NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
AND
2020 (UNAUDITED)
1.
ORGANIZATION AND BUSINESS
CareCloud,
Inc., formerly MTBC, Inc. (“CareCloud”, and together with its consolidated subsidiaries, the “Company,”
“we,” “us” and/or “our”) is a healthcare information technology company that provides a full
suite of proprietary cloud-based solutions, together with related business services, to healthcare providers and hospitals
throughout the United States. The Company’s integrated services are designed to help customers increase revenues, streamline
workflows and make better business and clinical decisions, while reducing administrative burdens and operating costs. Our
Software-as-a-Service (“SaaS”) platform includes revenue cycle management (“RCM”), practice management
(“PM”), electronic health record (“EHR”), business intelligence, telehealth, patient experience management
(“PXM”) solutions and complementary software tools and business services for high-performance medical groups and health
systems. CareCloud has its corporate offices in Somerset, New Jersey and maintains client support teams throughout the U.S., and
offshore offices in Pakistan and Azad Jammu and Kashmir, a region administered by Pakistan (the “Pakistan
Offices”), and in Sri Lanka.
CareCloud
was founded in 1999 under the name Medical Transcription Billing, Corp. and incorporated under the laws of the State of Delaware in 2001.
In 2004, the Company formed MTBC Private Limited (or “MTBC Pvt. Ltd.”), a 99.9% majority-owned subsidiary of CareCloud based
in Pakistan. The remaining 0.01% of the shares of MTBC Pvt. Ltd. is owned by the founder and Executive Chairman of CareCloud. In 2016,
the Company formed MTBC Acquisition Corp. (“MAC”), a Delaware corporation, in connection with its acquisition of substantially
all of the assets of MediGain, LLC and its subsidiary, Millennium Practice Management Associates, LLC (together “MediGain”).
MAC has a wholly owned subsidiary in Sri Lanka, RCM MediGain Colombo, Pvt. Ltd. In May 2018, the Company formed CareCloud Practice Management,
Corp. (“CPM”), a Delaware corporation, to operate the medical practice management business acquired from Orion Healthcorp.
In
January 2020, the Company purchased CareCloud Corporation, a company whose name we took. That company is now known as CareCloud Health,
Inc. (“CCH”). In June 2020, the Company purchased Meridian Billing Management Co. and its affiliate Origin Holdings, Inc.
(collectively “Meridian” and sometimes referred to as “Meridian Medical Management”).
During
March 2021, the Company formed a new wholly-owned subsidiary, CareCloud Acquisition, Corp. (“CAC”). In June 2021, CAC purchased
certain assets and assumed certain liabilities of MedMatica Consulting Associates Inc., (“MedMatica”) and purchased the stock
of Santa Rosa Staffing, Inc., (“SRS”). The assets and liabilities of MedMatica were merged into SRS and the company was renamed
medSR, Inc. (“medSR”). See Note 3.
During
2020, a New Jersey corporation, talkMD Clinicians, PA (“talkMD”), was formed by the wife of the Executive Chairman, who is
a licensed physician, to provide telehealth services. talkMD was determined to be a variable interest entity (“VIE”) for
financial reporting purposes because the entity will be controlled by the Company. As of September 30, 2021, talkMD had not yet commenced
operations. During September 2021, the Company made arrangements to have the income tax returns prepared for talkMD and will advance
the funds for the required taxes. The aggregate amount to be advanced is approximately $3,500.
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 September 30, 2021,
the results of operations for the three months and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended
September 30, 2021 and 2020. 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, 2020 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, 2020, which are included in the Company’s Annual Report on Form 10-K, filed with the
SEC on February 25, 2021.
Recent
Accounting Pronouncements — In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes.
This ASU simplifies accounting for income taxes to reduce complexity in the accounting standards. The amendments consist of the removal
of certain exceptions to the general principles of ASC 740 and some additional simplifications. The amendments are effective for public
business entities for fiscal years beginning after December 15, 2020. There was no impact on the condensed consolidated financial statements
as a result of this standard.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies the accounting for certain financial
instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own
equity. The amendments are not required to be implemented until 2022 for public entities. The Company is in the process of determining
if this update will have a significant impact on the condensed consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.
The guidance in Accounting Standards Update (“ASU”) 2016-13 replaces the incurred loss impairment methodology under current
GAAP. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets
and certain other instruments. It will apply to all entities. For trade receivables, loans and held-to-maturity debt securities, entities
will be required to estimate lifetime expected credit losses. This may result in the earlier recognition of credit losses. In November
2019, the FASB issued ASU No. 2019-10, which delays this standard’s effective date for SEC smaller reporting companies to the fiscal
years beginning on or after December 15, 2022. The Company is in the process of determining if this update will have a significant impact
on the condensed consolidated financial statements.
3.
ACQUISITIONS
2021
Acquisition
On
June 1, 2021, CAC entered into an Asset and Stock Purchase Agreement (“Purchase Agreement”) with MedMatica and its sole shareholder.
Pursuant to the Purchase Agreement, CAC acquired (i) all of the issued and outstanding capital stock of SRS, a Delaware corporation,
and (ii) all of the MedMatica assets that were used in MedMatica’s and SRS’ business. Certain MedMatica liabilities were
also assumed under the Purchase Agreement. The total cash consideration was $10 million plus a working capital adjustment of approximately
$3.8 million. The Purchase Agreement also provides that if during the 18-month period commencing on June 1, 2021 (the “Earn-Out
Period”), certain EBITDA and revenue targets with respect to the assets and capital stock purchased under the Purchase Agreement
are achieved, then CAC shall pay MedMatica an earn-out up to a maximum of $8 million. Further, if during the Earn-Out Period, certain
additional and increased EBITDA and revenue targets with respect to the assets and capital stock purchased under the Purchase Agreement
are achieved, then CAC shall pay MedMatica an additional earn-out, up to a maximum of $5 million.
MedMatica
and SRS are in the business of providing a broad range of specialty consulting services to hospitals and large healthcare groups, including
certain consulting services related to healthcare IT application services and implementations, medical practice management, and revenue
cycle management. The acquisition has been accounted for as a business combination.
A
summary of the total consideration is as follows:
SUMMARY
OF TOTAL CONSIDERATION ON BUSINESS CONSIDERATION
medSR
Purchase Price
|
|
($ in thousands)
|
|
Cash
|
|
$
|
12,261
|
|
Amounts held in escrow
|
|
|
1,571
|
|
Contingent consideration
|
|
|
6,500
|
|
Preferred stock
|
|
|
|
|
Warrants
|
|
|
|
|
Total purchase price
|
|
$
|
20,332
|
|
The
Company engaged a third party valuation specialist to assist the Company in valuing the assets acquired and liabilities assumed from
MedMatica. The following table summarizes the preliminary purchase price allocation. The Company expects to finalize the purchase price
allocation during the fourth quarter of 2021 and is finalizing the projections and the valuation of the acquired assets and assumed liabilities.
The
preliminary purchase price allocation for medSR is summarized as follows:
SCHEDULE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
|
|
($ in thousands)
|
|
Accounts receivable
|
|
$
|
2,705
|
|
Receivable from seller
|
|
|
396
|
|
Prepaid expenses
|
|
|
108
|
|
Unbilled receivables
|
|
|
2,402
|
|
Property and equipment
|
|
|
94
|
|
Customer relationships
|
|
|
4,500
|
|
Acquired backlog
|
|
|
500
|
|
Goodwill
|
|
|
11,406
|
|
Accounts payable
|
|
|
(536
|
)
|
Accrued expenses & compensation
|
|
|
(1,223
|
)
|
Deferred revenue
|
|
|
(20
|
)
|
Total preliminary purchase price allocation
|
|
$
|
20,332
|
|
The
acquired accounts receivable is recorded at fair value, which represents amounts that have subsequently been paid or were expected to
be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by these intangibles.
