SECURITIES AND EXCHANGE COMMISSION
|☒||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the quarterly period ended July 31, 2022
|☐||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: 001-38977
|(Exact name of registrant as specified in its charter)|
|(State or other jurisdiction of|
incorporation or organization)
1521 Concord Pike
Suite 301 PMB 221
|(Address of principal executive offices)||(Zip Code)|
(Registrant’s telephone number, including area code)
434 Fayetteville St, Suite 1400, Raleigh, NC 27601
(Former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class|| ||Trading|
| ||Name of each exchange|
on which registered
|Common Stock, par value $0.01 per share|| ||PHR|| ||The New York Stock Exchange|
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 September 2, 2022, 52,532,170 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
1 Phreesia, Inc. is a fully remote company and no longer maintains its principal executive office. The address listed here is the mailing address that we maintain. For purposes of compliance with applicable requirements of the Securities Act of 1933, as amended, and Securities Exchange Act of 1934, as amended, stockholder communications required to be sent to our principal executive offices should be directed to the email address set forth in our proxy materials and/or identified on our investor relations website.
For the Quarter Ended July 31, 2022
TABLE OF CONTENTS
Summary of Material Risks Associated with our Business
Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business. These risks and uncertainties include, but are not limited to, the following:
•We have grown rapidly in recent periods, and as a result, our expenses have continued to increase. If we fail to manage our growth effectively, our revenue may not increase, and we may be unable to implement our business strategy.
•We operate in a highly competitive industry, and if we are not able to compete effectively, including with the electronic health records ("EHR") and practice management ("PM") systems with which we integrate, our business and results of operations will be harmed.
•We have experienced net losses in the past and we may not achieve profitability in the future.
•Business or economic disruptions or global health concerns have harmed and may continue to harm our business and increase our costs and expenses.
•Privacy concerns or security breaches relating to our SaaS-based technology platform (the "Phreesia Platform" or our "Platform") could result in economic loss, damage to our reputation, deterring users from using our products, and our exposure to legal penalties and liability.
•We previously identified a material weakness in our internal control over financial reporting, and we may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.
•We typically incur significant upfront costs in our client relationships, and if we are unable to develop or grow these relationships over time, we are unlikely to recover these costs and our operating results may suffer.
•As a result of our variable sales and implementation cycles, we may be unable to recognize revenue to offset expenditures, which could result in fluctuations in our quarterly results of operations or otherwise harm our future operating results.
•We depend on our senior management team and certain key employees, and the loss of one or more of our executive officers or key employees or an inability to attract and retain highly skilled employees could adversely affect our business.
•We are subject to data privacy and security laws and regulations governing our collection, use, disclosure, or storage of personally identifiable information, including protected health information and payment card data, which may impose restrictions on us and our operations and subject us to penalties if we are unable to fully comply with such laws.
The summary risk factors described above should be read together with the text of the full risk factors below and in the other information set forth in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes, as well as in other documents that we file with the U.S. Securities and Exchange Commission, (the "SEC"). If any such risks and uncertainties actually occur, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition and results of operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance and may contain projections of our future results of operations or of our financial information or state other forward-looking information. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.
Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties, and other 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 these forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•our future financial performance, including our revenue, cash flows, costs of revenue and operating expenses;
•the rapidly evolving industry and the market for technology-enabled services in healthcare in the United States being relatively immature and unproven;
•our reliance on a limited number of clients for a substantial portion of our revenue;
•our anticipated growth and growth strategies and our ability to effectively manage that growth;
•our ability to achieve and grow profitability;
•the sufficiency of our cash, cash equivalents and investments to meet our liquidity needs;
•our potential competition with our customers or partners;
•our existing clients not renewing their existing contracts with us, renewing at lower fee levels or declining to purchase additional applications from us;
•our failure to adequately expand our direct sales force impeding our growth;
•our ability to recover the significant upfront costs in our customer relationships;
•our ability to determine the size of our target market;
•liability arising from our collection, use, disclosure, or storage of sensitive data collected from or about patients;
•consolidation in the healthcare industry resulting in loss of clients;
•the uncertainty and ongoing flux of the regulatory and political framework;
•the impact of the COVID-19 pandemic and other global financial, economic and political events on our business and our ability to attract, retain and cross-sell to healthcare services clients;
•our ability to obtain, maintain and enforce intellectual property for our technology and products;
•our reliance on third-party vendors, manufacturers and partners to execute our business strategy;
•our inability to implement our solutions for clients resulting in loss of clients and reputation;
•our dependency on our key personnel, and our ability to attract, hire, integrate, and retain key personnel, including as a result of being a fully remote company;
•the possibility that we may become subject to future litigation;
•our future indebtedness and contractual obligations;
•our expectations regarding trends in our key metrics and revenue from subscription fees from our healthcare services clients, payment processing fees and fees charged to our life sciences clients by delivering targeted messages to patients;
•our ability to realize the intended benefits of our acquisitions; and
•other risks and uncertainties, including those listed under the caption "Risk Factors."
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. We have based our forward-looking statements primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including, without limitation, those described in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q.
Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in these forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date on which the statements are made. We undertake no obligation to update, and expressly disclaim the obligation to update, any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.
