Item
1. Condensed Consolidated Financial Statements (Unaudited)
MEDICAL
TRANSCRIPTION BILLING, CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
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.
MEDICAL
TRANSCRIPTION BILLING, CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
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.
MEDICAL
TRANSCRIPTION BILLING, CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
|
|
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.
MEDICAL
TRANSCRIPTION BILLING, CORP.
CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Accumulated
Other Comprehensive
|
|
|
Treasury
(Common)
|
|
|
Total
Shareholders'
|
|
|
|
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
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,381,667
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,381,667
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(64,731
|
)
|
|
|
-
|
|
|
|
(64,731
|
)
|
Issuance
of stock under the Amended and Restated Equity Incentive Plan
|
|
|
24,750
|
|
|
|
25
|
|
|
|
266,663
|
|
|
|
267
|
|
|
|
(267
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
Stock-based
compensation, net of cash settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
907,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
907,160
|
|
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
|
|
Issuance
of preferred stock, net of fees and expenses
|
|
|
609,893
|
|
|
|
609
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,021,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,022,267
|
|
Preferred
stock dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,283,151
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,283,151
|
)
|
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
|
|
See
notes to condensed consolidated financial statements.
MEDICAL
TRANSCRIPTION BILLING, CORP.
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.
MEDICAL
TRANSCRIPTION BILLING, CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (UNAUDITED)
1.
Organization and Business
Medical
Transcription Billing, Corp. (and together with its 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 management teams in various US offices
and operates facilities in 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 Officer 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 the assets of MediGain, LLC and its subsidiary,
Millennium Practice Management Associates, LLC (together “MediGain). MAC has a wholly-owned subsidiary in Sri Lanka, RCM
MediGain Colombo, Pvt. Ltd. In conjunction with its continued growth of 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.
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
million
of cash and had positive working capital of $913,000. The loss before income taxes was
$915,000
for the three months ended September 30, 2017, of which
$664,000
represents
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
million
in 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
.
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
$913,000
at 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 million
of 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 September 30, 2017, the results of operations for the three and nine months ended September 30, 2017 and 2016 and
cash flows for the nine months ended September 30, 2017 and 2016. 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, 2016 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, which are included in the Company’s Annual Report
on Form 10-K, filed with the SEC on March 31, 2017.
Recent
Accounting Pronouncements
—
From time to time, new accounting pronouncements are
issued by the Financial Accounting Standards Board (“FASB”) and are adopted by us as of the specified effective date.
Unless otherwise discussed, we believe that the impact of recently adopted and recently issued accounting pronouncements will
not have a material impact on our consolidated financial position, results of operations and cash flows.
In
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.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). The new standard will require organizations that lease
assets — referred to as “lessees” — to recognize on the balance sheet the assets and liabilities for the
rights and obligations created by those leases. Under the new guidance, a lessee will be 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 require both types of leases to be recognized on the balance sheet. The amendments in this ASU are effective for
financial statements issued for annual periods beginning after December 15, 2018 with earlier adoption permitted. The Company
is currently evaluating the impact of this new standard.
In
January 2017, the FASB issued ASU No. 2017-01
Business Combinations
(Topic 805):
Clarifying the Definition of a Business
.
The ASU clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations
with evaluating whether transactions should be accounted 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 of assets and activities is a business. The amendments
provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more
operable. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
Upon adoption, the Company will apply the guidance
in this ASU when evaluating whether acquired assets and activities constitute a business.
Also
in January 2017, the FASB issued ASU No. 2017-04,
Intangibles – Goodwill and Other
(Topic 350)
: Simplifying the
Accounting for Goodwill Impairment
. The ASU modifies the accounting for goodwill impairment with the objective of simplifying
the process of determining impairment levels. Specifically, the amendments in the ASU eliminate a step in the goodwill impairment
test which requires companies to develop a hypothetical purchase price allocation when analyzing goodwill impairment. 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
ASU is effective for annual periods beginning in the year 2020, with early adoption permitted for any impairment tests after January
1, 2017. The Company has elected to early adopt ASU 2017-04. There is currently no impact on the condensed consolidated financial
statements as a result of this adoption.
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.
ACQUISITIONS
2017
Acquisition
Effective
July 1, 2017, the Company purchased substantially all of the assets of Washington Medical Billing, LLC (“WMB”), a
Washington limited liability company. In accordance with the asset purchase agreement, 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 to the acquisition date to the extent such amounts in the aggregate exceed the Initial Payment Amount (the “WMB
Installment Payments”). 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.
