access to high-touch member support services through our PCAs, thereby reducing the physical and emotional rigors of infertility and its treatment. |
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| Appeal to Existing and Prospective Employees. Better fertility benefits programs can be a key component of enhancing a company’s overall benefits and an important tool in its recruiting efforts and in helping retain key talent. An appealing feature of the Progyny benefit from an employee retention perspective is that the benefit is both comprehensive and is accessible by all groups across an employee population. The level of employee satisfaction we provide is important for any employer focused on employee retention. |
We Provide Meaningful Value to Our Members
| Superior Clinical Outcomes. Our members experience healthier pregnancies (with significantly increased utilization of single embryo transfer) 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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Single embryo transfer rate(1) |
| 49.5 | % |
| 53.1 | % |
| 89.0 | % | | 58.1 | % | 61.1 | % | 88.4 | % |
Pregnancy rate per IVF transfer |
| 52.5 | % |
| 54.6 | % |
| 60.7 | % |
| 52.4 | % | 54.0 | % | 59.9 | % |
Miscarriage rate |
| 18.5 | % |
| 18.2 | % |
| 10.2 | % |
| 19.0 | % | 18.7 | % | 13.3 | % |
Live birth rate |
| 43.3 | % |
| 45.3 | % |
| 54.5 | % |
| 42.1 | % | 43.7 | % | 51.9 | % |
IVF multiples rate |
| 16.1 | % |
| 15.4 | % |
| 3.6 | % |
| 12.2 | % | 11.2 | % | 2.4 | % |
(1) | Calculated based on the Society for Assisted Reproductive Technology, or SART, 2017 National Summary Report, |
(2) | Calculated based on CDC, |
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| Calculated based on the 12-month period ended December 31, |
| Comprehensive Coverage. We provide all individuals with access to comprehensive coverage. Our Smart Cycle design ensures that members always have coverage for a full treatment cycle as their access to treatment is not limited by a dollar maximum that could be exhausted mid-treatment. Additionally, members have access to the latest technologies and procedures, which are reviewed and approved by our Medical Advisory Board. |
| Access for All Members and Dependents. Smart Cycles are available to be utilized across all employee groups, including populations not typically covered, such as LGBTQ+ individuals and single mothers by choice. |
| Equitable Access to Care. Our Smart Cycle design ensures members receive fair and balanced access to care that is not dependent on where members live, how expensive a fertility specialist is or which specific treatments are required. |
| High-Touch Concierge Member Experience. We provide our members with high-touch, end-to-end concierge support, including logistical assistance, clinical guidance and emotional support through our PCAs and our in-house clinical staff. |
| Access to Selective, Premier Fertility Specialist Network. Our solution provides members with access to the nation’s most desired fertility providers, including approximately |
| Integrated Pharmacy Benefits Solution. Progyny Rx provides members with a simplified authorization process, timely medication delivery and member support from pharmacy clinicians seven days a week. |
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We Provide Meaningful Value to Our Fertility Specialists
| Members Supported With a Comprehensive Benefit. Our solutions allow our members to arrive at their fertility specialist with a fully-covered course of treatment and the flexibility to utilize the latest approved technologies and best practices via our comprehensive Smart Cycle benefits plan design. These members are also educated on the use of best practices and are supported by PCAs along their fertility journey. |
| Eliminate Step Therapy Protocols. Our network of fertility specialists have access to the latest science and technologies through our innovative Smart Cycles, which free our fertility specialists from having to follow the ineffective protocols common to conventional coverage and allow them to pursue the most effective treatments first, thereby saving time and money. |
| Simplified Administration. Once a Smart Cycle treatment is authorized, fertility specialists within our network are able to prescribe the optimal treatment plan without any need for pre-certification or pre-authorization. |
| Superior Clinical Outcomes. Outcomes for Progyny members across our fertility specialist network are superior to the average outcomes that these same provider clinics report to the CDC for all of their patients. For example, as shown in the prior table, the in-network average live birth rate for Progyny members is |
| Eliminating Financial Risk Associated With Collections. We assume full responsibility for the collection of all members’ deductibles and coinsurance, thereby eliminating the burden and cost of collection (and bad debt expense) for member payments that our provider clinics otherwise would experience. |
| Data Sharing and Reporting. We produce clinic scorecards quarterly with key performance indicators that allow fertility specialists to compare their results with peer averages. |
| Higher Volumes and Improved Financial Performance. Fertility specialists in our network often experience an increase in patient volume, and because of our comprehensive benefits design, an increase in the number of patients who progress from consultation to treatment. |
We are a leading benefits management company specializing in fertility and family building benefits solutions in the United States, with a client base of over 130 self-insured employer clients representing approximately 2.1 million members. We drive superior clinical outcomes for our members including higher pregnancy success rates, lower miscarriage rates, fewer multiple births and a higher live birth rate. We are a recognized and trusted brand and believe that our leadership and market differentiation is evidenced by our retention of substantially all of our clients since we first began offering our fertility benefits solutions in 2016.
Differentiated Model Drives Superior Clinical Outcomes at Reduced Overall Cost
In contrast to conventional fee-for-service coverage, which is designed to simply contain utilization, our case management-driven benefits model is comprehensive, does not exhaust coverage mid treatment cycle, includes access to the latest technologies and best clinical practices and drives superior outcomes. The success of our plan design in driving more favorable outcomes is evidenced by the fact that outcomes for Progyny members across our fertility specialist network are superior to the average outcomes that these same provider clinics report to the CDC for all of their patients.
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In addition to the tangible medical and pharmacy cost savings, our clients are also able to avoid some of the indirect costs of infertility such as employee absenteeism and loss of productivity caused by stress and depression, as well as lack of employee retention caused by multiple births.
We believe that a key differentiator of our services is our concierge member support delivered by our PCAs who are unique to our platform and a valuable resource to our members. PCAs provide meaningful education, clinical guidance and emotional support for our members and are available throughout the member's fertility and family building journey. In addition, the member experience is tailored to meet the unique needs of our clients' employees and the PCAs have expertise in fertility treatment issues uniquely affecting LGBTQ+ individuals, single mothers by choice and individuals looking to pursue surrogacy or adoption.
Selective, Premier Fertility Specialist Network
Our fertility specialists are thought leaders in the treatment of fertility and are driving differentiated outcomes for our members. Because of the unique Progyny benefits design, our fertility specialists can utilize the most effective treatment for members the first time, without the restrictions of conventional benefits programs. Our network includes 22 of the top 25 fertility practice groups by volume in the United States according to 2017 CDC data.
Value-Added Integrated Pharmacy Program
We more effectively manage the complex fertility medication process through a single authorization mechanism for fertility treatments and the related prescription drugs, with guaranteed timely delivery and extensive clinical support around drug storage and administration techniques, including injection training, seven days a week. In addition to the unit-cost savings we deliver through our negotiated formulary rates, we also employ an innovative cost containment program that has enabled our clients and members to save additional costs through the reduction in overprescribing that is typical of conventional fertility pharmacy management.
Purpose-Built, Data-Driven and Disruptive Platform
The outcomes data we collect and analyze provides insights across our business, including the creation and management of our plan design and clinical protocols to ensure the efficiency of employer expenditures. We also manage our fertility specialist network and ensure adherence to Progyny practice standards based on this data to ensure that fertility specialists are driving improved clinical outcomes and member satisfaction.
A key differentiator of our solution is our in-depth client reporting. We synthesize our data into comprehensive reporting for our employer clients so that they can see the detail of the utilization of the benefit by their employees, their expenditures, the outcomes and value created and their employees' satisfaction with the experience. We believe we are the only benefits manager that tracks fertility outcomes from medical record data on a timely basis, and we believe this unique data reporting to be important for our employer clients to understand why Progyny offers a superior solution.
Since launching our benefits solution, we have increased our client base every year without any dilution to or decrease in the level and quality of services. Once we begin providing services to a client, we believe it is difficult for our clients to replicate our outcomes with another solution. In addition, we have been able to add new solutions and technologies to our offering while sustaining this growth and believe our platform is capable of continuing to rapidly adopt more clients without meaningful infrastructure enhancements.
Deeply Experienced Management Team with Strong Culture
Our management team has extensive operational experience and background in healthcare, technology and services. Additionally, our sales, support and development teams have significant healthcare, technology and benefits
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experience and are a key competitive advantage to our success. Their demonstrated track record of success in running public companies and scaling growth organizations will allow us to continue to be leaders in our industry.
A large part of our continued success is driven by our unique culture and the dedication and commitment of our Progyny team. We have been recognized by Modern Healthcare as one of the Best Places to Work in Healthcare in 2018 and 2019, positioning us well to continue to attract and retain top talent.
We intend to continue increasing our client base of self-insured employers throughout the United States by leveraging our experienced salesforce and strong relationships with benefits consultants. We believe we have an addressable market of approximately 8,000 potential self-insured employer clients in the United States and, with our current base of over 130180 clients, are still in the early stages of our growth trajectory. Importantly, as we have continued to grow, we have meaningfully diversified our client base across an array of different industries. We are expanding our client base within each industry that we serve, and have an industry-specific strategy, which enables us to most effectively target our addressable market. Additionally, we believe that our expanding presence has resulted in a heightened awareness of fertility benefits and has informed the market of the value we provide to our employer clients and our members, which we believe also helps facilitate growth.
Capitalize on Embedded Growth Potential within Our Existing Client Base
Because of how our revenue model is structured, we believe we are positioned to realize organic revenue growth as our clients and their respective employee bases grow and utilize more fertility treatment services as a result. A meaningful portion of our clients have grown, and we believe many of them will continue to grow. In addition, we have historically realized similar utilization trends of fertility services for new members compared with existing members on a same client basis. We believe the combination of these factors results in meaningful and sustainable embedded growth potential well into the future.
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Expansion of Progyny Benefits Solutions within Our Existing Client Base
We believe we will continue to see growth from existing clients that add incremental services to their fertility benefits program. For example, a client can expand the fertility benefits they offer to their employees by increasing the number of Smart Cycles they contract for. In addition, our fertility benefits solution clients can purchase our add-on Progyny Rx solution. We introduced Progyny Rx in the third quarter of 2017 and went live with a select number of clients in January 2018. Currently, 70%73% of our clients are utilizing this solution, including 75%84% of the clients we signed in 2019.2020. We believe our sales and marketing capabilities play an important role in informing and educating clients about the additional value and impact we can provide to them and their members by enhancing their benefit program.
New Services and Addressable Markets to Enhance the Depth and Breadth of Our Comprehensive Fertility Offering
As we continue to grow and expand our client base, we are continuously evaluating the latest evolving trends to find ways we can better serve the needs of existing and new potential clients and their employees. We believe we are uniquely positioned to do this for several reasons. First, we believe the combination of our Medical Advisory Board and our selective network of high-quality fertility specialists, as well as the data we collect and analyze, provides us with differentiated insights into fertility care delivery and support. In addition, we believe we have positive and collaborative relationships with our clients that offer us additional insights into their needs. We believe the combination of these factors, coupled with our demonstrated track record of adding more services to our benefits design, highlights that we are well positioned to do so in the future. To date, we have identified several ways we believe we can potentially expand our offering and expand our client base in the future. We will continue to evaluate opportunities as our platform continues to expand.
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Our Clients
We currently serve over 130180 self-insured employers in the United States across more than 2530 industries. Our current clients, who are industry leaders across both high-growth and mature industries and range in size from approximately 1,000 to 250,000350,000 employees, represent approximately 2.12.7 million covered lives.
In 2019, 2018lives under contract. For the year ended December 31, 2020, two clients accounted for 18% and 2017, each of our largest three clients represented more than 10%17%, or a combined 35%, of our total revenue. For the years ended December 31, 2019, 2018 and 2017, Google Inc.No other clients accounted for 16%, 24% and 45% of our total revenue, respectively. In addition, Amazon.com, Inc. accounted for 15% of our total revenuemore than 10% for the year ended December 31, 2019. Finally, Microsoft Corporation accounted for 10% and 14% of our total revenue for the years ended December 31, 2019 and December 31, 2018, respectively.2020.
Our clients represent a large proportion of companies identified by FertilityIQ as the “best companies to work for as a fertility patient” in their 2019-2020 industry study. We believe that our employer clients are thought leaders in their respective industries and are creating a network effect that is helping to drive more widespread adoption of fertility benefits in their specific industries
industries. We have clients in the technology, consumer retail, industrial, healthcare, media, insurance, legal, food and beverage, financial services, life sciences, professional services, government services, energy, manufacturing, logistics, transportation, real estate, nonprofit and hospitality sectors.
Substantially all of our clients have renewed their benefits management contracts since our initial benefits offerings launched in 2016. The majority of our clients have signed multi-year contracts or contracts that renew automatically on an annual basis.
Given that the majority of our clients contract with us for a January 1st 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 the 20192020 sales cycle, more clients have opted for comprehensive coverage, with substantially all of our new clients electing for Progyny Rx, multiple Smart Cycles and/or egg-freezing.
Our Competitive Landscape
We believe we are the leader in the market for employer-sponsored fertility benefits and family building solutions.
We believe we compete favorably based on the following competitive factors:
| the value and comprehensiveness of the benefits solution and superior outcomes for employees; |
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| benefits plan design; |
| access for all employees and their dependents, including LGBTQ+ and single mothers by choice; |
| equitable access to care across geographies; |
| treatment plans that maximize effectiveness and achieve desired outcomes; |
| member experience, including unlimited dedicated patient education, clinical guidance and emotional support; |
| access to a network of high-quality fertility specialists; |
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| data reporting and sharing; and |
| access to an integrated pharmacy solution. |
While we do not believe any single competitor offers a comparably robust, integrated fertility and family building benefits solution, we compete primarily with health insurance companies and benefits administrators that also provide fertility benefits management services as part of their overall healthcare coverage. These competitors include conventional health insurance carriers, such as UnitedHealthcare, Cigna, Aetna and members of the Blue Cross Blue Shield Association.
Other competitors who currently provide fertility benefits management services to employers include WIN Fertility and Optum Fertility Solutions.
Our solutions are structured as a pre-tax benefit program integrated into employers’ overall employee medical insurance, which is unique compared to the offerings of benefits managers new to the industry that do not have integrated health insurance carrier solutions. These emerging companies, such as Carrot Fertility and Maven Clinic, currently offer employees post-tax reimbursement programs for fertility benefits. In addition to our unique plan design, member support and fertility specialist network, one of the key structural differences between our pre-tax benefit and their post-tax reimbursement programs is that the individual receiving reimbursement for fertility treatments must pay income taxes on the amount of that reimbursement for the post-tax programs.
Sales and Marketing
We sell our solutions through our sales organization and, in many cases, we leverage our relationships with top benefits consultants to establish relationships with potential clients. Our sales team has broad experience in health benefits management and extensive long-term relationships with industry participants and benefits executives at large employers. Our sales team is organized principally by geography and account size and is responsible for identifying potential clients and managing the overall sales process. The success and effectiveness of our sales team is evidenced by the over 5045 new clients that we added in 2019,2020, and the fact that approximately 65% of our current clients terminated their existing fertility coverage to switch to Progyny.
We generate client leads, accelerate sales opportunities and build brand awareness through our marketing programs. Our marketing programs target human resource, benefits and finance executives in addition to health professionals and senior business leaders. Our principal marketing programs include learning opportunities for potential members, demand generation, field marketing events, integrated marketing campaigns (including direct email and online advertising) and participation in industry events, trade shows and conferences. We also benefit from strong referrals as several of our prominent clients have publicly endorsed Progyny and discussed the value they and their members receive.
Government Regulation
As a participant in the health care industry, we are required to comply with extensive and complex U.S. laws and regulations at the federal and state levels. Although many regulatory and governmental requirements do not directly apply to our business, our clients are required to comply with a variety of U.S. laws, and we may be affected by these
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laws as a result of our contractual obligations. We have attempted to structure our operations to comply with laws, regulations and other requirements applicable to us directly and to our clients, members, fertility specialists and specialty pharmacies, but there can be no assurance that our operations will not be challenged or impacted by enforcement initiatives.
Healthcare Reform
It is uncertain how our operations will be affected by the changing political, legislative, and regulatory landscapes, as well as other influences impacting the healthcare industry. While the most salient vehicle for healthcare reform, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, does not directly regulate our business, as a benefit area,
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it does affect the coverage and plan designs that are or will be provided by certain insurance carriers and certain of our clients, as well as the overall reimbursement environment for healthcare providers. There remainSince its enactment in March 2010, there have been judicial, executive and Congressional challenges to certain aspects of the ACA, as well as efforts by the Trump administration to repeal or replace certain aspects of the ACA. Further,For example, the United States Supreme Court announced on March 2, 2020 that it will consolidateheard oral arguments in California v. Texas, which consolidated two cases regarding the constitutionality of the ACA.ACA, on November 10, 2020. It is unclear when a decision is expected to be made. The Supreme Court’s decision could end the case, or it could result in the case being sent back to the lower courts for continued litigation. Other health reform efforts have been proposed by members of Congress, such as measures that would expand the role of government-sponsored coverage, including further reform to the ACA, as well as single payer or so-called “Medicare-for-All���“Medicare-for-All” proposals, which could have far-reaching implications for the healthcare industry if enacted. On January 28, 2021, President Joe Biden issued an Executive Order directing federal agencies to examine all existing regulations, orders, guidance documents, policies and similar agency actions to determine if any such actions are inconsistent with the policy set forth in the Executive Order to protect and strengthen the ACA and make high-quality healthcare accessible and affordable for every American. As another example of recent healthcare legislative changes, the Consolidated Appropriations Act, or CAA, enacted on December 27, 2020, contain provisions impacting group health plans, including protections for plan participants from surprise medical bills and ensuring health plan price transparency.
Several items pertain to disclosure. The CAA prohibits plans from entering into services agreements that directly or indirectly restrict the plans from disclosing provider-specific costs and quality of care information. It will also require disclosure by health insurance brokers and consultants to plan sponsors regarding reasonably expected direct and indirect compensation for referral of services to group health plans. Additionally, the CAA requires plans to submit reports to the Department of Labor, HHS and IRS with certain information on pharmacy benefits and drug costs for participants and beneficiaries and the application of in-network rates to out of network services, effective December 27, 2021. The CAA will also require certain service providers for health plans to comply with certain ERISA fee disclosure rules. In addition, effective January 1, 2022, the No Surprises Act (enacted as part of the CAA) provides protection against surprise medical bills by prohibiting plans and providers from balance billing patients for emergency care performed by out-of-network providers as well as non-emergency and ancillary services performed by out-of-network providers at in-network facilities, subject to certain notice and consent exceptions for non-emergency and ancillary services. The new law also grants additional patient protections, including requiring providers to send a good faith estimate of the expected charges for furnishing items or services to an insured patient’s health plan (or directly to an uninsured patient) before such items or services are delivered (including items or services reasonably expected to be provided in conjunction with scheduled items or services or that are reasonably expected to be delivered by another provider). The No Surprises Act also provides a dispute resolution process in the event the actual charges for such items and services are substantially higher than the plan’s estimate, and will prohibit providers from charging patients an amount beyond the in-network cost sharing amount for services rendered by out-of-network providers, subject to certain exceptions. Several states have also enacted comprehensive surprise billing laws and the CAA defers to existing state requirements with respect to state-established payment amounts.
We are unable to predict how these changes to the full impact ofACA and other healthcare reform initiatives eventsfrom new legislation, regulation, judicial action and/or executive action, including the CAA and No Surprises Act and state laws, will ultimately be resolvedimpact the healthcare industry and what the potential impact may be on our business and on our relationships with current and future clients, insurance carriers, and healthcare providers.
Licensing Requirements
Many states have licensure or registration requirements for entities providing third-party administrator, or TPA, or pharmacy benefit management, or PBM, services. Given the nature and scope of the solutions and services that we provide, we are required to maintain TPA andand/or PBM licenses and registrations in certain jurisdictions and to ensure
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that such licenses and registrations are in good standing on an annual basis. These licenses require us to comply with the rules and regulations of the governmental bodies that issued such licenses.licenses, including maintaining certain solvency or bond requirements. Our failure to comply with such rules and regulations could result in administrative penalties, the suspension of a license, or the loss of a license, all of which could negatively impact our business.
Separately, states impose licensing requirements on insurers, risk-bearing entities, and insurance agents, as well as those entities that provide utilization review services. We do not believe that our services require us to be licensed under these state laws. We are unable to predict, however, how our services may be viewed by regulators over time, how these laws and regulations will be interpreted, or the full extent of their application. If a regulatory authority in any state determine that the nature of our business requires that we be licensed under such state laws, we may need to restructure our business to comply with any related requirements.
Fraud and Abuse Laws. Many of our clients, insurance carriers, and network healthcare providers are impacted directly and indirectly by certain fraud and abuse laws, including the federal anti-kickback and false claims laws. Because the solutions we provide are not reimbursed by government healthcare payors, such fraud and abuse laws generally do not directly apply to our business. However, many states have similar laws and regulations that may differ from each other and federal law in significant ways, thus complicating compliance efforts. For example, certain states have anti-kickback and false claims laws that may be broader in scope than analogous federal laws and may apply regardless of payor.
ERISA. The Employee Retirement Income Security Act of 1974, or ERISA, regulates certain aspects of employee pension and health benefits plans, includingwhich includes both insured and self-funded corporate health plans sponsored by our clients, with which we have agreements to provide TPA services. WeAlthough health plans and their fiduciaries are subject to the fiduciary obligations of ERISA, we believe that we are not fiduciaries in the conduct of our business vis-a-vis these plans is not generally subject to the fiduciary obligations of ERISA.plans. However, there can be no assurance the United States Department of Labor, or the DOL, which is the agency that enforces ERISA, would not in the future assert that the fiduciary obligations imposed by ERISA apply to certain aspects of our operations or courts would not reach such a ruling in private ERISA litigation. In addition to its fiduciary provisions, ERISA has broad preemptive effect and has been held to preempt state laws imposing transparency requirements on PBMs.
ERISA also imposes civil and criminal liability on service providers to health plans subject to ERISA and certain other persons with relationships to such planhealth plans subject to ERISA if certain forms of illegal or prohibited remuneration are made or received by such service providers or other persons. These provisions of ERISA are similar, but not identical, to the healthcare anti-kickback laws described above, although ERISA lacks the statutory and regulatory “safe harbor” exceptions incorporated into the healthcare anti-kickback laws. Like the healthcare anti-kickback laws, the corresponding provisions of ERISA are broadly written and their application to particular cases can be uncertain.
Employee benefits plans subject to ERISA are subject to certain rules, published by the DOL, including certain reporting requirements for direct and indirect compensation received by plan service providers. However, many self-funded healthFinally, although ERISA has broad preemptive effect with respect to certain state laws that “relate” to benefit plans, such as the plans that we have contracts with are exempt from these
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reportingit does not preempt state laws imposing transparency requirements under current law. At this time, we are unable to predict whether the DOL will issue additional regulations or guidance on reporting or which additional regulations, if any, may be proposed in formal rulemaking by the DOL.PBMs.
Prompt Pay Laws. Certain states have laws regulating the amount of time that may elapse from when a third-party payor receives a claim for services rendered to when those services are paid. Many of these state laws do not apply to our business as these laws are preempted by ERISA or otherwise exempt entities like us that provide TPA-only services.
Network Adequacy and Access. Certain states and government programs have laws regulating healthcare provider networks in order to ensure adequacy and access for beneficiaries and providers. These laws may affect us and our payor clients in network design and management. If we do not comply, we could face enforcement action or other penalties.
Requirements Regarding the Privacy and Security of Personal Information
HIPAA Privacy and Security Requirements. There are numerous federal and state laws and regulations related to the privacy and security of health information. In particular, regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or collectively referred to as HIPAA, establish privacy and security standards that limit the use and disclosure of certain individually identifiable health information (known as “protected health information”) and require
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the implementation of administrative, physical and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information.
As a provider of services to entities subject to HIPAA, we are directly subject to certain provisions of the regulations as a “Business Associate.” When acting as a Business Associate under HIPAA, to the extent permitted by applicable privacy regulations and contracts and associated Business Associate Agreements with our clients, we are permitted to use and disclose protected health information to perform our solutions and for other limited purposes, but other uses and disclosures, such as marketing communications, require written authorization from the patient or must meet an exception specified under the privacy regulations.
Other Privacy and Security Requirements. In addition to HIPAA, numerous other federal and state laws govern the collection, dissemination, use, access to and confidentiality of personal information, some of which may be applicable to our business. Certain federal and state laws protect types of personal information that may be viewed as particularly sensitive. For example, New York’s Public Health Law, Article 27-F protects information that could reveal confidential HIV-related information about an individual. State laws are contributing to increased enforcement activity and may also be subject to interpretation by various courts and other governmental authorities. Further, California recently enacted the California Consumer Privacy Act, or CCPA, which went into operation on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation.
Data Protection and Breaches. Laws in all 50 states require businesses to provide notice to clients whose personally identifiable information has been disclosed as a result of a data breach. Most states require holders of personal information to maintain safeguards and take certain actions in response to a data breach, such as providing prompt notification of the breach to affected individuals or the state’s attorney general. A non-permitted use or disclosure of protected health information is presumed to be a breach under HIPAA unless the Covered Entity or Business Associate establishes that there is a low probability the information has been compromised consistent with requirements enumerated in HIPAA. As a Business Associate under HIPAA, we are required to report breaches of unsecured protected health information to Covered Entities within 60 days of discovery of the breach or such shorter period as set forth in the applicable Business Associate Agreement .Agreement.
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HIPAA Transaction and Identifier Standards. HIPAA and its implementing regulations mandate format and data content standards and provider identifier standards (known as the National Provider Identifier) that must be used in certain electronic transactions, such as claims, payment advice and eligibility inquiries. The U.S. Department of Health and Human Services, or HHS, now requires the use of updated standard code sets for diagnoses and procedures known as the ICD-10 code sets. Enforcement of compliance with these standards falls under HHS and is carried out by the Centers for Medicare & Medicaid Services, or CMS. In the event new requirements are imposed, we will be required to modify our systems and processes to accommodate these changes.
Consumer Protection Laws. Federal and state consumer protection laws are being applied increasingly by the Federal Trade Commission, or FTC, Federal Communications Commission, or FCC, and states’ attorneys general to regulate the collection, use, storage and disclosure of personal or health information, through websites or otherwise, and to regulate the presentation of website content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Consumer protection laws require us to publish statements to our members that describe how we handle personal information and choices members may have about the way we handle personal information. If such information that we publish is considered untrue, we may be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences.
Restrictions on Communication. Communications with our members increasingly may be subject to and restricted by laws and regulations governing communications via telephone, fax, text, and email. We also use email and social media platforms as marketing tools. For example, we maintain social media accounts. As laws and regulations, including FTC enforcement, rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.
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Intellectual Property
We rely on trademarks, copyrights, trade secrets, intellectual property assignment agreements, confidentiality procedures, non-disclosure agreements, and employee non-disclosure and invention assignment agreements to establish and protect our proprietary rights. Though we rely in part upon these legal and contractual protections, we believe that factors such as our relationships with providers and clients, unique benefits model, ability to track outcomes and creation of resources for all constituents, along with the skills and ingenuity of our employees, are larger contributors to our success our company. Other than the trademark Progyny (and design), Smart Cycle and UnPack It, which are not subject to any known rights of others, including any impairments, assignments or pledges, we do not believe our business is dependent to a material degree on trademarks, patents, copyrights or trade secrets.
