S-1/A 1 d692551ds1a.htm AMENDMENT NO. 1 TO FORM S-1 Amendment No. 1 to Form S-1
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As filed with the Securities and Exchange Commission on June 26, 2019.

Registration No. 333-232264

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

PHREESIA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7389   20-2275479

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

432 Park Avenue South, 12th Floor

New York, NY 10016

(888) 654-7473

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Chaim Indig

Chief Executive Officer

432 Park Avenue South, 12th Floor

New York, NY 10016

(888) 654-7473

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

John J. Egan, Esq.

Edwin M. O’Connor, Esq.

Andrew R. Pusar, Esq.

Goodwin Procter LLP

100 Northern Avenue

Boston, MA 02210

(617) 570-1000

 

Charles Kallenbach, Esq.

Phreesia, Inc.

432 Park Avenue South, 12th Floor

New York, NY 10016

(888) 654-7473

 

John Chory, Esq.

Ian D. Schuman, Esq.

Stelios G. Saffos, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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 to Section 7(a)(2)(B) of the Securities Act.  

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate
Offering Price(1)(2)

  Amount of
Registration Fee(3)

Common Stock, par value $0.01 per share

  $125,000,000   $15,150(4)

 

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Includes the offering price of shares that the underwriters may purchase pursuant to an option to purchase additional shares.
(3)   Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
(4)   Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated June 26, 2019

Prospectus

                Shares

 

LOGO

Common Stock

This is the initial public offering of the common stock of Phreesia, Inc.

The selling stockholders identified in this prospectus are offering                 shares of our common stock, and we are offering                 shares of common stock. We will not receive any proceeds from the sales of our shares of common stock by the selling stockholders. We anticipate that the initial public offering price will be between $                 and $                 per share.

Prior to this offering, there has been no public market for our common stock. We have applied for listing of our common stock on the New York Stock Exchange, or the NYSE, under the symbol “PHR.”

We are an “emerging growth company” under the applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements and may elect to comply with reduced reporting requirements in future filings.

 

     
      Per share      Total  

Initial public offering price

   $                        $                    

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

Proceeds, before expenses, to selling stockholders

   $        $    

 

 

 

(1)   We refer you to the “Underwriting” section beginning on page 167 of this prospectus for additional information regarding underwriter compensation.

We have granted the underwriters a 30-day option to purchase up to an additional                 shares of our common stock to cover over-allotments at the initial public offering price less underwriting discounts and commissions.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 19.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to investors on or about                 , 2019.

 

 

 

J.P. Morgan   Wells Fargo Securities   William Blair
Allen & Company LLC     Piper Jaffray

                , 2019


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Table of contents

 

     Page  

Prospectus summary

     1  

Risk factors

     19  

Special note regarding forward-looking statements

     58  

Market and industry data

     60  

Use of proceeds

     61  

Dividend policy

     62  

Capitalization

     63  

Dilution

     66  

Selected financial data

     70  

Management’s discussion and analysis of financial condition and results of operations

     72  

Business

     100  

Management

     125  

Executive compensation

     134  

Director compensation

     145  

Certain relationships and related party transactions

     148  

Principal and selling stockholders

     151  

Description of capital stock

     154  

Shares eligible for future sale

     161  

Material U.S. federal income tax considerations for non-U.S. holders of common stock

     163  

Underwriting

     167  

Legal matters

     175  

Experts

     175  

Where you can find more information

     175  

Index to financial statements

     F-1  

Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders, nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.


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For investors outside the United States: neither we, the selling stockholders, nor any of the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside the United States.

This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.


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Basis of presentation

Our fiscal year ends on January 31 of each year. References in this prospectus to a fiscal year mean the year in which that fiscal year ends. References in this prospectus to “fiscal 2017” or “our 2017 fiscal year” relate to the fiscal year ended January 31, 2017, references in this prospectus to “fiscal 2018” or “our 2018 fiscal year” relate to the fiscal year ended January 31, 2018 and references in this prospectus to “fiscal 2019” or “our 2019 fiscal year” relate to the fiscal year ended January 31, 2019.


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Prospectus summary

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” and the financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless the context indicates otherwise, the terms “Phreesia,” “the company,” “we,” “us” and “our” in this prospectus refer to Phreesia, Inc. References to the “selling stockholders” refer to the selling stockholders named in this prospectus.

Our mission

To create a better, more engaging healthcare experience.

Overview

We are a leading provider of comprehensive solutions that transform the healthcare experience by engaging patients in their care and enabling healthcare provider organizations to optimize operational efficiency, improve profitability and enhance clinical care. As evidenced in industry survey reports from KLAS, we have been recognized as a leader based on our integration capabilities with healthcare provider organizations, the broad adoption of our patient intake functionalities and by overall client satisfaction. Through the SaaS-based Phreesia Platform (the “Phreesia Platform” or “our Platform”), we offer healthcare provider organizations (our “provider clients”) a robust suite of solutions to manage the patient intake process and an integrated payments solution for secure processing of patient payments. Our Platform also provides life sciences companies with an engagement channel for targeted and direct communication with patients. In fiscal 2019, we facilitated more than 54 million patient visits for approximately 50,000 individual providers, including physicians, physician assistants and nurse practitioners, in nearly 1,600 healthcare provider organizations across all 50 states. We define a patient visit as an individual, in-person visit to a healthcare provider, which may include multiple visits by the same patient. Additionally, our Platform processed more than $1.4 billion in patient payments in fiscal 2019.

Patient intake is a complex and time-consuming process involving numerous tasks, including registration, insurance verification, patient questionnaires, patient-reported outcomes, or PROs, payments and scheduling. Inefficiencies during the intake process often result in lower patient and provider satisfaction, wasted time, missed revenue opportunities and diminished health outcomes. Phreesia was founded to revolutionize patient intake and to create a better, more engaging healthcare experience. We have created an integrated and streamlined system that automates data capture and engages patients before, during and after the point of care.

The Phreesia Platform manages the end-to-end patient intake process and encompasses a comprehensive range of services, including initial patient contact, registration, appointment scheduling, payments and post-appointment patient surveys. The Phreesia Platform securely collects and analyzes each patient’s information and provides engagement tools to efficiently guide each patient through their healthcare journey. We deploy our Platform across a range of modalities, including through patients’ mobile devices (Phreesia Mobile), through a web-based dashboard for providers (Phreesia Dashboard) and through our proprietary, self-service intake tablets (PhreesiaPads) and on-site kiosks (Arrivals Stations), all of which provide an individualized intake experience for each patient based on age, gender and appointment type. Our solutions are highly customizable

 

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and scalable to any size healthcare provider organization and can seamlessly integrate within a provider client’s workflows and leading Practice Management, or PM, and Electronic Health Record, or EHR, systems. Our Platform additionally allows for time-of-service and secure post-explanation of benefits integrated payments.

We serve an array of provider clients ranging from single-specialty practices, which include internal and family medicine, urology, dermatology and orthopedics, to large, multi-specialty groups such as Crystal Run Healthcare and Iowa Clinic and large health systems such as Ascension Medical Group and Baycare Health Systems. Our life sciences business additionally serves clients in the pharmaceutical, biotechnology and medical device industries, including 13 of the top 20 global pharmaceutical companies as measured by revenue in fiscal 2019.

The Phreesia Platform currently offers the following solutions to our clients:

 

 

Our registration solution automates patient self-registration via Phreesia Mobile—either before or at the time of the patient’s visit—or through the use of a purpose-built PhreesiaPad or Arrivals Station for on-site check-in. The solution also includes the Phreesia Dashboard, which provider staff use to monitor and manage the intake process.

 

 

Our patient activation solution enables providers to communicate with their patients through automated, tailored patient surveys, branded patient announcements and messaging and preventive screening outreach.

 

 

Our revenue cycle solution provides insurance-verification processes, point-of-sale payments applications and cost estimation tools, which help providers maximize the timely collection of patient payments.

 

 

Our clinical support solution collects clinical intake and PRO data for more than 25 specialties, enabling our clients to ask the right clinical questions of the right patients at the right time, and gather key data that aligns with their quality-reporting goals.

 

 

Our appointments solution provides a comprehensive appointment scheduling system to provider clients with applications for online appointments, reminders and referral tracking.

 

 

Our life sciences solution provides a channel for our life sciences clients to deliver targeted and clinically relevant marketing content to patients, which allows them to have more informed conversations with their providers. We also enable our life sciences clients to receive direct patient feedback to incorporate into their business models.

The Phreesia Platform provides significant and measurable value to patients, healthcare provider organizations and life sciences companies. For patients, we provide a seamless, individualized intake experience and flexible payment options. For provider clients, we enable them to increase collections, streamline the referral process, improve quality measures, increase patient satisfaction and consistently collect key clinical, demographic and social data. Based on client feedback received and our internal analysis, we believe that the majority of our provider clients have been able to increase time-of-service collections. For life sciences clients, we increase patient awareness and education of their marketed products. Based on our analysis of client advertising campaigns conducted by Crossix and another data analytics company, which we commissioned, we believe patients exposed to a brand campaign using the Phreesia Platform are over four and a half times more likely, on average, to have a prescription filled for that product than control patients.

The success and continued evolution of our company has been due in large part to the talent and engagement of the entire Phreesia team. Our team members are key pillars of our success and fostering and developing their talent is central to our culture.

 

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Based on the significant value we provide to our clients, we have experienced strong organic revenue growth over the last two fiscal years. Total revenue increased approximately 25% from $79.8 million in fiscal 2018 to $99.9 million in fiscal 2019. For the three months ended April 30, 2018 and 2019, our revenue was $23.9 million and $28.3 million, respectively. Adjusted EBITDA increased from a loss of $4.1 million in fiscal 2018 to income of $3.5 million in fiscal 2019. For the three months ended April 30, 2018 and 2019, our Adjusted EBITDA was $1.0 million and negative $0.3 million, respectively. See “Prospectus summary—Summary financial and other data” for more information as to how we define and calculate Adjusted EBITDA and for a reconciliation of net income, the most comparable GAAP measure, to Adjusted EBITDA.

Industry challenges and our opportunity

We develop and market solutions that increase efficiency, reduce costs and improve clinical effectiveness in the healthcare industry. We believe the following trends impacting the healthcare industry represent significant opportunities for us.

Inefficiency and waste amidst continually rising U.S. healthcare expenditure

According to the Centers for Medicare & Medicaid Services, or CMS, total U.S. healthcare spending was $3.6 trillion in 2018 and is expected to grow to $6.0 trillion, or 20% of GDP, by 2027. At the same time, research from the National Academy of Medicine estimated that approximately 30% of U.S. healthcare spending in 2018, or $1.1 trillion, was wasteful. Additionally, a study in the Journal of American Medical Association estimated that roughly 27%, or $300 billion, of total healthcare waste is administrative-related. Much of this excess spending relates to complex billing procedures, non-standardized practices and a lack of communication between front- and back-office operations, leading to increased costs, errors and inefficient use of providers’ time. Physician practices, burdened by these complex administrative and billing tasks, require extensive support staff to handle these challenges.

The patient intake process today is primarily manual, tedious, prone to costly errors and repetitive. By contrast, the Phreesia Platform provides an automated and comprehensive solution to address key provider pain points. As the leading patient intake platform, Phreesia increases staff and doctor efficiency and allows providers to maximize clinical time with patients, reduce administrative complexities and optimize the delivery of care.

Increasing patient financial responsibility in healthcare

As healthcare expenditures continue to rise, employers and health systems have shifted more of the cost to patients through increased cost sharing and the use of high-deductible health plans. These trends have resulted in significant increases in out-of-pocket patient spending, which CMS expects to total $586 billion by 2027. The emergence of the patient as a major payer of healthcare is a dramatic shift in the industry payment landscape, which requires provider staff to obtain payment from the patient before and after the point of care. These tasks are best accomplished with more automated registration, billing and collection workflows, as well as patient-centric payment options. Against this backdrop, patients have historically struggled to understand their bills. According to a McKinsey & Company analysis, by some estimates, healthcare provider organizations collect only half of patient balances after initial visit, which contributes to incremental financial pressure.

Phreesia’s comprehensive digital payment platform enables providers to more effectively engage patients and increase collections. Our robust suite of revenue cycle solutions drives profitability, increases transparency and enhances the patient financial experience.

 

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Increasing consumerism in healthcare

As patients pay an ever-growing share of their healthcare costs, they are increasingly demanding higher quality care, increased cost transparency, shared decision making and convenience. As such, patient experience and satisfaction are becoming important priorities for providers as they compete to attract and retain new patients. Moreover, pharmaceutical companies are increasingly becoming more patient-centric due to increased competition and development of more targeted therapies.

We believe the Phreesia Platform drives improved patient satisfaction and education, efficiency and overall quality of care. Our Platform provides an end-to-end patient intake solution that engages patients directly on their device of choice (Phreesia Mobile, PhreesiaPad or Arrivals Station) to provide streamlined, self-service patient intake and empowers providers with intuitive, cloud-based software that drives actionable insights. Our automated and integrated intake solution allows us to achieve high levels of patient utilization, providing us and our provider clients with important access to patients at key moments of their care. We also help educate patients about relevant treatment options to encourage more engaging provider interaction, and we give pharmaceutical companies an effective channel to incorporate the patient voice in to their business models in an increasingly competitive, patient-centric healthcare environment.

Ongoing shift to value-based reimbursement models

The U.S. healthcare system has been shifting toward alternative payment models, in which healthcare provider organizations share financial risk and are reimbursed based on patients’ experience and outcomes, based on a review by the Health Care Payment & Learning Action Network. According to the American Hospital Association, the shift to these models requires healthcare provider organizations to manage new challenges related to measurement and reporting, population health management, care coordination and other patient demands, all of which may require additional staff and capabilities.

The Phreesia Platform provides real-time insights necessary to improve outcomes in a value-based operating model. We utilize industry-accepted PROs and clinical screening tools that have been developed by third parties and tested for reliability, sensitivity and validity. These PROs allow our healthcare provider clients to close gaps in care, identify successful treatments and engage patients in their care. At the same time, our ability to streamline the intake process and critical workflows improves provider and staff efficiency, allowing for optimal allocation of resources to manage the demands of a value-based care model.

Increasing focus on personalized healthcare solutions

We believe that the treatment and prevention of disease are becoming increasingly personalized, driven by technological advancements in the use of patient-specific health, lifestyle/environmental, genomic and other data to diagnose, treat and prevent disease at a personalized level. According to the Journal of the American Medical Association, pharmaceutical companies currently spend a substantial portion of their direct-to-consumer marketing dollars on television and print to reach large patient populations with chronic conditions such as diabetes and pain, which we believe is not as effective as targeted outreach. As new therapies, including those for smaller patient populations, are brought to market, pharmaceutical companies need cost-efficient marketing channels and capabilities to promote new medicines.

Phreesia’s high levels of patient engagement and robust targeting capabilities create an attractive marketing channel for life sciences companies to reach and inform targeted patient populations while they are seeking care which empowers patients to have informed conversations with their physician about their care plan and treatment options.

 

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Our market opportunity

The Phreesia Platform serves a range of provider clients, including single-specialty practices, multi-specialty groups and large health systems. Through our life sciences solutions, we provide services to large and small pharmaceutical, medical device and biotechnology companies. We believe the current addressable market for our Platform and services is approximately $7 billion and is derived from: (1) the potential subscription-based revenue generated from the approximately 890,000 U.S.-based ambulatory care providers currently taking medical appointments, (2) consumer-related transaction and payment processing fees, which are based on a percentage of payments that can be processed via the Phreesia Platform, and (3) a portion of the $6 billion spent by life sciences companies on direct-to-consumer prescription drug marketing. As we develop new products and services on the Phreesia Platform, we expect our total addressable market to grow. Our recent entry into acute-care organizations is an example of a new market offering that is not included in our current addressable market.

Our value proposition

We are focused on creating a better, more engaging healthcare experience for patients, healthcare provider organizations and life sciences companies. We believe our solutions provide a unique value proposition that is differentiated from what is offered by the traditional healthcare system.

Value proposition for patients

 

 

Improved patient experience. Our Platform streamlines the patient intake process and provides consumer-centric options for check-in. We pre-populate information from prior visits, minimizing the frustration of repetitive questions during the intake process and streamlining the information for review by a clinician by the time the patient reaches the exam room. We also offer patients a convenient, flexible, secure intake experience that saves time and reduces the confusion and anxiety around payments. Additionally, our cost estimation tool allows patients to receive an accurate estimate of their out-of-pocket spend for a particular service prior to receiving care. Patients are also able to save time by requesting appointments directly on their healthcare provider organization’s website using our technology.

 

 

Flexible payment options. Our Platform gives patients flexibility and choice in how they pay for healthcare services. Patients are able to pay upfront or set up an automated payment plan that adheres to the provider client’s financial policies. Patients can also choose to pay online on their provider’s website or place a card on file. Our Platform also removes the need for difficult payment-related conversations with staff and ensures a level of personal privacy throughout the transaction.

 

 

Engagement in care. By leveraging the power of self-service and providing individualized, flexible intake solutions, we engage patients early in their healthcare journey and empower them to be more active in their care decisions.

Value proposition for healthcare provider organizations

 

 

Simplify operations and enhance staff efficiency. We enable healthcare provider organizations to streamline operations through automated patient intake and payments that are integrated into existing workflows and PM and EHR systems. By automating the numerous tasks of the intake process, our provider clients have been able to save time on patient check-ins.

 

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Improve cash flow and profitability. We enable our provider clients to increase collections and reduce costs. Based on client feedback received and our internal analysis, we believe that our flexible patient payment options, including card on file, have led to an increase in time-of-service collections for the majority of our provider clients. Our automated eligibility and benefits verification solution also reduces the number of denied claims.

 

 

Enhance clinical quality. We enable our provider clients to more efficiently and effectively capture the right clinical information to meet their clinical goals and align with quality reporting initiatives. We administered more than five million PROs, such as depression screeners and health risk assessments, in fiscal 2019. Our logic-driven targeting and delivery of PROs and other questionnaires help providers identify and target at-risk patients in need of specific care and reduce errors by avoiding the need to manually gather the information.

 

 

Improve patient experience. We simplify the patient intake process to drive higher patient satisfaction, retention and engagement. Our streamlined intake and payments offering provides a consumer-friendly experience and engages patients to take control of their care. Through our patient surveys, providers are able to conduct outreach to patients within 24 hours of visit and generate real-time feedback that informs and drives improvement efforts.

Value proposition for life sciences organizations

 

 

Targeted, direct digital marketing. We provide life sciences companies with a channel to identify, reach, educate and communicate with patients when they are most receptive and actively seeking care. Our data-driven solutions provide custom, targeted patient outreach based on various clinical, environmental and social data, allowing our clients to engage patients with clinically relevant medical content to help facilitate conversations with their providers about treatment options.

 

 

Improve brand conversion and adherence. Our data and analytics capabilities identify patient populations that align with our life sciences clients’ target audiences. Based on our analysis of client advertising campaigns conducted by Crossix and another data analytics company, which we commissioned, we believe patients exposed to a brand campaign using the Phreesia Platform are over four and a half times more likely, on average, to have a prescription filled for that product than control patients. Integration with our point-of-care solutions, which engage our patients in their own care, increases incremental prescriptions with existing patients, driving an adherence benefit and strong return to our clients.

 

 

Feedback from patient voice. Our Patient Insights solution provides a channel for our life sciences clients to deliver real-time, dynamic surveys to highly targeted patients and capture direct patient feedback.

Our competitive strengths

Market leadership. We believe the Phreesia Platform is the most comprehensive and scalable patient intake and payments solution in the market, placing us at the point of care and in the center of the patient-provider relationship. Phreesia is an industry leader in market share and user engagement, with approximately 50,000 individual providers in nearly 1,600 healthcare provider organizations. We were named the 2019 KLAS Category Leader for Patient Intake Management based on survey data from healthcare provider organizations on areas such as integration, implementation support and overall client satisfaction. A 2018 KLAS report also ranked Phreesia as having the broadest adoption of its patient intake functionalities.

 

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Scalable SaaS-based platform embedded in mission-critical daily workflows. Our Platform seamlessly integrates into our provider clients’ daily workflows with bi-directional integration into 21 of the leading PM and EHR systems collectively representing the majority of the total PM and EHR market. These robust integrations provide real-time exchange of clinical, demographic and financial information. For example, customized consent forms and questionnaires are uploaded directly into a provider clients’ PM or EHR system immediately upon completion, which reduces staff time spent on administrative tasks. Our feature-rich SaaS technology architecture is highly scalable across healthcare provider organizations of all sizes, from small independent practices to large health systems with multiple locations, enabling us to implement our solutions quickly and cost-effectively.

Integrated payment platform. The integration of payments within our patient intake platform creates a seamless experience for both patients and providers and results in increased payments for healthcare provider organizations and revenue for Phreesia. Compared with disparate payment platforms and manual reconciliation processes, the Phreesia Platform automatically posts payments in real-time to a provider client’s PM system, creating material time and cost efficiencies for our provider clients. Our revenue cycle solutions, such as card on file, online payments and payment plans, provide convenient payment options for patients, lower bad debt expense for provider clients and reduce payment-related tasks for their staff.

Significant and measurable return on investment. We actively measure and report performance metrics for our provider clients, demonstrating significant and sustainable return on investment in multiple impact areas, often as early as 30-60 days after launch. Example impact areas include: increased collections, expanding staff and provider capacity, optimizing profitability, improving patient experience, and enhancing clinical care.

Proven ability to innovate and meet the evolving needs of our clients. We have demonstrated the ability to quickly and reliably incorporate new applications into the Phreesia Platform to address the myriad of challenges facing healthcare provider organizations and we continue to evaluate the most impactful innovations that will drive a better healthcare experience. Our solution was initially designed as a patient check-in and messaging tool, but it has rapidly evolved into a comprehensive patient intake and payment platform designed to keep pace with evolving demand from patients and providers. We have introduced multiple new applications in the last three years, including Phreesia Mobile, which allows patients to check in conveniently from their own device and has significantly increased patient utilization and overall patient engagement, and Payment Assurance, which eliminates many of the manual tasks required to bill a patient.

Attractive, highly scalable financial model. Our revenue is largely derived from recurring monthly subscriptions and re-occurring payment processing fees, which should increase with growth of our client base and the ongoing shift of healthcare costs to patients. We have successfully expanded our products sold to existing clients by adding incremental providers and offering additional solutions to these clients. This has led to a 26% increase in average revenue per provider client from fiscal 2018 to fiscal 2019. As our provider clients continue to add more providers to our Platform, we benefit from increased scale and strong unit economics. Our highly recurring revenue and strong client retention is evidenced by our 107% annual dollar-based net retention rate for provider clients in fiscal 2019.

Founder-led and deeply experienced management team with strong culture. Our founders, Chaim Indig and Evan Roberts, are pioneers in patient intake who have led our company through consistent and rapid growth over the past 14 years. Our senior leadership team has extensive healthcare, technology and payment knowledge and expertise, and an average 10-year tenure with Phreesia. Additionally, our dedicated sales, implementation, support and development teams also have significant healthcare, technology and payment experience and are a key competitive advantage to our success in the marketplace.

 

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Attracting and retaining top talent is a high priority for us. Our strong company culture and investment in the long-term career growth for our people is evidenced by their long tenure with our organization. We believe our success is due in large part to the continued engagement of our talented and committed team. Modern Healthcare magazine recognized Phreesia as one of the “Best Places to Work in Healthcare” for the last three consecutive years, optimally positioning us to continue to attract top healthcare and technology talent.

Our growth strategies

The success of our business depends on acquiring new provider clients and increasing utilization among our existing provider clients, which in turn drives growth across our Platform and solutions. We believe we are well-positioned to benefit from a number of prevailing industry tailwinds across patient intake, patient payments and life sciences marketing. We intend to continue to proactively grow the business through the following strategies:

 

 

Expanding our Platform to new healthcare provider organizations

 

Deepening our relationship with existing provider clients

 

Continuing to innovate and leverage our Platform to optimize healthcare delivery

 

Pursuing opportunistic strategic investments, partnerships and acquisitions

 

Enhancing our margins through continued strategic growth

Risk factors summary

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

 

We have experienced net losses in the past and we may not achieve profitability in the future.

