Item
1. Consolidated Financial Statements
CARECLOUD,
INC.
CONSOLIDATED
BALANCE SHEETS
($
in thousands, except share and per share amounts)
See
notes to consolidated financial statements.
CARECLOUD,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
($
in thousands, except share and per share amounts)
See
notes to consolidated financial statements.
CARECLOUD,
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($
in thousands)
| (a) | No tax effect has been recorded as the Company recorded a valuation allowance against the
tax benefit from its foreign currency translation adjustments. |
See
notes to consolidated financial statements.
CARECLOUD,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021
($
in thousands, except for number of shares)
For
all periods presented, the preferred stock dividends were paid monthly at the rate of $2.75
and $2.19 for Series A and Series B, respectively, per share per annum.
See
notes to consolidated financial statements.
CARECLOUD,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
($
in thousands)
See
notes to consolidated financial statements.
CARECLOUD,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
AND
2021 (UNAUDITED)
1.
ORGANIZATION AND BUSINESS
CareCloud,
Inc. (“CareCloud”, and together with its consolidated subsidiaries, the “Company,” “we,” “us”
and/or “our”) is a healthcare information technology company that provides a full suite of proprietary cloud-based solutions,
together with related business services, to healthcare providers and hospitals throughout the United States. 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. Our Software-as-a-Service (“SaaS”) platform includes revenue cycle management
(“RCM”), practice management (“PM”), electronic health record (“EHR”), business intelligence, telehealth,
patient experience management (“PXM”) solutions and complementary software tools and business services for high-performance
medical groups and health systems. CareCloud has its corporate offices in Somerset, New Jersey and maintains client support teams throughout
the U.S., and offshore offices in Pakistan and Azad Jammu and Kashmir, a region administered by Pakistan (the “Pakistan Offices”),
and in Sri Lanka.
CareCloud
was founded in 1999 under the name Medical Transcription Billing, Corp. and incorporated under the laws of the State of Delaware in 2001.
In 2004, the Company formed MTBC Private Limited (or “MTBC Pvt. Ltd.”), a 99.9% majority-owned subsidiary of CareCloud based
in Pakistan. The remaining 0.1% of the shares of MTBC Pvt. Ltd. is equally owned by the founder and Executive Chairman of CareCloud and
a local employee who is also a director of this entity. Effective April 1, 2022, the Company formed MTBC Bagh Private Limited (or “MTBC
Bagh Pvt. Ltd.”), a 99.8% majority owned subsidiary of CareCloud based in Azad Jammu and Kashmir, a region administered by Pakistan.
The remaining 0.2% of the shares of MTBC Bagh Pvt. Ltd. are equally owned by the founder and Executive Chairman of CareCloud and the
same director/employee as above. In 2016, the Company 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, the
Company formed CareCloud Practice Management, Corp. (“CPM”), a Delaware corporation, to operate the medical practice management
business acquired from Orion Healthcorp.
In
January 2020, the Company purchased CareCloud Corporation, a company whose name we took. That company is now known as CareCloud Health,
Inc. (“CCH”). In June 2020, the Company purchased Meridian Billing Management Co. and its affiliate Origin Holdings, Inc.
(collectively “Meridian” and sometimes referred to as “Meridian Medical Management”). Both companies were subsequently
merged and the surviving company was renamed Meridian Medical Management, Inc.
During
March 2021, the Company formed a new wholly-owned subsidiary, CareCloud Acquisition, Corp. (“CAC”). In June 2021, CAC purchased
certain assets and assumed certain liabilities of MedMatica Consulting Associates Inc., (“MedMatica”) and purchased the stock
of Santa Rosa Staffing, Inc., (“SRS”). The assets and liabilities of MedMatica were merged into SRS and the company was renamed
medSR, Inc. (“medSR”). See Note 3.
2.
BASIS OF PRESENTATION
The
accompanying unaudited 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 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, 2022, the results of operations for
the three and six months ended June 30, 2022 and 2021 and cash flows for the six months ended June 30, 2022 and 2021. 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
accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2021, which are included in the Company’s Annual Report on Form 10-K, filed
with the SEC on March 14, 2022.
Recent
Accounting Pronouncements — From time to time, new accounting pronouncements are issued by the Financial Accounting Standards
Board (“FASB”) and are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the
impact of recently adopted and recently issued accounting pronouncements will not have a material impact on our consolidated financial
position, results of operations and cash flows.
In
June 2016, the FASB issued ASU 2016-13, including subsequent codification improvements, Financial Instruments – Credit Losses:
Measurement of Credit Losses on Financial Instruments. The guidance in Accounting Standards Update (“ASU”) 2016-13 replaces
the incurred loss impairment methodology under current GAAP. The new impairment model requires immediate recognition of estimated credit
losses expected to occur for most financial assets and certain other instruments. It will apply to all entities. For trade receivables,
loans and held-to-maturity debt securities, entities will be required to estimate lifetime expected credit losses. This may result in
the earlier recognition of credit losses. In November 2019, the FASB issued ASU No. 2019-10, which delays this standard’s effective
date for SEC smaller reporting companies to the fiscal years beginning on or after December 15, 2022. The Company is in the process of
determining if this update will have a significant impact on the consolidated financial statements.
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 effective for public business entities for fiscal years beginning
after December 15, 2020. The Company adopted this guidance effective January 1, 2021. There was no impact on the consolidated financial
statements as a result of this standard.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies the accounting for certain financial
instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own
equity. The Company adopted this guidance effective January 1, 2022. There was no impact on the consolidated financial statements as
a result of this standard.
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers. The amendments in this update require acquiring entities to apply Topic 606 to recognize and measure
contract assets and contract liabilities in a business combination. The amendments are effective for public business entities for fiscal
years beginning after December 15, 2022. The Company is in the process of determining if this update will have a significant impact on
the consolidated financial statements.
3.
ACQUISITIONS
2021
Acquisition
On
June 1, 2021, CAC entered into an Asset and Stock Purchase Agreement (“Purchase Agreement”) with MedMatica and its sole shareholder.
Pursuant to the Purchase Agreement, CAC acquired (i) all of the issued and outstanding capital stock of SRS, a Delaware corporation,
and (ii) all of the MedMatica assets that were used in MedMatica’s and SRS’ business. Certain MedMatica liabilities were
also assumed under the Purchase Agreement. The total cash consideration was $10 million plus a working capital adjustment of approximately
$3.8 million. The Purchase Agreement also provides that if during the 18-month period commencing on June 1, 2021 (the “Earn-Out
Period”), certain EBITDA and revenue targets with respect to the assets and capital stock purchased under the Purchase Agreement
are achieved, then CAC shall pay MedMatica an earn-out up to a maximum of $8 million. Further, if during the Earn-Out Period, certain
additional and increased EBITDA and revenue targets with respect to the assets and capital stock purchased under the Purchase Agreement
are achieved, then CAC shall pay MedMatica an additional earn-out, up to a maximum of $5 million.
MedMatica
and SRS were in the business of providing a broad range of specialty consulting services to hospitals and large healthcare groups, including
certain consulting services related to healthcare IT application services and implementations, medical practice management, and revenue
cycle management. The acquisition has been accounted for as a business combination.
A
summary of the total consideration is as follows:
SUMMARY
OF TOTAL CONSIDERATION ON BUSINESS CONSIDERATION
| medSR Purchase Price | |
| |
| | |
($ in thousands) | |
| Cash | |
$ | 12,261 | |
| Amounts held in escrow | |
| 1,571 | |
| Contingent consideration | |
| 5,605 | |
| Total purchase price | |
$ | 19,437 | |
The
Company engaged a third party valuation specialist to assist the Company in valuing the assets acquired and liabilities assumed from
MedMatica. The following table summarizes the purchase price allocation.
SCHEDULE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
| | |
($ in thousands) | |
| Accounts receivable | |
$ | 2,696 | |
| Receivable from seller | |
| 227 | |
| Prepaid expenses | |
| 102 | |
| Unbilled receivables | |
| 2,491 | |
| Property and equipment | |
| 84 | |
| Customer relationships | |
| 3,100 | |
| Acquired backlog | |
| 490 | |
| Goodwill | |
| 11,931 | |
| Accounts payable | |
| (539 | ) |
| Accrued expenses & compensation | |
| (1,125 | ) |
| Deferred revenue | |
| (20 | ) |
| Total purchase price allocation | |
$ | 19,437 | |
The
acquired accounts receivable is recorded at fair value, which represents amounts that have subsequently been paid or were 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 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 goodwill from this acquisition is deductible
ratably for income tax purposes over fifteen years. The purchase agreement provides that if revenue and EBITDA over the next 18 months
exceeds certain specified amounts, there will be an earn-out payment to the seller equal to such excess, up to $13 million. It was estimated
that the probable payment will be approximately $5.6 million and this amount was recorded as part of the purchase price allocation as
contingent consideration. At June 30, 2022 and December 31, 2021, the Company determined that the fair value of the contingent consideration
was approximately $1.9 million and $3.1 million, respectively, based in part on the actual operating results since the acquisition. The
difference in the contingent consideration between December 31, 2021 and June 30, 2022 has been recorded as a change in contingent consideration
in the consolidated statements of operations.
As
part of the acquisition, $1.5 million of the purchase price was held in escrow, which represented $500,000 to be paid upon the achievement
of agreed-upon revenue and backlog milestones, and the balance to be held for up to 18 months to satisfy certain indemnification obligations.
During the third quarter of 2021, the initial portion of the escrow was settled whereby $250,000 was paid to the seller and $250,000
was offset against the working capital adjustment. An additional $71,000 that was held in escrow was also paid. The balance of the $1.0 million escrow is included in consideration payable and restricted cash in the consolidated balance sheets at December 31, 2021 and June
30, 2022. Approximately $12.3 million in cash was paid at closing.
The
weighted-average amortization period of the acquired intangible assets is approximately three years.
Revenue
earned from the clients obtained from the medSR acquisition on June 1, 2021 was approximately $8.6 million and $15.8 million for the
three and six months ended June 30, 2022, respectively.
The
medSR 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 expansion of its customer base and by increasing available
customer relationship resources and specialized trained staff.
Pro
forma financial information (Unaudited)
The
unaudited pro forma information below represents the consolidated results of operations as if the medSR acquisition occurred on January
1, 2021. 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 acquisition 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 combination. The difference
between the actual revenue and the pro forma revenue is approximately $8.1 million and $17.8 million of additional revenue recorded by
medSR for the three and six months ended June 30, 2021, respectively. Other differences arise from amortizing purchased intangibles using
the double declining balance method.
SCHEDULE OF BUSINESS ACQUISITION PRO FORMA INFORMATION
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands, except per share amounts) | |
| Total revenue | |
$ | 37,228 | | |
$ | 42,169 | | |
$ | 72,569 | | |
$ | 81,624 | |
| Net income (loss) | |
$ | 2,830 | | |
$ | (337 | ) | |
$ | 4,067 | | |
$ | (1,622 | ) |
| Net loss attributable to common shareholders | |
$ | (946 | ) | |
$ | (3,975 | ) | |
$ | (3,746 | ) | |
$ | (8,389 | ) |
| Net loss per common share | |
$ | (0.06 | ) | |
$ | (0.28 | ) | |
$ | (0.25 | ) | |
$ | (0.59 | ) |
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, 2022 and the year ended December 31,
2021:
SCHEDULE
OF INTANGIBLE ASSETS AND GOODWILL
| | |
| | | |
| | |
| | |
Six Months Ended | | |
Year Ended | |
| | |
June 30, 2022 | | |
December 31, 2021 | |
| | |
($ in thousands) | |
| Beginning gross balance | |
$ | 61,186 | | |
$ | 49,291 | |
| Acquisition, net of adjustments | |
| - | | |
| 11,895 | |
| Ending gross balance | |
$ | 61,186 | | |
$ | 61,186 | |
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, 2022, and December 31, 2021 consist of the following:
SCHEDULE
OF FINITE-LIVED INTANGIBLE ASSETS
| | |
| | | |
| | |
| | |
June 30, 2022 | | |
December 31, 2021 | |
| | |
($ in thousands) | |
| Contracts and relationships acquired | |
$ | 47,597 | | |
$ | 47,597 | |
| Capitalized software | |
| 17,471 | | |
| 13,196 | |
| Non-compete agreements | |
| 1,236 | | |
| 1,236 | |
| Other intangible assets | |
| 8,399 | | |
| 8,396 | |
| Total intangible assets | |
| 74,703 | | |
| 70,425 | |
| Less: Accumulated amortization | |
| 44,526 | | |
| 39,647 | |
| Intangible assets - net | |
$ | 30,177 | | |
$ | 30,778 | |
Other
intangible assets primarily represent acquired software and purchased intangibles. Amortization expense was approximately $4.9 million
and $5.0 million for the six months ended June 30, 2022 and 2021, respectively. The weighted-average amortization period is three years.
