2023-04-20 13:51:13 ET
Summary
- The company managed to grow at triple-digit rates even through COVID and some very serious execution problems, all the while raking in scores of new customers.
- With COVID now largely in the rear-view mirror and the company addressing its execution problems, even small improvements will lead to big gains.
- The company has rapidly gained a foothold in a new attractive segment, skilled nursing facilities, with a string of deals, some of them really large.
- With roughly 10K billable patients, the company is already breakeven but they already won contracts for 100x that number of patients although onboarding these will take years.
- With the company already breakeven, continued growth and execution improvements could lead to profits and positive cash flow due to a highly scalable business model.
We wrote about Reliq Health ( RQHTF ) before but the company is making good progress so an update is warranted, even if that inflection point we surmised was a little further out than we expected.
Our thesis is simple; as the company managed to produce triple-digit growth and has reached breakeven despite strong headwinds from COVID and lousy execution (see below), wait for what happens next as COVID disappears and execution improves.
Quick recap
The company offers remote care management for patients with chronic ailments with the help of hardware (to take vitals) and SaaS software (iUGO platform). In principle, this offers a very attractive business model:
- The market is rapidly expanding, greatly helped by a shift towards value-based care and a corresponding proliferation in CMS codes for reimbursement:
- This is a new market, it's largely a greenfield opportunity and Reliq is winning customers left, right, and center with monthly, almost weekly customer wins . If one adds all these potential patients of these customers one arrives well over 1M potential patients to be onboarded to their platform, although this process is a multi-year one.
- Most new customers come through referrals from existing customers.
- They are attracting larger-scale customers .
- It's often very beneficial for customers to join Reliq's platform as they gain much more in reimbursements than they have to pay in subscription fees to Reliq, also avoiding penalties for early readmissions and improving the health of patients.
- The economics are particularly interesting as the SaaS software generates roughly $50-$65 per customer per month with high gross margins (and is endlessly expandable with new modules and functions). Even at the present small scale of operation, the company is already breakeven.
- Patients tend to stay on the platform for the rest of their lives as they have chronic conditions (often more than one) with 5% dying every year but being replaced by 13% new patients from the existing customer base.
Large disconnect
There is a large disconnect between the contracts that the company is winning with all these patients that could be onboarded (well over 1M) this implies, and actual revenue (figures are in CAD$, and for some reason, the Q4 figures, CAD$4.12M aren't included):
SaaS revenue tripled in Q2 (ending in December 2022) to CAD$1.72M, which amounts to an ARR (annual recurring revenue, excluding hardware sales) of CAD$6.8M or in the order of 10K billable patients. Yet the company is already breakeven at this level.
There are three main reasons for this disconnect between order wins and revenues:
- COVID has created severe problems in this segment, remember, these are facilities with older, chronically sick patients, at prime risk of contagion.
- The onboarding process is very gradual, it runs months or years (even a decade with a big client like Data Soft Logic).
- There were significant operational problems in the onboarding process.
Onboarding process
Here are the different steps from customer win to revenue:
It turns out there were significant problems in two of these, adherence and collections.
Adherence
In order to be able to bill the customer, patients must be adherent, that is, they must provide data at least 16 days per month. It turns out that very few (>30%) were actually doing that as customers were managing the adherence process.
These are doctors focusing on caregiving with little time to spare, they are often not ideally placed to follow up with patients that have gone home to see whether they are providing data.
Even if patients are in possession of the hardware already, they often wait for a phone call from their doctor as a sign to start or some explanation of what they are supposed to do.
What Reliq proposed (from January 1, 2023, onwards) is that it will take over adherence management for all new contracts, and increasingly also for existing ones, from an April 12, 2023 investor update :
Adherence is actually a billable activity so we don't have to worry the cost of managing this process will come at the expense of profits.
Management argues that small-scale experiments have shown that they can significantly improve adherence by taking control of the process, from less than 20% to 70%+.
In the same April 12 update management also argued that they expect to manage adherence for close to 100% of their existing customers.
Collections
Collections were clearly a very serious problem with account receivables almost growing in tandem with revenues (Q4 figures not yet in the graph but TTM revenues were CAD$12.68M in Q2 and receivables rose to CAD$12.27M).