 

 

The healthcare industry is rapidly evolving and the market for technology-enabled services that empower healthcare consumers is relatively immature and unproven. If we are not successful in promoting the benefits of our Platform, our growth may be limited.

 

 

We have grown rapidly in recent periods, and if we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase and we may be unable to implement our business strategy.

 

 

We derive a significant portion of our revenues from our largest clients.

 

 

We may potentially compete with our clients or partners, which may 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 personal health information, which may impose restrictions on us and our operations and subject us to penalties if we are unable to fully comply with such laws.

 

 

Privacy concerns or security breaches relating to our Platform could result in economic loss, damage our reputation, deter users from using our products, and expose us to legal penalties and liability.

 

 

If we are unable to obtain, maintain and enforce intellectual property protection for our technology and products or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and products substantially similar to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

 

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We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above the initial public offering price.

 

 

If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our common stock could decline.

Implications of being an emerging growth company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenues of at least $1.07 billion or (c) in which we are deemed to be a “large accelerated filer,” under the rules of the U.S. Securities and Exchange Commission, or SEC, which means the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the prior July 31st, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards. Therefore, we will not be subject to the same transition period for new or revised accounting standards as other public companies that are not emerging growth companies. While we have elected the exemption permitted under JOBS Act to adopt new or revised accounting standards until such time as those standards apply to private companies, we are permitted to early adopt new or revised accounting standards for which the respective standard allows for early adoption.

Channels for disclosure of information

Investors, the media and others should note that, following the completion of this offering, we intend to announce material information to the public through filings with the SEC, the investor relations page on our website, press releases, and public conference calls and webcasts.

Company and other information

We were incorporated under the laws of the State of Delaware in 2005. Our principal executive office is located at 432 Park Avenue South, 12th Floor, New York, New York 10016, and our telephone number is (888) 654-7473. Our website address is http://www.phreesia.com. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

 

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This summary highlights information contained elsewhere in this prospectus. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included elsewhere in this prospectus, “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations.” As used in this prospectus, unless the context otherwise requires, references to the “company,” “we,” “us” and “our” refer to Phreesia, Inc.

 

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The offering

 

Common stock offered by us

                shares

 

Common stock offered by the selling stockholders

                shares

 

Common stock to be outstanding immediately after this offering

                shares

 

Underwriters’ option to purchase additional shares

We have granted a 30-day option to the underwriters to purchase up to an aggregate of                 additional shares of common stock to cover over-allotments at the initial public offering price less underwriting discounts and commissions.

 

Use of proceeds

We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $                million, or $                million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of common stock in this offering by the selling stockholders.

 

  The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. We will use a portion of the net proceeds from this offering to pay a cash dividend to the holders of shares of our Senior A preferred stock and our Senior B preferred stock, which shares we refer to collectively as the Senior Convertible preferred stock, unless the initial public offering price for this offering exceeds certain thresholds as described in “Dividend Policy” below. We may also use a portion of the net proceeds from this offering to repay some or all of our secured term loan or our revolving line of credit with Silicon Valley Bank. We intend to use the remaining net proceeds from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time. See “Risk factors—We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.”

 

  For a more complete description of our intended use of the proceeds from this offering, see “Use of proceeds.”

 

Risk factors

You should carefully read the “Risk factors” section of this prospectus beginning on page 19 for a discussion of factors that you should consider before deciding to invest in our common stock.

 

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Proposed symbol

“PHR.”

 

Dividend Policy

The terms of our sixth amended and restated certificate of incorporation, as amended and in effect immediately prior to the closing of this offering, or the pre-offering certificate of incorporation, provide that each share of our Senior Convertible preferred stock accrues, from and after the date of the issuance, cash dividends at the rate per annum of 8% of the original issue price applicable to such share of Senior Convertible preferred stock. Our Junior Convertible preferred stock and redeemable preferred stock do not accrue any dividends. The accruing dividend on the Senior Convertible preferred stock is payable to the holders of shares of our Senior Convertible preferred stock upon the closing of this offering if (i) the offering price to the public in this offering is at least $9.20 per share and (ii) this offering results in at least $50 million in proceeds to us, net of underwriting discounts and commissions. We refer to an offering satisfying the conditions in the prior sentence as a Qualified Public Offering. However, if this offering constitutes a Qualified Public offering and the initial public offering price for this offering exceeds certain thresholds, the amount of the dividend payable to holders of shares of our Senior Convertible preferred stock will decrease, and ultimately may no longer become payable, based on a sliding scale set forth in our pre-offering certificate of incorporation. The cash dividend will no longer be payable to holders of Senior A preferred stock if the initial public offering price for this offering is at least $9.88 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to our capital stock) and will no longer be payable to holders of Senior B preferred stock if the initial public offering price for this offering is at least $16.64 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to our capital stock). If this offering does not constitute a Qualified Public Offering, the accrued dividend on our Senior Convertible preferred stock may be payable, in full or in part, to holders of our Senior Convertible preferred stock at the closing of this offering, subject to any discussions and agreements between the company and such holders of Senior Convertible preferred stock.

 

  Based on an assumed closing date for this offering of                , 2019, and an assumed initial public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we expect to pay an aggregate accrued cash dividend of approximately $                to holders of our Senior Convertible preferred stock at the closing of this offering.

 

 

If this offering closes one day prior to the assumed closing date of                , 2019, such cash dividends decrease by an aggregate amount of approximately $                ; if this offering closes one day following the assumed closing date of                , 2019, such cash dividends increase by an aggregate amount of approximately $                . In addition, a $1.00 increase in the assumed initial public offering price of $                would decrease the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                ;

 

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a $1.00 decrease in the assumed initial public offering price of $                would increase the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                .

 

  The cash dividend will not be paid on any shares of our common stock purchased in this offering. We do not pay dividends on our common stock and do not anticipate paying any dividends on our common stock for the foreseeable future. Any future determinations relating to our dividend policy will be made at the discretion of our board of directors and will depend on various factors.

 

  See the section entitled “Dividend policy” on page 62.

The number of shares of our common stock to be outstanding after this offering is based on 4,448,655 shares of our common stock outstanding as of April 30, 2019 and an additional 55,617,548 shares of our common stock issuable upon the automatic conversion of all outstanding shares of our convertible preferred stock upon the closing of this offering, and excludes:

 

 

7,872,153 shares of common stock issuable upon the exercise of stock options outstanding as of April 30, 2019 under our Amended and Restated 2006 Stock Option and Grant Plan, as amended, or the 2006 Plan, at a weighted average exercise price of $0.70 per share;

 

 

5,406,968 shares of common stock issuable upon the exercise of stock options outstanding as of April 30, 2019 under our 2018 Stock Option and Grant Plan, as amended, or the 2018 Plan, at a weighted average exercise price of $2.77 per share;

 

 

858,750 shares of our common stock subject to restricted stock units, or RSUs, outstanding as of April 30, 2019;

 

 

893,618 shares of our common stock issuable upon the exercise of warrants outstanding as of April 30, 2019 to purchase common stock at a weighted average exercise price of $2.08 per share;

 

 

1,278,397 shares of our common stock issuable upon the exercise of warrants outstanding as of April 30, 2019 to purchase convertible preferred stock at a weighted average exercise price of $1.78 per share;

 

 

358,244 shares of our redeemable preferred stock issuable upon the exercise of a warrant outstanding as of April 30, 2019, which will be cancelled upon the closing of this offering;

 

 

429,330 shares of common stock available for future issuance as of April 30, 2019 under the 2018 Plan, which will cease to be available for issuance at the time that our 2019 Stock Option and Incentive Plan, or the 2019 Plan, becomes effective;

 

 

42,560,530 shares of our redeemable preferred stock, which will be cancelled upon the closing of this offering;

 

 

                     shares of our common stock reserved for future issuance under our 2019 Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus is a part; and

 

 

                     shares of our common stock reserved for issuance under our 2019 Employee Stock Purchase Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus is a part.

Unless otherwise indicated, all information in this prospectus reflects or assumes the following:

 

 

the filing of our amended and restated certificate of incorporation effective upon the closing of this offering;

 

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the adoption of our amended and restated bylaws, effective on the date on which the registration statement of which this prospectus is part is declared effective;

 

 

the automatic conversion of all outstanding shares of our Junior Convertible preferred stock and our Senior Convertible preferred stock, which we refer to collectively herein as our convertible preferred stock, into an aggregate of 55,617,548 shares of common stock upon the closing of this offering;

 

 

the cancellation of 42,560,530 shares of our redeemable preferred stock upon the closing of this offering;

 

 

a warrant to purchase 489,605 shares of our Junior Convertible preferred stock and 358,244 shares of our redeemable preferred stock outstanding as of April 30, 2019 becoming a warrant to purchase an aggregate of 489,605 shares of common stock, at a weighted-average exercise price of $0.01, upon the closing of this offering, and whereby the portion of the warrant exercisable for 358,244 shares of our redeemable preferred stock will be cancelled upon the closing of this offering;

 

 

warrants to purchase 672,560 shares of our Senior A preferred stock outstanding as of April 30, 2019 becoming warrants to purchase an aggregate of 672,560 shares of common stock, at a weighted-average exercise price of $3.00, upon the closing of this offering;

 

 

no exercise of options or warrants outstanding as of April 30, 2019, other than the automatic cashless exercise of a warrant to purchase 116,232 shares of our Senior A preferred stock which, based on an assumption that the fair market value of our common stock for purposes of automatic exercise under the warrant will be equal to the assumed initial public offering price of $                per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the automatic conversion of the shares of Senior A preferred stock issued pursuant to such automatic cashless exercise into shares of common stock, would result in the issuance of                shares of our common stock upon the closing of this offering (a $1.00 decrease in the assumed initial public offering price of $                per share would increase the number of additional shares of our common stock issuable in connection with such automatic exercise by an aggregate of                shares; a $1.00 increase in the assumed initial public offering price of $                per share would decrease the number of additional shares of our common stock issuable in connection with such exercise by an aggregate of                shares);

 

 

for purposes of any automatic cashless automatic exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of such warrant;

 

 

no settlement of outstanding RSUs subsequent to April 30, 2019;

 

 

no exercise by the underwriters of their option to purchase up to                additional shares of common stock in this offering; and

 

 

a 1-for-         reverse stock split of our common stock effected on                     .

 

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Summary financial and other data

You should read the following summary financial data together with our financial statements and the related notes appearing at the end of this prospectus and the “Selected financial data” and “Management’s discussion and analysis of financial condition and results of operations” sections of this prospectus. We have derived the statement of operations data for fiscal 2018 and fiscal 2019 and the balance sheet data as of fiscal 2019 from our audited financial statements and the related notes thereto appearing at the end of this prospectus. The statements of operations data for three months ended April 30, 2018 and 2019 and the balance sheet data as of April 30, 2019 are derived from unaudited interim financial statements included elsewhere in this prospectus. The unaudited interim financial statements have been prepared on the same basis as the audited financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the unaudited interim financial statements. Our historical results are not necessarily indicative of results that may be expected in the future, and the results for the three months ended April 30, 2019 and are not necessarily indicative of results to be expected for the full year or any other period. The summary financial data in this section is not intended to replace the financial statements and related notes thereto included elsewhere in this prospectus and are qualified in their entirety by the financial statements and related notes thereto included at the end of this prospectus.

 

     
     Fiscal year ended January 31,     Three months ended
April 30,
 
(in thousands, except per share data)                2018                 2019                 2018                 2019  

Statement of operations data:

        

Revenue

        

Subscription and related services

   $ 32,430     $ 43,928     $ 10,002     $ 12,683  

Payment processing fees

     28,671       36,881       9,232       11,557  

Life sciences

     18,733       19,080       4,637       4,070  
  

 

 

   

 

 

   

 

 

 

Total revenue

   $ 79,834     $ 99,889     $ 23,871     $ 28,310  

Expenses

        

Cost of revenue (excluding depreciation and amortization)

  

 

12,562

 

 

 

15,105

 

 

 

3,223

 

 

 

3,996

 

Payment processing expense

     17,209       21,892       5,590       6,949  

Sales and marketing

     24,761       26,367       6,247       7,702  

Research and development

     11,377       14,349       3,109       4,299  

General and administrative

     18,838       20,076       4,928       6,245  

Depreciation

     6,832       7,552       1,772       2,155  

Amortization

     2,808       4,042       913       1,219  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

   $ 94,387     $ 109,382     $ 25,781     $ 32,564  

Operating loss

   $ (14,553   $ (9,494   $ (1,910   $ (4,255

Other income (expense)

        

Other income (expense)

     602       (7     (175     (1,145

Change in fair value of warrant liability

     (598     (2,058     (291     (423

Interest income (expense)

     (3,642     (3,504     (848     (804
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (3,639   $ (5,568   $ (1,314   $ (2,372
  

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

   $ (18,192   $ (15,062   $ (3,224   $ (6,627
  

 

 

   

 

 

   

 

 

 

Provision for income taxes

     —         —         —         (68
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (18,192   $ (15,062   $ (3,224   $ (6,695

Accretion of redeemable preferred stock

   $ (19,981   $ (30,199   $ (2,490   $ (7,863
  

 

 

   

 

 

   

 

 

 

 

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     Fiscal year ended January 31,     Three months ended
April 30,
 
(in thousands, except per share data)                2018                 2019                 2018                 2019  

Net loss attributable to common stockholders

   $ (38,173   $ (45,261   $ (5,713   $ (14,558
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

   $ (11.29   $ (11.16   $ (1.50   $ (3.29
  

 

 

 

Weighted-average common shares outstanding, basic and diluted(1)

     3,381       4,054       3,811       4,425  
  

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(1)

   $       $       $       $    
  

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted (unaudited)(1)

        

 

 

 

(1)   See Note 13 to our financial statements appearing at the end of this prospectus for details on the calculation of basic and diluted net loss per share attributable to common stockholders and unaudited basic and diluted pro forma net loss per share attributable to common stockholders.

 

   
     As of April 30, 2019  
(in thousands)    Actual     Pro forma(1)      Pro forma as
adjusted(2)
 

Balance sheet data:

       

Cash and cash equivalents

   $ 5,913     $                        $                    

Total assets

     68,107       

Long-term debt and capital leases, net of discount, including current portion

     37,979       

Preferred stock warrant liability

     5,921       

Redeemable preferred stock

     214,353       

Common stock and additional paid in capital

     44       

Total stockholders’ equity (deficit)

     (224,063     

 

 

 

     
     As of and for fiscal
year ended January 31,
     As of and for
three months
ended April 30,
 
      2018     2019      2018     2019  

Non-GAAP measures and other data:

         

Provider clients (average over period)(3)

     1,416       1,490        1,450       1,549  

Average revenue per provider client (4)

   $ 43,163     $ 54,231      $ 13,265     $ 15,649  

Patient payment volume (in millions)(5)

   $ 1,106     $ 1,446      $ 360     $ 461  

Annual dollar-based net retention rate (end of period)(6)

     111%       107%        —         —    

Adjusted EBITDA (in thousands)(7)

   $ (4,109   $ 3,548      $ 1,027     $ (282

Free cash flow (in thousands)(8)

   $ (23,107   $ (11,963    $ (2,855   $ (692

 

 

 

(1)   The pro forma balance sheet data give effect to:

 

   

the filing and effectiveness of our amended and restated certificate of incorporation;

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 55,617,548 shares of common stock upon the closing of this offering;

 

   

the cancellation of 42,560,530 shares of our redeemable preferred stock upon the closing of this offering;

 

   

a warrant to purchase 489,605 shares of our Junior Convertible preferred stock and 358,244 shares of our redeemable preferred stock becoming a warrant to purchase an aggregate of 489,605 shares of common stock, at a weighted-average exercise price of $0.01, upon the closing of this offering, and whereby the portion of the warrant exercisable for 358,244 shares of our redeemable preferred stock will be cancelled upon the closing of this offering;

 

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warrants to purchase 672,560 shares of our Senior A preferred stock becoming warrants to purchase an aggregate of 672,560 shares of common stock, at a weighted-average exercise price of $3.00, upon the closing of this offering;

 

   

the automatic cashless exercise of a warrant to purchase 116,232 shares of our Senior A preferred stock, which, based on an assumption that the fair market value of our common stock for purposes of automatic exercise under the warrant will be equal to the assumed initial public offering price of $                per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the automatic conversion of the shares of Senior A preferred stock issued pursuant to such automatic cashless exercise into shares of common stock, would result in the issuance of                shares of our common stock upon the closing of this offering (a $1.00 decrease in the assumed initial public offering price of $                per share would increase the number of additional shares of our common stock issuable in connection with such automatic exercise by an aggregate of                shares; a $1.00 increase in the assumed initial public offering price of $                per share would decrease the number of additional shares of our common stock issuable in connection with such exercise by an aggregate of                shares);

 

   

for purposes of any automatic cashless automatic exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of such warrant; and

 

   

the payment of an accrued dividend to holders of 22,871,507 shares of our Senior Convertible preferred stock in the aggregate amount of $                , which becomes due and payable to such holders upon the conversion of all such shares into an aggregate of 22,871,507 shares of common stock upon the closing of this offering. The cash dividend is calculated based on an assumed closing date for this offering of                , 2019, and an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus. If this offering closes one day prior to the assumed closing date of                , 2019, such cash dividends decrease by an aggregate amount of approximately $                ; if this offering closes one day following the assumed closing date of                , 2019, such cash dividends increase by an aggregate amount of approximately $                . In addition, a $1.00 increase in the assumed initial public offering price of $                would decrease the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of approximately $                ; a $1.00 decrease in the assumed initial public offering price of $                would increase the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of approximately $                .

 

(2)   The pro forma as adjusted balance sheet data give further effect to our issuance and sale of                shares of our common stock in this offering at an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $                million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $                million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(3)   We define provider clients as the average number of healthcare provider organizations that generate revenue each month during the applicable period. See “Management’s discussion and analysis of financial condition and results of operations” for additional information regarding our calculation.

 

(4)   We define average revenue per provider client as the total subscription and related services and payment processing revenue generated from provider clients in a given period divided by the average number of provider clients that generate revenue each month during that same period. See “Management’s discussion and analysis of financial condition and results of operations” for additional information regarding our calculation.

 

(5)   We measure patient payment volume as the total dollar volume of transactions between our provider clients and their patients utilizing our payment platform, including via credit and debit cards, cash and check. See “Management’s discussion and analysis of financial condition and results of operations” for additional information regarding our calculation.

 

(6)   We calculate annual dollar-based net retention rate by summing the monthly subscription fees and payment processing revenue of all provider clients that have had revenue during the one-year period prior to the calculation period and comparing it with the sum of the monthly subscription fees and payment processing revenue (net of contraction, churn and expansion) for the same set of provider clients in the calculation period. Contraction is defined as a reduction in revenue for a client and expansion is defined as an increase in revenue for a client in the calculation period as compared to the prior period. A client who churns is a client whose revenue in the calculation period is zero. We calculate annualized dollar-based net retention rate by taking a geometric mean of the monthly rates over an annual period. We define our base revenue as the aggregate subscription fees (excluding related services revenue) and payment processing revenue of our provider client base as of the date one year prior to the date of calculation. We define our retained revenue net of contraction, churn and expansion as the aggregate subscription fees (excluding related services revenue) and payment processing revenue of the same provider client base included in our measure of base revenue at the end of the period being measured. See “Management’s discussion and analysis of financial condition and results of operations” for additional information regarding our calculation.

 

(7)  

Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income or loss or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity. We define Adjusted EBITDA as net income or loss, before net interest expense (income), provision for income taxes, depreciation and amortization, and before non-cash based compensation expense, non-cash change in fair value of warrant liability and other income (expense), net. We have provided below a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

 

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We have presented Adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short and long-term operational plans. In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

     Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:

 

   

although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

Adjusted EBITDA does not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive impact of non-cash stock-based compensation; or (3) tax payments that may represent a reduction in cash available to us; (4) net interest expense/(income); and

 

   

other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

 

     Because of these and other limitations, you should consider Adjusted EBITDA along with other GAAP-based financial performance measures, including various cash flow metrics, net loss, and our GAAP financial results. The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods indicated:

 

     
     Fiscal year ended
January,    
    Three months
ended April 30,
 
(in thousands, unaudited)    2018     2019     2018     2019  

Net loss

   $ (18,192   $ (15,062   $ (3,224   $ (6,695

Interest (income) expense, net

     3,642       3,504       848       804  

Depreciation and amortization

     9,640       11,594       2,685       3,374  

Stock-based compensation expense

     805       1,447       252       599  

Change in fair value of warrant liability

     598       2,058       291       423  

Income tax provision

     —         —         —         68  

Other (income) expense, net

     (602     7       175       1,145  
  

 

 

 

Adjusted EBITDA

   $ (4,109   $ 3,548     $ 1,027     $ (282

 

 

 

(8)   Free cash flow is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business, making strategic investments, partnerships and acquisitions and strengthening our financial position.

 

     We calculate free cash flow as net cash flow from operating activities less purchases of property and equipment and capitalized internal-use software development costs.

 

     The following table presents a reconciliation of free cash flow from net cash used in operating activities, the most directly comparable GAAP financial measure, for each of the periods indicated:

 

     
     Fiscal year ended
January 31,
    Three months
ended April 30,
 
(in thousands)    2018     2019     2018     2019  

Net cash (used in) provided by operating activities

   $ (11,142   $ (2,130   $ (923   $ 2,033  

Less:

        

Purchases of property and equipment

     (6,590     (4,724     (719     (1,314

Capitalized internal-use software

     (5,375     (5,109     (1,213     (1,411
  

 

 

 

Free cash flow

   $ (23,107   $ (11,963   $ (2,855   $ (692

 

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our audited annual financial statements and notes thereto and the “Management’s discussion and analysis of financial condition and results of operations” section of this prospectus before deciding whether to purchase shares of our common stock. If any of the following risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operation.

Risks relating to our business and industry

We have experienced net losses in the past and we may not achieve profitability in the future.

We have incurred significant operating losses since our inception. For fiscal 2019 and fiscal 2018 and the three months ended April 30, 2019, we had a net loss of $15.1 million, $18.2 million and $6.7 million, respectively, and a loss from operations of $9.5 million, $14.6 million and $4.3 million, respectively. Our operating expenses may increase substantially in the foreseeable future as we continue to invest to grow our business and build relationships with or clients and partners, develop our Platform, develop new solutions and comply with being a public company. We expect to incur significant additional expenses as a public company. These efforts may prove to be more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. In addition, to the extent we are successful in increasing our client base, we could incur increased losses because significant costs associated with entering into client agreements are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. As a result, we may need to raise additional capital through equity and debt financings in order to fund our operations. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer.

The healthcare industry is rapidly evolving and the market for technology-enabled services that empower healthcare consumers is relatively immature and unproven. If we are not successful in promoting the benefits of our Platform, our growth may be limited.

The market for our products and services is subject to rapid and significant changes. The market for technology-enabled services that empower healthcare consumers is characterized by rapid technological change, new product and service introductions, increasing patient financial responsibility, consumerism and engagement, the ongoing shift to value-based care and reimbursement models, and the entrance of non-traditional competitors. In addition, there may be a limited-time opportunity to achieve and maintain a significant share of this market due in part to the rapidly evolving nature of the healthcare and technology industries and the substantial resources available to our existing and potential competitors. The market for technology-enabled services that empower healthcare consumers is relatively new and unproven, and it is uncertain whether this market will achieve and sustain high levels of demand and market adoption.

In order to remain competitive, we are continually involved in a number of projects to compete with these new market entrants by developing new services, growing our client base and penetrating new markets. Some of these projects include the expansion of our integration capabilities with additional EHR and PM solutions , the expansion of our mobile platform, and the recent roll-out of our cost estimation features. These projects carry risks, such as cost overruns, delays in delivery, performance problems and lack of acceptance by our clients. Our integration partners may also decide to develop and offer their own patient engagement solutions that are similar to our Platform offerings.