The goodwill represents the Company’s ability to have an expanded local presence in additional markets and operational synergies
that we expect to achieve that would not be available to other market participants. The goodwill from this acquisition is deductible
ratably for income tax purposes over fifteen years. The
purchase agreement provides that if revenue and EBITDA over the next 18 months exceeds certain specified amounts, there will be an earn-out
payment to the seller equal to such excess, up to $13 million. It
was estimated that the probable payment will be approximately $6.5
million and this amount has been recorded as
part of the preliminary purchase price allocation as contingent consideration.
As
part of the acquisition, $1.5
million of the purchase price was held in escrow,
which represents $500,000
to be paid upon the achievement of agreed upon
achievement of certain revenue and backlog milestones, and the balance will be held up to 18
months to satisfy certain indemnification obligations.
During the current quarter, the initial portion of the escrow was settled whereby $250,000
was paid to the seller and $250,000
was offset against the working capital adjustment.
The balance of the $1.0
million escrow is included in consideration payable
and restricted cash in the condensed consolidated balance sheet at September 30, 2021. Approximately $12.3
million in cash was paid at closing.
The
weighted-average amortization period of the acquired intangible assets is approximately three years.
Revenue
earned from the clients obtained from the medSR acquisition on June 1, 2021 was approximately $6.3 million and $9.0 million during the
three and nine months ended September 30, 2021, respectively.
The
medSR acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened the
Company’s presence in the healthcare information technology industry through expansion of its customer base and by increasing available
customer relationship resources and specialized trained staff.
2020
Acquisitions
On
June 16, 2020, the Company entered into a Stock Purchase Agreement with Meridian Billing Management Co., a Vermont corporation, Origin
Holdings, Inc., a Delaware corporation, and GMM II Holdings, LLC, a Delaware limited liability company (“Seller”), pursuant
to which the Company purchased all of the issued and outstanding capital stock of Meridian from the Seller. Meridian is in the business
of providing medical billing, revenue cycle management, electronic medical records, medical coding and related services. These revenues
have been included in the Company’s Healthcare IT segment. The acquisition has been accounted for as a business combination.
The
total consideration paid at closing was $11.9 million, net of cash received, 200,000 shares of the Company’s Preferred Stock plus
warrants to purchase 2,250,000 shares of the Company’s common stock, with an exercise price per share of $7.50 and a term of two
years. The Company also assumed Meridian’s negative net working capital and certain long-term lease liabilities where the leased
space is either not being utilized or will be vacated shortly, with an aggregate value of approximately $4.8 million.
A
summary of the total consideration is as follows:
SUMMARY OF TOTAL CONSIDERATION ON BUSINESS CONSIDERATION
Meridian
Purchase Price
|
|
($ in thousands)
|
|
Cash
|
|
$
|
11,864
|
|
Preferred stock
|
|
|
5,000
|
|
Warrants
|
|
|
4,770
|
|
Total purchase price
|
|
$
|
21,634
|
|
Of
the Preferred Stock consideration, 100,000 shares were held in escrow for up to one month pending completion of technical migration and
customer acceptance. The shares held in escrow were released on August 3, 2020.
The
Company’s Preferred Stock and warrants issued as part of the acquisition consideration were issued in a transaction exempt from
registration under the Securities Act of 1933, as amended (the “Securities Act”). The warrants were valued using the Black-Scholes
method. The Company registered the Preferred Stock and the securities underlying the warrants for resale under the Securities Act.
The
Meridian acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened the
Company’s presence in the healthcare information technology industry through geographic expansion of its customer base and by increasing
available customer relationship resources and specialized trained staff.
The
Company engaged a third-party valuation specialist to assist the Company in valuing the assets acquired and liabilities assumed from
Meridian. The following table summarizes the purchase price allocation:
SCHEDULE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
|
|
($ in thousands)
|
|
Accounts receivable
|
|
$
|
3,558
|
|
Prepaid expenses
|
|
|
704
|
|
Contract asset
|
|
|
881
|
|
Property and equipment
|
|
|
426
|
|
Operating lease right-of-use assets
|
|
|
2,776
|
|
Customer relationships
|
|
|
12,900
|
|
Technology
|
|
|
900
|
|
Goodwill
|
|
|
13,789
|
|
Accounts payable
|
|
|
(3,373
|
)
|
Accrued expenses & compensation
|
|
|
(3,932
|
)
|
Deferred revenue
|
|
|
(907
|
)
|
Operating lease liabilities
|
|
|
(6,025
|
)
|
Other current liabilities
|
|
|
(63
|
)
|
Total purchase price allocation
|
|
$
|
21,634
|
|
The
acquired accounts receivable is recorded at fair value, which represents amounts that have subsequently been paid or were expected to
be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by these intangibles.
The goodwill from this acquisition is not deductible for income tax purposes and represents the Company’s ability to have an expanded
local presence in additional markets and operational synergies that we expect to achieve that would not be available to other market
participants.
The
weighted-average amortization period of the acquired intangible assets is approximately three years.
Revenue
earned from the clients obtained from the Meridian acquisition was approximately $9.4 million and $28.1 million during the three and
nine months ended September 30, 2021, respectively, and was approximately $10.0 million and $11.4 million during the three and nine months
ended September 30, 2020, respectively.
On
January 8, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CareCloud Corporation,
a Delaware corporation which was subsequently renamed CareCloud Health, Inc. (“CCH”), MTBC Merger Sub, Inc., a Delaware corporation
and wholly-owned subsidiary of the Company (“Merger Sub”) and Runway Growth Credit Fund Inc. (“Runway”), solely
in its capacity as a seller representative, pursuant to which Merger Sub merged with and into CCH (the “Merger”), with CCH
surviving as a wholly-owned subsidiary of the Company. The Merger became effective simultaneously with the execution of the Merger Agreement.
The acquisition has been accounted for as a business combination.
The
total consideration for the Merger included approximately $11.9 million paid in cash at closing, the assumption of a working capital
deficiency of approximately $5.1 million and 760,000 shares of the Company’s Preferred Stock. The Merger Agreement provided that
if CCH’s 2020 revenues exceed $36 million, there will be an earn-out payment to the seller equal to such excess, up to $3 million.
Based on the 2020 revenues, no earn-out payment was required. Additional consideration included warrants to purchase 2,000,000 shares
of the Company’s common stock, 1,000,000 of which have an exercise price per share of $7.50 and a term of two years, and the other
1,000,000 warrants have an exercise price per share of $10.00 and a term of three years.
A
summary of the total consideration is as follows:
SUMMARY OF TOTAL CONSIDERATION ON BUSINESS CONSIDERATION
CCH
Purchase Price
|
|
($ in thousands)
|
|
Cash
|
|
$
|
11,853
|
|
Preferred stock
|
|
|
19,000
|
|
Warrants
|
|
|
300
|
|
Contingent consideration
|
|
|
1,000
|
|
Total purchase price
|
|
$
|
32,153
|
|
Of
the Preferred Stock consideration, 160,000 shares were placed in escrow for up to 24 months, and an additional 100,000 shares were placed
in escrow for up to 18 months, in both cases, to satisfy indemnification obligations of the seller for losses arising from certain specified
contingent liabilities. The escrowed shares net of such losses were released upon the joint instruction of the Company and Runway in
accordance with the applicable escrow terms. Such shares were entitled to the monthly dividend, which was to be paid when, and if, the
shares were released. The Company had accrued the dividend monthly on the Preferred Stock held in escrow. Due to the settlement of the
obligation in April 2021, accrued dividends of $513,000 relating to the 160,000 shares held in escrow were reversed during the first
quarter of 2021. The shares held in escrow were forfeited to cover the cost of the settlement.
It
was determined that 55,822 shares of the Preferred Stock would be released from escrow and cancelled since one of the contingent liabilities
was settled for the amount of the cancelled shares. This included a cash payment of approximately $1.3 million. Dividends previously
accrued on these shares of $102,000 were reversed as of June 30, 2020, since the amounts will not need to be paid. The remaining shares
held in escrow have been released.
The
Company’s Preferred Stock and warrants issued as part of the Merger consideration were issued in a transaction exempt from registration
under the Securities Act of 1933, as amended (the “Securities Act”). The warrants were valued using the Black-Scholes method.
