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spk01: Greetings and welcome to Uphouse first quarter 2023 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shannon Devine, Investor Relations. Please go ahead.
spk00: Thank you, Operator. During today's call, management will be making forward-looking statements. Please refer to the company's SEC filing, including the quarterly report, to be filed on Form 10-Q for a summary of the forward-looking statements, the risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements. Uphill cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise these statements to reflect new circumstances or unanticipated events that occur as except as required by law. Throughout the call today, we'll refer to pro forma revenues, pro forma growth margins, and adjusted EBITDA. These metrics are not determined in accordance with GAAP and therefore are susceptible to varying calculations. Definitions, calculations, and reconciliations for the financial statements of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of UP Health's financial results provide useful information regarding certain financial and business trends and the results of our operations. I will now turn the call over to Sam Meche, UP Health's Chief Executive Officer. Sam?
spk04: Thank you, Shannon, and good afternoon, everyone. Thank you all for joining us today. Myrna and I are very excited to discuss our first quarter performance with you. When we last spoke in March, we shared our plans to recalibrate our business in 2023 and to implement our three-year plan to right-size the business, providing the necessary foundation to achieve our growth ambitions. We view this work as critical to achieving our mission, which is to enable high-quality, affordable, and accessible healthcare for everyone. Executing our plan will enable us to create solutions that combine technology and services to improve access to care, which is needed now more than ever, as society emerges from the pandemic and deals with unprecedented challenges moving forward. Since our conversation in March, we have focused on executing our plan. You will see from our first quarter results that we made the changes necessary to launch our recalibration year. We acknowledged the macroeconomic realities of the market, and we responded accordingly. We shifted our focus to fewer objectives. We reduced our cash burn and improved our operating disciplines. We stabilized our core businesses and are accelerating the growth of those businesses. We told you that we would shut down any initiatives and businesses that were not working and did just that, ending our managed care and sovereign nations pursuits and closing our provider practice in Missouri. Today, we closed on our deal to divest Innovations Group Incorporated, or IGI, our pharmacy compounding business to Belmar Pharma Solutions. We have reduced headcount by 12% since August, and we continue to decrease contractor and external vendor spend. Our team's commitment to aligning our expenses to our current revenue is best illustrated by the reduction in our operating expenses. As a percentage of revenue, total sales and marketing, R&D, and general and administrative expenses decreased from 46% in the first quarter of 2022 to 40% in the first quarter of 2023. I would like to take a moment to discuss in further detail the progress we have made on execution, starting with the recently completed sale of IGI. Today's closing is a significant milestone toward right-sizing our business and further defining our key focus on the strategic directions for growth. With the sale of IGI, we solidify our balance sheet with $56 million in gross proceeds, providing the company with the necessary financial footing to execute on our current initiatives and future growth plans and to solidify our three-year plan with 2023 serving as our recalibration year. While most of our actions in the first quarter were focused on reducing headcount, cutting costs, and recalibrating the business, we also took steps to pivot to growth. In our U.S. telehealth business, we signed contracts with 29 new clients that will generate incremental revenues over the next 12 months. Additionally, We saw a minute growth of 58% in the first quarter, which contributed to the business achieving $17.5 million of revenue. Our services segment revenues were $20.8 million, representing an increase of 17% compared to revenues by the first quarter of 2022, primarily due to higher census and improved payer mix that upheld behavioral and an increase in the volume and sales price of prescriptions in the pharmacy business. Integrated care management's revenues of $3.9 million, representing an increase of 48% compared to the revenues of the first quarter of 2022, were primarily due to growth in professional services revenue from existing customers as we focused on customer retention and relationship expansion. Additionally, we significantly refined our go-to-market strategy for the integrated care management business, and we engaged an industry veteran to help us improve our positioning in the market. In February, we launched the up health