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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number: 001-39100

Progyny, Inc.

(Exact name of registrant as specified in its charter)

Delaware

27-2220139

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

1359 Broadway

New York, New York

10018

(Address of principal executive offices)

(Zip Code)

(212) 888-3124

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock,

$0.0001 par value per share

PGNY

The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of April 30, 2021, the registrant had 88,525,303 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

Table of Contents

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Balance Sheets as of March 31, 2021 and December 31, 2020

6

Statements of Operations for the Three Months Ended March 31, 2021 and 2020

7

Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020

8

Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020

9

Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020

10

Notes to Financial Statements

11

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 3.

Defaults Upon Senior Securities

69

Item 4.

Mine Safety Disclosures

69

Item 5.

Other Information

69

Item 6.

Exhibits

70

Signatures

71

2

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding our future results of operations and financial position, our ability to acquire or invest in complementary businesses, products, and technologies, our ability to achieve profitability on an annual basis and sustain such profitability, the sufficiency of our cash and cash equivalents, anticipated sources and uses of cash, our business strategy and our ability to acquire new clients and successfully engage new and existing clients, our ability to effectively manage our growth and compete effectively with existing competitors and new market entrants, impact of recently adopted accounting pronouncements; our ability to attract and retain qualified employees and key personnel; the plans and objectives of management for future operations and capital expenditures, and the impact of the COVID-19 pandemic on our business, operations, and the markets and communities in which we and our clients, members and providers operate are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described under Part II, Item 1A. “Risk Factors” and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

In addition, statements such as “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

3

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SUMMARY OF RISKS AFFECTING OUR BUSINESS

Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Quarterly Report on Form 10-Q and our other filings with the U.S. Securities and Exchange Commission, or the SEC, before making an investment decision regarding our common stock.

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.
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.
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.
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.
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.
If we are unable to attract new clients, our business, financial condition and results of operations would be adversely affected.
A significant change in the utilization of our solutions could have an adverse effect on our business, financial condition and results of operations.
We have a history of operating losses and may not sustain profitability in the future.
We have a limited operating history with our current platform of solutions, which makes it difficult to predict our future results of operations.
Changes in the health insurance market could 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.
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 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.
We operate in a highly regulated industry and must comply with a significant number of complex and evolving requirements.
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.

4

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GENERAL

Unless the context otherwise indicates, references in this Quarterly Report on Form 10-Q to the terms “Progyny,” “the Company,” “we,” “our” and “us” refer to Progyny, Inc.

“Progyny®” and our other registered and common law trade names, trademarks and service marks are the property of Progyny, Inc. Other trade names, trademarks and service marks used in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, the trademarks and trade names in this Quarterly Report on Form 10-Q may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights thereto.

We may announce material business and financial information to our investors using our investor relations website at investors.progyny.com. We therefore encourage investors and others interested in Progyny to review the information that we make available on our website, in addition to following our filings with the SEC, webcasts, press releases and conference calls.

5

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Progyny, Inc.

Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

    

March 31, 

    

December 31, 

2021

2020

ASSETS

 

  

 

  

Current assets:

Cash and cash equivalents

$

29,820

$

70,305

Marketable securities

77,095

38,994

Accounts receivable, net of $11,818 and $9,502 of allowance at March 31, 2021 and December 31, 2020, respectively

 

116,666

 

75,664

Prepaid expenses and other current assets

 

4,218

 

5,259

Total current assets

 

227,799

 

190,222

Property and equipment, net

 

3,583

 

3,400

Operating lease right-of-use assets

8,456

8,668

Goodwill

 

11,880

 

11,880

Intangible assets, net

 

973

 

1,213

Deferred tax assets

41,341

37,971

Other noncurrent assets

 

556

 

573

Total assets

$

294,588

$

253,927

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

57,306

$

43,514

Accrued expenses and other current liabilities

 

43,692

 

34,272

Total current liabilities

 

100,998

 

77,786

Operating lease noncurrent liabilities

8,096

8,318

Other noncurrent liabilities

876

876

Total liabilities

 

109,970

 

86,980

Commitments and Contingencies (Note 7)

 

  

 

  

STOCKHOLDERS' EQUITY

 

  

 

  

Common stock, $0.0001 par value; 1,000,000,000 shares authorized at March 31, 2021 and December 31, 2020; 87,732,302 and 87,054,329 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

 

9

 

9

Additional paid-in capital

 

238,695

 

236,139

Treasury stock, at cost, $0.0001 par value; 615,980 shares at March 31, 2021 and December 31, 2020

 

(1,009)

 

(1,009)

Accumulated deficit

 

(53,027)

 

(68,193)

Accumulated other comprehensive income

(50)

1

Total stockholders’ equity

 

184,618

 

166,947

Total liabilities and stockholders’ equity

$

294,588

$

253,927

The accompanying notes are an integral part of these unaudited financial statements.

6

Table of Contents

Progyny, Inc.

