Quipt Home Medical Corp. (NASDAQ:QIPT) Q1 2023 Earnings Conference Call February 14, 2023 10:00 AM ET
Company Participants
Greg Crawford – Chairman and Chief Executive Officer
Hardik Mehta – Chief Financial Officer
Conference Call Participants
Doug Cooper – Beacon Securities
Rahul Sarugaser – Raymond James
Tania Armstrong-Whitworth – Canaccord Genuity
Justin Keywood – Stifel
Stefan Quenneville – Echelon Capital Markets
Operator
Thank you for standing by. This is the conference operator. Welcome to the Fiscal First Quarter 2023 Results Conference Call for Quipt Home Medical Corp. [Operator Instructions] And the conference is being recorded. [Operator Instructions]
We remind you that the remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of the company’s results news release. The company’s actual performance could differ materially from these statements.
At this point, I’d like to turn the call over to Chairman and Chief Executive Officer, Greg Crawford.
Greg Crawford
Thank you, operator. And thank you all for joining us today on the call. My name is Greg Crawford, and I’m the Chairman and Chief Executive Officer of Quipt Home Medical. Joining me today is Hardik Mehta, our Chief Financial Officer.
With the closure of our largest acquisition today, Quipt is off to a historically strong start in calendar 2023. We believe solidifying ourselves as the fifth largest provider of home medical equipment focused on end-to-end respiratory care in the United States from a revenue standpoint.
As of fiscal Q2, Quipt currently has a $220 million run rate revenue and a $49 million run rate adjusted EBITDA, giving us a significant growth platform to continue driving economies of scale. The driving force behind our continued success is the more than 1000 Quipt team members who dedicate their daily work to providing superior patient care in order to improve the quality of life for each and every patient we serve.
Our team is the real reason why the momentum continues to be robust throughout the business and we are able to successfully operate a patient-centric ecosystem. We are devoted to offering equipment solutions geared towards cardio and pulmonary disease states, all of which are minimizing the load that is being placed on the conventional healthcare system.
In 2022, we improved the quality of life of over 200,000 patients, and in 2023 we will start with over 270,000 patient lives. Our primary goal is to make patient lives outside of the hospitals better by making it easier for them to breathe and sleep, which is ultimately result in higher life satisfaction.
Quipt stands apart in the market because of our high-touch service model we employ. As we carried out our strategic growth plan and future vision fiscal Q1 2023 produced 38% year-over-year revenue growth and margin acceleration. For us, it goes without saying that offering a full range of end-to-end respiratory solutions is essential to maintaining our success and a significant growth factor in our key markets. Our team is concentrating on our primary sales touchpoints, which are healthcare institutions, including hospitals, physicians’ offices, long-term care facilities, home health agencies and rehab centers. We have been able to use the technology platforms we have deployed over the past few years, along with our specialized clinical programs to effectively treat patients at home in a way that best meets their needs with the ability to monitor patients in greater numbers, reduce organizational redundancy and lower overall healthcare cost.
Returning to historical levels of organic growth is one of the primary focuses of our team, and we are confident that as the year 2023 develops, we will be able to meet and surpass historical levels of 8% to 10%, given the substantial tailwinds that are in our favor. In the first fiscal quarter, we saw the beginning of these improved patterns in organic growth with 2% sequential organic growth returning. We have a fantastic opportunity to increase our organic growth performance as a result of our focus on growing our sales team, expanding the continuum of care, receiving the benefits of the major improvements to the supply chain, and operating in a regulatory environment that is extremely bullish.
We continue to place a renewed emphasis on growing our sales team and we are making progress, in particular, because our sales professionals can now interact with our primary sales touchpoints in a more active manner in the post-pandemic environment. To achieve our organic growth goals, we are concentrating our efforts in areas with a high prevalence of cardio and pulmonary disease states and on hospitals with high admission rates. This is done with the intentions of acquiring patients at an earlier stage in the course of their illness, which is essential to our long-term expansion objectives. We will discuss our record breaking fiscal first quarter 2023 performance, as well as positive, real-time business developments during this call. In addition, we will provide an update on the regulatory landscape, which remains the best in over a decade as well as the significant improvement in the supply chain and our core business.
