CloudMD Software & Services Inc

XTSX:DOC

Hello, and welcome to CloudMD Software Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Mark Kuindersma. You may begin.

Thank you, and good morning, everyone. Thank you for joining us on our Third Quarter 2023 Conference Call webinar. We'll start the call with our CEO, Karen Adams, followed by CFO, Prakash Patel, who will provide a recap of the company's Q3 2023 financial results before opening for a question-and-answer period with our covering analysts. A reminder that today's discussion contains certain forward-looking information, which involve inherent risks and uncertainties and other factors that could cause actual results to differ materially from management's current expectations. Forward-looking information should not be interpreted as an assurance of future performance or results. The risks related to forward-looking information are described in the company's MD&A, which is available on SEDAR. We encourage you to review our public disclosure and context of all forward-looking information that you may hear today during this call. Investors are cautioned not to place undue reliance on such forward-looking information unless such information -- should consider a reasonable basis on information available to management as of today. However, the company disclaims any intention or obligation to update or review any forward-looking information as a result of new information, future events or any other reason except to the extent required by law.Now it's my pleasure to turn the call over to Karen Adams, CEO of CloudMD. Karen, over to you.

Thank you, Mark. Welcome, everyone, to CloudMD's Q3 2023 Earnings Call. We want to thank everyone for their patience as we rescheduled this call. As you know, we had to delay this call due to KPMG's need for additional time to review our financial statements. Prakash will further address this in his comments. Let me start with an overview of our Q3 results. Q3 was a positive quarter with some significant milestones achieved. The team is following through on its commitments and it is reflected in our quarterly results. After many months of hard work and a commitment to path to profitability, we are pleased to report that we generated consolidated revenue of $23.6 million, an increase of 2% over the previous quarter and a $750,000 improvement in adjusted EBITDA over the same period, leading to positive adjusted EBITDA of $49,000 a full quarter ahead of our commitment of breakeven in Q4. Our EBITDA continues to grow due to effective operating cost management, realizing the previously reported over $20 million in annualized cost savings and a further $1 million annualized savings from stock office optimization identified in this quarter and will be actioned in the next few months. The leadership team intends to continue this momentum through our objective of managing costs and organic revenue. We also delivered strong and consistent margin growth over last year. While the trend line is positive, we will at times be impacted by seasonality and revenue mix, along with external factors, such as rising costs against fixed-term contracts. This is all part of our forecast. However, we still expect margin expansion as we drive efficiency through automation and continue to manage delivery costs during times of inflation and healthcare provider supply chain issues. I'm pleased with the trend line we are seeing with organic revenue, gross margin expansion and cost control. I want to now turn to the operating divisions to provide a brief update. As previously reported in the Health and Productivity division, we secured a foundational contract for remote patient monitoring in the United States. This contract will provide remote patient monitoring services for hospital network with approximately 150 healthcare providers and over 25,000 patients that are suited for the program. This contract for remote patient monitoring is expected to generate approximately $3 million to $4 million per quarter once fully implemented, providing a solid foundation of growth expected to begin early in 2024 and into 2025. In 2024, we will begin reporting patients on the Healthy Life platform using our remote patient monitoring solution. We continue to grow the pipeline in the United States, which is currently at $200 million, by adding a mix of health care systems as well as small and medium clinics. Health care systems take time during the acquisition phase, predicated by the need to work with their procurement processes. Additional time is required to properly train staff on best practices, to quickly onboard patients with chronic conditions into the program, most effectively. We will continue to create innovation with adding additional features within the platform Healthy Life. Our Health and Wellness Solutions segment had a mixed quarter with strong revenue. In the