CARECLOUD, INC. The following is a discussion of our consolidated financial condition and results of operations for the years endedDecember 31, 2021 and 2020 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 F-1 of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Overview The Company is a healthcare information technology company that provides Software-as-a-Service offerings ("SaaS") and technology-enabled business solutions, which are often bundled, but are occasionally provided individually, together with related business services to healthcare providers and hospitals throughoutthe United States . Our integrated 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.
At a high level, these solutions can be categorized as follows:
? Technology-enabled business solutions, which are often bundled but are
occasionally provided individually, including:
? EHRs, which are easy to use, integrated with our business services or offered
as Software-as-a-Service ("SaaS") solutions, and allow our healthcare provider
clients to deliver better patient care, document their clinical visits
effectively and thus potentially qualify for government incentives, reduce
documentation errors and reduce paperwork;
? PM software and related tools, which support our clients' day-to-day business
operations and workflows;
?
assist patients and healthcare providers in the provision of healthcare
services;
? Telehealth solutions, which allow healthcare providers to conduct remote
patient visits;
? Healthcare claims clearinghouse, which enables our clients to electronically
scrub and submit claims to, and process payments from, insurance companies;
? Business intelligence, customized applications, interfaces and a variety of
other technology solutions that support our healthcare clients;
? RCM services, which include end-to-end medical billing, eligibility, analytics,
and related services, all of which can often be provided either with our technology platform or through a third-party system; and
? Professional services consisting of application and advisory services, revenue
cycle services, data analytic services and educational training services.
? Medical practice management services are provided to medical practices. In this
service model, we provide the medical practice with appropriate facilities,
equipment, supplies, support services, nurses and administrative support staff.
We also provide management, bill-paying and financial advisory services. Our offshore operations inPakistan andSri Lanka together accounted for approximately 11% and 10% of total expenses for the years endedDecember 31, 2021 and 2020, respectively. A significant portion of those expenses were personnel-related costs (approximately 80% and 79% of foreign costs for the years endedDecember 31, 2021 and 2020, respectively). Because personnel-related costs are significantly lower inPakistan andSri Lanka than in theU.S. and many other offshore locations, we believe our offshore operations give us a competitive advantage over many industry participants. All of the medical billing companies that we have acquired used domestic labor or subcontractors from higher cost locations to provide all or a substantial portion of their services. We are able to achieve significant cost reductions as we shift these labor costs to our offshore operations. 39 Key Performance Measures
We consider numerous factors in assessing our performance. Key performance measures used by management include adjusted EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share. These key performance measures 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 inthe 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 (benefit) 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 exchange (gains) and losses and other non-operating expenses;
? Stock-based compensation expense and cash-settled awards, 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, exit costs related to contractual agreements;
? Loss on lease termination, impairment and unoccupied lease charges; and
? Changes in contingent consideration.
Set forth below is a presentation of our adjusted EBITDA for the years endedDecember 31, 2021 and 2020: December 31, 2021 2020 ($ in thousands) Net revenue$ 139,599 $ 105,122 GAAP net income (loss) 2,836 (8,813 ) Provision for income taxes 157 103 Net interest expense 440 446
Foreign exchange loss / other expense 241
71
Stock-based compensation expense 5,396
6,502
Depreciation and amortization 12,195
9,905
Transaction and integration costs 1,364
2,694
Loss on lease termination, impairment and unoccupied lease charges 2,005
963
Change in contingent consideration (2,515 )
(1,000 ) Adjusted EBITDA$ 22,119 $ 10,871 40
Adjusted operating income and adjusted operating margin exclude the following elements which are included in GAAP operating income (loss):
? Stock-based compensation expense and cash-settled awards, 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, exit costs related to contractual agreements;