As
of June 30, 2022, future amortization scheduled to be expensed is as follows:
SCHEDULE
OF FINITE-LIVED INTANGIBLE ASSETS, FUTURE AMORTIZATION EXPENSE
| | |
| | |
| Years ending December 31, | |
($ in thousands) | |
| 2022 (six months) | |
$ | 7,249 | |
| 2023 | |
| 11,549 | |
| 2024 | |
| 7,481 | |
| 2025 | |
| 2,548 | |
| 2026 | |
| 300 | |
| Thereafter | |
| 1,050 | |
| Total | |
$ | 30,177 | |
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, 2022 and 2021:
SCHEDULE
OF LOSSES PER SHARE, BASIC AND DILUTED
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands, except share and per share amounts) | |
| Basic and Diluted: | |
| | | |
| | | |
| | | |
| | |
| Net loss attributable to common shareholders | |
$ | (1,039 | ) | |
$ | (3,865 | ) | |
$ | (3,936 | ) | |
$ | (8,958 | ) |
| Weighted-average common shares used to compute basic and diluted loss per share | |
| 15,070,147 | | |
| 14,430,882 | | |
| 15,031,363 | | |
| 14,258,772 | |
| Net loss attributable to common shareholders per share - basic and diluted | |
$ | (0.07 | ) | |
$ | (0.27 | ) | |
$ | (0.26 | ) | |
$ | (0.63 | ) |
At
June 30, 2022, the 433,251 unvested equity restricted stock units (“RSUs”) as discussed in Note 12 and 1,353,489 unexercised
warrants expiring between September 2022 and September 2023 with exercise prices between $3.92 to $10.00 have been excluded from the
above calculations as they were anti-dilutive. At June 30, 2021, the 476,607 unvested equity RSUs and 3,152,140 unexercised warrants
have been excluded from the above calculations as they were anti-dilutive. Vested RSUs, vested restricted shares and exercised warrants
have been included in the above calculations.
6.
DEBT
SVB
— During October 2017, the Company opened a revolving line of credit with Silicon Valley Bank (“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. During the third quarter of 2021, the
credit line was further increased to $20 million and the term was extended for another year. As of June 30, 2022, there was $7.0 million
borrowed under the credit facility, which was repaid in July. Interest on the SVB revolving line of credit is currently charged at the
prime rate plus 1.50% with a minimum rate of 6.50%. 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 subsidiaries. Future acquisitions
are subject to approval by SVB.
In
connection with the original SVB debt agreement, the Company paid SVB approximately $50,000 of fees upfront and issued warrants for SVB
to purchase 125,000 shares of its common stock, and committed to pay an annual anniversary fee of $50,000 a year. Based on the terms
in the original SVB credit agreement, these warrants have a strike price equal to $3.92. They have a five-year exercise window and net
exercise rights, and were valued at $3.12 per warrant. As a result of the revision in the SVB credit line, which increased the credit
line from $5 million to $10 million and reduced the interest rate by 25 basis points, the Company paid approximately $50,000 of fees
upfront and issued an additional 28,489 warrants, with a strike price equal to $5.26, a five-year exercise window and net exercise rights.
The additional warrants were valued at $3.58 per warrant. The SVB credit agreement contains various covenants and conditions governing
the revolving line of credit. These covenants include a minimum level of adjusted EBITDA and a minimum liquidity ratio. At June 30, 2022
and 2021, the Company was in compliance with all covenants.
During
January 2022, the agreement with SVB was modified to allow the Company to issue Series B Preferred Stock and pay monthly dividends on
this stock, to use a portion of the offering proceeds to redeem a portion of the Series A Preferred Stock that is outstanding and to
allow for the potential exchange of shares of Series A Preferred Stock for Series B Preferred Stock.
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 year 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
currently 4.15%.
7.
LEASES
We
determine if an arrangement is a lease at inception. We have operating leases for office and temporary living space as well as for some
office equipment. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liability
and non-current operating lease liability in our consolidated balance sheets as of June 30, 2022 and December 31, 2021. 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.
As
most of our leases do not provide an implicit rate, 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. 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 we believe that we may want the right to exercise that option. Leases with a term
of less than 12 months are not recorded in the consolidated balance sheets. 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 are re-measured using the current incremental
borrowing rate. We review our incremental borrowing rate for our portfolio of leases on a quarterly basis. During the three and six months
ended June 30, 2022, there were approximately $266,000 and $529,000, respectively, of unoccupied lease charges. During the three and
six months ended June 30, 2021, there were approximately $223,000 and $466,000, respectively, of unoccupied lease charges for two of
the Company’s facilities. During the six months ended June 30, 2022, there was a gain on lease termination of approximately $105,000.
During the six months ended June 30, 2021, the Company recorded approximately $775,000 of impairment charges on a vendor contract.
During
the three months ended June 30, 2022, a facility lease was terminated in conjunction with the Company ceasing its document storage services
resulting in additional costs of approximately $197,000. This amount is included in Net loss on lease terminations, impairment and unoccupied
lease charges in the consolidated statements of operations.
Lease
expense is included in direct operating costs and general and administrative expenses in the consolidated statements of operations based
on the nature of the expense. As of June 30, 2022, we had 33 leased properties, five in Medical Practice Management and 28 in Healthcare
IT, with remaining terms ranging from less than one year to fifteen years. Our lease terms are determined taking into account lease renewal
options, the Company’s anticipated operating plans and leases that are on a month-to-month basis. The Company also has some related
party leases – see Note 9.
The
components of lease expense were as follows:
SCHEDULE
OF LEASE EXPENSE
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands) | |
| Operating lease cost | |
$ | 905 | | |
$ | 1,058 | | |
$ | 1,877 | | |
$ | 2,115 | |
| Short-term lease cost | |
| 35 | | |
| 22 | | |
| 75 | | |
| 44 | |
| Variable lease cost | |
| 10 | | |
| 8 | | |
| 19 | | |
| 14 | |
| Total- net lease cost | |
$ | 950 | | |
$ | 1,088 | | |
$ | 1,971 | | |
$ | 2,173 | |
Short-term
lease cost represents leases that were not capitalized as the lease term as of the later of January 1, 2022 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 is as follows:
SCHEDULE
OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO LEASES
| | |
June 30, 2022 | | |
December 31, 2021 | |
| | |
($ in thousands) | |
| Operating leases: | |
| | | |
| | |
| Operating lease ROU assets, net | |
$ | 5,447 | | |
$ | 6,940 | |
| | |
| | | |
| | |
| Current operating lease liabilities | |
$ | 3,224 | | |
$ | 3,963 | |
| Non-current operating lease liabilities | |
| 3,319 | | |
| 4,545 | |
| Total operating lease liabilities | |
$ | 6,543 | | |
$ | 8,508 | |
| | |
| | | |
| | |
| Operating leases: | |
| | | |
| | |
| ROU assets | |
$ | 7,171 | | |
$ | 10,535 | |
| Asset lease expense | |
| (1,658 | ) | |
| (3,574 | ) |
| Foreign exchange loss | |
| (66 | ) | |
| (21 | ) |
| ROU assets, net | |
$ | 5,447 | | |
$ | 6,940 | |
| | |
| | | |
| | |
| Weighted average remaining lease term (in years): | |
| | | |
| | |
| Operating leases | |
| 4.53 | | |
| 4.26 | |
| Weighted average discount rate: | |
| | | |
| | |
| Operating leases | |
| 6.75 | % | |
| 6.76 | % |
Supplemental
cash flow and other information related to leases is as follows:
SCHEDULE
OF SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION RELATED TO LEASES
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands) | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | | |
| | | |
| | |
| Operating cash flows from operating leases | |
$ | 1,158 | | |
$ | 1,336 | | |
$ | 2,370 | | |
$ | 2,732 | |
| | |
| | | |
| | | |
| | | |
| | |
| ROU assets obtained in exchange for lease liabilities: | |
| | | |
| | | |
| | | |
| | |
| Operating leases, excluding impairments and terminations | |
$ | 15 | | |
$ | 1,537 | | |
$ | 442 | | |
$ | 1,748 | |
Maturities
of lease liabilities are as follows:
SCHEDULE
OF MATURITIES OF LEASE LIABILITIES
| Operating leases - Years ending December 31, | |
($ in thousands) | |
| 2022 (six months) | |
$ | 2,205 | |
| 2023 | |
| 2,263 | |
| 2024 | |
| 995 | |
| 2025 | |
| 514 | |
| 2026 | |
| 232 | |
| Thereafter | |
| 1,756 | |
| Total lease payments | |
| 7,965 | |
| Less: imputed interest | |
| (1,422 | ) |
| Total lease obligations | |
| 6,543 | |
| Less: current obligations | |
| (3,224 | ) |
| Long-term lease obligations | |
$ | 3,319 | |
8.
COMMITMENTS AND CONTINGENCIES
Legal
Proceedings — On May 30, 2018, the Superior Court of New Jersey, Chancery Division, Somerset County (the “Chancery Court”)
denied the Company’s and MTBC Acquisition Corp.’s (“MAC’s”) request to enjoin an arbitration proceeding
demanded by Randolph Pain Relief and Wellness Center (“RPRWC”) related to RCM services provided by parties unaffiliated with
the Company and MAC. On June 15, 2018, the Company and MAC filed an appeal of the Chancery Court’s decision with the New Jersey
Superior Court, Appellate Division. On July 19, 2018, the Chancery Court ordered that the arbitration be stayed pending the Company’s
and MAC’s appeal. On appeal, the Company and MAC contended they were never party to the billing services agreement giving rise
to the arbitration claim, did not assume the obligations of Millennium Practice Management Associates, Inc. (“MPMA”) under
such agreement, and any agreement to arbitrate disputes arising under such agreement did not apply to the Company or MAC as RPRWC terminated
the agreement before the APA took effect. On January 30, 2019, the parties conducted oral arguments before the Appellate Court.
On
April 23, 2019, the Appellate Division affirmed in part and reversed in part the trial court’s order. The Appellate Division upheld
the portion of the trial court’s order requiring MAC to participate in the arbitration based on the trial court’s finding
that MAC had assumed MPMA’s contractual responsibilities. The Appellate Division reversed the trial court’s order requiring
the Company to participate in the arbitration on the grounds that insufficient facts had been provided by RPRWC from which the court
could conclude the Company was required to participate in the arbitration. As a result, the Appellate Division remanded the issue of
whether Company is required to participate in the arbitration back to the trial court for further proceedings.
The
parties completed discovery in the remanded matter on November 29, 2019, and thereafter both the Company and RPRWC filed cross-motions
for summary judgment in their favor. On February 6, 2020, the Chancery Court denied RPRWC’s motion for summary judgment and granted
the Company’s cross-motion for summary judgment. The Chancery Court held that the Company cannot be compelled to participate in
the Arbitration. RPRWC has informed the Company that it does not intend to appeal the Chancery Court’s ruling and that it intends
to move forward solely against MAC. On March 25, 2020, the Chancery Court lifted the stay of arbitration relative to RPRWC and MAC. In
its arbitration demand RPRWC alleges that MPMA, a subsidiary of MediGain, LLC, breached the terms of the billing services agreement the
parties had entered into and sought compensatory damages of $6.6 million and costs.
