SECURITIES & EXCHANGE COMMISSION EDGAR FILING
MTBC, Inc.
Form: 10-K
Date Filed: 2020-02-28
Corporate Issuer CIK: 1582982
© Copyright 2020, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36529
MTBC, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7 Clyde Road
Somerset, New Jersey
(Address of principal executive offices)
22-3832302
(I.R.S. Employer
Identification Number)
08873
(Zip Code)
(732) 873-5133
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
11% Series A Cumulative Redeemable Perpetual Preferred
Stock, par value $0.001 per share
Securities registered pursuant to Section 12(g) of the Act: None
Trading Symbol(s)
MTBC
Name of exchange on which registered
Nasdaq Global Market
MTBCP
Nasdaq Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ]
Non-accelerated filer [X]
Accelerated filer [ ]
Smaller reporting company [X]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 30, 2019, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $31.4 million,
based on the last reported trading price of the Common Stock on that date, as reported on the Nasdaq Global Market.
At February 27, 2020, the registrant had 12,335,930 shares of common stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 19, 2020 are incorporated by reference into Part III, Items 10, 11, 12,
13, and 14 of this Annual Report on Form 10-K.
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Forward Looking Statements
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Table of Contents
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART III
Item 15. Exhibits, Financial Statement Schedules
Signatures
PART IV
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Forward-Looking Statements
Certain statements that we make from time to time, including statements contained in this Annual Report on Form 10-K, constitute “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. All statements other than statements of historical fact contained in this Annual Report on Form 10-K are forward-looking
statements. These statements relate to anticipated future events, future results of operations or future financial performance. In some cases, you can identify
forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Our operations involve risks and uncertainties,
many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-
looking statements ultimately prove to be correct. Forward-looking statements in this Annual Report on Form 10-K include, without limitation, statements
reflecting management’s expectations for future financial performance and operating expenditures (including our ability to continue as a going concern, to raise
additional capital and to succeed in our future operations), expected growth, profitability and business outlook, increased sales and marketing expenses, and the
expected results from the integration of our acquisitions.
Forward-looking statements are only predictions, are uncertain and involve substantial known and unknown risks, uncertainties, and other factors that may cause
our (or our industry’s) actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed
or implied by these forward-looking statements. These factors include, among other things, the unknown risks and uncertainties that we believe could cause
actual results to differ from these forward-looking statements as set forth under the heading, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
New risks and uncertainties emerge from time to time, and it is not possible for us to predict all of the risks and uncertainties that could have an impact on the
forward-looking statements, including without limitation, risks and uncertainties relating to:
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our ability to manage our growth, including acquiring, partnering with, and effectively integrating the recent acquisition of CareCloud Corporation and
other acquired businesses into our infrastructure and avoiding legal exposure and liabilities associated with acquired companies and assets;
our ability to retain our clients and revenue levels, including effectively migrating new clients and maintaining or growing the revenue levels of our new
and existing clients;
our ability to maintain operations in Pakistan and Sri Lanka in a manner that continues to enable us to offer competitively priced products and services;
our ability to keep pace with a rapidly changing healthcare industry;
our ability to consistently achieve and maintain compliance with a myriad of federal, state, foreign, local, payor and industry requirements, regulations,
rules, laws and contracts;
our ability to maintain and protect the privacy of confidential and protected Company, client and patient information;
our ability to develop new technologies, upgrade and adapt legacy and acquired technologies to work with evolving industry standards and third-party
software platforms and technologies, and protect and enforce all of these and other intellectual property rights;
our ability to attract and retain key officers and employees, and the continued involvement of Mahmud Haq as Executive Chairman and Stephen Snyder
as Chief Executive Officer, all of which are critical to our ongoing operations, growing our business and integrating of our newly acquired businesses;
our ability to comply with covenants contained in our credit agreement with our senior secured lender, Silicon Valley Bank and other future debt facilities;
our ability to compete with other companies developing products and selling services competitive with ours, and who may have greater resources and
name recognition than we have; and
our ability to keep and increase market acceptance of our products and services.
Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are reasonable, we cannot
guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of such
forward-looking statements, whether as a result of new information, future events, or otherwise, after the date of this Annual Report on Form 10-K.
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PART I
Item 1. Business
Our Company
MTBC, Inc., (and together with its consolidated subsidiaries “MTBC” or the “Company”) is a healthcare information technology company that offers an integrated
suite of proprietary cloud-based electronic health records and practice management solutions, together with related business services, to healthcare providers.
The Company’s integrated services are designed to help customers increase revenues, streamline workflows and make better business and clinical decisions,
while reducing administrative burdens and operating costs. The Company’s services include full-scale revenue cycle management, electronic health records, and
other technology-driven practice management services for private and hospital-employed healthcare providers. These solutions and services include:
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Revenue cycle management (“RCM”) services, which include end-to-end medical billing, eligibility, analytics, and related services, all of which can often
be provided either with our technology platform or through a third-party system;
Proprietary healthcare IT solutions, which are bundled with our RCM services, including:
○ Electronic health records (“EHR”), which are easy to use, integrated with our business services or offered as software as a service (“SaaS”)
solutions, and allow our healthcare provider clients to reduce paperwork and qualify for incentives;
○ Practice management (“PM”) software and related tools, which support our clients’ day-to-day business operations and workflows;
○ Mobile Health (“mHealth”) solutions, including smartphone applications that assist patients and healthcare providers in the provision of
healthcare services;
○ Healthcare claims clearinghouse, which enables our clients to electronically scrub and submit claims to, and process payments from, insurance
companies; and
○ Business intelligence, customized applications, interfaces and a variety of other technology solutions that support our healthcare clients;
• Group purchasing services which include our negotiation of discounts with pharmaceutical manufacturers and the extension of those discounts to our
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physician members;
Comprehensive practice management services, which are offered under long-term management service agreements pursuant to which we provide
certain practices with the administrative support, facilities, supplies, equipment, marketing, RCM, accounting, and other non-clinical services required to
efficiently operate their practices; and
Telemedicine, a service which is launching in 2020, will allow our clients to conduct remote office visits with patients and bill for these visits where
permissible.
We are able to deliver our industry-leading solutions at very competitive prices because we leverage a combination of our proprietary software, which automates
our workflows and increases efficiency, together with our team of over 300 experienced health industry experts throughout the United States. These experts are
supported by our highly educated and specialized offshore workforce of approximately 2,400 team members at labor costs that we believe are approximately
one-tenth the cost of comparable U.S. employees. Our unique business model has allowed us to become a leading consolidator in our industry sector, gaining
us a reputation for acquiring and positively transforming distressed competitors into profitable operations of MTBC.
During January 2020, the Company, through a merger with its subsidiary, acquired CareCloud Corporation (“CareCloud”), which has developed a highly
acclaimed cloud-based platform including EHR, PM and patient experience capabilities. The Company acquired CareCloud on a cash-free, debt-free basis with
neutral working capital. The total consideration for the merger paid at closing was $17 million in cash and 760,000 shares of the Company’s 11% Series A
Cumulative Redeemable Perpetual Preferred Stock. The merger agreement provides that if CareCloud’s 2020 revenues exceed $36 million, there will be an
earn-out payment to the seller equal to such excess, up to $3 million. Additional consideration included warrants to purchase 2,000,000 shares of the
Company’s common stock, 1,000,000 of which has an exercise price per share of $7.50 and a term of two years, and the second million of which has an exercise
price per share of $10.00 and a term of three years. Of the preferred stock consideration, 160,000 shares of Series A Preferred Stock will be held in escrow for
up to 24 months, and an additional 100,000 shares of Series A Preferred Stock will be held 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.
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During April 2019, the Company acquired substantially all of the revenue cycle management business of Etransmedia Technology, Inc. (“ETM”) through MTBC’s
wholly owned subsidiary MTBC-Med, Inc. The Company paid $1.6 million in cash for the acquisition.
The ETM 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.
During July 2018, the Company acquired substantially all of the revenue cycle management, practice management and group purchasing assets of Orion
Healthcorp, Inc. and 13 of its affiliates (together “Orion”). The acquisition was completed through MTBC’s wholly owned subsidiaries, MTBC Health, Inc. and
MTBC Practice Management, Corp. The Company paid $12.6 million in cash for the acquisition. This acquisition expanded the scope of our offerings to include
additional niche hospital solutions, a service that negotiates vaccine discounts with pharmaceutical manufacturers and then extends those vaccine discounts to
its physician members, and a service that provides end-to-end practice management services to physician practices under multi-decade management service
agreements.
Adoption of our RCM solutions typically requires little or no upfront expenditure by a client. Additionally, for most of our solutions and customers, our financial
performance is linked directly to the financial performance of our clients, as the vast majority of our revenues are based on a percentage of our clients’
collections. The standard fee for our complete, integrated, end-to-end solution is among the lowest in the industry. We estimate that as of December 31, 2019,
we provided services to approximately 10,500 providers, (which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff
that render bills for their services) practicing in approximately 1,800 independent medical practices and hospitals, representing 86 specialties and subspecialties
in 46 states. In addition, we served approximately 200 clients that are not medical practices, but are primarily service organizations who serve the healthcare
community. The foregoing numbers include clients leveraging any of our products or services, and are based in part upon estimates where the precise number of
practices or providers is unknown.
We service clients ranging from small practices, consisting of one to ten providers, to community hospitals. Our customer, that generates the largest revenue for
us, has over 1,800 providers of physical, occupational and speech therapy services to patients in multiple states.
On July 23, 2014, the Company completed its initial public offering (“IPO”) of common stock. The Company sold approximately four million shares at a price of
$5.00 per share to the public.
In November 2015, the Company completed a public offering of its 11% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Preferred Stock” or
“Series A Preferred Stock”). The Company sold 231,616 shares at a price of $25.00 per share and received net proceeds of approximately $4.7 million. In July
2016, the Company sold an additional 63,040 shares of Preferred Stock and received net proceeds of approximately $1.3 million. In 2017, the Company raised a
total of $16.4 million in net proceeds from a series of additional offerings totaling approximately 765,000 shares of Preferred Stock, all at $25.00 per share. In
May 2017, the Company completed a registered direct offering of one million shares of its common stock at $2.30 per share, raising net proceeds of
approximately $2.0 million. During 2018, the Company issued 1,020,000 shares of Preferred Stock and received net proceeds of approximately $22.8 million.
During 2019, the Company issued 373,000 shares of Preferred Stock and received net proceeds, after fees and expenses, of approximately $9.6 million.
On February 6, 2019, the Company’s Board of Directors approved an amendment to our Articles of Incorporation to change the Company’s name to MTBC, Inc.
Employees
Including the employees of our subsidiaries, as of December 2019, the Company employed approximately 2,700 people worldwide on a full-time basis. We also
utilize the services of a small number of part time employees. In addition, all officers of the Company work on a full-time basis. Over the next twelve months, we
anticipate increasing our total number of employees only if our revenues increase, our operating requirements warrant such hiring, or we are hiring for specific
functions where we place additional emphasis, such as marketing and sales.
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Our Growth Strategy
The Healthcare IT service industry is highly fragmented, with many local and regional RCM companies serving small medical practices and hospitals. We believe
that the industry is ripe for consolidation and that we can achieve significant growth organically and through acquisitions. We further believe that it is becoming
increasingly difficult for traditional RCM companies to meet the growing technology and business service needs of healthcare providers without a significant
investment in an information technology infrastructure. Since the Company went public in July 2014, we have acquired substantially all of the assets of 15 RCM
companies. Although the specific arrangements have varied with each transaction, typical arrangements include a discounted price, consideration which is
sometimes tied to revenues from the customer relationships acquired, and structuring the acquisition as an asset purchase so as to limit our liability. We typically
leverage our technology and our cost-effective offshore team to reduce costs promptly after the transaction closes, although there will be initial costs associated
with the integration of the acquired business with our existing operations.
We believe we can further accelerate organic growth through industry participants, whereby in addition to obtaining referrals, we utilize them as channel
partners to offer integrated solutions to their clients. We have entered into such arrangements with industry participants, and from which we began to derive
revenue from them starting in mid-2014. We have developed application interfaces with numerous EHR systems, together with device and lab integration to
support these relationships.
During 2018, we completed our acquisition of Orion, adding approximately $29 million and $17.8 million of revenue for the years ended December 31, 2019 and
2018, respectively. In addition to revenue cycle management, after the Orion acquisition we earned approximately 21% and 19% of our revenue from practice
management services for the years ended December 31, 2019 and 2018, respectively, which represents fees based on our actual costs plus a percentage of the
operating profit. We also earned approximately 2% of our revenue from group purchasing services for both the years ended December 31, 2019 and 2018.
During January 2020, we completed our acquisition of CareCloud, which is our largest acquisition to date. CareCloud offers software services for PM, electronic
health records and patient experience management on a SaaS basis and also offers RCM services to a portion of its clients.
Industry Overview
In December 2019, Healthcare Finance reported that healthcare spending in the U.S. hit a high-water mark of $3.6 trillion, rising at a rate of 4.6%. They reported
that nearly 60% of the total cost goes toward hospitals, physicians and clinical services. The Centers for Medicare and Medicaid Services (“CMS”) also projected
that U.S healthcare spending will grow 5.7% annually on average during years 2020 through 2027, reaching $6.0 trillion by 2027. CMS also projected that health
spending will grow 0.8% faster than gross domestic product (“GDP”) annually during the years 2020 through 2027; and as a result, the healthcare share of GDP
is expected to rise from 17.9% in 2017 to 19.4% by 2027.