 

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Our success depends on providing high-quality products and services that healthcare providers use to improve clinical, financial and operational performance and which are used and positively received by patients. If we cannot adapt to rapidly evolving industry standards, technology and increasingly sophisticated and varied healthcare provider and patient needs, our existing technology could become undesirable, obsolete or harm our reputation. We must continue to invest significant resources in our personnel and technology in a timely and cost-effective manner in order to enhance our existing products and services and introduce new high-quality products and services that existing clients and potential new clients will want. Our operating results would also suffer if our innovations are not responsive to the needs of our existing clients or potential new clients, are not appropriately timed with market opportunity, are not effectively brought to market or significantly increase our operating costs. If our new or modified product and service innovations are not responsive to the preferences of healthcare providers and their patients, emerging industry standards or regulatory changes, are not appropriately timed with market opportunity or are not effectively brought to market, we may lose existing clients or be unable to obtain new clients and our results of operations may suffer.

We believe demand for our products and services has been driven in large part by increasing patient responsibility, engagement and consumerism, high deductible health plans and declining reimbursements. According to the American Hospital Association, the shift to value-based reimbursement models requires healthcare provider organizations to manage new challenges related to measurement and reporting, population health management, care coordination and other patient demands, all of which may require additional staff and capabilities. Our ability to streamline the intake process and critical workflows in order to improve provider and staff efficiency and allow for optimal allocation of resources will be critical to our business. Our success also depends to a substantial extent on the ability of our Platform to increase patient engagement, and our ability to demonstrate the value of our Platform to provider clients, patients and life science companies. If our existing clients do not recognize or acknowledge the benefits of our Platform or our Platform does not drive patient engagement, then the market for our products and services might not develop at all, or it might develop more slowly than we expect, either of which could adversely affect our operating results.

In addition, we have limited insight into trends that might develop and affect our business. We might make errors in predicting and reacting to relevant business, legal and regulatory trends and healthcare reform, which could harm our business. If any of these events occur, it could materially adversely affect our business, financial condition or results of operations.

Finally, our competitors may have the ability to devote more financial and operational resources than we can to developing new technologies and services, including services that provide improved operating functionality, and adding features to their existing service offerings. If successful, their development efforts could render our services less desirable, resulting in the loss of our existing clients or a reduction in the fees we generate from our products and services.

We have grown rapidly in recent periods, and if we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase and we may be unable to implement our business strategy.

We have experienced significant growth in recent periods, which puts strain on our business, operations and employees. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. We must also attract, train and retain a significant number of qualified sales and marketing personnel, client support personnel, professional services personnel, software engineers, technical personnel and management personnel, and the availability of such personnel, in particular software engineers, may be constrained.

 

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A key element of how we manage our growth is our ability to scale our capabilities and satisfactorily implement our solution for our clients’ needs. Our provider clients often require specific features or functions unique to their organizational structure, which, at a time of significant growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully implement our solution to our clients in a timely manner. Our success also depends on our ability to satisfactorily integrate our Platform with the PM and EHR systems utilized by our provider clients. If we are unable to address the needs of our provider clients, including by integrating our Platform with the EHR and PM systems of our provider clients, or our provider clients are unsatisfied with the quality of our solution or services, they may not renew their contracts, seek to cancel or terminate their relationship with us or renew on less favorable terms, any of which could adversely affect our business.

Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our growth is expected to require significant capital expenditures and may divert financial resources from other projects such as the development of new applications and services. We may also need to make further investments in our technology and automate portions of our solution or services to decrease our costs. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our revenue may not increase or may grow more slowly than expected and we may be unable to implement our business strategy.

We derive a significant portion of our revenues from our largest clients.

Historically, we have relied on a limited number of clients for a substantial portion of our total revenue and accounts receivable. For fiscal 2019, our four largest clients comprised approximately 19% of our total revenue. The sudden loss of any of our clients, or the renegotiation of any of our client contracts, could adversely affect our operating results.

Because we rely on a limited number of clients for a significant portion of our revenues, we depend on the creditworthiness of these clients. If the financial condition of our clients declines, our credit risk could increase. Should one or more of our significant clients declare bankruptcy, it could adversely affect the collectability of our accounts receivable and affect our bad debt reserves and net income.

Most of our client contracts have an annual term. However, these contracts may be terminated before their term expires for various reasons. For example, after a specified period, certain of these contracts are terminable for convenience by our clients after a notice period has passed and the client has paid a termination fee. The termination fee typically requires the client to pay us the lesser of six months of fees payable under the contract or the total fees payable under the contract for the remainder of the annual term. Certain of our contracts are terminable immediately upon the occurrence of certain events. For example, certain of our life sciences contracts may be terminated by the client immediately following certain actions by the Food and Drug Administration, or FDA. If any of our contracts with our clients is terminated, we may not be able to recover all fees due under the terminated contract, which may adversely affect our operating results.

The growth of our business relies, in part, on the growth and success of our clients and certain revenues from our engagements, which are difficult to predict and are subject to factors outside of our control.

We enter into agreements with our provider clients, under which a significant portion of our fees are variable, including fees which are dependent upon the number of add-on features to the Phreesia Platform subscribed for by our clients and the number of patients utilizing our payment processing tools. If there is a general reduction in spending by healthcare provider organizations on healthcare technology solutions, it may result in a reduction in fees generated from our provider clients or a reduction in the number of add-on features

 

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subscribed for by our provider clients. This could lead to a decrease in our revenue, which could harm our business, financial condition and results of operations.

In addition, the number of patients utilizing our payment processing tools, and the amounts those patients pay to their healthcare providers directly for services, is often impacted by factors outside of our control, such as the number of patients with high deductible health plans. Accordingly, revenue under these agreements is uncertain and unpredictable. If the number of patients utilizing our payment systems, or the aggregate amounts paid by such patients directly to their healthcare providers through the Phreesia Platform, were to be reduced by a material amount, such decrease would lead to a decrease in our revenue, which could harm our business, financial condition and results of operations. In addition, growth forecasts of our clients are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate. Even if the markets in which our provider clients compete meet the size estimates and growth forecasted, including with respect to number of patients and revenues derived from their healthcare services, the number of patients using our payment processing tools, and the aggregate dollar amount of payments made by patients directly to their healthcare providers through the Phreesia Platform, could fail to grow at similar rates, if at all.

We also generate revenue through fees charged to our life sciences clients by delivering targeted messages to patients who opt-in to such communications. We refer to this service offering as Phreesia Connect. These messages enable life science companies to engage with patients and deliver relevant, targeted messages at the point when they are actively seeking care. The success of Phreesia Connect is driven, in part, by our ability to maintain high patient opt-in rates, the number of newly approved drugs and the success of newly launched drugs, each of which are impacted by factors outside of our control. If there is a reduction in newly approved drugs, or newly launched drugs are not successful, this could negatively affect the ability of our life science clients to deliver relevant, targeted messages to patients who would have otherwise been candidates to receive such drugs, and accordingly may reduce patient opt-in rates. A reduction in patient opt-in rates through Phreesia Connect could lead to a decrease in our revenue, which could harm our business, financial condition and results of operations.

We may potentially compete with our partners, which may adversely affect our business.

Our partners, including our integration partners for EHR and PM solutions, could become our competitors by offering similar services. Some of our partners offer, or may begin to offer, services, including patient intake and engagement services, payment processing tools and targeted patient communication services, in addition to any EHR and PM systems, in the same or similar manner as we do. Although there are many potential opportunities for, and applications of, these services, our partners may seek opportunities or target new clients in areas that may overlap with those that we have chosen to pursue. In such cases we may potentially compete against our partners. Competition from our partners may adversely affect our business and results from operations.

If our existing clients do not continue to renew their contracts with us, renew at lower fee levels or decline to purchase additional applications and services from us, it could have a material adverse effect on our business, financial condition and results of operations.

We expect to derive a significant portion of our revenue from renewal of existing clients’ contracts and sales of additional applications and services to existing clients. As part of our growth strategy, for instance, we have recently focused on expanding our services amongst current clients. As a result, achieving a high client retention rate and selling additional applications and services are critical to our future business, revenue growth and results of operations.

 

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Factors that may affect our retention rate and our ability to sell additional applications and services include, but are not limited to, the following:

 

 

the price, performance and functionality of our Platform;

 

patient acceptance and adoption of services and utilization of our payment processing tools;

 

the availability, price, performance and functionality of competing solutions;

 

our ability to develop and sell complimentary applications and services;

 

the stability, performance and security of our hosting infrastructure and hosting services;

 

changes in healthcare laws, regulations or trends; and

 

the business environment of our clients.

We typically enter into annual contracts with our clients, which have a stated initial term of one year and automatically renew for one-year subsequent terms. Approximately ninety percent (90%) of our client contracts renew each year. Most of our clients have no obligation to renew their subscriptions for our Platform solution after the initial term expires. In addition, our clients may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these clients and may decrease our annual revenue. If our clients fail to renew their contracts, renew their contracts upon less favorable terms or at lower fee levels or fail to purchase new products and services from us, our revenue may decline or our future revenue growth may be constrained. Should any of our clients terminate their relationship with us after implementation has begun, we would not only lose our time, effort and resources invested in that implementation, but we would also have lost the opportunity to leverage those resources to build a relationship with other clients over that same period of time.

Failure to adequately expand our direct sales force will impede our growth.

We believe that our future growth will depend on the continued development of our direct sales force and its ability to obtain new clients and to manage our existing client base. Identifying and recruiting qualified personnel and training them requires significant time, expense and attention. It can take six months or longer before a new sales representative is fully trained and productive. Our business may be adversely affected if our efforts to expand and train our direct sales force do not generate a corresponding increase in revenue. In particular, if we are unable to hire and develop sufficient numbers of productive direct sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, sales of our services will suffer and our growth will be impeded.

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.

We devote significant resources to establish relationships with new clients and deepen relationships with existing clients. Our sales cycle for our services can be variable, typically ranging from two to eight months from initial contact to contract execution. During this period, our efforts involve educating our clients and patients about the use, technical capabilities and benefits of our products and services. We do not provide access to the Platform and do not charge fees during this initial sales period. For clients that decide to enter into a contract with us, some of these contracts may provide for a preliminary trial period where a subset of providers from the client is granted access to our Platform for our standard fees. Following any such trial period, we aim to increase the number of providers within the client that utilize the Platform. Accordingly, our operating results will depend in substantial part on our ability to deliver a successful client and patient experience and persuade our clients and patients to grow their relationship with us over time. As we expect to grow rapidly, our client acquisition costs could outpace our build-up of recurring revenue, and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability. Any increased or unexpected costs or unanticipated delays, including delays caused by factors outside our control, could cause our operating results to suffer.

 

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If the estimates and assumptions we use to determine the size of our target market are inaccurate, our future growth rate may be impacted and our business would be harmed.

Market estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this prospectus relating to the size and expected growth of the market for our services may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.

The principal assumptions relating to our market opportunity include the number of healthcare providers currently taking appointments, the amount of annual out of pocket consumer spend for healthcare-related professional services, and the amount of annual spend by life sciences companies on digital marketing at the point of care. Our market opportunity is also based on the assumption that the strategic approach that our solution enables for our potential clients will be more attractive to our clients than competing solutions.

If these assumptions prove inaccurate, our business, financial condition and results of operations could be adversely affected. For more information regarding our estimates of market opportunity and the forecasts of market growth included in this prospectus, see “Market and industry data.”

We are subject to data privacy and security laws and regulations governing our collection, use, disclosure, or storage of personally identifiable information, including personal health information, which may impose restrictions on us and our operations and subject us to penalties if we are unable to fully comply with such laws.

As described below, we are required to comply with numerous federal and state laws and regulations governing the collection, use, disclosure, storage and transmission of personally identifiable information, including personal health information, that we may obtain or have access to in connection with the provision of our services. These laws and regulations, including their interpretation by governmental agencies, are subject to frequent change and could have a negative impact on our business.

We are a “Business Associate” as defined under the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which we collectively refer to as HIPAA, and the U.S. Department of Health and Human Services Office of Civil Rights, or OCR, may impose penalties on a Business Associate for a failure to comply with applicable requirement of HIPAA. Penalties will vary significantly depending on factors such as the date of the violation, whether the Business Associate knew or should have known of the failure to comply, or whether the Business Associate’s failure to comply was due to willful neglect. Currently, these penalties include civil monetary penalties for violations. However, a single breach incident can result in violations of multiple requirements, resulting in possible penalties in excess of pre-set annual limits. Further, a person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and imprisonment up to one year. The criminal penalties increase to $100,000 and up to five years’ imprisonment if the wrongful conduct involves false pretenses, and to $250,000 and up to 10 years’ imprisonment if the wrongful conduct involves the intent to sell, transfer, or use identifiable health information for commercial advantage, personal gain, or malicious harm. The U.S. Department of Justice, or the DOJ, is responsible for criminal prosecutions under HIPAA. State attorneys general also have the right to prosecute HIPAA violations committed against residents of their states. While HIPAA does not create a private right of action that would allow individuals to sue in civil court for HIPAA violations, its standards have been used as the basis for the duty of care in state civil suits, such as those for negligence or recklessness in misusing individuals’ health information. Furthermore, in the event of a breach as defined by HIPAA, the Business Associate may have to comply with specific reporting requirements under HIPAA regulations. Please see

 

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“Business—Healthcare laws and regulations” for more about how HIPAA and the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, may affect our business.

Numerous other federal and state laws may apply that restrict the use and protect the privacy and security of personally identifiable information, as well as employee personal information. These include state medical privacy laws, state social security number protection laws and federal and state consumer protection laws. These various laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by the courts and government agencies, creating complex compliance issues for us and our partners and potentially exposing us to additional expense, adverse publicity and liability, any of which could adversely affect our business.

Federal and state consumer protection laws are increasingly being applied by the United States Federal Trade Commission, or FTC, and states’ attorneys general to regulate the collection, use, storage and disclosure of personal or personally identifiable information, through websites or otherwise, and to regulate the presentation of website content.

The security measures that we and our third-party vendors and subcontractors have in place to ensure compliance with privacy and data protection laws may not protect our facilities and systems from security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and human errors or other similar events. In 2013, we experienced a security breach involving a stolen laptop, which we reported to OCR. Under the HITECH Act, as a Business Associate we may also be liable for privacy and security breaches and failures of our subcontractors. Even though we provide for appropriate protections through our agreements with our subcontractors, we still have limited control over their actions and practices. A breach of privacy or security of individually identifiable health information by a subcontractor may result in an enforcement action, including criminal and civil liability, against us. We are not able to predict the extent of the impact such incidents may have on our business. Our failure to comply may result in criminal and civil liability because the potential for enforcement action against Business Associates is now greater. Enforcement actions against us could be costly and could interrupt regular operations, which may adversely affect our business. While we have not received any notices of violation of the applicable privacy and data protection laws and believe we are in compliance with such laws, there can be no assurance that we will not receive such notices in the future.

There is ongoing concern from privacy advocates, regulators and others regarding data privacy and security issues, and the number of jurisdictions with data privacy and security laws has been increasing. Also, there are ongoing public policy discussions regarding whether the standards for de-identification, anonymization or pseudonymization of health information are sufficient, and the risk of re-identification sufficiently small, to adequately protect patient privacy. We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, including the California Consumer Privacy Act (“CCPA”), which will go into effect January 1, 2020, and while the May 2019 draft version of the regulations include an exception for activities that are subject to HIPAA, we cannot yet determine the impact the CCPA or other such future laws, regulations and standards may have on our business. Future laws, regulations, standards and obligations, and changes in the interpretation of existing laws, regulations, standards and obligations could impair our or our clients’ ability to collect, use or disclose information relating to consumers, which could decrease demand for our Platform, increase our costs and impair our ability to maintain and grow our client base and increase our revenue. New laws, amendments to or re-interpretations of existing laws and regulations, industry standards and contractual obligations could impair our or our customers’ ability to collect, use or disclose information relating to patients or consumers, which could decrease demand for our Platform offerings, increase our costs and impair our ability to maintain and grow our client base and increase our revenue. In view of new or modified federal or state laws and regulations, industry standards, contractual obligations and other legal obligations, or any changes in their interpretation,

 

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we may find it necessary or desirable to fundamentally change our business activities and practices or to expend significant resources to modify our software or platform and otherwise adapt to these changes.

In addition to government regulation, we are subject to self-regulatory standards and industry certifications that legally or contractually apply to us. These include the Payment Card Industry Data Security Standards, or PCI-DSS, with which we are currently compliant, and HITRUST certification, which we currently maintain. In the event we fail to comply with the PCI-DSS or fail to maintain our HITRUST certification, we could be in breach of our obligations under customer and other contracts, fines and other penalties could result, and we may suffer reputational harm and damage to our business. Further, our clients may expect us to comply with more stringent privacy and data security requirements than those imposed by laws, regulations or self-regulatory requirements, and we may be obligated contractually to comply with additional or different standards relating to our handling or protection of data on or by our offerings.

Any failure or perceived failure by us to comply with federal or state laws or regulations, industry standards or other legal obligations, or any actual or suspected privacy or security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personally identifiable information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our clients to lose trust in us, which could have an adverse effect on our reputation and business. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new products and features could be limited. Any of these developments could harm our business, financial condition and results of operations. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our Platform.

Privacy concerns or security breaches relating to our Platform could result in economic loss, damage our reputation, deter users from using our products, and expose us to legal penalties and liability.

We collect, process and store significant amounts of data concerning our clients, including data pertaining to personally identifiable information, including health information, of patients received in connection with the utilization of our Platform by patients of our healthcare provider and life science clients. While we have taken reasonable steps to protect such data, techniques used to gain unauthorized access to data and systems, disable or degrade service, or sabotage systems, are constantly evolving, and we may be unable to anticipate such techniques or implement adequate preventative measures to avoid unauthorized access or other adverse impacts to such data or our systems.

Like all internet services, our service is vulnerable to software bugs, computer viruses, internet worms, break-ins, phishing attacks, attempts to overload servers with denial-of-service, or other attacks or similar disruptions from unauthorized use of our and third-party computer systems, any of which could lead to system interruptions, delays, or shutdowns, causing loss of critical data or the unauthorized access of data. Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in our industry. Functions that facilitate interactivity with other internet platforms could increase the scope of access of hackers to user accounts. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of our products to the satisfaction of our clients and their patients may harm our reputation and our ability to retain existing clients. In 2013, we experienced a security breach, when one of our employees had a laptop containing Protected Health Information (as defined under HIPAA) stolen. This breach did not result in any claims against us, and since this incident, we have implemented policies that prohibit the download and storage of Protected Health Information and adopted a policy of encryption for all company laptops. Although we have in place systems and processes that are designed to protect our data, prevent data loss, disable undesirable accounts and activities on our Platform and prevent or detect security breaches, we cannot assure you that such measures will provide absolute security. If an actual or perceived breach of security occurs to our systems or a

 

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third party’s systems, we also could be required to expend significant resources to mitigate the breach of security and to address matters related to any such breach, including notifying users or regulators. Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur.

If we are not able to maintain and enhance our reputation and brand recognition, our business and results of operations will be harmed.

We believe that maintaining and enhancing our reputation and brand recognition is critical to our relationships with existing clients and the patients that they serve and to our ability to attract new clients. The promotion of our brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of our clients and patients, could make it substantially more difficult for us to attract new clients. Similarly, because our partners often act as references for us with prospective new provider clients, any existing partner that questions the quality of our work or that of our employees could impair our ability to secure additional new clients. If we do not successfully maintain and enhance our reputation and brand recognition with our clients and their patients, our business may not grow and we could lose our relationships with clients, which would harm our business, results of operations and financial condition.

Consolidation in the healthcare industry could have a material adverse effect on our business, financial condition and results of operations.

Many healthcare industry participants are consolidating to create larger and more integrated healthcare delivery systems with greater market power. We expect regulatory and economic conditions to result in additional consolidation in the healthcare industry in the future. As consolidation accelerates, the economies of scale of our clients’ organizations may grow. If a client experiences sizable growth following consolidation, it may determine that it no longer needs to rely on us and may reduce its demand for our products and services. In addition, as healthcare providers and life science companies consolidate to create larger and more integrated healthcare delivery systems with greater market power, these providers may try to use their market power to negotiate fee reductions for our products and services. Finally, consolidation may also result in the acquisition or future development by our healthcare provider and life science clients of products and services that compete with our products and services. Any of these potential results of consolidation could have a material adverse effect on our business, financial condition and results of operations.

We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share our business and operating results will be harmed.

The market for our products and services is fragmented, competitive and characterized by rapidly evolving technology standards, client needs and the frequent introduction of new products and services. Our competitors range from smaller niche companies to large, well-financed and technologically-sophisticated entities. As costs fall and technology improves, increased market saturation may change the competitive landscape in favor of competitors with greater scale than we currently possess.

We compete on the basis of several factors, including breadth, depth and quality of product and service offerings, ability to deliver clinical, financial and operational performance improvement through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition and

 

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the ability to integrate our Platform solutions with various PM and EHR systems and other technology. Some of our competitors have greater name recognition, longer operating histories and significantly greater resources than we do. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or client requirements. In addition, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their products to the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, larger client bases, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage.

Further, in light of these advantages, even if our services are more effective than the product or service offerings of our competitors, current or potential clients might accept competitive products and services in lieu of purchasing our services. In addition to new niche vendors, who offer stand-alone products and services, we also face competition from PM and EHR providers, including those with which we have integration partnerships. PM or EHR providers may have existing systems in place at clients in our target market. These PM and EHR providers may now, or in the future, offer or promise products or services similar to ours, and which offer ease of integration with existing systems and which leverage existing client and vendor relationships.

We also compete on the basis of price. We may be subject to pricing pressures as a result of, among other things, competition within the industry, consolidation of healthcare industry participants, practices of managed care organizations, government action and financial stress experienced by our clients. If our pricing experiences significant downward pressure, our business will be less profitable and our results of operations will be adversely affected.

We cannot be certain that we will be able to retain our current clients or expand our client base in this competitive environment. If we do not retain current clients or expand our client base, or if we have to renegotiate existing contracts, our business, financial condition and results of operations will be harmed. Moreover, we expect that competition will continue to increase as a result of consolidation in both the healthcare information technology and healthcare industries. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change in the competitive landscape could also adversely affect our ability to compete effectively and could harm our business, financial condition and results of operations.

We are bound by exclusivity provisions that restrict our ability to enter into certain sales and marketing relationships in order to market and sell our services.

Some of our client contracts include exclusivity or other restrictive clauses. Any contracts with exclusivity or other restrictive provisions may limit our ability to conduct business with certain potential clients. Client contracts with exclusivity or other restrictive provisions may constrain our ability to partner with or provide services to other prospective clients or purchase services from other vendors within certain time periods. Accordingly, these exclusivity clauses may prevent us from entering into long-term relationships with potential clients and could cause our business, financial condition and results of operations to be harmed.

The healthcare regulatory and political framework is uncertain and evolving.

Healthcare laws and regulations are rapidly evolving and may change significantly in the future, which could adversely affect our financial condition and results of operations. For example, in March 2010, the Patient Protection and Affordable Care Act, or ACA, was adopted, which is a healthcare reform measure that provides healthcare insurance for approximately 30 million additional Americans. The ACA includes a variety of healthcare reform provisions and requirements that became effective at varying times through 2018 and substantially changes the way healthcare is financed by both governmental and private insurers, which may

 

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significantly impact our industry and our business. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the Tax Cuts and Jobs Act, or Tax Act, the remaining provisions of the ACA are also invalid. While the Trump Administration and the Center for Medicare and Medicaid Services, or CMS, have both stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, if any, and other efforts to repeal and replace the ACA will impact the ACA and our business.

Further, on February 11, 2019 The U.S. Department of Health and Human Services, or HSS, Office of the National Coordinator for Health Information Technology, or ONC, and CMS proposed complementary new rules to support seamless and secure access, exchange, and use of electronic health information, or EHI, by increasing innovation and competition by giving patients and their healthcare providers secure access to health information and new tools, allowing for more choice in care and treatment. The proposed rules are intended to clarify provisions of the 21st Century Cures Act regarding interoperability and “information blocking,” which will create significant new requirements for health care industry participants. Information blocking means activities that are likely to interfere with, prevent, or materially discourage access, exchange, or use of EHI. The proposed ONC rule, if adopted, create significant new requirements for health care industry participants, and would require certain electronic health record technology to incorporate standardized application programming interfaces, or APIs, to allow individuals to securely and easily access structured EHI using smartphone applications. The ONC would also implement provisions of the Cures Act requiring that patients can electronically access all of their EHI (structured and/or unstructured) at no cost. Finally, to further support access and exchange of EHI, the proposed ONC rule implements the information blocking provisions of the Cures Act and proposes seven “reasonable and necessary activities” as exceptions to information blocking activities, as long as specific conditions are met.