We are operating in an extremely favorable regulatory and reimbursement environment, which was most recently evident by the Medicare fee schedule adjustments resulting in a significant CPI increase for DME providers that began January 1, 2023 of 6.4% to 9.1%. The percentage depends on whether product serviced are competitive bidding program items or in a former competitive bidding area. As we look at our product mix, we see a blended increase of about 8%. In calendar 2023 this CPI adjustment will be significant to us and start to positively affect our financial results during our second fiscal quarter.
Additionally, in 2023, CMS relaxed coverage criteria for home oxygen therapy now allowing patients who present to their physicians with an acute or chronic respiratory disorder to be covered for home oxygen therapy and also removing the long-standing requirement for patients to obtain certificates of medical necessity, which eases the administrative burden on healthcare providers, further improving patient accessibility.
Finally, the underlying positive regulatory environment is anchored by the decision CMS made to cancel the 2021 competitive bidding program for 13 product categories. In a time when the demand for the home medical equipment industry seems to be at an all-time high, we welcome these continuous positive regulatory changes.
Turning to the supply chain environment, we have seen major improvement in 2023, with January being the first month since the June, 2021, Philips recall, we did not have allocation limits on a connected sleep device. The continued expectation is that exiting calendar Q1, we will be back to pre-pandemic setup levels. The team is actively driving setups across the organization to match the robust demand, which we feel will continue for the foreseeable future. This real-time development is a powerful tailwind and will significantly contribute to our organic growth over the coming year.
When we look at the financial performance for fiscal Q1 2023, we can see that our team of operators has once again generated remarkable results. Most notably, the healthy and accelerating margin profile experienced throughout this time of higher than normal inflation. We saw a rise in revenue of 38% Q1 2022 to fiscal Q1 2023, bringing the total to $40.8 million and a 50% increase in adjusted EBITDA, bringing the total to $9 million. We witnessed a decrease in bad debt expense and an acceleration of our adjusted EBITDA margin, which came in at 22%. This strong result is continued evidence that we are able to scale quickly through the strategic acquisitions without jeopardizing our billing capabilities or overall margin profile.
We are pleased to close another record quarter in fiscal Q1 and begin calendar 2023 with a recent milestone acquisition, which provides us with a significant presence from coast to coast in the United States. On a combined basis, we have grown to 115 locations in 26 states and surpassing 270,000 active patients. We are excited about what we have achieved to date while at the same time continuing to have a deep acquisition pipeline, strong access to capital with a conservative balance sheet and significant tailwinds within the business, we are looking forward to continuing to drive value for our shareholders.
With that commentary, I’d like to hand the call over to Hardik to discuss our fiscal first quarter 2023 financial results.
Hardik Mehta
Thanks, Greg. On Monday evening, we announced our fiscal first quarter 2023 financial results representing the three months ended December 31, 2022. In reviewing the fiscal first quarter 2023 numbers, please note that all financial values are in U.S. dollars and the full results are available on SEDAR and EDGAR.
Here are some key highlights. Through the company’s continued use of technology and centralized intake processes, respiratory resupply setups and/or deliveries increased to 69,482 for the quarter ended December 31, 2022 compared to 51,137 for the quarter ended December 31, 2021, an increase of 36%. The company’s customer base increased 32% year-over-year to 99,420 unique patients, served in fiscal Q1 2023 from 75,309, unique patients in fiscal Q1 2022. Compared to 118,100 unique setups and deliveries in fiscal Q1 2022, the company completed 146,350 unique setups and deliveries in fiscal Q1 2023, an increase of 24%.
