You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal year ends
January 31. References to fiscal 2023 and 2022 refer to the fiscal years ended January 31, 2023and 2022, respectively. Basis of Presentation This management's discussion and analysis discusses our financial condition and results of operations for the years ended January 31, 2023and 2022. Please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended January 31, 2022for a comparison of the year ended January 31, 2022to the year ended January 31, 2021.
•Total revenue increased 32% to
•Net loss was
•Adjusted EBITDA was negative
•Cash used in operating activities was
with cash used in operating activities of
•Free cash flow was negative
•Cash and cash equivalents was
For a reconciliation of Adjusted EBITDA to net loss and a reconciliation of free cash flow to net cash used in operating activities, and for more information as to how we define and calculate such measures, see the section below titled "Non-GAAP financial measures."
We are a leading provider of comprehensive software solutions that improve the operational and financial performance of healthcare organizations by activating patients in their care to optimize patient health outcomes. As evidenced in industry survey reports from KLAS, we have been recognized as a leader based on our integration capabilities with healthcare services client organizations, the broad adoption of our patient intake functionalities and by overall client satisfaction. Through our SaaS-based technology platform, which we refer to as the Phreesia Platform or our Platform, we offer healthcare services clients a robust suite of integrated solutions that manage patient access, registration and payments. Our Platform also provides life sciences companies, health plans and other payer organizations (payers), patient advocacy, public interest and other not-for-profit organizations with a channel for direct communication with patients. We serve an array of healthcare services clients of all sizes across over 25 specialties, ranging from single-specialty practices, including internal and family medicine, urology, dermatology, and orthopedics, to large, multi-specialty 54 -------------------------------------------------------------------------------- groups, and health systems as well as regional and national payers and other organizations that provide other types of healthcare-related services. Our network solutions revenue (as described below) is generated from clients in the pharmaceutical, biotechnology, and medical device industries, as well as payers, patient advocacy, public interest and other not-for-profit organizations seeking to activate, engage and educate patients about topics critical to their health. We derive revenue from (i) subscription fees from healthcare services clients for access to the Phreesia Platform and related professional services fees, (ii) payment processing fees based on levels of patient payment volume processed through the Phreesia Platform and (iii) fees from life sciences and payer clients for delivering direct communications to help activate, engage and educate patients about topics critical to their health using the
PhreesiaPlatform. 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 market and sell our products and services to healthcare services clients throughout the United Statesusing a direct sales organization. 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 leads, 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 three months to six months, depending on the size of the potential client. In addition, through Phreesia University( Phreesia'sin-house training program), events, client conferences and webinars, we help our healthcare services clients optimize their businesses and, as a result, support client retention.
We also sell products and services to life sciences and payer organizations as
well as advertising agencies through our direct sales and marketing teams.
Since our inception, we have focused substantially all of our sales efforts within
the United States. Accordingly, substantially all of our revenue from historical periods has come from the United States, and our current strategy is to continue to focus substantially all of our sales efforts within the United States. Our revenue growth has been primarily organic and reflects our significant addition of new healthcare services clients. New healthcare services clients are defined as clients that go live in the applicable period and existing healthcare services clients are defined as clients that go live in any period before the applicable period. Investments in Growth During the fiscal year ended January 31, 2022, we accelerated hiring and overall investments across all areas of Phreesiato prepare for our anticipated growth in clients and use of our platform. Results for the fiscal year ended January 31, 2023reflect a full year run rate of expenditures related to those investments. In fiscal 2024 and thereafter, we expect growth in our team and compensation to moderate.
Recent developments and current economic conditions
See "Liquidity and Capital Resources -
Silicon Valley Bankfacility - Closure of SVB" below for additional discussion regarding the closure of SVB and its impact on our cash and cash equivalents, liquidity and sources of funds available for our material cash requirements.
Macroeconomic environment and geopolitical conditions
Our business is directly and indirectly affected by macroeconomic conditions, geopolitical conditions and the state of global financial markets. Recent geopolitical uncertainty resulting, in part, from military conflict between
Russiaand Ukraineas well as other macro-economic conditions, such as the impact of pandemics, increased interest rates, inflation in the cost of goods, services and labor, or a recession or an economic slowdown in the U.S.or internationally have contributed to significant volatility and decline in global financial markets during fiscal 2023. The uncertainty over the extent and duration of the ongoing conflict and these macroeconomic conditions continues to cause disruptions to businesses and markets worldwide. While none of these factors individually has had a material impact on our business to date, it is difficult to predict the potential impact these factors may have on our future business results, and each could adversely impact our business operations, financial performance and results of operations. 55 --------------------------------------------------------------------------------
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.
