# CareCloud, Inc.: Form 10-Q for the period ended Sep 30, 2024

- Company: [CareCloud, Inc.](/companies/ccld.md) (CIK 1582982)
- Form: 10-Q
- Filed: 2024-11-12
- Accepted by EDGAR: Nov 12, 2024, 21:30 ET
- Period: 2024-09-30
- Accession: 0001493152-24-044794
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1582982/000149315224044794/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1582982/000149315224044794/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-07-01 to 2024-09-30 | $28.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2024-01-01 to 2024-09-30 | $82.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Research and development | 3 months, 2024-07-01 to 2024-09-30 | $800.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2024-01-01 to 2024-09-30 | $2.8m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-07-01 to 2024-09-30 | $3.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2024-01-01 to 2024-09-30 | $5.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $41.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $119.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $3.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $4.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | −$0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | −$0.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 16,195,363 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 16,114,330 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $15.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $759.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-09-30 | $2.8m | us-gaap:Cash |
| Current assets | at 2024-09-30 | $22.7m | us-gaap:AssetsCurrent |
| Total assets | at 2024-09-30 | $70.7m | us-gaap:Assets |
| Current liabilities | at 2024-09-30 | $21.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-09-30 | $24.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $46.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,367 characters.

The following is a discussion of our condensed consolidated financial condition and results of operations for the three and nine months ended September 30, 2024 and 2023, and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our Condensed 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, 2023, filed with the SEC on March 21, 2024.

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.

### 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, 2024 and December 31, 2023, the Company held cash of approximately $100,000 and $255,000, 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 December 2023, the Company suspended its Preferred Stock dividend and 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. This was considered a triggering event and resulted in a goodwill impairment charge. As of September 30, 2024, the Company’s stock price for its common and preferred shares increased from their year-end values. Accordingly, the Company determined there was no impact on the valuation of goodwill. If the stock prices were 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 records (“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 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, 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 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;
- Artificial intelligence (“AI”):
- CareCloud cirrusAI is designed to serve as a digital healthcare assistant, helping to enhance clinical decision-making, streamline workflows, reduce administrative burdens, optimize revenue management, and promote patient-centered care. The functions include:
- AI-Powered Clinical Decision Support: CareCloud cirrusAI Guide automates clinical data input, and assists clinicians in workflow tasks, providing real-time, evidence-based recommendations and personalized suggestions via Vertex AI’s generative AI tools for providers to consider. This innovation can lead to enhanced diagnosis accuracy and treatment planning.
- AI-Powered Virtual Support Assistant: CareCloud cirrusAI Chat facilitates natural language conversations with practice staff members, offering valuable assistance in navigating CareCloud Electronic Health Records workflows. This tool streamlines post-training and onboarding for new staff, reducing response times and providing real-time assistance, ultimately saving time.
- AI-Driven Appeals: CareCloud cirrusAI Appeals generates customized appeal letters by analyzing patient claim details, the appeal’s reason, and the specific payor involved for healthcare workers to review, edit, and send. This functionality supports CareCloud’s RCM teams in optimizing providers’ RCM and securing proper reimbursement.
- CareCloud cirrusAI integrates with CareCloud’s EHR solution, talkEHR, making it easily accessible to providers of all sizes.
- Patient Experience Management 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.
- **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 330 experienced health industry experts throughout the United States. These experts are supported by our highly educated and specialized offshore workforce of approximately 3,300 team members that are approximately 15% 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 and Sri Lanka together accounted for approximately 15% and 13% of total expenses for the nine months ended September 30, 2024 and 2023, respectively. A significant portion of those foreign expenses were personnel-related costs (approximately 75% and 77% for the nine months ended September 30, 2024 and 2023, 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 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 income (loss):

- Income tax provision 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 (benefit) 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; and
- Loss on lease terminations, unoccupied lease charges and restructuring costs.