Statements of Operations

(Unaudited)

(in thousands, except share and per share amounts)

Three Months Ended

March 31, 

    

2021

    

2020

Revenue

$

122,133

$

81,024

Cost of services

 

93,226

  

64,422

Gross profit

 

28,907

  

16,602

Operating expenses:

 

 

  

 

Sales and marketing

 

4,014

  

3,267

General and administrative

 

13,086

  

9,904

Total operating expenses

 

17,100

  

13,171

Income from operations

 

11,807

  

3,431

Other income (expense):

 

 

  

 

Other income

7

164

Interest income (expense), net

 

(18)

  

150

Total other income (expense), net

 

(11)

  

314

Income before income taxes

 

11,796

  

3,745

Benefit (provision) for income taxes

3,370

  

(116)

Net income

$

15,166

$

3,629

Net income attributable to common stockholders

$

15,166

$

3,629

Net income per share attributable to common stockholders:

 

 

  

 

Basic

$

0.17

$

0.04

Diluted

$

0.15

  

$

0.04

Weighted-average shares used in computing net income per share:

 

  

 

Basic

87,404,287

  

84,537,538

Diluted

100,106,497

  

99,665,158

The accompanying notes are an integral part of these unaudited financial statements.

7

Table of Contents

Progyny, inc

Statement of Comprehensive Income

(Unaudited)

(in thousands)

Three Months Ended

March 31, 

    

2021

    

2020

Net income

$

15,166

$

3,629

Other comprehensive income:

Unrealized loss on marketable securities

(51)

Total other comprehensive income

(51)

Total comprehensive income

$

15,115

$

3,629

The accompanying notes are an integral part of these unaudited financial statements.

8

Table of Contents

Progyny, Inc.

Statements of Changes in Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

Additional 

Other

Common Stock

Treasury

Paid in

Accumulated 

Comprehensive

    

Shares

    

Amount

    

Stock

Capital

    

Deficit

    

Income

    

Total

For the three months ended March 31, 2021:

Balance at December 31, 2020

 

87,054,329

$

9

$

(1,009)

$

236,139

$

(68,193)

$

1

$

166,947

Issuance of employee equity awards, net of shares withheld

 

677,973

 

 

 

(2,478)

 

 

 

(2,478)

Stock-based compensation

 

 

 

 

5,034

 

 

 

5,034

Other comprehensive income

(51)

(51)

Net income

 

 

 

 

 

15,166

 

 

15,166

Balance at March 31, 2021

 

87,732,302

$

9

$

(1,009)

$

238,695

$

(53,027)

$

(50)

$

184,618

For the three months ended March 31, 2020:

Balance at December 31, 2019

 

84,188,202

$

8

$

(1,009)

$

228,755

$

(113,483)

$

$

114,271

Issuance of employee equity awards, net of shares withheld

 

657,626

 

 

 

597

 

 

 

597

Stock-based compensation

 

 

 

 

2,049

 

 

 

2,049

Reduction in initial public offering costs

115

115

Impact of adoption of ASU 2016-13

(1,169)

(1,169)

Net income

 

 

 

 

 

3,629

 

 

3,629

Balance at March 31, 2020

 

84,845,828

$

8

$

(1,009)

$

231,516

$

(111,023)

$

$

119,492

The accompanying notes are an integral part of these unaudited financial statements.

9

Table of Contents

Progyny, Inc.

Statements of Cash Flows

(Unaudited)

(in thousands)

Three Months Ended

March 31, 

    

2021

    

2020

OPERATING ACTIVITIES

 

  

  

Net income

$

15,166

$

3,629

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

  

 

  

Deferred tax expense (benefit)

 

(3,370)

  

 

116

Non-cash interest expense

19

19

Depreciation and amortization

 

422

  

 

520

Stock-based compensation expense

 

5,034

  

 

2,049

Bad debt expense

 

2,518

  

 

1,685

Changes in operating assets and liabilities:

 

Accounts receivable

 

(43,520)

  

 

(20,054)

Prepaid expenses and current other assets

 

1,046

  

 

561

Accounts payable

 

13,797

  

 

20,359

Accrued expenses and other current liabilities

 

9,413

  

 

3,256

Other noncurrent assets and liabilities

7

Net cash provided by operating activities

 

532

  

 

12,140

INVESTING ACTIVITIES

 

 

  

 

  

Purchase of property and equipment, net

 

(369)

  

 

(693)

Purchase of marketable securities

(62,146)

Sale of marketable securities

23,995

Net cash (used in) investing activities

 

(38,520)

  

 

(693)

FINANCING ACTIVITIES

 

 

  

 

  

Payment of initial public offering costs

(791)

Proceeds from exercise of stock options

 

539

  

 

597

Payment of employee taxes related to equity awards

(3,523)

Proceeds from contributions to employee stock purchase plan

487

Net cash (used in) financing activities

 

(2,497)

  

 

(194)

Net increase (decrease) in cash and cash equivalents

 

(40,485)

  

 

11,252

Cash and cash equivalents, beginning of period

 

70,305

  

 

80,382

Cash and cash equivalents, end of period

$

29,820

$

91,634

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Additions of property and equipment, net included in accounts payable and accrued expenses

$

20

$

68

The accompanying notes are an integral part of these unaudited financial statements.

10

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Progyny, Inc.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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.

Progyny is a provider of a fertility benefits 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.

