UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark one)

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20172019

 

or

 

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to

 

Commission File Number 001-36529

 

MEDICAL TRANSCRIPTION BILLING, CORP.

MTBC, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 22-3832302

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

7 Clyde Road

Somerset, New Jersey

 

 

08873

(Address of principal executive offices)

(Zip Code)

 

(732) 873-5133

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer[  ]Accelerated filer[  ]
Non-Accelerated filer[  ] (Do not check if a smaller reporting company)Smaller reporting company [X]
 Emerging growth company [X]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act. [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareMTBCNasdaq Global Market
Series A Preferred Stock, par value $0.001 per shareMTBCPNasdaq Global Market

At NovemberAugust 1, 2017,2019, the registrant had 11,530,59112,033,242 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 
 

 

INDEX

 

 Page
  
Forward LookingForward-Looking Statements2
  
PART I. FINANCIAL INFORMATION

   
Item 1.Condensed Consolidated Financial Statements (unaudited)(Unaudited)3
 Condensed Consolidated Balance Sheets at SeptemberJune 30, 20172019 and December 31, 201620183
 Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 201620184
 Condensed Consolidated Statements of Comprehensive Loss for the three and ninesix months ended SeptemberJune 30, 20172019 and 201620185
 Condensed Consolidated StatementStatements of Shareholders’ Equity for the ninethree and six months ended SeptemberJune 30, 20172019 and 20186
 Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172019 and 201620187
 Notes to Condensed Consolidated Financial Statements8
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1824
Item 3.Quantitative and Qualitative Disclosures About Market Risk2934
Item 4.Controls and Procedures2935
   
 PART II. OTHER INFORMATION
   
Item 1.Legal Proceedings3136
Item 1A.Risk Factors3136
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3136
Item 3.Defaults Upon Senior Securities3136
Item 4.Mine Safety Disclosures3136
Item 5.Other Information3136
Item 6.Exhibits32

37

Signatures3238

 

1

 

Forward LookingForward-Looking Statements

 

Certain statements that we make from time to time, including statements contained in this Quarterly Report on Form 10-Q, constitute “forward looking“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements. These statements among other things, relate to our business strategy, goals and expectations concerning our products,anticipated future events, future results of operations prospects, plans and objectives of management. The words “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will” and similar terms and phrases are used toor future financial performance. In some cases, you can identify forward-looking statements in this presentation.by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Our operations involve risks and uncertainties, many of which are outside of our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements reflecting management’s expectations for future financial performance and operating expenditures (including our ability to continue as a going concern, to raise additional capital and to succeed in our future operations), expected growth, profitability and business outlook, increased sales and marketing expenses, and the expected results from the integration of our acquisitions.

 

Forward-looking statements are only current predictions, are uncertain and are subject toinvolve substantial known and unknown risks, uncertainties, and other factors thatwhich may cause our (or our industry’s) actual results, levels of activity performance, or achievementsperformance to be materially different from those anticipatedany future results, levels of activity or performance expressed or implied by suchthese forward-looking statements. These factors include, among other things, the unknown risks and uncertainties that we believe could cause actual results to differ from these forward lookingforward-looking statements as set forth under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 31, 2017.20, 2019. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all of the risks and uncertainties that could have an impact on the forward-looking statements, including without limitation, risks and uncertainties relating to:

 

 ●our ability to manage our growth, including acquiring, partnering with, and effectively integrating recent acquisitions and other acquired businesses into our infrastructure;
●our ability to complyinfrastructure and avoiding legal exposure and liabilities associated with covenants contained in our credit agreement with our senior secured lender, Silicon Valley Bankacquired companies and other future debt facilities;assets;
   
 ●our ability to retain our clients and revenue levels, including effectively migrating and keeping new clients acquired through business acquisitions and maintaining or growing the revenue levels of our new and existing clients;
●our ability to attract and retain key officers and employees, including Mahmud Haq and other personnel critical to growing our business and integrating of our newly acquired businesses;
●our ability to raise capital and obtain and maintain financing on acceptable terms;
●our ability to compete with other companies developing products and selling services competitive with ours, and who may have greater resources and name recognition than we have;
   
 ●our ability to maintain operations in Pakistan and Sri Lanka in a manner that continues to enable us to offer competitively priced products and services;
●our ability to keep and increase market acceptance of our products and services;
   
 ●our ability to keep pace with a rapidly changing healthcare industry;
   
 ●our ability to consistently achieve and maintain compliance with a myriad of federal, state, foreign, local, payor and industry requirements, regulations, rules, laws and laws;
●our ability to protect and enforce intellectual property rights; andcontracts;
   
 ●our ability to maintain and protect the privacy of confidential and protected Company, client and patient information.information;
●our ability to protect and enforce intellectual property rights;
●our ability to attract and retain key officers and employees, and the continued involvement of Mahmud Haq as executive chairman, all of which are critical to our ongoing operations, growing our business and integrating of our newly acquired businesses;
●our ability to comply with covenants contained in our credit agreement with our senior secured lender, Silicon Valley Bank and other future debt facilities;
●our ability to pay our monthly preferred dividends to the holders of our Series A Preferred Stock;
●our ability to compete with other companies developing products and selling services competitive with ours, and who may have greater resources and name recognition than we have; and
●our ability to keep and increase market acceptance of our products and services.

 

Although we believe that the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are reasonable, weWe cannot guarantee future results, levels of activity performance, or achievements.performance. Except as required by law, we are under no duty to update or revise any of such forward-looking statements, whether as a result of new information, future events, or otherwise, after the date of this Quarterly Report on Form 10-Q.

 

You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

All references to “MTBC,” “Medical Transcription Billing, Corp.,” “we,” “us,” “our” or the “Company” mean Medical Transcription Billing, Corp. and its subsidiaries, except where it is made clear that the term means only the parent company.

2

 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

MEDICAL TRANSCRIPTION BILLING, CORP.

MTBC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

  June 30, 2019  December 31, 2018 
  (Unaudited)    
ASSETS        
CURRENT ASSETS:        
Cash $10,583,026  $14,472,483 
Accounts receivable - net of allowance for doubtful accounts of $194,000 and $189,000 at June 30, 2019 and December 31, 2018, respectively  7,518,940   7,331,474 
Contract asset  2,473,671   2,608,631 
Inventory  402,570   444,437 
Current assets - related party  13,200   25,203 
Prepaid expenses and other current assets  843,428   1,191,445 
Total current assets  21,834,835   26,073,673 
Property and equipment - net  2,031,246   1,832,187 
Operating lease right-of-use assets  4,860,780   - 
Intangible assets - net  6,507,149   6,634,003 
Goodwill  12,633,696   12,593,795 
Other assets  412,101   489,703 
TOTAL ASSETS $48,279,807  $47,623,361 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
CURRENT LIABILITIES:        
Accounts payable $2,442,211  $2,438,267 
Accrued compensation  2,181,733   1,731,063 
Accrued expenses  2,031,007   1,589,009 
Deferred rent (current portion)  -   90,657 
Operating lease liability (current portion)  2,077,030   - 
Deferred revenue (current portion)  16,225   25,355 
Accrued liability to related party  663   10,663 
Notes payable (current portion)  152,830   277,776 
Contingent consideration  279,565   526,432 
Dividend payable  1,486,708   1,468,724 
Total current liabilities  10,667,972   8,157,946 
Notes payable  158,874   222,400 
Deferred rent  -   189,366 
Operating lease liability  2,876,232   - 
Deferred revenue  18,360   18,949 
Deferred tax liability  149,166   164,346 
Total liabilities  13,870,604   8,753,007 
COMMITMENTS AND CONTINGENCIES (Note 8)        
SHAREHOLDERS’ EQUITY:        
Preferred stock, $0.001 par value - authorized 7,000,000 and 4,000,000 shares at June 30, 2019 and December 31, 2018, respectively; issued and outstanding 2,162,449 and 2,136,289 shares at June 30, 2019 and December 31, 2018, respectively  2,162   2,136 
Common stock, $0.001 par value - authorized 29,000,000 and 19,000,000 shares at June 30, 2019 and December 31, 2018, respectively; issued 12,769,041 and 12,570,557 shares at June 30, 2019 and December 31, 2018, respectively; outstanding, 12,028,242 and 11,829,758 shares at June 30, 2019 and December 31, 2018, respectively  12,769   12,571 
Additional paid-in capital  62,300,966   65,142,460 
Accumulated deficit  (25,270,408)  (24,203,745)
Accumulated other comprehensive loss  (1,974,286)  (1,421,068)
Less: 740,799 common shares held in treasury, at cost at June 30, 2019 and December 31, 2018  (662,000)  (662,000)
Total shareholders’ equity  34,409,203   38,870,354 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $48,279,807  $47,623,361 

  September 30,  December 31, 
  2017  2016 
  (Unaudited)    
ASSETS      
CURRENT ASSETS:        
Cash $2,789,382  $3,476,880 
Accounts receivable - net of allowance for doubtful accounts of $268,000 and $156,000 at September 30, 2017 and December 31, 2016, respectively  3,535,673   4,330,901 
Current assets - related party  25,203   13,200 
Prepaid expenses and other current assets  758,785   618,501 
Total current assets  7,109,043   8,439,482 
Property and equipment - net  1,424,732   1,588,937 
Intangible assets - net  2,997,211   5,833,706 
Goodwill  12,263,943   12,178,868 
Other assets  152,712   282,713 
TOTAL ASSETS $23,947,641  $28,323,706 
LIABILITIES AND SHAREHOLDERS' EQUITY        
CURRENT LIABILITIES:        
Accounts payable $1,017,774  $1,905,131 
Accrued compensation  848,571   2,009,911 
Accrued expenses  758,357   1,236,609 
Deferred rent (current portion)  79,150   61,437 
Deferred revenue (current portion)  52,145   41,666 
Accrued liability to related party  16,614   16,626 
Borrowings under line of credit  2,000,000   2,000,000 
Current portion of long-term debt  -   2,666,667 
Notes payable - other (current portion)  246,603   5,181,459 
Contingent consideration (current portion)  537,736   535,477 
Dividend payable  638,905   202,579 
Total current liabilities  6,195,855   15,857,562 
Long - term debt, net of discount and debt issuance costs  -   4,033,668 
Notes payable - other  137,550   166,184 
Deferred rent  371,273   433,186 
Deferred revenue  30,001   26,673 
Contingent consideration  131,957   394,072 
Deferred tax liability  510,530   345,530 
Total liabilities  7,377,166   21,256,875 
COMMITMENTS AND CONTINGENCIES (Note 8)        
SHAREHOLDERS' EQUITY:        
Preferred stock, par value $0.001 per share - authorized 2,000,000 shares; issued and outstanding 929,299 and 294,656 shares at September 30, 2017 and December 31, 2016, respectively  929   295 
Common stock, $0.001 par value - authorized 19,000,000 shares; issued 12,271,390 and 10,792,352 shares at September 30, 2017 and December 31, 2016, respectively; outstanding, 11,530,591 and 10,051,553 shares at September 30, 2017 and December 31, 2016, respectively  12,272   10,793 
Additional paid-in capital  40,985,992   26,038,063 
Accumulated deficit  (23,325,897)  (17,944,230)
Accumulated other comprehensive loss  (440,821)  (376,090)
Less: 740,799 common shares held in treasury, at cost at September 30, 2017 and December 31, 2016  (662,000)  (662,000)
Total shareholders' equity  16,570,475   7,066,831 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $23,947,641  $28,323,706 

See notes to condensed consolidated financial statements.

 

3

 

MEDICAL TRANSCRIPTION BILLING, CORP.MTBC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2019  2018  2019  2018 
NET REVENUE $16,749,499  $8,682,937  $31,829,710  $16,990,262 
OPERATING EXPENSES:                
Direct operating costs  11,396,395   4,333,573   21,243,935   8,817,628 
Selling and marketing  382,557   403,057   743,956   708,071 
General and administrative  5,143,754   3,054,205   9,305,830   5,654,939 
Research and development  218,408   248,921   473,064   504,800 
Change in contingent consideration  -   11,030   (64,203)  42,780 
Depreciation and amortization  836,161   559,696   1,592,901   1,150,467 
Total operating expenses  17,977,275   8,610,482   33,295,483   16,878,685 
OPERATING (LOSS) INCOME  (1,227,776)  72,455   (1,465,773)  111,577 
OTHER:                
Interest income  67,497   29,939   145,697   35,224 
Interest expense  (100,562)  (74,167)  (195,958)  (148,248)
Other income - net  545,221   218,589   464,191   369,963 
(LOSS) INCOME BEFORE INCOME TAXES  (715,620)  246,816   (1,051,843)  368,516 
Income tax provision  55,352   51,536   14,820   98,200 
NET (LOSS) INCOME $(770,972) $195,280  $(1,066,663) $270,316 
                 
Preferred stock dividend  1,486,706   1,248,717   2,979,406   2,024,049 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(2,257,678) $(1,053,437) $(4,046,069) $(1,753,733)
                 
Net loss per common share: basic and diluted $(0.19) $(0.09) $(0.34) $(0.15)
Weighted-average common shares used to compute basic and diluted loss per share  12,022,143   11,665,174   11,984,284   11,641,190 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
NET REVENUE $7,513,592  $5,341,002  $23,518,416  $15,663,687 
OPERATING EXPENSES:                
Direct operating costs  4,171,932   2,670,385   13,592,492   7,292,415 
Selling and marketing  228,991   274,796   853,460   838,721 
General and administrative  2,474,139   2,569,399   8,232,613   8,173,272 
Research and development  249,045   174,876   843,294   575,059 
Change in contingent consideration  -   (196,882)  151,423   (607,978)
Depreciation and amortization  664,441   1,118,282   3,637,131   3,536,940 
Restructuring charges  -   -   275,628   - 
Total operating expenses  7,788,548   6,610,856   27,586,041   19,808,429 
OPERATING LOSS  (274,956)  (1,269,854)  (4,067,625)  (4,144,742)
OTHER:                
Interest income  5,446   10,918   13,598   25,310 
Interest expense  (678,103)  (176,527)  (1,242,672)  (486,481)
Other income (expense) - net  32,494   (13,933)  107,364   (40,447)
LOSS BEFORE INCOME TAXES  (915,119)  (1,449,396)  (5,189,335)  (4,646,360)
Income tax provision  65,000   45,309   192,332   126,236 
NET LOSS $(980,119) $(1,494,705) $(5,381,667) $(4,772,596)
                 
Preferred stock dividend  652,697   231,473   1,283,151   549,945 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(1,632,816) $(1,726,178) $(6,664,818) $(5,322,541)
Loss per common share:                
Basic and diluted loss per share $(0.14) $(0.17) $(0.62) $(0.53)
Weighted-average basic and diluted shares outstanding  11,485,811   10,006,121   10,835,142   10,031,212 

See notes to condensed consolidated financial statements.

4

MEDICAL TRANSCRIPTION BILLING, CORP.

MTBC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2019  2018  2019  2018 
NET (LOSS) INCOME $(770,972) $195,280  $(1,066,663) $270,316 
OTHER COMPREHENSIVE LOSS, NET OF TAX                
Foreign currency translation adjustment (a)  (762,563)  (227,258)  (553,218)  (430,404)
COMPREHENSIVE LOSS $(1,533,535) $(31,978) $(1,619,881) $(160,088)

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
NET LOSS $(980,119) $(1,494,705) $(5,381,667) $(4,772,596)
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX                
Foreign currency translation adjustment (a)  (33,880)  1,489   (64,731)  12,305 
COMPREHENSIVE LOSS $(1,013,999) $(1,493,216) $(5,446,398) $(4,760,291)

��

(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 condensed consolidated financial statements.

5

MEDICAL TRANSCRIPTION BILLING, CORP.

MTBC, INC.

CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE NINETHREE AND SIX MONTHS ENDED SEPTEMBERJUNE 30, 20172019 AND JUNE 30, 2018

Preferred Stock  Common Stock  Additional Paid-in  Accumulated  Accumulated Other Comprehensive  Treasury (Common)  Total Shareholders'  Preferred Stock  Common Stock  Additional Paid-in  Accumulated  Accumulated Other Comprehensive  Treasury (Common)  Total Shareholders’ 
Shares Amount  Shares Amount  Capital Deficit  Loss Stock Equity   Shares   Amount   Shares   Amount   Capital  Deficit  Loss  Stock  Equity 
Balance - January 1, 2017  294,656  $295   10,792,352  $10,793  $26,038,063  $(17,944,230) $(376,090) $(662,000) $7,066,831 
Balance- December 31, 2018  2,136,289  $2,136   12,570,557  $12,571  $65,142,460  $(24,203,745) $(1,421,068) $(662,000) $38,870,354 
Net loss  -   -   -   -   -   (5,381,667)  -   -   (5,381,667)  -   -   -   -   -   (295,691)  -   -   (295,691)
Foreign currency translation adjustment  -   -   -   -   -   -   (64,731)  -   (64,731)  -   -   -   -   -   -   209,345   -   209,345 
Issuance of stock under the Amended and Restated Equity Incentive Plan  24,750   25   266,663   267   (267)  -   -   -   25   26,160   26   179,984   180   (206)  -   -   -   - 
Stock-based compensation, net of cash settlements  -   -   -   -   907,160   -   -   -   907,160   -   -   -   -   523,556   -   -   -   523,556 
Issuance of common stock, net of fees and expenses  -   -   1,000,000   1,000   1,971,065   -   -   -   1,972,065 
Issuance of common stock held as contingent consideration  -   -   212,375   212   331,464   -   -   -   331,676 
Tax withholding obligations on stock issued to employees  -   -   -   -   (800,271)  -   -   -   (800,271)
Preferred stock dividends  -   -   -   -   (1,492,700)  -   -   -   (1,492,700)
Balance - March 31, 2019  2,162,449  $2,162   12,750,541  $12,751  $63,372,839  $(24,499,436) $(1,211,723) $(662,000) $37,014,593 
                                    
Balance- April 1, 2019  2,162,449  $2,162   12,750,541  $12,751  $63,372,839  $(24,499,436) $(1,211,723) $(662,000) $37,014,593 
Net loss  -   -   -   -   -   (770,972)  -   -   (770,972)
Foreign currency translation adjustment  -   -   -   -   -   -   (762,563)  -   (762,563)
Issuance of stock under the Amended and Restated Equity Incentive Plan  -   -   18,500   18   (18)  -   -   -   - 
Stock-based compensation, net of cash settlements  -   -   -   -   473,387   -   -   -   473,387 
Tax withholding obligations on stock issued to employees  -   -   -   -   (58,536)  -   -   -   (58,536)
Preferred stock dividends  -   -   -   -   (1,486,706)  -   -   -   (1,486,706)
Balance - June 30, 2019  2,162,449  $2,162   12,769,041  $12,769  $62,300,966  $(25,270,408) $(1,974,286) $(662,000) $34,409,203 
                                    
Balance- December 31, 2017 before adoption  1,086,739  $1,087   12,271,390  $12,272  $45,129,517  $(23,509,386) $(721,070) $(662,000) $20,250,420 
Cumulative effect of adopting ASC 606  -   -   -   -   -   1,444,121   -   -   1,444,121 
Balance- January 1, 2018 after adoption  1,086,739  $1,087   12,271,390  $12,272  $45,129,517  $(22,065,265) $(721,070) $(662,000) $21,694,541 
Net income  -   -   -   -   -   75,036   -   -   75,036 
Foreign currency translation adjustment  -   -   -   -   -   -   (203,146)  -   (203,146)
Issuance of stock under the Amended and Restated Equity Incentive Plan  29,550   29   134,583   134   (163)  -   -   -   - 
Stock-based compensation, net of cash settlements  -   -   -   -   112,090   -   -   -   112,090 
Tax withholding obligations on stock issued to employees  -   -   -   -   (226,250)  -   -   -   (226,250)
Preferred stock dividends  -   -   -   -   (775,332)  -   -   -   (775,332)
Balance - March 31, 2018  1,116,289  $1,116   12,405,973  $12,406  $44,239,862  $(21,990,229) $(924,216) $(662,000) $20,676,939 
                                    
Balance- April 1, 2018  1,116,289  $1,116   12,405,973  $12,406  $44,239,862  $(21,990,229) $(924,216) $(662,000) $20,676,939 
Net income  -   -   -   -   -   195,280   -   -   195,280 
Foreign currency translation adjustment  -   -   -   -   -   -   (227,258)  -   (227,258)
Stock-based compensation, net of cash settlements  -   -   -   -   364,710   -   -   -   364,710 
Issuance of preferred stock, net of fees and expenses  609,893   609   -   -   13,021,658   -   -   -   13,022,267   420,000   420   -   -   9,354,490   -   -   -   9,354,910 
Preferred stock dividends  -   -   -   -   (1,283,151)  -   -   -   (1,283,151)  -   -   -   -   (1,248,717)  -   -   -   (1,248,717)
Balance - September 30, 2017  929,299  $929   12,271,390  $12,272  $40,985,992  $(23,325,897) $(440,821) $(662,000) $16,570,475 
Balance - June 30, 2018  1,536,289  $1,536   12,405,973  $12,406  $52,710,345  $(21,794,949) $(1,151,474) $(662,000) $29,115,864 

For all periods presented, the preferred stock dividends were paid monthly at the rate of $2.75 per share per annum.

See notes to condensed consolidated financial statements.

6

MTBC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018

  2019  2018 
OPERATING ACTIVITIES:        
Net (loss) income $(1,066,663) $270,316 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:        
Depreciation and amortization  1,627,296   1,176,939 
Deferred rent  -   (36,022)
Lease amortization  943,028   - 
Deferred revenue  (9,719)  (34,832)
Provision for doubtful accounts  92,061   112,406 
(Benefit) provision for deferred income taxes  (15,180)  78,000 
Foreign exchange gain  (295,487)  (332,100)
Interest accretion  258,735   95,604 
Gain on sale of assets  (26,213)  - 
Stock-based compensation expense  1,550,188   537,402 
Change in contingent consideration  (64,203)  42,780 
Changes in operating assets and liabilities, net of businesses acquired:        
Accounts receivable  267,850   2,576 
Contract asset  274,129   326,631 
Inventory  41,867   - 
Other assets  571,468   (91,643)
Accounts payable and other liabilities  (836,228)  (180,452)
Net cash provided by operating activities  3,312,929   1,967,605 
INVESTING ACTIVITIES:        
Capital expenditures, net  (904,220)  (376,430)
Cash paid for acquisitions  (1,600,000)  (1,000,000)
Net cash used in investing activities  (2,504,220)  (1,376,430)
FINANCING ACTIVITIES:        
Proceeds from issuance of preferred stock, net of fees and expenses  -   9,415,000 
Preferred stock dividends paid  (2,961,422)  (1,714,979)
Settlement of tax withholding obligations on stock issued to employees  (932,465)  (213,675)
Repayments of notes payable, net  (181,457)  (139,485)
Contingent consideration payments  (182,664)  (82,725)
Other financing activities  -   (60,090)
Net cash (used in) provided by financing activities  (4,258,008)  7,204,046 
EFFECT OF EXCHANGE RATE CHANGES ON CASH  (440,158)  (434,834)
NET (DECREASE) INCREASE IN CASH  (3,889,457)  7,360,387 
CASH - beginning of the period  14,472,483   4,362,232 
CASH - end of the period $10,583,026  $11,722,619 
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:        
Vehicle financing obtained $24,909  $75,372 
Dividends declared, not paid $1,486,708  $1,056,217 
SUPPLEMENTAL INFORMATION - Cash paid during the period for:        
Income taxes $35,862  $29,673 
Interest $28,085  $20,221 

See notes to condensed consolidated financial statements.

67

 

MEDICAL TRANSCRIPTION BILLING, CORP.MTBC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

  2017  2016 
OPERATING ACTIVITIES:        
Net loss $(5,381,667) $(4,772,596)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  3,637,131   3,536,940 
Deferred rent  (38,544)  (28,032)
Deferred revenue  13,807   (32,912)
Provision for doubtful accounts  357,671   205,289 
Provision for deferred income taxes  165,000   114,893 
Foreign exchange (gain) loss  (27,145)  72,360 
Interest accretion and write-off of deferred financing costs  672,998   145,038 
Non-cash restructuring charges  17,001   - 
Stock-based compensation expense  333,854   765,595 
Change in contingent consideration  151,423   (607,978)
Acquisition settlements  -   (26,296)
Changes in operating assets and liabilities:        
Accounts receivable  437,557   (160,523)
Other assets  107,532   211,651 
Accounts payable and other liabilities  (1,754,255)  90,843 
Net cash used in operating activities  (1,307,637)  (485,728)
INVESTING ACTIVITIES:        
Capital expenditures  (499,988)  (319,870)
Cash paid for acquisitions  (205,000)  (1,425,000)
Net cash used in investing activities  (704,988)  (1,744,870)
FINANCING ACTIVITIES:        
Contingent consideration payments  (79,603)  (153,799)
Settlement of tax withholding obligations on stock issued to employees  (195,912)  (8,500)
Proceeds from issuance of common stock, net of placement costs  2,000,000   - 
Proceeds from issuance of preferred stock, net of placement costs  13,484,552   1,270,528 
Proceeds from long term debt, net of costs  -   1,908,141 
Repayments of debt obligations  (7,626,088)  (554,002)
Repayment of Prudential obligation  (5,000,000)  - 
Proceeds from line of credit  7,000,000   6,000,000 
Repayments of line of credit  (7,000,000)  (6,000,000)
Payment of registration statement and bank costs  (335,239)  (119,406)
Preferred stock dividends paid  (846,825)  (506,603)
Purchase of common shares  -   (546,145)
Net cash provided by financing activities  1,400,885   1,290,214 
EFFECT OF EXCHANGE RATE CHANGES ON CASH  (75,758)  11,317 
NET DECREASE IN CASH  (687,498)  (929,067)
CASH - Beginning of the period  3,476,880   8,039,562 
CASH - End of period $2,789,382  $7,110,495 
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:        
Vehicle financing obtained $30,746  $189,725 
Contingent consideration resulting from acquisitions $-  $678,368 
Dividends declared, not paid $638,905  $202,578 
Purchase of prepaid insurance through assumption of note $298,698  $313,577 
SUPPLEMENTAL INFORMATION - Cash paid during the period for:        
Income taxes $9,513  $32,816 
Interest $599,950  $321,530 

See notes to condensed consolidated financial statements.

7

MEDICAL TRANSCRIPTION BILLING, CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172019 AND 20162018 (UNAUDITED)

 

1.Organization and Business

 

Medical Transcription Billing, Corp.MTBC, Inc., (and together with its consolidated subsidiaries “MTBC” or the “Company”) is a healthcare information technology company that offers an integrated suite of proprietary cloud-based electronic health records and practice management solutions, together with related business services, to healthcare providers. The Company’s integrated services are designed to help customers increase revenues, streamline workflows and make better business and clinical decisions, while reducing administrative burdens and operating costs. The Company’s services include full-scale revenue cycle management, electronic health records, and other technology-driven practice management services for private and hospital-employed healthcare providers. MTBC has its corporate offices in Somerset, New Jersey and maintains account managementclient support teams in various US offices and operates facilities inthroughout the U.S., Pakistan and Sri Lanka.

 

MTBC was founded in 1999 and incorporated under the laws of the State of Delaware in 2001. In 2004, MTBC formed MTBC Private Limited (or “MTBC Pvt. Ltd.”), a 99.9% majority-owned subsidiary of MTBC based in Pakistan. The remaining 0.01% of the shares of MTBC Pvt. Ltd. is owned by the founder and Chief Executive OfficerChairman of MTBC. MTBC formed MTBC-Europe Sp. z.o.o. (or “MTBC-Europe”), a wholly-owned subsidiary of MTBC based in Poland in 2015. In 2016, MTBC formed MTBC Acquisition Corp. (“MAC”), a Delaware corporation, in connection with its acquisition of substantially all of the assets of MediGain, LLC and its subsidiary, Millennium Practice Management Associates, LLC (together “MediGain). MAC has a wholly-ownedwholly owned subsidiary in Sri Lanka, RCM MediGain Colombo, Pvt. Ltd. In conjunctionMay 2018, MTBC formed MTBC Health, Inc. (“MHI”) and MTBC Practice Management, Corp. (“MPM”), each a Delaware corporation in connection with MTBC’s acquisition of substantially all of the revenue cycle management, practice management and group purchasing organization assets of Orion Healthcorp, Inc. and 13 of its affiliates (together, “Orion”). MHI is a direct, wholly owned subsidiary of MTBC, and was formed to own and operate the revenue cycle management and group purchasing organization businesses acquired from Orion. MPM is a wholly owned subsidiary of MHI and was formed to own and operate the practice management business acquired from Orion. In March 2019, MTBC formed MTBC-Med, Inc. (“MED”), a Delaware corporation, in connection with its continued growthacquisition of substantially all of the assets of Etransmedia Technology, Inc. and its offshore operations in Pakistan and Sri Lanka, in April 2017, MTBC began the winding down of its operations in India and Poland. These operations have been terminated and the subsidiaries are being liquidated.(“ETM”). See Note 3.

 

2. Liquidity

The Company previously adopted FASB Accounting Standard Codification (“ASC”) Topic 205-40, Presentation of Financial Statements – Going Concern, which requires that management evaluate whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued. Based upon the analysis set forth below, management believes there is no longer substantial doubt about the Company’s ability to continue as a going concern and to meet the obligations as they become due within the next twelve months.

As part of the evaluation, management considered that on September 30, 2017, the Company had$2.8 millionof cash and had positive working capital of $913,000. The loss before income taxes was$915,000for the three months ended September 30, 2017, of which$664,000represents non-cash depreciation and amortization and$463,000 of non-cash financing costs, which were written off as a result of the termination of the Opus Bank (“Opus”) credit agreement.

During the second and third quarter of 2017, the Company raised a total of$15.0 millionin net proceeds from a series of equity financings. In May 2017, the Company completed a registered direct offering of one million shares of its common stock at $2.30 per share, raising net proceeds of approximately $2.0 million. Between June and September 2017, the Company completed five public offerings of approximately 610,000 shares of its 11% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Preferred Stock”) at $25.00 per share, raising net proceeds of approximately$13.0 million.

8

These equity financings improved the financial position of the Company and allowed us to repay the amount owed to Prudential during the third quarter. As a result of the common and preferred stock offerings, the Company’s cash position and the working capital deficit at the end of the second quarter improved to positive net working capital of$913,000at the end of the third quarter. At September 30, 2017, the total amount outstanding under the Opus credit line was $2 million and the Company has$2.8 millionof cash. In October 2017, the Company entered into a new credit facility with Silicon Valley Bank (“SVB”) and repaid and terminated its previous facility with Opus. The SVB credit facility is a $5 million 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 facility agreement. Under the SVB credit facility agreement, the facility currently available to the Company is in excess of $4 million. Management continues to focus on the Company’s overall profitability, including growing revenue and managing expenses, and expects that these efforts will continue to enhance our liquidity and financial position. The Company forecasts that cash flow from operations over the next 12 months will be positive and provide sufficient liquidity to the Company.Management has based its expectations on assumptions that may prove to be wrong.

3. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 8-03. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the Company’s financial position as of SeptemberJune 30, 2017,2019, the results of operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 and cash flows for the ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

 

The condensed consolidated balance sheet as of December 31, 20162018 was derived from our audited consolidated financial statements. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016,2018, which are included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 31, 2017.

20, 2019.

