NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017 (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 Executive Chairman of MTBC. 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 Indian subsidiary is being liquidated. The Poland subsidiary has been liquidated.
In
May 2018, MTBC formed MTBC Health, Inc. (“MHI”) and MTBC Practice Management, Corp., (“MPM”) each a Delaware
corporation, in connection with its acquisition of substantially all of the revenue cycle, practice management, and group purchasing
organization assets of Orion Healthcorp, Inc. and 13 of its affiliates (together, “Orion”). (See Note 15.) MHI is
a direct, wholly owned subsidiary of MTBC, and was formed to own and operate the revenue cycle management and group purchasing
organization businesses acquired from Orion. MPM is a wholly owned subsidiary of MHI, and was formed to own and operate the practice
management business acquired from Orion.
2.
BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial reporting and as required by Regulation
S-X, Rule 8-03. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain
all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the Company’s financial
position as of June 30, 2018, the results of operations for the three and six months ended June 30, 2018 and 2017 and cash flows
for the six months ended June 30, 2018 and 2017. 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, 2017 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, 2017, which are included in the Company’s Annual Report
on Form 10-K, filed with the SEC on March 7, 2018.
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 condensed consolidated financial position, results of operations and cash flows.
The
Company adopted Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
(ASC 606)
on January 1, 2018 using a modified retrospective adoption methodology, whereby the cumulative impact of all prior periods is
recorded in accumulated deficit or other impacted balance sheet items upon adoption. 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. Under the previous accounting
standard, the criterion impacting the timing of our revenue recognition was the requirement of fees to be either fixed or determinable,
therefore, we did not recognize revenue for medical billing claims until we were notified of these collections, as the fees were
not fixed or determinable until such time. The new guidance does not limit the recognition of revenue to only fees that are fixed
or determinable. Instead, the standard focuses on recognizing revenue as value is transferred to customers. The impact as of January
1, 2018 on our medical billing services is a revenue recognition and reporting model that reflects revenue recognized over time
rather than delaying the recognition of revenue until the point in time in which the fees to be charged become determinable. The
impact to the accumulated deficit as of January 1, 2018 for the contract asset related to medical billing revenue was approximately
$1.3 million. There was no material impact to the Company’s other revenue streams.
The
Company determined that the only significant incremental cost incurred to obtain contracts within the scope of ASC 606, are sales
commissions paid to sales people and outside referral sources. Under the new standard, certain costs to obtain a contract, which
we previously expensed, are deferred and amortized over the period of contract performance or a longer period, generally the expected
client life. The impact to the accumulated deficit as of January 1, 2018 was approximately $101,000. As of June 30, 2018, the
capitalized sales commissions were approximately
$113,000. Amortization of capitalized sales commissions
for the three and six months ended June 30, 2018 was approximately
$14,000
and $26,000, respectively.
The
following table reconciles the balances as presented for the three and six months ended June 30, 2018 to the balances prior to
the adjustments made to implement the new revenue recognition standard for the same period:
|
|
Three
Months Ended June 30, 2018
|
|
|
Six
Months Ended June 30, 2018
|
|
|
|
As
Presented
|
|
|
Impact
of New Revenue Standard
|
|
|
Previous
Revenue Standard
|
|
|
As
Presented
|
|
|
Impact
of New Revenue Standard
|
|
|
Previous
Revenue Standard
|
|
NET
REVENUE
|
|
$
|
8,682,937
|
|
|
$
|
279,560
|
|
|
$
|
8,403,377
|
|
|
$
|
16,990,262
|
|
|
$
|
326,631
|
|
|
$
|
16,663,631
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
operating costs
|
|
|
4,333,573
|
|
|
|
-
|
|
|
|
4,333,573
|
|
|
|
8,817,628
|
|
|
|
-
|
|
|
|
8,817,628
|
|
Selling
and marketing
|
|
|
403,057
|
|
|
|
(7,688
|
)
|
|
|
410,745
|
|
|
|
708,071
|
|
|
|
(11,225
|
)
|
|
|
719,296
|
|
General