For the fiscal years ended January 31, Change 2023 2022 Amount % Key Metrics: Average healthcare services clients ("AHSCs") 2,856 2,074 782 38 %
Healthcare services revenue per AHSC
$ (4,879)(6) % Total revenue per AHSC $ 98,358 $ 102,812
We remain focused on building secure and reliable products that derive a strong return on investment for our clients and implementing them with speed and ease. This strategy continues to enable us to grow our network of healthcare services clients. We believe the investments we make to grow, strengthen and sustain our network of healthcare services clients lead to growth in all of our revenue categories. As a result, we are relabeling and expanding our key metrics related to revenue and AHSCs to more clearly depict the value of our network of healthcare services clients. During the fourth quarter of the year ended
January 31, 2023, we relabeled our key metric "Average revenue per healthcare services client" to "Healthcare services revenue per AHSC". We did not make any changes to the calculation of this metric in connection with relabeling this metric, and we have not changed any previously reported amounts. During the fourth quarter of the year ended January 31, 2023, we have added a key metric for Total revenue per AHSC. The definitions of our key metrics are presented below. •AHSCs. We define AHSCs as the average number of clients that generate subscription and related services or payment processing revenue each month during the applicable period. In cases where we act as a subcontractor providing white-label services to our partner's clients, we treat the contractual relationship as a single healthcare services client. We believe growth in AHSCs 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 services organizations that are not yet clients. While growth in AHSCs 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 AHSC growth. For example, as AHSCs increase, we may need to add to our customer support team and invest to maintain effectiveness and performance of our Platform and software for our healthcare services clients and their patients. •Healthcare services revenue per AHSC. We define Healthcare services revenue as the sum of subscription and related services revenue and payment processing revenue. We define Healthcare services revenue per AHSC as healthcare services revenue in a given period divided by AHSCs during that same period. We are focused on continually delivering value to our healthcare services clients and believe that our ability to increase healthcare services revenue per AHSC is an indicator of the long-term value of the Phreesia Platform. Healthcare services revenue per AHSC was $72,599for the year ended January 31, 2023compared to $77,478for the year ended January 31, 2022, a decrease of $4,879. The decline was primarily driven by AHSC growth significantly outpacing payment processing volume and payment processing revenue growth. Additionally, the mix of solutions used by new clients across the Patient Access, Registration and Revenue Cycle offerings has been a contributing factor to the declining trends in this metric. •Total Revenue per AHSC. We define Total revenue per AHSC as Total revenue in a given period divided by AHSCs during that same period. Our healthcare services clients directly generate subscription and related services and payment processing revenue. Additionally, our relationships with healthcare services clients who subscribe to the Phreesia Platform give us the opportunity to engage with life sciences companies, health plans and other payer organizations, patient advocacy, public interest and other not-for-profit organizations who deliver direct communication to patients through our Platform. As a result, we believe that our ability to increase Total revenue per AHSC is an indicator of the long-term value of the Phreesia Platform. Total revenue per AHSC was $98,358for the year ended January 31, 2023compared to $102,812for the year ended January 31, 2022, 56 -------------------------------------------------------------------------------- a decrease of $4,454. The decline was primarily driven by healthcare services client growth significantly outpacing growth in payment processing volume and payment processing revenue. Additional Information For the fiscal years ended January 31, Change 2023 2022 Amount % Patient payment volume (in millions) $ 3,284 $ 2,769 $ 51519 % Payment facilitator volume percentage 80 % 79 % 1 % 1 % •Patient payment volume. We believe that patient payment volume is an indicator of both the underlying health of our healthcare services clients' businesses and the continuing shift of healthcare costs to patients. We measure patient payment volume as the total dollar volume of transactions between our healthcare services clients and their patients utilizing our payment platform, including via credit and debit cards that we process as a payment facilitator as well as cash and check payments and credit and debit transactions for which we act as a gateway to other payment processors. •Payment facilitator volume percentage. We define payment facilitator volume percentage as the volume of credit and debit card patient payment volume that we process as a payment facilitator as a percentage of total patient payment volume. Payment facilitator volume is a major driver of our payment processing revenue. 57
Results of operations
The following tables set forth our results of operations for the periods
presented and as a percentage of revenue for those periods:
For the fiscal years ended
For the fiscal years ended January
January 31, 31, (in thousands) 2023 2022 2023 2022 Revenue Subscription and related services
$ 128,975 $ 95,51446 % 45 % Payment processing fees 78,368 65,201 28 % 31 % Network solutions 73,567 52,518 26 % 25 % Total revenue 280,910 213,233 100 % 100 % Expenses Cost of revenue (excluding depreciation and amortization) 58,944 42,669 21 % 20 % Payment processing expense 50,323 38,719 18 % 18 % Sales and marketing 151,263 106,421 54 % 50 % Research and development 91,244 52,265 32 % 25 % General and administrative 80,384 68,674 29 % 32 % Depreciation 17,988 14,985 6 % 7 % Amortization 7,316 6,317 3 % 3 % Total expenses 457,462 330,050 163 % 155 % Operating loss (176,552) (116,817) (63) % (55) % Other expense, net (175) (78) - % - % Interest income (expense), net 1,064 (1,084) - % (1) % Total other income (expense), net 889 (1,162) - % (1) %
Loss before provision for income taxes (175,663) (117,979)
(63) % (55) % Provision for income taxes (483) (182) - % - % Net loss
$ (176,146) $ (118,161)(63) % (55) %
Components of statements of operations
We generate revenue primarily from providing an integrated SaaS-based software and payment platform for the healthcare industry. We derive revenue from subscription fees and related services generated from our healthcare services 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 fees from life sciences and payer clients for delivering direct communications to help activate, engage and educate patients about topics critical to their health using the Phreesia Platform.
