CareCloud, Inc. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the CareCloud Inc. First Quarter 2024 Results Conference Call. Following the presentation, we will conduct a question-and-answer session. Also note that this call is being recorded on Tuesday, May 14, 2024. And I would like to turn the conference over to Liz Ferrer, Vice President of Human Resources. Please go ahead.

Good morning, everyone. Welcome to CareCloud's First Quarter 2024 Conference Call. On today's call are Mahmud Haq, our Founder and Executive Chairman; Hadi Chaudhry, our Chief Executive Officer and Director; Stephen Snyder, our President; and Norman Roth, our Interim Chief Financial Officer and Controller. Before we begin, I would like to remind you that certain statements made during this conference call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21A of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts made during this conference are forward-looking statements, including, without limitation, statements regarding our expectations and guidance for future financial and operational performance, expected growth, business outlook and potential organic growth and acquisitions. Forward-looking statements may sometimes be identified with words such as will, may, expect, plan, anticipate, upcoming, believe, estimate or similar terminology and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which would cause actual results to differ materially from those contemplated in these forward-looking statements. These statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our press release and our reports filed with the Securities and Exchange Commission where you will find a more comprehensive discussion of our performance and factors that could cause actual results to differ materially from these forward-looking statements. For anyone who dialed into the call by telephone, you may want to download our first quarter 2024 earnings presentation. Please visit our Investor Relations site, ir.carecloud.com, click on news and events, then click IR calendar, First Quarter 2024 Results Conference Call and download the earnings presentation. Finally, on today's call, you may refer to certain non-GAAP financial measures. Please refer to the present day's press release announcing our first quarter 2024 results for a reconciliation of these non-GAAP performance measures to our GAAP final results. With that said, I'll now turn the call over to our CEO, Hadi Chaudhry. Hadi?

Thank you, Liz, and thanks to all of you for joining our first quarter 2024 earnings call. As we discussed in our most recent earnings call, this year, we will continue to remain steadfast in focusing on increasing profitability and free cash flow. To achieve this overarching objective, our team will leverage our proven technology expertise and AI, our integrated global workforce and our core competencies related to integration and cost rationalization. Our first quarter results demonstrate that we are making progress on our objectives. In particular, since October of 2023, we have identified approximately $22 million of annualized cost reduction that we are working to implement. The early results of these cuts are beginning to be seen as cash from operations increased to $4.1 million as compared to $1 million during the first quarter of last year and our adjusted EBITDA was $3.7 million. This increase in cash enabled us to pay down $2 million of our credit facility, $1 million during Q1 and another $1 million so far in the second quarter. These improvements in profitability are in spite of the fact that our revenue, which was $26 million for the first quarter, was lower than the first quarter of last year, primarily due to the lower nonrecurring revenue for Med SR. Year-over-year, we saw improvements in our digital health offering with revenue growing nearly 4x. We continue to remain confident that the cross-selling opportunity of higher-margin, tech-enabled RCM to our nonrecurring professional services clients will continue to represent a significant opportunity for growth. We continue to align our expenses with our revenue and are focusing on the opportunities that generate the best return on investment. Our primary objective will remain centered on profitability and free cash flow, supported by a company-wide commitment to operating leverage and improving our competitive position. Norman will cover these results in more detail later in the call. Turning to our products. As our investors know, our proprietary end-to-end platform is fully integrated and designed with the flexibility to be adapted across markets and to meet the evolving needs of our clients, the overwhelming majority of whom utilize more than one CareCloud solution. We continue to see rising demand for our digital health and generative AI solutions as we are eager to meet this demand with our scalable solutions and specialized workforce. In Q4 of 2023, we were thrilled to introduce our groundbreaking suite of generative AI solutions, CareCloud cirrusAI. This innovative platform has empowered our revenue cycle management team with a generative AI-based appeals product revolutionizing the appeal generation process with unparalleled effectiveness and cost efficiency. Additionally, we have seamlessly integrated a virtual support assistant into our offering, ensuring that our valued customers receive enhanced and timely support. The CareCloud cirrusAI guide represents a significant advancement in leveraging AI to deliver clinical decision support by streamlining data input processes and providing real-time evidence-based recommendations. It assists clinicians in their workflow, ultimately enhancing diagnostic accuracy and treatment planning. By analyzing past medical and social histories alongside current symptoms, it generates suggestive patient charges facilitating informed decision making. Since its launch, we have seen tremendous interest in the CareCloud cirrusAI guide, with over 400 customers signing up or expressing interest in this transformative tool. We remain committed to providing this product free of charge to our existing clientele as we continue to define our AI technology and improve outcomes. In just the past several months, cirrusAI guide has facilitated thousands of recommendations underscoring our dedication to delivering actionable insights and exceptional service. Continuing our commitment to advancing health care technology, we are proud to introduce our latest offering, cirrusAI Notes. This solution revolutionizes the transcription process of provider-patient interactions, delivering precise clinical notes in real time within a secure HIPAA-compliant environment. Operating seamlessly during patient consultations, CareCloud cirrusAI Notes intelligently identifies crucial dialogue and medical terminology, compiling them into comprehensive clinical notes for immediate review by physicians. Upon approval, these notes are securely archived within the patient's electronic health record, ensuring seamless continuity of care. We are currently evaluating and testing this solution with an initial pilot group. Over the next 30 days, we plan to introduce it to our existing customer base at market competitive pricing. Additionally, we are implementing risk-free trial periods to ensure customer satisfaction and confidence in the product. Finally, I'm pleased to welcome back Steve Snyder to our executive team as President. Whether it has been as General Counsel, Chief Strategy Officer, President, or CEO, he has partnered with me and our broader team over the last two decades, and we have all worked together to build a world-class game-changing company. I will now turn the floor over to Stephen. Steve?