However, there were reasons for the problems:
- The company extended very generous payment terms during the difficult COVID time in order to produce goodwill and rapidly expand its customer base.
- The company changed hardware sales from upfront to 12-24 monthly payments, with revenues recognized upfront but future payment terms showing up in accounts receivable.
- There were $15M in deferred hardware sales at the end of the last (calendar) year from clients who asked for a delay in shipment. Management expects the majority of these to ship in Q3 and Q4 (the March and June quarters), with the attached software sales.
Management is now calling in outstanding bills (with COVID problems now receding) and incentivizing their salespeople to prioritize collections.
If they indeed collect $5M by the end of June (that is in H2/FY23) is a pretty dramatic improvement from the $200K in the previous six months (H1/FY23) and with Q4 profit prediction it should lead to positive cash flow as well. The company is also splitting out receivables:
As long as cash flow improves, we don't need to be too worried about increasing receivables, as these indicate increasing hardware sales which is a good forward-looking indicator of revenues and have software sales attached as well.
Skilled Nursing Facilities
There is considerable upside from the SNF segment, a lucrative segment for the company where it didn't even have a presence just 6 months ago, but already has some significant customer wins behind its belt.
Some more interesting details about the financials involved:
The company made considerable inroads in this segment in short order, which is a highly promising development and we repeat, one that wasn't even on the map half a year ago. The April 12 update mentioned additional progress:
So while new, it's basically a very attractive segment for the company:
- They are very incentivized by the penalties of readmission.
- They train the patients with the hardware before they leave the facilities, helping adherence.
- They have billing departments, which make collections significantly smoother.
Risks
While there is no notable short position (1.5M shares out of nearly 200M shares are short), the company isn't entirely without skeptics. We've come across several arguments:
- Late last decade when this market was new (with just one CMS billing code) they billed patients who were not yet approved by CMS, which led to a bit of a crisis. They have instigated built-in safeguards in the software to prevent this from happening again. They have a top auditor in KPMG.
- Management has been rather optimistic with projections in the past, but the pandemic was a big headwind and customers tend to start small-scale so it wasn't immediately obvious that adherence was so low.
- Receivables are ballooning, but this is mostly due to the $15M in hardware (and attached software) sales deference, and the change in hardware sales from up-front to 12-24 month schemes and generous payment terms during hard times for customers.
- The company is low on cash due to favorable payment conditions during COVID. However, it has been low on cash forever and hasn't needed additional finance. Management argues the cash situation is improving (and even argues there will be a share buyback late in H2/CA23).
- We can also point out that the CEO has been buying shares on the open market multiple times recently and net loss was reduced 97% to just $71K in Q2/23 (the December quarter). Basically the company is already breakeven .
Valuation
There are 197.5M shares outstanding, 432K warrants and 11.8M options for a fully diluted count of 210M, at CAD$0.50 that's a market cap (and EV, the company has cash nor debt) of CAD$105M.
With a Q2 run rate of CAD$16.5M the shares trade at an EV/S of 6.4x. We don't think that's expensive, given:
- Revenues are rising at a triple-digit rate
- The company is already breakeven
- Cash flow will likely turn significantly positive in H2/FY23 (Jan-Jun/23).
Conclusion
We see multiple attractive features:
- The company has a tremendous, largely greenfield opportunity supported by demographic developments and a shift in healthcare towards value-based care. The company is already rapidly taking advantage of the opportunity.
- The company was able to grow at triple-digit rates with strong COVID headwinds and very lousy execution (low adherence and collections), imagine what they can achieve with improved execution (which is what they are embarking on).
- Given the tremendous amount of customer wins already in the bag (a large multiple of the current 10K billable patients), even a small improvement in execution will significantly add to the top and bottom lines, especially given that the company is already breakeven at this small scale and the highly scalable nature of the business model.
- In the last six months, the company entered a new very attractive segment, skilled nursing facilities and it has rapidly established a significant position.
- Once on the platform, patients basically stay on it until they die and net patient growth from existing customers is in the order of 8% due to demographics and customer expansion.
For further details see:
Reliq Health May Be Set To Rise