Increasingly complex reimbursement processes. New laws and payer requirements have further complicated insurance reimbursement processes. For
example, Medicare, Medicaid and commercial insurances are increasingly requiring proof of adherence to best practices and improved patient health outcomes
to support full reimbursement. Moreover, the recent shift to a new generation of insurance codes has dramatically increased the complexity associated with
selecting appropriate procedure and diagnosis codes needed to support proper claim submission and reimbursement.
Movement toward healthcare information technology. Since 2011, the federal government has offered financial incentives to eligible healthcare providers
who adopt and meaningfully use EHR technology. Beginning in 2015, providers who were not meaningfully using this technology began to incur penalties, which
increase over time. While these incentives and penalties have encouraged many providers to adopt and meaningfully use EHR software, we believe that most
providers are not utilizing an integrated platform that combines practice management, business intelligence, and revenue cycle management. The lack of an
integrated platform leaves them ill-equipped to address the multitude of rapidly growing industry challenges and government mandates.
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The US Healthcare IT industry market has been estimated by Markets & Markets to be approximately $177 billion with its largest sub-segment RCM to be
approximately $87 billion in 2019, growing at a 12% compound annual growth rate (“CAGR”). The North American EHR market has been estimated to be
approximately $40 billion, growing at a CAGR of 6% per year. The Analytics and AI sub-segment was estimated to be approximately $30 billion, growing at a
27% CAGR and the Telehealth market is estimated to be approximately $20 billion with a CAGR of 17%. Standalone billing and practice management solutions
are reported to be declining in the market today as medical practices move towards integrated, end-to-end systems that incorporate front and back office data
flows, provide seamless access to clinical data from EHRs, and streamline the entire revenue cycle management process.
Shift in focus to preventive care. In an effort to avoid the negative health effects and increased costs associated with undetected and untreated chronic
conditions, most health insurance plans provide co-payment and deductible-free coverage for preventive health services, such as annual well visits. Many
believe that this shift in focus will, in the long-term, reduce costs and improve patient health. Effective preventative health services require access to
comprehensive medical records that are readily available to primary care physicians and other physicians providing preventative healthcare.
Inaccessibility of critical data. To thrive in the emerging healthcare landscape, healthcare practices need timely information, such as health insurance plan
eligibility and coverage details, provider performance and productivity data, as well as clinical and reimbursement benchmarking. However, we believe that most
small and medium size practices do not have access to this type of real-time data, business intelligence and analytical tools, and thus struggle to efficiently
operate their practices and make optimal decisions.
Competition
The market for practice management, EHR and RCM information solutions and related services is highly competitive, and we expect competition to increase in
the future. We face competition from other providers of both integrated and stand-alone practice management, EHR and RCM solutions, including competitors
who utilize a web-based platform and providers of locally installed software systems. Our competitors also include larger healthcare IT companies, such as
athenahealth, Inc., Allscripts Healthcare Solutions, Inc., eClinicalWorks and Greenway Medical Technologies, Inc.
Many of our competitors have longer operating histories, greater brand recognition and greater financial, marketing and other resources than MTBC. We also
compete with various regional RCM companies, some of which may continue to consolidate and expand into broader markets. We expect that competition will
continue to increase as a result of incentives provided by various governmental initiatives, and consolidation in both the information technology and healthcare
industries. In addition, our competitive edge could be diminished or completely lost if our competition develops similar offshore operations in Pakistan or other
countries, such as India and the Philippines, where labor costs are lower than those in the U.S. (although higher than in Pakistan). Pricing pressures could
negatively impact our margins, growth rate and market share.
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Our Solution
We believe that our fully integrated solutions uniquely address the challenges in the industry. Our solutions dramatically simplify the complexities inherent in the
claim reimbursement process and thereby deliver objectively superior results, such as reduced claim denial rates, improved customer days in accounts
receivable, reduced patient no-shows, increased well visit encounters and reimbursement. Our solutions empower our customers with the real-time data they
need to be efficient and make better decisions, such as real-time insurance eligibility and deductible details, provider productivity details and payer benchmarking.
Our fully integrated suite of technology and business service solutions is designed to enable healthcare practices to thrive in the midst of a rapidly changing
environment in which managing reimbursement, clinical workflows and day-to-day administrative tasks are becoming increasingly complex, costly and time-
consuming. Moreover, in most cases the standard fee for our complete, integrated, end-to-end solution is based upon a percentage of a practice’s healthcare-
related revenues, with a monthly minimum fee, plus a nominal one-time setup fee, and is among the lowest in the industry.
Our Business Strategy
Our objective is to become the leading provider of integrated, end-to-end SaaS and business service solutions to healthcare providers practicing in an
ambulatory setting. To achieve this objective, we employ the following strategies:
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Provide comprehensive practice management, electronic health records, revenue cycle management and mobile health solutions to
independent healthcare practices and hospitals. We believe that providers are in need of an integrated, end-to-end solution, such as the solution
that MTBC provides, to manage the different facets of their businesses, from clinical documentation to claim submission and financial reporting.
Provide exceptional customer service. We realize that our success is tied directly to our customers’ success. Accordingly, a substantial portion of our
highly trained and educated workforce is devoted to customer service.
Leverage significant cost advantages provided by our technology and skilled offshore workforce. Our unique business model includes our web-
based software and a cost-effective offshore workforce primarily based in Pakistan. We believe that this operating model provides us with significant cost
advantages compared to other revenue cycle management companies and it allows us to significantly reduce the operational costs of the companies we
acquire.
Pursue strategic acquisitions. Approximately 58% of our current practices and 78% of the current year’s revenue were obtained through strategic
transactions with revenue cycle management companies. With most of our acquisition transactions, our goal is to retain the acquired customers over the
long-term and migrate those customers to our platform soon after closing.
Our Service Offerings
Healthcare IT:
We offer fully-integrated, cloud-based SaaS solutions and business services designed for healthcare providers. Our products and services offer healthcare
providers a unified solution designed to meet the healthcare industry’s demand for the delivery of cost-efficient, quality care with measurable outcomes. The four
primary components of our proprietary web-based suite of services are: (i) practice management applications, (ii) a certified electronic health records solution, (iii)
revenue cycle management services, and (iv) mobile health applications. We also offer group purchasing services.
PracticePro®, which we have offered for several years, provides our clients with a seamlessly integrated, end-to-end solution. TalkEHR ®, our proprietary cloud-
based EHR, is also available to customers as a standalone product. We regularly update our software platform with the goal of staying on the leading edge of
industry developments, payer reimbursements trends and new regulations.
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As of January 8, 2020, we now offer CareCloud’s widely acclaimed platform to customers, both on a SaaS basis and bundled with RCM services. This platform
offers additional capabilities beyond those available in talkEHR®. The Company anticipates integrating the CareCloud platform and its proprietary platform in the
coming years.
Cloud-based practice management application
Our proprietary, cloud-based practice management application automates the labor-intensive workflow of a medical office in a unified and streamlined SaaS
platform. The various functions of the platform collectively support the entire workflow of the day-to-day operations of a medical office in an intuitive and user-
friendly format. For example, our platform provides office staff with real-time insurance details to allow them to more efficiently collect patient payments; its
automated appointment reminders reduce patient no-show rates, and its scheduling functionality results in increased reimbursable patient well visit appointments.
A simple, individual and secure login to our web-based platform gives physicians, other healthcare providers and staff members’ access to a vast array of real
time practice management data which they can access at the office or from any other location where they can access the Internet. Users can customize the
“Practice Dashboard” to display only the most useful and relevant information needed to carry out their particular functions. We believe that this streamlined and
centralized automated workflow allows providers to focus on delivering quality patient care rather than office administration.
Electronic health records
Both our cloud-based EHR solution and CareCloud’s platform have received ONC-ACB Health Information Technology certification. Moreover, in a previous
study, KLAS, a leading independent industry assessor of healthcare information technology products, issued its annual electronic health records ranking and
CareCloud’s EHR placed first in our target market of one to ten providers, outperforming most leading electronic health records. Our and CareCloud’s EHR
allows a provider to view all patient information in one online location. Providers can track patients from their initial appointments; chart clinical data, history, and
other personal information; enter and submit claims for medical services; and review and respond to queries for additional information regarding the billing
process. Additionally, the EHR software delivers a robust document management system to enable providers to transition to paperless environments. The
document management function makes available electronic connectivity between practitioners and patients, thereby streamlining patient care coordination and
communications. In 2015, we introduced a tablet-based EHR, leveraging our web-based platform in a form that many providers find more convenient. During the
third quarter of 2017, the Company introduced talkEHR™, a voice enabled EHR solution.
Revenue cycle management and other technology-driven business services
Our proprietary revenue cycle management offering is designed to improve the medical billing reimbursement process, allowing healthcare providers to
accelerate and increase collections, reduce errors in submission and streamline workflow to free up practitioners to focus on patient care. Customers using
PracticePro® will generally see higher claims acceptance and resolution, and faster collections. Our revenue cycle management service employs a proprietary
rules-based system designed and constantly updated by our knowledgeable workforce, who screens and scrubs claims prior to submission for payment.
Mobile health solutions
The functionality of our cloud-based platform is extended to mobile devices through our integrated suite of mobile health applications. These mobile health
applications include physician end-user tools that support, among other things, electronic prescribing, the capture of billing charges in the current medical coding
formats, and the creation and secure transfer of clinical audio notes that are converted into text and billing charges. In 2015, we introduced an ICD-10 mHealth
app for iOS and Android, which has emerged as the most popular ICD-10 app among U.S. healthcare providers. We also offer iCheckIn, a patient check-in app
for iOS and Android-based tablet devices. Our patient applications allow patients to access their medical information, securely communicate with their doctors’
office, schedule appointments, request prescription refills, pay balances and check-in for office appointments.
Practice management:
Since 2018 MTBC offers comprehensive practice management services to physicians where we provide the medical practice with appropriate facilities,
equipment, supplies, support services and administrative support staff. We also provide management, bill-paying and financial advisory services. The Company’s
fees are based on the operating results of the practice.
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Patient experience solution:
Due to the January 2020 acquisition of CareCloud, we now offer their product called Breeze. This product helps patients manage every interaction with a
practice including check-in, appointments, messages, intake forms and payments on many different electronic devices thus integrating the core patient activities
coordinated by the front office into one seamless digital workflow.
Telemedicine:
In December 2019, MTBC introduced a Telemedicine capability which will allow our physician customers to conduct remote telemedicine appointments with their
patients and bill for these appointments where permitted. We will offer telemedicine services as part of an integrated suite of services available to our physician
customers using our platform. We are working towards offering telemedicine on a standalone basis as well.
Voting Rights of Our Directors, Executive Officers, and Principal Stockholders
As of December 31, 2019, approximately 49% of both the shares of our common stock and voting power of our common stock are held by our directors and
executive officers. Therefore, they have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our
directors, as well as the overall management and direction of our company.
Corporate Information
We were incorporated in Delaware on September 28, 2001 under the name Medical Transcription Billing, Corp., and legally changed our name to MTBC, Inc. on
February 6, 2019. Our principal executive offices are located at 7 Clyde Road, Somerset, New Jersey 08873, and our telephone number is (732) 873-5133. Our
website address is www.mtbc.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual
Report on Form 10-K, and you should not consider information on our website to be part of this document.
MTBC, MTBC.com, A Unique Healthcare IT Company, CareCloud and other trademarks and service marks of MTBC appearing in this Annual Report on Form
10-K are the property of MTBC. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the property
of their respective holders.
We were an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act until December 31, 2019. We note that,
as a smaller reporting company and a non-accelerated filer, we may take advantage of specified reduced reporting requirements and are relieved of certain
other significant requirements that are otherwise generally applicable to public companies, including not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, reduced disclosure obligations regarding executive compensation in our Annual
Report, periodic reports and proxy statements and providing only two years of audited financial statements in our Annual Report and our periodic reports.
Where You Can Find More Information
Our website, which we use to communicate important business information, can be accessed at: www.mtbc.com. We make our Annual Reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge on or through our website as soon as
reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Materials we file with or
furnish to the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Also, the SEC Internet website (www.sec.gov) contains
reports, proxy and information statements, and other information that we file electronically with the SEC.
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Item 1A. Risk Factors
Risks Related to Our Acquisition Strategy
If we do not manage our growth effectively, our revenue, business and operating results may be harmed.
Our strategy is to expand through organic growth, and through synergistic, accretive acquisitions of healthcare IT companies. Since 2006, we have acquired the
assets or businesses of approximately 20 RCM companies. The majority of these transactions have occurred since we went public in July 2014. Our future
acquisitions may require greater than anticipated investment of operational and financial resources as we seek to migrate customers of these companies to our
solutions. Acquisitions also require the integration of different software and services, assimilation of new employees, diversion of management and IT resources,
and increases in administrative costs. Acquisitions may also require additional costs associated with any debt or equity financings undertaken to pay for such
acquisitions. We cannot assure you that any acquisition we undertake will be successful. Future growth will also place additional demands on our customer
support, sales, and marketing resources, and may require us to hire and train additional employees. We will need to expand and upgrade our systems and
infrastructure to accommodate our growth. The failure to manage our growth effectively will materially and adversely affect our business.
We may be unable to retain customers following their acquisition, which may result in a decrease in our revenues and operating results.