Our total revenue consists of the following:
•Subscription and related services. We primarily generate subscription fees from our healthcare services clients based on the number of healthcare services clients that subscribe to and utilize the Phreesia Platform. Our healthcare services clients are typically billed monthly in arrears, though in some instances, healthcare services clients may opt to be billed quarterly or annually in advance. Subscription fees are typically auto-debited from healthcare services clients' accounts every month. As we target and add larger enterprise healthcare services clients, these clients may choose to contract differently than our typical per healthcare services client subscription model. To the extent we charge in an alternative manner with larger enterprise healthcare services clients, we expect that such a pricing model will recur and, combined with our per healthcare services client subscription fees, will increase as a percentage of our total revenue. 58 -------------------------------------------------------------------------------- In addition, we receive certain fees from healthcare services 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 Kiosks), 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. Credit and debit patient payment volume processed through our payment facilitator model represented 80% and 79% of our patient payment volume in fiscal 2023 and 2022, respectively. The remainder of our patient payment volume is composed of credit and debit transactions for which
Phreesiaacts as a gateway to another payment processor, and cash and check transactions. Utilization trends have been dynamic through the pandemic, diverging from our pre-pandemic seasonality. We expect the environment to remain dynamic through fiscal year 2024. •Network solutions. We generate revenue from life sciences and payer clients for delivering direct communications to patients. As we expand our healthcare services client base, we increase the number of new patients we can reach to deliver our direct communications that help activate, engage and educate patients about topics critical to their health on behalf of life sciences and payer clients.
Cost of revenue (excluding depreciation and amortization)
Our cost of revenue primarily consists of personnel costs, including salaries, stock-based compensation, benefits and bonuses for implementation and technical support, and infrastructure costs to operate our Platform such as hosting fees and fees paid to various third-party providers for access to their technology, as well as costs to verify insurance eligibility and benefits.
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, stock-based compensation, commissions, bonuses and benefits costs for our sales and marketing personnel. Sales and marketing 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.
Research and development
Research and development expense consists of costs to develop our products and services that do not meet the criteria for capitalization as internal-use software. These costs consist primarily of personnel costs, including salaries, stock-based compensation, benefits and bonuses for our development personnel. Research and development expense also includes third-party partner fees and third-party consulting fees, offset by any internal-use software development cost capitalized during the same period.
General and administrative
General and administrative expense consists primarily of personnel costs, including salaries, stock-based compensation, bonuses and benefits for our executive, finance, legal, security, human resources, information technology and other administrative personnel. General and administrative expense also includes software costs to support our finance, legal and human resources operations, insurance costs as well as fees to third-party providers for accounting, legal and consulting services, costs for various non income-based taxes and allocated overhead. Depreciation
Depreciation represents depreciation expense for PhreesiaPads and Arrivals
Kiosks, data center and other computer hardware, purchased computer software,
furniture and fixtures and leasehold improvements.
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), net
Our other income and expense line items consist of the following:
•Other (expense) income, net. Other (expense) income, net consists of foreign
currency-related losses and gains and other miscellaneous (expense) income.
•Interest income. Interest income consists of interest earned on our cash and
cash equivalent balances.
•Interest expense. Interest expense consists primarily of the interest incurred on our financing obligations as well as amortization of discounts and deferred financing costs. Provision for income taxes Based upon our cumulative pre-tax losses in recent years and available evidence, we have determined that it is more likely than not that certain deferred tax assets as of
January 31, 2023will not be realized in the near term. Consequently, we have established a valuation allowance against our net deferred tax assets totaling approximately $143.1 millionand $97.3 millionas of January 31, 2023and 2022, respectively, to recognize only the portion of our deferred tax asset that is more likely than not to be realized. In future periods, if we conclude we have future taxable income sufficient to realize the deferred tax assets, we may reduce or eliminate the valuation allowance.