The
preliminary purchase price allocation for WMB was performed by the Company and is summarized as follows:
Customer
relationships
|
|
$
|
120,000
|
|
Goodwill
|
|
|
85,000
|
|
|
|
$
|
205,000
|
|
The
WMB acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened
the Company’s presence in the healthcare technology industry through geographic expansion of its customer base and by increasing
available customer relationship resources and specialized trained staff.
The
weighted-average amortization period of the acquired intangible assets is three years.
Revenue
earned from the WMB acquisition was approximately $165,000 during the quarter ended September 30, 2017.
2016
Acquisitions
On
February 15, 2016 (the “GCB Closing Date”), the Company entered into an asset purchase agreement with Gulf Coast Billing,
Inc. (“GCB”), pursuant to which the Company purchased substantially all of the assets of GCB. The aggregate final
purchase price for GCB was
$1,480,000
which
consisted of cash of
$1,250,000
and 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
$325,000
which
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 $5,000 for three years beginning July, 2016 subject to proportionate adjustment if annualized revenues decrease below
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.
The
debt was collateralized by substantially all of MediGain’s assets, so immediately after purchasing the debt, MAC entered
into a strict foreclosure agreement with MediGain transferring substantially all the assets (including accounts receivable, fixed
assets, client relationships, and MediGain’s wholly-owned subsidiaries in India and Sri Lanka) to MAC in satisfaction 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.
MediGain,
GCB, RMB and WFS are collectively referred to as the “2016 Acquisitions.” Revenue earned from the 2016 Acquisitions
was approximately $4.1 million and $12.8 million during the three and nine months ended September 30, 2017, respectively.
Pro
forma financial information (Unaudited)
The
unaudited pro forma information below represents condensed consolidated results of operations as if the 2016 Acquisitions and
the WMB Acquisition occurred on January 1, 2016. The pro forma information has been included for comparative purposes and is not
indicative of results of operations of the Company would have had if the acquisitions occurred on the above date, nor is it necessarily
indicative of future results.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
($
in thousands, except per share data)
|
|
Total
revenue
|
|
$
|
7,514
|
|
|
$
|
9,984
|
|
|
$
|
24,036
|
|
|
$
|
32,895
|
|
Net
loss attributable to common shareholders
|
|
$
|
(1,581
|
)
|
|
$
|
(4,316
|
)
|
|
$
|
(6,584
|
)
|
|
$
|
(13,830
|
)
|
Net
loss per common share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(1.38
|
)
|
|
5.
|
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 nine months ended September 30, 2017 and the year ended
December 31, 2016:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Beginning
gross balance
|
|
$
|
12,178,868
|
|
|
$
|
8,971,994
|
|
Acquisitions
|
|
|
85,075
|
|
|
|
3,206,874
|
|
Ending
gross balance
|
|
$
|
12,263,943
|
|
|
$
|
12,178,868
|
|
Intangible
assets include customer contracts and relationships and covenants not-to-compete acquired in connection with acquisitions, as
well as software purchase and development costs and trademarks acquired. Intangible assets - net as of September 30, 2017 and
December 31, 2016 consist of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Contracts
and relationships acquired
|
|
$
|
16,491,300
|
|
|
$
|
16,371,375
|
|
Non-compete
agreements
|
|
|
1,236,377
|
|
|
|
1,236,377
|
|
Other
intangible assets
|
|
|
1,482,864
|
|
|
|
1,289,339
|
|
Total
intangible assets
|
|
|
19,210,541
|
|
|
|
18,897,091
|
|
Less:
Accumulated amortization
|
|
|
(16,213,330
|
)
|
|
|
(13,063,385
|
)
|
Intangible
assets - net
|
|
$
|
2,997,211
|
|
|
$
|
5,833,706
|
|
Amortization
expense was
approximately $3.2 million
for both the nine months ended September 30, 2017
and 2016, and $508,000 and $1.0 million for the three months ended September 30, 2017 and 2016, respectively. The weighted-average
amortization period is three years.