Revenue for fiscal Q1 2023 was $40.8 million compared to $29.5 million for fiscal Q1 2022 representing a 38% increase in revenue year-over-year.
Organic growth increased by 2% sequentially compared to fiscal Q4 2022. We anticipate organic growth meeting and surpassing historical levels of 8% to 10% as calendar 2023 progresses.
Recurring revenue as of fiscal Q1 2023 continues to be strong and exceeds 77% of total revenue.
Adjusted EBITDA for fiscal Q1 2023 was $9 million at 22% margin compared to adjusted EBITDA for fiscal Q1 2022 of $6 million at 20.3% margin, representing a 50% increase year-over-year. We expect to continue seeing strong margin performance through the rest of the year.
Net income for fiscal Q1 2023 was $325,000 or $0.01 per fully diluted share compared to net income for fiscal Q1 2022 of a loss of $2.1 million or $0.06 per fully diluted share. Additionally, we believe that the recent CPI adjustment announced will have a meaningful positive impact on our net income as we progress in calendar 2023.
Cash flow from continuing operations was $4.8 million for the quarter ended December 31, 2022 compared to $5.1 million for the quarter ended December 31, 2021. CapEx as a percentage of total revenue was lower than fiscal year 2022, a trend that the company will like to maintain. For fiscal Q1 2023 bad debt expense was at 5.6% compared to 8.2% in fiscal Q1 2022. One of the primary reasons is improved billing and collection processes and exemplify our ability to scale and add more revenue through add-on acquisitions without compromising our billing capabilities.
For the three months ended December 31, 2022 operating expenses were $19,462,000, an increase of $6,048,000 from $13,414,000 for the three months ended December 31, 2021. Acquisitions contributed approximately $5 million of this increases, remaining increases are related to payroll, professional fees and inflation. The company reported $3.5 million of cash on hand and total credit availability of $101.9 million as of December 31, 2022 with $16.9 million available towards line of credit and $85 million available on DDTL.
The company paid down $3.9 million of its revolving line of credit during the quarter ended December 31, 2022. The company has $37.1 million of liabilities that are due within one-year, but has $38.9 million of current assets plus revolver line of credit availability of $16.9 million to meet those obligations. We are really proud of the continued operational excellence, which is reflected in the robust performance throughout the first quarter of fiscal year. We are very pleased as we have near critical scale that our adjusted EBITDA margin has hit 22% and we anticipate that we will continue to have accelerating margins moving forward.
We feel insulated despite the challenging economic environment. We believe we experience peak inflation during the most recent fiscal year and anticipate the CPI adjustment that begin January 1st. We will have a very favorable effect on our financial results in calendar year 2023 starting with our fiscal Q2 results. As we entered calendar 2023, we announced our largest acquisition-to-date covering eight states, seven of which were new to Quipt with our 1.5 million people suffering from COPD across those states.
The closing of this recent acquisition is a major accomplishment providing us with a turnkey acquisition at a prudent purchase price while simultaneously maintaining our conservative balance sheet at 1.96 times our net leverage, and allowing for financial flexibility on a go forward basis. We are confident that we will have the ability to increase the size of our senior credit facility whenever the appropriate window of opportunity presents itself.
Including the acquisition, Quipt has a combined annualized run rate revenue and annualized run rate adjusted EBITDA of $220 million and $49 million respectively, including the $2 million of cost savings and synergies based on Quipt’s reported audited financial results for the first quarter ended September 30, 2022. And Great Elm’s unaudited results for 12 months ended August 31, 2022. Post-acquisition Quipt’s recurring revenue will increase from 77% for the quarter end December 31, 2022 to 82% on a pro forma business.
The purchase price was $80 million, which is comprised of approximately $73 million in cash, $5 million in assumed debt and 431,000 Quipt common shares. Cash was obtained from delayed draw term-loan and revolving credit facility components of the facility. The purchase price was at the multiple of 5.2 times post synergies. We are well underway on our integration processes and we believe that the initial 2 million of synergies identified will be felt on the lighter side of six months.