The CMS Proposed Rule focuses on health plans, payors, and health care providers, and proposes measures to enable patients to have both their clinical and administrative information travel with them.

It is unclear whether or when these rules, and others released simultaneously, will be adopted, in whole or in part. If adopted, the rules may benefit us in that certain EHR vendors will no longer be permitted to interfere with our attempts at integration, but the rules may also make it easier for other similar companies to enter the market, creating increased competition and reducing our market share. It is unclear at this time what the costs of compliance with the proposed rules, if adopted, would be, and what additional risks there may be to our business.

In addition, we are subject to various other laws and regulations, including, among others, the Stark Law relating to self-referrals, anti-kickback laws, antitrust laws and the privacy and data protection laws described below. See “Business—Healthcare laws and regulations.”

If we are unable to obtain, maintain and enforce intellectual property protection for our technology and products or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and products substantially similar to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

Our business depends on proprietary technology and content, including software, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret, copyright laws, confidentiality procedures and contractual provisions to protect our intellectual property rights in our proprietary technology and content. We are pursuing the registration of our trademarks and service marks in the United States. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent and other intellectual property filings that could be expensive and time-consuming. Effective trademark, trade-secret and copyright

 

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protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. These measures, however, may not be sufficient to offer us meaningful protection. If we are unable to protect our intellectual property and other proprietary rights, our competitive position and our business could be harmed, as third parties may be able to commercialize and use technologies and software products that are substantially the same as ours without incurring the development and licensing costs that we have incurred. Any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed or misappropriated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, or our intellectual property rights may not be sufficient to permit us to take advantage of current market trends or otherwise to provide us with competitive advantages, which could result in costly redesign efforts, discontinuance of certain offerings or other competitive harm.

Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’ products and services, and may in the future seek to enforce our rights against potential infringement. However, the steps we have taken to protect our proprietary rights may not be adequate to prevent infringement or misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully protect our intellectual property rights could result in harm to our ability to compete and reduce demand for our technology and products. Moreover, our failure to develop and properly manage new intellectual property could adversely affect our market positions and business opportunities. Also, some of our products and services rely on technologies and software developed by or licensed from third parties. Any disruption or disturbance in such third-party products or services, which we have experienced in the past, could interrupt the operation of our Platform. We may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all.

We may also be required to protect our proprietary technology and content in an increasing number of jurisdictions, a process that is expensive and may not be successful, or which we may not pursue in every location. In addition, effective intellectual property protection may not be available to us in every country, and the laws of some foreign countries may not be as protective of intellectual property rights as those in the United States. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States and elsewhere, and from interpretations of intellectual property laws by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain and maintain the intellectual property rights necessary to provide us with a competitive advantage. Our failure to obtain, maintain and enforce our intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.

If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

We believe that the Phreesia brand is critical to the success of our business, and we utilize trademark registration and other means to protect it. Our business would be harmed if we were unable to protect our brand against infringement and its value was to decrease as a result.

The registered or unregistered trademarks or trade names that we own or license may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with potential partners. In addition, third parties may in the future file for registration of trademarks similar or identical to our trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to commercialize our technologies or products in certain relevant countries. If we

 

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are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively and our business may be adversely affected.

Third parties may initiate legal proceedings alleging that we are infringing or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on our business, financial condition and results of operations.

Our commercial success depends on our ability to develop and commercialize our services and use our proprietary technology without infringing the intellectual property or proprietary rights of third parties. Intellectual property disputes can be costly to defend and may cause our business, operating results and financial condition to suffer. As the market for healthcare in the United States expands and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Whether merited or not, we may face allegations that we, our partners, our licensees or parties indemnified by us have infringed or otherwise violated the patents, trademarks, copyrights or other intellectual property rights of third parties. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. We may also face allegations that our employees have misappropriated the intellectual property or proprietary rights of their former employers or other third parties. It may be necessary for us to initiate litigation to defend ourselves in order to determine the scope, enforceability and validity of third-party intellectual property or proprietary rights, or to establish our respective rights. Regardless of whether claims that we are infringing patents or other intellectual property rights have merit, such claims can be time-consuming, divert management’s attention and financial resources and can be costly to evaluate and defend. Results of any such litigation are difficult to predict and may require us to stop commercializing or using our products or technology, obtain licenses, modify our services and technology while we develop non-infringing substitutes or incur substantial damages, settlement costs or face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services. If we require a third-party license, it may not be available on reasonable terms or at all, and we may have to pay substantial royalties, upfront fees or grant cross-licenses to intellectual property rights for our products and services. We may also have to redesign our products or services so they do not infringe third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and time, during which our technology and products may not be available for commercialization or use. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not obtain a third-party license to the infringed technology, license the technology on reasonable terms or obtain similar technology from another source, our revenue and earnings could be adversely impacted.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual property. We are not currently subject to any claims from third parties asserting infringement of their intellectual property rights. Some third parties may be able to sustain the costs of complex litigation more effectively than we can because they have substantially greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock. Moreover, any uncertainties resulting from the initiation and continuation of any legal proceedings could have a material adverse effect on our ability to raise the funds necessary to continue our operations. Assertions by third parties that we violate

 

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their intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.

Our use of “open source” software could adversely affect our ability to offer our services and subject us to possible litigation.

We may use open source software in connection with our products and services. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the use of open source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code, which could include valuable proprietary code of the user, on unfavorable terms or at no cost. While we monitor the use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our proprietary source code or pay damages for breach of contract could have a material adverse effect on our business, financial condition and results of operations and could help our competitors develop products and services that are similar to or better than ours.

If we are unable to protect the confidentiality of our trade secrets, know-how and other proprietary information, the value of our technology and products could be adversely affected.

We may not be able to protect our trade secrets, know-how and other proprietary information adequately. Although we use reasonable efforts to protect this proprietary information and technology, our employees, consultants and other parties may unintentionally or willfully disclose our information or technology to competitors. Enforcing a claim that a third party illegally obtained and is using any of our proprietary information or technology is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets, know-how and other proprietary information. We rely, in part, on non-disclosure, confidentiality and invention assignment agreements with our employees, consultants and other parties to protect our trade secrets, know-how and other intellectual property and proprietary information. These agreements may not be self-executing, or they may be breached and we may not have adequate remedies for such breach. Moreover, third parties may independently develop similar or equivalent proprietary information or otherwise gain access to our trade secrets, know-how and other proprietary information.

We rely on our third-party vendors and partners to execute our business strategy. Replacing them would be difficult and disruptive to our business. If we are unsuccessful in forming or maintaining such relationships on terms favorable to us, our business may not succeed.

We have entered into contracts with third-party vendors to provide critical services relating to our business, including initial software development and cloud hosting. Some of these third-party vendors utilize employees or consultants located offshore. We also rely on third-party providers to enable automated eligibility and benefits verification through our Platform. We depend on our third-party processing partners to perform payment processing services, which generate almost all of our payments revenue. Our processing partners may go out of business or otherwise be unable or unwilling to continue providing such services, which could significantly and materially reduce our payments revenue and disrupt our business. A number of our processing contracts require us to assume liability for any losses our processing partners may suffer as a result of losses caused by our provider clients and their patients, including losses caused by chargebacks and fraud. Thus, in

 

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the event of a significant loss by our processing partners, we may be required to pay-out a large amount of cash in one or two business days following such event and, if we do not have sufficient cash on hand, may be deemed in breach of such contracts. A contractual dispute with our processing partners could adversely impact our revenue. Certain contracts may expire or be terminated, and we may not be able to replicate the associated revenue through a new processing partner relationship for a considerable period of time.

In the event that these service providers fail to maintain adequate levels of support, do not provide high quality service, increase the fees they charge us, discontinue their lines of business, terminate our contractual arrangements or cease or reduce operations, we may suffer additional costs and be required to pursue new third-party relationships, which could materially disrupt our operations and our ability to provide our products and services, and could divert management’s time and resources. It would be difficult to replace some of our third-party vendors in a timely manner if they were unwilling or unable to provide us with these services in the future, and our business and operations could be adversely affected. For example, we rely on certain third-party vendors for payment processing services. If these services fail or are of poor quality, our business, reputation and operating results could be harmed.

In addition, we have entered into strategic alliances with providers of EHR and PM solutions, and we intend to pursue such alliances in the future. These strategic alliance agreements are typically structured as commercial and technical partnership agreements, pursuant to which we integrate certain of our Platform solutions into the EHR and PM systems that are utilized by many of our clients, for agreed payments to such integration partners. The success of our business strategy relies, in part, on our ability to form and maintain these alliances with such partners in order to facilitate and permit the integration of our Platform into the EHR and PM systems used by our provider clients and their patients. If providers of EHR or PM solutions amend, terminate or fail to perform their obligations under their strategic alliance agreements with us, our Platform solutions may no longer integrate with the EHR and PM systems of our provider clients, which would materially and adversely affect our business results.

We may also seek new strategic alliances in the future, and we may not be successful in entering into future alliances on terms favorable to us. Any delay in entering into strategic alliances with providers of EHR or PM solutions would likely either delay the development and adoption of our products and services and reduce their competitiveness, or prevent the integration of our product offerings, in each case with respect to healthcare provider organizations that utilize such EHR or PM solutions. Any such delay could adversely affect our business.

We rely on a limited number of third-party suppliers and contract manufacturers to support our products, and a loss or degradation in performance of these suppliers and contract manufacturers could have a negative effect on our business, financial condition and results of operations.

We rely on third-party suppliers and contract manufacturers for the materials and components used to operate our Phreesia Platform and product offerings, and to manufacture and assemble our hardware, including the PhreesiaPad and our on-site kiosks, which we refer to as Arrivals Stations. We rely on a sole supplier, for example, as the manufacturer of our PhreesiaPads and Arrivals Stations, which help drive our business and support our provider, patient processing and life sciences offerings. In connection with these services, our supplier builds new hardware for us and refurbishes and maintains existing hardware.

Any of our other suppliers or third-party contract manufacturers may be unwilling or unable to supply the necessary materials and components or manufacture and assemble our products reliably and at the levels we anticipate or that are required by the market. Our ability to supply our products commercially and to develop any future products depends, in part, on our ability to obtain these materials, components and products in accordance with regulatory requirements and in sufficient quantities for commercialization.

 

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While our suppliers and contract manufacturers have generally met our demand for products and services on a timely basis in the past, we cannot guarantee that they will in the future be able to meet our demand for products, either because of acts of nature, the nature of our agreements with those manufacturers or our relative importance to them as a customer, and our manufacturers may decide in the future to discontinue or reduce the level of business they conduct with us. If we are required to change contract manufacturers due to any change in or termination of our relationships with these third parties, or if our manufacturers are unable to obtain the materials they need to produce our products at consistent prices or at all, we may lose sales, experience manufacturing or other delays, incur increased costs or otherwise experience impairment to our client relationships. We cannot guarantee that we will be able to establish alternative relationships on similar terms, without delay or at all.

While we believe replacement suppliers and manufacturers exist for all materials, components and services necessary to our systems and the Phreesia Platform, establishing additional or replacement suppliers for any of these materials, components or services, if required, could be time-consuming and expensive, may result in interruptions in our operations and product delivery, may affect the performance of our business or could require that we modify our operations. Even if we are able to find replacement suppliers or third-party contract manufacturers, we will be required to verify that the new supplier or third-party manufacturer maintains facilities, procedures and operations that comply with our quality expectations and applicable regulatory requirements.

If our third-party suppliers fail to deliver the required quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the supply of our products to clients and the development of any future products will be delayed, limited or prevented, which could have material adverse effect on our business, financial condition and results of operations.

Any restrictions on our use of, or ability to license, data, or our failure to license data and integrate third-party technologies, could have a material adverse effect on our business, financial condition and results of operations.

We depend upon licenses from third parties for some of the technology and data used in our applications, and for some of the technology platforms upon which these applications are built and operate. We expect that we may need to obtain additional licenses from third parties in the future in connection with the development of our products and services. In addition, we obtain a portion of the data that we use from government entities, public records and from our partners for specific partner engagements. We believe that we have all rights necessary to use the data that is incorporated into our products and services. However, we cannot assure you that our licenses for information will allow us to use that information for all potential or contemplated applications and products. In addition, certain of our products depend on maintaining our data and analytics platform, which is populated with data disclosed to us by healthcare providers, life science companies and their respective patients and other partners with their consent. If these clients, patients or partners revoke their consent for us to maintain, use, de-identify and share this data, consistent with applicable law, our data assets could be degraded.

In the future, data providers could withdraw their data from us or restrict our usage for any reason, including if there is a competitive reason to do so, if legislation is passed restricting the use of the data or if judicial interpretations are issued restricting use of the data that we currently use in our products and services. In addition, data providers could fail to adhere to our quality control standards in the future, causing us to incur additional expense to appropriately utilize the data. If a substantial number of data providers were to withdraw or restrict their data, or if they fail to adhere to our quality control standards, and if we are unable to identify

 

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and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide products and services to our partners would be materially adversely impacted, which could have a material adverse effect on our business, financial condition and results of operations.

We also integrate into our proprietary applications and use third-party software to maintain and enhance, among other things, content generation and delivery, and to support our technology infrastructure. Some of this software is proprietary and some is open source software. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. These technologies may not be available to us in the future on commercially reasonable terms or at all and could be difficult to replace once integrated into our own proprietary applications. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to obtain, maintain or comply with any of these licenses could delay development until equivalent technology can be identified, licensed and integrated, which would harm our business, financial condition and results of operations.

Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us. If our data suppliers choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions.

If we cannot implement our solution for clients or resolve any technical issues in a timely manner, we may lose clients and our reputation may be harmed.

Our clients utilize a variety of data formats, applications and infrastructure and our solution must support our clients’ data formats. Furthermore, the healthcare industry has shifted towards digitalized record keeping, and accordingly, many of our provider clients have developed their own software, or utilize third-party software, for practice management and secure storage of electronic medical records. Our ability to develop and maintain logic-based and scalable technology for patient intake management and engagement and payment processing that successfully integrates with our clients’ software systems for practice management and storage of electronic medical records is critical. If our Platform does not currently support a client’s required data format or appropriately integrate with clients’ systems, then we must configure our Platform to do so, which increases our expenses.

Additionally, we do not control our clients’ implementation schedules. As a result, if our clients do not allocate the internal resources necessary to meet their implementation responsibilities or if we face unanticipated implementation difficulties, the implementation may be delayed. If the client implementation process is not executed successfully or if execution is delayed, we could incur significant costs, clients could become dissatisfied and decide not to increase utilization of our solution or not to implement our solution beyond an initial period prior to their term commitment or, in some cases, revenue recognition could be delayed. In addition, competitors with more efficient operating models with lower implementation costs could jeopardize our client relationships.

Our clients and patients depend on our support services to resolve any technical issues relating to our solution and services, and we may be unable to respond quickly enough to accommodate short-term increases in demand for support services, particularly as we increase the size of our client bases (including healthcare provider organizations and the number of patients that they serve). We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. It is difficult to predict client and patient demand for technical support services, and if client or patient demand increases significantly, we may be unable to provide satisfactory support services to our clients. Further, if we

 

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are unable to address the needs of our clients and their patients in a timely fashion or further develop and enhance our solution, or if a client or patient is not satisfied with the quality of work performed by us or with the technical support services rendered, then we could incur additional costs to address the situation or be required to issue credits or refunds for amounts related to unused services, and our profitability may be impaired and clients’ or patients’ dissatisfaction with our solution could damage our ability to expand the number of applications and services purchased by such clients. These clients may not renew their contracts, seek to terminate their relationship with us or renew on less favorable terms. Moreover, negative publicity related to our client and patient relationships, regardless of its accuracy, may further damage our business by affecting our reputation or ability to compete for new business with current and prospective clients. If any of these were to occur, our revenue may decline and our business, financial condition and results of operations could be adversely affected.

We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our clients, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with clients, adversely affecting our brand and our business.

Our ability to deliver our products and services, particularly our cloud-based solutions, is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable Internet access and services and reliable telephone and facsimile services. Our services are designed to operate without interruption in accordance with our service level commitments.

However, we have experienced limited interruptions in these systems in the past, including server failures that temporarily slow down the performance of our services, and we may experience more significant interruptions in the future. We rely on internal systems as well as third-party suppliers, including bandwidth and telecommunications equipment providers, to provide our services. We do not maintain redundant systems or facilities for some of these services. Interruptions in these systems, whether due to system failures, computer viruses, physical or electronic break-ins or other catastrophic events, could affect the security or availability of our services and prevent or inhibit the ability of our partners to access our services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in substantial costs to remedy those problems or negatively impact our relationship with our clients, our business, results of operations and financial condition. To operate without interruption, both we and our service providers must guard against:

 

 

damage from fire, power loss and other natural disasters;

 

telecommunications failures;

 

software and hardware errors, failures and crashes;

 

security breaches, computer viruses and similar disruptive problems; and

 

other potential interruptions.

Any disruption in the network access, telecommunications or co-location services provided by third-party providers or any failure of or by third-party providers’ systems or our own systems to handle current or higher volume of use could significantly harm our business. We exercise limited control over our third-party suppliers, which increases our vulnerability to problems with services they provide. We have experienced failures by third-party providers’ systems which resulted in a limited interruption of our system, although this failure did not result in any claims against us. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with clients and adversely affect our business and could expose us to third-party liabilities.

 

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Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we cannot provide assurance that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

The reliability and performance of our Internet connection may be harmed by increased usage or by denial-of-service attacks. The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our Internet-based services.

We depend on our senior management team, 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.

Our success depends, in part, on the skills, working relationships and continued services of our founders, Chaim Indig (Chief Executive Officer) and Evan Roberts (Chief Operating Officer), and senior management team and other key personnel. From time to time, there may be changes in our senior management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.

In addition, competition for qualified management in our industry is intense. Many of the companies with which we compete for management personnel have greater financial and other resources than we do. While we have entered into offer letters or employment agreements with certain of our executive officers, all of our employees are “at-will” employees, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment rights. In order to retain valuable employees, in addition to salary and cash incentives, we provide stock options that vest over time or based on performance. The value to employees of stock options that vest over time or based on performance will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract offers from other organizations. The departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to hire other personnel to manage and operate our business, and there can be no assurance that we would be able to employ a suitable replacement for the departing individual, or that a replacement could be hired on terms that are favorable to us. In addition, volatility or lack of performance in our stock price may affect our ability to attract replacements should key personnel depart. If we are not able to retain any of our key management personnel, our business could be harmed.

We may make future acquisitions and investments which may be difficult to integrate, divert management resources, result in unanticipated costs or dilute our stockholders.

We have in the past acquired, and we may in the future acquire or invest in, businesses, products or technologies that we believe could complement or expand our products and services, enhance our technical capabilities or otherwise offer growth opportunities. We cannot assure you that we will realize the anticipated benefits of these or any future acquisitions. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

There are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate or integrate the acquired personnel, operations and technologies successfully or effectively manage the combined business following the acquisition, and our management may be distracted

 

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from operating our business. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, without limitation:

 

 

difficulty integrating the purchased operations, products or technologies and maintaining the quality and security standards consistent with our brand;

 

 

the need to integrate or implement additional controls, procedures and policies;

 

 

unanticipated costs or liabilities associated with the acquisition;

 

 

our inability to comply with the regulatory requirements applicable to the acquired business;

 

 

substantial unanticipated integration costs;

 

 

assimilation of the acquired businesses, which may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business;

 

 

use of substantial portions of our available cash or the incurrence of debt to consummate the acquisition;

 

 

the loss of key employees, particularly those of the acquired operations;

 

 

difficulty retaining or developing the acquired business’ customers;

 

 

adverse effects on our existing business relationships;

 

 

failure to realize the potential cost savings or other financial benefits or the strategic benefits of the acquisitions, including failure to consummate any proposed or contemplated transaction; and

 

 

liabilities from the acquired businesses for infringement of intellectual property rights or other claims and failure to obtain indemnification for such liabilities or claims.

Acquisitions also increase the risk of unforeseen legal liability, including for potential violations of applicable law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses which are not discovered by due diligence during the acquisition process. Generally, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our business, results of operations or financial condition. Even if we are successful in completing and integrating an acquired business, the acquired businesses may not perform as we expect or enhance the value of our business as a whole.

We may become subject to litigation, which could have a material adverse effect on our business, financial condition and results of operations.

We may become subject to litigation in the future. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which we are not, or cannot be, insured against. We generally intend to defend ourselves vigorously; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having a material adverse effect on our business, financial condition, results of operations, cash flow and per share trading price of our common stock. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured and adversely impact our ability to attract directors and officers.

 

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Our operating results have in the past and may continue to fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

Our operating results are likely to fluctuate, and if we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Moreover, our stock price may be based on expectations of our future performance that may be unrealistic or that may not be met. Some of the important factors that could cause our revenues and operating results to fluctuate from quarter to quarter include:

 

 

the extent to which our services achieve or maintain market acceptance;

 

 

our ability to introduce new services and enhancements to our existing services on a timely basis;

 

 

new competitors and the introduction of enhanced products and services from new or existing competitors;

 

 

the length of our contracting and implementation cycles;

 

 

the financial condition of our current and potential clients;

 

 

the ability of our Platform to integrate with the systems, including EHR and PM systems, utilized by our provider clients;

 

 

changes in client budgets and procurement policies;

 

 

amount and timing of our investment in research and development activities;

 

 

technical difficulties or interruptions in our services;

 

 

our ability to hire and retain qualified personnel, including the rate of expansion of our sales force;

 

 

changes in the regulatory environment related to healthcare;

 

 

regulatory compliance costs;

 

 

the timing, size and integration success of potential future acquisitions; and

 

 

unforeseen legal expenses, including litigation and settlement costs.

Many of these factors are not within our control, and the occurrence of one or more of them might cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenues and operating results may not be meaningful and should not be relied upon as an indication of future performance.

A significant portion of our operating expense is relatively fixed in nature and planned expenditures are based in part on expectations regarding future revenue. Accordingly, unexpected revenue shortfalls may decrease our margins and could cause significant changes in our operating results from quarter to quarter.

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.

The sales cycle for our services can be variable, typically ranging from two to eight months from initial contact to contract execution. During the sales cycle, we expend time and resources, and we do not recognize any revenue to offset such expenditures. Our implementation cycle is also variable, typically ranging from one to 24 months from contract execution to completion of implementation. The variability of our sales and

 

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implementation cycles are dependent on numerous factors, including the size and complexity of the applicable customer. Some of our new-client set-up projects are complex and require a lengthy delay and significant implementation work, including to educate prospective clients about the uses and benefits of our Platform. Each customer’s situation is different, and unanticipated difficulties and delays may arise as a result of failure by us or by the client to meet our respective implementation responsibilities. During the implementation cycle, we expend substantial time, effort and financial resources implementing our service, but accounting principles do not allow us to recognize the resulting revenue until the service has been implemented, at which time we begin recognition of implementation revenue over the life of the contract. This could harm our future operating results.

After a client contract is signed, we provide an implementation process for the client during which appropriate connections and registrations are established and checked, data is loaded into our Platform system, data tables are set up and practice personnel are given initial training. The length and details of this implementation process vary widely from client to client. Typically, implementation of larger clients takes longer than implementation for smaller clients. Implementation for a given client may be cancelled. Despite the fact that we typically require a deposit in advance of implementation, some clients have cancelled before our service has been started. In addition, implementation may be delayed or the target dates for completion may be extended into the future for a variety of reasons, including to meet the needs and requirements of the customer, because of delays with payer processing and because of the volume and complexity of the implementations awaiting our work. If implementation periods are extended, our revenue cycle will be delayed and our financial condition may be adversely affected. In addition, cancellation of any implementation after it has begun may involve loss to us of time, effort and expenses invested in the cancelled implementation process and lost opportunity for implementing paying clients in that same period of time.

These factors may contribute to substantial fluctuations in our quarterly operating results, particularly in the near term and during any period in which our sales volume is relatively low. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decrease.

Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality.