As
of September 30, 2017, future amortization expense scheduled to be expensed is as follows:
Years
ending
|
|
|
|
|
December
31
|
|
|
|
|
2017
(three months)
|
|
|
$
|
493,264
|
|
2018
|
|
|
|
1,601,110
|
|
2019
|
|
|
|
827,033
|
|
2020
|
|
|
|
75,804
|
|
Total
|
|
|
$
|
2,997,211
|
|
|
6
.
|
NET
LOss per COMMON share
|
The
following table presents the weighted-average shares outstanding for basic and diluted net loss per share for the three and nine
months ended September 30, 2017 and 2016:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Basic
and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(1,632,816
|
)
|
|
$
|
(1,726,178
|
)
|
|
$
|
(6,664,818
|
)
|
|
$
|
(5,322,541
|
)
|
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
|
|
Net
loss attributable to common shareholders per share - Basic and Diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.53
|
)
|
All
unvested restricted share units (“RSUs”), the 200,000 warrants granted to Opus in 2015 and 2016 and the two million
warrants issued during the second quarter of 2017 as part of the sale of common stock have been excluded from the above calculations
as they were anti-
dilutive. Vested RSUs and vested restricted shares have been included in the above
calculations.
Opus
—
On September
2, 2015, the Company entered into 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. The Company’s obligations to Opus were
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.
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 year terms and were issued at current market rates.
Insurance
Financing
— The Company finances certain insurance purchases over the term of the policy life. The interest rate charged
is 5.25%.
|
8
.
|
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.
Leases
— The Company leases certain office space and other facilities under operating leases expiring through 2021. Certain
of these leases contain renewal options.
Future
minimum lease payments under non-cancelable operating leases for office space as 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
rental expense, included in direct operating costs and general and administrative expense in the condensed consolidated statements
of operations, amounted to approximately $690,000 and $581,000 for the nine months ended September 30, 2017 and 2016, respectively,
and approximately $237,000 and $202,000 for the three months ended September 30, 2017 and 2016, respectively.
Acquisitions
—
In connection with some of the Company’s acquisitions, contingent consideration as of September 30, 2017 is
payable in the form of cash with payment terms through 2019. 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.
|
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.”
The
Company had sales to a related party, a physician who is the wife of the CEO. Revenues from this customer were approximately $12,000
and $13,000
for the nine months ended September
30, 2017 and 2016, respectively, and approximately $4,000 and $5,000 for the three months ended September 30, 2017 and 2016, respectively
.
As of September 30, 2017 and December 31, 2016, the receivable balance due from this customer was approximately $1,500
and $1,600, respectively.
The
Company is a party to a nonexclusive aircraft dry lease agreement with Kashmir Air, Inc. (“KAI”), which is owned by
the CEO. The Company recorded an expense of approximately $96,000 for both the nine months ended September 30, 2017 and 2016 and
approximately $32,000 for both the three months ended September 30, 2017 and 2016. As of September 30, 2017 and December 31, 2016,
the Company had a liability outstanding to KAI of approximately $17,000
,
which is included in accrued liability to related party in the condensed consolidated balance sheets.
The
Company leases its corporate offices, temporary housing for its foreign visitors and a storage facility in New Jersey and its
backup operations center in Bagh, Pakistan, from the CEO. The related party rent expense for the nine months ended September 30,
2017 and 2016 was approximately $141,000 and $131,000, respectively,
and $47,000 and $43,000 for
the three months ended September 30, 2017 and 2016, respectively, and is included in direct operating costs and general and administrative
expense in the condensed consolidated statements of operations. Current assets-related party on the consolidated balance sheets
includes security deposits related to the leases of the Company’s corporate offices in the amount of approximately $13,000
as of both September 30, 2017 and December 31, 2016. The September 30, 2017 balance also includes prepaid rent paid to the CEO
of approximately $12,000.
|
11.
|
STOCK-BASED
COMPENSATION
|
In
April 2014, the Company adopted the Medical Transcription Billing, Corp. 2014 Equity Incentive Plan (the “2014 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 whereby an additional 1,500,000 shares of common stock and 100,000 shares of Preferred Stock were
added to the plan for future issuance. The name of the 2014 Plan was changed to the Amended and Restated Equity Incentive Plan
(the “Incentive Plan”). As of September 30,
2017, 1,238,734 shares of common stock and
67,000 shares of Preferred Stock are available for grant. Permissible awards include incentive stock options, non-statutory stock
options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance stock and cash-settled
awards and other stock-based awards in the discretion of the Compensation Committee of the Board of Directors including unrestricted
stock grants.
The
equity based RSUs contain a provision in which the units shall immediately vest and become converted into common shares at the
rate of one common share per RSU, immediately after a change in control, as defined in the award agreement.
