Patient Home Monitoring Corp. Chairman Michael Dalsin on the Road to $1 Billion

Patient Home Monitoring Corp.(TSX.V:PHM) (OTCMKTS:PHMZF) Chairman Michael Dalsin returns for another discussion on the remarkable performance of his company, and their quest for NASDAQ and a $1 Billion market cap.

Midas-Letter-financial-radio-podcast-thumb[four_fifth_last padding=”0 0 0 20px”]Listen to the interview with Michael Dalsin:

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Full Transcript

James West: Michael I’m looking at three press releases here, all in the month of March. You’ve made three acquisitions in March alone…my head is spinning. How many acquisitions have you made so far in 2015?

Michael Dalsin Well actually we’ve announced three acquisitions that we plan to make. We have letters of intent that basically tee us up to close the acquisitions but they’re not really included in our business or our financials, which is really where the rubber hits the road for me – until they’re closed.

In 2015, so far we’ve made two acquisitions – I think about $13 million in sales – but obviously the more pressing agenda item for us is these next three deals that we’re looking to acquire, which will essentially double the size of the company…they will get us to about $100 million in sales on an inorganic basis, and then when you add organic growth – and we think 25% is a good number – it takes us to about $125 million in run rate revenues with about 20% EBITDA, and we really believe that by summertime that that’s going to be a reality.

James West: Okay so you’ve issued term sheets to 12 companies with combined annual revenues in excess of $141 million…

Michael Dalsin Yes.

James West: Is that all going to happen in 2015?

Michael Dalsin If we close these three letters of intent we have. Some things are a bit different for us. Letters of intent are intended to close, we intend to close, the seller intends to close, and there’s many clauses in a fairly thick legal document that draws us to the close. A term sheet’s just literally ‘ you have a business, and I want to buy it, and this is how much I want to pay you’, and if you like that answer, then we’re going to move to the next step. Which is more thorough due diligence, a deep dive into the patient database, which often kills the deal if the patient database isn’t as thick or as untapped as we really want it to be.

So the guidance that we gave – and we had a good conference call this morning – some of your listeners might have heard it, some of them might have not – but when I talked to you last time, we really talked about, I said we’d really like to get to about $100 million in revenue by the end of 2015…I think we spoke maybe three of four months ago.

Things have moved forward. We invest heavily in our M&A team and we have a lot of deal flow and a lot of pipeline, and obviously our cross-selling quarter after quarter after quarter has now worked. So we’re kind of upping that – I don’t want to call it ‘guidance’, because we’re not AT&T – I mean this is a goal, and a lot things can go wrong between this discussion and our goal, but goal would be to actually exit 2015 at $175 million. Now how are we going to get there?

Well, the three LOI’s we just announced get us to $100 million in inorganic growth, we believe we can get to $125 million when you add our organic growth (could be higher, but we’re comfortable with that number)… we think we’re going to get to that number in the summertime. Then the question is, ‘well, how do we get the other $75 million’? Well through those term sheets, through other term sheets that we have. We feel like if what we did in the first six months is acquire $40 + million worth of inorganic growth, then in the following six months we should be able to do easily that. So I think these numbers are a good goal for us to have, a good goal for our M&A management team to have.

And obviously, I get the great pleasure of speaking to you once every three to six months, and you keep me honest. So I get to go back and listen to what I said last time and compare to this time, and so far, we’ve achieved the numbers we’ve set as goals, and that’s always a good feeling as a shareholder.

James West: You are the official poster child of ‘under-promise and over-deliver’ I can assure you of that.

Michael Dalsin I do not sandbag.

James West: No exactly. So now is there any risk here Michael? I mean, you guys are just going like a house on fire. Is there any sort of dilution in terms of your human resource capital at the C-suite level where you feel that you might be getting a bit too aggressive? You might be taking on too much? Or is it all just rolling and falling right into place better than your expectations?

 

Michael Dalsin Well I mean yes to both. Its really rolling and falling into place better than expectations. I am famous for having very low expectations. I worry about the risk all day long. The upside is something that your hope for, the risk is something you plan for. So in my experience, there’s a dozen risks, and it starts with integration risk, and that really results in a longer time, and a more expensive integration.