We believe there are significant seasonal factors that may cause us to record higher revenue in some quarters compared with others. We believe this variability is largely due to our focus on the healthcare industry. For example, with respect to our provider clients, we receive a disproportionate increase in revenue from such clients during the first two to three months of the calendar year relative to the other months of the year, which is driven, in part, by the resetting of patient deductibles at the beginning of each calendar year. Sales for our life sciences solutions are also seasonal, primarily due to the annual spending patterns of our clients. This portion of our sales is usually the highest in the fourth quarter of each calendar year. While we believe we have visibility into the seasonality of our business, our rapid growth rate over the last several years may have made seasonal fluctuations more difficult to detect. If our rate of growth slows over time, seasonal or cyclical variations in our operations may become more pronounced, and our business, results of operations and financial position may be adversely affected.

We have identified a material weakness in our internal control over financial reporting and 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.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-

 

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Oxley Act, requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our annual report for the year ending January 31, 2021, provide a management report on the internal control over financial reporting. Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company,” as defined in the JOBS Act.

Prior to this offering, we were a private company and have limited accounting and financial reporting personnel and other resources with which to address our internal controls and procedures. In connection with the audit of our financial statements for fiscal 2019, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We determined that we had a material weakness because we did not maintain a sufficient complement of personnel with an appropriate degree of knowledge, experience, and training, commensurate with our accounting and reporting requirements. As a result of the lack of personnel, we had inappropriate segregation of duties throughout several control processes, including the review and approval of manual journal entries. Accordingly, internal controls over our financial statement close process were not designed appropriately to detect a material error in the financial statements in a timely manner. As a result, there were a number of post-close adjustments that were material to the financial statements. This material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.

To address this material weakness, we plan to hire additional accounting personnel and implement process level and management review controls. While we intend to implement a plan to remediate this material weakness, we cannot predict the success of such plan or the outcome of our assessment of these plans at this time. If our steps are insufficient to successfully remediate the material weakness and otherwise establish and maintain an effective system of internal control over financial reporting, the reliability of our financial reporting, investor confidence in us and the value of our common stock could be materially and adversely affected. We can give no assurance that this implementation will remediate this deficiency in internal control or that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements, cause us to fail to meet our reporting obligations.

Effective internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. For as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.

 

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We may be subject to additional tax liabilities in connection with our operations or due to future legislation, each of which could materially impact our financial position and results of operation.

We are subject to federal and state income, sales, use, value added and other taxes in the United States and other countries in which we conduct business, and such laws and rates vary by jurisdiction. We do not collect sales and use, value added and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Certain jurisdictions in which we do not collect sales, use, value added or other taxes on our sales may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future.

Although we believe our tax practices and provisions are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical tax practices, provisions and accruals. If we receive an adverse ruling as a result of an audit, or we unilaterally determine that we have misinterpreted provisions of the tax regulations to which we are subject, there could be a material effect on our tax provision, net income or cash flows in the period or periods for which that determination is made, which could materially impact our financial results. Further, any changes in the taxation of our activities, including certain proposed changes in U.S. tax laws, may increase our effective tax rate and adversely affect our financial position and results of operations. In addition, liabilities associated with taxes are often subject to an extended or indefinite statute of limitations period. Therefore, we may be subject to additional tax liability (including penalties and interest) for a particular year for extended periods of time.

Interruption or failure of our information technology and communications systems could impair our ability to effectively deliver our products and services, which could cause us to lose clients and harm our operating results.

Our business depends on the continuing operation of our technology infrastructure and systems. Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles in enhancing our existing software and developing new software, and it is possible that we may discover additional problems that prevent our proprietary applications from operating properly. In addition, any damage to or failure of our existing systems could result in interruptions in our ability to deliver our products and services. Interruptions in our service could reduce our revenue and profits, and our reputation could be damaged if people believe our systems are unreliable.

Our systems and operations are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, break-ins, hardware or software failures, telecommunications failures, computer viruses or other attempts to harm our systems and similar events. Any unscheduled interruption in our service would result in an immediate loss of revenue. Frequent or persistent system failures that result in the unavailability of our Platform or slower response times could reduce our clients’ ability to access our Platform, impair our delivery of our products and services and harm the perception of our Platform as reliable, trustworthy and consistent. Our insurance policies provide only limited coverage for service interruptions and may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems.

Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations.

Our offices may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, fires, floods, nuclear disasters and acts of terrorism or other criminal activities, which may render it difficult or impossible for us to operate our business for some period of time. For example, our headquarters is located in the greater New York City area, a region with a history of terrorist attacks and hurricanes. Any disruptions in our operations related to the repair or replacement of our offices, could

 

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negatively impact our business and results of operations and harm our reputation. Insurance may not be sufficient to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations. In addition, our clients’ facilities may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or material adverse effects on our business.

If our services fail to provide accurate and timely information, or if our content or any other element of our service is associated with errors or malfunctions, we could have liability to clients, providers or patients which could adversely affect our results of operations.

Our software, content and services are used to assist medical groups, health systems and payers with managing the patient intake process and to empower patients and healthcare organizations as they navigate the challenges of an evolving healthcare system. If our software, content or services fail to provide accurate and timely information or are associated with errors or malfunctions, then clients, providers or patients could assert claims against us that could result in substantial costs to us, harm our reputation in the industry and cause demand for our services to decline.

Our proprietary service is utilized in patient intake and engagement and to help healthcare providers better understand patients through medical histories, insurance benefits and socio-economic indicators. If our service fails to provide accurate and timely information, or if our content or any other element of our service is associated with errors or malfunctions, we could have liability to clients, providers or patients.

The assertion of such claims and ensuing litigation, regardless of its outcome could result in substantial cost to us, divert management’s attention from operations, damage our reputation and decrease market acceptance of our services. We attempt to limit by contract our liability for damages and to require that our clients assume responsibility for medical care and approve key system rules, protocols and data. Despite these precautions, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable, may not be binding upon patients or may not otherwise protect us from liability for damages.

We maintain general liability and insurance coverage, but this coverage may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims against us. In addition, the insurer might disclaim coverage as to any future claim. One or more large claims could exceed our available insurance coverage.

Our proprietary software may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. It is challenging for us to test our software for all potential problems because it is difficult to simulate the wide variety of computing environments or methodologies that our clients may deploy or rely upon. From time to time we have discovered defects or errors in our software, and such defects or errors can be expected to appear in the future. Defects and errors that are not timely detected and remedied could expose us to risk of liability to clients, providers and patients and cause delays in introduction of new services, result in increased costs and diversion of development resources, require design modifications or decrease market acceptance or client satisfaction with our services. If any of these risks occur, they could materially adversely affect our business, financial condition or results of operations.

Our marketing efforts depend significantly on our ability to receive positive references from our existing clients.

Our marketing efforts depend significantly on our ability to call upon our current clients to provide positive references to new potential clients. Given our limited number of long-term clients, the loss or dissatisfaction of any client could substantially harm our brand and reputation, inhibit widespread adoption of our solution and

 

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impair our ability to attract new clients and maintain existing clients. Any of these consequences could lower our revenues and have a material adverse effect on our business, financial condition and results of operations.

Our payments platform is a core element of our business. If our payments platform is limited, restricted, curtailed or degraded in any way, or if we fail to continue to grow and develop our payments platform, our business may be materially and adversely affected.

Our payments platform is a core element of our business. For fiscal 2019, our payments platform generated 37% of our total revenue. Our future success depends in large part on the continued growth and development of our payment processing platform. If such activities are limited, restricted, curtailed or degraded in any way, or if we fail to continue to grow and develop or payments platform, our business may be materially and adversely affected. The utilization of our payment processing tools may be impacted by factors outside of our control, such as disruptions in the payment processing industry generally. If the number of patients utilizing our payments platform, or the aggregate amounts paid by such patients directly to their healthcare providers through our payments platform, were to be reduced as a result of disruptions in the payment processing industry, it could result in a decrease to our revenue, which could harm our business, financial condition and results of operations.

The continued growth and development of our payment processing activities will also depend on our ability to anticipate and adapt to changes in client behavior. For example, client behavior may change regarding the use of credit card transactions, including the relative increased use of cash, crypto-currencies, other emerging or alternative payment methods and credit card systems that we or our processing partners do not adequately support or that do not provide adequate commissions to independent sales organizations such as us. Any failure to timely integrate emerging payment methods (e.g. ApplePay or Bitcoin) into our software, anticipate client behavior changes, or contract with processing partners that support such emerging payment technologies could cause us to lose traction among our subscribers, resulting in a corresponding loss of revenue, in the event such methods become popular among their consumers.

Increases in card network fees and other changes to fee arrangements may result in the loss of clients who use our payment processing services or a reduction in our earnings.

From time to time, card networks, including Visa, Mastercard, American Express and Discover, increase the fees that they charge acquirers, which would be passed down to processors, payment facilitators and merchants. We could attempt to pass these increases along to our clients, but this strategy might result in the loss of clients to competitors who do not pass along the increases. If competitive practices prevent us from passing along the higher fees to our clients in the future, we may have to absorb all or a portion of such increases, which may increase our operating costs and reduce our earnings.

If we fail to comply with the applicable requirements of card networks, they could seek to fine us, suspend us or terminate our payment facilitator status. If our merchants or sales partners incur fines or penalties that we cannot collect from them, we may have to bear the cost of such fines or penalties.

We provide a payments solution for the secure processing of patient payments. Our payment processing tools can connect to multiple clearinghouses and can also connect directly with patients. We have developed partnerships with primary credit card processors in the United States to facilitate payment processing. For example, we are registered with Visa, Mastercard, American Express, Discover and other card networks as service providers for acquiring member institutions. These card networks set the operating rules and standards with which we must comply. The termination of our status as a certified service provider, a decision by the card networks to exclude payment facilitators or bar us from serving as such, or any changes in network rules or standards, including interpretation and implementation of the operating rules or standards, that increase the

 

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cost of doing business or limit our ability to provide transaction processing services to our merchants or partners, could adversely affect our business, financial condition or results of operations.

As such, we and our merchants are subject to card network rules that could subject us or our merchants to a variety of fines or penalties that may be levied by card networks for certain acts or omissions by us. The rules of card networks are set by their boards, which may be influenced by card issuers. Many banks directly or indirectly sell processing services to merchants in direct competition with us. These banks could attempt, by virtue of their influence on the networks, to alter the networks’ rules or policies to the detriment of non-members including our businesses. If a merchant or sales partner fails to comply with the applicable requirements of card networks, it could be subject to a variety of fines or penalties that may be levied by card networks. If we cannot collect processing fees from the applicable merchant, we may have to bear the cost of such fines or penalties, resulting in lower earnings for us. The termination of our registration, including a card network barring us from acting as a payment facilitator, or any changes in card network rules that would impair our registration, could require us to stop providing payment processing services relating to the affected card network, which would adversely affect our ability to conduct our business.

Our business and growth strategy depend on our ability to maintain and expand a network of provider clients. If we are unable to do so, our future growth would be limited and our business, financial condition and results of operations would be harmed.

Our success is dependent upon our continued ability to maintain a network of qualified provider clients. If we are unable to recruit and retain healthcare groups and other healthcare professionals, it would have a material adverse effect on our business and ability to grow and would adversely affect our results of operations. In any particular market, healthcare groups and professionals could demand higher payments or take other actions that could result in higher medical costs, less attractive service for our clients and the patients that they serve or difficulty meeting regulatory or accreditation requirements. Our ability to develop and maintain satisfactory relationships with qualified healthcare groups and professionals also may be negatively impacted by other factors not associated with us, such as changes in Medicare and/or Medicaid reimbursement levels and other pressures on healthcare providers and consolidation activity among hospitals, physician groups and healthcare providers. The failure to maintain or to secure new cost-effective client contracts may result in a loss of or inability to grow our client base, higher costs, healthcare provider network disruptions, less attractive service for our clients and/or difficulty in meeting regulatory or accreditation requirements, any of which could have a material adverse effect on our business, financial condition and results of operations.

We may be liable for use of incorrect or incomplete data we provide which could harm our business, financial condition and results of operations.

We store and display data for use by healthcare providers in handling patient intake and engagement, including data regarding personal health information of patients. Our clients, their patients, or third parties provide us with most of this data. If this data is incorrect or incomplete or if we make mistakes in the capture or input of this data, adverse consequences may occur and give rise to product liability and other claims against us. In addition, a court or government agency may take the position that our storage and display of health information exposes us to liability for wrongful delivery or handling of healthcare services or erroneous health information. While we maintain insurance coverage, we cannot be certain that this coverage will prove to be adequate or will continue to be available on acceptable terms, if at all. Even unsuccessful claims could result in substantial costs and diversion of management resources. A claim brought against us that is uninsured or under-insured could harm our business, financial condition and results of operations.

 

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Our services present the potential for embezzlement, identity theft or other similar illegal behavior by our employees or subcontractors with respect to third parties.

Among other things, our services involve handling payments from patients for many of our clients, and this frequently includes original checks and/or credit card information. Even in those cases in which we do not handle payments, our services also involve the use and disclosure of personal and business information that could be used to impersonate third parties or otherwise gain access to their data or funds. If any of our employees or subcontractors takes, converts or misuses such funds, documents or data, we could be liable for damages, and our business reputation could be damaged or destroyed.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success, and our business may be harmed.

We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow, we may find it difficult to maintain these important aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

Any failure to offer high-quality client support services could adversely affect our relationships with our clients and strategic partners and our operating results.

Our clients and patients depend on our support and client education organizations to educate them about, and resolve technical issues relating to, our products and services. We may be unable to respond quickly enough to accommodate short-term increases in client demand for education and support services. Increased client demand for these services, without a corresponding increase in revenue, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on the reputation of our products and services and business and on positive recommendations from our existing clients. Any failure to maintain high-quality education and technical support, or a market perception that we do not maintain high-quality education support, could adversely affect our reputation, our ability to sell our products and services to existing and prospective clients and our business and operating results.

Our ability to limit our liabilities by contract or through insurance may be ineffective or insufficient to cover our future liabilities.

We attempt to limit, by contract, our liability for damages arising from our negligence, errors, mistakes or security breaches. Contractual limitations on liability, however, may not be enforceable or may otherwise not provide sufficient protection to us from liability for damages and we are not always able to negotiate meaningful limitations. We maintain liability insurance coverage, including coverage for cyber security and errors and omissions. It is possible, however, that claims could exceed the amount of our applicable insurance coverage, if any, or that this coverage may not continue to be available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us, investigating and defending against them could be expensive and time-consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay market acceptance of our products and services, any of which could materially and adversely affect our reputation and our business.

Changes in laws and regulations relating to interchange fees on payment card transactions would adversely affect our revenue and results of operations.

A provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, known as the Durbin Amendment empowered the Federal Reserve Board, or FRB, to establish and regulate a cap on the

 

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interchange fees that merchants pay banks for electronic clearing of debit card transactions. The FRB issued a rule, effective October 1, 2011, implementing the Durbin Amendment. The final rule established standards for assessing whether debit card interchange fees received by debit card issuers were reasonable and proportional to the costs incurred by issuers for electronic debit transactions, and it established a maximum permissible interchange fee that an issuer may receive for an electronic debit transaction, limiting the fee revenue to debit card issuers and payment processors. HSA-linked payment cards are currently exempt from the rule, assuming the card is the only means of access to the underlying funds (except when all remaining funds are provided to the cardholder in a single transaction). The FRB is empowered to issue amendments to the rule, or a state or federal legislative body could enact new legislation, which could change the scope of the current rule and the basis upon which interchange rate caps are calculated. To the extent that HSA-linked payment cards and other exempt payment cards used on our Platform (or their issuing banks) lose their exempt status under the current rules or if the current interchange rate caps applicable to other payment cards used on our Platform are reduced, any such amendment, rulemaking, or legislation could impact interchange rates applicable to payment card transactions processed through our Platform. As a result, this could decrease our revenue and profit and could have a material adverse effect on our financial condition and results of operations.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of January 31, 2019, we had U.S. federal and state net operating loss carryforwards, or NOLs, of approximately $100 million due to prior period losses, which, subject to the following discussion, are generally available to be carried forward to offset a portion of our future taxable income, if any, until such NOLs are used or expire. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-ownership change NOLs to offset future taxable income. Similar rules may apply under state tax laws. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. In addition, under the Tax Act, the amount of post 2017 NOLs that we are permitted to deduct in any taxable year is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the NOL deduction itself. The Tax Act generally eliminates the ability to carry back any NOL to prior taxable years, while allowing post 2017 unused NOLs to be carried forward indefinitely without expiration. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs.

We recently changed from a December 31 fiscal year-end to a January 31 fiscal year-end. This change will make period-over-period comparisons more difficult in the short-term.

We recently changed our fiscal year-end from December 31 to January 31. Prior to 2019, we reported on a calendar-year basis with a year-end of December 31. We changed our fiscal year-end, effective January 31, 2019, to better align our fiscal calendar with the seasonal nature of our business. There are significant seasonal factors that may cause us to record higher revenue in some quarters compared with others. This change to our fiscal year-end may render period-over-period comparisons of our financial results less meaningful during this initial transition period.

The process of implementing a fiscal calendar transition has required and will continue to require us to adjust the processes, data and systems that our management and personnel rely upon to conduct our business operations and provide products and services to our clients. This change to our fiscal year-end, and any errors in our implementation of this change, could adversely impact our business and results of operations.

 

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Economic uncertainties or downturns in the general economy or the industries in which our clients operate could disproportionately affect the demand for our solution and negatively impact our results of operations.

Market volatility and economic uncertainty remain widespread, making it potentially very difficult for our clients and us to accurately forecast and plan future business activities. During challenging economic times, our clients and patients may have difficulty gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and adversely affect our revenue. If that were to occur, our financial results could be harmed. Further, challenging economic conditions may impair the ability of our clients to pay for the applications and services they already have purchased from us and, as a result, our write-offs of accounts receivable could increase. Patients utilizing our payment processing tools may also fail to make such payments on a timely basis or at all. We cannot predict the timing, strength or duration of any economic slowdown or recovery. If the condition of the general economy or markets in which we operate worsens, our business could be harmed.

If we or our clients fail to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare programs and financial relationships among healthcare providers, we or our clients may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs.

As a participant in the healthcare industry, our operations and relationships, and those of our clients, are regulated by a number of federal, state and local governmental entities. The impact of these regulations can adversely affect us even though we may not be directly regulated by specific healthcare laws and regulations. We must ensure that our products and services can be used by our clients in a manner that complies with those laws and regulations. Inability of our clients to do so could affect the marketability of our products and services or our compliance with our client contracts, or even expose us to direct liability under the theory that we had assisted our clients in a violation of healthcare laws or regulations.

A number of federal and state laws, including anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims, apply to healthcare providers and others that make, offer, seek or receive referrals or payments for products or services that may be paid for through any federal or state healthcare program and, in some instances, any private program. For example, the federal Anti-Kickback Statute prohibits any person or entity from offering, paying, soliciting or receiving anything of value, directly or indirectly, covertly or overtly, in cash or in kind, for the referral of patients covered by Medicare, Medicaid and other federal healthcare programs or the leasing, purchasing, ordering or arranging for or recommending the lease, purchase or order of any item, good, facility or service covered by these programs. On January 31, 2019, the Department of Health and Human Services, or HHS, and HHS Office of Inspector General, or OIG, proposed an amendment to one of the existing Anti-Kickback safe harbors (42 C.F.R. 1001.952(h)) which would prohibit certain pharmaceutical manufacturers from offering rebates to pharmacy benefit managers, or PBMs, in the Medicare Part D and Medicaid managed care programs. The proposed amendment would remove protection for “discounts” from Anti-Kickback enforcement action, and would include criminal and civil penalties for knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or reward the referral of business reimbursable under federal health care programs. At the same time, HHS also proposed to create a new safe harbor to protect point-of-sale discounts that drug manufacturers provide directly to patients, and adds another safe harbor to protect certain administrative fees paid by manufacturers to PBMs. If this proposal is adopted, in whole or in part, it is unclear what effect it would have on our ability to provide certain services to our customers, particularly through Phreesia Connect, what effect it could have on our customers’ businesses, and how this may affect our revenues and business model. On May 10, 2019, the Centers for Medicare and Medicaid Services announced a new pricing transparency rule, which goes into effect on July 9, 2019. This final rule requires direct-to-consumer television advertisements for prescription drugs and biological products for which reimbursement is available, directly or indirectly, through or under Medicare or Medicaid to include the list

 

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price of that product, except for a prescription drug or biological product that has a list price of less than $35 per month for a 30-day supply or typical course of treatment. The pricing transparency rule could have a negative effect on our business, particularly our Phreesia Connect services.

HIPAA, as amended by HITECH, and their respective implementing regulations, also impose criminal and civil liability for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program (including private payors) or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services. Many states also have similar anti-kickback laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program. Moreover, both federal and state laws forbid bribery and similar behavior. These laws are complex and their application to our specific services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Determination by a court or regulatory agency that our services violate these laws could subject us to civil or criminal penalties, could invalidate all or portions of some of our client contracts, could require us to change or terminate some portions of our business, could require us to refund portions of our services fees, could cause us to be disqualified from serving clients doing business with government payers and could have an adverse effect on our business. Even an unsuccessful challenge by regulatory authorities of our activities could result in adverse publicity and could require a costly response from us.

There are federal and state laws that forbid the offering or giving of remuneration, which includes, without limitation, any transfer of items or services for free or for less than fair market value (with limited exceptions), in exchange for patient referrals, patient brokering, remuneration of patients or billing based on referrals between individuals and/or entities that have various financial, ownership or other business relationships. In many cases, billing for care arising from such actions is illegal. These limitations can vary widely from state to state, and application of these state laws, the federal anti-inducement law, and the federal prohibition on physician self-referral, known as the Stark Law, is very complex. Any determination by a state or federal regulatory agency that any of our clients violate or have violated any of these laws may result in allegations that claims that we have processed or forwarded are improper. This could subject us to civil or criminal penalties, could require us to change or terminate some portions of our business, could require us to refund portions of our services fees and could have an adverse effect on our business. Even an unsuccessful challenge by regulatory authorities of our activities could result in adverse publicity and could require a costly response from us.

Federal and state regulatory and law enforcement authorities have recently increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other healthcare reimbursement laws and rules. From time to time, participants in the healthcare industry receive inquiries or subpoenas to produce documents in connection with government investigations. We could be required to expend significant time and resources to comply with these requests, and the attention of our management team could be diverted by these efforts. The occurrence of any of these events could give our clients the right to terminate our contracts with us and result in significant harm to our business and financial condition.

These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Any failure of our products or services to comply with these laws and regulations could result in substantial civil or criminal liability and could, among other things, adversely affect demand for our services, force us to expend significant capital, research and development and other resources to address the failure, invalidate all or portions of some of our contracts with our clients, require us to change or terminate some portions of our business, require us to refund portions of our revenue, cause us to be disqualified from serving clients doing

 

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business with government payers, and give our clients the right to terminate our contracts with them, any one of which could have an adverse effect on our business.

The U.S. Food and Drug Administration may in the future determine that our technology solutions are subject to the Federal Food, Drug, and Cosmetic Act and we may face additional costs and risks as a result.

The FDA may promulgate a policy or regulation that affects our products and services. For example, the FDA in future rule-making may consider our technology solution as a medical device. Medical devices are subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act, or FDCA. Under the FDCA, medical devices include any instrument, apparatus, machine, contrivance or other similar or related articles that is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease. FDA regulations govern among other things, product development, testing, manufacture, packaging, labeling, storage, clearance or approval, advertising and promotion, sales and distribution and import and export.

Non-compliance with applicable FDA requirements can result in, among other things, public warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the FDA to grant marketing approvals, withdrawal of marketing approvals, a recommendation by the FDA to disallow us from entering into government contracts and criminal prosecutions. The FDA also has the authority to request repair, replace or refund of the cost of any device.

Potential additional regulation of the disclosure of health information outside the United States may adversely affect our operations and may increase our costs.

Federal or state governmental authorities may impose additional data security standards or additional privacy or other restrictions on the collection, use, transmission and other disclosures of health information. In the future, industry requirements or guidance (e.g., payor requirements), contractual obligations, and/or legislation at both the federal and the state level may limit, forbid or regulate the use or transmission of health information outside of the United States. These developments, if adopted, may render our use of our office in Ottawa, Ontario, Canada, for work related to such data impracticable or substantially more expensive. Alternative means of supporting our clients with the use of such information within the United States may involve substantial delay in implementation and increased cost.