WHERE YOU CAN FIND MORE INFORMATION
Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media and web channels as a means of disclosing information about the company, our platform, our planned financial and other announcements, attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:
PHREESIA Twitter Account (https://twitter.com/phreesia)
PHREESIA Facebook Page (https://www.facebook.com/phreesia/)
PHREESIA LinkedIn Page (https://www.linkedin.com/company/phreesia)
PHREESIA News Page (https://www.phreesia.com/news/)
PHREESIA Life Sciences Twitter Account (https://twitter.com/PhreesiaLifeSci)
PHREESIA Life Sciences Facebook Page (https://www.facebook.com/PhreesiaLifeSciences/)
PHREESIA Life Sciences LinkedIn Page (https://www.linkedin.com/company/phreesia-life-sciences/)
PHREESIA Life Sciences Page (https://lifesciences.phreesia.com)
The information we post through these channels may be deemed material. Accordingly, investors should monitor these accounts and our News page, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. These channels may be updated from time to time on Phreesia’s investor relations website.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands, except share and per share data)
|July 31, 2022||January 31, 2022|
|Cash and cash equivalents||$||240,729 ||$||313,812 |
|Settlement assets||19,725 ||19,590 |
Accounts receivable, net of allowance for doubtful accounts of $1,029 and $863 as of July 31, 2022 and January 31, 2022, respectively
|46,958 ||40,262 |
|Deferred contract acquisition costs||1,363 ||1,642 |
|Prepaid expenses and other current assets||7,721 ||11,043 |
|Total current assets||316,496 ||386,349 |
Property and equipment, net of accumulated depreciation and amortization of $61,661 and $53,321 as of July 31, 2022 and January 31, 2022, respectively
|28,558 ||34,645 |
Capitalized internal-use software, net of accumulated amortization of $33,809 and $31,139 as of July 31, 2022 and January 31, 2022, respectively
|27,522 ||17,643 |
|Operating lease right-of-use assets||1,315 ||2,337 |
|Deferred contract acquisition costs||1,988 ||2,437 |
Intangible assets, net of accumulated amortization of $1,864 and $1,178 as of July 31, 2022 and January 31, 2022, respectively
|12,086 ||12,772 |
|Deferred tax asset||75 ||515 |
|Goodwill||33,836 ||33,621 |
|Other assets||4,112 ||4,157 |
|Total Assets||$||425,988 ||$||494,476 |
|Liabilities and Stockholders’ Equity|
|Settlement obligations||$||19,725 ||$||19,590 |
|Current portion of finance lease liabilities and other debt||5,717 ||5,821 |
|Current portion of operating lease liabilities||1,298 ||1,281 |
|Accounts payable||10,088 ||5,119 |
|Accrued expenses||17,925 ||20,128 |
|Deferred revenue||17,195 ||16,493 |
|Total current liabilities||71,948 ||68,432 |
|Long-term finance lease liabilities and other debt||4,933 ||7,423 |
|Operating lease liabilities, non-current||633 ||1,276 |
|Long-term deferred revenue||10 ||65 |
|Total Liabilities||77,524 ||77,196 |
|Commitments and contingencies (Note 11)|
Common stock, $0.01 par value - 500,000,000 shares authorized as of both July 31, 2022 and January 31, 2022; 53,072,838 and 52,095,964 shares issued as of July 31, 2022 and January 31, 2022, respectively
|531 ||521 |
|Additional paid-in capital||896,264 ||860,657 |
Treasury stock, at cost, 563,428 and 301,003 shares as of July 31, 2022 and January 31, 2022, respectively
|Total Stockholders’ Equity||348,464 ||417,280 |
|Total Liabilities and Stockholders’ Equity||$||425,988 ||$||494,476 |
See notes to unaudited consolidated financial statements
Unaudited Consolidated Statements of Operations
(in thousands, except share and per share data)
|Three months ended |
|Six months ended |
|Subscription and related services||$||31,069 ||$||22,885 ||$||60,170 ||$||44,704 |
|Payment processing fees||19,581 ||16,306 ||38,962 ||32,950 |
|Life sciences||17,217 ||11,816 ||32,089 ||21,644 |
|Total revenues||67,867 ||51,007 ||131,221 ||99,298 |
|Cost of revenue (excluding depreciation and amortization)||14,873 ||10,032 ||29,259 ||18,566 |
|Payment processing expense||12,554 ||9,648 ||24,712 ||19,373 |
|Sales and marketing||38,341 ||22,167 ||78,372 ||37,179 |
|Research and development||22,542 ||11,443 ||43,177 ||19,497 |
|General and administrative||20,073 ||16,244 ||40,928 ||28,915 |
|Depreciation||4,220 ||3,701 ||8,498 ||6,998 |
|Amortization||1,599 ||1,580 ||3,203 ||3,231 |
|Total expenses||114,202 ||74,815 ||228,149 ||133,759 |
|Other income (expense), net||38 ||(90)||7 ||(24)|
|Interest (expense) income, net||(206)||(207)||(589)||(445)|
|Total other expense, net||(168)||(297)||(582)||(469)|
|Loss before provision for income taxes||(46,503)||(24,105)||(97,510)||(34,930)|
|Provision for income taxes||(213)||(288)||(448)||(437)|
|Net loss per share attributable to common stockholders, basic and diluted||$||(0.89)||$||(0.48)||$||(1.88)||$||(0.73)|
|Weighted-average common shares outstanding, basic and diluted||52,325,209 ||50,577,614 ||52,135,250 ||48,287,305 |
See notes to unaudited consolidated financial statements
Unaudited Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
|Shares||Amount||APIC||Accumulated Deficit||Treasury stock||Total|
|Balance, February 1, 2021||44,880,883 ||$||449 ||$||579,599 ||$||(311,777)||$||(4,965)||$||263,306 |
|Net loss||— ||— ||— ||(10,974)||— ||(10,974)|
|Stock-based compensation||— ||— ||5,774 ||— ||— ||5,774 |
|Exercise of stock options and vesting of restricted stock units||214,346 ||2 ||498 ||— ||— ||500 |
|Treasury stock from vesting of restricted stock units - satisfaction of tax withholdings||— ||— ||— ||— ||(1,145)||(1,145)|