Emerging Growth Company Status

Prior to December 31, 2020, the Company was an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies.

The Company elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it was (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opted out of the extended transition period provided in the JOBS Act. Based on the market value of the Company’s common stock as of June 30, 2020, the Company ceased to qualify as an emerging growth company as of December 31, 2020. As a result, the Company no longer was able to use the extended transition period for complying with new or revised accounting standards available to emerging growth companies and was required to adopt new or revised accounting standards as of the effective dates for public companies. Refer to Note 2 – Summary of Significant Accounting Policies below for a discussion of new accounting pronouncements adopted in the fourth quarter of 2020 with an effective date of January 1, 2020.

Basis of Presentation

The interim unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial reporting. These interim financial statements have been prepared on a basis consistent with the annual financial statements and, in the opinion of management, include all adjustments necessary to fairly state our financial position as of March 31, 2021, the results of our operations for the three months ended March 31, 2021 and 2020 and the results of our

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cash flows for the three months ended March 31, 2021 and 2020. Therefore, these unaudited financial statements should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021.

The results for the three months ended March 31, 2021 are not necessarily indicative of the operating results expected for the year ending December 31, 2021 or any other future period.  Additionally, there are many uncertainties regarding the ongoing coronavirus (“COVID-19”) pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it has impacted and may continue to impact its customers and members, its provider network, specialty pharmacy partners, employees, suppliers, vendors, and other business partners. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, future results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact, vaccine roll-out and impact, and the economic impact on local, regional and national markets.  The overall disruption of the healthcare and fertility markets and the other risks and uncertainties associated with the pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP generally requires management to make estimates and assumptions that affect the reported amount of certain assets, liabilities, revenue, and expenses, and the related disclosure of contingent assets and liabilities. Such estimates include, but are not limited to, the determination of revenue recognition including accrued receivables, accrued claims payable, allowance for doubtful accounts, stock-based compensation, lease liabilities, and accounting for income taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

2.           Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to clients in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The Company applies the following five-step model to recognize revenue from contracts with 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

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Progyny’s 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

Progyny primarily generates revenue through its fertility benefits solution, in which Progyny provides self-insured enterprise entities (“clients”) and their employees and partners (together, “members”) with fertility benefits. As part of the fertility benefits solution, Progyny provides access to effective and cost-efficient fertility treatments, referred to as Smart Cycles, as well as other related services. Smart Cycles are proprietary treatment bundles that include certain medical services available to members through Progyny’s proprietary, credentialed network of provider clinics. In addition to access to Progyny’s Smart Cycle treatment bundles and access to Progyny’s network of provider clinics, the fertility benefits solution includes other comprehensive services, which Progyny refers 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 Progyny’s in house staff of PCAs.

The promises within Progyny’s fertility benefits contract with a client represent a single performance obligation because Progyny provides a significant service of integrating the Progyny designed 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. Progyny’s fertility benefits solution is a stand-ready obligation that is satisfied over the contract term.

Progyny’s contracts include the following sources of consideration, which are all variable: a per employee per month (“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. The Company allocates 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 the Company’s efforts to provide its fertility benefits solution to its clients in the period and represents the consideration the Company is entitled to for the fertility benefit 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.

Progyny’s 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. The Company estimates the variable consideration related to the total PEPM administration fee, less estimated refunds related to service level agreements, and recognizes the amounts allocated to the fertility benefits solution ratably over the contract term. Progyny’s estimate of service level agreement refunds, have not historically resulted in significant adjustments to the transaction price.

Clients are typically invoiced on a monthly basis for the PEPM administration fee. Progyny invoices its 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.

The Company assesses whether it is the principal or the agent for each arrangement with a client, since fertility treatment services are provided by a third party—the provider clinics. The Company is the principal in its arrangements with clients and therefore presents revenue gross of the amounts paid to the provider clinics because Progyny controls the specified service (the fertility benefits solution) before it is transferred to the client. Progyny integrates the fertility treatment services provided by the provider clinics into the overall fertility benefits solution that the client contracted to receive. In addition, Progyny defines the scope of the potential services to be performed by the provider clinics and monitors the performance of the provider clinics. Furthermore, Progyny is primarily responsible for fulfilling the promise to the client and has discretion in setting the pricing, as Progyny

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separately negotiates agreements with the provider clinics, which establish pricing for each treatment service. Pricing of services from provider clinics is independent from the fees charged to clients.

Pharmacy Benefits Revenue

For clients that have the fertility benefits solution, Progyny offers, as an add-on, its pharmacy benefits solution, which is a separate, fully integrated pharmacy benefit. As part of the pharmacy benefits solution, Progyny provides care management services, which include Progyny’s formulary plan design, prescription fulfillment, simplified authorization and timely delivery of the medications used during treatment through Progyny’s 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 Progyny provides 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.

Progyny’s 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. The Company allocates 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 the Company’s efforts to provide its pharmacy benefits solution to clients in the period and represents the consideration the Company is entitled to for the pharmacy benefit services provided. As a result, the fixed fee per fertility drug is included in the transaction price and recognized in the period in which the Company is 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. Progyny invoices 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 pharmacies. Once an invoice is issued, payment terms are typically between 30 to 60 days.