? Loss on lease termination, impairment and unoccupied lease charges; and
? Changes 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 years endedDecember 31, 2021 and 2020: December 31, 2021 2020 ($ in thousands) Net revenue$ 139,599 $ 105,122 GAAP net income (loss) 2,836 (8,813 ) Provision for income taxes 157 103 Net interest expense 440 446 Other expense (income) - net 96 (7 ) GAAP operating income (loss) 3,529 (8,271 ) GAAP operating margin 2.5 % (7.9 %)
Stock-based compensation expense 5,396
6,502
Amortization of purchased intangible assets 8,880
8,127
Transaction and integration costs 1,364
2,694
Loss on lease termination, impairment and unoccupied lease charges 2,005
963
Change in contingent consideration (2,515 ) (1,000 ) Non-GAAP adjusted operating income$ 18,659 $
9,015
Non-GAAP adjusted operating margin 13.4 %
8.6 %
Adjusted net income and adjusted net income per share exclude the following elements which are included in GAAP net income (loss):
? Foreign exchange (gains) and losses and other non-operating expenses;
? Stock-based compensation expense and cash-settled awards, 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, exit costs related to contractual agreements;
? Loss on lease termination, impairment and unoccupied lease charges;
? Changes in contingent consideration; and
? Income tax expense (benefit) 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 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 years endedDecember 31, 2021 and 2020: 41 December 31, 2021 2020 ($ in thousands except for per share amounts) GAAP net income (loss) $ 2,836 $ (8,813 ) Foreign exchange loss / other expense 241 71 Stock-based compensation expense 5,396 6,502 Amortization of purchased intangible assets 8,880 8,127 Transaction and integration costs 1,364 2,694 Loss on lease termination, impairment and unoccupied lease charges 2,005 963 Change in contingent consideration (2,515 ) (1,000 ) Income tax expense (benefit) related to goodwill 290 (85 ) Non-GAAP adjusted net income $ 18,497
$ 8,459
December 31,
2021 2020
GAAP net loss attributable to common
shareholders, per share $ (0.77 ) $ (1.79 )
Impact of preferred stock dividend 0.96 1.13
Net income (loss) per end-of-period share 0.19
(0.66 )
Foreign exchange loss / other expense 0.02
0.01
Stock-based compensation expense 0.36
0.49
Amortization of purchased intangible assets 0.60
0.60
Transaction and integration costs 0.09
0.20
Loss on lease termination, impairment and unoccupied lease charges 0.13
0.07
Change in contingent consideration (0.17 ) (0.07 ) Income tax expense (benefit) related to goodwill 0.02 (0.01 ) Non-GAAP adjusted earnings per share $ 1.24 $
0.63
End-of-period common shares 14,916,842
13,380,245
In-the-money warrants and outstanding unvested RSUs 684,528
3,392,575
Total fully diluted shares 15,601,370
16,772,820
Non-GAAP adjusted diluted earnings per share $ 1.19 $
0.50
For purposes of determining non-GAAP adjusted earnings per share, the Company
used the number of common shares outstanding at the end of December 31, 2021 and
2020. 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 theapplicable income taxes. 42
Consolidated Statements of Operations Data
Years ended December 31,
2021 2020 2019 2018 2017
($ in thousands, except per share data)
Net revenue $ 139,599 $ 105,122 $ 64,439 $ 50,546 $ 31,811
Operating expenses:
Direct operating costs 86,918 64,821 41,186 31,253 17,679
Selling and marketing 8,786 6,582 1,522 1,612 1,106
General and administrative 24,273 22,811 17,912 16,264 11,738
Research and development 4,408 9,311 871 1,029 1,082
Change in contingent
consideration (2,515 ) (1,000 ) (344 ) 73 152
Depreciation and
amortization 12,195 9,905 3,006 2,854 4,300
Loss on lease termination,
impairment and unoccupied
lease charges 2,005 963 219 - 276
Total operating expenses 136,070 113,393 64,372 53,085 36,333
Operating income (loss) 3,529 (8,271 ) 67 (2,539 ) (4,522 )
Interest expense - net (440 ) (446 ) (121 ) (250 ) (1,307 )
Other (expense) income - net (96 ) 7 (625 ) 494 332
Income (loss) before
provision for income taxes 2,993 (8,710 ) (679 ) (2,295 ) (5,497 )
Income tax provision
(benefit) 157 103 193 (157 ) 68
Net income (loss) $ 2,836 $ (8,813 ) $ (872 ) $ (2,138 ) $ (5,565 )
Preferred stock dividend 14,052 13,877 6,386 4,824 2,030
Net loss attributable to
common shareholders $ (11,216 ) $ (22,690 ) $ (7,258 ) $ (6,962 ) $ (7,595 )
Weighted average common
shares outstanding basic and
diluted 14,541,061 12,678,845 12,087,947 11,721,232 11,010,432
Net loss per common share:
basic and diluted $ (0.77 ) $ (1.79 ) $ (0.60 ) $ (0.59 ) $ (0.69 ) Consolidated Balance Sheet Data
As of December 31,
2021 2020 2019 2018 2017
($ in thousands)
Cash $ 10,340 $ 20,925 $ 19,994 $ 14,472 $ 4,362
Working capital - net (1) 5,997 15,795 19,823 17,916 4,608
Total assets 140,848 137,999 56,402 47,623 25,526
Long-term debt 20 41 83 222 121
Shareholders' equity 97,931 101,245 42,837 38,870 20,250
(1) Working capital-net is defined as current assets less current liabilities.