8

Recent Accounting Pronouncements —From time to time, new accounting pronouncements are issued by In February 2016, 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 May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers(Topic 606). The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. These ASUs can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company plans to adopt Topic 606 using the modified retrospective method when it becomes effective for the Company in the first quarter of 2018. We have assigned internal resources to assist in the evaluation of the potential impacts of this amendment. Implementation efforts to date have included a review of revenue agreements and the performance obligations contained therein, and review of our commercial terms and practices across our revenue streams and a comparison of our current revenue recognition procedures to those required under Topic 606. While the Company is continuing to assess the effects of the amendment, management currently believes that the new guidance will not have a material impact on our revenue recognition policies, practices or systems. The Company is continuing to evaluate the effect that Topic 606 will have on its consolidated financial statements and related disclosures, and preliminary assessments are subject to change. We are in the process of finalizing the analysis of the requirements under Topic 606 and quantifying the effects if any, from the implementation which should be completed during the fourth quarter of 2017.

9

In February 2016, the FASB“FASB” issued ASU No. 2016-02,Leases (Topic 842). The new standard will requirerequires organizations that leasehave leased assets, — referred to as “lessees” —“lessees,” to recognize on the balance sheet the assets and liabilities forthat represent the rights and obligations created by those leases.leases, respectively. Under the new guidance, a lessee will beis required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP — which requires only capital leases to be recognized on the balance sheet, — the new ASU will requirerequires both types of leases to be recognized on the balance sheet. The FASB has subsequently issued further ASU’s related to the standard providing additional practical expedients and an optional transition method allowing entities to not recast comparative periods. The amendments in this ASU No. 2016-02 are effective for financial statements issued for annual periods beginning after December 15, 2018 with earliernow effective.

We adopted the standard on January 1, 2019 using the optional transition adjustment method. As part of the adoption permitted. The Company is currently evaluatingof ASC 842, we performed an assessment of the impact of thisthe new lease recognition standard has on the condensed consolidated financial statements. All of our leases, which consist of facility and equipment leases, have been classified as operating leases. The Company does not have any financing leases. We adopted the requirements of the new standard without restating the prior periods. There was no impact to the accumulated deficit as of the date of adoption. For leases in place at the transition date, we adopted the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases.

We have also adopted the practical expedients that allow us to treat the lease and non-lease components of our leases as a single component for our facility leases. We elected the short-term lease recognition exemption for all leases that qualify. As such, for those leases that qualify, we did not recognize ROU asset or lease liabilities as part of the transition adjustment. As of January 1, 2019, the impact on the consolidated assets was approximately $4.2 million and the impact on the consolidated liabilities was approximately $4.4 million. The adoption of ASC 842 did not have a material effect on the Company’s results of operations, stockholders’ equity, or statement of cash flows.

We have also evaluated, documented, and implemented required changes in internal control as part of our adoption of the new lease recognition standard. These changes include implementing updated accounting policies affected by ASC 842 and implementing a new information technology application to calculate our right-of-use assets, lease liabilities and required disclosures.

 

In January 2017,June 2016, the FASB issued ASU No. 2017-012016-13,Business Combinations(Topic 805):Clarifying the DefinitionFinancial Instruments – Credit Losses: Measurement of a BusinessCredit Losses on Financial Instruments (“ASU 2016-13”). The guidance in ASU clarifies2016-13 replaces the definitionincurred loss impairment methodology under current GAAP. The new impairment model requires immediate recognition of a business with the objective of adding guidanceestimated credit losses expected to assist companies and other reporting organizations with evaluating whether transactions should be accountedoccur for as acquisitions (or disposals) of assets or business. The amendments in this ASU provide a more robust framework to use in determining when a set ofmost financial assets and activities is a business. The amendments provide more consistencycertain 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 applying the guidance, reduce the costsearlier recognition of application, and make the definition of a business more operable. Thecredit losses. ASU 2016-13 is effective for annual periods beginning after December 15, 2017, including2019, and interim periods within those annual periods.Upon Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently in the Companyprocess of evaluating this new guidance, which we expect will apply the guidance in this ASU when evaluating whether acquired assetsnot have a material impact on our consolidated financial statements and activities constitute a business.results of operations.

 

Also in January 2017,On February 14, 2018, the FASB issued ASU No. 2017-04,2018-02,IntangiblesIncome Statement – Goodwill andReporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.(Topic 350): SimplifyingThese amendments provide financial statement preparers with an option to reclassify standard tax effects within accumulated other comprehensive income to retained earnings in each period in which the Accounting for Goodwill Impairment. The ASU modifieseffect of the accounting for goodwill impairment with the objective of simplifying the process of determining impairment levels. Specifically, the amendmentschange in the ASU eliminate a stepU.S. federal corporate income tax rate in the goodwill impairment test which requires companies to develop a hypothetical purchase price allocation when analyzing goodwill impairment.Tax Cuts and Jobs Act is recorded. This eliminates the need for companies to estimate the fair value of individual existing assets and liabilities within a reporting unit. Instead, goodwill impairment will now be the amount by which a reporting unit’s total carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other aspects of the goodwill impairment test process have remained the same. The ASUguidance is effective for annualfiscal years beginning after December 15, 2018, and interim periods beginning in the year 2020, with early adoption permitted for any impairment tests after January 1, 2017.therein. The Company has elected to early adopt ASU 2017-04. There is currently nodoes not anticipate any material impact on the condensed consolidated financial statements as a result of this adoption.standard.

9

 

In May 2017, the FASB issued ASU No. 2017-09,Compensation - Stock Compensation: Scope of Modification Accounting(Topic 718), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The update is to be adopted prospectively to an award modified on or after the adoption date. Early adoption is permitted. The Company is currently evaluating the effect of this update but does not believe it will have a material impact on its consolidated financial statements and related disclosures.

4. 3.ACQUISITIONS

 

20172019 Acquisition

 

Effective July 1, 2017,On April 3, 2019, the Company purchasedexecuted an asset purchase agreement (“APA”) to acquire substantially all of the assets of Washington Medical Billing, LLC (“WMB”), a Washington limited liability company. In accordance withETM. The purchase price was $1.6 million and the asset purchase agreement,assumption of certain liabilities, excluding acquisition-related costs of approximately $125,000. Per the Company agreed to a non-refundable initial payment (the “Initial Payment Amount”) of $205,000. In addition to the Initial Payment Amount, the Company agreed to pay the sellers 22%, 23% and 24% of revenue collected from the WMB accounts in the first, second and third year, respectively, subsequent toAPA, the acquisition had an effective date to the extent such amounts in the aggregate exceed the Initial Payment Amount (the “WMB Installment Payments”).of April 1, 2019. The WMB Installment Payments are to be paid quarterly commencing October, 2017. Based on the Company’s revenue forecast, it does not appear that there will be any WMB Installment Payments and therefore the preliminary aggregate purchase price of WMB was determined to be $205,000.

10

The preliminary purchase price allocationacquisition has been accounted for WMB was performed by the Company and is summarized as follows:a business combination.

Customer relationships $120,000 
Goodwill  85,000 
  $205,000 

 

The WMBETM acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base and by increasing available customer relationship resources and specialized trained staff.

 

The purchase price allocation for ETM was performed by the Company and is summarized as follows:

Customer relationships $856,000 
Accounts receivable  547,377 
Contract asset  139,169 
Operating lease right-of-use assets  1,224,480 
Property and equipment  91,277 
Goodwill  39,901 
Operating lease liabilities  (1,224,480)
Accrued expenses  (73,724)
Total $1,600,000 

The acquired accounts receivable are recorded at fair value which represents amounts that have subsequently been paid or are expected to be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by these intangibles. The goodwill from this acquisition is deductible ratably for income tax purposes over fifteen years and represents the Company’s ability to have an expanded local presence in additional markets and operational synergies that we expect to achieve that would not be available to other market participants.

The weighted-average amortization period of the acquired intangible assets is threefour years.

 

Revenue earned from the WMBclients obtained from the ETM acquisition was approximately $165,000$2.0 million during both the quarterthree and six months ended SeptemberJune 30, 2017.2019.

 

2016 Acquisitions2018 Acquisition

 

On February 15, 2016 (the “GCB Closing Date”),May 7, 2018, the Company entered intoexecuted an asset purchase agreement with Gulf Coast Billing, Inc. (“GCB”), pursuantAPA to which the Company purchasedacquire substantially all of the revenue cycle, practice management, and group purchasing organization assets of GCB.Orion. The aggregate final purchase price for GCB was$1,480,000which consisted $12.6 million, excluding acquisition-related costs of cashapproximately $245,000. Per the APA, the acquisition had an effective date of$1,250,000and contingent consideration of$230,000. During the quarter ended June 30, 2017, an agreement was reached with GCB that no additional contingent consideration will be paid.

On May 2, 2016 (the “RMB Closing Date”), the Company entered into an asset purchase agreement with Renaissance Medical Billing, LLC (“RMB”), pursuant to which the Company purchased substantially all of the assets of RMB. In accordance with the RMB asset purchase agreement, the Company paid $175,000 in initial cash consideration (“RMB Initial Payment”), on the RMB Closing Date. In addition, the Company will pay RMB twenty-seven percent (27%) of the revenue earned and received from the acquired RMB accounts for three years, less the RMB Initial Payment which will be deducted in full from the required payments (the “RMB Installment Payments”) before any additional payment is made to the seller. The aggregate purchase price for RMB was$325,000which consisted of cash of $175,000 and contingent consideration of$150,000. Through September 30, 2017, approximately $24,000 of contingent consideration payments have been made.

Effective July 1, 2016 (the “WFS Closing Date”), the Company entered into an asset purchase agreement with WFS Services, Inc. (“WFS”), pursuant to which the Company purchased substantially all of the assets of WFS. In accordance with the WFS asset purchase agreement, the Company did not pay any initial cash consideration on the WFS Closing Date but will make monthly payments of $5,0002018. The acquisition has been accounted for three years beginning July, 2016 subject to proportionate adjustment if annualized revenues decrease belowas a threshold specified in the APA. In addition, each quarter the Company will pay WFS fifty percent (50%) of Adjusted EBITDA, as defined in the WFS asset purchase agreement, generated from the WFS customer accounts acquired for three years. The aggregate purchase price of WFS was determined to be $298,000, which was recorded as contingent consideration. Through September 30, 2017, $60,000 of contingent consideration payments have been made.

On October 3, 2016, MAC acquired substantially all of the assets of MediGain. Since MediGain was in default of its obligations to Prudential prior to the acquisition, MAC purchased 100% of MediGain’s senior secured debt from Prudential.business combination.

 

The debt was collateralizedOrion acquisition added a significant number of clients to the Company’s customer base and, similar to previous acquisitions, broadened the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base and by substantially all of MediGain’s assets, so immediately afterincreasing available customer relationship resources and specialized trained staff. The acquisition also included Orion’s practice management and group purchasing services. The practice management services provide three pediatric medical practices with the debt, MAC entered intonurses, administrative support, facilities, supplies, equipment, marketing, RCM, accounting and other non-clinical services needed to efficiently operate the practices. The group purchasing services enable medical providers to purchase various vaccines directly from selected pharmaceutical companies at a strict foreclosure agreement with MediGain transferring substantially alldiscounted price.

10

The Company engaged a third-party valuation specialist to assist the Company in valuing the assets (includingacquired from Orion. The following table summarizes the purchase price allocation.

Customer relationships $6,250,000 
Accounts receivable  5,654,919 
Contract asset  861,341 
Inventory  307,278 
Property and equipment  319,352 
Goodwill  329,852 
Accounts payable  (677,872)
Accrued expenses  (444,870)
Total $12,600,000 

The acquired accounts receivable fixed assets, clientare recorded at fair value which represents amounts that have subsequently been paid or are expected to be paid by clients. The inventory acquired represents vaccines held at the managed practices. The fair value of customer relationships was based on the estimated discounted cash flows generated by these intangibles. The goodwill from this acquisition is deductible ratably for income tax purposes over fifteen years and MediGain’s wholly-owned subsidiariesrepresents the Company’s ability to have an expanded local presence in Indiaadditional markets, operational synergies that we expect to achieve that would not be available to other market participants and Sri Lanka)the ability to MAC in satisfactionoffer group purchasing and practice management services.

The weighted-average amortization period of the outstanding obligations under the senior secured notes. The aggregate purchase price was $7 million which consisted of $2 million in cash paid at closing and $5 million, plus interest, which was paid during the third quarter of 2017.acquired intangibles is seven years.

 

11

MediGain, GCB, RMB and WFS are collectively referred to as the “2016 Acquisitions.” Revenue earned from the 2016 Acquisitionsclients obtained from the Orion acquisition was approximately $4.1$7.1 million and $12.8$14.8 million during the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively.

 

Pro forma financial information (Unaudited)

 

The unaudited pro forma information below represents condensed consolidated results of operations as if the 2016 AcquisitionsOrion and the WMB AcquisitionETM acquisitions occurred on January 1, 2016.2018. The pro forma information has been included for comparative purposes and is not indicative of results of operations ofthat the Company would have had if the acquisitions occurred on the above date, nor is it necessarily indicative of future results. The unaudited pro forma information reflects material, non-recurring pro forma adjustments directly attributable to the business combinations. The difference between the actual revenue and the pro forma revenue is approximately $19.1 million of additional revenue recorded by Orion and approximately $6.5 million of additional revenue recorded by ETM for the six months ended June 30, 2018. The difference between the actual and pro forma results for the three months ended June 30, 2019 represent approximately $200,000 of transaction and integration costs incurred by the Company during the period.

 

 Three Months Ended Nine Months Ended 
 September 30, September 30, 
 2017 2016 2017 2016  

Three Months Ended

June 30,

 

Six Months

Ended June 30,

 
 ($ in thousands, except per share data)  2019 2018 2019 2018 
Total revenue $7,514  $9,984  $24,036  $32,895  $16,749  $21,129  $33,897  $42,610 
Net loss $(571) $(2,618) $(2,729) $(5,953)
Net loss attributable to common shareholders $(1,581) $(4,316) $(6,584) $(13,830) $(2,058) $(3,867) $(5,708) $(7,977)
Net loss per common share $(0.14) $(0.43) $(0.61) $(1.38) $(0.17) $(0.33) $(0.48) $(0.69)

 

5.11GOODWILL AND INTANGIBLE ASSETS-NET

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 ninesix months ended SeptemberJune 30, 20172019 and the year ended December 31, 2016:2018:

 

 Six Months Ended Year Ended 
 September 30, 2017 December 31, 2016  June 30, 2019  December 31, 2018 
Beginning gross balance $12,178,868  $8,971,994  $12,593,795  $12,263,943 
Acquisitions  85,075   3,206,874 
Acquisition  39,901   329,852 
Ending gross balance $12,263,943  $12,178,868  $12,633,696  $12,593,795 

Of the total goodwill, approximately $90,000 is allocated to the Practice Management segment and the balance is allocated to the Healthcare IT segment.

 

Intangible assets include customer contracts and relationships and covenants not-to-compete acquired in connection with acquisitions, as well as trademarks acquired and software purchase and development costs and trademarks acquired.costs. Intangible assets - net as of SeptemberJune 30, 20172019 and December 31, 20162018 consist of the following:

 

 September 30, 2017 December 31, 2016  June 30, 2019 December 31, 2018 
Contracts and relationships acquired $16,491,300  $16,371,375  $23,597,300  $22,741,300 
Non-compete agreements  1,236,377   1,236,377   1,236,377   1,236,377 
Other intangible assets  1,482,864   1,289,339   1,606,552   1,477,059 
Total intangible assets  19,210,541   18,897,091   26,440,229   25,454,736 
Less: Accumulated amortization  (16,213,330)  (13,063,385)  (19,933,080)  (18,820,733)
Intangible assets - net $2,997,211  $5,833,706  $6,507,149  $6,634,003 

 

Amortization expense wasapproximately $3.2$1.2 million and $854,000 for both the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018 and $508,000$612,000 and $1.0 million$415,000 for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The weighted-average amortization period is threecurrently seven years.

