Good morning, ladies and gentlemen. Welcome to the CareCloud Inc. First Quarter 2023 Results Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to your host, Kimberly Blanche, CareCloud's General Counsel. Ms. Blanche, you may begin.

Good morning, everyone. Welcome to the CareCloud First Quarter 2023 Conference Call. On today's call are Mahmud Haq, our Founder and Executive Chairman; Hadi Chaudhry, our Chief Executive Officer, President and Director; and Bill Korn, our Chief Financial Officer. Before we begin, I would like to remind you that certain statements made during this conference call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts made during this conference call are forward-looking statements, including, without limitation, statements regarding our expectations and guidance for future financial and operational performance, expected growth, business outlook and potential organic growth and acquisitions. Forward-looking statements may sometimes be identified with words such as will, may, expect, plan, anticipate, upcoming, believe, estimate or similar terminology and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. These statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our press release and our reports filed with the Securities and Exchange Commission, where you will find a more comprehensive discussion of our performance and factors that could cause actual results to differ materially from these forward-looking statements. For anyone who dialed into the call by telephone, you may want to download our first quarter 2023 earnings presentation. Please visit our Investor Relations site, ir.carecloud.com, click on News & Events, then click IR calendar, click First Quarter 2023 Results Conference Call and download the earnings presentation. Finally, on today's call, we may refer to certain non-GAAP financial measures. Please refer to today's press release announcing our first quarter 2023 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results. With that said, I'll now turn the call over to our CEO, Hadi Chaudhry. Hadi?

Thank you, Kim, and thanks to all of you for joining us for our first quarter 2023 earnings call. We started 2023, building on an organic growth momentum we created throughout 2022. In the first quarter, we reported revenue of $30.1 million and adjusted EBITDA of $4.2 million. We are pleased that these numbers are in line with our internal expectations and keep us on track to deliver on our full year's guidance. Today, we will provide you with an update on our organic bookings momentum, our progress towards converting bookings into revenue recognized during the first quarter, the emerging growth opportunities in the Middle East, our increased focus on marketing efforts to raise awareness of our comprehensive solutions and early adopters of our therapy EHR solution that I mentioned last quarter. First, I will provide an update on the continued momentum of our overall bookings with a particularly meaningful contribution from our wellness offerings, which include chronic care management and remote patient monitoring. After about a year on the market, it continues to gain traction with our physician base. Our recurring revenue bookings for the first quarter of 2023 were over $8 million. 2022 was a record year for bookings, and debt certainly continued in 2023. We have seen good momentum in overall bookings, including wellness bookings over the last year, and I would like to share a little detail on how it's converting to revenue. I'm going to talk first about overall bookings conversion and then break it down by tech-enabled RCM, force and wellness. First off, the total recurring bookings we signed in 2022. 92% of the potential revenue has gone live with us in some form or fashion. In the first quarter, on an annualized basis, we recognized 44% of the potential revenue opportunity from those…

Thanks, Hadi, and thank you all for joining our call today. I'd like to start by reiterating Hadi's sentiment that we are pleased to report the first quarter results were in line with what we expected, and we are on track to achieve our full-year goals. In the first quarter, we reported revenue of $30 million. While down year-over-year, the decline can be largely attributed to 3 factors. First, the loss of revenue from 2 customers due to healthy demergers. Approximately $2.6 million of the decrease in first-quarter revenue was due to these 2 clients who completed migrating to their acquirer's platforms in mid-2022. Second, some softness in Med SR, which is a project-based professional services business that tends to fluctuate. Med SR revenue was down $1.2 million from first quarter 2022. Our professional services business continues to be strong. And while our expectation is that second-quarter professional services revenue will be similar to the first quarter, we have a number of major projects in our pipeline for the second half of 2023. And finally, the first quarter of 2022 included approximately $1.2 million of revenue from revenue cycle management for services, which were COVID related. This was not present during the first quarter of 2023. Despite these three factors, we still remain confident of the full-year picture. Of the first quarter revenue, approximately 87% came from our tech-enabled business solutions and professional services. We reported a GAAP net loss of $401,000 and adjusted EBITDA came in at $4.2 million. As a reminder, our first quarter revenue is typically down 5% to 8% from Q4 due to insurance deductibles resetting at year-end. While it is typical for our revenue to be back half weighted, in 2023, it will be more so than usual because of record bookings from new clients…