and administrative
|
|
|
3,054,205
|
|
|
|
-
|
|
|
|
3,054,205
|
|
|
|
5,654,939
|
|
|
|
-
|
|
|
|
5,654,939
|
|
Research
and development
|
|
|
248,921
|
|
|
|
-
|
|
|
|
248,921
|
|
|
|
504,800
|
|
|
|
-
|
|
|
|
504,800
|
|
Change
in contingent consideration
|
|
|
11,030
|
|
|
|
-
|
|
|
|
11,030
|
|
|
|
42,780
|
|
|
|
-
|
|
|
|
42,780
|
|
Depreciation
and amortization
|
|
|
559,696
|
|
|
|
-
|
|
|
|
559,696
|
|
|
|
1,150,467
|
|
|
|
-
|
|
|
|
1,150,467
|
|
Total
operating expenses
|
|
|
8,610,482
|
|
|
|
(7,688
|
)
|
|
|
8,618,170
|
|
|
|
16,878,685
|
|
|
|
(11,225
|
)
|
|
|
16,889,910
|
|
OPERATING
INCOME (LOSS)
|
|
|
72,455
|
|
|
|
287,248
|
|
|
|
(214,793
|
)
|
|
|
111,577
|
|
|
|
337,856
|
|
|
|
(226,279
|
)
|
OTHER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
29,939
|
|
|
|
-
|
|
|
|
29,939
|
|
|
|
35,224
|
|
|
|
-
|
|
|
|
35,224
|
|
Interest
expense
|
|
|
(74,167
|
)
|
|
|
-
|
|
|
|
(74,167
|
)
|
|
|
(148,248
|
)
|
|
|
-
|
|
|
|
(148,248
|
)
|
Other
income - net
|
|
|
218,589
|
|
|
|
-
|
|
|
|
218,589
|
|
|
|
369,963
|
|
|
|
-
|
|
|
|
369,963
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
246,816
|
|
|
|
287,248
|
|
|
|
(40,432
|
)
|
|
|
368,516
|
|
|
|
337,856
|
|
|
|
30,660
|
|
Income
tax provision
|
|
|
51,536
|
|
|
|
-
|
|
|
|
51,536
|
|
|
|
98,200
|
|
|
|
-
|
|
|
|
98,200
|
|
NET
INCOME (LOSS)
|
|
$
|
195,280
|
|
|
$
|
287,248
|
|
|
$
|
(91,968
|
)
|
|
$
|
270,316
|
|
|
$
|
337,856
|
|
|
$
|
(67,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
1,248,717
|
|
|
|
-
|
|
|
|
1,248,717
|
|
|
|
2,024,049
|
|
|
|
-
|
|
|
|
2,024,049
|
|
NET
(LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(1,053,437
|
)
|
|
$
|
287,248
|
|
|
$
|
(1,340,685
|
)
|
|
$
|
(1,753,733
|
)
|
|
$
|
337,856
|
|
|
$
|
(2,091,589
|
)
|
Loss per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) income per share
|
|
$
|
(0.09
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.18
|
)
|
These
condensed consolidated financial statements include enhanced disclosures, particularly around the contract asset and the disaggregation
of revenue. See Note 9, “Revenue,” for these enhanced disclosures.
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.
We
plan to adopt the new standard on a modified retrospective basis. We have assigned internal resources to assist in the evaluation
of the potential impacts of this standard. Implementation efforts to date have included training on the new standards, the review
of lease agreements and other contracts to evaluate potential embedded leases. The Company is continuing to evaluate the effect
that Topic 842 will have on its consolidated financial statements and related disclosures. We are in the process of implementing
changes to our processes and controls in conjunction with the review of existing lease agreements in connection with the adoption
of the new standard. Implementation efforts to date have included training on the new standard, the review of lease agreements
and other contracts and the purchase of software to assist us in the accounting and evaluation required under Topic 842. We anticipate
that this standard will have a material impact on our consolidated financial statements, as all long-term leases will be capitalized
on the condensed consolidated balance sheet. We expect that our leases designated as operating leases in Note 11 – Commitments
and Contingencies included in our Annual Report on Form 10-K for the year ended December 31. 2017, filled with the Securities
and Exchange Commission on March 7, 2018 will be reported on the consolidated balance sheet upon adoption.
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.
On
February 14, 2018, the FASB issued ASU 2018-02,
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income.
These amendments provide financial statement preparers
with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period
in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. This
guidance is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted.
We are currently assessing the impact this guidance will have on our consolidated financial statements.
3.
ACQUISITION
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 a percentage of revenue collected from the WMB accounts for the three years, subsequent to the acquisition
date to the extent such amounts in the aggregate exceed the Initial Payment Amount (the “WMB Installment Payments”).
Based on the Company’s revenue forecast, it does not appear that there will be any WMB Installment Payments and therefore
the aggregate purchase price of WMB was determined to be $205,000.
Revenue
earned from the WMB acquisition was approximately $47,000 and $113,000 during the three and six months ended June 30, 2018, respectively.