This acquisition provides us increased geography reach, giving us an additional opportunities to further expand on our tried and true acquisition and integration strategy with highly acquisitive tuck-in acquisitions for our full suite of respiratory care products and services. We believe that is more cost and revenue synergies to be captured over time, in particular through the various cross-selling opportunities including ventilation and oxygen. Also, the significant opportunity to increase resupply revenue once sleep patients are onboarded to Quipt’s resupply program.
Looking forward, our pipeline continues to be deep and we remain committed to our prudent acquisition approach along with our tried and true integration processes, which has been the catalyst for our consistent revenue growth displayed on an annual basis. Moreover, given the nature of our industry and operation as a respiratory driven healthcare organization, we feel well protected from any future economic difficulties. We are well positioned to continue to implement our growth and acquisition strategy and increase shareholder value.
Thank you, and with that update, I’ll turn the call back to Greg.
Greg Crawford
Thanks Hardik.
Superior patient care is our top priority in every one of our markets, and we do everything in our power to assist those who require treatment for conditions like sleep apnea, COPD and other chronic respiratory diseases. Our aim is to make sure that patients get the treatment they need when, where and how they require it.
When I think about how our company has evolved, I am immensely proud of the entire team for their ongoing dedication to going above and beyond. Quipt now serves more than 270,000 active patients, that’s more than 32,000 referring physicians in 26 states. According to our estimates, Quipt is now the fifth largest home medical equipment provider in the United States in terms of revenue. At this point, respiratory products constitute about 79% of our overall product mix, and we continue to develop methods to increase our patient base and access lucrative markets by cultivating relationships with referral sources, patients and payers.
At the same time, we continue to simplify our operating platform. We anticipate that our strong momentum will continue throughout 2023 as a result of our successful execution of the critical components of our growth strategy on the heels of the largest acquisition to date. As a reminder, these components include making accretive acquisitions, investing in our future organic growth developments, and expanding our healthcare network across the country.
Continued execution of national insurance contracts will play a crucial role in future organic growth development. We signed UnitedHealthcare, the largest healthcare insurer in the U.S. last year as our first national contract. Given the sizable area we have already expanded into this year, we are actively working with additional significant commercial payers to assist them in understanding the benefits of our strong patient-centric approach for both patients and payers. We are confident that we will be able to get further national insurance contracts during the first half of 2023.
As we can see from the current environment, a significant effort is being made to ensure that a patient is treated in a home care setting whenever feasible. As a result, we will continue to use our high-touch model centered around technology usage such as remote patient monitoring to grow our referral sources, which will benefit our company. We constantly invest in technology to improve our operational efficiency via automated ordering systems, revenue cycle management, and our automated resupply program. These activities assist us to increase productivity and produce long-term value. Investments in our scalable healthcare platform generate strong cash flow, margin expansion, accretive acquisitions and organic sales growth.
I would now like to review with you the three components of our core growth strategy as we move into 2023. First is organic growth, which historically has ran 8% to 10% annually and we are confident that 2023 will meet and surpass this. Initiatives on this front includes growing our sales team, which is how we reach important touchpoints like hospital networks, doctor’s offices, long-term care facilities. Moreover extending patient accessibility by signing additional national healthcare insurance contracts with significant payers in the United States.
Secondly, in order to always be improving our operational performance, we will endeavor to expand our use of technology throughout the organization. We are focused on the use of data mining and data analytics tools to drive efficiencies and long-term profitability. The third component of our expansion strategy is the execution of strategic acquisitions. We are on the lookout for respiratory companies that can be effectively integrated into our scalable infrastructure.