Thank you, Bill. We are pleased with a strong start of 2023, and we are proud of the work that the CareCloud team has done to set us on the right path for a successful year. As always, I would like to thank our customers, shareholders, and all of our employees for their continued support of the CareCloud mission. Let's open the call to questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question will come from Jeffrey Cohen at Ladenburg Thalmann.

I wanted to kind of probe it further, Hadi, to talk about some of the AI and the past, present and future functionality at CareCloud. And if you could more specifically kind of lead that into some of the ChatGPT conversation, some of the -- talk about some of the inputs there as far as verbal inputs and then perhaps talk about some of the data mining and the onboarding as well, please?

Sure, Jeff. No, that's a great question and that's the most probably hot topic in the industry today, not only from the healthcare perspective, it's from the overall industry perspective. So as I mentioned, we are in the process of currently exploring. Our R&D team is working on all of these, the possible ways to leverage the AI with the help of this open AI or APIs that have become available now. But I can just share with you as an example that probably should help you understand the kind of things that we are trying to work on. We are in the process of, to begin within the first phase, utilizing the ChatGPTs, the most recent version, which is probably the version 4.0, we can try to introduce the concept such as the copilot concept or a medical assistant concept. We already have, as part of our talk, the medical assistant or our Alison engine. So we're just trying to make that further smart. So what can happen is anonymously not sharing any PHI. We're going to take the medical history, social history, the current medication, all of those, and pass it on to the AI engine. The AI engine can even generate the basic complete fully suggested care plan for that patient, and that will be suggested to the doctor. Again, at the end of the day, it's the doctor's responsibility to finalize to sign off on the care plan or the care plan the doctor can want to use. But I think that should just help you kind of understand that that's the level. There could be 50 different variables that could have been passed to these open APIs. The results can be received, we can parse it, compile it, and can suggest the information to the doctor. It can help in the identification of rare diseases or submitting all this information. In the case of a rare disease, our system can suggest leveraging the same AI that this patient could have been infected by this one rare disease doctor. So please conduct these 5 additional tests as an example. So these are some of the examples that this is how we are trying to leverage. We will communicate with the help of the press releases either late in this quarter or early in the third quarter. By that time, we should have a first integrated AI-based, whether it's leveraging the open APIs or the ChatGPT's open APIs, that product, we expect that to release.

Okay. That's helpful. And tied in a little bit to requirements on your hardware and backbones there as far as GPUs, CPUs, stores, some of the requirements on cloud or hardware in your end?

I think if you think about with the technology advancements, most of these kinds of things has become now irrelevant because it's so easy being in the cloud. If you need to increase the processor is a matter of a mouse click, and just approving and it can give you more processing power. So I think since our infrastructure has already been deployed very effectively between the different cloud environments. So we do not see any hurdles when it comes to the infrastructure. And the cost of -- by increasing the small hardware increase is minimal because we are not trying to buy a whole new big server from scratch. So we don't see any issues on that front.

Okay. That's helpful. And then lastly for us for, I guess, for Bill or Mahmad, any commentary on the M&A environment, how things have moved in any particular direction or trends over the past, say, 4 or 5 months?

