Description

Investment Thesis: CareCloud, Inc. (NASDAQ: CCLD)

CareCloud (NASDAQ:CCLD, CCLDP, CCLDO))) is a healthcare revenue life cycle software which  brings disciplined innovation to the business of healthcare. Our suite of technology-enabled solutions helps clients increase financial and operational performance, streamline clinical workflows and improve the patient experience. More than 40,000 providers count on CareCloud to improve patient care, while reducing administrative burdens and operating costs. Learn more about our products and services, including revenue cycle management (RCM), practice management (PM), electronic health records (EHR), business intelligence, patient experience management (PXM) and digital health at www.carecloud.com.

Strategic Acquisition Interest and Insider Confidence

CareCloud, Inc., a prominent player in the healthcare software industry, has recently attracted an unsolicited acquisition offer from a leading private equity fund, priced at $5 per share. This offer underscores the inherent value and potential of CareCloud, highlighting its attractiveness to savvy investors. Significantly, this proposal includes a commitment to honor accrued dividends on preferred shares, reflecting a thoughtful approach to shareholder interests.

Aligned Insider Participation Enhances Credibility

The confidence in CareCloud's future is further reinforced by substantial insider ownership, with insiders demonstrably aligning their interests with those of the company. Notably, there was active insider buying in December 2023, signaling strong belief in the company’s growth trajectory and strategic direction. Such insider activity often serves as a positive indicator of the company's internal confidence and potential for growth.

Financial Discipline and Strong Cash Flows

The presence of preferred stock has instilled a disciplined approach in management, ensuring a focused strategy on financial health and shareholder value. In the last fiscal year, CareCloud reported an impressive $15 million in operating cash flow, evidence of its efficient operations and strong market position. This financial prudence makes CareCloud an attractive target for acquisitions, particularly in the high-growth healthcare software market.

Innovative Product Offerings and Market Position

CareCloud is at the forefront of technological innovation in the healthcare space, with new digital offerings and generative AI products (such as medical transcription)  currently under trial. These innovations are designed to enhance the company’s service delivery and expand its market reach, further solidifying its position in a sector experiencing robust annual growth rates of 15 to 20%. The trial phase of these new offerings indicates a strategic approach to product development, allowing CareCloud to refine and perfect its solutions in response to direct market feedback.

Advisory Expertise for Strategic Decisions

The seriousness of the acquisition offer has prompted CareCloud to engage JMP Securities as its banker and advisor, particularly to evaluate strategic options concerning the Class B preferred stock. This move ensures that all shareholder interests are carefully considered in any potential corporate restructuring or acquisition scenario, thereby maximizing stakeholder value.

Insider Buying in Q4 2023

CCLD received a very interesting and serious unsolicited buyout offer last week. 

PR says: “CareCloud, Inc. (the "Company" or "CareCloud") (NASDAQ:CCLD, CCLDP and CCLDO))), a leader in healthcare technology solutions for medical practices and health systems nationwide, today released details regarding its receipt of an unsolicited, non-binding indication of interest dated March 4, 2024, to acquire the Company for $5.00 per share of its common stock, and the $25 redemption price per share of its 8.75% Series B Cumulative Redeemable Perpetual Preferred Stock ("Series B Preferred Stock"). The indication of interest was subject to satisfactory due diligence.

The letter made no mention of the treatment of the Company's 11% Series A Cumulative Redeemable Perpetual Preferred Stock ("Series A Preferred Stock"), which the Company believes was due to their respective redemption provisions on a change of control that enables a buyer to take the Company private while leaving the Series A Preferred Stock as a publicly traded security. The Company's Board of Directors thoroughly evaluated the indication of interest and determined it was in the Company's best interests to decline it in its present form.