29

Set forth below is a presentation of our adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023:

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net revenue | $28,546 | $29,280 | $82,598 | $88,643 |
| GAAP net income (loss) | 3,122 | (2,749) | 4,555 | (4,982) |
| Provision for income taxes | 41 | 57 | 119 | 204 |
| Net interest expense | 162 | 300 | 764 | 705 |
| Foreign exchange (gain) loss / other expense | (57) | 426 | 244 | 609 |
| Stock-based compensation expense (benefit), net of restructuring costs | 252 | 1,209 | (191) | 3,783 |
| Depreciation and amortization | 3,241 | 3,903 | 10,885 | 10,282 |
| Transaction and integration costs | 12 | 91 | 35 | 270 |
| Loss on lease terminations, unoccupied lease charges and restructuring costs | 67 | 8 | 505 | 430 |
| Adjusted EBITDA | **$6,840** | **$3,245** | **$16,916** | **$11,301** |

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

- Stock-based compensation expense (benefit) 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; and
- Loss on lease terminations, unoccupied lease charges and restructuring costs.

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, 2024 and 2023:

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net revenue | $28,546 | $29,280 | $82,598 | $88,643 |
| GAAP net income (loss) | 3,122 | (2,749) | 4,555 | (4,982) |
| Provision for income taxes | 41 | 57 | 119 | 204 |
| Net interest expense | 162 | 300 | 764 | 705 |
| Other (income) expense - net | (60) | 422 | 227 | 591 |
| GAAP operating income (loss) | 3,265 | (1,970) | 5,665 | (3,482) |
| GAAP operating margin | 11.4% | (6.7%) | 6.9% | (3.9%) |
| Stock-based compensation expense (benefit), net of restructuring costs | 252 | 1,209 | (191) | 3,783 |
| Amortization of purchased intangible assets | 75 | 1,201 | 1,501 | 3,775 |
| Transaction and integration costs | 12 | 91 | 35 | 270 |
| Loss on lease terminations, unoccupied lease charges and restructuring costs | 67 | 8 | 505 | 430 |
| Non-GAAP adjusted operating income | **$3,671** | **$539** | **$7,515** | **$4,776** |
| Non-GAAP adjusted operating margin | 12.9% | 1.8% | 9.1% | 5.4% |

30

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

- Foreign currency gains and losses and other non-operating expenditures;
- Stock-based compensation expense (benefit) 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;
- Loss on lease terminations, unoccupied lease charges and restructuring costs; and
- Income tax provision resulting from the amortization of goodwill related to our acquisitions.

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 income (loss) to non-GAAP adjusted net income for the three and nine months ended September 30, 2024 and 2023:

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| GAAP net income (loss) | $3,122 | $(2,749) | $4,555 | $(4,982) |
| Foreign exchange (gain) loss / other expense | (57) | 426 | 244 | 609 |
| Stock-based compensation expense (benefit), net of restructuring costs | 252 | 1,209 | (191) | 3,783 |
| Amortization of purchased intangible assets | 75 | 1,201 | 1,501 | 3,775 |
| Transaction and integration costs | 12 | 91 | 35 | 270 |
| Loss on lease terminations, unoccupied lease charges and restructuring costs | 67 | 8 | 505 | 430 |
| Income tax provision related to goodwill | - | 17 | - | 81 |
| Non-GAAP adjusted net income | **$3,471** | **$203** | **$6,649** | **$3,966** |

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, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| GAAP net loss attributable to common shareholders, per share | $(0.04) | $(0.42) | $(0.28) | $(1.07) |
| Impact of preferred stock dividend | 0.23 | 0.25 | 0.56 | 0.76 |
| Net income (loss) per end-of-period share | 0.19 | (0.17) | 0.28 | (0.31) |
| Foreign exchange (gain) loss / other expense | 0.00 | 0.02 | 0.02 | 0.04 |
| Stock-based compensation expense (benefit), net of restructuring costs | 0.02 | 0.08 | (0.01) | 0.24 |
| Amortization of purchased intangible assets | 0.00 | 0.07 | 0.09 | 0.23 |
| Transaction and integration costs | 0.00 | 0.01 | 0.00 | 0.02 |
| Loss on lease terminations, unoccupied lease charges and restructuring costs | 0.00 | 0.00 | 0.03 | 0.03 |
| Income tax provision related to goodwill | - | 0.00 | - | 0.00 |
| Non-GAAP adjusted earnings per share | **$0.21** | **$0.01** | **$0.41** | **$0.25** |
| End-of-period common shares | 16,221,820 | 15,857,650 | 16,221,820 | 15,857,650 |
| Outstanding unvested RSUs | 265,699 | 758,160 | 265,699 | 758,160 |
| Total fully diluted shares | 16,487,519 | 16,615,810 | 16,487,519 | 16,615,810 |
| Non-GAAP adjusted diluted earnings per share | **$0.21** | **$0.01** | **$0.40** | **$0.24** |