The Company assesses whether it is 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. The Company is the principal in its arrangements with clients, and therefore presents revenue gross of the amounts paid to the specialty pharmacies. Progyny controls the specified service (the pharmacy benefits solution) before it is transferred to the client. Progyny integrates 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, Progyny defines the scope of the potential services to be performed by the specialty pharmacies and monitors the performance of the specialty pharmacies. Furthermore, Progyny is primarily responsible for fulfilling the promise to the client and has discretion in setting the pricing, as Progyny separately negotiates agreements with pharmacies, which establish pricing for each drug. Pricing of fertility drugs is independent from the fees charged to clients.

The Company does not disclose the transaction price allocated to remaining performance obligations because all of the transaction price is variable and is allocated to the distinct periods to which the services relate, as discussed above. The remaining contract term is typically less than one year, due to the client’s contractual termination options.

There are no material contract asset or contract liability balances as of March 31, 2021 and December 31, 2020.

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Accrued Receivables and Accrued Claims Payable

Accrued receivables are estimated based on historical experience for those fertility benefit services provided but for which a claim has not been received from the provider clinic at the end of each period, which includes assumptions regarding the lag between authorization date and service date as well as estimates for changes and cancellations of services. At the same time, cost of services and accrued claims payables are estimated based on the amount to be paid to the provider clinic and historical gross margin achieved on fertility benefit services. Estimates are adjusted to actual at the time of billing. Adjustments to original estimates have not been material.

As of March 31, 2021 and December 31, 2020, accrued receivables were $42.0 million and $28.2 million. Accrued receivables are included within accounts receivable in the balance sheet.  

Accrued claims payable of $31.9 million and $22.8 million as of March 31, 2021 and December 31, 2020, respectively, are included within accrued expenses and other current liabilities in the balance sheet.  Claims payable are paid within 30 days based on contractual terms.

As of March 31, 2021 and December 31, 2020, unbilled receivables, which represent claims received and approved but unbilled at the end of the reporting period, were $23.2 million and $16.4 million, respectively. Unbilled receivables are typically billed to clients within 30 days of the approved claim based on the contractual billing schedule agreed upon with the client. Unbilled receivables are included in accounts receivable in the balance sheet.

Accounts Receivable and Allowance for Doubtful Accounts

The accounts receivable balance primarily includes amounts due from clients and members. The Company estimates the allowance for doubtful accounts based on the lifetime expected credit losses for the client and member receivable pools, respectively. Under this current expected credit losses model, the Company determines the allowance for doubtful accounts based on factors such as the age of the receivable balance, historical experience, current economic conditions, and reasonable and supportable forecasts of future economic conditions. An allowance for credit losses is applied at the time the asset is recognized. Expected credit losses are recorded as general and administrative expenses on the statements of operations. The following table provides a summary of the activity in this allowance (in thousands):

Three Months Ended March 31, 2021

Balance at
Beginning
of Period

Charged
to Costs
and Expenses

Write-offs

Balance
at End
of Period

Allowance for doubtful accounts

  

$

9,502

  

$

2,518

  

$

(202)

  

$

11,818

Cost of Services

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, Provider Relations and Claims Processing teams; and (3) related information technology support costs.  Our contracts with provider clinics are typically for a term of one to two years.

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Pharmacy Benefit Services

Pharmacy benefit 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, Provider Relations and Claim Processing teams; and (3) related information technology support costs. Contracts with the specialty pharmacies are typically for a term of one year.

In the specialty pharmacy contracts, the contractual fees of prescription drugs sold includes the cost of the prescription drugs purchased and shipped to members by the Company’s specialty mail service dispensing pharmacies, net of any volume-related or other discounts.

Vendor rebates

The Company receives a rebate on formulations purchased and dispensed by the Company’s specialty pharmacies. The Company’s contractual arrangements with pharmacy program partners provide for the Company to receive a discount (or rebate) from established list prices paid subsequent to dispensing when products are purchased indirectly from pharmacy program partners (such as through a specialty pharmacy). These rebates are recognized as a reduction of Cost of services when prescriptions are dispensed and are generally estimated and billed to manufacturers within 20 days of the end of each month. The effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected has not been material to the Company’s results of operations.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, as well as improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted this standard as of January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements.

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. The Company adopted this standard on January 1, 2020, using the modified retrospective transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company not to reassess (i) whether any expired or existing contracts contained leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for existing leases. The Company also elected to not reassess lease terms for existing leases using hindsight and to account for each separate lease and non-lease component as a single lease component. As a result of the adoption of the new leasing guidance, the Company recorded right-of-use assets and lease liabilities of $9.5 million and $9.9 million, respectively. The right-of-use assets are classified within Operating lease right-of-use assets on the Company’s consolidated balance sheet. Lease liabilities are classified within accrued expenses and other current liabilities and operating lease noncurrent liabilities on the Company’s consolidated balance sheet. The adoption of the standard did not materially impact the Company’s statement of operations or statement of cash flows for the year ended December 31, 2020. See Note 5 – Leases for further details.  