Seasonality
Given that the majority of our clients contract with us for a January 1st benefits plan start date, the first quarter has historically been the strongest in terms of sequential quarterly growth. We have in the past and expect in the future to experience seasonal fluctuations in our revenue as more members choose to start their fertility journey while also seeking to minimize their out of pocketout-of-pocket costs as the calendar year progresses.
WorkingEmployees and Human Capital
As of December 31, 2020, we had 210 full-time employees. Our working capitalemployees are our most important asset and our culture is affected bya key to our success. In response to the timingCOVID-19 pandemic, we implemented significant changes designed to ensure the safety and well-being of paymentsour employees as well as the communities in which we operate. This includes a work-from-home policy for all of our employees for most of 2020. We have not furloughed or laid off any employees due to third party providersthe pandemic. We recently re-opened our offices for a small group of employees, while implementing additional safety measures including testing, masks and collections from clientssocial distancing protocols.
We are united around our mission and have increased ascommitted to our revenue has increased. In particular, during the ramp upshared values of Passion, Collaboration, Innovation, Integrity 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 expensesGrowth. Our people strategy is focused on employee culture 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,engagement, competitive compensation and its impact on cash flow from operations, can fluctuate materially from period to period.development, diversity, equity and inclusion, and community outreach and support.
| ● | Culture and Engagement. Our benefits are designed to help employees and their families stay healthy, meet their financial goals, protect their income and help them balance their work and personal lives. These include access to mental health services, life and financial planning workshops, wellness initiatives, employee assistance programs, and new parent and return to work benefits. We also measure employee engagement on an ongoing basis, including through broad employee satisfaction surveys and pulse surveys on specific issues, intended to assess our success in promoting an environment where employees are engaged, satisfied, productive and possess a strong understanding of our business goals. The results from engagement surveys are used to implement programs and processes designed to enhance employee engagement and improve the employee experience or modify existing programs and benefits offerings. |
| ● | Competitive Compensation and Development. We invest in our workforce by offering competitive salaries, attractive incentives and innovative benefits. We focus on creating opportunities for employee growth, development and training, including opportunities to cultivate talent and identify candidates for new roles from within the company, management and leadership development programs, technical skill building initiatives and mentoring programs. |
| ● | Diversity, Equity and Inclusion. We believe diversity, equity and inclusion results in business growth and encourages increased innovation, retention of talent and a more engaged workforce. We strive to create a workplace where all individuals feel valued, empowered and welcomed. Our key initiatives focus on recruiting outreach, internal resource groups, mentoring programs and career development ladders. |
| ● | Community Outreach and Support. We believe it is important to give back and promote community outreach and support through corporate giving, charitable matching, and employee volunteerism in the communities in which we live and work. We allow flexible work hours to accommodate employee volunteer opportunities, provide corporate sponsored charitable events and have designed initiatives in the fertility and maternal health space to include corporate matching of employee charitable donations. |
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Our Employees
As of December 31, 2019, we had 167 full-time employees. None of our employees are represented by a labor union or covered by collective bargaining agreements, and we have not experienced any work stoppages.
Our Corporate Information
We were incorporated in Delaware in 2008 under the name Auxogen Bioscience, Inc. In 2010, we changed our name to Auxogyn, Inc., and in 2015 we changed our name to Progyny, Inc. Our principal executive offices are located at 1359 Broadway, New York, New York 10018, and our telephone number is (212) 888-3124. Our website address is www.progyny.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information on our website to be part of this Annual Report on Form 10-K.
We completed our initial public offering, or our IPO, in October 2019, and our common stock is listed on the Nasdaq Global Select Market under the symbol “PGNY.”
Available Information
We file electronically with the SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (including amendments to those reports), proxy statements, and other information. Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. We make available on our website at investors.progyny.com, under “Financials—SEC Filings,” free of charge, copies of these reports as soon as reasonably practicable after filing or furnishing these reports with the SEC. The information contained on the websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.
Investing in our common stock involves a high degree of risk. You should carefully consider all of the information in this Annual Report on Form 10-K, including the sections titled “Cautionary Note Regarding Forward-Looking Statements,” and Part II, Item 7.“Management’s7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The risks described below are not the only ones we face. Any of the following risks could materially and adversely affect our business, financial condition and results of operations, the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. Our business, financial condition and results of operations could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.
Risks Related to Our Business and Industry
The COVID-19 pandemic has had and is expected to continue to have, and similar health epidemics could in the future have, an adverse impact on our business, operations, and the markets and communities in which we and our clients, members and providers operate.
Our business and operations have been adversely affected by the COVID-19 pandemic, which has impacted the markets and communities in which we and our clients, members and providers operate. Since December 2019, when COVID-19 was first reported, the virus has spread to countries worldwide, including the United States and more specifically, New York, New York, where our primary office is located.
The ongoing COVID-19 pandemic has adversely impacted, and may continue to adversely impact, many aspects of our business. Our revenue growth for the year ended December 31, 2020 was negatively impacted by COVID-19 and our revenue growth in future periods may continue to be adversely impacted by COVID-19. Our providers have and may in the future delay new fertility cycles because they operate in areas acutely affected by the COVID-19 pandemic, on account of executive orders to postpone non-emergent surgeries or other medical treatments, or in order to conserve medical resources for non-fertility related medical treatments. Many of our members live in communities that are acutely affected by the COVID-19 pandemic and have delayed and may not want to continue or begin new fertility cycles during the pandemic. The lack of research on the impact of COVID-19 vaccines on pregnancy may also affect member behavior and utilization. Furthermore, as certain of our potential clients experience downturns or uncertainty in their own business operations and revenue because of the economic effects resulting from the spread of COVID-19, they have and may continue to decrease their spending on health benefits and delay or cancel implementation of fertility benefits. Each of these factors could affect our utilization rates and the number of members enrolled in our clients’ benefit plans.
In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place, and continue to enforce in whole or in part, and may at any time choose to fully reinstate, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions in order to control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur or reoccur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that could negatively impact productivity and disrupt our operations and those of our clients, members and providers.
In light of the uncertainty and rapidly evolving situation relating to the spread of COVID-19 and in compliance
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with shelter-in-place orders and other government executive orders directing that all non-essential businesses close their physical operations, we implemented a work-from-home policy for all of our employees. Although we have since re-opened our offices for a small group of employees, the majority of our employees continue to work remotely. We may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in the best interests of our business, our employees and the communities we serve. While most of our operations can be performed remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed, many employees may have additional personal needs to attend to (such as looking after children as a result of school closures or family who become sick), and employees may become sick themselves and be unable to work. Decreased effectiveness of our team could adversely affect our results due to our inability to meet in person with potential clients, longer time periods to complete implementation of new clients, longer time to respond to members, extended timelines for data collection and review and a corresponding reduction in growth, or other decreases in productivity that could seriously harm our business. In addition, working remotely could increase our cybersecurity risk and make us more susceptible to communication disruptions, which could adversely impact our business operations or delay necessary interactions with our clients, member, providers and other third parties. Furthermore, we may decide to postpone or cancel planned investments in our business in response to changes in our business as a result of the spread of COVID-19, which may impact our member utilization and rate of growth, either of which could seriously harm our business.
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. Moreover, to the extent the COVID-19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, including but not limited to, those related to our ability to expand our customer base and develop and expand our sales and marketing capabilities, and may impact our ability to comply with the financial covenant relating to revenue targets in our loan agreement with Silicon Valley Bank if a material economic downturn results in substantially lower revenue than expected under our annual financial projections.
The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation closely. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.
We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline.
We have provided and may continue to provide guidance about our business and future operating results. On February 24, 2021, we issued guidance for the first quarter of 2021 and full year 2021. In developing this guidance, our management must make certain assumptions and judgments about its future performance. Some of those key assumptions relate to the impact of the COVID-19 pandemic and the associated economic uncertainty on our business and the timing and scope of economic recovery globally and how long it will take both clinics and patients to return to normal practice volumes, which are inherently difficult to predict. This guidance, which consists of forward-looking statements, is qualified by, and subject to, such assumptions, estimates and expectations as of the date such guidance is given. While presented with numerical specificity, this guidance is necessarily speculative in nature, and is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions or economic conditions, some of which may change. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release of such guidance. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic, and which could adversely affect our business and future operating results. There are no comparable recent events that provide insights as to the probable effect of the COVID-19 pandemic, and, as a result, the ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. We are relying on the reports and models of economic and medical experts in making assumptions relating to the duration of this crisis and predictions as to timing and pace of any future economic recovery. If these models are incorrect or incomplete, or if we fail to accurately predict the full impact that the COVID-19 pandemic will have on all aspects of our business, the guidance and other forward-looking statements we provide may also be incorrect or
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incomplete. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline.
The fertility market in which we participate is competitive, and if we do not continue to compete effectively, our results of operations could be harmed.
The market for our solutions is competitive and is likely to attract increased competition, which could make it hard for us to succeed. We compete on the basis of several factors, including the comprehensiveness of our benefits solutions and the Smart Cycle (our unique approach to benefits plan design which ensures that members always have coverage for a full treatment cycle as their access to treatment is not limited by a dollar maximum that could be exhausted mid-treatment), superior clinical outcomes, access for all employee groups (including LGBTQ+ and single mothers by choice), equitable access to care across geographies, quality of the member experience and comprehensive member support, access to our selective Center of Excellence (our proprietary, credentialed network of high-quality fertility specialists), data reporting and sharing and access to an integrated pharmacy solution. While we do not believe any single
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competitor offers a similarly robust and integrated fertility and family building benefits solution, we compete primarily with health insurance companies and benefits administrators that also provide fertility benefits management services as part of their overall healthcare coverage. These competitors include all conventional health insurers, such as UnitedHealthcare, Cigna, Aetna and members of the Blue Cross Blue Shield Association. Other competitors that currently provide fertility benefits management services to employers include WIN Fertility and Optum Fertility Solutions. We also compete with benefits managers that are new to the industry that do not have integrated health insurance carrier solutions, such as Carrot Fertility and Maven Clinic, which currently offer employees post-tax reimbursement programs for fertility benefits.
As we market our solutions to potential clients that currently utilize other vendors to manage their employees’ fertility benefits, we may fail to convince their internal stakeholders that our offerings and our model are superior to their current solutions. Some of our competitors are more established, benefit from greater brand recognition and have substantially greater financial, technical and marketing resources. Our competitors may seek to develop or integrate solutions and services that may become more efficient or appealing to our existing and potential clients. For example, fertility-focused pharmacy benefits managers, or PBMs, could emerge that would compete with Progyny Rx. In addition, we believe one of our key competitive advantages is our purpose-built, data-driven platform. While we do not believe any competitors have developed a similarly robust data collection, analysis and reporting process at this time, current or future competitors may be successful in doing so in the future.
In addition, we believe that there is growing awareness of the demand for fertility benefits. As the fertility benefits field gains more attention, more competitors may be drawn into the market. We also could be adversely affected if we fail to identify or effectively respond to changes in market dynamics. As a result of any of these factors, we may not be able to continue to compete successfully against our current or future competitors, and this competition could result in the failure of our platform to continue to maintain market acceptance, which would harm our business, financial condition and results of operations.
Our business depends on our ability to retain our existing clients and increase the adoption of our services within our client base. Any failure to do so would harm our business, financial condition and results of operations.
As part of our growth strategy, we are focused on retaining and expanding our services within our existing client base. A client can expand the fertility benefits they offer to their employees a number of ways, including by adding egg freezing or increasing the number of Smart Cycle units under their benefits plan (i.e., from two to three Smart Cycles per household). In addition, our fertility benefits solution clients can purchase our add-on Progyny Rx solution. We went live with Progyny Rx in 2018 and 73% of our clients have now launched this solution, including approximately 84% of the clients we signed in 2020.
Factors that may affect our ability to retain our existing clients and sell additional solutions to them include, but are not limited to, the following:
| ● | the price, timeliness and outcomes of our solutions; |
| ● | the availability, price, timeliness, outcome, performance and functionality of competing solutions; |
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| ● | our ability to maintain and appropriately expand our Center of Excellence network of high-quality fertility specialists; |
| ● | our ability to offer complementary solutions and services that will enhance our comprehensive fertility offering; |
| ● | changes in healthcare laws, regulations or the enforcement of such laws and regulations, or trends; |
| ● | any material increase in unemployment rate; |
| ● | the business environment of our clients and, in particular, reduction in our clients’ headcount; and |
| ● | consolidation of our clients, resulting in a change to their benefits program or a shift to one of our competitors. |
Any of the above factors, alone or together, could negatively affect our ability to retain existing clients and sell additional solutions to them, which would have an adverse effect on our business, revenue growth and results of operations.
Our largest clients account for a significant portion of our revenue and a significant number of our clients are in the technology industry. The loss of one or more of these clients, changes to pricing terms with these clients or changes within the technology industry could negatively impact our business, financial condition and results of operations.
We serve over 180 employers in the United States across more than 30 industries. For the year ended December 31, 2020, two clients accounted for 18% and 17%, or a combined 35%, of our total revenue. No other clients accounted for more than 10% for the year ended December 31, 2020. In 2019, each of our largest three clients represented more than 10% of our total revenue, accounting for 16%, 15%, and 10%, respectively. Engagement with these clients is generally covered through contracts that are multi-year in duration. One or both of these clients may terminate early or decline to renew their existing contracts with us upon expiration and any such termination or failure to renew could have a negative impact on our revenue and compromise our growth strategy. Clients could also renegotiate pricing terms at the time of renewal, which could have a negative impact on our revenue. In addition, we generate a significant portion of our revenue from clients in the technology industry. Any of a variety of changes in that industry, including changes in economic conditions, mergers or consolidations, reduced spending on benefits programs and other factors, could adversely affect our business, financial condition and results of operations.
If we are unable to attract new clients, our business, financial condition and results of operations would be adversely affected.
To increase our revenue, we must continue to attract new clients. Our ability to do so depends in large part on the success of our sales and marketing efforts, and the success of attracting industry leaders in diversified sectors, which could prompt others in the same sectors to follow suit to remain competitive. Potential clients may seek out other options; therefore, we must demonstrate that our solutions are valuable and superior to alternatives. If we fail to provide high-quality solutions and convince clients of the benefits of our model and value proposition, we may not be able to attract new clients. The market for our solutions could decline or grow more slowly than we expect due to general economic conditions, outbreaks of contagious diseases or worsening thereof, including the COVID-19 pandemic, a decrease in business investments, including spending on employee benefits, and other factors. If the markets for our solutions decline or grow more slowly than we expect, or if the number of clients that contract with us for our solutions declines or fails to increase as we expect, our financial results could be harmed. As the markets in which we participate mature, fertility solutions and services evolve and competitors begin to enter into the market and introduce differentiated solutions or services that are perceived to compete with our solutions, particularly if such competing solutions are adopted by an industry leader in a particular sector, our ability to sell our solutions could be impaired. As a result of these and other factors, we may be unable to attract new clients, which would have an adverse effect on our business, financial condition and results of operations.
A significant change in the utilization of our solutions could have an adverse effect on our business, financial condition and results of operations.
We do not control or impact the level of utilization of our solutions for each of our clients, in particular for newer clients. A significant reduction in the number of members using our solutions could adversely affect our business, financial condition and results of operations. Factors that have and could continue to contribute to a reduction in the use of our
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solutions include: reductions in workforce by existing clients; general economic downturn that results in business failures and high unemployment rates; outbreaks of contagious diseases or the worsening thereof, including the COVID-19 pandemic; employers no longer offering comprehensive health coverage or offering alternative solutions such as coverage on a voluntary, employee-funded basis; federal and state regulatory changes; changes to taxability of medical benefits; failure to adapt and respond effectively to the changing medical landscape, changing laws, regulations and government enforcement priorities, changing client needs, requirements or preferences; premium increases and benefits changes; negative publicity, through social media or otherwise and news coverage.
It is also difficult for us to predict the level of utilization of our services at the member level. If the actual utilization of our services by members is significantly greater than budgeted, the client may be responsible for corresponding costs that exceed its planned expenditure. If we cannot help our clients accurately predict the level of utilization by their employees, our clients may turn to alternative solutions, and our business and profitability would be adversely impacted.
We have a limited operating history with our current platform of solutions, which makes it difficult to predict our future results of operations.
We went live with our fertility benefits solution in 2016 and Progyny Rx in 2018. As a result of our limited operating history with the current platform of solutions, as well as a limited amount of time serving a majority of our client base, our ability to accurately forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or decline for a number of reasons, including slowing demand for our solutions and fertility benefits in general, change in utilization trends by our members, general economic slowdown, an increase in unemployment, an increase in competition, changes to health care trends and regulations, changes to science relating to the fertility market, a decrease in the growth of the fertility market, or our failure, for any reason, to continue to take advantage of growth opportunities. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, and our business could suffer.
We have a history of operating losses and may not sustain profitability in the future.
We experienced net losses from 2015 to 2019. Our net loss from continuing operations was $(8.6)$8.6 million and $(5.1)$5.1 million and for the years ended December 31, 2019 and 2018, respectively. While we have experienced significant revenue growth since 2016, achieved profitability in 2020 and currently project future profitability, we are not certaincannot guarantee whether we will obtain sufficient levels of sales to sustain our growth or maintain profitability in the future. We also expect our costs and expenses to increase in future periods, which could negatively affect our future results of operations if our revenue does not increase. In particular, we intend to continue to incrementally expand our sales and client account management teams to educate potential clients and drive new client adoption, as well as enhance the scope of Progyny benefits within our existing client base. We also expect to incur additional costs as we introduce new solutions and services to enhance our comprehensive fertility offering. We will also face increased compliance costs associated with growth, the expansion of our client base and being a public company. Our efforts to grow our business may be costlier than we expect, and we may not be able to increase our revenue enough to offset our increased operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties, complications and delays, and other unknown events. If we are unable to sustain profitability, the value of our business and common stock may significantly decrease.
We haveChanges or developments in the health insurance markets in the United States, including passage and implementation of a limitedlaw to create a single-payer or government-run health insurance program, could materially and adversely harm our business and operating history with our current platformresults.
Our business operates within the public and private sectors of solutions,the U.S. health insurance system, which makes it difficult to predict our future results of operations.
We went live with our fertility benefits solution in 2016 and Progyny Rx in 2018. As a result of our limited operating history with the current platform of solutions, as well as a limited amount of time serving a majority of our client base, our ability to accurately forecast our future results of operations is limitedare evolving quickly and subject to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or decline for a number of reasons, including slowing demand for our solutions and fertility benefits in general, change in utilization trends by our members, general economic slowdown, an increase in unemployment, an increase in competition, changes to health care trends and regulations, changes to science relating to the fertility market, a decrease in the growth of the fertility market, or our failure, for any reason, to continue to take advantage of growth opportunities. If our assumptions regarding these
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risks and uncertaintieschanging regulatory environment, and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, and our business could suffer.
If we are unable to attract new clients, our business, financial condition and results of operations would be adversely affected.
To increase our revenue, we must continue to attract new clients. Our ability to do so dependsperformance will depend in large part on the success of our sales and marketing efforts, and the success of attracting industry leadersgrowth in diversified sectors, which could prompt others in the same sectors to follow suit to remain competitive. Potential clients may seek out other options; therefore, we must demonstrate that our solutions are valuable and superior to alternatives. If we fail to provide high-quality solutions and convince clients of the benefits of our model and value proposition, we may not be able to attract new clients. The market for our solutions could decline or grow more slowly than we expect due to general economic conditions, outbreaks of contagious diseases, a decrease in business investments, including spending on employee benefits, and other factors. If the markets for our solutions decline or grow more slowly than we expect, or if the number of clients that contract with us for our solutions declines or fails to increase as we expect, our financial results could be harmed. As the markets in which we participate mature, fertility solutions and services evolve and competitors begin to enter into the market and introduce differentiated solutions or services that are perceived to compete with our solutions, particularly if such competing solutions are adopted by an industry leader in a particular sector, our ability to sell our solutions could be impaired. As a result of these and other factors, we may be unable to attract new clients, which would have an adverse effect on our business, financial condition and results of operations.
Our business depends on our ability to retain our existing clients and increase the adoption of our services within our client base. Any failure to do so would harm our business, financial condition and results of operations.
As part of our growth strategy, we are focused on retaining and expanding our services within our existing client base. A client can expand the fertility benefits they offer to their employees a number of ways, including by adding egg freezing or increasing the number of Smart Cycle units under their benefits plan (i.e., from two to three Smart Cycles per household). For example, 6% of our existing 2019 clients increased their Smart Cycle benefit for their 2020 benefits plan year. In addition, our fertility benefits solution clients can purchase our add-on Progyny Rx solution. We went live with Progyny Rx in 2018 and 70% of our clients have now launched this solution, including approximately 75% of the clients we signed in 2019.
Factors that may affect our ability to retain our existing clients and sell additional solutions to them include, but are not limited to, the following:
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Any of the above factors, alone or together, could negatively affect our ability to retain existing clients and sell additional solutions to them, which would have an adverse effect on our business, revenue growth and results of operations.
Our largest clients account for a significant portion of our revenue and a significant number of our clients are in the technology industry. The loss of one or more of these clients or changes within the technology industry could negatively impact our business, financial condition and results of operations.
We currently serve over 130 self-insured employers in the United States across more than 25 industries. In 2019 and 2018, each of our largest three clients represented more than 10% of our total revenue. For the years ended December 31, 2019 and 2018, one of our clients accounted for 16% and 24% of our total revenue, respectively. In addition, another client accounted for 15% of our revenue for year ended December 31, 2019. Finally, a third client accounted for 10% and 14% of our total revenue for the years ended December 31, 2019 and 2018, respectively. Engagement with these clients is generally covered through contracts that are multi-year in duration. One or more of these clients may terminate early or decline to renew their existing contracts with us upon expiration and any such termination or failure to renew could have a negative impact on our revenue and compromise our growth strategy. In addition, we generate a significant portion of our revenue from clients in the technology industry. Any of a variety of changes in that industry, including changes in economic conditions, mergers or consolidations, reduced spending on benefits programs and other factors, could adversely affect our business, financial condition and results of operations.
Changes in the health insurance market could harm our business, financial condition and results of operations.
The market for private health insurance, in the United States is evolving and, as our solutions are integrated with health insurance plans offered by insurance carriers for our clients or our future financial performance will depend in part on the growth in this market.clients’ self-insured plans, as well as our ability to adapt to regulatory developments. Changes and developments in the health insurance system in the United States including taxability of medical benefits like ours, could reduce demand for our solutionsservices and harm our business. For example, there has been an ongoing national debate relating to the health care reimbursementinsurance system in the United States. Some members of CongressCertain elected officials have introduced proposals that would create a new single payor single-payer
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national health insurance program for all United States residents, others have proposedreplacing virtually all other sources of public and private insurance, to more incremental approaches, such asor creating a new public health insurance plan option that would compete with private insurers. Additionally, proposals to establish a single-payer or government-run health care system at the state level are regularly introduced, such as in New York and California. At the federal level, President Biden and Congress may consider other legislation and/or executive orders to change elements of the ACA. In December 2019, a supplementfederal appeals court held that the individual mandate portion of the ACA was unconstitutional and left open the question whether the remaining provisions of the ACA would be valid without the individual mandate. On November 10, 2020, the U.S. Supreme Court heard oral arguments in this matter, and is in the process of reviewing this case. A decision is expected in 2021. On January 28, 2021, President Biden issued an Executive Order that iterates the policy of the Administration to private sourcesprotect and strengthen the ACA, making high-quality healthcare accessible and affordable to all Americans. The Executive Order directs federal agencies to examine agency actions to determine whether they are consistent with that the Administration’s commitment regarding the ACA, and begin rulemaking to suspend, revise, or rescind any inconsistent actions. Areas of coverage. focus include policies or practices that may reduce affordability of coverage, present unnecessary barriers to coverage, or undermine protections for people with preexisting conditions. We continue to evaluate the effect that the ACA and its possible modifications, repeal and replacement has on our business.
In the event that laws, regulations or rules that eliminate or reduce private sources of health insurance or require such benefits to be taxable are adopted, the subsequent impact on the insurance carriers and/or self-insured plans may in turn adversely impact our ability to accurately forecast future results and harm our business, financial condition and results of operations.
The health benefits industry may be subject to negative publicity, which could adversely affect our business, financial condition and results of operations.
The health benefits industry may be subject to negative publicity, which can arise from, among other things, increases in premium rates, industry consolidation, cost of care initiatives, drug prices and the ongoing debate over the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA. There remain judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the Trump administration to repeal or replace certain aspects of the ACA. Further, the United States Supreme Court announced on March 2, 2020 that it will consolidate two cases regarding the constitutionality of the ACA. It is unclear when such oral arguments are to be held and when a decision is expected to be made. In addition, negative publicity may result in increased regulation and legislative review of industry practices, which may further increase our costs of doing business and adversely affect our profitability. For example, PBM programs and drug rebates have recently been criticized as leading to a lack of transparency about the true cost of a drug, and this negative publicity may lead tocertain members of Congress as well as HHS’s Office of Inspector General, or OIG, have proposed regulatory changes that could potentially affect our business and operations. Negative public perception or publicity of the health benefits industry in general, the insurance carriers with whom we integrate our solutions, our self-insured employer clients, or us could adversely affect our business, financial condition and results of operations.
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If our computer systems, or those of our provider clinics, specialty pharmacies or other downstream vendors lag, fail or suffer security breaches, we may incur a material disruption of our services, which could materially impact our business and the results of operations.
Our business is increasingly dependent on critical, complex and interdependent information technology systems, including cloud-based systems, to support business processes as well as internal and external communications. Our success therefore is dependent in part on our ability to secure, integrate, develop, redesign and enhance our (or contract with vendors to provide) technology systems that support our business strategy initiatives and processes in a compliant, secure, and cost and resource efficient manner. If we or our provider clinics, specialty pharmacies or other downstream vendors have an issue with our or their respective technology systems, it may result in a disruption to our operations or downstream disruption to our relationships with our clients or our selective network of high-quality fertility specialists. Additionally, if we choose to insource any of the services currently handled by a third party, it may result in technological or operational disruptions.
In addition, despitethe current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years. Despite the implementation of security measures, including steps designed to secure our internal computertechnology infrastructure and sensitive data, we can provide no assurance that our current technology system or any updates or upgrades thereto, the current or future technology systems and those of our provider clinics, specialty pharmacies or other downstream vendors, are potentially vulnerable to damage fromfully protected against malicious intrusion, malware, computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. While we are not aware that wefailures, information or data theft or other similar risks.