Customers of the businesses we acquire often have the right to terminate their service contracts for any reason at any time upon notice of 90 days or less. These
customers may elect to terminate their contracts as a result of our acquisition or choose not to renew their contracts upon expiration. Legal and practical
limitations on our ability to enforce non-competition and non-solicitation provisions against customer representatives and sales personnel that leave the
businesses we acquire to join competitors may result in the loss of acquired customers. In the past, our failure to retain acquired customers has at times resulted
in decreases in our revenues. Our inability to retain customers of businesses we acquire could adversely affect our ability to benefit from those acquisitions and
to grow our future revenues and operating income.
Acquisitions may subject us to liability with regard to the creditors, customers, and shareholders of the sellers.
While we attempt to limit our exposure to the liabilities associated with the businesses we acquire, we cannot guarantee that we will be successful in avoiding all
material liability. Regardless of how we structure the acquisition, whether as an asset purchase, stock purchase, merger or other business combination,
creditors, customers, vendors, governmental agencies and other parties at times seek to hold us accountable for unpaid debts, breach of contract claims,
regulatory violations and other liabilities that relate to the business we acquired. Disaffected shareholders of the businesses we acquire have also attempted to
interfere with our business acquisitions or brought claims against us. We attempt to minimize all of these risks through thorough due diligence, negotiating
indemnities and holdbacks, obtaining relevant representations from sellers, procuring insurance coverage and leveraging experienced professionals when
appropriate.
Through the CareCloud transaction, we acquired its software technology and related business, of which certain elements are currently subject to a civil
investigation to determine compliance with certain federal regulatory requirements. The Company will cooperate with the inquiry as CareCloud has historically
done. This element was considered as part of the transaction and we believe that the continued investigation will have no material impact on our financial
statements and that we have properly protected ourselves from liability through the negotiated structure of the transaction. However, the outcome of matters
such as this are not necessarily predictable. In the event of an unfavorable outcome, our business, reputation, and financial condition could be materially and
adversely affected.
We may be unable to implement our strategy of acquiring additional companies.
We have no unconditional commitments with respect to any acquisition as of the date of this Form 10-K. Although we expect that one or more acquisition
opportunities will become available in the future, we may not be able to acquire additional companies at all or on terms favorable to us. We will likely need
additional financing for such acquisitions, but there is no assurance that we will be able to borrow funds or raise capital through the issuance of our equity on
favorable terms. Certain of our larger, better capitalized competitors may seek to acquire some of the companies we may be interested in. Competition for
acquisitions would likely increase acquisition prices and result in us having fewer acquisition opportunities.
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Depending on the type of businesses we acquire (e.g., RCM, practice management, EHR), we may have varying cost saving and/or cross-selling opportunities
with the acquired business. However, there is no assurance that we will achieve anticipated cost savings and cross-selling on our acquisitions, and failure to do
so may mean we overpaid for such acquisitions.
In completing any future acquisitions, we will rely upon the representations, warranties and indemnities made by the sellers with respect to each acquisition as
well as our own due diligence investigation. We cannot be assured that such representations and warranties will be true and correct or that our due diligence will
uncover all materially adverse facts relating to the operations and financial condition of the acquired companies or their customers. To the extent that we are
required to pay for obligations of an acquired company, or if material misrepresentations exist, we may not realize the expected benefit from such acquisition and
we will have overpaid in cash and/or stock for the value received in that acquisition.
Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of indebtedness and increased amortization
expense.
Future acquisitions may result in dilutive issuances of equity securities, the incurrence of debt, the assumption of known and unknown liabilities, the write-off of
software development costs and the amortization of expenses related to intangible assets, all of which could have an adverse effect on our business, financial
condition and results of operations.
Risks Related to Our Business
We operate in a highly competitive industry, and our competitors may be able to compete more efficiently or evolve more rapidly than we do, which
could have a material adverse effect on our business, revenue, growth rates and market share.
The market for practice management, healthcare IT solutions and related services is highly competitive, and we expect competition to increase in the future. We
face competition from other providers of both integrated and stand-alone practice management, EHR and RCM solutions, including competitors who utilize a
web-based platform and providers of locally installed software systems. Our competitors include larger healthcare IT companies, such as athenahealth, Inc.,
eClinicalWorks, Allscripts Healthcare Solutions, Inc. and Greenway Medical Technologies, Inc., all of which may be able to respond more quickly and effectively
than we can to new or changing opportunities, technologies, standards, regulations or customer needs and requirements. Many of our competitors have longer
operating histories, greater brand recognition and greater financial, marketing and other resources than us. We also compete with various regional RCM
companies, some of which may continue to consolidate and expand into broader markets. We expect that competition will continue to increase as a result of
incentives provided by the Health Information Technology for Economic and Clinical Health (“HITECH”) Act, and consolidation in both the information technology
and healthcare industries. Competitors may introduce products or services that render our products or services obsolete or less marketable. Even if our products
and services are more effective than the offerings of our competitors, current or potential customers might prefer competitive products or services to our products
and services. In addition, our competitive edge could be diminished or completely lost if our competition develops similar offshore operations in Pakistan or other
countries, such as India and the Philippines, where labor costs are lower than those in the U.S. (although higher than in Pakistan). Pricing pressures could
negatively impact our margins, growth rate and market share.
If we are unable to successfully introduce new products or services or fail to keep pace with advances in technology, we would not be able to
maintain our customers or grow our business which will have a material adverse effect on our business.
Our business depends on our ability to adapt to evolving technologies and industry standards and upgrade existing and introduce new products and services
accordingly. If we cannot adapt to changing technologies and industry standards, including changing requirements of third party applications and software and
meet the requirements of our customers, our products and services may become obsolete, and our business would suffer significantly. Because both the
healthcare industry and the healthcare IT technology market are constantly evolving, our success will depend, in part, on our ability to continue to enhance our
existing products and services, develop new technology that addresses the increasingly sophisticated and varied needs of our customers, respond to
technological advances and emerging industry standards and practices on a timely and cost-effective basis, educate our customers to adopt these new
technologies, and successfully assist them in transitioning to our new products and services. The development of our proprietary technology entails significant
technical and business risks. We may not be successful in developing, using, marketing, selling, or maintaining new technologies effectively or adapting our
proprietary technology to evolving customer requirements, emerging industry standards or changing third party applications, and, as a result, our business and
reputation could materially suffer. We may not be able to introduce new products or services on schedule, or at all, or such products or services may not achieve
market acceptance or existing products or services may cease to function properly. A failure by us to timely adapt to ever changing technologies or our failure to
regularly upgrade existing or introduce new products or to introduce these products on schedule could cause us to not only lose our current customers but also
fail to attract new customers.
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The continued success of our business model is heavily dependent upon our offshore operations, and any disruption to those operations will
adversely affect us.
The majority of our operations, including the development and maintenance of our web-based platform, our customer support services and medical billing
activities, are performed by our highly educated workforce of approximately 2,400 employees in Pakistan and Sri Lanka. Approximately 98% of our offshore
employees are in Pakistan and our remaining employees are located at our smaller offshore operation center in Sri Lanka. The performance of our operations in
Pakistan, and our ability to maintain our offshore offices, is an essential element of our business model, as the labor costs in Pakistan are substantially lower than
the cost of comparable labor in India, the United States and other countries, and allows us to competitively price our products and services. Our competitive
advantage will be greatly diminished and may disappear altogether if our operations in Pakistan are negatively impacted.
Pakistan and Sri Lanka have experienced, and continue to experience, political and social unrest, war and acts of terrorism. Our operations in our offshore
locations may be negatively impacted by these and a number of other factors, including a failing power grid and infrastructure, vandalism, currency fluctuations,
cost of labor and supplies, and changes in local law as well as laws within the United States relating to these countries. Client mandates or preferences for on-
shore service providers may also adversely impact our business model. Our operations in Pakistan and Sri Lanka may also be affected by trade restrictions,
such as tariffs or other trade controls. If we are unable to continue to leverage the skills and experience of our highly educated workforce, particularly in Pakistan,
we may be unable to provide our products and services at attractive prices, and our business would be materially and negatively impacted or discontinued.
We believe that the labor costs in Pakistan and Sri Lanka are approximately 10% of the cost of comparably educated and skilled workers in the U.S. If there
were potential disruptions in any of these locations, they could have a negative impact on our business.
Future changes in visa rules could prevent our offshore employees from entering the United States, which could decrease our efficiency.
In the ordinary course of business, we bring skilled employees from our offshore subsidiaries to the U.S. to serve as liaisons on projects and to expand the
respective employees’ understanding of both the U.S. healthcare industry and the needs and expectations of our customers. These visits equip them to better
understand and support our business objectives. While the current administration’s actions up to this point have not had an impact on us, we cannot predict
whether the administration may in the future take actions that would prevent non-U.S. employees from visiting the U.S. If such restrictions were implemented in
the future, it may become more difficult or expensive for us to educate and equip the employees of our foreign subsidiaries to support our business needs. We
may also have difficulty in finding employees and contractors in the U.S that can replace the functions now performed by our offshore employees that we bring
over to the U.S., which could negatively impact our business.
Our offshore operations expose us to additional business and financial risks which could adversely affect us and subject us to civil and criminal
liability.
The risks and challenges associated with our operations outside the United States include laws and business practices favoring local competitors; compliance
with multiple, conflicting and changing governmental laws and regulations, including employment and tax laws and regulations; and fluctuations in foreign
currency exchange rates. Foreign operations subject us to numerous stringent U.S. and foreign laws, including the Foreign Corrupt Practices Act (“FCPA”), and
comparable foreign laws and regulations that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by
U.S. and other business entities for the purpose of obtaining or retaining business. Safeguards we implement to discourage these practices may prove to be less
than effective and violations of the FCPA and other laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, including
class action lawsuits and enforcement actions from the SEC, Department of Justice and overseas regulators.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Changes in the healthcare industry could affect the demand for our services and may result in a decrease in our revenues and market share.
As the healthcare industry evolves, changes in our customer base may reduce the demand for our services, result in the termination of existing contracts, and
make it more difficult to negotiate new contracts on terms that are acceptable to us. For example, the current trend toward consolidation of healthcare providers
may cause our existing customer contracts to terminate as independent practices are merged into hospital systems or other healthcare organizations. Such
larger healthcare organizations may have their own practice management, and EHR and RCM solutions, reducing demand for our services. If this trend
continues, we cannot assure you that we will be able to continue to maintain or expand our customer base, negotiate contracts with acceptable terms, or
maintain our current pricing structure, which would result in a decrease in our revenues and market share.
The current administration and some members of Congress have been critical of the Affordable Care Act (“ACA”) and have taken steps toward materially revising
or even repealing it. On December 14, 2018, a federal judge in Texas ruled the ACA unconstitutional. The decision declared that key parts of the legislation were
inconsistent with the Constitution. The decision is still making its way through the courts and has not made an impact on the exchanges which are still open. As
of now, there has been no impact to the coverage plans and no final ruling. The ACA included specific reforms for the individual and small group marketplace,
including an expansion of Medicaid. We can give no assurances that healthcare reform initiatives, if passed, will not have a material adverse impact on our
operational results or the manner in which we operate our business.
If providers do not purchase our products and services or delay in choosing our products or services, we may not be able to grow our business.
Our business model depends on our ability to sell our products and services. Acceptance of our products and services may require providers to adopt different
behavior patterns and new methods of conducting business and exchanging information. Providers may not integrate our products and services into their
workflow and may not accept our solutions and services as a replacement for traditional methods of practicing medicine. Providers may also choose to buy our
competitors’ products and services instead of ours. Achieving market acceptance for our solutions and services will continue to require substantial sales and
marketing efforts and the expenditure of significant financial and other resources to create awareness and demand by providers. If providers fail to broadly
accept our products and services, our business, financial condition and results of operations will be adversely affected.
If the revenues of our customers decrease, or if our customers cancel or elect not to renew their contracts, our revenue will decrease.
Under most of our customer contracts, we base our charges on a percentage of the revenue that our customer collects through the use of our services. Many
factors may lead to decreases in customer revenue, including:
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reduction of customer revenue as a result of changes to the ACA;
a rollback of the expansion of Medicaid or other governmental programs;
reduction of customer revenue resulting from increased competition or other changes in the marketplace for physician services;
failure of our customers to adopt or maintain effective business practices;
actions by third-party payers of medical claims to reduce reimbursement;
government regulations and government or other payer actions or inaction reducing or delaying reimbursement;
interruption of customer access to our system; and
our failure to provide services in a timely or high-quality manner.
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We have incurred operating losses and net losses, and we may not be able to achieve or subsequently maintain profitability in the future.
We incurred net losses of approximately $872,000 and $2.1 million for the years ended December 31, 2019 and 2018, respectively. Our net loss for the years
ended December 31, 2019 and 2018 includes approximately $1.9 million and $1.8 million of non-cash amortization expense of purchased intangible assets,
respectively.
We may not succeed in achieving the efficiencies we anticipate from our acquisitions and possible future acquisitions, including moving sufficient labor to our
offshore locations to offset increased costs resulting from these acquisitions, and we may continue to incur losses in future periods. We expect to incur additional
operating expenses as a public company and we intend to continue to increase our operating expenses as we grow our business. We also expect to continue to
make investments in our proprietary technology, sales and marketing, infrastructure, facilities and other resources as we seek to grow, thereby incurring
additional costs. If we are unable to generate adequate revenue growth and manage our expenses, we may continue to incur losses in the future and may not be
able to achieve or maintain profitability.
