NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE THREE AND SIX MONTHS JUNE 30, 2020 AND 2019 (UNAUDITED)
1.
Organization and Business
MTBC,
Inc., (and together with its consolidated subsidiaries “MTBC” or the “Company”) is a healthcare information
technology company that offers an integrated suite of proprietary cloud-based electronic health records and practice management
solutions, together with related business services, to healthcare providers. The Company’s integrated services are designed
to help customers increase revenues, streamline workflows and make better business and clinical decisions, while reducing administrative
burdens and operating costs. The Company’s services include full-scale revenue cycle management, comprehensive practice
management services, electronic health records, and other technology-driven practice management services for private and hospital-employed
healthcare providers. MTBC has its corporate offices in Somerset, New Jersey and maintains client support teams throughout the
U.S., in Pakistan and in Sri Lanka.
MTBC
was founded in 1999 and incorporated under the laws of the State of Delaware in 2001. In 2004, MTBC formed MTBC Private Limited
(or “MTBC Pvt. Ltd.”), a 99.9% majority-owned subsidiary of MTBC based in Pakistan. The remaining 0.01% of the shares
of MTBC Pvt. Ltd. is owned by the founder and Executive Chairman of MTBC. In 2016, MTBC formed MTBC Acquisition Corp. (“MAC”),
a Delaware corporation, in connection with its acquisition of substantially all of the assets of MediGain, LLC and its subsidiary,
Millennium Practice Management Associates, LLC (together “MediGain). MAC has a wholly owned subsidiary in Sri Lanka, RCM
MediGain Colombo, Pvt. Ltd. In May 2018, MTBC formed MTBC Health, Inc. (“MHI”) and MTBC Practice Management, Corp.
(“MPM”), each a Delaware corporation in connection with MTBC’s acquisition of substantially all of the revenue
cycle management, practice management and group purchasing organization assets of Orion Healthcorp, Inc. and 13 of its affiliates
(together, “Orion”). MHI is a direct, wholly owned subsidiary of MTBC, and was formed to own and operate the revenue
cycle management and group purchasing organization businesses acquired from Orion. MPM is a wholly owned subsidiary of MHI and
was formed to own and operate the practice management business acquired from Orion. In March 2019, MTBC formed MTBC-Med, Inc.
(“MED”), a Delaware corporation, in connection with its acquisition of substantially all of the assets of Etransmedia
Technology, Inc. and its subsidiaries (“Etransmedia”). In January 2020, MTBC purchased CareCloud Corporation. In June
2020, MTBC purchased Meridian Billing Management Co. and its affiliate Origin Holdings, Inc. (collectively “Meridian”
and sometimes referred to as “Meridian Medical Management”). See Note 3.
During
the first quarter of 2020, a New 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 of June 30,
2020, talkMD had not yet commenced operations or had any transactions or agreements with the Company or otherwise.
2.
BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial reporting and as required by Regulation
S-X, Rule 8-03. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain
all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the Company’s financial
position as of June 30, 2020, the results of operations for the three months and six months ended June 30, 2020 and 2019 and cash
flows for the six months ended June 30, 2020 and 2019. When preparing financial statements in conformity with GAAP, the Company
must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ significantly from those estimates.
The
condensed consolidated balance sheet as of December 31, 2019 was derived from our audited consolidated financial statements. The
accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2019, which are included in the Company’s Annual Report
on Form 10-K, filed with the SEC on February 28, 2020.
Recent
Accounting Pronouncements — On February 14, 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. These amendments
provide financial statement preparers with an option to reclassify standard tax effects within accumulated other comprehensive
income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in
the Tax Cuts and Jobs Act is recorded. This guidance is effective for fiscal years beginning after December 15, 2018, and interim
periods therein. There was no impact on the condensed consolidated financial statements as a result of this standard.
In
June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplifies
the accounting for nonemployee share-based payments by aligning it with the accounting for share-based payments to employees,
with exceptions. Under this guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date,
which may lower their cost and reduce volatility in the income statement. Awards to nonemployees are measured by estimating the
fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value
of the equity instruments issued, whichever can be measured more reliably. Entities need to consider the probability that a performance
condition will be satisfied when an award contains such condition. The guidance is effective for public business entities for
fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. There was no impact on the
condensed consolidated financial statements as a result of this standard.
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. This ASU simplifies accounting
for income taxes to reduce complexity in the accounting standards. The amendments consist of the removal of certain exceptions
to the general principles of ASC 740 and some additional simplifications. The amendments are not required to be implemented until
2021 for public entities. The Company is in the process of investigating if this update will have a significant impact on the
consolidated financial statements.
3.
ACQUISITIONS
2020
Acquisition
On
June 16, 2020, MTBC entered into a Stock Purchase Agreement with Meridian Billing Management Co., a Vermont corporation, Origin
Holdings, Inc., a Delaware corporation and GMM II Holdings, LLC, a Delaware limited liability company (“Seller”),
pursuant to which MTBC purchased all of the issued and outstanding capital stock of Meridian from the Seller. Meridian is in the
business of providing medical billing, revenue cycle management, electronic medical records, medical coding and related services.
These revenues have been included in the Company’s Healthcare IT segment. The acquisition has been accounted for as a business
combination.
The
total consideration paid at closing was $11.9 million, net of cash received, 200,000 shares of the Company’s Preferred Stock
plus warrants to purchase 2,250,000 shares of the Company’s common stock, with an exercise price per share of $7.50 and
a term of two years. The Company also assumed Meridian’s negative net working capital and certain long-term lease liabilities
where the leased space is either not being utilized or will be vacated shortly, with an aggregate value of approximately $4.8
million.
A
summary of the total consideration is as follows:
Meridian
Purchase Price
Cash
|
|
$
|
11,863,724
|
|
Preferred stock
|
|
|
5,000,000
|
|
Warrants
|
|
|
4,770,000
|
|
Total purchase
price
|
|
$
|
21,633,724
|
|
Of
the Preferred Stock consideration, 100,000 shares will be held in escrow for up to one month pending completion of technical migration
and customer acceptance. Shares net of such losses will be released upon the joint instruction of the Company and the seller in
accordance with the applicable escrow terms. Such shares are entitled to the monthly dividend, which will be paid when, and if,
the shares are released. The Company accrues the dividend monthly on the Preferred Stock held in escrow. The shares held in escrow
were released on August 3, 2020.
The
Company’s Preferred Stock and warrants issued as part of the acquisition consideration were issued in a transaction exempt
from registration under the Securities Act of 1933, as amended (the “Securities Act”). The Company has agreed to register
for resale under the Securities Act the Preferred Stock and the securities underlying the warrants.
The
Meridian acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened
the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base
and by increasing available customer relationship resources and specialized trained staff.