During
the third quarter of 2017, a total of 200,000 RSUs were granted equally to the four outside members of the Board of directors
and a total of 300,000 RSUs were granted equally to three executive officers. The RSUs vest over the next two years, at six month
intervals.
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 or Preferred Stock on the date of grant is used in recording
the fair value of the award. 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 of
Operations:
|
|
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
|
|
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, 2017
|
|
|
406,959
|
|
Granted
|
|
|
528,000
|
|
Vested
|
|
|
(327,159
|
)
|
Forfeited
|
|
|
(29,331
|
)
|
Outstanding
and unvested at September 30, 2017
|
|
|
578,469
|
|
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 and $31,000 at September 30, 2017 and December 31, 2016, respectively,
and is included in accrued compensation in the condensed consolidated balance sheets.
The
deferred income tax provision for the nine months ended September 30, 2017 and 2016 primarily relates to the amortization of goodwill.
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 all Federal
and state deferred tax assets as of September 30, 2017 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.
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.
|
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 September 30, 2017 and December 31, 2016, the carrying amounts of receivables, accounts payable, 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 Level 2 in the fair
value hierarchy.
Contingent
Consideration
The
Company’s contingent consideration of approximately $670,000 and $930,000 as of September 30, 2017 and December 31, 2016,
respectively, are Level 3 liabilities. The fair value of the contingent consideration at September 30, 2017 and December 31, 2016
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
|
|
15.
SUBSEQUENT EVENT
During
October 2017, 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, the Company paid approximately $90,000 of fees upfront and issued warrants for SVB to
purchase 125,000 shares of its common stock, and committed to pay an annual anniversary fee of $50,000 a year. 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 registration 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.
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 nine months ended
September 30, 2017 and 2016 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
is a healthcare information technology company that provides a fully integrated suite of proprietary web-based solutions, together
with related business services, to healthcare providers. Our integrated Software-as-a-Service (or SaaS) platform is designed to
help our customers increase revenues, streamline workflows and make better business and clinical decisions, while reducing administrative
burdens and operating costs. We are able to deliver our leading solutions at very competitive prices because we leverage our proprietary
software, which automates our workflows and increases efficiency, together with our highly educated and specialized offshore workforce
of more than 1,700 team members at labor costs that we believe to be approximately one-tenth the cost of comparable U.S.
Our
flagship offering, PracticePro, empowers healthcare practices with the core software and business services they need to address
industry challenges on one unified SaaS platform. We deliver powerful, integrated 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 payment for their services. PracticePro consists of:
|
●
|
Practice
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 solutions requires little or no upfront expenditure by a provider. Additionally, 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 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.
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 200 providers have signed-up for talkEHR 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.
Our
offshore operations in Pakistan and Sri Lanka accounted for approximately 29% and 32% of total expenses for the nine months ended
September 30, 2017 and 2016, respectively. A significant portion of those expenses were personnel-related costs (approximately
79% and 75% for the nine months ended September 30, 2017 and 2016, respectively). 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 costs 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, but 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 India and its
offshore subcontractors, impacted MTBC’s expenses during the fourth quarter of 2016 and the first quarter of 2017.
Key
Performance Measures
We
consider numerous factors in assessing our performance. Key performance measures used by management, including adjusted EBITDA,
adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share, are non-GAAP financial
measures, which we believe better enable management and investors to analyze and compare the underlying business results from
period to period.
These
non-GAAP financial measures should not be considered in isolation, or as a substitute for or superior to, financial measures calculated
in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Moreover, these
non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of our business
as determined in accordance with GAAP. We compensate for these limitations by analyzing current and future results on a GAAP basis
as well as a non-GAAP basis, and we provide reconciliations from the most directly comparable GAAP financial measures to the non-GAAP
financial measures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other
companies, including companies in our industry, may calculate similarly titled non-GAAP financial measures differently than we
do, limiting the usefulness of those measures for comparative purposes.
Adjusted
EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share provide an
alternative view of performance used by management and we believe that an investor’s understanding of our performance is
enhanced by disclosing these adjusted performance measures.
