CloudMD Software & Services Inc. (OTCQX:DOCRF) Q2 2022 Earnings Conference Call August 23, 2022 9:00 AM ET
Company Participants
Julia Becker – VP, IR
Karen Adams – President and CEO
John Plunkett – CFO
Conference Call Participants
Rob Goff – Echelon Partners
Gabriel Leung – Beacon Securities
Doug Taylor – Cannaccord Genuity
Nick Agostino – Laurentian Bank
Prasath Pandurangan – Bloom Burton
Operator
Good morning and welcome to CloudMD’s Q2 2022 Earnings Conference Call and Webinar. At this time all participants are in a listen-only mode. After the speaker’s presentation there will a question-and-answer session from the company’s covering analysts. [Operator Instructions]. It is now my pleasure to turn the call over to Julia Becker, Vice President, Investor Relations, with opening remarks.
Julia Becker
Thank you, Kevin and good morning everyone. Thank you for joining us for our second quarter 2022 conference call and webinar. We’ll start the call with our CEO, Karen Adams, followed by CFO, John Plunkett, who will provide a recap of the company’s Q2 2022 financial results before opening up for a question-and-answer period with our covering analysts.
A friendly reminder, that today’s discussion contains certain forward-looking information, which involves inherent risks and uncertainties and other factors that could cause actual results to differ materially from management’s current expectations. Forward-looking information should not be interpreted as assurances of future performance or results. The risks related to forward-looking information are described in the company’s MD&A, which is available on SEDAR. We encourage you to review our public disclosure in the context of all the forward-looking information that you may hear today during this earnings call. Investors are cautioned not to place undue reliance on such forward-looking information, and that such information is considered reasonable based on information available to management as of today. However, the company disclaims any intention or obligation to update or review any forward-looking information as a result of new information, future events, or for any other reason, except to the extent required by law. With that, it is my pleasure to turn the call over to Karen Adams, CEO of CloudMD. Karen, the floor is yours.
Karen Adams
Thank you, Julia and good morning everyone. Welcome to CloudMD Q2 2022 earnings call. Since this is my first call as CEO, I want to share some high level perspectives and reflections from the past few months. There is momentum in our industry that is driving revenue growth but there are also challenges in our business that we have identified and created mitigation plans for which we will discuss today.
Sector trends are converging towards CloudMD’s vision of personalized connected healthcare. This is evident given the importance of health equity, prevention, and healthcare to mitigate risk coupled with scarce health resources and poor access. Employers are moving from commodity based transactional experiences to personalized and connected care, a trend that we anticipated and built our service offering around through Kii. Since COVID hospitals are facing staff shortages, employees are shifting to a hybrid work environment, and there are growing mental health issues throughout North America. All these issues will require greater public and private partnership to fill the gap.
An example of this is the Ontario Government COVID Program, which generated incredible mental health outcomes for Ontario citizens. This program was offered as a self-referral, limited time based program that ended this August. The program helped over 60,000 people in Ontario with their mental health issue using mind beacons iCBT. Subsequently, our iCBT was chosen through a competitive process as one of two companies to provide therapists led iCBT services for Ontario citizens under the new Ontario health contract. This multiyear contract up to five years has been awarded for the provision of therapists led iCBT support services to be integrated into the Ontario Structured Psychotherapy Program starting this fall. We are currently in discussions with the government to use the results of our previous program to ensure increased accessibility for those with mental health issues in Ontario.
In addition to the pressure on the healthcare system, 500,000 Canadians miss work each week due to mental health issues, and a further 75% of disability claims costs are related to mental health. We only see this increase with a greater return to the workplace in the fall. It is not enough for employers to address the physical health needs of their employees, they must address the whole person care. For employers, our value proposition is only growing with our ability to use our healthcare navigators and our broad network of healthcare providers to address both the mental and physical health of individuals. Through our disability and mental health support solutions insurers are able to shorten duration of absence, and the user is experiencing accelerated health outcomes. For employers facing staffing shortages, the highest return on investment is keeping their employees healthy, engaged, and productive.