Individuals may claim our text messaging services are not compliant with the Telephone Consumer Protection Act.

The Telephone Consumer Protection Act, or TCPA, is a federal statute that protects consumers from unwanted telephone calls and faxes. Since its inception, the TCPA’s purview has extended to text messages sent to consumers. We must ensure that our services that leverage text messaging comply with TCPA regulations and agency guidance. While we strive to adhere to strict policies and procedures, the Federal Communications Commission, or FCC, as the agency that implements and enforces the TCPA, may disagree with our interpretation of the TCPA and subject us to penalties and other consequences for noncompliance. Determination by a court or regulatory agency that our services violate the TCPA could subject us to civil penalties, could invalidate all or portions of some of our client contracts, could require us to change or terminate some portions of our business, could require us to refund portions of our services fees, and could have an adverse effect on our business. Even an unsuccessful challenge by consumers or regulatory authorities of our activities could result in adverse publicity and could require a costly response from us.

 

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Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.

We operate in a rapidly changing industry. Accordingly, our risk management policies and procedures may not be fully effective to identify, monitor and manage all risks our business encounters. If our policies and procedures are not fully effective or we are not successful in identifying and mitigating all risks to which we are or may be exposed, we may suffer uninsured liability, harm to our reputation or be subject to litigation or regulatory actions that could adversely affect our business, financial condition or results of operations.

Our office in Ottawa, Canada is subject to the laws and regulations of the government of Canada and its subdivisions.

Our office in Ottawa, Ontario, Canada is subject to additional laws and regulations by the government of Canada, as well as its provinces. These include Canadian federal and local corporation requirements, restrictions on exchange of funds, employment-related laws and qualification for tax status. If we fail to comply with Canadian laws and regulations, or if the government of Canada or its provinces determines that our corporate actions do not comply with applicable Canadian law, we could face sanctions or fines, which could have a material adverse effect on our business.

Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.

Accounting rules and interpretations for certain aspects of our operations are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Risks relating to our indebtedness

In order to support the growth of our business, we may need to incur additional indebtedness under our current credit facilities or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all.

Our operations have consumed substantial amounts of cash since inception and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, develop new applications and services, enhance our existing solution and services, enhance our operating infrastructure and potentially acquire complementary businesses and technologies. For fiscal 2019, our net cash used in operating activities was $2.1 million. For the three months ended April 30, 2019, our net cash provided by operating activities was $2.0 million. As of April 30, 2019, we had $5.9 million of cash and cash equivalents, which are held for working capital purposes. As of April 30, 2019, we had borrowings of $35.2 million under our credit facility and the ability to borrow up to an additional $19.8 million. We may also use a portion of the net proceeds from this offering to repay some or all of our secured term loan or our revolving line of credit with Silicon Valley Bank. Borrowings under our credit facility are secured by substantially all of our properties, rights and assets, excluding intellectual property.

Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including the need to:

 

 

finance unanticipated working capital requirements;

 

develop or enhance our technological infrastructure and our existing products and services;

 

fund strategic relationships, including joint ventures and co-investments;

 

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fund additional implementation engagements;

 

respond to competitive pressures; and

 

acquire complementary businesses, technologies, products or services.

Accordingly, we may need to engage in equity or debt financings or collaborative arrangements to secure additional funds. Additional financing may not be available on terms favorable to us, or at all. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could have a material adverse effect on our business, financial condition and results of operations.

Restrictive covenants in the agreements governing our credit facility may restrict our ability to pursue our business strategies.

The credit agreement governing our credit facility contains certain customary restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, create subsidiaries, enter into certain transactions with affiliates, and transfer or dispose of assets as well as financial covenants requiring us to maintain a specified level of recurring revenue growth, a specified maximum funded debt to recurring revenue ratio and a specified amount of minimum liquidity.

Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants could result in a default under the loan agreement, which could cause all of the outstanding indebtedness under our credit facility to become immediately due and payable and terminate all commitments to extend further credit. These covenants could also limit our ability to seek capital through the incurrence of new indebtedness or, if we are unable to meet our obligations, require us to repay any outstanding amounts with sources of capital we may otherwise use to fund our business, operations and strategy.

Despite our substantial indebtedness, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.

We may incur substantial additional indebtedness in the future. Although the agreement governing our credit facility contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and the indebtedness we can incur in compliance with these restrictions could be substantial. If we incur additional debt, the risks associated with our substantial leverage would increase.

Risks relating to this offering and ownership of our common stock

There may not be an active, liquid trading market for our common stock.

Prior to this offering, there has been no public market for shares of our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any

 

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shares of our common stock that you purchase, or the price at which you may be able to sell such shares may decline. The initial public offering price of shares of our common stock has been determined by negotiation between us and the underwriters and may not be indicative of prices that will prevail following the completion of this offering. The market price of shares of our common stock may decline below the initial public offering price, and you may not be able to resell your shares of our common stock at or above the initial public offering price.

We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above the initial public offering price.

The trading price of our common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including:

 

 

market conditions in the broader stock market in general, or in our industry in particular;

 

actual or anticipated fluctuations in our quarterly financial reports and results of operations;

 

our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

 

indebtedness incurred in the future;

 

introduction of new products and services by us or our competitors;

 

issuance of new or changed securities analysts’ reports or recommendations;

 

sales of large blocks of our common stock;

 

additions or departures of key personnel;

 

regulatory developments;

 

litigation and governmental investigations; and

 

economic and political conditions or events.

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

The trading market for our common stock will also be influenced by the research and reports that industry or securities analysts publish about us or our business. As a new public company, we do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrades our common stock or provides more favorable recommendations about our competitors, or if our results of operations do not meet their expectations, our stock price could decline.

If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our common stock could decline.

If our existing stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decrease significantly. The perception in the public market that our existing stockholders might sell shares of common stock could also depress our market price. Upon the completion of this offering, we will have shares of common stock outstanding. In addition, options that are held by our employees are currently exercisable or will be exercisable in 2019. Our executive officers

 

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and directors will be subject to the lock-up agreements described under “Underwriting” and the Rule 144 holding period requirements described under “Shares eligible for future sale.” After these lock-up periods have expired, the holding periods have elapsed and, in the case of restricted stock, the shares have vested, additional shares will be eligible for sale in the public market. The market price of shares of our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

Moreover, after this offering, holders of an aggregate of approximately              shares of our common stock will have rights, subject to specified conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

Anti-takeover provisions under our incorporation documents and Delaware law could delay or prevent a change of control which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and amended and restated bylaws, which are to become effective at or prior to the closing of this offering, contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:

 

 

a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;

 

 

a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our stockholders;

 

 

a requirement that special meetings of stockholders be called only by the board of directors acting pursuant to a resolution approved by the affirmative vote of a majority of the directors then in office;

 

 

advance notice requirements for stockholder proposals and nominations for election to our board of directors;

 

 

a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than 75% of all outstanding shares of our voting stock then entitled to vote in the election of directors;

 

 

a requirement of approval of not less than 75% of all outstanding shares of our voting stock to amend any bylaws by stockholder action or to amend specific provisions of our amended and restated certificate of incorporation; and

 

 

the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and which preferred stock may include rights superior to the rights of the holders of common stock.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover provisions and other provisions in our

 

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amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

Our amended and restated bylaws will designate the Court of Chancery of the State of Delaware, or the Chancery Court, as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated bylaws, which will become effective in connection with the completion of this offering, will provide that, unless we consent in writing to the selection of an alternative forum, the Chancery Court will be the sole and exclusive forum for state law claims for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim pursuant to any provision of the General Corporation Law of the State of Delaware, our amended and restated certificate of incorporation or our amended and restated bylaws, or (4) any action asserting a claim governed by the internal affairs doctrine. This exclusive forum provision will not apply to any causes of action arising under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the choice of forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial condition.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent shares subsequently are issued under outstanding options or warrants, you will incur further dilution. Based on an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $                per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price.

 

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We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the year in which we complete this offering, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering; (b) in which we have total annual gross revenue of at least $1.07 billion; or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700 million as of the prior July 31st; and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. This may make comparison of our financial statements with the financial statements of another public company that is not an emerging growth company, or an emerging growth company that has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in “Use of proceeds.” Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds, with only limited information concerning management’s specific intentions. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

In making your investment decision, you should understand that we and the underwriters have not authorized any other party to provide you with information concerning us or this offering.

You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, some media coverage, including coverage that is not directly attributable to statements made by our officers or employees, that incorrectly reports on statements made by our officers or employees or that is misleading as a result of omitting information provided by us, our officers or employees. We and the underwriters have not authorized any other party to provide you with information concerning us or this offering.

 

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We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition or results of operations.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, which will require, among other things, that we file with the Securities and Exchange Commission, or the SEC, annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and The New York Stock Exchange to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank Act was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas, such as “say on pay” and proxy access. Recent legislation permits emerging growth companies to implement many of these requirements over a longer period and up to five years from the pricing of this offering. We intend to take advantage of this new legislation but cannot guarantee that we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements in the section captioned “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations,” “Business” and elsewhere in this prospectus contain forward-looking statements. 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.

These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

 

net losses experienced in the past and our ability to achieve profitability in the future;

 

 

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 ability to effectively manage our growth;

 

 

potentially competing 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;

 

 

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;

 

 

contractual terms, changes in law or regulation, or liability or expense arising from our collection, use, disclosure, or storage of sensitive data collected from or about patients, including risks of theft or leakage of patient data;

 

 

our ability to maintain and enhance our reputation and brand recognition;

 

 

consolidation in the healthcare industry resulting in loss of clients;

 

 

the competition which could limit our ability to maintain or expand market share within our industry, including competition from our existing customers;

 

 

the uncertainty of the regulatory and political framework;

 

 

our ability to obtain, maintain and enforce intellectual property protection for our technology and products;

 

 

our use of open source software leading to possible litigation;

 

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our inability to protect the confidentiality of our trade secrets impacting the value of our technology;

 

 

our reliance on third-party vendors and partners to execute our business strategy;

 

 

our dependency on a limited number of third-party suppliers and contract manufacturers to support our products;

 

 

our inability to implement our solutions for clients resulting in loss of clients and reputation;

 

 

our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our users;

 

 

our dependency on our key personnel, and our ability to attract, hire, integrate and retain key personnel;

 

 

the risks related to future acquisition and investment opportunities;

 

 

the possibility that we may become subject to future litigation;

 

 

our future indebtedness;

 

 

our expectations regarding trends in our key metrics and revenue from subscription fees from our provider clients, payment processing fees and fees charged to our life science clients by delivering targeted messages to patients; and

 

 

the effectiveness of our risk management policies.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

In addition, you should refer to the “Risk factors” section of this prospectus for a discussion of these and other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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Market and industry data

This prospectus contains statistical data, estimates and forecasts from various sources, including independent industry publications and other information from our internal sources. This information is based upon a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections titled “Risk factors” and “Special note regarding forward-looking statements,” that could cause results to differ materially from those expressed in these publications and reports.

The sources of certain statistical data, estimates and forecasts contained in this prospectus are the following independent industry publications or reports:

 

 

American Hospital Association, Regulatory Overload: Assessing the Regulatory Burden on Health Systems, Hospitals and Post-acute Care Providers, October 2017;

 

 

Centers for Medicare & Medicaid Service, National Health Expenditure Projections 2018-2027, 2019;

 

 

Health Care Payment Learning & Action Network, APM Measurement: Progress of Alternative Payment Models Methodology and Results Report, 2018;

 

 

Journal of Academy of Medicine, Eliminating Waste in US Health Care, April 2012;

 

 

Kaiser Family Foundation, 2018 Employer Health Benefits Survey, October 2018;

 

 

KLAS, Best in KLAS: Software & Services, January 2019;

 

 

KLAS, Patient Intake Management 2018: Solutions for a More Efficient Practice, June 2018;

 

 

National Academy of Medicine, Vital Directors for Health & Healthcare, 2017;

 

 

National Center for Health Statistics, High-deductible Health Plan Enrollment Among Adults Aged 18-64 With Employment-based Insurance Coverage, August 2018;

 

 

Software Advice, How Patients Use Online Reviews, February 2019; and

 

 

The Journal of the American Medical Association, Medical Marketing in the United States 1997-2016, January 2019.

Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied on therein.

Certain information included in this prospectus concerning our industry and the markets we serve, including our market share, are also based on our good-faith estimates derived from management’s knowledge of the industry and other information currently available to us.

 

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Use of proceeds

We estimate that the net proceeds to us from the sale of the shares of our common stock in this offering will be approximately $                , or approximately $                 if the underwriters exercise their option to purchase additional shares in full, based upon an assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholders.

Each $1.00 increase (decrease) in the assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $                , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $                , assuming that the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the initial public offering price or the number of shares by these amounts would have a material effect on our uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders.

We intend to use approximately $                to pay a cash dividend to the holders of 22,871,507 shares of our Senior Convertible preferred stock, which is payable to such holders upon the conversion of all such shares into an aggregate of 22,871,507 shares of our common stock upon the closing of this offering. This cash dividend is calculated based on an assumed closing date for this offering of                , 2019, and an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus. If this offering closes one day prior to the assumed closing date of                , 2019, such cash dividends decrease by an aggregate amount of approximately $                ; if this offering closes one day following the assumed closing date of                , 2019, such cash dividends increase by an aggregate amount of approximately $                . In addition, a $1.00 increase in the assumed initial public offering price of $                would decrease the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                ; a $1.00 decrease in the assumed initial public offering price of $                would increase the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                .

We may also use a portion of the net proceeds from this offering to repay some or all of our secured term loan or our revolving line of credit with Silicon Valley Bank.

We intend to use the remaining net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds we receive from this offering to acquire or invest in businesses, products, services or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.

We cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. Accordingly, we will have broad discretion in using these proceeds, and you will not have the opportunity to influence decisions on the use of these proceeds. Pending their uses, we plan to invest the net proceeds of this offering in interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

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Dividend policy

We have never declared or paid any cash dividends on our common stock or any other securities. However, pursuant to our sixth amended and restated certificate of incorporation, as amended and in effect immediately prior to the closing of this offering, or the pre-offering certificate of incorporation, each share of our Senior A preferred stock and our Senior B preferred stock, which we refer to collectively herein as our Senior Convertible preferred stock, accrues, from and after the date of issuance, cash dividends at the rate per annum of 8% of the original issue price applicable to such share of Senior Convertible preferred stock. Our Junior Convertible preferred stock and redeemable preferred stock do not accrue any dividends. The aggregate accruing dividend on the Senior Convertible preferred stock, which we refer to as the IPO Dividend, is payable to the holders of shares of our Senior Convertible preferred stock upon the closing of the sale of shares of our common stock to the public at a price of at least $9.20 per share, in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, or the Securities Act, resulting in at least $50,000,000 in proceeds to us, net of underwriting discounts and commissions. We refer to an offering satisfying the conditions in the prior sentence as a Qualified Public Offering. If this offering does not constitute a Qualified Public Offering, the accrued dividend on our Senior Convertible preferred stock may be payable, in full or in part, to holders of our Senior Convertible preferred stock at the closing of this offering, subject to any discussions and agreements between the company and such holders of Senior Convertible preferred stock.

The amount of the IPO Dividend payable to holders of our Senior Convertible preferred stock may vary depending on the initial public offering price of our common stock in this offering. If this offering constitutes a Qualified Public Offering and the initial public offering price exceeds certain thresholds, the amount of the IPO Dividend payable to holders of shares of our Senior Convertible preferred stock will decrease, and ultimately may no longer become payable, based on a sliding scale set forth in our pre-offering certificate of incorporation. The cash dividend will no longer be payable to holders of Senior A preferred stock if the initial public offering price for this offering is at least $9.88 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to our capital stock) and will no longer be payable to holders of Senior B preferred stock if the initial public offering price for this offering is at least $16.64 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to our capital stock). Assuming a closing date for this offering of                , 2019, and an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, the amount of the IPO dividend payable to holders of shares of our Senior Convertible preferred stock will be approximately $                . If this offering closes one day prior to the assumed closing date of                , 2019, such cash dividends decrease by an aggregate amount of approximately $                ; if this offering closes one day following the assumed closing date of                , 2019, such cash dividends increase by an aggregate amount of approximately $                . In addition, a $1.00 increase in the assumed initial public offering price of $                would decrease the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                ; a $1.00 decrease in the assumed initial public offering price of $                would increase the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                .

Except for the IPO Dividend, we anticipate that we will retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate declaring or paying cash dividends in the foreseeable future. In addition, future debt instruments may materially restrict our ability to pay dividends on our common stock. Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, restrictions that may be imposed by applicable law and our contracts and other factors the board of directors deems relevant. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of our credit facility with Silicon Valley Bank. See “Management’s discussion and analysis of financial condition and results of operation—Liquidity and capital resources.”

 

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Capitalization

The following table sets forth our cash and cash equivalents and our capitalization as of April 30, 2019:

 

 

on an actual basis;

 

 

on a pro forma basis to give effect to:

 

   

the filing and effectiveness of our amended and restated certificate of incorporation;

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock, which we refer to collectively herein as our convertible preferred stock into an aggregate of 55,617,548 shares of common stock upon the closing of this offering;

 

   

the cancellation of 42,560,530 shares of our redeemable preferred stock upon the closing of this offering;

 

   

a warrant to purchase 489,605 shares of our Junior Convertible preferred stock and 358,244 shares of our redeemable preferred stock outstanding as of April 30, 2019 becoming a warrant to purchase an aggregate of 489,605 shares of common stock, at a weighted-average exercise price of $0.01, upon the closing of this offering, and whereby the portion of the warrant exercisable for 358,244 shares of our redeemable preferred stock will be cancelled upon the closing of this offering;

 

   

warrants to purchase 672,560 shares of our Senior A preferred stock outstanding as of April 30, 2019 becoming warrants to purchase an aggregate of 672,560 shares of common stock, at a weighted-average exercise price of $3.00, upon the closing of this offering;

 

   

the automatic cashless exercise of a warrant to purchase 116,232 shares of our Senior A preferred stock, which, based on an assumption that the fair market value of our common stock for purposes of automatic exercise under the warrant will be equal to the assumed initial public offering price of $                per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the automatic conversion of the shares of Senior A preferred stock issued pursuant to such automatic cashless exercise into shares of common stock, would result in the issuance of                shares of our common stock upon the closing of this offering (a $1.00 decrease in the assumed initial public offering price of $                 per share would increase the number of additional shares of our common stock issuable in connection with such automatic exercise by an aggregate of                  shares; a $1.00 increase in the assumed initial public offering price of $                 per share would decrease the number of additional shares of our common stock issuable in connection with such exercise by an aggregate of                  shares);

 

   

for purposes of any cashless automatic exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of such warrant; and

 

   

the payment of an accrued dividend to holders of 22,871,507 shares of our Senior Convertible preferred stock in the aggregate amount of $                , which becomes due and payable to such holders upon the conversion of all such shares into an aggregate of 22,871,507 shares of common stock upon the closing of this offering. The cash dividend is calculated based on an assumed closing date for this offering of                , 2019, and an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus. If this offering closes one day prior to the assumed closing date of                , 2019, such cash dividends decrease by an aggregate amount of approximately $                ; if this offering closes one day following the assumed closing date of                , 2019, such cash dividends increase by an aggregate amount of approximately $                .

 

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In addition, a $1.00 increase in the assumed initial public offering price of $                would decrease the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                ; a $1.00 decrease in the assumed initial public offering price of $                would increase the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                .

 

 

on a pro forma as adjusted basis to give further effect to our issuance and sale of                shares of our common stock in this offering at an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the information in this table together with our financial statements and the related notes appearing at the end of this prospectus and the “Selected financial data” and “Management’s discussion and analysis of financial condition and results of operations” sections of this prospectus.

 

   
     As of April 30, 2019  
(in thousands, except share and per share data)    Actual     Pro forma      Pro forma as
adjusted
 

Cash and cash equivalents

   $ 5,913     $                        $    
  

 

 

 

Long-term debt, net of discount, including current portion

   $ 34,227     $                        $    

Warrant liability

     5,921                            

Senior Convertible preferred stock (Senior A preferred stock and Senior B preferred stock), $0.01 par value; 25,320,169 shares authorized, 22,871,507 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     139,047                            

Junior Convertible preferred stock, $0.01 par value; 34,000,000 shares authorized, 32,746,041 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     32,746                            

Redeemable preferred stock, $0.01 par value; 44,000,000 shares authorized, 42,560,530 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     42,560                            

Total Preferred stock

     214,353       

Stockholders’ (deficit) equity:

       

Preferred stock, $0.01 par value; no shares authorized, issued or outstanding, actual;              shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

                                

Common stock, $0.01 par value; 80,000,000 shares authorized, 4,448,655 shares issued and outstanding, actual;             shares authorized,              issued and outstanding, pro forma;             shares authorized,              shares issued and outstanding, pro forma as adjusted

     44                            

Additional paid-in capital

                                

Accumulated deficit

     (224,107                          
  

 

 

 

Total stockholders’ equity (deficit)

     (224,063                          
  

 

 

 

Total capitalization

   $ 30,438     $        $                    

 

 

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $                million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $                 million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The table above does not include:

 

 

7,872,153 shares of common stock issuable upon the exercise of stock options outstanding as of April 30, 2019 under our Amended and Restated 2006 Stock Option and Grant Plan, as amended, or the 2006 Plan, at a weighted average exercise price of $0.70 per share;

 

 

5,406,968 shares of common stock issuable upon the exercise of stock options outstanding as of April 30, 2019 under our 2018 Stock Option and Grant Plan, as amended, or the 2018 Plan, at a weighted average exercise price of $2.77 per share;

 

 

858,750 shares of our common stock subject to RSUs outstanding as of April 30, 2019;

 

 

893,618 shares of our common stock issuable upon the exercise of warrants outstanding as of April 30, 2019 to purchase common stock at a weighted average exercise price of $2.08 per share;

 

 

1,278,397 shares of our common stock issuable upon the exercise of warrants outstanding as of April 30, 2019 to purchase convertible preferred stock at a weighted average exercise price of $1.78 per share;

 

 

358,244 shares of our redeemable preferred stock issuable upon the exercise of a warrant outstanding as of April 30, 2019, which will be cancelled upon the closing of this offering;

 

 

429,330 shares of common stock available for future issuance as of April 30, 2019 under the 2018 Plan, which will cease to be available for issuance at the time that our 2019 Stock Option and Incentive Plan, or the 2019 Plan, becomes effective;

 

 

              shares of our common stock reserved for future issuance under our 2019 Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus is a part; and

 

 

              shares of our common stock reserved for issuance under our 2019 Employee Stock Purchase Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus is a part.

 

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Dilution

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

Our historical net tangible book value (deficit) as of April 30, 2019 was $(229.0) million, or $(51.49) per share of common stock. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities and the carrying value of our preferred stock, which is not included within stockholders’ equity (deficit). Historical net tangible book value (deficit) per share represents historical net tangible book value (deficit) divided by the 4,448,655 shares of common stock outstanding as of April 30, 2019.