 

As of SeptemberJune 30, 2017,2019, future amortization expense scheduled to be expensed is as follows:

 

Years ending   
December 31   
2019 (six months) $959,035 
2020  1,301,600 
2021  1,157,877 
2022  800,107 
2023  338,528 
Thereafter  1,950,002 
Total $6,507,149 

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Years ending    
December 31    
2017 (three months)  $493,264 
2018   1,601,110 
2019   827,033 
2020   75,804 
Total  $2,997,211 

5.NET LOss per COMMON share

6.NET LOss per COMMON share

 

The following table presentsreconciles the weighted-average shares outstanding for basic and diluted net loss per share for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:

 

 Three Months Ended Nine Months Ended 
 September 30, September 30,  

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 
  2017  2016  2017  2016  2019 2018 2019 2018 
Basic and Diluted:                                
Net loss attributable to common shareholders $(1,632,816) $(1,726,178) $(6,664,818) $(5,322,541) $(2,257,678) $(1,053,437) $(4,046,069) $(1,753,733)
Weighted average shares applicable to common shareholders used in computing basic and diluted loss per share  11,485,811   10,006,121   10,835,142   10,031,212 
Weighted-average common shares used to compute basic and diluted loss per share  12,022,143   11,665,174   11,984,284   11,641,190 
Net loss attributable to common shareholders per share - Basic and Diluted $(0.14) $(0.17) $(0.62) $(0.53) $(0.19) $(0.09) $(0.34) $(0.15)

 

All unvested restricted sharestock units (“RSUs”), the 200,000 warrants granted to Opus in 2015 and 2016Bank (“Opus”) and the two million153,489 warrants issued during the second quarter of 2017 as part of the sale of common stockgranted to Silicon Valley Bank (“SVB”) have been excluded from the above calculations as they were anti-dilutive.anti-dilutive. Vested RSUs and vested restricted shares have been included in the above calculations.

 

7.Debt

6.Debt

 

OpusSVB—On September 2, 2015, During October 2017, the Company entered intoopened a credit agreement with Opus. Opus extended a credit facility totaling $10 million to the Company, inclusive of $8 million of term loans and a $2 million revolving line of credit.credit from SVB under a three-year agreement. The Company’s obligationsSVB 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 Opus were$10 million and the term was extended for an additional year. Nothing was drawn on this line of credit as of June 30, 2018 or 2019. Interest on the SVB revolving line of credit is charged at the prime rate plus 1.50%. There is also a fee of one-half of 1% annually for the unused portion of the credit line. The debt is secured by substantially all of the Company’s domestic assets and 65% of the shares in its offshore subsidiaries. During October 2017, the Opus credit facility was replaced. See Note 15.facilities. Future acquisitions are subject to approval by SVB.

 

Interest expense in the consolidated statements of operations for both the three and nine months ended September 30, 2017 includes $463,000 of deferred financing costs which were written off as a result of the termination of the Opus credit agreement.

Prudential Deferred Purchase Price — During the current quarter, the entire amount due to Prudential of $5 million was paid, including $270,000 of accrued interest, which fully satisfied the amount owed.

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 yearyears 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 5.25%5.87%.

 

87.leases.Commitments and Contingencies

Legal Proceedings — The Company is subject to legal proceedings and claims which have arisen in the ordinary course of business and have not been fully adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect upon the consolidated financial position, results of operations, or cash flows of the Company.

 

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liability and noncurrent operating lease liability in our condensed consolidated balance sheet as of June 30, 2019. The Company does not have any finance leases.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

We use our estimated incremental borrowing rates, which are derived from information available at the lease commencement date, in determining the present value of lease payments. For leases in existence at the adoption of ASC 842, we used the incremental borrowing rate as of January 1, 2019. We give consideration to our bank financing arrangements, geographical location and collateralization of assets when calculating our incremental borrowing rates.

Our lease terms include options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of less than 12 months are not recorded in the condensed consolidated balance sheet. Our lease agreements do not contain any residual value guarantees. For real estate leases, we account for the lease and non-lease components as a single lease component. Some leases include escalation clauses and termination options that are factored in the determination of the lease payments when appropriate.

If a lease is modified after the effective date, the operating lease ROU asset and liability is re-measured using the current incremental borrowing rate.

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Leases— The Company leases certain office space and other facilities under operating leases expiring through 2021. Certain of these leases contain renewal options.

 

Future minimumWe lease payments under non-cancelable operating leases for office space asall of September 30, 2017 are as follows:

Years Ending   
December 31 Total 
2017 (three months) $68,994 
2018  304,357 
2019  163,179 
Total $536,530 

Total rentalour facilities and some equipment. Lease expense is included in direct operating costs and general and administrative expenseexpenses in the condensed consolidated statements of operations amountedbased on the nature of the expense. As of June 30, 2019, we had 34 leased properties, five in Practice Management and 29 in Healthcare IT, with remaining terms ranging from less than one year to five years. Our lease terms are determined taking into account lease renewal options, the Company’s anticipated operating plans and leases that are on a month-to-month basis. We also have some related party leases – see Note 9.

The components of lease expense were as follows:

  

Three Months Ended

June 30, 2019

  

Six Months Ended

June 30, 2019

 
Operating lease cost $639,393  $1,104,621 
Short-term lease cost  32,425   137,976 
Variable lease cost  12,450   19,033 
Total- net lease cost $684,268  $1,261,630 

Short-term lease cost represents leases that were not capitalized as the lease term as of the later of January 1, 2019 or the beginning of the lease was less than 12 months. Variable lease costs include utilities, real estate taxes and common area maintenance costs.

Supplemental balance sheet information related to leases was as follows:

  June 30, 2019 
Operating leases:    
Operating lease ROU asset, net $4,860,780 
     
Current operating lease liabilities $2,077,030 
Non-current operating lease liabilities  2,876,232 
Total operating lease liabilities $4,953,262 
     
Operating leases:    
ROU assets, gross $5,878,215 
Asset lease expense  (943,028)
Foreign exchange loss  (74,407)
ROU assets, net $4,860,780 
     
Weighted average remaining lease term (in years):    
Operating leases  2.67 
Weighted average discount rate:    
Operating leases  7.04%

Supplemental cash flow and other information related to leases was as follows:

  

Three Months Ended

June 30, 2019

  

Six Months Ended

June 30, 2019

 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows from operating leases $646,824  $1,124,884 
         
ROU assets obtained in exchange for lease liabilities:        
Operating leases $1,453,751  $1,634,041 

14

Maturities of lease liabilities are as follows:

Operating leases  
2019 (six months) $1,287,711 
2020  2,033,900 
2021  1,397,022 
2022  561,914 
2023  141,314 
Total lease payments  5,421,861 
Less: imputed interest  (468,599)
Total lease obligations  4,953,262 
Less: current obligations  (2,077,030)
Long-term lease obligations $2,876,232 

As of June 30, 2019, we do not have operating lease commitments that have not yet commenced.

Disclosures related to periods prior to adoption of ASC 842:

Operating lease rent expense was approximately $690,000$220,000 and $581,000 for the nine months ended September 30, 2017 and 2016, respectively, and approximately $237,000 and $202,000$436,000 for the three and six months ended SeptemberJune 30, 20172018, respectively. Month to month leases and 2016, respectively.cancellable leases are not included in the table below. Certain leases are maintained on a month to month basis. This includes leases for the US corporate facility and other locations with the Executive Chairman (see Note 9). As of December 31, 2018, future lease payment obligations under non-cancellable operating leases were as follows:

Operating leases   
2019 $932,068 
2020  715,059 
2021  510,927 
2022  412,585 
2023  91,797 
Total $2,662,436 

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”) 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 Superior Court of New Jersey, 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 does not apply to the Company or MAC. On January 30, 2019, the parties conducted oral arguments before the Appellate Court. On April 23, 2019, the Appellate Division reversed the trial court’s order, in part, ruling that the Company is not required to participate in the arbitration, but 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 remanded RPRWC’s demand for the Company to arbitrate back to the trial court for further proceedings. RPRWC’s arbitration demand alleges MPMA, a subsidiary of MediGain, LLC, breached a billing services agreement and seeks compensatory damages of six million, six hundred thousand dollars and costs. On June 6, 2019, the Chancery Court conducted a scheduling conference to establish deadlines for exchanging written discovery between the parties on issues related to whether MTBC, in addition to MAC is required to arbitrate the underlying dispute. Currently, the parties are exchanging discovery requests and responding to same. The Court has scheduled an additional status conference on August 6, 2019. The allegations of breach of contract made by RPRWC have not been the subject of the ongoing legal proceedings. RPRWC has not provided the Company or MAC with information sufficient to enable the Company and MAC to estimate a range of possible losses that may arise from this matter. The Company and MAC plan to vigorously defend against RPRWC’s claim and in the event of a loss, if any, they anticipate the loss to be substantially less than the amount claimed.

15

 

Acquisitions —In connection with someone of the Company’s acquisitions, contingent consideration as of SeptemberJune 30, 20172019 is payable in cash, which represents the form of cash with payment termsdate through 2019.which contingent payments are required. Depending on the terms of the agreement, if the performance measures are not achieved, the Company may pay less than the recorded amount, and if the performance measures are exceeded, the Company may pay more than the recorded amount.

 

9.Related PARTIES

SHAREHOLDERS’ EQUITY TRANSACTIONS

In August 2017, the Company completed two public preferred stock offerings whereby a total of 60,195 shares of its Preferred Stock were sold at $25.00 per share. As a result of this sale, the Company received net proceeds of approximately $1.3 million. In September 2017, the Company completed two public preferred stock offerings whereby a total of 255,000 shares of its Preferred Stock were sold at $25.00 per share. As a result of this sale, the Company received net proceeds of approximately $5.6 million. Dividends on the Preferred Stock of $2.75 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. As of September 30, 2017, the Board of Directors has declared monthly dividends on the Preferred Stock payable through November 2017.

 

Commencing on or after November 4, 2020, the Company may redeem, at its option, the 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 Preferred Stock has no stated maturity, is not subject to any sinking fund or other mandatory redemption, and is not convertible into or exchangeable for any of the Company’s other securities. Holders of the Preferred Stock have no voting rights except for limited voting rights if dividends payable on the Preferred Stock are in arrears for eighteen or more consecutive or non-consecutive monthly dividend periods. If the Company were to liquidate, dissolve or wind up, the holders of the Preferred Stock will have the right to receive $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any payment is made to the holders of the common stock. The Preferred Stock is listed on the Nasdaq Capital Market under the trading symbol “MTBCP.”

10.Related PARTIES

The Company had sales to a related party, a physician who is the wife of the CEO.Executive Chairman. Revenues from this customer were approximately $12,000 and $13,000$9,000 for both the ninesix months ended SeptemberJune 30, 20172019 and 2016, respectively,2018, and approximately$5,000 and $4,000 and $5,000 for the three months ended SeptemberJune 30, 20172019 and 2016, respectively.2018, respectively. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the receivable balance due from this customer was approximately $1,500 and $1,600, respectively.

 

14

The Company is a party to a nonexclusive aircraft dry lease agreement with Kashmir Air, Inc. (“KAI”), which is owned by the CEO.Executive Chairman. The Company recorded an expense of approximately $96,000$64,000 for both the nine monthssix month periods ended SeptemberJune 30, 20172019 and 20162018, and approximately $32,000 for both the three months ended SeptemberJune 30, 20172019 and 2016.2018. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company had a liability outstanding to KAI of approximately $17,000,$1,000 and $11,000 respectively, which is included in accrued liability to related party in the condensed consolidated balance sheets. The original aircraft lease expired on March 31, 2019 and was not included in the ROU asset at January 1, 2019 or March 31, 2019. A lease for a different aircraft at the same lease rate was entered into as of April 1, 2019 and has been included in the ROU asset and operating lease liability at June 30, 2019.

 

The Company leases its corporate offices in New Jersey, its temporary housing for its foreign visitors, and a storage facility in New Jersey and its backup operations center in Bagh, Pakistan, from the CEO.Executive Chairman. The related party rent expense for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 was approximately $141,000$94,000 and $131,000,$95,000, respectively,and $47,000 and $43,000 for the three months ended SeptemberJune 30, 20172019 and 2016, respectively,2018 was approximately $46,000 and $47,000, and is included in direct operating costs and general and administrative expense in the condensed consolidated statements of operations. Current assets-related party onin the condensed consolidated balance sheets includes security deposits and prepaid rent related to the leases of the Company’s corporate offices in the amount of approximately $13,000 and $25,000 as of both SeptemberJune 30, 20172019 and December 31, 2016. 2018, respectively.

Included in the ROU asset at June 30, 2019 is approximately $570,000 applicable to the related party leases. Included in the current and non-current operating lease liability at June 30, 2019 is approximately $274,000 and $296,000, respectively applicable to the related party leases.

10. REVENUE

Introduction

The SeptemberCompany accounts for revenue in accordance with ASC 606,Revenue from Contracts with Customers, which was adopted January 1, 2018 using the modified retrospective method. All revenue is recognized as our performance obligations are satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under ASC 606. Under ASC 606, the Company recognizes revenue when the revenue cycle management services begin on the medical billing claims, which is generally upon receipt of the claim from the provider. For revenue cycle management services, the Company estimates the value of the consideration it will earn over the remaining contractual period as our services are provided and recognizes the fees over the term; this estimation involves predicting the amounts our clients will ultimately collect associated with the services they provided. The selling price of the Company’s services equals the contractual price. Certain significant estimates, such as payment-to-charge ratios, effective billing rates and the estimated contractual payment periods are required to measure revenue cycle management revenue under ASC 606.

Most of our current contracts with customers contain a single performance obligation. For contracts where we provide multiple services, such as where we perform multiple ancillary services, each service represents its own performance obligation. Selling prices are based on the contractual price for the service, which approximates the stand alone selling price.

16

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 seven primary sources: revenue cycle management services, practice management services, professional services, ancillary services, group purchasing services, printing and mailing services, and clearinghouse and EDI (electronic data interchange) services.

The following table represents a disaggregation of revenue for the three and six months ended June 30:

  Three Months Ended June 30,  Six Months Ended June 30, 
   2019   2018   2019   2018 
Healthcare IT:                
Revenue cycle management services $11,432,683  $7,866,650  $21,990,125  $15,259,040 
Professional services  383,336   59,653   718,771   184,268 
Ancillary services  930,181   313,454   1,429,277   562,091 
Group purchasing services  205,066   -   405,113   - 
Printing and mailing services  358,440   301,279   750,100   649,523 
Clearinghouse and EDI services  150,869   141,901   286,933   335,340 
Practice Management:                
Practice management services  3,288,924   -   6,249,391   - 
Total $16,749,499  $8,682,937  $31,829,710  $16,990,262 

Revenue cycle management services:

Revenue cycle management services are the recurring process of submitting and following up on claims with health insurance companies in order for the healthcare providers to receive payment for the services they rendered. MTBC typically invoices customers on a monthly basis based on the actual collections received by its customers and the agreed-upon rate in the sales contract. The services include use of practice management software and related tools (on a software-as-a-service (“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 2017days. 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.

17

Other revenue streams:

MTBC also provides implementation and professional services to clearinghouse and other customers and records revenue monthly on a time and materials or a fixed rate basis. This is a separate performance obligation from the clearinghouse and recurring EDI services provided, for which the Company receives and records monthly fees. The performance obligation is satisfied over time as the implementation or professional services are rendered.

Ancillary services represent services such as coding and transcription that are rendered in connection with the delivery of revenue cycle management and related medical services. The Company invoices customers monthly, based on the actual amount of services performed at the agreed upon rate in the contract. These services are only offered to revenue cycle management customers. These services do not represent a material right because the services are optional to the customer and customers electing these services are charged the same price for those services as if they were on a standalone basis. Each individual coding or transcription transaction processed represents a performance obligation, which is satisfied over time as that individual service is rendered.

The Company provides group purchasing services which enable medical providers to purchase various vaccines directly from selected pharmaceutical companies at a discounted price. Currently, there are approximately 4,000 medical providers who are members of the program. Revenue is recognized as the vaccine shipments are made to the medical providers. 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.

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.

The medical billing clearinghouse service takes claim information from customers, checks the claims for errors and sends this information electronically to insurance companies. MTBC invoices customers on a monthly basis based on the number of claims submitted and the agreed-upon rate in the agreement. This service is provided to medical practices and providers to medical practices who are not revenue cycle management customers. The performance obligation is satisfied once the relevant submissions are completed.