Comparison of fiscal 2023 versus fiscal 2022
Revenue (in thousands) Fiscal years ended January 31, 2023 2022 $ Change % Change Subscription and related services
$ 128,975 $ 95,514 $ 33,46135 % Payment processing fees 78,368 65,201 13,167 20 % Network solutions 73,567 52,518 21,049 40 % Total revenue $ 280,910 $ 213,233 $ 67,67732 % •Subscription and related services. Our subscription and related services revenue from healthcare services organizations increased $33.5 millionto $129.0 millionfor fiscal 2023, as compared to $95.5 millionfor fiscal 2022, primarily due to new healthcare services clients added in fiscal 2023 as well as expansion of and cross-selling to existing healthcare services clients. •Payment processing fees. Our revenue from patient payments processed through the Phreesia Platform increased $13.2 millionto $78.4 millionfor fiscal 2023, as compared to $65.2 millionfor fiscal 2022, due to the addition of more healthcare services clients, which drove increases in patient visits and patient payments processed through the Phreesia Platform. •Network solutions. Our revenue from life science and payer clients increased $21.0 millionto $73.6 millionfor fiscal 2023, as compared to $52.5 millionfor fiscal 2022 due to an increase in new activation, engagement and education programs and deeper patient outreach among the existing programs.
Cost of revenue (excluding depreciation and amortization)
Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Cost of revenue (excluding depreciation and amortization)
$ 58,944 $ 42,669 $ 16,27538 % Cost of revenue (excluding depreciation and amortization) increased $16.3 millionto $58.9 millionfor fiscal 2023, as compared to $42.7 millionfor fiscal 2022. The increase resulted primarily from a $6.8 millionincrease in employee compensation costs driven by higher compensation for existing employees and higher average headcount, as well as a $2.5 millionincrease in outside services costs and a $1.2 millionincrease in software costs, each driven by growth in revenue. 60 --------------------------------------------------------------------------------
Stock compensation incurred related to cost of revenue was
Payment processing expense Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Payment processing expense
$ 50,323 $ 38,719 $ 11,60430 % Payment processing expense increased $11.6 millionto $50.3 millionin fiscal 2023, as compared to $38.7 millionfor fiscal 2022. The increase resulted primarily from an increase in payment processing fees revenue and patient payments processed through the Phreesia Platform, each driven by an increase in patient visits over the prior year. Sales and marketing Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Sales and marketing $ 151,263 $ 106,421 $ 44,84242 % Sales and marketing expense increased $44.8 millionto $151.3 millionfor fiscal 2023, as compared to $106.4 millionfor fiscal 2022. The increase was primarily attributable to a $37.6 millionincrease in total compensation costs driven by higher compensation for existing employees and higher average headcount, as well as a $3.8 millionincrease in outside services costs, a $1.5 millionincrease in travel and entertainment costs and $1.3 millionincrease in software costs.
Stock compensation incurred related to sales and marketing expense was
Research and development
Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Research and development $ 91,244
38,979 75 %
Research and development expense increased
$39.0 millionto $91.2 millionfor fiscal 2023, as compared to $52.3 millionfor fiscal 2022. The increase resulted primarily from a $26.8 millionincrease in total compensation costs driven by higher compensation for existing employees and higher average headcount, as well as a $6.8 millionincrease in outside services costs and higher software expenses. Stock compensation incurred related to research and development expense was $11.8 millionand $6.0 millionin fiscal 2023 and fiscal 2022, respectively. General and administrative Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change General and administrative $ 80,384 $ 68,674 $ 11,71017 % General and administrative expense increased $11.7 millionto $80.4 millionfor fiscal 2023, as compared to $68.7 millionfor fiscal 2022. The increase resulted primarily from a $11.0 millionincrease in total compensation and benefits costs driven by higher average headcount as well as a $2.2 millionincrease in outside services costs, partially offset by decreases in other third-party general and administrative expenses.
Stock compensation incurred related to general and administrative expense was
Depreciation Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Depreciation $ 17,988
$ 14,985 $ 3,00320 %
Depreciation expense increased
attributable to higher data center and computer equipment depreciation.
Amortization Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Amortization $ 7,316
$ 6,317 $ 99916 % Amortization expense increased $1.0 millionto $7.3 millionfor fiscal 2023, as compared to $6.3 millionfor fiscal 2022. The increase was primarily driven by higher amortization of acquired intangible assets. Other expense, net Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Other expense, net $ (175) $ (78) $ (97)124 %
Other expense, net increased by
primarily of foreign exchange losses.
Interest income (expense), net
Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Interest income (expense), net
$ 1,064 $ (1,084) $ 2,148(198 %) Interest income (expense), net changed by $2.1 millionto $1.1 millionof income for fiscal 2023, as compared to $1.1 millionof expense for fiscal 2022. The change is primarily attributable to higher interest income earned from our money market mutual funds, partially offset by higher commitment fees related to the Third SVB Facility as well as interest expense related to finance leases we entered into during fiscal 2023 and fiscal 2022. Provision for income taxes Fiscal years ended January 31, (in thousands) 2023 2022 $ Change % Change Provision for income taxes $ (483) $ (182) $ (301)165 % Provision for income taxes increased by $0.3 millionto $0.5 millionfor fiscal 2023, as compared to $0.2 millionfor fiscal 2022. Provision for income taxes relates primarily to change in Canadian net operating loss carryforwards and state income taxes. Non-GAAP financial measures 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 interest (income) expense, net, provision for income taxes, depreciation and 62 --------------------------------------------------------------------------------
amortization, and before stock-based compensation expense, change in fair value
of contingent consideration liabilities and other expense, net.