quarter, we renewed a large client in our assessment business, with increased profitability and improved margins. Our pipeline continues to grow as clients have the desire to consolidate services with fewer vendors at the right cost. The current economic conditions as well as the focus on increasing mental health issues for people with all ages has shown a light on the capacity for our programs to create engagement and support the resolution of mental and physical health issues. CloudMD was founded on whole person care and the ability to build an ecosystem of solutions that would address an individual's mental and physical health issues. The increasing migration of clients to our services validates our competitive differentiated approach to health navigation at all stages of an individual's health journey. We have achieved annual revenue growth on a normalized basis of 10%, which is evidence of our momentum in the market. Our priority is to deliver double-digit organic growth while maintaining cost-cutting and delivering positive adjusted EBITDA. We continue to see contract findings that represent small, medium and large organizations across multiple services. The revenue performance is supported by an increase in our cross-sell and multiproduct sales through our existing 7,000 clients, which you have heard me say, is critical to revenue growth and lower customer acquisition costs. In the quarter, 39% of our sales were additional solutions sold to existing customers compared to 32% in Q2. 35% of our new contracts were for multiple products, a first for CloudMD. This increase in multiyear multiproduct sales led to a $2.8 million in ARR contract growth, including contracts with one of the big 5 technology companies in the world, a large railroad and a prominent Canadian university, along with many other clients. We also had our largest quarter in new revenue for Occupational Health with over $800,000 in annualized ARR. Subsequent to the end of Q2, we have signed an additional 246,000 new lives, including a large media and telecommunications company. We have also secured a new partnership with an insurer for EAP services that will launch in Q2 2024. Gross margins were down slightly due to revenue mix in the Assessment division. This is a result of specific [ stereotypes ] being requested within the period, even though revenue and volumes were up. The management team is leveraging our proprietary ISS platform to ensure capacity utilization to improve gross margin. In addition, EBITDA improvements are being made through the insourcing of the call center and redesigning of operations to meet customer demand and profitability. Management in Health and Wellness services will be continuing to Q4 and 2024 with geographic expansion in Alberta and Quebec. We will open office in Quebec in early Q1 2024 and expand our operational capabilities within the province. We will have a new industry leader to lead the operational management within the province, for the delivery of our ecosystem of services. In Alberta, we will be expanding our assessment services and have attracted an industry leader in healthcare provider recruitment to ensure our ability to support growth. I want to take a moment and comment on our technology and specifically AI. As part of our growth pillars, we are using technology to create efficiencies to reduce costs and create a better user experience. Technology is also used for revenue generation, which can be achieved by delivering first in class services and move towards a single integrated dataset to form deep insights by using AI and GenAI. Near term, the team is building their first recommendation engine, an AI power system that creates recommendations for services, thereby creating an efficient and optimized user experience. This will continue to reduce dependency on all care pathways having to be completed by a nurse upon intake. The ability to automatically triage and prioritize a select number of treatment pathway will save time for staff and users alike, providing better, faster assets to appropriate care. Further, continued investments in AI include moving towards hyper individual customer engagement as we reform our content engine to tailor suggestions to users, based on their core needs and preferences. We believe investments into this will elevate user engagement and deepen brand loyalty to our services. All things I have addressed today, speak about our strategy and action. The leadership team is focused on generating high-quality organic growth, identifying operational improvements with integration and cost efficiency and improving cost management. We are pleased with the progressive results that are indicative of our sustainable growth and the narrowing of the gap to profitability. I will now ask Prakash to provide some commentary on the Q3 results and address the share consolidation report. Prakash?

