CareCloud, Inc. (CCLD) Q4 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the MTBC Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Shruti Patel, General Counsel. Please go ahead.

Good morning everyone. Welcome to the MTBC 2016 fourth quarter conference call. On today’s call are Mahmud Haq, our Chairman and Chief Executive Officer; Stephen Snyder, our President and Director; and Bill Korn, our Chief Financial Officer. Before we begin, I would like to remind you that many of our comments may contain forward-looking statements, which are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks and uncertainties that could cause our actual results to differ materially. These statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our press release and our reports filed with the Securities and Exchange Commission, where you will find factors that could cause actual results to differ materially from these forward-looking statements. With that said, I'll now turn the call over to the Chairman and CEO of MTBC, Mr. Mahmud Haq. Mahmud?

Thank you Shruti, and thank you for joining us on our fourth quarter 2016 call. We are pleased to announce a 65% growth over fourth quarter 2015 and third quarter 2016 in our third consecutive quarter of quarter-over-quarter revenue growth. We are greatly encouraged by the growth opportunities provided by our recent acquisition of MediGain and look forward to delivering strong revenue and EBITDA growth in 2017. As previously announced, on October 3, 2016 MTBC achieved a corporate milestone in its acquisition of substantially all of the assets of MediGain, LLC, a Texas-based medical billing company, and its subsidiary, Millennium Practice Management, LLC, a New Jersey-based medical billing company, together known as MediGain. Expected to be accretive to shareholders in 2017, the acquisition reflects the strategic nature of MTBC's acquisition-based growth strategy. I would now like to turn the call over to our President Steve Snyder to discuss this exciting deal in more detail. Steve?

Thank you. Mahmud. As Mahmud mentioned we were pleased to have acquired MediGain during the fourth quarter of last year. As a result of this acquisition, we have expanded our customer base and have on boarded talented team members from MediGain, who are helping us further enhance our operational capabilities and successfully leverage growth opportunities. During the six months since closing the MediGain transaction, we have significantly reduced MediGain’s operating costs, while improving their processes and ability to grow and to retain customer relationships. Moreover, our combined sales team has leveraged our corporate synergies to accelerate organic growth. As we move forward, we expect to continue improving operating margins throughout 2017, while continuing to also deliver outstanding technology solutions and services to our new and existing customers. I will now turn the call over to Bill Korn, our Chief Financial Officer, who will provide you with the detailed review of our full year and fourth quarter financial results. Bill?