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We have experienced anyand expect to continue to experience actual and attempted cyber-attacks of our IT networks, such system failure, accidentas through email phishing scams, spoofing attempts and malicious attachments. Although none of these actual or security breach to date, ifattempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that such incidents will not have such an event were to occur and cause interruptionsimpact in our operations, it could result in a material disruption to our ability to deliver our solutions.the future. In addition, to the extent that any disruption or security breach were to result in a loss or inappropriate disclosure of confidential information, we could incur liability. We have access to sensitive information relating to members, our employees and our business partners in the ordinary course of our business. Any failure or perceived failure by us, or our third-party contractors on our behalf, to comply with local and foreign laws regarding privacy and data security, as well as contractual commitments in this respect, may result in governmental enforcement claims, fines, or litigation, which could have an adverse effect on our reputation and business. If a significant data breach occurred, our reputation could be materially and adversely affected, confidence among our clients and members may be diminished, or we may be subject to legal claims, any of which may contribute to the loss of customers and have a material adverse effect on us. To the extent such disruptions or uncertainties result in the theft, destruction, loss or misappropriation or release of our confidential data or our intellectual property, our business and results of operations could be materially and adversely affected. See “—Risks Related to Government Regulation—We operate in a highly regulated industry and must comply with a significant number of complex and evolving requirements—Data Protection and Breaches.”
A significant change in the utilization of our solutions could have an adverse effect on our business, financial condition and results of operations.
We do not control or impact the level of utilization of our solutions for each of our clients, in particular for newer clients. A significant reduction in the number of members using our solutions could adversely affect our business, financial condition and results of operations. Factors that could contribute to a reduction in the use of our solutions include: reductions in workforce by existing clients; general economic downturn that results in business failures and high unemployment rates; outbreaks of contagious diseases; employers no longer offering comprehensive health coverage or offering alternative solutions such as coverage on a voluntary, employee-funded basis; federal and state regulatory changes; changes to taxability of medical benefits; failure to adapt and respond effectively to changing medical landscape, changing regulations, changing client needs, requirements or preferences; premium increases and benefits changes; negative publicity, through social media or otherwise and news coverage.
It is also difficult for us to predict the level of utilization of our services at the member level. If the actual utilization of our services by members is significantly greater than budgeted, the client may be responsible for corresponding costs that exceed its planned expenditure. If we cannot help our clients accurately predict the level of utilization by their employees, our clients may turn to alternative solutions, and our business and profitability would be adversely impacted.
If we fail to offer high-quality support, our reputation could suffer.
Our clients rely on our client account management personnel and our members rely on our PCAs to resolve issues and realize the full benefits that our solutions and services provide. High-quality support is also important for the renewal and expansion of our services to existing clients. The importance of our support functions will increase as we expand our business and pursue new clients. If we do not help our clients quickly resolve issues and provide effective ongoing support, our ability to maintain and expand our offerings to existing and new clients could suffer, and our reputation with existing or potential clients could suffer. Further, to the extent that we are unsuccessful in hiring, training and retaining adequate PCAs and client account management personnel, our ability to provide adequate and timely support to our members and clients would be negatively impacted, and our members’ and clients’ satisfaction with our solutions and services would be adversely affected.
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Our marketing efforts depend significantly on our ability to receive positive references from our existing clients.
Our marketing efforts depend significantly on our ability to call on our current clients to provide positive references to new, potential clients. Given our limited number of long-term clients, the loss or dissatisfaction of any client could substantially harm our brand and reputation, inhibit the market adoption of our offering and impair our ability to attract new clients and maintain existing clients. Any of these consequences could have an adverse effect on our business, financial condition and results of operations.
Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our client base and achieve broader market acceptance of solutions we provide.
Our ability to increase our client base and achieve broader market acceptance of solutions we provide will depend to a significant extent on our ability to expand our marketing and sales capabilities. We plan to continue expanding our direct sales force and to dedicate significant resources to sales and marketing programs, including direct sales, inside sales, targeted direct marketing, advertising, digital marketing, e-newsletter and conference sponsorships. All of these efforts will require us to invest significant financial and other resources. Our business and results of operations could be harmed if our sales and marketing efforts do not generate significant increases in revenue. We may not achieve anticipated revenue growth from expanding our sales and marketing efforts if we are unable to hire, develop, integrate and retain talented and effective sales personnel, if our new and existing sales personnel, on the whole, are unable to achieve desired productivity levels in a reasonable period of time, or if our sales and marketing programs are not effective.
Our future revenue may not grow at the rates they historically have, or at all.
We have experienced significant growth since the launch of our fertility benefits solution in 2016. Revenue and our client base may not grow at the same rates they historically have, or they may decline in the future. Our future growth will depend, in part, on our ability to:
| continue to attract new clients and maintain existing clients; |
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| price our solutions and services effectively so that we are able to attract new clients, expand sales to our existing clients and maintain profitability; |
| provide our clients and members with client support that meets their needs, including through dedicated PCAs; |
| maintain successful collection of member cost shares and other applicable receivable balances directly from members; |
| retain and maintain relationships with high-quality and respected fertility specialists; |
| attract and retain highly qualified personnel to support all clients and members; |
| maintain satisfactory relationships with insurance carriers; and |
| increase awareness of our brand and successfully compete with other companies. |
We may not successfully accomplish all or any of these objectives, which may affect our future revenue, and which makes it difficult for us to forecast our future results of operations. In addition, if the assumptions that we use to plan our business are incorrect or change in reaction to changes in our market, it may be difficult for us to maintain profitability. You should not rely on our revenue for any prior quarterly or annual periods as any indication of our future revenue or revenue growth.
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In addition, we expect to continue to expend substantial financial and other resources on:
| sales and marketing; |
| our technology infrastructure, including systems architecture, scalability, availability, performance and security; and |
| general administration, including increased legal and accounting expenses associated with being a public company. |
These investments may not result in increased revenue growth in our business. If we are unable to increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position, and results of operations will be harmed, and we may not be able to maintain profitability over the long term. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods.
If our revenue growth does not meet our expectations in future periods, we may not maintain profitability in the future, our business, financial position and results of operations may be harmed.
If the estimates and assumptions we use to determine the size of the target markets for our services are inaccurate, our future growth rate may be impacted and our business would be harmed.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Furthermore, the healthcare industry is rapidly evolving and the markets for fertility benefits management and the related fertility pharmacy benefits management are relatively immature. Market opportunity estimates and growth forecasts, including those we have generated ourselves, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, including the risks described herein. Even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, if at all.
Our estimates of the market opportunity for our services are based on the assumption that the purpose-built, data-driven and disruptive fertility benefits platform with the Smart Cycle plan design we offer will be attractive to employers. Employers may pursue alternatives or may not see the value in providing enhanced fertility-related coverage and services to their employees. In addition, we believe we are expanding the size of the fertility market as we enhance demand and increase awareness for fertility benefits. If these assumptions prove inaccurate, or if the increase in awareness of fertility
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benefits attracts potential competitors to enter the market and results in greater competition, our business, financial condition and results of operations could be adversely affected.
It is difficult to predict member utilization rates and demand for our solutions, the entry of competitive solutions or the future growth rate and size of the fertility market, and more specifically the fertility benefits management market and the pharmacy benefits management market. The expansion of the fertility market depends on a number of factors, including, but not limited to: the continued trend of individuals starting families later in life, increase in number of single mothers by choice, adoption of non-traditional paths to parenthood and continued de-stigmatization of infertility. Further, the expansion of the fertility benefits management market and the pharmacy benefits market both depend on a number of factors, including, but not limited to: the continued trends of a competitive workforce with employers competing for talent based on benefits that they provide and employers’ focus on benefits to attract and retain top talent.
If fertility benefits management or pharmacy benefits management do not continue to achieve market acceptance, or if there is a reduction in demand caused by a lack of client or member acceptance, a reduction in employers’ focus on enhancing benefits to employees, weakening economic conditions, data security or privacy concerns, governmental regulation, competing offerings or otherwise, the market for our solutions and services might not continue to develop or might develop more slowly than we expect, which would adversely affect our business, financial condition and results of operations.
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We may not be able to successfully manage our growth, and if we are not able to grow efficiently, our business, financial condition and results of operations could be harmed.
As usage of our solutions grows, we will need to devote additional resources to improving and maintaining our infrastructure. In addition, we will need to appropriately scale our internal business systems and our client account management and member services personnel to serve our growing client base. Any failure of or delay in these efforts could result in reduced client and member satisfaction, resulting in decreased sales to new clients and lower renewal and utilization rates by existing clients, which could hurt our revenue growth and our reputation. Even if we are successful in these efforts, they will require the dedication of management time and attention. We could also face inefficiencies or service disruptions as a result of our efforts to scale our internal infrastructure. We cannot be sure that the expansion and improvements to our internal infrastructure will be effectively implemented on a timely basis, and such failures could harm our business, financial condition and results of operations.
UnfavorableReductions in employee benefits spending or material defaults by members on their cost share due to unfavorable conditions in our industry or the United States economy or reductions in employee benefits spending, could limit our ability to grow our business and negatively affect our results of operations.
Unfavorable economic conditions could result in the cancellation by certain clients, a reduction in their number of employees or material defaults by members on their cost share, particularly if they lose their employer coverage and do not replace it with a health benefit plan that provides fertility coverage. Unfavorable changes in our industry or in the United States economy could have a negative effect on oursour and our clients’ and potential clients’ results of operations. Negative conditions in the general economy in the United States, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, international trade relations, political turmoil, natural catastrophes, outbreaks of contagious diseases or the worsening thereof, including the COVID-19 pandemic, warfare and terrorist attacks on the United States, could cause a decrease in business investments, including spending on employee benefits, and negatively affect the growth of our business. In addition, unfavorable economic conditions could result in the cancellation by certain clients or material defaults by members on their cost share. Further, economic conditions including interest rate fluctuations, changes in capital market conditions and regulatory changes, such as the taxability of medical benefits like ours, may affect our ability to obtain necessary financing on acceptable terms. In addition, the increased pace of consolidation in the healthcare industry may result in competitors with greater market power. We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or within any particular industry.
SeasonalityOur business experiences seasonality, which may cause fluctuations in our sales and results of operations.
Our business experiences moderate seasonality in revenue with a slightly higher proportion of revenue during the second half of the year as compared with the first half. Given that the majority of our clients contract with us for a January 1st benefits plan start date and that the average cost of treatments earlier in the overall treatment process is somewhat lower than the average cost as treatment progresses, our revenue from treatment services tend to grow as the year continues, particularly for new clients. In addition, as with most medical benefits plans, members will typically seek to maximize the use of their benefits once they have reached their annual deductible and/or annual out-of-pocket maximums, thereby
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increasing treatments in the latter part of the year. We expect that this seasonality will continue to affect our revenue and results of operations in the future as we continue to target larger enterprise clients.
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In addition, the seasonality of our businesses could create cash flow management risks if we do not adequately anticipate and plan for periods of comparatively decreased cash flow, which could negatively impact our ability to execute on our strategy, which in turn could harm our results of operations. Accordingly, our results for any particular quarter may vary for a number of reasons, and we caution investors to evaluate our quarterly results in light of these factors.
If our new solutions and services are not adopted by our clients or members, or if we fail to innovate and develop new offerings that are adopted by our clients, our revenue and results of operations may be adversely affected.
To date, we have derived a substantial majority of our revenue from sales of our fertility benefits and Progyny Rx solutions. As we operate in an evolving industry, our long-term results of operations and continued growth will depend on our ability to successfully develop and market new successful solutions and services to our clients. If our existing clients and members do not value and/or are not willing to make additional payments for such new solutions or services, it could adversely affect our business, financial condition and results of operations. If we are unable to predict clients’ or members’ preferences, if the markets in which we participate change, including in response to government regulation, or if we are
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unable to modify our solutions and services on a timely basis, we may lose clients. Our results of operations would also suffer if our innovations are not responsive to the needs of the members, appropriately timed with market opportunity or effectively brought to market.
If we fail to adapt and respond effectively to the changing medical landscape, changing laws, regulations and government enforcement priorities, changing client needs, requirements or preferences, our offerings may become less competitive.
The market in which we compete is subject to a changing medical landscape and changing laws, regulations and government enforcement priorities, as well as changing client needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. Our business strategy may not effectively respond to these changes, and we may fail to recognize and position ourselves to capitalize upon market opportunities. We may not have sufficient advance notice and resources to develop and effectively implement an alternative strategy. There may be scientific or clinical changes that require us to change our solutions or that make our solutions, including the Smart Cycles, less competitive in the marketplace. If there are sensitivities to our model or our existing competitors and new entrants create new disruptive business models and/or develop new solutions that clients and members prefer to our solutions, we may lose clients and members, and our results of operations, cash flows and/or prospects may be adversely affected. The future performance of our business will depend in large part on our ability to design and implement market appropriate strategic initiatives, some of which will occur over several years in a dynamic industry. If these initiatives do not achieve their objectives, our results of operations could be adversely affected.
If we fail to maintain and enhance our brand, our ability to expand our client base will be impaired and our business, financial condition and results of operations may suffer.
We believe that maintaining and enhancing the Progyny brand is important to support the marketing and sale of our existing and future solutions to new clients and expand sales of our solutions to existing clients. We also believe that the importance of brand recognition will increase as competition in our market increases. Successfully maintaining and enhancing our brand will depend largely on the effectiveness of our marketing efforts, our ability to provide reliable services that continue to meet the needs of our clients at competitive prices, our ability to maintain our clients’ trust, our ability to continue to develop new solutions, and our ability to successfully differentiate our platform from competitive solutions and services. Our brand promotion activities may not generate client awareness or yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, our business, financial condition and results of operations may suffer.
If we fail to retain and motivate members of our management team or other key employees, or fail to attract additional qualified personnel to support our operations, our business and future growth prospects could be harmed.
Our success and future growth depend largely upon the continued services of our management team and our other key employees. From time to time, there may be changes in our executive management team or other key employees resulting from the hiring or departure of these personnel. Our executive officers and other key employees are employed on an at-will basis, which means that these personnel could terminate their employment with us at any time. The loss of
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one or more of our executive officers, or the failure by our executive team to effectively work with our employees and lead our company, could harm our business.
In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for experienced sales and client account management personnel. There is no guarantee we will be able to attract such personnel or that competition among potential employers will not result in increased salaries or other benefits. From time to time, we have experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, experiences significant volatility, or increases such that prospective employees believe there is limited upside to the value of our equity awards, it may adversely affect our ability to recruit and retain key employees. If we fail to attract
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new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability due to COVID-19, we may not be able to execute on our business strategy and/or our operations may be negatively impacted.
If we cannot maintain our company culture as we grow, our success and our business and competitive position may be harmed.
We believe our culture has been a key contributor to our success to date and that the critical nature of the mission we are pursuing promotes a sense of greater purpose and fulfillment in our employees. Any failure to preserve our culture could negatively affect our ability to retain and recruit personnel, which is critical to our growth, and to effectively focus on and pursue our corporate objectives. As we grow and develop the infrastructure of a public company, we may find it difficult to maintain these important aspects of our culture. If we fail to maintain our company culture, our business and competitive position may be harmed.
Risks Related to Our Relationships with Third Parties
Our business depends on our ability to maintain our Center of Excellence network of high-quality fertility specialists and other healthcare providers. If we are unable to do so, our future growth would be limited and our business, financial condition and results of operations would be harmed.
Our success is dependent upon our continued ability to maintain a selective Center of Excellence, our proprietary, credentialed network of high-quality fertility specialists. Fertility specialists and our other network providers could refuse to contract, demand higher payments or take other actions that could result in higher medical costs, less attractive service for our members or difficulty meeting regulatory or accreditation requirements. Identifying high-quality fertility specialists and other healthcare providers, credentialing and negotiating contracts with them and evaluating, monitoring and maintaining our network, requires significant time and resources. Our network provider arrangements generally may be terminated or not renewed by either party without cause upon prior written notice. We cannot provide any assurance that we will be able to continue to renew our existing contracts or enter into new contracts on a timely basis or under favorable terms enabling us to service our members profitably. If we are not successful in maintaining our relationships with top fertility specialists, these fertility specialists may refuse to renew their contracts with us, and potential competitors may be effective in onboarding these or other high-quality fertility specialists to create a similarly high-quality network. Any of these events could have a material adverse effect on the provision of services to our members and our operations.
There may be additional shifts in the fertility specialty provider space as the fertility market matures, and high-quality fertility specialists may become more demanding in re-negotiating to remain in our network. Our ability to develop and maintain satisfactory relationships with high-quality fertility specialists and other healthcare providers also may be negatively impacted by other factors not associated with us, such as legal and regulatory changes, including changes in government enforcement priorities, impacting providers or consolidation activity among hospitals, physician groups and healthcare providers. In addition, in some markets and geographies, certain organizations of physicians or healthcare providers, such as practice management companies (which group together physician practices for administrative efficiency)efficiency and marketing leverage), accountable care organizations, clinically integrated networks, independent practice associations, and other organizational structures that physicians and other healthcare providers choose may change the way in which healthcarethese providers do business with us, and may change the competitive landscape. Such organizations or groups of health
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care providers may compete directly with us, which could adversely affect our business, financial conditionoperations, and our results of operations, financial position, and cash flows by impacting our relationships with these providers or affecting the way that we price our products and estimate our costs, which might require us to incur costs to change our operations. Health care providers in our network may consolidate or merge into other groups or healthcare systems, resulting in a reduction of providers in our network and in the competitive environment. In addition, if these providers refuse to contract with us, use their market position to negotiate contracts unfavorable to us or place us at a competitive disadvantage, our ability to market our solutions or to be profitable in those areas could be materially and adversely affected.
From time to time, our network providers may assert, or threaten to assert, claims seeking to terminate our contractual arrangements. If enough provider agreements were terminated, such termination could adversely impact the adequacy of our network to service our members, and may put us at risk of non-compliance with applicable federal and state laws. If we are unable to retain our current provider contract terms or enter into new provider contracts timely or on favorable terms, our profitability may be harmed. In addition, from time to time, we may in the future be subject to class action or other lawsuits by health care providers with respect to claims payment procedures, reimbursement policies, network participation, or similar matters. In addition, regardless of whether any such lawsuits brought against us are successful or have merit, they will be time-consuming and costly, and could have an adverse impact on our reputation. As a result, under such circumstances, we may be unable to operate our business effectively.
In addition, the perceived value of our solutions and our reputation may be negatively impacted if the services provided by one or more of our fertility specialists or another network healthcare provider are not satisfactory to our members, including as a result of provider error that could result in litigation. For example, if a provider within our network experiences an issue with their cryopreservation techniques or releases sensitive information of our members, we could incur additional expenses and it could give rise to litigation against us. Any such issue with one of our providers may expose us to public scrutiny, adversely affect our brand and reputation, expose us to litigation and/or regulatory action, and otherwise make our operations vulnerable. Further, if a fertility specialist provides services that result in less than favorable outcomes, this could cause us to fail to meet our contractually guaranteed specified service metrics, and we could be obligated to provide the client with a fee reduction. The failure to maintain our selective network of high-quality fertility specialists and other healthcare providers or the failure of those specialistsproviders to meet and exceed our members’ expectations, may result in a loss of or inability to grow or maintain our client base, which could adversely affect our business, financial condition and results of operations.
Our growth depends in part on the success of our strategic relationships with, and monitoring of, third parties, including vendors, as well as insurance carriers.
In order to grow our business, we anticipate that we will continue to depend on our relationships with third parties, including vendors and insurance carriers. As the fertility management market and our client base grow, if we do not successfully maintain our relationships with insurance carriers, they may make integration more difficult or expensive, such as implementing an onerous fee structure in exchange for our ability to continue to integrate our solutions with their
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platforms. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our results of operations may suffer.
In addition, our arrangements with these third parties may expose us to public scrutiny, adversely affect our brand and reputation, expose us to litigation and/or regulatory action, and otherwise make our operations vulnerable if we fail to adequately monitor their performance or if they fail to meet their contractual obligations to us or to comply with applicable laws or regulations.
If we fail to maintain an efficient pharmacy distribution network or if there is a disruption to our distribution network of specialty pharmacies, our business, financial condition and results of operations could suffer.
The timely delivery of fertility prescriptions is essential for fertility treatments. If prescriptions are delivered late, the delay may result in postponement of a member’s treatment cycle and member dissatisfaction with our solutions. We believe that our ability to maintain and grow the adoption of Progyny Rx is highly dependent on our success in maintaining an efficient pharmacy distribution network and our record of on-time delivery. The specialty pharmacies in our network could refuse to contract, demand higher drug pricing or take other actions that could result in higher medical costs or less attractive services for our members. We do not control the pricing strategies of our specialty pharmacy partners, each of whom may be motivated by independent considerations and drivers that are outside our control and has the ability to set or impact market price for different prescription medications. We also cannot provide any assurance that we will be able to continue to renew our existing contracts, current negotiated pricing or discounts, or enter into new contracts on a timely
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basis or under favorable terms enabling us to service our members profitably. If we are not successful in maintaining our relationships with the specialty pharmacies in our network, are otherwise unable to maintain an efficient pharmacy distribution network, or if a significant disruption thereto should occur, the use of Progyny Rx may decline due to the inability to timely deliver prescription or offer competitive drug pricing to members, which could cause our business, financial condition and results of operations to suffer.
If we lose our relationship with one or more key pharmaceutical manufacturers, or if the rebates provided by pharmaceutical manufactures decline, our business and results of operations could be adversely affected.
We maintain contractual relationships with select pharmaceutical manufacturers, which provide us with access to limited distribution specialty pharmaceutical rebates for drugs we purchase. TheWhile we have contractual relationships with such pharmaceutical manufacturers, such manufacturers in turn often negotiate complex and multi-party pricing structures with other industry participants, and we have no control over the policies and strategies implemented in negotiating these pricing structures, and such structures may set or significantly impact market prices for prescription drugs we purchase and associated rebates for such drugs. Pharmaceutical manufacturers generally direct medication pricing by setting medication list prices and offering rebates and/or discounts for their medications. Various market considerations—such as the number of competitor medications, the availability of alternative treatment options, and negotiated rates among industry participants—impact the list prices for medications. Our ability to obtain specialty pharmaceutical rebates, our relative bargaining power, the value of any such rebates and our ability to generate revenue are directly affected by the pricing structures in place among the various industry participants, and changes in medication pricing and in the general pricing structures, whether due to regulatory requirements, competitive pressures or otherwise, could have an adverse effect on our business, financial condition and results of operations. Further, the consolidation of pharmaceutical manufacturers, the shortages of drugs provided by such manufacturers, the termination or material alteration of our contractual relationships, or our failure to renew such contracts on favorable terms could have a material adverse effect on our business and results of operations. In addition, PBM programs have been the subject of debate in federal and state legislatures and various other public and governmental forums. Adoption of new laws, rules or regulations or changes in, or new interpretations of, existing laws, rules or regulations, relating to any of these programs could materially adversely affect our business and results of operations.
Our marketing efforts depend on our ability to maintain our relationship with benefits consultants.
We sell our solutions through our sales organization and, in many cases, we leverage our relationships with top benefits consultants to establish relationships with potential clients. Our sales team has broad experience in health benefits management and extensive pre-existing long-term relationships with industry participants and benefits executives at large employers. If we fail to maintain our relationship with the benefits consultants, our marketing efforts, business and profitability would be adversely impacted.
We are exposed to credit risk from our members.
We collect copayments, coinsurance and deductibles directly from members. We do not require collateral for such receivables. Our failure to collect a significant portion of the amount due on such receivables directly from members could adversely affect our business, financial condition and results of operations.
Risks Related to Government Regulation
We operate in a highly regulated industry and must comply with a significant number of complex and evolving legal and regulatory requirements.
We have attempted to structure our operations to comply with laws, regulations and other requirements applicable to us directly and to our clients and vendors, but there can be no assurance that our operations will not be challenged or impacted by regulatory authorities or enforcement initiatives. We have been, and in the future may become, involved in governmental investigations, audits, reviews and assessments. Any determination by a court or agency that our corporate structure, solutions or services violate, or cause our clients to violate, applicable laws, regulations or other requirements could subject us or our clients to significant administrative, civil or criminal penalties. Such a determination also could require us to change
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or terminate portions of our business, disqualify us from serving clients that do business with government entities, or cause us to refund some or all of our service fees or otherwise compensate our clients. In addition, failure to satisfy laws, regulations or other requirements could adversely affect demand for our solutions and could force us to expend significant capital, research and development and other resources to address the failure. Even an unsuccessful challenge by regulatory and other authorities or parties could be expensive and time-consuming, could result in loss of business, exposure to adverse publicity, and injury to our reputation and could adversely affect our ability to retain and attract clients. If we fail to comply with applicable laws, regulations and other requirements, our business, financial condition and results of operations could be adversely affected. Such non-compliance could also require significant investment to address and may prove costly. There are several additional
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federal and state statutes, regulations, guidance and contractual provisions related to or impacting the healthcare industry that may apply to our business activities directly or indirectly, including, but not limited to:
| ● | Licensing and Licensed Personnel. Many states have licensure or registration requirements for entities acting as a third-party administrator, or TPA, and/or PBMs. The scope of these laws differs from state to state, and the application of such laws to the activities of TPAs and/or PBMs is often unclear. Given the nature and scope of the solutions and services that we provide, we are required to maintain TPA and PBM licenses and registrations in certain jurisdictions and to ensure that such licenses and registrations are in good standing on an annual basis. We are licensed, have licensure applications pending before appropriate regulatory bodies, are exempt from licensure or registration, or believe that we are otherwise authorized under such laws in those states in which we provide our TPA and PBM services. These licenses require us to comply with the rules and regulations of the governmental bodies that issued such licenses, including maintaining certain solvency or bonds requirements. Our failure to comply with such rules and regulations could result in significant administrative penalties, the suspension of a license, or the loss of a license, all of which could negatively impact our business. Additionally, from time to time, legislation is considered that would purport to declare a PBM a fiduciary with respect to its clients. While the validity of such laws is questionable and we do not believe any such laws are currently in effect, we cannot predict what effect, if any, such statutes, if enacted, may have on our business and financial results |
Licensing and Licensed Personnel. Many states have licensure or registration requirements for entities acting as a third-party administrator, or TPA, and PBMs. The scope of these laws differs from state to state, and the application of such laws to the activities of TPAs and PBMs is often unclear. Given the nature and scope of the solutions and services that we provide, we are required to maintain TPA and PBM licenses and registrations in certain jurisdictions and to ensure that such licenses and registrations are in good standing on an annual basis. We are licensed, have licensure applications pending before appropriate regulatory bodies, are exempt from licensure or registration, or are otherwise authorized under such laws in those states in which we provide our TPA and PBM services. These licenses require us to comply with the rules and regulations of the governmental bodies that issued such licenses. Our failure to comply with such rules and regulations could result in significant administrative penalties, the suspension of a license, or the loss of a license, all of which could negatively impact our business. Additionally, from time to time, legislation is considered that would purport to declare a PBM a fiduciary with respect to its clients. While the validity of such laws is questionable and we do not believe any such laws are currently in effect, we cannot predict what effect, if any, such statutes, if enacted, may have on our business and financial results.