Adjusted
EBITDA excludes the following elements which are included in GAAP net income (loss):
|
●
|
Income
tax expense 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 incentives and related fees, and cash-settled awards, based on changes in the stock
price;
|
|
●
|
Non-cash
depreciation and amortization charges, and does not reflect any cash requirements for replacement for capital expenditures;
|
|
●
|
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 operations; and
|
|
●
|
Changes
in contingent consideration.
|
Set
forth below is a presentation of our adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
($
in thousands)
|
|
Net
revenue
|
|
$
|
7,514
|
|
|
$
|
5,341
|
|
|
$
|
23,519
|
|
|
$
|
15,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
net loss
|
|
$
|
(980
|
)
|
|
$
|
(1,495
|
)
|
|
$
|
(5,382
|
)
|
|
$
|
(4,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
65
|
|
|
|
45
|
|
|
|
192
|
|
|
|
126
|
|
Net
interest expense
|
|
|
673
|
|
|
|
166
|
|
|
|
1,229
|
|
|
|
461
|
|
Foreign
exchange / other expense
|
|
|
(24
|
)
|
|
|
14
|
|
|
|
(34
|
)
|
|
|
40
|
|
Stock-based
compensation expense
|
|
|
126
|
|
|
|
194
|
|
|
|
334
|
|
|
|
816
|
|
Depreciation
and amortization
|
|
|
664
|
|
|
|
1,118
|
|
|
|
3,637
|
|
|
|
3,537
|
|
Integration
and transaction costs
|
|
|
85
|
|
|
|
285
|
|
|
|
636
|
|
|
|
609
|
|
Change
in contingent consideration
|
|
|
-
|
|
|
|
(197
|
)
|
|
|
151
|
|
|
|
(608
|
)
|
Adjusted
EBITDA
|
|
$
|
609
|
|
|
$
|
130
|
|
|
$
|
763
|
|
|
$
|
208
|
|
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 incentives and related fees, and cash-settled awards, 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 operations; and
|
|
●
|
Changes
in contingent consideration.
|
Set
forth below is a presentation of our adjusted operating income and adjusted operating margin, which represents adjusted operating
income as a percentage of net revenue, for the three and nine months ended September 30, 2017 and 2016:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
($
in thousands)
|
|
Net
revenue
|
|
$
|
7,514
|
|
|
$
|
5,341
|
|
|
$
|
23,519
|
|
|
$
|
15,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
net loss
|
|
$
|
(980
|
)
|
|
$
|
(1,495
|
)
|
|
$
|
(5,382
|
)
|
|
$
|
(4,773
|
)
|
Provision
for income taxes
|
|
|
65
|
|
|
|
45
|
|
|
|
192
|
|
|
|
126
|
|
Net
interest expense
|
|
|
673
|
|
|
|
166
|
|
|
|
1,229
|
|
|
|
461
|
|
Other
(income) expense - net
|
|
|
(32
|
)
|
|
|
14
|
|
|
|
(107
|
)
|
|
|
40
|
|
GAAP
operating loss
|
|
|
(274
|
)
|
|
|
(1,270
|
)
|
|
|
(4,068
|
)
|
|
|
(4,146
|
)
|
GAAP
operating margin
|
|
|
(3.6
|
%)
|
|
|
(23.8
|
%)
|
|
|
(17.3
|
%)
|
|
|
(26.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
126
|
|
|
|
194
|
|
|
|
334
|
|
|
|
816
|
|
Amortization
of purchased intangible assets
|
|
|
419
|
|
|
|
949
|
|
|
|
2,881
|
|
|
|
3,077
|
|
Integration
and transaction costs
|
|
|
85
|
|
|
|
285
|
|
|
|
636
|
|
|
|
609
|
|
Change
in contingent consideration
|
|
|
-
|
|
|
|
(197
|
)
|
|
|
151
|
|
|
|
(608
|
)
|
Non-GAAP
adjusted operating income
|
|
$
|
356
|
|
|
$
|
(39
|
)
|
|
$
|
(66
|
)
|
|
$
|
(252
|
)
|
Non-GAAP
adjusted operating margin
|
|
|
4.7
|
%
|
|
|
(0.7
|
%)
|
|
|
(0.3
|
%)
|
|
|
(1.6
|
%)
|
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 incentives and related fees, and cash-settled awards, 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 operations;
|
|
●
|
Changes
in contingent consideration; and
|
|
●
|
Income
tax expense resulting from the amortization of goodwill related to our acquisitions.
|
No
tax effect has been provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per share as the Company
has sufficient carry forward losses to offset the applicable income taxes.