Thanks Steve. We are pleased to report that revenues for the three months ended December 31, 2016 were $8.8 million, compared to $5.4 million in the same period of 2015, which represents 65% revenue growth. The increase was primarily a result of the MediGain acquisition, which occurred on October 3, 2016. Our fourth quarter 2016 GAAP net loss was $4.0 million, or 46% of net revenue, compared to a GAAP net loss of $802,000 for the fourth quarter of 2015. The increase in the net loss is primarily the result of planned, short-term increases in operating expenses related to the acquisition and integration of MediGain. Fourth quarter revenue increased by $3.5 million or 65%, while direct operating costs increased from $2.4 million in the fourth quarter 2015 to $6.1 million in the fourth quarter 2016, and G&A increased from $2.6 million to $4.3 million. On October 3rd, the day we purchased MediGain, we began reducing expenses. For example, four subcontract firms represented $750,000 of the fourth quarter 2016 direct operating expense, and as of today, we have transitioned all of the work from these four subcontract firms to our employees. These transitions significantly reduced our operating expenses, while improving performance. We have also been deploying our experienced team and our technology to reduce personnel and related operating expenses. Finally, we have reduced the facilities costs associated with MediGain by approximately 70%. The GAAP net loss for fourth quarter was $0.42 per share, calculated using the net loss attributable to common shareholders divided by the weighted average number of common shares outstanding. Non-GAAP adjusted net income of fourth quarter was negative $1.3 million, or negative $0.12 per share, compared to the non-GAAP adjusted net income of $121,000 in the same period of 2015. Non-GAAP adjusted net income per share is calculated using the end-of-period common shares outstanding, including shares which are part of contingent consideration. Adjusted EBITDA for the fourth quarter was negative $814,000 or negative 9.2% of revenue, compared to adjusted EBITDA of positive $312,000, or 5.8% of revenue, in fourth quarter 2015. Turning to the full year, MTBC's revenues for the year ended December 31, 2016 were $24.5 million, compared to $23.1 million in 2015, an increase of 6%. The GAAP net loss for the year ended December 31, 2016 was $8.8 million, 36% of net revenue, or $0.95 per share, compared to a GAAP net loss of $4.7 million in 2015. The net loss for 2016 includes $5.1 million of non-cash depreciation and amortization expense, primarily the result of amortizing purchased intangible assets. The increase in the cash portion of the net loss is primarily the result of an increase in operating expenses due to the acquisition of MediGain during fourth quarter 2016. Non-GAAP adjusted net income for the year ended December 31, 2016 was negative $2.0 million, or negative $0.19 per share, compared to non-GAAP adjusted net income of negative $1.4 million in 2015. Adjusted EBITDA for the year ended December 31, 2016 was negative $605,000, or negative 2.5% of revenue, compared to adjusted EBITDA of negative $675,000, or negative 2.9% of revenue in 2015. The difference of $8.2 million between adjusted EBITDA and the GAAP net loss in the year 2016 reflects $5.1 million of non-cash amortization and depreciation expense, $1.9 million of stock-based compensation, $1.0 million of integration and transaction costs related to recent acquisitions, $197,000 of provision for taxes, and $646,000 of net interest expense, offset by a $716,000 decrease in the contingent consideration liability. Management believes that our non-GAAP metrics are closer to reflecting our cash flow, and we will focus on driving positive adjusted EBITDA during 2017. I would like to talk for a minute about our cash balance and liquidity. As of December 31, 2016, the Company had $3.5 million in cash. Our stockholders' equity was approximately $7.1 million and our accumulated deficit was approximately $17.9 million. The company had a working capital deficiency of approximately $7.4 million, the majority of which is attributable to the balance of the MediGain purchase price. MTBC purchased MediGain on October 3, 2016 by acquiring MediGain’s debt to Prudential Insurance for $7 million, and immediately foreclosing on MediGain’s assets including customer relationships, accounts receivable, fixed assets and intellectual property. We paid Prudential $2 million upfront and still owe Prudential $5 million, of which $3 million is now due. In order to satisfy our existing obligations, the management believes additional funding will be necessary, which might be in the form of sales of additional shares of our Series A Preferred Stock, our common stock, or some other instrument. We may seek additional capital from public or private offerings or may elect to borrow additional amounts under new credit lines or from other sources. If the Company issues equity or debt securities to raise additional funds, our existing stockholders may experience dilution, we may incur significant financing costs, and the new equity or debt securities may have rights, preferences and privileges senior to those of existing stockholders. Management concluded that without additional financing, there would be doubt about the Company's ability to continue as a going concern within a year after the date the financial statements were issued. As a result, the audit report included in MTBC’s Annual Report on Form 10-K to be filed this afternoon will contain a going concern emphasis-of-matter paragraph. The company anticipates full year 2017 revenue will be approximately $30 million to $31 million, which represents growth of 22% to 27% over 2016 revenue. In large measure, this is the result of the MediGain acquisition, which occurred on October 3, 2016 and will contribute to the full year 2017 instead of just a single quarter. We expect adjusted EBITDA to be $2.0 million to $2.5 million for full year 2017, anticipating that the first quarter will be slightly negative due to planned integration expenses, but each successive quarter will be positive and reflect growth. Our prospects for growth and profitability have never been stronger. That concludes my review of MTBC’s financial results, and I'll now turn the call over to our Chairman and CEO, Mahmud Haq, for some closing remarks. Mahmud?

Thank you, Bill. We are excited by the revenue growth we reported in fourth quarter 2016. the integration of MediGain into our business is going very well, and we anticipate this will give us the scale we need to generate adjusted EBITDA starting with Q2 of 2017. MTBC has never been in a stronger position and we look forward to giving you future updates on our progress. I would also like to thank our team members for their hard work and dedication. Finally I want to thank the physician customer for trusting us to help manage their practices. We will now open the call to questions. Operator?

[Operator Instructions] The first question comes from Keay Nakae of Chardan. Please go ahead.

Yes, thank you. I want to talk about the operating expense, so sequentially in the quarter you have direct operating expense up about 3.5 million, G&A up 1.7 million, so how you think about these numbers as – going forward as you try to whittle down the operating expense of MediGain.