Separately, states impose licensing requirements on insurers, risk-bearing entities, and insurance agents, as well as those entities that provide utilization review services. We do not believe that the nature of our services requires us to be licensed under applicable state law. We are unable to predict, however, how our services may be viewed by regulators over time, how these laws and regulations will be interpreted and enforced, or the full extent of their application. If a regulatory authority in any state determines that the nature of our business requires that we be licensed under applicable state laws, we may need to restructure our business to comply with any related requirements, such as maintaining adequate reserves, creating new compliance processes, hiring additional personnel to manage regulatory compliance, and paying additional regulatory fees or penalties, which could adversely affect our results of operation. Additionally, we may need to cease operations until we are able to obtain appropriate licensure, which may adversely affect our revenue for a period of time that we cannot estimate.
In addition, we employ PCAs to support and guide our members as part of our fertility benefits management services. The PCAs do not provide any licensed healthcare services, and in turn, are not licensed by any regulatory body to provide these services. We otherwise do not employ individuals to provide any healthcare services requiring licensure. If a professional board in any state determines that the services provided by our employed PCAs require a license to be provided, we may need to conduct additional training and credentialing, replace staff, obtain additional insurance, and pay increased salaries, which could adversely affect our results of operation. We may additionally need to suspend the PCA services we provide while our personnel obtains the necessary licensure, which may adversely affect our relationships with our clients and members and cause us to be in breach of our contracts.
| ● | HIPAA Privacy and Security Requirements. There are numerous federal and state laws and regulations related to the privacy and security of health information. In particular, regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish privacy and security standards that limit the use and disclosure of certain individually identifiable health information (known as “protected health information”) and require the implementation of administrative, physical and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. The privacy regulations established under HIPAA also provide patients with rights related to understanding and controlling how their protected health information is used and disclosed. As a provider of services to entities subject to HIPAA, we are directly subject to certain provisions of the regulations as a “Business Associate.” When acting as a Business Associate under HIPAA, to the extent permitted by applicable privacy regulations and contracts and associated Business Associate Agreements with our clients, we are permitted to use and disclose protected health information to perform our services and for other limited purposes, but other uses and disclosures, such as marketing communications, require written authorization from the patient or must meet an exception specified under the privacy regulations. We also have downstream Business Associates, which provide us with services and are also subject to HIPAA regulations. |
HIPAA Privacy and Security Requirements. There are numerous federal and state laws and regulations related to the privacy and security of health information. In particular, regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish privacy and security standards that limit the use and disclosure of certain individually identifiable health information (known as “protected health information”) and require the implementation of administrative, physical and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and
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availability of electronic protected health information. The privacy regulations established under HIPAA also provide patients with rights related to understanding and controlling how their protected health information is used and disclosed. As a provider of services to entities subject to HIPAA, we are directly subject to certain provisions of the regulations as a “Business Associate.” When acting as a Business Associate under HIPAA, to the extent permitted by applicable privacy regulations and contracts and associated Business Associate Agreements with our clients, we are permitted to use and disclose protected health information to perform our services and for other limited purposes, but other uses and disclosures, such as marketing communications, require written authorization from the patient or must meet an exception specified under the privacy regulations. We also have downstream Business Associates, which provide us with services and are also subject to HIPAA regulations.
If we, or any of our downstream Business Associates, are unable to properly protect the privacy and security of protected health information entrusted to us, we could be found to have breached our contracts with our clients and be subject to investigation by the U.S. Department of Health and Human Services, or HHS, Office for Civil Rights, or OCR. In the event OCR finds that we have failed to comply with applicable HIPAA privacy and security standards, we could face civil and criminal penalties. In addition, OCR performs compliance audits of Covered Entities and Business Associates in order to proactively enforce the HIPAA privacy and security standards. OCR has become an increasingly active regulator and has signaled its intention to continue this trend. OCR has the discretion to impose penalties and may require companies to enter into resolution agreements and corrective action plans which impose ongoing compliance requirements. OCR enforcement activity, or a third-party audit related to a HIPAA incident regarding us or a third-party vendor, can result in financial liability and reputational harm, and responses to such enforcement activity can consume significant internal resources. In addition to enforcement by OCR, state attorneys general are authorized to bring civil actions under either HIPAA or relevant state laws seeking either injunctions or damages in response to violations that threaten the privacy of state residents. Although we have implemented and maintain policies, processes and compliance program infrastructure to assist us in complying with these laws and regulations and our contractual obligations, we cannot provide assurance regarding how these laws and regulations will be interpreted, enforced or applied to our operations. In addition to the risks associated with enforcement activities and potential contractual liabilities, our ongoing efforts to comply with evolving laws and regulations at the federal and state levels also might require us to make costly system purchases and/or modifications or otherwise divert significant resources to HIPAA compliance initiatives from time to time.
| ● | Other Privacy and Security Requirements. In addition to HIPAA, numerous other federal and state laws govern the collection, dissemination, use, access to and confidentiality of personal information, some of which may be applicable to our business. Certain federal and state laws protect types of personal information that may be viewed as particularly sensitive. For example, New York’s Public Health Law, Article 27-F protects information that could reveal confidential HIV-related information about an individual. In many cases, state laws are more restrictive than, and not preempted by, HIPAA, and may allow personal rights of action with respect to privacy or security breaches, as well as fines. State laws are contributing to increased enforcement activity and may also be subject to interpretation by various courts and other governmental authorities. Further, California recently enacted the CCPA, which went into operation on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business. |
Other Privacy and Security Requirements. In addition to HIPAA, numerous other federal and state laws govern the collection, dissemination, use, access to and confidentiality of personal information, some of which may be applicable to our business. Certain federal and state laws protect types of personal information that may be viewed as particularly sensitive. For example, New York’s Public Health Law, Article 27-F protects information that could reveal confidential HIV-related information about an individual. In many cases, state laws are more restrictive than, and not preempted by, HIPAA, and may allow personal rights of action with respect to privacy or security breaches, as well as fines. State laws are contributing to increased enforcement activity and may also be subject to interpretation by various courts and other governmental authorities. Further, California recently enacted the CCPA, which went into operation on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business.
Certain of our solutions and services involve the transmission and storage of client and member data in various jurisdictions, which subjects the operation of those solutions and services to privacy or data protection laws and regulations in those jurisdictions. While we believe these solutions and services comply with current regulatory and security requirements in the jurisdictions in which we provide these solutions and services, there can be no assurance that such requirements will not change or that we will not otherwise
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be subject to legal or regulatory actions. These laws and regulations are rapidly evolving and changing, and could have an adverse impact on our operations. These laws and regulations are subject to uncertainty in how they may be interpreted and enforced by government authorities and regulators. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may increase our operational costs, prevent us from providing our solutions, and/or impact our ability to invest in or jointly develop our solutions. We also may face audits or investigations by one or more government agencies relating to our compliance with these laws and regulations. An adverse outcome under any such investigation or audit could result in fines, penalties, other liability, or could result in adverse publicity or a loss of reputation, and adversely affect our business. Any failure or perceived failure by us or by our solutions to comply with these laws and regulations may subject us to legal or regulatory actions, damage our reputation or adversely affect our ability to provide our solutions in the jurisdiction that has enacted the applicable law or regulation. Moreover, if these laws and regulations change, or are interpreted and applied in a manner that is inconsistent with our policies and processes or the operation of our solutions, we may need to expend resources in order to change our business operations, policies and processes or the manner in which we provide our solutions. This could adversely affect our business, financial condition and results of operations.
Data Protection and Breaches. In recent years, there have been a number35
| ● | Data Protection and Breaches. In recent years, there have been a number of well-publicized data breaches involving the improper dissemination of personal information of individuals both within and outside of the healthcare industry. Laws in all 50 states require businesses to provide notice to clients whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is costly. States are also constantly amending existing laws, requiring attention to frequently changing regulatory requirements. Most states require holders of personal information to maintain safeguards and take certain actions in response to a data breach, such as providing prompt notification of the breach to affected individuals or the state’s attorney general. In some states, these laws are limited to electronic data, but states increasingly are enacting or considering stricter and broader requirements. |
Additionally, under HIPAA, Covered Entities must report breaches of unsecured protected health information to affected individuals without unreasonable delay, not to exceed 60 days following discovery of the breach by a Covered Entity or its agents. Notification also must be made to OCR and, in certain circumstances involving large breaches, to the media. Business Associates must report breaches of unsecured protected health information to Covered Entities within 60 days of discovery of the breach by the Business Associate or its agents or such shorter period as set forth in the applicable Business Associate Agreement. A non-permitted use or disclosure of protected health information is presumed to be a breach under HIPAA unless the Covered Entity or Business Associate establishes that there is a low probability the information has been compromised consistent with requirements enumerated in HIPAA.
Despite our security management efforts with respect to physical and technological safeguards, employee training, vendor (and sub-vendor) controls and contractual relationships, our infrastructure, data or other operation centers and systems used in our business operations, including the internet and related systems of our vendors (including vendors to whom we outsource data hosting, storage and processing functions) are vulnerable to, and from time to time experience, unauthorized access to data and/or breaches of confidential information due to a variety of causes. Techniques used to obtain unauthorized access to or compromise systems change frequently, are becoming increasingly sophisticated and complex, and are often not detected until after an incident has occurred. As a result, we might not be able to anticipate these techniques, implement adequate preventive measures, or immediately detect a potential compromise. If our security measures, some of which are managed by third parties, or the security measures of our service providers or vendors, are breached or fail, it is possible that unauthorized or illegal access to or acquisition, disclosure, use or processing of personal information, confidential information, or other sensitive client, member, or employee data, including HIPAA-regulated protected health information, may occur. A security breach or failure could result from a variety of circumstances and events, including third-party action, human negligence or error, malfeasance, employee theft or misuse, phishing and other social engineering schemes, computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing
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software, databases or components thereof, power outages, hardware failures, telecommunication failures, and catastrophic events.
If our security measures, or those of our service providers or vendors, were to be breached or fail, our reputation could be severely damaged, adversely affecting client or investor confidence. As a result, clients may curtail their use of or stop using our offering and our business may suffer. In addition, we could face litigation, damages for contract breach, penalties and regulatory actions for violation of HIPAA and other laws or regulations applicable to data protection and significant costs for remediation and for measures to prevent future occurrences. In addition, any potential security breach could result in increased costs associated with liability for stolen assets or information, repairing system damage that may have been caused by such breaches, incentives offered to clients or other business partners in an effort to maintain the business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. Negative publicity may also result from real, threatened or perceived security breaches affecting us or our industry or clients, which could cause us to lose clients or partners and adversely affect our operations and future prospects. While we maintain cyber insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and such insurance may not be available for renewal on acceptable terms or at all, and in any event, insurance coverage would not address the reputational damage that could result from a security incident.
HIPAA Transaction and Identifier Standards. HIPAA and its implementing regulations mandate format and data content standards and provider identifier standards (known as the National Provider Identifier) that must be used in certain electronic transactions, such as claims, payment advice and eligibility inquiries. HHS has established standards that health plans must use for electronic fund transfers with providers, has established operating rules for certain transactions, and is in the process36
| ● | HIPAA Transaction and Identifier Standards. HIPAA and its implementing regulations mandate format and data content standards and provider identifier standards (known as the National Provider Identifier) that must be used in certain electronic transactions, such as claims, payment advice and eligibility inquiries. HHS has established standards that health plans must use for electronic fund transfers with providers, has established operating rules for certain transactions, and is in the process of establishing operating rules to promote uniformity in the implementation of the remaining types of covered transactions. The ACA also requires HHS to establish standards for health claims attachment transactions. HHS has modified the standards for electronic healthcare transactions (e.g., eligibility, claims submission and payment and electronic remittance) from Version 4010/4010A to Version 5010. Further, HHS now requires the use of updated standard code sets for diagnoses and procedures known as the ICD-10 code sets. Enforcement of compliance with these standards falls under HHS and is carried out by CMS. |
In the event new requirements are imposed, we will be required to modify our systems and processes to accommodate these changes. We will seek to modify our systems and processes as needed to prepare for and implement changes to the transaction standards, code sets operating rules and identifier requirements; however, we may not be successful in responding to these changes, and any responsive changes we make to our systems and processes may result in errors or otherwise negatively impact our service levels. In addition, the compliance dates for new or modified transaction standards, operating rules and identifiers may overlap, which may further burden our resources.
| ● | Fraud and Abuse Laws. Many of our clients, insurance carriers, and network healthcare providers are impacted directly and indirectly by certain fraud and abuse laws, including the federal Anti-Kickback Statute, the Physician Self-Referral Law, commonly referred to as the Stark Law, and the False Claims Act, as well as their state equivalents. Because the solutions and services we provide are not reimbursed by government healthcare payors, such fraud and abuse laws generally do not directly apply to our business, however, some laws may be applicable to us. For example, certain states have anti-kickback and false claims laws that may be broader in scope than analogous federal laws and may apply to items and services reimbursed by any third-party payor, including private insurers, self-insured employers and on a cash basis by patients. |
Fraud and Abuse Laws. Many of our clients, insurance carriers, and network healthcare providers are impacted directly and indirectly by certain fraud and abuse laws, including the federal Anti-Kickback Statute, the Physician Self-Referral Law, commonly referred to as the Stark Law, and the False Claims Act, as well as their state equivalents. Because the solutions and services we provide are not reimbursed by government healthcare payors, such fraud and abuse laws generally do not directly apply to our business, however, some laws may be applicable. For example, certain states have anti-kickback and false claims laws that may be broader in scope than analogous federal laws and may apply regardless of payor.
The laws, regulations and other requirements in this area are both broad and vaguecomplex and judicial and regulatory interpretation can also be inconsistent. We review our practices with regulatory experts in an effort to comply with all applicable laws, regulatory and other requirements. However, we are unable to predict how these laws, regulations and other requirements will be interpreted or the full extent of their application, particularly to services that are not directly reimbursed by federal and state healthcare programs. Any determination by a federal or
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state regulatory authority that any of our activities or those of our clients or vendors violate any of these laws or regulations could subject us to significant administrative, civil or criminal penalties, damages, disgorgement, monetary fines or imprisonment, require us to enter into corporate integrity agreements or similar agreements with ongoing compliance obligations, disqualify us from providing services to clients that are, or do business with, government healthcare programs and/or have an adverse impact on our business, financial condition and results of operations. Even an unsuccessful challenge by a regulatory authority of our activities could result in adverse publicity and could require a costly response from us.
ERISA Regulation. The Employee Retirement Income Security Act of 1974, or ERISA, regulates certain aspects of employee pension and health benefits plans, including self-funded corporate health plans sponsored by our clients, with which we have agreements to provide TPA services. As part of our agreements with a number of these clients, we offer PBM services through Progyny Rx. We believe the conduct of our business vis-à-vis these plans is not generally subject to the fiduciary obligations of ERISA. However, there can be no assurance the United States Department of Labor, or the DOL, which is the agency that enforces ERISA, would not in the future assert that the fiduciary obligations imposed by ERISA apply to certain aspects of our operations or courts would not reach such a ruling in private ERISA litigation. In addition to its fiduciary provisions, ERISA has broad preemptive effect and has been held to preempt state laws imposing transparency requirements on PBMs. ERISA also imposes civil and criminal liability on service providers to health plans subject to ERISA and certain other persons with relationships to such plans if certain forms of illegal or prohibited remuneration are made or received by such service providers or other persons. These provisions of ERISA are similar, but not identical, to the healthcare anti-kickback laws described above, although ERISA lacks the statutory and regulatory “safe harbor” exceptions incorporated into the healthcare anti-kickback laws. Like the healthcare anti-kickback laws, the corresponding provisions of ERISA are broadly written and their application to particular cases can be uncertain. Employee benefits plans subject to ERISA are subject to certain rules, published by the DOL, including certain reporting requirements for direct and indirect compensation received by plan service providers. However, many self-funded health plans such as the plans that we have contracts with are exempt from these reporting requirements under current law. At this time, we are unable to predict whether the DOL will issue additional regulations or guidance on reporting or which additional regulations, if any, may be proposed in formal rulemaking by the DOL.
Prompt Pay Laws. Certain states have laws regulating the amount of time that may elapse from when a third-party payor receives a claim for services rendered to when those services are paid. These “prompt pay” laws may impact us as well as our clients and insurance carriers. Under these “prompt pay” laws, we may be obligated to pay healthcare providers within established time periods, and such time periods may be shorter than existing contracted terms and/or via electronic transfer. In many states, we are deemed to be exempt from the prompt pay laws, however, we seek to comply with them in each state in which we do business to the extent applicable, and our efforts include the use of controls such as policies and processing systems that ensure we pay claims as quickly as possible and contract language related to timeframes permitted by applicable law. If we do not make payments to healthcare providers in a timely fashion consistent with prompt pay laws, we may be required to pay interest in addition to any amounts owed to such providers. In addition, our reputation may be harmed and our contractual obligations to certain clients may be breached, causing us to lose revenue or otherwise pay penalties under such contracts.
Network Adequacy and Access Requirements. Network adequacy and access laws require health plans to maintain a network of healthcare providers sufficient to deliver the benefits they contract to provide to their enrollees. In light of the increase in “narrow networks”, there has been a legislative push to ensure that commercial payors contract with a sufficient number of healthcare providers to create an “adequate network.” Additionally, a majority of states now have some form of legislation affecting our payor clients’ ability to limit access to a provider network or remove a provider from the network. Such legislation may require our clients to admit any healthcare provider including any pharmacy provider willing to meet the plan’s price and other terms for network participation (“any willing provider” legislation) or may provide that a provider may not be removed from a network except in compliance with certain procedures (“due process” legislation). Further, to ensure network adequacy and quality, a network may seek to accredit its healthcare providers through any number of accrediting bodies, such as the National Committee for Quality Assurance,
| ● | State Corporate Practice and Fee-Splitting Prohibitions. There is a risk that regulatory authorities in some jurisdictions may find that our contractual relationships with our fertility specialists violate laws prohibiting the corporate practice of medicine and/or fee-splitting. These laws generally prohibit non-physician entities from practicing medicine, exercising control over physicians or engaging in certain practices such as fee-splitting with physicians. Although we believe all of our arrangements with our network providers are in compliance with such laws, there can be no assurance that these laws will be interpreted in a manner consistent with our practices or that other laws or regulations will not be enacted in the future that could have a material and adverse effect on our business, results of operations, and financial condition. Regulatory authorities, state medical boards of medicine, state attorneys general and other parties, including our network physicians, may assert that we are engaged in the prohibited corporate practice of medicine, and/or that our arrangement with our network providers constitutes unlawful fee-splitting. If a state’s prohibition on corporate practice of medicine or fee-splitting law is interpreted in a manner that is inconsistent with our practices, we would be required to restructure or terminate our contractual relationship with our network providers to bring our activities into compliance with such laws, disciplinary action, penalties, damages, fines, and/or a loss of revenue, any of which could have a material and adverse effect on our business, results |
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| of operations, and financial condition. State corporate practice of medicine doctrines and fee-splitting prohibitions also often impose penalties on physicians themselves for aiding the corporate practice of medicine or unlawful fee-splitting, which could discourage physicians from participating in our network of providers. |
| ● | ERISA Regulation. The Employee Retirement Income Security Act of 1974, or ERISA, regulates certain aspects of employee health plans, including both insured and self-funded health plans sponsored by our clients, with which we have agreements to provide TPA services. As part of our agreements with a number of these clients, we offer PBM services through Progyny Rx. Because we believe the conduct of our business vis-à-vis these plans is not of a fiduciary nature, it is not generally subject to the fiduciary obligations of ERISA. However, there can be no assurance the United States Department of Labor, or the DOL, which is the agency that enforces ERISA, would not in the future assert that the fiduciary obligations imposed by ERISA apply to certain aspects of our operations or courts would not reach such a ruling in private ERISA litigation. ERISA also imposes civil and criminal liability on service providers to health plans subject to ERISA and certain other persons with relationships to such plans if certain forms of illegal or prohibited remuneration are made or received by such service providers or other persons. These provisions of ERISA are similar, but not identical, to the healthcare anti-kickback laws described above, although ERISA lacks the statutory and regulatory “safe harbor” exceptions incorporated into the healthcare anti-kickback laws. Like the healthcare anti-kickback laws, the corresponding provisions of ERISA are broadly written and their application to particular cases can be uncertain. ERISA plans are subject to certain rules, published by the DOL, including certain reporting requirements for direct and indirect compensation received by plan service providers Separately, although ERISA generally preempts state laws that relate to ERISA plans, the recent Supreme Court ruling in Rutledge v. Pharm. Care Mgmt. Ass’n established that ERISA does not preempt all state laws imposing transparency or other requirements on PBMs. |
| ● | Prompt Pay Laws. Certain states have laws regulating the amount of time that may elapse from when a third-party payor receives a claim for services rendered to when those services are paid. These “prompt pay” laws may impact us as well as our self-insured clients and insurance carriers. Under these “prompt pay” laws, we may be obligated to pay healthcare providers within established time periods, and such time periods may be shorter than existing contracted terms and/or via electronic transfer. In many states, we are deemed to be exempt from the prompt pay laws, however, we seek to comply with them in each state in which we do business to the extent applicable, and our efforts include the use of controls such as policies and processing systems that ensure we pay claims as quickly as possible and contract language related to timeframes permitted by applicable law. If we do not make payments to healthcare providers in a timely fashion consistent with prompt pay laws, we may be required to pay interest in addition to any amounts owed to such providers. In addition, our reputation may be harmed and our contractual obligations to certain clients may be breached, causing us to lose revenue or otherwise pay penalties under such contracts. |
| ● | Network Adequacy and Access Requirements. Network adequacy and access laws require health plans to maintain a network of healthcare providers sufficient to deliver the benefits they contract to provide to their enrollees. In light of the increase in “narrow networks”, there has been a legislative push to ensure that commercial payors contract with a sufficient number of healthcare providers to create an “adequate network.” Additionally, a majority of states now have some form of legislation affecting our payor clients’ ability to limit access to a provider network or remove a provider from the network. Such legislation may require our clients to admit any healthcare provider including any pharmacy provider willing to meet the plan’s price and other terms for network participation (“any willing provider” legislation) or may provide that a provider may not be removed from a network except in compliance with certain procedures (“due process” legislation). Further, to ensure network adequacy and quality, a network may seek to accredit its healthcare providers through any number of accrediting bodies, such as the National Committee for Quality Assurance, or NCQA, and the Utilization Review Accreditation Commission. We follow NCQA standards to credential the health providers with whom we contract to provide services within our network, and engage Council for Affordable Quality Healthcare to conduct provider credentialing where required. Should any of the states we operate in determine that our network of providers does not meet adequacy or access requirements, we may be subject to administrative penalties and other administrative actions, as well as private litigation. In addition, if we are unable to contract with a sufficient number of providers, we may become subject to administrative penalties or enforcement actions from state regulatory agencies, litigation from consumers, and may be in breach of certain contractual covenants with our partners. |
or NCQA, and the Utilization Review Accreditation Commission. We follow NCQA standards to credential the health providers with whom we contract to provide services within our network, and engage Council for Affordable Quality Healthcare to conduct provider credentialing where required. Should any38
| ● | Consumer Protection Laws. Federal and state consumer protection laws are being applied increasingly by the Federal Trade Commission, or FTC, Federal Communications Commission, or FCC, and states’ attorneys general to regulate the collection, use, storage and disclosure of personal or health information, through websites or otherwise, and to regulate the presentation of website content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Consumer protection laws require us to publish statements to users of our services that describe how we handle personal information and choices consumers may have about the way we handle personal information. If such information that we publish is considered untrue, we may be subject to claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences, including, costs of defending against litigation, settling claims and loss of willingness of current and future clients to work with us. |
| ● | Restrictions on Communication. Communications with our members increasingly may be subject to and restricted by laws and regulations governing communications via telephone, fax, text, and email. We also use email and social media platforms as marketing tools. For example, we maintain social media accounts. As laws and regulations, including FTC enforcement, rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties. |
Consumer Protection Laws. Federal and state consumer protection laws are being applied increasingly by the Federal Trade Commission, or FTC, Federal Communications Commission, or FCC, and states’ attorneys general to regulate the collection, use, storage and disclosure of personal or health information, through websites or otherwise, and to regulate the presentation of website content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Consumer protection laws require us to publish statements to users of our services that describe how we handle personal information and choices consumers may have about the way we handle personal information. If such information that we publish is considered untrue, we may be subject to claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences, including, costs of defending against litigation, settling claims and loss of willingness of current and future clients to work with us.
Restrictions on Communication. Communications with our members increasingly may be subject to and restricted by laws and regulations governing communications via telephone, fax, text, and email. We also use email and social media platforms as marketing tools. For example, we maintain social media accounts. As laws and regulations, including FTC enforcement, rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.
The healthcare regulatory and political framework is uncertain and evolving. Recent and future developments in the healthcare industry could have an adverse impact on our business, financial condition and results of operations.
All of our revenue is derived from the healthcare industry, which is highly regulated and subject to changing political, legislative, regulatory and other influences. Healthcare laws and regulations are rapidly evolving and may change significantly in the future. For example, whilethe ACA does not directly regulate our business as a benefit area, it doesmay affect the coverage and plan designs that are or will be provided by certain insurance carriers and certain of our clients with self-insured plans, taxability of benefits under such plans, as well as the overall reimbursement and drug pricing environment for healthcare providers. There remainSince its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA, as well as efforts by the Trump administration to repeal or replace certain aspects of the ACA. Further,For example, the United States Supreme Court announced on March 2, 2020 that it will consolidateheard oral arguments in California v. Texas, which consolidated two cases regarding the constitutionality of the ACA. It is unclear when aACA on November 10, 2020. A decision is expected in 2021. The Supreme Court’s decision could end the case, or it could result in the case being sent back to be made. Healththe lower courts for continued litigation. Other health reform efforts including reforms to the ACA, andhave been proposed by members of Congress, such as measures that would expand the role of government-sponsored coverage, including single payer or so-called “Medicare-for-All” proposals,further reform to the ACA, which could have far-reaching implications for the healthcare industry if enacted. On January 28, 2021, President Joe Biden issued an Executive Order directing federal agencies to examine all existing regulations, orders, guidance documents, policies and similar agency actions to determine if any such actions are inconsistent with the policy set forth in the Executive Order to protect and strengthen the ACA and make high-quality healthcare accessible and affordable for every American. As another example of recent healthcare legislative changes, the Consolidated Appropriations Act, or CAA, enacted on December 27, 2020, contain provisions impacting group health plans, including protections for plan participants from surprise medical bills and ensuring health plan price transparency. The CAA prohibits plans from entering into services agreements that directly or indirectly restrict the plans from disclosing provider-specific costs and quality of care information. It also requires disclosure by health insurance brokers and consultants to plan sponsors regarding reasonably expected direct and indirect compensation for referral of services to group health plans. Additionally, the CAA requires plans to submit reports to the Department of Labor, HHS and IRS with certain information on pharmacy benefits and drug costs for participants and beneficiaries and the application of in-network rates to out of network services, effective December 27, 2021. The CAA will also require certain service providers for health plans to comply with certain ERISA fee disclosure rules. In addition, effective January 1, 2022, the No Surprises Act (enacted as part of the CAA) provides protection against surprise medical bills by prohibiting plans and providers from balance billing patients for emergency care performed by out-of-network providers as well as non-emergency and ancillary services performed by out-of-network providers at in-network facilities, subject to certain notice and consent exceptions for non-emergency and ancillary services. The new law also grants additional patient protections, including requiring providers to send a good faith estimate of the expected charges for furnishing items or services to an insured patient’s health plan (or directly to an uninsured patient) before such items or services are delivered (including items or services reasonably expected to be provided in conjunction with scheduled items or services or that are reasonably expected to be delivered by another provider). The No Surprises Act also provides a dispute resolution process in the event the actual charges for such items and services are substantially higher than the plan’s estimate, and will prohibit providers from charging patients an amount beyond the in-network cost sharing amount for services rendered by out-of-network
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providers, subject to certain exceptions. Several states have also enacted comprehensive surprise billing laws and the CAA defers to existing state requirements with respect to state-established payment amounts.