innovation lab to focus on incorporating data and analytics and artificial intelligence to our technology and technology enabled services. We are in the process of developing use cases and reviewing them with some of our strategic clients to validate our hypotheses with the market. All of these efforts have had a very positive impact on our sales pipeline, which increased by 25% over the fourth quarter. Turning specifically to our first quarter results, at a high level, our first quarter was notable. Revenues in the first quarter of 2023 were $42.1 million, representing an increase of 17% compared to the revenues for the first quarter of 2022 of $36 million. It is important to keep in mind the first quarter includes revenues of $8.8 million from IGI, and going forward, we will have 12 months of an unfavorable comparison after IGI closes. Gross margin continued to expand to 54% from 39% in the first quarter of 2022 as a result of improvements across our business and favorable payer mix. Adjusted EBITDA for the first quarter of 2023 improved by $7.9 million to $6.6 million compared to adjusted EBITDA for the first quarter of 2022 of negative $1.3 million. While we are pleased with our first quarter results, and are encouraged by the direction of the company, the path ahead still has its challenges. It is imperative that we leverage our cash position wisely and that we invest in initiatives that will drive growth as we continue our work to turn the company around. Our early indicators are positive, and we continue to drive consistently against our commitments. Repeatable revenue, which is growing appropriately, and converting earnings to positive free cash flow. Most importantly, our turnaround efforts enable us to focus on achieving our vision of driving the digital transformation of healthcare to create a world in which everyone everywhere can enjoy the best health. Before I turn the call over to Martin, I want to thank you for continuing with us on this journey. As evident in our first quarter results and our recently completed sale of IGI, we are making progress on our recalibration, and we look forward to continuing to deliver on our strategic plans and priorities, and most importantly, and delivering for our shareholders. I'll now turn the call over to Martin to discuss our financial results in detail before we open up the call for questions. Martin?
spk07: Thanks very much, Sam. We appreciate everyone joining us today. Before I begin my review of our first quarter results, I want to first comment on the presentation and our earnings release as it pertains to the results and comparison periods. Recall that we deconsolidated our Indian telehealth subsidiary, GloCal, from our financial reporting effective July 1st, 2022. So Q1 and Q2 of 2022 include the financial results of both the Indian and U.S. telehealth businesses in our virtual care infrastructure group, while this quarter's results include only the U.S. telehealth business. The company completed the first quarter of 2023 with revenues of $42.1 million. representing year-over-year growth of 29% over Q1 2022 on a pro-forma basis and 4% growth over Q4 2022's $40.5 million in revenue. Gross margin for the quarter was 54% compared to 41% in pro-forma Q1 2022 and 45% in Q4 2022. In Q1 2023, UpHealth recorded adjusted EBITDA of $6.6 million compared to 2022's pro forma adjusted EBITDA of negative $1.6 million and $1.9 million of adjusted EBITDA in Q4 2022. The company's sequential and year-over-year growth in quarterly revenue, gross margin, and adjusted EBITDA represent strong progress towards our goals. But as Sam mentioned, we have additional work to do to reach our goal of achieving positive operating free cash flow. Looking at revenue breakdown by segment, services, which again includes our pharmacy and behavioral health businesses, was the largest contributor to the company's Q1 2023 revenue with $20.8 million or 49% of the total revenue. Services revenue grew 17% in Q1 2023 over Q1 2022 and 9% from Q4 2022. IGI contributed approximately $8.8 million to Uphel's Q1 2023 revenues, and we expect to recognize approximately 40% to 45% of that amount in Q2 2023. The sale of IGI will result in a drop in revenue starting in the second quarter, which we will endeavor to recover through growth in our other businesses over the course of the year. Virtual care infrastructure, which for Q1 included only the U.S. telehealth business and not the Indian business, was next with $17.5 million worth of revenue, or 41% of the company's total Q1 2023 revenues. U.S. telehealth revenue grew approximately 42% from pro forma Q1 2022. The company's revenue mix in Q1 2023 continued to shift toward the high-margin U.S. telehealth business, and we expect that trend to continue throughout 2023. Integrated Care Management, or ICM, had revenues of $3.9 million in Q1 2023, which represented probably more than 9% of the company's total revenues. ICM revenue grew 2.5% from $3.8 million in the fourth quarter of 2022 and grew approximately 48% from $2.6 million in Q1 2022. The company's gross margin for the first quarter of 2023 was 53.8%. and gross margins