Pro
forma financial information (Unaudited)
The
unaudited pro forma information below represents condensed consolidated results of operations as if the WMB acquisition occurred
on January 1, 2017. The pro forma information has been included for comparative purposes and is not indicative of results of operations
that the Company would have had if the acquisitions occurred on the above date, nor is it necessarily indicative of future results.
Pro forma information for the three and six months ended June 30, 2018 is not presented as there was no acquisition which was
not fully reflected in the Company’s condensed consolidated financial statements during those periods.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2017
|
|
|
June
30, 2017
|
|
Total
revenue
|
|
$
|
8,041
|
|
|
$
|
16,523
|
|
Net
loss attributable to common shareholders
|
|
$
|
(2,108
|
)
|
|
$
|
(5,003
|
)
|
Net
loss per common share
|
|
$
|
(0.19
|
)
|
|
$
|
(0.48
|
)
|
4.
GOODWILL AND INTANGIBLE ASSETS-NET
Goodwill
consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. The following
is the summary of the changes to the carrying amount of goodwill for the six months ended June 30, 2018 and the year ended December
31, 2017:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Beginning
gross balance
|
|
$
|
12,263,943
|
|
|
$
|
12,178,868
|
|
Acquisition
|
|
|
-
|
|
|
|
85,075
|
|
Ending
gross balance
|
|
$
|
12,263,943
|
|
|
$
|
12,263,943
|
|
Intangible
assets include customer contracts and relationships and covenants not-to-compete acquired in connection with acquisitions, as
well as trademarks acquired and software costs. Intangible assets - net as of June 30, 2018 and December 31, 2017 consist of the
following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Contracts
and relationships acquired
|
|
$
|
16,491,300
|
|
|
$
|
16,491,300
|
|
Non-compete
agreements
|
|
|
1,236,377
|
|
|
|
1,236,377
|
|
Other
intangible assets
|
|
|
1,521,664
|
|
|
|
1,498,417
|
|
Total
intangible assets
|
|
|
19,249,341
|
|
|
|
19,226,094
|
|
Less:
Accumulated amortization
|
|
|
(17,547,101
|
)
|
|
|
(16,716,550
|
)
|
Intangible
assets - net
|
|
$
|
1,702,240
|
|
|
$
|
2,509,544
|
|
Amortization
expense was
approximately
$854,000
and
$2.6 million
for the six months ended June 30, 2018 and 2017 and
$415,000
and
$1.3 million for the three months ended June 30, 2018 and 2017, respectively.
The weighted-average amortization period is three years.
As
of June 30, 2018, future amortization scheduled to be expensed is as follows:
Years
Ending December 31
|
|
|
|
2018
(six months)
|
|
$
|
737,104
|
|
2019
|
|
|
850,389
|
|
2020
|
|
|
103,127
|
|
2021
|
|
|
11,620
|
|
Total
|
|
$
|
1,702,240
|
|
5.
NET LOss per COMMON share
The
following table presents the basic and diluted net loss per weighted-average shares outstanding for the three and six months ended
June 30, 2018 and 2017:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic
and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(1,053,437
|
)
|
|
$
|
(2,121,478
|
)
|
|
$
|
(1,753,733
|
)
|
|
$
|
(5,032,002
|
)
|
Weighted
average shares applicable to common shareholders used in computing basic and diluted loss per share
|
|
|
11,665,174
|
|
|
|
10,833,075
|
|
|
|
11,641,190
|
|
|
|
10,504,417
|
|
Net
loss attributable to common shareholders per share - Basic and Diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.48
|
)
|
All
unvested restricted stock units (“RSUs”), the 200,000 warrants granted to Opus Bank (“Opus”), the 2,000,000
warrants issued during the second quarter of 2017 as part of the registered direct sale of common stock (which
expired unexercised in May 2018) and the 125,000 warrants granted to Silicon Valley Bank (“SVB”) in October
2017 have been excluded from the above calculations as they were anti-
dilutive. Vested RSUs and vested
restricted shares have been included in the above calculations.
6.
DEBT
SVB
— During October 2017, the Opus credit
facility was replaced with a revolving line of credit from SVB under a three-year agreement. 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. The full $5 million facility is generally available to the Company.
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% annually
for the unused portion of the credit line. The debt is secured by all of the Company’s domestic assets and 65% of the shares
in its offshore facilities.
Future acquisitions are subject to approval by SVB.