The following table shows
our reconciliation of GAAP net loss to non-GAAP adjusted net income for the three and nine months ended September 30, 2017 and
2016:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
($
in thousands)
|
|
GAAP
net loss
|
|
$
|
(980
|
)
|
|
$
|
(1,495
|
)
|
|
$
|
(5,382
|
)
|
|
$
|
(4,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange / other expense
|
|
|
(24
|
)
|
|
|
14
|
|
|
|
(34
|
)
|
|
|
40
|
|
Stock-based
compensation expense
|
|
|
126
|
|
|
|
194
|
|
|
|
334
|
|
|
|
816
|
|
Amortization
of purchased intangible assets
|
|
|
419
|
|
|
|
949
|
|
|
|
2,881
|
|
|
|
3,077
|
|
Integration
and transaction costs
|
|
|
85
|
|
|
|
285
|
|
|
|
636
|
|
|
|
609
|
|
Change
in contingent consideration
|
|
|
-
|
|
|
|
(197
|
)
|
|
|
151
|
|
|
|
(608
|
)
|
Income
tax expense related to goodwill
|
|
|
55
|
|
|
|
42
|
|
|
|
165
|
|
|
|
115
|
|
Non-GAAP
adjusted net income
|
|
$
|
(319
|
)
|
|
$
|
(208
|
)
|
|
$
|
(1,249
|
)
|
|
$
|
(724
|
)
|
|
|
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
|
|
For
purposes of determining non-GAAP adjusted net income per share, the Company used the number of common shares outstanding at the
end of September 30, 2017 and 2016, including shares which were issued but have 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. 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 losses to offset the applicable income taxes.
Key
Metrics
In
addition to the line items in our consolidated financial statements, we regularly review the following 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. 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.
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 September 30, 2017, we provided RCM and related services to approximately 2,600 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. In addition, we served approximately 230 clients who were not medical
practices, but are service organizations who serve the healthcare community. As of September 30, 2016, we served approximately
1,820 providers representing approximately 740 practices.
Sources
of Revenue
Revenue:
We primarily derive our revenues from revenue cycle management services, 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 records and practice management software
as part of the bundled fee. These payments accounted for approximately 89% of our revenues during both the three and nine months
ended September 30, 2017, and 85% and 86% of our revenues during the three and nine months ended September 30, 2016, respectively.
We
earned approximately 2% of our revenue from clearinghouse and EDI clients during both the three and nine months ended September
30, 2017, and 3% of our revenue from clearinghouse and EDI clients for both the three and nine months ended September 30, 2016.
We earned approximately 5% and 4% of 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.
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, 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,
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, occupancy and insurance, software license fees and outside professional fees.
Contingent
Consideration.
Contingent consideration represents the amount payable to the sellers of our acquisitions based on the achievement
of defined performance measures contained in the purchase agreements. Contingent consideration is adjusted to fair value at the
end of each reporting period.
Depreciation
and Amortization Expense.
Depreciation expense is charged using the straight-line method over the estimated lives of the assets
ranging from three to five years. Amortization expense is charged on either an accelerated or on a straight-line basis over a
period of three years for most intangible assets acquired in connection with acquisitions.
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 other income (expense) results primarily
from foreign currency transaction gains (losses).
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 September 30, 2017 and December 31, 2016.
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 estimates 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, as more experience is acquired,
as additional information is obtained and as our operating environment changes. On a regular basis, we review our 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.
The
methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations.
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, filed with the SEC on March 31, 2017.