Thanks, Karen. I will be reviewing our consolidated results for the quarter, including financial highlights to our business segments and our liquidity position. But before I begin, I'd like to highlight that our Q3 interim consolidated financial statements reflect amended and unaudited comparable figures from 2022. After the issuance of our audited consolidated financial statements, additional procedures were performed by our management team and auditors, and a number of adjustments were identified that required restatement of the annual financial statements. The expected restatement impact is summarized in the notes to the interim financial statements and remain subject to the completion of the field work performed by our auditors. On a reported basis, Q3 revenue from continued operations was $23.6 million, an increase of 0.3% over the same prior year period. This number does not effectively capture the growth we've seen in our core business as the prior year includes revenue from our onetime COVID mandates. On a normalized basis, our consolidated revenue grew by 8% quarter-over-quarter compared to the prior year, driven by the strength we are seeing in our Health and Wellness Services business. Our Health and Wellness Service business contributed $22.3 million in revenues compared to $21.7 million in Q2 2023, a 3% increase quarter-over-quarter. Year-over-year organic growth excluding the impact of COVID contracts was 10.4%. In the third quarter, we signed multiyear contracts of $2.8 million, solidifying our confidence in the ability to deliver double-digit organic growth in our HWS segment. At the same time, we divested $450,000 of nonaccretive contracts in the quarter, further solidifying our commitment to profitability rather than top line growth. Health and Productivity Solutions generated quarterly revenue of $1.3 million compared to $1.4 million in Q2 2023, excluding our divested and held-for-sale assets. The slightly lower revenue was due to the timing of certain client mandates. As forecasted, the contract we announced in August to provide remote patient monitoring for a major U.S. regional hospital network provided no significant revenue in the quarter. We expect the contract will be ramped up over Q1 and Q2 of 2024 to deliver an average of $3 million to $4 million in revenue per quarter once fully deployed. Profit margin from our continued operations in the quarter decreased from 38.2% to 35.9% or $8.5 million in Q2 2023. As Karen stated, the decline was driven by a shift in revenue mix in the assessments business, despite higher volumes. We have improved gross margin by 150 basis points compared to the prior year, and we expect this trend line to remain positive as we continue to renegotiate long-standing contracts at more favorable margin, improve our cost of delivery and drive efficiencies using automation throughout our processes. I'm really proud to announce that our adjusted EBITDA in the quarter was a record positive $49,000 compared to negative $3.2 million in the prior year and negative $700,000 in Q2. The executive team committed to achieving adjusted EBITDA positive as a key deliverable for the year and we delivered on that promise. The improvement in adjusted EBITDA from last quarter can be attributed to our continued cost optimization efforts in capturing value chain efficiencies. We reduced our SG&A as a percentage of revenue from 47% of revenue last year to 37% this quarter. To put it another way, we've taken $4 million in annualized SG&A costs out of the business while growing revenue and gross margin. I would also like to note that adjusted EBITDA contained only minor adjustments for severance paid and consulting fees related to divestitures. As a team, we are thrilled with the progress we've made and look forward to continued trends -- continued trends towards improved profitability and positive cash flow. After successfully selling off our nonaccretive assets, we've now focused on consolidation efforts to address redundancies in our back office. In Q3, we identified and actioned $1 million of annualized savings through the consolidation of our tech stack, centralizing payroll and consolidating platforms. In this manner, we continue recognizing cost savings to improve gross margins while prudently securing long-term cash flow by supporting higher revenues with lower spend. Turning our attention from earnings to liquidity in our financial position. We are on a trajectory of becoming cash flow positive from operations. On an adjusted basis, removing the impact of severance, onetime payments and discontinued operations, our net operating cash used in the quarter was only $300,000. In addition to that, we paid down $1.8 million in debt. Overall normalized usage of cash for the quarter was $2.3 million compared to $3.1 million in Q2 2023. We closed the quarter with $13.3 million in cash, which we forecast as sufficient to fund ongoing operations in the near term. We continue to have a disciplined approach to capital deployment with a view of maximizing every dollar's ROI as we continue to seek out nondilutive sources of capital to fund our longer-term strategic priorities. As I mentioned before, in the interim, we continue to take a hard look at indirect operational spend while the business ramps up. I'd like to turn your attention to some other financial items. First, VisionPros. We are in the midst of divesting from this asset and do not expect material cash from the sale of this business. The main benefit for us from the sale is to limit the ongoing cash requirements to operate the business, which is approximately $400,000 a quarter and allows us to continue to focus on our core offering. Next, we currently have $16.5 million in short-term debt that we are actively renegotiating. We will update you by our next call as to the status of these discussions. As a reminder, the debt is a floating rate debt, and we do not expect a significant increase in interest costs when renegotiated.And finally, I'd like to address the vote put forward at our upcoming AGM regarding the ability to perform a share consolidation. We believe a share consolidation, coupled with continued strong financial performance will lead to a more investable company. More importantly, the higher share price enables us to be more attractive to institutional shareholders and lenders in the long term, reduces volatility in our market cap and helps us meet or maintain minimum price requirements for both the TSX and the OTC exchange. In summary, we remain on the path towards achieving positive cash flow in the near term. Despite many tough divestiture decisions, renegotiating nonaccretive contracts, the heavy task of solidifying our offering to the market, reducing spend internally while growing the business, we continue to realize healthy margins, increase ARA and deliver robust growth. This gives me the confidence to continue what we started and our financial results validate that we are making the right calls and doing the impactful things that matter. With that, I will pass the call back to Karen for her closing remarks. Karen?