In
connection with the SVB debt agreement, the Company paid SVB approximately $50,000 of fees upfront and issued warrants for SVB
to purchase 125,000 shares of its common stock, and committed to pay an annual anniversary fee of $50,000 a year. Based on the
terms in the SVB credit agreement, the warrants have a strike price equal to $3.92. They have a five-year exercise window and
net exercise rights, and were valued at $3.12 per warrant. The SVB credit agreement contains various covenants and conditions
governing the revolving line of credit. These covenants include a minimum level of adjusted EBITDA and a minimum liquidity ratio.
At June 30, 2018, the Company was in compliance with all covenants.
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 fully paid and then closed and replaced with the SVB facility.
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%.
7.
Commitments and Contingencies
Legal
Proceedings
— On May 30, 2018, the Superior Court of New Jersey, Chancery Division, Somerset County (the “Chancery
Court”), denied the Company’s and MAC’s request to enjoin an arbitration proceeding demanded by a former customer
related to RCM services provided by parties other than the Company and MAC. On June 15, 2018, the Company and MAC filed an appeal
of the Chancery Court’s order. On July 19, 2018, the Chancery Court ordered that the arbitration be stayed pending the Company’s
and MAC’s appeal. The demand for arbitration alleges breach of a billing services agreement between the former customer
and Millennium Practice Management Associates, Inc., (“MPMA”) a subsidiary of MediGain
,
and seeks compensatory damages and costs. The Company and MAC contend they were never party to the billing services agreement
giving rise to the arbitration claim, did not assume the obligations of MPMA under such agreement, and any agreement to arbitrate
disputes arising under such agreement does not apply to the Company or MAC. While the allegations of breach of contract made by
the former customer have not been the subject of ongoing legal proceedings, the Company and MAC believe that such allegations
lack merit on numerous grounds. The Company’s and MAC’s appeal remains pending.
From
time to time, we may become involved in other legal proceedings arising in the ordinary course of our business. Including the
proceeding described above, we are not presently a party to any legal proceedings that, in the opinion of our management, would
individually or taken together have a material adverse effect on our business, consolidated results of operations, financial position
or cash flows of the Company.
Leases
— The Company leases certain office space and other facilities under operating leases expiring through 2021. Certain
of these leases contain renewal options. There is an offshore lease with monthly rent payments of approximately $21,000 that has
a three-month cancellation provision. The Company also has month to month leases for its US corporate facility and other locations
amounting to approximately $12,000 per month which it expects to remain month to month (See Note 8).
Future
minimum lease payments under non-cancelable operating leases for office space as of June 30, 2018 are as follows:
Years
Ending December 31
|
|
Total
|
|
2018
(six months)
|
|
$
|
158,055
|
|
2019
|
|
|
198,193
|
|
Total
|
|
$
|
356,248
|
|
Total
rental expense, included in direct operating costs and general and administrative expense in the condensed consolidated statements
of operations, amounted to
approximately $436,000 and $453,000 for the six months ended June 30, 2018
and 2017, respectively, and $220,000 and $224,000 for the th
ree months ended June 30, 2018 and 2017, respectively.
Acquisitions
—
In connection with some of the Company’s acquisitions, contingent consideration as of June 30, 2018 is payable
in cash through 2019, which represents the date through which contingent payments are forecasted to be required. Depending on
the terms of the agreement, if the performance measures are not achieved, the Company may pay less than the recorded amount, and
if the performance measures are exceeded, the Company may pay more than the recorded amount.
8.
Related PARTIES
The
Company had sales to a related party, a physician who is the wife of the Executive Chairman. Revenues from this customer were
approximately
$9,000
and
$8,000 for the six months ended June 30, 2018 and 2017, respectively and
$4,000 for both the three months ended June 30,
2018 and 2017
. As of June 30, 2018 and December 31, 2017, the receivable balance due from this
customer was
approximately $1,400
and $1,900, respectively.
The
Company is a party to a nonexclusive aircraft dry lease agreement with Kashmir Air, Inc. (“KAI”), which is owned by
the Executive Chairman. The Company recorded an expense of
approximately
$64,000
for both the six months
ended June 30, 2018 and 2017 and
$32,000
for
both the three months ended June 30, 2018 and
2017. As of June 30, 2018 and December 31, 2017,
the Company had a liability outstanding to KAI of approximately $11,000,
which is included in accrued liability to related
party in the condensed consolidated balance sheets.