For all of the above revenue streams other than group purchasing services, revenue is recognized over time, which is typically one month or less, which closely matches the point in time that the customer simultaneously receives and consumes the benefits provided by the Company. For the group purchasing services, revenue is recognized at a point in time. Other than the group purchasing services, each of the Company’s services are substantially the same and have the same periodic pattern of transfer to the customer. Each service provided by the Company is considered a separate performance obligation.

Practice management services:

The Company also provides practice management services under long-term management service agreements to three medical practices. We provide the medical practices with the nurses, administrative support, facilities, supplies, equipment, marketing, RCM, accounting, and other non-clinical services needed to efficiently operate their practices. Revenue is recognized as the services are provided to the medical practices. Revenue recorded in the consolidated statements of operations represents the reimbursement of costs paid by the Company for the practices and the management fee earned each month for managing the practice. The management fee is based on either a fixed fee or a percentage of the net operating income.

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The Company assumes all financial risk for the performance of the managed medical practices. Revenue is impacted by amount of the costs incurred by the practices and their operating income. The gross billing of the practices is impacted by billing rates, changes in current procedural terminology code reimbursement and collection trends which in turn impacts the management fee that the Company is entitled to. Billing rates are reviewed at least annually and adjusted based on current insurer reimbursement practices. The performance obligation is satisfied as the management services are provided.

Our contracts for practice management services have approximately an additional 20 years remaining and are only cancellable under very limited circumstances. The Company receives a management fee each month for managing the day-to-day business operations of each medical group as a fixed fee or a percentage payment of the net operating income which is included in revenue in the consolidated statements of operations.

The Company also provides accounting services and a practice manager to one additional medical practice for which it receives monthly fees.

Our practice management services obligations consist of a series of distinct services that are substantially the same and have the same periodic pattern of transfer to our customers. Revenue is recognized over time, however, for reporting and convenience purposes management fee is computed at each month end.

Information about contract balances:

The contract asset in the condensed consolidated balance sheets represents the revenue associated with the amounts we estimate our revenue cycle management clients will ultimately collect associated with the services they have provided and the relative fee we charge associated with those collections, together with amounts related to the group purchasing services. As of June 30, 2019, the estimated revenue expected to be recognized in the future related to the remaining revenue cycle management performance obligations outstanding was approximately $2 million. We expect to recognize substantially all of the revenue for the remaining performance obligations over the next three months. Approximately $0.5 million of the contract asset represents revenue earned, not paid, from the group purchasing services.

Accounts receivable are shown separately at their net realizable value in our condensed consolidated balance sheets. Amounts that we are entitled to collect under the applicable contract are recorded as accounts receivable. Invoicing is performed at the end of each month when the services have been provided. The contract asset results from our revenue cycle management services and is due to the timing of revenue recognition, submission of claims from our customers and payments from the insurance providers. The contract asset includes our right to payment for services already transferred to a customer when the right to payment is conditional on something other than the passage of time. For example, contracts for revenue cycle management services where we recognize revenue over time but do not have a contractual right to payment until the customer receives payment of their claim from the insurance provider. The contract asset also includes prepaid rent paidthe revenue accrued, not received, for the group purchasing services. 

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The contract asset was approximately $2.5 million and $1.7 million as of June 30, 2019 and June 30, 2018, respectively. Changes in the contract asset are recorded as adjustments to net revenue. The changes primarily result from providing services to revenue cycle management customers that result in additional consideration and are offset by our right to payment for services becoming unconditional and changes in the CEOrevenue accrued for the group purchasing services. The contract asset for our group purchasing services is reduced when we receive payments from vaccine manufacturers and is increased for revenue earned, not received. Deferred revenue represents sign-up fees received from customers that are amortized over three years. The opening and closing balances of approximately $12,000.the Company’s accounts receivable, contract asset and deferred revenue are as follows for the six months ended June 30, 2019 and 2018:

  Accounts Receivable,
Net		  Contract Asset  Deferred Revenue (current)  Deferred Revenue
(long term)		 
Beginning balance as of January 1, 2019 $7,331,474  $2,608,631  $25,355  $18,949 
ETM acquisition  -   139,169   -   - 
Increase (decrease), net  187,466   (274,129)  (9,130)  (589)
Ending balance as of June 30, 2019 $7,518,940  $2,473,671  $16,225  $18,360 
                 
Beginning balance as of January 1, 2018 $3,879,463  $1,342,692  $62,104  $28,615 
(Decrease) increase, net  (441,613)  326,631   (34,429)  (403)
Ending balance as of June 30, 2018 $3,437,850  $1,669,323  $27,675  $28,212 

Deferred commissions:

 

11.STOCK-BASED COMPENSATION

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 $60,000 and $113,000 at June 30, 2019 and 2018, respectively, and are included in the other assets amounts in the condensed consolidated balance sheets.

 

11. STOCK-BASED COMPENSATION

In April 2014, the Company adopted the Medical Transcription Billing, Corp. 2014its Equity Incentive Plan (the “2014 Plan”“Plan”), reserving a total of 1,351,000 shares of common stock for grants to employees, officers, directors and consultants. During April 2017, the 2014 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 nameDuring June 2018, the Company’s shareholders approved the addition of the 2014 Plan was changed200,000 preferred shares to the Amended and Restated Equity Incentive Plan (the “Incentive Plan”).for future grants. As of SeptemberJune 30,2017, 1,238,734 2019, 554,910 shares of common stock and 67,000138,400 shares of Series A Preferred Stock are available for grant.grant under the Plan. Permissible awards include incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”),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 common stock equity based RSUs contain a common provision in which the units shall immediately vest and become converted into common shares at the rate of one common share per RSU, immediately after a change in control, as defined in the award agreement. The preferred stock RSUs contain a similar provision, which vest and convert to Series A Preferred Stock upon a change in control.

 

DuringCommon and preferred stock RSUs

In February 2019, the third quarterCompensation Committee approved executive bonuses to be paid in shares of 2017, a totalSeries A Preferred Stock, with the number of 200,000 RSUs were granted equallyshares and the amount based on specified criteria being achieved during the year 2019. The actual amount will be settled in early 2020 based on the achievement of the specified criteria. For the three and six months ended June 30, 2019, an expense of approximately $301,000 and $602,000, respectively, was recorded for these bonuses based on the value of the shares at the grant date and recognized over the service period. The portion of the stock compensation expense to be used for the payment of withholding and payroll taxes is included in accrued compensation in the condensed consolidated balance sheets. The balance of the stock compensation expense has been recorded as additional paid-in capital.

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The following table summarizes the RSU transactions related to the four outside memberscommon and preferred stock under the Equity Incentive Plan for the six months ended June 30, 2019:

  Common Stock  Preferred Stock 
Outstanding and unvested shares at January 1, 2019  929,347   44,800 
Granted  5,000   44,000 
Vested  (319,813)  (44,800)
Forfeited  (12,120)  - 
Outstanding and unvested shares at June 30, 2019  602,414   44,000 

Of the total outstanding and unvested common stock RSUs at June 30, 2019, 568,081 RSUs are classified as equity and 34,333 RSUs are classified as a liability. All of the Board of directors and a total of 300,000preferred stock RSUs were granted equally to three executive officers. The RSUs vest over the next two years, at six month intervals.are classified as equity.

 

Stock-based compensation expense

The Company recognizes compensation expense on a straight-line basis over the total requisite service period for the entire award. For stock awards classified as equity, the market price of our common stock or Preferred Stockpreferred stock on the date of grant is used in recording the fair value of the award.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 nine months ended September 30, 2017 and 2016:

Stock-based compensation included in the Condensed Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
Consolidated Statement ofOperations: 2017  2016  2017  2016 
Direct operating costs $1,705  $3,571  $7,162  $8,909 
General and administrative  124,789   131,077   318,870   731,690 
Research and development  (675)  3,767   7,822   6,910 
Selling and marketing  -   5,378   -   18,086 
Total stock-based compensation expense $125,819  $143,793  $333,854  $765,595 

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The following table summarizes the RSU and restricted stock transactions related to the common stock under the Incentive Plan for the nine months ended September 30, 2017:

Outstanding and unvested at January 1, 2017406,959
Granted528,000
Vested(327,159)
Forfeited(29,331)
Outstanding and unvested at September 30, 2017578,469

Of the total outstanding and unvested at September 30, 2017, 548,334 RSUs and restricted stock awards are classified as equity and 30,135 RSUs are classified as a liability.

The liability for the cash-settled awards was approximately $17,000$479,000 and $31,000$118,000 at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, and is included in accrued compensation in the condensed consolidated balance sheets.

 

12.INCOME TAXES

The following table summarizes the components of share-based compensation expense for the three and six months ended June 30, 2019 and 2018:

Stock-based compensation included in the Three Months Ended June 30,  Six Months Ended June 30, 
condensed consolidated statements of operations: 2019  2018  2019  2018 
Direct operating costs $46,207  $8,475  $96,858  $9,859 
General and administrative  711,050   396,674   1,407,471   522,600 
Research and development  4,353   4,563   9,834   4,943 
Selling and marketing  31,053   -   36,025   - 
Total stock-based compensation expense $792,663  $409,712  $1,550,188  $537,402 

12. INCOME TAXES

 

The income tax expense for the three months ended June 30, 2019 was approximately $55,000, comprised of a current tax expense of $15,000 and deferred tax expense of $40,000. The current income tax provision and the deferred income tax benefit for the six months ended June 30, 2019 were approximately $30,000 and $15,000, respectively.

The current income tax provision for the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018 primarily relates to the amortization of goodwill.state minimum taxes and foreign income taxes.

 

Although the Company is forecasting a return to profitability, it 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 allthe Federal and state deferred tax assets as of SeptemberJune 30, 20172019 and December 31, 2016. Some of the Federal NOL carry forward is currently subject to certain utilization limitations under Section 382 of the Internal Revenue Code.2018.

 

The Company’s plan to repatriate earnings in its foreign locations to the United States requires that U.S. federal income taxes be provided on the Company’s earnings in those foreign locations. For state tax purposes, the Company’s foreign earnings generally are not taxed due to an exemption available in states where the Company currently transacts business.13. FAIR VALUE OF FINANCIAL INSTRUMENTS

13.RESTRUCTURING CHARGES

During March 2017, the Company decided to close its operations in Poland and India. In connection with the closing of these subsidiaries, in the first quarter of 2017, the Company expensed approximately $276,000 of restructuring charges representing primarily employee severance costs, remaining lease and termination fees, disposal of property and equipment and professional fees. The remaining amounts to be paid of approximately $19,000 are included in accrued expenses in the condensed consolidated balance sheet as of September 30, 2017.

14.FAIR VALUE OF FINANCIAL INSTRUMENTS

 

As of SeptemberJune 30, 20172019, and December 31, 2016,2018, the carrying amounts of receivables,accounts receivable, accounts payable and accrued expenses and the amount due to Prudential (at December 31, 2016 only) approximated their estimated fair values because of the short term nature of these financial instruments.

Fair value measurements-Level 2

Our notes payable are carried at cost and approximate fair value since the interest rates being charged approximate market rates. The fair value of our term loans at December 31, 2016 was approximately $7.3 million. The Company’s outstanding borrowings under the line of credit with Opus had a carrying value of $2 million as of both September 30, 2017 and December 31, 2016. The fair value of the outstanding borrowings with Opus under the term loans at December 31, 2016 and the line of credit at December 31, 2016 and September 30, 2017 approximated the carrying value, as these borrowings bore interest based on prevailing variable market rates currently available at those dates. As a result, the Company categorizes these borrowings as Levellevel 2 in the fair value hierarchy.

 

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Contingent Consideration

The Company’s contingent consideration of approximately $670,000$280,000 and $930,000$526,000 as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, are Level 3 liabilities. The fair value of the contingent consideration at SeptemberJune 30, 20172019 and December 31, 20162018 was primarily driven by changes in revenue estimates related to the acquisitions during 2015 and 2016, the price of the Company’s common stock on the Nasdaq Capital Market (only for the December 31, 2016 contingent consideration amount), the passage of time and the associated discount rate. Due to the number of factors used to determine contingent consideration, it is not possible to determine a range of outcomes. Subsequent adjustments to the fair value of the contingent consideration liability will continue to be recorded in the Company’s results of operations until all contingencies are settled.

 

The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):

 

  Fair Value Measurement at Reporting
Date Using Significant Unobservable
Inputs, Level 3		 
  Nine Months Ended September 30, 
  2017  2016 
Balance - January 1, $929,549  $1,172,508 
Acquisitions  -   678,368 
Change in fair value  151,423   (607,978)
Settlement in the form of shares issued  (331,676)  - 
Payments  (79,603)  (153,799)
Balance - September 30, $669,693  $1,089,099 

  Fair Value Measurement at Reporting Date Using Significant Unobservable Inputs, Level 3 
  Six Months Ended June 30, 
  2019  2018 
Balance - January 1, $526,432  $603,411 
Change in fair value  (64,203)  42,780 
Payments  (182,664)  (82,725)
Balance - June 30, $279,565  $563,466 

 

115. SUBSEQUENT EVENT4.SEGMENT REPORTING

 

During October 2017,Both our Chief Executive Officer and Executive Chairman serve as the Opus credit facility was replaced with a $5 million revolving line of credit from SVB. Interest on the SVB revolving line of credit is charged at the prime rate plus 1.75%. There is also a fee of one-half of 1% for the unused portion of the credit line. Available borrowings are subject to 200% of repeatable revenue as defined, reduced by an annualized attrition rate. The debt is secured by all of the Company’s domestic assets and 65% of the shares in its offshore facilities.Future acquisitions are subject to approval by SVB.

In connection with the SVB debt agreement,Chief Operating Decision Maker (“CODM”), organize the Company, paid approximately $90,000 of fees upfrontmanage resource allocations and issued warrants for SVB to purchase 125,000 shares of its common stock,measure performance among two operating and committed to pay an annual anniversary fee of $50,000 a year. The warrants have a strike price equal to the highest volume weighted average price per share for any five consecutive trading days during the thirty consecutive trading-day period commencing on the fifteenth trading day immediately preceding the date of the loan agreement. They have a five-year exercise window, piggyback registrationreportable segments: (i) Healthcare IT and net exercise rights, and will be valued once the strike price is determined. The SVB credit agreement contains various covenants and conditions governing the revolving line of credit.(ii) Practice Management.

 

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The Healthcare IT segment includes revenue cycle management and other services. The Practice Management segment includes the management of three medical practices and starting April 1, 2019, certain practice management services are being provided to a fourth practice. Each segment is considered a reporting unit. The CODM evaluates financial performance of the business units on the basis of revenue and direct operating costs excluding unallocated amounts, which are mainly corporate overhead costs. Our CODM does not evaluate operating segments using asset or liability information. The accounting policies of the segments are the same as those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 20, 2019. There was only one operating segment during the three and six months ended June 30, 2018 as the Practice Management segment was acquired in July 2018. The following table presents revenues, operating expenses and operating income (loss) by reportable segment:

 

  Six Months Ended June 30, 2019 
  Healthcare IT  Practice Management  Unallocated Corporate Expenses  Total 
Net revenue $25,580,319  $6,249,391  $-  $31,829,710 
Operating expenses:                
Direct operating costs  16,403,912   4,840,023   -   21,243,935 
Selling and marketing  726,147   17,809   -   743,956 
General and administrative  5,757,549   955,760   2,592,521   9,305,830 
Research and development  473,064   -   -   473,064 
Change in contingent consideration  (64,203)  -   -   (64,203)
Depreciation and amortization  1,435,071   157,830   -   1,592,901 
Total operating expenses  24,731,540   5,971,422   2,592,521   33,295,483 
Operating income (loss) $848,779  $277,969  $(2,592,521) $(1,465,773)

  Three Months Ended June 30, 2019 
  Healthcare IT  Practice Management  Unallocated Corporate Expenses  Total 
Net revenue $13,460,575  $3,288,924  $-  $16,749,499 
Operating expenses:                
Direct operating costs  8,929,458   2,466,937   -   11,396,395 
Selling and marketing  374,196   8,361   -   382,557 
General and administrative  3,295,146   559,390   1,289,218   5,143,754 
Research and development  218,408   -   -   218,408 
Depreciation and amortization  757,084   79,077   -   836,161 
Total operating expenses  13,574,292   3,113,765   1,289,218   17,977,275 
Operating (loss) income $(113,717) $175,159  $(1,289,218) $(1,227,776)

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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 ninesix months ended SeptemberJune 30, 20172019 and 20162018, and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our Condensed Consolidated Financial Statements and related notes beginning on page 4 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.

