# CareCloud, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [CareCloud, Inc.](/companies/ccld.md) (CIK 1582982)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 16:30 ET
- Period: 2023-09-30
- Accession: 0001493152-23-039155
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1582982/000149315223039155/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1582982/000149315223039155/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $29.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $88.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $1.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $3.5m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$2.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$3.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $57.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $204.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$2.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$5.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.42 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$1.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.42 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$1.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 15,760,499 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 15,600,361 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $11.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $2.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Current assets | at 2023-09-30 | $27.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $125.9m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $21.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $37.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $88.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,216 characters.

The following is a discussion of our consolidated financial condition and results of operations for the three and nine months ended September 30, 2023 and 2022, and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our Consolidated Financial Statements and related notes beginning on page 4 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 2, 2023.

Some of the statements set forth in this section are forward-looking statements relating to our future results of operations. Our actual results may vary from the results anticipated by these statements. Please see “*Forward-Looking Statements”* on page 2 of this Quarterly Report on Form 10-Q.

### COVID-19 Update

In response to the COVID-19 pandemic, we implemented a business continuity plan to respond quickly and provide ongoing guidance so that we could continue offering our clients uninterrupted products, services and support while also protecting our employees. We believe these actions have been successful and that the pandemic, and our responses, have not significantly affected our financial results for the nine months ended September 30, 2023.

Refer to Part I, Item 1A. Risk Factors, Risks Related to Our Business in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2023 for further discussion of the potential impact of the COVID-19 pandemic on our business.

### Financial Risks

The Company maintains cash balances at Silicon Valley Bank (“SVB”), a division of First-Citizens Bank & Trust Company in excess of the FDIC insurance coverage limits. The Company performs periodic evaluations of the relative credit standing of this financial institution to ensure its credit worthiness. As of September 30, 2023 and December 31, 2022, the Company held cash of approximately $71,000 and $1.8 million, respectively, in the name of its subsidiaries at banks in Pakistan and Sri Lanka. The banking systems in these countries do not provide deposit insurance coverage. The Company has not experienced any losses on its cash accounts.

During the three months ended September 30, 2023, the Company experienced a decline in its market capitalization as a result of a sustained decrease in the Company’s stock price for its common and preferred shares. If the stock prices were to continue to decline, it could result in another triggering event that could impact the valuation of goodwill.

### Overview

The Company is a healthcare information technology company that provides technology-enabled revenue cycle management and a full suite of proprietary cloud-based solutions to healthcare providers, from small practices to enterprise medical groups, hospitals, and health systems throughout the United States. Our integrated Software-as-a-Service (“SaaS”) platform includes revenue cycle management (“RCM”), practice management (“PM”), electronic health record (“EHR”), business intelligence, telehealth, patient experience management (“PXM”) solutions and complementary software tools and business services for high-performance medical groups and health systems. The Company also offers printing and mailing and group purchasing services.

Our technology-enabled business solutions can be categorized as follows:

- **Technology-enabled revenue cycle management:**
- Revenue Cycle Management (“RCM”) services including end-to-end medical billing, eligibility, analytics, and related services, all of which can be provided utilizing our technology platform and robotic process automation tools or leveraging a third-party system;
- Medical coding and credentialing services to improve provider collections, back-end cost containment, and drive total revenue realization for our healthcare clients; and
- Healthcare claims clearinghouse which enables our clients to electronically scrub and submit claims and process payments from insurance companies.
- **Cloud-based software:**
- Electronic Health Records (“EHR”), which are easy to use and sometimes integrated with our business services, and enable our healthcare provider clients to deliver better patient care, streamline their clinical workflows, decrease documentation errors, and potentially qualify for government incentives;
- Practice Management (“PM”) software and related capabilities, which support our clients’ day-to-day business operations and financial workflows, including automated insurance eligibility software, a robust billing and claims rules engine, and other automated tools designed to maximize reimbursement;
- Patient Experience Management (“PXM”) solutions designed to transform interactions between patients and their clinicians, including smartphone applications that assist patients and healthcare providers in the provision of healthcare services, contactless digital check-in solutions, messaging, and online appointment scheduling tools;
- Business Intelligence (“BI”) and healthcare analytics platforms that allow our clients to derive actionable insights from their vast amount of data; and
- Customized applications, interfaces, and a variety of other technology solutions that support our healthcare clients.
- **Digital health:**
- Chronic care management is a program that supports care for patients with chronic conditions by certified care managers that operate under the supervision of the patient’s regular physician;
- Remote patient monitoring enables patient data collected outside the clinical setting through remote devices to be fed into their provider’s EHR to enable proactive patient care; and
- Telemedicine solutions which allow healthcare providers to conduct remote patient visits and extend the timely delivery of care to patients unable to travel to a provider’s office.

