UpHealth: Sick Business’s Deteriorated Financial Sheet Is Doomed

UpHealth

Do you remember SPAC-mania? The dreadful moment at the outset of the decade when cheap money enabled a sponsor-led cash grab aimed at retail traders that were more comparable to following advice from YouTube gurus than sifting through mountains of financial data?

Inflationary pressures, rising interest rates, inflated stock risk premiums, and a growing apathy in capital markets are all likely to lead to the business model imploding spectacularly (pun intended).

It’s a recurring pattern among famous SPAC sponsors, whether it’s Chamath Palihapitiya, Betsy Cohen, Howard Lutnick, or Michael Klein: they all have one thing in common: they all have below-average Spac-related returns.

So it’s no surprise that our telehealth upstart, UpHealth (NYSE:UPH), has been on a capital destruction mission. In 2021, the initiative was the result of SPAC-era cheap money and a timed union of UpHealth holdings and Cloudbreak Health through blank-check firm GigCapital2. Since then, stockholders have suffered losses, with possibly only sponsors receiving any kind of return since the company’s initial public offering.

The telehealth specialist situated in Florida offers digital health technologies and tech-focused services to provide integrated care solutions. The company’s mission is to revolutionize healthcare by creating and managing a variety of technological platforms for remote consulting, data science, and developing predictive models to improve healthcare.

In essence, the company offers a distinct and differentiated combination of sophisticated technology solutions and services aimed at improving population health, including integrated care management, virtual care infrastructure, and services.

One of UpHealth’s business segments, integrated care management, has suffered a significant reduction in revenue.

Given a track record of red ink, ongoing losses, and a shifting monetary climate, it’s difficult to get excited about the company or its prospects. Since its inception, the company has lost 98% of its value, thereby transforming it into a micro-cap stock.

The company has had extraordinary success in its short history, with FY2022 sales of $158M. Nevertheless, such expansion has come at the price of earnings in a model aided by easy credit markets. Times have changed since then.

The company’s success has been fueled by its virtual care infrastructure.

We at ZMK Capital are pessimistic about the company’s prospects. Purchasing growth, large gaps in cash flow from operations, and a reliance on cheap credit markets and easy money have never been sustainable corporate strategies.

We believe the company will struggle to survive at a time when the winds are changing and the macroeconomic environment is requiring a rethink on the cost of capital and equity risk premiums.

Services are the company’s core business, and they continue to grow, albeit at a slower pace.

While this is true, we would like to draw readers’ attention to the fact that UpHealth Inc. is presently trading in the penny stock zone and is subject to large price volatility. Because of the low float and lack of liquidity, this is not an appropriate short sale. While our rating is low, given the aforementioned dynamics, we do not propose that readers deliberately aim to hold equity low.

Financials

The financials of UpHealth are just unsustainable. Steady but declining growth, exorbitant operating expenses combined with exorbitant sales, general, and administrative charges ($71M FY 2022 on $158M FY 2022 sales!!). The annual net interest expense of $26M highlights the strain on the firm’s finances as the monetary environment alters.

To stop the losses, the company must completely rethink its strategy.

Maybe in recognition of this, the company just appointed a new CEO, Samuel J. Meckey, and has begun a comprehensive makeover of the business model. This involves increasing sales in SyntraNet and Marti, as well as focusing on occupancy rates in HelloLyf.

Gains in operating performance can only be realized through a comprehensive cost-cutting strategy that includes establishing a shared services role, lowering office space, professionalizing procurement, and drastically reducing sales, general, and administrative expenditures. Improvements in the operational discipline are equally sought by various efforts centered on talent and culture development.

Samuel J. Meckey, a Harvard MBA graduate, is likely to uncover additional corporate skeletons in the near future, resulting in more bad news before a long but incremental redressal. Aside from the concerns about decreasing projected growth, the health tech venture’s balance sheet contains other problematic factors.

The total debt to EBITDA ratio is currently 128.3x, and the quality of current assets pales in comparison to current liabilities. UpHealth Inc. has a current ratio of 0.6x and a quick ratio of 0.5x, indicating the company’s current inability to fund current payments with current assets. This means that the company will continue to rely on credit markets to stay afloat, at the risk of high debt interest costs.

Forecasts indicate that sales growth may slow in 2023.

Nothing has been done to accelerate receivables, and only significant changes in the time it takes to pay vendors (from 35 days in FY 2021 to 67 days in FY 2022) have helped the company optimize working capital. Cash and cash equivalents have decreased significantly, from $58 million in FY 2021 to $15.6 million in FY2022.

The elephant in the room is the $159 million of goodwill on the balance sheet for FY2022. Given the company’s equity of only $105 million, any significant impairment would be enough to completely wipe it out. That is odd for a company that is hemorrhaging cash, is relying on credit markets to exist, and has high operating costs. Goodwill should be closely monitored since any changes in valuation would very certainly result in existential capital structure difficulties for UpHealth Inc.

Risk

The risks associated with focused investment in UpHealth Inc are substantial. The company’s current financial situation is unsustainable. With about $3 million in monthly cash burn on only $15 million in cash on hand, the clock is ticking before a capital raising of some kind is required to save the company.

Selling, general, and administrative expenditures have gotten out of hand, and the growth-oriented company model appears to be based on them. Experts are already anticipating a sales slowdown this year, meaning that gaping losses can no longer be offset by massive increases in the top line.

The amount of goodwill on the balance sheet poses an existential danger to the organization if any impairment results in a drastic decrease in valuation. Goodwill has already been impaired twice ($-297M in FY 2021 and -$114M in FY 20222), indicating that the acquisition prices paid for companies/business units was excessive.

The company has successfully refinanced some debt (+67.5M), but the risks that credit markets will stay turbulent are significant, especially given the current anxieties in the banking sector.

Important Takeaways

UpHealth is a structurally weakened company with no way out. Its expansion has been dependent on continuing cash burn, notably in SG&A, and it has clearly managed to navigate an easy money market.

Yet, the situation has shifted, with stock risk premiums continuing to rise while credit markets dry up. Despite fresh talent and strategy adjustments, it may be too late for a company burning $3 million with only about $15 million in cash on hand.

Featured Image: Unsplash @ gpiron

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About the author: Stephanie Bédard-Châteauneuf has over seven years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, market news, and personal finance. She has an MBA in finance.