We have provided below a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. We have presented Adjusted EBITDA in this Annual Report on Form 10-K 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; (3) tax payments that may represent a reduction in cash available to us; or (4) interest (income) expense, net; 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: For the fiscal years ended January 31, (in thousands) 2023 2022 Net loss $ (176,146)
$ (118,161)Interest (income) expense, net (1,064) 1,084 Provision for income taxes 483 182 Depreciation and amortization 25,304 21,302 Stock-based compensation expense 58,775 36,234 Change in fair value of contingent consideration liabilities - 258 Other expense, net 175 78 Adjusted EBITDA $ (92,473) $ (59,023)
We calculate free cash flow as net cash used in operating activities less
capitalized internal-use software development costs and purchases of property
Additionally, 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. 63 --------------------------------------------------------------------------------
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:
For the fiscal years ended January 31, (in thousands) 2023 2022 Net cash used in operating activities
$ (90,123) $ (74,710)Less: Capitalized internal-use software (21,471) (12,385) Purchases of property and equipment (4,732) (18,420) Free cash flow $ (116,326) $ (105,515)
Liquidity and capital resources
connection with this offering, we issued and sold 5,175,000 shares of common
stock at an issuance price of
consist of money market funds and cash on deposit.
We believe that our existing cash and cash equivalents, along with cash
generated in the normal course of business, will be sufficient to meet our needs
for at least the next 12 months.
In addition, we also have potential borrowing capacity under our credit
agreement subject to certain restrictive covenants. See Subsequent Event –
Closure of SVB below and Note 17 – Subsequent Event within Item 8 – Financial
Statements and Supplementary Data for additional information regarding our
credit agreement with SVB.
Our future capital requirements and the adequacy of available funds will depend
on many factors, including those set forth under “Risk Factors.”
In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.
Second Amended and Restated Loan and Security Agreement
May 5, 2020, we entered into the Second SVB Facility. The Second SVB Facility provided for a revolving line of credit of up to $50.0 million(with options to increase up to $65.0 million). We transferred the $20.0 millionoutstanding balance on a previous SVB Facility, the First SVB Facility term loan, plus related prepayment fees, into the revolving credit borrowings outstanding under the Second SVB Facility. As of January 31, 2022, the interest rate on the Second SVB Facility was 4.5%. Borrowings under the Second SVB Facility were payable on May 5, 2025. We repaid the outstanding balance on the Second SVB Facility in January 2021. Third SVB Facility On March 28, 2022, we entered into the Third SVB Facility to increase the borrowing capacity from $50.0 millionto $100.0 million. The Third SVB Facility also reduced the interest rate to the greater of 3.25% or the Wall StreetJournal Prime Rate minus 0.5%, amended the annual commitment fees to approximately $0.3 millionper year and amended the quarterly fee to 0.15% per annum of the average unused revolving line under the facility. Borrowings under the Third SVB Facility are payable on May 5, 2025. As of January 31, 2023, the interest rate on the Third SVB Facility was 7%. As of January 31, 2023, we had no outstanding balance on the Third SVB Facility and $100.0 millionof available borrowings under the facility. In the event that we terminate the Third SVB Facility prior to the Maturity Date and do not replace the facility with another SVB facility, we are required to pay a termination fee equal to $0.2 millionplus a percent of total borrowing capacity, both of which would be reduced based on the amount of time elapsed before the termination.
Any of our obligations under the Third SVB Facility are secured by a first
priority security interest in substantially all of our assets, other than
intellectual property. The Third SVB Facility includes financial covenants
including, but not
64 -------------------------------------------------------------------------------- limited to requiring us to maintain a minimum Adjusted Quick Ratio and limiting the amount of cash and cash equivalents we hold outside SVB, each as defined in the Third SVB Facility. We were in compliance with all covenants related to the Third SVB Facility as of
January 31, 2023.