We are unable to predict how these changes to the full impact of healthACA and other healthcare reform initiatives from new legislation, regulation, judicial action and/or executive action, including the CAA and No Surprises Act and state laws, will ultimately impact the healthcare industry and what the potential impact may be on our operationsbusiness or on our business and on our relationships with future clients, insurance carriers, and healthcare providers.
We are subject to potential changes in light of the uncertainty regarding whether, when and how the ACA will be further changed, what alternative reforms (including single payer proposals), if any, may be enacted, the timing of enactment and implementation of alternative provisions and the impact of alternative provisions on various healthcare industry participants.
Government regulation,laws, regulations, government enforcement priorities, public policy, industry standards and other requirements, including with respect to Progyny Rx’s PBM practices, which create risks and challenges with respect to our compliance efforts and our business strategies.strategies, and may adversely affect our business.
The healthcare industry is highly regulated and subject to frequently changing laws, regulations, government enforcement priorities, public policies, industry standards and other requirements. Many healthcare laws and regulations are complex, and their application to specific
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solutions, services and relationships may not be clear. Because our clients are subject to various requirements, we may be impacted as a result of our contractual obligations even when we are not directly subject to such requirements. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the solutions and services that we provide, and these laws and regulations may be applied to our solutions and services in ways that we do not anticipate. The ACA, efforts to repealrevise, expand or materially change the ACA, and other federal and state efforts to reform or revise aspects of the healthcare industry or to revise or create additional legal or and regulatory requirements could impact our operations, the use of our solutions and services, and our ability to market new solutions and services, or could create unexpected liabilities for us. There have also been a number of reform efforts around PBMs including pricing and transparency which could affect our business. We also may be impacted by laws, industry standards and other requirements that are not specific to the healthcare industry, such as consumer protection laws and payment card industry standards. These requirements may impact our operations and, if not followed, could result in fines, penalties and other liabilities and adverse publicity and injury to our reputation.
In recent years, there have been a number of reform efforts, including from federal and state legislatures as well as the HHS OIG, around PBM program pricing and transparency that could affect our business. Current PBM laws and regulations govern, and proposed legislation and regulations may govern and/or further restrict critical PBM practices, including, among other things, disclosure, receipt and retention of rebates and other payments received from pharmaceutical manufacturers, rules governing contractual provisions between PBMs and their contracted payers and/or pharmacies, and registration or licensing of PBMs. For example, in 2019, the U.S. Senate and House of Representatives proposed a number of bills that would, among other things, require PBMs to submit information on their costs, fees and rebates, requiring 100% of the rebates to be passed on to consumers, and/or impose rebates on manufacturers that chose to increase their drug prices more rapidly than inflation. Further, the U.S. Supreme Court’s recent decision in Rutledge v. Pharm. Care Mgmt. Ass’n on December 10, 2020, which held that an Arkansas state law requiring PBMs to reimburse pharmacies at a price equal to or greater than the price pharmacies pay in purchasing medications from a wholesaler, was not preempted by the federal ERISA statute. The Supreme Court’s ruling solidifies the legality of state-level legislation regulating PBMs, which may encourage a new wave of legislation aimed at controlling prescription drug costs and providing pricing transparency. In the wake of the Rutledge ruling, for example, New York has already reintroduced previously vetoed PBM legislation and Governor Andrew Cuomo has issued an Executive Budget for 2022 that highlights the need for PBM accountability. At least 10 states have proposed new PBM legislation in 2021 alone, including New York, Texas, and Florida. A number of these proposed laws would require PBMs to submit annual transparency reports or otherwise disclose contractual arrangements with health benefit plans or health insurance issuers, or allow regulators to conduct audits of PBM operations. Additionally, certain quasi-regulatory organizations, including the National Association of Boards of Pharmacy and the National Association of Insurance Commissioners, have issued model regulations or may propose future model regulations concerning PBM operations. PBM credentialing organizations may also establish voluntary standards regarding PBM activities. While the model regulations and standards of these quasi-regulatory or credentialing organizations are not legal requirements, federal and state lawmakers may be influenced to adopt similar legislation and such model regulations and standards may also impact client expectations or requirements for PBM services. PBM operations may also be subject to federal and state fraud and abuse laws. We do not believe our operations are directly subject to such laws (including the recent finalization of regulations under the federal anti-kickback statute directly applicable to PBMs) as the PBM solutions and services we provide are not reimbursed by government healthcare payors. Some states’ anti-kickback and false claims laws may be broader in scope than analogous federal laws and may apply to items and services reimbursed by any third-party payor, including private insurers, self-insured employers and on a cash basis by patients, and may be applicable to us.
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Accordingly, it is reasonably possible that our business operations and operating results could be materially adversely affected by legislative, regulatory and public policy changes at the federal or state level, increased government involvement in drug reimbursement and pricing, and/or increased regulation of PBMs. Adoption of new laws, rules or regulations or changes in government enforcement priorities of or new interpretations of, existing laws, rules or regulations relating to PBMs could materially adversely affect our business and results of operations with respect to Progyny Rx. Additionally, such legal and regulatory changes may adversely affect our ability to conduct business on commercially reasonable terms in states where PBM legislation is in effect and the Company’s ability to standardize its Progyny Rx PBM products and services across state lines. Further, failure by the Company to comply with these laws or regulations could result in material fines and/or sanctions and could have a material adverse effect on the Company’s operating results and/or cash flows.
We are subject to anti-corruption, anti-bribery, anti-money laundering, and similar laws, and non-compliance with such laws can subject us to criminal or civil liability and harm our business, financial condition and results of operations.
While we operate only in the United States, we remain subject to the U.S. Foreign Corrupt Practices Act, U.S. domestic bribery laws, and other anti-corruption and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees and their third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. If we expand our business and sales outside the United States and to the public sector, we may engage with business partners and third-party intermediaries to market our services and to obtain for us the necessary permits, licenses, and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities.
Detecting, investigating, and resolving actual or alleged violations of anti-corruption laws can require a significant diversion of time, resources, and attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, prosecution, enforcement actions, sanctions, settlements, fines, damages, other civil or criminal penalties or injunctions, suspension or debarment from contracting with certain persons, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal proceeding, our business, financial condition and results of operations could be harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees, which could adversely affect our business, financial condition and results of operations.
Any potential sales to government entities are subject to a number of challenges and risks.
We may sell our services or solutions to U.S. federal, state, and local government, and agency, clients. Sales to such entities are subject to a number of challenges and risks. Selling to such entities can be highly competitive, expensive, and time-consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. Government contracting requirements may change and in doing so restrict our ability to sell into the government sector until we have attained the revised certification. Government demand and payment for our offerings is dependent on many factors outside our control, including general economic conditions, public sector budgetary constraints and funding authorizations, and general political priorities, with funding reductions or delays adversely affecting public sector demand for our offerings.
Further, governmental and highly regulated entities may demand contract terms that differ from our standard arrangements. Such entities may have statutory, contractual, or other legal rights to terminate contracts with us or our
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partners due to a default or for other reasons. Any such termination may adversely affect our reputation, business, financial condition and results of operations.
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Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success depends in part on our ability to protect our brand and proprietary trade secret and confidential information, including unpatented know-how, technology and other proprietary information, maintaining, defending and enforcing our intellectual property rights. We rely on our agreements with our clients, and non-disclosure and confidentiality agreements with employees and third parties, and our trademarks, trade secrets, and copyrights to protect our intellectual property rights. However, any of these parties may breach such agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for such breaches. There is no assurance that we will be able to obtain, maintain, defend and enforce our intellectual property rights, or that such intellectual property rights will not be challenged, narrowed, held unenforceable or circumvented. Therefore, these legal protections and precautions may not prevent infringement, misappropriation or other violations of our intellectual property. Any litigation and any infringement, misappropriation or other violations of our intellectual property could hinder our ability to market and sell our solutions, and our business, financial condition and results of operations could be adversely affected.
If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us and our competitive position would be harmed.
Third parties may allege that our products and services, or the conduct of our business, infringe, misappropriate or otherwise violate such third party’s intellectual property rights. Even if such claims are without merit, defending such claims would cause us to incur substantial expenses and could cause us to pay substantial damages or seek a costly license if we are found to be infringing, misappropriating, or otherwise violating a third party’s intellectual property rights. If we are unable to enter into a license on acceptable terms or at all, we could be forced to cease some aspect of our business operations or be forced to redesign our products or services so that we no longer infringe the third-party intellectual property rights, which may result in significant cost and delay to us, or which redesign could be technically infeasible. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our employees and management personnel from their normal responsibilities.
Moreover, although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any third parties, including such individual’s former employer. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
Furthermore, we currently own registered trademarks. In addition, any of our trademarks or trade names, whether registered or unregistered, may be challenged, opposed, infringed, cancelled, circumvented or declared generic, or determined to be infringing on other marks, as applicable. We may not be able to protect our rights to these trademarks and trade names, which we will need to build name recognition by potential collaborators or clients in our markets of interest.
Any litigation against us could be costly and time-consuming to defend and could harm our business, financial condition and results of operations.
We have in the past and may in the future become subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our clients or vendors in connection with commercial disputes or employment claims made by our current or former employees. We are currently in arbitration with a former vendor who alleges a breach of our contract with such vendor, as described in Part I, Item 3. “Legal Proceedings” of this Annual Report on Form 10-K. We are unable to predict the outcome of any of these legal proceedings. Such proceedings might result in substantial costs, regardless of the outcome, and may divert management’s attention and resources, which might seriously
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harm our business, financial condition and results of operations. As discussed in Part I, Item 3 of this Annual Report on the Form 10-K, we were subject to a vendor arbitration that was recently settled in December 2020. As part of our settlement and to avoid further costs, we agreed to pay the vendor a total of $5.75 million. Insurance might not cover suchlitigation claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims, and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, potentially harming our business, financial condition and results of operations.
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Acquisitions, strategic investments, partnerships, or alliances could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our business, financial condition and results of operations.
We may in the future seek to acquire or invest in businesses, joint ventures, products and services, or technologies that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. Any such acquisition or investment may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable opportunities, whether or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products and services, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, they are operationally difficult to integrate, or we have difficulty retaining the clients of any acquired business due to changes in ownership, management or otherwise. These transactions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing business. Any such transactions that we are able to complete may not result in any synergies or other benefits we had expected to achieve, which could result in impairment charges that could be substantial. In addition, we may not be able to find and identify desirable acquisition targets or business opportunities or be successful in entering into an agreement with any particular strategic partner. These transactions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if the resulting business from such a transaction fails to meet our expectations, or we fail to successfully integrate such businesses into our own, our business, financial condition and results of operations may be adversely affected or we may be exposed to unknown risks or liabilities.
The December 2017 U.S. federal tax reform may subject us to potential adverse tax consequences.
The Tax Cuts and Jobs Act, or the Tax Act, enacted in December 2017, among other things, includes changes to U.S. federal tax rates, imposes additional limitations on the deductibility of interest, has both positive and negative changes to the utilization of future net operating loss carryforwards, allows for the expensing of certain capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a “quasi-territorial system”. Our net deferred tax assets and liabilities and valuation allowance have been revalued at the U.S. corporate rate, which the Tax Act reduced to 21%. We continue to examine the impact this tax reform legislation may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse.
Changes in our effective tax rate or tax liabilityliabilities may have an adverse effect on our results of operations.
Our effective tax rate could increasebe impacted due to several factors, including, but not limited to:
| changes in the relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates; |
| changes in tax laws, tax treaties, and regulations or the interpretation of |
| changes to our assessment about our ability to realize our deferred tax assets that are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies, and the economic and political environments in which we do business; |
| the outcome of future tax audits, examinations, or administrative appeals; |
| limitations or adverse findings regarding our ability to do business in some |
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| ● | discrete impact tax items, including such items resulting from the amount and timing of equity exercises and our share price. |
Any of these developments could have an adverse effect on our results of operations.
Certain U.S. state tax authorities may assert that we have a state nexus and seek to impose state and local income taxes which could adversely affect our results of operations.
We currently file state income tax returns in certain states. There is a risk that certain state tax authorities, where we do not currently file a state income tax return, could assert that we are liable for state and local income taxes based upon income or gross receipts allocable to such states. States are becoming increasingly aggressive in asserting a nexus for state income tax purposes. We could be subject to state and local taxation, including penalties and interest attributable to prior periods, if a state tax authority in which we do not currently file a state income tax return successfully asserts that our activities give rise to a taxable nexus. Such tax assessments, penalties and interest may adversely affect our results of operations.
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We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our profitability.
As of December 31, 2019, we had federal and state net operating loss carryforwards of approximately $92 million and $71 million, respectively, due to prior period losses, some of which, if not utilized, will begin to expire in 2031 for federal and state purposes. Federal and California research and development tax credit carryforwards are approximately $729,000 and $830,000, respectively. The federal research and development tax credits begin to expire in 2030, and the California research and development tax credits have no expiration date. These net operating loss and research tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability.
In addition, underUnder Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. Future issuances of our stock could cause an “ownership change.” Any future ownership change, which could be outside of our control, could also have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
Accounting principles generally accepted in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. As of January 1, 2020, we adopted ASU No. 2016-02, Leases (Topic 842) using the modified retrospective transition method and recorded a right-of-use asset and lease liabilities of $9.5 million and $9.9 million, respectively. In addition, as of January 1, 2020, we also adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) using the modified retrospective transition method, which resulted in a cumulative-effect adjustment to accumulated deficit of $1.2 million and impacted our methodology for calculating and estimating our allowance for doubtful accounts. 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 for additional information on recently adopted accounting standards. A change in theseaccounting principles or interpretations could have a significant effect on our reported results of operations and could affect the reporting of transactions already completed before the announcement of a change.
For example, in February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. As an “emerging growth company,” we are allowed under the JOBS Act to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The adoption of new or revised accounting principles may require us to make changes to our systems, processes and control, which could have a significant effect on our reported financial results, cause unexpected financial reporting fluctuations, retroactively affect previously reported results or require us to make costly changes to our operational processes and accounting systems upon or following the adoption of these standards.
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If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” of this Annual Report on Form 10-K. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. SignificantWe believe that the assumptions and estimates associated with our revenue recognition including accrued receivables and judgments used in preparingallowance for service changes and cancellations, accrued claims payable, stock-based compensation, and accounting for income taxes have the greatest potential impact on our consolidated financial statements include those relatedand therefore, we consider these to the determination of fair value ofbe our common stock, estimates of accounts receivable relating to member copaymentscritical accounting policies and revenue recognition relating to services rendered but for which no claim has yet been reported, among others.estimates. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile, and the value of our common stock may decline.
As tenured investors look to monetize their positions, we have seen large blocks of shares enter the public market over a short period of time. The market price of our common stock may be highly volatile and may fluctuate or decline
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substantially as a result of this and a variety of factors, some of which are beyond our control, including, but not limited to:
| high volume of direct sales into the market by large investors; |
● | actual or anticipated fluctuations in our financial condition or results of operations; |
| variance in our financial performance from expectations of securities analysts; |
| changes in the pricing of our solutions and services; |
| changes in our projected operating and financial results; |
| changes in laws or regulations applicable to our products and solutions; |
| announcements by us or our competitors of significant business developments, acquisitions, or new offerings; |
| significant data breaches of our company, providers, vendors or pharmacies; |
| our involvement in litigation; |
| future sales of our common stock by us or our |
| changes in senior management or key personnel; |
| the trading volume of our common stock; |
| changes in the anticipated future size and growth rate of our market; and |
| general economic, industry, and market conditions. |
Broad market and industry fluctuations, as well as general economic, political, regulatory, and market conditions, including those related to the recent COVID-19 pandemic, may also negatively impact the market price of our common stock. Fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the uncertainty caused by and the unprecedented nature of the current COVID-19 pandemic. These and other factors may cause the market price
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and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial expenses and divert our management’s attention.
An active trading market for our common stock may not be sustained.
An active public trading market for our common stock may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price and the value of your investment could decline.
Our results of operations may fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance. In addition to the other risks described herein, factors that may affect our results of operations include the following:
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| fluctuations in demand for or pricing of our solutions; |
| our ability to attract new clients; |
| our ability to retain our existing clients; |
| client expansion rates; |
| changes in clients’ budgets and in the timing of their budget cycles and purchasing decisions; |
| our ability to control costs, including our operating expenses and healthcare costs; |
| the amount and timing of payment for operating expenses, particularly sales and marketing expenses; |
| the amount and timing of non-cash expenses, including stock-based compensation, goodwill impairments and other non-cash charges; |
| the amount and timing of costs associated with recruiting, training and integrating new employees and retaining and motivating existing employees; |
| general economic conditions, as well as economic conditions specifically affecting industries in which our clients |
| the impact of new accounting pronouncements; |
| changes in the competitive dynamics of our market, including consolidation among competitors or clients; and |
| significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our solutions and services. |
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Any of these and other factors, or the cumulative effect of some of these factors, may cause our results of operations to vary significantly. For example, the full impact of the COVID-19 pandemic is unknown at this time, but could result in adverse changes in our results of operations for an unknown period of time as the virus and its related political, social and economic impacts spread. If our quarterly results of operations fall below the expectations of investors and securities analysts who follow our stock, the price of our common stock could decline substantially, and we could face costly lawsuits, including securities class action suits.
In connection with our preparation of our annual financial statements for the year ended December 31, 2018, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. Any failure to maintain effective internal control over financial reporting could harm us.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. In connection with our audit of the fiscal year 2018 consolidated financial statements, we and our independent registered public accounting firm identified one material weakness in our controls related to the lack of review and oversight over financial reporting. We determined that we had insufficient financial statement close processes and procedures relating to the classification and presentation of certain revenue and expenses. Under standards established by the United States Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis. During 2019, we completed the remediation measures related to the material weakness and concluded that our internal control over financial reporting was effective as of December 31, 2019.
Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
As a result of being a public company, we are obligated to develop and maintain proper and effective internal controls over financial reporting, and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the fiscal year ending December 31, 2020, which is the year covered by the second annual report following the completion of our IPO. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition,and our independent registered public accounting firm will beis required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company.” We have recently commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, but we may not be able to complete our evaluation, testing and any required remediation in a timely fashion once initiated. Ourreporting. To achieve compliance with Section 404, we perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Annual Report on Form 10-K filing for each year, as required by Section 404 of SOX. Our existing management team has and will require that we incurcontinue to devote a substantial accounting expenses and expend significant management efforts. We currently do not have an internal audit group,amount of time to these compliance initiatives, and we willmay need to hire additional accounting and financial staff with appropriate public company experience to assist us in ongoing compliance with these requirements. Moreover, these rules and technical accounting knowledgeregulations have increased and compile the systemwill continue to increase our legal and process documentation necessary to perform the evaluation needed to comply with Section 404.financial compliance costs and will make some activities more time consuming and costly.
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During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to certify that our internal control over financial reporting is effective. For example, in connection with our audit of the fiscal year 2018 consolidated financial statements, we and our independent registered public accounting firm identified one material weakness in our controls related to the lack of
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review and oversight over financial reporting, which we determined we had remediated as of December 31, 2019. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
Future sales of our common stock in the public market could cause the market price of our common stock to decline.
Future sales of a substantial number of shares of our common stock in the public market by us or our stockholders, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock.
All of our directors and officers and the holders of substantially all of our capital stock and securities convertible into our capital stock are subject to lock-up agreements that restrict their ability to transfer shares of our capital stock through the end of the day on April 21, 2020. These lock-up agreements limit the number of shares of capital stock that may be sold immediately following our IPO. Subject to certain limitations, substantially all of these shares will become eligible for sale upon expiration of the 180-day lock-up period. J.P. Morgan Securities LLC, Goldman Sachs & Co. LLC and BofA Securities, Inc. may, in their sole discretion, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.
In addition, as of December 31, 2019,2020, there were an aggregate of 15,721,13913,384,301 and 489,067 shares of our common stock subject to outstanding options and weunvested restricted stock units, respectively. We have registered all of the shares of common stock issuable upon exercise of outstanding options or other equity awards we may grant in the future, for public resale under the Securities Act. Accordingly, these shares will be eligible for sale in the public market to the extent such options are exercised subject to the lock-up agreements described above and restricted stock units are vested, in compliance with applicable securities laws.
Further, holders of a substantial number of shares of our common stock have rights, subject to certain conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders.
We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in businesses, joint ventures, products and services, or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.
If securities or industry analysts do not publish research, or publish unfavorable or inaccurate research, about our business, the market price and trading volume of our common stock could decline.
The market price and trading volume of our common stock will be heavily influenced by the way analysts interpret our financial information and other disclosures. We do not have control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, our stock price would be negatively affected. If securities or industry analysts do not publish research or reports about our business, downgrade our common stock, or
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publish negative reports about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price to decline and could decrease the trading volume of our common stock. We have experienced and may in the future experience analyst coverage reduction due to analysts leaving firms, changing firms or going on temporary leaves of absences. Such reduction in analyst coverage, even if temporary, could lead to volatility in our stock price.
We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors. Accordingly, you may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on your investment.
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We are an “emerging growth company” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We will remain an emerging growth company until the earliest of (1) December 31, 2024; (2) the last day of our first fiscal year in which we have total annual gross revenue of at least $1.07 billion; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of our first fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th.
We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future results of operations may not be as comparable to the results of operations of certain other companies in our industry that adopted such standards. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.
We incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
As a public company, we have incurred and will continue to incur significant legal, accounting, and other expenses that we did not incur as a private company, which we expectprior to further increase after we are no longer an “emerging growth company.”our initial public offering. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Stock Market, or Nasdaq, and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Effective January 1, 2021, we became a “large accelerated filer” under SEC reporting rules and are required to file our annual report and quarterly reports more quickly than we previously had been required to file them, which may require us to dedicate additional resources to the timely filing of such reports. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and make some activities more time- consumingtime-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the specific timing of such costs.
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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
| authorize our Board of Directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our Board of Directors that may be senior to our common stock; |
| require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; |
| specify that special meetings of our stockholders can be called only by our Board of Directors, the chairperson of our Board of Directors, or our chief executive officer; |
| establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors; |
| establish that our Board of Directors is divided into three classes, with each class serving three-year staggered terms; |
| prohibit cumulative voting in the election of directors; |
| provide that our directors may be removed for cause only upon the vote of at least |
| provide that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum; and |
| require the approval of our Board of Directors or the holders of at least |
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for
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shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of our common stock in an acquisition.
Our amended and restated certificate of incorporation designates the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, any state court located within the State of Delaware, or if all such state courts
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lack jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a breach of a fiduciary duty owed by any current or former director, officer or other employee, to us or our stockholders; (3) any action or proceeding asserting a claim against us or any of our current or former directors, officers or other employees, arising out of or pursuant to any provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; (4) or any action or proceeding to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our amended and restated bylaws; (5) any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware; or (6) any action asserting a claim against us, or any of our directors, officers or other employees, that is governed by the internal affairs doctrine, in all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. For the avoidance of doubt, these choice of forum provisions will not apply to suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. In particular, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees and may discourage these types of lawsuits. A stockholder may, nevertheless, seek to bring a claim in a venue other than that designated in our amended and restated certificate of incorporation. In such instance we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions, which may require significant additional costs. Furthermore, if a court were to find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our corporate headquarters is located at 1359 Broadway, New York, New York 10018, under a sublease that begancommenced in JulySeptember 2019 and expires in May 2029. We use this space for administration, sales and marketing and client support.
On January 14, 2019, a vendor filed a Demand for ArbitrationSee Part II, Item 8 “Financial Statements and Statement of Claim against us for alleged breach of the November 10, 2017 Preferred Specialty Pharmacy Agreement, or the Agreement, between usSupplementary Data — Note 15 — Commitments and the vendor. On March 13, 2019, we terminated the Agreement for material breach with the vendor. On April 3, 2019, the vendor filed a Second Amended Demand for Arbitration, or SAD, for breach of the Agreement. The vendor is seeking $25.0 million in damages, fees, interest and costs. The alleged damages are not quantified or factually supported in the SAD. Pursuant to a schedule set forth by the Arbitration Panel, on May 3, 2019, we filed a Motion to Dismiss the SAD. That Motion to Dismiss was fully briefed on June 14, 2019 and was decided on July 31, 2019. The Arbitration Panel dismissed two of the vendor’s four claims. We believe the vendor’s remaining claims are without merit and intend to vigorously defend against the claims in the arbitration. See “Risk Factors—Risks Related to Our Business and Industry—Any litigation against us could be costly and time-consuming to defend and could harm our business, financial condition and results of operations.Contingencies — Arbitration/Litigation.”
We believe there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, results of operations, or cash flows. However, in addition to the matter described above, we may, from time to time, be involved in various legal proceedings arising from the normal course of business activities. Defending such proceedings is costly and can impose a significant burden on management and employees. The results of litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers and directors as of the date of this Annual Report on Form 10-K.
Name | Age | |
Executive Officers: | | |
David Schlanger | 61 | Chief Executive Officer and Director |
Peter Anevski | 53 | President and Chief Operating Officer |
Jennifer Bealer | 40 | Executive Vice President, Secretary and General Counsel |
Lisa Greenbaum | 49 | Executive Vice President and Chief Client Officer |
Mark Livingston | 55 | Chief Financial Officer |
| | |
Non- Employee Directors: | | |
Beth Seidenberg, M.D. | 63 | Chair of the Board of Directors |
Malissia Clinton | 52 | Director |
Fred E. Cohen, D.Phil. | 64 | Director |
Kevin Gordon | 58 | Director |
Roger Holstein | 68 | Director |
Jeff Park | 49 | Director |
Norman Payson, M.D. | 72 | Director |
Cheryl Scott | 71 | Director |
| | |
Executive Officers
David Schlanger has served as our Chief Executive Officer since January 2017 and on our board of directors since March 2017. From August 2013 until September 2016, he served as the Chief Executive Officer of WebMD Health Corp., or WebMD. Prior to that, he served as the Interim Chief Executive Officer and in various other senior executive positions at WebMD and predecessor companies for more than 15 years, including as Senior Vice President, Strategic and Corporate Development and Senior Vice President, Corporate Development. Mr. Schlanger received his B.S. from Georgetown University and his J.D. from the University of Michigan Law School. We believe that Mr. Schlanger is qualified to serve on our board of directors because of his extensive experience at healthcare companies and in executive management.