The
Company engaged a third-party valuation specialist to assist the Company in valuing the assets acquired and liabilities assumed
from Meridian. The following table summarizes the preliminary purchase price allocation. The Company expects to finalize the purchase
price allocation by the end of the third quarter and is finalizing the projections and the valuation of the acquired assets and
assumed liabilities. The preliminary purchase price allocation for Meridian is summarized as follows:
Accounts receivable
|
|
$
|
3,800,037
|
|
Prepaid expenses
|
|
|
703,732
|
|
Contract asset
|
|
|
881,111
|
|
Property and equipment
|
|
|
425,993
|
|
Operating lease right-of-use assets
|
|
|
2,805,993
|
|
Customer relationships
|
|
|
11,900,000
|
|
Technology
|
|
|
900,000
|
|
Goodwill
|
|
|
14,206,436
|
|
Accounts payable
|
|
|
(3,373,212
|
)
|
Accrued expenses & compensation
|
|
|
(3,591,380
|
)
|
Deferred revenue
|
|
|
(907,077
|
)
|
Operating lease liabilities
|
|
|
(6,054,659
|
)
|
Other current
liabilities
|
|
|
(63,250
|
)
|
Total
preliminary purchase price allocation
|
|
$
|
21,633,724
|
|
The
acquired accounts receivable are recorded at fair value which represents amounts that have subsequently been paid or are expected
to be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by
these intangibles. The goodwill from this acquisition is not deductible for income tax purposes and represents the Company’s
ability to have an expanded local presence in additional markets and operational synergies that we expect to achieve that would
not be available to other market participants.
The
weighted-average amortization period of the acquired intangible assets is approximately four years.
Revenue
earned from the clients obtained from the Meridian acquisition was approximately $1.3
million during the three and six months ended June 30, 2020.
On
January 8, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CareCloud
Corporation, a Delaware corporation (“CareCloud”), MTBC Merger Sub, Inc., a Delaware corporation and wholly-owned
subsidiary of the Company (“Merger Sub”) and Runway Growth Credit Fund Inc. (“Runway”), solely in its
capacity as a seller representative, pursuant to which Merger Sub merged with and into CareCloud (the “Merger”), with
CareCloud surviving as a wholly-owned subsidiary of the Company. The Merger became effective simultaneously with the execution
of the Merger Agreement. The acquisition has been accounted for as a business combination.
The
total consideration for the Merger included approximately $11.9 million paid in cash at closing, the assumption of a working capital
deficiency of approximately $5.1 million and 760,000 shares of the Company’s Preferred Stock. The Merger Agreement provides
that if CareCloud’s 2020 revenues exceed $36 million, there will be an earn-out payment to the seller equal to such excess,
up to $3 million. Additional consideration included warrants to purchase 2,000,000 shares of the Company’s common stock,
1,000,000 of which have an exercise price per share of $7.50 and a term of two years, and the other 1,000,000 warrants have an
exercise price per share of $10.00 and a term of three years.
A
summary of the total consideration is as follows:
CareCloud
Purchase Price
Cash
|
|
$
|
11,852,526
|
|
Preferred stock
|
|
|
19,000,000
|
|
Warrants
|
|
|
300,000
|
|
Contingent consideration
|
|
|
1,000,000
|
|
Total purchase price
|
|
$
|
32,152,526
|
|
Of
the Preferred Stock consideration, 160,000 shares were placed in escrow for up to 24 months, and an additional 100,000 shares
were placed in escrow for up to 18 months, in both cases, to satisfy indemnification obligations of the seller for losses arising
from certain specified contingent liabilities. Shares net of such losses will be released upon the joint instruction of the Company
and Runway in accordance with the applicable escrow terms. Such shares are entitled to the monthly dividend, which will be paid
when, and if, the shares are released. The Company accrues the dividend monthly on the Preferred Stock held in escrow.
During
July 2020, it was determined that 55,726 shares of the Preferred Stock would be released from escrow, returned to the Company
and cancelled. Dividends previously accrued on these shares of $102,166 were reversed as of June 30, 2020, since the amounts will
not need to be paid. The remaining shares continue to be held in escrow.
The
Company’s Preferred Stock and warrants issued as part of the Merger consideration were issued in a transaction exempt from
registration under the Securities Act of 1933, as amended (the “Securities Act”). The Company has agreed to register
for resale under the Securities Act the Preferred Stock and the securities underlying the warrants.
The
CareCloud acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened
the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base
and by increasing available customer relationship resources and specialized trained staff.
The
Company engaged a third-party valuation specialist to assist the Company in valuing the assets acquired and liabilities assumed
from CareCloud. The following table summarizes the purchase price allocation:
Accounts receivable
|
|
$
|
2,298,716
|
|
Prepaid expenses
|
|
|
1,277,990
|
|
Contract asset
|
|
|
537,722
|
|
Property and equipment
|
|
|
402,970
|
|
Operating lease right-of-use assets
|
|
|
2,858,626
|
|
Customer relationships
|
|
|
8,000,000
|
|
Trademark
|
|
|
800,000
|
|
Software
|
|
|
4,800,000
|
|
Goodwill
|
|
|
22,868,078
|
|
Other long term assets
|
|
|
539,560
|
|
Accounts payable
|
|
|
(6,942,710
|
)
|
Accrued expenses
|
|
|
(2,080,977
|
)
|
Current loan payable
|
|
|
(79,655
|
)
|
Operating lease liabilities
|
|
|
(2,858,544
|
)
|
Deferred revenue
|
|
|
(269,250
|
)
|
Total purchase price allocation
|
|
$
|
32,152,526
|
|
The
acquired accounts receivable are recorded at fair value which represents amounts that have subsequently been paid or are expected
to be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by
these intangibles. The goodwill from this acquisition is not deductible for income tax purposes and represents the Company’s
ability to have an expanded local presence in additional markets and operational synergies that we expect to achieve that would
not be available to other market participants.
The
weighted-average amortization period of the acquired intangible assets is approximately three years.
Revenue
earned from the clients obtained from the CareCloud acquisition was approximately $7.5 million during the three months ended June
30, 2020 and approximately $15.1 million during the six months ended June 30, 2020.
2019
Acquisition
On
April 3, 2019, the Company executed an asset purchase agreement (“APA”) to acquire substantially all of the assets
of Etransmedia. The purchase price was $1.6 million and the assumption of certain liabilities, excluding acquisition-related costs
of approximately $125,000. Per the APA, the acquisition had an effective date of April 1, 2019. The acquisition has been accounted
for as a business combination.
The
Etransmedia acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened
the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base
and by increasing available customer relationship resources and specialized trained staff.
The
purchase price allocation for Etransmedia was performed by the Company and is summarized as follows:
Customer relationships
|
|
$
|
856,000
|
|
Accounts receivable
|
|
|
547,377
|
|
Contract asset
|
|
|
139,169
|
|
Operating lease right-of-use assets
|
|
|
1,224,480
|
|
Property and equipment
|
|
|
91,277
|
|
Goodwill
|
|
|
39,901
|
|
Operating lease liabilities
|
|
|
(1,224,480
|
)
|
Accrued expenses
|
|
|
(73,724
|
)
|
Total
|
|
$
|
1,600,000
|
|
The
acquired accounts receivable are recorded at fair value which represents amounts that have subsequently been paid or are expected
to be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by
these intangibles. The goodwill from this acquisition is deductible ratably for income tax purposes over fifteen years and represents
the Company’s ability to have an expanded local presence in additional markets and operational synergies that we expect
to achieve that would not be available to other market participants.
The
weighted-average amortization period of the acquired intangible assets is approximately three years.
Revenue
earned from the clients obtained from the Etransmedia acquisition was approximately $993,000 during the three months ended June
30, 2020 and approximately $2.2 million during the six months ended June 30, 2020.