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to

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inform credit loss estimates. The adoption of the new standard impacted the Company’s methodology for calculating and estimating the allowance for doubtful accounts. In the fourth quarter of 2020, the Company adopted this standard as of January 1, 2020 using the modified retrospective transition method, which resulted in a cumulative-effect adjustment to accumulated deficit of $1.2 million. As disclosed in Note 17 – Unaudited Quarterly Results of Operations Data in the Company’s Annual Report on Form 10-K, quarterly financial information for interim periods of 2020 has been recast, which includes a $0.4 million impact to the previously disclosed general and administrative expense for the three month period ended March 31, 2020.

In August 2018, the FASB issued final guidance requiring a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in Accounting Standards Codification (“ASC”) 350-402 Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40) to determine which implementation costs to capitalize as assets. The Company adopted this standard on January 1, 2020. The adoption of the new standard did not have a material effect on the Company’s financial statements.

3.           Revenue

Disaggregated revenue

The following table disaggregates revenue by service (in thousands):

Three Months Ended

March 31, 

    

2021

    

2020

Fertility benefit services revenue

$

88,854

$

59,433

Pharmacy benefit services revenue

 

33,279

 

21,591

Total revenue

$

122,133

$

81,024

4.           Fair Value of Financial Instruments

The fair value of financial instruments is determined based on assumptions that market participants would use when pricing an asset or liability at the balance sheet date. Certain assets are categorized based on the following fair value hierarchy of market participant assumptions:

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

Level 3 — Prices or valuation techniques that require inputs that are both significant to the fair value of the asset or liability and supported by little or no market activity.

The Company uses observable market data when available, and minimizes the use of unobservable inputs when determining fair value.

As of March 31, 2021 and December 30, 2020, the Company had $31.3 million and $66.3 million, respectively, in financial assets held in money market accounts and $77.1 million and $39.0 million, respectively, held in marketable securities, including U.S. treasury bills. All were classified as Level 1 in the fair value hierarchy. The Company measured these assets at fair value. The Company classified these assets as Level 1

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because the values of these assets are determined using unadjusted quoted prices in active markets for identical assets.

As of March 31, 2021 and December 31, 2020, the Company did not have any assets or liabilities classified as Level 2 or Level 3 in the fair value hierarchy.

5.           Leases

In September 2019, the Company’s lease agreement for its corporate headquarters commenced and will expire in May 2029. Pursuant to the lease, the Company will pay the base rent of approximately $1.3 million per annum through the end of the fifth lease year and approximately $1.4 million per annum thereafter through the expiration date.

The Company recognizes lease expense on a straight-line basis over the lease term. Lease expense for our operating lease for the three months ended March 31, 2021 and March 31, 2020 was $0.3 million and $0.4 million, respectively.

Information related to our leases is as follows (in thousands):

Balance Sheet Location

March 31, 2021

December 31, 2020

Operating Leases

Right-of-use asset

Operating lease right-of-use assets

$

8,456

$

8,668

Short-term lease liabilities

Accrued expenses and other current liabilities

$

1,231

$

1,231

Long-term lease liabilities

Operating lease noncurrent liabilities

$

8,096

$

8,318

Other information

Cash outflows from operating activities attributable to operating leases

$

321

$

820

Weighted average remaining lease term, operating lease

8.2 years

8.4 years

Weighted average discount rate, operating lease

4.29%

4.29%

Future minimum facility lease payments as of March 31, 2021, were as follows:

Operating Lease Payments as of
March 31, 2021

Year Ending December 31:

    

2021

    

$

964

2022

 

1,286

2023

 

1,286

2024

1,326

2025

1,407

Thereafter

 

4,807

Total undiscounted lease payments

$

11,076

Less: imputed interest

1,749

Present value of lease liabilities

$

9,327

Less: current portion of operating lease liabilities

1,231

Operating lease noncurrent liabilities

$

8,096

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6.           Debt

In June 2018, the Company entered into a loan agreement with Silicon Valley Bank for a revolving line of credit up to $15.0 million based upon an advance rate of 80% on “eligible” accounts receivable to fund its working capital and other general corporate needs, which was amended in April 2019, January 2020, June 2020, and February 2021 (as amended, the “SVB Line of Credit”). Eligible accounts receivable is defined in the loan agreement as accounts billed with aging 90 days or less and excludes accounts receivable due for member copayments, coinsurance, and deductibles.

The Company is required to pay a revolving line commitment fee of $225,000 in three equal annual installments of $75,000 starting on the one-year anniversary of the revolving line. The Company made the first installment payment of $75,000 in June 2019 and accrues this cost monthly. The SVB Line of Credit matures in June 2021. When the Company holds 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. Interest is paid based upon the borrowed funds.

The SVB Line of Credit contains customary affirmative covenants, financial covenants, as well as negative covenants that, among other things, restrict the Company’s ability to incur additional indebtedness (including guarantees of certain obligations); create liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; maintain collateral; pay dividends or make other payments in respect of capital stock; make acquisitions; make investments, loans and advances; enter into transactions with affiliates; make payments with respect to or modify subordinated debt instruments; and enter into agreements with negative pledge clauses or clauses restricting subsidiary distributions. The financial covenant requires the Company to achieve a specified minimum quarterly revenue as defined by the SVB Line of Credit.  