On
May 28, 2020, the arbitrator handling the matter conducted a scheduling conference with the parties in order to establish deadlines for
the parties to exchange discovery requests and responses. During the conference, the arbitrator directed RPRWC to produce statement of
damages on which it bases its claim. RPRWC disclosed its statement of damages to MAC on June 12, 2020. RPRWC’s June 12, 2020 statement
of damages increased its alleged damages from $6.6 million and costs to $20 million and costs. On July 24, 2020, RPRWC disclosed a declaration
to MAC, in which RPRWC estimates its damages to be approximately $11 million plus costs. RPRWC then served expert reports in November
2021, whereby RPRWC’s expert alleged that damages were estimated to be in the range of $9.8 million to $10.8 million. MAC has served
an expert report refuting the alleged damages. A hearing was held in this matter over four days in June 2022. The parties may submit
written closing arguments to the arbitrator. The arbitrator has not yet set a deadline to submit written closing arguments.
While
the allegations of breach of contract made by RPRWC are the subject of the ongoing legal proceedings, MAC believes RPRWC’s allegations
lack merit on numerous grounds. The Company and MAC continue to vigorously defend against RPRWC’s claim and in the event of a loss,
if any, they anticipate the loss will not have a material impact on the consolidated financial statements.
Through
the CCH transaction, we acquired its software technology and related business, of which certain elements were, at the time of the acquisition,
subject to a civil investigation to determine pre-acquisition compliance with certain federal regulatory requirements. This element was
considered as part of the transaction as $4 million of the transaction’s consideration was held in escrow for the resolution of
this investigation. Following the closing of the transaction, the Company continued to cooperate with the inquiry as CCH had historically
done since the commencement of the investigation in July of 2018. The Company accrued $4.2 million to resolve this investigation, including
the $4 million in escrow, which was recorded as an indemnification asset which is included in the consolidated balance sheets at December
31, 2020 in prepaid expenses and other current assets with an offsetting amount in accrued expenses. The Company settled the obligation
in April 2021 substantially within the range covered by the escrowed funds.
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
$11,000 and $9,000 for the six months ended June 30, 2022 and 2021, respectively and $6,000 and $5,000 for the three months ended June
30, 2022 and 2021, respectively. As of June 30, 2022, and December 31, 2021, the receivable balance due from this customer was approximately
$8,000 and $3,000, respectively.
The
Company was a party to a nonexclusive aircraft dry lease agreement with Kashmir Air, Inc. (“KAI”), which was owned by the
Executive Chairman. The Company recorded an expense of approximately $30,000 and $60,000 for the three and six months ended June 30,
2021, respectively. The lease for the aircraft was renewed as of April 1, 2021 and terminated on August 31, 2021. As of June 30, 2022,
there was no liability outstanding to KAI.
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 and an apartment for temporary housing in Dubai, the UAE, from the Executive Chairman.
The related party rent expense for the six months ended June 30, 2022 and 2021 was approximately $101,000 and $94,000, respectively,
and was approximately $50,000 and $49,000 for the three months ended June 30, 2022 and 2021, respectively, 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, 2022 and 2021, the Company spent approximately $432,000 and $807,000 to upgrade the related party leased facilities. Current assets-related
party in the consolidated balance sheets includes security deposits related to the leases of the Company’s corporate offices in
the amount of approximately $16,000 and $13,000 as of June 30, 2022 and December 31, 2021, respectively.
Included
in the ROU asset at June 30, 2022 is approximately $388,000 applicable to the related party leases. Included in the current and non-current
operating lease liability at June 30, 2022 is approximately $168,000 and $215,000, respectively, applicable to the related party leases.
Included
in the ROU asset at December 31, 2021 is approximately $483,000 applicable to the related party leases. Included in the current and non-current
operating lease liability at December 31, 2021 is approximately $174,000 and $305,000, respectively, applicable to the related party
leases.
During
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, 2022, talkMD had not yet commenced
operations.
10. SHAREHOLDERS’ EQUITY
During
2022, the Company sold 1,210,248 shares of 8.75% Series B Cumulative Redeemable Perpetual Preferred Stock (“Series B Preferred
Stock”) and received net proceeds of approximately $27.9 million. This includes 99,438 shares sold under the Company’s at-the-market
facility (“ATM”). The Series B Preferred Stock is listed on the Nasdaq Global Market under the symbol “MTBCO.”
Dividends on the Series B Preferred Stock of approximately $2.19 annually per share are cumulative from the date of issue and are payable
each month when, as and if declared by the Company’s Board of Directors. On March 18, 2022, the Company used a portion of the proceeds
from selling Series B Preferred Stock and redeemed 800,000 shares of Series A Preferred Stock for $25.00 per share, plus all accrued
and unpaid dividends to, but not including, the redemption date.
Commencing
on February 15, 2024 and prior to February 15, 2025, we may redeem, at our option, the Series B Preferred Stock, in whole or in part,
at a cash redemption price of $25.75 per share, plus all accrued and unpaid dividends to, but not including, the redemption date. On
or after February 15, 2025 and prior to February 15, 2026, we may redeem, at our option, the Series B Preferred Stock, in whole or in
part, at a cash redemption price of $25.50 per share, plus all accrued and unpaid dividends to, but not including, the redemption date.
On or after February 15, 2026 and prior to February 15, 2027, we may redeem, at our option, the Series B Preferred Stock, in whole or
in part, at a cash redemption price of $25.25 per share, plus all accrued and unpaid dividends to, but not including, the redemption
date. On or after February 15, 2027, we may redeem, at our option, the Series B Preferred Stock, in whole or in part, at a cash redemption
price of $25.00 per share, plus all accrued and unpaid dividends to, but not including, the redemption date.
The
Company has the right to sell up to $35 million of its Series B Preferred Stock using its ATM facility. The underwriter receives 3% of
the gross proceeds. The Company also has the right to sell up to $50 million of its common stock using a second ATM facility. The underwriters
of the common stock ATM also receive 3% of the gross proceeds. During the six months ended June 30, 2022, no shares of common stock were
issued under this ATM.
During
the six months ended June 30, 2021, 858,000 common stock warrants were exercised at $7.50 each resulting in gross proceeds of $6,435,000.
During the quarter ended June 30, 2021, the Company sold 178,092 shares of common stock under its ATM and received net proceeds of approximately
$1.4 million. Also, during the quarter ended June 30, 2021, the Company cancelled 215,822 shares of preferred stock that were held in
escrow from the CCH acquisition as the matters related to the escrow were settled in cash.
11. 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. For revenue cycle management services, the Company recognizes revenue when services
begin on medical billing claims, which is generally upon receipt of the claim from the provider. The Company estimates the value of the
consideration it will earn over the remaining contractual period as 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. 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 the standard.
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. The standalone selling prices
are based on the contractual price for the service.
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 five primary sources: (1) technology-enabled business solutions, (2) professional services, (3) printing and mailing
services, (4) group purchasing services and (5) medical practice management services.
The
following table represents a disaggregation of revenue for the three and six months ended June 30:
SCHEDULE
OF DISAGGREGATION OF REVENUE
| | |
| | |
| | |
| | |
| |
| | |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands) | |
| Healthcare IT: | |
| | | |
| | | |
| | | |
| | |
| Technology-enabled business solutions | |
$ | 23,589 | | |
$ | 27,145 | | |
$ | 46,831 | | |
$ | 52,990 | |
| Professional services | |
| 9,824 | | |
| 3,497 | | |
| 18,138 | | |
| 4,114 | |
| Printing and mailing services | |
| 458 | | |
| 272 | | |
| 921 | | |
| 656 | |
| Group purchasing services | |
| 158 | | |
| 171 | | |
| 292 | | |
| 359 | |
| Medical Practice Management: | |
| | | |
| | | |
| | | |
| | |
| Medical practice management services | |
| 3,199 | | |
| 2,980 | | |
| 6,387 | | |
| 5,715 | |
| Total | |
$ | 37,228 | | |
$ | 34,065 | | |
$ | 72,569 | | |
$ | 63,834 | |
| Revenues | |
$ | 37,228 | | |
$ | 34,065 | | |
$ | 72,569 | | |
$ | 63,834 | |
Technology-enabled
business solutions:
Revenue
derived on an on-going basis from our technology-enabled solutions is typically billed as a percentage of payments collected by our customers.
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. The Company 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 fee for these services
typically includes use of practice management software and related tools (on a SaaS basis), electronic health records (on a SaaS basis),
medical billing services and use of mobile health solutions. We consider the services to be one performance obligation since the promises
are not distinct in the context of the contract. The performance obligation consists of a series of distinct services that are substantially
the same and have the same periodic pattern of transfer to our customers.
In
many cases, our clients may terminate their agreements with 90 days’ notice without cause, thereby limiting the term in which we
have enforceable rights and obligations, although this time period can vary between clients. Our payment terms are normally net 30 days.
Although our contracts typically have stated terms of one or more years, under ASC 606 our contracts are considered month-to-month and
accordingly, there is no financing component.
For
the majority of our revenue cycle management contracts, the total transaction price is variable because our obligation is to process
an unknown quantity of claims, as and when requested by our customers over the contract period. When a contract includes variable consideration,
we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include
variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative
revenue recognized will not occur when the uncertainty associated with variable consideration is subsequently resolved. Estimates to
determine variable consideration, such as payment to charge ratios, effective billing rates, and the estimated contractual payment periods,
are updated at each reporting date. Revenue is recognized over the performance period using the input method.
Our
proprietary, cloud-based practice management application automates the labor-intensive workflow of a medical office in a unified and
streamlined SaaS platform. The Company has a large number of clients who utilize the Company’s practice management software, electronic
health records software, patient experience management solutions, business intelligence software and/or robotic process automation software
on a SaaS basis, but who do not utilize the Company’s revenue cycle management services. SaaS fees may be fixed based on the number
of providers, or may be variable.
The
medical billing clearinghouse service takes claim information from customers, checks the claims for errors and sends this information
electronically to insurance companies. The Company 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.
Additional
services such as coding, credentialing and transcription are sometimes 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.
Professional
services:
Our
professional services include an extensive set of services including EHR vendor-agnostic optimization and activation, project management,
IT transformation consulting, process improvement, training, education and staffing for large healthcare organizations including health
systems and hospitals. Revenue is recorded monthly on a time and materials or a fixed rate basis. This is a separate performance obligation
from any RCM or SaaS services provided, for which the Company receives and records monthly fees. The performance obligation is satisfied
over time as the professional services are rendered.
Printing
and mailing services:
The
Company provides printing and mailing services for both revenue cycle management customers and a 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.
Group
purchasing services:
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. Fees from the pharmaceutical companies are paid 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.
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. 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.
Medical
practice management services:
The
Company also provides medical 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 the 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 medical 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.
Our
medical 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:
As
of June 30, 2022, the estimated revenue expected to be recognized in the future related to the remaining revenue cycle management performance
obligations outstanding was approximately $4.4 million. We expect to recognize substantially all of the revenue for the remaining performance
obligations over the next three months. Approximately $309,000 of the contract asset represents revenue earned, but not yet paid, from
the group purchasing services.
Amounts
that we are entitled to collect under the applicable contract are recorded as accounts receivable. Invoicing is performed at the end
of each month when the services have been provided. The contract asset includes our right to payment for services already transferred
to a customer when the right to payment is conditional on something other than the passage of time. For example, contracts for revenue
cycle management services where we recognize revenue over time but do not have a contractual right to payment until the customer receives
payment of their claim from the insurance provider. The contract asset also includes the revenue accrued, not received, for the group
purchasing services.