Our primary focus right now is on expanding our business to a larger size economically with the overreaching strategic goal of broadening our payer base and expanding our geographic reach into more states, including those that are already a part of our network. We have the financial freedom to execute on our acquisition pipeline, which provides us with abundant opportunity to continue expanding our revenue and EBITDA as well as our patient population and overall geographic reach. We anticipate that we will be active throughout 2023.
After completing our biggest purchase-to-date, we are off to a strong start in 2023 on the capital markets front. We are connecting with U.S. and Canadian investors to share our captivating narrative and have the exciting chance to talk to investors about our future growth ambitions. Through 2023 both our institutional shareholder base and our total U.S. ownership has grown significantly and we will continue attending investor conferences and take part in investor roadshow throughout 2023.
Moreover, we have plans to uplift to the Toronto Stock Exchange big board in the first half of calendar 2023, which we believe will foster more liquidity and institutional ownership over time. It is important to note that investment dealers with global headquarters account for 40% of TSX trading. This forthcoming big milestone for us is undoubtedly a testament to our historical financial success, which has given us the chance to seize this wonderful opportunity.
Given the bullish industry environment, that rapidly improved supply chain for sleep devices in real time, and all the organic tailwinds at our back we are continuing to strategically position the company for ongoing strong growth and we must remain aggressive in taking advantage of the many opportunities that are open to us. With our operational excellence and sub-2-time leverage balance sheet, we have all the resources needed to execute our ambitious growth plan. We have high hopes for the future of Quipt and the more than 270,000 patients we care for.
As a healthcare organization with a concentration on respiratory treatments, we feel well insulated from any potential economic challenges given the nature of our business and sector. Currently, our run rate revenue is $220 million and our run rate adjusted EBITDA is $49 million. It is important to note that these run rate figures are not inclusive of the positive impact of the CPI adjustment that took effect January 1, 2023.
As we move through 2023, we have a great deal of confidence in our ambitious growth trajectory, and I would like to take a moment to once again, thank the entire Quipt team for its tireless efforts and its stakeholders for all their continued support.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Doug Cooper with Beacon Securities. Please go ahead.
Doug Cooper
Hey, good morning, Greg and Hardik. Congratulations on a nice quarter and we look forward to the inclusion of Great Elm in Q2. I just want to focus on the margins for a minute; obviously very strong here in Q1. Great improvement both sequentially and year-over-year. Can you give us any idea on a pro forma basis what the margin would have been if the CPI adjustment was made on October 1st as opposed to January 1st?
Hardik Mehta
Sure. I mean, I guess the CPI increase across our organization translates to around 6% for the Medicare fees – 6% to 7% for the Medicare fees. And – but I think to be frank, the question is a little more complex than that. Over the last six months the company has been working with different vendors and has also worked on some pricing arrangements and stuff, which you are seeing some benefits into the margins. But I think if you want to annualize the CPI increases around $6 million is how we calculate it internally.
Doug Cooper
Okay. And how much of that just based on your cost base today would, do you think would fall to EBITDA?
Hardik Mehta
I would say proportionate to our revenue versus sales combination. So if you look at our sales as a – if you look at our cost of goods as a percentage of our sales and then increase the revenue by about 2% overall because we are – the 2% is kind of a blended rate to the whole revenue for CPI increase.
Doug Cooper
Okay. So maybe just from a broader perspective, if you had 22% margin in this quarter prior to the CPI adjustment that started six weeks ago and you would – you feel comfortable that 22% margin is a baseline that you can expand from there? Is that a fair assessment?
Hardik Mehta
Yes.
Doug Cooper
Okay. Just on bad debt provision, obviously pretty low 5.6% or 5.7%, is that sustainable as we head through the balance of the year?
Hardik Mehta
Yes. I think that’s definitely we did half a point here and there, but I think that is definitely sustainable.
Doug Cooper
Okay. And my final question just on the sales, we’ve added a bunch of sales folks. How quickly does it take for them to ramp and what percentage of your sales force would be new? Like, have you added 10%, 15%, like what percentage is new and typically how long till a new salesman hits their stride? Is it six months, eight month’s kind of thing?