Closure of SVB
March 10, 2023, Silicon Valley Bank("SVB") was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation("FDIC") as receiver. On March 9, 2023, we transferred a substantial portion of our cash and cash equivalents from SVB to other financial institutions. We had total cash and cash equivalents of approximately $170 millionas of March 10, 2023. On March 12, 2023, a Joint Statement by the U.S. Treasury, Federal Reserve, and FDIC, and a statement by the Federal Reserve Board, was issued stating that actions were approved enabling the FDICto complete its resolutions of SVB in a manner that fully protects all depositors. As a result of our actions to move a substantial portion of our cash to other financial institutions and the actions taken by the FDICon March 12, 2023, we have determined that all of our cash and cash equivalents continue to be available for our use. We are also party to the Third SVB Facility which contains certain restrictive covenants including a covenant that limits our ability to retain specified levels of cash in accounts outside of SVB. On March 10, 2023, in connection with the transfer of a substantial portion of our cash and cash equivalents from SVB to other financial institutions, we obtained consent from SVB to hold up to $165 millionof cash in accounts outside SVB until May 15, 2023. The consent serves to permit us to borrow against the Third SVB Facility once the cash and cash equivalents retained outside of SVB are compliant with the covenant and so long as we remain in compliance with all other covenants under the Third SVB Facility. With the exception of this consent, the SVB developments and related FDICactions noted above have not materially impacted our financial position or our operations. We believe that our cash and cash equivalents along with cash generated in the normal course of business, are sufficient to fund our operations for at least the next 12 months. The following table summarizes our sources and uses of cash for each of the periods presented: Fiscal years ended January 31, (in thousands) 2023 2022 Net cash used in operating activities $ (90,123)$
Net cash used in investing activities (26,203)
Net cash (used in) provided by financing activities (20,803) 234,969
Net (decrease) increase in cash and cash equivalents
Operating activities The primary sources of cash from operating activities are cash received from our customers and interest earned on our money market mutual funds. The primary uses of cash for operating activities are for payroll, payments to suppliers and employees, payments for operating leases, as well as cash paid for interest on our finance leases and other borrowings and cash paid for various sales, property and income taxes.
During the fiscal year ended
exceeded our cash received from customers in connection with our normal
During the fiscal year ended
exceeded our cash received from customers in connection with our normal
The change in net cash used in operating activities was driven primarily by higher employee compensation costs, primarily due to higher average employee headcount as well as an increase in compensation costs for existing employees, and higher outside services costs, partially offset by an increase in cash received from customers driven by higher revenues as well as higher interest income on money market mutual funds we held during the year ended
January 31, 2023. 65 --------------------------------------------------------------------------------
During the fiscal year ended
January 31, 2023, net cash used in investing activities was $26.2 million, principally resulting from capital expenditures, the majority of which consisted of $21.5 millionof cash paid for capitalized internal-use software, as well as $4.7 millionof purchases of property and equipment, including hardware used by clients and data center equipment. During the fiscal year ended January 31, 2022, net cash used in investing activities was $65.2 million, principally resulting from $34.4 millionof net cash paid for the acquisition of Insignia, $18.4 millionof purchases of property and equipment, principally driven by the purchase of data center equipment, as well as $12.4 millionof cash paid for capitalized internal-use software. Financing activities
During the fiscal year ended
treasury stock to satisfy tax withholdings on stock compensation awards and
arrangements, partially offset by
During the fiscal year ended
January 31, 2022, cash provided by financing activities was $235.0 million, primarily consisting of $245.8 millionin proceeds from the April 2021offering of our common stock, net of underwriters' discounts and commissions, and $6.9 millionin proceeds from our equity compensation plans, partially offset by $9.0 millionused for treasury stock to satisfy tax withholdings on stock compensation awards, $5.3 millionused for principal payments on finance leases and financing arrangements and $3.3 millionused for payments of acquisition-related liabilities.
Material Cash Requirements
Our material cash requirements relate to leases, financing arrangements, contractual purchase commitments and human capital. Refer to Note 4 - Composition of certain financial statement accounts in Part II - Item 8 of this Annual Report on Form 10-K for additional information on accrued payroll related liabilities. Refer to Note 6 - Finance leases and other debt, Note 10 - Leases and Note 11 - Commitments and contingencies in Part II - Item 8 of this Annual Report on Form 10-K for additional information on cash requirements for leases, financing arrangements and contractual purchase commitments. See "Liquidity and Capital Resources -
Silicon Valley Bankfacility - Closure of SVB" above for information regarding the closure of SVB and its impact on our cash and cash equivalents, liquidity and sources of funds available for our material cash requirements.
Critical accounting policies and estimates
The preparation of the consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. Our most significant estimates and judgments involve revenue recognition, the fair value of assets acquired in business combinations, capitalized internal-use software, income taxes, and valuation of our stock-based compensation. Actual results may differ from these estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
We account for revenue from contracts with clients by applying the requirements
of Topic 606, which includes the following steps:
•Identification of the contract, or contracts, with a client
•Identification of the performance obligations in a contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the
•Recognition of revenue when, or as, performance obligations are satisfied
Revenues are recognized when control of these services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We believe the areas in which we apply the most critical judgements when determining revenue recognition relate to the identification of distinct performance obligations, the assessment of the standalone selling price ("SSP") for each performance obligation identified, the determination of the amount of variable consideration to include in the transaction price of our contracts with customers and the determination of whether we are the principal or the agent for certain performance obligations.