Thank you, Prakash. I want to take this opportunity to remind you of the upcoming Annual General Meeting December 15, 2023. As Prakash highlighted, one of the things you will be voting on, is share consolidation, which is not intended to be implemented immediately, but rather a consideration for the Board. Share consolidation is another step in our journey to being a stronger business focused on creating value for all stakeholders. The Board of Directors will continue to monitor market conditions, and we'll have discretion for a period of 1 year following the annual meeting, to determine the exact consolidation ratio and timing of the share consolidation, including to not carry out any share consolidation as the Board deems to be in the best interest of the corporation and its stakeholders. In conclusion, I am proud of all the progress the entire team has made to build a solid foundation. All employees of CloudMD are focused on creating value for our clients and users. Our revenue is growing, our cost cuts are being recognized in the financial statements, and we have crossed the threshold of being adjusted EBITDA positive. We are still dealing with integrated-related costs that are impacting cash flow, such as real estate. Our pipeline continues to grow with the increasing need to support individuals' health and wellbeing with solutions that empower healthier lives.All of our employees are laser-focused on their role in supporting the strategic initiatives and growth pillars. We also acknowledge that this takes time. We continue to demonstrate the time is what will result in long-term sustainable results. I want to thank our staff and healthcare providers for their ongoing demonstration of their ability to not only support but execute on our strategic initiatives. Every day, our staff and healthcare providers deliver care to individuals making a difference in their lives. I want to thank our customers and partners who entrust us to navigate the health risk management of individuals. You have our commitment to continue the momentum and paths change. I will now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Gabriel Leung with Beacon Securities.

Congrats on the progress. First, Karen, you mentioned you had a big assessment renewal, I guess, in the quarter. And I'm curious, as you look over the next couple of months, whether there's any additional large deal renewals that we should be aware of.

No, not. There are no large significant material renewals that you should be aware.

Got you. The -- other relates to the RPM project in the U.S., I guess you talked about your expectations for how the revenues will scale equal fully deployed. But I'm curious internally, what sort of metrics are you guys tracking to gauge how successfully it's progressing over the near term? And whether you can share some of those metrics with us?

Yes. I think the most important metric that we look at is patients onboarding onto the app. That is the single biggest criteria for us at this point because we believe that the more patients that we can onboard onto the app, not only can we have a significant impact on the clinic or the health care system in results, but it's also a testament for us to have a client for referrals for other large opportunities that are sitting in the pipeline. So it's very important. I think for cash, the other metrics that we're looking at is the engagements with the individual on the platform. And we have numerous SLAs relating to the specific clients in time to respond in a variety of measurements, depending on the individual's chronic conditions. So I think from a financial perspective, though, the largest one we have is onboarding of patients. Does that answer your question, Gabe?

No, that's super helpful. And then just you mentioned about the pipeline and some other larger RPM opportunities as well. Just curious where things -- where things are on that front in terms of signing additional networks.