Our pro forma net tangible book value as of April 30, 2019 was $(            ) million, or $(            ) per share of common stock. Pro forma net tangible book value represents the amount of our total tangible assets less our total liabilities, after giving effect to:

 

 

the automatic conversion of all outstanding shares of our convertible preferred stock as of April 30, 2019 into an aggregate of 55,617,548 shares of common stock upon the closing of this offering;

 

 

the cancellation of 42,560,530 shares of our redeemable preferred stock upon the closing of this offering;

 

 

a warrant to purchase 489,605 shares of our Junior Convertible preferred stock and 358,244 shares of our redeemable preferred stock outstanding as of April 30, 2019 becoming a warrant to purchase an aggregate of 489,605 shares of common stock, at a weighted-average exercise price of $0.01, upon the closing of this offering, and whereby the portion of the warrant exercisable for 358,244 shares of our redeemable preferred stock will be cancelled upon the closing of this offering;

 

 

warrants to purchase 672,560 shares of our Senior A preferred stock outstanding as of April 30, 2019 becoming warrants to purchase an aggregate of 672,560 shares of common stock, at a weighted-average exercise price of $3.00, upon the closing of this offering;

 

 

the automatic cashless exercise of a warrant to 116,232 purchase shares of our Senior A preferred stock, which, based on an assumption that the fair market value of our common stock for purposes of automatic exercise under the warrant will be equal to the assumed initial public offering price of $                per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the automatic conversion of the shares of Senior A preferred stock issued pursuant to such automatic cashless exercise into shares of common stock, would result in the issuance of                shares of our common stock upon the closing of this offering (a $1.00 decrease in the assumed initial public offering price of $                 per share would increase the number of additional shares of our common stock issuable in connection with such automatic exercise by an aggregate of                  shares; a $1.00 increase in the assumed initial public offering price of $                 per share would decrease the number of additional shares of our common stock issuable in connection with such exercise by an aggregate of                  shares);

 

 

for purposes of any automatic cashless exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of such warrant;

 

 

the payment of an accrued dividend to holders of 22,871,507 shares of our Senior Convertible preferred stock in the aggregate amount of $                , which becomes due and payable to such holders upon the conversion of all such shares into an aggregate of 22,871,507 shares of common stock upon the closing of this offering. The cash dividend is calculated based on an assumed closing date for this offering of                , 2019, and an assumed initial public offering price of $                per share, which is the midpoint of the price range set

 

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forth on the cover page of this prospectus. If this offering closes one day prior to the assumed closing date of                , 2019, such cash dividends decrease by an aggregate amount of approximately $                ; if this offering closes one day following the assumed closing date of                , 2019, such cash dividends increase by an aggregate amount of approximately $                . In addition, a $1.00 increase in the assumed initial public offering price of $                would decrease the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                ; a $1.00 decrease in the assumed initial public offering price of $                would increase the cash dividend payable to holders of our Senior Convertible preferred stock by an aggregate of $                .

Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding as of April 30, 2019, after giving effect to the pro forma adjustments described above.

After giving further effect to our issuance and sale of                 shares of our common stock in this offering at an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of April 30, 2019 would have been $                million, or $                per share. This represents an immediate increase in pro forma as adjusted net tangible book value per share of $                 to existing stockholders and immediate dilution of $                in pro forma as adjusted net tangible book value per share to new investors purchasing common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

            $                    

Historical net tangible book value (deficit) per share as of April 30, 2019

   $ (51.49)     

Increase per share attributable to the pro forma adjustments described above

     
  

 

 

 

Pro forma net tangible book value per share as of April 30, 2019

     

Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing common stock in this offering

     
  

 

 

 

Pro forma as adjusted net tangible book value per share after this offering

     
  

 

 

 

Dilution per share to new investors purchasing common stock in this offering

      $    

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $                and dilution per share to new investors purchasing common stock in this offering by $                , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase our pro forma as adjusted net tangible book value per share after this offering by $                and decrease the dilution per share to new investors purchasing common stock in this offering by $                , assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A decrease of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease our pro forma as adjusted net tangible book value per share after this offering by $                and increase the dilution per share to new

 

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investors purchasing common stock in this offering by $                , assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares in full, our pro forma as adjusted net tangible book value per share after this offering would be $                , representing an immediate increase in pro forma as adjusted net tangible book value per share of $                to existing stockholders and immediate dilution in pro forma as adjusted net tangible book value per share of $                 to new investors purchasing common stock in this offering, assuming an initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, as of April 30, 2019, on the pro forma as adjusted basis described above, the total number of shares of common stock purchased from us on an as converted to common stock basis, the total consideration paid or to be paid and the average price per share paid or to be paid by existing stockholders and by new investors in this offering at an assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing common stock in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

       
     Shares purchased      Total consideration      Average price  
      Number      Percent      Amount      Percentage      Per share  

Existing stockholders

            %      $                              %      $                    

Investors participating in this offering

               $    
  

 

 

 

Total

        100.0%      $                          100.0%     

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $                 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by                 percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by                 percentage points, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase (decrease) of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $                 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by                percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by                percentage points, assuming no change in the assumed initial public offering price.

The table above assumes no exercise of the underwriters’ option to purchase additional shares in this offering. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of our common stock held by existing stockholders would be reduced to    % of the total number of shares of our common stock outstanding after this offering, and the number of shares of common stock held by new investors purchasing common stock in this offering would be increased to      % of the total number of shares of our common stock outstanding after this offering.

 

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The tables and discussion above are based on the number of shares of our common stock outstanding as of April 30, 2019, and exclude:

 

 

7,872,153 shares of common stock issuable upon the exercise of stock options outstanding as of April 30, 2019 under the 2006 Plan at a weighted average exercise price of $0.70 per share;

 

 

5,406,968 shares of common stock issuable upon the exercise of stock options outstanding as of April 30, 2019 under the 2018 Plan at a weighted average exercise price of $2.77 per share;

 

 

858,750 shares of our common stock subject to RSUs outstanding as of April 30, 2019;

 

 

893,618 shares of our common stock issuable upon the exercise of warrants outstanding as of April 30, 2019 to purchase common stock at a weighted average exercise price of $2.08 per share;

 

 

1,278,397 shares of our common stock issuable upon the exercise of warrants outstanding as of April 30, 2019 to purchase convertible preferred stock at a weighted average exercise price of $1.78 per share;

 

 

358,244 shares of our redeemable preferred stock issuable upon the exercise of a warrant outstanding as of April 30, 2019, which will be cancelled upon the closing of this offering;

 

 

429,330 shares of common stock available for future issuance as of April 30, 2019 under the 2018 Plan, which will cease to be available for issuance at the time that the 2019 Plan becomes effective;

 

 

              shares of our common stock reserved for future issuance under our 2019 Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus is a part; and

 

 

              shares of our common stock reserved for issuance under our 2019 Employee Stock Purchase Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus is a part.

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced by                shares, or    % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to                shares, or    % of the total number of shares of our common stock outstanding after this offering. In addition, if the underwriters exercise their option to purchase additional shares in full, the number of shares held by the existing stockholders after this offering would be reduced to    % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to                shares, or    % of the total number of shares of common stock outstanding after this offering.

To the extent that outstanding stock options or warrants are exercised, new stock options or warrants are issued, or we issue additional shares of common stock in the future, there will be further dilution to new investors. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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Selected financial data

You should read the following selected financial data together with our financial statements and the related notes appearing at the end of this prospectus and the "Management’s discussion and analysis of financial condition and results of operations” section of this prospectus. We have derived the statement of operations data for fiscal 2018 and fiscal 2019 and the balance sheet data as of fiscal 2019 from our audited financial statements appearing at the end of this prospectus. The statements of operations data for three months ended April 30, 2018 and 2019 and the balance sheet data as of April 30, 2019 are derived from unaudited interim financial statements included elsewhere in this prospectus. The unaudited interim financial statements have been prepared on the same basis as the audited financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the unaudited interim financial statements. Our historical results are not necessarily indicative of results that may be expected in the future, and the results for the three months ended April 30, 2019 and are not necessarily indicative of results to be expected for the full year or any other period. The selected financial data in this section are not intended to replace the financial statements and related notes thereto included elsewhere in this prospectus and are qualified in their entirety by the financial statements and related notes thereto included at the end of this prospectus.

 

     
     Fiscal year ended
January 31,
    Three months ended
April 30,
 
(in thousands, except per share data)            2018             2019             2018             2019  

Statement of operations data:

        

Revenue

        

Subscription and related services

   $ 32,430     $ 43,928     $ 10,002     $ 12,683  

Payment processing fees

     28,671       36,881       9,232       11,557  

Life sciences

     18,733       19,080       4,637       4,070  
  

 

 

 

Total revenue

   $ 79,834     $ 99,889     $ 23,871     $ 28,310  

Expenses

        

Cost of revenue (excluding depreciation and amortization)

     12,562       15,105       3,223       3,996  

Payment processing expense

     17,209       21,892       5,590       6,949  

Sales and marketing

     24,761       26,367       6,247       7,702  

Research and development

     11,377       14,349       3,109       4,299  

General and administrative

     18,838       20,076       4,928       6,245  

Depreciation

     6,832       7,552       1,772       2,155  

Amortization

     2,808       4,042       913       1,219  
  

 

 

 

Total expenses

   $ 94,387     $ 109,382     $ 25,781     $ 32,564  

Operating loss

   $ (14,553   $ (9,494   $ (1,910   $ (4,255

Other income (expense)

        

Other income (expense)

     602       (7     (175     (1,145

Change in fair value of warrant liability

     (598     (2,058     (291     (423

Interest income (expense)

     (3,642     (3,504     (848     (804
  

 

 

 

Total other income (expense)

   $ (3,639   $ (5,568   $ (1,314   $ (2,372
  

 

 

 

Loss before provision for income taxes

   $ (18,192   $ (15,062   $ (3,224   $ (6,627
  

 

 

 

Provision for income taxes

     —         —         —         (68
  

 

 

 

Net loss

   $ (18,192   $ (15,062   $ (3,224   $ (6,695

Accretion of redeemable preferred stock

   $ (19,981   $ (30,199   $ (2,490   $ (7,863
  

 

 

 

Net loss attributable to common stockholders

   $ (38,173   $ (45,261   $ (5,713   $ (14,558
  

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

   $ (11.29   $ (11.16   $ (1.50   $ (3.29
  

 

 

 

Weighted-average common shares outstanding, basic and diluted(1)

     3,381       4,054       3,811       4,425  
  

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(1)

   $       $       $       $    
  

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted (unaudited)(1)

        

 

 

 

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(1)   See Note 13 to our financial statements appearing at the end of this prospectus for details on the calculation of basic and diluted net loss per share attributable to common stockholders and unaudited basic and diluted pro forma net loss per share attributable to common stockholders.

 

     
     As of January 31,     As of April 30,  
(in thousands)    2018     2019     2019  

Balance sheet data:

      

Cash and cash equivalents

   $ 10,503     $ 1,543     $ 5,913  

Total assets

     57,136       59,262       68,107  

Long-term debt and capital leases, net of discount, including current portion

     22,934       32,285       37,979  

Preferred stock warrant liability

     3,440       5,498       5,921  

Redeemable preferred stock

     176,291       206,490       214,353  

Common stock and additional paid in capital

     36       44       44  

Total stockholders’ equity (deficit)

     (167,683     (210,974     (224,063

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Selected financial data” and the financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those identified below and those discussed in the section titled “Risk factors” and in other parts of this prospectus.

Overview

We are a leading provider of comprehensive solutions that transform the healthcare experience by engaging patients in their care and enabling healthcare provider organizations to optimize operational efficiency, improve profitability and enhance clinical care. As evidenced in industry survey reports from KLAS, we have been recognized as a leader based on our integration capabilities with healthcare provider organizations, the broad adoption of our patient intake functionalities and by overall client satisfaction. Through the SaaS-based Phreesia Platform, we offer our provider clients a robust suite of solutions to manage the patient intake process and an integrated payments solution for secure processing of patient payments. Our Platform also provides life sciences companies with an engagement channel for targeted and direct communication with patients. In fiscal 2019, we facilitated more than 54 million patient visits for approximately 50,000 individual providers, including physicians, physician assistants and nurse practitioners, in nearly 1,600 healthcare provider organizations across all 50 states. Additionally, our Platform processed more than $1.4 billion in patient payments during this time.

We serve an array of healthcare provider organizations of all sizes ranging from single-specialty practices, which include internal and family medicine, urology, dermatology and orthopedics, to large, multi-specialty groups such as Crystal Run Healthcare and Iowa Clinic and large health systems such as Ascension Medical Group and Baycare Health Systems. Our life sciences business additionally serves clients in the pharmaceutical, biotechnology and medical device industries, including 13 of the top 20 global pharmaceutical companies as measured by revenue in fiscal 2019.

We derive revenue from (i) subscription fees from healthcare provider organizations for access to the Phreesia Platform and related professional services fees, approximately 95% of which are generated from fees related to our base package and add-ons, (ii) payment processing fees based on levels of patient payment volume processed through the Phreesia Platform and (iii) fees from life science companies to deliver marketing content to patients using the Phreesia Platform. We have strong visibility into our business as the majority of our revenue is derived from recurring subscription fees and re-occurring payment processing fees.

We have achieved rapid provider client growth through our effective sales channel. We market and sell our products and services to provider clients throughout the United States using a direct sales organization segmented into several highly targeted and coordinated teams, which are concentrated in Raleigh, North Carolina, New York, New York and Ottawa, Canada. Our demand generation team develops content and identifies prospects that our sales development team researches and qualifies to generate high-grade, actionable sales programs. Our direct sales force executes on these qualified sales programs, partnering with client services to ensure prospects are educated on the breadth of our capabilities and demonstrable value proposition, with the goal of attracting and retaining clients and expanding their use of our Platform over time. Most of our Platform solutions are contracted pursuant to annual, auto-renewing agreements. Our sales typically involve competitive processes and sales cycles have, on average, varied in duration from two months

 

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to eight months, depending on the size of the potential client. In addition, through Phreesia University (Phreesia’s in-house training program) events, client conferences and webinars, we help our provider clients optimize their businesses and, as a result, support client retention.

We intend to continue scaling our sales, marketing, client services and client success organizations to meet the needs of our growing provider client base. We will continue our strategic and research and development investments to innovate, enhance and expand the Phreesia Platform, software architecture and data center infrastructure with new features and functionality.

Since our inception, we have not marketed or sold our products internationally. Accordingly, all of our revenue from historical periods, including fiscal 2019, has come from the United States, and our current strategy is to continue to focus our sales efforts solely within the United States.

Our revenue growth has been entirely organic and reflects our significant addition of new provider clients and increased revenue from existing clients. Total revenue increased approximately 25% from $79.8 million in fiscal 2018 to $99.9 million in fiscal 2019. For the three months ended April 30, 2018 and 2019, our total revenue was $23.9 million and $28.3 million, respectively. Net loss was $18.2 million and $15.1 million in fiscal 2018 and 2019, respectively, and $3.2 million and $6.7 million for the three month period ended April 30, 2018 and 2019, respectively. Adjusted EBITDA was negative $4.1 million and positive $3.5 million for fiscal 2018 and 2019, respectively, and positive $1.0 million and negative $0.3 million for the three month period ended April 30, 2018 and 2019, respectively. In fiscal 2019, cash used in operating activities was $2.1 million and free cash flow was negative $12.0 million. For the three month period ended April 30, 2019, cash provided by operating activities was $2.0 million and free cash flow was negative $0.7 million. For a reconciliation of Adjusted EBITDA to net loss and free cash flow, please see the section titled “Prospectus summary—Summary financial and other data.”

Our business model

Our business model is focused on maximizing long-term value for our clients and us. We invest significantly to acquire and onboard new provider clients and believe that we will achieve a positive return on these investments through strong retention of and expansion of business with such clients over time. Acquisition and onboarding costs for new clients include sales, implementation and marketing costs. We recognize software subscription revenue from our provider clients ratably over the term of subscription period, which commences when all revenue recognition criteria have been met. We recognize gross payment revenue from our patient payment platform at the time payment is made by the patient through the Phreesia Platform. We recognize revenue from our life sciences clients as marketing content is delivered to patients interacting with the Phreesia Platform.

The profit we achieve from our provider clients varies and depends on the specific solutions purchased by the client, the number of providers at the client and the volume of payment transactions processed by their patients through our payment platform. Our sales, marketing and onboarding expenses associated with new provider clients typically exceed first-year contribution we generate from those clients. However, provider clients’ subscriptions typically renew automatically each year so our primary cost relating to a client renewal is our account management team with very limited sales, marketing and implementation expense. We may incur minimal incremental sales and marketing costs relative to initial client acquisition costs to expand our business with the provider client through the sale of additional subscriptions purchased for a client’s providers or the cross-sale or and up-sale of new applications, such as Phreesia Mobile and Appointments.

To illustrate the economic relationship with our provider clients, the following is an analysis of the provider clients we on-boarded in fiscal 2017, which we refer to as the FY 2017 Cohort, and in fiscal 2018, which we refer

 

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to as the FY 2018 Cohort. We selected the FY 2017 Cohort and the FY 2018 Cohort, or our Cohorts, as representative sets of provider clients because we believe that time is an important factor to understand long-term value of our provider client base. We also believe that the Cohorts are a fair representation of our overall client base because they include provider clients across organization sizes, specialties, geographies and include provider clients that have expanded their business as well as those who have reduced or not renewed with Phreesia.

In fiscal 2017 and fiscal 2018, we incurred upfront sales and marketing expense to acquire the FY 2017 Cohort and the FY 2018 Cohort, respectively. While most of the sales and marketing costs were to acquire the applicable clients in the initial year, we did have limited incremental sales and marketing expense as clients within each Cohort expanded and renewed business with Phreesia in subsequent years and we expect this trend to continue. This limited incremental sales and marketing expense was less than $3.0 million for fiscal 2017 and fiscal 2018 and was mostly comprised of sales expenses associated with our life sciences revenue and sales expenses associated with up-sales and cross-sales of additional revenue to clients within the Cohorts. We expect these trends to continue in cohorts for subsequent fiscal years. We also incurred upfront implementation costs to onboard these clients onto the Phreesia Platform during the initial year. As a result, our costs in the initial year, which was fiscal 2017 for the FY 2017 Cohort and fiscal 2018 for the FY 2018 Cohort, are higher for the applicable Cohort than in future years as implementation cost is minimal for renewals and expansion sales within such Cohort. We expect this trend for implementation costs to be the same for subsequent cohorts.

We recognize the following revenue from our Cohorts: (i) subscription fees generated from the provider clients within the cohort for access to the Phreesia Platform and related one-time professional services fees, (ii) payment processing fees based on levels of patient payment volume processed by the provider clients within the Cohort through the Phreesia Platform, and (iii) fees from life science companies to deliver targeted digital marketing content to patients of the provider clients within the Cohort using the Phreesia Platform.

We measure contribution income as total revenue associated with the applicable Cohort in excess of the estimated upfront and ongoing costs with respect to the same client group, which we refer to as Associated Costs. Estimated upfront costs to acquire the Cohorts include sales, marketing and on-boarding costs. In addition, estimated ongoing costs to support the provider clients include hardware expense, payment processing fees, eligibility and benefits processing, hosting fees, direct costs to support life science marketing programs for patients of our provider clients and resources from our technology support, deployment and product specialist teams. Expenses allocated to the Cohorts include allocation of personnel costs such as salaries and commissions and other direct costs. For purposes of this cohort analysis, we have excluded all research and development and general and administrative expenses because these expenses support the overall growth of our business and benefit all of our clients, partners and users.

The provider clients within the Cohorts all launched and began to ramp up utilization of the Phreesia Platform at different times throughout the applicable initial year. Therefore, fiscal 2017 does not represent a complete year of revenue and contribution income for the FY 2017 Cohort, and fiscal 2018 does not represent a complete year of revenue and contribution income for the FY 2018 Cohort. Combined with the significant upfront sales, marketing and implementation costs to acquire and on-board the Cohorts, we have a net contribution loss in the initial year for each Cohort. In fiscal 2018 and fiscal 2019, we realized $23.7 million and $24.8 million of revenue (net of churn) from the FY 2017 Cohort and contribution margin percentage associated with the FY 2017 Cohort increased from 53.2% in fiscal 2018 to 54.1% in fiscal 2019. In fiscal 2018 and fiscal 2019, we realized $13.7 million and $25.2 million of revenue (net of churn) from the FY 2018 Cohort and contribution margin percentage associated with the FY 2018 Cohort increased from -72.6% in fiscal 2018 to 54.4% in fiscal 2019. We measure contribution margin percentage as revenue from the applicable Cohort minus Associated Costs for the applicable Cohort, divided by revenue for the applicable Cohort, in each case for the applicable

 

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period. The upfront sales and marketing cost to acquire the FY 2017 Cohort and the 2018 Cohort was recouped by client contribution income in approximately 13-14 months.

Revenue, Associated Costs and contribution margin percentage of each Cohort are reflected in the charts below which are intended to further illustrate the economic relationship with our provider clients over time.

LOGO

LOGO

We expect cohort contribution, margins and acquisition costs will fluctuate from one period to another depending on the number of provider clients remaining in each cohort, our ability to increase their revenue, other changes to products and services offered to such clients through the Phreesia Platform, as well as changes in our associated costs. The methods used to measure revenue, Associated Costs and contribution margin percentage have been refined over time, such that we do not have consistent corresponding information for prior historical periods that would allow us to present additional historical cohorts, and the

 

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revenue, Associated Costs and contribution margin percentage from such cohorts could vary. While we believe the Cohorts are a fair representation of our overall client base, there is no assurance that the Cohorts will be representative of any future group of provider clients or periods.

We have demonstrated a consistent track record of retaining revenue from cohorts of our provider clients over time. The chart below illustrates the stability of the recurring subscription and payment processing revenue from our provider clients from four different cohorts over the last three fiscal years.

 

LOGO

 

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Further, as a result of our new product innovation, go-to-market strategy focused on provider clients and high quality client service, we have grown our average revenue per provider client over 72% from approximately $31 thousand per provider client per year in FY 2017 to over $54 thousand per provider client per year in FY 2019. These results, which are illustrated in the chart below, have been achieved by acquiring larger new provider clients and expanding business with our existing provider clients.

 

LOGO

Key metrics

We regularly review the following key metrics to measure our performance, identify trends affecting our business, formulate financial projections, make strategic business decisions and assess working capital needs.

 

     
     As of and for fiscal
year ended January 31,
     As of and for three
months ended April 30,
 
              2018      2019      2018      2019  

Key Metrics:

           

Provider clients (average over period)

     1,416        1,490        1,450        1,549  

Average revenue per provider client

   $ 43,163      $ 54,231      $ 13,265      $ 15,649  

Patient payment volume (in millions)

   $ 1,106      $ 1,446      $ 360      $ 461  

Annual dollar-based net retention rate (end of period)

     111%        107%                

 

 

 

 

Provider clients. We define provider clients as the average number of healthcare provider organizations that generate revenue each month during the applicable period. In one specific case wherein we act as a subcontractor providing white-label services to our partner’s clients, we treat this contractual relationship as a single provider client. We believe growth in the number of provider clients is a key indicator of the performance of our business and depends, in part, on our ability to successfully develop and market our Platform to healthcare provider organizations that are not yet clients. While growth in the number of provider clients is an important indicator of expected revenue growth, it also informs our management of the areas of our business that will require further investment to support expected future provider client growth. For example, as the number of provider clients increases, we may need to add to our customer support team and invest to maintain effectiveness and performance of our Platform and software for our provider clients and their patients. The number of provider clients increased from 1,454 as of the end of fiscal 2018 to 1,566 as of the end of fiscal 2019, while the average number of provider clients increased from 1,416 in fiscal 2018 to 1,490 provider clients in fiscal 2019. The average number of provider clients increased from 1,450 for the

 

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three months ended April 30, 2018 to 1,549 provider clients for the three months ended April 30, 2019. We expect the number of provider clients to continue to increase in the future. The growth rate of the number of provider clients decreased in fiscal 2018 and fiscal 2019 which may continue in the future as the size of our provider client base increases.

 

 

Average revenue per provider client. We define average revenue per provider client as the total subscription and related services and payment processing revenue generated from provider clients in a given period divided by the average number of provider clients that generate revenue each month during that same period. We are focused on continually delivering value to our provider clients and believe that our ability to increase average revenue per provider client is an indicator of the long-term value of our existing provider client relationships. Average revenue per provider client increased from $43,163 in fiscal 2018 to $54,231 in fiscal 2019. Average revenue per provider client increased from $13,265 for the three months ended April 30, 2018 to $15,649 for the three months ended April 30, 2019.

 

 

Patient payment volume. We measure patient payment volume as the total dollar volume of transactions between our provider clients and their patients utilizing our payment platform, including via credit and debit cards, cash and check. Patient payment volume is a major driver of our payment processing revenue, and we believe that patient payment volume is an indicator of both the underlying health of our provider clients’ businesses and the continuing shift of healthcare costs to patients. Patient payment volume increased from $1.1 billion in fiscal 2018 to $1.4 billion in fiscal 2019. Patient payment volume increased from $360 million for three months ended April 30, 2018 to $461 million for the three months ended April 30, 2019.