 

Overview

 

MTBC, Inc., (formerly Medical Transcription Billing, Corp.) together with its consolidated subsidiaries (“MTBC” or the “Company”), is a healthcare information technology company that provides a fully integrated suite of proprietary web-based solutions together with relatedand business services to healthcare providers. Our integrated Software-as-a-Service (or SaaS)(“SaaS”) platform isand business services are designed to help our customersclients increase revenues, streamline workflows and make better business and clinical decisions, while reducing administrative burdens and operating costs. These solutions and services include:

Healthcare IT:

●Revenue cycle management (“RCM”) services;

oProprietary, healthcare IT solutions, which are part of our RCM services, including:

●Electronic health records,
●Practice management software and related tools,
●Mobile Health (“mHealth”) solutions,
●Healthcare claims clearinghouse, and
●Business intelligence, customized applications, interfaces and a variety of other technology solutions that support our healthcare clients.

●Group purchasing services.

Practice Management:

●Comprehensive practice management services.

We are able to deliver our leadingindustry-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 experienced health industry experts throughout the United States, who are supported by our highly educated and specialized offshore workforce of more than 1,700approximately 2,200 team members at labor costs that we believe to beare approximately one-tenth the cost of comparable U.S. employees. Our unique business model has also allowed us to become a leading consolidator in our industry sector, in which we have gained a reputation for being able to acquire and transform distressed competitors into profitable operations of MTBC.

 

Our flagship offering, PracticePro, empowers healthcare practices withDuring April 2019, the core softwareCompany acquired substantially all of the revenue cycle management and practice management business services they need to address industry challenges on one unified SaaS platform. We deliver powerful, integratedof Etransmedia Technology, Inc. and easy-to-use ‘big practice solutions’ to small and medium practices, which enable them to efficiently operate their businesses, manage clinical workflows and receive timely paymentits subsidiaries (together “ETM”). The Company paid $1.6 million in cash for their services. PracticePro consists of:the acquisition.

 

During July 2018, the Company acquired substantially all of the revenue cycle management, practice management and group purchasing assets of Orion Healthcorp, Inc. and 13 of its affiliates (together, “Orion”). The Company paid $12.6 million in cash for the acquisition. This acquisition expanded the scope of our offerings to include additional niche hospital solutions, a service that negotiates vaccine discounts with pharmaceutical manufacturers and then extends those vaccine discounts to physician members, and a service that provides end-to-end practice management services to physician practices under multi-decade management service agreements.

 ●24Practice management software and related tools, which facilitate the day-to-day operation of a medical practice;
 ●Electronic health records (or EHR), which are easy to use, highly ranked, and allow our clients to reduce paperwork and qualify for government incentives;
●Revenue cycle management (or RCM) services, which include end-to-end medical billing, analytics, and related services; and
●Mobile Health (or mHealth) solutions, including smartphone applications that assist patients and healthcare providers in the provision of healthcare services.

 

Adoption of our RCM solutions requires little or no upfront expenditure by a provider.practice. Additionally, for most of our solutions and customers, our financial performance is linked directly to the financial performance of our clients because the vast majority of our revenues are based on a percentage of our clients’ collections. The standard fee for our complete, integrated, end-to-end solution is among the lowest in the industry.

During the third quarter of 2017, the Company introduced two new products – talkEHR, a voice enabled electronic health records (EHR) solution and EnrollmentPlus, a SaaS solution that streamlines the insurance enrollment workflow.

The Company has a clearinghouse service which allows clients We currently provide services to track claim status and includes services such as batch electronic claim and payment transaction clearing and web access for claim corrections. The Company also has an EDI service which provides a centralized electronic data interchange management system to record, manage and control the exchange of information. In addition, the Company has a printing and mailing operation.

Our growth strategy involves both acquisitive and organic growth. Both prongs of our strategy have yielded positive results for us historically.

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With regard to our acquisition strategy, we believe that it is becoming increasingly difficult for traditional RCM companies to meet the growing technology and business service needs of healthcare providers without a significant investment in information technology infrastructure. The RCM service industry is highly fragmented, with many local and regional RCM companies serving small medical practices. We believe that the industry is ripe for consolidation and that we can achieve significant growth through acquisitions.

Our investment in sales and marketing during 2017 has helped us sign new customers which we expect will accelerate organic growth. First, we actively partner with industry participants who cross-market our services and otherwise provide referrals. Second, our newly launched talkEHR is a free product, but is designed to encourage users to upgrade to a revenue-generating, premium billing solution. Since the third quarter launch of talkEHR, more than 20011,000 providers, have signed-up(which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff that render bills for talkEHRtheir services) practicing in approximately 1,800 independent medical practices and a few have already upgraded to our premium billing. As we move forward, we intend to continue to strategically promote talkEHR to new users, while encouraging providers who have already signed-up to actively use talkEHR in their day-to-day practice and upgrade to our premium billing solution. Third, a key part of our organic growth strategy for larger groups involves active attendance and participation in industry tradeshows.hospitals.

 

Our offshore operations in Pakistan and Sri Lanka accounted for approximately 29%17% and 32% of total expenses for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. A significant portion of those foreign expenses were personnel-related costs (approximately 79% and 75% for both the ninesix months ended SeptemberJune 30, 20172019 and 2016, respectively)2018). 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. All of the medical billing companies that we have acquired use domestic labor or subcontractors from higher cost locations to provide all or a substantial portion of their services. We are able to achieve significant cost reductions as we shift these labor costsleverage technology to reduce manual work and strategically transition a portion of the remaining manual tasks to our offshore operations.

On October 3, 2016, MTBC Acquisition, Corp. (“MAC”), a newly formed, a wholly-owned subsidiary of MTBC, acquired substantially all the medical billing business and assets of MediGain, LLC, a Texas limited liability company, and its subsidiary Millennium Practice Management Associates, LLC, a New Jersey limited liability company (“Millennium”) (together “MediGain”). In connection with this acquisition, MTBC expects to generate at least $10 million of annual revenue from the customers acquired. Although there is no assurance that the customers will remain with MTBC, the Company expects that this acquisition will continue to be accretive to earnings during the remainder of 2017. During the fourth quarter of 2016 and the first three quarters of 2017, we made significant progress at integrating the acquired operations with MTBC, buthighly-specialized, cost-efficient team in the short term, we had a significant number of additional U.S.-based employees from MediGain. This cost, as well as costs from MediGain’s operations in IndiaU.S., Pakistan and its offshore subcontractors, impacted MTBC’s expenses during the fourth quarter of 2016 and the first quarter of 2017.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.

 

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Adjusted EBITDA excludes the following elements which are included in GAAP net income (loss):

 

 ●Income tax (benefit) expense 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 asset impairment charges and other non-operating expenditures;
 ●Stock-based compensation expense including customer incentivesincludes cash-settled awards and the related fees, and cash-settled awards,taxes, based on changes in the stock price;
 ●Non-cash depreciationDepreciation and amortization charges, and does not reflect any cash requirements for replacement for capital expenditures;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, exit costs related to terminating leases and other contractual agreements costs related to specific transactions and restructuring charges arising from discontinued facilities and operations; and
 ●Changes in contingent consideration.

25

 

Set forth below is a presentation of our adjusted EBITDA for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:

 

 Three Months Ended Nine Months Ended 
 September 30, September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
 2017 2016 2017 2016  2019  2018  2019  2018 
 ($ in thousands)  ($ in thousands) 
Net revenue $7,514  $5,341  $23,519  $15,664  $16,749  $8,683  $31,830  $16,990 
                                
GAAP net loss $(980) $(1,495) $(5,382) $(4,773)
GAAP net (loss) income $(771) $195  $(1,067) $270 
                                
Provision for income taxes  65   45   192   126   55   51   15   98 
Net interest expense  673   166   1,229   461   33   44   50   113 
Foreign exchange / other expense  (24)  14   (34)  40   (539)  (185)  (296)  (332)
Stock-based compensation expense  126   194   334   816   793   409   1,550   537 
Depreciation and amortization  664   1,118   3,637   3,537   836   560   1,593   1,151 
Integration and transaction costs  85   285   636   609 
Integration, transaction and restructuring costs  733   472   939   651 
Change in contingent consideration  -   (197)  151   (608)  -   11   (64)  43 
Adjusted EBITDA $609  $130  $763  $208  $1,140  $1,557  $2,720  $2,531 

 

Adjusted operating income and adjusted operating margin exclude the following elements which are included in GAAP operating income (loss):

 

 ●Stock-based compensation expense including customer incentivesincludes cash-settled awards and the related fees, and cash-settled awards,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, exit costs related to terminating leases and other contractual agreements, costs related to specific transactions and restructuring charges arising from discontinued facilities and operations; and
 ●Changes in contingent consideration.

 

2026

 

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 ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:

 

 Three Months Ended Nine Months Ended 
 September 30, September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
 2017 2016 2017 2016  2019  2018  2019  2018 
 ($ in thousands)  ($ in thousands) 
Net revenue $7,514  $5,341  $23,519  $15,664  $16,749  $8,683  $31,830  $16,990 
                                
GAAP net loss $(980) $(1,495) $(5,382) $(4,773)
GAAP net (loss) income $(771) $195  $(1,067) $270 
Provision for income taxes  65   45   192   126   55   51   15   98 
Net interest expense  673   166   1,229   461   33   44   50   113 
Other (income) expense - net  (32)  14   (107)  40 
GAAP operating loss  (274)  (1,270)  (4,068)  (4,146)
Other income - net  (545)  (218)  (464)  (370)
GAAP operating (loss) income  (1,228)  72   (1,466)  111 
GAAP operating margin  (3.6%)  (23.8%)  (17.3%)  (26.5%)  (7.3)%  0.8%  (4.6)%  0.7%
                                
Stock-based compensation expense  126   194   334   816   793   409   1,550   537 
Amortization of purchased intangible assets  419   949   2,881   3,077   551   337   1,037   698 
Integration and transaction costs  85   285   636   609 
Integration, transaction and restructuring costs  733   472   939   651 
Change in contingent consideration  -   (197)  151   (608)  -   11   (64)  43 
Non-GAAP adjusted operating income $356  $(39) $(66) $(252) $849  $1,301  $1,996  $2,040 
Non-GAAP adjusted operating margin  4.7%  (0.7%)  (0.3%)  (1.6%)  5.1%  15.0%  6.3%  12.0%

 

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 asset impairment charges and other non-operating expenditures;
 ●Stock-based compensation expense including customer incentivesincludes cash-settled awards and the related fees, and cash-settled awards,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, or transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees, exit costs related to terminating leases and other contractual agreements, costs related to specific transactions and restructuring charges arising from discontinued facilities and operations;
 ●Changes in contingent consideration; and
 ●Income tax (benefit) expense resulting from the amortization of goodwill related to our acquisitions.

 

2127

 

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(loss) income to non-GAAP adjusted net income for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:

 

 Three Months Ended Nine Months Ended  Three Months Ended June 30,  Six Months Ended June 30, 
 September 30, September 30,  2019  2018  2019  2018 
 2017 2016 2017 2016  ($ in thousands) 
 ($ in thousands) 
GAAP net loss $(980) $(1,495) $(5,382) $(4,773)
GAAP net (loss) income $(771) $195  $(1,067) $270 
                                
Foreign exchange / other expense  (24)  14   (34)  40   (539)  (185)  (296)  (332)
Stock-based compensation expense  126   194   334   816   793   409   1,550   537 
Amortization of purchased intangible assets  419   949   2,881   3,077   551   337   1,037   698 
Integration and transaction costs  85   285   636   609 
Integration, transaction and restructuring costs  733   472   939   651 
Change in contingent consideration  -   (197)  151   (608)  -   11   (64)  43 
Income tax expense related to goodwill  55   42   165   115 
Income tax expense (benefit) related to goodwill  40   40   (15)  78 
Non-GAAP adjusted net income $(319) $(208) $(1,249) $(724) $807  $1,279  $2,084  $1,945 

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
GAAP net loss per share $(0.14) $(0.17) $(0.62) $(0.53)
                 
GAAP net loss per end-of-period share  (0.09)  (0.15)  (0.47)  (0.46)
Foreign exchange / other expense  0.00   0.00   0.00   0.00 
Stock-based compensation expense  0.01   0.02   0.03   0.08 
Amortization of purchased intangible assets  0.04   0.10   0.25   0.30 
Integration and transaction costs  0.01   0.03   0.06   0.06 
Change in contingent consideration  -   (0.02)  0.01   (0.06)
Income tax expense related to goodwill  0.00   0.00   0.01   0.01 
Non-GAAP adjusted net income per share $(0.03) $(0.02) $(0.11) $(0.07)
                 
End-of-period shares  11,530,591   10,295,370   11,530,591   10,295,370 

Set forth below is a reconciliation of our non-GAAP adjusted net income per share to our GAAP net loss attributable to common shareholders, per share:

  Three Months Ended June 30,  Six Months Ended June 30, 
  2019  2018  2019  2018 
GAAP net loss attributable to common shareholders, per share $(0.19) $(0.09) $(0.34) $(0.15)
Impact of preferred stock dividend  0.13   0.11   0.25   0.17 
Net (loss) income per end-of-period share  (0.06)  0.02   (0.09)  0.02 
                 
Foreign exchange / other expense  (0.04)  (0.02)  (0.02)  (0.03)
Stock-based compensation expense  0.07   0.04   0.13   0.05 
Amortization of purchased intangible assets  0.04   0.03   0.08   0.06 
Integration, transaction and restructuring costs  0.06   0.04   0.08   0.06 
Change in contingent consideration  -   0.00   (0.01)  0.00 
Income tax expense (benefit) related to goodwill  0.00   0.00   (0.00)  0.01 
Non-GAAP adjusted net income per share $0.07  $0.11  $0.17  $0.17 
                 
End-of-period shares  12,028,242   11,665,174   12,028,242   11,665,174 

 

For purposes of determining non-GAAP adjusted net income per share, the Company used the number of common shares outstanding at the end of SeptemberJune 30, 20172019 and 2016, including shares which were issued but have2018. Non-GAAP adjusted net income per share does not been settled, and considered contingent consideration. Accordingly, the end-of-period diluted common shares include 248,625 of contingently issuable shares at September 30, 2016.take into account dividends paid on our preferred stock. No tax effect has been provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per common 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 condensed consolidated financial statements, we regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, make strategic business decisions, and assess market share trends and working capital needs.metrics. We believe information on these metrics is useful for investors to understand the underlying trends in our business.

 

Set forth below are our key operating and financial metrics for RCM customers using our platform, which excludes acquired customers who have not migrated to our platform as well as customers of our clearinghouse, EDI and other services. Revenue from practices using our proprietary platform accounted for approximately 47% of our revenue for the nine months ended September 30, 2017 and approximately 75% of our revenue for the nine months ended September 30, 2016.

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First Pass Acceptance Rate: We define first pass acceptance rate as the percentage of claims submitted electronically by us, through our platform, to insurers and clearinghouses that are accepted on the first submission and are not rejected for reasons such as insufficient information or improper coding. Our first-time acceptance rate was approximately 96% for the twelve months ended September 30, 2017 and 2016, which compares favorably to the average of the top twelve payers of approximately 95%, as reported by the American Medical Association.

First Pass Resolution Rate: First pass resolution rate measures the percentage of primary claims that are favorably adjudicated and closed upon a single submission. Our first pass resolution rate was approximately 94% for the twelve months ended September 30, 2017 and 2016.