CloudMD has proven functional assets and foundational assets with strong data that informs treatment, a North American presence, scalable model, and a healthcare provider network that is excited to work to change the way healthcare is delivered. Our programs are proving the direct impact on reducing disability. For example, in our partnerships with organizations like group benefit insurers we are reporting very strong reductions in absence and disability durations through our mental health programs designed to help an individual’s recovery and to return to work. We also see the same strong data trend line with employers that we partner with to deliver integrated Case Management and Health Recovery Program like iCBT for return to work, mental health coaching, and nurse navigation services. These examples further cements our position as the leading organization that not only drives health outcomes, but also measurable business results. My mission is to lead the industry in innovation and ensure we fulfill CloudMD’s potential to serve individuals and clients for decades to come.
I will discuss the strong performance we are seeing in our Enterprise Health Solutions Division in a moment. However, we have discovered issues with some of the company’s former acquisitions that have impacted our financial results. Our job is to remove distractions so that EHS’s inherent profitability and organic growth potential are clear to investors. To that end, management, John and myself took the necessary steps to begin correcting those issues, most notably rectifying the problems caused by the previous owners of VisionPros. We solidified contracts with our U.S. distributors and started sales in the U.S. in June. We expect sales to continue to ramp up in Q3, but expect it to take time to reach historical levels.
We are aligning costs from our former acquisitions with their revenue and margin potential. Across the organization we are making significant progress in integrating and optimizing to drive efficiency. We have identified a further 4 million of annualized cost savings that will be removed from the organization starting in the third quarter of 2022. This will offset the lower growth contribution from the change in the Ontario Health contract. In addition, we are moving the direct delivery costs associated with the change in the Ontario Health contract volume. This quarter also included significant onetime costs, including professional fees related to acquisitions, severances, and other previous acquisition cost issues. We’ve taken many very challenging but necessary steps this quarter to create a clean start where we can demonstrate The strength of our strategy and our core business without being distracted by the challenges of non-profitable and non-core businesses.
In Q2, there was significant market adoption of our core services as we closed 4.2 million in annual reoccurring revenue sales contracts within the EHS line of business that will contribute in the second half of this year and again into the coming fiscal year. These contracts represent over 350 new customers who chose CloudMD’s personalized Connected Care Services, which adds to our network of 7200 clients. Many of these clients made the switch from competitors to CloudMD, citing the combination of personalized care plans and access that is available digitally as well as through a 24/7 Call Center as a differentiator. This means an additional 440,000 net new live. This is an increase of 14% in the number of counts, and a 35% increase in the number of lives covered relative to December 31, 2021. New customers include several large brand name organizations that have moved their EAP business to CloudMD, including a 30,000 member Life Group of the Christian Labor Association of Canada, and a 50,000 association members in the U.S. through new distribution channel partnerships with a large third party administrator. This first association contract represents the first step in what we expect will grow into a multiproduct EAP telemedicine mental and physical health navigation program delivered by CloudMD.
We have also closed a material multi product deal with Aviva [ph] for EAP and telemedicine services for their employees, in addition to a new mental health program to support to support their claimants. This strong organic growth has been driven by four key factors, one multiproduct sales. In Q2, we not only contracted for our first large U.S. based multiproduct contract, but are able to report on sales to several large contracts to existing customer. Approximately 30% of our top 100 customers are now multiproduct customers. In the quarter over 25% of new large contracts were from multi services and we expect that trend to continue. These contracts include our mental health support solutions, occupational health, and absence management programs.
Two direct sales team, our direct sales team has been focused on penetrating large market employers and are responsible for a 2.8 times increase in the average deal value in Q2. The growth is driven by a much greater number of large accounts with recurring revenue of over 100,000 per year. This momentum is a strong indicator of CloudMD’s competitive position in the larger markets, where we continue to win business away from direct competitors. New accounts include a leading national U.S. insurance company, large transportation manufacturer, large national telecommunications provider, multiple regional health networks, and a large financial services firm, and a new distribution partnership with a North American group benefit provider.
Distribution channel partners, the direct sales team is augmented by over 80 strategic channel partners such as brokers, advisors, carriers, third party administrators that deliver results on our behalf across Canada. Our partnership with Sun Life and the Mental Health Coaching Program adds monthly new clients with expected broader deployment in the back end of the year and 2023. The team has also developed new distribution channel partnerships with large health systems and pharmaceutical organizations such as Sanofi, targeting populations with diabetes for mental health support. We are also in active discussions with several specialty health clinics for similar strategies and expect these newly emerging channel partners to become a very important part of our growth plan.