Greg Crawford
Hi, Doug, this is Greg. It normally takes about six to nine months and probably since the July, August timeframe in that of 2022 and that we have probably increased our sales team about 20% to 22% or so as far as the overall head count. So some of those hires in that early on are just now starting to hit their stride and that of where they should be.
Doug Cooper
And, sorry, just one more for me and then I’ll pass it along. Just in terms of the organic growth that you referenced in target of 8% to 10%, does that – is that just to Quipt business or do you anticipate great being able to grow in that – in, at that level as well? I’ll leave it there. Thank you.
Greg Crawford
Well, we anticipate the entire business in that is going to grow in fact at a minimum back to historical levels. And that where we were prior to supply chain issues in fiscal 2022. Historically we had been right in that 8% to 10% range. So we think that now that we kind of got the first quarter of seeing that 2% sequential organic growth in that, that we can consistently hit that stride if not exceed that.
Doug Cooper
Okay, perfect. Thanks very much.
Operator
The next question comes from Rahul Sarugaser with Raymond James. Please go ahead.
Rahul Sarugaser
Good morning, Greg, Hardik. Thanks so much for taking our questions and crossing the quarter. So sort of a general question, you previously talked about new product offerings specifically in diabetes. Could you give us a sense for the timing on that specifically also around the new acquisition?
Greg Crawford
Yes. So as far as adding new product lines those are things that we’ve been working on in that since last year in that we’ve been adding product lines, in that such as urological and incontinence supplies and that where we see fit. So we expect to continue to expand those product lines and that as we continue to cross sell in that the patient database.
Rahul Sarugaser
Terrific. And just a quick follow on, like, so in terms of timing, how should we be thinking about the timing for that? And then I’ll throw in my second question, which is just sort of following on for Doug’s previous questions around sort the margin. So we saw – looking at COGS having increased a little bit, of course there’s CPI adjustment so how should we be thinking as sort of a more normalized COGS margin going forward?
Greg Crawford
I guess what you see in Q1 is certainly – that is a baseline that we could all work off. One thing I didn’t address in Doug’s question was cost of good is definitely a function of our sales and rental revenue split as well. So we are anticipating that we will continue to grow our sale side of our business especially with Great Elm coming on board and us trying to push our resupply program on the Great Elm acquisition. So you might see some – the allocation between or the percentage between rentals and sales might change, and as a result of that it does have a direct impact on our margins as well.
So all I’m saying is it’s a little more complicated than just thinking as CPI increase and passing on that CPI increase into a gross margin number because the gross margin numbers would also be changing along with our product mix of rental and sales.
Rahul Sarugaser
Great. Okay. And that’s helpful. And then just sort of one somewhat housekeeping cash question. Now, of course with the acquisition, your cash position’s going to change; cash flow correctly within this quarter, which is obviously an artifact. And we’re all going to run our own numbers, but maybe just for the sake of clarity, could you give us a sense for pro forma cash moving into the new quarter post-acquisition? Thanks.
Greg Crawford
Sure. On a post-acquisition basis from an internal modeling perspective, we do expect the first two quarters to be possibly a little drag on the cash flow side. And a lot of combinations of the new consummated transaction, there are obviously activities and services that you have that you’re going to use your cash tours. We also in assumed about $5 million of lease liability as part of the acquisition. So those lease liability will start flowing through our lease payment on the cash flow. So for the first two or three quarters we would – we do see there would be more of a cash music then what are historically enhancement.
Rahul Sarugaser
Okay. That’s very often. And then just a quick follow-up then, and then I’ll get into back in queue. So in terms of the liquidity availability that you talked about with sort of the pay down on the debt. Can you maybe just give us a sense for your liquidity and the ability to sort of manage these integration incremental integration costs? And then I’ll get back on the queue. Thanks.