Yes. Good question, Jeff. We continue to see companies that on the surface look like potentially interesting acquisition targets. We also continue to see people have expectations that are probably very good for them but don't make a whole lot of economic sense for us. So we're going to continue to do what we've done in the past, which has kind of applied this rule of thumb that says, "I'd like, but I'm doing a transaction. I'd like to think that I'm going to get a return on my investment in 3 to 4 years. I'm going to get profits or cash flows equal to what I invested in 3 to 4 years. And if we feel pretty confident, then it looks like it's going to be a good investment for our shareholders. And if the company has a valuation that's 5x revenue, and they've never been profitable, and you don't see any way that it's going to make sense, then we'll pass. And we're continuing to see that. We do think that as the next 12 months unfold, eventually, the economy is going to get into a recession. Eventually, companies are going to start to recognize that they're getting in trouble and there are going to be some tempting targets. So we're always looking for those.

Your next question comes from Allen Klee at Maxim Group LLC.

When you broke out the pieces of the decline in revenues, one of them was more volume related to COVID-related cases in 1Q '22. Do you have a sense of how much extra do you think that factored into the rest of '22? And have you factored that into your full-year guidance?

Thanks, Allen. So we did some work for a couple of organizations that were doing large-scale COVID testing. And there was a lot of that revenue that actually did happen in the first quarter of '22 in part because some claims sort of got delayed and then finally got approved and therefore, generated a bulk of revenue. So there's a little more that's in the next 3 quarters. It certainly was much less than we saw in Q1. So I think Q1 of '22 was kind of extraordinary in that regard. I would say that we've probably all seen that very few people are going to labs for COVID test today. A lot of people are doing COVID at home. So there's not a whole lot of revenue from COVID testing. And it's probably good for us that the COVID is largely at the rearview zero at this point. But that was certainly a factor in Q1 when you're doing the year-over-year comparison.

And you mentioned that you have -- oh, go ahead, sorry.

Sorry, I don't know with your question, yes, it has been baked in, and we do also see towards the tail end instead of the COVID test revenue. We see some opportunities, though it's not as big as the COVID testing was initially for evolving in those certain labs who have been authorized to send the free test kits to the patients under the government program. But though the public health emergency is ending, most of that is going away and it's still the number is not, but that's going to help us offset some of that. And all this has already been baked in for the rest of the year.

That's great. You mentioned that you have a new Force client that will be generating revenue in the second half. Can you provide any color on that?

Sure. So this is one of the deals we signed towards the end of last year. And when it comes to typical small Force deals, those practices or those deals can go live within 30 days or 60 days, but many are dealing with a large publicly traded national company and where we have to provide a couple of hundred employees, we have to go through, as an example, the sharing of the SOP and agreeing on the SOPs than the extensive training on both sides, the data security checklist verifications. So we have been going through all of those. Everything is going smoothly, everything is on track. But the go-live instead of 30 to 60 days could span between two to three quarters as an example. So the top of this is our largest one. We anticipate some time towards the close of the second quarter going live, and that we will have the revenue in the third and the fourth quarter. The second to the largest one, which is also a significant one has gone live, which I mentioned as part of my call earlier, in this recent month, and we already have started to receive a very good feedback from the clients. So you will see some of that revenue in the second quarter already. Actually, this is our first -- the way we are looking at it. This is our first large deal for the Force in this space, which hopefully should open up more doors for us with similar other large organizations in the country.

That's great. My last question is on converting bookings from wellness to revenues. You're using a third party, my understanding is to make this happen. Can you explain a little to the degree to what they're doing to ensure adherence and [collectability] and that they're doing it and not the doctor's office, which I know with some other companies that's created a challenge for those two issues?