I think we talked the first time almost a year ago – maybe it was in June of last year – and I said what really is going to slow us down is a bad deal. We’ve done 6 deals since that discussion, and we haven’t had a bad deal yet. Obviously as we get bigger, it makes for less and less of an impact. But you know a bad deal doesn’t kill us. A bad deal just slows us down. We can’t do other deals. We’re focused on fixing the deal that we bought that wasn’t good. And then we’re spending money on top of it. So we lose time and money, which is never a good thing. So the risk of integration is really time and money risk. Its not kind of a ‘derailment’ risk. I think other macro-economic risks include re-imbursement cuts, although I think we’re on the right side of that, because we’re home based rather than hospital based.

What other risks do we have? I feel like every quarter, we de-risk this thing. I will say this, and you know we haven’t really talked about perspective on these calls much. We talk about what has happened in the last quarter.

This is going to give you some of the perspective of PHM. PHM is a tiny, tiny tiny business relative to the market – the market is $250 billion. After we close the deals that we’ve announced – there will be 150,000 people in our database out of 54 million [in the market -e d.] We’ll be a $100 million company out of $250 billion. I often talk about at $100 million, we become a legitimate business. Legitimate meaning we’re actually big enough to start de-risking significant start-up risk. But this is the beginning. We’re very very early stage. And we talked you know a couple of times ago – and you know we had talked maybe a couple of times ago – I think we were at maybe $0.30 or $0.40, we had closed maybe two or three deals, and you had said, ‘Hey at a $1.80, what does a buyout look like?’, and I thought ‘boy $1.80   sounds pretty good to me’. I think we’re at $1.50 now, so, What has changed between now and then?

Well, data. Things have gone certainly better than I expected. There’s more deals out there. We can get them at better multiples. Our M&A team rocks. They’re incredible. Edward Brann is truly a prodigy. He’s got these deals coming in like crazy. Our management team has been able to cross-sell, we’re throwing off good cash flow. So all the things that make this company successful, we’ve been able to hit all of them. So I am – probably like every other shareholder – ratcheting up my level of what I consider to be fair. So I look at that and I think we could hit $175 million a year by the end of this year in exit run rate. We have two big deals out there that are about $80 million in revenues that we’re hopefully kind of working through, and god only knows if that will ending up happening. But god it does, we could end up exiting at $250 million more than likely if we do those deals and of course I’m not saying that we’re going to do those deals. But I think $175 million is a number we can achieve and on the outside $250 million.

We bought this business when it was $4 million bucks, and that was 20 months ago. In 30 months, if we can go from $4 million to $0.25 billion, my view there is ‘well why is that an end point?’. Let’s run this thing to a half a billion or more. And I’m getting more bullish on getting bigger, and getting more significant. Our little business model seems to be chugging away, and even at $1 billion, I don’t know if this business is all that mind-numbing in a $250 billion space.

So my expectations are changing. I do think we’re going to list on the NASDAQ –that’s inevitable actually. I think we’re going to certainly pass the $2 requirement to be able to list there. And in fact, we’re probably going to get the growth premium that this company probably should have, and I think its tough for the Canadian market to give it in the context of a venture stock. If we’re a venture stock, you know, we’re still a venture stock. We’re still on the junior exchange in Canada, and with that comes a certain level of cynicism and skepticism by a lot of investors.

The look at PHM and they think ‘meh…its part of that group of companies that’s doing terribly’. Obviously to break out, we list on the NASDAQ, we get to a quarter billion in sales, I think we break out.

James West: Yeah, absolutely. Okay well lets talk a little bit about at least the one glimmer of I guess what could be considered negative news in the slightest sense. You announced in today’s press release that you’d cancelled the Georgia Letter of Intent. How much did that cost you, and what kind of opportunity cost was involved with that?

Michael Dalsin Well, it cost us in dollars, nothing. We don’t have break-up fees, so it cost us zero. There was certainly some time – you know, dead deal talk – again it was a small deal, but it definitely cost us time and energy. We really walked away from that deal because, for the size of the deal that it was, the potential trailing liabilities for a deal that small were just not in our favour, and we didn’t feel that the sellers were going to stand behind the potential liabilities that perhaps they created.

Again, I don’t know that we saw liabilities that they created. Its just that every time you buy a company that has been in business, and they’ve billed Medicare and other insurance companies, there’s a potential that they might have mis-billed those companies, and mis-billed Medicare, and if that’s the case, Medicare comes back and penalizes that company heavily, and since we’re buying the stock of that company, that would be our penalty. And we’re really only comfortable buying a company when we feel like the owners can indemnify us against those potential liabilities. In this particular case, we just felt like the risk/reward was not in our favour. It was such a small deal that the liability issues could have been far in excess of the value of the company, and so we walked away.

