Nova Leap Healt Q4 - My view Nova Leap Healt Q4 - My view
Revenues 2021: 21.279 M
2022: 28.205 M
“2022 annual revenues of $28.205 million were the highest in the Company’s history and represents a 32.5% increase from 2021 revenues of $21.279 million;” Strong increase FY.
Q2: 6.986.758
Q3: 7.141.654
Q4: 6.780.083
Q4 is a historically weak quarter in home care due to the holidays. Therefore, it is strong that, without acquisitions during this time, that Q4 is almost in line with Q2 figures.
Net income Net (loss) income (31/12)
2021: 1,760,713
2022: (835,745)
So how do revenues and net income relate from positive to negative despite increased numbers?
COVID-19 relief programs (ERC not included):
2021: 5,151,029
2022: 0
The money from Covid-19 was used for increased costs, paying off loans and indirect acquisitions.
Gross profit margin “Gross profit margin as a percentage of revenues increased to 35.4% in 2022 from 33.9% in 2021. Gross profit margin was 35.6% in Q4 2022, 35.7% in Q3 2022 and 32.6% in Q4 2021” This increase is a message of strength and reassuring for the future.
Liabilities Demand loans (31/12)
2021: 3,122,672
2022: 1,378,244
Government loans and deferred payroll liability (31/12)
2021: 298,373
2022: 88,600
Almost $2 million of their loans have been paid off, which continues to reinforce the likely strategy of paying off as much as possible while the interest rate is high, to hopefully be able to make one or more larger loans when the interest rate is lower. Wisely. Q3 stated figures if repayment of loans is intact after Q4:
“
The Company’s debt position improved significantly during the course of the year and we remain on target to end 2023 with approximately $290,000 of bank debt. Through prudent fiscal management, the Company is now in a position of strength which should give us more flexibility to borrow for future acquisitions.” Impairment loss “In Q4 2022, a goodwill impairment loss of $514,403 was recorded in one of the Company’s New England agencies where a lawsuit was filed in Q3 2022 seeking $1.2 million in past and projected future profits against the previous owner and a related corporate entity for breach of certain covenants that formed part of the acquisition agreement. The impairment loss is based on the loss of significant client service hours during 2022 and the expected longer recovery time to return to previous revenue levels;” This was the quarter's big news, which significantly affected the result for the quarter. This type of write-downs, if they occur, even if they happened earlier in the year, are usually done within FY and Q4.
You can interpret the large write-down as a likely scenario that you don't expect to get any money back. It can also be interpreted as that the clear and large financial loss that is being written off (for now) in this individual business shows that there is a clear case, because of the large loss, that you have a good chance of winning this legal process, and thus getting return parts or the whole amount.
Employee Retention Credit (“ERC”) ”As of September 30, 2022, an ERC amount of $659,495 is outstanding …” (Q3)
“Subsequent to the year end, an additional amount of $207,188 was collected with the funds used to further reduce the non-revolving loan to $430,000.” (Q4)
Due to the large payout in Q2 ($917,474), I thought and hoped that the remaining amount would be received during Q4. In fact 0 was received and the $207,188 was paid out now in January and will thus be included in the next Q1 (2023) report. If the historical pattern of payouts is correct then one should receive the remaining sum of $430,000 in Q2 (2023).
This will of course strengthen the balance sheet already in H1 2023.
Q3-Q4 Foreign exchange (loss) gain
Q3: 880,705
Q4: (176,891)
Impairment loss (loss)
Q3: 0
Q4: (514,403)
Net income (loss)
Q3: 549,070
Q4: (970,395)
These two columns/numbers are extremely important to remember when interpreting net income below. So there is a difference of one million in currency exchange between the two quarters and over half a million in a single write-down (which you can double over and get the money back after the legal process). If you had also received the full amount of ERC during Q4, as I had hoped for, the result would have been approx. $2.2 M higher in total, i.e. from a net income loss to a large profit of over $1.2 M in total.
It is also true that Adjusted EBITDA was weaker in Q4 compared to Q3. This is a pattern that varies due to the long-term commitment that CEO Chris Dobbins explains more here:
Listen 10:45-11:45
https://www.youtube.com/watch?v=f14Xwl92cgY&ab_channel=PlanetMicroCap
Insider ownership “Consistent with past years, insiders continued to make meaningful investments in the Company. Insider ownership grew year over year from 36.2% at the end of 2021 to 38.9% where it stands today. I believe this serves as an indication of the value insiders believe has yet to be reflected in the current market environment and the confidence they hold in our long term strategy.” Stronger and stronger insider ownership is fantastic.