Other Financial Data To provide investors with additional insight and allow for a more comprehensive understanding of the information used by management in its financial and operational decision-making, we supplement our consolidated financial statements presented on a basis consistent withU.S. generally accepted accounting principles, or GAAP, with adjusted EBITDA, (previously defined), a non-GAAP financial measure of earnings. Years ended December 31, 2021 2020 2019 2018 2017 ($ in thousands) Adjusted EBITDA$ 22,119 $ 10,871 $ 8,101 $ 4,802 $ 2,291 43
Quarterly Results of Operations
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2021 2021 2021 2021 2020 2020 2020 2020
($ in thousands, except per share data)
Net revenue $ 37,462 $ 38,304 $ 34,065 $ 29,768 $ 32,037 $ 31,639 $ 19,579 $ 21,867
Operating expenses:
Direct operating costs 24,200 24,124 20,534 18,060 18,979 19,719 12,556 13,567
Selling and marketing 2,317 2,375 2,204 1,890 1,805 1,571 1,625 1,581
General and
administrative 6,459 5,921 6,269 5,624 5,634 6,191 5,393 5,593
Research and development 81 488 1,813 2,026 2,465 2,367 2,146 2,333
Change in contingent
consideration (2,515 ) - - - (500 ) (500 ) - -
Depreciation and
amortization 2,689 3,547 3,128 2,831 2,961 3,206 2,405 1,333
Loss on lease
termination, impairment
and unoccupied lease
charges 340 424 223 1,018 282 320 63 298
Total operating expenses 33,571 36,879 34,171 31,449 31,626 32,874 24,188 24,705
Operating income (loss) 3,891 1,425 (106 ) (1,681 ) 411 (1,235 ) (4,609 ) (2,838 )
Interest expense - net (176 ) (87 ) (113 ) (64 ) (94 ) (130 ) (142 ) (80 )
Other (expense) income -
net (16 ) (65 ) 205 (220 ) (77 ) (247 ) (114 ) 445
Income (loss) before
provision (benefit) for
income taxes 3,699 1,273 (14 ) (1,965 ) 240 (1,612 ) (4,865 ) (2,473 )
Income tax provision
(benefit) 177 (232 ) 213 (1 ) 85 62 (74 ) 30
Net income (loss) $ 3,522 $ 1,505 $ (227 ) $ (1,964 ) $ 155 $ (1,674 ) $ (4,791 ) $ (2,503 )
Preferred stock dividend 3,644 3,642 3,638 3,128 3,727 4,230 3,277 2,643
Net loss attributable to
common shareholders $ (122 ) $ (2,137 ) $ (3,865 ) $ (5,092 ) $ (3,572 ) $ (5,904 ) $ (8,068 ) $ (5,146 )
Net loss per common
share:
Basic and diluted $ (0.01 ) $ (0.15 ) $ (0.27 ) $ (0.36 ) $ (0.27 ) $ (0.47 ) $ (0.65 ) $ (0.42 )
Adjusted EBITDA $ 6,098 $ 6,674 $ 5,656 $ 3,691 $ 5,702 $ 4,213 $ 191 $ 765
44
Reconciliation of net income (loss) to adjusted EBITDA
The following table contains a reconciliation of net income (loss) to adjusted
EBITDA by year.
Years ended December 31,
2021 2020 2019 2018 2017
($ in thousands)
Net income (loss) $ 2,836 $ (8,813 ) $ (872 ) $ (2,138 ) $ (5,565 )
Depreciation 1,927 1,354 909 689 634
Amortization 10,268 8,551 2,097 2,165 3,666
Foreign exchange loss (gain)
/ other expense 241 71 827 (435 ) (249 )
Interest expense - net 440 446 121 250 1,307
Income tax provision
(benefit) 157 103 193 (157 ) 68
Stock-based compensation
expense 5,396 6,502 3,216 2,464 1,487
Transaction and integration
costs 1,364 2,694 1,735 1,891 515
Loss on lease termination,
impairment and unoccupied
lease charges 2,005 963 219 - 276
Change in contingent
consideration (2,515 ) (1,000 ) (344 ) 73 152
Adjusted EBITDA $ 22,119 $ 10,871 $ 8,101 $ 4,802 $ 2,291
The following table contains a reconciliation of net income (loss) to adjusted
EBITDA by quarter.