But I do want to say – and I think this is a very important concept – part of our announcements of Letters of Intent is to do two things. One, often times, if there’s a stock component to a deal, we want to announce that stock component at a price to lock the seller in. That’s important for them, its important for us. Oftentimes our stock price rises as we obviously have quarters that are better every quarter. And so we lock that seller in – it takes about ninety days to close a deal – so we want to lock that seller in and give them a price that’s fair at the time that we made the deal.

The second reason we do it is largely because we want to be able to allocate resources time and into closing the deal. So LOI’s can fail. We make sure we do everything we can so they don’t, but is it a glimmer of bad news? Its not bad news for us from a material standpoint. Its pretty inconsequential. But I think what it does do is it highlights one thing for retail investors about especially about our business is this: The LOI does not mean that we’re collecting money, it does not mean that we own the business. It does not mean that we can cross-sell. It’s usually 90 days away from that event that we can start cross-selling where we sign a purchase agreement.

So its an important step for us to get the deal closed. Its important to let our shareholders know. I mean, I will say this: surprises are terrible – good and bad surprises. As a shareholder, I’m not a big fan of surprises. So we do our best to try and let every shareholder know that this is what we think is happening, if its up or down or left or right, we just want everyone to kind of know what we know when we know it. And an LOI is kind of a precursor to a deal and its important for our shareholders to know when we think we’re going to do a deal, and when it dies, why it dies and how it dies. So that is probably the one glimmer of aggravation is that an LOI died

But in this case, Roger Greene who is my partner and a lawyer is quite happy that it died, cause I think he looked and thought that it’s not worth the couple of million we would make for the potential of $10 million in liabilities that may never happen, but its just I wouldn’t sleep at night if what we did is make $2 million and lost 10. That’s just not how we’re rolling here.

James West: Okay so you say the market is worth $250 billion and PHM at this point is still a small piece of that. How much of that market do you think you can capture each year from now, and do you think that the rate at which you capture market share is going to go up before you hit a certain point and then you get taken out?

Michael Dalsin Well I’ve always thought $300 million is a revenue line that makes us a business that’s attractive, that we’re a big enough business in the U.S. Healthcare market that could be attractive to a suitor. $100 million makes us legitimate and de-risks us, $300 million puts us in a ballpark where a small private equity fund might look at us.

I think $1 billion is realistic…we can realistically get to $1 billion, and just to give you some flavor of why I think that’s not a stretch: You know today, we are in the tiniest, tiniest parts of the Northeast. We’re not in New York, we’re no in Connecticut, we’re a little bit in Virginia, we’re a little bit in Maine, we’re a little bit in Florida. We are pretty well satisfied in South Carolina. We will be in Tennessee and Colorado. We have not a lot in California, not a lot in Arizona. Nothing brewing in Texas. We have a very small deal in Texas and Oklahoma. So when you think about just geographically where we kind of are buying businesses, we have a lot of geography to roll. And then you think about he numbers – out of 54 million patients, we have 150,000. Can we get to a million patients, can we have 1/54th of the market rolled up? That doesn’t feel like a big number.

And then you think about the different types of cross-selling revenues. There’s dozens and dozens of …I mean quite literally: you take every organ in your body and multiply it times three, there’s three different devices that treat or diagnose every organ of your body virtually. So your talking about dozens of home testing and diagnostic and therapy that we could service. So when you start adding all that up, for us to be $1 billion at 1/250th of the market, I mean again, t we like being in gargantuan markets, cause you can see your way into clawing your way into a decent size number. So kind of officially, Roger and I have said, you know half a billion is a number we think we can reach. We can see the pipeline, we can see our cap structure, we can see our management team getting to that $0.5 billion. Whether we get there in a year and a half, or three years, I don’t know, but I think we can get there. The next stop for us the billion dollar mark and I think at that point you know its ‘are we a takeout, are we a dividend, are we going to be public?

A lot of our current shareholders kind of probably really don’t care if we are doing $1 billion in sales and we have a $3 billion market cap – what the outcome of that is, as long as we get there profitably.

James West: Yeah that’s absolutely right. A lot of your shareholders are also my subscribers Michael and they are very happy campers. I hear from them quite frequently. So I want to thank you once again for your time, we’re going to wrap it up there, and we’ll catch up with you in another three months and see how much farther you’ve gone down the field.

Michael Dalsin Any time for you.

 

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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