CareCloud, Inc. — Second Quarter 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. CareCloud provides healthcare software, revenue-cycle management, professional, and medical-practice management services. Results include the June 2021 acquisition of medSR.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $34.1 million | $19.6 million | $63.8 million | $41.4 million |
| Operating loss | $0.1 million | $4.6 million | $1.8 million | $7.4 million |
| Net loss | $0.2 million | $4.8 million | $2.2 million | $7.3 million |
| Net loss attributable to common shareholders | $3.9 million | $8.1 million | $9.0 million | $13.2 million |
| GAAP loss per common share | $0.27 | $0.65 | $0.63 | $1.07 |
| Adjusted EBITDA, non-GAAP | $5.7 million | $0.2 million | $9.3 million | $1.0 million |
Q2 GAAP operating margin improved to negative 0.3% from negative 23.5%; first-half margin was negative 2.8% versus negative 18.0%. Non-GAAP adjusted operating margin was 13.6% for Q2 and 11.9% for the first half, compared with negative 0.8% and 0.6%, respectively. Adjusted measures exclude items including stock compensation, acquired-intangible amortization, transaction and integration costs, and impairment or unoccupied-lease charges.
- Cash flow: Operating cash flow was $1.1 million in Q2 and $2.1 million for the first half, versus $1.0 million and negative $2.9 million in the comparable 2020 periods. First-half investing cash use was $17.0 million, including $12.3 million paid for acquisitions, $1.5 million of property and equipment, and $3.3 million of capitalized software.
- Liquidity: June 30 cash was $8.0 million plus $1.5 million restricted cash. Working capital was approximately $8.0 million. The company had $5.0 million drawn on its revolving credit line at quarter-end and repaid it in full in July 2021.
- Debt and obligations: The balance sheet reported $5.0 million of line-of-credit borrowings, $53,000 of notes payable, $1.9 million of deferred payroll taxes, and $9.8 million of operating lease liabilities at June 30. Preferred dividends payable were $3.8 million; $7.2 million of preferred dividends were paid in the first half.
Material changes versus prior period
- Revenue increased 74% in Q2 and 54% in the first half. Management attributed much of the growth to acquired businesses: CCH, Meridian, and medSR contributed approximately $21.3 million of Q2 revenue and $38.5 million for the first half.
- Technology-enabled business solutions generated $27.1 million of Q2 revenue and $53.0 million for the first half. Professional-services revenue rose to $3.5 million in Q2 from $0.4 million, primarily reflecting acquired and expanded services.
- Operating expenses rose 41% in Q2 and 34% in the first half, below revenue growth. Direct costs and selling and marketing costs increased, while R&D expense decreased partly because more software development costs were capitalized. Depreciation and amortization and impairment/unoccupied-lease charges increased.
- Cash and restricted cash fell by $11.4 million over the first half, principally amid acquisition spending, preferred dividends, and other investing and financing activity. Financing included $6.4 million from warrant exercises, $1.4 million from common-stock issuance, and $5.0 million of credit-line proceeds.
Outlook, risks, and unusual items
- No quantified forward guidance was provided. Management stated it was forecasting a return to profitability, while cautioning that historical losses and uncertainty about future U.S. taxable income led to a valuation allowance against deferred tax assets.
- The medSR acquisition closed June 1 for total preliminary consideration of $20.3 million: $12.3 million cash, $1.6 million held in escrow, and $6.5 million estimated contingent consideration. Additional earn-outs could total up to $13 million over an 18-month period, subject to revenue and EBITDA targets. The purchase-price allocation remained preliminary.
- Management said COVID-19 had not materially adversely affected results in the first half, but its effects on operations, demand, patient visits, and the wider economy remained uncertain.
- A subsidiary, MAC, continues to face arbitration claims by Randolph Pain Relief and Wellness Center. The claimant disclosed damages estimates ranging from $11 million plus costs to a prior demand of $20 million plus costs; CareCloud said the claims were speculative and expected any award to be substantially lower. CareCloud itself was previously ruled not subject to the arbitration.
- The company settled a civil investigation involving acquired CCH operations in April 2021 for approximately $4.2 million, substantially within the amount covered by escrowed consideration.
- Other stated risks include acquisition integration and earn-out obligations, client retention and collections, compliance and data privacy, offshore operations, competition, key-person dependence, credit-agreement covenants, and the ability to pay preferred dividends. Management reported compliance with SVB covenants at June 30.
Most important facts for investors to verify
- How much of reported growth and improved adjusted results is organic and sustainable versus attributable to acquisitions and exclusions in non-GAAP measures.
- Whether medSR meets its revenue and EBITDA targets, and the final purchase-price allocation and resulting goodwill and amortization expense.
- Cash conversion and working-capital trends, including collections, contract assets, acquisition-related spending, and the company’s ability to fund preferred dividends and other obligations.
- Potential dilution from equity issuance, outstanding warrants and equity awards, and the company’s use of its $50 million at-the-market facility.
- Developments in the MAC arbitration, acquired-business contingencies, and the continuing effects of COVID-19 and other disclosed operating risks.