Kontigo Care’s Q1’23 report was slightly weaker than expected. However, we see no major drama as business activity remains high, and the anticipated price increases are expected to offset higher costs. The price increase occurred in March, which will gradually impact as subscription periods expire and new prices become effective. The final impact of the price increase on net revenue and results can be assessed at the end of 2023.

Net sales for the quarter came in at SEK7.1m (6.8m) and EBIT at -SEK0.4m. We had forecasted net sales to SEK7.8m, a minor negative deviation of 9%. The gross margin reached c85%.

The company signed four new frame agreements with municipalities during the quarter; the total number of municipality contracts now stands at 158, with c55% of municipalities contracted. 10 new licenses were added during the quarter. Consequently, the base of active licenses increased during the first quarter of ’23 from 946 to 956. MRR (Monthly Recurring Revenue) increased from cSEK2.4mSEK at the end of the last quarter to SEK2.5m by the end of Q1’23.

Operating expenses (ex. D&A) amounted to SEK10.4m (7.0). The negative result of cSEK0.5m was impacted by one-time costs amounting to SEK0.8m related to the mandatory adaptation to the regulatory framework in MDR requirements. One-time costs for the transition to MDR are also expected in the upcoming quarters. Cash flow from operating activities was cSEK1m: by the end of the quarter, cash and cash equivalents amounted to cSEK9m. During the quarter, two loans were obtained from financial institutions totalling SEK7.0m.

Kontigo Care uses capitalisation – i.e., it records an asset (in this case, development costs) on the balance sheet instead of immediately expensing this on the income statement. In Q1, Kontigo Care capitalised SEK3.9m for development (mainly derived from the drug monitoring project), while D&A amounted to cSEK1m (amortisation amounted to SEK0.7m).

On the 8^th of Mars ‘23, Kontigo Care announced a signed agreement with Region Uppsala to conduct a clinical study for mobile phone-based drug monitoring starting in March 2023. The study is Kontigo Care’s second clinical study for mobile phone-based iris and pupil detection. The first study began in February 2023 in the Netherlands. The new clinical study will be carried out within the framework of the syringe exchange program. The syringe exchange program offers addicts health screening, sampling, and vaccination for hepatitis A and B, as well as counselling and supportive conversations for drug sobriety. The purpose of the clinical study is primarily to investigate how easy it is to use the new application that measures drug sobriety by analysing the iris and pupil. The purpose of the study in the Netherlands is to examine the application's ability to calculate drug intake under controlled conditions. A second objective is to advance AI algorithms and drug monitoring software development. Together, these two studies form the foundation for a future CE-approved product.

On the 20^th of February ’23, Kontigo Care announced a signed agreement with Leiden University Hospital (LUMC) in the Netherlands to conduct a pilot study for mobile phone-based iris and pupil detection to measure drug intoxication. Further,  the clinical trial application has been approved by the authorities in the Netherlands. The pilot study in Leiden will take place with a group of volunteers and cover four different drug types. It is expected to start in February 2023 and finish in June 2023.

Existing customers provide a mixed picture of outlook. Longer decision-making processes, uncertainty about economic development, and tighter budgets result in weaker contributions of new licenses in municipalities. However, others see increasing needs for digital support in addiction care and the opportunity for more efficient healthcare and cost savings.

According to the company, it currently targets about 10% of the potential market in Sweden, leaving plenty of room for growth. However, Kontigo Care mainly focuses on a slow-moving area: the municipalities in Sweden. Even though the Previct products have been proven to increase efficiency amongst therapists and improve treatments, the municipalities are still traditional and look at the licensing costs. Given this, and in combination with a presumed softer municipality economy this year, we expect a c10% growth rate in ’23.

Kontigo Care has already started communicating with some regions and is preparing the necessary upgrades to meet the regions’ regulatory demands (MDR). We believe the potential agreements with the regions will likely include larger volumes of licences. On the downside, given the volumes, the price is likely to be lower than today. Nevertheless, we expect the new reorganisation of responsibilities for addictive care to boost sales in Sweden. The regions are likely to look for eHealth solutions with a proven track record that help therapists become more effective. The ambition is to initiate a small number of pilot projects with regions in Sweden during ’23.

Regarding internationalisation, we expect results from the collaboration with distributor A-klinikka later this year for the Finnish market. However, this will likely have a limited effect on the top line in ‘23.  

We have lowered net sales from SEK33m to SEK31m, adjusting for a weaker licence intake in Q1’23. We now forecast c10% net sales growth for 2023. Further, we have adjusted D&A ’23e-26e and adjusted for a higher cost base ‘23e-‘26e. The tables below summarise our estimate changes and estimates.

We value Kontigo Care using a DCF valuation based on different long-term sales growth and margin assumptions. Our new fair value range is SEK1.5–18 (previously: 2.2-19), with a Base case of SEK10.5 (11) per share. This is based on the financial forecasts in the table above and long-term assumptions outlined in the table below