The
Company leases its corporate offices in New Jersey, its temporary housing for its foreign visitors, a storage facility and its
backup operations center in Bagh, Pakistan, from the
Executive Chairman
. The related party
rent expense was approximately
$95,000 and $94,000
for the six months ended June 30, 2018 and
2017 respectively
, and for
both the three months ended June 30, 2018 and 2017 was approximately
$47,000
, and is included in direct operating costs and general and administrative expense in the
condensed consolidated statements of operations. Current assets-related party in the condensed consolidated balance
sheets
includes security deposits related to the leases of the Company’s corporate offices of approximately $13,000 as of both
June 30, 2018 and December 31, 2017. The June 30, 2018 and December 31, 2017 balances also include prepaid rent paid to the Executive
Chairman of approximately $12,000.
The
Company accounts for revenue in accordance with ASC 606,
Revenue from Contracts with Customers
, which was adopted January
1, 2018 using the modified retrospective method. All revenue is recognized as our performance obligations are satisfied. A performance
obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under ASC
606. Under the new standard, the Company recognizes revenue when the services begin on the medical billing claims, which is generally
upon receipt of the claim from the provider. For medical billing services, the Company estimates the value of the consideration
it will earn over the remaining contractual period as our services are provided and recognizes the fees over the term; this estimation
involves predicting the amounts our clients will ultimately collect associated with the services they provided. Certain significant
estimates, such as payment-to-charge ratios, effective billing rates and the estimated contractual payment periods are required
to measure medical billing revenue under the new standard. The timing of the revenue recognition of our other revenue streams
were not materially impacted by the adoption of ASC 606.
All
of our revenue is derived from contracts with customers and is reported as revenue in the condensed consolidated statements of
operations. In many cases, our clients may terminate their agreements with 90 days’ notice without cause, thereby limiting
the term in which we have enforceable rights and obligations, although this time period can vary between clients. Our payment
terms are normally net 30 days. We provide value to our clients over the term of the contract and recognize revenue ratably over
the term, which is consistent with the measure of progress. In the event that we are entitled to variable consideration for services
provided during a specific time period, fees for these services are allocated to and recognized over the specific time period.
Our contracts contain penalty clauses for early termination. Although our contracts have stated terms of one or more years, under
ASC 606 our contracts are considered month to month and accordingly, there is no financing component.
Disaggregation
of Revenue from Contracts with Customers
We
derive revenue from six primary sources: medical billing services, ancillary services, printing and mailing, clearinghouse and
EDI (electronic data interchange) services, Enrollment
Plus
TM
and professional services. All of our current contracts
with customers contain a single performance obligation. For contracts where we provide multiple services such as where we perform
multiple ancillary services, each service represents its own performance obligation. Selling prices are based on the contractual
price for the service.
The
following table represents a disaggregation of revenue for the three and six months ended June 30:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Medical
billing revenue
|
|
$
|
7,866,650
|
|
|
$
|
7,013,263
|
|
|
$
|
15,259,040
|
|
|
$
|
14,345,898
|
|
Ancillary
services
|
|
|
313,454
|
|
|
|
251,104
|
|
|
|
562,091
|
|
|
|
534,761
|
|
Printing
and mailing
|
|
|
301,279
|
|
|
|
294,627
|
|
|
|
649,523
|
|
|
|
641,420
|
|
Clearinghouse
and EDI services
|
|
|
141,901
|
|
|
|
185,842
|
|
|
|
335,340
|
|
|
|
372,177
|
|
Enrollment
Plus
|
|
|
19,200
|
|
|
|
-
|
|
|
|
102,857
|
|
|
|
-
|
|
Professional
services
|
|
|
40,453
|
|
|
|
39,914
|
|
|
|
81,411
|
|
|
|
110,568
|
|
Total
|
|
$
|
8,682,937
|
|
|
$
|
7,784,750
|
|
|
$
|
16,990,262
|
|
|
$
|
16,004,824
|
|
We
apply the portfolio approach as permitted by ASC 606 as a practical expedient to contracts with similar characteristics and we
use estimates and assumptions when accounting for those portfolios. Our contracts generally include standard commercial payment
terms. We have no significant obligations for refunds, warranties or similar obligations and our revenue does not include taxes
collected from our customers.
Medical
billing revenue:
Medical
billing is the recurring process of submitting and following up on claims with health insurance companies in order for the healthcare
providers to receive payment for the services they rendered. MTBC invoices customers on a monthly basis based on the actual collections
received by its customers and the agreed-upon rate in the sales contract. The series of services under medical billing revenue
includes practice management software and related tools, electronic health records, revenue cycle management services and mobile
health solutions. We consider the series of services provided under our medical billing contracts to be one performance obligation
since the promises are not distinct in the context of the contract.