Determination of Performance Obligations
A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Our contracts with customers may include multiple promises to transfer services to a customer. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as a single performance obligation may require significant judgment that requires us to assess the nature of the promise and the value delivered to the customer.
Our subscription and related services revenue includes certain fees from clients
for professional services associated with implementation services.
In determining whether professional services for implementation are distinct, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services and the complexity of interfaces created between systems. We determined that the majority of implementation services were not distinct from the related subscription service because they are proprietary such that they cannot be performed by another entity, because we generally do not sell professional services on a stand-alone basis, and because they are integral to the customer's ability to derive the intended benefit of the subscription service, indicating that the implementation services and related subscription are inputs to a combined output.
Determination of Standalone Selling Prices
We allocate the transaction price of our customer contracts to the performance obligations within those contracts based on the relative SSP of the performance obligations. The SSP is the price that we would sell a product separately to a customer. The best evidence of this is an observable price from stand-alone sales of that product to similarly situated customers. However, as we do not typically transfer our performance obligations on a standalone basis, but rather we transfer bundles of performance obligations, we use an adjusted market assessment approach to estimate the price a customer would be willing to pay for our performance obligations using historical price information as priced in previous bundled contracts.
In determining SSPs, we stratify the population of customer transactions by
product, type, size of customer and geographic area. We typically establish a
range of SSPs for each of our performance obligations.
The prices we charge for digital messaging solutions provided to life sciences companies have historically been highly variable. We consider pricing to be highly variable if we have a history of selling the services at a wide range of prices to similar customers in similar geographic areas within the same time periods. As the pricing of our digital messaging solutions has historically been highly variable, we use the residual method to estimate the SSP of performance obligations for digital messaging solutions. We estimate the residual SSP of our digital messaging solutions as the total transaction price of the customer contract less the SSPs of the remaining performance obligations pursuant to the contract. Variable Consideration We estimate the transaction price at contract inception, including any variable consideration, and we update the estimate each reporting period for any changes in circumstances. When determining the transaction price, we assume the products will be transferred to the customer based on the terms of the existing contract and our assumption does not take into consideration the possibility of a contract being canceled, renewed, or modified. 67 -------------------------------------------------------------------------------- We occasionally provide credits to customers representing adjustments to the transaction price. Known and estimable credits and adjustments represent a form of variable consideration, which are estimated at contract inception and generally result in reductions to revenues recognized for a particular contract. These estimates are updated at the end of each reporting period as additional information becomes available. We estimate the amount of variable consideration based on its expected probability-weighted value or its most likely amount. We include variable consideration in the transaction price to the extent it is probable there will not be a significant reversal of revenue when the uncertainty with respect to the variable consideration is resolved. We believe that there will not be significant changes to our estimates of variable consideration as of
January 31, 2023.
Principal vs Agent Considerations
As part of our revenue recognition process, we evaluate whether we are the principal or agent for the performance obligations in our contracts with customers. When we determine that we are the principal for a performance obligation, we recognize revenue for that performance obligation on a gross basis. When we determine that we are an agent for a performance obligation, we recognize revenue for that performance obligation net of the related costs. In determining whether we are the principal or the agent, we evaluate whether we have control of the services before we transfer the services to the customer by considering whether we are primarily obligated for transferring the services to the customer, whether we have inventory risk for the services before the services are transferred to the customer, and whether we have latitude in establishing prices. We recognize payment processing fees collected from customers as revenue on a gross basis because, as the merchant of record, we control the services before delivery to the customer, we are primarily responsible for the delivery of the services to our customers, we have latitude in establishing pricing with respect to the customer and other terms of service, we have sole discretion in selecting the third-party to perform the settlement, and we assume the credit risk for the transaction processed. We also have the unilateral ability to accept or reject a transaction based on our established criteria. Business combinations We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. With the assistance of third-party appraisers, we assess the fair value of the assets acquired in business combinations. The fair value of the acquired licenses and technology was estimated using the relief from royalty method. The fair value of customer relationships was estimated using a multi period excess earnings method. To calculate fair value, we used cash flows discounted at a rate considered appropriate given the inherent risks associated with each client grouping. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. We continue to collect information and reevaluate these estimates and assumptions quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Where applicable, the consideration transferred for business combinations includes the acquisition date fair value of contingent consideration. In connection with the QueueDr acquisition, we recorded contingent consideration liabilities within accrued expenses for amounts payable to the selling shareholders based on collections from QueueDr customers. The fair value of our contingent consideration liabilities was determined using a Monte-Carlo simulation which uses estimated cash flows and likelihoods of contract cancellation to estimate the expected payout based on collections and active status of the underlying customer contracts. The fair value of our contingent consideration liabilities was determined based on inputs which are not readily available in public markets. Therefore, we categorized the liabilities as Level 3 in the fair value hierarchy. In connection with the acquisition of QueueDr, we recorded contingent consideration liabilities with an acquisition-date fair value of
$2,240. During the fiscal years ended January 31, 2021and 2022, we paid a total of $2,574to settle the contingent consideration liabilities, which represented the maximum amount payable for the contingent consideration liabilities. Changes in the fair value of contingent consideration liabilities are included in general and administrative expense in the accompanying consolidated statements of operations.
