Phreesia, Inc. — Form 10-Q summary
Reporting period: Quarter ended October 31, 2019; comparisons are with the three and nine months ended October 31, 2018. Phreesia provides a SaaS patient-intake and payments platform for healthcare providers, plus patient-engagement services for life sciences companies. Figures below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $32.8 | $24.8 | $92.0 | $73.4 |
| Operating loss | $(2.2) | $(3.0) | $(10.6) | $(6.2) |
| Net loss | $(2.4) | $(4.2) | $(16.6) | $(10.0) |
| Adjusted EBITDA (non-GAAP) | $3.0 | $0.4 | $3.5 | $3.2 |
| Operating cash flow | $(3.0) | $0.7 | $(0.4) | $1.7 |
| Free cash flow (non-GAAP) | $(6.6) | $(1.6) | $(9.6) | $(5.5) |
- Revenue mix, Q3 / nine months 2019: Subscription and related services $14.6 / $41.3; payment processing $11.6 / $34.8; life sciences $6.7 / $15.9.
- Growth and operating measures: Revenue rose 33% in Q3 and 25% for the nine-month period. Average provider clients were 1,573 in Q3 versus 1,503; average revenue per provider client was $16,637 versus $13,308. Patient payment volume increased 29% to $463 million in Q3 and to $1.388 billion for nine months.
- Margins: GAAP operating margin was approximately negative 6.8% in Q3 2019 versus negative 12.3% a year earlier; for nine months, negative 11.6% versus negative 8.4%. Payment processing expense was $6.9 million in Q3 and $21.0 million year to date, increasing 28% in both comparisons.
- Cash, liquidity and debt at October 31: Cash and cash equivalents were $91.4 million, up from $1.5 million at January 31. Long-term debt principal was $20.0 million (carrying value, net of financing costs, was $19.4 million); no revolving borrowings were outstanding, with $25 million available. Capital lease liabilities totaled $4.4 million, including $2.4 million current.
- Balance sheet: Total assets were $155.9 million, total liabilities $53.4 million, and stockholders’ equity $102.5 million. Redeemable preferred stock was eliminated through conversion or cancellation at the IPO.
Changes versus prior comparable periods
- Provider subscription and payment growth reflected new customers and expansion/cross-selling to existing customers; life-sciences revenue increased 40% in Q3, but only 9% for the nine months.
- Expenses grew faster than revenue for the nine-month period: total expenses increased 29% versus revenue growth of 25%. R&D rose 36% and general and administrative expense rose 48% year to date. Management attributed G&A increases partly to public-company costs, accounting and tax fees, software, insurance and stock compensation.
- Despite higher nine-month net loss and operating loss, Adjusted EBITDA increased modestly. Q3 net loss improved year over year. The nine-month loss attributable to common stockholders, $87.8 million, included $14.955 million of preferred dividends and $56.175 million of preferred-stock accretion; these items were substantially affected by the pre-IPO capital structure.
- Cash flow weakened: nine-month operating cash flow shifted from $1.7 million provided to $0.4 million used, while investing cash outflow increased to $9.2 million, mainly for equipment and capitalized software.
Outlook, risks and unusual items
- Management expects losses and negative cash flows to continue for at least the next year, but believes cash, normal-course cash generation and available credit are sufficient for at least 12 months. The filing gives no numerical revenue or earnings guidance.
- The July 2019 IPO generated $130.8 million of net proceeds before approximately $6.1 million of offering costs; Phreesia also paid $15.0 million in preferred dividends. The IPO converted preferred shares into common stock and changed the warrant liability classification. A debt refinancing resulted in a $1.1 million extinguishment loss during the nine months.
- Credit-facility obligations are secured by substantially all assets other than intellectual property and include revenue and liquidity covenants, which the company reported meeting at October 31. Debt principal payments begin in March 2021; the facility matures in February 2024.
- Risks highlighted include persistent losses, customer concentration (the four largest clients contributed about 16% of nine-month revenue), renewals and customer growth, payment-processing and third-party-provider dependence, competition, healthcare regulation, privacy and cybersecurity, and seasonal revenue patterns. Management noted increased payment revenue early in the calendar year as patient deductibles reset.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in financial-reporting controls, stemming from insufficient accounting personnel and inadequate segregation of duties, including review of manual journal entries. Remediation efforts were ongoing; management nevertheless stated the financial statements fairly present the company’s position and results.
- The company reported no legal proceedings believed likely to have a material financial impact. It also reported no material change in planned use of IPO proceeds.
Most important facts for investors to verify
- Whether revenue growth and client expansion continue while expense growth moderates and losses narrow.
- Cash burn and capital spending trends, including whether liquidity remains adequate under management’s stated 12-month outlook.
- Customer concentration, renewal performance, payment volume, and reliance on the payment processor and other third parties.
- Compliance with credit-facility covenants and the terms, availability and repayment schedule of debt and leases.
- Progress in remediating the material weakness and restoring effective disclosure controls.
- Effects of seasonal payment activity, public-company costs, privacy/regulatory requirements, and potential share dilution from equity awards and outstanding securities.