Prompted by the indication of interest, the Company retained an investment bank to examine and evaluate the terms of its Series A Preferred Stock, including the differing redemption rights afforded to Series A preferred stockholders as compared to Series B preferred stockholders, and to make recommendations to the Board of Directors that may be beneficial to the Company and its shareholders.“

In the recent conference call discussion about the private equity fund's interest in acquiring the company, several key points were highlighted regarding the treatment of preferred stock:

1. Preferred Stock Treatment: The PE fund's proposal includes specific terms for the Series B preferred stock in the context of a change of control. The buyers of the common stock would be responsible for paying the accrued dividends and the liquidation value of $25 per share as part of the transaction terms.

2. Silence on Series A: The indication of interest from the PE fund was silent regarding the Series A preferred stock, which suggests that there may not be an immediate plan for these shares.

3. Board Considerations: The board is seeking guidance from the advisory bank, Citizens JMP, on potential modifications to the certificate designation to address the disparity between the treatment of Series A and Series B preferred stock. This indicates the board is actively looking for solutions to ensure equity among preferred shareholders in the event of a change of control.

Here are the positive takeaways from the most recent call.

Here are some positive highlights from the CareCloud Q4 2023 Earnings Call:

1. Operational Efficiency and Profitability Focus: CareCloud has intensified its focus on operational efficiencies aimed at improving profitability and free cash flow. This strategic move indicates a robust internal discipline and alignment of costs with revenue goals.

2. Innovative Technology and Market Adaptability: CareCloud continues to advance its technology, emphasizing its proprietary end-to-end platform that offers flexibility across markets. This adaptability is crucial as healthcare administrative complexity evolves.

3. Growth in Digital Health and AI Solutions: The company is experiencing rising demand for its tech-enabled Revenue Cycle Management (RCM) and generative AI solutions. These advancements are expected to enhance service delivery and improve profitability margins.

4. Strong Revenue and EBITDA Performance: CareCloud reported a revenue of $117 million and adjusted EBITDA of $15 million for the full year, meeting their expectations and showcasing stable financial management.

5. Strategic Cost Management: The company is implementing strategic cost optimization initiatives, expected to significantly improve free cash flow by approximately $18 million annually, with about $13 million realized in 2024.

6. Product Innovation: Introduction of the CirrusAI suite, particularly the new CirrusAI nodes, highlights CareCloud’s commitment to innovation. These AI nodes enhance the efficiency of patient visits and clinical documentation, which can significantly improve workflow and patient care quality.

7. Expansion of Wellness Segment: The wellness segment is expected to be a key driver of growth for 2024, fueled by a strong uptick in patient engagements and a shift towards preventive medicine and value-based care.

8. Minimal Impact from External Challenges: CareCloud demonstrated resilience and minimal disruption from an industry-wide cybersecurity breach, highlighting effective risk management and diversified clearinghouse partnerships.

9. Strong Guidance for 2024: The company forecasts revenue between $118 million and $120 million and an adjusted EBITDA of $21 million to $23 million for 2024, reflecting optimism about their growth trajectory and operational strategies.

These points underline CareCloud’s strategic positioning for sustained growth, operational excellence, and innovation, making it a compelling investment consideration.

Valuation:

Buyer is offering 80 million to the common stock holders and will redeem the Preferred A stock.  

Revenues: $115M

Last year cash flow from operations: $15M

Treatment of preferred stock B is a question. Should it be added as a debt or not? In my opinion, the fact that it is not a debt with covenants, it really offers a lot of flexibility to the owners.   So if you consider it as not debt, the buyout price is somewhere in the Ebit multiple of 20 times which is not a lot for a recurring SAAS play with optionality to generative artificial intelligence operating in an industry growing 15 to 20% in a stable industry such as healthcare serving a growing aging population in the USA.

The preferreds are paying 11% and 8% respectively.  I would consider buying the common stock, the preferreds as decent place to invest your money.  I expect the outcome of this buyout this year if not the 1st half of this year.

Catalyst

- Received buyout offer in the 1st quarter of 2024. Serious offer enough for company to hire exclusive banker (i.e. they paid fees) 

- Insider buying in Dec 2023

-The preferreds are paying 11% and 8% respectively.  I would consider buying the common stock, the preferreds as decent place to invest your money.  I expect the outcome of this buyout this year if not the 1st half of this year.