Progyny, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results; amounts below are in U.S. dollars. Progyny provides fertility benefits and an add-on pharmacy benefits solution to self-insured employers. At quarter-end it served 84 clients and approximately 1.379 million covered members.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $61.2 million | $27.8 million | $164.6 million | $76.2 million |
| Gross profit / margin | $12.3 million / 20.1% | $5.0 million / 18.2% | $33.7 million / 20.5% | $14.0 million / 18.4% |
| Operating income (loss) | $3.1 million | $(0.6) million | $8.5 million | $(2.7) million |
| Net loss from continuing operations | $(8.2) million | $(1.1) million | $(4.2) million | $(3.5) million |
| Adjusted EBITDA | $5.5 million | $0.7 million | $14.5 million | $1.0 million |
Revenue grew 120% in Q3 and 116% for the nine-month period year over year. Nine-month revenue comprised $136.1 million from fertility benefits and $28.5 million from pharmacy benefits. Management attributed growth mainly to more clients and broader availability of Progyny Rx. Q3 ART cycles increased to 3,763 from 1,842; nine-month cycles were 9,768 versus 5,051.
Q3 net loss included an $11.2 million noncash expense from remeasurement of convertible preferred stock warrants; the nine-month remeasurement expense was $12.4 million. The warrant liability rose to $17.0 million from $4.6 million at year-end 2018. Adjusted EBITDA excludes this adjustment and other specified items and is a non-GAAP measure.
At September 30, cash and cash equivalents were $7.7 million, accounts receivable $44.3 million, current assets $53.3 million, and current liabilities $57.6 million. No debt was drawn on the $15 million revolving facility; the company reported $14.1 million available. Nine-month operating cash flow was $4.0 million, investing cash use was $0.7 million, and financing cash flow was $4.1 million. Receivables growth was a significant working-capital use, partly offset by increases in payables and accrued liabilities. The company reported no term debt and was in compliance with the credit facility covenants.
Material changes versus comparable periods
- Gross margin improved by 190 basis points in Q3 and 210 basis points for the nine months; management attributed the improvement to operating efficiencies.
- Operating expenses rose with growth: nine-month sales and marketing expense increased 68%, and general and administrative expense increased 42% year over year.
- Q3 operating income turned positive, but net loss widened because of the warrant fair-value adjustment. For the nine months, continuing-operations loss narrowed; 2018 reported net income also included a $5.7 million after-tax gain from the Eeva divestiture.
- At quarter-end, accounts receivable was $44.3 million versus $23.3 million at December 31, 2018. Two customers accounted for 31% of receivables; one client represented 16% of nine-month 2019 revenue.
Outlook, risks, and unusual items
- No quantified revenue, earnings, or margin guidance is provided. Management said cash, IPO proceeds, operating cash flow, and available credit should fund working capital and capital expenditures for at least 12 months.
- After quarter-end, the October 29, 2019 IPO generated approximately $77.7 million in net proceeds for the company. Existing preferred shares converted into common shares at the IPO; these transactions are not reflected in the September 30 balance sheet.
- A vendor arbitration seeks $25.0 million in damages, fees, interest, and costs; the filing says the alleged damages were not quantified or factually supported. The panel dismissed two of the vendor’s four claims. Progyny disputes the remaining claims and says the outcome cannot be predicted.
- The company entered a New York office sublease expiring in May 2029, with contractual operating lease commitments totaling $12.4 million.
- Management identified disclosure controls as ineffective at September 30 due to a material weakness involving review and oversight of financial reporting and classification and presentation of certain revenue and expenses. Remediation steps were substantially implemented, but management said further operation and testing were needed to conclude remediation was complete.
- Key disclosed risks include customer concentration, client retention and utilization variability, competition, provider and pharmacy relationships, healthcare regulation and privacy/security exposure, and the possibility that growth investments and public-company costs prevent sustained profitability. Management cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether client additions, renewals, covered-member growth, and utilization support continued revenue growth, and how much growth comes from pharmacy benefits.
- Whether gross-margin gains persist as treatment and drug costs, provider pricing, and staffing needs change.
- How cash conversion develops as receivables grow, including collection experience and customer concentration.
- The outcome and potential financial exposure of the vendor arbitration, notwithstanding the dismissal of two claims.
- Whether the material weakness is fully remediated after testing, and whether controls remain effective as a public company.
- The IPO’s effect on liquidity and share count, including subsequent preferred-stock conversion, option and warrant exercises, and potential equity-plan dilution.