Member participation in our Group Purchasing Organization (“GPO”) programs may be terminated with limited or no notice and without significant
termination payments. If our members reduce activity levels or terminate or elect not to renew their contracts, our revenue and results of operations
may decrease.
As part of the Orion acquisition in 2018, we acquired GPO program relationships. The GPO participation agreements are generally for an initial two-year term,
and the option to renew for additional one-year terms. The GPO participation agreements are generally terminable by either party by providing written notice to
the other.
There can be no assurance that the members will extend or renew their GPO participation agreements. Failure of these members to renew their GPO
participation agreements may have a small impact on our revenue and results of operations.
Our success in retaining member participation in our GPO program depends upon our reputation, strong relationships with such members and our ability to
deliver consistent, reliable and high quality products and services; a failure in any of these areas may result in the loss of members. In addition, members may
seek to reduce, cancel or elect not to renew their contracts due to factors that are beyond our control and are unrelated to our performance, including their
business or financial condition, changes in their strategies or business plans, their acquisition, or economic conditions in general. When contracts are reduced,
canceled or not renewed for any reason, we lose the anticipated future revenue associated with such contracts and consequently, our revenue and results of
operations may decrease.
We rely on the administrative fees we receive from our GPO suppliers, and the failure to maintain contracts with these GPO suppliers could have a
generally negative effect on our relationships with our members and could affect our business, financial condition and results of operations.
We derive some of our revenue from the administrative fees that we receive from our GPO suppliers. We maintain contractual relationships with these suppliers
which provide products and services to our members at reduced costs and which pay us administrative fees based on the dollars spent by our members for such
products and services. Our contracts with these GPO suppliers generally may be terminated upon 90 days’ notice. A termination of any relationship or agreement
with a GPO supplier would result in the loss of administrative fees. In addition, if we lose a relationship with a GPO supplier, we may not be able to negotiate
similar arrangements for our members and our ability to maintain our member agreements may be impacted.
As a result of our variable sales and implementation cycles, we may be unable to recognize revenue from prospective customers on a timely basis
and we may not be able to offset expenditures.
The sales cycle for our services can be variable, typically ranging from two to four months from initial contact with a potential customer to contract execution,
although this period can be substantially longer. During the sales cycle, we expend time and resources in an attempt to obtain a customer without recognizing
revenue from that customer to offset such expenditures. Our implementation cycle is also variable, typically ranging from two to four months from contract
execution to completion of implementation. Each customer’s situation is different, and unanticipated difficulties and delays may arise as a result of a failure by us
or by the customer to meet our respective implementation responsibilities. During the implementation cycle, we expend substantial time, effort, and financial
resources implementing our services without recognizing revenue. Even following implementation, there can be no assurance that we will recognize revenue on
a timely basis or at all from our efforts. In addition, cancellation of any implementation after it has begun may involve loss to us of time, effort, and expenses
invested in the canceled implementation process, and lost opportunity for implementing paying customers in that same period of time.
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As a result of the Wayfair decision and changes in various states’ laws, we are required to collect sales and use taxes on certain products and
services we sell in certain jurisdictions. We may be subject to liability for past sales and incur additional related costs and expenses, and our future
sales may decrease.
We may lose sales or incur significant expenses should states be successful in imposing additional state sales and use taxes on our products and services. A
successful assertion by one or more states that we should collect sales or other taxes on the sale of our products and services that we are currently not
collecting could result in substantial tax liabilities for past sales, decrease our ability to compete with healthcare IT vendors not subject to sales and use taxes,
and otherwise harm our business. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to
varying interpretations that may change over time. We review these rules and regulations periodically and, when we believe that our products or services are
subject to sales and use taxes in a particular state, we voluntarily approach state tax authorities in order to determine how to comply with their rules and
regulations. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states where we believe no
compliance is necessary.
If the federal government were to impose a tax on imports or services performed abroad, we might be subject to additional liabilities. At this time, there is no way
to predict whether this will occur or estimate the impact on our business.
Vendors of products and services like us are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar
taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our products or services, we may be liable for
past taxes in addition to taxes going forward. Liability for past taxes may also include very substantial interest and penalty charges. Nevertheless, customers
may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes. If we are required to collect and pay back
taxes and the associated interest and penalties, and if our customers fail or refuse to reimburse us for all or a portion of these amounts, we will have incurred
unplanned expenses that may be substantial. Moreover, imposition of such taxes on our products and services going forward will effectively increase the cost of
those products and services to our customers and may adversely affect our ability to retain existing customers or to gain new customers in the states in which
such taxes are imposed.
We may also become subject to tax audits or similar procedures in states where we already pay sales and use taxes. The incurrence of additional accounting
and legal costs and related expenses in connection with, and the assessment of, taxes, interest, and penalties as a result of audits, litigation, or otherwise could
be materially adverse to our current and future results of operations and financial condition.
If we lose the services of Mahmud Haq or other members of our management team, or if we are unable to attract, hire, integrate and retain other
necessary employees, our business would be harmed.
Our future success depends in part on our ability to attract, hire, integrate and retain the members of our management team and other qualified personnel. In
particular, we are dependent on the services of Mahmud Haq, our founder, principal stockholder and Executive Chairman, Stephen Snyder, our Chief Executive
Officer and A. Hadi Chaudhry, our President. Mr. Haq is instrumental in managing our offshore operations in Pakistan and coordinating those operations with our
U.S. activities. The loss of Mr. Haq, who would be particularly difficult to replace, could negatively impact our ability to effectively manage our cost-effective
workforce in Pakistan, which enables us to provide our products and solutions at attractive prices. Our future success also depends on the continued
contributions of our other executive officers and certain key employees, each of whom may be difficult to replace, and upon our ability to attract and retain
additional management personnel. Competition for such personnel is intense, and we compete for qualified personnel with other employers. We may face
difficulty identifying and hiring qualified personnel at compensation levels consistent with our existing compensation and salary structure. If we fail to retain our
employees, we could incur significant expenses in hiring, integrating and training their replacements, and the quality of our services and our ability to serve our
customers could diminish, resulting in a material adverse effect on our business.
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We may be unable to adequately establish, protect or enforce our patents, trade secrets and other intellectual property rights.
Our success depends in part upon our ability to establish, protect and enforce our patents, trade secrets and other intellectual property and proprietary rights. If
we fail to establish, protect or enforce these rights, we may lose customers and important advantages in the market in which we compete. We rely on a
combination of patent, trademark, copyright and trade secret law and contractual obligations to protect our key intellectual property rights, all of which provide
only limited protection. Our intellectual property rights may not be sufficient to help us maintain our position in the market and our competitive advantages.
Trade secrets may not be protectable if not properly kept confidential. We strive to enter into non-disclosure agreements with our employees, customers,
contractors and business partners to limit access to and disclosure of our proprietary information. However, the steps we have taken may not be sufficient to
prevent unauthorized use of our customer information, technology, and adequate remedies may not be available in the event of unauthorized use or disclosure
of our trade secrets and proprietary information. Our ability to protect the trade secrets of our acquired companies from disclosure by the former employees of
these acquired entities may be limited by law in the jurisdiction in which the acquired company and/or former employee resides, and/or where the disclosure
occurred, and this leaves us vulnerable to the solicitation of the customers we acquire by former employees of the acquired business that join our competitors.
Accordingly, despite our efforts, we may be unable to prevent third-parties from using our intellectual property for their competitive advantage. Any such use
could have a material adverse effect on our business, results of operations and financial condition. Monitoring unauthorized uses of and enforcing our intellectual
property rights can be difficult and costly. Legal intellectual property actions are inherently uncertain and may not be successful, and may require a substantial
amount of resources and divert our management’s attention.
Claims by others that we infringe their intellectual property could force us to incur significant costs or revise the way we conduct our business.
Our competitors protect their proprietary rights by means of patents, trade secrets, copyrights, trademarks and other intellectual property. We have not
conducted an independent review of patents and other intellectual property issued to third-parties, who may have patents or patent applications relating to our
proprietary technology. We may receive letters from third parties alleging, or inquiring about, possible infringement, misappropriation or violation of their
intellectual property rights. Any party asserting that we infringe, misappropriate or violate proprietary rights may force us to defend ourselves, and potentially our
customers, against the alleged claim. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and/or invalidation
of our proprietary rights or interruption or cessation of our operations. Any such claims or lawsuit could:
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be time-consuming and expensive to defend, whether meritorious or not;
require us to stop providing products or services that use the technology that allegedly infringes the other party’s intellectual property;
divert the attention of our technical and managerial resources;
require us to enter into royalty or licensing agreements with third-parties, which may not be available on terms that we deem acceptable;
prevent us from operating all or a portion of our business or force us to redesign our products, services or technology platforms, which could be
difficult and expensive and may make the performance or value of our product or service offerings less attractive;
subject us to significant liability for damages or result in significant settlement payments; and/or
require us to indemnify our customers.
Furthermore, during the course of litigation, confidential information may be disclosed in the form of documents or testimony in connection with discovery
requests, depositions or trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could materially adversely
affect our business. Some of our competitors may be able to sustain the costs of intellectual property litigation more effectively than we can because they have
substantially greater resources. In addition, any litigation could significantly harm our relationships with current and prospective customers. Any of the foregoing
could disrupt our business and have a material adverse effect on our business, operating results and financial condition.
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We may be unable to protect, and we may incur significant costs in enforcing, our intellectual property rights.
Our patents, trademarks, trade secrets, copyrights, and other intellectual property rights are important assets to us. Various events outside of our control pose a
threat to our intellectual property rights, as well as to our products, services, and technologies. For instance, any of our current or future intellectual property
rights may be challenged by others or invalidated through administrative process or litigation. Any of our pending or future patent applications, whether or not
being currently challenged, may not be issued with the scope of the claims we seek, if at all.
We have taken efforts to protect our proprietary rights, including a combination of license agreements, confidentiality policies and procedures, confidentiality
provisions in employment agreements, confidentiality agreements with third parties, and technical security measures, as well as our reliance on copyright, patent,
trademark, trade secret and unfair competition laws. These efforts may not be sufficient or effective. For example, the secrecy of our trade secrets or other
confidential information could be compromised by our employees or by third parties, which could cause us to lose the competitive advantage resulting from those
trade secrets or confidential information. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise infringe upon,
misappropriate or use our intellectual property. We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. We
may also conclude that, in some instances, the benefits of protecting our intellectual property rights may be outweighed by the expense.
In addition, our platforms incorporate “open source” software components that are licensed to us under various public domain licenses. Open source license
terms are often ambiguous, and there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses. Therefore, the
potential impact of such terms on our business is somewhat unknown. Further, some enterprises may be reluctant or unwilling to use cloud-based services,
because they have concerns regarding the risks associated with the security and reliability, among other things, of the technology delivery model associated with
these services. If enterprises do not perceive the benefits of our services, then the market for these services may not expand as much or develop as quickly as
we expect, either of which would adversely affect our business, financial condition, or operating results.
Legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and still evolving. The laws of some
foreign countries may not be as protective of intellectual property rights as those in the United States, and effective intellectual property protection may not be
available in every country in which our products and services are distributed.
Any impairment of our intellectual property rights, or our failure to protect our intellectual property rights adequately, could give our competitors’ access to our
technology and could materially and adversely impact our business and operating results. Any increase in the unauthorized use of our intellectual property could
also divert the efforts of our technical and management personnel and result in significant additional expense to us, which could materially and adversely impact
our operating results. Finally, we may be required to spend significant resources to monitor and protect our intellectual property rights, including with respect to
legal proceedings, which could result in substantial costs and diversion of resources and could materially and adversely impact our business, financial condition
and operating results.
Current and future litigation against us could be costly and time-consuming to defend and could result in additional liabilities.
We may from time to time be subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by current and former
clients in connection with commercial disputes and employment claims made by our current or former employees. Claims may also be asserted by or on behalf
of a variety of other parties, including government agencies, patients of our physician clients, stockholders, the sellers of the businesses that we acquire, or the
creditors of the businesses we acquire. Any litigation involving us may result in substantial costs and may divert management’s attention and resources, which
may seriously harm our business, overall financial condition, and operating results. Insurance may not cover existing or future claims, be sufficient to fully
compensate us for one or more of such claims, or continue to be available on terms acceptable to us. A claim brought against us that is uninsured or
underinsured could result in unanticipated costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of
our performance resulting in a reduction in the trading price of our stock.
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Our proprietary software or service delivery platform (including the platform we acquired through CareCloud) may not operate properly, which could
damage our reputation, give rise to claims against us, or divert application of our resources from other purposes, any of which could harm our
business and operating results.
We may encounter human or technical obstacles that prevent our proprietary or acquired applications from operating properly. If our applications do not function
reliably or fail to achieve customer expectations in terms of performance, customers could assert liability claims against us or attempt to cancel their contracts
with us. This could damage our reputation and impair our ability to attract or maintain customers.
There are particular risks when we inherit technologies through the companies we acquire. These technologies, often developed by distressed companies, were
not created under our direct supervision and control and therefore may not have been developed in accordance with our standards. Such acquired technologies
could, and at times do, contain operational deficiencies, defects, glitches or bugs that may not be discovered immediately or otherwise could have been avoided
had we built the technology ourselves. Whether technology we develop or technology we acquire, we will need to replace certain components and remediate
software defects or bugs from time to time. There can be no assurance that such defects or bugs, or the process of remediating them, will not have a material
impact on our business. Our inability to promptly and cost-effectively correct a product defect could result in the Company having to withdraw an important
product from market, damage to our reputation, and result in material costs and expenses, any of which could have a material impact on our revenue, margins,
and operating results.