Our professional services solutions can be categorized as follows:

- **Healthcare IT professional services & staffing:**
- Professional services consisting of a broad range of consulting services including full software implementations and activation, revenue cycle optimization, data analytic services, and educational training services;
- Strategic advisory services to manage system evaluations and selection, provide interim management, and operational assessments; and
- Workforce augmentation and on-demand staffing to support our clients as they expand their businesses, seek highly trained personnel, or struggle to address staffing shortages.

Our medical practice management solutions include:

- **Medical practice management:**
- Medical practice management services for medical providers, including facilities, equipment, supplies, support services, nurses, and administrative support staff.

We are able to deliver our industry-leading solutions at very competitive prices because we leverage a combination of our proprietary software, which automates our workflows and increases efficiency, together with our team of approximately 450 experienced health industry experts throughout the United States. These experts are supported by our highly educated and specialized offshore workforce of approximately 3,500 team members that are approximately 13% of the cost of comparably educated and skilled workers in the U.S. Our unique business model also allowed us to become a leading consolidator in our industry sector, gaining us a reputation for acquiring and positively transforming distressed competitors into profitable operations of CareCloud.

Our offshore operations in the Pakistan Offices, UAE and Sri Lanka together accounted for approximately 13% and 12% of total expenses for the nine months ended September 30, 2023 and 2022, respectively. A significant portion of those foreign expenses were personnel-related costs (approximately 77% and 80% for the nine months ended September 30, 2023 and 2022, respectively). Because personnel-related costs are significantly lower in Pakistan and Sri Lanka than in the U.S. and many other offshore locations, we believe our offshore operations give us a competitive advantage over many industry participants. We are able to achieve significant cost reductions and leverage technology to reduce manual work and strategically transition a portion of the remaining manual tasks to our highly-specialized, cost-efficient team in the U.S., the Pakistan Offices, UAE and Sri Lanka.

### Key Performance Measures

We consider numerous factors in assessing our performance. Key performance measures used by management, including adjusted EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share, are non-GAAP financial measures, which we believe better enable management and investors to analyze and compare the underlying business results from period to period.

These non-GAAP financial measures should not be considered in isolation, or as a substitute for or superior to, financial measures calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of our business as determined in accordance with GAAP. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis, and we provide reconciliations from the most directly comparable GAAP financial measures to the non-GAAP financial measures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Adjusted EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share provide an alternative view of performance used by management and we believe that an investor’s understanding of our performance is enhanced by disclosing these adjusted performance measures.

Adjusted EBITDA excludes the following elements which are included in GAAP net (loss) income:

- Income tax expense or the cash requirements to pay our taxes;
- Interest expense, or the cash requirements necessary to service interest on principal payments, on our debt;
- Foreign currency gains and losses and other non-operating expenditures;
- Stock-based compensation expense includes cash-settled awards and the related taxes, based on changes in the stock price;
- Depreciation and amortization charges;
- Integration costs, such as severance amounts paid to employees from acquired businesses, and transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees and exit costs related to contractual agreements;
- Net loss on lease terminations and unoccupied lease charges; and
- Change in contingent consideration.

Set forth below is a presentation of our adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net revenue | $29,280 | $33,723 | $88,643 | $106,292 |
| GAAP net (loss) income | (2,749) | 1,056 | (4,982) | 4,933 |
| Provision for income taxes | 57 | 55 | 204 | 144 |
| Net interest expense | 300 | 82 | 705 | 281 |
| Foreign exchange loss / other expense | 426 | 523 | 609 | 359 |
| Stock-based compensation expense | 1,209 | 1,328 | 3,783 | 3,399 |
| Depreciation and amortization | 3,903 | 2,810 | 10,282 | 8,686 |
| Transaction and integration costs | 91 | 316 | 270 | 724 |
| Net loss on lease terminations and unoccupied lease charges | 8 | 307 | 430 | 928 |
| Change in contingent consideration | - | (1,660) | - | (2,890) |
| Adjusted EBITDA | **$3,245** | **$4,817** | **$11,301** | **$16,564** |

27

Adjusted operating income and adjusted operating margin exclude the following elements that are included in GAAP operating (loss) income:

- Stock-based compensation expense includes cash-settled awards and the related taxes, based on changes in the stock price;
- Amortization of purchased intangible assets;
- Integration costs, such as severance amounts paid to employees from acquired businesses, and transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees and exit costs related to contractual agreements;
- Net loss on lease terminations and unoccupied lease charges; and
- Change in contingent consideration.