Yes. So we're growing the pipeline, which I'm very pleased. I'm pleased to see that it's also, as I cited small and medium-size clinics as well as the large healthcare system. And I think that's important because just as we have accomplished in our health and wellness business, having the diversity of the client base allows for revenue to be onboarded quite quickly in the smaller clinics versus the larger healthcare systems. They can be quite cumbersome. I think with regards to the pipeline, we want to get I would say the clients that we are currently actively onboarding from a large client base, we want to get enough on the platform that we feel comfortable and confident, in our ability to then expand. I would also say with some of these other larger healthcare systems, there's a commitment that has to be made to the local geography of where the individual companies or the individual healthcare systems are. So by way as example, if you were in California, we'd want to have an onboarding and implementation person, fulltime in the state of which the contract resides. So we're being thoughtful to get the onboarding of the patients in this one contract so that we can fund the growth and expansion through the operations and the gross margin. It's a healthy gross margin business for us. So we can use the flow of gross margin to support the growth of this business because as you know, we have a commitment to profitability, meaning we are generating revenue and then using that cash versus using cash in advance of revenue. Does that make sense, Gabe?

Yes. No, that's helpful. And then maybe just shifting over to the P&L and the balance sheet. As it relates to VisionPros, I know there's still a work of progress, but are there expectations that that might be divested before the end of the calendar year?

That is the target. We are in active conversations trying to divest the asset before the end of the year. The challenge, of course, you bump into the holiday season and just getting the right lawyers, et cetera, into the room is going to be difficult over the holidays. So we're trying to get this accelerated as quickly as possible. In my comments, I had mentioned a key benefit for us to post the sale as early as we can, as the limitation of cash requirements to run the business. We're very mindful of that being attuned to dollar ROI as how I ascribed to it earlier; making sure that every dollar we spend has the appropriate ROI and that $400,000 could be better spent on assets that are returning larger margins in our core offering.

Got you. And just on the cost-cutting effort, would you say that the bulk of the cost savings initiatives has played out on the P&L and the main driver for EBITDA improvement now were predicated on top line growth and maybe some more efficiencies you talked about automation within the operations? But the low-hanging fruit, I guess, is flex. Is that fair to say on the cost saving side of things?

Yes. I think you need to think of it to rigs. So first of all, revenue growth is differential for us. Every dollar we denting revenue contributed significantly given our healthy gross margin to our overall bottom line. With regards to cost cutting, I think when we bought a lot of these companies, the integration of the cost cutting, and that didn't happen, so we've been focused on that over the last 15 months. I think that where we are now shifting our focus is to the shared services model in IT, finance and HR. So we moved as we as example, we're moving to an HR system in January, which will give us some cost savings. We are consolidating some of our tech stack, which will give us some cost savings. And then per cash is committed on the finance side to be consolidating our financial system. So we'll get some cost savings there. So I would say we're not done. And I think we're choosing to use the word now continuous improvement will lead to a better, more sustainable bottom line. We want to get to a point where the cash flow positive that enables us to look at the sales complement at salespeople to new geographies, new solutions. So I would say that there is a responsibility as we grow the business and scale that we continue to look at the cost savings on an ongoing basis. Anything else you would add, Prakash?

I think that initiative that we're ascribing to of addressing our back office really details into how we support the business from a shared services perspective, which I think will result in additional efficiencies in North, right? As we consolidate the finance, for example, around the system that better delivers KPIs, there will be efficiencies that we will ascribe to once we deliver those KPIs on a more consistent basis to our business. The same goes with IT and HR, for example. And I think organizations generally benefit when the back office is functioning really well. And that's the goal of the organization now; spend the dollars and save the dollars in the back office to support the organization to drive further, call it, efficiencies and revenue growth on the comp side.

And I think the other thing I would add to that is we don't take it lightly that we have been managed to grow the revenue while doing all these thoughts. It's highly unusual to be able to manage both. It is a tough thing for the team to do. We were very fortunate that we've grown the business to early at 7,000 clients. So that's why we are very focused on cross-sell. Cross-sell is an efficient way to get customer acquisition costs without having to deploy to salespeople and marketing costs, but there will come a point, as Prakash and I talked about accelerating the shared services will enable us to generate some cash that we can reinvest back into the business, to drive marketing support and in areas such as our remote patient monitoring, where we're looking to expand and capitalize on meeting the pipeline.

One last thing for me. There's probably not much you can say. But beyond what you've, I guess, talked about on the MD&A on the debt refile, is there anything you can share about how discussions are going with your lender in terms of the renewal process?