Capitalized internal-use software
We capitalize certain costs incurred for the development of computer software
for internal use pursuant to ASC Topic 350-40, Intangibles-Goodwill and
Other-Internal use software. These costs relate to the development of our
Phreesia Platform. We capitalize the costs during the development of the
project, when it is determined that it
68 -------------------------------------------------------------------------------- is probable that the project will be completed, and the software will be used as intended. Costs related to preliminary project activities, post-implementation activities, training and maintenance are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally three to five years. We evaluate the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our solutions, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods.
An asset and liability approach is used for financial accounting and reporting of current and deferred income taxes. Deferred income tax assets and liabilities are computed for temporary differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income or loss. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We follow ASC 740, Accounting for Uncertainty in Income Taxes. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in a company's consolidated financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in the interim periods, disclosure, and transition. We have accumulated
U.S.federal and state net operating loss carryforwards of approximately $493.3 million, and $332.5 millionas of January 31, 2023and 2022, respectively. These carryforwards will begin to expire in 2025. As of January 31, 2023, our foreign branch had net operating loss carryforwards of approximately $0.7 million, which may be available to offset future income tax liabilities and will expire beginning in 2034. In assessing the realizability of the net deferred tax asset we consider all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. Due to uncertainty regarding the ability to realize the benefit of U.S.deferred tax assets primarily relating to net operating loss carryforwards, we have established valuation allowances to reduce deferred the U.S.deferred tax assets to an amount that is more likely than not to be realized. On the basis of this evaluation, we have recorded valuation allowances of $143.1 millionand $97.3 millionas of January 31, 2023and 2022. Under Section 382 of the Code, if a corporation undergoes an "ownership change" (generally defined as a greater than 50% change by value in its equity ownership over a three-year period), the corporation's ability to use its pre-ownership change net operating loss carryforwards and other pre-ownership change tax attributes to offset its post-change income may be limited. As of January 31, 2023, we have U.S.net operating loss carryforwards of approximately $493.3 million. We have completed a Section 382 study and, as a result of the analysis, it is more likely than not that we have experienced an "ownership change". We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. Accordingly, if we earn net taxable income, it is more likely than not that our ability to use our pre-ownership change net operating loss carryforwards to offset U.S.federal taxable income will be subject to limitations, which could potentially result in increased future tax liability. We review and evaluate tax positions in major jurisdictions and determine whether we record unrecognized tax benefits as reductions of deferred tax assets or as liabilities in accordance with ASC 740 and adjust these unrecognized tax benefits when our judgment changes as a result of the evaluation of new information not previously available. We recognize interest and penalties related to uncertain tax positions in income tax expense. There was no outstanding balance for unrecognized tax benefits as of January 31, 2023.
Stock-based compensation for market-based performance stock units (“PSUs”)
We recognize the grant-date fair value of stock-based awards issued as compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. We granted market-based PSUs during fiscal 2021, 2022 and 2023. 69 -------------------------------------------------------------------------------- PSUs vest in between 0% and 220% of the number of PSUs originally granted based on our total stockholder return ("TSR"), relative to a peer group of companies on the Russell 3000 stock index. PSUs granted during fiscal 2023, 2022 and 2021 vest in a maximum of 220%, 200% and 200% of the number of PSUs originally granted, respectively. We estimate the fair value of the PSUs using a Monte Carlo Simulation model which projects TSR for
Phreesiaand each member of the peer group over a performance period of approximately three years. The most critical and judgmental assumptions used in the Monte Carlo Simulation to estimate the fair value of the PSUs are set forth below: •Correlation coefficient: The correlation coefficient measures the correlation of our stock to the stock of the companies in the peer group. This coefficient is used to project the performance of our stock against our peers to estimate projected performance under the plan. •Expected volatility: For PSUs granted during the year ended January 31, 2023, the expected volatility is based on the historical volatility of our stock price over a term commensurate with the simulation term assumption. For PSUs granted during the fiscal years ended January 31, 2022and 2021, the expected volatility was based on historical volatilities of peer companies within our industry which were commensurate with the simulation term assumption.
Recent accounting pronouncements
There are no recently issued accounting pronouncements that we have not yet
adopted that will materially impact our consolidated financial statements.
See Note 3 to our Consolidated financial statements of this Annual Report on
Form 10-K for a discussion of recent accounting pronouncements.
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