|Issuance of common stock in follow-on public offering, net||5,175,000 ||52 ||245,761 ||— ||— ||245,813 |
|Balance, April 30, 2021||50,270,229 ||$||503 ||$||831,632 ||$||(322,751)||$||(6,110)||$||503,274 |
|Net loss||— ||— ||— ||(24,393)||— ||(24,393)|
|Stock-based compensation||— ||— ||7,355 ||— ||— ||7,355 |
|Exercise of stock options and vesting of restricted stock units||621,897 ||6 ||1,300 ||— ||— ||1,306 |
|Treasury stock from vesting of restricted stock units - satisfaction of tax withholdings||— ||— ||— ||— ||(978)||(978)|
|Balance, July 31, 2021||50,892,126 ||$||509 ||$||840,287 ||$||(347,144)||$||(7,088)||$||486,564 |
|Balance, February 1, 2022||52,095,964 ||$||521 ||$||860,657 ||$||(429,938)||$||(13,960)||$||417,280 |
|Net loss||— ||— ||— ||(51,242)||— ||(51,242)|
|Stock-based compensation||— ||— ||12,594 ||— ||— ||12,594 |
|Exercise of stock options and vesting of restricted stock units||326,624 ||4 ||544 ||— ||— ||548 |
|Issuance of stock for share-settled bonus awards||233,135 ||2 ||6,772 ||— ||— ||6,774 |
|Treasury stock from vesting of restricted stock units - satisfaction of tax withholdings||— ||— ||— ||— ||(4,735)||(4,735)|
|Balance, April 30, 2022||52,655,723 ||$||527 ||$||880,567 ||$||(481,180)||$||(18,695)||$||381,219 |
|Net loss||— ||— ||— ||(46,716)||— ||(46,716)|
|Stock-based compensation||— ||— ||13,236 ||— ||— ||13,236 |
|Exercise of stock options and vesting of restricted stock units||321,148 ||3 ||422 ||— ||— ||425 |
|Issuance of common stock for employee stock purchase plan||95,967 ||1 ||2,039 ||— ||— ||2,040 |
|Treasury stock from vesting of restricted stock units - satisfaction of tax withholdings||— ||— ||— ||— ||(1,740)||(1,740)|
|Balance, July 31, 2022||53,072,838 ||$||531 ||$||896,264 ||$||(527,896)||$||(20,435)||$||348,464 |
See notes to unaudited consolidated financial statements
Unaudited Consolidated Statements of Cash Flows
| ||Six months ended |
|Adjustments to reconcile net loss to net cash used in operating activities:|
|Depreciation and amortization||11,701 ||10,229 |
|Stock-based compensation expense||28,709 ||13,047 |
|Amortization of deferred financing costs and debt discount||144 ||144 |
|Cost of Phreesia hardware purchased by customers||546 ||273 |
|Deferred contract acquisition costs amortization||905 ||1,152 |
|Non-cash operating lease expense||1,022 ||483 |
|Change in fair value of contingent consideration liabilities||— ||209 |
|Deferred tax asset||440 ||279 |
|Changes in operating assets and liabilities:|
|Prepaid expenses and other assets||3,190 ||(1,037)|
|Deferred contract acquisition costs||(177)||(2,541)|
|Accounts payable||3,715 ||950 |
|Accrued expenses and other liabilities||983 ||(275)|
|Deferred revenue||647 ||2,100 |
|Net cash used in operating activities||(53,476)||(12,202)|
|Capitalized internal-use software||(10,242)||(5,023)|
|Purchases of property and equipment||(2,634)||(5,030)|
|Net cash used in investing activities||(12,876)||(10,053)|
|Proceeds from issuance of common stock in equity offerings, net of underwriters' discounts and commissions||— ||245,813 |
|Proceeds from issuance of common stock upon exercise of stock options||1,141 ||2,678 |
|Treasury stock to satisfy tax withholdings on stock compensation awards||(6,309)||(1,960)|
|Proceeds from employee stock purchase plan||1,949 ||295 |
|Finance lease payments||(2,899)||(2,100)|
|Principal payments on financing agreements||(216)||(873)|
|Debt issuance costs and loan facility fee payments||(397)||(125)|
|Payment of contingent consideration for acquisitions||— ||(400)|
|Net cash (used in) provided by financing activities||(6,731)||243,328 |
|Net (decrease) increase in cash and cash equivalents||(73,083)||221,073 |
|Cash and cash equivalents – beginning of period||313,812 ||218,781 |
|Cash and cash equivalents – end of period||$||240,729 ||$||439,854 |
|Supplemental information of non-cash investing and financing information:|
|Right-of-use assets recorded in exchange for operating lease liabilities||$||— ||$||81 |
|Property and equipment acquisitions through finance leases||$||526 ||$||1,980 |
|Purchase of property and equipment and capitalized software included in accounts payable||$||2,379 ||$||3,503 |
|Capitalized stock-based compensation||$||695 ||$||82 |
|Issuance of stock to settle liabilities for stock-based compensation||$||8,814 ||$||— |
|Cash paid for:|| |
|Interest||$||446 ||$||365 |
See notes to unaudited consolidated financial statements
Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share data)
1. Background and liquidity
Phreesia, Inc. (the "Company") is a leading provider of comprehensive software solutions that improve the operational and financial performance of healthcare organizations by activating patients in their care to optimize patient health outcomes. Through the SaaS-based technology platform (the "Phreesia Platform" or "Platform"), the Company offers healthcare services clients a robust suite of integrated solutions that manage patient access, registration, payments and clinical support. The Company’s Platform also provides life sciences companies, patient advocacy, public interest and other not-for-profit organizations with a channel for targeted and direct communication with patients. In connection with the patient intake and registration process, Phreesia offers its healthcare services clients the ability to lease tablets ("PhreesiaPads") and on-site kiosks ("Arrivals Kiosks") along with their monthly subscription. The Company was formed in May 2005.