Thanks, Hadi, and thank you to our investors for joining today's call. As Hadi explained, we are very pleased to see early signs that the fruit of the company's hard work is beginning to come to fruition. In particular, we've seen year-over-year increases of more than 200% in our free cash flow. Our cash from operations has increased by nearly 300%, and we posted $129,000 of GAAP operating income versus a loss of $223,000 during this quarter last year. We believe that these numbers are not mere aberrations. Instead, they are the direct result of decisive actions taken by the company that are starting to be seen in our financial statements. There are snapshots of the trend line that we believe is moving strongly in the right direction. Between October 2023 and today, we have identified approximately $22 million in annualized cuts that we plan to execute before the end of 2024. Additionally, we have identified and taken preliminary steps on other material cuts that will not be seen until 2025 due to contract term requirements. As to the 2024 reductions, we have already taken action on approximately 75% of the $22 million in reductions. That's why we expect an in-year impact during 2024 alone of approximately $15 million in reduced expenses. But let's focus for a minute on a specific example. Prior to 2024, we continued to rely on three different partners who provided R&D resources at a combined annualized cost of approximately $3 million. We inherited these partnerships in conjunction with various acquisition closings. As part of our cost rationalization assessment, we developed an action plan for transitioning this work to our internal R&D team members and expect to realize net annualized savings of approximately $1.9 million, with in-year savings of $1.4 million. Better yet, as we leverage our team, we are able to more tightly control and accelerate the development efforts without the operational risks associated with relying on third parties. By focusing on doing more with less, we are becoming a stronger, more effective and more nimble company. Since our founding, our competitive advantage has always been centered around our cost-efficient global team, our core technology strengths, and our unique integration capabilities. The more we lean into these strengths, the more we are able to reduce costs and the stronger our platform becomes. These are but a small number of the multitude of expense reductions that have already occurred or will soon occur, some of which will save us $15 million during 2024 and far more as we move forward. I'll now turn the floor over to our Interim CFO, Norm Roth. Norm?

Thanks, Steve, and thank you all for joining our call today. I would like to start by reiterating Hadi and Steve's sentiment that we are pleased to report that our first-quarter results were in line with our expectations and we are on track to achieve our full year goals of returning to profitability and positive cash flow. In the first quarter, we reported revenue of nearly $26 million. While down year-over-year, the bulk of the decline, $2 million, was due to Med SR, which is a project-based professional services business that tends to fluctuate. Med SR had softness in the second half of last year, which is continuing. So our expectation is that our second-quarter professional services revenue will be similar to the first quarter but we are hopeful that we will see some growth in the second half of 2024. More importantly, our direct operating costs decreased by almost $3 million from Q1 2023, and our operating expenses, including G&A, R&D and sales and marketing expenses, decreased by $2.4 million. We reported positive GAAP operating income of $129,000 for the first time since Q4 2022, and our GAAP net loss decreased from $401,000 in Q1 2023 to $241,000. We reported adjusted EBITDA of $3.7 million in the first quarter. Our GAAP earnings per share was negative $0.02 compared to negative $0.28 in Q1 2023. This improvement in profitability translated into an improvement in cash flow. Our net cash provided from operating activities was $4.1 million, almost 4x Q1 2023, and our free cash flow was $2.2 million compared to negative $2 million last year. Please note that free cash flow is a measure of cash we generate from operating and investing activities and does not take into account the use of cash during Q1 of 2023 for our preferred stock dividends. Our free cash flow allowed us to pay down $1 million on our SVB line of credit during Q1 and still end the quarter with $4.1 million of cash, an increase of $800,000 from December 31, 2023. We paid down another $1 million on the SVB credit line during April. Reducing our SVB line of credit balance by generating positive free cash flow is a top priority for us and is a prerequisite to being able to restart the dividends on our preferred stock. I'll close my comments by reiterating our 2024 guidance. We continue to expect revenue of $118 million to $120 million and adjusted EBITDA of $21 million to $23 million. We expect to see steady quarterly revenue growth throughout the year, and as we hold the line on expenses, this means that our adjusted EBITDA and cash flows will grow even faster than revenue. The first quarter results put us on a good footing for the year ahead. We're happy with our progress toward returning to profitability and look forward to updating you later in the year. With that, I'll turn the call over to Mahmud for closing remarks. Mahmud?