The Company registered the Preferred Stock and the securities underlying the warrants for resale under the Securities Act.
The
CCH acquisition added additional clients to the Company’s customer base. The Company acquired CCH’s software technology and
related business. Similar to previous acquisitions, this transaction broadened the Company’s presence in the healthcare information
technology industry through geographic expansion of its customer base and by increasing available customer relationship resources and
specialized trained staff.
The
Company engaged a third-party valuation specialist to assist the Company in valuing the assets acquired and liabilities assumed from
CCH. The following table summarizes the purchase price allocation:
SCHEDULE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
|
|
($ in thousands)
|
|
Accounts receivable
|
|
$
|
2,299
|
|
Prepaid expenses
|
|
|
1,278
|
|
Contract asset
|
|
|
538
|
|
Property and equipment
|
|
|
403
|
|
Operating lease right-of-use assets
|
|
|
2,859
|
|
Customer relationships
|
|
|
8,000
|
|
Trademark
|
|
|
800
|
|
Software
|
|
|
4,800
|
|
Goodwill
|
|
|
22,868
|
|
Other long term assets
|
|
|
540
|
|
Accounts payable
|
|
|
(6,943
|
)
|
Accrued expenses
|
|
|
(2,081
|
)
|
Current loan payable
|
|
|
(80
|
)
|
Operating lease liabilities
|
|
|
(2,859
|
)
|
Deferred revenue
|
|
|
(269
|
)
|
Total purchase price allocation
|
|
$
|
32,153
|
|
The
acquired accounts receivable is recorded at fair value, which represents amounts that have subsequently been paid or were expected to
be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by these intangibles.
The goodwill from this acquisition is not deductible for income tax purposes and represents the Company’s ability to have an expanded
local presence in additional markets and operational synergies that we expect to achieve that would not be available to other market
participants.
The
weighted-average amortization period of the acquired intangible assets is approximately three years.
Revenue
earned from the clients obtained from the CCH acquisition was approximately $8.8 million during the three months ended September 30,
2021 and approximately $26.0 million during the nine months ended September 30, 2021. Revenue from these clients was approximately $8.2
million during the three months ended September 30, 2020 and approximately $23.2 million during the nine months ended September 30, 2020.
Pro
forma financial information (Unaudited)
The
unaudited pro forma information below represents the condensed consolidated results of operations as if the CCH, Meridian and medSR
acquisitions occurred on January 1, 2020. The pro forma information has been included for comparative purposes and is not indicative
of results of operations that the Company would have had if the acquisitions occurred on the above date, nor is it necessarily
indicative of future results. The unaudited pro forma information reflects material, non-recurring pro forma adjustments directly
attributable to the business combinations. The difference between the actual revenue and the pro forma revenue is approximately
$17.8
million of additional revenue primarily
recorded by medSR for the nine months ended September 30, 2021. Other differences arise from amortizing purchased
intangibles using the double declining balance method.
SCHEDULE OF BUSINESS ACQUISITION, PRO FORMA INFORMATION
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
($ in thousands except per share amounts)
|
|
Total revenue
|
|
$
|
38,304
|
|
|
$
|
35,051
|
|
|
$
|
119,929
|
|
|
$
|
101,318
|
|
Net income (loss)
|
|
$
|
2,211
|
|
|
$
|
(1,112
|
)
|
|
$
|
1,593
|
|
|
$
|
(12,823
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(1,431
|
)
|
|
$
|
(5,434
|
)
|
|
$
|
(8,815
|
)
|
|
$
|
(23,680
|
)
|
Net loss per common share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(1.90
|
)
|
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 nine months ended September 30, 2021 and the year ended December
31, 2020:
SCHEDULE OF INTANGIBLE ASSETS AND GOODWILL
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
($ in thousands)
|
|
Beginning gross balance
|
|
$
|
49,291
|
|
|
$
|
12,634
|
|
Acquisitions
|
|
|
11,370
|
|
|
|
36,657
|
|
Ending gross balance
|
|
$
|
60,661
|
|
|
$
|
49,291
|
|
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 September 30, 2021 and December 31, 2020 consist of the following:
SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
($ in thousands)
|
|
Contracts and relationships acquired
|
|
$
|
48,997
|
|
|
$
|
44,497
|
|
Capitalized software
|
|
|
10,976
|
|
|
|
5,760
|
|
Non-compete agreements
|
|
|
1,236
|
|
|
|
1,236
|
|
Other intangible assets
|
|
|
8,355
|
|
|
|
7,906
|
|
Total intangible assets
|
|
|
69,564
|
|
|
|
59,399
|
|
Less: Accumulated amortization
|
|
|
37,421
|
|
|
|
29,421
|
|
Intangible assets - net
|
|
$
|
32,143
|
|
|
$
|
29,978
|
|
Amortization
expense was approximately $8.0
million and $6.0
million for the nine months ended September 30,
2021 and 2020, respectively, and $3.1
million and $2.8
million for the three months ended September
30, 2021 and 2020, respectively. The remaining weighted-average amortization period is approximately 3.1
years.
As
of September 30, 2021, future amortization scheduled to be expensed is as follows:
SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS, FUTURE AMORTIZATION EXPENSE
Years ending December 31,
|
|
($ in thousands)
|
|
2021 (three months)
|
|
$
|
3,731
|
|
2022
|
|
|
12,586
|
|
2023
|
|
|
9,574
|
|
2024
|
|
|
4,601
|
|
2025
|
|
|
300
|
|
Thereafter
|
|
|
1,351
|
|
Total
|
|
$
|
32,143
|
|
5.
NET LOSS PER COMMON SHARE
The
following table reconciles the weighted-average shares outstanding for basic and diluted net loss per share for the three and nine months
ended September 30, 2021 and 2020:
SCHEDULE OF LOSSES PER SHARE, BASIC AND DILUTED
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
($ in thousands, except share and per share amounts)
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(2,137
|
)
|
|
$
|
(5,903
|
)
|
|
$
|
(11,094
|
)
|
|
$
|
(19,118
|
)
|
Weighted-average common shares used to compute basic and diluted loss per share
|
|
|
14,737,103
|
|
|
|
12,771,307
|
|
|
|
14,419,968
|
|
|
|
12,493,458
|
|
Net loss attributable to common shareholders per share - Basic and Diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(1.53
|
)
|
All
unvested restricted stock units (“RSUs”) and unexercised warrants have been excluded from the above calculations as they
were anti-dilutive. Vested RSUs, vested restricted shares and exercised warrants have been included in the above calculations.
6.
DEBT
SVB
— During October 2017, the Company opened a revolving line of credit with SVB under a three-year agreement. The SVB credit
facility is a secured revolving line of credit where borrowings are based on a formula of 200% of repeatable revenue adjusted by an annualized
attrition rate as defined in the credit agreement. During the current quarter, the credit line was increased from $10 million to $20
million and the term of the agreement was extended through October 2023. At September 30, 2021, $6.0 million was drawn on the line, although
it was subsequently repaid in full during October 2021. Interest on the SVB revolving line of credit is charged at the prime rate plus
1.50%, with a minimum interest rate of 6.5%. There is also a fee of one-half of 1% annually for the unused portion of the credit line.
The debt is secured by all of the Company’s domestic assets and 65% of the shares in its offshore facilities. Future acquisitions
are subject to approval by SVB.
Vehicle
Financing Notes — The Company financed certain vehicle purchases both in the United States and in Pakistan. The vehicle financing
notes have three to six 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
4.15 % based on the annual renewal.
7.
LEASES
We
determine if an arrangement is a lease at inception. We have operating leases for office and temporary living space as well as for some
office equipment. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liability
and non-current operating lease liability in our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020.
Each time the Company acquires a business, the ROU assets and the lease liabilities are recorded at fair value as of the date of acquisition.
The Company does not have any finance leases.
ROU
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present
value of lease payments over the lease term.
As
most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rates, based on information available
at the lease commencement date, in determining the present value of lease payments. We give consideration to our bank financing arrangements,
geographical location and collateralization of assets when calculating our incremental borrowing rates.
Our
lease terms typically include options to extend the lease. We consider the options in determining the ROU assets and lease liabilities.