Moreover, information services as complex as those we offer have in the past contained, and may in the future develop or contain, undetected defects or errors.
We cannot assure you that material performance problems or defects in our products or services will not arise in the future. Errors may result from receipt, entry,
or interpretation of patient information or from interface of our services with legacy systems and data that we did not develop and the function of which is outside
of our control. Despite testing, defects or errors may arise in our existing or new software or service processes. Because changes in payer requirements and
practices are frequent and sometimes difficult to determine except through trial and error, we are continuously discovering defects and errors in our software and
service processes compared against these requirements and practices. These defects and errors and any failure by us to identify and address them could result
in loss of revenue or market share, liability to customers or others, failure to achieve market acceptance or expansion, diversion of development resources,
injury to our reputation, and increased service and maintenance costs. Defects or errors in our software might discourage existing or potential customers from
purchasing our products and services. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects
or errors or in responding to resulting claims or liability may be substantial and could adversely affect our operating results.
In addition, customers relying on our services to collect, manage, and report clinical, business, and administrative data may have a greater sensitivity to service
errors and security vulnerabilities than customers of software products in general. We market and sell services that, among other things, provide information to
assist healthcare providers in tracking and treating patients. Any operational delay in or failure of our technology or service processes may result in the
disruption of patient care and could cause harm to patients and thereby create unforeseen liabilities for our business.
Our customers or their patients may assert claims against us alleging that they suffered damages due to a defect, error, or other failure of our software or service
processes. A product liability claim or errors or omissions claim could subject us to significant legal defense costs and adverse publicity, regardless of the merits
or eventual outcome of such a claim.
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Our physicians have relied on our platforms (including the platform we acquired through CareCloud) as being certified by the office of the National Coordinator
for Health Information Technology (“ONC”). If this certification were to be challenged, we might face liability related to any incentive that the physicians received
in reliance upon such certification.
If our security measures are breached or fail and unauthorized access is obtained to a customer’s data, our service may be perceived as insecure, the
attractiveness of our services to current or potential customers may be reduced, and we may incur significant liabilities.
Our services involve the web-based storage and transmission of customers’ proprietary information and patient information, including health, financial, payment
and other personal or confidential information. We rely on proprietary and commercially available systems, software, tools and monitoring, as well as other
processes, to provide security for processing, transmission and storage of such information. Because of the sensitivity of this information and due to
requirements under applicable laws and regulations, the effectiveness of our security efforts is very important. We maintain servers, which store customers’ data,
including patient health records, in the U.S. and offshore. We also process, transmit and store some data of our customers on servers and networks that are
owned and controlled by third-party contractors in India and elsewhere. If our security measures are breached or fail as a result of third-party action, acts of terror,
social unrest, employee error, malfeasance or for any other reasons, someone may be able to obtain unauthorized access to customer or patient data. Improper
activities by third-parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or
developments may facilitate or result in a compromise or breach of our security systems. Our security measures may not be effective in preventing unauthorized
access to the customer and patient data stored on our servers. If a breach of our security occurs, we could face damages for contract breach, penalties for
violation of applicable laws or regulations, possible lawsuits by individuals affected by the breach and significant remediation costs and efforts to prevent future
occurrences. In addition, whether there is an actual or a perceived breach of our security, the market perception of the effectiveness of our security measures
could be harmed and we could lose current or potential customers.
Our products and services are required to meet the interoperability standards, which could require us to incur substantial additional development
costs or result in a decrease in revenue.
Our customers and the industry leaders enacting regulatory requirements are concerned with and often require that our products and services be interoperable
with other third-party healthcare information technology suppliers. Market forces or regulatory authorities could create software interoperability standards that
would apply to our solutions, and if our products and services are not consistent with those standards, we could be forced to incur substantial additional
development costs. There currently exists a comprehensive set of criteria for the functionality, interoperability and security of various software modules in the
healthcare information technology industry. However, those standards are subject to continuous modification and refinement. Achieving and maintaining
compliance with industry interoperability standards and related requirements could result in larger than expected software development expenses and
administrative expenses in order to conform to these requirements. These standards and specifications, once finalized, will be subject to interpretation by the
entities designated to certify such technology. We will incur increased development costs in delivering solutions if we need to change or enhance our products
and services to be in compliance with these varying and evolving standards. If our products and services are not consistent with these evolving standards, our
market position and sales could be impaired and we may have to invest significantly in changes to our solutions.
Disruptions in Internet or telecommunication service or damage to our data centers could adversely affect our business by reducing our customers’
confidence in the reliability of our services and products.
Our information technologies and systems are vulnerable to damage or interruption from various causes, including acts of God and other natural disasters, war
and acts of terrorism and power losses, computer systems failures, internet and telecommunications or data network failures, operator error, losses of and
corruption of data and similar events. Our customers’ data, including patient health records, reside on our own servers located in the U.S., Pakistan and Sri
Lanka. Although we conduct business continuity planning to protect against fires, floods, other natural disasters and general business interruptions to mitigate
the adverse effects of a disruption, relocation or change in operating environment at our data centers, the situations we plan for and the amount of insurance
coverage we maintain may not be adequate in any particular case. In addition, the occurrence of any of these events could result in interruptions, delays or
cessations in service to our customers. Any of these events could impair or prohibit our ability to provide our services, reduce the attractiveness of our services to
current or potential customers and adversely impact our financial condition and results of operations.
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In addition, despite the implementation of security measures, our infrastructure, data centers, or systems that we interface with or utilize, including the internet
and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, denial-
of-service attacks or other attacks by third-parties seeking to disrupt operations or misappropriate information or similar physical or electronic breaches of
security. Any of these can cause system failure, including network, software or hardware failure, which can result in service disruptions. As a result, we may be
required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by such breaches.
We may be subject to liability for the content we provide to our customers and their patients.
We provide content for use by healthcare providers in treating patients. This content includes, among other things, patient education materials, coding and drug
databases developed by third-parties, and prepopulated templates providers can use to document as visits and record patient health information. If content in the
third-party databases we use is incorrect or incomplete, adverse consequences, including death, may give rise to product liability and other claims against us. A
court or government agency may take the position that our delivery of health information directly, including through licensed practitioners, or delivery of
information by a third-party site that a consumer accesses through our solutions, exposes us to personal injury liability, or other liability for wrongful delivery or
handling of healthcare services or erroneous health information. Our liability insurance coverage may not be adequate or continue to be available on acceptable
terms, if at all. A claim brought against us that is uninsured or under-insured could harm our business. Even unsuccessful claims could result in substantial costs
and diversion of management resources.
We are subject to the effect of payer and provider conduct that we cannot control and that could damage our reputation with customers and result in
liability claims that increase our expenses.
We offer electronic claims submission services for which we rely on content from customers, payers, and others. While we have implemented features and
safeguards designed to maximize the accuracy and completeness of claims content, these features and safeguards may not be sufficient to prevent inaccurate
claims data from being submitted to payers. Should inaccurate claims data be submitted to payers, we may experience poor operational results and be subject
to liability claims, which could damage our reputation with customers and result in liability claims that increase our expenses.
Failure by our clients to obtain proper permissions and waivers may result in claims against us or may limit or prevent our use of data, which could
harm our business.
Our clients are obligated by applicable law to provide necessary notices and to obtain necessary permission waivers for use and disclosure of the information
that we receive. If they do not obtain necessary permissions and waivers, then our use and disclosure of information that we receive from them or on their behalf
may be limited or prohibited by state or federal privacy laws or other laws. This could impair our functions, processes, and databases that reflect, contain, or are
based upon such data and may prevent use of such data. In addition, this could interfere with or prevent creation or use of rules, and analyses or limit other
data-driven activities that benefit us. Moreover, we may be subject to claims or liability for use or disclosure of information by reason of lack of valid notice,
permission, or waiver. These claims or liabilities could subject us to unexpected costs and adversely affect our operating results.
Any deficiencies in our financial reporting or internal controls could adversely affect our business and the trading price of our securities.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section
404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting.
In the future, if we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial
statements may be materially misstated. In addition, our internal control over financial reporting would not prevent or detect all errors and fraud. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that
all control issues and instances of fraud will be detected.
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If there are material weaknesses or failures in our ability to meet any of the requirements related to the maintenance and reporting of our internal controls,
investors may lose confidence in the accuracy and completeness of our financial reports, which in turn could cause the price of our common stock and Series A
Preferred Stock to decline. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in
our internal controls, it may negatively impact our business, results of operations and reputation. In addition, we could become subject to investigations by
Nasdaq, the SEC or other regulatory authorities, which could require additional management attention and which could adversely affect our business.
We are a party to several related-party agreements with our founder and Executive Chairman, Mahmud Haq, which have significant contractual
obligations. These agreements are reviewed by our Audit Committee on an annual basis.
Since inception, we have entered into several related-party transactions with our founder and Executive Chairman, Mahmud Haq, which subject us to significant
contractual obligations. We believe these transactions reflect terms comparable to those that would be available from third parties. Our independent audit
committee has reviewed these arrangements and continues to do so on an annual basis.
We depend on key information systems and third party service providers.
We depend on key information systems to accurately and efficiently transact our business, provide information to management and prepare financial reports.
These systems and services are vulnerable to interruptions or other failures resulting from, among other things, natural disasters, terrorist attacks, software,
equipment or telecommunications failures, processing errors, computer viruses, other security issues or supplier defaults. Security, backup and disaster
recovery measures may not be adequate or implemented properly to avoid such disruptions or failures. Any disruption or failure of these systems or services
could cause substantial errors, processing inefficiencies, security breaches, inability to use the systems or process transactions, loss of customers or other
business disruptions, all of which could negatively affect our business and financial performance.
Systems failures or cyberattacks and resulting interruptions in the availability of or degradation in the performance of our websites, applications,
products or services could harm our business.
As cybersecurity attacks continue to evolve and increase, our information systems could also be penetrated or compromised by internal and external parties’
intent on extracting confidential information, disrupting business processes or corrupting information. Our systems may experience service interruptions or
degradation due to hardware and software defects or malfunctions, computer denial-of-service and other cyberattacks, human error, earthquakes, hurricanes,
floods, fires, natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses, or
other events. Our systems are also subject to break-ins, sabotage and intentional acts of vandalism. Some of our systems are not fully redundant and our
disaster recovery planning is not sufficient for all eventualities. We have experienced and will likely continue to experience system failures, denial of service
attacks and other events or conditions from time to time that interrupt the availability or reduce the speed or functionality of our websites and mobile applications.
These events likely will result in loss of revenue. A prolonged interruption in the availability or reduction in the speed or other functionality of our websites and
mobile applications could materially harm our business. Frequent or persistent interruptions in our services could cause current or potential users to believe that
our systems are unreliable, leading them to switch to our competitors or to avoid our sites, and could permanently harm our reputation and brands. Moreover, to
the extent that any system failure or similar event results in damages to our customers or their businesses, these customers could seek significant compensation
from us for their losses and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address. These risks could arise from external
parties or from acts or omissions of internal or service provider personnel. Such unauthorized access could disrupt our business and could result in the loss of
assets, litigation, remediation costs, damage to our reputation and failure to retain or attract customers following such an event, which could adversely affect our
business.
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Regulatory Risks
The healthcare industry is heavily regulated. Our failure to comply with regulatory requirements could create liability for us, result in adverse
publicity and negatively affect our business.
The healthcare industry is heavily regulated and is constantly evolving due to the changing political, legislative, regulatory landscape and other factors. Many
healthcare laws are complex, and their application to specific services and relationships may not be clear. In particular, many existing healthcare laws and
regulations, when enacted, did not anticipate or address the services that we provide. Further, healthcare laws differ from state to state and it is difficult to ensure
that our business, products and services comply with evolving laws in all states. By way of example, certain federal and state laws forbid billing based on
referrals between individuals or entities that have various financial, ownership, or other business relationships with healthcare providers. These laws vary widely
from state to state, and one of the federal laws governing these relationships, known as the Stark Law, is very complex in its application. Similarly, many states
have laws forbidding physicians from practicing medicine in partnership with non-physicians, such as business corporations, as well as laws or regulations
forbidding splitting of physician fees with non-physicians or others. Other federal and state laws restrict assignment of claims for reimbursement from
government-funded programs, the manner in which business service companies may handle payments for such claims and the methodology under which
business services companies may be compensated for such services.
The Office of Inspector General (“OIG”) of the Department of Health and Human Services (“HHS”) has a longstanding concern that percentage-based billing
arrangements may increase the risk of improper billing practices. In addition, certain states have adopted laws or regulations forbidding splitting of fees with non-
physicians which may be interpreted to prevent business service providers, including medical billing providers, from using a percentage-based billing
arrangement. The OIG and HHS recommend that medical billing companies develop and implement comprehensive compliance programs to mitigate this risk.
While we have developed and implemented a comprehensive billing compliance program that we believe is consistent with these recommendations, our failure to
ensure compliance with controlling legal requirements, accurately anticipate the application of these laws and regulations to our business and contracting model,
or other failure to comply with regulatory requirements, could create liability for us, result in adverse publicity and negatively affect our business.