Results
of Operations
The
following table sets forth our consolidated results of operations as a percentage of total revenue for the periods shown.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net
revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
operating costs
|
|
|
55.5
|
%
|
|
|
50.0
|
%
|
|
|
57.8
|
%
|
|
|
46.6
|
%
|
Selling
and marketing
|
|
|
3.0
|
%
|
|
|
5.1
|
%
|
|
|
3.6
|
%
|
|
|
5.4
|
%
|
General
and administrative
|
|
|
32.9
|
%
|
|
|
48.1
|
%
|
|
|
35.0
|
%
|
|
|
52.2
|
%
|
Change
in contingent consideration
|
|
|
0.0
|
%
|
|
|
(3.7
|
%)
|
|
|
0.6
|
%
|
|
|
(3.9
|
%)
|
Research
and development
|
|
|
3.3
|
%
|
|
|
3.3
|
%
|
|
|
3.6
|
%
|
|
|
3.7
|
%
|
Depreciation
and amortization
|
|
|
8.8
|
%
|
|
|
20.9
|
%
|
|
|
15.5
|
%
|
|
|
22.6
|
%
|
Restructuring
charges
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
1.2
|
%
|
|
|
0.0
|
%
|
Total
operating expenses
|
|
|
103.5
|
%
|
|
|
123.7
|
%
|
|
|
117.3
|
%
|
|
|
126.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(3.5
|
%)
|
|
|
(23.7
|
%)
|
|
|
(17.3
|
%)
|
|
|
(26.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
9.0
|
%
|
|
|
3.1
|
%
|
|
|
5.2
|
%
|
|
|
2.9
|
%
|
Other
income (expense) - net
|
|
|
0.4
|
%
|
|
|
(0.3
|
%)
|
|
|
0.5
|
%
|
|
|
(0.3
|
%)
|
Loss
before income taxes
|
|
|
(12.1
|
%)
|
|
|
(27.1
|
%)
|
|
|
(22.0
|
%)
|
|
|
(29.8
|
%)
|
Income
tax provision
|
|
|
0.9
|
%
|
|
|
0.8
|
%
|
|
|
0.8
|
%
|
|
|
0.8
|
%
|
Net
loss
|
|
|
(13.0
|
%)
|
|
|
(27.9
|
%)
|
|
|
(22.8
|
%)
|
|
|
(30.6
|
%)
|
Comparison
of the three and nine months ended September 30, 2017 and 2016
|
|
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
|
%
|
Revenue.
Total revenue of $7.5 million and $23.5 million for the three and nine months ended September 30, 2017 increased by $2.2 million
or 41% and $7.9 million or 50% from revenue of $5.3 million and $15.7 million for the three and nine months ended September 30,
2016. Total revenue for the three and nine months ended September 30, 2017 included approximately $4.1 million and $12.8 million
of revenue from customers we acquired from the 2016 Acquisitions (primarily MediGain), offset by attrition from customers.
|
|
Three
Months Ended
September 30,
|
|
|
Change
|
|
|
Nine
Months Ended
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
2017
|
|
|
2016
|
|
|
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
|
%
|
Selling
and marketing
|
|
|
228,991
|
|
|
|
274,796
|
|
|
|
(45,805
|
)
|
|
|
(17
|
%)
|
|
|
853,460
|
|
|
|
838,721
|
|
|
|
14,739
|
|
|
|
2
|
%
|
General
and administrative
|
|
|
2,474,139
|
|
|
|
2,569,399
|
|
|
|
(95,260
|
)
|
|
|
(4
|
%)
|
|
|
8,232,613
|
|
|
|
8,173,272
|
|
|
|
59,341
|
|
|
|
1
|
%
|
Research
and development
|
|
|
249,045
|
|
|
|
174,876
|
|
|
|
74,169
|
|
|
|
42
|
%
|
|
|
843,294
|
|
|
|
575,059
|
|
|
|
268,235
|
|
|
|
47
|
%
|
Change
in contingent consideration
|
|
|
-
|
|
|
|
(196,882
|
)
|
|
|
196,882
|
|
|
|
100
|
%
|
|
|
151,423
|
|
|
|
(607,978
|
)
|
|
|
759,401
|
|
|
|
125
|
%
|
Depreciation
|
|
|
156,237
|
|
|
|
128,743
|
|
|
|
27,494
|
|
|
|
21
|
%
|
|
|
484,429
|
|
|
|
369,204
|
|
|
|
115,225
|
|
|
|
31
|
%
|
Amortization
|
|
|
508,204
|
|
|
|
989,539
|
|
|
|
(481,335
|
)
|
|
|
(49
|
%)
|
|
|
3,152,702
|
|
|
|
3,167,736
|
|
|
|
(15,034
|
)
|
|
|
(0
|
%)
|
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
|
%
|
Direct
Operating Costs.
Direct operating costs of $4.2 million and $13.6 million for the three and nine months ended September 30,
2017, respectively, increased by $1.5 million or 56% and $6.3 million or 86% from direct operating costs of $2.7 million and $7.3
million for the three and nine months ended September 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 during the three and nine months ended September 30, 2017, respectively. Postage and delivery costs increased
by $243,000 and $690,000 for the three and nine months ended September 30, 2017, respectively, primarily due to the acquisition
of WFS. Salary and other related expenses in Pakistan increased by $332,000 and $1.1 million for the three and nine months ended
September 30, 2017, respectively, as a result of the additional employees in Pakistan hired to service customers of the 2016 Acquisitions.
Selling
and Marketing Expense.