Sure. Great question. If you think about it, we were a tech-enabled RCM and EHR practice management and in the technology company, that's what our strengths have been for such a long time. The chronic care and remote patient we stepped in, there was one thing we do not want to day 1 start by doing over selves as an example, the trained care managers. So some of those as a partnership with that company, with the back end there helping us to bridge some of those gaps. But because we are the ones who are capable, we have the most capability on the revenue cycle, on the technology platforms, software. So most of that work is us sort of collaboratively we are conducting. But when it comes to the care manager part, they have been involved or they have been participation from our third party. But we are looking at it or for our clients, for them, it's us. It's our responsibility to work with that third party to deliver the right results. So as I mentioned, just because the 3 pieces involved, one is us. The second thing is the client. And the third piece is the patient's adaptability. And that's why it's taking a little more time to ramp up. It's we absolutely anticipated the same from day 1 when we stepped into this. But this means the first go-live. I think by the end of this year, we will have a much better model to forecast when and how the revenue will be recognized. But I think so far, we are making great progress. As I mentioned, over 90% has already in the production or preproduction stage, or we are conducting eligibility checks, or we are engaging the patients to take their consent, or we already have started to talk to the patient through the help of the care managers taking an approval and review by the physician, by the doctor and have started providing the preventative care and then can start submitting the claims.

Your next question comes from Neil Chatterji at B. Riley Financial.

Thanks for the color on the kind of second-half strength versus first-half. Maybe just kind of quarterly cadence on the top line for the rest of '23. I guess a couple of things there. Just how should we think about the potential dollar impact on the 2 clients rolling off to the second quarter? And then how should we think about just the third quarter versus the fourth quarter, maybe for like the CareCloud Force and wellness conversion with that contribution to be more kind of back-end loaded in the second half or kind of more evenly distributed.

Thanks, Neil. So in terms of the quarterly cadence, the two clients that rolled off last year. For the most part, their use of services dropped by the end of the second quarter. So for example, if you look in 2022, you saw that the third quarter revenue was about $3.5 million less than the second quarter, and that was almost entirely due to those lines. So what you're going to see when you do the comparison, Q1 of '23 to Q1 of '22, you're looking at a quarter without the clients versus with, so you see a negative. You're going to have the exact same phenomenon in Q2. By the time you get to Q3 and Q4, you'll be comparing against a period when those clients were largely down. And I say largely because as you would expect with a large hospital, it's not like they were doing $12 billion of business one day and 0 the next day, gradually one group after another moved off. But the bulk of the business was out in the second half of the year. So when we're doing that comparison in third and fourth quarters, you won't have that phenomenon. When you think about both Wellness and Force, what you're seeing is business signed last year, going live, as Hadi mentioned, with these 2 Force clients, one of them started using billable work in April. Another one is going to be going live by the end of the quarter. So you'll start to see real revenue in Q3 and even more revenue than that in Q4. Similarly, with Wellness, you have a little bit of revenue right now. But overall, the business that we signed up for last year, while we are working with most of those doctor practices, we haven't yet…

Got it. Great. And then just one follow-up here. Just on gross margins. You might have touched on it a little bit there on the COGS. But I think there was the seasonality impact of the deductible is kind of depressing sales and not as much on the cost side. Just curious on kind of the expectations on gross margins for the balance of '23.

Good question. So I think when you're looking at Q2, Q2 numbers are not going to be so dramatically different than Q1. So I probably think about the gross margin in Q2 being pretty similar. As you get into Q3, you're going to see revenue growing. You're going to see some costs growing, but not as fast. So you're going to see gross margins increasing. And by the time you get to Q4, you're going to see a significant increase in gross margins. And I would expect, it's hard to predict this. But I would expect that by the time you get to Q4, you're going to see a higher level of -- a higher percentage of gross margins and probably even a higher percentage of adjusted EBITDA than we've ever shown before because you're going to be seeing this rapid growth in revenue. So don't expect that in Q2. Don't expect to see improvement in Q3. But I would look at Q4 as being the point to look at and say, the business is getting a little closer to a steady state now.

Got it. And just one last quick follow-up. Just on the sales force. I think you had a meaningful increase in '22. Just kind of curious about how to think about that in terms of potentially expanding more at all in '23. And then just remind us on the typical productivity ramp there.