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2021 2021 2021 2021 2020 2020 2020 2020
($ in thousands)
Net income (loss) $ 3,522 $ 1,505 $ (227 ) $ (1,964 ) $ 155 $ (1,674 ) $ (4,791 ) $ (2,503 )
Depreciation 446 488 533 460 409 383 287 275
Amortization 2,243 3,059 2,595 2,371 2,553 2,823 2,118 1,058
Foreign exchange loss
(gain) / other expense 73 70 (146 ) 244 87 296 111 (424 )
Interest expense - net 176 87 113 64 94 130 142 80
Income tax provision
(benefit) 177 (232 ) 213 (1 ) 85 62 (74 ) 30
Stock-based
compensation expense 1,390 1,004 1,735 1,267 1,551 1,763 1,881 1,307
Transaction and
integration costs 246 269 617 232 986 609 454 644
Loss on lease
termination, impairment
and unoccupied lease
charges 340 424 223 1,018 282 321 63 298
Change in contingent
consideration (2,515 ) - - - (500 ) (500 ) - -
Adjusted EBITDA $ 6,098 $ 6,674 $ 5,656 $ 3,691 $ 5,702 $ 4,213 $ 191 $ 765
Key Metrics
In addition to the line items in our consolidated financial statements, we regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, make strategic business decisions, and assess market share trends and working capital needs. We believe information on these metrics is useful for investors to understand the underlying trends in our business. Providers and Practices Served: As ofDecember 31, 2021 and 2020, we provided services to 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 practices. In addition, we served approximately 200 clients who were not medical practices, but are service organizations who serve the healthcare community. Customer Renewal Rate: Our customer renewal rate measures the percentage of our RCM clients who utilize our technology platform who were a party to a services agreement with us onJanuary 1 of a particular year and continued to operate and be a client onDecember 31 of the same year. It also includes acquired accounts, if they are a party to a services agreement with the company we acquired and are generating revenue for us, so long as the risk of client loss under the respective purchase agreement has fully shifted to us byJanuary 1 of the particular year. Our renewal rates for 2021 and 2020 were 91% and 83%, respectively. 45 Sources of Revenue
Revenue: We primarily derive our on-going revenues from technology-enabled business solutions, reported in our Healthcare IT segment, which is typically billed as a percentage of payments collected by our customers. The fee for our services includes the ability to use our EHR and practice management software as well as RCM as part of the bundled fee. These services accounted for approximately 76% and 84% of our revenues during the years endedDecember 31, 2021 and 2020, respectively. This includes customers utilizing our proprietary product suites, as well as customers from acquisitions of RCM companies which we are servicing utilizing third-party software. Key drivers of our revenue include growth in the number of providers we are servicing, the number of patients served by those providers, and collections by those providers. It also includes Software-as-a-Service ("SaaS") fees, for clients not utilizing revenue cycle management services. When clients utilize our revenue cycle management services, basic SaaS services are included at no additional charge. Revenue is also generated from coding, credentialing, indexing, transcription and other ancillary services. Our professional services include an extensive set of services including EHR vendor-agnostic optimization and activation, project management, IT transformation, consulting, process improvement, training, education and staffing for large healthcare organizations including health systems and hospitals. Revenue is recorded monthly on either a time and materials or a fixed rate basis for each contract.
We also generate revenue from our printing and mailing, group purchasing services and medical practice management services.
We earned approximately 1% of our revenue from group purchasing services during the years endedDecember 31, 2021 and 2020. We earned approximately 8% and 11% of our revenue from medical practice management services, including reimbursement of certain costs plus a percentage of the operating profit, during the years endedDecember 31, 2021 and 2020, respectively. We began providing practice management services and group purchasing services onJuly 1, 2018 .
Operating Expenses Direct Operating Costs. Direct operating costs consist primarily of salaries and benefits related to personnel who provide services to our customers and the patients of the three managed medical practices, claims processing costs, 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. Operations in our Offshore Offices together accounted for approximately 11% and 10% of direct operating costs for the years endedDecember 31, 2021 and 2020, respectively. As we grow, we expect to achieve further economies of scale and to see our direct operating costs decrease as a percentage of revenue.
Selling and Marketing Expense. Selling and marketing expense consists primarily of compensation and benefits, commissions, travel and advertising expenses.
Research and Development Expense. Research and development expense consists primarily of personnel-related costs and third-party contractor costs as well as hosting services used in development of software.
General and Administrative Expense. General and administrative expense consists primarily of personnel-related expense for administrative employees, including compensation, benefits, travel, occupancy and insurance, software license fees and outside professional fees. Our Offshore Offices accounted for approximately 17% and 15% of general and administrative expenses for the years endedDecember 31, 2021 and 2020, respectively. 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 practice management clients is amortized on a straight-line basis over a period of twelve years. 46
Loss on lease termination, Impairment and Unoccupied Lease Charges. Loss on lease termination represents the write-off of leasehold improvements as the result of an early lease termination. Impairment charges represent charges recorded for a leased facility no longer being used by the Company and a non-cancellable vendor contract where the services are no longer being used. Unoccupied lease charges represent the portion of lease and related costs for that portion of the space that is vacant and not being utilized by the Company. The Company is marketing the unused space for sub-lease. The Company was able to turn back to the landlord one of the unused facilities effectiveJanuary 1, 2022 . Interest and Other Income (Expense). Interest expense consists of interest costs and loan origination costs related to our working capital line of credit and amounts due in connection with acquisitions, offset by interest income. Our other income (expense) results primarily from foreign currency transaction gains (losses). There were foreign exchange gains of$16,000 and$14,000 for the years endedDecember 31, 2021 and 2020, respectively. 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 reported GAAP earnings in 2021, it incurred losses historically and there is uncertainty regarding future US taxable income, which make 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 ofDecember 31, 2021 andDecember 31, 2020 . EffectiveJanuary 1, 2018 , there is a global intangible low-taxed income ("GILTI") tax. Companies can either account for the GILTI inclusion in the period in which they are incurred or establish deferred tax liabilities for the expected future taxes associated with GILTI. The Company elected to record the GILTI provisions as they are incurred each period.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense and related disclosures. We base our estimates, assumptions and judgments on historical experience, current trends and various other factors that we believe to be reasonable under the circumstances. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. On a regular basis, we review our accounting policies, estimates, assumptions and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Critical accounting policies are those policies used in the preparation of our consolidated financial statements that require management to make difficult, subjective, or complex adjustments, and to make estimates about the effect of matters that are inherently uncertain.