Thank you, Norm. Our primary focus is on disciplined operational improvements, setting the stage for profitable and sustainable growth, ultimately creating long-term value for our shareholders. I would like to thank our employees, customers, and shareholders for their continuous support in furthering CareCloud's mission. Operator, please open the floor for questions.

And your first question will be from Jeffrey Cohen at Ladenburg.

I guess firstly, could you talk about yesterday's press release. Maybe give us a little flavor on that as far as the capital structure update in the announcement yesterday.

Sure. Jeff, thanks for the question. And maybe, Jeff, if we kind of step back for a minute, as you know, it's pretty common for public companies to receive these sorts of inbound expressions of interest in one format or another. And as a general rule, they don't necessarily publicly disclose them all, and we're no different in that regard. But for this particular indication of interest, the Board thought that it was important to provide disclosure. As context to explain to your point, why we selected Citizens JMP to analyze the overall capital structure and to provide guidance with regard to potential changes to the capital structure. And those changes, of course, would be changes to ensure and to protect the best interest of the company and also the best interest of all the shareholders. So by providing some more granular details, at least on a high level with regard to the indication of interest, we thought that was helpful, again, to pull out the differentiation, at least this particular party was making with regard to the treatment of the preferred As and the Bs. In the context of a change of control, the context, of course, being that in change of control with regard to Series B. In effect, the buyers of the common stock would ultimately pay the accrued dividends and the liquidation value of $25 in conjunction with any transaction. And at least this particular indication of interest was silent as to the Series A, and again, the Board thinks it's important to receive some guidance from a bank like Citizens JMP with regard to any possible modifications of the certificate designation that could address this disparity.

That's helpful, Steve. Could you give us a sense, was that a PE fund or a competitive company in the space? Or any color there is appreciated.

Sure, sure. It was a leading PE fund.

Got it. Okay. And then secondly, for us, any comments on the line of credit? Where does it stand there and what would you expect it to look like throughout 2024?

Thank you for the question, Jeff. Currently, the credit line is $8 million. To provide some context, we have a $20 million line of credit with SVB. Last December, we had a $10 million balance on that line. The bank indicated that if we continued paying dividends, we wouldn't be able to relax the covenants necessary to access the remaining $15 million on the line, whether for business needs or to pay preferred dividends. Consequently, we made the difficult decision to suspend the preferred stock dividend last December. At the same time, we continued with our plan to reduce expenses across the company, focusing on achieving positive free cash flow and profitability. As we've mentioned before, we've identified about $22 million in annual cost reductions and expect to save approximately $15 million in 2024, which is roughly equal to our annual dividend. Our free cash flow stands at $2.2 million. We plan to keep repaying the line from our cash flow and want to see several months of positive cash flow that would cover the dividends before discussing the potential reinstatement of the dividend. So far, we've paid down $2 million of the dividend, leaving a balance of $8 million. The Board and management are very confident about the future of the company, as shown by the 38% insider ownership. Our founder, Mahmud Haq, has increased his ownership to over 5 million shares from approximately 4.8 million shares at the IPO. This significant insider ownership indicates that our founder and the rest of the company's directors are invested in ensuring the company's success. I hope this answers your question.

Next question is from Allen Klee of Maxim Group.