Leases with a term of less than 12 months are not recorded in the condensed consolidated balance sheets. Our lease agreements do not
contain any residual value guarantees. For real estate leases, we account for the lease and non-lease components as a single lease component.
Some leases include escalation clauses and termination options that are factored in the determination of the lease payments when appropriate.
If
a lease is modified after the effective date, the operating lease ROU asset and liability are re-measured using the current incremental
borrowing rate. During the nine months ended September 30, 2021, there was $686,000 of unoccupied lease charges for two of the Company’s
facilities. During the nine months ended September 30, 2020, there was approximately $300,000 of unoccupied lease charges. Additionally,
during 2020, there was a lease impairment of approximately $383,000 since the Company is no longer using one of its leased facilities.
In
February 2021, the Company was able to settle one of the lease obligations assumed in connection with the Meridian acquisition for an
amount that approximated the remaining lease liability.
During
the current quarter, the Company decided to terminate one of its leases in Pakistan which, with a modification, will expire as
of the end of the year. The Company does not intend to renew this lease and will consolidate its employees into
the remaining facilities. As a result of the termination, the Company incurred a loss of approximately $18,000
which has been included in loss on lease termination,
impairment and unoccupied lease charges in the September 30, 2021 condensed consolidated statement of operations.
Lease
expense is included in direct operating costs and general and administrative expenses in the condensed consolidated statements of operations
based on the nature of the expense. As of September 30, 2021, we had 37 leased properties, six in Medical Practice Management and 31
in Healthcare IT, with remaining terms ranging from less than one year to five years. Our lease terms are determined taking into account
lease renewal options, the Company’s anticipated operating plans and leases that are on a month-to-month basis. The Company also
has some related party leases – see Note 9.
The
components of lease expense were as follows:
SCHEDULE OF LEASE EXPENSE
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
($ in thousands)
|
|
Operating lease cost
|
|
$
|
1,066
|
|
|
$
|
1,227
|
|
|
$
|
3,181
|
|
|
$
|
2,861
|
|
Short-term lease cost
|
|
|
22
|
|
|
|
25
|
|
|
|
65
|
|
|
|
36
|
|
Variable lease cost
|
|
|
11
|
|
|
|
7
|
|
|
|
25
|
|
|
|
22
|
|
Total- net lease cost
|
|
$
|
1,099
|
|
|
$
|
1,259
|
|
|
$
|
3,271
|
|
|
$
|
2,919
|
|
Short-term
lease cost represents leases that were not capitalized as the lease term as of the later of January 1, 2021 or the beginning of the lease
was less than 12 months. Variable lease costs include utilities, real estate taxes and common area maintenance costs.
Supplemental
balance sheet information related to leases is as follows:
SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO LEASES
|
|
|
1
|
|
|
|
2
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
($ in thousands)
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
Operating lease ROU assets, net
|
|
$
|
7,108
|
|
|
$
|
7,743
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
3,929
|
|
|
$
|
4,729
|
|
Non-current operating lease liabilities
|
|
|
5,026
|
|
|
|
6,297
|
|
Total operating lease liabilities
|
|
$
|
8,955
|
|
|
$
|
11,026
|
|
|
|
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
ROU assets
|
|
$
|
9,310
|
|
|
$
|
10,648
|
|
Asset lease expense
|
|
|
(2,191
|
)
|
|
|
(2,889
|
)
|
Foreign exchange gain (loss)
|
|
|
(11
|
)
|
|
|
(16
|
)
|
ROU assets, net
|
|
$
|
7,108
|
|
|
$
|
7,743
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.41
|
|
|
|
2.71
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
6.78
|
%
|
|
|
6.76
|
%
|
Supplemental
cash flow and other information related to leases is as follows:
SCHEDULE OF SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION RELATED TO LEASES
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
($ in thousands)
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,316
|
|
|
$
|
1,417
|
|
|
$
|
4,048
|
|
|
$
|
2,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases, net of impairment and terminations
|
|
$
|
315
|
|
|
$
|
203
|
|
|
$
|
2,063
|
|
|
$
|
6,467
|
|
Maturities
of lease liabilities are as follows:
SCHEDULE OF MATURITIES OF LEASE LIABILITIES
|
|
|
5
|
|
Operating leases - Year ending December 31,
|
|
($ in thousands)
|
|
2021 (three months)
|
|
$
|
1,253
|
|
2022
|
|
|
4,115
|
|
2023
|
|
|
2,024
|
|
2024
|
|
|
789
|
|
2025
|
|
|
481
|
|
Thereafter
|
|
|
1,972
|
|
Total lease payments
|
|
|
10,634
|
|
Less: imputed interest
|
|
|
(1,679
|
)
|
Total lease obligations
|
|
|
8,955
|
|
Less: current obligations
|
|
|
(3,929
|
)
|
Long-term lease obligations
|
|
$
|
5,026
|
|
As
of September 30, 2021, we have one operating lease commitment that has not yet commenced with an aggregate gross lease liability of approximately
$99,000.
8.
COMMITMENTS AND CONTINGENCIES
Legal
Proceedings — On April 4, 2017, Randolph Pain Relief and Wellness Center (“RPRWC”) filed an arbitration demand
with the American Arbitration Association (the “Arbitration”) seeking to arbitrate claims against CareCloud, Inc. (“CareCloud”)
and MTBC Acquisition Corp. (“MAC”). The claims relate solely to services provided by Millennium Practice Management Associates,
Inc. (“MPMA”), a subsidiary of MediGain, LLC, pursuant to a billing services agreement that contains an arbitration provision.
CareCloud and MAC jointly moved in the Superior Court of New Jersey, Chancery Division, Somerset County (the “Chancery Court”)
to enjoin the Arbitration on the grounds that neither were a party to the billing services agreement. On May 30, 2018, the Chancery Court
denied that motion and CareCloud and MAC appealed. The Chancery Court ordered the Arbitration stayed pending the appeal.
On
April 23, 2019, the Appellate Division reversed the Chancery Court’s ruling that CareCloud is required to participate in the Arbitration
and remanded the case for further proceedings before the Chancery Court on that issue. The Appellate Division upheld the Chancery Court’s
ruling that MAC was required to participate in the Arbitration. The parties completed discovery in the remanded matter, and both CareCloud
and RPRWC filed cross-motions for summary judgement in their favor. On February 6, 2020, the Chancery Court denied RPRWC’s motion
for summary judgment and granted CareCloud’s motion for summary judgment, holding that CareCloud cannot be compelled to participate
in the Arbitration. RPRWC has informed CareCloud that it does not intend to appeal the Chancery Court’s ruling and that it intends
to move forward solely against MAC in the Arbitration. On March 25, 2020, the Chancery Court lifted the stay of arbitration relative
to RPRWC and MAC.
Due
to conflicting information provided by RPRWC, it is unclear what the extent of the claimed damages are in this matter which at this time
appear to be entirely speculative. According to its arbitration demand, RPRWC seeks compensatory damages of $6.6 million, plus costs,
for MPMA’s alleged breach of the billing services agreement. On June 12, 2020, in response to a directive from the arbitrator,
RPRWC disclosed a statement of damages to MAC in which it increased its alleged damages from $6.6 million and costs to $20 million and
costs. On July 24, 2020, RPRWC disclosed a declaration to MAC, in which RPRWC estimates its damages to be approximately $11 million plus
costs. MAC intends to vigorously defend against RPRWC’s claims. If RPRWC is successful in the Arbitration,
CareCloud and MAC anticipate the award would be substantially less than the amount claimed.
From
time to time, we may become involved in other legal proceedings arising in the ordinary course of our business. Including the proceedings
described above, we are not presently a party to any legal proceedings that, in the opinion of our management, would individually or
taken together have a material adverse effect on our business, consolidated results of operations, financial position or cash flows of
the Company.
9.
RELATED PARTIES
The
Company had sales to a related party, a physician who is the wife of the Executive Chairman. Revenues from this customer were approximately
$15,000 and $11,000 for the nine months ended September 30, 2021 and 2020, respectively and $6,000 and $4,000 for the three months ended
September 30, 2021 and 2020, respectively. As of both September 30, 2021, and December 31, 2020, the receivable balance due from this
customer was approximately $2,000.