Days in Accounts Receivable: Days in accounts receivable measures the median number of days between the day a claim is submitted by us on behalf of our customer, and the date the claim is paid to our customer. Our clients’ median days in accounts receivable was approximately 36 days for primary care and 41 days for combined specialties for the twelve months ended September 30, 2017, and approximately 31 days for primary care and 39 days for combined specialties for the twelve months ended September 30, 2016, as compared to the national average of 36 and 40 days, respectively, as reported by the Medical Group Management Association in 2016.

Providers and Practices Served: As of SeptemberJune 30, 2017,2019, we provided RCM and related services to approximately 2,600an estimated universe of more than 11,000 providers (which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff that render bills for their services), representing approximately 740 practices.1,800 independent medical practices and hospitals. In addition, we served approximately 230200 clients who were not medical practices, but are service organizations who serve the healthcare community. As of SeptemberJune 30, 2016,2018, we served approximately 1,8203,300 providers representing approximately 740730 practices. 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.

28

 

Sources of Revenue

 

Revenue:We primarily derive our revenues from revenue cycle management services, reported in our Healthcare IT segment, which is typically billed as a percentage of payments collected by our customers. This fee includes RCM, as well as the ability to use our electronic health recordsEHR and practice management software as part of the bundled fee. All of these services are considered revenue cycle management revenue. These payments accounted for approximately 89% of our revenues during both the three68% and nine months ended September 30, 2017, and 85% and 86%91% of our revenues during the three and nine months ended SeptemberJune 30, 2016,2019 and 2018, respectively and 69% and 90% for six months ended June 30, 2019 and 2018, respectively. Other Healthcare IT services, including printing and mailing operations and professional services, represented approximately 11% and 9% of revenues for the three months ended June 30, 2019 and 2018, respectively and 10% for both the six months ended June 30, 2019 and 2018.

 

WeAs a result primarily of the Orion acquisition, we earned approximately 2%20% of our revenue from clearinghouse and EDI clientspractice management services during both the three and ninesix months ended SeptemberJune 30, 2017,2019. This revenue represents fees based on our actual costs plus a percentage of the operating profit and 3%is reported in our Practice Management segment. Also commencing July 1, 2018, we earned approximately 1% of our revenue from clearinghouse and EDI clients forduring both the three and ninesix months ended SeptemberJune 30, 2016. We earned approximately 5% and 4% of2019 from group purchasing services which are reported in our revenue from printing and mailing operations during the three and nine months ended September 30, 2017, respectively, and 6% and 2% of our revenue from printing and mailing operations during the three and nine months ended September 30, 2016, respectively.Healthcare IT 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 condensed consolidated statements of operations.

 

Selling and Marketing Expense.Selling and marketing expense consists primarily of compensation and benefits, commissions, travel and advertising expenses.

 

Research and Development Expense.Research and development expense consists primarily of personnel-related costs and third-party contractor costs.

 

General and Administrative Expense.General and administrative expense consists primarily of personnel-related expense for administrative employees, including compensation, benefits, travel, occupancyfacility lease costs and insurance, software license fees and outside professional fees.

 

23

Contingent Consideration.Contingent consideration represents the amountportion 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 fiveten 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.acquisitions including those intangibles related to the group purchasing services. Amortization expense related to the value of our practice management clients is amortized on a straight-line basis over a period of twelve years.

 

Interest and Other Income (Expense). Interest expense consists primarily of interest costs related to our working capital line of credit, term loans and amounts due in connection with acquisitions, offset by interest income. Our otherOther income (expense) results primarily from foreign currency transaction gains (losses). and income earned from temporary cash investments.

 

29

Income Tax. In preparing our condensed 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 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 all deferred tax assets as of SeptemberJune 30, 20172019 and December 31, 2016.2018.

 

Critical Accounting Policies and Estimates

 

We prepare our condensed consolidated financial statements in accordance with GAAP. The preparation of these financial statements requires us to make estimatescritical accounting policies and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense and related disclosures. We base our estimates, assumptions and judgments on historical experience, current trends and various other factors that we believe to be reasonable under the circumstances. The accounting estimates used in the preparation of our condensed consolidated financial statements will change as new events occur, asthat we believe affect our more experience is acquired, as additional information is obtainedsignificant judgments and asestimates used in the preparation of our operating environment changes. On a regular basis, we reviewcondensed 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, 2018.

Except for the adoption of FASB ASC Topic 842, Leases, discussed below, there have been no material changes to our critical accounting policies estimates, assumptions and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates and such differences could be material.during the six months ended June 30, 2019 as compared to those reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Leases:

We adopted ASU 2016-02:Leases (Topic 842) as of January 1, 2019. 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 our condensed consolidated balance sheet at June 30, 2019. The methods, estimatesCompany does not have any finance leases.

ROU assets represent our right to use an underlying asset for the lease term and judgmentslease 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 usewill exercise that option. Leases with a term of less than 12 months are not recorded in applying our accounting policies havethe condensed 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 significant impact on our resultssingle lease component. Some leases include escalation clauses and termination options that are factored into the determination of operations. the future lease payments when appropriate.

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, 2016,2018, filed with the SEC on March 31, 2017.

20, 2019.

 

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Results of Operations

 

The following table sets forth our consolidated results of operations as a percentage of total revenue for the periods shown.shown:

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

  Three Months Ended June 30,  Six Months Ended June 30, 
 2017 2016 2017 2016  2019 2018 2019 2018 
Net revenue  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
Operating expenses:                                
Direct operating costs  55.5%  50.0%  57.8%  46.6%  68.0%  49.9%  66.7%  51.9%
Selling and marketing  3.0%  5.1%  3.6%  5.4%  2.3%  4.6%  2.3%  4.2%
General and administrative  32.9%  48.1%  35.0%  52.2%  30.7%  35.2%  29.2%  33.3%
Research and development  1.3%  2.9%  1.5%  3.0%
Change in contingent consideration  0.0%  (3.7%)  0.6%  (3.9%)  0.0%  0.1%  (0.2)%  0.3%
Research and development  3.3%  3.3%  3.6%  3.7%
Depreciation and amortization  8.8%  20.9%  15.5%  22.6%  5.0%  6.4%  5.0%  6.8%
Restructuring charges  0.0% 0.0% 1.2% 0.0%
Total operating expenses  103.5%  123.7%  117.3%  126.6%  107.3%  99.1%  104.5%  99.5%
                                
Operating loss  (3.5%)  (23.7%)  (17.3%)  (26.6%)
Operating (loss) income  (7.3)%  0.9%  (4.5)%  0.5%
                                
Interest expense - net  9.0%  3.1%  5.2%  2.9%  0.2%  0.5%  0.2%  0.7%
Other income (expense) - net  0.4%  (0.3%)  0.5%  (0.3%)
Loss before income taxes  (12.1%)  (27.1%)  (22.0%)  (29.8%)
Other income - net  3.3%  2.5%  1.5%  2.2%
(Loss) income before income taxes  (4.2)%  2.9%  (3.2)%  2.0%
Income tax provision  0.9%  0.8%  0.8%  0.8%  0.3%  0.6%  0.0%  0.6%
Net loss (13.0%)  (27.9%)  (22.8%)  (30.6%)
Net (loss) income  (4.5)%  2.3%  (3.2)%  1.4%

 

Comparison of the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018

 

  

Three Months Ended

September 30,

  Change  Nine Months Ended
September 30,		  Change 
  2017  2016  Amount  Percent  2017  2016  Amount  Percent 
Revenue $7,513,592  $5,341,002  $2,172,590   41% $23,518,416  $15,663,687  $7,854,729   50%
  Three Months Ended     Six Months Ended    
  June 30,  Change  June 30,  Change 
  2019  2018  Amount  Percent  2019  2018  Amount  Percent 
Net revenue $16,749,499  $8,682,937  $8,066,562   93% $31,829,710  $16,990,262  $14,839,448   87%

 

Revenue.Total revenue of $7.5$16.7 million and $23.5$31.8 million for the three and ninesix months ended SeptemberJune 30, 20172019 increased by $2.2$8.1 million or 41%93% and $7.9$14.8 million or 50%87% from revenue of $5.3$8.7 million and $15.7$17.0 million for the three and ninesix months ended SeptemberJune 30, 2016. Total revenue2018, respectively. Revenue for the three and ninesix months ended SeptemberJune 30, 2017 included2019 includes approximately $4.1$7.1 million and $12.8$14.8 million, of revenuerespectively from customers weacquired in the Orion acquisition. Of the six months amount, $8.2 million relates to RCM clients and other revenue streams, $6.2 million relates to practice management services and $405,000 relates to group purchasing services. Revenue for both the three and six months ended June 30, 2019 includes $2.0 million from customers acquired from the 2016 Acquisitions (primarily MediGain), offset by attrition from customers.ETM acquisition.

 

 Three Months Ended     Six Months Ended    
 Three Months Ended
September 30,		 Change Nine Months Ended
September 30,		 Change  June 30,  Change  June 30,  Change 
 2017 2016 Amount Percent 2017 2016 Amount Percent  2019 2018 Amount Percent 2019 2018 Amount Percent 
Direct operating costs $4,171,932  $2,670,385  $1,501,547   56% $13,592,492  $7,292,415  $6,300,077   86% $11,396,395  $4,333,573  $7,062,822   163% $21,243,935  $8,817,628  $12,426,307   141%
Selling and marketing  228,991   274,796   (45,805)  (17%)  853,460   838,721   14,739   2%  382,557   403,057   (20,500)  (5)%  743,956   708,071   35,885   5%
General and administrative  2,474,139   2,569,399   (95,260)  (4%)  8,232,613   8,173,272   59,341   1%  5,143,754   3,054,205   2,089,549   68%  9,305,830   5,654,939   3,650,891   65%
Research and development  249,045   174,876   74,169   42%  843,294   575,059   268,235   47%  218,408   248,921   (30,513)  (12)%  473,064   504,800   (31,736)  (6)%
Change in contingent consideration  -   (196,882)  196,882   100%  151,423   (607,978)  759,401   125%  -   11,030   (11,030)  (100)%  (64,203)  42,780   (106,983)  (250)%
Depreciation  156,237   128,743   27,494   21%  484,429   369,204   115,225   31%  223,724   144,917   78,807   54%  431,342   295,988   135,354   46%
Amortization  508,204   989,539   (481,335)  (49%)  3,152,702   3,167,736   (15,034)  (0%)  612,437   414,779   197,658   48%  1,161,559   854,479   307,080   36%
Restructuring charges  -   -   -  100%  275,628   -   275,628  100%
Total operating expenses $7,788,548  $6,610,856  $1,177,692  18% $27,586,041  $19,808,429  $7,777,612  39% $17,977,275  $8,610,482  $9,366,793   109% $33,295,483  $16,878,685  $16,416,798   97%

 

Direct Operating Costs.Direct operating costs of $4.2$11.4 million and $13.6$21.2 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2019 increased by $1.5$7.1 million or 56%163% and $6.3$12.4 million or 86%141% from direct operating costs of $2.7$4.3 million and $7.3$8.8 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively. The MediGain acquisition increased salary costs by $912,000 and $3.3 million in the U.S. and $172,000 and $733,000 in India and Sri Lanka and operational outsourcing costs by $107,000 and $466,000 during2018. During the three and nine months ended SeptemberJune 30, 2017, respectively. Postage and delivery2019, salary costs increased by $243,000$3.6 million and $690,000outsourcing and processing costs increased by $1.2 million. During the six months ended June 30, 2019, salary costs increased by $6.5 million and outsourcing and processing costs increased by $2.0 million. Facility costs increased by $556,000 for the three and nine months ended SeptemberJune 30, 2017, respectively, primarily due to2019 and $952,000 for the acquisition of WFS. Salarysix months ended June 30, 2019. Medical supplies for the managed practices, which were not incurred during the six months ended June 30, 2018, were $1.3 million and other related expenses in Pakistan increased by $332,000 and $1.1$2.4 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively, as a result of2019, respectively. The increase in the additional employees in Pakistan hiredcosts for the three and six months ended June 30, 2019 were primarily related to service customers of the 2016 Acquisitions.Orion and Etransmedia acquisitions.

 

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Selling and Marketing Expense.Selling and marketing expense of $229,000$383,000 and $853,000$744,000 for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2019 decreased by $46,000$21,000 or 17%5% and increased by $15,000$36,000 or 2%5% from selling and marketing expense of $275,000$403,000 and $839,000$708,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively.

 

General and Administrative Expense.General and administrative expense of $2.5$5.1 million and $9.3 million for the three and six months ended SeptemberJune 30, 2017 decreased by $95,000 or 4% and for the nine months ended September 30, 2017, general and administrative expenses of $8.2 million2019 increased by $59,000$2.1 million or 1%68% and $3.7 million or 65% compared to the same period in 2016.2018. The reductionincrease in general and administrative expense for the three and six months ended SeptemberJune 30, 20172019 was primarily duerelated to reduced salaryadditional salaries, facility costs and professional fees. The increase forfees as a result of the nine months ended September 30, 2017 compared to the same period in 2016 relates to additional salary costs from the MediGain acquisition. The integration of acquired businesses resulted in expense reductions related to the closing of officesOrion and reducing third party expenses such as computer expenses, accommodation costs, office costs, and insurance expenses, which offset increased general and administrative resulting from theEtransmedia acquisitions.

 

Research and Development Expense. Research and development expense of $249,000$218,000 and $843,000$473,000 for the three and ninesix months ended SeptemberJune 30, 2017, respectively, increased2019 decreased by $74,000 or 42%$31,000 and $268,000 or 47%$32,000 from research and development expense of $175,000$249,000 and $575,000$505,000 for the three and ninesix months ended SeptemberJune 30, 2016, respectively, as a result2018, respectively. During the three months ended June 30, 2019, the Company capitalized approximately $178,000 of adding additional technical employeesdevelopment costs in Pakistan performing software development work.connection with its internal-use software.

 

Contingent Consideration.The change in contingent consideration of $151,000 during$107,000 for the ninesix months ended SeptemberJune 30, 2017 and $197,000 and $608,000 during2019 was due to a favorable settlement of the three and nine months ended September 30, 2016, respectively, relatesamount due to the change in the fair valueowners of the contingent consideration from acquisitions. The expense for the nine months ended September 30, 2017 resulted from an increase in the price of the Company’s common stock for the Practicare shares that were held in escrow and released during June 2017.a company previously acquired.

 

Depreciation.Depreciation of $156,000$224,000 and $484,000$431,000 for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2019 increased by $27,000$79,000 or 21%54% and $115,000$135,000 or 31%46% from depreciation of $129,000$145,000 and $369,000$296,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively, primarily as a result ofdue to additional purchases and the property and equipment purchasesacquired as part of the Orion and the acquisition of property and equipment from the MediGain acquisition.ETM acquisitions.

 

Amortization Expense.Amortization expense of $508,000$612,000 and $3.2$1.2 million for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, decreasedincreased by $481,000$198,000 and $15,000$307,000 from amortization expense of $990,000$415,000 and $3.2 million$854,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. This decrease duringThe increase for the three and six months ended SeptemberJune 30, 2017 resulted from2019 was primarily related to the intangible assets acquired in connection with our 2014 acquisitions becoming fully amortized. The Company generally amortizes intangible assets over three years.from the Orion and Etransmedia acquisitions.

 

Restructuring Charges. In connection with the closing of its subsidiaries in Poland and India, as of March 31, 2017, the Company accrued approximately $276,000 of restructuring charges representing primarily employee severance costs, remaining lease and termination fees and professional fees. The Company anticipates that the liquidation will be completed in early 2018. A substantial amount of the work performed by these locations was transferred to the Pakistan facility. The Company will also be using an outside contractor to perform some of the work previously performed by the Indian subsidiary. As a result of closing the Poland and India facilities, the Company will no longer need to fund the costs of these facilities.