Yes. Congrats on the profitability improvement. A question on your guidance. You commented that you expect revenue to increase each quarter for the rest of the year. We know that the first quarter is seasonally low, so we would expect a jump up in Q2. But could you kind of give us the playbook for why you expect Q3 and Q4 to continue to grow after that?

Thank you, Allen. As you noted, the first quarter usually experiences seasonality, and those figures are lower compared to the other quarters of the year. I mentioned earlier that our digital health offering has seen a year-over-year revenue increase of about four times. This revenue growth is attributed to our digital health offering as well as the sales of our technology-enabled solutions. It reflects the strength of our complete range of proprietary solutions, including RCM and digital health solutions. In the latter half of the year, we anticipate additional contributions from our various AI products and services.

I have one other follow-up question on the expression of interest. You noted one of the series has to be redeemed. The other one could be left outstanding. If it was left outstanding, I'm assuming though, it's still a liability of the acquiring company, right? Is that true?

That's correct, Allen. Yes, they would still in the context of a transaction, we still have all the same obligations that we would have relative to the As.

Your next question will be from Bill Sutherland at Benchmark.

Welcome back, Steve. I was thinking on the cost takeout, maybe one or two other important examples that you're counting on for the target.

Thank you for your question, Bill. If we take a moment to consider the bigger picture regarding our current status, since we initially discussed the overall reduction in expenses as a project in the fourth quarter of last year, we have identified approximately $22 million in annualized cost savings. Our company's competitive advantage has always been our ability to leverage our cost-efficient, fully integrated team. Additionally, our technological capabilities are another key component of that advantage, primarily through our IT and R&D team. Furthermore, our ability to integrate new solutions and clients, whether through organic growth or acquisitions, enhances these capabilities. As we focus more on these core advantages, we find that doing so increases our capacity to reduce costs and strengthens the company and our platform overall. One specific example of this advantage is the reduction of several R&D vendors resulting from past acquisitions. Broadly, out of the $22 million in savings, about $7 million is tied directly to our IT and R&D capabilities, which reflects our effective utilization of the team for these solutions. As we seek out cuts, we are eliminating redundancies among vendors and personnel, with a particular emphasis on ensuring that these changes do not affect our clients. We are strategically targeting non-client-facing roles to ensure there is no impact on near-term or long-term revenue generation.

Will you have additional restructuring or onetime charges to realize the cost savings?

Yes. Good question. And we'll hand the floor over to Norm to jump in on that.

Thank you, Bill. So we're estimating about another $400,000 for the remainder of the year in restructuring charges.

Okay. Yes, I've been thinking about your revenue trajectory. And to what degree do you kind of see it in the sales pipeline at this point since you're just launching these AI products?

I believe you should view it from a growth viewpoint, specifically regarding net new revenue. We're performing significantly better this year in terms of attrition. Currently, our annualized attrition is an improvement over last year. We are dedicated to retaining our existing revenue. Furthermore, regarding top-line revenue, we're observing growth from digital health services. When comparing the first quarter of this year to the same quarter last year, our performance in RCM and technology-enabled solutions appears to be at least on par with last year, if not slightly better. Therefore, with the advances in RCM, digital health, and improved attrition rates, we anticipate seeing net new revenue growth in the coming quarters alongside the typical seasonal effects in Q1.

So I guess you're saying not as reliant as I thought on the new products? And are you looking for the chronic care and the other remote monitoring?

Correct. The CTM RPM will be a digital health solution, and there is revenue growth as clients continue to ramp up and move through the onboarding process to go live in the upcoming quarters. So yes, we anticipate growth from there and also from RCM. Regarding the AI solution, one of the products we rely on is managed by our partner, Google Cloud, using their LLM. We understand that AI hallucination needs to be significantly reduced and improved before we can move these into production at the right price point, and we are actively addressing those issues. For the recently launched AI technology solution, CirrusAI Notes, this technology appears to be more mature compared to others. We believe that once we complete the initial pilot testing and optimization, we will assign a price to it and share that within the next 30 days. We expect some revenue from these products in the second half of the year. While it's difficult to predict the exact dollar amount at this point, you should consider it part of our top-line guidance.

Right. And I know it's a very competitive space now, the documentation side.

Next is a follow-up from Allen Klee.

Yes. Just a couple of housekeeping of when the 10-Q might be filed and what your share count currently is? And then I have one follow-up after that.

Thank you, Allen. So the 10-Q will be filed tonight at 4:30 right after the market closed. And our common share count right now is about 16.1 million shares outstanding.

I'm sorry, could you say that again?