Revenue from Contracts with Customers:
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers. Our revenue recognition policies require us to make significant judgments and estimates, particularly as it relates to revenue cycle management. Under ASC 606, certain significant accounting estimates, such as payment-to-charge ratios, effective billing rates and the estimated contractual payment periods are required to measure the revenue cycle management revenue. We analyze various factors including, but not limited to, contractual terms and conditions, the credit-worthiness of our customers and our pricing policies. Changes in judgment on any of the above factors could materially impact the timing and amount of revenue recognized in a given period. Revenue is recognized as the performance obligations are satisfied. We derive revenue from five primary sources: technology-enabled business solutions, professional services, printing and mailing services, group purchasing services and medical practice management services. All of our revenue arrangements are based on contracts with customers. Most of our contracts with customers contain a single performance obligation. For contracts where we provide multiple services such as where we perform multiple ancillary services, each service represents its own performance obligation. Selling or transaction prices are based on the contractual price for the service, which is consistent with the stand-alone selling price. 47
Technology-enabled business solutions:
Our technology-enabled business solutions include our revenue cycle management and SaaS services. Revenue cycle management services are the recurring process of submitting and following up on claims with health insurance companies in order for the healthcare providers to receive payment for the services they rendered.CareCloud typically invoices customers on a monthly basis based on the actual collections received by its customers and the agreed-upon rate in the sales contract. The services include use of practice management software and related tools (on a software-as-a-service ("SaaS") basis), electronic health records (on a SaaS basis), medical billing services and use of mobile health solutions. We consider the services to be one performance obligation since the promises are not distinct in the context of the contract. The performance obligation consists of a series of distinct services that are substantially the same and have the same periodic pattern of transfer to our customers. In many cases, our clients may terminate their agreements with 90 days' notice without cause, thereby limiting the term in which we have enforceable rights and obligations, although this time period can vary between clients. Our payment terms are normally net 30 days. Although our contracts typically have stated terms of one or more years, under ASC 606 our contracts are considered month-to-month and accordingly, there is no financing component. For the majority of our revenue cycle management contracts, the total transaction price is variable because our obligation is to process an unknown quantity of claims, as and when requested by our customers over the contract period. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with variable consideration is subsequently resolved. Estimates to determine variable consideration such as payment to charge ratios, effective billing rates, and the estimated contractual payment periods are updated at each reporting date. Revenue is recognized over the performance period using the input method. Professional services: Revenues from professional services are recorded as the services are provided as the performance obligations are satisfied over time. Revenue is recorded based on the number of hours incurred and the agreed-upon hourly rate. Invoicing is performed at the end of each month. Practice management services: We estimate the amount that will be collected on claims submitted to insurance carriers which is used to determine the compensation to be paid to the owners of the managed practices. These compensation amounts reduce the revenue that the Company recognizes since they are deducted from gross billings. The estimate of the amounts to be received from the insurance claims are updated at each reporting period. Although we believe that our approach to estimates and judgments is reasonable, actual results could differ, and we may be exposed to increases or decreases in revenue that could be material. Our estimates of variable consideration may prove to be inaccurate, in which case we may have understated or overstated the revenue recognized in an accounting period. The amount of variable consideration recognized to date that remains subject to estimation is included within the contract asset in the consolidated balance sheets. Contingent Consideration: If a business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date. The Company adjusts the contingent consideration liability at the end of each reporting period based on fair value inputs representing changes in forecasted revenue of the acquired entities and the probability of an adjustment to the purchase price. Critical estimates include determining the forecasted revenue for certain acquisitions, probability and timing of cash collections and an appropriate discount rate. Changes in the fair value of the contingent consideration after the acquisition date are included in earnings if the contingent consideration is recorded as a liability. Goodwill Impairment:
Goodwill is evaluated for impairment annually as ofOctober 31st , referred to as the annual test date. The Company will also test for impairment between annual test dates if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is performed at the reporting-unit level. The Company has determined that its business consists of two operating segments and two reporting units (Healthcare IT and Practice Management). Application of the goodwill impairment test requires judgment including the use of a discounted cash flow and market approach methodology. These analyses require significant assumptions and judgments. These assumptions and judgments include estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, determination of our weighted average cost of capital and the selection of comparable companies and the interpretation of their data. Future business and economic conditions, as well as differences in actual financial results related to any of the assumptions, could materially impact the consolidated financial statements through impairment of goodwill or intangible assets and acceleration of the amortization period of the purchased intangible assets which are finite-lived assets. No impairment charges were recorded during the years ended December
31, 2021 or 2020. 48 Business Combinations:
The Company accounts for business combinations under the provisions of ASC 805, Business Combinations, which requires that the acquisition method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. The fair value amount assigned to intangible assets is based on an exit price from a market participant's viewpoint, and utilizes data such as discounted cash flow analysis and replacement cost models. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected client retention rates, expected future cash inflows and outflows, discount rates, and estimated useful lives of those intangible assets. ASC 805 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill.Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. Results of Operations
The following table sets forth our consolidated results of operations as a percentage of total revenue for the years shown.