Changes
in the contract asset are recorded as adjustments to net revenue. The changes primarily result from providing services to revenue cycle
management customers that result in additional consideration and are offset by our right to payment for services becoming unconditional
and changes in the revenue accrued for the group purchasing services. The contract asset for our group purchasing services is reduced
when we receive payments from vaccine manufacturers and is increased for revenue earned, not received. The opening and closing balances
of the Company’s accounts receivable, contract asset and deferred revenue are as follows:
SCHEDULE
OF ACCOUNTS RECEIVABLE CONTRACT ASSET AND DEFERRED REVENUE
| | |
Accounts Receivable, Net | | |
Contract Asset | | |
Deferred Revenue (current) | | |
Deferred Revenue
(long term) | |
| | |
($ in thousands) | |
| Balance as of January 1, 2022 | |
$ | 17,006 | | |
$ | 4,725 | | |
$ | 1,085 | | |
$ | 341 | |
| medSR acquisition | |
| | | |
| | | |
| | | |
| | |
| Increase (decrease), net | |
| 1,978 | | |
| (25 | ) | |
| 365 | | |
| 22 | |
| Balance as of June 30, 2022 | |
$ | 18,984 | | |
$ | 4,700 | | |
$ | 1,450 | | |
$ | 363 | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance as of January 1, 2021 | |
$ | 12,089 | | |
$ | 4,105 | | |
$ | 1,173 | | |
$ | 305 | |
| Beginning balance | |
$ | 12,089 | | |
$ | 4,105 | | |
$ | 1,173 | | |
$ | 305 | |
| medSR acquisition | |
| 2,705 | | |
| 2,402 | | |
| 20 | | |
| - | |
| Increase (decrease), net | |
| 1,430 | | |
| (1,037 | ) | |
| (12 | ) | |
| (121 | ) |
| Balance as of June 30, 2021 | |
$ | 16,224 | | |
$ | 5,470 | | |
$ | 1,181 | | |
$ | 184 | |
| Ending balance | |
$ | 16,224 | | |
$ | 5,470 | | |
$ | 1,181 | | |
$ | 184 | |
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. Deferred commissions were approximately $762,000 and $1.0 million at June 30, 2022 and 2021, respectively, and are included
in the other assets amounts in the consolidated balance sheets.
12.
STOCK-BASED COMPENSATION
In
April 2014, the Company adopted the Medical Transcription Billing, Corp. 2014 Equity Incentive Plan (the “Original Plan”),
reserving 1,351,000 shares of common stock for grants to employees, officers, directors and consultants. On April 14, 2017, the Original
Plan was amended and restated whereby an additional 1,500,000 shares of common stock and 100,000 shares of Series A Preferred Stock were
added to the plan for future issuance (the “A&R Plan”). During 2018, an additional 200,000 of Series A Preferred Stock
were added to the A&R Plan for future issuance. In May 2020, an additional 2,000,000 shares of common stock and an additional 300,000
shares of Series A Preferred Stock were added to the A&R Plan for future issuance. During 2022, an additional 1,000,000 shares of
common stock and 200,000 shares of Series B Preferred Stock were added to the A&R Plan for future issuance. Some of the Series A
Preferred Stock shares were subsequently redesignated as Series B Preferred Stock and were removed from the A&R Plan. As of June
30, 2022, 1,864,497 shares of common stock, 33,769 shares of Series A Preferred Stock and 156,000 shares of Series B 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.
Common
and preferred stock RSUs
In
February 2022, the Compensation Committee approved executive bonuses to be paid in shares of Series B Preferred Stock, with the number
of shares and the amount based on specified criteria being achieved during the year 2022. The actual amount of shares will be settled
in early 2023 based on the achievement of the specified criteria. For the six months ended June 30, 2022, an expense of approximately
$370,000 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 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 A&R Plan for the six months ended
June 30, 2022 and 2021:
DISCLOSURE
OF SHARE-BASED COMPENSATION ARRANGEMENTS BY SHARE-BASED PAYMENT AWARD
| | |
Common Stock | | |
Series A
Preferred Stock | | |
Series B
Preferred Stock | |
| Outstanding and unvested shares at January 1, 2022 | |
| 418,039 | | |
| 34,000 | | |
| - | |
| Granted | |
| 362,756 | | |
| - | | |
| 44,000 | |
| Vested | |
| (234,874 | ) | |
| (34,000 | ) | |
| (10,000 | ) |
| Forfeited | |
| (35,870 | ) | |
| - | | |
| - | |
| Outstanding and unvested shares at June 30, 2022 | |
| 510,051 | | |
| - | | |
| 34,000 | |
| | |
| | | |
| | | |
| | |
| Outstanding and unvested shares at January 1, 2021 | |
| 382,435 | | |
| 44,000 | | |
| - | |
| Granted | |
| 419,159 | | |
| 42,166 | | |
| - | |
| Vested | |
| (294,575 | ) | |
| (52,166 | ) | |
| - | |
| Forfeited | |
| (30,412 | ) | |
| - | | |
| - | |
| Outstanding and unvested shares at June 30, 2021 | |
| 476,607 | | |
| 34,000 | | |
| - | |
The
liability for the cash-settled awards and the liability for withheld taxes in connection with the equity awards was approximately $578,000
and $1.0 million at June 30, 2022 and December 31, 2021, respectively, and is included in accrued compensation in the consolidated balance
sheets. During the six months ended June 30, 2022, approximately $13,000 was paid in connection with the cash-settled awards. During
the six months ended June 30, 2021, approximately $87,000 was paid in connection with the cash-settled awards.
Stock-based
compensation expense
The
Company recognizes compensation expense on a straight-line basis over the total requisite service period for the entire award. For stock
awards classified as equity, the market price of our common stock or preferred stock on the date of grant is used in recording the fair
value of the award and includes the related taxes. For stock awards classified as a liability, the earned amount is marked to market
based on the end of period common stock price.
The
following table summarizes the components of share-based compensation expense for the three and six months ended June 30, 2022 and 2021:
SCHEDULE
OF EMPLOYEE SERVICE SHARE-BASED COMPENSATION ALLOCATION OF RECOGNIZED PERIOD COSTS
| | |
| | |
| | |
| | |
| |
| Stock-based compensation included in the | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| consolidated statements of operations: | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands) | |
| Direct operating costs | |
$ | 201 | | |
$ | 254 | | |
$ | 418 | | |
$ | 559 | |
| General and administrative | |
| 765 | | |
| 1,120 | | |
| 1,145 | | |
| 1,745 | |
| Research and development | |
| 73 | | |
| 72 | | |
| 143 | | |
| 209 | |
| Selling and marketing | |
| 145 | | |
| 288 | | |
| 365 | | |
| 489 | |
| Total stock-based compensation expense | |
$ | 1,184 | | |
$ | 1,734 | | |
$ | 2,071 | | |
$ | 3,002 | |
13.
INCOME TAXES
The
income tax expense for the three months ended June 30, 2022 was approximately $25,000
comprised of a current tax expense of $34,000
and a deferred tax benefit of $9,000.
The income tax expense for the six months ended June 30, 2022 was approximately $89,000
comprised of a current tax expense of $62,000
and a deferred tax expense of $27,000.
The
income tax expense for the three months ended June 30, 2021 was approximately $213,000, comprised of a current tax expense of $51,000
and a deferred tax expense of $162,000. The income tax expense for the six months ended June 30, 2021 was approximately $212,000, comprised
of a current tax expense of $86,000 and a deferred tax expense of $126,000.
During
the quarter ended June 30, 2022, it was determined that for the states that follow the federal rules regarding indefinite life net operating
losses, the offset to the state deferred tax liability was approximately $45,000. This amount was recorded during the current quarter
as part of the deferred tax benefit.
The
current income tax provision for the six months ended June 30, 2022 and 2021 primarily relates to state minimum taxes and foreign income
taxes. The deferred tax provision (benefit) for the three and six months ended June 30, 2022 and 2021 relates to the book and tax difference
of amortization on indefinite-lived intangibles, primarily goodwill. To the extent allowable, the federal deferred 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 income
tax provisions of the CARES Act and determined the impact to be either immaterial or not applicable. Under the CARES Act, the Company
took advantage of the payroll tax deferral provision. As of both June 30, 2022 and December 31, 2021, the Company has deferred approximately
$934,000 of payroll taxes. This amount needs to be repaid by December 31, 2022.
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, 2022 and December
31, 2021.
14.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair
value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect our view of market participant assumptions in the absence of observable market information.
We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair values
of assets and liabilities required to be measured at fair value are categorized based upon the level of judgement associated with the
inputs used to measure their value in one of the following three categories:
Level
1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. We held no Level 1 financial instruments
at June 30, 2022 or December 31, 2021.
Level
2: Quoted prices for similar instruments in active markets with inputs that are observable, either directly or indirectly. Our Level
2 financial instruments include notes payable which are carried at cost and approximate fair value since the interest rates being charged
approximate market rates.
Level
3: Unobservable inputs are significant to the fair value of the asset or liability, and include situations where there is little, if
any, market activity for the asset or liability. Our Level 3 instrument includes the fair value of contingent consideration related to
completed acquisitions. The fair value at June 30, 2022 is based on discounted cash flow analysis reflecting the likelihood of achieving
specified performance measures or events and captures the contractual nature of the contingencies, the passage of time and the associated
discount rate. As of June 30, 2022, the contingent consideration is valued using a Monte Carlo simulation model.
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):
SCHEDULE
OF FAIR VALUE LIABILITIES MEASURED ON RECURRING BASIS, UNOBSERVABLE INPUT RECONCILIATION
| | |
Fair Value Measurement at Reporting Date Using Significant Unobservable Inputs, Level 3 | |
| | |
Six Months Ended June 30, | |
| | |
2022 | | |
2021 | |
| | |
($ in thousands) | |
| Balance - January 1, | |
$ | 3,090 | | |
$ | - | |
| Acquisitions | |
| - | | |
| 6,500 | |
| Change in fair value | |
| (1,230 | ) | |
| - | |
| Payments | |
| - | | |
| - | |
| Balance - June 30, | |
$ | 1,860 | | |
$ | 6,500 | |
15.
SEGMENT REPORTING
The
Company’s Chief Executive Officer and Executive Chairman jointly 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) Medical Practice Management.