Pro
forma financial information (Unaudited)
The
unaudited pro forma information below represents the condensed consolidated results of operations as if the Etransmedia, CareCloud
and Meridian acquisitions occurred on January 1, 2019. The pro forma information has been included for comparative purposes and
is not indicative of results of operations that the Company would have had if the acquisitions occurred on the above date, nor
is it necessarily indicative of future results. The unaudited pro forma information reflects material, non-recurring pro forma
adjustments directly attributable to the business combinations. The difference between the actual revenue and the pro forma revenue
is approximately $6.7 million and $18.3 million of additional revenue primarily recorded by Meridian for the three and six months
ended June 30, 2020, respectively.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
($ in thousands except
per share amounts)
|
|
Total
revenue
|
|
$
|
26,239
|
|
|
$
|
38,055
|
|
|
$
|
59,654
|
|
|
$
|
75,847
|
|
Net loss
|
|
$
|
(6,472
|
)
|
|
$
|
(6,949
|
)
|
|
$
|
(9,702
|
)
|
|
$
|
(17,749
|
)
|
Net loss attributable
to common shareholders
|
|
$
|
(9,749
|
)
|
|
$
|
(8,436
|
)
|
|
$
|
(15,622
|
)
|
|
$
|
(20,728
|
)
|
Net loss per common share
|
|
$
|
(0.79
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(1.26
|
)
|
|
$
|
(1.73
|
)
|
4.
GOODWILL AND INTANGIBLE ASSETS-NET
Goodwill
consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. The following
is the summary of the changes to the carrying amount of goodwill for the six months ended June 30, 2020 and the year ended December
31, 2019:
|
|
Six
Months Ended
|
|
|
Year
Ended
|
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
Beginning gross balance
|
|
$
|
12,633,696
|
|
|
$
|
12,593,795
|
|
Acquisitions
|
|
|
37,074,514
|
|
|
|
39,901
|
|
Ending gross balance
|
|
$
|
49,708,210
|
|
|
$
|
12,633,696
|
|
Intangible
assets include customer contracts and relationships and covenants not-to-compete acquired in connection with acquisitions, as
well as trademarks acquired and software costs. Intangible assets - net as of June 30, 2020 and December 31, 2019 consist of the
following:
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
Contracts and relationships
acquired
|
|
$
|
43,497,300
|
|
|
$
|
23,597,300
|
|
Capitalized software
|
|
|
7,824,576
|
|
|
|
538,012
|
|
Non-compete agreements
|
|
|
1,236,377
|
|
|
|
1,236,377
|
|
Other intangible
assets
|
|
|
3,263,552
|
|
|
|
1,489,458
|
|
Total intangible
assets
|
|
|
55,821,805
|
|
|
|
26,861,147
|
|
Less: Accumulated
amortization
|
|
|
24,028,768
|
|
|
|
20,883,922
|
|
Intangible assets
- net
|
|
$
|
31,793,037
|
|
|
$
|
5,977,225
|
|
Amortization
expense was approximately $3.2 million and $1.2 million for the six months ended June 30, 2020 and 2019, respectively,
and $2.1 million and $612,000 for the three months ended June 30, 2020 and 2019, respectively. The weighted-average amortization
period is currently approximately 4.1 years.
As
of June 30, 2020, future amortization scheduled to be expensed is as follows:
Years
ending
December
31,
|
|
|
|
2020 (six months)
|
|
$
|
6,173,120
|
|
2021
|
|
|
9,790,704
|
|
2022
|
|
|
7,716,583
|
|
2023
|
|
|
5,269,929
|
|
2024
|
|
|
1,192,701
|
|
Thereafter
|
|
|
1,650,000
|
|
Total
|
|
$
|
31,793,037
|
|
5.
NET LOss per COMMON share
The
following table reconciles the weighted-average shares outstanding for basic and diluted net loss per share for the three and
six months ended June 30, 2020 and 2019:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(8,069,422
|
)
|
|
$
|
(2,257,678
|
)
|
|
$
|
(13,214,109
|
)
|
|
$
|
(4,046,069
|
)
|
Weighted-average
common shares used to compute basic and diluted loss per share
|
|
|
12,395,197
|
|
|
|
12,022,143
|
|
|
|
12,353,007
|
|
|
|
11,984,284
|
|
Net loss attributable
to common shareholders per share - Basic and Diluted
|
|
$
|
(0.65
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(1.07
|
)
|
|
$
|
(0.34
|
)
|
All
unvested restricted stock units (“RSUs”), the 200,000 warrants granted to Opus Bank (“Opus”), the 153,489
warrants granted to Silicon Valley Bank (“SVB”), the 2,000,000 warrants granted in connection with the CareCloud acquisition
and the 2,250,000 warrants granted in connection with the Meridian acquisition have been excluded from the above calculations
as they were anti-dilutive. Vested RSUs and vested restricted shares have been included in the above calculations.
6.
Debt
SVB
— During October 2017, the Company opened a revolving line of credit with SVB under a three-year agreement. The SVB
credit facility is a secured revolving line of credit where borrowings are based on a formula of 200% of repeatable revenue adjusted
by an annualized attrition rate as defined in the credit agreement. During the third quarter of 2018, the credit line was increased
from $5 million to $10 million and the term was extended for an additional year. Nothing was drawn on this line of credit as of
December 31, 2019. At June 30, 2020, the entire line available of $9,750,000 was drawn, although it was subsequently repaid in
full during July, 2020. Interest on the SVB revolving line of credit is charged at the prime rate plus 1.50%, with a minimum interest
rate of 6.5%. There is also a fee of one-half of 1% annually for the unused portion of the credit line. The debt is secured by
all of the Company’s domestic assets and 65% of the shares in its offshore facilities. Future acquisitions are subject to
approval by SVB.
Vehicle
Financing Notes — The Company financed certain vehicle purchases both in the United States and in Pakistan. The vehicle
financing notes have three to six years terms and were issued at current market rates.
Insurance
Financing — The Company finances certain insurance purchases over the term of the policy life. The interest rate charged
is 4.52% based on the annual renewal.
7.
leases
We
determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, current operating lease liability and non-current operating lease liability in our condensed consolidated balance sheet
as of June 30, 2020 and December 31, 2019. Each time the Company acquires a business, the ROU assets and the lease liabilities
are recorded at fair value as of the date of acquisition. The Company does not have any finance leases.
ROU
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make
lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated
present value of lease payments over the lease term.
We
use our estimated incremental borrowing rates, which are derived from information available at the lease commencement date, in
determining the present value of lease payments. For leases in existence at the adoption of ASC 842, we used the incremental borrowing
rate as of January 1, 2019. We give consideration to our bank financing arrangements, geographical location and collateralization
of assets when calculating our incremental borrowing rates.
Our
lease terms include options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a
term of less than 12 months are not recorded in the condensed consolidated balance sheet. Our lease agreements do not contain
any residual value guarantees. For real estate leases, we account for the lease and non-lease components as a single lease component.
Some leases include escalation clauses and termination options that are factored in the determination of the lease payments when
appropriate.
If
a lease is modified after the effective date, the operating lease ROU asset and liability is re-measured using the current incremental
borrowing rate. During the six months ended June 30, 2020, a lease impairment of approximately $361,000 was recorded since the
Company is no longer using one of its leased facilities and is currently in the process of subleasing the space.
We
lease all of our facilities and some equipment. Lease expense is included in direct operating costs and general and administrative
expenses in the condensed consolidated statements of operations based on the nature of the expense. As of June 30, 2020, we had
38 leased properties, five in Practice Management and 33 in Healthcare IT, with remaining terms ranging from less than one year
to five years. Our lease terms are determined taking into account lease renewal options, the Company’s anticipated operating
plans and leases that are on a month-to-month basis. We also have some related party leases – see Note 9.