Introduction of Kii, I would like to congratulate the team on the formal launch of our Kii Personalized and Connected Care brand that offers our integrated services with an EHR. Starting in September, all new multiproduct clients will be on this platform and we will be transitioning our clients from their legacy interface to Kii over the coming months. Kii is important in its ability to address the sector trends of Personalized Care Health Equity, as well as mental and physical health issues. It also removes significant barriers to sales for multiproduct solutions, provides better data driven solutions, and ultimately offers a higher ROI for employers.
Looking at our other business lines, the core of our digital health solutions business is our patented RTIP platform and remote patient monitoring which continues to show steady growth as standalone services for practitioners and government agencies, and makes up the core functionality in our key platform. In our clinics and pharmacy division, we are in the process of a divestiture and we’ll have an update for you in Q3. These are very good assets, but they are not core to the future of our business.
To conclude our core business is disrupting the industry and will continue to grow but we must do it with a strong lens on operational and cost alignment. I will take the necessary steps to ensure it reaches potential and the company delivers solid financial performance. I will now ask John to share the financial overview and outlook. John.
John Plunkett
Thank you, Karen and good morning everyone. I would like to say how honored I am to take on the responsibility of Chief Financial Officer of CloudMD. I echo Karen’s sentiment and feel very positive about the outlook of the company’s core EHS business, and we’re working hard to achieve strong long-term financial sustainability and profitability. I would also like to thank Sean Carr for his contributions during the interim period, a time of significant transition and complex financial issues.
Overall, our Q2 financial results were mixed with some positive progress from a business performance perspective, including solid sales performance in our EHS business. However, we had the overhang of particularly elevated ease of cash during the quarter. We generated total revenue of 40.3 million compared to 15.7 million in Q2 2021, which represents 157% year-over-year growth. Sequentially revenue was down 2.6% from the first quarter, primarily due to fee for service COVID testing contracts which are winding down. Enterprise Health Solutions contributed revenues of 24.5 million compared to 26 million in Q1 with the impact of 3.2 million lower revenue from COVID contracts offset by new recurring revenue contracts for EAP and mental health services.
Looking ahead in the EHS division, we see strong organic growth with 4.2 million in annual recurring revenue contracts signed in the second quarter. We are targeting growth in this business in the low double digits. It’s worth noting that revenue contribution from new contracts sold is recorded when we start to provide the service, typically a one to two quarter lag. The growth of the coming quarters will be offset by a reduction in volumes in our TAiCBT contract with the Ontario government. This will have a 1.5 million impact on third quarter revenues and a 2.5 million to 2.75 million impact in the fourth quarter. Despite the short-term revenue decline, we expect to continue to grow iCBT revenue through integration with broader products in both direct employer markets and referral channel partners.
Digital Health Solutions generated revenue of 6.2 million in the quarter at 10.3% increase over Q1. We resolved the outstanding issues with VisionPros during the quarter and had U.S. sales resume towards the end of June. We expect sales to continue to grow in the division and we will have a full quarter of sales in the U.S. VisionPros in the third quarter although not at the level prior to the temporary halt. It will take several quarters to return to historical run rate.
Clinics and pharmacies generated revenues of 9.6 million in the second quarter compared to 9.7 million in the prior year period. Gross profit in the quarter was 31%. The decrease in margins was a result of the timing of contractor development costs and idea for which were unusually high in the second quarter. They reduced gross margin by 170 basis points, absent this gross margin would have been 32.7% and increased 20 basis points compared to Q1 2022. As our core EHS business drives organic growth, we will see margin improvement however, this will be offset by growth in VisionPros revenue, which has a lower gross margin. As a result, we are targeting low to mid 30% gross margin in the near-term, with expansion coming as we shift more revenue towards our EHS business and integrate our higher margin offerings.
Adjusted EBITDA in the quarter was negative 3.2 million compared to negative 1.6 million in Q1. The reduction was due to lower gross profits of $1 million and additional sales and marketing spend in VisionPros and higher R&D spend. There were numerous onetime costs in the quarter including severance costs related to cost saving initiatives, acquisition related expenses, legal and professional fees. We expect these onetime costs to be significantly lower in the third quarter. Cash used in operations was very high in the second quarter at 13.2 million. That number significantly overstates our normalized cash use as it includes the impact of negative changes in working capital as we settled several vendor liabilities, and also incurred other non-recurring expenditures for acquisitions, professional fees, and severances during the quarter. In total of the 13.2 million used in operating activities in the second quarter, approximately 7.8 million was for onetime costs.