Peter Anevski has served as our Chief Operating Officer since January 2017 and our President since June 2019. Until September 2020, Mr. Anevski also served as our Chief Financial Officer. Mr. Anevski has extensive experience managing financial functions for public companies. From May 2013 until September 2016, he served as the Executive Vice President and Chief Financial Officer of WebMD. Prior to that, Mr. Anevski served in senior finance and operations roles at WebMD and predecessor companies for 14 years, including as Senior Vice President, Finance. Mr. Anevski received his B.A. in Accounting from Montclair State University.
Jennifer Bealer has served as our General Counsel since October 2017. Prior to that, she was an Associate at Ropes & Gray’s nationally-ranked healthcare practice from November 2010 to October 2017, where she gained extensive expertise in providing healthcare clients with strategic, regulatory, compliance and transaction advice. Ms. Bealer holds Bachelor of Science degrees in Biology and Psychology from the Pennsylvania State University and received her J.D. from the University of Pennsylvania Law School, A.L.M from Harvard University, and Master of Bioethics from University of Pennsylvania School of Medicine.
Lisa Greenbaum has served as our Executive Vice President and Chief Client Officer since June 2019. Prior to that, Ms. Greenbaum spent 15 years at WebMD in various roles, including Group General Manager of Professional Services, Senior Vice President, Group Vice President, Vice President of Sales and Executive Director. She also has
50
experience working for digital health and pharmaceutical companies, including HealthStream, Merck and Procter & Gamble. Ms. Greenbaum received her B.A. from Duke University.
Mark Livingston has served as our Chief Financial Officer since September 2020. Previously, Mr. Livingston had served as our Executive Vice President of Finance since May 2019. Prior to joining that, he served as Chief Financial Officer of the international business at Scripps Network Interactive, a media company, where he worked from August 2010 to April 2018, and as Chief Financial Officer of Emerson, Reid & Company, an employee benefits wholesaler, from June 2007 to August 2010. Previously, Mr. Livingston has held senior financial leadership roles at WebMD Corporation and Hess Corporation. Mr. Livingston received his B.S. from Tulane University, and is a licensed Certified Public Accountant
Non-Employee Directors
Beth Seidenberg, M.D. has served as a member of our board of directors since May 2010 and as Chair of our board of directors since June 2015. Dr. Seidenberg has been a partner at Kleiner Perkins, a venture capital firm, since May 2005, where she primarily focuses on life sciences investing. She has also served as the Managing Director of Westlake Village BioPartners, another venture capital firm, since August 2018. Prior to joining Kleiner Perkins, Dr. Seidenberg was the Senior Vice President, Head of Global Development and Chief Medical Officer at Amgen, Inc., a biotechnology company. In addition, Dr. Seidenberg was a senior executive in research and development at Bristol Myers Squibb Company, a biopharmaceutical company, and Merck. Dr. Seidenberg has served on the board of directors of Atara Biotherapeutics since August 2012. Dr. Seidenberg previously served on the boards of directors of Epizyme, Inc., from February 2008 to September 2019, Tesaro, Inc., from June 2011 to February 2019, and ARMO BioSciences, Inc. from December 2012 until June 2018. Dr. Seidenberg received a B.S. from Barnard College and an M.D. from the University of Miami School of Medicine and completed her post-graduate training at the Johns Hopkins University, George Washington University and the National Institutes of Health. We believe that Dr. Seidenberg is qualified to serve on our board of directors because of her extensive experience in the life sciences industry as a senior executive and venture capitalist, as well as her training as a physician.
Malissia Clinton has served as a member of our board of directors since November 2020. Ms. Clinton has served as Senior Vice President, General Counsel and Secretary at The Aerospace Corporation since 2009. She previously worked at Northrop Grumman from 2002 to 2009, including her role as Senior Counsel for Special Projects beginning in 2007. Ms. Clinton joined TRW Space Technology, a division of TRW, Inc., in 1998 as Counsel in its Telecommunication Programs and Avionic Systems division. She began her career as an Associate at Tuttle & Taylor. Additionally, Ms. Clinton has served on the board of directors of 3D Systems Corporation since 2019 and on the board of directors of City of Hope Medical Center since 2016. Ms. Clinton holds a Bachelor of Science degree in Political Science and Government from Arizona State University and received her Juris Doctor from the Stanford Law School. We believe that Ms. Clinton is qualified to serve on our board of directors because of her strong legal background and extensive experience in corporate governance.
Fred E. Cohen, M.D. D.Phil.has served on our board of directors since March 2015. Dr. Cohen is currently a Senior Advisor to TPG Capital, where he previously served for over 15 years as a Partner, and founder of TPG Biotechnology, a life science focused venture capital fund. Beginning in November 2017, Dr. Cohen has served as a co-founder and senior managing director of Vida Ventures, LLC, a biotechnology venture capital fund. In addition, for three decades throughout his career, Dr. Cohen has been affiliated with University of California, San Francisco where he held various clinical responsibilities, including as a research scientist, an internist for hospitalized patients, a consulting endocrinologist, and the Chief of the Division of Endocrinology and Metabolism. Dr. Cohen currently serves on the boards of directors of the following public companies: Urogen Pharma Ltd. (since May 2017), CareDx, Inc. (since January 2003), Intellia Therapeutics, Inc. (since January 2019) and Veracyte, Inc. (since 2007). Dr. Cohen also serves on the board of directors of several privately-held companies and previously served on the board of directors of BioCryst Pharmaceuticals, Inc. from July 2013 until January 2019, Quintiles Transnational Holdings, Inc. from May 2007 to November 2015, Roka Bioscience, Inc. from September 2009 to October 2017, Five Prime Therapeutics, Inc. from May 2002 until May 2018, Tandem Diabetes Care, Inc. from June 2013 until June 2019 and Genomic Health Inc. from April 2002 until November 2019. Dr. Cohen received his B.S. degree in Molecular Biophysics and Biochemistry from Yale University, his D.Phil. in Molecular Biophysics from Oxford on a Rhodes Scholarship, and his M.D. from Stanford. He is a member of the National Academy of Medicine and the American Academy of Arts and Sciences. We believe that Dr. Cohen is qualified to serve on our board of directors because of his financial and medical knowledge and experience.
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Kevin Gordon has served as a member of our board of directors since October 2019. Mr. Gordon has also served on the board of directors of Veracyte, Inc., a genomic diagnostics company, since December 2016, and Q Holdco Limited, a private company that provides world class engineered and elastomeric solutions, since September 2019. From January 2018 until March 2019, he was the President and Chief Financial Officer of Liquidia Technologies Inc., a clinical biopharmaceutical company. Mr. Gordon served as Executive Vice President and Chief Operating Officer of Quintiles Transnational Holdings Inc., or Quintiles, a research, clinical trial and pharmaceutical consulting company, from October 2015 until its merger with IMS Health Holdings, Inc. (forming IQVIA Holdings, Inc.) in October 2016. Prior to that, he was the Executive Vice President and Chief Financial Officer of Quintiles from July 2010 until December 2015. Mr. Gordon served as Executive Vice President and Chief Financial Officer of Teleflex Incorporated, a medical device company, from March 2007 until January 2010. Mr. Gordon held various senior corporate development positions at Teleflex Incorporated from 1997 to 2007. From 1992 to 1997, he held various senior positions, including Chief Financial Officer at Package Machinery Company. From 1984 to 1992, he held senior manager and other various finance positions at KPMG LLP. Mr. Gordon holds a Bachelor of Science degree in Accounting from the University of Connecticut. We believe that Mr. Gordon is qualified to serve on our board of directors because of his extensive accounting experience and leadership experience in healthcare companies.
Roger Holstein has served as a member of our board of directors since November 2020. He has been a Managing Director at Vestar Capital Partners since 2006. He currently serves on the boards of Quest Analytics, Healthgrades and Veritas Collaborative. From 1997 to 2005, Mr. Holstein served as Chief Executive Officer, President or Director of WebMD and helped establish it as the leading source of healthcare information for consumers and professionals. From 1991 to 1996, Mr. Holstein was a member of the Office of the President at Medco, where he helped create the business of prescription benefit management. Prior to that, Mr. Holstein held executive positions at MCI, Warner Amex Cable and Grey Advertising. He began his career in marketing with the Spirits of St. Louis basketball team in the American Basketball Association. Mr. Holstein holds a Bachelor of Arts degree, with distinction, from Swarthmore College. We believe Mr. Holstein is qualified to serve on our board of directors because of his extensive leadership and healthcare experience.
Jeff Park has served as a member of our board of directors since October 2019. Mr. Park has served since April 2019 as the Chairman and Chief Executive Officer of WellDyneRx, an independent pharmacy benefits manager. From January 2018 until May 2018, he was the Interim Chief Executive Officer of Diplomat Pharmacy, Inc., or Diplomat, a provider of specialty pharmacy services. Additionally, from June 2017 to February 2019, he served on the board of directors of Diplomat. Prior to that, from July 2015 until July 2016, he was the Chief Operating Officer of OptumRX, the entity resulting from the merger of Catamaran Corporation, or Catamaran, and OptumRX, UnitedHealthcare Group’s free-standing pharmacy care services business. Before the merger, from March 2014 until July 2015, he was Catamaran’s Executive Vice President, Operations, and previously served as Catamaran’s Chief Financial Officer, beginning in 2006. Mr. Park holds a Bachelor of Science degree in Accounting from Brock University. We believe that Mr. Park is qualified to serve on our board of directors because of his extensive leadership experience in the pharmaceutical industry.
Norman Payson, M.D. has served on our board of directors since December 2016. Dr. Payson was co-founder and Chief Executive Officer of Healthsource from 1985 to 1997, Chief Executive Officer of Oxford Health Plans from 1998 to 2002, Chairman of Concentra from 2005 to 2008 and Chief Executive Officer of Apria Healthcare Group Inc. from 2008 to 2012, where he is currently a member of the board of directors. Since 1997, Dr. Payson has served as President and a director of NCP, Inc., his family office, through which he engages in consulting and personal investment activities. Additionally, Dr. Payson served as a strategic advisor for Evolent Health, Inc., or Evolent, from March 2014 through December 2020 and from December 2013 to June 2019, Dr. Payson also served on the board of directors of Evolent. Dr. Payson is currently serving on the Board of Directors of various private and not-for-profit companies including Access Clinical Partners, City of Hope, Smile Brands, HPM National Advisory Board at the Mailman School of Public Health at Columbia and USC Schaeffer Center Advisory Board. Dr. Payson is also on the board of Kiva Foundation, a private charitable foundation organized by Dr. Payson and his wife in June 1998. Until June 2019, Dr. Payson served as a director at Geisel School of Medicine at Dartmouth, where he now serves as director emeritus. Dr. Payson holds a Bachelor of Science degree in earth and planetary sciences from the Massachusetts Institute of Technology and received his doctorate in medicine from Dartmouth Medical School. Dr. Payson is a California licensed physician. We believe that Dr. Payson is qualified to serve on our board of directors because of his 30-year career as chief executive officer or chairman of multiple healthcare organizations, including publicly-traded companies.
Cheryl Scott has served as a member of our board of directors since October 2019. Ms. Scott has served since July 2016 as the Main Principal of the McClintock Scott Group. From June 2006 to July 2016, Ms. Scott served as
52
Senior Advisor to the Bill & Melinda Gates Foundation. Previously, she served as President and Chief Executive Officer of the Seattle-based Group Health Cooperative for eight years. Ms. Scott has served as a member of the board of directors of Evolent Health, Inc. since November 2015. She also currently serves on a variety of private and not-for-profit boards. She was a member of the board of directors of Recreational Equipment Incorporated (REI) from 2005 to 2017, and served as the board chairperson from 2015 to 2017. Ms. Scott received her bachelor’s degree in communications and master’s degree in health management from the University of Washington, and is currently a Clinical Professor of Health Services at the University of Washington. We believe that Ms. Scott is qualified to serve on our board of directors because of her extensive career in healthcare, leadership and corporate governance, including her tenure as the Chief Executive Officer of Group Health Cooperative.
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
ITEM 5.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. Prior to that time, there was no public market for our stock.
Holders of Record
As of February 27, 2020,January 31, 2021, there were approximately 15167 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
We have never declared or paid cash dividends on our capital stock. We intend to retain any future earnings and do not expect to pay cash dividends in the foreseeable future.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.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:
| | | | | | | | | | | | |
Period | | Total Number of |
| 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 | | | 9,800 |
| $ | 32.63 |
| | — |
| $ | — |
November 1, 2020 through November 30, 2020 | |
| 331 |
|
| 30.00 |
| | — |
|
| — |
December 1, 2020 through December 31, 2020 | |
| 3,676 |
|
| 40.45 |
| | — |
|
| — |
Total shares repurchased | | | 13,807 |
| $ | 34.65 |
| | — |
| $ | — |
(1) Represents shares withheld on net settlements of restricted stock units that vested under our equity incentive plans.
5153
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. under the Securities Act or the Exchange Act.
The graph set forth below compares cumulative total return on our common stock with the cumulative total return of the (i) S&P Health Care (Sector) and (ii) the Nasdaq Composite Index resulting from an initial investment of $100 in each and, assuming the reinvestment of any dividends, based on closing prices. Measurement points are from October 25,24, 2019 (the date our common stock began trading on Nasdaq) through December 31, 2019. 2020.
| | | | | | | | | | | | | | | | | | |
| | Cumulative Total Returns since Initial Public Offering | ||||||||||||||||
Company/Index | | | 10/24/2019 | | | 12/31/2019 | | | 3/31/2020 | | | 6/30/2020 | | | 9/30/2020 | | | 12/31/2020 |
Progyny, Inc. | | $ | 100.00 | | $ | 211.15 | | $ | 163.00 | | $ | 198.54 | | $ | 226.38 | | $ | 326.08 |
S&P 500 Health Care | | $ | 100.00 | | $ | 111.78 | | $ | 97.17 | | $ | 109.86 | | $ | 115.81 | | $ | 124.56 |
NASDAQ Composite | | $ | 100.00 | | $ | 109.61 | | $ | 94.07 | | $ | 122.88 | | $ | 136.43 | | $ | 157.45 |
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.
52
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 $77.5$77.6 million, after deducting the underwriting discount of $5.9 million and offering expenses of $3.7$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 $77.5$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
54
ITEM 6.SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended December 31, 2020, 2019 and 2018 and 2017 and the selected consolidated balance sheet data as of December 31, 2019, 20182020 and 20172019 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. Our historical results are not necessarily indicative of the results to be expected for any other period in the future.
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
|
|
|
|
|
|
|
|
| |
|
| (in thousands, except share and per share data) | |||||||
Consolidated Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 229,683 |
| $ | 105,400 |
| $ | 48,584 |
Cost of services(1) |
|
| 184,178 |
|
| 85,966 |
|
| 41,184 |
Gross profit |
|
| 45,505 |
|
| 19,434 |
|
| 7,400 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
Sales and marketing(1) |
|
| 11,901 |
|
| 7,285 |
|
| 4,258 |
General and administrative(1) |
|
| 23,927 |
|
| 15,601 |
|
| 14,147 |
Total operating expenses |
|
| 35,828 |
|
| 22,886 |
|
| 18,405 |
(Loss) income from operations |
|
| 9,677 |
|
| (3,452) |
|
| (11,005) |
Other expense: |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (58) |
|
| (497) |
|
| (740) |
Convertible preferred stock warrant valuation adjustment |
|
| (18,176) |
|
| (2,944) |
|
| (714) |
Total other expense, net |
|
| (18,234) |
|
| (3,441) |
|
| (1,454) |
(Loss) income from continuing operations, before tax |
|
| (8,557) |
|
| (6,893) |
|
| (12,459) |
Benefit (provision) for income taxes |
|
| (12) |
|
| 1,777 |
|
| 3 |
Net (loss) income from continuing operations |
| $ | (8,569) |
| $ | (5,116) |
| $ | (12,456) |
Net income from discontinued operations, net of taxes(2) |
| $ | — |
| $ | 5,777 |
| $ | 4 |
Net (loss) income and comprehensive (loss) income |
| $ | (8,569) |
| $ | 661 |
| $ | (12,452) |
Net (loss) income attributable to common stockholders |
| $ | (8,569) |
| $ | (5,541) |
| $ | (13,468) |
Net (loss) income per share attributable to common stockholders, basic and diluted |
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | (0.41) |
| $ | (1.00) |
| $ | (2.37) |
Discontinued operations(2) |
|
| — |
|
| 1.04 |
|
| — |
Total net (loss) income per share attributable to common stockholders, basic and diluted |
| $ | (0.41) |
| $ | 0.04 |
| $ | (2.37) |
| | | | | | | | | | | | |
| | Year Ended December 31, | ||||||||||
|
| 2020(1) |
| 2019 |
| 2018 |
| 2017 | ||||
| | (in thousands, except share and per share data) | ||||||||||
Consolidated Statements of Operations Data: |
| |
|
| |
|
| |
|
| |
|
Revenue | | $ | 344,858 | | $ | 229,683 | | $ | 105,400 | | $ | 48,584 |
Cost of services(2) | |
| 274,799 | |
| 184,178 | |
| 85,966 | |
| 41,184 |
Gross profit | |
| 70,059 | |
| 45,505 | |
| 19,434 | |
| 7,400 |
Operating expenses: | |
|
| |
|
| |
|
| |
|
|
Sales and marketing(2) | |
| 15,006 | |
| 11,901 | |
| 7,285 | |
| 4,258 |
General and administrative(2) | |
| 46,705 | |
| 23,927 | |
| 15,601 | |
| 14,147 |
Total operating expenses | |
| 61,711 | |
| 35,828 | |
| 22,886 | |
| 18,405 |
Income (loss) from operations | |
| 8,348 | |
| 9,677 | |
| (3,452) | |
| (11,005) |
Other income (expense): | |
|
| |
|
| |
|
| |
|
|
Other income | | | 210 | | | — | | | — | | | — |
Interest income (expense), net | |
| 121 | |
| (58) | |
| (497) | |
| (740) |
Convertible preferred stock warrant valuation adjustment | |
| — | |
| (18,176) | |
| (2,944) | |
| (714) |
Total other income (expense), net | |
| 331 | |
| (18,234) | |
| (3,441) | |
| (1,454) |
Income (loss), before income taxes | |
| 8,679 | |
| (8,557) | |
| (6,893) | |
| (12,459) |
Benefit (provision) for income taxes | |
| 37,780 | |
| (12) | |
| 1,777 | |
| 3 |
Net income (loss) from continuing operations | | $ | 46,459 | | $ | (8,569) | | $ | (5,116) | | $ | (12,456) |
Net income from discontinued operations, net of taxes(3) | | $ | — | | $ | — | | $ | 5,777 | | $ | 4 |
Net income (loss) | | $ | 46,459 | | $ | (8,569) | | $ | 661 | | $ | (12,452) |
Net income (loss) attributable to common stockholders | | $ | 46,459 | | $ | (8,569) | | $ | (5,541) | | $ | (13,468) |
Net income (loss) per share attributable to common stockholders: | |
|
| |
|
| |
|
| |
|
|
Basic: | | | | | | | | | | | | |
Continuing operations | | $ | 0.54 | | $ | (0.41) | | $ | (1.00) | | $ | (2.37) |
Discontinued operations(3) | |
| — | |
| — | |
| 1.04 | |
| — |
Total net income (loss) per share attributable to common stockholders basic | | $ | 0.54 | | $ | (0.41) | | $ | 0.04 | | $ | (2.37) |
Diluted: | | | | | | | | | | | | |
Continuing operations | | $ | 0.47 | | $ | (0.41) | | $ | (1.00) | | $ | (2.37) |
Discontinued operations(3) | |
| — | |
| — | |
| 1.04 | |
| — |
Total net income (loss) per share attributable to common stockholders diluted | | $ | 0.47 | | $ | (0.41) | | $ | 0.04 | | $ | (2.37) |
Weighted‑average shares used in computing net income (loss) per share: | |
|
| |
|
| |
|
| |
|
|
Basic(4) | |
| 85,722,670 | |
| 20,735,202 | |
| 5,539,739 | |
| 5,677,860 |
Diluted(4) | |
| 99,055,526 | |
| 20,735,202 | |
| 5,539,739 | |
| 5,677,860 |
5355
Weighted‑average shares used in computing net (loss) income per share: |
|
|
|
|
|
|
|
|
|
Basic(3) |
|
| 20,735,202 |
|
| 5,539,739 |
|
| 5,677,860 |
Diluted(3) |
|
| 20,735,202 |
|
| 5,539,739 |
|
| 5,677,860 |
(1) |
|
| (2) | Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Year Ended December 31, | |||||||||||||||||||
|
| 2019 |
| 2018 |
| 2017 | |||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | |||||||||
| | Year Ended December 31, | |||||||||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2017 | |||||||||||||
| | | | | | | | | | | | ||||||||||
Cost of services |
| $ | 537 |
| $ | 96 |
| $ | 26 | | $ | 3,056 | | $ | 537 | | $ | 96 | | $ | 26 |
Selling and marketing |
|
| 900 |
|
| 366 |
|
| 309 | |
| 2,066 | |
| 900 | |
| 366 | |
| 309 |
General and administrative |
|
| 3,624 |
|
| 2,535 |
|
| 1,224 | |
| 7,699 | |
| 3,624 | |
| 2,535 | |
| 1,224 |
Total stock‑based compensation expense |
| $ | 5,061 |
| $ | 2,997 |
| $ | 1,559 | | $ | 12,821 | | $ | 5,061 | | $ | 2,997 | | $ | 1,559 |
| (3) |
| See Note |
| (4) |
| See Note |
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| December 31, | |||||||||||||||||||
|
| 2019 |
| 2018 |
| 2017 | |||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | |||||||||
| | December 31, | |||||||||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2017 | |||||||||||||
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
| | |
| | |
| | |
| |
Cash and cash equivalents |
| $ | 80,382 |
| $ | 127 |
| $ | 4,691 | | $ | 70,305 | | $ | 80,382 | | $ | 127 | | $ | 4,691 |
Marketable securities | | | 38,994 | | | — | | | — | | | — | |||||||||
Total assets |
|
| 150,434 |
|
| 41,324 |
|
| 34,961 | |
| 253,927 | |
| 150,434 | |
| 41,324 | |
| 34,961 |
Working capital(1) |
|
| 96,281 |
|
| (5,665) |
|
| (1,000) | |
| 112,436 | |
| 96,281 | |
| (5,665) | |
| (1,000) |
Convertible preferred stock warrant liability |
|
| — |
|
| 4,589 |
|
| 1,645 | |
| — | |
| — | |
| 4,589 | |
| 1,645 |
Total stockholders’ equity (deficit) |
|
| 114,271 |
|
| (95,115) |
|
| (97,622) | |
| 166,947 | |
| 114,271 | |
| (95,115) | |
| (97,622) |
| (1) |
| Working capital is defined as current assets less current liabilities. |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
54
ITEM 7.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.10-K. A discussion of the year ended December 31, 20182019 compared to the year ended December 31, 20172018 has been reported previously in our final prospectusAnnual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on October 25, 2019 pursuant to Rule 424(b)(4)March 10, 2020 (File No. 333-233965), or the Prospectus,001-39100) under the heading “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations – Comparison of Years Ended December 31, 2019 and 2018.”
Overview
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.
56
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 130.180. 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 2.12.7 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 allOur members experience healthier pregnancies and superior rates of our clients since inception,pregnancy and our member satisfaction over that samelive births, as well as reduced rates of miscarriages and multiple births, saving valuable 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.money and limiting personal and professional disruption.
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.
Progyny Rx. 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
55
of the medications by our network of specialty pharmacies, as well as medication administration training, pharmacy support services and continuing PCA support.
Our Clients. We currently serve over 130 self-insured180 employers in the United States across more than 2530 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 250,000350,000 employees, represent approximately 2.12.7 million covered lives.lives under contract.
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. |
57
| 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 2% and 1% of our total revenue for the years ended December 31, 2020 and 2019, |
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 1st 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 primarily 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 2.12.7 million lives under contract represents only 3%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 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. As of
56
December 31, 2020 and 2019, we served 135 and 2018 we serve 87 and 33 clients, respectively, representing 1,517,0002,335,000 and 720,2001,517,000 members, respectively.
Importantly, as we have continued to grow, we have meaningfully diversified our client base across more than 2530 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, | ||||||||||||||
|
| 2019 |
| 2018 | ||||||||||||
| | | | | | | | | ||||||||
| | As of December 31, | ||||||||||||||
| | 2020 | | 2019 | ||||||||||||
Client Tier (Members) |
| Clients |
| Members |
| Clients |
| Members |
| Clients |
| Members |
| Clients |
| Members |
Up to 2,500 |
| 17 |
| 29,000 |
| 7 |
| 10,800 |
| 23 | | 38,000 |
| 17 | | 29,000 |
2,501 - 10,000 |
| 47 |
| 245,000 |
| 15 |
| 98,300 |
| 74 |
| 393,000 |
| 47 | | 245,000 |
10,001 - 50,000 |
| 17 |
| 377,000 |
| 7 |
| 180,700 |
| 30 |
| 645,000 |
| 17 | | 377,000 |
Greater than 50,000 |
| 6 |
| 866,000 |
| 4 |
| 430,400 |
| 8 |
| 1,259,000 |
| 6 | | 866,000 |
Total |
| 87 |
| 1,517,000 |
| 33 |
| 720,200 |
| 135 |
| 2,335,000 |
| 87 | | 1,517,000 |
58
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 1.52.3 million members atas of December 31, 2019.2020.
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, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
| | | | | | | | | ||||
| | Three Months Ended | | Year Ended | ||||||||
| | December 31, | | December 31, | ||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Assisted Reproductive Treatment (ART) Cycles(1) |
| 13,550 |
| 7,099 | | 5,719 | | 3,782 | | 19,003 | | 13,550 |
Utilization - All Members(2) |
| 1.30% |
| 1.25% | | 0.50% | | 0.50% | | 1.16% | | 1.30% |
Utilization - Female Only(2) |
| 1.09% |
| 1.02% | | 0.45% | | 0.44% | | 0.97% | | 1.09% |
Average Members | | 2,305,000 | | 1,514,000 | | 2,191,000 | | 1,309,000 | ||||
| (1) |
| 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. |
| (2) |
| 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. |
Impact of COVID-19 on our Business
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. 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.
5759
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; the imposition of protective public safety measures; and the economic impact on local, regional and national markets. To the extent that the markets we serve experience increased cases of COVID-19, state or local governments may reinstitute measures to control its spread, which could again negatively impact our members’ access to care. We will continue to evaluate the nature and extent of these potential impacts to our business, results of operations and liquidity.
For additional information on the various risks posed by the COVID-19 pandemic, please read Part I, Item 1A. Risk Factors included in this Annual Report on Form 10-K.
Components of Results of Operations
Revenue
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 areis 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 inon 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.
60
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 and Claims Processing teams; and (3) and related information technology support costs. Our contracts with provider clinics are typically for a term of one to two years.