by segment for the quarter were as follows. Integrated care management, 66.7 percent, virtual care infrastructure, 58.3 percent, and services, 47.6 percent. We view gross margin as a key metric for up health and as being useful for industry comparison purposes. Accordingly, let me also provide some additional color on our gross margins from a trend perspective, as well as framing them within the context of our overall financial model. Gross margins in virtual care infrastructure increased to 58.3% in the first quarter from 47% in pro forma Q1 2022 and 51% in Q4 2022. As we continue to see operating leverage and increasing utilization of video telehealth services contribute to improving gross margins in the U.S. telehealth business. Gross margins in the services segment increased to 47.6% from 33% in Q1 2022 and 36% in Q4 2022 as a result of continued strong performance in parts of our behavioral health and compounding pharmacy operations. Strong pharmacy volumes and normal seasonal increases in capacity utilization combined with a favorable payer mix in our Florida behavioral health businesses more than offset weakness in our medical group performance in Missouri as we close down and integrate those operations into our Florida behavioral health business. Gross margins at integrated care management increased to 66.6% in the first quarter, from 62.7% in Q1 2022, and from 61% in Q4 2022, as a result of a higher mix of professional services. The ICM group's gross margins are at levels consistent with the expectations that we've discussed on previous calls. Upheld's first quarter adjusted EBITDA was $6.6 million, up from $1.9 million in Q4 2022. Adjustments were made for certain non-recurring expenses, including legal and restructuring expenses. We expect expenses for legal and restructuring costs to continue as we deal with various shareholder litigation matters, including with the former owners of our Indian subsidiary, and as we consolidate corporate operations to drive efficiencies and lower costs. As a reminder, adjusted EBITDA is a non-GAAP measure, and we have included a reconciliation of GAAP operating loss to adjusted EBITDA in the press release. Now I'd like to provide more detail on the company's liquidity position. As of March 31st, 2023, the company had an unrestricted cash balance of $13.3 million, including cash at IGI, which will be swept to the corporate balance sheet as part of the transaction. and will be reflected in the second quarter cash position. In addition, this does not include approximately $7 million held in an account in India that has been effectively frozen by the emergency arbitrator in our action against the former GloCal shareholders. Additionally, we completed an issue of 1.65 million common shares and 1.35 million pre-funded warrants, raising gross proceeds of $4.5 million on March 13th, 2023. Interest payments and payments for various professional fees, including legal and consulting expenses, impacted our cash balance while our business segments continued to post strong revenues and EBITDA growth. As Sam mentioned in his remarks, we closed the sale of the IGI Pharmacy business earlier today. The gross proceeds of the transaction were $56 million before adjustments for changes in working capital, escrow funding, and various transaction expenses. In accordance with the terms of the indenture with our secured note holders, the company will offer to repurchase an amount of secured notes equaling 20% of the net proceeds of the IGI sale, about $15 million. The actions that we've taken to bolster our cash position, combined with the financial performance of the business, which continues to trend toward being operating cash flow positive in the next several months when adjusted for extraordinary expenses such as legal fees, provides the company with sufficient liquidity to execute on our growth plans for the foreseeable future. We continue to expect 2023 revenues to be in the range of $127 to $135 million. This represents growth of 5% to 12% over pro forma 2022 revenue of $121 million. For comparison purposes, both 2023 estimated revenue and 2022 pro forma revenue include approximately five months of operations for IGI, and exclude the Indian operations. In 2023, we expect gross margins to be in the range of 43 to 45%, and adjusted EBITDA to be in the range of $7 to $10 million. That concludes our prepared remarks. Operator, we're now ready to take questions.
spk03: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. And as a reminder, you can press the 1-4. And our first question is from the line of Mike Lattimore with Northland Capital Markets. Please go ahead.
spk05: All right, thanks. Yeah, congrats on the progress that's here so far. Looks good. Martin, did you give the, I think you gave a telehealth growth rate number on a pro forma basis. Is that 42% or what was the number?
spk07: Telehealth on a pro forma basis, Mike?
spk05: I think, I thought you gave that number, yeah. I did, yeah.
spk07: Hang on one second. Let me just grab it. Sure. I guess the other... Yeah, you heard it right, 42%. So just to be clear, that's pro forma ex glocal in Q1 2022.