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, 2024 and 2023. Non-GAAP adjusted diluted earnings per share was computed using an as-converted method and includes outstanding unvested RSUs. Non-GAAP adjusted earnings per share and non-GAAP adjusted diluted earnings per share does 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 condensed 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, 2024 and 2023, 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 63% and 64% for the three months ended September 30, 2024 and 2023, respectively, and 66% and 65% for the nine months ended September 30, 2024 and 2023, respectively. Other healthcare IT services, including printing and mailing operations, group purchasing and professional services, represented approximately 22% and 23% of revenues for the three months ended September 30, 2024 and 2023, respectively, and 21% and 23% for the nine months ended September 30, 2024 and 2023, respectively.

We earned approximately 15% and 13% of our revenue from medical practice management services during the three and nine months ended September 30, 2024, respectively, and approximately 13% and 12% during the three and nine months ended September 30, 2023, 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 condensed 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.

*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.

*Loss on Lease Terminations, Unoccupied Lease Charges and Restructuring Costs.* 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. Two of the leases that had unoccupied space ended in February 2023. Restructuring costs consists of severance and separation costs associated with the optimization of the Company’s operations and profitability improvements.

*Interest and Other Income (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 income (expense) - net results primarily from foreign currency transaction gains/(losses).

*Income Taxes.* In preparing our condensed 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, 2024 and December 31, 2023.

### Critical Accounting Policies and Estimates

The critical accounting policies and estimates used in the preparation of our condensed consolidated financial statements that we believe affect our more significant judgments and estimates used in the preparation of our condensed 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 condensed consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

*Capitalized Software Costs:*

As of September 30, 2024 and December 31, 2023, the carrying amounts of internally-developed capitalized software in use was $13.7 million and $17.1 million, respectively. The decrease was due to the current year amortization exceeding the amounts being capitalized.

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, 2023, filed with the SEC on March 21, 2024.

### 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, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net revenue | 100.0% | 100.0% | 100.0% | 100.0% |
| Operating expenses: |  |  |  |  |
| Direct operating costs | 54.0% | 62.4% | 55.5% | 60.7% |
| Selling and marketing | 4.8% | 8.0% | 5.8% | 8.5% |
| General and administrative | 15.3% | 18.7% | 14.7% | 18.6% |
| Research and development | 2.8% | 4.3% | 3.4% | 4.0% |
| Depreciation and amortization | 11.4% | 13.3% | 13.2% | 11.6% |
| Loss on lease terminations, unoccupied lease charges and restructuring costs | 0.2% | 0.0% | 0.6% | 0.5% |
| Total operating expenses | 88.5% | 106.7% | 93.2% | 103.9% |
| Operating income (loss) | 11.5% | (6.7%) | 6.8% | (3.9%) |
| Net interest expense | (0.6%) | 1.0% | (0.9%) | 0.8% |
| Other income (expense) - net | 0.2% | (1.4%) | (0.3%) | (0.7%) |
| Income (loss) before provision for income taxes | 11.1% | (9.1%) | 5.6% | (5.4%) |
| Income tax provision | 0.1% | 0.2% | 0.1% | 0.2% |
| Net income (loss) | 11.0% | (9.3%) | 5.5% | (5.6%) |