Set forth below is a presentation of our adjusted operating income and adjusted operating margin, which represents adjusted operating income as a percentage of net revenue, for the three and nine months ended September 30, 2023 and 2022:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net revenue | $29,280 | $33,723 | $88,643 | $106,292 |
| GAAP net (loss) income | (2,749) | 1,056 | (4,982) | 4,933 |
| Provision for income taxes | 57 | 55 | 204 | 144 |
| Net interest expense | 300 | 82 | 705 | 281 |
| Other expense - net | 422 | 495 | 591 | 300 |
| GAAP operating (loss) income | (1,970) | 1,688 | (3,482) | 5,658 |
| GAAP operating margin | (6.7%) | 5.0% | (3.9%) | 5.3% |
| Stock-based compensation expense | 1,209 | 1,328 | 3,783 | 3,399 |
| Amortization of purchased intangible assets | 1,201 | 1,428 | 3,775 | 4,884 |
| Transaction and integration costs | 91 | 316 | 270 | 724 |
| Net loss on lease terminations and unoccupied lease charges | 8 | 307 | 430 | 928 |
| Change in contingent consideration | - | (1,660) | - | (2,890) |
| Non-GAAP adjusted operating income | **$539** | **$3,407** | **$4,776** | **$12,703** |
| Non-GAAP adjusted operating margin | 1.8% | 10.1% | 5.4% | 12.0% |

Adjusted net income and adjusted net income per share exclude the following elements which are included in GAAP net (loss) income:

- Foreign currency gains and losses and other non-operating expenditures;
- Stock-based compensation expense includes cash-settled awards and the related taxes, based on changes in the stock price;
- Amortization of purchased intangible assets;
- Integration costs, such as severance amounts paid to employees from acquired businesses, and transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees and exit costs related to contractual agreements;
- Net loss on lease terminations and unoccupied lease charges;
- Change in contingent consideration; and
- Income tax expense resulting from the amortization of goodwill related to our acquisitions.

28

No tax effect has been provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per share as the Company has sufficient carry forward net operating losses to offset the applicable income taxes. The following table shows our reconciliation of GAAP net (loss) income to non-GAAP adjusted net income for the three and nine months ended September 30, 2023 and 2022:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| GAAP net (loss) income | $(2,749) | $1,056 | $(4,982) | $4,933 |
| Foreign exchange loss / other expense | 426 | 523 | 609 | 359 |
| Stock-based compensation expense | 1,209 | 1,328 | 3,783 | 3,399 |
| Amortization of purchased intangible assets | 1,201 | 1,428 | 3,775 | 4,884 |
| Transaction and integration costs | 91 | 316 | 270 | 724 |
| Net loss on lease terminations and unoccupied lease charges | 8 | 307 | 430 | 928 |
| Change in contingent consideration | - | (1,660) | - | (2,890) |
| Income tax expense related to goodwill | 17 | 35 | 81 | 61 |
| Non-GAAP adjusted net income | **$203** | **$3,333** | **$3,966** | **$12,398** |

Set forth below is a reconciliation of our GAAP net loss attributable to common shareholders, per share to our non-GAAP adjusted net income per share:

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| GAAP net loss attributable to common shareholders, per share | $(0.42) | $(0.18) | $(1.07) | $(0.45) |
| Impact of preferred stock dividend | 0.25 | 0.25 | 0.76 | 0.78 |
| Net (loss) income per end-of-period share | (0.17) | 0.07 | (0.31) | 0.33 |
| Foreign exchange loss / other expense | 0.02 | 0.03 | 0.04 | 0.02 |
| Stock-based compensation expense | 0.08 | 0.09 | 0.24 | 0.23 |
| Amortization of purchased intangible assets | 0.07 | 0.09 | 0.23 | 0.31 |
| Transaction and integration costs | 0.01 | 0.02 | 0.02 | 0.05 |
| Net loss on lease terminations and unoccupied lease charges | 0.00 | 0.02 | 0.03 | 0.06 |
| Change in contingent consideration | 0.00 | (0.11) | 0.00 | (0.19) |
| Income tax expense related to goodwill | 0.00 | 0.00 | 0.00 | 0.00 |
| Non-GAAP adjusted earnings per share | **$0.01** | **$0.21** | **$0.25** | **$0.81** |
| End-of-period common shares | 15,857,650 | 15,211,136 | 15,857,650 | 15,211,136 |
| In-the-money warrants and outstanding unvested RSUs | 758,160 | 605,526 | 758,160 | 605,526 |
| Total fully diluted shares | 16,615,810 | 15,816,662 | 16,615,810 | 15,816,662 |
| Non-GAAP adjusted diluted earnings per share | **$0.01** | **$0.21** | **$0.24** | **$0.78** |

For purposes of determining non-GAAP adjusted earnings per share, the Company used the number of common shares outstanding at the end of September 30, 2023 and 2022. Non-GAAP adjusted diluted earnings per share was computed using an as-converted method and includes warrants that are in-the-money as of that date as well as outstanding unvested RSUs. Non-GAAP adjusted earnings per share and non-GAAP adjusted diluted earnings per share do not take into account dividends paid on preferred stock. No tax effect has been provided in computing non-GAAP adjusted earnings per share and non-GAAP adjusted diluted earnings per share as the Company has sufficient carry forward net operating losses to offset the applicable income taxes.