The
components of lease expense were as follows:
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
834,950
|
|
|
$
|
639,393
|
|
|
$
|
1,634,486
|
|
|
$
|
1,104,621
|
|
Short-term lease cost
|
|
|
941
|
|
|
|
32,425
|
|
|
$
|
10,310
|
|
|
|
137,976
|
|
Variable lease
cost
|
|
|
2,062
|
|
|
|
12,450
|
|
|
$
|
15,534
|
|
|
|
19,033
|
|
Total- net lease
cost
|
|
$
|
837,953
|
|
|
$
|
684,268
|
|
|
$
|
1,660,330
|
|
|
$
|
1,261,630
|
|
Short-term
lease cost represents leases that were not capitalized as the lease term as of the later of January 1, 2020 or the beginning of
the lease was less than 12 months. Variable lease costs include utilities, real estate taxes and common area maintenance costs.
Supplemental
balance sheet information related to leases was as follows:
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
Operating
lease ROU assets, net
|
|
$
|
8,358,549
|
|
|
$
|
3,526,315
|
|
|
|
|
|
|
|
|
|
|
Current operating
lease liabilities
|
|
$
|
4,689,790
|
|
|
$
|
1,688,772
|
|
Non-current
operating lease liabilities
|
|
|
7,592,536
|
|
|
|
2,040,772
|
|
Total
operating lease liabilities
|
|
$
|
12,282,326
|
|
|
$
|
3,729,544
|
|
|
|
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
ROU assets
|
|
$
|
9,724,984
|
|
|
$
|
5,467,749
|
|
Asset lease expense
|
|
|
(1,337,677
|
)
|
|
|
(1,888,443
|
)
|
Foreign
exchange loss
|
|
|
(28,758
|
)
|
|
|
(52,991
|
)
|
ROU
assets, net
|
|
$
|
8,358,549
|
|
|
$
|
3,526,315
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term
(in years):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
2.81
|
|
|
|
2.46
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
6.80
|
%
|
|
|
7.05
|
%
|
Supplemental
cash flow and other information related to leases was as follows:
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
763,733
|
|
|
$
|
646,824
|
|
|
$
|
1,443,066
|
|
|
$
|
1,124,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for
lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases,
net of impairment and terminations
|
|
$
|
2,646,511
|
|
|
$
|
1,453,751
|
|
|
$
|
6,263,898
|
|
|
$
|
1,634,041
|
|
Maturities
of lease liabilities are as follows:
Operating
leases - Year ending December 31,
|
|
|
|
2020 (six months)
|
|
$
|
2,788,605
|
|
2021
|
|
|
4,908,064
|
|
2022
|
|
|
3,818,759
|
|
2023
|
|
|
1,617,221
|
|
2024
|
|
|
288,327
|
|
2025
|
|
|
54,948
|
|
Total lease payments
|
|
|
13,475,924
|
|
Less: imputed
interest
|
|
|
(1,193,598
|
)
|
Total lease obligations
|
|
|
12,282,326
|
|
Less: current
obligations
|
|
|
(4,689,790
|
)
|
Long-term lease
obligations
|
|
$
|
7,592,536
|
|
As
of June 30, 2020, we have one operating lease commitment with a five year term that commences on July 1, 2020 aggregating approximately
$31,000.
8.
Commitments and Contingencies
Legal
Proceedings — On April 4, 2017, Randolph Pain Relief and Wellness Center (“RPRWC”) filed an arbitration
demand with the American Arbitration Association (the “Arbitration”) seeking to arbitrate claims against MTBC, Inc.
(“MTBC”) and MTBC Acquisition Corp. (“MAC”). The claims relate solely to services provided by Millennium
Practice Management Associates, Inc. (“MPMA”), a subsidiary of MediGain, LLC, pursuant to a billing services agreement
that contains an arbitration provision. MTBC and MAC jointly moved in the Superior Court of New Jersey, Chancery Division, Somerset
County (the “Chancery Court”) to enjoin the Arbitration on the grounds that neither were a party to the billing services
agreement. On May 30, 2018, the Chancery Court denied that motion and MTBC and MAC appealed. The Chancery Court ordered the Arbitration
stayed pending the appeal.
On
April 23, 2019, the Appellate Division reversed the Chancery Court’s ruling that MTBC is required to participate in the
Arbitration and remanded the case for further proceedings before the Chancery Court on that issue. The Appellate Division upheld
the Chancery Court’s ruling that MAC was required to participate in the Arbitration. The parties completed discovery in
the remanded matter, and both MTBC and RPRWC filed cross-motions for summary judgement in their favor. On February 6, 2020, the
Chancery Court denied RPRWC’s motion for summary judgment and granted MTBC’s motion for summary judgment, holding
that MTBC cannot be compelled to participate in the Arbitration. RPRWC has informed MTBC that it does not intend to appeal the
Chancery Court’s ruling and that it intends to move forward solely against MAC in the Arbitration. On March 25, 2020, the
Chancery Court lifted the stay of arbitration relative to RPRWC and MAC.
Due
to conflicting information provided by RPRWC, it is unclear what the extent of the claimed damages are in this matter which at
this time appear to be entirely speculative. According to its arbitration demand, RPRWC seeks compensatory damages of $6.6 million,
plus costs, for MPMA’s alleged breach of the billing services agreement. On June 12, 2020, in response to a directive from
the arbitrator, RPRWC disclosed a statement of damages to MAC in which it increased its alleged damages from six million, six
hundred thousand dollars and costs to twenty million dollars and costs. RPRWC subsequently revised its damages claim downward.
On July 24, 2020, RPRWC disclosed a declaration to MAC, in which RPRWC estimates its damages to be approximately eleven million
dollars plus costs. MAC intends to vigorously defend against RPRWC’s claims. If RPRWC is successful in the Arbitration,
MTBC and MAC anticipate the award would be substantially less than the amount claimed.
From
time to time, we may become involved in other legal proceedings arising in the ordinary course of our business. Including the
proceedings described above, we are not presently a party to any legal proceedings that, in the opinion of our management, would
individually or taken together have a material adverse effect on our business, consolidated results of operations, financial position
or cash flows of the Company.
9.
Related PARTIES
The
Company had sales to a related party, a physician who is the wife of the Executive Chairman. Revenues from this customer were
approximately $7,000 and $9,000 for the six months ended June 30, 2020 and 2019 and $2,000 and $5,000 for the three months ended
June 30, 2020 and 2019, respectively. As of both June 30, 2020, and December 31, 2019, the receivable balance due from this customer
was approximately $1,000 and $2,000, respectively.
The
Company is a party to a nonexclusive aircraft dry lease agreement with Kashmir Air, Inc. (“KAI”), which is owned by
the Executive Chairman. The Company recorded an expense of approximately $73,000 and $64,000 for the six month periods ended June
30, 2020 and 2019 and $32,000 for both the three months ended June 30, 2020 and 2019. As of both June 30, 2020 and December 31,
2019, the Company had a liability outstanding to KAI of approximately $1,000, which is included in accrued liability to related
party in the condensed consolidated balance sheets. The original aircraft lease expired on March 31, 2019 and was not included
in the ROU asset at January 1, 2019. A lease for a different aircraft at the same lease rate was entered into as of April 1, 2019
and has been included in the ROU asset and operating lease liability at December 31, 2019 and June 30, 2020.