Selling and marketing expense of $229,000 and $853,000 for the three and nine months ended September
30, 2017, respectively, decreased by $46,000 or 17% and increased by $15,000 or 2% from selling and marketing expense of $275,000
and $839,000 for the three and nine months ended September 30, 2016, respectively.
General
and Administrative Expense.
General and administrative expense of $2.5 million for the three months ended September 30, 2017
decreased by $95,000 or 4% and for the nine months ended September 30, 2017, general and administrative expenses of $8.2 million
increased by $59,000 or 1% compared to the same period in 2016. The reduction in general and administrative expense for the three
months ended September 30, 2017 was primarily due to reduced salary costs and professional fees. The increase for 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 offices and reducing third party
expenses such as computer expenses, accommodation costs, office costs, and insurance expenses, which offset increased general
and administrative resulting from the acquisitions.
Research
and Development Expense.
Research and development expense of $249,000 and $843,000 for the three and nine months ended September
30, 2017, respectively, increased by $74,000 or 42% and $268,000 or 47% from research and development expense of $175,000 and
$575,000 for the three and nine months ended September 30, 2016, respectively, as a result of adding additional technical employees
in Pakistan performing software development work.
Contingent
Consideration.
The change in contingent consideration of $151,000 during the nine months ended September 30, 2017 and $197,000
and $608,000 during the three and nine months ended September 30, 2016, respectively, relates to the change in the fair value
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.
Depreciation.
Depreciation of $156,000 and $484,000 for the three and nine months ended September 30, 2017, respectively, increased by $27,000
or 21% and $115,000 or 31% from depreciation of $129,000 and $369,000 for the three and nine months ended September 30, 2016,
respectively, primarily as a result of additional property and equipment purchases and the acquisition of property and equipment
from the MediGain acquisition.
Amortization
Expense.
Amortization expense of $508,000 and $3.2 million for the three and nine months ended September 30, 2017, respectively,
decreased by $481,000 and $15,000 from amortization expense of $990,000 and $3.2 million for the three and nine months ended September
30, 2016, respectively. This decrease during the three months ended September 30, 2017 resulted from the intangible assets acquired
in connection with our 2014 acquisitions becoming fully amortized. The Company generally amortizes intangible assets over three
years.
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
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 and $14,000 for the three and nine months ended September 30, 2017, respectively, decreased
by $5,000 or 50% and $12,000 or 46% from interest income of $11,000 and $25,000 for the three and nine months ended September
30, 2016, respectively. Interest income primarily represents late fees from customers.
Interest
Expense.
Interest expense of $678,000 and $1.2 million for the three and nine months ended September 30, 2017, respectively,
increased by $502,000 or 284% and $756,000 or 155% from interest expense of $177,000 and $486,000 for the three and nine months
ended September 30, 2016, respectively. This increase was primarily due to additional interest costs on borrowings under our term
loans and line of credit and amounts related to the MediGain acquisition. Also, included in the 2017 interest expense is $463,000
of deferred financing costs related to the Opus credit agreement, which were written off as a result of the loans being paid off
and the agreement terminated two years earlier than anticipated.
Other
Income (Expense) - net.
Other income - net was $32,000 and $107,000 for the three and nine months ended September 30, 2017,
respectively, compared to other expense - net of $14,000 and $40,000 for the three and nine months ended September 30, 2016, respectively.
Included in other income (expense) are 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 and $192,000 provision for income taxes for the three and nine months ended September 30,
2017, respectively, an increase of $20,000 or 43% and $66,000 or 52% compared to the provision for income taxes of $45,000 and
$126,000 for the three and nine months ended September 30, 2016, respectively. Included in the nine month ended September 30,
2017 and 2016 tax provisions are $165,000 and $115,000, respectively, deferred 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 million for the three months ended September 30, 2016, to $915,000 and increased
from $4.6 million to $5.2 million from the nine months ended September 30, 2016 to the same period in 2017. Although the Company
is forecasting a return to profitability, it incurred three years of cumulative losses which make 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 September 30, 2017 and 2016.
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.
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.
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 excess of $4 million available on the SVB credit line.
Contractual
Obligations and Commitments
We
have contractual obligations under our line of credit and related to contingent consideration in connection with the acquisitions
made in 2015 and 2016. We also maintain operating leases for property and certain office equipment. For additional information,
see Contractual Obligations and Commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed
with the SEC on March 31, 2017.
Off-Balance
Sheet Arrangements
As
of September 30, 2017 and 2016, 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.