Sure, Neil, thanks for the question. And this is Hadi. Yes, you're right, from the overall expense standpoint, we mentioned we anticipate increasing from 7% to 8% in terms of the percentage for sales and marketing expenses from the workforce perspective. I shared this number on my last call when we spoke at the beginning of this year, a number of entire sales and marketing people were somewhere around 55-ish and today, that number is close to 67%, 68%. And I'm talking about the overall sales and marketing team offshore and onshore together. So yes, we continue to increase as we see that we keep on making progress and we can keep on signing the deals. And you can see that in terms of the first quarter booking numbers, it's, again, $8 million, it's almost similar to the fourth quarter last year.

And then as far as the productivity ramp?

Okay, do you mean those salespeople being trained on and start contributing?

Yes.

I think it's by the time from when any salesperson joined us. And first of all, we tried to hire someone who already have been coming from at least the healthcare industry have an understanding of what they are selling, plus a lot of experience at least in general sales and marketing. 3 months is a good time frame for what we see from the day the person joins to the day when the person should become effective. Between these 3 months, the trainings are conducted on other product lines, the tools that we are using, at least 30 days, the person gets scheduled by another experienced salesperson. So when the engagement is done, the additional one of our experienced salesperson also stay on the call to make sure the right pitch has been done, and the deal gets closed. And I think on the fourth month and fifth month, the person should start getting it independently and start selling the deals.

Your next question comes from William Sutherland at the Benchmark Company.

I was thinking maybe to get you to get a little more color on the Middle East initiative in terms of kind of a time frame that you're starting to think about and what the financial implications could be particularly as you ramp it up. And then kind of maybe even touch on the potential that you see.

So the way we are looking at this opportunity, there are 3 major opportunity areas for us. One is our [indiscernible], which is about RCM capability. So one is the RCM on the revenue cycle side. The second one is our EHR for ambulatory practices, though that percentage is very small in the UAE, the Middle East market. Most of that is it comes under the government. And the third piece is our Medicare-related professional services business. It could be a Meditech implementation. It could be a Cerner implementation. So these are the three large areas. And I think where we can bring in a lot of value in addition to our market reputation two decades of experience in the industry on the U.S. side and then a cost-effective global workforce, primarily from Pakistan. It's about a 2-hour flight roughly, 3 hours flight from Pakistan. There are no issues for the visa. The employees can travel there and we can provide the same solution in a much more cost-effective way. All that can be at so many different numbers in terms of the TAM when you go and start doing the search, but there is one consistent thing that over the next 6, 7 years, this health sector in the Middle East is expected to grow at a CAGR of roughly over 30% or around 30%. So I think that opens a lot of doors for us and especially for the early adapters to step in when it's in the early stages of this evolution that's going to come in those countries. As I mentioned, from setting up the entity and all that, we are almost done. There are a few minor things that have been left behind. We will do a groundbreaking. We will be presenting. We will have a boot at that export at that rate show. We will be speaking. Our leadership for Medicaid will be speaking there. So we'll start engaging, whether it's the government-based authority to government-related people or the other competition in that area. So we will keep on sharing the information, but I think this year towards the end of this year, we hope we should be able to start closing some business from that area.

Okay. That sounds like it will probably be starting out with the Med SR kind of implementation.

You are absolutely right, Bill. Those can, because the hospital implementation will ramp up significantly what it is today based on the government initiatives. And those large health system implementations since [indiscernible] even before we acquired this company, we had 20 years or 2 decade-plus experience in this activation, implementation, training, and all of those things, and even providing internal CIOs as an example. So whether we are providing those from our U.S. workforce or from the Pakistan workforce, I think we have a good handle and experience on how to pull these projects off, especially with the America team. The team has done an implementation of 400 FTEs, 500 FTE is the largest one on the U.S. side. So that combination should absolutely help us do a similar thing in the Middle East in a much more cost-effective way.

Okay. And one more for me. Bill, I wanted to think about the implications, the blended gross margin as you begin to convert these bookings in Force and Wellness and they become a more meaningful part of the revenue mix. Maybe just characterize the different kind of gross margins that we should be seeing across the business lines?