Absent onetime costs and negative changes in working capital, our normalized cash used in operations was 4.1 million in the second quarter. Since the start of the third quarter we have identified 4 million of annualized cost savings that will be removed from the organization. This will offset the lower gross contribution from the change in the Ontario Health contract. In addition, we’re removing the direct delivery costs associated with the change in the Ontario Health contract volumes. We expect to mitigate any adjusted EBITDA downsides from the change in the contract volumes. We had approximately 30 million in cash on hand at the end of the second quarter. We understand the importance of our capital and are focused on reducing our current cash use. In the second half of 2022, we will continue to realign our cost structure with significant reductions planned. This combined with growth in our core business will move us towards cash flow positivity. However, I do not expect that we’ll be cash flow positive before the second quarter of 2023. We are targeting being adjusted EBITDA positive in the first quarter of 2023.
We’ve commenced the process to divest our non-core assets and have made good progress over the past 45 days. We hope to be in a position to provide an update on this process in the next several weeks. We expect that the divestment of non-core assets will provide some capital to the business in the near term. Finally, as a result of the VisionPros settlement, we have received 3.4 million in cash since the start of the third quarter. While revenue will begin to recover within VisionPros, we incurred a 29.1 million impairment charge in our VisionPros CGU this quarter to reflect the issues caused by previous management, including the impact on revenue — the impact on the revenue forecast, and to reflect current market dynamics. During the second quarter, we also recorded an impairment charge in our Rxi business unit, a reflection that cash flows were not meeting forecasted expectations. The Rxi business has been included in our review of non-core assets and we expect to have an update on plans for this business in the coming quarter. With that, I’ll pass the call back over to Karen.
Karen Adams
Thank you, John. We will focus on continuing to accelerate revenue with our differentiated value proposition, align the cost structure of the organization, and strong controls on cash flow management. I want to thank every employee and all of our clinicians at CloudMD for their dedication and commitment as we continue to empower healthier lives. With that we will open up the floor to questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from Rob Goff with Echelon Partners. Your line is open.
Rob Goff
Hi, good morning and thank you, Karen and John for taking our questions. We are encouraged by the actions you’ve taken, the tough actions needed, though. Now, in terms of a question, building on the 4.2 million of ARR added in the quarter can you discuss the pipeline and the traction that you were seeing in the EHS both North and South of the border?
Karen Adams
Sure. And thank you for the question, Rob. So the size of the pipeline relative to forecasts we’re very comfortable with. The pipeline is growing on a month-over-month basis. And I’m also very optimistic because it includes multi product proposal. The mix two in the pipeline is between our distribution partners, the two I noted in the U.S. specifically are contributing to the pipeline, as well as direct to organizations across multiple sectors, and lifescience group. All new customers are going on the Kii platform. I think I’m also very excited that over 70 clients are currently in an RFP stage with us or a proposal. And I think that really the deal sizes have also changed so when I look at the different deal sizes now, we are seeing larger average revenue per contract than we were prior. And I think the only other thing I would add and then John maybe can add some commentary if you would like is that we are also seeing over 30% of the deals coming in as multi products of the new customers adding. So, we’re seeing momentum across every one of our key strategic growth pillars and the growth of pipeline coming is good because if deals are coming out and new ones are coming in, pipeline is growing month-over-month, does that make sense Rob. Did I answer your question?
Rob Goff
Yes, thank you.
Operator
One moment for our next question. The next question comes from Gabriel Leung with Beacon Securities. Your line is open.
Gabriel Leung
Good morning. Thanks for taking my questions. A couple for you first to John, just as we think about the cash restructuring costs that you plan to incur, expect to incur over the next couple of quarters, can you talk a little bit about that, now you’re looking to drop about $4 million of annualized costs along with the direct costs associated with the delivery of the Ontario contracts. I’m curious to know how much cash you expect to use for restructuring between now and Q1 I guess was when you expect sort of EBITDA breakeven?