### Key Metrics

In addition to the line items in our consolidated financial statements, we regularly review the following metrics. We believe information on these metrics is useful for investors to understand the underlying trends in our business.

*Providers and Practices Served:* As of both September 30, 2023 and 2022, we provided services to an estimated universe of approximately 40,000 providers (which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff that render bills for their services), representing approximately 2,600 independent medical practices and hospitals. In addition, we served approximately 150 clients who were not medical practices, but are service organizations who serve the healthcare community. The foregoing numbers include clients leveraging any of our products or services and are based in part upon estimates in cases where the precise number of practices or providers is unknown.

### Sources of Revenue

*Revenue:* We primarily derive our revenues from subscription-based technology-enabled business solutions, reported in our Healthcare IT segment, which are typically billed as a percentage of payments collected by our customers. This fee includes technology-enabled RCM, as well as the ability to use our EHR, practice management system and other software as part of the bundled fee. These solutions accounted for approximately 64% of our revenues during both the three months ended September 30, 2023 and 2022, and 65% and 64% for the nine months ended September 30, 2023 and 2022, respectively. Other healthcare IT services, including printing and mailing operations, group purchasing and professional services, represented approximately 23% and 25% of revenues for the three months ended September 30, 2023 and 2022, respectively, and 23% and 26% for the nine months ended September 30, 2023 and 2022, respectively.

We earned approximately 13% and 12% of our revenue from medical practice management services during the three and nine months ended September 30, 2023, respectively, and approximately 11% and 10% during the three and nine months ended September 30, 2022, respectively. This revenue represents fees based on our actual costs plus a percentage of the operating profit and is reported in our Medical Practice Management segment.

### Operating Expenses

*Direct Operating Costs.* Direct operating cost consists primarily of salaries and benefits related to personnel who provide services to our customers, claims processing costs, costs to operate the three managed practices, including facility lease costs, supplies, insurance and other direct costs related to our services. Costs associated with the implementation of new customers are expensed as incurred. The reported amounts of direct operating costs do not include depreciation and amortization, which are broken out separately in the consolidated statements of operations.

*Selling and Marketing Expense.* Selling and marketing expense consists primarily of compensation and benefits, commissions, travel and advertising expenses.

*General and Administrative Expense.* General and administrative expense consists primarily of personnel-related expense for administrative employees, including compensation, benefits, travel, facility lease costs and insurance, software license fees and outside professional fees.

*Research and Development Expense.* Research and development expense consists primarily of personnel-related costs, software expense and third-party contractor costs.

*Change in Contingent Consideration.* Contingent consideration represents the portion of consideration payable to the sellers of some of our acquisitions, the amount of which is based on the achievement of defined performance measures contained in the purchase agreements. Contingent consideration is adjusted to fair value at the end of each reporting period.

*Depreciation and Amortization Expense.* Depreciation expense is charged using the straight-line method over the estimated lives of the assets ranging from three to five years. Amortization expense is charged on either an accelerated or on a straight-line basis over a period of three or four years for most intangible assets acquired in connection with acquisitions including those intangibles related to the group purchasing services. Amortization expense related to the value of our medical practice management clients is amortized on a straight-line basis over a period of twelve years.

*Net Loss on Lease Terminations and Unoccupied Lease Charges.* Net loss on lease terminations represents the write-off of leasehold improvements and gains or losses as the result of lease terminations. Unoccupied lease charges represent the portion of the lease and related costs for that portion of the space that is vacant and not being utilized by the Company. One of the leases that had unoccupied space ended in February 2023. The Company was able to turn back to the landlord one of the other unused facilities effective January 1, 2022.

*Interest Income, Interest Expense and Other Expense - net.* Interest income represents interest earned on temporary cash investments and late fees from customers. Interest expense consists primarily of interest costs related to our line of credit, term loans and the amortization of deferred financing costs. Other expense - net results primarily from foreign currency transaction (losses)/gains.

*Income Taxes.* In preparing our consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities. Although the Company is forecasting a return to profitability, it incurred losses historically and there is uncertainty regarding future U.S. taxable income, which makes realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all deferred tax assets as of September 30, 2023 and December 31, 2022.

### Critical Accounting Policies and Estimates

The critical accounting policies and estimates used in the preparation of our consolidated financial statements that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this Report are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

*Capitalized Software Costs:*

As of September 30, 2023 and December 31, 2022, the carrying amounts of internally-developed capitalized software in use was $17.6 million and $16.6 million, respectively. The increase in the capitalized software costs represents the continued investment in proprietary technology.