The
Company was 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 $80,000 and $105,000 for the nine month periods ended September
30, 2021 and 2020 and $20,000 and $32,000 for the three months ended September 30, 2021 and 2020, respectively. As of December 31, 2020,
the Company had a liability outstanding to KAI of approximately $1,000, which is included in accrued liability to related party in the
condensed consolidated balance sheet. The lease for the aircraft was renewed as of April 1, 2021 and terminated on August 31, 2021 and
has been included in the ROU asset and operating lease liability on December 31, 2020. As a result of the lease termination, the Company
incurred a loss of approximately $185,000 which has been included in loss on lease termination, impairment and unoccupied lease charges
in the September 30, 2021 condensed consolidated statement of operations.
The
Company leases its corporate offices in New Jersey, its temporary housing for its foreign visitors, a printing and mailing facility and
its backup operations center in Bagh, Pakistan, from the Executive Chairman. The related party rent expense for the nine months ended
September 30, 2021 and 2020 was approximately $140,000
and $139,000,
respectively, and the rent expense was approximately $47,000
for both the three months ended September 30,
2021 and 2020, respectively, and is included in direct operating costs and general and administrative expense in the condensed
consolidated statements of operations. During the nine months ended September 30, 2021, the Company spent approximately $1.4
million to upgrade the related party leased facilities
and the leased aircraft. Current assets-related party in the condensed consolidated balance sheets includes security deposits and prepaid
rent related to the leases of the Company’s corporate offices in the amount of approximately $13,000
as of both September 30, 2021 and December 31,
2020. On
October 15, 2021, the Company entered into a one-year lease agreement with the Executive Chairman for an apartment for temporary housing
in Dubai.
Included
in ROU assets at September 30, 2021 and December 31, 2020 is approximately $119,000 and $283,000, respectively, applicable to the related
party leases. Included in the current and non-current operating lease liability at September 30, 2021 is approximately $61,000 and $57,000,
respectively, applicable to the related party leases. At December 31, 2020, the current and non-current operating lease liability applicable
to related party leases was approximately $202,000 and $92,000, respectively.
During
2020, a New Jersey corporation, talkMD Clinicians, PA (“talkMD”), was formed by the wife of the Executive Chairman, who is
a licensed physician, to provide telehealth services. talkMD was determined to be a variable interest entity (“VIE”) for
financial reporting purposes because the entity will be controlled by the Company. As of September 30, 2021, talkMD had not yet commenced
operations. During September 2021, the Company made arrangements to have the income tax returns prepared for talkMD and will advance
the funds for the required taxes. The aggregate amount to be advanced is approximately $3,500.
10.
SHAREHOLDERS’ EQUITY
The
Company has the right to sell up to $50 million of its common stock using an “at-the-market” facility (“ATM”).
The underwriter receives 3% of the gross proceeds. During the second quarter of 2021, the Company sold 178,092 shares of common stock
under its ATM and received net proceeds of approximately $1.4 million. During the current quarter, the Company sold 136,395 shares of
common stock and received net proceeds of approximately $1.2 million. During the second quarter of 2021, the Company cancelled 215,822
shares of preferred stock that were held in escrow from the CCH acquisition as the matters related to the escrow were settled in cash.
11.
REVENUE
Introduction
The
Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers. All revenue is recognized as our
performance obligations are satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to
a customer, and is the unit of account under ASC 606. Under ASC 606, the Company breaks a contract into distinctly identifiable performance
obligations. Most of our contracts with customers contain a single performance obligation. For contracts where we provide multiple services,
such as where we perform multiple ancillary services that are priced separately, each service represents its own performance obligation.
Selling prices are based on the contractual price for the service, which approximates their standalone selling price.
Many
technology-enabled business solutions are invoiced based on receipt of payment by the practices which are our clients, for medical billing
claims where the provider utilized our software or where we submitted a claim. For these solutions, 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 from the services they provided. The selling price
of the Company’s services equals the contractual price. Certain significant estimates, such as payment-to-charge ratios, effective
billing rates and the estimated contractual payment periods are required to measure revenue under ASC 606.
We
apply the portfolio approach as permitted by ASC 606 as a practical expedient to contracts with similar characteristics, and we use estimates
and assumptions when accounting for those portfolios. Our contracts generally include standard commercial payment terms. We have no significant
obligations for refunds, warranties or similar obligations and our revenue does not include taxes collected from our customers.
Disaggregation
of Revenue from Contracts with Customers
We
derive the majority of our revenue from providing technology-enabled business solutions, including our integrated SaaS-based software
platform and revenue cycle management services. In addition, we derive revenues from professional services, group purchasing services,
printing and mailing services, and medical practice management services.
The
following table represents a disaggregation of revenue for the three and nine months ended September 30:
SCHEDULE OF DISAGGREGATION OF REVENUE
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
($ in thousands)
|
|
Healthcare IT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-enabled business solutions
|
|
$
|
27,086
|
|
|
$
|
27,078
|
|
|
$
|
80,075
|
|
|
$
|
61,138
|
|
Professional services
|
|
|
6,863
|
|
|
|
489
|
|
|
|
10,978
|
|
|
|
1,278
|
|
Printing and mailing services
|
|
|
429
|
|
|
|
341
|
|
|
|
1,084
|
|
|
|
1,094
|
|
Group purchasing services
|
|
|
300
|
|
|
|
283
|
|
|
|
659
|
|
|
|
649
|
|
Medical Practice Management:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical practice management services
|
|
|
3,626
|
|
|
|
3,448
|
|
|
|
9,341
|
|
|
|
8,926
|
|
Total
|
|
$
|
38,304
|
|
|
$
|
31,639
|
|
|
$
|
102,137
|
|
|
$
|
73,085
|
|
Technology-enabled
business solutions:
Most
of our revenue comes from clients who are using subscription-based technology-enabled business solutions. These solutions typically include
one or more elements of our proprietary cloud-based software-as-a-service (“SaaS”) platform, along with revenue cycle management
and related services.
Practice
management software automates the labor-intensive workflow of a medical office in a unified and streamlined manner. EHR software allows
our healthcare provider clients to deliver better patient care, document their clinical visits effectively and to potentially qualify
for government incentives, reduce documentation errors and reduce paperwork. Patient experience management software allows patients to
schedule appointments, request refills, and view their electronic records online or via their mobile device. Business intelligence, robotic
process automation, patient experience software, customized applications, interfaces and a variety of other technology solutions support
our healthcare clients, either in conjunction with our practice management and EHR platform or through interfaces with third-party platforms.
When these software elements are part of the technology-enabled business solution, they are normally included in a price, which is normally
expressed as a percentage of the practice’s collections.
Revenue
cycle management services are the recurring process of submitting and following up on claims with health insurance companies in order
for the healthcare providers to receive payment for the services they rendered. Approximately 78% of our revenue is derived from clients
using one or more elements of our technology platform and approximately 22% comes from clients using our other services.
The
Company invoices many customers on a monthly basis based on the actual collections received by customers and the agreed-upon rate in
the sales contract. The fee for these services typically includes use of practice management software and related tools (on a SaaS basis),
electronic health records (on a SaaS basis), medical billing services and use of mobile health solutions. Alternatively, SaaS fees may
be fixed based on the number of providers, or may be variable based on usage. We consider the services to be one performance obligation
since the promises are not distinct in the context of the contract. The performance obligation consists of a series of distinct services
that are substantially the same and have the same periodic pattern of transfer to our customers.
In
many cases, our clients may terminate their agreements with 90 days’ notice without cause, thereby limiting the term in which we
have enforceable rights and obligations, although this time period can vary between clients. Our payment terms are normally net 30 days.
Although our contracts typically have stated terms of one or more years, under ASC 606, our contracts are considered month-to-month and
accordingly, there is no financing component.
