Wolf of Oakville financial review Well Health Technologies $WELL.TO (3 / 5)
March 26, 2024|2023 Annual
What a disappointment these guys have been, and more so seemingly deserving of the 1/2 star downgrade they received for their Q3. I sold my position after they dropped a turd last quarter and I'm now questioning my sanity for buying the dip later on and I currently stand about even on that trade after the stock took about a 14% dip post earnings last week while I was being a degenerate in Las Vegas last week. Apparently lots of interest in my thoughts this time around, so let's dive into their annuals.
Balance Sheet:
We start with a just ok current ratio of 1.15, slightly lower than the 1.2 they were at at the end of Q3. That consists of $43.4M in cash, $95M in accounts receivables, $14.2M in assets held for sale and about $24M in other current assets against $153M in current liabilities due over the course of the next twelve months. Debt is over $295M with $42M current with $45.5M in long term convertible debenture obligations and $22.5M in deferred acquisition costs. Nearly 47% of their accounts payables are overdue, which is down from a percentage of total A/R but still not a great number with $5.2M written off in 2023 and $3M on the books as expected write offs currently.
Cash Flow:
WELL produced $66.4M in operational cash flow in 2023, but that is down by over $10M from they year prior. They utilized $81M in investing activities, mainly from a total of 10 acquisitions during their fiscal year. They also incurred $51M in new debt. Overall their cash position depleted by $5.5M during 2023. Their cash flow to debt ratio has gone from .3 to .22 which means that if they devoted their entire operational cash flow to service their debt it would take them over four, nearly five years to do so. And that is only including bank debt and not other long term liabilities rising from previous acquisitions. This does not signal to me that they have been managing their cash flow or debt well and their current cash position just covers the current portion of their debt.
Share Capital:
- 241.4M shares outstanding with 10.4M shares in dilution during their fiscal year
- Company has an NCIB expiring in June. Don't be fooled, they aren't buying anything back
- 2M options outstanding with all but 100k currently ITM and would expect about 1.1M to be exercised this year
- 5.1M RSU's outstanding with 4.4M granted this year and 2.95M becoming vested.
- 3.4M PSU's outstanding with 2.15M granted and 1.3M vested during the year. It hasn't gone unnoticed that options are no longer being granted, but RSU's and PSU's are
- Total stock based comp for 2023 was $8.68M, up 63% from 2022
- Interestingly, $7.15M of their current assets are in employee receivables, $6.8M of which are payroll taxes paid by the company for their RSU's and note 21 in the financials suggests a good portion of this is from 2022.
- 10% insider ownership and 5% institutional ownership (per Yahoo Finance)
- No significant insider transactions in the open market
Income Statement:
Finally we get to some good news here with annual revenues coming in at $776M, up 36% from the $569M achieved last year. Gross margin continues to be an issue and in their fiscal year had 530 basis points of margin erosion down to 48% which is a $41M lost opportunity on $776M in revenue. Their G&A expenses were up by nearly 26%, so another slight positive is there was some minor conversion on that line on 36% growth. That nets out to $35.1M in total operating income, about $11.8M better than last year. But even with a $42M one time gain in revaluation of investments, total net income still declined by over $2M during their 2023.
In looking for some more positives here, it does look like their Q4 did trend better than their first three quarters. Their gross margin gap after nine months was 750 basis points worse to last year and ended the year 220 bps better than that. They also converted a little better within their G&A expenses, closed their profitability gap and QoQ revenue was up by 13% over what they did in Q3.
Overall:
Their annual financials are not great outside of the revenue line, but maybe, just maybe their Q4 is a sign of improving metrics to come. I'd like to think I'm convinced of this, but I'm far from that. I don't like their debt position and even more so now given their reduction in operational cash flow. They are going to be in debt for sometime and their worsening debt ratios are only going to see their variable interest rates increase. I don't like the self fellating stock based compensation, and the fact that insiders owe the company millions makes me think insider selling to cover this off could come at any time. My guess is we will see the acquisition train start to slow as they try to manage what they currently have. I hope that's what they do. Analysts currently have WELL pegged anywhere from $4.75 up to $11. Personally I think it's in the lower range of that. Given how the stock looks technically and the relatively low MC/Revenue, I'm going to leave this as a three star. The better Q4 compared to the rest of the year saved it from another downgrade.