December 31,
2021 2020
Net revenue 100.0 % 100.0 %
Operating expenses:
Direct operating costs 62.3 % 61.7 %
Selling and marketing 6.3 % 6.3 %
General and administrative 17.4 % 21.7 %
Research and development 3.2 % 8.9 %Change in contingent consideration (1.8 %) (1.0 %) Depreciation and amortization 8.7 % 9.4 % Loss on lease termination, impairment and unoccupied lease charges 1.4 % 0.9 % Total operating expenses 97.5 % 107.9 % Operating income (loss) 2.5 % (7.9 %) Interest expense - net 0.3 % 0.4 % Other (expense) income - net (0.1 %) 0.0 %
Income (loss) before income taxes 2.1 %
(8.3 %)
Income tax provision 0.1 % 0.1 %
Net income (loss) 2.0 % (8.4 %)
Comparison of 2021 and 2020
Year Ended
December 31, Change
2021 2020 Amount Percent
($ in thousands)
Net revenue $ 139,599 $ 105,122 $ 34,477 33 %
49
Net revenue. Net revenue of$139.6 million for the year endedDecember 31, 2021 increased by$34.5 million or 33% from revenue of$105.1 million for the year endedDecember 31, 2020 . Total revenue for the year endedDecember 31, 2021 included approximately$71.4 million from customers acquired in the CCH and Meridian acquisitions and approximately$15.9 million from the medSR acquisition. The year 2021 includes a full year of revenue from the Meridian acquisition. Revenue for the year endedDecember 31, 2021 includes$105.5 million relating to technology-enabled business solutions,$19.0 million related to professional services,$12.5 million for practice management services and$2.6 million from printing and mailing and group purchasing services. Year Ended December 31, Change 2021 2020 Amount Percent ($ in thousands) Direct operating costs$ 86,918 $ 64,821 $ 22,097 34 % Selling and marketing 8,786 6,582 2,204 33 % General and administrative 24,273 22,811 1,462 6 % Research and development 4,408 9,311 (4,903 ) (53 %) Change in contingent consideration (2,515 ) (1,000 ) (1,515 ) (152 %) Depreciation 1,927 1,354 573 42 % Amortization 10,268 8,551 1,717 20 % Loss on lease termination, impairment and unoccupied lease charges 2,005 963 1,042 108 % Total operating expenses$ 136,070 $ 113,393 $ 22,677 20 % Direct Operating Costs. Direct operating costs of$86.9 million for the year endedDecember 31, 2021 increased by$22.1 million or 34% from direct operating costs of$64.8 million for the year endedDecember 31, 2020 . Salary costs increased by$15.3 million primarily as a result of the medSR and Meridian acquisitions. Outsourcing and other customer processing costs increased by$7.4 million , outside consultant costs decreased by$326,000 and facility costs decreased by$173,000 . Selling and Marketing Expense. Selling and marketing expense of$8.8 million for the year endedDecember 31, 2021 increased by$2.2 million or 33% from selling and marketing expense of$6.6 million for the year endedDecember 31, 2020 . The increase was primarily related to additional emphasis on sales and marketing activities inCareCloud Health and medSR. General and Administrative Expense. General and administrative expense of$24.3 million for the year endedDecember 31, 2021 increased by$1.5 million or 6% from general and administrative expense of$22.8 million for the year endedDecember 31, 2020 . Salary costs increased by$440,000 as a result of the medSR acquisition.
Research and Development Expense. Research and development expense of$4.4 million for the year endedDecember 31, 2021 decreased by$4.9 million or 53% from research and development expense of$9.3 million in the prior year. The decrease resulted from an increase in internally developed software projects which were capitalized and use of offshore resources for software maintenance which is expensed. Change in Contingent Consideration. The change of$2.5 million and$1.0 million for the years ended 2021 and 2020, respectively, relates to changes in the fair value of the contingent consideration. Depreciation. Depreciation of$1.9 million for the year endedDecember 31, 2021 increased by$573,000 or 42% from depreciation of$1.4 million for the year endedDecember 31, 2020 , primarily as a result of additional property and equipment purchases and the property and equipment obtained from the medSR
and Meridian acquisitions. Amortization Expense. Amortization expense of$10.3 million for the year endedDecember 31, 2021 increased by$1.7 million or 20% from amortization expense of$8.6 million for the year endedDecember 31, 2020 . The increase was primarily related to the intangible assets acquired from the medSR and Meridian acquisitions. Loss on lease termination, Impairment and Unoccupied Lease Charges. Loss on lease termination represents the write-off of leasehold improvements as the result of an early lease termination. Impairment charges represent charges recorded for a leased facility no longer being used by the Company and a non-cancellable vendor contract where the services are no longer being used. Unoccupied lease charges represent the portion of lease and related costs for that portion of the space that is vacant and not being utilized by the Company. The Company is marketing the unused space for sub-lease. The Company was able to turn back to the landlord one of the unused facilities effectiveJanuary 1 ,
2022.