58
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; (2) costs incurred (including salaries, bonuses, benefits, stock-based compensation, other related costs, and an allocation of our general overhead, depreciation and amortization) for those employees associated with our care management service functions: PCA, and Provider Relations and Claims Processing 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 expensecompany and stock warrant valuation adjustment.
to support growth in the business.
5961
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 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, 2019, and 2018,2020, in part because in the current year we recorded a full valuation allowance forachieved 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 based onof $38.0 million are realizable and have therefore released substantially all of 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:
| | | | | | | ||||||
|
| Year Ended | ||||||||||
| | December 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
|
|
|
|
|
|
| ||||||
|
| Year Ended | ||||||||||
|
| December 31, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (in thousands) | ||||||||||
| | (in thousands) | ||||||||||
Consolidated Statements of Operations Data: |
|
|
|
|
|
| | | | | | |
Revenue |
| $ | 229,683 |
| $ | 105,400 | | $ | 344,858 | | $ | 229,683 |
Cost of services(1) |
|
| 184,178 |
|
| 85,966 | |
| 274,799 | |
| 184,178 |
Gross profit |
|
| 45,505 |
|
| 19,434 | |
| 70,059 | |
| 45,505 |
Operating expenses: |
|
|
|
|
|
| |
|
| |
|
|
Sales and marketing(1) |
|
| 11,901 |
|
| 7,285 | |
| 15,006 | |
| 11,901 |
General and administrative(1) |
|
| 23,927 |
|
| 15,601 | |
| 46,705 | |
| 23,927 |
Total operating expenses |
|
| 35,828 |
|
| 22,886 | |
| 61,711 | |
| 35,828 |
Income (loss) from operations |
|
| 9,677 |
|
| (3,452) | ||||||
Other expense, net |
|
| (18,234) |
|
| (3,441) | ||||||
(Loss) Income before income taxes |
|
| (8,557) |
|
| (6,893) | ||||||
Income from operations | |
| 8,348 | |
| 9,677 | ||||||
Other income (expense), net | |
| 331 | |
| (18,234) | ||||||
Income (loss) before income taxes | |
| 8,679 | |
| (8,557) | ||||||
Benefit (provision) for income taxes |
|
| (12) |
|
| 1,777 | |
| 37,780 | |
| (12) |
Net (loss) income from continuing operations |
| $ | (8,569) |
| $ | (5,116) | ||||||
Net income (loss) | | $ | 46,459 | | $ | (8,569) | ||||||
Adjusted EBITDA |
| $ | 18,342 |
| $ | 1,428 | | $ | 32,393 | | $ | 18,342 |
| (1) |
| Includes |
|
|
|
|
|
|
| ||||||
|
| Year Ended | ||||||||||
|
| December 31, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
| | | | | | | ||||||
|
| Year Ended | ||||||||||
| | December 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
Cost of services |
| $ | 537 |
| $ | 96 | | $ | 3,056 | | $ | 537 |
Sales and marketing |
|
| 900 |
|
| 366 |
| | 2,066 |
| | 900 |
General and administrative |
|
| 3,624 |
|
| 2,535 |
| | 7,699 |
| | 3,624 |
Total stock‑based compensation expense |
| $ | 5,061 |
| $ | 2,997 | | $ | 12,821 | | $ | 5,061 |
6062
|
|
|
|
|
| |||||
|
| Year Ended |
| |||||||
|
| December 31, |
| |||||||
|
| 2019 |
| 2018 |
| |||||
| | | | | | |||||
| | Year Ended |
| |||||||
| | December 31, |
| |||||||
| | 2020 | | 2019 | | |||||
Consolidated Statements of Operations Data, as a percentage of revenue: |
|
|
|
|
|
|
|
|
| |
Revenue |
| 100 | % | 100 | % | | 100 | % | 100 | % |
Cost of services |
| 80 |
| 82 |
|
| 80 |
| 80 | |
Gross profit |
| 20 |
| 18 |
|
| 20 |
| 20 | |
Operating expenses: |
|
|
|
|
|
|
|
|
| |
Sales and marketing |
| 5 |
| 7 |
|
| 4 |
| 5 | |
General and administrative |
| 11 |
| 15 |
|
| 14 |
| 11 | |
Total operating expenses |
| 16 |
| 22 |
|
| 18 |
| 16 | |
Income (loss) from operations |
| 4 |
| (4) |
| |||||
Other expense, net |
| (8) |
| (3) |
| |||||
Income from operations |
| 2 |
| 4 | | |||||
Other income (expense), net |
| 0 |
| (8) | | |||||
Income (loss) before income taxes |
| (4) |
| (7) |
|
| 2 |
| (4) | |
Benefit (provision) for income taxes |
| — |
| 2 |
|
| 11 |
| — | |
Net (loss) income from continuing operations |
| (4) | % | (5) | % | |||||
Net income (loss) | | 13 | % | (4) | % | |||||
Adjusted EBITDA |
| 8 | % | 1 | % | | 9 | % | 8 | % |
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. GAAP. 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. GAAP. 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 income and expenses, including other income and interest (income) 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 settlement cost and legal fees that may be payable in connectionassociated with a vendor arbitration; and (8) it does not include non-deferred costs associated with the IPO.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. 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,income (loss), adjusted to exclude depreciation and amortization, stock-based compensation expense, netother income, interest (income) expense, net, convertible preferred stock warrant valuation adjustment, (benefit) provision (benefit) for income taxes, settlement cost and 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 operationsincome for each of the periods indicated:
6163
| | | | | | |
| | Year ended | ||||
| | December 31, | ||||
|
| 2020 |
| 2019 | ||
| | | | | | |
Net income (loss) from continuing operations | | $ | 46,459 | | $ | (8,569) |
Add: | |
| | |
|
|
Depreciation and amortization | |
| 1,906 | |
| 2,135 |
Stock‑based compensation expense | |
| 12,821 | |
| 5,061 |
Other income | | | (210) | | | — |
Interest (income) expense, net | |
| (121) | |
| 58 |
Convertible preferred stock warrant valuation adjustment | |
| — | |
| 18,176 |
(Benefit) provision for income taxes | |
| (37,780) | |
| 12 |
Settlement cost and legal fees associated with a vendor arbitration | |
| 9,318 | |
| 1,319 |
Non-deferred IPO Costs | |
| — | |
| 150 |
Adjusted EBITDA | | $ | 32,393 | | $ | 18,342 |
|
|
|
|
|
|
|
|
|
| Year ended |
| ||||
|
|
| December 31, |
| |||
|
| 2019 |
| 2018 |
| ||
|
|
| |||||
Net (loss) income from continuing operations |
| $ | (8,569) |
| $ | (5,116) |
|
Add: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,135 |
|
| 1,883 |
|
Stock‑based compensation expense |
|
| 5,061 |
|
| 2,997 |
|
Interest expense, net |
|
| 58 |
|
| 497 |
|
Convertible preferred stock warrant valuation adjustment |
|
| 18,176 |
|
| 2,944 |
|
Provision (benefit) for income taxes |
|
| 12 |
|
| (1,777) |
|
Legal fees associated with a vendor arbitration |
|
| 1,319 |
|
| — |
|
Non-deferred IPO Costs |
|
| 150 |
|
| — |
|
Adjusted EBITDA |
| $ | 18,342 |
| $ | 1,428 |
|
Comparison of Years Ended December 31, 20192020 and 2018 2019
Revenue
|
|
|
|
|
|
|
|
|
|
| Year Ended |
|
| ||||
|
| December 31, |
|
| ||||
|
| 2019 |
| 2018 |
| % Change | ||
|
| (dollars in thousands) |
|
| ||||
Revenue |
| $ | 229,683 |
| $ | 105,400 |
| 118% |
| | | | | | | | |
| | Year Ended | | | ||||
| | December 31, | | | ||||
|
| 2020 |
| 2019 |
| % Change | ||
| | (dollars in thousands) | | | ||||
Revenue |
| $ | 344,858 | | $ | 229,683 |
| 50% |
Revenue increased by $124.3$115.2 million, or 118%50%, for the year ended December 31, 20192020 compared to the year ended December 31, 2018.2019. This increase is primarily due to a $89.8$63.9 million, or 90%34% increase, in revenue from our fertility benefits solution and a $34.4$51.2 million or 614%128% 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. TheProgyny Rx revenue growth outpacesoutpaced the fertility benefits revenue due to the fact thatas Progyny Rx was introduced in the marketplace in the third quarter of 2017 and went live with only a select number of clients inon January 1, 2018. Our revenue growth in 2019 benefited from having Progyny Rx available for the full selling season in 2018 and has continued to add both new and existing clients.fertility benefit solution clients since its initial launch. Our revenue growth for the year ended December 31, 2020 was negatively impacted by COVID-19.
Cost of Services
|
|
|
|
|
|
|
|
|
|
| Year Ended |
|
| ||||
|
| December 31, |
|
| ||||
|
| 2019 |
| 2018 |
| % Change | ||
|
| (dollars in thousands) |
|
| ||||
Cost of services |
| $ | 184,178 |
| $ | 85,966 |
| 114% |
| | | | | | | | |
| | Year Ended | | | ||||
| | December 31, | | | ||||
|
| 2020 |
| 2019 |
| % Change | ||
| | (dollars in thousands) | | | ||||
Cost of services |
| $ | 274,799 | | $ | 184,178 |
| 49% |
Cost of services increased by $98.2$90.6 million, or 114%49%, for the year ended December 31, 20192020 compared to the year ended December 31, 2018. This increase is2019 primarily due to a $93.0 millionan increase in medical treatment and pharmacy prescription costs associated with the fertility treatments delivered and a $5.2 million increaseas well as increases in personnel and overheadpersonnel-related costs, for our care management services teams and an increase in costs of adjudicating claims.
62
including stock-based compensation.
Gross Profit and Gross Margin
| | | | | | | | | ||||||||
|
| Year Ended |
| | ||||||||||||
| | December 31, |
| | ||||||||||||
| | 2020 |
| 2019 | | % Change | ||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Year Ended |
|
| ||||||||||||
|
| December 31, |
|
| ||||||||||||
|
| 2019 |
| 2018 |
| % Change | ||||||||||
|
|
| (dollars in thousands) |
|
| |||||||||||
| | | (dollars in thousands) | | | |||||||||||
Gross profit |
| $ | 45,505 |
| $ | 19,434 |
| 134% |
| $ | 70,059 | | $ | 45,505 |
| 54% |
Gross margin |
|
| 19.8% |
|
| 18.4% |
|
|
| | 20.3% | | | 19.8% |
|
|
64
Gross profit increased by $26.1$24.6 million, or 134%54%, for the year ended December 31, 20192020 compared to the year ended December 31, 2018.2019.
Gross margin increased 14050 basis points for the year ended December 31, 20192020 compared to year ended December 31, 20182019, primarily due to increased operating efficiencies.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.
Operating Expenses
Sales and Marketing Expense
|
|
|
|
|
|
|
|
|
|
| Year Ended |
|
| ||||
|
| December 31, |
|
| ||||
|
| 2019 |
| 2018 |
| % Change | ||
|
| (dollars in thousands) |
|
| ||||
Sales and marketing |
| $ | 11,901 |
| $ | 7,285 |
| 63% |
| | | | | | | | |
|
| Year Ended |
| | ||||
| | December 31, | | | ||||
|
| 2020 |
| 2019 |
| % Change | ||
| | (dollars in thousands) | | | ||||
Sales and marketing |
| $ | 15,006 | | $ | 11,901 |
| 26% |
Sales and marketing expense increased by $4.6$3.1 million, or 63%26%, for the year ended December 31, 20192020 compared to the year ended December 31, 2018.2019. This increase was primarily due to a $3.6$3.2 million increase in personnel relatedpersonnel-related costs (including a $0.4$1.2 million increase in stock basedstock-based compensation) duerelating to additional headcount and commissions for sales and marketing functions.functions, which was partially offset by lower travel and other overhead costs due to COVID-19.
General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
| Year Ended |
|
| ||||
|
| December 31, |
|
| ||||
|
| 2019 |
| 2018 |
| % Change | ||
|
| (dollars in thousands) |
|
| ||||
General and administrative |
| $ | 23,927 |
| $ | 15,601 |
| 53% |
| | | | | | | | |
|
| Year Ended |
| | ||||
| | December 31, | | | ||||
| | 2020 |
| 2019 |
| % Change | ||
| | (dollars in thousands) | | | ||||
General and administrative |
| $ | 46,705 | | $ | 23,927 |
| 95% |
General and administrative expense increased by $8.3$22.8 million, or 53%95%, for the year ended December 31, 20192020 compared to the year ended December 31, 2018.2019. This increase was primarily due to a $3.6$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 $1.1$4.1 million increase in stock basedstock-based compensation) due toas a result of additional headcount for general and administrative functions, $1.5 million increase in legal costs (including $1.3million increase in legal costs associated with a vendor arbitration), $0.8$4.0 million increase in bad debt expense, a $3.5 million increase in insurance costs, and $2.4a $0.9 million increase in other related general and administrative expenses including incremental costs related to being a public company. expenses.
Other Expense,Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
| Year Ended |
|
| ||||
|
| December 31, |
|
| ||||
|
| 2019 |
| 2018 |
| % Change | ||
|
| (dollars in thousands) |
|
| ||||
Other expense, net |
| $ | 18,234 |
| $ | 3,441 |
| 430% |
| | | | | | | | |
|
| Year Ended |
| | ||||
| | December 31, | | | ||||
| | 2020 |
| 2019 |
| % Change | ||
| | (dollars in thousands) | | | ||||
Other income (expense), net |
| $ | 331 | | $ | (18,234) |
| NM |
Other expense,income (expense), net increasedimproved by $14.8$18.6 million or 430%, for 2019the year ended December 31, 2020 compared to 2018. This increase wasthe 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 warrantwarrants and an increase of $15.2 million, offset by a
63
$0.4$0.4 million in lowerinvestment and interest expense.income for the year ended December 31, 2020. The preferred stock warrants were converted to common stock warrants in connection withas of the IPO and willtherefore were no longer be markedsubject to market.a mark to market adjustment.
65
Benefit (Provision) for Income Taxes
|
|
|
|
|
|
|
|
|
|
| Year Ended |
|
| ||||
|
| December 31, |
|
| ||||
|
| 2019 |
| 2018 |
| % Change | ||
|
|
| (dollars in thousands) |
|
| |||
Benefit (provision) for income taxes |
| $ | (12) |
| $ | 1,777 |
| -101% |
| | | | | | | | |
|
| Year Ended |
| | ||||
| | December 31, | | | ||||
| | 2020 |
| 2019 |
| % Change | ||
| | | (dollars in thousands) | | | |||
Benefit (provision) for income taxes |
| $ | 37,780 | | $ | (12) |
| NM |
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 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. $12,000.
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. 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 our common stock at a public offering price of $13.00 per share. We received net proceeds of $77.5approximately $77.6 million from the IPO, after deducting underwriters’ discounts and commissions of $5.9 million and offering costs of $3.7$3.6 million.
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. 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. 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. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations. For additional information on the various risks posed by the COVID-19 pandemic, please read Part I, Item 1A. Risk Factors included in this Annual Report on Form 10-K.
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.
66
In June 2018, we entered into an agreement with Silicon Valley Bank to replace our then outstandingthen-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.
64
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.
The following table summarizes our cash flows from continuing operations for the periods presented:
| | | | | | | ||||||
| | Year Ended | ||||||||||
| | December 31, | ||||||||||
| | 2020 |
| 2019 | ||||||||
|
|
|
|
|
|
| ||||||
|
| Year Ended | ||||||||||
|
| December 31, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
|
| (in thousands) | |||||||||
| | (in thousands) | ||||||||||
Cash (used in) provided by operating activities |
| $ | (1,534) |
| $ | 2,272 | | $ | 36,203 |
| $ | (1,534) |
Cash (used in) investing activities |
|
| (2,956) |
|
| (579) | |
| (40,031) |
|
| (2,956) |
Cash provided by (used in) financing activities |
|
| 84,545 |
|
| (8,738) | |
| (6,249) |
|
| 84,545 |
Net increase (decrease) in cash and cash equivalents from continuing operations |
| $ | 80,055 |
| $ | (7,045) | | $ | (10,077) |
| $ | 80,055 |
Operating Activities
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. Changes in operating assets and liabilities resulted in cash used in operating activities from an increase in accounts receivable of $35.3 million and prepaid expenses and other current assets of $0.3 million, more than offset by cash provided by operating activities from increases in accounts payable of $25.0 million, accrued expenses and other current liabilities of $17.4 million, and other noncurrent assets and liabilities of $0.6 million. These changes are a result of the impact of revenue growth and our operating results as well as the timing of payments to third party providers and collections from customers. 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.
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$40.0 million and $0.6$3.0 million for the years ended December 31, 2020 and 2019, and 2018, respectively, consistingrespectively. 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. Leasehold improvements, of $2.0 million during 2019 wereincluding leasehold improvements associated with the buildout of our new corporate office which was occupied in February 2020.
67
Financing Activities
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, 2019)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.
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.
65
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2019:2020:
| | | | | | | | | | | | | | | | |||||||||||||||
| | Payments Due By Period | ||||||||||||||||||||||||||||
| | | | | Less than | | | | | | | | More than | |||||||||||||||||
|
| Total |
| 1 Year |
| 1 - 3 Years |
| 3 - 5 Years |
| 5 Years | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| Payments Due By Period | ||||||||||||||||||||||||||||
|
|
|
|
| Less than |
|
|
|
|
|
|
| More than | |||||||||||||||||
|
| Total |
| 1 Year |
| 1 - 3 Years |
| 3 - 5 Years |
| 5 Years | ||||||||||||||||||||
|
| (in thousands) | ||||||||||||||||||||||||||||
| | (in thousands) | ||||||||||||||||||||||||||||
Operating lease commitments |
| $ | 12,282 |
| $ | 885 |
| $ | 2,572 |
| $ | 2,612 |
| $ | 6,213 | | $ | 11,398 | | $ | 1,286 | | $ | 2,572 | | $ | 2,733 | | $ | 4,807 |
Total |
| $ | 12,282 |
| $ | 885 |
| $ | 2,572 |
| $ | 2,612 |
| $ | 6,213 | | $ | 11,398 | | $ | 1,286 | | $ | 2,572 | | $ | 2,733 | | $ | 4,807 |
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 intocommenced 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‑BalanceOff-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. GAAP. 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.
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.
For additional information about our criticalsignificant 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.
68
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 |
66
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.
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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.
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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
AccruedWe estimate accrued receivables for those fertility benefits claims are estimated based on historical experience for each period based on thethose fertility benefitsbenefit services provided but for which a claim has not been received from the provider clinic. clinic, which includes assumptions regarding the lag between the authorization date and service date. 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 (included within accrued expense and other current liabilities) are estimated based on the amount to be paid to the provider clinicsclinic and historical gross margin achieved. Estimatesachieved on fertility benefit services. We include accrued claims payable
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within accrued expenses and other current liabilities on our consolidated balance sheet. Claims payable are generally paid within 30 days based on contractual terms. Our estimates are adjusted to actual at the time of billing. Adjustments to original estimatesbilling and these adjustments have beenhistorically 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 forfeituresForfeitures and cancellations of awards are recognized as they occur.
Prior to January 1, 2018, forfeitures were
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estimated atour IPO on October 29, 2019, 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 hashad historically been determined by our Board of Directors as there was no public market for the common stock. The Board of Directors determinesdetermined 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:
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| 2018 | ||||
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| | Year Ended | ||||||
| | December 31, | ||||||
| | 2020 |
| 2019 | ||||
Expected volatility |
| 48.6% - 49.0% |
| 48.1% - 48.9% |
| 49.2% - 54.7% |
| 48.6% - 49.0% |
Expected term (years) |
| 5.63 - 6.28 |
| 5.38 - 6.10 |
| 5.50 - 6.11 |
| 5.63 - 6.28 |
Risk‑free interest rate |
| 1.5% - 2.5% |
| 2.6% - 3.1% |
| 0.3% - 1.7% |
| 1.5% - 2.5% |
Expected dividend yield |
| — |
| — |
| — |
| — |
Common Stock ValuationsIncome Taxes
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, andaccount for income taxes in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”). Deferred income taxes are recorded for the American Instituteexpected tax consequences of Certified Public Accountants Practice Aid, Valuationtemporary differences between the tax basis of Privately-Heldassets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. 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. Income tax expense consists of taxes currently payable and changes in deferred tax assets and liabilities calculated according to local tax rules.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. 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 Equity Securities Issued as Compensation,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 Boardrealizable deferred tax assets.
The amount of Directors exercised reasonable judgmentdeferred 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 considered numerous objective and subjective factorsmeasurement of uncertain tax positions taken or expected to be taken in our tax return. The first step is to determine if the best estimateweight of available evidence indicates that it is more likely than not that the fair valuetax position will be sustained in an audit, including resolution of our common stock at each grant date. These factors include:
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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 ofany
6971
comparable publicly traded companiesrelated 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 our industry or similar business operations asthe consolidated statements 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.operations.
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 arePrior 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 have elected to use the extended transition period under the JOBS Act until the earlier of the date we (1) arewere no longer an emerging growth company or (2) affirmatively and irrevocably optopted 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, our financial statements may not be comparablethe Company no longer is able to companies that complyuse the extended transition period for complying with new or revised accounting pronouncementsstandards available to emerging growth companies and is required to adopt new or revised accounting standards as of the effective dates for public companycompanies. 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 dates.date of January 1, 2020.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates.
Interest Rate Risk
At December 31, 2019,2020, we had cash and cash equivalents of $80.4$70.3 million and marketable securities of $39.0 million. Interest-earning instruments carry a degree of interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. A hypothetical 10% change in interest rates would not result in a material impact on our consolidated financial statements.
Inflation Rate Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.
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ITEM 8.FINANCIAL8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Toto Consolidated Financial Statements
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74 | |
Financial Statements: | |
77 | |
78 | |
79 | |
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) | 80 |
81 | |
82 |
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Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors of Progyny, Inc. and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Progyny, Inc. (the Company) as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations, and comprehensive income (loss), changes in convertible preferred stock and stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission “(2013 framework)” and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases and associated amendments (Topic 842) using the modified retrospective method.
Adoption of ASU No. 2016-13
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for credit losses in 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) using the modified retrospective method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| | |
| | Accrued Receivables and Accrued Claims Payable |
Description of the Matter | | As of December 31, 2020, accrued receivables and accrued claims payable were $28.2 million and $22.8 million, respectively. As discussed in Note 2 to the consolidated financial statements, the Company estimates accrued receivables for those fertility benefit services provided but for which a claim has not been received from the provider clinic based on historical claims experience. The estimated cost of the related services and accrued claims payable are determined based upon the historical costs paid to the provider clinic and the historical gross margin achieved for each related fertility benefit service estimated to have been provided. Auditing the Company’s estimates of accrued receivables and the related accrued claims payable was complex and required significant judgment as the estimates were sensitive to changes in the significant assumptions, including management’s assumptions regarding the lag between authorization date and service date, service changes and cancellations. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the Company’s process to estimate accrued receivables and the associated claims payable. For example, we tested controls over management’s review of the methodology, significant assumptions and the underlying data used to determine these estimates. To test the accrued receivables and the related claims payable, our audit procedures included, among others, assessing the methodology, evaluating the significant assumptions described above and testing the completeness and accuracy of the underlying data used in the Company’s analysis. For example, we tested the Company’s assumptions of the lag between the authorization date and service date, service changes and cancellations based on historical claims data, historical gross margin per service and tested the clerical accuracy of management’s analysis. Additionally, we evaluated the historical accuracy of management’s estimate by testing management’s retrospective review analysis that compared the prior period estimated accrued receivables and accrued claims payable to actual billing and claims data. |
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| | Valuation of deferred tax assets |
Description of the Matter | | As of December 31, 2020, the Company had deferred tax assets related to deductible temporary differences and carryforwards of $40.8 million, net of a valuation allowance of $0.2 million. As discussed in Note 14 to the consolidated financial statements, the Company recognizes a valuation allowance to reduce the carrying value of its deferred tax assets to the amount that management believes is more likely than not to be realized. Auditing the Company’s assessment of the realizability of its deferred tax assets involved complex auditor judgment because management’s estimates of future taxable income are highly judgmental and based upon significant assumptions that may be affected by future market conditions and the Company’s performance. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s income tax process, including management’s assessment of the realizability of the deferred tax assets. For example, we tested controls over management’s review of the significant assumptions and the underlying data used to determine the timing and amount of projected future taxable income. Among other audit procedures performed, we evaluated the Company’s assessment of the realizability of deferred tax assets and the resultant valuation allowance including management’s estimates of future taxable income. We compared management’s estimates of future taxable income, with actual results of prior periods, economic trends and other forecasted financial information prepared by the Company. We involved our tax professionals to evaluate the application of tax law in the Company’s assessment. We also tested the Company’s scheduling of the timing and amount of reversal of taxable temporary differences. |
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
New York, NY
March 9, 20201, 2021
7376
Progyny, Inc.
(in thousands, except share and per share amounts)
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| 2018 | ||||||||
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 80,382 |
| $ | 127 | | $ | 70,305 | | $ | 80,382 |
Accounts receivable, net of $6,320 and $3,486 of allowances at December 31, 2019 and December 31, 2018, respectively |
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| 47,059 |
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| 23,325 | ||||||
Marketable securities | | | 38,994 | | | — | ||||||
Accounts receivable, net of $16,199 and $6,320 of allowances at December 31, 2020 and December 31, 2019, respectively | |
| 75,664 | |
| 47,059 | ||||||
Prepaid expenses and other current assets |
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| 5,003 |
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| 885 | |
| 5,259 | |
| 5,003 |
Assets of discontinued operations, current |
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| — |
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| 200 | ||||||
Total current assets |
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| 132,444 |
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| 24,537 | |
| 190,222 | |
| 132,444 |
Property and equipment, net |
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| 3,083 |
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| 776 | |
| 3,400 | |
| 3,083 |
Operating lease right-of-use assets | | | 8,668 | | | — | ||||||
Goodwill |
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| 11,880 |
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| 11,880 | |
| 11,880 | |
| 11,880 |
Intangible assets, net |
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| 2,375 |
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| 3,859 | |
| 1,213 | |
| 2,375 |
Other assets |
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| 652 |
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| 272 | ||||||
Deferred tax assets | | | 37,971 | | | — | ||||||
Other noncurrent assets | |
| 573 | |
| 652 | ||||||
Total assets |
| $ | 150,434 |
| $ | 41,324 | | $ | 253,927 | | $ | 150,434 |
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | |
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Current liabilities: |
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Accounts payable |
| $ | 19,388 |
| $ | 15,578 | | $ | 43,514 | | $ | 19,388 |
Accrued expenses and other current liabilities |
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| 16,775 |
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| 9,782 | |
| 34,272 | |
| 16,775 |
Convertible preferred stock warrant liabilities |
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| — |
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| 4,589 | ||||||
Short term debt |
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| — |
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| 253 | ||||||
Total current liabilities |
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| 36,163 |
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| 30,202 | |
| 77,786 | |
| 36,163 |
Operating lease noncurrent liabilities | | | 8,318 | | | — | ||||||
Other noncurrent liabilities | | | 876 | | | — | ||||||
Total liabilities |
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| 36,163 |
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| 30,202 | |
| 86,980 | |
| 36,163 |
Commitments and Contingencies (Note 11) |
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Convertible preferred stock (Note 12), $0.0001 par value; 100,000,000 and 314,930,070 shares authorized as of December 31, 2019 and December 31, 2018; zero and 65,428,088 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively; aggregate liquidation preference of $0 and $106,369 as of December 31, 2019 and December 31, 2018, respectively |
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| — |
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| 106,237 | ||||||
STOCKHOLDERS' EQUITY (DEFICIT) |
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Common stock, $0.0001 par value; 1,000,000,000 shares authorized at December 31, 2019 and 417,000,000 at December 31, 2018; 84,188,202 and 5,155,407 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively |
|
| 8 |
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| 1 | ||||||
Commitments and Contingencies (Note 15) | |
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STOCKHOLDERS' EQUITY | |
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Common stock, $0.0001 par value; 1,000,000,000 shares authorized at December 31, 2020 and 2019, respectively; 87,054,329 and 84,188,202 shares issued and outstanding at December 31, 2020 and 2019, respectively | |
| 9 | |
| 8 | ||||||
Additional paid-in capital |
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| 228,755 |
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| 10,622 | |
| 236,139 | |
| 228,755 |
Treasury stock, at cost , $0.0001 par value; 615,980 shares outstanding at December 31, 2019 and 589,320 at December 31, 2018 |
|
| (1,009) |
|
| (884) | ||||||
Treasury stock, at cost, $0.0001 par value; 615,980 shares outstanding at December 31, 2020 and 2019, respectively | |
| (1,009) | |
| (1,009) | ||||||
Accumulated deficit |
|
| (113,483) |
|
| (104,854) | |
| (68,193) | |
| (113,483) |
Total stockholders’ equity (deficit) |
|
| 114,271 |
|
| (95,115) | ||||||
Total liabilities, convertible preferred stock, and stockholders’ equity (deficit) |
| $ | 150,434 |
| $ | 41,324 | ||||||
Accumulated Other Comprehensive Income | | | 1 | | | — | ||||||
Total stockholders’ equity | |
| 166,947 | |
| 114,271 | ||||||
Total liabilities and stockholders’ equity | | $ | 253,927 | | $ | 150,434 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Progyny, Inc.
