The company has been growing like gangbusters while it has been out of the public eye, but are insurers willing to foot the bill?
A Quick Recap
Assure Holdings is a company that offers neuromonitoring services to surgeons to help ensure that no nerves are inadvertently damaged during surgery. I’ve held this stock in my portfolio since last fall and it has given me quite a wild ride. News first broke of financial improprieties back in March of this year and trading of the stock was immediately halted. It has been a long wait, but trading has now resumed and it is worth taking a closer look at this company to see where we stand now that the dust has settled.
Trading Resumes
After an excruciating 5 month wait, with no assurance that investors would ever see any of their money again, it was a relief when the stock finally started trading again a few weeks ago. When news of their financial difficulties first arose back in March, the stock price immediately plummeted from $3.80 a share, all the way down to $1.70 before trading was halted. News then began to slowly trickle out over the next few months, but it was not until August that they finally managed to complete their audit with their new set of auditors, file their delayed financial results and get trading reinstated on their stock.
In August, the company released its 2017 year-end annual report as well as the first and second quarterly reports for 2018 and hosted two separate conference calls. After dutifully listening to both calls and poring over the financial reports, I think I have a reasonable understanding of what exactly this fiasco was all about.
Misuse of Company Funds
At the root of it, it seems that the founder and CEO of the company, along with the president, were taking liberties with the company credit card, using company funds to pay for their personal expenses. (And at over $1 million, we’re not talking about the occasional dinner out at the local Cracker Barrel.) The president was the less profligate of the pair, so while he has left the company, and collecting on the amount he allegedly owes may be easier said than done, the sum is relatively immaterial.
Mr. Parsons, the founder and former CEO, on the other hand, has made amends. He owns quite a sizable chunk of Assure Holdings shares and it is probably in his better interests to make the company whole than it would be to cut and run. He has resigned as CEO but stays on as director and is still actively helping Assure in its sales and expansion efforts with physicians outside Assure’s home state of Colorado.
Mr. Parsons has agreed to pay back the amounts owing in full, with interest, and has also agreed to cover the auditing and legal expenses involved in the investigation. Against this sum of $2.1 million, he has pledged 5.6 million of his own shares in the company (worth approximately $10 million.)
The company has hired a new CEO who spoke on both the conference calls and sounds engaged and excited about the future growth prospects of Assure. It is also actively searching for a new CFO and it hopes to announce a selection soon.
With the messiness of the past 6 months hopefully behind it, Assure can now turn its attention to the business at hand and by all accounts, it looks like business has been very good.
Business Has Been Booming
I would have expected the core business to have struggled during the tumult and uncertainty of the last 6 months, but it seems like this has not been the case. Instead, it could rightfully be said that Assure has been on fire. This year, they expanded outside of their home state of Colorado into the states of Louisiana, Texas and Utah. Louisiana was a particular success with the rapid development of their physician and technologist network in that state from a standing start in January.
They say that the surgeons in Louisiana were impressed with the package of services that Assure offered and they received very positive word of mouth commendations that let them onboard a significant number of new physicians in that state. The local hospitals were also impressed enough with the caliber of Assure’s services that they have approached the company directly to ask if they could supply them with technologists for their operating rooms.
From the beginning of this year to the recently ended second quarter, Assure went from performing no procedures outside of Colorado to getting an impressive 35% of its total revenues from out of state. That is an astounding accomplishment for a company in such a state of turmoil and speaks very well to their future growth prospects as they eye expansion into other states such as Michigan, Pennsylvania and Oklahoma.
Meanwhile they continue to broaden their service coverage, targeting procedures beyond their traditional area of spinal surgery.
In the second quarter just ended, they reported a whopping 97% increase in managed cases and a 47% increase in total revenues. In Q1, sales were up 86% over the year earlier period.
The company’s reported earnings are equally impressive. Q2 is typically one of their slower quarters as both surgeons and patients go on vacation and the pace of the operating room slows down a bit. Despite, this, Assure posted record earnings in this quarter on the back of their impressive sales gains. After tax earnings came in at almost $3.3 million giving EPS (assuming the grant of a pre-arranged performance stock bonus) of around 7 c.
If we could annualize that to a full year, we’d have EPS of 28 c (USD) and a p:e of 6.4 using the recent $2.35 share price (= $1.78 USD).
This would be a mouth watering p:e even for an average growth sort of company but all indications are that this could turn out to be a high growth story, deserving of a significantly higher p:e ratio. The company has a strong balance sheet with little in the way of net debt and, being in the healthcare sector, offers the additional attraction of likely being relatively recession resistant.
If this was all there was to the story, I’d be backing up the truck to buy as much of this stock as I could. However, there is a big question mark still hanging over this company which is likely what is keeping the share price in check.
Are You Ready For The Bill, Sir?
Neuromonitoring as a service has been around for many years but previously was too expensive to perform feasibly since it meant that a neurologist had to be present in the operating room along with the surgeon for the full duration of the operation to monitor the read-out and alert the surgeon if there were any signs of potential nerve damage.
Assure’s secret sauce is that they have used the modern capabilities of telemedicine to produce significant economies of scale. A single neurologist can now monitor many different surgeries simultaneously by having the read-outs from the operating room equipment sent remotely to his office. He can now essentially be in many different places at once, ensuring the safety of a dozen or more patients at the same time whereas before he could be attending to only one.
While this is clearly a big leap forward for patient well-being, my concern is that the insurance companies who are getting billed for these procedures might balk at paying high rates for a procedure that no longer requires the same time-consuming physical physician presence that it once did. If insurance companies refuse to pay up, or if they lower their reimbursement rates, then Assure’s profit becomes much less assured.
Concerningly, their record of collecting on the money they have been billing has so far been quite underwhelming. Over the past 18 months, Assure has billed $27 million in new revenue and yet has actually collected on only $8 million worth of previous billings over this same time period. That’s a big gap.
Encouragingly, the company is very upfront about the concerning appearance of its ballooning accounts receivables. It raised the issue in both recent conference calls. It said that the lag time between when it submits its bill to the insurance company and the time it actually gets paid can be as long as 2 years and could even drag on, in some cases, for 3 years or longer as negotiations with the insurance companies are drawn out. They believe that ultimately, they will get a much higher proportion of their billings paid if they hold out for the best offer they can negotiate rather than taking the first low-ball offer the insurance company hands them. They use a third-party billing and collection agency who has experience in these matters and they say that an independent auditor found that their billing methods were consistent with industry practices.
Nonetheless, this is a very young company; one that grew from less than $1 million in quarterly revenue 2 years ago to the current rate of just over $6 million per quarter. There is simply not enough data yet to be sure how much of the money they are billing they will ultimately receive. The CEO said that they themselves are still in the learning phase and that they will adjust their billing accounting quarter by quarter as they get more insight into the ultimate level of reimbursement they can expect to obtain.
Given this uncertainty, the exact level of earnings becomes something of a question mark. Do the earnings as management has reported them reflect an optimistic, rose-coloured view of their operations or are they taking a properly conservative approach to accounting for their ultimate level of collections as they claim?
The Final Verdict
For the time being, I am giving this company the benefit of the doubt. The valuation is low enough that it leaves at least some wiggle room for a future reduction in earnings as a result of having to write off uncollected billings. As well, cash collections have been increasing over the last two quarters and in the months of June and July the company recorded positive cash flow.
The drama may not be over yet for this young upstart. But if they can collect on a reasonable proportion of their billings and can avoid any more scandals, then long-suffering investors may still reap the ultimate rewards.
Full disclosure: I own shares in Assure Holdings.