The federal Anti-Kickback Statute (“AKS”) prohibits us from knowingly and willfully soliciting, receiving, offering or providing remuneration in exchange for
referrals or recommendations for purposes of selling products or services which are paid for by federal healthcare programs such as Medicare and Medicaid. In
addition, a claim including products or services resulting from a violation of AKS constitutes a violation of the federal False Claims Act (“FCA”). If we are
determined to have violated the FCA, we may be required to pay up to three times the actual damages sustained by the government, plus mandatory civil
penalties for each separate false claim. If we are found to be in violation of the FCA, AKS, ACA, or any other applicable state or any federal fraud and abuse
laws, whether by our current practices or for the past practices of a company we acquire, we may be subject to substantial civil damages and criminal penalties
and fines that could have a material adverse impact on our business.
In addition, federal and state legislatures and agencies periodically consider proposals to revise aspects of the healthcare industry or to revise or create
additional statutory and regulatory requirements. For instance, the current administration may make changes to the ACA, the nature and scope of which are
presently unknown. Similarly, certain computer software products are regulated as medical devices under the Federal Food, Drug, and Cosmetic Act. While the
Food and Drug Administration (“FDA”) has sometimes chosen to disclaim authority to, or to refrain from actively regulating certain software products which are
similar to our products, this area of medical device regulation remains in flux. We expect that the FDA will continue to be active in exploring legal regimes for
regulating computer software intended for use in healthcare settings. Any additional regulation can be expected to impose additional overhead costs on us and
should we fail to adequately meet these legal obligations, we could face potential regulatory action. Regulatory authorities such as the Centers for Medicare and
Medicaid Services may also impose functionality standards with regard to electronic prescribing technologies. If implemented, proposals like these could impact
our operations, the use of our services and our ability to market new services, or could create unexpected liabilities for us. We cannot predict what changes to
laws or regulations might be made in the future or how those changes could affect our business or our operating costs.
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If we do not maintain the certification of our EHR solution pursuant to the HITECH Act, our business, financial condition and results of operations
will be adversely affected.
The HITECH Act provides financial incentives for healthcare providers that demonstrate “meaningful use” of EHR and mandates use of health information
technology systems that are certified according to technical standards developed under the supervision of the U.S. Department of Health and Human Services
(“HHS”). The HITECH Act also imposes certain requirements upon governmental agencies to use, and requires healthcare providers, health plans, and insurers
contracting with such agencies to use, systems that are certified according to such standards. Such standards and implementation specifications that are being
developed under the HITECH Act includes named standards, architectures, and software schemes for the authentication and security of individually identifiable
health information and the creation of common solutions across disparate entities.
The HITECH Act’s certification requirements affect our business because we have invested and continue to invest in conforming our products and services to
these standards. HHS has developed certification programs for electronic health records and health information exchanges. Our web-based EHR solution has
been certified as a complete EHR by ICSA Labs, a non-governmental, independent certifying body. We must ensure that our EHR solutions continue to be
certified according to applicable HITECH Act technical standards so that our customers qualify for any “meaningful use” incentive payments and are not subject
to penalties for non-compliance. Failure to maintain this certification under the HITECH Act could jeopardize our relationships with customers who are relying
upon us to provide certified software, and will make our products and services less attractive to customers than the offerings of other EHR vendors who maintain
certification of their products.
If a breach of our measures protecting personal data covered by HIPAA or the HITECH Act occurs, we may incur significant liabilities.
The Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”), and the regulations that have been issued under it contain substantial
restrictions and requirements with respect to the use, collection, storage and disclosure of individuals’ protected health information. Under HIPAA, covered
entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health
information maintained or transmitted by them or by others on their behalf. In February 2009, HIPAA was amended by the HITECH Act to add provisions that
impose certain of HIPAA’s privacy and security requirements directly upon business associates of covered entities. Under HIPAA and the HITECH Act, our
customers are covered entities and we are a business associate of our customers as a result of our contractual obligations to perform certain services for those
customers. The HITECH Act transferred enforcement authority of the security rule from CMS to the Office for Civil Rights of HHS, thereby consolidating authority
over the privacy and security rules under a single office within HHS. Further, HITECH empowered state attorneys’ general to enforce HIPAA.
The HITECH Act heightened enforcement of privacy and security rules, indicating that the imposition of penalties will be more common in the future and such
penalties will be more severe. For example, the HITECH Act requires that the HHS fully investigate all complaints if a preliminary investigation of the facts
indicates a possible violation due to “willful neglect” and imposes penalties if such neglect is found. Further, where our liability as a business associate to our
customers was previously merely contractual in nature, the HITECH Act now treats the breach of duty under an agreement by a business associate to carry the
same liability as if the covered entity engaged in the breach. In other words, as a business associate, we are now directly responsible for complying with HIPAA.
We may find ourselves subject to increased liability as a possible liable party and we may incur increased costs as we perform our obligations to our customers
under our agreements with them.
Finally, regulations also require business associates to notify covered entities, who in turn must notify affected individuals and government authorities of data
security breaches involving unsecured protected health information. We have performed an assessment of the potential risks and vulnerabilities to the
confidentiality, integrity and availability of electronic health information. In response to this risk analysis, we implemented and maintain physical, technical and
administrative safeguards intended to protect all personal data and have processes in place to assist us in complying with applicable laws and regulations
regarding the protection of this data and properly responding to any security incidents. If we knowingly breach the HITECH Act’s requirements, we could be
exposed to criminal liability. A breach of our safeguards and processes could expose us to civil penalties of up to $1.5 million for each incident and the possibility
of civil litigation.
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If we or our customers fail to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare
programs and financial relationships among healthcare providers, we or our customers may be subject to civil and criminal penalties or loss of
eligibility to participate in government healthcare programs.
As a participant in the healthcare industry, our operations and relationships, and those of our customers, are regulated by a number of federal, state and local
governmental entities. The impact of these regulations can adversely affect us even though we may not be directly regulated by specific healthcare laws and
regulations. We must ensure that our products and services can be used by our customers in a manner that complies with those laws and regulations. Inability of
our customers to do so could affect the marketability of our products and services or our compliance with our customer contracts, or even expose us to direct
liability under the theory that we had assisted our customers in a violation of healthcare laws or regulations. A number of federal and state laws, including anti-
kickback restrictions and laws prohibiting the submission of false or fraudulent claims, apply to healthcare providers and others that make, offer, seek or receive
referrals or payments for products or services that may be paid for through any federal or state healthcare program and, in some instances, any private program.
These laws are complex and their application to our specific services and relationships may not be clear and may be applied to our business in ways that we do
not anticipate. Federal and state regulatory and law enforcement authorities have recently increased enforcement activities with respect to Medicare and
Medicaid fraud and abuse regulations and other healthcare reimbursement laws and rules. From time to time, participants in the healthcare industry receive
inquiries or subpoenas to produce documents in connection with government investigations. We could be required to expend significant time and resources to
comply with these requests, and the attention of our management team could be diverted by these efforts. The occurrence of any of these events could give our
customers the right to terminate our contracts with us and result in significant harm to our business and financial condition.
These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Any failure of our products or services to comply
with these laws and regulations could result in substantial civil or criminal liability and could, among other things, adversely affect demand for our services,
invalidate all or portions of some of our contracts with our customers, require us to change or terminate some portions of our business, require us to refund
portions of our revenue, cause us to be disqualified from serving customers doing business with government payers, and give our customers the right to
terminate our contracts with them, any one of which could have an adverse effect on our business.
Potential healthcare reform and new regulatory requirements placed on our products and services could increase our costs, delay or prevent our
introduction of new products or services, and impair the function or value of our existing products and services.
Our products and services may be significantly impacted by healthcare reform initiatives and will be subject to increasing regulatory requirements, either of which
could negatively impact our business in a multitude of ways. If substantive healthcare reform or applicable regulatory requirements are adopted, we may have to
change or adapt our products and services to comply. Reform or changing regulatory requirements may also render our products or services obsolete or may
block us from accomplishing our work or from developing new products or services. This may in turn impose additional costs upon us to adapt to the new
operating environment or to further develop or modify our products and services. Such reforms may also make introduction of new products and service more
costly or more time-consuming than we currently anticipate. These changes may also prevent our introduction of new products and services or make the
continuation or maintenance of our existing products and services unprofitable or impossible.
Additional regulation of the disclosure of medical information outside the United States may adversely affect our operations and may increase our
costs.
Federal or state governmental authorities may impose additional data security standards or additional privacy or other restrictions on the collection, use,
transmission, and other disclosures of medical information. Legislation has been proposed at various times at both the federal and the state level that would limit,
forbid, or regulate the use or transmission of medical information outside of the United States. Such legislation, if adopted, may render our use of our servers in
offshore offices for work related to such data impracticable or substantially more expensive. Alternative processing of such information within the United States
may involve substantial delay in implementation and increased cost.
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Our services present the potential for embezzlement, identity theft, or other similar illegal behavior by our employees.
Among other things, our services from time to time involve handling mail from payers and payments from patients for our customers, and this mail frequently
includes original checks and credit card information and occasionally includes currency. Where requested, we deposit payments and process credit card
transactions from patients on behalf of customers and then forward these payments to the customers. Even in those cases in which we do not handle original
documents or mail, our services also involve the use and disclosure of personal and business information that could be used to impersonate third parties or
otherwise gain access to their data or funds. The manner in which we store and use certain financial information is governed by various federal and state laws. If
any of our employees takes, converts, or misuses such funds, documents, or data, we could be liable for damages, subject to regulatory actions and penalties,
and our business reputation could be damaged or destroyed. In addition, we could be perceived to have facilitated or participated in illegal misappropriation of
funds, documents, or data and therefore be subject to civil or criminal liability.
Risks Related to Ownership of Shares of Our Common Stock
Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to meet investor expectations, which may cause the
price of our common stock to decline.
Variations in our quarterly and year-end operating results are difficult to predict and may fluctuate significantly from period to period. If our sales or operating
results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Specific factors that may cause
fluctuations in our operating results include:
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demand and pricing for our products and services;
government or commercial healthcare reimbursement policies;
physician and patient acceptance of any of our current or future products;
introduction of competing products;
our operating expenses which fluctuate due to growth of our business;
timing and size of any new product or technology acquisitions we may complete; and
variable sales cycle and implementation periods for our products and services.
Future sales of shares of our common stock could depress the market price of our common stock.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that
our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly.
Mahmud Haq currently controls 40.2% of our outstanding shares of common stock, which will prevent investors from influencing significant
corporate decisions.
Mahmud Haq, our founder and Executive Chairman, beneficially owns 40.2% of our outstanding shares of common stock. As a result, Mr. Haq exercises a
significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation, and
approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in
management, and will make the approval of certain transactions difficult or impossible without his support, which in turn could reduce the price of our common
stock.
Provisions of Delaware law, of our amended and restated charter and amended and restated bylaws may make a takeover more difficult, which could
cause our common stock price to decline.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and in the Delaware General Corporation Law (“DGCL”)
may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt, which is opposed by management and the
Board of Directors. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so. We have a staggered Board
of Directors that makes it difficult for stockholders to change the composition of the Board of Directors in any one year. Further, our amended and restated
certificate of incorporation provides for the removal of a director only for cause upon the affirmative vote of the holders of at least 50.1% of the outstanding
shares entitled to cast their vote for the election of directors, which may discourage a third party from making a tender offer or otherwise attempting to obtain
control of us. These and other anti-takeover provisions could substantially impede the ability of public stockholders to change our management and Board of
Directors. Such provisions may also limit the price that investors might be willing to pay for shares of our Series A Preferred Stock in the future.
25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Any issuance of additional preferred stock in the future may dilute the rights of our existing stockholders.
Our Board of Directors has the authority to issue up to 7,000,000 shares of preferred stock and to determine the price, privileges and other terms of these
shares, of which 2,539,325 shares have been issued as of December 31, 2019. Our Board of Directors may exercise its authority with respect to the remaining
shares of preferred stock without any further approval of common stockholders. The rights of the holders of common stock may be adversely affected by the
rights of future holders of preferred stock.
We do not intend to pay cash dividends on our common stock.
Currently, we do not anticipate paying any cash dividends to holders of our common stock. As a result, capital appreciation, if any, of our common stock will be a
stockholder’s sole source of gain.
Complying with the laws and regulations affecting public companies will increase our costs and the demands on management and could harm our
operating results.
As a public company, we continue to incur significant legal, accounting, and other expenses. In addition, the Sarbanes-Oxley Act and rules subsequently
implemented by the SEC and the Nasdaq Stock Market impose various requirements on public companies, including requiring changes in corporate governance
practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have
increased and will continue to increase our legal, accounting, and financial compliance costs and have made and will continue to make some activities more time-
consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance,
and we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and
regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors or our board committees or as
executive officers.
In addition, the Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and
the effectiveness of our disclosure controls and procedures quarterly. In particular, for the year ended December 31, 2019, we performed system and process
evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. As an “emerging growth company” in previous years, we elected to avail
ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over
financial reporting under Section 404 of the Sarbanes-Oxley Act. However, we may no longer avail ourselves of this exemption as we ceased to be an
“emerging growth company” and are now a “smaller reporting company.” Although we are still currently exempt from the requirement to have our independent
registered public accounting firm attest to the effectiveness of our internal control over financial reporting, when our independent registered public accounting firm
is required to undertake such an assessment, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable
provisions of Section 404 requires that we incur substantial accounting expense and expend significant management time on compliance-related issues and stay
in compliance with reporting requirements. Moreover, if we are not able to stay in compliance with the requirements of Section 404 applicable to us in a timely
manner, or if we or our independent registered public accounting firm identifies any deficiency(ies) in our internal control over financial reporting that are deemed
to be material weakness(es), the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory
authorities, which would require additional financial and management resources.