Substantially
all of our medical billing contracts contain variable consideration and we estimate the variable consideration which we expect
to be entitled to over the contractual period associated with our medical billing contracts, which begins no earlier than go-live
and recognize the fees over the term. When a contract includes variable consideration, we evaluate the estimate of the variable
consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the
transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is subsequently resolved. For the majority of our
medical billing contracts, the total contractual price is variable because our obligation is to process an unknown quantity of
transactions, as and when requested by our customers, over the contract period. We allocate the variable price to each claim processed
using the time-series concept and recognize revenue based on the most likely amount of consideration to which we will be entitled
to, which is generally the amount we have the right to invoice. Estimates to determine the variable consideration such as payment
to charge ratios, effective billing rates, and the estimated contractual payment periods are updated at each reporting date.
The
contract asset in the condensed consolidated balance sheet represents the revenue associated with the amounts our clients will
ultimately collect associated with the services they have provided and the relative fee we charge associated with those collections.
The performance obligations as of January 1, 2018 were substantially recognized in the quarter ended March 31, 2018. As of June
30, 2018, the estimated revenue expected to be recognized in the future related to the remaining performance obligations was approximately
$1.7 million. As of June 30, 2018, the Company determined the contract asset for a significant customer, where the information
was previously unavailable. Of the total contract asset at June 30, 2018, approximately $210,000 was related to this customer.
We expect to recognize substantially all of the revenue for the remaining performance obligations over the next 3 months.
Our
medical billing performance obligations consist of a series of distinct services that are substantially the same and have the
same periodic pattern of transfer to our customers. We consider each periodic rendering of service to be a distinct performance
obligation and, accordingly, recognize revenue over time.
Other
revenue streams:
Ancillary
services represent services such as coding and transcription that are rendered in connection with the delivery of medical billing
and related services. The Company invoices customers monthly, based on the actual amount of services performed at the agreed upon
rate in the contract. These services are only offered to medical billing customers. These services do not represent a material
right because the services are optional to the customer and customers electing these services are charged the same price for those
services as if they were on a standalone basis. Each individual coding or transcription transaction processed represents a performance
obligation, which is satisfied once that individual service is completed.
The
Company provides printing and mailing services for a non-medical billing customer and invoices on a monthly basis based on the
number of prints, the agreed-upon rate per print and the postage incurred. The performance obligation is satisfied once the printing
and mailing is completed.
The
medical billing clearinghouse takes claim information from customers, checks the claims for errors and sends this information
electronically to insurance companies. MTBC invoices customers on a monthly basis based on the number of claims submitted and
the agreed-upon rate in the agreement. This service is provided to non-medical billing customers. The performance obligation is
satisfied once the relevant submissions are completed.
MTBC
also provides implementation and professional services to clearinghouse customers and records revenue monthly on a time and materials
basis. This is a separate performance obligation from the clearinghouse and EDI services provided. The performance obligation
is satisfied once the implementation or professional service is completed.
For
the Enrollment
Plus
product, the Company receives a monthly fee per member for providing an electronic interchange for the
enrollment of a customer’s members using a platform that the Company developed. Enrollment
Plus
automates the customer’s
processing and enrollment of new members. The performance obligation is satisfied once the enrollment of members is completed.
For
all of the above revenue streams, revenue is recognized over time, when invoiced, which closely matches point in time recognition,
as the customer simultaneously receives and consumes the benefits provided by the Company. Each of the services provided above
is considered a separate performance obligation and is satisfied over time, which is typically one month or less.
Information
about contract balances:
Accounts
receivable are shown separately at their net realizable value in our condensed consolidated balance sheets. Amounts that we are
entitled to collect under the applicable contract are recorded as accounts receivable. Invoicing is performed at the end of each
month when the services have been provided. The contract asset results from our medical billing services and is due to the timing
of revenue recognition, submission of claims from our customers and payments from the insurance providers. The contract asset
includes our right to payment for services already transferred to a customer when the right to payment is conditional on something
other than the passage of time. For example, contracts for medical billing services where we recognize revenue over time but do
not have a contractual right to payment until the customer receives payment of their claim from the insurance provider. The contract
asset was approximately $1.7 million as of June 30, 2018. Changes in the contract asset are recorded as adjustments to net revenues
and primarily result from providing services to customers that result in additional consideration and are offset by our right
to payment for services becoming unconditional. Deferred revenue represents sign-up fees received from customers that are amortized
over 3 years. The opening and closing balances of the Company’s accounts receivable, contract asset and deferred revenue
are as follows:
|
|
Accounts
Receivable,
Net
|
|
|
Contract
Asset
|
|
|
Deferred
Revenue (current)
|
|
|
Deferred
Revenue
(long
term)
|
|
Beginning
balance as of January 1, 2018
|
|
$
|
3,879,463
|
|
|
$
|
1,342,692
|
|
|
$
|
62,104
|
|
|
$
|
28,615
|
|
(Decrease)
increase, net
|
|
|
(441,613
|
)
|
|
|
326,631
|
|
|
|
(34,429
|
)
|
|
|
(403
|
)
|
Ending
balance as of June 30, 2018
|
|
$
|
3,437,850
|
|
|
$
|
1,669,323
|
|
|
$
|
27,675
|
|
|
$
|
28,212
|
|
Deferred
commissions:
Our
sales incentive plans include commissions payable to employees and third parties at the time of initial contract execution that
are capitalized as incremental costs to obtain a contract. The capitalized commissions are amortized over the period the related
services are transferred. Amortization of the capitalized commissions was $14,000 and $26,000 for the three and six months ended
June 30, 2018, respectively. As we do not offer commissions on contract renewals, we have determined the amortization period to
be the estimated client life, which is three years. Deferred commissions were approximately $113,000 at June 30, 2018 and are
included in the Other Assets lines in our condensed consolidated balance sheets.