So I think that one of the things that you need to think about in terms of the gross margin is in the first quarter, in the results that we just published, you've got cost without offsetting revenues. So clearly, some of that is, again, as you're getting started, so that's kind of depressing the gross margin. I think that we find that we can get very good margins in our Force business. That should be as good as our typical margins for the rest of our healthcare-enabled services. I think with wellness day 1, you're going to see a little bit lower level of margin in part because we're relying a little more on a third party and in part because we're going to start off overstaffing, putting in more people, making sure we're doing things right. And over time, you'll see the margins in Wellness improve. But I think that I would kind of look at 2024, you'll see margin expansion coming from wellness. So in the second half of '23, as wellness revenue grows, some of that will probably be a little bit lower level of gross margin, but it will be offset enough by the new clients and everything else that you'll sort of see by the time you get to Q4, a meaningful expansion in our overall gross margin.

So the character of each individual business, such as wellness isn't particularly different from your profile currently. It's just a matter of getting it...

Yes. I mean, again, if you think of Wellness, the chronic care management visits have a higher staffing component, the remote patient monitoring engagements. As those get set up, that's done largely automated. So again, day 1 CCM engagement where I'm using a third party will probably be a little bit lower margin and then you ramp up, and then you hire and get some of our people trained, and then you start giving people the remote devices and by the time you're monitoring their blood pressure in a totally automated fashion with no people, now you've got a pretty nice margin profile.

[Operator Instructions] Your next question will come from Constantine Davides at EF Hutton.

You guys have obviously done a great job of adding some new services and solutions over the past several quarters. And I guess we've all been focused on the upsell opportunity of those services into your sort of legacy base. But what I'm wondering is, you look back 4, 5, 6 quarters. And are you starting to see that you're able to swim maybe a bit more upstream in terms of attracting new logos? That is to say, are you seeing sort of more enterprise opportunities than you have in years past?

So let's take an example of this therapy EHR that we launched. If you think about it, the therapy today based on the number of providers in the world, let's say, the third-largest specialty. We do not have or until now, we did not have our own EHR designed for the therapy practices. Though this market has been dominated by some of these large players who have been in this industry for such a long time, whether it's [indiscernible] and a number of others. So today, the way it works is the client ever in this space may have been using one of these other industry EHRs. In some cases, we have interfaces, other cases of our employees connect to those EHR systems remotely wherever it needs to. But all the rest of the RCM work has been done and all the other pieces by our team members to our platform. So now for us, if you think about it being the third largest specialty, it makes more sense for us to, first of all, penetrate to our own existing client base because that's where the easy opportunity exists. But that does not mean that we do not launch it externally. We do launch it externally at the same time, and we do get some of those deals from external. But the easy sell or the opportunity that exists within our company is far better than, or is low-hanging fruit, I would say, instead of going to the external one. If I take -- since this is something new, we just started, we still need to spend probably another few quarters before we can go full force externally with the large campaigns. Talking about Wellness as an example, 2022, our trinary focus, most of the focus was of our internal client base. So this year, we have gone or we have a, you can say, 50% to 50%. We anticipate 50% of the bookings should come from our internal client base. And the other 50% should come -- and I'm talking about Wellness offering as an example. The 50% we anticipate could come from the new logos. So this could even become the anchor. This could even become one of the services we are offering, but we will try to sign the full end-to-end deal, including RCM. We already have started to see some results, and we did sign a few clients in the first quarter, the new logos from the Wellness offering. To you, from your point, we already have started to see that, and our campaigns are in progress, and we are making progress there.

There are no other questions. So I will turn the conference back to Kimberly Blanche for any closing remarks.

On behalf of the company, I'd like to thank everyone who joined us on today's call. We appreciate your participation and your interest in us as a company, and we look forward to speaking with you again next quarter. Thank you all, and have a great day.

Thank you.

Ladies and gentlemen, this does conclude your conference call for this morning. Again, thank you all for participating, and we ask that you please disconnect your lines.