50
Year Ended
December 31, Change
2021 2020 Amount Percent
($ in thousands)
Interest income $ 15 $ 42 $ (27 ) (64 %)
Interest expense (455 ) (488 ) 33 7 %Other (expense) income - net (96 ) 7 (103 ) (1,471 %) Income tax provision
157 103 (54 ) (52 %)
Interest Income. Interest income of$15,000 for the year endedDecember 31, 2021 decreased by$27,000 or 64% from interest income of$42,000 for the year endedDecember 31, 2020 . Interest income primarily represents interest earned on temporary cash investments and late fees from customers. Interest Expense. Interest expense of$455,000 for the year endedDecember 31, 2021 decreased by$33,000 or 7% from interest expense of$488,000 for the year endedDecember 31, 2020 . Interest expense also includes the amortization of deferred financing costs which was approximately$200,000 and$180,000 during the years endedDecember 31, 2021 and 2020, respectively. Other (Expense) Income - net. Other expense - net was$96,000 for the year endedDecember 31, 2021 compared to other income - net of$7,000 for the year endedDecember 31, 2020 . Included in other (expense) income - net are foreign currency transaction gains (losses) primarily resulting from transactions in foreign currencies other than the functional currency. These transaction gains and losses are recorded in the consolidated statements of operations related to the recurring measurement and settlement of such transactions.
Income Tax Provision. There was a
The current income tax benefit for the year endedDecember 31, 2021 was approximately$132,000 compared to a tax provision of$187,000 , for the year endedDecember 31, 2020 . In 2021, there was a net operating loss carryback of$285,000 recorded as a result of pre-acquisition losses of Meridian. The balance of the provision for 2021 and for 2020 primarily relates to state minimum taxes and foreign income taxes. The pre-tax income was$3.0 million for the year endedDecember 31, 2021 and the pre-tax loss was$8.7 million for the year endedDecember 31, 2020 . The Company has incurred losses historically and there is uncertainty regarding futureU.S. taxable income, which make realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance was recorded against all deferred tax assets atDecember 31, 2021 and 2020.
The Company has recorded goodwill as a result of its acquisitions.Goodwill is generally not amortized for financial reporting purposes. However, goodwill from asset acquisitions is tax deductible and amortized over 15 years for tax purposes. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this indefinitely lived asset. The resulting deferred tax liability, which is expected to continue to be recorded over the amortization period, will have an indefinite life. As a result of the Company incurring tax losses for 2021 and 2020 which have an indefinite life under the recent tax reform legislation, the federal deferred tax liability resulting from the amortization of goodwill was offset against these indefinite federal operating net loss deferred tax assets to the extent allowable. The remaining deferred tax liability could remain on the Company's consolidated balance sheet indefinitely unless there is an impairment of goodwill (for financial reporting purposes) or a portion of the related business is sold. The Company will maintain a full valuation allowance on deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. While the Company had GAAP earnings in 2021 and plans to be profitable in the future and begin utilizing these deferred tax assets, the Company currently lacks sufficient evidence to allow it to release the valuation allowance in 2021 and 2020. Release of the valuation allowance would result in the recognition of certain deferred tax assets and an income tax benefit in the period of release. As ofDecember 31, 2021 , the Company has a total federal NOL carry forward of approximately$274.5 million of which approximately$198.8 million will expire between 2034 and 2037, and the balance of approximately$75.7 million has an indefinite life. Out of the total federal NOL carry forward, approximately$237.6 million is from theCareCloud and Meridian acquisitions and is subject to the federal Section 382 NOL annual usage limitations. The Company has state NOL carry forwards of approximately$212.1 million , of which$86.5 million relates to theState of New Jersey . These NOLs expire between 2034 and 2040. 51
Liquidity and Capital Resources
During the year endedDecember 31, 2021 , there was positive cash flow from operations of$13.3 million and at year-end, the Company had$10.3 million in cash and restricted cash and positive working capital of$6.0 million . During the year endedDecember 31, 2020 , there was negative cash flow from operations of approximately$892,000 and at year-end the Company had$20.9 million in cash and positive working capital of$15.8 million . Cash used by operations in 2020 includes$10.3 million used to pay outstanding obligations assumed with the acquisitions ofCareCloud and Meridian, which were anticipated at the time of acquisition and factored into the purchase prices. The Company has a revolving line of credit with SVB, and, as ofDecember 31, 2021 , there was$8 million balance outstanding. During the year endedDecember 31, 2021 , the Company sold 346,389 shares of common stock and raised$2.7 million in net proceeds after fees and expenses. The exercise of 858,000 warrants resulted in net proceeds of$6.4 million . During the year endedDecember 31, 2020 , the Company sold 1,932,000 shares of Preferred Stock and raised$44.5 million in net proceeds after fees and expenses.