I'm sorry, we're going to file the 10-Q tonight at 4:30 after market close, and our common shares outstanding is 16.1 million.

Okay. And then one follow-up question on the unsolicited offer. The third-party bank that was hired to evaluate it was to look at the offer and you wrote in the press release to also make recommendations that might be beneficial to yourselves? Is the way I read this that, that means that they recommended that the terms of both of the preferred stock should be changed related to the redemption provisions?

Good question, Allen. And we've just recently retained Citizens JMP. So they're just starting their work right now. But again, a core part of their focus is really on the issues that you're alluding to, which is the Series A and the Series B and really analyzing the certificate designation in particular, with regard to changes of control as it relates to Series A in particular. So we'll have to see what guidance they provide ultimately, but that will be a core part of their overall focus.

One other thing, I believe you mentioned last quarter about launching CareCloud PRIME. Do you have any updates on that?

Yes. As we move that into production and we continue to onboard and transition more and more clients from our existing platform to this new platform, that process continues.

And any commentary on CareCloud Wellness?

Right. So the Wellness, as I mentioned, if you look at it from Q1 2023 to Q1 2024, the revenue, you can see that it has increased by almost 4x and we continue to see the momentum. Though it took us a little more time initially to ramp this thing up. But now with more patients onboarded, and more practices onboarded, we continue to see an increase in that revenue.

Okay. You mentioned that revenue for Med SR was a bit slow in the first quarter and is likely to remain at that level in the second quarter. Last quarter, you discussed potential opportunities with Meditech. Can you provide any insights on what opportunities might be available to enhance this in the second half?

Yes, sure. So Bill, if you look at it, basically, there is a health system space related project revenue, which is, as we know, the highest share is Epic followed by a number of other players. But we work closely with Meditech, and then there is an RCM play. There could be different other staff of CIOs and the training and the like. These are the main revenue drivers of Med SR. RCM, last year, the revenue was compared to 2022. By 2022, we increased RCM revenue by roughly 300% compared to acquisition levels. I think we see either the same or some growth in the RCM related revenue through Med SR relationships. The Meditech or the Epic. So first of all, with Epic, we don't do any large projects since the time they considered us to be in a competitive position. So there is a very small piece of the overall Epic-related projects we could have done or Med SR could have done compared to prior to the acquisition. So Meditech, we continue to work closely, and the revenue has continuously grown over the last two years on the Meditech side. But there is, at the same time, a dependency on Meditech's own growth for the year. How many sales they have made, and how many projects they have implemented because then there is a direct correlation in terms of the growth from Meditech or Epic and the like. So I think we continue to believe it's going to be either the Meditech or RCM or maybe some work from an Epic side that we have room for.

I apologize for the interruption. To build on Hadi's comment, it's important to consider that on the Med SR side, we are mainly discussing nonrecurring project revenue. As Norm pointed out, there is some softness in our overall revenue mix. Despite that, we see many exciting opportunities to enhance revenue, particularly with our generative AI products, which we are enthusiastic about. This year, our primary focus as a team is on generating cash flow. This is the first step in our strategy to achieve an annualized free cash flow of $20 million. We aim to reach $21 million, $22 million, and so on. Additionally, expanding and growing revenue will be crucial, but we encourage you to evaluate our performance this year mainly based on our ability to generate free cash flow. Long-term revenue growth will certainly be a vital component of our offerings in the future, but for now, I recommend focusing on our free cash flow generation.

That's helpful. I'll ask one more question. Cirrus Notes sounds pretty exciting. I'm trying to understand how it will be positioned in the market. Is my understanding correct that this is a software solution that requires approval from the clinician or doctor? Does that mean this aims to compete with pure transcription users out there, like scribes, which are at the lower end of ambient solutions? Or would you say it's focused elsewhere? Additionally, does it create the note instantly, or is there a time delay where someone needs to review it?

Good question, Allen. You clearly have a strong understanding of this competitive space. Our product is designed to listen in real-time to patient-provider conversations and instantly convert that into a note. As we roll it out, it could be used purely as a technology tool where doctors can interact with it, add any necessary notes, and save it. Alternatively, it could also function as a combined technology and resource tool, allowing our team or doctors to review and make edits after listening to the recorded conversation. Therefore, it represents both a technology and service solution as we continue our rollout. Like any product, we will initially target our existing client base, aiming to implement it for all current clients before pursuing new sales opportunities.

At this time, Mr. Roth, we have no other questions registered. Please proceed.

Yes. Thank you, everyone, for attending the call. Have a great day.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.