Healthcare Triangle, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. The company provides cloud, data, software, platform and managed IT services to healthcare and life sciences organizations. This unaudited report covers the three and nine months ended September 30, 2022; financial amounts below are in U.S. dollars, millions, unless noted.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $11.950 | $8.078 | $34.594 | $26.081 |
| Cost of revenue, excluding D&A | $8.522 | $5.352 | $25.113 | $17.829 |
| Gross margin, excluding D&A | 28.7% | 33.7% | 27.4% | 31.6% |
| Operating loss | $(2.247) | $(1.770) | $(5.654) | $(2.019) |
| Net loss | $(2.339) | $(1.992) | $(4.747) | $(2.504) |
| Net loss per share, basic and diluted | $(0.07) | $(0.07) | $(0.13) | $(0.09) |
Revenue increased 48% in Q3 and 33% year to date. The Q3 net loss widened by $0.347 million; the nine-month net loss widened by $2.243 million. Nine-month results included $1.087 million of PPP loan-forgiveness income recognized in Q2. D&A rose to $0.909 million in Q3 and $2.464 million year to date, principally reflecting acquired Devcool intangibles.
Revenue mix. Q3 Software Services revenue rose 168% to $6.177 million, Platform Services rose 88% to $2.065 million, and Managed Services and Support fell 21% to $3.708 million. For nine months, the respective changes were +121% to $18.218 million, +24% to $4.497 million, and −16% to $11.879 million. Management attributed much of Software Services growth to the Devcool acquisition and the Managed Services decline to lower hosting revenue. Q3 customers served increased to 44 from 35.
Cash flow and balance sheet. Cash was $4.144 million at September 30, up from $1.770 million at December 31, 2021. Current assets were $11.079 million and current liabilities $5.060 million; the company reported a 2.2 current ratio. Nine-month operating cash flow was negative $0.372 million, investing cash flow negative $3.305 million (including $3.279 million for intangible assets), and financing cash flow positive $6.051 million. Accounts receivable was $6.702 million, down from $9.672 million at year-end.
Current short-term borrowing was $2.453 million under a receivables-backed facility bearing interest at floating prime plus 1%. Total liabilities were $7.287 million, including $2.227 million of contingent consideration and $0.055 million of warrant liability. The company raised approximately $6.5 million gross, or $5.888 million net, in a July private placement. Management stated cash and available credit were expected to meet working-capital and capital needs for at least 12 months, while noting additional funding could be needed and may not be available on reasonable terms.
Material changes, outlook and risks
- Cost of revenue grew faster than revenue, reducing gross margin excluding D&A by about 5 percentage points in both comparative periods. Sales and marketing increased 37% in Q3 and 86% year to date; G&A increased 97% and 40%, respectively. Management cited higher headcount-related spending and public-company costs.
- Segment operating results were mixed: for nine months, Managed Services and Support generated $3.935 million of segment operating profit, while Software Services recorded a $0.665 million loss and Platform Services a $1.777 million loss. Unallocated costs were $7.147 million.
- The July financing included 3.93 million common shares, a pre-funded warrant for 2.168 million shares and preferred investment options for up to 6.098 million shares. The filing reports 39.467 million common shares outstanding at September 30 and 41.634 million at November 9; the pre-funded warrant shares were issued after quarter-end.
- Management is prioritizing recurring Managed Services and Platform/SaaS revenue, cross-selling and customer retention. CloudEz, DataEz and Readabl.AI SaaS offerings were commercially available from Q1 2022, but the company said customer acceptance and their future revenue impact were not yet established. No numeric financial guidance was provided.
- Key risks include customer concentration (top five represented 76% of Q3 revenue and 74% for nine months; one customer represented 38% of Q3 revenue), execution of SaaS adoption and growth plans, long customer procurement cycles, competition, cybersecurity and privacy incidents, staffing, and funding needs. The filing states COVID-19 had not materially harmed results to date, but future effects remained uncertain.
- The company reported no material change to previously disclosed risk factors, no material non-routine legal proceeding, and no reportable subsequent event other than the share repurchase and pre-funded warrant share issuance. Management concluded disclosure controls were effective as of September 30, 2022.
Important facts for investors to verify
- Whether revenue growth and planned recurring SaaS/platform sales can offset weaker hosting revenue and declining gross margins.
- Customer retention, the concentration and collectability of receivables, and the reported $0.222 million allowance for doubtful accounts.
- Cash burn, availability and cost of the receivables-backed credit facility, and management’s 12-month liquidity assessment.
- Potential dilution from the private placement warrants and preferred investment options, in addition to shares already issued after quarter-end.
- The assumptions behind contingent consideration, acquired intangible assets and their amortization, and the impact of the Devcool acquisition on operating performance.