### Comparison of the three and nine months ended September 30, 2024 and 2023:

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Change Amount | Percent | Nine Months Ended September 30, 2024 | 2023 | Change Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net revenue | $28,546 | $29,280 | $(734) | (3%) | $82,598 | $88,643 | $(6,045) | (7%) |

*Net Revenue.* Net revenue of $28.5 million and $82.6 million for the three and nine months ended September 30, 2024, respectively, decreased by $734,000 or 3% and $6.0 million or 7% from net revenue of $29.3 million and $88.6 million for the three and nine months ended September 30, 2023, respectively. Revenue for the three and nine months ended September 30, 2024 includes $17.9 million and $54.2 million relating to technology-enabled business solutions, $4.9 million and $13.8 million related to professional services and $4.2 million and $11.0 million for medical practice management services, respectively.

There was an $800,000 and $4.0 million decrease in project-based professional services revenue for the three and nine months ended September 30, 2024 compared to the same periods in the prior year. The 2024 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. There was no revenue from these two customers for the three months ended September 30, 2024, compared to $700,000 for the same period in 2023. Revenue from these customers for the nine months ended September 30, 2024 and 2023 was $300,000 and $2.7 million, respectively, accounting for approximately $2.4 million of the decline in revenue.

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Change Amount | Percent | Nine Months Ended September 30, 2024 | 2023 | Change Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Direct operating costs | $15,420 | $18,260 | $(2,840) | (16%) | $45,839 | $53,843 | $(8,004) | (15%) |
| Selling and marketing | 1,375 | 2,337 | (962) | (41%) | 4,809 | 7,529 | (2,720) | (36%) |
| General and administrative | 4,378 | 5,482 | (1,104) | (20%) | 12,127 | 16,518 | (4,391) | (27%) |
| Research and development | 800 | 1,260 | (460) | (37%) | 2,768 | 3,523 | (755) | (21%) |
| Depreciation | 504 | 493 | 11 | 2% | 1,510 | 1,496 | 14 | 1% |
| Amortization | 2,737 | 3,410 | (673) | (20%) | 9,375 | 8,786 | 589 | 7% |
| Loss on lease terminations, unoccupied lease charges and restructuring costs | 67 | 8 | 59 | 738% | 505 | 430 | 75 | 17% |
| Total operating expenses | $25,281 | $31,250 | $(5,969) | (19%) | $76,933 | $92,125 | $(15,192) | (16%) |

*Direct Operating Costs.* Direct operating costs of $15.4 million and $45.8 million for the three and nine months ended September 30, 2024, respectively, decreased by $2.8 million or 16% and $8.0 million or 15% compared to direct operating costs of $18.3 million and $53.8 million for the three and nine months ended September 30, 2023, respectively. During the three and nine months ended September 30, 2024, salary costs decreased by $1.7 million and $5.1 million, outsourcing and processing costs decreased by $813,000 and $1.7 million and billable expenses decreased by $400,000 and $1.1 million, respectively. The decrease in the salary costs was due to a decrease in the U.S. and Pakistan headcount, lower revenue and 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, 2024.

*Selling and Marketing Expense.* Selling and marketing expense of $1.4 million and $4.8 million for the three and nine months ended September 30, 2024, respectively, decreased by $962,000 or 41% and $2.7 million or 36% from selling and marketing expense of $2.3 million and $7.5 million for the three and nine months ended September 30, 2023, respectively. The decrease for the three and nine months ended September 30, 2024 was due to a reduction in headcount and lower spending on selling and marketing activities.

*General and Administrative Expense.* General and administrative expense of $4.4 million and $12.1 million for the three and nine months ended September 30, 2024, respectively, decreased by $1.1 million or 20% and $4.4 million or 27% compared to general and administrative expense of $5.5 million and $16.5 million for the three and nine months ended September 30, 2023, respectively. During the three and nine months ended September 30, 2024, salary costs decreased by $823,000 and $3.0 million, respectively and legal and professional fees decreased by $105,000 and $564,000, respectively. The decrease in salary costs was due to lower headcount. 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 $800,000 and $2.8 million for the three and nine months ended September 30, 2024, respectively, decreased by $460,000 or 37% and $755,000 or 21% from research and development expense of $1.3 million and $3.5 million for the three and nine months ended September 30, 2023, respectively. During the nine months ended September 30, 2024 and 2023, the Company capitalized approximately $4.4 million and $6.6 million, respectively, of development costs in connection with its internal-use software.

