Progyny, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Progyny provides employer fertility benefits and an add-on pharmacy benefits solution, Progyny Rx. At quarter-end it served 134 clients and approximately 2.157 million covered lives, versus 80 clients and 1.322 million covered lives a year earlier.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $64.6 million | $56.2 million | $145.6 million | $103.4 million |
| Gross profit | $12.0 million | $11.5 million | $28.6 million | $21.4 million |
| Gross margin | 18.5% | 20.4% | 19.6% | 20.7% |
| Operating income (loss) | ($1.8) million | $2.4 million | $2.0 million | $5.5 million |
| Net income (loss) | ($1.8) million | $1.5 million | $2.2 million | $4.0 million |
| Adjusted EBITDA | $3.0 million | $4.6 million | $10.2 million | $8.9 million |
- Revenue and mix: Q2 revenue grew 15%; six-month revenue grew 41%. Q2 fertility-benefit revenue was $46.3 million, up 1%, while pharmacy-benefit revenue was $18.3 million, up 75%. For the first half, fertility revenue was $105.7 million, up 23%, and pharmacy revenue was $39.9 million, up 131%.
- Profitability and costs: Gross margin fell 190 basis points in Q2 and 110 basis points for the first half. Management attributed the decline largely to retaining care-management staff during the COVID-related treatment pause. Q2 general and administrative expense rose 70% to $10.2 million; first-half expense increased 87% to $19.6 million. The filing cites added personnel and stock compensation, arbitration legal fees, bad-debt expense and insurance costs.
- Cash flow: First-half operating cash flow was positive $14.3 million, versus negative $1.9 million in 2019. Investing cash outflow was $42.8 million, primarily from $42.0 million of marketable-security purchases. Financing cash outflow was $2.6 million. Cash and cash equivalents decreased by $31.0 million to $49.4 million.
- Liquidity and debt: At June 30, cash and cash equivalents were $49.4 million and marketable securities were $42.0 million. The company reported $15.0 million available under its revolving credit facility and no borrowings outstanding. The facility matures in June 2021; the company reported covenant compliance. Total current assets were $159.7 million and current liabilities $57.7 million.
- Other balance-sheet items: Accounts receivable, net, was $65.0 million, including an $11.1 million allowance; the allowance was $6.3 million at year-end 2019. First-half bad-debt expense was $2.5 million. Total liabilities were $58.0 million, with no drawn debt reported.
Material changes, outlook and risks
- COVID-19: Management said the pandemic materially negatively affected first-half operating results. Following fertility-treatment suspension guidance issued in March, treatment volumes fell sharply. Clinics began resuming services after updated guidance in late April and May; utilization near the end of Q2 was approximately 90% of normal levels. The timing of a full recovery remained uncertain. Management said it believed liquidity was sufficient for at least 12 months and had not identified a material pandemic-related liquidity deficiency as of the filing.
- Utilization: First-half assisted reproductive treatment cycles increased to 7,877 from 6,005, while reported utilization rates declined: 0.66% versus 0.86% for all members and 0.58% versus 0.73% for female members.
- Guidance: The filing refers to guidance issued August 5, 2020 for Q3 and full-year 2020, and a preliminary 2021 revenue projection. Numerical guidance is not provided clearly in the supplied filing text, so values cannot be summarized here. Management noted that assumptions depended on the pandemic, economic recovery and resumption of fertility services.
- Concentration and contingencies: Each of the two largest clients represented more than 10% of first-half revenue; one accounted for 18% and another for 17%. A former specialty-pharmacy vendor is seeking $25.0 million in arbitration damages, fees, interest and costs; Progyny says the claims are without merit. The panel had dismissed two of four claims, and the outcome remained uncertain.
- Additional unusual items: First-half stock-based compensation rose to $5.6 million from $1.5 million. The company expected to cease qualifying as an emerging growth company on December 31, 2020, increasing reporting and compliance requirements. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Investor facts to verify
- Check the numerical Q3, full-year 2020 and preliminary 2021 guidance referenced as issued August 5, including assumptions and subsequent revisions.
- Track fertility treatment utilization and clinic capacity recovery, and assess whether the reported near-normal late-Q2 level persisted.
- Monitor gross margin, cost growth and the effects of maintaining care-management staffing during lower treatment volumes.
- Assess receivable aging, allowance adequacy, member cost-share collections and the cash-conversion impact of working-capital swings.
- Review client concentration, renewals and Progyny Rx adoption, along with the potential impact of any large-client changes.
- Follow the vendor arbitration, including potential financial exposure and legal costs; the claimed $25.0 million is not an adjudicated liability.
- Confirm ongoing liquidity, credit-facility availability and covenant compliance, particularly if pandemic-related revenue or utilization weakens.