For
the majority of our contracts, the total transaction price is variable because our obligation is to process an unknown quantity of claims,
as and when requested by our customers over the contract period. When a contract includes variable consideration, we evaluate the estimate
of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include variable consideration
in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized
will not occur when the uncertainty associated with variable consideration is subsequently resolved. Estimates to determine variable
consideration, such as payment to charge ratios, effective billing rates, and the estimated contractual payment periods, are updated
at each reporting date. Revenue is recognized over the performance period using the input method.
Included
in technology-enabled business solutions are ancillary services such as coding, credentialing and transcription that are rendered in
connection with the delivery of revenue cycle management 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 revenue cycle management customers.
These services do not represent a material right because the services are optional to the customer and customers electing these services
are charged the same price for those services as if they were on a standalone basis. Each individual ancillary service transaction processed
represents a performance obligation, which is satisfied over time as that individual service is rendered.
Also
included in technology-enabled business solutions are medical billing clearinghouse services that takes claim information from customers,
checks the claims for errors and sends this information electronically to insurance companies. The Company invoices customers on a monthly
basis based on the number of claims submitted and the agreed-upon rate in the agreement. This service is provided to medical practices
and providers to medical practices who are not revenue cycle management customers. The performance obligation is satisfied once the relevant
submissions are completed.
Professional
services:
The
Company provides implementation and professional services to certain customers and records revenue monthly on a time and materials or
a fixed rate basis. These services consist of implementation, advisory and on demand staffing. This is a separate performance obligation
from any revenue cycle management and SaaS services provided, for which the Company receives and records monthly fees. The performance
obligation is satisfied over time as the professional services are rendered.
Substantially
all of the professional services obligations consist of a series of distinct services that are substantially the same and have the same
periodic pattern of transfer to our customers. Revenue is recognized over time.
Other
revenue streams:
The
Company provides printing and mailing services for both technology-enabled business solutions and a customer that does not utilize our
technology-enabled business solutions, 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
Company also provides group purchasing services that enable medical providers to purchase various vaccines directly from selected pharmaceutical
companies at a discounted price. Currently, there are approximately 4,000 medical providers who are members of the program. Revenue is
recognized as the vaccine shipments are made to the medical providers. Fees from the pharmaceutical companies are paid either quarterly
or annually and the Company adjusts its revenue accrual at the time of payment. The Company makes significant judgments regarding the
variable consideration that we expect to be entitled to for the group purchasing services, which includes the anticipated shipments
to the members enrolled in the program, anticipated volumes of purchases made by the members, and the changes in the number of members.
The amounts recorded are constrained by estimates of decreases in shipments and loss of members to avoid a significant revenue reversal
in the subsequent period. The only performance obligation is to provide the pharmaceutical companies with the medical providers who want
to become members in order to purchase vaccines. The performance obligation is satisfied once the medical provider agrees to purchase
a specific quantity of vaccines and the medical provider’s information is forwarded to the vaccine suppliers. The Company records
a contract asset for revenue earned and not paid, as the ultimate payment is conditioned on achieving certain volume thresholds.
For
all of the above revenue streams other than group purchasing services and printing and mailing, revenue is recognized over time, which
is typically one month or less, which closely matches the point in time that the customer simultaneously receives and consumes the benefits
provided by the Company. For the group purchasing services, revenue is recognized at a point in time. Each service is substantially the
same and has the same periodic pattern of transfer to the customer. Each of the services provided above is considered a separate performance
obligation.
Medical
practice management services:
The
Company also provides medical practice management services under long-term management service agreements to three medical practices.
We provide the medical practices with the nurses, administrative support, facilities, supplies, equipment, marketing, RCM, accounting,
and other non-clinical services needed to efficiently operate their practices. Revenue is recognized as the services are provided to
the medical practices. Revenue recorded in the consolidated statements of operations represents the reimbursement of costs paid by the
Company for the practices and the management fee earned each month for managing the practice. The management fee is based on either a
fixed fee or a percentage of the net operating income.
The
Company assumes all financial risk for the performance of the managed medical practices. Revenue is impacted by the amount of the costs
incurred by the practices and their operating income. The gross billing of the practices is impacted by billing rates, changes in current
procedural terminology code reimbursement and collection trends which impacts the management fee that the Company is entitled to. Billing
rates are reviewed at least annually and adjusted based on current insurer reimbursement practices. The performance obligation is satisfied
as the management services are provided.
Our
contracts for medical practice management services have approximately an additional 20 years remaining and are only cancellable under
very limited circumstances. The Company receives a management fee each month for managing the day-to-day business operations of each
medical group as a fixed fee or a percentage payment of the net operating income, which is included in revenue in the condensed consolidated
statements of operations.
Our
medical practice management services obligations consist of a series of distinct services that are substantially the same and have the
same periodic pattern of transfer to our customers. Revenue is recognized over time; however, for reporting and convenience purposes,
the management fee is computed at each month end.
Information
about contract balances:
The
contract assets in the condensed consolidated balance sheets represent the revenue associated with the amounts we estimate our clients
will ultimately collect if our charges are based on a percentage of collections, together with amounts related to the group purchasing
services. As of September 30, 2021, the estimated revenue expected to be recognized in the future related to the remaining performance
obligations outstanding was approximately $4.1 million. We expect to recognize substantially all of the revenue for the remaining performance
obligations over the next three months. Approximately $544,000 of the contract asset represents revenue earned, but not yet paid, from
the group purchasing services.
Accounts
receivable are shown separately at their net realizable value in our condensed consolidated balance sheets. Amounts that we are entitled
to collect under the applicable contract are recorded as accounts receivable. Invoicing is performed at the end of each month when the
services have been provided. The contract asset results from our revenue cycle management services and is due to the timing of revenue
recognition, submission of claims from our customers and payments from the insurance providers. The contract asset includes our right
to payment for services already transferred to a customer when the right to payment is conditional on something other than the passage
of time. For example, contracts for revenue cycle management services where we recognize revenue over time but do not have a contractual
right to payment until the customer receives payment of their claim from the insurance provider. The contract asset also includes the
revenue accrued, not received, for the group purchasing services.
The
contract asset was approximately $4.7 million and $4.1 million as of September 30, 2021 and 2020, respectively. Changes in the contract
asset are recorded as adjustments to net revenue. The changes primarily result from providing services to customers that result in additional
consideration and are offset by our right to payment for services becoming unconditional and changes in the revenue accrued for the group
purchasing services. The contract asset for our group purchasing services is reduced when we receive payments from vaccine manufacturers
and is increased for revenue earned, not received. Deferred revenue represents sign-up fees received from customers that are amortized
over three years. The opening and closing balances of the Company’s accounts receivable, contract asset and deferred revenue are
as follows for the nine months ended September 30, 2021 and 2020:
SCHEDULE OF ACCOUNTS RECEIVABLE, CONTRACT ASSET AND DEFERRED REVENUE
|
|
Accounts Receivable, Net
|
|
|
Contract Asset
|
|
|
Deferred Revenue (current)
|
|
|
Deferred Revenue
(long term)
|
|
|
|
($ in thousands)
|
|
Balance as of January 1, 2021
|
|
$
|
12,089
|
|
|
$
|
4,105
|
|
|
$
|
1,173
|
|
|
$
|
305
|
|
medSR acquisition
|
|
|
2,705
|
|
|
|
2,402
|
|
|
|
20
|
|
|
|
-
|
|
Meridian acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Increase (decrease), net
|
|
|
3,300
|
|
|
|
(1,846
|
)
|
|
|
(104
|
)
|
|
|
(89
|
)
|
Balance as of September 30, 2021
|
|
$
|
18,094
|
|
|
$
|
4,661
|
|
|
$
|
1,089
|
|
|
$
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2020
|
|
$
|
6,995
|
|
|
$
|
2,385
|
|
|
$
|
20
|
|
|
$
|
19
|
|
CCH acquisition
|
|
|
2,299
|
|
|
|
538
|
|
|
|
-
|
|
|
|
269
|
|
Meridian acquisition
|
|
|
3,558
|
|
|
|
881
|
|
|
|
907
|
|
|
|
-
|
|
Increase (decrease), net
|
|
|
913
|
|
|
|
274
|
|
|
|
288
|
|
|
|
(128
|
)
|
Balance as of September 30, 2020
|
|
$
|
13,765
|
|
|
$
|
4,078
|
|
|
$
|
1,215
|
|
|
$
|
160
|
|
Deferred
commissions:
Our
sales incentive plans include commissions payable to employees and third parties at the time of initial contract execution that are capitalized
as incremental costs to obtain a contract. The capitalized commissions are amortized over the period the related services are transferred.