The Company was in compliance with all requirements and covenants of the revolving credit facility as of March 31, 2021 and December 31, 2020.

As of both March 31, 2021 and December 31, 2020, the Company had $0 drawn on the SVB Line of Credit. The Company recorded interest expense on the SVB Line of Credit of $18,750 and $0 during the three months ended March 31, 2021 and 2020, respectively.

7.         Commitments and Contingencies

Arbitration/Litigation

On January 14, 2019, a vendor filed a Demand for Arbitration and Statement of Claim against the Company (“Demand”) for alleged breach of the November 10, 2017 Preferred Specialty Pharmacy Agreement (“Agreement”) between the Company and the vendor. On March 13, 2019, the Company terminated the Agreement for material breach by the vendor. On April 3, 2019, the vendor filed a Second Amended Demand for Arbitration (“SAD”) for breach of the Agreement. The vendor was seeking $25.0 million in damages, fees, interest and cost. Pursuant to a schedule set forth by the Arbitration Panel, on May 3, 2019, the Company filed a Motion to Dismiss the SAD. That Motion 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. The Arbitration Panel held additional hearings for the two remaining claims between August 17, 2020 and August 26, 2020. Final arguments were held on October 20, 2020. To expeditiously resolve the matter, the parties proposed a settlement to the panel on November 16, 2020. In December 2020, the Company finalized and settled the arbitration for $5.75 million without admission of liability to avoid further legal costs.

The Company believes there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on the Company’s financial position, results of operations, or cash flows.

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8.           Stock-based Compensation

The following table summarizes stock-based compensation expense, which was included in the statements of operations as follows (in thousands):  

Three Months Ended

March 31

    

2021

    

2020

Cost of services

$

1,287

$

337

Selling and marketing

681

  

 

237

General and administrative

3,066

  

 

1,475

Total stock-based compensation expense

$

5,034

  

$

2,049

9.           Income Taxes

For the three months ended March 31, 2021 and 2020, the Company calculated its year-to-date provision for income taxes by applying the estimated annual effective tax rate to the year-to-date profit from operations before income taxes and adjusts the provision for income taxes for discrete tax items recorded in the period. The Company updates its estimate of its annual effective tax rate at the end of each quarterly period. The estimate takes into account annual forecasted income before income taxes and any significant permanent tax items.  During the three months ended March 31, 2021, the Company recorded a benefit for taxes of $3.4 million primarily due to equity compensation activity that occurred during the period. During the three months ended March 31, 2020, the Company recorded a provision for taxes of $0.1 million.

10.           Net Income Per Share

Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted net income per share attributable to common stockholders is computed by dividing the diluted net income attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming dilutive effect of outstanding common stock options, restricted stock units, and common stock warrants. In periods when the Company has incurred a net loss, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders because dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

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A reconciliation of net income available to common stockholders and the number of shares in the calculation of basic and diluted net income per share follows (in thousands, except share and per share amounts):

  

Three Months Ended

March 31

    

2021

    

2020

Basic net income per common share:

Numerator:

  

  

Net income

  

$

15,166

$

3,629

Denominator:

Weighted-average shares used in computing basic net income per share attributable to common stockholders

  

87,404,287

84,537,538

Basic net income per share attributable to common stockholders

$

0.17

$

0.04

  

Diluted net income per common share:

Numerator:

  

Net income attributable to common stockholders

  

$

15,166

$

3,629

Diluted net income attributable to common stockholders

$

15,166

$

3,629

Denominator:

Weighted-average shares used in computing basic net income per share attributable to common stockholder

  

87,404,287

84,537,538

Effect of dilutive securities

12,702,210

15,127,620

Weighted-average shares used in computing diluted net income per share attributable to common stockholders

  

100,106,497

99,665,158

Diluted net income per share attributable to common stockholders

$

0.15

$

0.04

The following weighted-average outstanding shares of potentially dilutive securities were excluded from the computation of diluted loss per share attributable to common stockholders for the period presented because including them would have been antidilutive:

Three Months Ended

March 31, 

2021

    

2020

Options to purchase common stock

389,514

 

256,679

Shares issuable under ESPP

2,055

Restricted stock units

4,100

115,741

Total

395,669

 

372,420

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ITEM 2. 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 financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission, or the SEC, on March 1, 2021. In addition to historical 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 the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q.

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.

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 current clients under contract to over 180. We have retained substantially all of our clients since inception, and our member satisfaction is evidenced by our industry-leading Net Promoter Score, or NPS, of +79 for our fertility benefits solution and +81 for our integrated pharmacy benefits solution, Progyny Rx as of December 31, 2020. We currently have contracts to provide coverage to approximately 2.7 million employees and their partners (known in our industry as covered lives), who we refer to as our members. We 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. Our members experience healthier pregnancies and superior rates of pregnancy and live births, as well as reduced rates of miscarriages and multiple births, saving valuable time and money and limiting personal and professional disruption.