Furthermore, investor perceptions of our Company may suffer if deficiencies are found, and this could cause a decline in the market price of our common and
preferred stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our
stated operating results and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial
reporting, or financial results and could result in an adverse opinion on internal control from our independent registered public accounting firm.
26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We remained an “emerging growth company” until December 31 of 2019, under the Securities and Exchange Act of 1934, as amended, or the Exchange Act.
While we were an “emerging growth company” as defined in the JOBS Act, we were able to take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and
stockholder approval of any golden parachute payments not previously approved.
We are a smaller reporting company and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will
make our common stock less attractive to investors.
While we have ceased being an emerging growth company as of December 31, 2019, many of the exemptions available for emerging growth companies are also
available to smaller reporting companies like us that have less than $250 million of worldwide common equity held by non-affiliates. The disclosures we will be
required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered a smaller reporting company. Specifically,
similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosures in their filings; are exempt
from the provisions of Section 404 requiring that independent registered public accounting firms provide an attestation reporting on the effectiveness of internal
control over financial reporting, and have certain other decreased disclosure obligations in their SEC filings. Our status as a smaller reporting company may make
it harder for investors to analyze our results of operations and financial prospects. We cannot predict if investors will find our common stock less attractive
because we will rely on the exemption available to smaller reporting companies. If some investors find our common stock less attractive as a result, there may
be a less active trading market for our common stock and our stock price may be more volatile.
Risks Related to Ownership of Shares of Our Preferred Stock
The Series A Preferred Stock ranks junior to all of our indebtedness and other liabilities.
In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay obligations on the Series A Preferred Stock
only after all of our indebtedness and other liabilities have been paid. The rights of holders of the Series A Preferred Stock to participate in the distribution of our
assets will rank junior to the prior claims of our current and future creditors and any future series or class of preferred stock we may issue that ranks senior to the
Series A Preferred Stock. Also, the Series A Preferred Stock effectively ranks junior to all existing and future indebtedness and to the indebtedness and other
liabilities of our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are, and future subsidiaries would be, separate legal entities and have
no legal obligation to pay any amounts to us in respect of dividends due on the Series A Preferred Stock. If we are forced to liquidate our assets to pay our
creditors, we may not have sufficient assets to pay amounts due on any or all of the Series A Preferred Stock then outstanding. We may in the future incur debt
and other obligations that will rank senior to the Series A Preferred Stock. At December 31, 2019, our total liabilities (excluding contingent consideration) equaled
approximately $13.6 million.
Certain of our existing or future debt instruments may restrict the authorization, payment or setting apart of dividends on the Series A Preferred Stock. Our Credit
Agreement with Silicon Valley Bank (“SVB”) restricts the payment of dividends in the event of any event of default, including failure to meet certain financial
covenants. There can be no assurance that we will remain in compliance with the SVB Credit Agreement, and if we default, we may be contractually prohibited
from paying dividends on the Series A Preferred Stock. Also, future offerings of debt or senior equity securities may adversely affect the market price of the
Series A Preferred Stock. If we decide to issue debt or senior equity securities in the future, it is possible that these securities will be governed by an indenture or
other instruments containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future
may have rights, preferences and privileges more favorable than those of the Series A Preferred Stock and may result in dilution to owners of the Series A
Preferred Stock. We and, indirectly, our shareholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity
securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or
nature of our future offerings. The holders of the Series A Preferred Stock will bear the risk of our future offerings, which may reduce the market price of the
Series A Preferred Stock and will dilute the value of their holdings in us.
27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We may not be able to pay dividends on the Series A Preferred Stock if we fall out of compliance with our loan covenants and are prohibited by our
bank lender from paying dividends or if we have insufficient cash to make dividend payments.
Our ability to pay cash dividends on the Series A Preferred Stock requires us to have either net profits or positive net assets (total assets less total liabilities)
over our capital, and to be able to pay our debts as they become due in the usual course of business. We cannot predict with certainty whether we will remain in
compliance with the covenants of our senior secured lender, SVB, which include, among other things, generating adjusted EBITDA and complying with a
minimum liquidity ratio. If we fall out of compliance, our lender may exercise any of its rights and remedies under the loan agreement, including restricting us
from making dividend payments.
Further, notwithstanding these factors, we may not have sufficient cash to pay dividends on the Series A Preferred Stock. Our ability to pay dividends may be
impaired if any of the risks described in this document, including the documents incorporated by reference herein, were to occur. Also, payment of our dividends
depends upon our financial condition, remaining in compliance with our affirmative and negative loan covenants with SVB, which we may be unable to do in the
future, and other factors as our Board of Directors may deem relevant from time to time. We cannot assure you that our businesses will generate sufficient cash
flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock, if any, and
preferred stock, including the Series A Preferred Stock to pay our indebtedness or to fund our other liquidity needs.
The market for our Series A Preferred Stock may not provide investors with adequate liquidity.
Our Series A Preferred Stock is listed on the Nasdaq Global Market. However, the trading market for the Series A Preferred Stock may not be maintained and
may not provide investors with adequate liquidity. The liquidity of the market for the Series A Preferred Stock depends on a number of factors, including
prevailing interest rates, our financial condition and operating results, the number of holders of the Series A Preferred Stock, the market for similar securities and
the interest of securities dealers in making a market in the Series A Preferred Stock. We cannot predict the extent to which investor interest in our Company will
maintain the trading market in our Series A Preferred Stock, or how liquid that market will be. If an active market is not maintained, investors may have difficulty
selling shares of our Series A Preferred Stock.
We may issue additional shares of Series A Preferred Stock and additional series of preferred stock that rank on parity with the Series A Preferred
Stock as to dividend rights, rights upon liquidation or voting rights.
We are allowed to issue additional shares of Series A Preferred Stock and additional series of preferred stock that would rank equal to or below the Series A
Preferred Stock as to dividend payments and rights upon our liquidation, dissolution or winding up of our affairs pursuant to our amended and restated certificate
of incorporation and the certificate of designations relating to the Series A Preferred Stock without any vote of the holders of the Series A Preferred Stock. Upon
the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock (voting together as a class with all other series of
parity preferred stock we may issue upon which like voting rights have been conferred and are exercisable), we are allowed to issue additional series of preferred
stock that would rank above the Series A Preferred Stock as to dividend payments and rights upon our liquidation, dissolution or the winding up of our affairs
pursuant to our amended and restated certificate of incorporation and the certificate of designations relating to the Series A Preferred Stock. The issuance of
additional shares of Series A Preferred Stock and additional series of preferred stock could have the effect of reducing the amounts available to the Series A
Preferred Stock upon our liquidation or dissolution or the winding up of our affairs. It also may reduce dividend payments on the Series A Preferred Stock if we
do not have sufficient funds to pay dividends on all Series A Preferred Stock outstanding and other classes or series of stock with equal priority with respect to
dividends.
Also, although holders of Series A Preferred Stock are entitled to limited voting rights with respect to the circumstances under which the holders of Series A
Preferred Stock are entitled to vote, the Series A Preferred Stock votes separately as a class along with all other series of our preferred stock that we may issue
upon which like voting rights have been conferred and are exercisable. As a result, the voting rights of holders of Series A Preferred Stock may be significantly
diluted, and the holders of such other series of preferred stock that we may issue may be able to control or significantly influence the outcome of any vote.
28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Future issuances and sales of senior or pari passu preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market
prices for the Series A Preferred Stock and our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at
times and prices favorable to us.
Market interest rates may materially and adversely affect the value of the Series A Preferred Stock.
One of the factors that influences the price of the Series A Preferred Stock is the dividend yield on the Series A Preferred Stock (as a percentage of the market
price of the Series A Preferred Stock) relative to market interest rates. An increase in market interest rates may lead prospective purchasers of the Series A
Preferred Stock to expect a higher dividend yield (and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for
dividend payments). Thus, higher market interest rates could cause the market price of the Series A Preferred Stock to materially decrease.
Holders of the Series A Preferred Stock may be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates
applicable to “qualified dividend income”.
Distributions paid to corporate U.S. holders of the Series A Preferred Stock may be eligible for the dividends-received deduction, and distributions paid to non-
corporate U.S. holders of the Series A Preferred Stock may be subject to tax at the preferential tax rates applicable to “qualified dividend income,” if we have
current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. We do not currently have such accumulated earnings and
profits. Additionally, we may not have sufficient current earnings and profits during future fiscal years for the distributions on the Series A Preferred Stock to
qualify as dividends for U.S. federal income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-
received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.” If any distributions on the Series A Preferred
Stock with respect to any fiscal year are not eligible for the dividends-received deduction or preferential tax rates applicable to “qualified dividend income”
because of insufficient current or accumulated earnings and profits, it is possible that the market value of the Series A Preferred Stock might decline.
Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to meet investor expectations, which may cause the
price of our Series A Preferred Stock to decline.
Variations in our quarterly and year-end operating results are difficult to predict and our income and cash flow may fluctuate significantly from period to period,
which may impact our Board of Directors’ willingness or legal ability to declare a monthly dividend. If our operating results fall below the expectations of investors
or securities analysts, the price of our Series A Preferred Stock could decline substantially. Specific factors that may cause fluctuations in our operating results
include:
•
•
•
•
•
•
•
demand and pricing for our products and services;
government or commercial healthcare reimbursement policies;
physician and patient acceptance of any of our current or future products;
introduction of competing products;
our operating expenses which fluctuate due to growth of our business;
timing and size of any new product or technology acquisitions we may complete; and
variable sales cycle and implementation periods for our products and services.
29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our Series A Preferred Stock has not been rated.
We have not sought to obtain a rating for the Series A Preferred Stock. No assurance can be given, however, that one or more rating agencies might not
independently determine to issue such a rating or that such a rating, if issued, would not adversely affect the market price of the Series A Preferred Stock. Also,
we may elect in the future to obtain a rating for the Series A Preferred Stock, which could adversely affect the market price of the Series A Preferred Stock.
Ratings only reflect the views of the rating agency or agencies issuing the ratings and such ratings could be revised downward, placed on a watch list or
withdrawn entirely at the discretion of the issuing rating agency if in its judgment circumstances so warrant. Any such downward revision, placing on a watch list
or withdrawal of a rating could have an adverse effect on the market price of the Series A Preferred Stock.
We may redeem the Series A Preferred Stock on or after November 4, 2020
On or after November 4, 2020, we may, at our option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time. Also, upon the
occurrence of a change of control, we may, at our option, redeem the Series A Preferred Stock, in whole or in part, within 120 days after the first date on which
such change of control occurred. We may have an incentive to redeem the Series A Preferred Stock voluntarily if market conditions allow us to issue other
preferred stock or debt securities at a rate that is lower than the dividend on the Series A Preferred Stock. If we redeem the Series A Preferred Stock, then from
and after the redemption date, dividends will cease to accrue on shares of Series A Preferred Stock, the shares of Series A Preferred Stock shall no longer be
deemed outstanding and all rights as a holder of those shares will terminate, except the right to receive the redemption price plus accumulated and unpaid
dividends, if any, payable upon redemption.
The market price of our Series A Preferred Stock is variable and could be substantially affected by various factors.
The market price of our Series A Preferred Stock could be subject to wide fluctuations in response to numerous factors. These factors include, but are not limited
to, the following:
•
•
•
•
•
•
•
•
•
•
prevailing interest rates, increases in which may have an adverse effect on the market price of the Series A Preferred Stock;
trading prices of similar securities;
our history of timely dividend payments;
the annual yield from dividends on the Series A Preferred Stock as compared to yields on other financial instruments;
general economic and financial market conditions;
government action or regulation;
our financial condition, performance and prospects of our competitors;
changes in financial estimates or recommendations by securities analysts with respect to us or our competitors in our industry;
our issuance of additional preferred equity or debt securities; and
actual or anticipated variations in quarterly operating results of us and our competitors.
A holder of Series A Preferred Stock has extremely limited voting rights.
The voting rights for a holder of Series A Preferred Stock are limited. Our shares of common stock are the only class of our securities that carry full voting rights,
and Mahmud Haq, our Executive Chairman, beneficially owns approximately 40.2% of our outstanding shares of common stock. As a result, Mr. Haq exercises a
significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation, and
approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in
management, and will make the approval of certain transactions difficult or impossible without his support, which in turn could reduce the price of our Series A
Preferred Stock.
Voting rights for holders of the Series A Preferred Stock exist primarily with respect to the ability to elect, voting together with the holders of any other series of
our preferred stock having similar voting rights, two additional directors to our Board of Directors, subject to limitations, in the event that eighteen monthly
dividends (whether or not consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to our articles of
incorporation or articles of amendment relating to the Series A Preferred Stock that materially and adversely affect the rights of the holders of Series A Preferred
Stock or authorize, increase or create additional classes or series of our capital stock that are senior to the Series A Preferred Stock. Other than the limited
circumstances and except to the extent required by law, holders of Series A Preferred Stock do not have any voting rights.
30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Series A Preferred Stock is not convertible, and investors will not realize a corresponding upside if the price of the common stock increases.