The
Company leases its corporate offices in New Jersey, its temporary housing for its foreign visitors, a printing and mailing facility
and its backup operations center in Bagh, Pakistan, from the Executive Chairman. The related party rent expense for the six months
ended June 30, 2020 and 2019 was approximately $93,000 and $94,000, and for both the three months ended June 30, 2020 and 2019
was $46,000 and is included in direct operating costs and general and administrative expense in the consolidated statements of
operations. During the six months ended June 30, 2020, the Company spent a total of approximately $62,000 to upgrade two of the
leased facilities. Current assets-related party in the condensed consolidated balance sheets includes security deposits and prepaid
rent related to the leases of the Company’s corporate offices in the amount of approximately $13,000 as of both June 30,
2020 and December 31, 2019.
Included
in the ROU asset at June 30, 2020 and December 31, 2019 is approximately $418,000 and $566,000, respectively, applicable to the
related party leases. Included in the current and non-current operating lease liability at June 30, 2020 is approximately $263,000
and $164,000, respectively, applicable to the related party leases. At December 31, 2019, the current and non-current operating
lease liability applicable to related party leases was approximately $275,000 and $298,000, respectively.
During
the first quarter, talkMD Clinicians, PA, a New Jersey corporation was formed to provide telehealth services. This entity is owned
by the wife of the Executive Chairman since an entity providing medical services must be owned by a physician. The Company did
not have any transactions with this entity during the quarter ended June 30, 2020.
10.
REVENUE
Introduction
The
Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers. All revenue is recognized
as our performance obligations are satisfied. A performance obligation is a promise in a contract to transfer a distinct good
or service to a customer, and is the unit of account under ASC 606. Under ASC 606, the Company recognizes revenue when the revenue
cycle management services begin on the medical billing claims, which is generally upon receipt of the claim from the provider.
For revenue cycle management services, the Company estimates the value of the consideration it will earn over the remaining contractual
period as our services are provided and recognizes the fees over the term; this estimation involves predicting the amounts our
clients will ultimately collect associated with the services they provided. The selling price of the Company’s services
equals the contractual price. Certain significant estimates, such as payment-to-charge ratios, effective billing rates and the
estimated contractual payment periods are required to measure revenue cycle management revenue under ASC 606.
Most
of our current 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 prices are
based on the contractual price for the service, which approximates the stand alone selling price.
We
apply the portfolio approach as permitted by ASC 606 as a practical expedient to contracts with similar characteristics and we
use estimates and assumptions when accounting for those portfolios. Our contracts generally include standard commercial payment
terms. We have no significant obligations for refunds, warranties or similar obligations and our revenue does not include taxes
collected from our customers.
Disaggregation
of Revenue from Contracts with Customers
We
derive revenue from eight primary sources: revenue cycle management services, SaaS solutions, professional services, ancillary
services, group purchasing services, printing and mailing services, and clearinghouse and EDI (electronic data interchange) services
and practice management services.
The
following table represents a disaggregation of revenue for the three and six months ended June 30:
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Healthcare IT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
cycle management services
|
|
$
|
11,364,851
|
|
|
$
|
11,366,628
|
|
|
$
|
24,554,814
|
|
|
$
|
21,883,468
|
|
SaaS solutions
|
|
|
3,757,078
|
|
|
|
66,055
|
|
|
|
7,370,592
|
|
|
|
106,657
|
|
Professional services
|
|
|
397,547
|
|
|
|
383,336
|
|
|
|
788,975
|
|
|
|
718,771
|
|
Ancillary services
|
|
|
831,244
|
|
|
|
930,181
|
|
|
|
1,552,606
|
|
|
|
1,429,277
|
|
Group purchasing
services
|
|
|
189,456
|
|
|
|
205,066
|
|
|
|
366,008
|
|
|
|
405,113
|
|
Printing and mailing
services
|
|
|
323,827
|
|
|
|
358,440
|
|
|
|
752,705
|
|
|
|
750,100
|
|
Clearinghouse and
EDI services
|
|
|
262,207
|
|
|
|
150,869
|
|
|
|
581,374
|
|
|
|
286,933
|
|
Practice Management:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Practice
management services
|
|
|
2,452,580
|
|
|
|
3,288,924
|
|
|
|
5,478,884
|
|
|
|
6,249,391
|
|
Total
|
|
$
|
19,578,790
|
|
|
$
|
16,749,499
|
|
|
$
|
41,445,958
|
|
|
$
|
31,829,710
|
|
Revenue
cycle management 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. MTBC 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
medical billing services and often include use of practice management software and related tools (on a software-as-a-service (“SaaS”)
basis), electronic health records (on a SaaS basis), 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.
SaaS
Solutions:
Some
of the Company’s SaaS solutions were initially developed by CareCloud and Meridian, both of which were acquired during
2020.
The
Company’s SaaS solutions which were initially developed and sold by CareCloud include Central, Complete and Breeze. Central
is a SaaS subscription service for healthcare practice management. Complete is a SaaS subscription service that combines healthcare
practice management with electronic health records. Breeze is a SaaS subscription service providing patient registration and intake
solutions.
The
Company’s SaaS solutions which were initially developed and sold by Meridian include VertexDr, Precision BI and Microbots.
VertexDr is one of the only fully-integrated electronic medical record and practice management systems encompassing appointment
scheduling, practice management, electronic prescribing of controlled substances (EPCS), customizable electronic health records,
mobile functionality, and automation. Precision BI provides powerful insight into both clinical and financial performance so healthcare
providers can optimize revenue, increase productivity and improve patient care. RPA is an industry term for software tools that
help automate routine tasks to make them more reliable and efficient. Meridian’s RPA solution, Microbots, are digital assistants
that replace mundane, repetitive processes, allowing organizations scalability and increased production in a HIPAA compliant environment.
Under
the Company’s SaaS solutions, the Company derives revenue primarily from recurring business subscription fees. The Company
typically invoices customers on a monthly basis based on an agreed-upon rate in the sales contract. The Company considers all
these 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 customers. Recurring business subscription fees may also include amounts charged to the customer for patient statements and
for other services for which reimbursement is based on a fixed fee per patient visit and recognized as revenue as the related
services are performed.
Payment
terms for the above SaaS solutions are normally between seven and thirty days. Although the contracts typically have stated terms
of one or more years, under ASC 606, contracts are considered month-to-month and accordingly, there is no financing component.
Professional
services:
These
services include training, implementation, data conversion, data migration and ongoing support.
For
all of the above revenue streams, revenue is recognized over time, which is typically one month or less, which closely matches
the point in time that the customer simultaneously receives and consumes the benefits provided by the Company. Each service is
substantially the same and has the same periodic pattern of transfer to the customer. Each of the services provided above is considered
a separate performance obligation.
MTBC
also provides implementation and professional services to certain customers and records revenue monthly on a time and materials
or a fixed rate basis. The performance obligation is satisfied over time as the implementation or professional services are rendered.
Other
revenue streams:
Ancillary
services represent services such as coding, credentialing and transcription that are rendered in connection with the delivery
of revenue cycle management and related medical services. The Company invoices customers monthly, based on the actual amount of
services performed at the agreed upon rate in the contract. These services are only offered to revenue cycle management customers.
These services do not represent a material right because the services are optional to the customer and customers electing these
services are charged the same price for those services as if they were on a standalone basis. Each individual coding, credentialing
or transcription transaction processed represents a performance obligation, which is satisfied over time as that individual service
is rendered.