On September 8, 2022, the Company ceased using its Raleigh, North Carolina office as its principal executive offices.
Since the Company commenced operations, it has not generated sufficient revenue to meet its operating expenses and has continued to incur significant net losses. To date, the Company has primarily relied upon the proceeds from issuances of common stock, debt and preferred stock to fund its operations as well as sales of Company products and services in the normal course of business. Management believes that net losses and negative cash flows will continue for at least the next year.
Management believes that the Company’s cash and cash equivalents at July 31, 2022, along with cash generated in the normal course of business, and available borrowing capacity under the Second Amended and Restated Loan and Security Agreement with Silicon Valley Bank ("SVB"), as amended by the First Loan Modification Agreement (as amended, the "Third SVB Facility") (Note 6), are sufficient to fund its operations for at least the next 12 months.
The Company will seek to obtain additional financing, if needed, to successfully implement its long-term strategy.
2. Basis of presentation
(a) Consolidated financial statements
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and regulations of the Securities and Exchange Commission ("SEC") regarding quarterly financial reporting and include the accounts of Phreesia, Inc., its branch operation in Canada and its consolidated subsidiaries (or collectively, the "Company").
(b) Fiscal year
The Company’s fiscal year ends on January 31. References to fiscal 2023 and 2022 refer to the fiscal years ending on January 31, 2023 and January 31, 2022, respectively.
(c) Unaudited interim financial statements
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP and applicable rules and regulations of the SEC regarding interim financial reporting. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for the fair statement of the Company’s interim financial position as of July 31, 2022 and the results of its operations, changes in its stockholders' equity and its cash flows for the periods ended July 31, 2022 and 2021. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results for the interim periods are not necessarily indicative of results to be expected for the full year, any other interim periods, or any future year or period. The Company’s management believes that the
disclosures herein are adequate to make the information presented not misleading when read in conjunction with the audited financial statements and accompanying notes for the fiscal year ended January 31, 2022.
3. Summary of significant accounting policies
The Company’s significant accounting policies are disclosed in the audited financial statements for the fiscal year ended January 31, 2022. Since the date of those audited financial statements, there have been no material changes to the Company’s significant accounting policies, including the status of recent accounting pronouncements, other than those detailed below.
(a) Use of estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and assumptions on historical experience, known trends and events and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments. Although management believes its estimates and assumptions are reasonable under the circumstances at the time they are made, they are based upon information available at the time they are made. Management evaluates the estimates and assumptions on an ongoing basis and, if necessary, makes adjustments. Actual results could differ from those estimates made under different assumptions or circumstances. The most significant assumptions and estimates relate to the allowance for doubtful accounts, capitalized internal-use software, the determination of the useful lives of property and equipment, the fair value of securities underlying stock-based compensation, the fair value of identifiable assets and liabilities and contingent consideration in business acquisitions, and the realization of deferred tax assets.
(b) Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and settlement assets. The Company’s cash and cash equivalents are held by established financial institutions. The Company does not require collateral from its customers and generally requires payment within 30 to 60 days of billing. Settlement assets are amounts due from well-established payment processing companies and normally take or business days to settle which mitigates the associated risk of concentration. The Company utilizes one third-party payment processor.
The Company’s customers are primarily physician’s offices and other healthcare services organizations located in the United States as well as pharmaceutical companies. The Company did not have any individual customers that represented more than 10% of total revenues for both the three and six months ended July 31, 2022 and 2021. As of both July 31, 2022 and January 31, 2022, the Company had receivables from at least one entity that accounted for at least 10% of total accounts receivable.
(c) Risks and uncertainties
Risks related to the COVID-19 pandemic
In March 2020, the World Health Organization declared the ongoing outbreak of a novel strain of coronavirus ("COVID-19") a pandemic. There continues to be uncertainty as to the duration and extent to which the global COVID-19 pandemic, as well as the emergence of new variants, may adversely impact the Company's business operations, financial performance, and results of operations, as well as macroeconomic conditions, at this time.