Greg Crawford
Sure. Yes. I think we are very confident about our liquidity at this point. We still have availability on our line of credit and that should be plenty for us to go through cash flow fluctuations we talked about. And as far, and apart from that to support our acquisition, we still have our ability on our DDTL. So between our ability on DDTL and the line of credit we feel like extremely comfortable with where we stand, not just to maintain what we have, but if we want to – should continue on the acquisition path again, we don’t see a challenge of liquidity from that perspective.
Rahul Sarugaser
Terrific. That’s helpful. Thanks for taking our questions, I’ll get back in the queue now.
Operator
The next question comes from Tania Armstrong-Whitworth with Canaccord Genuity. Please go ahead.
Tania Armstrong-Whitworth
Good morning guys. Just following up on the questioning around bad debt, we can see a pretty market decline quarter-over-quarter. And I wonder if there were specific changes you made to your billing and collection process you can highlight for us.
Greg Crawford
Hi, good morning. Primarily in that it’s been our workflow processes in that, that we’ve improved on in that throughout 2022, and that we’re just starting to kind of see some of the reflective in that, of that work on the financials. So we would expect to see that to continue in that beyond this quarter.
Tania Armstrong-Whitworth
Okay. And where do you think that line item will settle as a percent of revenue then once all those changes are fully in effect?
Greg Crawford
Yes, we think consistently to stay in this, 5% to 7% range, I know kind of prior to this we were always 8% to 10% in that for bad debt. So we think now we can stay consistently 5% to 7%. That will depend on acquisitions also as we acquire companies and perhaps they don’t collect quite as good as we do in that it takes a while to implement that, but besides a larger one could potentially affect that.
Tania Armstrong-Whitworth
Okay, excellent. And when Great Elm is brought on, are they running at 5% to 7% bad debt expense as well, or is it a little bit higher and we may see that pick up in the interim?
Greg Crawford
Well, they are within a couple points of where we are on the lower side. So we don’t – again, that’s why on the first question we said that what we currently have in Q1 can be considered as a good baseline, hopefully we’ll improve from here.
Tania Armstrong-Whitworth
Perfect. And then on Great Elm as well, I’m forgetting now if there are mixes between sales and rentals. Should we expect the gross margin to temporarily dip as you integrate Great Elm and get your patients onto your resupply business or will the Medicare changes kind of offset that and you can see gross merchants stay about the same?
Greg Crawford
Yes, so I guess, Great Elm does have a slightly different revenue versus – sorry, revenue distinction between rentals and sales. So you would see a mathematical shift on the gross margin side. But if you look at, let’s say, if you look at gross margin as a – cost of gross as a percentage of sales, we probably will still align between the two companies post close.
Tania Armstrong-Whitworth
Perfect. And then a bit different than we see in other healthcare companies where you typically see that Q4 seasonality, it doesn’t seem like your business has a ton of seasonality. Is that fair to assume?
Greg Crawford
Yes, historically we haven’t seen seasonality in that from a revenue standpoint on the collection side in that we do it see seasonality in that we’re on the fiscal year nine thirty as a reminder, so typically maybe into our Q2 in that from a cash perspective and collections and that we could see a slight dip. But historically, we’ve picked that up in the prior quarters or in the following quarters.
Tania Armstrong-Whitworth
Perfect. Thanks guys. That’s all for me.
Operator
The next question comes from Justin Keywood with Stifel. Please go ahead.
Justin Keywood
Hi, good morning. Thanks for taking my call. And nice to see the operating leverage in the quarter. Just on the organic growth outlook of 8% to 10%, is that a big conservative given the already price increases implemented early last month, which I believe, is a blended rate of around 8% for Quipt?
Greg Crawford
Yes, that is correct. And that it is about – the CPI is about 8% overall. We believe that 8% to 10% in that is probably on the lighter side in that especially when we get into the back half of calendar 2023 between the expansion of the sales force that we’re starting to see some impact from and then the full integration in that Great Elm and then supply chain, like we’ve mentioned, we think at a minimum we can get back to where we were historically prior to supply chain constraints.
