CareCloud, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
CareCloud provides technology-enabled healthcare revenue cycle management, cloud software and related services, professional services, and medical practice management. It reports Healthcare IT and Medical Practice Management segments. The company estimated it served approximately 40,000 providers across 2,600 practices and hospitals at June 30, 2023.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $29.4 | $37.2 | $59.4 | $72.6 |
| Operating income (loss) | $(1.3) | $2.8 | $(1.5) | $4.0 |
| Net income (loss) | $(1.8) | $2.7 | $(2.2) | $3.9 |
| Net loss attributable to common shareholders | $(5.7) | $(1.0) | $(10.1) | $(3.9) |
| GAAP operating margin | (4.4%) | 7.4% | (2.5%) | 5.5% |
| Adjusted EBITDA (non-GAAP) | $3.8 | $7.0 | $8.1 | $11.7 |
| Adjusted operating margin (non-GAAP) | 5.9% | 15.4% | 7.1% | 12.8% |
Q2 basic and diluted loss per common share was $0.37, compared with $0.07 in Q2 2022; six-month loss per share was $0.65 versus $0.26. Preferred dividends were $3.9 million for Q2 and $7.8 million for the first half, contributing to the larger loss attributable to common shareholders.
Cash flow: For the six months, operating activities provided $7.4 million, investing activities used $6.1 million, and financing activities used $5.8 million. Cash decreased $4.6 million to $7.7 million. Q2 operating cash flow was $6.4 million; cash declined approximately $0.5 million during the quarter after investing, financing, and exchange-rate effects.
Margins and expenses: Direct operating costs were 59.5% of revenue in Q2 2023 versus 58.5% a year earlier. Selling and marketing, general and administrative, research and development, and depreciation and amortization were 8.8%, 20.1%, 4.0%, and 11.4% of revenue, respectively. GAAP operating margin declined into loss despite lower total operating expenses, as revenue fell faster.
Balance sheet and liquidity
At June 30, 2023, cash was $7.7 million, current assets $27.8 million, current liabilities $19.6 million, and reported net working capital $8.2 million. Total assets were $126.8 million and shareholders’ equity was $93.5 million. Accounts receivable was $12.0 million and contract assets were $4.8 million.
Borrowings on the secured revolving credit facility were $10.0 million, up from $8.0 million at year-end 2022. The facility limit was increased to $25 million in February 2023; the company reported approximately $4.4 million of unused borrowing base at June 30. Interest was prime plus 1.50%. The company reported compliance with credit covenants. It also had approximately $4.7 million in operating lease liabilities and $16,000 of notes payable.
Changes versus the prior comparable period
- Revenue decreased 21% in Q2 and 18% for the first half. Management attributed the decline mainly to lower project-based professional services and the wind-down/transition of two acquired customer accounts.
- Revenue from the two accounts was $1.0 million in Q2 2023 versus $4.2 million in Q2 2022; first-half revenue was $2.0 million, accounting for approximately $5.7 million of the year-over-year first-half decline.
- Direct operating costs fell 20% in both comparisons, partly reflecting lower salaries, a weaker Pakistan exchange rate, reduced U.S. headcount, and lower outsourcing and processing costs. Selling and marketing and R&D expenses increased.
- Interest expense rose to $327,000 in Q2 and $477,000 for the first half, primarily due to greater use of the line of credit. Amortization also increased as software placed into production began amortizing.
- Operating cash flow was down $0.7 million year over year for the first half. Cash used in financing increased, including $7.8 million of preferred dividends and $1.2 million of employee equity-award tax withholding payments.
Outlook, commentary and risks
Management said it is pursuing organic revenue growth, including its CareCloud Wellness offering and increased professional-services activity, while reducing noncritical spending and reviewing capital expenditures. It expects revenue from the two transitioning customer accounts to be approximately $0.5 million for the remainder of 2023. Management stated that cash on hand, operating cash flows, and potential capital-raising capacity should be sufficient to fund operations for the next 12 months and beyond; this assessment depends partly on future cash generation and access to financing. No specific revenue or earnings guidance was provided.
- Funding and dividends: Management identifies potential common or Series B preferred stock issuance and additional credit-line borrowing as funding sources. The company has substantial recurring preferred-dividend obligations and warns of its ability to pay them.
- Customer and operating risks: Revenue depends on retaining clients and maintaining collections; the filing highlights client transitions, integration and growth execution, competitive pressures, and the ability to maintain offshore operations.
- Banking and currency exposure: Cash balances at the principal bank exceeded FDIC insurance limits. Subsidiaries held approximately $75,000 at banks in Pakistan and Sri Lanka, where deposits were uninsured. Foreign exchange movements also affected results.
- Debt and compliance: The revolving facility is secured by domestic assets and 65% of shares in offshore subsidiaries and includes adjusted EBITDA and liquidity covenants. The company reported covenant compliance at quarter-end.
- Unusual items and estimates: Q2 included $153,000 of lease termination and unoccupied-space charges; first-half charges were $422,000. The company adopted the expected-credit-loss standard in 2023, recording a $186,000 opening accumulated-deficit adjustment. Goodwill was $61.2 million, and management recorded a valuation allowance against deferred tax assets.
The company said the arbitration dismissing claims brought against its subsidiary by Randolph Pain Relief and Wellness Center became final after no appeal action was filed by the deadline. Management reported no other legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether customer transitions and reduced project-based services stabilize, and whether new sales and CareCloud Wellness can offset lost revenue.
- Whether operating cash generation can support investment, lease and debt obligations, and preferred dividends without additional equity or borrowing.
- The facility’s borrowing availability, interest cost, covenant headroom, and ongoing compliance.
- Underlying performance alongside non-GAAP measures, including the recurring impact of stock compensation, amortization, and other adjustments.
- Client collection trends, contract-asset conversion, and the assumptions underlying expected credit losses and management’s liquidity outlook.