John Plunkett
Yeah, thanks for the question Gabe. So from a cash restructuring perspective to execute on the cost reductions associated with the change in the Ontario Health volumes, I’m expecting that we’re going to incur somewhere between 500,000 to 700,000 of severance related to restructuring costs.
Gabriel Leung
Got you. And then how should we think about I guess the free cash flow burn between Q3 and Q4 leaning to Q1, how much of a step down should we expect vis-à-vis what we saw in Q2?
John Plunkett
Yeah, sure. So here’s how I’m thinking about cash or cash on hand and our cash burn moving forward. So we ended the quarter with 29.7 million of cash on hand. We have receded 3.4 million in cash in the third quarter related to the VisionPros settlement and we’re expecting to pick up some cash from the divestiture strategy that we’ve outlined. From a cash burn perspective in the second quarter, our normalized cash use was high $6 million once we normalize for negative changes in working capital, and some onetime costs. I’m expecting that we’re going to be able to mitigate the changes in the Ontario Health contract from a cash flow standpoint, and not expecting an impact there save for some of the restructuring costs that I’ve mentioned. And obviously, myself and Karen and team are extremely focused on cost reduction in the second half of this year, in combination with growth in the business. So growth in the business targeting 10% in our core business, and the net contributions from that growth combined with a significant cost reduction in the second half of the year, is what’s going to put us on the path to getting to cash flow positivity in 2023 and adjusted EBITDA positivity by Q1 of 2023.
Gabriel Leung
Great, thanks for that. And then Karen, just looking at the I guess, the EHS business, as you look at some of the net new ones you incurred in Q2 and along with the pipeline, and the forward outlook, what are you seeing in terms of competition? And what are your customers saying to you about your platform vis-à-vis some of the guys you’re competing against on these RFPs?
Karen Adams
Great question. So and thank you for that. I would say it comes down to a couple of things. In mental and physical health, access to care is the most important. So the fact that we don’t push people to digital and we have the 24/7 call center 365 days a week really does give us a combination of being able to help people in the way they want to be helped. The personalized care plans, one of the largest problems in the program across the industry over the last 15 years has been engagement, and really getting people to engage and use the program because part of our value proposition is being able to measure health outcomes back to the buyer, the payer. And so engagement is really important or you won’t get the health outcome. And so I think having the nurse navigators as a core part of all of our programs, provides that coaching moment for people and keeps them in the program. And that has been the two main differentiators that customers switching from the competitors have cited. And the last thing I would say is across Canada in present we have some small communities in every province across Canada. And I believe that being able to not just be able to serve as somebody through a call center, but actually having the medical practitioners available in all communities across Canada has also been cited as something that our competitors haven’t, in all cases been able to deliver. I think that’s just a testament to the business that we purchased. Having longevity and delivering the service, and being able to truly say they’ve done it before, has really given us an upper leg here. Does that answer your question Gabe?
Gabriel Leung
Yeah, no, that’s great. Thanks for that. And my last question, I guess is, what are your thoughts around or actually let me ask another way, have you seen sort of new opportunities pop up here in Canada on the EHS side, as it directly relates to the acquisition of Lightworks by TELUS [ph] and have you seen sort of customers rethink their the relationship with Lightworks and thereby creating an opportunity for a collaborative approach?
Karen Adams
So I — we tend to not think of single competitors, what we are really focused on is, we know what our competitive differentiator is against each of the people that we compete against. It’s a big market, there’s lots of market share. We use that knowledge base to position what is the customer going to get differently. And so, I think we have a very small number of players, of significant players currently in the space. In some industries the barrier to entry is low, I would say the barrier to entry is high here because you have to now deliver on the value proposition of not only being able to help somebody when they’re at work and struggling, or casual absence, or disability, or return to work, or workers comp, or [indiscernible]. If you’re going to deliver against the value proposition, you’ve got to be at every point of access where an employee is in the workplace, or their family members to be successful. And that takes years and years of clinical outcomes to develop the workflows properly. So I feel very passionate about the business we’ve built here with the offering and having the competitive edge. And I think we have been considered a disruptor in the industry.
Gabriel Leung
That’s great. Thanks for all the feedback.
Karen Adams
Thank you, Gabe for your support.