spk05: So, I mean, that's a pretty healthy growth rate. I guess, can you talk a little bit about, you know, just the drivers of that business, you know, the differentiation? You hear so much about macroeconomic headwinds, but 42% is a really healthy number. So I guess maybe talk a little bit about that business and why it's doing so well.
spk04: I can take that, Martin. Thank you, Mike, for the question. So there's two things that are really driving the growth of that business. First, we've seen an increase in the number of devices that we have distributed. As we've talked about, we're up over – we're into over 2,800 facilities at this time. We just had several new sales in the first quarter. The second is we've been working very closely with our customers about driving the proper utilization of the devices and making sure that the teams know how they're doing it. So you saw we talked about the growth in the minutes for that business that we saw was about 58% in the first quarter. So it's a really good product. We've got good NPS scores with our customers, and we've been really focused on adding new customers and new devices out into the market and then making sure that our customers are using them properly to drive increased same-store growth, if you will.
spk07: Yeah, and I would just add a couple of things there. You know, what we've seen, and we mentioned this in the remarks, Mike, is a transition of the mix towards video and away from audio. So that drives revenues and margins.
spk05: Is that just a process change or a technology change?
spk07: A little bit of both. We've certainly made a lot of advancements on the core platform and its efficiency and ability to handle many, many calls at the same time. And also, you know, a reflection of the fact that the video is a superior product.
spk05: Right, right. Okay. And then you also touched on, I think, just pipeline. I think you said it grew 25% sequentially. Is that largely kind of in the telehealth category or is that growth across the board?
spk04: Yeah, thanks, Mike. The pipeline growth is across the board. So we've added a couple of new sales leaders to our team. We've been focused on improving the pipeline for the integrated care management business and then also aggressively growing the pipeline for the telehealth business. And then it's a slightly different approach for our behavioral health business, but we've added resources there that are helping to drive patient volume. So across all three businesses, we've seen improvements in our pipeline.
spk05: Got it. And then If you back out the IGI business, is there a natural seasonality in the rest of the businesses throughout the year? Is there like an inherent, you know, sort of build throughout the year? Or is there not seasonality in the non-IGI business?
spk04: I'm sorry. You were broken up on my line. I apologize. Could you repeat that question?
spk05: Yeah, if you take out the IGI business, the business that's left, is there a natural seasonality in it, meaning, you know, one quarter is naturally the lowest of the year and the other quarter is actually the highest?
spk04: There's a little bit of a natural seasonality in terms of utilization. You see some utilization come down a little bit during the summer and build back towards the end of the year, but it's still fairly consistent with what you've seen historically.
spk07: Yeah, and I would say, Mike, in the behavioral health business, there is an element of seasonality. Typically, the first and the second quarters are the strongest in that business, and the fourth quarter is the weakest. And we talked a little bit about that in terms of capacity utilization on the last call.
spk05: Got it. And then just the very last one is just, again, a clarification. Martin, did you say you expect to be
spk03: operating cash flow positive within a few months is everything yes okay great thanks very much thanks mike and our next question is from the line of bill sutherland with the benchmark company please proceed with your question thanks uh good work guys in all respects um i uh
spk06: Obviously, looking at the very nice EBITDA in the quarter that is almost at the low end of your annual range, I just want to ask how we should think about the rest of the year as far as the cadence of EBITDA from here. Thanks.
spk04: Thank you, Bill. Really, really good question. I would say we're off to a great start for the year. We just closed on the sale of IGI, so that's going to take down some of our revenue and some of our EBITDA, so we can't quite annualize or extrapolate that yet fully from Q1. But we're really pleased with the results in Q1, and we're going to continue to drive to improve that number throughout the course of the year.
spk06: My sense was, I think from comments in the past, that IGI's contribution to EBITDA was, you know, not a big percentage of the total. So, again, what kind of falls off going forward in the continuing ops from a margin perspective?
spk02: Martin, you want to handle that one or overtake me?