The following table summarizes our cash flows for the years presented.
Year Ended December 31, Change
2021 2020 Amount Percent
($ in thousands)
Net cash provided by (used in)
operating activities $ 13,334 $ (892 ) $ 14,226 1,595 %
Net cash used in investing
activities (23,146 ) (31,469 ) 8,323 26 %
Net cash (used in) provided by
financing activities (519 ) 33,422 (33,941 ) (102 %)
Effect of exchange rate changes
on cash (254 ) (130 ) (124 ) (95 %)
Net (decrease) increase in cash
and restricted cash $ (10,585 ) $ 931 $ (11,516 ) (1,237 %)
The income before income taxes was$3.0 million for the year endedDecember 31, 2021 , of which$12.2 million was non-cash depreciation and amortization. The loss before income taxes for the year endedDecember 31, 2020 was$8.7 million , of which$9.9 million was non-cash depreciation and amortization. Management continues to focus on the Company's overall profitability, including growing revenue and managing expenses, 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 twenty-four months from the date of financial statements issuance. 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 practice management contracts are based on our costs plus a percentage of 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. During the second quarter of 2020, patient volumes decreased due to COVID-19, but returned to near normal levels during the second half of 2020 and have remained fairly consistent since then. The Company did not have any significant employee terminations or furloughs as a result of COVID-19. Operating Activities Cash provided by operating activities was$13.3 million and cash used by operating activities was$892,000 during the years endedDecember 31, 2021 and 2020, respectively. The increase in the net income of$11.6 million included the following changes in non-cash items: increase in depreciation and amortization of$2.5 million , decrease in stock-based compensation of$1.1 million , and an increase in contingent consideration of$1.5 million . Revenue increased by$34.5 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , and operating expenses increased by$22.7 million for the same period primarily due to the acquisitions of Meridian and medSR. Accounts receivable increased by$620,000 for the year endedDecember 31, 2021 , compared with a reduction of$394,000 for the year endedDecember 31, 2020 . This excludes the acquired accounts receivable as part of the medSR,CareCloud and Meridian acquisitions. Accounts payable, accrued compensation and accrued expenses increased by$10.4 million during the year endedDecember 31, 2021 , compared with an increase of$11.9 million for the year endedDecember 31, 2020 . While the cash used to pay pre-acquisition accounts payable, accrued compensation and accrued expenses was anticipated at the time of theCareCloud , Meridian and medSR acquisitions, and was considered as part of the purchase prices of these transactions, it is shown as cash used by operations to conform with GAAP. 52 Investing Activities Cash used in investing activities during the year endedDecember 31, 2021 was$23.1 million , a decrease of$8.3 million compared to$31.5 million during the year endedDecember 31, 2020 . The change is due to the Company acquiringCareCloud and Meridian for a cash consideration of$23.7 million during 2020, while in 2021 the Company paid$12.6 million for the acquisitions of medSR. Capitalized software was$7.6 million and$5.2 million during the years endedDecember 31, 2021 and 2020, respectively. Financing Activities Cash used by financing activities during the year endedDecember 31, 2021 was$519,000 , compared to$33.4 million of cash provided for the year endedDecember 31, 2020 . Cash provided by financing activities during 2021 includes$6.4 million of net proceeds from issuing 858,000 shares from the exercise of common stock warrants and$2.7 million of net proceeds after fees and expenses from issuing 346,389 shares of common stock via an "at-the-market" offering, offset by$1.0 million of repayments for debt obligations, and$14.4 million of preferred stock dividends. Cash provided by financing activities during 2020 includes$44.5 million of net proceeds from issuing 1,932,000 shares of preferred stock, offset by$666,000 of repayments for debt obligations, and$11.4 million of preferred stock dividends. There was also$2.1 million of payments to settle the tax withholding obligations in 2021 compared to$2.2 million in 2020. The net proceeds from the line of credit were$8.0 million during the year endedDecember 31, 2021 . There were no borrowings under the revolving line of credit during the year endedDecember 31, 2020 .
Contractual Obligations and Commitments
We have contractual obligations under our line of credit. We also maintain operating leases for property and certain office equipment. We were in compliance with all SVB covenants in 2021.
Off-Balance Sheet Arrangements
As ofDecember 31, 2021 , and 2020, 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. During the first quarter of 2020, aNew Jersey corporation, talkMD Clinicians, PA ("talkMD"), was formed by the wife of the Executive Chairman, who is a licensed physician, to provide telehealth services. talkMD was determined to be a variable interest entity ("VIE") for financial reporting purposes because the entity will be controlled by the Company. As ofDecember 31, 2021 , talkMD had not yet commenced operations. DuringSeptember 2021 , the Company made arrangements to have the income tax returns prepared for talkMD and will advance the funds for the required taxes. The aggregate amount advanced was approximately$3,500 . We do not engage in off-balance sheet financing arrangements.
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