The
Company provides group purchasing services which enable medical providers to purchase various vaccines directly from selected
pharmaceutical companies at a discounted price. Currently, there are approximately 4,000 medical providers who are members of
the program. Revenue is recognized as the vaccine shipments are made to the medical providers. Referral fees from the pharmaceutical
companies are paid to MTBC either quarterly or annually and the Company adjusts its revenue accrual at the time of payment. The
Company makes significant judgments regarding the variable consideration which we expect to be entitled to for the group purchasing
services which includes the anticipated shipments to the members enrolled in the program, anticipated volumes of purchases made
by the members and the changes in the number of members. The amounts recorded are constrained by estimates of decreases in shipments
and loss of members to avoid a significant revenue reversal in the subsequent period. The only performance obligation is to provide
the pharmaceutical companies with the medical providers who want to become members in order to purchase vaccines. The performance
obligation is satisfied once the medical provider agrees to purchase a specific quantity of vaccines and the medical provider’s
information is forwarded to the vaccine suppliers. The Company records a contract asset for revenue earned and not paid as the
ultimate payment is conditioned on achieving certain volume thresholds.
The
Company provides printing and mailing services for both revenue cycle management customers and a large non- revenue cycle management
customer, and invoices on a monthly basis based on the number of prints, the agreed-upon rate per print and the postage incurred.
The performance obligation is satisfied once the printing and mailing is completed.
The
medical billing clearinghouse service takes claim information from customers, checks the claims for errors and sends this information
electronically to insurance companies. MTBC invoices customers on a monthly basis based on the number of claims submitted and
the agreed-upon rate in the agreement. This service is provided to medical practices and providers to medical practices who are
not revenue cycle management customers. The performance obligation is satisfied once the relevant submissions are completed.
For
all of the above revenue streams other than group purchasing services, revenue is recognized over time, which is typically one
month or less, which closely matches the point in time that the customer simultaneously receives and consumes the benefits provided
by the Company. For the group purchasing services, revenue is recognized at a point in time. Other than the group purchasing services,
each of the Company’s services are substantially the same and have the same periodic pattern of transfer to the customer.
Each service provided by the Company is considered a separate performance obligation.
Practice
management services:
The
Company also provides practice management services under long-term management service agreements to three medical practices. We
provide the medical practices with the nurses, administrative support, facilities, supplies, equipment, marketing, RCM, accounting,
and other non-clinical services needed to efficiently operate their practices. Revenue is recognized as the services are provided
to the medical practices. Revenue recorded in the consolidated statements of operations represents the reimbursement of costs
paid by the Company for the practices and the management fee earned each month for managing the practice. The management fee is
based on either a fixed fee or a percentage of the net operating income.
The
Company assumes all financial risk for the performance of the managed medical practices. Revenue is impacted by amount of the
costs incurred by the practices and their operating income. The gross billing of the practices is impacted by billing rates, changes
in current procedural terminology code reimbursement and collection trends which in turn impacts the management fee that the Company
is entitled to. Billing rates are reviewed at least annually and adjusted based on current insurer reimbursement practices. The
performance obligation is satisfied as the management services are provided.
Our
contracts for practice management services have approximately an additional 20 years remaining and are only cancellable under
very limited circumstances. The Company receives a management fee each month for managing the day-to-day business operations of
each medical group as a fixed fee or a percentage payment of the net operating income which is included in revenue in the consolidated
statements of operations.
The
Company also provides accounting services and a practice manager to one additional medical practice for which it receives monthly
fees.
Our
practice management services obligations consist of a series of distinct services that are substantially the same and have the
same periodic pattern of transfer to our customers. Revenue is recognized over time; however, for reporting and convenience purposes,
the management fee is computed at each month end.
Information
about contract balances:
The
contract assets in the condensed consolidated balance sheets represent the revenue associated with the amounts we estimate our
revenue cycle management clients will ultimately collect associated with the services they have provided and the relative fee
we charge associated with those collections, together with amounts related to the group purchasing services. As of June 30, 2020,
the estimated revenue expected to be recognized in the future related to the remaining revenue cycle management performance obligations
outstanding was approximately $3.1 million. We expect to recognize substantially all of the revenue for the remaining performance
obligations over the next three months. Approximately $376,000 of the contract asset represents revenue earned, not paid, from
the group purchasing services.
Accounts
receivable are shown separately at their net realizable value in our condensed consolidated balance sheets. Amounts that we are
entitled to collect under the applicable contract are recorded as accounts receivable. Invoicing is performed at the end of each
month when the services have been provided. The contract asset results from our revenue cycle management services and is due to
the timing of revenue recognition, submission of claims from our customers and payments from the insurance providers. The contract
asset includes our right to payment for services already transferred to a customer when the right to payment is conditional on
something other than the passage of time. For example, contracts for revenue cycle management services where we recognize revenue
over time but do not have a contractual right to payment until the customer receives payment of their claim from the insurance
provider. The contract asset also includes the revenue accrued, not received, for the group purchasing services.
The
contract asset was approximately $3.4 million and $2.5 million as of June 30, 2020 and 2019, respectively. Changes in the contract
asset are recorded as adjustments to net revenue. The changes primarily result from providing services to revenue cycle management
customers that result in additional consideration and are offset by our right to payment for services becoming unconditional and
changes in the revenue accrued for the group purchasing services. The contract asset for our group purchasing services is reduced
when we receive payments from vaccine manufacturers and is increased for revenue earned, not received. Deferred revenue represents
sign-up fees received from customers that are amortized over three years. The opening and closing balances of the Company’s
accounts receivable, contract asset and deferred revenue are as follows for the six months ended June 30, 2020 and 2019:
|
|
Accounts
Receivable,
Net
|
|
|
Contract
Asset
|
|
|
Deferred
Revenue
(current)
|
|
|
Deferred
Revenue
(long term)
|
|
Balance as of January 1, 2020
|
|
$
|
6,995,343
|
|
|
$
|
2,385,334
|
|
|
$
|
20,277
|
|
|
$
|
18,745
|
|
CareCloud acquisition
|
|
|
2,298,716
|
|
|
|
537,722
|
|
|
|
-
|
|
|
|
269,250
|
|
Meridian acquisition
|
|
|
3,800,037
|
|
|
|
881,111
|
|
|
|
907,077
|
|
|
|
-
|
|
(Decrease) increase,
net
|
|
|
(1,888,242
|
)
|
|
|
(376,335
|
)
|
|
|
82,207
|
|
|
|
(81,274
|
)
|
Balance as of June 30, 2020
|
|
$
|
11,205,854
|
|
|
$
|
3,427,832
|
|
|
$
|
1,009,561
|
|
|
$
|
206,721
|
|
Balance as of January 1, 2019
|
|
$
|
7,331,474
|
|
|
$
|
2,608,631
|
|
|
$
|
25,355
|
|
|
$
|
18,949
|
|
ETM acquisition
|
|
|
-
|
|
|
|
139,169
|
|
|
|
-
|
|
|
|
-
|
|
Increase (decrease),
net
|
|
|
187,466
|
|
|
|
(274,129
|
)
|
|
|
(9,130
|
)
|
|
|
(589
|
)
|
Balance as of June 30, 2019
|
|
$
|
7,518,940
|
|
|
$
|
2,473,671
|
|
|
$
|
16,225
|
|
|
$
|
18,360
|
|
Deferred
commissions:
Our
sales incentive plans include commissions payable to employees and third parties at the time of initial contract execution that
are capitalized as incremental costs to obtain a contract. The capitalized commissions are amortized over the period the related
services are transferred. As we do not offer commissions on contract renewals, we have determined the amortization period to be
the estimated client life, which is three years for contracts entered into by MTBC and four years for contracts entered into by
CareCloud. Deferred commissions were approximately $836,000 and $60,000 at June 30, 2020 and 2019, respectively, and are included
in the other assets amounts in the condensed consolidated balance sheets.