Operator
One moment for our next question. Next question comes from Doug Taylor with CG. Your line is open.
Doug Taylor
Yeah, thank you. Good morning, Karen and John. Yeah, looking past the potential divestiture here of the bricks and mortar business, you got a number of moving parts with respect to your top line here with Ontario Home Health ramping down and VisionPros. We’ve also got these new EHS contracts ramping up. I guess my question is, can you help us as we’re trying to model all this out by speaking to the directionality of the revenue into Q3 and Q4 versus Q2, once taking all that into account?
Karen Adams
Yeah, and just before, and thank you for that question. But just before we get to that, I think one thing that we can say is that during COVID there was a number of onetime mandates that came to the forefront in EHS. And I think these onetime mandates we executed on very well. And we’re proud of the fact that people came to us to deliver those onetime mandates. Those onetime mandates are not in our sales pipeline now to the degree that they were then. And so I think that the understanding that most of our contracts, if not all our contracts that we bring on average tenure of three to five years and are reoccurring or recurring revenue, that is giving us a little more confidence, let’s say or a builder pass Q3, Q4. But John, do you have in your mind where you see Q3 and Q4 from both the pipeline perspective and the conversion from the pipeline into the deals, what you’re seeing.
John Plunkett
Yeah, sure. So, let me have a pass of this, Doug. So I think you’re right, there’s definitely a couple puts and takes as we think about Q3 and Q4. As we stated, the Ontario Health contract is going to have pressure on Q3 to the tune of about 1.5 million versus Q2, and Q4 about 2.5 million to 2.75 million versus Q2, okay. From an organic growth perspective, obviously the wins that we’ve achieved in the second quarter of 2022 are going to start to come online sometime between Q3 and Q4, which is going to provide a natural lift in the business over the next six months. So what I would say is, and I think probably the only other piece I would add there is as we think about some of the seasonality in our business, particularly around idea for historically that business has typically trended up in the third and fourth quarter of the year, particularly into the fourth quarter. So, normalizing for all of this, I’d expect that Q3 is going to look fairly consistent with Q2 from a revenue standpoint, and I’m expecting that we’re going to see that lift as we move into the fourth quarter obviously, seeing some of the new wins coming online, plus lifting the idea for business, which tends to be a little higher in the fourth quarter.
Karen Adams
And the group benefits as the business tends to have the renewal. I think the other important piece on that is Sun Life. So we are starting, took a while for that program, the pilot went very well. And month-over-month we’re seeing integration of new clients on the platform. However, Q4 as we know in a group benefit industry is a high renewal time, where people reconsider what plan designs look like. So we anticipate Q4 and Q1, traditionally, from a seasonality perspective, having a lot of new sales start.
John Plunkett
Yep, and sorry, just to jump in with one other point, you know, we are expecting to see our VisionPros business begin to ramp up in the second half of the year. I’d imagine that the ramp is going to be fairly small relative to Q2 in the third quarter. But hoping we’re going to start to see some more traction as we’re selling into the U.S. market by the fourth quarter of this year. As we mentioned in our prepared remarks, the ramp up and return to the historical run rate of that business is going to take some time. So we’re not going to be where we were in Q4 of 2021. But we’re obviously working hard to get back there.
Karen Adams
And I just want to add a comment to that to make sure that we’re clear about the why. So the why the ramp up is taking a bit longer is in this business there is high customer acquisition costs, and we are being prudent around the customer acquisition cost to bring revenue back so that we maintain our gross margin and our EBITDA contribution. And these customers, we have to bring them back in a way where we’re engaging with them, but we’re being very prudent around how we bring customers back so that we get the sticky factor with those customers staying with us over time.
Doug Taylor
That’s fantastic. A lot of color. So given the outlook you just provided from the top line, I think you’ve already talked to gross margin and then your EBITDA and cash flow, what I mean — what additional cost reduction goals or targets are required to get you to those EBITDA and cash flow targets beyond the 4 million that you’ve already announced?