spk07: Sure. No, no. Hey, Bill. So IGI contributes about $500,000 a month, maybe a smidge more at this point in EBITDA, and that pretty much all drops to cash flow. So it's not an insignificant amount that we do have to replace going forward. We did have a very strong first quarter. We expect the rest of the year to continue to be robust. Maybe not quite at that level. As Sam mentioned, we've got to replace the sales and the margin from IGI. And if we feel that the forecasts are no longer reflecting the run rate and potential and results of the business, then we'll revise the guidance accordingly.
spk06: Well, let me come at it It's a little different way, just to see if I can understand it a little bit better. Did you say, Martin, that the gross margins that you achieved in the first quarter for the three segments X IGI are sustainable?
spk07: I didn't comment on the gross margins at all, Bill. I just said that the The EBITDA margin of the IGI business was about five, the EBITDA contribution was about half a million dollars a month. In terms of gross margins, they were very strong in the first quarter. We were happy with them. I think there were some very positive mix issues that contributed to those margins, which may or may not continue. And we've guided a longer-term guidance with respect to margins, gross margins, is in the 45% to 50% range. And so we would think of those as kind of the normal course and steady-state gross margins. Maybe they're shifting up a little bit. But at the moment, we're comfortable with what we've guided. And if the perspective changes, we'll make an announcement to that effect.
spk06: Okay, okay. I was curious, you mentioned that the go-to-market strategy for ICM is being refined. Can you give us a little color on how, you know, what's changing and kind of maybe what that means for the sales cycle and, you know, the potential of that business to get back in growth mode?
spk04: Yeah, happy to talk about that. So, for our integrated care management business, we've looked at a couple of things. So, first and foremost, we've got a lot of great data, and we think there's some analytics capabilities that we can really add into our business to pair with the CentraNet platform to really help our customers clearly identify the next best actions, for example, that they should be taking with some of the members that they're serving on the platform. We've developed some very, very good use cases beyond the HIE market when you look at the PBM market, for example, where we've got customers that are leveraging the platform and having great results from that. And then the experience that we've gotten with our customers in California, we're starting other states. start to build upon the digitization of the healthcare system in California and start to add some of those requirements into some of the things that they require from their counties and their plans. And so we think that there's gonna be an opportunity to really package together both a technology and a technology-enabled service approach to how we serve our payer customers in that market.
spk06: You're alluding to the Medi-Cal? contract, I think. So it feels like it will take time. That sounds like a pretty big lift to get the engine. Those are long sales cycles, I would imagine, right, with other types of governments.
spk04: Oh, sorry, Bill. I didn't mean to cut you off.
spk06: Go ahead and finish. Yeah, I was going too slow there. The other similar systems that I assume you're going after, like Medi-Cal.
spk04: Yeah, so there's a couple of proposals that are out for other counties in California. So we've been pursuing some of those. In the first quarter, we really focused on the account retention. And that has been going quite well for us. So we're very happy with the progress there. And so really, it is a long sales cycle. You are correct. But the focus on additional markets and kind of upsells to our existing clients with new sales to other clients is well underway. And so we're basically seeing some really good data for us in terms of how we can leverage our Medicaid data and analytics in particular. for community-based and exchange work that's underway in some other states. So we've submitted a couple of RFP responses already this year. We're working on that. You are correct, it is a little bit of a longer sales cycle, but we think that the work that we're doing to transform our business model, our architecture, and the engineering to really support a full SaaS cloud model and incorporate some of those new initiatives around data and analytics is going to make us much more attractive for the customers that we're bidding on.
spk06: Okay. Sounds promising. I appreciate the color. Thanks, guys. Thanks, Bill.
spk03: And we have no further questions in the queue at this time. I will now turn it back for closing remarks.
spk04: Thank you, operator. And once again, Martin and I both want to thank everybody for joining us today. This was a very good day, very good quarter for us. We're very excited about the direction that the company is taking, getting the IDI sale closed and really restructuring our balance sheet is something we're very excited about. And it's allowing us to pivot to growth and continue to focus on the work that we need to do to recalibrate the business. Again, we're very happy with our first quarter results. We think that it's a very strong start to the year, and it's our goal and objective to continue that performance throughout the course of the year. So once again, thank you for continuing with us on this journey. We appreciate it, and we look forward to talking to you again and sharing results after the second quarter.
spk03: That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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