11.
STOCK-BASED COMPENSATION
In
April 2014, the Company adopted the Medical Transcription Billing, Corp. 2014 Equity Incentive Plan (the “2014 Plan”),
reserving 1,351,000 shares of common stock for grants to employees, officers, directors and consultants. During 2017, the 2014
Plan was amended and restated whereby an additional 1,500,000 shares of common stock and 100,000 shares of Preferred Stock were
added to the plan for future issuance. The 2014 Plan was amended and restated on April 14, 2017 (the “Amended and Restated
Equity Incentive Plan”). During 2018, an additional 200,000 of preferred shares were added to the plan for future issuance.
In May 2020, an additional 2,000,000 shares of common stock and 300,000 shares of Preferred Stock were added to the plan for future
issuance. As of June 30, 2020, 1,733,756 shares of common stock and 380,354 shares of Preferred Stock are available for grant.
Permissible awards include incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock,
RSUs, performance stock and cash-settled awards and other stock-based awards in the discretion of the Compensation Committee of
the Board of Directors including unrestricted stock grants.
The
equity-based RSUs contain a provision in which the units shall immediately vest and become converted into common shares at the
rate of one share per RSU, immediately after a change in control, as defined in the award agreement. The preferred stock RSUs
contain a similar provision, which vest and convert to Preferred Stock upon a change in control.
Common
and preferred stock RSUs
In
January 2020, the Compensation Committee approved executive bonuses to be paid in shares of Preferred Stock, with the number of
shares and the amount based on specified criteria being achieved during the year 2020. The actual amount will be settled in early
2021 based on the achievement of the specified criteria. For the six months ended June 30, 2020, an expense of approximately $600,000,
was recorded for these bonuses based on the value of the shares at the grant date and recognized over the service period. The
portion of the stock compensation expense to be used for the payment of withholding and payroll taxes is included in accrued compensation
in the condensed consolidated balance sheets. The balance of the stock compensation expense has been recorded as additional paid-in
capital.
The
following table summarizes the RSU transactions related to the common and preferred stock under the Equity Incentive Plan for
the six months ended June 30, 2020 and 2019:
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
Outstanding and unvested shares at January
1, 2020
|
|
|
451,085
|
|
|
|
44,000
|
|
Granted
|
|
|
618,879
|
|
|
|
44,000
|
|
Vested
|
|
|
(326,996
|
)
|
|
|
(44,000
|
)
|
Forfeited
|
|
|
(50,896
|
)
|
|
|
-
|
|
Outstanding and unvested shares at June 30, 2020
|
|
|
692,072
|
|
|
|
44,000
|
|
|
|
|
|
|
|
|
|
|
Outstanding and unvested shares at January 1, 2019
|
|
|
929,347
|
|
|
|
44,800
|
|
Granted
|
|
|
5,000
|
|
|
|
44,000
|
|
Vested
|
|
|
(319,813
|
)
|
|
|
(44,800
|
)
|
Forfeited
|
|
|
(12,120
|
)
|
|
|
-
|
|
Outstanding and unvested shares
at June 30, 2019
|
|
|
602,414
|
|
|
|
44,000
|
|
Of
the total outstanding and unvested common stock RSUs at June 30, 2020, 678,572 RSUs are classified as equity and 13,500 RSUs are
classified as a liability. All of the preferred stock RSUs are classified as equity.
Stock-based
compensation expense
The
Company recognizes compensation expense on a straight-line basis over the total requisite service period for the entire award.
For stock awards classified as equity, the market price of our common stock or preferred stock on the date of grant is used in
recording the fair value of the award and includes the related taxes. For stock awards classified as a liability, the earned amount
is marked to market based on the end of period common stock price. The liability for the cash-settled awards was approximately
$742,000 and $741,000 at June 30, 2020 and December 31, 2019, respectively, and is included in accrued compensation in the condensed
consolidated balance sheets.
The
following table summarizes the components of share-based compensation expense for the three and six months ended June 30, 2020
and 2019:
Stock-based
compensation included in the
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
consolidated
statements of operations:
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
$
|
258,653
|
|
|
$
|
46,207
|
|
|
$
|
429,154
|
|
|
$
|
96,858
|
|
General and administrative
|
|
|
1,217,298
|
|
|
|
711,050
|
|
|
|
2,068,767
|
|
|
|
1,407,471
|
|
Research and development
|
|
|
177,768
|
|
|
|
4,353
|
|
|
|
254,117
|
|
|
|
9,834
|
|
Selling and marketing
|
|
|
226,987
|
|
|
|
31,053
|
|
|
|
435,970
|
|
|
|
36,025
|
|
Total
stock-based compensation expense
|
|
$
|
1,880,706
|
|
|
$
|
792,663
|
|
|
$
|
3,188,008
|
|
|
$
|
1,550,188
|
|
12.
INCOME TAXES
The
income tax benefit for the three months ended June 30, 2020 was approximately $74,000, comprised of a current tax expense of $41,000
and a deferred tax benefit of $115,000. The income tax benefit for the six months ended June 30, 2020 was approximately $44,000,
comprised of a current tax expense of $56,000 and a deferred tax benefit of $100,000.
The
current income tax provision for the six months ended June 30, 2020 and 2019 primarily relates to state minimum taxes and foreign
income taxes. The deferred tax provision (benefit) for the three and six months ended June 30, 2020 and 2019 relates to the book
and tax difference of amortization on indefinite-lived intangibles, primarily goodwill. To the extent allowable, the federal tax
provision has been offset by the indefinite life net operating loss.
On
March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. Several new corporate tax provisions
were included in the CARES Act, including, but not limited to, the following: increasing the limitation threshold for determining
deductible interest expense, class life changes to qualified improvements (in general - from 39 years to 15 years), and the ability
to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years. The Company has
evaluated the new tax provisions of the CARES Act and determined the impact to be either immaterial or not applicable.
The
Company has incurred cumulative losses which make realization of a deferred tax asset difficult to support in accordance with
ASC 740. Accordingly, a valuation allowance has been recorded against the Federal and state deferred tax assets as of June 30,
2020 and December 31, 2019.
13.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As
of June 30, 2020, and December 31, 2019, the carrying amounts of accounts receivable, accounts payable and accrued expenses approximated
their estimated fair values because of the short-term nature of these financial instruments.
Fair
value measurements-Level 2
Our
notes payable are carried at cost and approximate fair value since the interest rates being charged approximate market rates.
As a result, the Company categorizes these borrowings as Level 2 in the fair value hierarchy.
Contingent
Consideration
The
Company’s contingent consideration of approximately $1.0 million and $280,000 as of June 30, 2020 and 2019, respectively,
is a Level 3 liability. The fair value of the contingent consideration at June 30, 2020 and 2019 were primarily driven by changes
in revenue estimates related to the Company’s acquisitions, the passage of time and the associated discount rate.