Progyny InNetwork

 

Progyny InNetwork

Provider Clinic 

 

National Averages

Provider Clinic 

Averages

for All Provider

Averages

for Progyny

 

Outcome

    

Clinics

    

for All Patients

    

Members Only(3)

 

Single embryo transfer rate(1)

64.0

%  

67.1

%  

90.1

%

Pregnancy rate per IVF transfer(1)

 

53.0

%  

54.7

%  

61.4

%

Miscarriage rate(1)

 

18.6

%  

18.4

%  

13.8

%

Live birth rate(2)

 

42.2

%  

43.6

%  

52.9

%

IVF multiples rate(2)

 

9.9

%  

9.1

%  

2.8

%

(1)Calculated based on the Society for Assisted Reproductive Technology, or SART, 2018 National Summary Report, finalized in 2021.
(2)Calculated based on CDC, 2019 National Summary and Clinic Data Sets, published in 2021.
(3)Calculated based on the 12-month period ended December 31, 2020.

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 (such as, in the case of in

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

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

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 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 have contracts to serve over 180 employers in the United States across more than 30 industries.  Our current clients, who are industry leaders across both high-growth and mature industries and who range in size from approximately 1,000 to 500,000 employees, represent approximately 2.7 million covered 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.
Population-Based Component. Clients who purchase our fertility benefits solution also typically pay us a per employee per month fee, or PEPM fee, which is population-based. This allows us to provide access to our PCAs for fertility and family building education and guidance and other digital tools to all of our members, regardless of whether they ultimately pursue fertility treatment. PEPM fees represented 1% and 2% of our total revenue for the three months ended March 31, 2021 and 2020, respectively.

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

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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 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 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 2.7 million lives under contract represents a single digit percent of our total market opportunity. We intend to continue to drive new client acquisition by investing significantly in sales and marketing to engage, educate and drive awareness of the unmet need around fertility solutions among benefits executives. We also increase brand awareness and adoption with employers by leveraging our strong relationships with benefits consultants. In particular, we are focused on expanding the number of clients with more than 2,500 covered lives. As of March 31, 2021 and December 31, 2020, we served 179 and 135 clients, respectively.

Importantly, as we have continued to grow, we have meaningfully diversified our client base across more than 30 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 March 31, 

As of December 31,

2021

2020

Client Tier (Members)

    

Clients

    

Members

    

Clients

    

Members

Up to 2,500

 

39

69,000

 

23

38,000

2,501 - 10,000

 

91

 

469,000

 

74

393,000

10,001 - 50,000

 

41

 

894,000

 

30

645,000

Greater than 50,000

 

8

 

1,287,000

 

8

1,259,000

Total

 

179

 

2,719,000

 

135

2,335,000

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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 approximately 2.7 million members as of March 31, 2021.

The following table highlights the number of assisted reproductive treatment, or ART, cycles performed for Progyny members and the member utilization rates for each of the periods presented:

Three Months Ended

March 31, 

2021

    

2020

Assisted Reproductive Treatment (ART) Cycles(1)

6,558

4,443

Utilization - All Members(2)

0.54%

0.46%

Utilization - Female Only(2)

0.47%

0.41%

Average Members

2,657,000

2,052,000

(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. Although public and private sector policies and initiatives to reduce the transmission of COVID-19 have varied significantly across the United States, but as of March 31, 2021, 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 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 monitor liquidity, as necessary, and ensure that our business can continue to operate during these uncertain times.

The outbreak and preventative measures taken to contain COVID-19, especially in the first half of 2020, negatively impacted our members’ access to care due to a temporary unavailability of the full range of fertility treatments at our provider clinics. 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 continued 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 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 of 2020.  The COVID-19 pandemic did continue to have a negative impact on our revenue growth during the three months ended March 31, 2021.

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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 II, Item 1A. Risk Factors included in this Quarterly Report on Form 10-Q.

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.

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 is recognized when the drugs are dispensed. This solution was introduced in the marketplace in the third quarter of 2017 and went live with a select number of clients on January 1, 2018.

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.

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Cost of Services

Our cost of services has three primary components: (1) fertility benefit services; (2) pharmacy benefit services; and (3) vendor rebates.

Fertility Benefit Services

Fertility benefit services costs include: (1) fees paid to provider clinics within our network, labs and anesthesiologists; (2) costs incurred (including salaries, bonuses, benefits, stock-based compensation, other related costs, and an allocation of our general overhead, depreciation and amortization) for those employees associated with our care management service functions: Provider Account Management, PCA, Provider Relations and Claims Processing teams; and (3) related information technology support costs. Our contracts with provider clinics are typically for a term of one to two years.

Pharmacy Benefit Services

Pharmacy benefit 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, 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 pharmacy program partners provide for us to receive a rebate from established list prices, which is paid subsequent to dispensing. These rebates are recorded as a reduction to cost of services when prescriptions are dispensed.

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

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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 for employees and professional fees and insurance and related third-party consulting services on an ongoing basis as a public company and to support growth in the business.

Other Income (Expense), net

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

Benefit (Provision) for Income Taxes

We are subject to income taxes in the United States. Income tax expense consists of taxes currently payable and changes in deferred tax assets and liabilities calculated according to local tax rules. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2020, we determined that there was sufficient positive evidence to conclude that it is more likely than not that the net deferred tax assets were realizable and released substantially all of our valuation allowance. We continue to maintain this position as of March 31, 2021.