10.
|
STOCK-BASED
COMPENSATION
|
In
April 2014, the Company adopted its Equity Incentive Plan, reserving 1,351,000 shares of common stock for grants to employees,
officers, directors and consultants. During April 2017, this plan was amended and restated whereby an additional 1,500,000 shares
of common stock and 100,000 shares of Series A Preferred Stock were added to the plan for future issuance. During June 2018, the
Company’s shareholders approved the addition of 200,000 preferred shares to the Equity Incentive Plan for future grants.
As of June 30, 2018, 985,700 shares of common stock and 227,200 shares of Series A Preferred Stock are available for grant under
our equity incentive plan. Permissible awards include incentive stock options, non-statutory stock options, stock appreciation
rights, restricted stock, RSUs, performance stock and cash-settled awards and other stock-based awards in the discretion of the
Compensation Committee of the Board of Directors including unrestricted stock grants.
The
equity based RSUs contain a provision in which the units shall immediately vest and become converted into common shares at the
rate of one common share per RSU, immediately after a change in control, as defined in the award agreement.
Common
stock RSUs
During
May 2018, a total of 150,000 RSUs of common stock were granted equally to two executive officers. The RSUs vest in one-third increments
over the next 15 months from the grant date. During the third quarter of 2017, a total of 200,000 RSUs of common stock were granted
equally to the four outside members of the Board of Directors and a total of 300,000 RSUs of common stock were granted equally
to three executive officers. The RSUs vest over the next two years, at six month intervals.
The
following table summarizes the RSU transactions related to the common stock under our equity incentive plan for the six months
ended June 30, 2018:
Outstanding
and unvested at January 1, 2018
|
|
|
605,969
|
|
Granted
|
|
|
231,200
|
|
Vested
|
|
|
(150,482
|
)
|
Forfeited
|
|
|
(5,666
|
)
|
Outstanding
and unvested at June 30, 2018
|
|
|
681,021
|
|
Of
the total outstanding and unvested at June 30, 2018, 591,251 RSUs are classified as equity and 89,770 RSUs are classified as a
liability.
The
liability for the cash-settled awards was approximately $45,000 and $41,000 at June 30, 2018 and December 31, 2017, respectively,
and is included in accrued compensation in the condensed consolidated balance sheets.
Stock-based
compensation expense
The
Company recognizes compensation expense on a straight-line basis over the total requisite service period for the entire award.
For stock awards classified as equity, the market price of our common stock or preferred stock on the date of grant is used in
recording the fair value of the award. For stock awards classified as a liability, the earned amount is marked to market based
on the end of period common stock price.
In
2017, the Compensation Committee of the Board of Directors approved executive bonuses to be paid in shares of Series A Preferred
Stock, with the number of shares and the value based on specified criteria being achieved during the year. The Company accrued
for this expense as based on the probable amount to be paid.
In
2018, the Compensation Committee has again approved executive bonuses to be paid in shares of Series A Preferred Stock, with the
number of shares and the amount based on specified criteria being achieved during 2018. The achievement of these criteria will
be determined after the year-end. Once the Company’s shareholders added additional shares of preferred stock to the Equity
Incentive Plan, the Company begun accruing for 2018 bonuses based on the probability of achieving the results. During the quarter
ended June 30, 2018, approximately $154,000 was accrued for the 2018 stock bonuses and is included in stock based compensation
expense.