There have been no material changes in our critical accounting policies and estimates from those described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 2, 2023.

### Results of Operations

The following table sets forth our consolidated results of operations as a percentage of total revenue for the periods shown:

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net revenue | 100.0% | 100.0% | 100.0% | 100.0% |
| Operating expenses: |  |  |  |  |
| Direct operating costs | 62.4% | 60.5% | 60.7% | 61.0% |
| Selling and marketing | 8.0% | 7.4% | 8.5% | 6.9% |
| General and administrative | 18.7% | 19.3% | 18.6% | 17.4% |
| Research and development | 4.3% | 3.5% | 4.0% | 3.1% |
| Change in contingent consideration | 0.0% | (4.9%) | 0.0% | (2.7%) |
| Depreciation and amortization | 13.3% | 8.3% | 11.6% | 8.2% |
| Net loss on lease terminations and unoccupied lease charges | 0.0% | 0.9% | 0.5% | 0.9% |
| Total operating expenses | 106.7% | 95.0% | 103.9% | 94.8% |
| Operating (loss) income | (6.7%) | 5.0% | (3.9%) | 5.2% |
| Interest expense - net | 1.0% | 0.2% | 0.8% | 0.3% |
| Other expense - net | (1.4%) | (1.5%) | (0.7%) | (0.3%) |
| (Loss) income before provision for income taxes | (9.1%) | 3.3% | (5.4%) | 4.6% |
| Income tax provision | 0.2% | 0.2% | 0.2% | 0.1% |
| Net (loss) income | (9.3%) | 3.1% | (5.6%) | 4.5% |

31

### Comparison of the three and nine months ended September 30, 2023 and 2022:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change Amount | Percent | Nine Months Ended September 30, 2023 | 2022 | Change Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net revenue | $29,280 | $33,723 | $(4,443) | (13%) | $88,643 | $106,292 | $(17,649) | (17%) |

*Net Revenue.* Net revenue of $29.3 million and $88.6 million for the three and nine months ended September 30, 2023, respectively, decreased by $4.4 million or 13% and $17.6 million or 17% from net revenue of $33.7 million and $106.3 million for the three and nine months ended September 30, 2022, respectively. Revenue for the three and nine months ended September 30, 2023 includes $18.8 million and $57.9 million relating to technology-enabled business solutions, $5.7 million and $17.8 million related to professional services and $3.7 million and $10.1 million for medical practice management services, respectively.

There was a $1.7 million and $7.8 million decrease in project-based professional services revenue for the three and nine months ended September 30, 2023 compared to the same periods in the prior year. The 2023 revenue was also negatively impacted by two large accounts that had each been previously acquired prior to our beginning to serve them after a 2020 acquisition. The services provided to them were each winding down at the time of our acquisition and they both transitioned to the systems of their acquirers during 2022. Revenue from these two customers for the three months ended September 30, 2023 and 2022 was $0.7 million and $3.0 million, respectively. Revenue from these customers for the nine months ended September 30, 2023 was $2.7 million, accounting for approximately $8.0 million of the decline in revenue. Revenue from these customers is expected to be approximately $0.3 million for the remainder of 2023. (Refer to Forward-Looking Statements disclosure on page 2 of this Form 10-Q.)

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change Amount | Percent | Nine Months Ended September 30, 2023 | 2022 | Change Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Direct operating costs | $18,260 | $20,406 | $(2,146) | (11%) | $53,843 | $64,866 | $(11,023) | (17%) |
| Selling and marketing | 2,337 | 2,504 | (167) | (7%) | 7,529 | 7,314 | 215 | 3% |
| General and administrative | 5,482 | 6,500 | (1,018) | (16%) | 16,518 | 18,479 | (1,961) | (11%) |
| Research and development | 1,260 | 1,168 | 92 | 8% | 3,523 | 3,251 | 272 | 8% |
| Change in contingent consideration | - | (1,660) | 1,660 | 100% | - | (2,890) | 2,890 | 100% |
| Depreciation | 493 | 474 | 19 | 4% | 1,496 | 1,405 | 91 | 6% |
| Amortization | 3,410 | 2,336 | 1,074 | 46% | 8,786 | 7,281 | 1,505 | 21% |
| Net loss on lease terminations and unoccupied lease charges | 8 | 307 | (299) | (97%) | 430 | 928 | (498) | (54%) |
| Total operating expenses | $31,250 | $32,035 | $(785) | (2%) | $92,125 | $100,634 | $(8,509) | (8%) |

*Direct Operating Costs.* Direct operating costs of $18.3 million and $53.8 million for the three and nine months ended September 30, 2023, respectively, decreased by $2.1 million or 11% and $11.0 million or 17% compared to direct operating costs of $20.4 million and $64.9 million for the three and nine months ended September 30, 2022, respectively. During the three and nine months ended September 30, 2023, salary costs decreased by $1.4 million and $7.4 million, outsourcing and processing costs decreased by $762,000 and $3.0 million and other costs such as medical supplies, vaccines, rent and consultancy fees decreased by $142,000 and $736,000, respectively. The decrease in the salary costs was due to the decrease in the Pakistan exchange rate, a decrease in the U.S. headcount and due to lower revenue, the redeployment of employees performing functions that were previously classified as direct operating costs to functions classified as research and development expense for the nine months ended September 30, 2023.