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:

Three Months Ended

March 31, 

2021

2020

(in thousands)

Statements of Operations Data:

 

  

 

  

Revenue

$

122,133

$

81,024

Cost of services(1)

 

93,226

 

64,422

Gross profit

28,907

16,602

Operating expenses:

  

  

Sales and marketing(1)

4,014

3,267

General and administrative(1)

13,086

9,904

Total operating expenses

17,100

13,171

Income from operations

 

11,807

3,431

Other income (expense), net

 

(11)

 

314

Income before income taxes

 

11,796

 

3,745

Benefit (provision) for income taxes

 

3,370

 

(116)

Net income

$

15,166

$

3,629

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

Three Months Ended

March 31, 

2021

2020

Cost of services

$

1,287

$

337

Sales and marketing

 

681

 

237

General and administrative

 

3,066

 

1,475

Total stock‑based compensation expense

$

5,034

$

2,049

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Three Months Ended

March 31, 

    

2021

    

2020

    

Statements of Operations Data, as a percentage of revenue:

 

  

 

  

 

Revenue

 

100

%  

100

%

Cost of services

 

76

 

79

 

Gross profit

 

24

 

21

 

Operating expenses:

 

  

 

  

 

Sales and marketing

 

3

 

4

 

General and administrative

 

11

 

12

 

Total operating expenses

 

14

 

16

 

Income from operations

 

10

 

5

 

Other income (expense), net

 

(0)

 

0

 

Income before income taxes

 

10

 

5

 

Benefit (provision) for income taxes

 

3

 

 

Net income

 

12

%  

5

%

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 expenses, including other income and interest (income) expense, net; (5) it does not reflect tax payments that may represent a reduction in cash available to us; and (7) it does not include legal fees associated with a vendor arbitration. In addition, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner as we calculate the measure, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net income from continuing operations and other U.S. GAAP results.

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

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associated with a vendor arbitration. The following table presents a reconciliation of Adjusted EBITDA to net income for each of the periods indicated:

Three Months Ended

March 31, 

2021

2020

(in thousands)

Net income

$

15,166

$

3,629

Add:

Depreciation and amortization

422

520

Stock‑based compensation

5,034

2,049

Other income

(7)

(164)

Interest (income) expense, net

18

(150)

(Benefit) provision for income taxes

(3,370)

116

Legal fees associated with a vendor arbitration

693

Adjusted EBITDA

$

17,263

$

6,693

Comparison of Three Months Ended March 31, 2021 and 2020

Revenue

Three Months

Ended March 31, 

    

2021

    

2020

    

% Change

(dollars in thousands)

Revenue

 

$122,133

$81,024

 

51%

Revenue increased by $41.1 million, or 51%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This increase is primarily due to a $29.4 million, or 50% increase in revenue from our fertility benefits solution and a $11.7 million or 54% 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 Progyny Rx benefit. Progyny Rx revenue growth outpaces the fertility benefits revenue growth as Progyny Rx went live with only a select number of clients on January 1, 2018 and has continued to add both new and existing fertility benefit solution clients since its initial launch. In addition, our revenue growth for the three months ended March 31, 2020 was negatively impacted by the short-term pause in treatments due to COVID-19.

Cost of Services

Three Months

    

Ended March 31, 

    

2021

    

2020

    

% Change

(dollars in thousands)

Cost of services

 

$93,226

 

$64,422

 

45%

Cost of services increased by $28.8 million, or 45%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to an increase in medical treatment and pharmacy prescription costs associated with fertility treatments delivered as well as increases in personnel-related costs, including stock-based compensation.

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Gross Profit and Gross Margin

Three Months

    

Ended March 31, 

    

2021

    

2020

    

% Change

(dollars in thousands)

Gross profit

 

$28,907

 

$16,602

 

74%

Gross margin

 

23.7%

20.5%

 

  

Gross profit increased by $12.3 million, or 74%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Gross margin increased 320 basis points for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to favorable new terms with our pharmacy program partners, the net impact of regular contract renewals with our providers as well as continued efficiencies gained across our care management services. Gross margin in the three months ended March 31, 2020 was also affected by our decision to keep all care management staff in place, despite the pause in treatments caused by COVID-19.

Operating Expenses

Sales and Marketing Expense

Three Months

    

Ended March 31, 

    

2021

    

2020

    

% Change

(dollars in thousands)

Sales and marketing

 

$4,014

 

$3,267

 

23%

Sales and marketing expense increased by $0.7 million, or 23%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This increase was primarily due to a $1.0 million increase in personnel-related costs (including a $0.4 million increase in stock-based compensation) relating to additional headcount and commissions for sales and marketing functions, which was partially offset by lower travel and other overhead costs expenses due to COVID-19.

General and Administrative Expense

Three Months

    

Ended March 31, 

    

2021

    

2020

    

% Change

(dollars in thousands)

General and administrative

 

$13,086

 

$9,904

 

32%

General and administrative expense increased by $3.2 million, or 32%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This increase was primarily due to a $2.4 million increase in personnel-related costs (including a $1.6 million increase