Other Risks and Uncertainties
The Company is subject to a variety of risk factors, including the economy, data privacy and security laws and government regulations. Additionally, the Company is subject to other risks associated with the markets in which it operates including reliance on third party vendors, partners, and service providers. Certain of the Company's service providers, including certain third-party software developers, are located in international locations subject to warfare and/or political and economic instability, such as Russia, Ukraine and India. As with any business, operation of the Company involves risk, including the risk of service interruption impacting the operations of the Company's business and the Company's customer’s facilities below expected levels of operation, shut downs due to the breakdown or failure of information technology and communications systems, changes in laws or regulations, political and economic instability, or catastrophic events such as fires, earthquakes, floods, explosions, global health
concerns such as pandemics or other similar occurrences affecting the delivery of our productions and services. The occurrence of any of these events could significantly reduce or eliminate revenues generated, or significantly increase the expenses of the Company's operations, adversely impacting the Company’s operating results and the Company's ability to meet the Company's obligations and commitments.
(d) New accounting pronouncements
Impact of recently adopted accounting pronouncements
During the three and six months ended July 31, 2022, the Company did not adopt any accounting pronouncements that materially impacted the Company's financial statements.
Recent accounting pronouncements not yet adopted
There are no recently issued accounting pronouncements the Company has not yet adopted that will materially impact the Company's consolidated financial statements.
4. Composition of certain financial statement captions
(a) Accrued expenses
Accrued expenses as of July 31, 2022 and January 31, 2022 are as follows:
| ||July 31, 2022||January 31, 2022|
|Payroll-related expenses and taxes||$||6,771 ||$||10,780 |
|Payment processing fees liability||3,876 ||3,502 |
|Tax liabilities||2,998 ||2,093 |
|Information technology services||2,142 ||1,266 |
|Other||2,138 ||2,487 |
|Total||$||17,925 ||$||20,128 |
(b) Property and equipment
Property and equipment as of July 31, 2022 and January 31, 2022 are as follows:
| ||(years)||July 31, 2022||January 31, 2022|
|PhreesiaPads and Arrivals Kiosks||3||$||26,835 ||$||26,387 |
|Computer equipment||3||55,519 ||53,957 |
3 to 5
|5,520 ||5,311 |
|Hardware development||3||1,058 ||1,024 |
|Furniture and fixtures||7||539 ||539 |
|Leasehold improvements||2||748 ||748 |
|Total property and equipment||$||90,219 ||$||87,966 |
|Less accumulated depreciation||(61,661)||(53,321)|
|Property and equipment — net||$||28,558 ||$||34,645 |
Depreciation expense related to property and equipment amounted to $4,220 and $3,701 for the three months ended July 31, 2022 and 2021, respectively. Depreciation expense related to property and equipment amounted to $8,498 and $6,998 for the six months ended July 31, 2022 and 2021, respectively.
Assets acquired under finance leases included in computer equipment were $27,842 and $27,310 as of July 31, 2022 and January 31, 2022, respectively. Accumulated amortization of assets under finance leases was $17,896 and $15,025 as of July 31, 2022 and January 31, 2022, respectively.
(c) Capitalized internal use software
For the three months ended July 31, 2022 and 2021, the Company capitalized $5,970 and $2,526, respectively, of costs related to the Phreesia Platform. For the six months ended July 31, 2022 and 2021, the Company capitalized $12,395 and $4,798, respectively, of costs related to the Phreesia Platform.
During the three months ended July 31, 2022 and 2021, amortization expense related to capitalized internal-use software was $1,255 and $1,452, respectively. During the six months ended July 31, 2022 and 2021, amortization expense related to capitalized internal-use software was $2,516 and $2,975, respectively.
(d) Intangible assets and goodwill
The following presents the details of intangible assets as of July 31, 2022 and January 31, 2022:
| ||(years)||July 31, 2022||January 31, 2022|
|Acquired technology||5||$||1,410 ||$||1,410 |
7 to 10
|6,340 ||6,340 |
|License||15||6,200 ||6,200 |
|Total intangible assets, gross carrying value||$||13,950 ||$||13,950 |
|Less accumulated amortization||(1,864)||(1,178)|
|Net carrying value||$||12,086 ||$||12,772 |
The remaining useful life for acquired technology in years was 3.1 and 3.5 as of July 31, 2022 and January 31, 2022, respectively. The remaining useful life for customer relationships in years was 8.7 and 9.2 as of July 31, 2022 and January 31, 2022, respectively. The remaining useful life for the license to the Patient Activation Measure ("PAM"®) in years was 14.4 and 14.8 as of July 31, 2022 and January 31, 2022, respectively.
Amortization expense associated with intangible assets amounted to $344 and $128 for the three months ended July 31, 2022 and 2021, respectively. Amortization expense associated with intangible assets amounted to $687 and $256 for the six months ended July 31, 2022 and 2021, respectively.
The estimated amortization expense for intangible assets for the next five years and thereafter is as follows as of July 31, 2022:
|July 31, 2022|
|2023 (Remaining six months)||$||686 |
|Fiscal Years Ending January 31,|
|2027 - thereafter||7,527 |
There were no significant changes to the Company's goodwill balance during the six months ended July 31, 2022. The Company did not record any impairments of goodwill during the three and six months ended July 31, 2022 or 2021. Goodwill was $33,836 and $33,621 as of July 31, 2022 and January 31, 2022, respectively.