*Depreciation Expense.* Depreciation expense of $504,000 and $1.5 million for the three and nine months ended September 30, 2024, respectively, increased by $11,000 and $14,000 from depreciation of $493,000 and $1.5 million for the three and nine months ended September 30, 2023, respectively.

*Amortization Expense.* Amortization expense of $2.7 million and $9.4 million for the three and nine months ended September 30, 2024, respectively, decreased by $673,000 or 20% and increased by $589,000 or 7% from amortization expense of $3.4 million and $8.8 million for the three and nine months ended September 30, 2023, respectively. The increase for the nine months ended September 30, 2024 was due to the placement of additional internal-use software into production and beginning the related amortization. The decrease for the quarter was due to previously acquired customer relationships becoming fully amortized.

*Loss on Lease Terminations, Unoccupied Lease Charges and Restructuring Costs.* 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. In addition, during the nine months ended September 30, 2023, the Company paid approximately $27,000 to settle a claim regarding a lease termination in India. 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 approximately $1,000 and $162,000, respectively. During the three and nine months ended September 30, 2023, there were $5,000 and $168,000 of unoccupied lease charges, respectively. There were $67,000 and $505,000 of restructuring costs being recorded for the three and nine months ended September 30, 2024, respectively, whereas in the same periods for 2023, there were no restructuring costs. Restructuring costs consists of severance and separation costs associated with the optimization of the Company’s operations and profitability improvements. There were no losses on lease terminations or unoccupied lease charges during the nine months ended September 30, 2024.

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Change Amount | Percent | Nine Months Ended September 30, 2024 | 2023 | Change Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income | $17 | $52 | $(35) | (67%) | $68 | $124 | $(56) | (45%) |
| Interest expense | (179) | (352) | 173 | 49% | (832) | (829) | (3) | 0% |
| Other income (expense) - net | 60 | (422) | 482 | 114% | (227) | (591) | 364 | 62% |
| Income tax provision | 41 | 57 | (16) | (28%) | 119 | 204 | (85) | (42%) |

*Interest Income.* Interest income of $17,000 and $68,000 for the three and nine months ended September 30, 2024, respectively, decreased by $35,000 and $56,000 from interest income of $52,000 and $124,000 for the three and nine months ended September 30, 2023, respectively. The interest income represents late fees from customers and interest earned on temporary cash investments, which decreased due to less funds being temporarily invested.

*Interest Expense.* Interest expense of $179,000 and $832,000 for the three and nine months ended September 30, 2024, respectively, decreased by $173,000 and increased by $3,000 from interest expense of $352,000 and $829,000 for the three and nine months ended September 30, 2023, respectively. Interest expense on the line of credit was $624,000 and $618,000 during the nine months ended September 30, 2024 and 2023, respectively.

*Other Income (Expense) – net.* Other income – net was $60,000 and other expense – net was $227,000 for the three and nine months ended September 30, 2024, respectively, compared to other expense – net of $422,000 and $591,000 for the three and nine months ended September 30, 2023, 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 condensed consolidated statements of operations.

*Income Tax Provision.* The provision for income taxes was $41,000 and $119,000 for the three and nine months ended September 30, 2024, respectively, compared to the provision for income taxes of $57,000 and $204,000 for the three and nine months ended September 30, 2023, respectively. As a result of the Company having certain net operating losses with an indefinite life under the federal and state tax rules, the federal and state deferred tax liability was offset against the net operating loss to the extent allowable in 2023. There were no deferred income taxes for the nine months ended September 30, 2024.

The current income tax expense for the three and nine months ended September 30, 2024 was approximately $41,000 and $119,000, respectively, which represents 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, 2024 and December 31, 2023.