The
Healthcare IT segment includes revenue cycle management, SaaS solutions and other services. The Medical Practice Management segment includes
the management of three medical practices. 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 that 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, 2021 filed with the SEC on March
14, 2022. The following table presents revenues, operating expenses and operating income (loss) by reportable segment:
SCHEDULE
OF REVENUES, OPERATING EXPENSES AND OPERATING INCOME (LOSS) BY REPORTABLE SEGMENT
| | |
| | | |
| | | |
| | | |
| | |
| | |
Six Months Ended June 30, 2022 | |
| | |
($ in thousands) | |
| | |
Healthcare IT | | |
Medical
Practice Management | | |
Unallocated Corporate
Expenses | | |
Total | |
| Net revenue | |
$ | 66,182 | | |
$ | 6,387 | | |
$ | - | | |
$ | 72,569 | |
| Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| Direct operating costs | |
| 39,296 | | |
| 5,164 | | |
| - | | |
| 44,460 | |
| Selling and marketing | |
| 4,797 | | |
| 13 | | |
| - | | |
| 4,810 | |
| General and administrative | |
| 6,982 | | |
| 857 | | |
| 4,140 | | |
| 11,979 | |
| Research and development | |
| 2,083 | | |
| - | | |
| - | | |
| 2,083 | |
| Change in contingent consideration | |
| (1,230 | ) | |
| - | | |
| - | | |
| (1,230 | ) |
| Depreciation and amortization | |
| 5,699 | | |
| 177 | | |
| - | | |
| 5,876 | |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 621 | | |
| - | | |
| - | | |
| 621 | |
| Total operating expenses | |
| 58,248 | | |
| 6,211 | | |
| 4,140 | | |
| 68,599 | |
| Operating income (loss) | |
$ | 7,934 | | |
$ | 176 | | |
$ | (4,140 | ) | |
$ | 3,970 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three Months Ended June 30, 2022 | |
| | |
($ in thousands) | |
| | |
Healthcare IT | | |
Medical Practice
Management | | |
Unallocated Corporate
Expenses | | |
Total | |
| Net revenue | |
$ | 34,029 | | |
$ | 3,199 | | |
$ | - | | |
$ | 37,228 | |
| Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| Direct operating costs | |
| 19,285 | | |
| 2,502 | | |
| - | | |
| 21,787 | |
| Selling and marketing | |
| 2,421 | | |
| 5 | | |
| - | | |
| 2,426 | |
| General and administrative | |
| 3,582 | | |
| 420 | | |
| 2,392 | | |
| 6,394 | |
| Research and development | |
| 1,098 | | |
| - | | |
| - | | |
| 1,098 | |
| Change in contingent consideration | |
| (630 | ) | |
| - | | |
| - | | |
| (630 | ) |
| Depreciation and amortization | |
| 2,847 | | |
| 89 | | |
| - | | |
| 2,936 | |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 463 | | |
| - | | |
| - | | |
| 463 | |
| Total operating expenses | |
| 29,066 | | |
| 3,016 | | |
| 2,392 | | |
| 34,474 | |
| Operating income (loss) | |
$ | 4,963 | | |
$ | 183 | | |
$ | (2,392 | ) | |
$ | 2,754 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
Six Months Ended June 30, 2021 | |
| | |
($ in thousands) | |
| | |
Healthcare IT | | |
Medical Practice
Management | | |
Unallocated Corporate
Expenses | | |
Total | |
| Net revenue | |
$ | 58,119 | | |
$ | 5,715 | | |
$ | - | | |
$ | 63,834 | |
| Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| Direct operating costs | |
| 34,149 | | |
| 4,446 | | |
| - | | |
| 38,595 | |
| Selling and marketing | |
| 4,079 | | |
| 15 | | |
| - | | |
| 4,094 | |
| General and administrative | |
| 6,839 | | |
| 1,016 | | |
| 4,038 | | |
| 11,893 | |
| Research and development | |
| 3,839 | | |
| - | | |
| - | | |
| 3,839 | |
| Depreciation and amortization | |
| 5,792 | | |
| 167 | | |
| - | | |
| 5,959 | |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 1,241 | | |
| - | | |
| - | | |
| 1,241 | |
| Total operating expenses | |
| 55,939 | | |
| 5,644 | | |
| 4,038 | | |
| 65,621 | |
| Operating income (loss) | |
$ | 2,180 | | |
$ | 71 | | |
$ | (4,038 | ) | |
$ | (1,787 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three Months Ended June 30, 2021 | |
| | |
($ in thousands) | |
| | |
Healthcare IT | | |
Medical Practice Management | | |
Unallocated Corporate Expenses | | |
Total | |
| Net revenue | |
$ | 31,085 | | |
$ | 2,980 | | |
$ | - | | |
$ | 34,065 | |
| Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| Direct operating costs | |
| 18,161 | | |
| 2,373 | | |
| - | | |
| 20,534 | |
| Selling and marketing | |
| 2,197 | | |
| 7 | | |
| - | | |
| 2,204 | |
| General and administrative | |
| 3,411 | | |
| 497 | | |
| 2,361 | | |
| 6,269 | |
| Research and development | |
| 1,813 | | |
| - | | |
| - | | |
| 1,813 | |
| Depreciation and amortization | |
| 3,043 | | |
| 85 | | |
| - | | |
| 3,128 | |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 223 | | |
| - | | |
| - | | |
| 223 | |
| Total operating expenses | |
| 28,848 | | |
| 2,962 | | |
| 2,361 | | |
| 34,171 | |
| Operating income (loss) | |
$ | 2,237 | | |
$ | 18 | | |
$ | (2,361 | ) | |
$ | (106 | ) |
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following is a discussion of our consolidated financial condition and results of operations for the three and six months ended June 30,
2022 and 2021, and other factors that are expected to affect our prospective financial condition. The following discussion and analysis
should be read together with our Consolidated Financial Statements and related notes beginning on page 3 of this Quarterly Report on
Form 10-Q.
Some
of the statements set forth in this section are forward-looking statements relating to our future results of operations. Our actual results
may vary from the results anticipated by these statements. Please see “Forward-Looking Statements” on page 2 of this
Quarterly Report on Form 10-Q.
COVID-19
Pandemic
While
the COVID-19 pandemic did not materially adversely affect the Company’s consolidated financial results and operations during the
three and six months ended June 30, 2022, economic and health conditions in the United States and across most of the globe continue to
change.
The
COVID-19 pandemic affected the Company’s operations in 2021 and may continue to do so indefinitely in the future. The pandemic
may have an impact on the Company’s business, operations, and financial results and conditions, directly and indirectly, including,
without limitation, impacts on the health of the Company’s management and employees, its operations, marketing and sales activities,
and on the overall economy. The spread of the virus did not adversely affect the health and availability of our employees and staff.
The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are
uncertain.
Due
to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, the Company’s consolidated results
of operations for the three and six months ended June 30, 2022 may not necessarily be indicative of the results to be expected for the
full fiscal year. The Company is not aware of any certain event or circumstance that would require an update to its estimates or judgements
or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These
estimates could change in the future as new information about future developments is obtained. Management cannot predict the future impact
of the COVID-19 pandemic on the Company’s consolidated operations nor on economic conditions generally, including the effects on
patient visits. The ultimate extent of the effects of the COVID-19 pandemic on the Company is uncertain and will depend on highly unpredictable
factors such as the ultimate geographic spread of the disease, the severity of the disease, the duration of outbreak, and the effectiveness
of any further developments globally and nationally. The Company will actively monitor the situation and take further action that is
in the best interest of our employees, customers, partners, and stockholders.
Overview
The
Company is a healthcare information technology company that provides Software-as-a-Service offerings (“SaaS”) and technology-enabled
business solutions, which are often bundled, but are occasionally provided individually, together with related business services to healthcare
providers and hospitals throughout the United States. Our integrated SaaS platform includes revenue cycle management (“RCM”),
practice management (“PM”), electronic health record (“EHR”), business intelligence, telehealth, patient experience
management (“PXM”) solutions and complementary software tools and business services for high-performance medical groups and
health systems.
At
a high level, these solutions can be categorized as follows:
| |
● |
Technology-enabled business solutions, which are often bundled but are occasionally provided individually, including: |
| |
|
○ |
EHRs, which
are easy to use, integrated with our business services or offered as Software-as-a-Service (“SaaS”) solutions, and allow
our healthcare provider clients to deliver better patient care, document their clinical visits effectively and thus potentially qualify
for government incentives, reduce documentation errors and reduce paperwork; |
| |
|
○ |
PM software and related
tools, which support our clients’ day-to-day business operations and workflows; |
| |
|
○ |
Mobile Health (“mHealth”)
solutions, including smartphone applications that assist patients and healthcare providers in the provision of healthcare services; |
| |
|
○ |
Telehealth
solutions, which allow healthcare providers to conduct remote patient visits; |
| |
|
○ |
Healthcare claims clearinghouse,
which enables our clients to electronically scrub and submit claims to, and process payments from, insurance companies; |
| |
|
○ |
Business intelligence,
customized applications, interfaces and a variety of other technology solutions that support our healthcare clients; |
| |
|
○ |
RCM services, which include
end-to-end medical billing, eligibility, analytics, and related services, all of which can often be provided either with our technology
platform or through a third-party system; and |
| |
|
○ |
Professional services consisting
of application and advisory services, revenue cycle services, data analytic services and educational training services. |
| |
● |
Medical practice
management services are provided to medical practices. In this service model, we provide the medical practice with appropriate facilities,
equipment, supplies, support services, nurses and administrative support staff. We also provide management, bill-paying and financial
advisory services. |
Our
solutions enable clients to increase financial and operational performance, streamline clinical workflows, get better insight through
data, and make better business and clinical decisions, resulting in improvement in patient care and collections while reducing administrative
burdens and operating costs.
The
modernization of the healthcare industry is transforming nearly every aspect of a healthcare organization from policy to providers, clinical
care to member services, devices to data, and ultimately the quality of the patient’s experience as a healthcare consumer. We create
elegant, user-friendly applications that solve many of the challenges facing healthcare organizations. We partner with organizations
to develop customized, best-in-class solutions to solve their specific challenges while ensuring they also meet future regulatory and
organizational requirements and market demands.
We
are able to deliver our industry-leading solutions at very competitive prices because we leverage a combination of our proprietary software,
which automates our workflows and increases efficiency, together with our team of approximately 600 experienced health industry experts
throughout the United States. These experts are supported by our highly educated and specialized offshore workforce of approximately
3,400 team members at labor costs that we believe are approximately one-tenth the cost of comparable U.S. employees. Our unique business
model also allowed us to become a leading consolidator in our industry sector, gaining us a reputation for acquiring and positively transforming
distressed competitors into profitable operations of CareCloud.
Adoption
of our technology-enabled business solutions typically requires little or no upfront expenditure by a client. Additionally, for most
of our solutions and customers, our financial performance is linked directly to the financial performance of our clients, as the vast
majority of our revenues are based on a percentage of our clients’ collections. The fees we charge for our complete, integrated,
end-to-end solution are very competitive and among the lowest in the industry. We estimate that we currently provide services to approximately
40,000 providers, (which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff that render
bills for their services) practicing in approximately 2,600 independent medical practices and hospitals representing
80 specialties and subspecialties in 50 states. In addition, we serve approximately 200 clients that are not medical practices, but are
primarily service organizations who serve the healthcare community. The foregoing numbers include clients leveraging any of our products
or services, and are based, in part, upon estimates where the precise number of practices or providers is unknown.
We
service clients ranging from small practices, consisting of one to ten providers, to large practices with over 2,300 providers operating
in multiple states, to community hospitals.
On
January 8, 2020, through a merger with a subsidiary, the Company acquired CareCloud Corporation, a Delaware corporation which was subsequently
renamed CareCloud Health, Inc. (“CCH”), which has developed a highly acclaimed cloud-based platform including EHR, PM and
patient experience capabilities. The Company paid $11.9 million in cash, assumed a working capital deficiency of approximately $5.1 million
and issued 760,000 shares of the Company’s Series A Preferred Stock and two million warrants for the purchase of the Company’s
common stock at prices of $7.50 for two years and $10.00 per share for three years.
On
June 16, 2020, the Company purchased all of the issued and outstanding capital stock of Meridian Billing Management Co. and its affiliate
Origin Holdings, Inc. (collectively, “Meridian,” and sometimes referred to as “Meridian Medical Management”),
a former GE Healthcare IT company that delivers advanced healthcare information technology solutions and services. The Company paid $11.9
million in cash, issued 200,000 shares of the Company’s Series A Preferred Stock and warrants to purchase 2,250,000 of the Company’s
common stock with an exercise price per share of $7.50 for two years and assumed Meridian’s negative working capital and certain
long-term lease liabilities where the space is either not being utilized or will be vacated shortly, with an aggregate value of approximately
$4.8 million.
On
June 1, 2021, CareCloud Acquisition Corp (“CAC”), a wholly-owned subsidiary, entered into an Asset and Stock Purchase Agreement
(the “Purchase Agreement”) with MedMatica Consulting Associates, Inc., (“MedMatica”) whereby CAC purchased the
assets of MedMatica and the stock of its wholly-owned subsidiary Santa Rosa Staffing, Inc. (“SRS”). MedMatica and SRS provide
a broad range of specialty consulting services to hospitals and large healthcare groups, including certain consulting services related
to healthcare IT applications services and implementations, practice management, and revenue cycle management. The total consideration
paid at closing was $10 million in cash, net of $1.5 million of escrow withheld. A working capital adjustment of approximately $3.8 million
was also paid at closing. The Purchase Agreement provides that if during the 18-month period commencing on June 1, 2021 (“the “Earn-Out
Period”), CAC’s EBITDA and revenue targets are achieved, then CAC shall pay an earn-out up to a maximum of $8 million (the
“Base Earn-Out”). If during the Earn-Out Period, CAC’s additional and increased EBITDA and revenue targets are achieved,
then CAC shall pay an additional earn-out, up to a maximum of $5 million (the “Additional Earn-Out”, collectively, with the
Base Earn-Out, the “Earn-Out”). CAC will have the right to offset the Earn-Out against any claim for which CAC is entitled
to indemnification under the Purchase Agreement and against damages for breaches by the seller of the non-competition and non-solicitation
provisions in the Purchase Agreement.