 

 

Annual dollar-based net retention rate. Annual dollar-based net retention rate is calculated by summing the monthly subscription fees and payment processing revenue of all provider clients that have had revenue during the one-year period prior to the calculation period and comparing it with the sum of the monthly subscription fees and payment processing revenue (net of contraction, churn and expansion) for the same set of provider clients in the calculation period. Contraction is defined as a reduction in revenue for a client and expansion is defined as an increase in revenue for a client in the calculation period as compared to the prior period. A client who churns is a client whose revenue in the calculation period is zero. The annualized dollar-based net retention rate is calculated by taking a geometric mean of the monthly rates over an annual period. We define our base revenue as the aggregate subscription fees (excluding related services revenue) and payment processing revenue of our provider client base as of the date one year prior to the date of calculation. We define our retained revenue (net of contraction, churn and expansion) as the aggregate subscription fees (excluding related services revenue) and payment processing revenue of the same provider client base included in our measure of base revenue at the end of the period being measured. Our annual dollar-based net retention rate is an important metric to measure our ability to retain and expand the revenue from existing provider clients. Our annual dollar-based net retention rate decreased from 111% in fiscal 2018 to 107% in fiscal 2019.

Components of statements of operations

Revenue

We generate revenue primarily from providing an integrated SaaS-based software and payment platform for the healthcare industry. We derive revenue from subscription fees, approximately 95% of which are generated from fees related to our base package and add-ons, and related services generated from our provider clients for access to the Phreesia Platform, payment processing fees based on the levels of patient payment volume processed through the Phreesia Platform, and from digital marketing revenue from life sciences companies to reach, educate and communicate with patients when they are most receptive and actively seeking care.

 

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Our total revenue consists of the following:

 

 

Subscription and related services. We primarily generate subscription fees from our provider clients based on the number of providers that subscribe to and utilize the Phreesia Platform. Our provider clients are typically billed monthly in arrears, though in some instances, provider clients may opt to be billed quarterly or annually in advance. Subscription fees are typically auto-debited from provider clients’ accounts every month. As we target and add larger enterprise provider clients, these clients may choose to contract differently than our typical per provider subscription model. To the extent we charge in an alternative manner with larger enterprise provider clients, we expect that such a pricing model will recur and, combined with our per provider subscription fees, will increase as a percentage of our total revenue.

In addition, we receive certain fees from provider clients for professional services associated with our implementation services as well as travel and expense reimbursements, shipping and handling fees, sales of hardware (PhreesiaPads and Arrivals Stations), on-site support and training.

 

 

Payment processing fees. We generate revenue from payment processing fees based on the number of transactions and the levels of patient payment volume processed through the Phreesia Platform. Payment processing fees are generally calculated as a percentage of the total transaction dollar value processed and/or a fee per transaction. We charged approximately 3% of the aggregate credit and debit patient payment volume processed through the Phreesia Platform as revenue in fiscal 2018 and fiscal 2019. Over 80% of our patient payment volume is composed of credit and debit transactions processed on Phreesia’s payment facilitator model, generating the majority of Phreesia’s payment processing revenue. The remainder of our patient payment volume is composed of credit and debit transactions for which Phreesia acts as a gateway to another payment processor, and cash and check transactions. We expect revenue from payment processing to increase as a percentage of our total revenue as we increase the number of provider clients on our Platform and as overall healthcare costs and patient financial responsibility continue to rise.

 

 

Life sciences. We generate revenue from the sale of digital marketing solutions to life sciences companies. As we expand our provider client base, we increase the number of new patients we can reach to deliver targeted marketing content on behalf of our life sciences clients. We expect that our revenue derived from life sciences clients will grow moderately on an absolute dollar basis but will decrease as percentage of our total revenue due to the faster revenue growth expected to be achieved from our provider clients.

Cost of revenue (excluding depreciation and amortization)

Our cost of revenue primarily consists of personnel costs, including salaries, benefits, bonuses and stock-based compensation for implementation and technical support, and costs to verify insurance eligibility and benefits, infrastructure costs to operate our SaaS-based Platform such as hosting fees and fees paid to various third-party partners for access to their technology.

Payment processing expense

Payment processing expense consists primarily of interchange fees set by payment card networks and that are ultimately paid to the card-issuing financial institution, assessment fees paid to payment card networks, and fees paid to third-party payment processors and gateways. Payment processing expense may increase as a percentage of payment processing revenue if card networks raise pricing for interchange and assessment fees or if we reduce pricing to our clients.

Sales and marketing

Sales and marketing expense consists primarily of personnel costs, including salaries, benefits, bonuses, stock-based compensation and commission costs for our sales and marketing personnel. Sales and marketing

 

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expense also includes costs for advertising, promotional and other marketing activities, as well as certain fees paid to various third-party partners for sales and lead generation. Advertising is expensed as incurred. We expect sales and marketing expense to continue to increase in absolute dollars as we increase our sales and marketing efforts and expand our operations into new markets, although such expense may fluctuate as a percentage of total revenue.

Research and development

Research and development expense consists of costs for the design, development, testing and enhancement of our products and services and are generally expensed as incurred. These costs consist primarily of personnel costs, including salaries, benefits, bonuses and stock-based compensation for our development personnel. Research and development expense also includes product management, life sciences analytics costs, third-party partner fees and third-party consulting fees, offset by any internal-use software development cost capitalized during the same period. We expect research and development expense to continue to increase in absolute dollars as we continue to enhance our product capabilities and access new markets, although such expense may fluctuate as a percentage of total revenue.

General and administrative

General and administrative expense consists primarily of personnel costs, including salaries, benefits, bonuses, and stock-based compensation for our executive, finance, legal, human resources, information technology and other administrative personnel. General and administrative expense also includes consulting, legal, security, accounting services and allocated overhead. We expect general and administrative expense to continue to increase in absolute dollars as we grow our operations and prepare to operate as a public company, although we expect such expense to decline as a percentage of total revenue over time.

Depreciation

Depreciation represents depreciation expense for PhreesiaPads and Arrivals Stations, data center and other computer hardware, purchased computer software, furniture and fixtures and leasehold improvements.

Amortization

Amortization primarily represents amortization of our capitalized internal-use software related to the Phreesia Platform as well as amortization of acquired intangible assets.

Other income (expense)

Our other income and loss line items consist of the following:

 

 

Other income (expense). Other income (expense) consists of foreign currency-related gains and losses and other income (expense).

 

 

Change in fair value of warrant liability. Preferred stock warrants are marked to market based on third-party valuations and the change in value is recorded in other income (expense).

 

 

Interest income. Interest income consists of interest earned on our cash and cash equivalent balances. Interest income has not been material to our operations.

 

 

Interest expense. Interest expense consists primarily of the interest incurred on our financing obligations. Any future borrowings under the SVB Facility, as further described below, will incur interest expense and result in increased interest expense in future periods.

 

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The following table summarizes the results of our operations for the periods presented:

 

     
    Fiscal year ended
January 31,
    Three months ended
April 30,
 
(in thousands)   2018     2019     Change     2018     2019     Change  

Revenue

           

Subscription and related services

  $ 32,430     $ 43,928       35%     $ 10,002     $ 12,683       27%   

Payment processing fees

    28,671       36,881       29%       9,232       11,557       25%   

Life sciences

    18,733       19,080       2%       4,637       4,070       (12)%  
 

 

 

     

 

 

   

Total revenue

  $ 79,834     $ 99,889       25%     $ 23,871     $ 28,310       19%   

Expenses

           

Cost of revenue (excluding depreciation and amortization)

    12,562       15,105       20%       3,223       3,996       24%   

Payments processing expense

    17,209       21,892       27%       5,590       6,949       24%   

Sales and marketing

    24,761       26,367       6%       6,247       7,702       23%   

Research and development

    11,377       14,349       26%       3,109       4,299       38%   

General and administrative

    18,838       20,076       7%       4,928       6,245       27%   

Depreciation

    6,832       7,552       11%       1,772       2,155       22%   

Amortization

    2,808       4,042       44%       913       1,219       34%   
 

 

 

     

 

 

   

Total expenses

  $ 94,387     $ 109,382       16%     $ 25,781     $ 32,564       26%   

Operating loss

  $ (14,553   $ (9,494     (35%   $ (1,910   $ (4,255     123%   

Other income (expense)

           

Other income (expense)

    602       (7     (101%     (175     (1,145     554%   

Change in fair value of warrant liability

    (598     (2,058     244%       (291     (423     45%   

Interest income (expense)

    (3,642     (3,504     (4%     (848     (804     (5)%  
 

 

 

     

 

 

   

Total other income (expense)

  $ (3,639   $ (5,568     53%     $ (1,314   $ (2,372     81%   

Loss before provision for income taxes

  $ (18,192   $ (15,062     (17%   $ (3,224   $ (6,627     106%   

Provision for income taxes

    —         —         (0%   $ —       $ (68     —   

Net loss

  $ (18,192   $ (15,062     (17%   $ (3,224   $ (6,695     108%   

Accretion of redeemable preferred stock

  $ (19,981   $ (30,199     (51%   $ (2,490   $ (7,863     216%   

Net loss attributable to common stockholders

  $ (38,173   $ (45,261     (19%   $ (5,713   $ (14,558     155%   

 

 

Comparison of the three months ended April 30, 2018 and 2019

Revenue

 

       
     Three months ended
April 30,
               
(in thousands)    2018      2019      $ Change      % Change  

Revenue

   $ 23,871      $ 28,310      $ 4,438        19%  

 

 

Total revenue increased $4.4 million to $28.3 million in the three months ended April 30, 2019, as compared to $23.9 million in the three months ended April 30, 2018. Revenue from provider clients increased $5.0 million to $24.2 million in the three months ended April 30, 2019, as compared to $19.2 million in the three months ended April 30, 2018. The increase was attributable to both increased subscription and payment revenue from new clients and expansion and cross-selling to existing clients. Our subscription and related services revenue from

 

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healthcare provider organizations increased $2.7 million to $12.7 million in the three months ended April 30, 2019, as compared to $10.0 million in the three months ended April 30, 2018 due to new provider clients added during the period and increased revenue from the expansion of products and services offered to existing provider clients. Our revenue from patient payments processed through the Phreesia Platform increased $2.3 million to $11.6 million in the three months ended April 30, 2019, as compared to $9.2 million in the three months ended April 30, 2018 due to the addition of more provider clients, expansion of existing provider clients and increased patient financial responsibility for their care. Our revenue from life science clients for digital marketing decreased $0.6 million to $4.1 million in the three months ended April 30, 2019, as compared to $4.6 million in the three months ended April 30, 2018 due to a decrease in sales of digital marketing solutions to service clients.

Cost of revenue (excluding depreciation and amortization)

 

       
     Three months ended
April 30,
               
(in thousands)                2018      2019      $ Change      % Change  

Cost of revenue (excluding depreciation and amortization)

   $ 3,223      $ 3,996      $ 773        24%  

 

 

Cost of revenue (excluding depreciation and amortization) increased $0.8 million to $4.0 million in the three months ended April 30, 2019, as compared to $3.2 million in the three months ended April 30, 2018. The increase resulted primarily from increases in implementation expenses of $0.3 million, deployment of $0.2 million and data center hosting of $0.1 million.

Payment processing expense

 

       
     Three months ended
April 30,
               
(in thousands)                2018      2019      $ Change      % Change  

Payment processing expense

   $ 5,590      $ 6,949      $ 1,359        24%  

 

 

Payments processing expense increased $1.4 million to $6.9 million in the three months ended April 30, 2019, as compared to $5.6 million in the three months ended April 30, 2018. The increase resulted primarily from increases to interchange and assessment expenses, which are the primary components of our transaction costs.

Sales and marketing

 

       
     Three months ended
April 30,
               
(in thousands)                2018      2019      $ Change      % Change  

Sales and marketing

   $ 6,247      $ 7,702      $ 1,455        23%  

 

 

Sales and marketing expense increased $1.5 million to $7.7 million in the three months ended April 30, 2019, as compared to $6.2 million in the three months ended April 30, 2018. The increase was primarily attributable to salary and stock compensation increases of $0.5 million, addition of analytics and insights team of $0.3 million and increase in bonus and commissions of $0.3 million.

 

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Research and development

 

       
     Three months ended
April 30,
               
(in thousands)                2018      2019      $ Change      % Change  

Research and development

   $ 3,109      $ 4,299      $ 1,190        38%  

 

 

Research and development expense increased $1.2 million to $4.3 million in the three months ended April 30, 2019, as compared to $3.1 million in the three months ended April 30, 2018. The increase resulted primarily from increased compensation to our research and development personnel of $1.0 million (including the establishment of our analytics department).

General and administrative

 

       
     Three months ended
April 30,
               
(in thousands)                2018      2019      $ Change      % Change  

General and administrative

   $ 4,928      $ 6,245      $ 1,317        27%  

 

 

General and administrative expense increased $1.3 million to $6.2 million in the three months ended April 30, 2019, as compared to $4.9 million in the three months ended April 30, 2018. The increase resulted primarily from an increase in stock compensation expense, salaries and accounting fees.

Depreciation

 

       
     Three months ended
April 30,
               
(in thousands)                2018      2019      $ Change      % Change  

Depreciation

   $ 1,772      $ 2,155      $ 383        22%  

 

 

Depreciation expense increased $0.4 million to $2.2 million in the three months ended April 30, 2019, as compared to $1.8 million in the three months ended April 30, 2018. The increase was attributable to PhreesiaPad, Arrivals Stations and data center depreciation.

Amortization

 

       
     Three months ended
April 30,
               
(in thousands)                2018      2019      $ Change      % Change  

Amortization

   $ 913      $ 1,219      $ 306        34%  

 

 

Amortization expense increased $0.3 million to $1.2 million in the three months ended April 30, 2019, as compared to $0.9 million in the three months ended April 30, 2018. The increase was due to increased capitalized internal use software development costs.

 

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Other income (expense)

 

       
     Three months ended
April 30,
             
(in thousands)                2018     2019     $ Change     % Change  

Other income (expense)

   $ (175   $ (1,145   $ (970     554%  

 

 

Other income (expense) consists primarily of foreign currency-related gains and losses. The three months ended April 30, 2019 includes a loss on extinguishment of debt of $1.0 million.

Change in fair value of warrant liability

 

       
     Three months ended
April 30,
             
(in thousands)                2018     2019     $ Change     % Change  

Change in fair value of warrant liability

   $ (291   $ (423   $ (132     45%  

 

 

The change in fair value of warrant liability increased $0.1 million, to $0.4 million in the three months ended April 30, 2019, as compared to $0.3 million in the three months ended April 30, 2018. The increase resulted primarily from an increase in the preferred stock valuation. The convertible preferred stock underlying the warrants will be converted to common stock upon the closing of this offering.

Interest income (expense)

 

       
     Three months ended
April 30,
              
(in thousands)                2018     2019     $ Change      % Change  

Interest income (expense)

   $ (848   $ (804   $ 44        (5)%  

 

 

Interest income (expense) decreased $0.04 million to $0.8 million in the three months ended April 30, 2019, as compared to $0.8 million in the three months ended April 30, 2018.

Comparison of fiscal 2018 versus fiscal 2019

Revenue

 

       
     Fiscal year ended
January 31,
               
      2018      2019      $ Change      % Change  

Revenue

   $ 79,834      $ 99,889      $ 20,055        25%  

 

 

Total revenue increased $20.1 million to $99.9 million, for fiscal 2019, as compared to $79.8 million for fiscal 2018. Revenue from provider clients increased $19.7 million to $80.8 million for fiscal 2019, as compared to $61.1 million for fiscal 2018. The $19.7 million increase was attributable to both increased subscription and payment revenue from new clients and expansion and cross-selling to existing clients. Our subscription and related services revenue from healthcare provider organizations increased $11.5 million to $43.9 million for fiscal 2019, as compared to $32.4 million for fiscal 2018 due to new provider clients added during the year and increased revenue from the expansion of products and services offered to existing provider clients. The increase in subscription and payment revenue from new provider clients was $8.8 million and the increase in

 

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subscription and payment revenue from existing provider clients was $10.9 million. New provider clients are defined as clients that go live in the applicable period and existing provider clients are defined as clients that go live in any period before the applicable period. Our revenue from patient payments processed through the Phreesia Platform increased $8.2 million to $36.9 million for fiscal 2019, as compared to $28.7 million for fiscal 2018 due to the addition of more provider clients, expansion of existing provider clients and increased patient financial responsibility for their care. Our revenue from life science clients for digital marketing increased $0.4 million to $19.1 million for fiscal 2019, as compared to $18.7 million for fiscal 2018 due to an increase in sales of digital marketing solutions to life sciences clients.

Cost of revenue (excluding depreciation and amortization)

 

       
     Fiscal year ended
January 31,
               
(in thousands)    2018      2019      $ Change      % Change  

Cost of revenue (excluding depreciation and amortization)

   $ 12,562      $ 15,105      $ 2,543        20%  

 

 

Cost of revenue (excluding depreciation and amortization) increased $2.5 million to $15.1 million for fiscal 2019, as compared to $12.6 million for fiscal 2018. The increase resulted primarily from increases in implementation expenses, technical support, deployment, data center hosting and payments to third-party partners. Approximately $0.7 million of the increase related to one-time hardware costs associated with the sale of PhreesiaPads and Arrivals Stations.

Payment processing expense

 

       
     Fiscal year ended
January 31,
               
(in thousands)    2018      2019      $ Change      % Change  

Payment processing expense

   $ 17,209      $ 21,892      $ 4,683        27%  

 

 

Payments processing expense increased $4.7 million to $21.9 million in fiscal 2019, as compared to $17.2 million for fiscal 2018. The increase resulted primarily from increases to interchange and assessment expenses, which are the primary components of our transaction costs.

Sales and marketing

 

       
     Fiscal year ended
January 31,
               
(in thousands)    2018      2019      $ Change      % Change  

Sales and marketing

   $ 24,761      $ 26,367      $ 1,606        6%  

 

 

Sales and marketing expense increased $1.6 million to $26.4 million for fiscal 2019, as compared to $24.8 million for fiscal 2018. The increase was primarily attributable to salary and stock compensation increases of $1.0 million, an increase in payments to third-party partners for marketing of $0.5 million and an increase in other sales and marketing related expenses of $0.1 million.

Research and development

 

       
     Fiscal year ended
January 31,
               
(in thousands)    2018      2019      $ Change      % Change  

Research and development

   $ 11,377      $ 14,349      $ 2,972        26%  

 

 

 

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Research and development expense increased $3.0 million to $14.3 million for fiscal 2019, as compared to $11.4 million for fiscal 2018. The increase resulted primarily from increased compensation to our research and development personnel of $2.7 million (including the establishment of our analytics department), an increase in payments to third-party partners of $0.1 million, and an increase in outside services and other expenses of $0.2 million.

General and administrative

 

       
     Fiscal year ended
January 31,
               
(in thousands)    2018      2019      $ Change      % Change  

General and administrative

   $ 18,838      $ 20,076      $ 1,238        7%  

 

 

General and administrative expense increased $1.2 million to $20.0 million for fiscal 2019, as compared to $18.8 million for fiscal 2018. The increase resulted primarily from increased spend on information technology security, legal and accounting fees.

Depreciation

 

       
     Fiscal year ended
January 31,
               
(in thousands)    2018      2019      $ Change      % Change  

Depreciation

   $ 6,832      $ 7,552      $ 720        11%  

 

 

Depreciation expense increased $0.7 million to $7.5 million for fiscal 2019, as compared to $6.8 million for fiscal 2018. The increase was attributable to PhreesiaPad, Arrivals Stations and data center depreciation.

Amortization

 

       
     Fiscal year ended
January 31,
               
(in thousands)    2018      2019      $ Change      % Change  

Amortization

   $ 2,808      $ 4,042      $ 1,234        44%  

 

 

Amortization expense increased $1.2 million to $4.0 million for fiscal 2019, as compared to $2.8 million for fiscal 2018. The increase was due to increased capitalized internal use software development costs.

Other income (expense)

 

       
     Fiscal year ended
January 31,
             
(in thousands)        2018      2019     $ Change     % Change  

Other income (expense)

   $ 602      $ (7   $ (609     (101)%  

 

 

Other income (expense) consists primarily of foreign currency-related gains and losses.

Change in fair value of warrant liability

 

       
     Fiscal year ended
January 31,
             
(in thousands)    2018     2019     $ Change     % Change  

Change in fair value of warrant liability

   $ (598   $ (2,058   $ (1,460     244%  

 

 

 

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The change in fair value of warrant liability increased $1.5 million, to $2.1 million for fiscal 2019, as compared to $0.6 million for fiscal 2018. The increase resulted primarily from an increase in the preferred stock valuation. The convertible preferred stock underlying the warrants will be converted to common stock upon the closing of this offering.

Interest income (expense)

 

       
     Fiscal year ended
January 31,
              
(in thousands)    2018     2019     $ Change      % Change  

Interest income (expense)

   $ (3,642   $ (3,504   $ 138        (4)%  

 

 

Interest income (expense) decreased $0.1 million to $3.5 million for fiscal 2019, as compared to $3.6 million for fiscal 2018. The decrease resulted primarily from interest on loans from third party lenders and interest on amounts borrowed under our lines of credit, as further discussed below.

Quarterly results of operations

The following tables set forth our unaudited statements of operations data for each of the nine quarters ended April 30, 2019 ,as well as the percentage that each line items represents of total revenue for each quarter. The unaudited quarterly statements of operations data set forth below have been prepared on a basis consistent with our audited annual financial statements and include, in our opinion, all normal recurring adjustments necessary for a fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our audited financial statements and the related notes included elsewhere in this prospectus.

 

   
    Three months ended,  
(in thousands)   April 30,
2017
    July 31,
2017
    October 31,
2017
    January 31,
2018
    April 30,
2018
    July 31,
2018
    October 31,
2018
    January 31,
2019
    April 30,
2019
 

Revenue

                 

Subscription and related services

  $ 6,760     $ 7,799     $ 8,623     $ 9,247     $ 10,002     $ 10,459     $ 10,929     $ 12,537     $ 12,683  

Payment processing fees

    7,060       6,987       7,051       7,574       9,232       9,174       9,073       9,403       11,557  

Life sciences

    3,611       4,968       5,264       4,891       4,637       5,146       4,754       4,543       4,070  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 17,431     $ 19,753     $ 20,938     $ 21,712     $ 23,871     $ 24,779     $ 24,756     $ 26,483     $ 28,310  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

                 

Cost of revenue (excluding depreciation and amortization)

    2,982       3,161       3,310       3,109       3,223       3,604       3,805       4,473       3,996  

Payments processing expense

    4,197       4,022       4,255       4,736       5,590       5,327       5,393       5,582       6,949  

Sales and marketing

    5,699       6,742       6,496       5,824       6,247       6,529       7,195       6,396       7,702  

Research and development

    2,657       2,918       2,927       2,875       3,109       3,179       3,856       4,205       4,299  

General and administrative

    5,021       4,730       4,414       4,672       4,928       4,650       4,540       5,958       6,245  

Depreciation

    1,562       1,699       1,738       1,832       1,772       1,777       1,966       2,037       2,155  

Amortization

    554       705       732       818       913       963       1,037       1,130       1,219  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  $ 22,672     $ 23,977     $ 23,872     $ 23,866     $ 25,871     $ 26,028     $ 27,792     $ 29,782     $ 32,564  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

  $ (5,241   $ (4,223   $ (2,934   $ (2,154   $ (1,910   $ (1,249   $ (3,036   $ (3,299   $ (4,255
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

                 

Other income (expense)

    (402     975       (173     201       (175     139       203       (173     (1,145

Change in fair value of warrant liability

    (169     (108     (138     (183     (291     (593     (611     (562     (423

Interest income (expense)

    (604     (1,055     (981     (1,003     (848     (884     (728     (1,045     (804
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

  $ (1,175   $ (189   $ (1,291   $ (985   $ (1,314   $ (1,338   $ (1,136   $ (1,780   $ (2,372
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax provision

  $ (6,416   $ (4,412   $ (4,225   $ (3,139   $ (3,224   $ (2,587   $ (4,172   $ (5,080   $ (6,627
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax provision

    —         —         —         —         —         —         —         —         (68
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (6,416   $ (4,412   $ (4,225   $ (3,139   $ (3,224   $ (2,587   $ (4,172   $ (5,080   $ (6,695

 

 

 

87


Table of Contents
   
    Three months ended,  
(percentage of revenue)   April 30,
2017
    July 31,
2017
    October 31,
2017
    January 31,
2018