### Liquidity and Capital Resources

As of September 30, 2024, the Company had total cash of $2.8 million and net working capital of $732,000. For the nine months ended September 30, 2024, cash provided by operations was $15.4 million offset by cash used in investing and financing activities of $15.8 million resulting in a decrease in cash of $549,000 after accounting for the effect of $140,000 of exchange rate changes. As of September 30, 2024, there were no borrowings under the credit facility as the Company fully repaid the outstanding $10.0 million balance during the nine months ended September 30, 2024.

In fiscal year 2023, the Company incurred a net loss of $48.7 million compared to $5.4 million of net income in fiscal year 2022, and at December 31, 2023, had cash of $3.3 million and a working capital deficit of $57,000. The decrease in cash for fiscal 2023 was $9.0 million compared to an increase in cash of $2.0 million in fiscal 2022. The Company also had $10.0 million drawn on its line of credit. Together, at December 31, 2023 these factors raised substantial doubt regarding the Company’s ability to continue as a going concern.

However, management has considered its plans to continue the Company as a going concern and believes substantial doubt was alleviated by focusing on cost-control. Management developed a plan that was substantially implemented during fiscal 2023 to improve liquidity in its operations through reductions in payroll and operating expenses. After the reductions are implemented and through employee attrition, the Company expects an improvement of approximately $22.0 million in annualized cost savings, of which approximately $16.0 million will be realized during 2024. The Company also suspended its Preferred Stock dividends in December 2023 resulting in cash savings of $1.3 million per month through September 11, 2024 and approximately $1.1 million per month thereafter. Additional headcount reductions occurred in 2024 and further cost reductions will continue throughout the year. As of September 30, 2024, the Company’s outstanding line of credit was fully repaid. The Company continues to be focused on reducing costs, returning to profitability, generating positive cash flow and maintaining compliance with its debt covenants. Although there are no guarantees that the Company will be successful, it believes that such initiatives will enable it to continue as a going concern through at least the next twelve months.

The Company has begun realizing the effect of these plans and expects continued effects to be realized during the remainder of 2024 and beyond, including further decrease in the Company’s operating costs and an improvement in the Company’s monthly cash flow from operations.

Management continues to focus on the Company’s overall profitability, including managing expenses, and to the extent possible growing revenue, and expects that these efforts will continue to enhance our liquidity and financial position. Based on management’s forecasts, the Company will have sufficient liquidity to meet its obligations as they become due for the next twelve months from the date of the financial statements’ issuance.

Change Healthcare, a subsidiary of UnitedHealth Group, experienced an incident on February 21, 2024, in which a cybersecurity threat actor gained access to some of its information technology systems (“Change Healthcare Cybersecurity Incident”). The Company used Change Healthcare to submit patient claims to Medicare and other payors for reimbursement. Since the time of the system disruption, the Company found alternative processes to maintain overall operations.

As of September 30, 2024, the Company has not identified any compromise or unauthorized access of its systems or networks due to this third party incident. As of the end of the third quarter of 2024, the Company reconnected to many of the applications previously maintained by Change Healthcare. The Company resumed claims submission to payors and utilized alternative platforms for its claims.

During the nine months ended September 30, 2024, the Company did not experience a material financial impact from the Change Healthcare Cybersecurity Incident on the financial results as reported. The impact to the first quarter financial results was primarily related to decreased cash flows from operations, which were recognized during the second and third quarters. The Company resumed submission of claims to payors and determined that the Change Healthcare Cybersecurity Incident did not materially impact the Company, including its business operations, financial condition or results of operations.

We have not been adversely affected by inflation as typically we receive a percentage of the fees our clients collect from our revenue cycle management services. Additionally, our medical practice management contracts are based on our costs plus a percentage of the medical practice’s operating income. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. In the event of inflation, we believe that we will be able to pass on any price increases for fixed rate contracts to our customers, as the prices that we charge are not governed by long-term contracts. The interest rate on our line of credit is based on the prime rate which had been increasing through 2023 but has decreased slightly in 2024.