*Selling and Marketing Expense.* Selling and marketing expense of $2.3 million and $7.5 million for the three and nine months ended September 30, 2023, respectively, decreased by $167,000 or 7% and increased by $215,000 or 3% from selling and marketing expense of $2.5 million and $7.3 million for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2023 was due to lower spending on selling and marketing activities.

*General and Administrative Expense.* General and administrative expense of $5.5 million and $16.5 million for the three and nine months ended September 30, 2023, respectively, decreased by $1.0 million or 16% and $2.0 million or 11% compared to general and administrative expense of $6.5 million and $18.5 million for the three and nine months ended September 30, 2022, respectively. During the three and nine months ended September 30, 2023, salary costs decreased by $292,000 and $1.4 million, computer expenses decreased by $89,000 and $314,000 and provision for doubtful accounts decreased by $48,000 and $327,000, respectively. The decrease in salary costs was due to lower headcount and a favorable change in foreign exchange rates. Also there was a decrease in the Company’s contributions to community based projects in Pakistan.

*Research and Development Expense.* Research and development expense of $1.3 million and $3.5 million for the three and nine months ended September 30, 2023, respectively, increased by approximately $92,000 or 8% and $272,000 or 8% from research and development expense of $1.2 million and $3.3 million for the three and nine months ended September 30, 2022, respectively. The increase was due to the redeployment of employees performing functions that were previously classified as direct operating costs to functions classified as research and development expense which was offset by a decrease in the U.S. headcount. During the nine months ended September 30, 2023 and 2022, the Company capitalized approximately $6.6 million and $7.0 million, respectively, of development costs in connection with its internal-use software.

*Change in Contingent Consideration.* There was no change in contingent consideration during the nine months ended September 30, 2023 as the balance of contingent consideration was $0 at December 31, 2022. The change of $1.7 million and $2.9 million for the three and nine months ended September 30, 2022, respectively, reflected the estimated decrease in the fair value of the contingent consideration from the medSR acquisition.

*Depreciation.* Depreciation of $493,000 and $1.5 million for the three and nine months ended September 30, 2023, respectively, increased by $19,000 or 4% and $91,000 or 6% from the depreciation of $474,000 and $1.4 million for the three and nine months ended September 30, 2022, respectively.

*Amortization Expense.* Amortization expense of $3.4 million and $8.8 million for the three and nine months ended September 30, 2023, respectively, increased by $1.1 million or 46% and $1.5 million or 21% from amortization expense of $2.3 million and $7.3 million for the three and nine months ended September 30, 2022, respectively. The increase in amortization expense was due to placing certain internal-use software into production and commencing amortization on that balance.

*Net Loss on Lease Terminations and Unoccupied Lease Charges.* Net loss on lease terminations represents the write-off of leasehold improvements and gains or losses as the result of lease terminations. During the nine months ended September 30, 2023, the Miami office lease that we assumed in connection with an acquisition ended and we entered into a new lease arrangement with the landlord for significantly less space. Charges of $2,000 and $73,000 for the three and nine months ended September 30, 2023, respectively, were incurred as a result of vacating the former premises. During the year ended December 31, 2022, a facility lease was terminated in conjunction with the Company ceasing its document storage services resulting in additional costs for the three and nine months ended September 30, 2023, of $1,000 and $162,000, respectively. In addition, during the nine months ended September 30, 2023, the Company paid $27,000 to settle a claim regarding a lease termination in India. Unoccupied lease charges represent the portion of the lease and related costs for that portion of the space that is vacant and not being utilized by the Company. The Company was able to turn back to the landlord one of the unused facilities effective January 1, 2022. Unoccupied lease charges for the three and nine months ended September 30, 2023 were $5,000 and $168,000, respectively. During the three and nine months ended September 30, 2022, there were $257,000 and $786,000, respectively, of unoccupied lease charges.