As we do not offer commissions on contract renewals, we have determined the amortization period to be the estimated client life which
is three years for contracts entered into by CCH. Deferred commissions were approximately $922,000 and $870,000 at September 30, 2021
and 2020, respectively, and are included in the other assets amounts in the condensed consolidated balance sheets.
12.
STOCK-BASED COMPENSATION
In
April 2014, the Company adopted the Medical Transcription Billing, Corp. 2014 Equity Incentive Plan (the “2014 Plan”), reserving
1,351,000 shares of common stock for grants to employees, officers, directors and consultants. During 2017, the 2014 Plan was amended
and restated whereby an additional 1,500,000 shares of common stock and 100,000 shares of Preferred Stock were added to the plan for
future issuance. The 2014 Plan was amended and restated on April 14, 2017 (the “Amended and Restated Equity Incentive Plan”).
During 2018, an additional 200,000 of preferred shares were added to the plan for future issuance. In May 2020, an additional 2,000,000
shares of common stock and 300,000 shares of Preferred Stock were added to the plan for future issuance. As of September 30, 2021, 1,344,833
shares of common stock and 323,878 shares of Preferred Stock are available for grant. Permissible awards include incentive stock options,
non-statutory stock options, stock appreciation rights, restricted stock, RSUs, performance stock and cash-settled awards and other stock-based
awards in the discretion of the Compensation Committee of the Board of Directors including unrestricted stock grants.
The
equity-based RSUs contain a provision in which the units shall immediately vest and become converted into common shares at the rate of
one share per RSU, immediately after a change in control, as defined in the award agreement. The preferred stock RSUs contain a similar
provision, which vest and convert to Preferred Stock upon a change in control.
Common
and preferred stock RSUs
In
January 2021, the Compensation Committee approved executive bonuses to be paid in shares of Preferred Stock, with the number of shares
and the amount based on specified criteria being achieved during the year 2021. The actual amount will be settled in early 2022 based
on the achievement of the specified criteria. For the nine months ended September 30, 2021, an expense of approximately $749,000 was
recorded for these bonuses based on the value of the shares at the grant date and recognized over the service period. The portion of
the stock compensation expense to be used for the payment of withholding and payroll taxes is included in accrued compensation in the
condensed consolidated balance sheets. The balance of the stock compensation expense has been recorded as additional paid-in capital.
The
following table summarizes the RSU transactions related to the common and preferred stock under the Equity Incentive Plan for the nine
months ended September 30, 2021 and 2020:
DISCLOSURE OF SHARE-BASED COMPENSATION ARRANGEMENTS BY SHARE-BASED PAYMENT AWARD
|
|
Common Stock
|
|
|
Preferred Stock
|
|
Outstanding and unvested shares at January 1, 2021
|
|
|
382,435
|
|
|
|
44,000
|
|
Granted
|
|
|
458,467
|
|
|
|
46,197
|
|
Vested
|
|
|
(475,120
|
)
|
|
|
(56,197
|
)
|
Forfeited
|
|
|
(85,286
|
)
|
|
|
-
|
|
Outstanding and unvested shares at September 30, 2021
|
|
|
280,496
|
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
Outstanding and unvested shares at January 1, 2020
|
|
|
451,085
|
|
|
|
44,000
|
|
Granted
|
|
|
777,884
|
|
|
|
59,673
|
|
Vested
|
|
|
(667,436
|
)
|
|
|
(59,673
|
)
|
Forfeited
|
|
|
(82,428
|
)
|
|
|
-
|
|
Outstanding and unvested shares at September 30, 2020
|
|
|
479,105
|
|
|
|
44,000
|
|
The
total outstanding and unvested common stock RSUs at September 30, 2021 are classified as equity.
Stock-based
compensation expense
The
Company recognizes compensation expense on a straight-line basis over the total requisite service period for the entire award. For stock
awards classified as equity, the market price of our common stock or preferred stock on the date of grant is used in recording the fair
value of the award and includes the related taxes. For stock awards classified as a liability, the earned amount is marked to market
based on the end of period common stock price. The liability for the cash-settled awards was approximately $559,000 and $976,000 at September
30, 2021 and December 31, 2020, respectively, and is included in accrued compensation in the condensed consolidated balance sheets.
The
following table summarizes the components of share-based compensation expense for the three months and nine months ended September 30,
2021 and 2020:
SCHEDULE OF EMPLOYEE SERVICE SHARE-BASED COMPENSATION, ALLOCATION OF RECOGNIZED PERIOD COSTS
Stock-based compensation included in the condensed consolidated statements of operations:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
($ in thousands)
|
|
Direct operating costs
|
|
$
|
207
|
|
|
$
|
379
|
|
|
$
|
766
|
|
|
$
|
809
|
|
General and administrative
|
|
|
737
|
|
|
|
819
|
|
|
|
2,482
|
|
|
|
2,887
|
|
Research and development
|
|
|
(3
|
)
|
|
|
262
|
|
|
|
206
|
|
|
|
516
|
|
Selling and marketing
|
|
|
63
|
|
|
|
303
|
|
|
|
552
|
|
|
|
739
|
|
Total stock-based compensation expense
|
|
$
|
1,004
|
|
|
$
|
1,763
|
|
|
$
|
4,006
|
|
|
$
|
4,951
|
|
13.
INCOME TAXES
The
income tax benefit for the three months ended September 30, 2021 was approximately $232,000
comprised of a current tax benefit of $245,000
and a deferred tax expense of $13,000.
The Company filed a carryback claim for approximately $285,000
with the Internal Revenue Service to recover
taxes previously paid by Meridian prior to its acquisition of Meridian. The income tax benefit for the nine months ended September 30,
2021 was approximately $20,000,
comprised of a current tax benefit of $160,000
and a deferred tax expense of $140,000.
The deferred tax expense is not anticipated to result in a cash payment. The carryback claim receivable is recorded in prepaid expenses
and other current assets in the condensed consolidated balance sheet at September 30, 2021.
With
the exception of the carryback claim tax benefit mentioned above, the
current income tax provision for the nine months ended September 30, 2021 and 2020 primarily relates to state minimum taxes and
foreign income taxes. The deferred tax provision for the three and nine months ended September 30, 2021 and 2020 relates to the book
and tax difference of amortization on indefinite-lived intangibles, primarily goodwill. To the extent allowable, the federal deferred
tax provision has been offset by the indefinite life net operating loss.
On
March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. Several new corporate tax provisions
were included in the CARES Act, including, but not limited to, the following: increasing the limitation threshold for determining deductible
interest expense, class life changes to qualified improvements (in general - from 39 years to 15 years), and the ability to carry back
net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years. The Company has evaluated the income
tax provisions of the CARES Act and determined the impact to be either immaterial or not applicable. Under the CARES Act, the Company
took advantage of the payroll tax deferral provision. As of both September 30, 2021 and December 31, 2020, the Company has deferred approximately
$1.9 million of payroll taxes. Of this amount, one-half needs to be repaid by December 31, 2021 and the balance by December 31, 2022.
The
Company has incurred cumulative losses, which make realization of a deferred tax asset difficult to support in accordance with ASC 740.
Accordingly, a valuation allowance has been recorded against the Federal and state deferred tax assets as of September 30, 2021 and December
31, 2020.
14.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair
value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect our view of market participant assumptions in the absence of observable market information.
We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair values
of assets and liabilities required to be measured at fair value are categorized based upon the level of judgement associated with the
inputs used to measure their value in one of the following three categories:
Level
1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. We held no Level 1 financial instruments
at September 30, 2021 or December 31, 2020.