The
following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair
value using significant unobservable inputs (Level 3):
|
|
Fair Value Measurement at Reporting Date
Using Significant Unobservable Inputs, Level 3
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Balance - January 1,
|
|
$
|
-
|
|
|
$
|
526,432
|
|
Acquisition
|
|
|
1,000,000
|
|
|
|
-
|
|
Change in fair value
|
|
|
-
|
|
|
|
(64,203
|
)
|
Payments
|
|
|
-
|
|
|
|
(182,664
|
)
|
Balance - June 30,
|
|
$
|
1,000,000
|
|
|
$
|
279,565
|
|
14.
SEGMENT REPORTING
Both
our Chief Executive Officer and Executive Chairman serve as the Chief Operating Decision Maker (“CODM”), organize
the Company, manage resource allocations and measure performance among two operating and reportable segments: (i) Healthcare IT
and (ii) Practice Management.
The
Healthcare IT segment includes revenue cycle management, SaaS solutions and other services. The Practice Management segment includes
the management of three medical practices and starting April 1, 2019, certain practice management services are being provided
to a fourth practice. Each segment is considered a reporting unit. The CODM evaluates financial performance of the business units
on the basis of revenue and direct operating costs excluding unallocated amounts, which are mainly corporate overhead costs. Our
CODM does not evaluate operating segments using asset or liability information. The accounting policies of the segments are the
same as those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the
SEC on February 28, 2020. The following tables present revenues, operating expenses and operating (loss) income by reportable
segment:
|
|
Six
Months Ended June 30, 2020
|
|
|
|
Healthcare
IT
|
|
|
Practice
Management
|
|
|
Unallocated
Corporate Expenses
|
|
|
Total
|
|
Net revenue
|
|
$
|
35,967,075
|
|
|
$
|
5,478,883
|
|
|
$
|
-
|
|
|
$
|
41,445,958
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
costs
|
|
|
21,926,644
|
|
|
|
4,196,760
|
|
|
|
-
|
|
|
|
26,123,404
|
|
Selling and marketing
|
|
|
3,189,461
|
|
|
|
16,937
|
|
|
|
-
|
|
|
|
3,206,398
|
|
General and administrative
|
|
|
6,894,125
|
|
|
|
1,024,695
|
|
|
|
3,066,762
|
|
|
|
10,985,582
|
|
Research and development
|
|
|
4,479,451
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,479,451
|
|
Depreciation and
amortization
|
|
|
3,578,708
|
|
|
|
158,993
|
|
|
|
-
|
|
|
|
3,737,701
|
|
Impairment
and unoccupied lease charges
|
|
|
360,826
|
|
|
|
-
|
|
|
|
-
|
|
|
|
360,826
|
|
Total
operating expenses
|
|
|
40,429,215
|
|
|
|
5,397,385
|
|
|
|
3,066,762
|
|
|
|
48,893,362
|
|
Operating (loss)
income
|
|
$
|
(4,462,140
|
)
|
|
$
|
81,498
|
|
|
$
|
(3,066,762
|
)
|
|
$
|
(7,447,404
|
)
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
Healthcare IT
|
|
|
Practice
Management
|
|
|
Unallocated Corporate
Expenses
|
|
|
Total
|
|
Net revenue
|
|
$
|
17,126,211
|
|
|
$
|
2,452,579
|
|
|
$
|
-
|
|
|
$
|
19,578,790
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
10,760,718
|
|
|
|
1,795,956
|
|
|
|
-
|
|
|
|
12,556,674
|
|
Selling and marketing
|
|
|
1,616,689
|
|
|
|
8,356
|
|
|
|
-
|
|
|
|
1,625,045
|
|
General and administrative
|
|
|
3,013,903
|
|
|
|
468,187
|
|
|
|
1,910,767
|
|
|
|
5,392,857
|
|
Research and development
|
|
|
2,146,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,146,325
|
|
Depreciation and amortization
|
|
|
2,325,418
|
|
|
|
79,497
|
|
|
|
-
|
|
|
|
2,404,915
|
|
Impairment and unoccupied lease charges
|
|
|
63,175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63,175
|
|
Total operating expenses
|
|
|
19,926,228
|
|
|
|
2,351,996
|
|
|
|
1,910,767
|
|
|
|
24,188,991
|
|
Operating (loss) income
|
|
$
|
(2,800,017
|
)
|
|
$
|
100,583
|
|
|
$
|
(1,910,767
|
)
|
|
$
|
(4,610,201
|
)
|
|
|
Six
Months Ended June 30, 2019
|
|
|
|
Healthcare
IT
|
|
|
Practice
Management
|
|
|
Unallocated
Corporate Expenses
|
|
|
Total
|
|
Net revenue
|
|
$
|
25,580,319
|
|
|
$
|
6,249,391
|
|
|
$
|
-
|
|
|
$
|
31,829,710
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
costs
|
|
|
16,403,912
|
|
|
|
4,840,023
|
|
|
|
-
|
|
|
|
21,243,935
|
|
Selling and marketing
|
|
|
726,147
|
|
|
|
17,809
|
|
|
|
-
|
|
|
|
743,956
|
|
General and administrative
|
|
|
5,757,549
|
|
|
|
955,760
|
|
|
|
2,592,521
|
|
|
|
9,305,830
|
|
Research and development
|
|
|
473,064
|
|
|
|
-
|
|
|
|
-
|
|
|
|
473,064
|
|
Change in contingent
consideration
|
|
|
(64,203
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(64,203
|
)
|
Depreciation
and amortization
|
|
|
1,435,071
|
|
|
|
157,830
|
|
|
|
-
|
|
|
|
1,592,901
|
|
Total
operating expenses
|
|
|
24,731,540
|
|
|
|
5,971,422
|
|
|
|
2,592,521
|
|
|
|
33,295,483
|
|
Operating income
(loss)
|
|
$
|
848,779
|
|
|
$
|
277,969
|
|
|
$
|
(2,592,521
|
)
|
|
$
|
(1,465,773
|
)
|
|
|
Three
Months Ended June 30, 2019
|
|
|
|
Healthcare
IT
|
|
|
Practice
Management
|
|
|
Unallocated
Corporate Expenses
|
|
|
Total
|
|
Net revenue
|
|
$
|
13,460,575
|
|
|
$
|
3,288,924
|
|
|
$
|
-
|
|
|
$
|
16,749,499
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
costs
|
|
|
8,929,458
|
|
|
|
2,466,937
|
|
|
|
-
|
|
|
|
11,396,395
|
|
Selling and marketing
|
|
|
374,196
|
|
|
|
8,361
|
|
|
|
-
|
|
|
|
382,557
|
|
General and administrative
|
|
|
3,295,146
|
|
|
|
559,390
|
|
|
|
1,289,218
|
|
|
|
5,143,754
|
|
Research and development
|
|
|
218,408
|
|
|
|
-
|
|
|
|
-
|
|
|
|
218,408
|
|
Depreciation
and amortization
|
|
|
757,084
|
|
|
|
79,077
|
|
|
|
-
|
|
|
|
836,161
|
|
Total
operating expenses
|
|
|
13,574,292
|
|
|
|
3,113,765
|
|
|
|
1,289,218
|
|
|
|
17,977,275
|
|
Operating (loss)
income
|
|
$
|
(113,717
|
)
|
|
$
|
175,159
|
|
|
$
|
(1,289,218
|
)
|
|
$
|
(1,227,776
|
)
|
15.
SUBSEQUENT EVENTS
During
July 2020, the Company sold 1,104,000 shares of its Series A Preferred Stock and received net proceeds of approximately $25.6
million, after issuance expenses. As noted in Note 6, the balance on the line of credit of $9,750,000 was repaid in
July.