Consolidated Statements of Operations and Comprehensive (Loss) Income
(in thousands, except share and per share amounts)
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| Year Ended December 31, | |||||||
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| 2018 |
| 2017 | |||
Revenue |
| $ | 229,683 |
| $ | 105,400 |
| $ | 48,584 |
Cost of services |
|
| 184,178 |
|
| 85,966 |
|
| 41,184 |
Gross profit |
|
| 45,505 |
|
| 19,434 |
|
| 7,400 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 11,901 |
|
| 7,285 |
|
| 4,258 |
General and administrative |
|
| 23,927 |
|
| 15,601 |
|
| 14,147 |
Total operating expenses |
|
| 35,828 |
|
| 22,886 |
|
| 18,405 |
Income (loss) from continuing operations |
|
| 9,677 |
|
| (3,452) |
|
| (11,005) |
Other expense: |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (58) |
|
| (497) |
|
| (740) |
Convertible preferred stock warrant valuation adjustment |
|
| (18,176) |
|
| (2,944) |
|
| (714) |
Total other expense, net |
|
| (18,234) |
|
| (3,441) |
|
| (1,454) |
Loss from continuing operations, before tax |
|
| (8,557) |
|
| (6,893) |
|
| (12,459) |
Benefit (provision) for income taxes |
|
| (12) |
|
| 1,777 |
|
| 3 |
Net Loss from continuing operations |
| $ | (8,569) |
| $ | (5,116) |
| $ | (12,456) |
Net income from discontinued operations, net of taxes |
| $ | — |
| $ | 5,777 |
| $ | 4 |
Net (loss) income and comprehensive (loss) income |
| $ | (8,569) |
| $ | 661 |
| $ | (12,452) |
Net loss attributable to common stockholders |
| $ | (8,569) |
| $ | (5,541) |
| $ | (13,468) |
Net loss per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | (0.41) |
| $ | (1.00) |
| $ | (2.37) |
Discontinued operations |
|
| — |
|
| 1.04 |
|
| — |
Total net loss per share attributable to common stockholders basic and diluted |
| $ | (0.41) |
| $ | 0.04 |
| $ | (2.37) |
Weighted-average shares used in computing net (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
| 20,735,202 |
|
| 5,539,739 |
|
| 5,677,860 |
| | | | | | | | | |
| | Year Ended | |||||||
| | December 31, | |||||||
|
| 2020 |
| 2019 |
| 2018 | |||
Revenue | | $ | 344,858 | | $ | 229,683 | | $ | 105,400 |
Cost of services |
| | 274,799 |
| | 184,178 | | | 85,966 |
Gross profit |
| | 70,059 |
| | 45,505 | | | 19,434 |
Operating expenses: |
| |
|
| |
| | |
|
Sales and marketing |
| | 15,006 |
| | 11,901 | | | 7,285 |
General and administrative |
| | 46,705 |
| | 23,927 | | | 15,601 |
Total operating expenses |
| | 61,711 |
| | 35,828 | | | 22,886 |
Income (loss) from operations |
| | 8,348 |
| | 9,677 | | | (3,452) |
Other income (expense): |
| |
|
| |
| | |
|
Other income | | | 210 | | | — | | | — |
Interest income (expense), net |
| | 121 |
| | (58) | | | (497) |
Convertible preferred stock warrant valuation adjustment |
| | — |
| | (18,176) | | | (2,944) |
Total other income (expense), net |
| | 331 |
| | (18,234) | | | (3,441) |
Income (loss) before income taxes |
| | 8,679 |
| | (8,557) | | | (6,893) |
Benefit (provision) for income taxes |
| | 37,780 |
| | (12) | | | 1,777 |
Net income (loss) from continuing operations | | $ | 46,459 | | $ | (8,569) | | $ | (5,116) |
Net income from discontinued operations, net of taxes | | $ | — | | $ | — | | $ | 5,777 |
Net income (loss) | | $ | 46,459 | | $ | (8,569) | | $ | 661 |
Net income (loss) attributable to common stockholders | | $ | 46,459 | | $ | (8,569) | | $ | (5,541) |
Net income (loss) per share attributable to common stockholders: |
| |
|
| |
| | |
|
Basic: | | | | | | | | | |
Continuing operations | | $ | 0.54 | | $ | (0.41) | | $ | (1.00) |
Discontinued operations | | | — |
| | — | | | 1.04 |
Total basic net income (loss) per share attributable to common stockholders | | $ | 0.54 | | $ | (0.41) | | $ | 0.04 |
Diluted: |
| | | | | | | | |
Continuing operations | | $ | 0.47 | | $ | (0.41) | | $ | (1.00) |
Discontinued operations | | | — | | | — | | | 1.04 |
Total diluted net income (loss) per share attributable to common stockholders | | $ | 0.47 | | $ | (0.41) | | $ | 0.04 |
Weighted-average shares used in computing net income (loss) per share: |
| |
|
| |
| | |
|
Basic |
| | 85,722,670 |
| | 20,735,202 | | | 5,539,739 |
Diluted |
| | 99,055,526 |
| | 20,735,202 | | | 5,539,739 |
The accompanying notes are an integral part of these consolidated financial statements.
7578
Progyny, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| | | | | | | | | |
| | Year Ended December 31, | |||||||
|
| 2020 |
| 2019 | | 2018 | |||
Net income (loss) | | $ | 46,459 | | $ | (8,569) | | $ | 661 |
Other comprehensive income: |
| | | | | | | | |
Unrealized gains on marketable securities | | | 1 | | | — | | | — |
Total other comprehensive income | | | 1 | | | — | | | — |
Total comprehensive income (loss) | | $ | 46,460 | | $ | (8,569) | | $ | 661 |
The accompanying notes are an integral part of these consolidated financial statements.
79
Progyny, Inc.
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)(Deficit)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
| Convertible |
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| ||||||||||||||||||||||||||||||
|
| Preferred Stock |
|
| Common Stock |
| Treasury |
| Paid in |
| Accumulated |
|
|
| |||||||||||||||||||||||||||||||||||
|
| Shares |
| Amount |
|
| Shares |
| Amount |
| Stock |
| Capital |
| Deficit |
| Total | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | Convertible | | | | | | | | | | | Additional | | | | | Other | | | | ||||||||||||||||||||||||||||
| | Preferred Stock | | | Common Stock | | Treasury | | Paid in | | Accumulated | | | Comprehensive | | | | ||||||||||||||||||||||||||||||||
|
| Shares |
| Amount |
|
| Shares |
| Amount |
| Stock |
| Capital |
| Deficit |
| Income |
| Total | ||||||||||||||||||||||||||||||
Balance at December 31, 2017 |
| 66,630,284 |
|
| 108,312 |
|
| 5,690,083 |
|
| 1 |
|
| — |
|
| 6,933 |
|
| (104,556) |
|
| (97,622) | | 66,630,284 | | $ | 108,312 | | | 5,690,083 | | $ | 1 | | $ | — | | $ | 6,933 | | $ | (104,556) | | $ | — | | $ | (97,622) |
Repurchase of convertible preferred stock |
| (1,202,196) |
|
| (2,075) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (425) |
|
| (425) | | (1,202,196) | | | (2,075) | | | — | | | — | | | — | | | — | | | (425) | | | — | | | (425) |
Repurchase of common stock |
| — |
|
| — |
|
| (589,321) |
|
| — |
|
| (884) |
|
| — |
|
| (321) |
|
| (1,205) |
| — | |
| — | |
| (589,321) | |
| — | |
| (884) | |
| — | |
| (321) | |
| — | |
| (1,205) |
Non-cash contribution |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 414 |
|
| — |
|
| 414 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 414 | |
| — | |
| — | |
| 414 |
Stock option exercise |
| — |
|
| — |
|
| 54,645 |
|
| — |
|
| — |
|
| 65 |
|
| — |
|
| 65 | | — | | | — | | | 54,645 | | | — | | | — | | | 65 | | | — | | | — | | | 65 |
Stock‑based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,997 |
|
| — |
|
| 2,997 | ||||||||||||||||||||||||||
Impact of adoption of 2016-09 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 213 |
|
| (213) |
|
| — | ||||||||||||||||||||||||||
Stock-based compensation | | — | |
| — | | | — | | | — | |
| — | | | 2,997 | | | — | | | — | | | 2,997 | |||||||||||||||||||||||
Impact of adoption of ASU 2016-09 | | — | |
| — | | | — | | | — | |
| — | | | 213 | | | (213) | | | — | | | — | |||||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 661 |
|
| 661 |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 661 | |
| — | |
| 661 |
Balance at December 31, 2018 |
| 65,428,088 |
| $ | 106,237 |
|
| 5,155,407 |
| $ | 1 |
| $ | (884) |
| $ | 10,622 |
| $ | (104,854) |
| $ | (95,115) | | 65,428,088 | | $ | 106,237 | | | 5,155,407 | | $ | 1 | | $ | (884) | | $ | 10,622 | | $ | (104,854) | | $ | — | | $ | (95,115) |
Repurchase of Common Stock |
| — |
|
| — |
|
| (26,659) |
|
| — |
|
| (125) |
|
| — |
|
| (60) |
|
| (185) | | — | | | — | | | (26,659) | | | — | | | (125) | | | — | | | (60) | | | — | | | (185) |
Stock option exercise |
| — |
|
| — |
|
| 6,490,059 |
|
| — |
|
| — |
|
| 6,536 |
|
| — |
|
| 6,536 |
| — | |
| — | |
| 6,490,059 | |
| — | |
| — | |
| 6,536 | |
| — | |
| — | |
| 6,536 |
Stock-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5,061 |
|
| — |
|
| 5,061 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 5,061 | |
| — | |
| — | |
| 5,061 |
Conversion of Convertible Preferred Stock to Common Stock upon initial public offering |
| (65,428,088) |
|
| (106,237) |
|
| 65,428,088 |
|
| 7 |
|
| — |
|
| 106,230 |
|
| — |
|
| 106,237 | ||||||||||||||||||||||||||
Conversion of convertible Preferred Stock Warrants to common stock warrants upon initial public offering |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 22,765 |
|
| — |
|
| 22,765 | ||||||||||||||||||||||||||
Conversion of convertible preferred stock to common stock upon initial public offering | | (65,428,088) | | | (106,237) | | | 65,428,088 | | | 7 | | | — | | | 106,230 | | | — | | | — | | | 106,237 | |||||||||||||||||||||||
Conversion of convertible preferred stock warrants to common stock warrants upon initial public offering | | — | |
| — | | | — | | | — | |
| — | | | 22,765 | | | — | | | — | | | 22,765 | |||||||||||||||||||||||
Warrant exercise |
| — |
|
| — |
|
| 441,307 |
|
| — |
|
| — |
|
| 62 |
|
| — |
|
| 62 | | — | |
| — | | | 441,307 | | | — | |
| — | | | 62 | | | — | | | — | | | 62 |
Issuance of Common Stock in connection with initial public offering, net of issuance costs of $5.9 million and $3.7 million in offering costs |
| — |
|
| — |
|
| 6,700,000 |
|
| — |
|
| — |
|
| 77,479 |
|
| — |
|
| 77,479 | ||||||||||||||||||||||||||
Issuance of common stock in connection with initial public offering, net of issuance costs of $5.9 million and $3.7 million in offering costs | | — | |
| — | | | 6,700,000 | | | — | |
| — | | | 77,479 | | | — | | | — | | | 77,479 | |||||||||||||||||||||||
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (8,569) |
|
| (8,569) |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (8,569) | |
| — | |
| (8,569) |
Balance at December 31, 2019 |
| — |
| $ | — |
|
| 84,188,202 |
| $ | 8 |
| $ | (1,009) |
| $ | 228,755 |
| $ | (113,483) |
| $ | 114,271 |
| — | | $ | — | |
| 84,188,202 | | $ | 8 | | $ | (1,009) | | $ | 228,755 | | $ | (113,483) | | $ | — | | $ | 114,271 |
Issuance of employee equity awards, net of shares withheld | | — | | | — | | | 2,688,273 | | | 1 | | | — | | | (5,451) | | | — | | | — | | | (5,450) | |||||||||||||||||||||||
Stock-based compensation | | — | | | — | | | — | | | — | | | — | | | 12,821 | | | — | | | — | | | 12,821 | |||||||||||||||||||||||
Warrant exercise | | — | | | — | | | 177,854 | | | — | | | — | | | (0) | | | — | | | — | | | (0) | |||||||||||||||||||||||
Reduction in initial public offering costs | | — | | | — | | | — | | | — | | | — | | | 14 | | | — | | | — | | | 14 | |||||||||||||||||||||||
Impact of adoption of ASU 2016-13 | | — | | | — | | | — | | | — | | | — | | | — | | | (1,169) | | | — | | | (1,169) | |||||||||||||||||||||||
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |||||||||||||||||||||||
Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 46,459 | | | — | | | 46,459 | |||||||||||||||||||||||
Balance at December 31, 2020 |
| — | | $ | — | |
| 87,054,329 | | $ | 9 | | $ | (1,009) | | $ | 236,139 | | $ | (68,193) | | $ | 1 | | $ | 166,947 | |||||||||||||||||||||||
The accompany notes are an integral part of these consolidated financial statements.
7680
Progyny, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
| ||||||||||
|
| Year Ended | ||||||||||||||||
|
| December 31, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2017 | ||||||||||||
| | | | | | | | | | |||||||||
| | Year Ended | ||||||||||||||||
| | December 31, | ||||||||||||||||
|
| 2020 |
| 2019 |
| 2018 | ||||||||||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
| | |
|
| | |
| |
|
Net (loss) income |
| $ | (8,569) |
| $ | 661 |
| $ | (12,452) | |||||||||
Net income (loss) | | $ | 46,459 | | $ | (8,569) | | $ | 661 | |||||||||
Less: Income from discontinued operations, net of income tax |
|
| — |
|
| (5,777) |
|
| (4) | |
| — |
|
| — |
|
| (5,777) |
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
| |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
|
|
|
|
|
|
|
| |||||||||
Deferred tax expense (benefit) |
|
| 12 |
|
| (1,777) |
|
| (3) | |
| (37,971) |
|
| 12 |
|
| (1,777) |
Non-cash interest expense | | | 75 | | | — | | | — | |||||||||
Loss on debt extinguishment |
|
| — |
|
| 88 |
|
| — | |
| — |
|
| — |
|
| 88 |
Depreciation and amortization |
|
| 2,133 |
|
| 1,883 |
|
| 1,559 | |
| 1,906 |
|
| 2,133 |
|
| 1,883 |
Stock-based compensation expense |
|
| 5,061 |
|
| 2,997 |
|
| 1,559 | |
| 12,821 |
|
| 5,061 |
|
| 2,997 |
Bad debt expense |
|
| 1,606 |
|
| 824 |
|
| 431 | |
| 5,562 |
|
| 1,606 |
|
| 824 |
Loss on disposal of property and equipment |
|
| 1 |
|
| — |
|
| 2 | |
| — |
|
| 1 |
|
| — |
Accretion of debt discount and debt issuance costs |
|
| — |
|
| 75 |
|
| 200 | |
| — |
|
| — |
|
| 75 |
Change in fair value of warrant liabilities |
|
| 18,176 |
|
| 2,944 |
|
| 714 | |
| — |
|
| 18,176 |
|
| 2,944 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
| |
| | | | | | | | |
Accounts receivable |
|
| (25,342) |
|
| (12,776) |
|
| (2,044) | |
| (35,336) |
|
| (25,342) |
|
| (12,776) |
Prepaid expenses and current other assets |
|
| (4,118) |
|
| (179) |
|
| (198) | |
| (326) |
|
| (4,118) |
|
| (179) |
Other assets |
|
| (380) |
|
| 100 |
|
| (279) | |||||||||
Accounts payable |
|
| 3,501 |
|
| 10,448 |
|
| (909) | |
| 25,008 |
|
| 3,501 |
|
| 10,448 |
Accrued expenses and other current liabilities |
|
| 6,385 |
|
| 2,761 |
|
| 2,005 | |
| 17,400 |
|
| 6,385 |
|
| 2,761 |
Net cash provided by (used in) continuing operations |
|
| (1,534) |
|
| 2,272 |
|
| (9,419) | |||||||||
Net cash provided by (used in) discontinued operations |
|
| — |
|
| — |
|
| (55) | |||||||||
Other noncurrent assets and liabilities | |
| 605 |
|
| (380) |
|
| 100 | |||||||||
Net cash provided by (used in) operating activities |
|
| (1,534) |
|
| 2,272 |
|
| (9,474) | |
| 36,203 |
|
| (1,534) |
|
| 2,272 |
| | | | | | | | | | |||||||||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Purchase of property and equipment, net |
|
| (2,956) |
|
| (579) |
|
| (612) | |
| (1,037) |
|
| (2,956) |
|
| (579) |
Net cash provided by (used in) continuing operations |
|
| (2,956) |
|
| (579) |
|
| (612) | |||||||||
Net cash provided by (used in) discontinued operations |
|
| 200 |
|
| 2,481 |
|
| — | |||||||||
Purchase of marketable securities | |
| (103,964) | | | — | | | — | |||||||||
Sale of marketable securities | | | 64,970 | | | — | | | — | |||||||||
Net cash (used in) continuing operations | |
| (40,031) |
|
| (2,956) |
|
| (579) | |||||||||
Net cash provided by discontinued operations | |
| — |
|
| 200 |
|
| 2,481 | |||||||||
Net cash provided by (used in) investing activities |
|
| (2,756) |
|
| 1,902 |
|
| (612) | |
| (40,031) |
|
| (2,756) |
|
| 1,902 |
| | | | | | | | | | |||||||||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock upon initial public offering, net of issuance and offering costs |
|
| 78,385 |
| — |
|
| — | ||||||||||
Proceeds from issuance of common stock upon initial public offering | | | — | | | 81,220 | | | — | |||||||||
Payment of initial public offering costs | | | (892) | | | (2,835) | | | | |||||||||
Repayment of term loan |
|
| — |
|
| (5,351) |
|
| (3,259) | |
| — |
|
| — |
|
| (5,351) |
Proceeds from revolving line of credit |
|
| 182,025 |
|
| 64,421 |
|
| — | |
| — |
|
| 182,025 |
|
| 64,421 |
Repayments made against revolving line of credit |
|
| (182,278) |
|
| (64,168) |
|
| — | |
| — |
|
| (182,278) |
|
| (64,168) |
Repurchase of convertible preferred stock |
|
| — |
| (2,500) |
|
| — | | | — | | | — | | | (2,500) | |
Repurchase of common stock |
|
| (185) |
| (1,205) |
|
| — | | | — | | | (185) | | | (1,205) | |
Exercise of stock options |
|
| 6,536 |
|
| 65 |
|
| 25 | |||||||||
Proceeds from exercise of stock options | |
| 2,329 |
|
| 6,536 |
|
| 65 | |||||||||
Payment of employee taxes related to equity awards | | | (8,930) | | | — | | | — | |||||||||
Proceeds from contributions to employee stock purchase plan | | | 1,244 | | | — | | | — | |||||||||
Exercise of stock warrants |
|
| 62 |
|
|
|
|
| | | — | | | 62 | | | — | |
Proceeds from issuance of convertible preferred stock and warrants, net |
|
| — |
|
| — |
|
| 15,000 | |||||||||
Net cash provided by (used in) continuing operations |
|
| 84,545 |
|
| (8,738) |
|
| 11,766 | |||||||||
Net cash provided by (used in) discontinued operations |
|
| — |
|
| — |
|
| — | |||||||||
Net cash provided by (used in) financing activities |
|
| 84,545 |
|
| (8,738) |
|
| 11,766 | |
| (6,249) |
|
| 84,545 |
|
| (8,738) |
Net increase (decrease) in cash and cash equivalents |
|
| 80,255 |
|
| (4,564) |
|
| 1,680 | |
| (10,077) |
|
| 80,255 |
|
| (4,564) |
Cash and cash equivalents, beginning of year |
|
| 127 |
|
| 4,691 |
|
| 3,011 | |
| 80,382 |
|
| 127 |
|
| 4,691 |
Cash and cash equivalents, end of year |
| $ | 80,382 |
| $ | 127 |
| $ | 4,691 | | $ | 70,305 | | $ | 80,382 | | $ | 127 |
| | | | | | | | | | |||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
| | | |
|
| |
|
| |
Cash paid for interest |
| $ | 176 |
| $ | 505 |
| $ | 542 | | $ | — | | $ | 176 | | $ | 505 |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
| | |
|
|
| |
|
| |
Additions of property and equipment, net included in accounts payable and accrued expenses | | $ | 24 | | $ | — | | $ | — | |||||||||
Deferred initial public offering costs in accounts payable and accrued expenses | | $ | — | | $ | 906 | | $ | — | |||||||||
Non-cash settlement of liability |
| $ | — |
| $ | 414 |
| $ | — | | $ | — | | $ | — | | $ | 414 |
Non-cash liability forgiveness related to divestiture |
| $ | — |
| $ | 4,869 |
| $ | — | | $ | — | | $ | — | | $ | 4,869 |
Non-cash preferred stock warrant conversion to common stock warrant upon IPO |
| $ | (22,765) |
| $ | — |
| $ | — | | $ | — | | $ | (22,765) | | $ | — |
Non-cash deferred initial public offering costs in accounts payable and accrued liabilities |
| $ | 906 |
| $ | — |
| $ | — | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7781
PROGYNY, INC.
Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
Description of Business
Progyny, Inc. (referred to as “Progyny” or the “Company”) was incorporated in the state of Delaware on April 3, 2008, and maintains its corporate headquarters in New York, NY. Prior to its 2015 acquisition of Fertility Authority, LLC, the Company was exclusively a medical device company in the field of reproductive medicine, translating scientific discoveries related to early embryo development into clinical tools. The Company’s product, the Early Embryo Viability Assessment Test (“Eeva”), was designed to assist clinicians and patients in assessing the likelihood of certain in vitro fertilization (“IVF”) outcomes.
With the acquisition of Fertility Authority, LLC, in March 2015, the Company established and operated as two segments; (i) medical device and (ii) the fertility benefits solution. In January 2018, the Company executed an agreement with a related party to sell the Eeva business, representing all of the medical device segment.
Subsequent to the sale of the Eeva business, Progyny is a provider of a fertility benefits solution.solution and pharmacy benefits solution and operates and manages in one operating segment. The fertility benefits solution consists of a significant service that integrates: (1) the treatment services (“Smart Cycles”) that the Company has designed, (2) access to the Progyny network of high-quality fertility specialists that perform the Smart Cycle treatments and (3) active management of the selective network of high-quality provider clinics, real-time member eligibility and treatment authorization, member-facing digital tools and detailed quarterly reporting supported by the Company’s dedicated account management teams, and end to end comprehensive concierge member support provided by Progyny’s in-house staff of Patient Care Advocates (“PCAs”) (collectively, the “care management services”).
The Company enhanced its fertility benefits solution with the launch of Progyny Rx, its pharmacy benefits solution, effective January 1, 2018. As part of this solution, the Company provides formulary plan design, simplified authorization, assistance with prescription fulfillment, and timely delivery of the medications by the Company’s network of specialty pharmacies, as well as medication administration training, pharmacy support services, and continuing PCA support. As a pharmacy benefits solution provider, Progyny manages the dispensing of pharmaceuticals through the Company’s specialty pharmacy contracts. The pharmacy benefits solution is only available as an add-on service to its fertility benefits solution.
Reverse Stock Split
On October 14, 2019, the shareholders of Progyny approved a one-for-4.5454 reverse stock split of its common and convertible preferred stock. The par value of the common stock and convertible preferred stock was not adjusted as a result of the reverse stock split. Accordingly, the consolidated financial statements and notes retroactively reflect Progyny’s capital structure after giving effect to the reverse stock split.
Initial Public Offering
On October 29, 2019, the Company completed its initial public offering (“IPO”) in which it issued and sold 6,700,000 shares of its common stock at a public offering price of $13.00 per share. As part of the IPO, certain selling stockholders offered and sold an additional 4,800,000 shares (including 1,500,000 shares sold pursuant to the exercise of the underwriters’ over-allotment option), at an equivalent public offering price of $13.00 per share. The Company received net proceeds of $77.5$77.6 million from the IPO, after deducting underwriters’ discounts and commissions of $5.9 million and offering costs of $3.7$3.6 million. Offering costs were initially capitalized and consisted of fees and expenses incurred in connection with the sale of common stock in the IPO, including legal, accounting, printing and other IPO-related costs. Upon completion of the IPO, these offering costs were reclassified to stockholders’ equity and offset against the proceeds from the offering on the balance sheet. Immediately prior to the completion of the IPO, all shares
78
of convertible preferred stock then outstanding were converted into 65,428,088 shares of common stock on a one-to-one basis, $106.2 million of convertible preferred stock was reclassified to additional paid-in-capital and $7,000 of convertible preferred stock was reclassified to common stock on the Company’s balance sheet.
82