(e) Accounts receivable
Accounts receivable as of July 31, 2022 and January 31, 2022 are as follows:
| ||July 31, 2022||January 31, 2022|
|Billed||$||45,320 ||$||40,733 |
|Unbilled||2,667 ||392 |
|Total accounts receivable, gross||$||47,987 ||$||41,125 |
|Less accounts receivable allowances||(1,029)||(863)|
|Total accounts receivable||$||46,958 ||$||40,262 |
Activity in the Company's allowance for doubtful accounts was as follows for the six months ended July 31, 2022:
| ||July 31, 2022|
Balance, January 31, 2022
|Bad debt expense||317 |
|Write-offs and adjustments||(151)|
Balance, July 31, 2022
The Company’s allowance for doubtful accounts represents the current estimate of expected future losses based on prior bad debt experience as well as considerations for specific customers as applicable. The Company's accounts receivable are considered past due when they are outstanding past the due date listed on the invoice to the customer. The Company writes off accounts receivable and removes the associated allowance for doubtful accounts when the Company deems the receivables to be uncollectible.
(f) Prepaid and other current assets
Prepaid and other current assets as of July 31, 2022 and January 31, 2022 are as follows:
| ||July 31, 2022||January 31, 2022|
|Prepaid software and business systems||$||3,036 ||$||3,738 |
|Prepaid data center expenses||2,711 ||3,230 |
|Prepaid insurance||110 ||1,924 |
|Other prepaid expenses and other current assets||1,864 ||2,151 |
|Total prepaid and other current assets||$||7,721 ||$||11,043 |
(g) Cloud computing implementation costs
The Company enters into cloud computing service contracts to support its sales and marketing, product development and administrative activities. Subsequent to the adoption of ASU 2018-15 in May 2020, the Company capitalizes certain implementation costs for cloud computing arrangements that meet the definition of a service contract. The Company includes these capitalized implementation costs within Prepaid expenses and other current assets and within other assets on its consolidated balance sheets. Once placed in service, the Company amortizes these costs over the remaining subscription term to the same caption in the statements of operations as the related cloud subscription. Capitalized implementation costs for cloud computing arrangements accounted for as service contracts were $1,532 and $1,514 as of July 31, 2022 and January 31, 2022, respectively. Accumulated amortization of capitalized implementation costs for these arrangements was $403 and $199 as of July 31, 2022 and January 31, 2022, respectively.
(h) Other income (expense), net
Other income (expense), net for the three months ended July 31, 2022 and 2021 was income of $38 and expense of $90, respectively. Other income (expense), net for the six months ended July 31, 2022 and 2021 was income of $7 and expense of $24, respectively. For all periods presented, other income (expense), net was composed primarily of foreign exchange gains and losses.
5. Revenue and contract costs
The Company generates revenue primarily from providing an integrated SaaS-based software and payment platform for the healthcare industry. The Company derives revenue from subscription fees and related services generated from the Company’s healthcare services clients for access to the Phreesia Platform, payment processing fees based on patient payment volume, and fees from life sciences companies to deliver marketing content to its patients using the Phreesia Platform.
The amount of subscription and related services revenue recorded pursuant to ASC 842 for the leasing of the Company’s PhreesiaPads and Arrivals Kiosks was $2,482 and $1,579 for the three months ended July 31, 2022 and 2021, respectively. The amount of subscription and related services revenue recorded pursuant to ASC 842 for the leasing of the Company’s PhreesiaPads and Arrivals Kiosks was $4,974 and $3,223 for the six months ended July 31, 2022 and 2021, respectively.
The following table represents a roll-forward of contract assets:
|January 31, 2022||$||392 |
|Amount transferred to receivables from beginning balance of contract assets||(340)|
|Contract asset additions, net of reclassification to receivables||2,615 |
|July 31, 2022||$||2,667 |The following table represents a roll-forward of deferred revenue:
|January 31, 2022||$||16,558 |
|Revenue recognized that was included in deferred revenue at the beginning of the period||(13,015)|
|Revenue recognized that was not included in deferred revenue at the beginning of the period||(17,626)|
|Increases due to invoicing prior to satisfaction of performance obligations||31,288 |
|July 31, 2022||$||17,205 |
Cost to obtain a contract
The Company capitalizes certain incremental costs to obtain customer contracts and amortizes these costs over a period of benefit that the Company has estimated to be five years. The Company determined the period of benefit by taking into consideration its customer contracts, its technology and other factors. Amortization expense is included in sales and marketing expenses in the accompanying statements of operations and totaled $438 and $577 for the three months ended July 31, 2022 and 2021, respectively. Amortization expense totaled $905 and $1,152 for the six months ended July 31, 2022 and 2021, respectively. The Company periodically reviews these deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit. There were no impairment losses recorded during the periods presented. to
The following table represents a roll forward of deferred contract acquisition costs:
|Beginning balance, January 31, 2022||$||4,079 |
|Additions to deferred contract acquisition costs||177 |
|Amortization of deferred contract acquisition costs||(905)|
|Ending balance, July 31, 2022||3,351 |
|Deferred contract acquisition costs, current (to be amortized in next 12 months)||1,363 |
|Deferred contract acquisition costs, non-current||1,988 |
|Total deferred contract acquisition costs||$||3,351 |
6. Finance leases and other debt
As of July 31, 2022 and January 31, 2022, the Company had the following outstanding finance lease liabilities and other debt:
|July 31, 2022||January 31, 2022|
|Finance leases||$||10,492 ||$||12,884 |
|Financing arrangements||45 ||266 |
|Accrued interest and payments||113 ||94 |
|Total finance lease liabilities and other debt||10,650 ||13,244 |
|Less - current portion of finance lease liabilities and other debt||(5,717)||(5,821)|
|Long-term finance lease liabilities and other debt||$||4,933 ||$||7,423 |
(a) Finance leases
See Note 10 - Leases for more information regarding finance leases.