Our
offshore operations in the Pakistan Offices and Sri Lanka accounted for approximately 11% of total expenses for both the six months ended
June 30, 2022 and 2021. A significant portion of those foreign expenses were personnel-related costs (approximately 80% for both the
six months ended June 30, 2022 and 2021). Because personnel-related costs are significantly lower in Pakistan and Sri Lanka than in the
U.S. and many other offshore locations, we believe our offshore operations give us a competitive advantage over many industry participants.
We are able to achieve significant cost reductions and leverage technology to reduce manual work and strategically transition a portion
of the remaining manual tasks to our highly-specialized, cost-efficient team in the U.S., the Pakistan Offices and Sri Lanka.
Key
Performance Measures
We
consider numerous factors in assessing our performance. Key performance measures used by management, including adjusted EBITDA, adjusted
operating income, adjusted operating margin, adjusted net income and adjusted net income per share, are non-GAAP financial measures,
which we believe better enable management and investors to analyze and compare the underlying business results from period to period.
These
non-GAAP financial measures should not be considered in isolation, or as a substitute for or superior to, financial measures calculated
in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Moreover, these non-GAAP
financial measures have limitations in that they do not reflect all the items associated with the operations of our business as determined
in accordance with GAAP. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP
basis, and we provide reconciliations from the most directly comparable GAAP financial measures to the non-GAAP financial measures. Our
non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies
in our industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those
measures for comparative purposes.
Adjusted
EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share provide an alternative
view of performance used by management and we believe that an investor’s understanding of our performance is enhanced by disclosing
these adjusted performance measures.
Adjusted
EBITDA excludes the following elements which are included in GAAP net income (loss):
| |
● |
Income tax
expense (benefit) or the cash requirements to pay our taxes; |
| |
● |
Interest expense, or the
cash requirements necessary to service interest on principal payments, on our debt; |
| |
● |
Foreign currency gains
and losses and other non-operating expenditures; |
| |
● |
Stock-based compensation
expense includes cash-settled awards and the related taxes, based on changes in the stock price; |
| |
● |
Depreciation and amortization
charges; |
| |
● |
Integration costs, such
as severance amounts paid to employees from acquired businesses, and transaction costs, such as brokerage fees, pre-acquisition accounting
costs and legal fees and exit costs related to contractual agreements; |
| |
● |
Net loss on lease termination,
impairment and unoccupied lease charges; and |
| |
● |
Change in contingent consideration. |
Set
forth below is a presentation of our adjusted EBITDA for the three and six months ended June 30, 2022 and 2021:
| | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands) | |
| Net revenue | |
$ | 37,228 | | |
$ | 34,065 | | |
$ | 72,569 | | |
$ | 63,834 | |
| | |
| | | |
| | | |
| | | |
| | |
| GAAP net income (loss) | |
| 2,737 | | |
| (227 | ) | |
| 3,877 | | |
| (2,191 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Provision for income taxes | |
| 25 | | |
| 213 | | |
| 89 | | |
| 212 | |
| Net interest expense | |
| 104 | | |
| 113 | | |
| 199 | | |
| 177 | |
| Foreign exchange (gain) loss / other expense | |
| (108 | ) | |
| (146 | ) | |
| (164 | ) | |
| 97 | |
| Stock-based compensation expense | |
| 1,184 | | |
| 1,735 | | |
| 2,071 | | |
| 3,002 | |
| Depreciation and amortization | |
| 2,936 | | |
| 3,128 | | |
| 5,876 | | |
| 5,959 | |
| Transaction and integration costs | |
| 306 | | |
| 617 | | |
| 408 | | |
| 849 | |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 463 | | |
| 223 | | |
| 621 | | |
| 1,241 | |
| Change in contingent consideration | |
| (630 | ) | |
| - | | |
| (1,230 | ) | |
| - | |
| Adjusted EBITDA | |
$ | 7,017 | | |
$ | 5,656 | | |
$ | 11,747 | | |
$ | 9,346 | |
Adjusted
operating income and adjusted operating margin exclude the following elements that are included in GAAP operating income (loss):
| |
● |
Stock-based
compensation expense includes cash-settled awards and the related taxes, based on changes in the stock price; |
| |
● |
Amortization of purchased
intangible assets; |
| |
● |
Integration costs, such
as severance amounts paid to employees from acquired businesses, and transaction costs, such as brokerage fees, pre-acquisition accounting
costs and legal fees and exit costs related to contractual agreements; |
| |
● |
Net loss on lease termination,
impairment and unoccupied lease charges; and |
| |
● |
Change in contingent consideration. |
Set
forth below is a presentation of our adjusted operating income and adjusted operating margin, which represents adjusted operating income
as a percentage of net revenue, for the three and six months ended June 30, 2022 and 2021:
| | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands) | |
| Net revenue | |
$ | 37,228 | | |
$ | 34,065 | | |
$ | 72,569 | | |
$ | 63,834 | |
| | |
| | | |
| | | |
| | | |
| | |
| GAAP net income (loss) | |
| 2,737 | | |
| (227 | ) | |
| 3,877 | | |
| (2,191 | ) |
| Provision for income taxes | |
| 25 | | |
| 213 | | |
| 89 | | |
| 212 | |
| Net interest expense | |
| 104 | | |
| 113 | | |
| 199 | | |
| 177 | |
| Other (income) expense - net | |
| (112 | ) | |
| (205 | ) | |
| (195 | ) | |
| 15 | |
| GAAP operating income (loss) | |
| 2,754 | | |
| (106 | ) | |
| 3,970 | | |
| (1,787 | ) |
| GAAP operating margin | |
| 7.4 | % | |
| (0.3 | )% | |
| 5.5 | % | |
| (2.8 | )% |
| | |
| | | |
| | | |
| | | |
| | |
| Stock-based compensation expense | |
| 1,184 | | |
| 1,735 | | |
| 2,071 | | |
| 3,002 | |
| Amortization of purchased intangible assets | |
| 1,651 | | |
| 2,175 | | |
| 3,456 | | |
| 4,311 | |
| Transaction and integration costs | |
| 306 | | |
| 617 | | |
| 408 | | |
| 849 | |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 463 | | |
| 223 | | |
| 621 | | |
| 1,241 | |
| Change in contingent consideration | |
| (630 | ) | |
| - | | |
| (1,230 | ) | |
| - | |
| Non-GAAP adjusted operating income | |
$ | 5,728 | | |
$ | 4,644 | | |
$ | 9,296 | | |
$ | 7,616 | |
| Non-GAAP adjusted operating margin | |
| 15.4 | % | |
| 13.6 | % | |
| 12.8 | % | |
| 11.9 | % |
Adjusted
net income and adjusted net income per share exclude the following elements which are included in GAAP net income (loss):
| |
● |
Foreign currency
gains and losses and other non-operating expenditures; |
| |
● |
Stock-based compensation
expense includes cash-settled awards and the related taxes, based on changes in the stock price; |
| |
● |
Amortization of purchased
intangible assets; |
| |
● |
Integration costs, such
as severance amounts paid to employees from acquired businesses, and transaction costs, such as brokerage fees, pre-acquisition accounting
costs and legal fees and exit costs related to contractual agreements; |
| |
● |
Net loss on lease termination,
impairment and unoccupied lease charges; |
| |
● |
Change in contingent consideration;
and |
| |
● |
Income tax expense (benefit)
resulting from the amortization of goodwill related to our acquisitions. |
No
tax effect has been provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per share as the Company has
sufficient carry forward net operating losses to offset the applicable income taxes. The
following table shows our reconciliation of GAAP net loss to non-GAAP adjusted net income for the three and six months ended June 30,
2022 and 2021:
| | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
($ in thousands) | |
| GAAP net income (loss) | |
$ | 2,737 | | |
$ | (227 | ) | |
$ | 3,877 | | |
$ | (2,191 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Foreign exchange (gain) loss / other expense | |
| (108 | ) | |
| (146 | ) | |
| (164 | ) | |
| 97 | |
| Stock-based compensation expense | |
| 1,184 | | |
| 1,735 | | |
| 2,071 | | |
| 3,002 | |
| Amortization of purchased intangible assets | |
| 1,651 | | |
| 2,175 | | |
| 3,456 | | |
| 4,311 | |
| Transaction and integration costs | |
| 306 | | |
| 617 | | |
| 408 | | |
| 849 | |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 463 | | |
| 223 | | |
| 621 | | |
| 1,241 | |
| Change in contingent consideration | |
| (630 | ) | |
| - | | |
| (1,230 | ) | |
| - | |
| Income tax (benefit) expense related to goodwill | |
| (9 | ) | |
| 163 | | |
| 27 | | |
| 127 | |
| Non-GAAP adjusted net income | |
$ | 5,594 | | |
$ | 4,540 | | |
$ | 9,066 | | |
$ | 7,436 | |
Set
forth below is a reconciliation of our GAAP net loss attributable to common shareholders, per share to our non-GAAP adjusted net income
per share:
| | |
Three
Months Ended June 30, | | |
Six
Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| GAAP
net loss attributable to common shareholders, per share | |
$ | (0.07 | ) | |
$ | (0.27 | ) | |
$ | (0.26 | ) | |
$ | (0.63 | ) |
| Impact
of preferred stock dividend | |
| 0.25 | | |
| 0.25 | | |
| 0.52 | | |
| 0.48 | |
| Net
income (loss) per end-of-period share | |
| 0.18 | | |
| (0.02 | ) | |
| 0.26 | | |
| (0.15 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Foreign
exchange (gain) loss / other expense | |
| (0.01 | ) | |
| (0.01 | ) | |
| (0.01 | ) | |
| 0.01 | |
| Stock-based
compensation expense | |
| 0.08 | | |
| 0.12 | | |
| 0.14 | | |
| 0.21 | |
| Amortization
of purchased intangible assets | |
| 0.11 | | |
| 0.15 | | |
| 0.22 | | |
| 0.30 | |
| Transaction
and integration costs | |
| 0.02 | | |
| 0.04 | | |
| 0.03 | | |
| 0.06 | |
| Net
loss on lease termination, impairment and unoccupied lease charges | |
| 0.03 | | |
| 0.02 | | |
| 0.04 | | |
| 0.07 | |
| Change
in contingent consideration | |
| (0.04 | ) | |
| 0.00 | | |
| (0.08 | ) | |
| 0.00 | |
| Income
tax expense related to goodwill | |
| 0.00 | | |
| 0.01 | | |
| 0.00 | | |
| 0.01 | |
| Non-GAAP
adjusted earnings per share | |
$ | 0.37 | | |
$ | 0.31 | | |
$ | 0.60 | | |
$ | 0.51 | |
| | |
| | | |
| | | |
| | | |
| | |
| End-of-period
common shares | |
| 15,078,460 | | |
| 14,611,606 | | |
| 15,078,460 | | |
| 14,611,606 | |
| In-the-money
warrants and outstanding unvested RSUs | |
| 433,251 | | |
| 2,628,747 | | |
| 433,251 | | |
| 2,628,747 | |
| Total
fully diluted shares | |
| 15,511,711 | | |
| 17,240,353 | | |
| 15,511,711 | | |
| 17,240,353 | |
| Non-GAAP
adjusted diluted earnings per share | |
$ | 0.36 | | |
$ | 0.26 | | |
$ | 0.58 | | |
$ | 0.43 | |
For
purposes of determining non-GAAP adjusted earnings per share, the Company used the number of common shares outstanding at the end of
June 30, 2022 and 2021. Non-GAAP adjusted diluted earnings per share was computed using an as-converted method and includes warrants
that are in-the-money as of that date as well as outstanding unvested RSUs. Non-GAAP adjusted earnings per share and non-GAAP adjusted
diluted earnings per share do not take into account dividends paid on Preferred Stock. No tax effect has been provided in computing non-GAAP
adjusted earnings per share and non-GAAP adjusted diluted earnings per share as the Company has sufficient carry forward net operating
losses to offset the applicable income taxes.