Karen Adams
Yeah, so I think one of the really important things to recognize here Doug is in these acquisitions we had a number of — we had a structure, if you will. The product we integrated upon acquisition, so that we could deliver on the key value proposition. Now as these businesses scale they look different. We are in the process of right sizing those businesses meaning the human capital aligned to the revenue portfolio, and also looking at discretionary spend. So those are two areas that John and I are highly focused on, discretionary spend, where can we quickly gain efficiencies, overspend, or eliminate spend in and put the spend towards more profitable business that will accelerate revenue growth. The second piece is really taking a look at the shared services model and starting to determine the best people to be in that shared services model to deliver against the revenue portfolio of the operating businesses. And John and I are implementing a process right now around business priorities so that we eliminate priorities that for a particular business might be very important but isn’t going to scale or isn’t going to negatively impact their gross margin or EBITDA, but they also aren’t going to show the same revenue acceleration perhaps of another business. So it’s a very tricky part for us right now but we expect to see further. We not only expect we are targeting further reductions in both the discretionary spend and in the SG&A on the people side. John, did you want to say anything about…
John Plunkett
So the only thing I would add, just basically to echo what Karen has said is that we believe that there is significant opportunities in our business to remove costs. We’re looking at every facet between shared services, direct client delivery, IT, back end, there’s plenty of opportunity there and we intend to make meaningful progress over the next two quarters.
Doug Taylor
Okay, perhaps last question for me, you’re speaking very definitively about divesting the bricks and mortar aspects of your business. In contemplating transaction like that and I understand we’re going to hear more about that in the coming months. Beyond the revenue impact, can you shed some light on what you think the impact to the profitability ramp you’ve discussed here would be from divesting those assets?
Karen Adams
Yeah, sure. So let me add some color. So from a directional context standpoint, Doug, our clinics and pharmacies segment has gross profit margins of about 20%. Certainly the Rxi side business is a significant revenue component of the clinics and pharmacies segment. And it typically has very low margins. So gross margins in that segment is about 20%. In terms of the EBITDA contribution from that segment, it’s fairly small. So as we look at that EBITDA and cash flow coming from that segment, I wouldn’t think about much in the current business.
Doug Taylor
So put another way, you wouldn’t change the timetable to EBITDA profitability at all.
John Plunkett
Correct.
Doug Taylor
Okay, I appreciate all the color. I will pass the line. Thank you.
Karen Adams
Thank you Doug.
Operator
One moment for our next question. Our next question comes from Nick Agostino with Laurentian Bank Securities. Your line is open.
Nick Agostino
Hi, yes. Good morning, everybody. Just want to get some clarification, I guess when it comes to your onboarding capacity. You guys, you announced a series of contract wins back in Q1 on EHS side. You’ve obviously announced more in Q2. And I’m just trying to understand how comfortable, like how much capacity do you have when it comes to your ability to get all the wins that you’ve announced thus far, I guess, fully on boarded I’m going to assume by the end of Q3, or should we assume that some of your first half wins when it comes to onboarding and the timing of those contracts maybe they spill over into Q4?
Karen Adams
So let me start by making two comments that probably I should have said up front, especially with the Ontario government contracts ending and the new ones starting. So, MindBeacon acquisition was very, very important to CloudMD from the perspective of being able to offer scale in our mental health program. The research on the MindBeacon specifically iCBT program points to a better in some cases outcome — health outcome than in person counseling. And the therapist led iCBT program ensures engagement and the clinical outcomes and allows us to scale fairly easily in the mental health support solution, which is a large accelerator of both the disability claims as I pointed to, and in the just the general self-referral program for people at work. So it really impacts our entire business. The launch of our physical health program, which launched if you may recall recently hearing about that, customers are onboarding in Q3, Q4. And again, there’s a large comorbidity between the physical health and the mental health and we’ll be using the iCBT sale. We’re not — we have capacity, we have the technology and the call center capability to onboard all of these clients. So they will be onboarding in Q3, Q4, there’s none spilling over into Q1.
And then the last thing I’d say is also in our business model, we are also taking the sales strategy with the MindBeacon iCBT to be selling to primary care doctors. So primary care doctors have the opportunity through the Ontario Self-Referral Program to also refer people to the iCBT program. So we’re leveraging that knowledge base from the primary care to do the referrals straight into the iCBT. So we feel like we’ve got the scale model down pretty good. And I think it’s been factored into all our forecasts both from a SG&A perspective, and from a gross margin perspective.