Q1 2023 South Carolina, for the period from December 6, 2021, onward
Kentucky/Indiana, for the period from December 11, 2021, onward
Texas, for the period from December 18, 2021, onward
These are the three most recent acquisitions, which means that Q1 2023 will be able to be compared fully organically with Q1 2022.
Q1 is historically a strong quarter for the entire home care market. Last year, Nova Leap Health had:
Service revenue: 7,296,609
Adjusted EBITDA: 227,562
It was at a gross margin percentage of 34.8%, which should be compared to having since then been at a higher margin in recent quarters. It also had foreign exchange losses of $192,563, which can be compared to USD/CAD today, March 3, indicating that it will make a foreign exchange gain in Q1 rather than a loss.
Then remember that they will collect at least $207,188 from ERC in Q1.
But most important of all two points, both of which I believe will increase both Service revenue and Adjusted EBITDA, in Q1 2023 compared to Q1 2022:
1. Increased potential workforce increases the possibility of revenues Home health care services - Increased number of jobs (US) in the last 8 months:
June: +11,000
July: +3,400
August: -1,800
September: +10,600
October: +6,000
November: +6,600
December: +10,800
January: +6,400
87 500 more jobs now in sector compared to January 2022 (YOY)
Social assistance
Individual and family services:
December: +10,100
January: +9,600
197 600 more jobs in sector compared to January 2022 (YOY)
Sources:
homehealthline.decisionhealth.com
https://www.bls.gov/news.release/empsit.t17.htm 2. Less active cases of Covid-19 after previous Omicron spike Go to this source and review the graphs:
Daily New Cases in the United States
Active Cases in the United States
https://www.worldometers.info/coronavirus/country/us/
And then review the same graphs in Canada:
https://www.worldometers.info/coronavirus/country/canada/ Having done this, you will be able to read a huge difference between Q1 2022 and the start of 2023. This should really indicate in Nova Leap Health's main Home Care segment in Assistance with Activities of Daily Living (ADLs) that it simply had the opportunity during this current quarter to make more visits. And if it coincides with increased need and staff strength according to point 1 above, then it is double profit compared to Q1 2022.
I also expect the possibility of integration and streamlining of the total of five acquired during the fall/winter of 2021 during the full year of 2022 can also push revenues.
Demand loans
Q1 2022: 2,930,016
Q4 2022: 1,378,244
Given that the ERC money was previously used to pay off loans and that in addition to this they paid off between 300,000-400,000 on the loans, I expect that demand loans will be under $1 M in Q1 2023.
To summarize, I expect records in both Services revenues and Adjusted EBITDA in Q1 2023 (reported around 10/5 historically). This while reducing demand loans by over $2 million in one year. Which would put the company in a stronger position than ever, which should provide opportunities in a stock that is well below its ATH ($0.96 CAD) now at $0.25 (CAD).
M&A “With the downturn of the capital market environment in the micro-cap space, we were not as active from an M&A perspective as we would have liked. However, opportunities for acquisitions remain plentiful and very much remains a key part of our strategy.” (Q4 2022)
Here I think it is important to listen to CEO Chris Dobbins again:
Listen between 3:05-6:00
https://www.youtube.com/watch?v=gDvEESVG2MQ&ab_channel=PlanetMicroCap My guess is that they want and will show the market organically strong and growing Adjusted EBITDA during the next three quarters in 2023 (Q1-Q3). This is due to three reasons:
1. Wait with hopes for a lower interest rate during Q3-Q4, which would provide security about a more economically favorable loan
2. Increased possibility of loan ceiling according to the x3 Adjusted EBITDA (on an annual basis) that CEO Chris Dobbins mentions during the latest video
3. With inflation and the subsequent interest rate that has been high for some time, it increases the chances of making cheap acquisitions every day
So according to this reasoning, I believe that the acquisition strategy will start again in Q4 this year. And this time, they will come in stalled for many, many years only when Nova Leap Health themselves are bought by a bigger player in the market.
Note! Figures in USD unless otherwise stated. For transparency, I own shares in Nova Leap Health both privately and through Betula Kapital. It is my largest private economic holding and the plan now is for it to be so for the foreseeable future. These are my thoughts and I reserve the right for any number to be wrong, so do your own analysis.