Key
Metrics
In
addition to the line items in our consolidated financial statements, we regularly review the following metrics. We believe information
on these metrics is useful for investors to understand the underlying trends in our business.
Providers
and Practices Served: As of both June 30, 2022 and 2021, we provided services to an estimated universe of approximately 40,000 providers
(which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff that render bills for their
services), representing approximately 2,600 independent medical practices and hospitals. In addition, we served approximately 200 clients
who were not medical practices, but are service organizations who serve the healthcare community. The foregoing numbers include clients
leveraging any of our products or services and are based in part upon estimates in cases where the precise number of practices or providers
is unknown.
Sources
of Revenue
Revenue:
We primarily derive our revenues from subscription-based technology-enabled business solutions, reported in our Healthcare IT segment,
which are typically billed as a percentage of payments collected by our customers. This fee includes RCM, as well as the ability to use
our EHR, practice management system and other software as part of the bundled fee. These solutions accounted for approximately 63% and
80% of our revenues during the three months ended June 30, 2022 and 2021, respectively, and 65% and 83% for the six months ended June
30, 2022 and 2021, respectively. Other healthcare IT services, including printing and mailing operations, group purchasing and professional
services, represented approximately 28% and 12% of revenues for the three months ended June 30, 2022 and 2021, respectively, and 26%
and 8% for the six months ended June 30, 2022 and 2021, respectively.
We
earned approximately 9% of our revenue from medical practice management services during both the three months ended June 30, 2022 and
2021, and 9% for both the six months ended June 30, 2022 and 2021. This revenue represents fees based on our actual costs plus a percentage
of the operating profit and is reported in our Medical Practice Management segment.
Operating
Expenses
Direct
Operating Costs. Direct operating cost consists primarily of salaries and benefits related to personnel who provide services to our
customers, claims processing costs, costs to operate the three managed practices, including facility lease costs, supplies, insurance
and other direct costs related to our services. Costs associated with the implementation of new customers are expensed as incurred. The
reported amounts of direct operating costs do not include depreciation and amortization, which are broken out separately in the consolidated
statements of operations.
Selling
and Marketing Expense. Selling and marketing expense consists primarily of compensation and benefits, commissions, travel and advertising
expenses.
General
and Administrative Expense. General and administrative expense consists primarily of personnel-related expense for administrative
employees, including compensation, benefits, travel, facility lease costs and insurance, software license fees and outside professional
fees.
Research
and Development Expense. Research and development expense consists primarily of personnel-related costs, software expense and third-party
contractor costs.
Contingent
Consideration. Contingent consideration represents the portion of consideration payable to the sellers of some of our acquisitions,
the amount of which is based on the achievement of defined performance measures contained in the purchase agreements. Contingent consideration
is adjusted to fair value at the end of each reporting period.
Depreciation
and Amortization Expense. Depreciation expense is charged using the straight-line method over the estimated lives of the assets ranging
from three to five years. Amortization expense is charged on either an accelerated or on a straight-line basis over a period of three
or four years for most intangible assets acquired in connection with acquisitions including those intangibles related to the group purchasing
services. Amortization expense related to the value of our medical practice management clients is amortized on a straight-line basis
over a period of twelve years.
Net
loss on lease termination, Impairment and Unoccupied Lease Charges. Net loss on lease termination represents the write-off of leasehold
improvements and gains or losses as the result of lease terminations. Impairment charges represent charges recorded for a leased facility
no longer being used by the Company and a non-cancellable vendor contract where the services are no longer being used. Unoccupied lease
charges represent the portion of lease and related costs for vacant space not being utilized by the Company.
Interest
and Other Income (Expense). Interest expense consists primarily of interest costs related to our line of credit, term loans and amounts
due in connection with acquisitions, offset by interest income. Other income (expense) results primarily from foreign currency transaction
gains (losses) and income earned from temporary cash investments.
Income
Tax. In preparing our consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate.
This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment
of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities. Although the
Company is forecasting a return to profitability, it incurred losses historically and there is uncertainty regarding future U.S. taxable
income, which makes realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance
has been recorded against all deferred tax assets as of June 30, 2022 and December 31, 2021.
Critical
Accounting Policies and Estimates
The
critical accounting policies and estimates used in the preparation of our consolidated financial statements that we believe affect our
more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this Report are
described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the consolidated
financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Leases:
We
determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, operating lease liability (current portion) and operating lease liability (noncurrent portion) in the consolidated balance sheets
at June 30, 2022 and December 31, 2021. 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. We give consideration to bank financing arrangements, geographical location and collateralization
of assets when calculating our incremental borrowing rates.
Our
lease term includes 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 consolidated balance sheet. Our lease agreements do not contain any residual value guarantees.
For real estate leases, we account for the leased and non-leased components as a single lease component. Some leases include escalation
clauses and termination options that are factored into the determination of the future lease payments when appropriate.
Capitalized
Software Costs:
All
of our software is considered internal use for accounting purposes, as we do not market or sell our software. As a result, we capitalize
certain costs associated with the creation of internally-developed software for internal use. The total of these costs is recorded in
Intangible assets – net in our consolidated balance sheets.
We
capitalized costs incurred during the application development stage related to our internal use software. Costs incurred during the application
development phase are capitalized only when we believe it is probable that the development will result in new or additional functionality.
The types of costs capitalized during the application development phase consist of employee compensation, employee benefits and employee
stock- based compensation. Costs related to the preliminary project stage and post-implementation activities are expensed as incurred.
Capitalized internal-use software is amortized on a straight-line basis over its estimated useful life when the asset has been placed
in service for general availability.
Significant
judgments related to internally-developed software include determining whether it is probable that projects will result in new or additional
functionality; concluding on when the application development phase starts and ends; and deciding which costs, especially employee compensation
costs, should be capitalized. Additionally, there is judgment applied to the useful lives of capitalized software; we have concluded
that the useful lives for capitalized internally-developed software is three years.
Company
management employs its best estimates and assumptions in determining the appropriateness of the judgments noted above on a project-by-project
basis during initial capitalization as well as subsequent measurement. While we believe that our approach to estimates and judgments
is reasonable, actual results could differ, and such differences could lead to an increase or decrease in expense.
As
of June 30, 2022 and December 31, 2021, the carrying amounts of internally-developed capitalized software in use was $14.5 million and
$11.6 million, respectively. The increase in the capitalized software costs represents the continued investment in proprietary technology.
There
have been no material changes in our critical accounting policies and estimates from those described in the Management’s Discussion
and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December
31, 2021, filed with the SEC on March 14, 2022.
Results
of Operations
The
following table sets forth our consolidated results of operations as a percentage of total revenue for the periods shown:
| | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Net revenue | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
| Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| Direct operating costs | |
| 58.5 | % | |
| 60.3 | % | |
| 61.3 | % | |
| 60.5 | % |
| Selling and marketing | |
| 6.5 | % | |
| 6.5 | % | |
| 6.6 | % | |
| 6.4 | % |
| General and administrative | |
| 17.2 | % | |
| 18.4 | % | |
| 16.5 | % | |
| 18.6 | % |
| Research and development | |
| 2.9 | % | |
| 5.3 | % | |
| 2.9 | % | |
| 6.0 | % |
| Change in contingent consideration | |
| (1.7 | )% | |
| 0.0 | % | |
| (1.7 | )% | |
| 0.0 | % |
| Depreciation and amortization | |
| 7.9 | % | |
| 9.2 | % | |
| 8.1 | % | |
| 9.3 | % |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 1.2 | % | |
| 0.7 | % | |
| 0.9 | % | |
| 1.9 | % |
| Total operating expenses | |
| 92.5 | % | |
| 100.4 | % | |
| 94.6 | % | |
| 102.7 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Operating income (loss) | |
| 7.5 | % | |
| (0.4 | )% | |
| 5.4 | % | |
| (2.7 | )% |
| | |
| | | |
| | | |
| | | |
| | |
| Interest expense - net | |
| 0.3 | % | |
| 0.3 | % | |
| 0.3 | % | |
| 0.3 | % |
| Other income (expense) - net | |
| 0.3 | % | |
| 0.6 | % | |
| 0.3 | % | |
| 0.0 | % |
| Income (loss) before income taxes | |
| 7.5 | % | |
| (0.1 | )% | |
| 5.4 | % | |
| (3.0 | )% |
| Income tax provision | |
| 0.1 | % | |
| 0.6 | % | |
| 0.1 | % | |
| 0.3 | % |
| Net income (loss) | |
| 7.4 | % | |
| (0.7 | )% | |
| 5.3 | % | |
| (3.3 | )% |
Comparison
of the three and six months ended June 30, 2022 and 2021:
| | |
Three Months Ended
June 30, | | |
Change | | |
Six Months Ended
June 30, | | |
Change | |
| | |
2022 | | |
2021 | | |
Amount | | |
Percent | | |
2022 | | |
2021 | | |
Amount | | |
Percent | |
| | |
($ in thousands) | |
| Net revenue | |
$ | 37,228 | | |
$ | 34,065 | | |
$ | 3,163 | | |
| 9 | % | |
$ | 72,569 | | |
$ | 63,834 | | |
$ | 8,735 | | |
| 14 | % |
Net
Revenue. Net revenue of $37.2 million and $72.6 million for the three and six months ended June 30, 2022, respectively, increased
by $3.2 million or 9% and $8.7 million or 14% from net revenue of $34.1 million and $63.8 million for the three and six months ended
June 30, 2021. Revenue for the three and six months ended June 30, 2022 includes approximately $8.6 million and $15.8 million from customers
acquired in the medSR acquisition, offset primarily by a decrease in revenue from three large accounts from a 2020 acquisition that are
winding down. Revenue for the three and six months ended June 30, 2022 includes $23.6 million and $46.8 million relating to technology-enabled
business solutions, $9.8 million and $18.1 million related to professional services and $3.2 million and $6.4 million for medical practice
management services.
| | |
Three Months
Ended June 30, | | |
Change | | |
Six Months
Ended June 30, | | |
Change | |
| | |
2022 | | |
2021 | | |
Amount | | |
Percent | | |
2022 | | |
2021 | | |
Amount | | |
Percent | |
| | |
($ in thousands) | |
| Direct operating costs | |
$ | 21,787 | | |
$ | 20,534 | | |
$ | 1,253 | | |
| 6 | % | |
$ | 44,460 | | |
$ | 38,595 | | |
$ | 5,865 | | |
| 15 | % |
| Selling and marketing | |
| 2,426 | | |
| 2,204 | | |
| 222 | | |
| 10 | % | |
| 4,810 | | |
| 4,094 | | |
| 716 | | |
| 17 | % |
| General and administrative | |
| 6,394 | | |
| 6,269 | | |
| 125 | | |
| 2 | % | |
| 11,979 | | |
| 11,893 | | |
| 86 | | |
| 1 | % |
| Research and development | |
| 1,098 | | |
| 1,813 | | |
| (715 | ) | |
| (39 | %) | |
| 2,083 | | |
| 3,839 | | |
| (1,756 | ) | |
| (46 | %) |
| Change in contingent consideration | |
| (630 | ) | |
| - | | |
| (630 | ) | |
| N/A | | |
| (1,230 | ) | |
| - | | |
| (1,230 | ) | |
| N/A | |
| Depreciation | |
| 482 | | |
| 533 | | |
| (51 | ) | |
| (10 | %) | |
| 931 | | |
| 994 | | |
| (63 | ) | |
| (6 | %) |
| Amortization | |
| 2,454 | | |
| 2,595 | | |
| (141 | ) | |
| (5 | %) | |
| 4,945 | | |
| 4,965 | | |
| (20 | ) | |
| 0 | % |
| Net loss on lease termination, impairment and unoccupied lease charges | |
| 463 | | |
| 223 | | |
| 240 | | |
| 108 | % | |
| 621 | | |
| 1,241 | | |
| (620 | ) | |
| (50 | %) |
| Total operating expenses | |
$ | 34,474 | | |
$ | 34,171 | | |
$ | 303 | | |
| 1 | % | |
$ | 68,599 | | |
$ | 65,621 | | |
$ | 2,978 | | |
| 5 | % |
Direct
Operating Costs. Direct operating costs of $21.8 million and $44.5 million for the three and six months ended June 30, 2022 increased
by $1.3 million or 6% and $5.9 million or 15% compared to direct operating costs of $20.5 million and $38.6 million for the three and
six months ended June 30, 2021. During the three and six months ended June 30, 2022, salary costs increased by $509,000 and $2.4 million,
and outsourcing and processing costs increased by $1.0 million and $3.4 million, respectively. The increase in these costs for the three
and six months ended June 30, 2022 were primarily related to the medSR acquisition.