The Company has a revolving line of credit, and as of September 30, 2024, there were no borrowings under the credit facility. During October 2024, the credit line was reduced to $10 million, which is the current unused borrowing base.

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

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 | Change Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net cash provided by operating activities | $7,068 | $4,313 | $15,413 | $11,721 | $3,692 | 31% |
| Net cash used in investing activities | (1,673) | (3,245) | (5,144) | (9,322) | 4,178 | 45% |
| Net cash used in financing activities | (5,166) | (2,581) | (10,678) | (8,406) | (2,272) | (27%) |
| Effect of exchange rate changes on cash | (64) | 253 | (140) | 114 | (254) | 223% |
| Net increase (decrease) in cash | $165 | $(1,260) | $(549) | $(5,893) | $5,344 | 91% |

The income before income taxes was $3.2 million and $4.7 million for the three and nine months ended September 30, 2024, respectively, which included $3.2 million and $10.9 million of non-cash depreciation and amortization, respectively. 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.

### Operating Activities

Net cash provided by operating activities was $15.4 million and $11.7 million during the nine months ended September 30, 2024 and 2023, respectively. This increase was primarily the result of the decrease in the net loss of $9.5 million which included the following changes in non-cash items: an increase in depreciation and amortization of $466,000 offset by a net decrease in stock-based compensation of $4.0 million. Accounts receivable increased $388,000 for the nine months ended September 30, 2024, compared with a decrease of $1.9 million for the nine months ended September 30, 2023. Accounts payable, accrued compensation and accrued expenses decreased by $2.2 million and $2.3 million during the nine months ended September 30, 2024 and 2023, respectively. The contract asset decreased by $477,000 during the nine months ended September 30, 2024 compared to an increase of $549,000 in the prior period.

### Investing Activities

Net cash used in investing activities was $5.1 million and $9.3 million for the nine months ended September 30, 2024 and 2023, respectively. Capital expenditures were $759,000 and $2.7 million for the nine months ended September 30, 2024 and 2023, respectively. The capital expenditures for the nine months ended September 30, 2024 and 2023 primarily represented computer equipment purchased and leasehold improvements for the Pakistan Offices. Software development costs of $4.4 million and $6.6 million for the nine months ended September 30, 2024 and 2023, 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 $10.7 million and $8.4 million during the nine months ended September 30, 2024 and 2023, respectively. Cash used in financing activities during the nine months ended September 30, 2024 included $478,000 of repayments for debt obligations and $200,000 of tax withholding obligations paid in connection with stock awards issued to employees. 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 offset by $1.4 million of proceeds from the issuance of Series B Preferred Stock. Repayments and net proceeds on the line of credit were $10.0 million and $4.0 million for the nine months ended September 30, 2024 and 2023, 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, 2024. 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, 2023, filed with the SEC on March 21, 2024.

### Off-Balance Sheet Arrangements

As of September 30, 2024, and 2023, 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, 1,083 characters.

On December 11, 2023, the Board of Directors suspended the monthly cash dividends for Series A Preferred Stock and Series B Preferred Stock beginning with the payment scheduled for December 15, 2023 together with the remaining dividends that were declared. The suspension of these dividends deferred approximately $1.3 million in cash dividend payments each month. Effective in September 2024, due to a change in the dividend rate on the Series A Preferred Stock, the monthly cash dividends were reduced to approximately $1.1 million per month. As a result of such suspension, as of the filing date of this Quarterly Report, the Company has approximately $10.6 million of dividends in arrears. During this suspension, dividends will continue to accumulate in arrears on the Series A and Series B Preferred Stock. The Board of Directors will regularly review and consider when the suspension should be lifted. See discussion of preferred stock dividend suspension in “Note 10, Shareholders’ Equity” of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report.

## Controls and procedures

As filed, 2,562 characters.

#### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Interim 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, 2024 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, 2024, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective. We will continue to improve the controls to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

#### 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 other than a process improvement to our disclosure controls and procedures.

## Risk factors

As filed, 1,483 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 21, 2024, 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 12, 2024.
Source: SEC EDGAR, the filing index for accession 0001493152-24-044794. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.