A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that develops software to help health-industry regulators and others better manage their information and improve their efficiency. Its clients include more than 300 state and local government organizations across North America.

The software has conceptual appeal, but the company’s challenges, including a weak balance sheet, are reflected in the stock’s 71% drop over the past year. That makes it difficult for the company to raise funds and continue operations, says Pat.

Q: HealthSpace Data Systems—what’s your view on it, Pat?

HealthSpace Data Systems, (symbol HS on the on the Canadian Securities Exchange; www.healthspace.com), develops and sells software aimed at letting health and various other regulatory authorities improve their effectiveness through the better use of information.

The company believes that its potential customers include the thousands of organizations in North America that are currently inspecting and regulating elements of public health and safety. It feels that many do not have effective and cost-efficient information management systems, and the cost of developing their own custom-built systems is prohibitive.

HealthSpace Data Systems’ main application is specifically designed for data collection in the field and can work either connected to or disconnected from the Internet; it provides health inspectors with a touch-screen experience when recording observations in the field. Calendars, past inspections, food codes and violations can be downloaded from the main system in addition to uploading newly created reports. The application also provides the ability to electronically capture signatures and insert photos, plus email inspection reports.

In addition, the company offers software applications to private businesses that give them insights into their own operations based on combining government inspection data with internal data.

HealthSpace has also launched My Health Department. This new platform aims to be the first portal to offer businesses, such as restaurants, the ability to easily connect and manage all things related to the regulatory and compliance nature of government oversight. Further, if a restaurant has locations across multiple jurisdictions, it can have several health departments to report to. This means numerous sets of invoices, permits and various other items to keep up with. Only a handful of health departments offer digital payment services (e.g., credit cards) and even fewer accept these payments online.

The company reports that over the last decade, it has developed both enterprise and mobile Internet-based applications that currently serve over 300 state and local government organizations. Collectively, they cover 62 separate contracts across North America.

Penny Stocks: Weak balance sheet hangs heavily over this low-priced stock

In the year ended July 31, 2018, overall revenue rose 15.0%, to $2.2 million from $1.9 million for the previous fiscal year. HealthSpace lost $943,026, or $0.008 a share, compared to a loss of $1.8 million, or $0.022 a share. (All figures except share price and market cap in U.S. dollars.)

The company’s software has conceptual appeal, but faces a number of big challenges. That is, in fact, why its shares have dropped from $0.21 at the start of 2018 to $0.06.

The company held cash of just $332,333 on July 31, 2018. However, it operates in a highly competitive business, and it will need to spend considerable amounts on marketing and research to win customers. That means it will need to raise funds to continue its operations and meet its debt obligations.

HealthSpace’s weak balance sheet has prompted its auditors to raise questions about the company’s ability to carry on the business as a “going concern.” It will also be difficult for HealthSpace to raise funds with its share price so low. Still, if it were able to sell shares to raise that money, they would be highly dilutive to current shareholders.

We don’t recommend shares of HealthSpace Data Systems.