That is a good question Keay. The good news is we took a lot of actions during the fourth quarter to reduce expenses. For example, on the day of the acquisition, MediGain had these three subcontract firms, and clients weren’t terribly pleased with the work that was being done by those firms. The good news is as we moved work to our employees, customers found they were getting better results, and getting better reimbursement for insurance, so customer satisfaction went up and our costs went down dramatically. So what you will see in Q1 of 2017, you will see tailing off of those subcontractor expenses, and then as you move into the Q2 you will see that subcontractor expenses are essentially gone. So again as a point of reference in Q4, the subcontract firms were roughly $750,000, and by that time you get to Q2 of 2017, that number is zero. In addition, we picked up a very strong team from MediGain in Sri Lanka. We have actually expanded that office a little bit. The cost in Sri Lanka is very similar to the cost of our team in Pakistan. So we are relying more on people who are our employees in both countries. We are looking at work that is being done by US employees, and again our model is to think about what can be automated. And that which can’t be automated how do we provide the best work most cost effectively. So again, what you will see is payroll expense that hits both direct operating cost and G&A. You will see those numbers reduced in Q1 of 2017, and you will see further reductions in Q2 and going forward. And finally we have looked at the employees who have the strong relationships with the clients. We have looked at the sales and marketing team and those are the folks that we are keeping. So, what you will actually see in terms of sales and marketing is a bit of an increase in sales and marketing going forward, and concurrent with that you will find for the first time in a long while we are actually starting to sign up a reasonable number of new clients, which will be providing organic revenue growth, something that we had not been able to do in the past because candidly we were spending almost no money on sales and marketing.

So, if we add all that up, how much more expense is there to wring out, again we are talking about a sequential increase of over $5 million in the quarter. And yes, you have got the $750,000 that you mentioned, but what about the balance of that increase in expense? What percentage of that can we realistically expect to reduce?

Maybe one way to look at that is if you look at the gross profit line, gross profit have been 60% in the past. They were 31% in Q4 of 2016. There is no reason why they won’t get back to 60% by the end of the year. So, it will be hard for me to draw the exact straight-line, but you will see those operating costs going down and therefore you will see the gross margin going up. So, the flip side G&A in the fourth quarter was 50% of revenue and again a lot of that was driven by expenses we picked up from MediGain. So A, you will see some of those expenses going away, and B, you will start to see revenue growing. So I expect to see G&A decreasing over time. Again I don't have a crystal ball, but, a target of getting it to the 30% is certainly not unreasonable.

Okay. And then, on the top line historically you have had – we have seen an attrition rate of required revenue, so what does that look like for MediGain after six months and for some of the other acquisitions you did in 2016 like Gulf Coast and some of the other smaller ones?

This is Mahmud. Let me answer that question. If you go back and look at our IPO in 2015, it took us about six quarters to bring it back to a cash flow positive, and the amount of acquisition revenue was about the same about $15 million or so at that time. This time around the reason we are very excited about the prospects is that it took us less than two quarters to wring out as Bill mentioned majority of the expenses, and if you look at the revenue, our revenue has stabilized. If you look at the full year forecast, full year guidance that we are giving of $31 million, $32 million, roughly it is $8 million a quarter. We are very comfortable with that number. So that can – what I am saying is attrition is significantly less than what we experienced at the time of the IPO. Our expenses we wringed out very quickly. We learnt from our mistakes after the IPO. And at this point, it is stable. The revenue, let us say, four quarters of $8 million, and it gives you $32 million. So we believe that the revenue it is stable. We already have the first quarter closing today. So we are comfortable with that number and to your other question about expenses, we think that – I would say about 60% to 70% expenses have been reduced so far, and about 30% or so percent is yet to be reduced.

Okay, that is helpful. Just factoring in the typical Q1 seasonality due to the new thresholds for deductibles, what sequentially should we be thinking about for that Q1 revenue versus Q4. Traditionally it is lower, is that the case as well?

And I think if you just what I just mentioned Keay, take the 32, divide that by 4, 8 million. I think that gives you a good threshold for quarterly revenue, and today being the last day we are comfortable with that number.

Okay, very good. That is helpful. Thanks. That is all I have.

And I think that is the exciting part. We believe that at this point, at the end of the first quarter, we are where we wanted to beWe believe that We believe that in terms of reduction of expenses and revenue control of attrition. And as Bill mentioned, with the sales team we have in place today, we feel that there will be not only that we would replace the natural attrition, but there will be a net-net increase in our revenue going forward from organic sources. We are not focused, which I am sure you have figured that out, we are not focused right now on acquisition. We are just focused on getting profitable this 2017 and organic growth.

Okay, thanks.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Shruti Patel for any closing remarks.

Thank you Andrew, and thank you everybody for joining, and that will conclude our 2016 fourth quarter call.

Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.