The status of the investment thesis here... This health care tech investment ticks almost all of the boxes for me.
- Does it have a great offering? Check.
- Is there a large addressable market? Check.
- Is funding available to cover the cost? Check.
- Have they signed a great many smaller deals to get them started? Check.
- Have they migrated to increasingly bigger deals with much more discerning clients? Check.
- Are they approaching or have they crossed over the threshold of profitability? Check.
But there is one box they haven't ticked.
- Are they approaching or have they crossed over the threshold of cash flow positivity? No.
And one box they need to improve dramatically.
- Have they reached a sufficient level of stickiness (adherence)? Not yet.
Let's look at the cash flow situation. We know they were really lenient and we know covid played a role in it. We know the auditor checked with clients and decided not to insist on substantial write-offs for the 2022 fiscal year. (That means clients agreed they owed the money.) Also, there's no doubt the company is putting in a lot of effort on this subject for the 2023 fiscal year, starting in January. What we don't know is how successful they've been, although it's apparent they have not made sufficient progress by June 30th to resolve it. They say they're making improvements and they say we should pay attention to the subsequent events section of the year-end financials, which should mean further progress. Of course, we need to see this for ourselves in the financials. I can't think of any reason why they shouldn't be able to collect, but this is a genuine concern that could affect the ongoing viability of the company. I only say "could" because they could still be successful with collections (and business) only from newer, larger, more sophisticated clients. I've seen no indication that larger clients won't pay their bills and it makes no sense whatsoever that larger clients would completely change over their business models only to have to change them back because they didn't feel like paying their major supplier. That's a lot of reputational damage.
Adherence is another issue, but not as black and white as collections. Adherence at fairly low levels has gotten the company to that profitability threshold. It seems to me that the bigger clients wouldn't have signed unless they could be assured, via data, that adherence could reach much higher, sustainable levels. As an investor, I can see that adherence levels at even half of what the company is talking about having already achieved (not necessarily across the board) would make for a very profitable experience.
Anyway, the biggest part of the above is collections IMHO. If the company doesn't collect enough to make the small fish viable, then it can migrate to the bigger ones and still do rather well. I don't see why this worst case scenario should have to play out but, if it does, the investment should still pay off reasonably well.
In closing, while this week's fundraise was unexpected, it does make sense. Any company signing this number of bigger deals (with presumably more to come) will need money to implement them. After all, this company needs boots on the ground for bigger implementations and ongoing adherence. And, the company would absolutely want to nail these implementations to ensure it keeps these clients and garners more. The company's messaging is undeniably poor, especially when it comes to forward looking statements, but it is what it is. You either accept that weakness, or move on.