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change Amount | Percent | Nine Months Ended September 30, 2023 | 2022 | Change Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income | $52 | $14 | $38 | 271% | $124 | $22 | $102 | 464% |
| Interest expense | (352) | (96) | (256) | (267%) | (829) | (303) | (526) | (174%) |
| Other expense - net | (422) | (495) | 73 | 15% | (591) | (300) | (291) | (97%) |
| Income tax provision | 57 | 55 | 2 | 4% | 204 | 144 | 60 | 42% |

33

*Interest Income.* Interest income of $52,000 and $124,000 for the three and nine months ended September 30, 2023, respectively, increased by $38,000 and $102,000 from interest income of $14,000 and $22,000 for the three and nine months ended September 30, 2022, respectively. The interest income represents interest earned on temporary cash investments, which increased due to rising interest rates and late fees from customers.

*Interest Expense.* Interest expense of $352,000 and $829,000 for the three and nine months ended September 30, 2023, respectively, increased by $256,000 and $526,000 from interest expense of $96,000 and $303,000 for the three and nine months ended September 30, 2022, respectively. The increase in interest expense was due to the increased use of the line of credit. Interest expense includes the amortization of deferred financing costs, which was $114,000 and $92,000 during the nine months ended September 30, 2023 and 2022, respectively.

*Other Expense – net.* Other expense – net was $422,000 and $591,000 for the three and nine months ended September 30, 2023, respectively, compared to other expense – net of $495,000 and $300,000 for the three and nine months ended September 30, 2022, respectively. Other expense or income primarily represents foreign currency transaction losses or gains. These transaction losses or gains result from revaluing intercompany accounts which are denominated in U.S. dollars that represent amounts payable/receivable between the entities. Whenever the exchange rate varies, the losses or gains are recorded in the consolidated statements of operations.

*Income Tax Provision.* The provision for income taxes was $57,000 and $204,000 for the three and nine months ended September 30, 2023, respectively, compared to the provision for income taxes of $55,000 and $144,000 for the three and nine months ended September 30, 2022, respectively. As a result of the Company having certain net operating losses with an indefinite life under the current federal tax rules, the federal deferred tax liability was offset against the federal net operating loss to the extent allowable in 2023 and 2022. During 2022, it was determined that for the states that follow the federal rules regarding indefinite life net operating losses, the offset to the state deferred tax liability was $45,000. This amount was recorded during the second quarter of 2022. Subsequently, the state deferred tax liability has been offset against state net operating losses to the extent allowable.

The current income tax expense for the three and nine months ended September 30, 2023 was approximately $40,000 and $123,000, respectively, and includes state minimum taxes and foreign income taxes. The Company has incurred cumulative losses historically and there is uncertainty regarding future U.S. taxable income, which makes realization of a deferred tax losses difficult to support in accordance with ASC 740. Accordingly, a valuation allowance was recorded against all deferred tax assets at September 30, 2023 and December 31, 2022.

### Liquidity and Capital Resources

As of September 30, 2023, the Company had total cash of $6.4 million and net working capital of $5.5 million. For the three and nine months ended September 30, 2023, cash provided by operations was $4.3 million and $11.7 million, respectively, offset by cash used in investing and financing activities of $5.8 million and $17.7 million, respectively, resulting in a decrease in cash of $1.3 million and $5.9 million, respectively, after accounting for the effect of $0.2 million and $0.1 million, respectively, of exchange rate changes.

The Company is currently looking at various ways to increase its revenue through organic growth via its current salesforce, which would generate additional gross margin with no change to operating expenses. A number of clients have signed up for the new CareCloud Wellness offering, and as this volume ramps up, it will generate additional margin. There is also significant effort being expended in increasing the professional services business, where clients are charged “cost-plus,” generating additional margin. Concurrently, the Company is reviewing its expenses and capital expenditures and has begun and will continue to reduce spending in non-critical areas, to reduce cash usage even without additional revenue.

Additional funding, if necessary, could come from the sale of the Company’s three public securities, i.e., sales of its common stock or one or both of its two series of Nasdaq-listed preferred stock. There are active “at-the-market” facilities to sell common stock and Series B preferred stock, and the Company can sell shares utilizing its existing shelf registration facility. Further, additional capital could be obtained from the Company’s credit line since the amount drawn is less than the borrowing base and the Company is in compliance with all covenants. Accordingly, we believe our cash on hand, our cash flows from operations and our ability to raise capital, if necessary, will be sufficient to fund our operations for the next 12 months and beyond.

The Company has a revolving line of credit, and as of September 30, 2023, there was $12 million outstanding of which $2 million was repaid in early October 2023. As of September 30, 2023, the unused borrowing base was approximately $3.3 million. During the nine months ended September 30, 2023, the Company sold 59,773 shares of 8.75% Series B Preferred Stock and raised $1.4 million in net proceeds after fees and expenses.