Level
2: Quoted prices for similar instruments in active markets with inputs that are observable, either directly or indirectly. Our Level
2 financial instruments include notes payable which are carried at cost and approximate fair value since the interest rates being charged
approximate market rates.
Level
3: Unobservable inputs are significant to the fair value of the asset or liability, and include situations where there is little, if
any, market activity for the asset or liability. Our Level 3 instrument includes the fair value of contingent consideration related
to completed acquisitions. The fair value at September 30, 2020 is based on a discounted cash flow analysis
reflecting the likelihood of achieving specified performance measure or events and captures the contractual nature of the
contingencies, the passage of time and the associated discount rate. As of September 30, 2021, the contingent consideration is
valued using a Monte Carlo simulation model.
The
following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value
using significant unobservable inputs (Level 3):
SCHEDULE OF FAIR VALUE, LIABILITIES MEASURED ON RECURRING BASIS, UNOBSERVABLE INPUT RECONCILIATION
|
|
Fair Value Measurement at Reporting Date Using Significant Unobservable Inputs, Level 3
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
($ in thousands)
|
|
Balance - January 1,
|
|
$
|
-
|
|
|
$
|
-
|
|
Acquisitions
|
|
|
6,500
|
|
|
|
1,000
|
|
Change in fair value
|
|
|
-
|
|
|
|
(500
|
)
|
Payments
|
|
|
-
|
|
|
|
-
|
|
Balance - September 30,
|
|
$
|
6,500
|
|
|
$
|
500
|
|
15.
SEGMENT REPORTING
The
Company’s Chief Executive Officer and Executive Chairman jointly serve as the Chief Operating Decision Maker (“CODM”),
organize the Company, manage resource allocations and measure performance among two operating and reportable segments: (i) Healthcare
IT and (ii) Medical Practice Management.
The
Healthcare IT segment includes revenue cycle management, SaaS solutions and other services. The Medical Practice Management segment includes
the management of three medical practices. Each segment is considered a reporting unit. The CODM evaluates financial performance of the
business units on the basis of revenue and direct operating costs excluding unallocated amounts, that are mainly corporate overhead costs.
Our CODM does not evaluate operating segments using asset or liability information. The accounting policies of the segments are the same
as those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February
25, 2021. The following tables present revenues, operating expenses and operating (loss) income by reportable segment:
SCHEDULE OF REVENUES, OPERATING EXPENSES AND OPERATING INCOME (LOSS) BY REPORTABLE SEGMENT
|
|
Nine Months Ended September 30, 2021
|
|
|
|
($ in thousands)
|
|
|
|
Healthcare IT
|
|
|
Medical
Practice Management
|
|
|
Unallocated
Corporate Expenses
|
|
|
Total
|
|
Net revenue
|
|
$
|
92,797
|
|
|
$
|
9,340
|
|
|
$
|
-
|
|
|
$
|
102,137
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
55,473
|
|
|
|
7,246
|
|
|
|
-
|
|
|
|
62,719
|
|
Selling and marketing
|
|
|
6,446
|
|
|
|
23
|
|
|
|
-
|
|
|
|
6,469
|
|
General and administrative
|
|
|
10,175
|
|
|
|
1,487
|
|
|
|
6,152
|
|
|
|
17,814
|
|
Research and development
|
|
|
4,328
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,328
|
|
Change in contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
9,251
|
|
|
|
254
|
|
|
|
-
|
|
|
|
9,505
|
|
Loss on lease termination,
impairment and unoccupied lease charges
|
|
|
1,664
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,664
|
|
Total operating expenses
|
|
|
87,337
|
|
|
|
9,010
|
|
|
|
6,152
|
|
|
|
102,499
|
|
Operating income (loss)
|
|
$
|
5,460
|
|
|
$
|
330
|
|
|
$
|
(6,152
|
)
|
|
$
|
(362
|
)
|
|
|
Three Months Ended September 30, 2021
|
|
|
|
($ in thousands)
|
|
|
|
Healthcare IT
|
|
|
Medical
Practice Management
|
|
|
Unallocated
Corporate Expenses
|
|
|
Total
|
|
Net revenue
|
|
$
|
34,678
|
|
|
$
|
3,626
|
|
|
$
|
-
|
|
|
$
|
38,304
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
21,324
|
|
|
|
2,800
|
|
|
|
-
|
|
|
|
24,124
|
|
Selling and marketing
|
|
|
2,368
|
|
|
|
7
|
|
|
|
-
|
|
|
|
2,375
|
|
General and administrative
|
|
|
3,336
|
|
|
|
471
|
|
|
|
2,114
|
|
|
|
5,921
|
|
Research and development
|
|
|
488
|
|
|
|
-
|
|
|
|
-
|
|
|
|
488
|
|
Depreciation and amortization
|
|
|
3,459
|
|
|
|
88
|
|
|
|
-
|
|
|
|
3,547
|
|
Loss on lease
termination, impairment and unoccupied lease charges
|
|
|
424
|
|
|
|
-
|
|
|
|
-
|
|
|
|
424
|
|
Total operating expenses
|
|
|
31,399
|
|
|
|
3,366
|
|
|
|
2,114
|
|
|
|
36,879
|
|
Operating income (loss)
|
|
$
|
3,279
|
|
|
$
|
260
|
|
|
$
|
(2,114
|
)
|
|
$
|
1,425
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
($ in thousands)
|
|
|
|
Healthcare IT
|
|
|
Medical
Practice Management
|
|
|
Unallocated
Corporate Expenses
|
|
|
Total
|
|
Net revenue
|
|
$
|
64,159
|
|
|
$
|
8,926
|
|
|
$
|
-
|
|
|
$
|
73,085
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
39,074
|
|
|
|
6,768
|
|
|
|
-
|
|
|
|
45,842
|
|
Selling and marketing
|
|
|
4,753
|
|
|
|
25
|
|
|
|
-
|
|
|
|
4,778
|
|
General and administrative
|
|
|
11,067
|
|
|
|
1,493
|
|
|
|
4,616
|
|
|
|
17,176
|
|
Research and development
|
|
|
6,846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,846
|
|
Change in contingent consideration
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(500
|
)
|
Depreciation and amortization
|
|
|
6,706
|
|
|
|
238
|
|
|
|
-
|
|
|
|
6,944
|
|
Impairment charges
|
|
|
681
|
|
|
|
-
|
|
|
|
-
|
|
|
|
681
|
|
Total operating expenses
|
|
|
68,627
|
|
|
|
8,524
|
|
|
|
4,616
|
|
|
|
81,767
|
|
Operating (loss) income
|
|
$
|
(4,468
|
)
|
|
$
|
402
|
|
|
$
|
(4,616
|
)
|
|
$
|
(8,682
|
)
|
|
|
Three Months Ended September 30, 2020
|
|
|
|
($ in thousands)
|
|
|
|
Healthcare IT
|
|
|
Medical Practice Management
|
|
|
Unallocated Corporate Expenses
|
|
|
Total
|
|
Net revenue
|
|
$
|
28,191
|
|
|
$
|
3,448
|
|
|
$
|
-
|
|
|
$
|
31,639
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
17,147
|
|
|
|
2,571
|
|
|
|
-
|
|
|
|
19,718
|
|
Selling and marketing
|
|
|
1,563
|
|
|
|
8
|
|
|
|
-
|
|
|
|
1,571
|
|
General and administrative
|
|
|
4,173
|
|
|
|
468
|
|
|
|
1,550
|
|
|
|
6,191
|
|
Research and development
|
|
|
2,367
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,367
|
|
Change in contingent consideration
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(500
|
)
|
Depreciation and amortization
|
|
|
3,127
|
|
|
|
79
|
|
|
|
-
|
|
|
|
3,206
|
|
Impairment charges
|
|
|
321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
321
|
|
Total operating expenses
|
|
|
28,198
|
|
|
|
3,126
|
|
|
|
1,550
|
|
|
|
32,874
|
|
Operating (loss) income
|
|
$
|
(7
|
)
|
|
$
|
322
|
|
|
$
|
(1,550
|
)
|
|
$
|
(1,235
|
)
|