The
following table summarizes the components of share-based compensation expense for the three and six months ended June 30, 2018
and 2017:
Stock-based
compensation included in the
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
Condensed
Consolidated Statement of Operations:
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Direct
operating costs
|
|
$
|
8,475
|
|
|
$
|
2,680
|
|
|
$
|
9,859
|
|
|
$
|
5,457
|
|
General
and administrative
|
|
|
396,674
|
|
|
|
68,791
|
|
|
|
522,600
|
|
|
|
194,081
|
|
Research
and development
|
|
|
4,563
|
|
|
|
7,218
|
|
|
|
4,944
|
|
|
|
8,497
|
|
Total
stock-based compensation expense
|
|
$
|
409,712
|
|
|
$
|
78,689
|
|
|
$
|
537,403
|
|
|
$
|
208,035
|
|
The
current income tax provision for the six months ended June 30, 2018 and 2017 primarily relates to state minimum taxes and foreign
income taxes. The deferred income tax provision for the six months ended June 30, 2018 and 2017 relates to the amortization of
goodwill.
Although
the Company is forecasting a return to profitability, it has not had sufficient history of profitable operations which makes realization
of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded
against all Federal and state deferred tax assets as of June 30, 2018 and December 31, 2017. The valuation allowance has been
applied to the net deferred tax assets and liabilities excluding the deferred tax liability related to the amortization of goodwill.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. Effective January 1, 2018, among other changes,
the Act (a) reduces the U.S. federal corporate tax rate to 21 percent, provides for a deemed repatriation and taxation at reduced
rates on historical earnings (a “Transition Tax”) of certain non-US subsidiaries owned by U.S. companies and establishes
new mechanisms to tax such earnings going forward. For the Transition Tax, we are finalizing the estimated amount of accumulated
foreign earnings. We expect to complete our analysis within the measurement period in accordance with Staff Accounting Bulletin
(“SAB”) 118.
The
Act includes a provision effective January 1, 2018 for a global intangible low-taxed income (“GILTI”) tax, which is
a new U.S. income inclusion of certain foreign earnings under the Subpart F tax regulations, but ultimately allowable to be offset
by the Company’s available net operating loss carryover. Companies can account for the GILTI inclusion in either the period
incurred or establish deferred tax liabilities for the expected future taxes associated with accumulated GILTI. The Company elected
to record the GILTI provisions as they are incurred each period. For the three and six months ended June 30, 2018, no GILTI tax
liability was recorded.
The
Company will continue to analyze the effects of the Act on its consolidated financial statements and operations. Our estimates
are subject to change as we review the data available and any additional guidance. Any additional impacts from the enactment of
the Act will be recorded as they are identified during the measurement period as provided in SAB 118. No provisional amounts were
recorded during the six months ended June 30, 2018. We expect to conclude our analysis by the end of the third quarter.
12.
|
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 Company does
not expect to record any additional restructuring charges for these closures.
13.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
As
of June 30, 2018 and December 31, 2017, the carrying amounts of receivables, accounts payable and accrued expenses approximated
their estimated fair values because of the short term nature of these financial instruments.
Fair
value measurements-Level 2
Our
notes payable are carried at cost and approximate fair value since the interest rates being charged approximate market rates.
Contingent
Consideration
The
Company’s contingent consideration of approximately $563,000 and $603,000 as of June 30, 2018 and December 31, 2017, respectively,
are Level 3 liabilities. The fair value of the contingent consideration at June 30, 2018 and December 31, 2017 was primarily driven
by changes in revenue estimates related to the acquisitions during 2015 and 2016, 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
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Balance
- January 1,
|
|
$
|
603,411
|
|
|
$
|
929,549
|
|
Change
in fair value
|
|
|
42,780
|
|
|
|
151,423
|
|
Settlement
in the form of shares issued
|
|
|
-
|
|
|
|
(331,676
|
)
|
Payments
|
|
|
(82,725
|
)
|
|
|
(33,114
|
)
|
Balance
- June 30,
|
|
$
|
563,466
|
|
|
$
|
716,182
|
|
On
May 4, 2018, the Company executed an asset purchase agreement (“APA”) to acquire substantially all of the revenue
cycle, practice management, and group purchasing organization assets of Orion. The acquisition was approved through a sale order
dated June 29, 2018 by the United States Bankruptcy Court for the Eastern District of New York as a Section 363 purchase under
Chapter 11 of the U.S. Bankruptcy Code. The final purchase price was $12.6 million. The final APA was approved by the Bankruptcy
Court, with an effective date of July 1, 2018. We expect that this acquisition will be accounted for as a business combination.