The following table summarizes our cash flows for the periods presented:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 | Change Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net cash provided by operating activities | $4,313 | $6,977 | $11,721 | $15,103 | $(3,382) | (22%) |
| Net cash used in investing activities | (3,245) | (3,496) | (9,322) | (9,123) | (199) | (2%) |
| Net cash used in financing activities | (2,581) | (9,047) | (8,406) | (11,144) | 2,738 | 25% |
| Effect of exchange rate changes on cash | 253 | 213 | 114 | (309) | 423 | 137% |
| Net decrease in cash and restricted cash | $(1,260) | $(5,353) | $(5,893) | $(5,473) | $(420) | (8%) |

The loss before income taxes was $2.7 million and $4.8 million for the three and nine months ended September 30, 2023, respectively, which included $3.9 million and $10.3 million of non-cash depreciation and amortization, respectively. The income before income taxes was $1.1 million and $5.1 million for the three and nine months ended September 30, 2022, respectively, which included $2.8 million and $8.7 million of non-cash depreciation and amortization, respectively.

### Operating Activities

Net cash provided by operating activities was $11.7 million and $15.1 million during the nine months ended September 30, 2023 and 2022, respectively. This decrease was primarily the result of the decrease in net income of $9.9 million which included the following changes in non-cash items: an increase in depreciation and amortization of $1.6 million and an increase in stock-based compensation of $384,000. The decrease in the net income was partially offset by the change in accounts receivable which decreased by $1.9 million for the nine months ended September 30, 2023, compared with a decrease of $10,000 for the nine months ended September 30, 2022. Accounts payable, accrued compensation and accrued expenses decreased by $2.3 million during the nine months ended September 30, 2023, compared with a decrease of $4.3 million for the nine months ended September 30, 2022. The contract asset increased by $867,000 during the nine months ended September 30, 2023 compared to the prior period.

### Investing Activities

Net cash used in investing activities was $9.3 million and $9.1 million for the nine months ended September 30, 2023 and 2022, respectively. Capital expenditures were $2.7 million and $2.1 million for the nine months ended September 30, 2023 and 2022, respectively. The capital expenditures for the nine months ended September 30, 2023 and 2022 primarily represented computer equipment purchased and leasehold improvements for the Pakistan Offices. Software development costs of $6.6 million and $7.0 million for the nine months ended September 30, 2023 and 2022, respectively, were capitalized in connection with the development of software for providing technology-enabled business solutions.

### Financing Activities

Net cash used in financing activities was $8.4 million and $11.1 million during the nine months ended September 30, 2023 and 2022, respectively. Cash used in financing activities during the nine months ended September 30, 2023 included $11.7 million of preferred stock dividends, $717,000 of repayments for debt obligations and $1.4 million of tax withholding obligations paid in connection with stock awards issued to employees. During the nine months ended September 30, 2023, the Company sold 59,773 shares of Series B Preferred Stock and received net proceeds of approximately $1.4 million. Cash used in financing activities during the nine months ended September 30, 2022 included $11.5 million of preferred stock dividends, $769,000 of repayments for debt obligations and $1.1 million of tax withholding obligations paid in connection with stock awards issued to employees. During the nine months ended September 30, 2022, the Company received net proceeds from the sale of Series B Preferred Stock of $30.3 million of which $20.0 million was used to redeem 800,000 shares of Series A Preferred Stock. Net proceeds and repayments on the line of credit were $4.0 million and $8.0 million, respectively, for the nine months ended September 30, 2023 and 2022, respectively.

### Contractual Obligations and Commitments

We have contractual obligations under our line of credit. We were in compliance with all covenants as of September 30, 2023. We also maintain operating leases for property and certain office equipment. For additional information, see Contractual Obligations and Commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 2, 2023.

### Off-Balance Sheet Arrangements

As of September 30, 2023, and 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special-purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

## Market risk

As filed, 175 characters.

We are a smaller reporting company as defined by 17 C.F.R. 229.10(f)(1) and are not required to provide information under this item, pursuant to Item 305(e) of Regulation S-K.

## Controls and procedures

As filed, 2,208 characters.

#### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, based on the Internal Control-Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023 as required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures, as of September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

#### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and l5d-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,482 characters.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I—Item 1A. “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on March 2, 2023, which could materially affect our business, financial condition and/or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, cash flows and/or future results.

*We Maintain Our Cash at Financial Institutions, Often in Balances That Exceed Federally Insured Limits.*

The financial markets recently have encountered volatility associated with concerns about the balance sheets of banks, especially small and regional banks who may have significant losses associated with investments that make it difficult to fund demands to withdraw deposits and other liquidity needs. Although the federal government has announced measures to assist these banks and protect depositors, some banks have already been impacted and others may be materially and adversely impacted. Our business is dependent on bank relationships and we are proactively monitoring the financial health of such bank relationships. Continued strain on the banking system may adversely impact our business, financial condition and results of operations.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-039155. Last ingested by Listed: Nov 5, 2026, 18:58 ET. No prices; not investment advice.