Nick Agostino
Okay, I appreciate that color. I guess my second question is, and you alluded to this earlier, we talked about onetime contracts, you expect more of them going forward, but probably at a smaller scale than the past. So speaking specifically to COVID contracts we saw there they — I think you guys called out that they came down over the course of Q2. But in your press release you anticipate more COVID related contract to mean Q3, Q4, possibly Q1 of next year. Can you — are those your anticipation there, are those contracts already in hand, and if so can you maybe talk about the scale or how big you anticipate COVID dollars to be relative to past dollars?
Karen Adams
So let me start with this. I mean first of all, over the last two years, organizations have developed protocols to address health mitigation. I think there was an onslaught of that at the beginning of COVID. I think the mandates that we received in 2020 and 2021 were focused on the importance of screening and offering healthcare navigation. That’s what those onetime mandates were for. And I think that our teams did rapid response, they’ve helped organizations respond to the pandemic. So those onetime mandates has built, I would say, stronger relationships with the customers and many of those customers go back years and years. In fact, one customer in particular I’m reflecting on today, goes back to 1975. So those contracts build strong relationships.
The other thing we’re figuring out with those contracts, the onetime mandate is the screening and the mental health is leading to the healthcare navigation conversation. And they’re leading to the proposals of saying if we had healthcare navigation for physical and mental health, perhaps that would have supported those onetime mandates. I think the onetime mandates created the urgency around the navigation. Our business is predicated, if you were to ask me, how I see the business unfolding, the majority of our business is the reoccurring and reoccurring revenue. We will also — we will have a fee for service, our mandated business over time. And I would say that customers will continue to ask us to review their protocols, and use our occupational health doctors to review those protocols. But I would say it’s a very, very small, like less than 5% of our overall business.
Nick Agostino
Okay, and then just one last question for me just as a clarification or verification, when it comes to earn outs forward is it — my understanding is that you’ve got about $4.5 million of contingent earn outs, is that something you can confirm?
John Plunkett
Yeah, correct. So from a, I guess, speaking to earn outs that if it is liability on our balance sheet, we have approximately just North of 4 million. I think it’s important to note that 3 million out of that 4 million can be equity settled at $2.30 per share. So in terms of the cash, contingent consideration liability, it’s approximately $1 million.
Nick Agostino
Okay, appreciate that color. Thank you.
Operator
One moment for our next question. Our next question comes from Prasath Pandurangan with Bloom Burton. Your line is open.
Prasath Pandurangan
Hi, good morning. Thanks for taking the question. First, could you give more color on the cost control measures in terms of the different line items and categories?
John Plunkett
Yeah, sure. So I guess, first off, in terms of, are you referring to the sort of the $4 million that we’ve said that we’ve identified since the start of the third quarter.
Prasath Pandurangan
As well as the others you envision in order to achieve profitability and sustainable cash flow positivity?
John Plunkett
For sure, so let me start. So in terms of the cost control measures and some of the actions taken since the beginning of the third quarter, we have found savings across our organization. As we think about our shared services infrastructure, finance, IT, sales and marketing, we’ve identified savings across those across those groups. With the reduction in the Ontario Health volumes we’ve reduced our marketing spend to bring customers into that program. And the other area of focus for us right now is from a clinical infrastructure standpoint. We are working hard to integrate our clinical networks, particularly as we think about our mental health support solutions alongside our EAP. So we’ve identified savings at this point from a number of areas, and in terms of where we’re focused going forward, it’s going to be across the organization.
Prasath Pandurangan
Yes, thanks.
John Plunkett
Thank you. Yeah also, from a real estate standpoint, we’re going to see some reductions starting in the third quarter as well.
Prasath Pandurangan
Great. And in terms of the divestitures, how close are we in the process and when can we expect announcements?
John Plunkett
Yeah, so from a process standpoint, I would say that we’re well on our way. And it’s our hope to be able to provide an update in the next several weeks on the progress we’re making.
Prasath Pandurangan
Great, thank you.
Operator
And I’m not showing any further questions at this time. I would like to turn the call back to Karen for any closing remarks?
Karen Adams
Well, I just want to thank everybody for attending the call today. And we look forward to providing more frequent updates to the investors on our progress between earnings calls, and we look forward to more dialogue with you as we move this company forward. Thank you for attending today.
Operator
Ladies and gentlemen, this concludes today’s presentation. You may now disconnect. Have a wonderful day.
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