(b) Amended and Restated Loan and Security Agreement
On February 28, 2019 (the "Effective Date"), the Company entered into the Amended and Restated Loan and Security Agreement (the "First SVB Facility") that provided for a $20,000 term loan. In connection with the transaction, the Company recorded a $1,073 loss on extinguishment of debt within other (expense) income, net for the settlement of previously outstanding loans payable.
On May 5, 2020, the Company entered into the Second SVB Facility. The Second SVB Facility modified the First SVB Facility. The Second SVB Facility provided for a revolving credit facility with an initial borrowing capacity of $50,000. The borrowing capacity could be increased to $65,000 at the sole discretion of Silicon Valley Bank. Upon entering into the Second SVB Facility, the Company borrowed $20,663 against the revolving credit facility and used the proceeds to repay all amounts due under the First SVB Facility term loan.
On March 28, 2022 (the "Third SVB Effective Date"), the Company entered into a First Loan Modification Agreement to the Second SVB Facility (as amended, the "Third SVB Facility") to increase the borrowing capacity from $50,000 to $100,000 and to reduce the interest rate on the facility. Borrowings under the Third SVB Facility are payable on May 5, 2025. Borrowings under the Third SVB Facility bear interest, which is payable monthly, at a floating rate equal to the greater of 3.25% or the Wall Street Journal Prime Rate minus 0.5%. As of July 31, 2022, the interest rate on the Second SVB Facility was 5.00%. In addition to principal and interest due under the revolving credit facility, the Company is required to pay an annual commitment fee of approximately $250 per year and a quarterly fee of 0.15% per annum of the average unused revolving line under the facility. The Company had $100,000 of availability under the facility as of July 31, 2022.
In the event that the Company terminates the Third SVB Facility prior to May 5, 2024, the Company will be required to pay a termination fee of up to 1.5% of borrowing capacity based on the length of time between termination and maturity. Any Company obligations under the Third SVB Facility are secured by a first priority security interest in substantially all of its assets, other than intellectual property. The Third SVB Facility includes a financial covenant that requires the Company to maintain a minimum Adjusted Quick Ratio as defined in the Third SVB Facility. The Third SVB Facility also includes a financial covenant that requires the Company to achieve certain profitability and liquidity thresholds. The financial covenant will not be effective if the Company maintains certain levels of liquidity as defined. Additionally, the Third SVB Facility contains customary events of default. The Company was in compliance with all covenants related to the Third SVB Facility as of July 31, 2022.
The Company presents unamortized deferred costs within other assets. The Company is amortizing the remaining unamortized costs over the remaining term of the Third SVB Facility.
Maturities of finance leases and other debt, in each of the next five years and thereafter are as follows:
| ||Total||Finance Leases||Other Debt|
|2023 (Remaining six months)||$||3,007 ||$||2,894 ||$||113 |
|Fiscal year ending January 31:|
|2024||4,966 ||4,921 ||45 |
|2025||2,475 ||2,475 ||— |
|2026||202 ||202 ||— |
|2027||— ||— ||— |
|Total maturities of finance leases and other debt||$||10,650 ||$||10,492 ||$||158 |
The components of interest (expense) income, net are as follows:
|Three months ended |
|Six months ended|
Interest expense (1)
|Interest income||86 ||19 ||105 ||39 |
|Interest (expense) income, net||$||(206)||$||(207)||$||(589)||$||(445)|
(1) Includes amortization of deferred financing costs and original issue discount.
7. Stockholders' equity
(a) Common stock
The Company closed an IPO on July 22, 2019 and filed an Amended and Restated Certificate of Incorporation authorizing the issuance of up to 500,000,000 shares of common stock, par value $0.01 per share.
On April 12, 2021, the Company completed a follow-on offering of its common stock. In connection with this offering, the Company issued and sold 5,175,000 shares of common stock at an issuance price of $50.00 per share resulting in net proceeds of $245,813, after deducting underwriting discounts and commissions.
(b) Treasury stock
The Company's equity-based compensation plan allows for the grant of non-vested stock options, restricted stock units ("RSUs") and total shareholder return ("TSR") performance-based stock units ("PSUs") to its employees pursuant to the terms of its stock option and incentive plans (see Note 8). Under the provision of the plans, for RSU and PSU awards, unless otherwise elected, participants fulfill their related income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting of the RSU or PSU, the Company divides the participant's estimated income tax obligation in dollars by the closing price of its common stock and withholds the resulting number of vested shares. The shares withheld are then transferred to the Company's treasury stock at cost.
8. Equity-based compensation
(a) Equity award plans
In January 2018, the Board of Directors adopted the Company’s 2018 Stock Option Plan (as amended, the "2018 Stock Option Plan") which provided for the issuance of options to purchase up to 3,048,490 shares of the Company’s common stock to officers, directors, employees, and consultants. The option exercise price per share is determined by the Board of Directors based on the estimated fair value of the Company’s common stock.