  Three Months Ended     Six Months Ended    
  June 30,  Change  June 30,  Change 
  2019  2018  Amount  Percent  2019  2018  Amount  Percent 
Interest income $67,497  $29,939  $37,558   125% $145,697  $35,224  $110,473   314%
Interest expense  (100,562)  (74,167)  (26,395)  (36)%  (195,958)  (148,248)  (47,710)  (32)%
Other income - net  545,221   218,589   326,632   149%  464,191   369,963   94,228   25%
Income tax provision  55,352   51,536   3,816   7%  14,820   98,200   (83,380)  (85)%

 

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  Three Months Ended
September 30,		  Change  Nine Months Ended
September 30,		  Change 
  2017  2016  Amount  Percent  2017  2016  Amount  Percent 
Interest income $5,446  $10,918  $(5,472)  (50%) $13,598  $25,310  $(11,712)  (46%)
Interest expense  (678,103)  (176,527)  (501,576)  (284%)  (1,242,672)  (486,481)  (756,191)  (155%)
Other income (expense) - net  32,494   (13,933)  46,427   333%  107,364   (40,447)  147,811   365%
Income tax provision  65,000   45,309   19,691   43%  192,332   126,236   66,096   52%

Interest Income.Interest income of $5,000$67,000 and $14,000$146,000 for the three and ninesix months ended SeptemberJune 30, 2017, respectively, decreased2019 increased by $5,000$38,000 or 50%125% and $12,000$110,000 or 46%314% from interest income of $11,000$30,000 and $25,000$35,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. InterestThe interest income primarily represents late fees from customers.interest earned on temporary cash investments.

 

Interest Expense.Interest expense of $678,000$101,000 and $1.2 million$196,000 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, increased by $502,000$26,000 or 284%36% and $756,000increased by $48,000 or 155%32% from interest expense of $177,000$74,000 and $486,000$148,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. This increase was primarily due to the additional interest costs on borrowings under our term loansvehicle financing during the three and line of credit and amounts related tosix months ended June 30, 2019. Interest expense includes the MediGain acquisition. Also, included in the 2017 interest expense is $463,000amortization of deferred financing costs, related towhich was $96,000 during both the Opus credit agreement, which were written off as a result of the loans being paid offsix months ended June 30, 2019 and the agreement terminated two years earlier than anticipated.2018, respectively.

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Other (Expense) Income (Expense) - net.Other (expense) income - net was $32,000$545,000 and $107,000$464,000 for the three and ninesix months ended SeptemberJune 30, 2017,2019 respectively, compared to other expenseincome - net of $14,000$219,000 and $40,000$370,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. Included in otherOther (expense) income (expense) areprimarily represents foreign currency transaction gains (losses) primarily resulting from transactions in foreign currencies other than the functional currency. These transaction gains and losses are recorded in the condensed consolidated statements of operations related to the recurring measurement and settlement of such transactions. Other income for the nine months ended September 30, 2017 also includes $59,000 in cash received, net of obligations assumed, from the former owners of an acquired business as compensation for early termination of a client contract.

 

Income Tax Provision.There was a $65,000$55,000 and $192,000$15,000 provision for income taxes for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, an increase of $20,000 or 43% and $66,000 or 52% compared to the provision for income taxes of $45,000$52,000 and $126,000$98,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. IncludedThere was a federal tax benefit recorded in the nine monthfirst quarter of 2019 which reduced the provision for the income taxes for the six months ended SeptemberJune 30, 2017 and 2016 tax provisions are $165,000 and $115,000, respectively, deferred2019.

The current income tax provisions related to the amortization of goodwill. The increase in the income tax provisions is due to additional deferred income taxes relating to the Company’s acquisitions. The pre-tax loss decreased from $1.4 millionprovision for the three and six months ended SeptemberJune 30, 2016,2019 was approximately $15,000 and $30,000, and primarily relates to $915,000state minimum taxes and increased from $4.6 million to $5.2 million from the nine months ended September 30, 2016 to the same period in 2017.foreign income taxes. Although the Company is forecasting a return to profitability, it has incurred three years of cumulative losses historically and there is uncertainty regarding future U.S. taxable income, which makemakes realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance was recorded against all deferred tax assets at SeptemberJune 30, 20172019 and 2016.2018.

 

Liquidity and Capital Resources

 

The Company had a cash balance of $2.8 million at September 30, 2017, and an outstanding balance of $2.0 million drawn on its revolving credit facility with Opus Bank (“Opus”).

During October 2017, the Company repaid and closed its Opus credit facility and replaced it with a $5 million revolving line of credit with Silicon Valley Bank (“SVB”). Borrowings under the SVB facility are based on amounts on 200% of repeatable revenue and adjusted for an annualized recurring churn rate. Under the SVB agreement, the facility currently available to the Company is in excess of $4.0 million.

During the nine months ended September 30, 2017, there was negative cash flow from operations of approximately $1.3 million, as the Company integrated its 2016 Acquisitions, the largest of which was MediGain. During the three months ended September 30, 2017, cash flow used by operations was $619,000. Included in this amount is $270,000 of interest paid to Prudential.

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The following table summarizes our cash flows:

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2017  2016  2017  2016 
Net cash used in operating activities $(618,752) $(169,023) $(1,307,637) $(485,728)
Net cash used in investing activities  (359,773)  (127,461)  (704,988)  (1,744,870)
Net cash (used in) provided by financing activities  (1,990,525)  783,673   1,400,885   1,290,214 
Effect of exchange rate changes on cash  (52,054)  4,385   (75,758)  11,317 
Net (decrease) increase in cash $(3,021,104) $491,574  $(687,498) $(929,067)

In September 2015, the Company secured a $10 million credit facility from Opus, including an $8 million term loan and a $2 million revolving line of credit. During October 2017, the credit facility with Opus was repaid and terminated, and replaced with a $5 million revolving line of credit from SVB. The Company has available in excess of $4.0 million under the SVB facility.

The Company had $2.8 million of cash and had positive working capital of $913,000 at September 30, 2017. The loss before income taxes was $915,000 for the three months ended September 30, 2017, of which $664,000 was non-cash depreciation and amortization. Additionally, the non-cash write-off of the deferred financing costs due to early the termination of the Opus credit agreement was $463,000.

Management achieved extensive expense reductions following the acquisition of MediGain in October 2016. The cost cutting included closing certain domestic and foreign facilities, eliminating reliance on subcontractors, and reducing non-essential personnel where work could be performed by offshore employees more cost-effectively. Direct operating and general and administrative costs decreased by $1.9 million and $1.8 million, respectively from the fourth quarter of 2016 to the third quarter of 2017. This represented reductions of 32% and 42%, respectively.

During the second and third quarter of 2017, the Company completed several equity financings totaling approximately $15.0 million in net proceeds.

Collectively, these developments dramatically improved the financial position of the Company. Management continues to focus on the Company’s overall profitability, including growing revenue and managing expenses, and expects that these efforts will continue to enhance our liquidity and financial position, allowing us to run our business, and comply with all bank covenants.

Operating Activities

Although revenue increased by $7.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, operating expenses increased by $7.8 million for the same period primarily due to the acquisition of MediGain in the fourth quarter of 2016. Cash used in operating activities was $1.3 million during the nine months ended September 30, 2017, compared to $486,000 during the nine months ended September 30, 2016. The increase in the net loss of $609,000 included the following changes in non-cash items: additional depreciation and amortization of $100,000, additional provision for doubtful accounts of $152,000, additional interest accretion of $528,000 and a change in contingent consideration of $759,000, offset by a decrease in stock compensation expense of $432,000 and a change in working capital of $1.4 million.

Accounts receivable decreased by $438,000 for the nine months ended September 30, 2017, compared with an increase of $161,000 for the nine months ended September 30, 2016. Accounts payable, accrued compensation and accrued expenses decreased $1.8 million for the nine months ended September 30, 2017 (primarily due to the payment of liabilities assumed in connection with the MediGain acquisition and the reduction in the use of outside contractors) compared to an increase of $91,000 for the nine months ended September 30, 2016.

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Investing Activities

Cash used in investing activities during the nine months ended September 30, 2017 was $705,000, a decrease of $1.0 million compared to $1.7 million during the nine months ended September 30, 2016. During the nine months ended September 30, 2017, $205,000 was paid in connection with the acquisition of WMB. During the nine months ended September 30, 2016, $1.25 million and $175,000 was paid in connection with the acquisitions of GCB and RMB, respectively.

Financing Activities

Cash provided by financing activities during the nine months ended September 30, 2017 was $1.4 million, compared to $1.3 million during the nine months ended September 30, 2016. Cash provided by financing activities during the nine months of 2017 includes $13.0 million of net proceeds from issuing approximately 610,000 shares of preferred stock, $2.0 million raised from issuing one million shares of common stock, offset by $7.6 million of repayments for debt obligations, a $5 million payment to Prudential and $847,000 of preferred stock dividends. Cash provided by financing activities for nine months ended September 30, 2016 included $2 million of additional borrowings on the Opus line of credit, offset by $554,000 repayment of debt obligations, $507,000 of preferred stock dividends and $546,000 of repurchases of common stock. Average borrowings from our revolving line of credit were $178,000 for the nine months ended September 30, 2016, compared to $1.4 million for the nine months ended September 30, 2017.

During October 2017, the Company replaced its Opus credit facility with a $5 million revolving line of credit from SVB. Borrowings under the credit facility are based on 200% of repeatable revenue, reduced by an annualized attrition rate as defined in the agreement. The Company currently has in excessAs of $4 million availableJune 30, 2019, nothing was drawn on the SVB credit line.agreement.

 

During the six months ended June 30, 2019, there was positive cash flow from operations of approximately $3.3 million and as of June 30, 2019 the Company had approximately $10.6 million in cash, positive working capital of $11.2 million and no bank debt.

During the second quarter of 2019, the Company paid the purchase price of $1.6 million for the ETM acquisition in cash.

During 2018, the Company paid the purchase price of $12.6 million for the Orion acquisition in cash. The Company occasionally utilizes its revolving line of credit with SVB, but, as of June 30, 2019, there was no balance outstanding. SVB doubled the maximum availability on the line from $5 million to $10 million in September 2018. During April 2018, the Company sold 420,000 shares of Series A Preferred Stock and raised net proceeds of approximately $9.4 million. During October 2018, the Company sold 600,000 additional shares of its Series A Preferred Stock raising net proceeds of approximately $13.4 million.

The following table summarizes our cash flows for the periods presented:

  Three Months Ended June 30,  Six Months Ended June 30, 
  2019  2018  2019  2018 
Net cash provided by operating activities $2,375,420  $1,294,224  $3,312,929  $1,967,605 
Net cash used in investing activities  (1,993,282)  (1,202,188)  (2,504,220)  (1,376,430)
Net cash (used in) provided by financing activities  (1,671,737)  8,318,083   (4,258,008)  7,204,046 
Effect of exchange rate changes on cash  (654,022)  (228,570)  (440,158)  (434,834)
Net (decrease) increase in cash $(1,943,621) $8,181,549  $(3,889,457) $7,360,387 

The loss before income taxes was $716,000 and $1.1 million for the three and six months ended June 30, 2019, respectively, which included $836,000 and $1.6 million of non-cash depreciation and amortization, respectively. The income before tax for the three and six months ended June 30, 2018 was $247,000 and $369,000, respectively, which included $560,000 and $1.2 million of non-cash depreciation and amortization, respectively.

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Operating Activities

Cash provided by operating activities was $3.3 million during the six months ended June 30, 2019, compared to $2.0 million during the six months ended June 30, 2018. The increase in the net loss of $1.3 million included the following changes in non-cash items: an increase in depreciation and amortization of $450,000, an increase in stock based compensation expense of $1.0 million, a change in the benefit for deferred income taxes of $93,000 and an increase in interest accretion of $163,000.

The net change in operating assets and liabilities increased by $319,000. Accounts receivable decreased by $268,000 for the six months ended June 30, 2019, compared with a decrease of $3,000 for the six months ended June 30, 2018. Accounts payable, accrued compensation and accrued expenses increased by $836,000 for the six months ended June 30, 2019 compared to a decrease of $180,000 for the six months ended June 30, 2018. For the three and six months ended June 30, 2019, the change in the lease liabilities is included in this amount.

Investing Activities

Capital expenditures were $904,000 and $376,000 for the six months ended June 30, 2019 and 2018, respectively. The capital expenditures for the six months ended June 30, 2019 primarily represented computer equipment purchased for the Pakistan office and $178,000 of capitalized development costs in connection with internal-use software.

Financing Activities

Cash used in financing activities during the six months ended June 30, 2019 was $4.3 million and cash provided by financing activities was $7.2 million for the six months ended June 30, 2018. Cash used in financing activities during the six months ended June 30, 2019 included $181,000 of repayments for debt obligations, $3.0 million of preferred stock dividends and $932,000 of tax withholding obligations paid in connection with stock awards issued to employees. Cash provided by financing activities included $9.4 million of net proceeds from issuing 420,000 shares of Preferred Stock during the six months ended June 30, 2018. Cash used in financing activities for six months ended June 30, 2018 included $139,000 of repayment for debt obligations, $1.7 million of preferred stock dividends and $214,000 of tax withholding obligations paid in connection with stock awards issued to employees. There were no borrowings or debt repayments during the six months ended June 30, 2019 and 2018.

Contractual Obligations and Commitments

 

We have contractual obligations under our line of credit and related to contingent consideration in connection with one acquisition made by the acquisitions made in 2015 and 2016.Company. We also maintain operating leases for property and certain office equipment. We were in compliance with all SVB covenants as of June 30, 2019. 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, 2016,2018, filed with the SEC on March 31, 2017.20, 2019.

 

Off-Balance Sheet Arrangements

 

As of SeptemberJune 30, 20172019 and 2016,2018, 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. Other than our operating leases for office space, computer equipment and other property, we do not engage in off-balance sheet financing arrangements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined by 17C.F.R.17 C.F.R. 229.10(f)(1) and are not required to provide information under this item, pursuant to Item 305(e) of Regulation S-K.

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, based on the 2013 framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”), evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 20172019 as required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

 

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Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

DuringBased on the current quarter, we have finalizedevaluation of our disclosure controls and procedures, as of June 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the integration and validation of controls for MediGain into the internal control practices for the Company.reasonable assurance level.

 

ExceptChanges in Internal Control Over Financial Reporting

Beginning January 1, 2019, we implemented ASC 842, “Leases.” For its adoption, we implemented changes to our lease identification processes and control activities within them such as described above in the preceding paragraph, during the quarter ended September 30, 2017, there wasdevelopment of new entity-wide policies, in-house training, ongoing contract reviews and system changes to accommodate presentation and disclosure requirements.

There were no changeother changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that hasoccurred during our most recent fiscal quarter that have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. Other Information

 

Item 1. Legal Proceedings

 

From time to time, we may become involved inSee discussion of legal proceedings arising in “Note 8, Commitments And Contingencies” of the ordinary course of our business. We are not presently a partyNotes to any legal proceedings that,Condensed Consolidated Financial Statements in the opinion of our management, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.

Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other factors.this Quarterly Report.

 

Item 1A. Risk Factors

 

Pursuant to the instructions of Item 1A of Form 10-Q, a smaller reporting company is not required to provide the information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Purchases of Equity Securities

The Company is prohibited from paying dividends on its common stock without the consent of its senior lender, SVB.

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

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Item 6. Exhibits

Exhibit Number Exhibit Description
   
31.1 Certification of the Company’s Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), of the Securities Exchange Act of 1934, as amended.
   
31.2 Certification of the Company’s Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), of the Securities Exchange Act of 1934, as amended.
   
32.1* Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2* Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS XBRL Instance
   
101.SCH XBRL Taxonomy Extension Schema
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
101.LAB XBRL Taxonomy Extension Label Linkbase
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase
   
101.DEF XBRL Taxonomy Extension Definition Linkbase

 

*The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates them by reference.

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Medical Transcription Billing, Corp.MTBC, Inc.
    
November 6, 2017August 7, 2019 By:/s/ Mahmud HaqStephen Snyder
Date  Mahmud HaqStephen Snyder
   Chairman of the Board and Chief Executive Officer
    
November 6, 2017August 7, 2019 By:/s/ Bill Korn
Date  Bill Korn
   Chief Financial Officer

 

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