They're ongoing. I don't think there's much rush on their side as well to extend the maturity, but we're pushing. They've been cooperative. They -- it's a process. So we're looking at extending the maturity time line. I think that's the appetite right now, and we continue to service our debt on that side. At the same time, we're looking at nondilutive sources of capital as well and participants that the bank could possibly participate with us in lending additional capital. So all of those conversations are on the table. But I think step one is extend the maturity so that we have a little bit more runway and then additional sources of capital thereafter.

Our next question comes from the line of Allen Klee with the Maxim Group.

On your remote patient monitoring contract, could you explain a little of what the key is onboarding and adherence of kind of what you're working on, how do you feel about the resources you have for that? Or -- and how you think about kind of how you identify the patients? Is the hospital helping you and maintaining adherence with those once they get signed up?

SSo first off, the hospital systems that we have contracted with is very involved in the onboarding. They have identified the 25,000 patients that they need for remote patient monitoring. So it is a very collaborative dually-invested relationship, where we feel very supportive. And the training and onboarding is happening with the health care system and the individuals. With regards to the staffing and the training, we feel confident with the complement we have now with the specific lifesize group, which is the 25,000 patients and some of the small and medium clinics that we have already onboarded. But at this point, we have redeployed staffing dollars to the remote patient monitors growth initiative in the U.S. in order to support a successful implementation. This particular healthcare system is on the East Coast. So it makes it very easy for us to be able to -- we have a large complement of South on the East Coast. So it's been very easy for us to be supportive of this integration. As we expand what I alluded to before, as we move across different states, then the dependency to hire more people to support will become critical, which is why we are looking to onboard patients now, support those patients with a great experience, use this reference as the ability to onboard other health care systems across the United States.

Just to add to that, I think it's important to note as well that the hospital network is actually incentivized through their, call it, revenue codes with Medicare and Medicaid to push the program onto their chronic patients. There's a big push in the U.S. to really drive preventative measures and preventative health care. So the hospital network helps us choose those chronic patients that will benefit from a platform like this and really are incentivized to push that platform out based on the specific conditions that match up to the program. And so really, it's a partnership with us, the hospital network to drive that volume, and we feel that we're well-suited internally to drive the program forward quite successfully with that partnership we had.

That's very helpful. One other question. You had a press release out on November 9 of an update on kind of some wins in your other business. You highlighted 100,000 new wins of new lives covered, and you highlighted 2 contracts with 48,000 live contract with a large tech company, a 10,000 live contract with a telecom company. Could you just give us an idea, help us understand like how those things ramp up and how you get paid on those -- yes, how all that works?

Yes. So those -- that specific [indiscernible] refer to our Health and Wellness Services business, which is a price per employee per month program on one of our many services within that division. So it's revenue that is generally contract terms that are 3 to 5 years on a per employee basis. Those contracts were sold subsequent, which is why we issued the press release to the end of Q2, and they can be onboarded anywhere Q3, Q4 or Q1 2024. Is that -- does that address the question?

Yes, that's great. So does your -- the amount of money you make on them, does that change based on how the customer -- how their lives perform?

So we -- our business is predicated on an underwriting approach where we look at utilization. Utilization has a specific price point. That price point is predicated on utilization. We have the rights every year to revisit that utilization and have a discussion with the clients around that price point vis-a-vis the actual utilization. So think about it to save as an insurance program where you're looking at you have some previous history. You're looking at the previous history of utilization of similar type products, and then you're consolidating that into a price point per month. So we are one of the key metrics we look at is revenue per case and cost per case, which is our ability when somebody actually uses the program.

Got it. Okay. That's very helpful. Okay. I like the discipline you're applying to focus the business and improve the financials and the momentum that you have. So congratulations.

I really appreciate you saying that, and thank you for attending the call and asking a thoughtful question.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Karen for closing remarks.

I just want to thank everybody for attending today's call, and I want to thank the entire staff at CloudMD for the work they do every day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.