Progyny, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; includes unaudited fourth-quarter results. The company completed its IPO in October 2019 and trades on Nasdaq as PGNY.
Business context
Progyny manages fertility and family-building benefits for self-insured employers. Its offering combines bundled Smart Cycle treatment coverage, member support and a selective fertility-provider network; clients may add Progyny Rx pharmacy benefits. Management cited more than 130 clients and approximately 2.1 million covered employees and partners in its overview, while a year-end operating table reports 87 clients and 1.517 million members under its stated client-counting definition.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $229.7 million | $105.4 million |
| Gross profit / margin | $45.5 million / 19.8% | $19.4 million / 18.4% |
| Operating income (loss) | $9.7 million | $(3.5) million |
| Net loss from continuing operations | $(8.6) million | $(5.1) million |
| Adjusted EBITDA (non-GAAP) | $18.3 million | $1.4 million |
| Cash from (used in) operating activities | $(1.5) million | $2.3 million |
Revenue grew 118%, driven by fertility-benefit revenue of $189.6 million (up 90%) and pharmacy-benefit revenue of $40.1 million (up 614%). Cost of services rose 114% to $184.2 million. Gross margin improved by 1.4 percentage points, which management attributed primarily to operating efficiencies. Adjusted EBITDA excludes, among other items, a substantial warrant valuation adjustment, stock compensation, arbitration legal fees and IPO costs; it is not a GAAP earnings measure.
Fourth quarter: Revenue was $65.1 million versus $29.2 million in Q4 2018. Operating income was $1.1 million versus an operating loss of $0.7 million. Net loss from continuing operations was $4.4 million versus $1.6 million, principally reflecting the preferred-stock warrant remeasurement charge.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $80.4 million, compared with $0.1 million a year earlier; working capital was $96.3 million.
- Operating cash use was $1.5 million, including a $25.3 million increase in accounts receivable. Investing cash use was $3.0 million, mainly property and equipment.
- Financing provided $84.5 million, principally from $77.5 million net IPO proceeds and stock-option exercises. The IPO also included secondary sales by existing holders.
- No revolving credit was drawn at year-end. The facility provides up to $15 million, subject to eligible receivables, and matures in June 2021. The company reported no term-loan balance at year-end.
- Operating lease commitments totaled $12.3 million, including a New York office lease extending to May 2029. The company said existing cash, operating cash flow and available credit should fund working capital and capital expenditures for at least 12 months.
Material changes and outlook
- Client and covered-life expansion supported significant revenue growth; ART cycles increased to 13,550 from 7,099, and all-member utilization rose to 1.30% from 1.25%.
- Progyny Rx adoption expanded, and represented $40.1 million of 2019 revenue. Management reported 70% of clients using the add-on.
- The company reported a full-year operating profit but a net loss. A $18.2 million noncash warrant valuation adjustment was the principal reason for the difference; the warrants converted to common-stock warrants in connection with the IPO and were no longer subject to that preferred-warrant remeasurement.
- Management provided no specific revenue or earnings guidance. It expects to invest in sales, client management, new offerings and public-company compliance costs, and cautioned that growth, utilization and profitability are uncertain.
- Key risks include dependence on large clients and the technology sector (three clients represented 41% of 2019 revenue), competition, uncertain benefit utilization, healthcare regulation, privacy and cybersecurity, provider/pharmacy relationships, seasonality and working-capital timing.
Contingencies and other notable items
A former specialty-pharmacy vendor seeks $25 million in arbitration damages, fees, interest and costs. The filing says the claim is not quantified or factually supported; the panel dismissed two of four claims, and Progyny intends to defend the remainder. The company states that the outcome cannot be predicted.
A material weakness in financial-reporting controls identified in the 2018 audit was reported as remediated during 2019; management concluded controls were effective at year-end. The 2019 financial statements were audited, but the auditor did not opine on internal-control effectiveness. The company also maintains a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Reconcile the overview’s more than 130 clients and approximately 2.1 million covered lives with the year-end table’s 87 clients and 1.517 million members, including definitions and timing.
- Monitor client concentration, contract renewals and the contribution of the largest customers to revenue.
- Assess cash conversion and receivables growth, given negative operating cash flow despite strong reported revenue and operating profit.
- Track GAAP profitability separately from Adjusted EBITDA and understand the treatment of warrant valuation, stock compensation and other exclusions.
- Follow the vendor arbitration, its potential financial exposure and any changes in the company’s assessment.
- Review future disclosures on regulatory compliance, data security, internal controls and the company’s ability to sustain growth and profitability.