In June 2019, the Board of Directors adopted the Company’s 2019 Stock Option and Incentive Plan (the "2019 Plan"), which replaced the 2018 Stock Option Plan upon the completion of the IPO. The 2019 Plan allows the Compensation Committee of the Board of Directors (the "Compensation Committee") to make equity-based incentive awards including stock options, RSUs and PSUs to the Company’s officers, employees, directors, and consultants. The initial reserve for the issuance of awards under this plan was 2,139,683 shares of common stock. The initial number of shares reserved and available for issuance automatically increased on February 1, 2020 and automatically increases each February 1 thereafter by 5% of the number of shares of common stock outstanding on
the immediately preceding January 31 (or such lesser number of shares determined by the Compensation Committee). As the 2018 Stock Option Plan was replaced by the 2019 Plan, all grants of stock options, RSUs and PSUs during the six months ended July 31, 2022 were made pursuant to the 2019 Plan.
In June 2019, the Board of Directors also adopted the Company’s 2019 Employee Stock Purchase Plan (the "ESPP"), which became effective immediately prior to the effectiveness of the registration statement for the Company’s initial public offering. The total shares of common stock initially reserved under the ESPP is limited to 855,873 shares.
In August 2021, the Company amended its fiscal 2022 incentive bonus to allow eligible employees to elect to receive all or a portion of their fiscal 2022 year end incentive compensation in the form of immediately vested restricted stock units instead of cash. In February 2022, the Company amended its fiscal 2023 incentive bonus to allow eligible employees to elect to receive all or a portion of their fiscal 2023 incentive compensation in the form of immediately vested restricted stock units instead of cash.
As of July 31, 2022, there are 3,780,626 shares available for future grant pursuant to the 2019 Plan after factoring in the automatic increase which occurs on February 1 of each fiscal year, as well as an additional 640,742 shares available for future grant pursuant to the ESPP. During the second quarter of fiscal 2022, the Company activated its ESPP. The ESPP has two six-month offering periods each calendar year beginning in January and July. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a 15% discount through payroll deductions.
(b) Summary of stock-based compensation
The following table sets forth stock-based compensation by type of award:
|Three months ended |
|Six months ended|
|RSUs||$||10,752 ||$||6,072 ||$||20,701 ||$||10,842 |
|Liability awards||1,669 ||— ||3,574 ||— |
|PSUs||1,805 ||551 ||3,447 ||1,037 |
|Stock options||358 ||632 ||874 ||1,150 |
|ESPP||321 ||100 ||808 ||100 |
|Total stock based compensation||$||14,905 ||$||7,355 ||$||29,404 ||$||13,129 |
The following table sets forth the presentation of stock-based compensation in the Company's financial statements:
|Three months ended |
|Six months ended|
Stock-based compensation expense recorded to additional paid-in capital(1)
|$||13,236 ||$||7,355 ||$||25,830 ||$||13,129 |
|Stock-based compensation expense recorded to accrued expenses||1,669 ||— ||3,574 ||— |
|Total stock-based compensation||14,905 ||7,355 ||29,404 ||13,129 |
|Less stock-based compensation expense capitalized as internal-use software||(347)||(82)||(695)||(82)|
|Stock-based compensation expense per consolidated statements of operations||$||14,558 ||$||7,273 ||$||28,709 ||$||13,047 |
(1) Stock-based compensation included in the Company's consolidated statements of stockholders' equity is
consistent with these amounts.
(c) Restricted stock units
The Company has issued restricted stock units to employees and independent directors that vest based on a time-based condition. For RSUs granted to employees prior to January 2021, pursuant to a time-based condition, 10% of the restricted stock units vest after one year, 20% vest after two years, 30% vest after three years and 40% vest
after four years. The restricted stock units expire seven years from the grant date. During the year ended January 31, 2022, the Company modified the vesting of RSUs granted subsequent to January 1, 2021 for employees other than its named executive officers listed in its most recent proxy statement ("NEOs") and other members of its executive management team. Pursuant to the modified vesting schedule, RSUs granted after January 1, 2021 for employees other than NEOs and other members of its executive management team vest 6.25% each quarter over four years based on continued service. For NEOs and other members of the Company's executive management team, RSUs granted after January 1, 2022 vest 6.25% each quarter over four years based on continued service.
Additionally, the Company provides certain employees the option to settle their incentive bonus in immediately vested RSUs. In April 2022, the Company issued 233,135 immediately vested RSUs to settle fiscal 2022 share settled bonus awards. The RSUs granted to settle bonus awards are included in RSUs granted and vested in the table below. See section (g) Liability awards below for additional information regarding share settled bonus awards.
| ||Restricted stock units|
|Unvested, January 31, 2022||3,133,839 |
Granted in six months ended July 31, 2022
|Forfeited and expired ||(273,699)|
Unvested, July 31, 2022
As of July 31, 2022, there is $119,896 remaining of total unrecognized compensation cost related to these awards. The total unrecognized costs are expected to be recognized over a weighted-average term of 3.0 years.
(d) Stock options
Options granted under the equity award plans have a maximum term of ten years and vest over a period determined by the Board of Directors (generally four years from the date of grant or the commencement of the grantee’s employment with the Company). Options generally vest 25% at the one-year anniversary of the grant date, after which point they generally vest pro rata on a monthly basis.
Stock option activity for the six months ended July 31, 2022 is as follows:
|Outstanding — January 31, 2022||1,705,150 ||$||6.01 |
Granted in six months ended July 31, 2022
|— ||$||— |
|Forfeited and expired||(7,418)||$||4.42 |
Outstanding and expected to vest — July 31, 2022