Progyny, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Business context
Progyny provides fertility benefits and an add-on pharmacy benefits solution, Progyny Rx, primarily to self-insured employers. Revenue is driven mainly by treatment and prescription utilization, with a smaller population-based per-employee-per-month component. The company reported 135 clients versus 84 a year earlier and approximately 2.3 million covered lives.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $98.9 | $61.2 | $244.6 | $164.6 |
| Gross profit | $20.8 | $12.3 | $49.4 | $33.7 |
| Gross margin | 21.1% | 20.1% | 20.2% | 20.5% |
| Operating income | $5.4 | $3.1 | $7.4 | $8.5 |
| Net income (loss) | $5.4 | ($8.2) | $7.6 | ($4.2) |
| Adjusted EBITDA (non-GAAP) | $10.6 | $5.5 | $20.7 | $14.5 |
- Q3 revenue rose 62% year over year; fertility benefit revenue increased 46% and Progyny Rx revenue 131%. For the nine-month period, revenue rose 49%, with fertility benefits up 31% and Progyny Rx up 131%.
- Q3 gross margin improved 100 basis points, which management attributed to higher revenue enabling favorable pharmacy partner terms and care-management efficiencies. Nine-month margin declined 30 basis points, primarily because the company retained care-management staff during the COVID-related pause in treatments.
- Q3 diluted earnings per share were $0.05; nine-month diluted earnings per share were $0.08. The 2019 comparison included noncash preferred-stock warrant valuation charges of $11.2 million for Q3 and $12.4 million for the nine-month period; the warrants ceased being remeasured after the IPO.
- Nine-month operating cash flow was $29.7 million, versus $4.0 million in 2019. Cash flow included substantial working-capital movements: accounts receivable increased $35.0 million, while accounts payable and accrued liabilities increased $23.7 million and $15.0 million, respectively.
- At September 30, cash and cash equivalents were $54.0 million and marketable securities were $51.0 million. Current assets were $184.6 million and current liabilities $74.2 million. No amount was drawn on the $15.0 million revolving credit facility; the company reported covenant compliance.
- Total liabilities were $74.8 million, with no revolving-credit borrowings reported. The facility matures in June 2021. Net investing cash outflow of $51.9 million mainly reflected purchases of marketable securities.
Material changes and operating developments
- COVID-19 materially affected nine-month operating results. Fertility clinic access and treatment volumes fell after the March 2020 industry guidance to suspend new treatment cycles; most clinics resumed services toward the end of Q2. Q3 revenue growth remained negatively affected, though Q3 ART cycles increased to 5,407 from 3,763 a year earlier.
- Q3 general and administrative expense doubled to $12.1 million, reflecting higher personnel and stock-based compensation, arbitration legal costs, insurance, and bad debt expense. Nine-month G&A increased 92% to $31.8 million.
- Net accounts receivable was $78.3 million, including an allowance of $12.6 million, versus $47.1 million and a $6.3 million allowance at year-end 2019. Nine-month bad-debt expense was $3.7 million.
- Management said the company would cease to qualify as an emerging growth company on December 31, 2020, increasing public-company compliance requirements and ending its extended transition period for new accounting standards.
Outlook, risks, and contingencies
- Management stated that cash, operating cash flows, and available credit were expected to support working capital and capital expenditures for at least 12 months. It also said the pandemic’s duration and effects on treatment access, utilization, clients, and the economy remained uncertain.
- The filing refers to Q4 and full-year 2020 guidance and a preliminary 2021 revenue projection issued November 5, 2020, but the provided filing text does not provide clear numerical values for that guidance.
- A former specialty-pharmacy vendor seeks $25.0 million in arbitration damages, fees, interest, and costs; Progyny says the claimed damages are not quantified or factually supported and believes the remaining claims lack merit. Two of four claims were dismissed; the company was awaiting the arbitration decision after final arguments in October 2020. The outcome and any potential financial effect were uncertain.
- Key risks include renewed COVID-related treatment restrictions, client concentration (the two largest clients represented 18% and 17% of nine-month revenue), member and client utilization, competition, provider and pharmacy relationships, credit collection, privacy and cybersecurity, healthcare regulation, and the ability to sustain profitability.
- The company reported effective disclosure controls as of September 30, 2020. It had a full valuation allowance against deferred tax assets and stated that no material off-balance-sheet arrangements existed apart from ordinary-course operating leases.
Important facts for investors to verify
- Read the November 5, 2020 earnings release for the actual Q4 and full-year 2020 guidance and preliminary 2021 projection, and compare subsequent results with those expectations.
- Track treatment volumes and utilization as clinics and members respond to COVID-19, including whether renewed restrictions affect service access.
- Assess cash conversion and receivable quality: operating cash flow benefited from higher payables and accrued liabilities while accounts receivable and the doubtful-account allowance rose.
- Monitor the arbitration outcome, the vendor’s claimed $25.0 million, and any resulting accrual, settlement, or disclosure.
- Evaluate customer concentration and renewal or expansion trends, alongside the differing growth and margins of fertility and pharmacy benefits.
- Review the effects of emerging-growth-company status ending and the adoption of new accounting standards, including lease and expected-credit-loss requirements.