Hardik Mehta
And just to clarify, the CPI percentages you mentioned that is only on the Medicare revenue, not on the total revenue of Quipt.
Justin Keywood
Right. But is the private insurers, aren’t there rates somewhat comparable or is there a bit of a lag for that to catch up?
Greg Crawford
Well, most of the – I mean commercial payers in that typically don’t follow Medicare. There are some of the Medicare Advantage plans that do. It just depends on if our contract is related to the Medicare rate or not as a percentage or anything. Those we’ll see an increase on. But what we’ve referred to as this 8% is the overall blend and then the $6 million that Hardik mentioned in that that is inclusive of all of those Medicare Advantage plans that we’re aware of and the Medicare.
Hardik Mehta
The point, the distinction we are trying to make Justin is it wouldn’t be appropriate for our users to take 8% over our total revenue. The 8% is only over the Medicare Plus, Medicare Advantage plans, which is you can refer to our investor debt, but about 35% of our – 34%, 35% of our revenue would be impacted by that.
Justin Keywood
Understood. And thanks for clarifying that. And then on M&A obviously a bigger acquisition with Great Elm in a pretty favorable multiple of what you would see with some of the smaller deals. What’s your ability to continue to acquire larger size companies at that multiple? Was Great Elm a bit of a unique situation or do you think there is other opportunities out there like it?
Greg Crawford
Yes, as far as multiples in that, I mean, we’ve seen multiples kind of stay pretty consistent. We’ll say $20 million an under type revenue companies in that are still in that four just over five times. We’ve historically seen larger companies $20 million to say $80 million, $90 million in top line revenue, and that come in in that seven to nine times. All of those are kind of pre any synergies. I’ll say that the market has slightly changed in that and came down on the larger size deals. There tends to be a fair amount of those still on the market that were commanding that high end of the multiple in that say going back a year and a half ago.
So we anticipate as long as we continue to remain disciplined in that, in our approach and that that we’ll be able to continue to fill the pipeline here and close some deals in that in 2023.
Justin Keywood
And would the focus still be in respiratory services or are you looking at any other areas?
Greg Crawford
Primarily would be re respiratory focused.
Justin Keywood
Great. Thank you for taking my questions.
Hardik Mehta
Thank you.
Operator
The next question comes from Stefan Quenneville with Echelon Capital Markets. Please go ahead.
Stefan Quenneville
Hi guys. Thanks for taking my question. And congrats on the quarter. Most of my questions have been answered. I just wanted to ask you kind of a question on the Cardinal distribution deal. It’s been about six months since you guys announced that. And I just wanted you to help me understand the kind of contribution that’s going to be making to organic growth and maybe just your assessment of how that’s panned out to date. Thanks.
Hardik Mehta
Yes, good question in that. I mean, we’ve seen a pickup in that in items such as incontinence and urological supplies. That’s kind of where our focus has been is on those particular items. And they have definitely contributed in that sum to the organic growth in that that we’ve seen over this past quarter. And we expect to see that to continue to build as we get into 2023.
Stefan Quenneville
And how much sort of tailwind in terms of like a basis points of growth, do you think that that could add?
Greg Crawford
Yes, it would be tough for us to really kind of give a number on that of where we’re at, how much those particular categories are actually going to contribute. So we’re still in the early stages.
Stefan Quenneville
Okay. Great. That’s it from me. Thanks guys.
Greg Crawford
Thank you.
Operator
That concludes the question-and-answer session. I will now hand the call back to Mr. Crawford for closing remarks.
Greg Crawford
Thank you, operator. And thank you all for your participation today. As always, you can find us on the web at www.quipthomemedical.com, where we will be posting a transcript of this call and also our updated investor deck. Thank you and have a great day.
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