Selling
and Marketing Expense. Selling and marketing expense of $2.4 million and $4.8 million for the three and six months ended June 30,
2022 increased by $222,000 or 10% and $716,000 or 17% from selling and marketing expense of $2.2 million and $4.1 million for the three
and six months ended June 30, 2021. The increase was primarily related to additional emphasis on sales and marketing activities.
General
and Administrative Expense. General and administrative expense of $6.4 million and $12.0 million for the three and six months ended
June 30, 2022 increased by $125,000 or 2% and $86,000 or 1% compared to three and six months ended June 30, 2021. The increase in general
and administrative expense was primarily related to an increase in salaries and wages due to the medSR acquisition.
Research
and Development Expense. Research and development expense of $1.1 million and $2.1 million for the three and six months ended June
30, 2022 decreased by approximately $715,000 and $1.8 million from research and development expense of $1.8 million and $3.8 million
for the three and six months ended June 30, 2021. The decrease represents less maintenance work on platforms generating revenue and more
resources dedicated to development of new technology which is not yet in commercial use. During the six months ended June 30, 2022 and
2021, the Company capitalized approximately $4.7 million and $3.3 million, respectively, of development costs in connection with its
internal-use software. For the three months ended June 30, 2022 and 2021, the Company capitalized approximately $2.3 million and $1.7
million, respectively, of such costs.
Change
in Contingent Consideration. The change of $630,000 and $1.2 million for the three and six months ended June 30, 2022 reflects the
estimated decrease in the fair value of the contingent consideration from the medSR acquisition.
Depreciation.
Depreciation of $482,000 and $931,000 for the three and six months ended June 30, 2022, respectively, decreased by $51,000 or 10%
and $63,000 or 6% from the depreciation of $533,000 and $994,000 for the three and six months ended June 30, 2021, respectively.
Amortization
Expense. Amortization expense of $2.5 million and $4.9 million for the three and six months ended June 30, 2022, respectively, decreased
by $141,000 or 5% and $20,000 from amortization expense of $2.6 million and $5.0 million for the three and six months ended June 30,
2021, respectively. The decrease was primarily related to the amortization of software which was previously capitalized and now placed
into use.
Net
Loss on Lease Termination, Impairment and Unoccupied Lease Charges. Net loss on lease termination represents the write-off of leasehold
improvements and gains or losses as the result of lease terminations. During the three months ended June 30, 2022, a facility lease was
terminated in conjunction with the Company ceasing its document storage services resulting in additional costs of approximately $197,000.
Impairment charges represent charges recorded for a leased facility no longer being used by the Company and a non-cancellable vendor
contract where the services are no longer being used. Unoccupied lease charges represent the portion of lease and related costs for that
portion of the space that is vacant and not being utilized by the Company. The Company was able to turn back to the landlord one of the
unused facilities effective January 1, 2022.
| | |
Three Months
Ended June 30, | | |
Change | | |
Six Months
Ended June 30, | | |
Change | |
| | |
2022 | | |
2021 | | |
Amount | | |
Percent | | |
2022 | | |
2021 | | |
Amount | | |
Percent | |
| | |
($ in thousands) | |
| Interest income | |
$ | 3 | | |
$ | 2 | | |
$ | 1 | | |
| 50 | % | |
$ | 8 | | |
$ | 6 | | |
$ | 2 | | |
| 33 | % |
| Interest expense | |
| (107 | ) | |
| (115 | ) | |
| 8 | | |
| 7 | % | |
| (207 | ) | |
| (183 | ) | |
| (24 | ) | |
| (13 | %) |
| Other income (expense) - net | |
| 112 | | |
| 205 | | |
| (93 | ) | |
| (45 | %) | |
| 195 | | |
| (15 | ) | |
| 210 | | |
| 1,400 | % |
| Income tax provision | |
| 25 | | |
| 213 | | |
| 188 | | |
| 88 | % | |
| 89 | | |
| 212 | | |
| 123 | | |
| 58 | % |
Interest
Income. Interest income of $3,000 and $8,000 for the three and six months ended June 30, 2022 increased by $1,000 or 50% and $2,000
or 33% from interest income of $2,000 and $6,000 for the three and six months ended June 30, 2021. The interest income represents interest
earned on temporary cash investments.
Interest
Expense. Interest expense of $107,000 and $207,000 for the three and six months ended June 30, 2022 decreased by $8,000 or 7% and
increased by $24,000 or 13% from interest expense of $115,000 and $183,000 for the three and six months ended June 30, 2021. Interest
expense includes the amortization of deferred financing costs, which was $61,000 and $71,000 during the six months ended June 30, 2022
and 2021, respectively.
Other
Income (Expense) – net. Other income – net was $112,000 and $195,000 for the three and six months ended June 30, 2022
compared to other income (expense) – net of $205,000 and ($15,000) for the three and six months ended June 30, 2021. Other income
(expense) primarily represents foreign currency transaction gains and losses. These transaction gains and losses result from revaluing
intercompany accounts whenever the exchange rate varies and are recorded in the consolidated statements of operations.
Income
Tax Provision. The provision for income taxes was $25,000 and $89,000 for the three and six months ended June 30, 2022 compared to
$213,000 and $212,000 for the three and six months ended June 30, 2021. As a result of the Company having certain net operating losses
with an indefinite life under the current federal tax rules, the federal deferred tax liability was offset against the federal net operating
loss to the extent allowable in 2022 and 2021. During the quarter ended June 30, 2022, it was determined that for the states that follow
the federal rules regarding indefinite life net operating losses, the offset to the state deferred tax liability was $45,000. This amount
was recorded during the current quarter. The current income tax expense for the three and six months ended June 30, 2022 was approximately
$34,000 and $62,000 and includes state minimum taxes and foreign income taxes. The Company has incurred cumulative losses historically
and there is uncertainty regarding future U.S. taxable income, which makes realization of a deferred tax losses difficult to support
in accordance with ASC 740. Accordingly, a valuation allowance was recorded against all deferred tax assets at June 30, 2022 and December
31, 2021.
Liquidity
and Capital Resources
During
the three and six months ended June 30, 2022, there was positive cash flow from operations of $5.0 million and $8.1 million and at June
30, 2022, the Company had $10.2 million in cash and restricted cash and positive working capital of $11.4 million. The Company has a
revolving line of credit with SVB, and, as of June 30, 2022, there was a $7 million balance outstanding which was repaid in July 2022.
During the six months ended June 30, 2022, the Company sold 1,210,248 shares of 8.75% Series B Preferred Stock and raised $27.9 million
in net proceeds after fees and expenses.
The
following table summarizes our cash flows for the periods presented:
| | |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | | |
Change | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | | |
Amount | | |
Percent | |
| | |
($ in thousands) | | |
| |
| Net cash provided by operating activities | |
$ | 5,039 | | |
$ | 1,123 | | |
$ | 8,126 | | |
$ | 2,081 | | |
$ | 6,045 | | |
| 290 | % |
| Net cash used in investing activities | |
| (2,830 | ) | |
| (14,780 | ) | |
| (5,627 | ) | |
| (16,999 | ) | |
| 11,372 | | |
| 67 | % |
| Net cash (used in) provided by financing activities | |
| (1,755 | ) | |
| 2,434 | | |
| (2,097 | ) | |
| 3,591 | | |
| (5,688 | ) | |
| (158 | %) |
| Effect of exchange rate changes on cash | |
| (370 | ) | |
| (270 | ) | |
| (522 | ) | |
| (96 | ) | |
| (426 | ) | |
| (444 | %) |
| Net increase (decrease) in cash and restricted cash | |
$ | 84 | | |
$ | (11,493 | ) | |
$ | (120 | ) | |
$ | (11,423 | ) | |
$ | 11,303 | | |
| 99 | % |
Income
before income taxes was $2.8 million and $4.0 million for the three and six months ended June 30, 2022, which included $2.9 million and
$5.9 million of non-cash depreciation and amortization, respectively. The loss before income taxes for the three and six months ended
June 30, 2021 was $14,000 and $2.0 million, which included $3.1 million and $6.0 million of non-cash depreciation and amortization, respectively.
Operating
Activities
Net
cash provided by operating activities was $8.1 million and $2.1 million during the six months ended June 30, 2022 and 2021, respectively.
This increase was primarily the result of the increase in net income of $6.1 million which included the following changes in non-cash
items: decrease in deferred revenue of $387,000, decrease in stock-based compensation of $931,000, and an increase in the change in contingent
consideration of $1.2 million.
Accounts
receivable increased by $2.6 million for the six months ended June 30, 2022 compared with an increase of $1.7 million for the six months
ended June 30, 2021. Accounts payable, accrued compensation and accrued expenses decreased by $2.9 million during the six months ended
June 30, 2022 compared with a decrease of $6.1 million for the six months ended June 30, 2021.
Investing
Activities
Net
cash used in investing activities was $5.6 million and $17.0 million for the six months ended June 30, 2022 and 2021, respectively. In
2021, $12.2 million of the $17.0 million of cash used was used for the acquisition of medSR. Capital expenditures were $973,000 and $1.5
million for the six months ended June 30, 2022 and 2021, respectively. The capital expenditures for the six months ended June 30, 2022
and 2021 primarily represented computer equipment purchased and leasehold improvements for the Pakistan Offices. Software development
costs of $4.7 million and $3.3 million for the six months ended June 30, 2022 and 2021, respectively, were capitalized in connection
with the development of software for providing technology-enabled business solutions.
Financing
Activities
Net
cash used by financing activities was $2.1 million during the six months ended June 30, 2022 and net cash provided by financing activities
was $3.6 million during the six months ended June 30, 2021. The Company received net proceeds from the sale of Series B Preferred Stock
of $27.9 million of which $20.0 million was used to redeem 800,000 shares of Series A Preferred Stock. Cash used in financing activities
during the six months ended June 30, 2022 included $7.7 million of preferred stock dividends, $338,000 of repayments for debt obligations
and $910,000 of tax withholding obligations paid in connection with stock awards issued to employees. Cash used in financing activities
for the six months ended June 30, 2021 included $7.2 million of preferred stock dividends, $391,000 of repayment for debt obligations
and $1.6 million of tax withholding obligations paid in connection with stock awards issued to employees.
Contractual
Obligations and Commitments
We
have contractual obligations under our line of credit. We were in compliance with all SVB covenants as of June 30, 2022. We also maintain
operating leases for property and certain office equipment. For additional information, see Contractual Obligations and Commitments under
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 14, 2022.
Off-Balance
Sheet Arrangements
As
of June 30, 2022, and 2021, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special-purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. During the first quarter of 2020, 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, 2022, talkMD had not yet commenced operations.