The Series A Preferred Stock is not convertible into the common stock and earns dividends at a fixed rate. Accordingly, an increase in market price of our
common stock will not necessarily result in an increase in the market price of our Series A Preferred Stock. The market value of the Series A Preferred Stock
may depend more on dividend and interest rates for other preferred stock, commercial paper and other investment alternatives and our actual and perceived
ability to pay dividends on, and in the event of dissolution satisfy the liquidation preference with respect to, the Series A Preferred Stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located at 7 Clyde Road, Somerset, New Jersey 08873 where we occupy approximately 2,400 square feet of space under a
month-to-month lease. Additionally, at December 31, 2019 we lease approximately 49,000 square feet of office space in approximately 12 locations throughout
the U.S., with lease terms that are typically two years or less. We also lease approximately 37,000 square feet for five pediatric offices in the Midwest, with
leases that will expire between December 2020 and July 2023. Effective January 1, 2020, the Company vacated one of its current premises and began leasing
an additional 9,000 square feet of office space with a lease term of approximately five years.
We also lease approximately 48,000 square feet of office space and computer server facilities in Islamabad, Pakistan, which lease expires in July 2021, as well
as approximately 33,000 square feet in Bagh, Pakistan, with an annually renewable lease. The Company also leases office space in Sri Lanka, which lease
expires in March of 2020. This lease will be renewed for an additional year at expiration.
The Company also leases computer co-location facilities and apartment space in several additional U.S. cities under short-term and long-term leases, however,
these leases are not significant. We believe our current facilities are adequate for our current needs and that suitable additional space will be available as and
when needed.
Item 3. 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 MTBC, Inc. (“MTBC”) 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.
MTBC 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 MTBC 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 MTBC 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 have completed discovery in the remanded matter, and both MTBC 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 MTBC’s cross-motion for summary judgment. The
Chancery Court held that MTBC cannot be compelled to participate in the Arbitration. RPRWC has informed MTBC 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.
RPRWC seeks compensatory damages of $6.6 million, plus costs, for MPMA’s alleged breach of the billing services agreement. RPRWC’s breach of contract
and compensatory damages claims have not been the subject of the ongoing court proceedings, which have focused solely on whether RPRWC can compel
MTBC and MAC to arbitrate its claim. Thus, RPRWC has not yet provided MAC with information sufficient to enable it to estimate a range of possible losses that
may arise from the Arbitration. MAC intends to vigorously defend against RPRWC’s claims. If RPRWC is successful in the Arbitration, MAC anticipates the
award would be substantially less than the amount claimed.
Item 4. Mine Safety Disclosures
None.
31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock has been listed since July 23, 2014 and is trading on the Nasdaq Global Market under the symbol “MTBC”.
Common Stockholders
As of February 12, 2020, there were approximately 3,400 holders of record of our common stock.
Dividends on Common Stock
We have not declared a cash dividend on our common stock since we became public on July 23, 2014, and currently we do not anticipate paying any cash
dividends to holders of our common stock. The Company is prohibited from paying any dividends on common stock without the prior written consent of its senior
lender, SVB.
Recent Sales of Unregistered Securities
There was no sale of unregistered equity securities during the three months ended December 31, 2019.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There was no share repurchase activity during the three months ended December 31, 2019.
Securities Authorized for Issuance under the Equity Compensation Plan
As of December 31, 2019, the following table shows the number of securities to be issued upon vesting under the equity compensation plan approved by the
Company’s Board of Directors.
Equity Compensation Plan Information
Plan Category
Equity compensation plan approved by security holders - common shares
Equity compensation plan approved by security holders - preferred shares
Total
32
Number of
securities to
be issued upon
vesting
451,084
44,000
495,084
Number of securities
remaining available for
future issuance under
equity incentive plan
(excluding securities to
be issued upon vesting)
401,738
133,654
535,392
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 6. Selected Financial Data
The selected consolidated statements of operations data presented below for the years ended December 31, 2019 and 2018, as well as the consolidated
balance sheet data as of December 31, 2019 and 2018, are derived from our audited consolidated financial statements included in this Annual Report on Form
10-K. The selected consolidated statements of operations data presented below for the years ended December 31, 2017, 2016 and 2015, as well as the
consolidated balance sheet data as of December 31, 2017, 2016 and 2015 are derived from our consolidated financial statements not included in this Annual
Report on Form 10-K. Historical results are not necessarily indicative of the results that may be expected in the future.
You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our Consolidated Financial Statements appearing on page F-1 in this Annual Report on Form 10-K. Acquisitions by the Company in
the last three years account for a significant portion of the increases in revenue and expenses in those years. Note 3 of our Consolidated Financial Statements
discusses the acquisitions in the last two years.
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Consolidated Statements of Operations Data
Net revenue
$
64,439 $
50,546
$
31,811
$
24,493
$
23,080
2019
Years ended December 31,
2018
2017
($ in thousands, except per share data)
2016
2015
Operating expenses:
Direct operating costs
Selling and marketing
General and administrative
Research and development
Change in contingent consideration
Depreciation and amortization
Restructuring and impairment charges
Total operating expenses
Operating income (loss)
Interest expense - net
Other (expense) income - net
Loss before provision (benefit) for income taxes
Income tax provision (benefit)
Net loss
Preferred stock dividend
Net loss attributable to common shareholders
$
$
41,186
1,522
17,912
871
(344)
3,006
219
64,372
31,253
1,612
16,264
1,029
73
2,854
-
53,085
17,679
1,106
11,738
1,082
152
4,300
276
36,333
13,417
1,224
12,459
902
(716)
5,108
-
32,394
11,630
467
11,969
659
(1,786)
4,599
-
27,538
67
(2,539)
(4,522)
(7,901)
(4,458)
121
(625)
(679)
193
(872) $
6,386
(7,258) $
250
494
(2,295)
(157)
(2,138)
4,824
(6,962)
11,721,232
(0.59)
$
1,307
332
(5,497)
68
(5,565)
2,030
(7,595)
11,010,432
(0.69)
$
$
$
646
(53)
(8,600)
197
(8,797)
753
(9,550)
10,036,988
(0.95)
$
$
$
262
170
(4,550)
138
(4,688)
207
(4,895)
9,732,806
(0.50)
$
$
Weighted average common shares outstanding basic and diluted
12,087,947
Net loss per common share basic and diluted
$
(0.60) $
Consolidated Balance Sheet Data
As of December 31,
Cash
Working capital - net (1)
Total assets
Long-term debt
Shareholders’ equity
$
$
19,994
19,824
56,403
83
42,838
(1) Working capital-net is defined as current assets less current liabilities.
2019
2018
$
2017
($ in thousands)
4,362
4,608
25,526
121
20,250
14,472
17,916
47,623
222
38,870
2016
2015
$
$
3,477
(7,418)
28,324
4,200
7,067
8,040
5,128
26,677
4,903
14,892
Years ended December 31,
2019
2018
2017
($ in thousands)
2,291
$
2016
2015
$
(605)
$
(675)
4,802
$
8,101
$
34
Other Financial Data
Adjusted EBITDA
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
To provide investors with additional insight and allow for a more comprehensive understanding of the information used by management in its financial and
operational decision-making, we supplement our consolidated financial statements presented on a basis consistent with U.S. generally accepted accounting
principles, or GAAP, with adjusted EBITDA, a non-GAAP financial measure of earnings. Adjusted EBITDA represents net income (loss) before income tax
expense, interest income, interest expense, depreciation, amortization, transaction, integration, restructuring and impairment charges and change in contingent
consideration. Our management uses adjusted EBITDA as a financial measure to evaluate the profitability and efficiency of our business model. We use this non-
GAAP financial measure to assess the strength of the underlying operations of our business. These adjustments, and the non-GAAP financial measure that is
derived from them, provide supplemental information to analyze our operations between periods and over time. Investors should consider our non-GAAP
financial measure in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP.
The following table contains a reconciliation of net loss to adjusted EBITDA.
Years ended December 31,
$
2017
($ in thousands)
(5,565)
634
3,666
(249)
1,307
68
1,487
515
276
152
2,291
$
(2,138)
689
2,165
(435)
250
(157)
2,464
1,891
-
73
4,802
2016
2015
$
$
(8,797)
527
4,581
53
646
197
1,928
976
-
(716)
(605)
$
$
(4,688)
420
4,179
(170)
262
138
629
341
-
(1,786)
(675)
2019
2018
$
$
(872)
909
2,097
827
121
193
3,215
1,736
219
(344)
8,101
$
$
35
Reconciliation of net loss
to adjusted EBITDA
Net loss
Depreciation
Amortization
Foreign exchange loss (gain) / other expense
Interest expense - net
Income tax provision (benefit)
Stock-based compensation expense
Transaction and integration costs
Restructuring and impairment charges
Change in contingent consideration
Adjusted EBITDA
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our consolidated financial condition and results of operations for the years ended December 31, 2019 and 2018 and other factors
that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our Consolidated Financial
Statements and related notes beginning on page F-1 of this Annual Report on Form 10-K.
Some of the statements set forth in this section are forward-looking statements relating to our future results of operations. Our actual results may vary from the
results anticipated by these statements. Please see “Forward-Looking Statements” on page 2 of this Annual Report on Form 10-K.
Overview
The Company is a healthcare information technology company that provides a suite of proprietary web-based solutions and business services to healthcare
providers. Our integrated Software-as-a-Service (“SaaS”) platform and business services are designed to help our clients increase revenues, streamline
workflows and make better business and clinical decisions, while reducing administrative burdens and operating costs. These solutions and services include:
Healthcare IT:
•
Revenue cycle management (“RCM”) services;
○ Proprietary, healthcare IT solutions, which is part of our RCM services, including:
Electronic health records,
Practice management software and related tools,
•
•
• Mobile Health (“mHealth”) solutions,
•
•
• Group purchasing services.
Healthcare claims clearinghouse, and
Business intelligence, customized applications, interfaces and a variety of other technology solutions that support our healthcare clients.
Practice Management:
•
•
Comprehensive practice management services; and
Telemedicine services.
Our offshore operations in Pakistan and Sri Lanka together accounted for approximately 14% and 22% of total expenses for the years ended December 31,
2019 and 2018, respectively. A significant portion of those expenses were personnel-related costs (approximately 78% and 79% of foreign costs for the years
ended December 31, 2019 and 2018, respectively). Because personnel-related costs are significantly lower in Pakistan and Sri Lanka than in the U.S. and many
other offshore locations, we believe our offshore operations give us a competitive advantage over many industry participants. All of the medical billing companies
that we have acquired used domestic labor or subcontractors from higher cost locations to provide all or a substantial portion of their services. We are able to
achieve significant cost reductions as we shift these labor costs to our offshore operations.
Key Performance Measures
We consider numerous factors in assessing our performance. Key performance measures used by management include adjusted EBITDA, adjusted operating
income, adjusted operating margin, adjusted net income and adjusted net income per share. These key performance measures are non-GAAP financial
measures, which we believe better enable management and investors to analyze and compare the underlying business results from period to period.
These non-GAAP financial measures should not be considered in isolation, or as a substitute for or superior to, financial measures calculated in accordance with
accounting principles generally accepted in the United States of America (“GAAP”). Moreover, these non-GAAP financial measures have limitations in that they
do not reflect all the items associated with the operations of our business as determined in accordance with GAAP. We compensate for these limitations by
analyzing current and future results on a GAAP basis, as well as a non-GAAP basis, and we provide reconciliations from the most directly comparable GAAP
financial measures to the non-GAAP financial measures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other
companies. Other companies, including companies in our industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the
usefulness of those measures for comparative purposes.
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Adjusted EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share provide an alternative view of
performance used by management and we believe that an investor’s understanding of our performance is enhanced by disclosing these adjusted performance
measures.
Adjusted EBITDA excludes the following elements which are included in GAAP net income (loss):
•
•
•
•
•
•
•
•
Income tax provision (benefit) or the cash requirements to pay our taxes;
Interest expense, or the cash requirements necessary to service interest on principal payments on our debt;
Foreign exchange (gains) and losses and other non-operating expenses;
Stock-based compensation expense and cash-settled awards, based on changes in the stock price;
Depreciation and amortization charges;
Integration costs, such as severance amounts paid to employees from acquired businesses and transaction costs, such as brokerage fees, pre-
acquisition accounting costs and legal fees, exit costs related to contractual agreements;
Restructuring and impairment charges; and
Changes in contingent consideration.
Set forth below is a presentation of our adjusted EBITDA for the years ended December 31, 2019 and 2018:
Net revenue
GAAP net loss
Provision (benefit) for income taxes
Net interest expense
Foreign exchange loss (gain) / other expense
Stock-based compensation expense
Depreciation and amortization
Transaction and integration costs
Restructuring and impairment charges
Change in contingent consideration
December 31,
2019
2018
$
($ in thousands)
64,439 $
50,546
(872)
(2,138)
193
121
827
3,215
3,006
1,736
219
(344)
8,101 $
(157)
250
(435)
2,464
2,854
1,891
-
73
4,802
Adjusted EBITDA
$
Adjusted operating income and adjusted operating margin exclude the following elements which are included in GAAP operating income (loss):
•
•
•
•
•
Stock-based compensation expense and cash-settled awards, based on changes in the stock price;
Amortization of purchased intangible assets;
Integration costs, such as severance amounts paid to employees from acquired businesses and transaction costs, such as brokerage fees, pre-
acquisition accounting costs and legal fees, exit costs related to contractual agreements;
Restructuring and impairment charges; and
Changes in contingent consideration.
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Set forth below is a presentation of our adjusted operating income and adjusted operating margin, which represents adjusted operating income as a percentage
of net revenue, for the years ended December 31, 2019 and 2018:
Net revenue
GAAP net loss
Provision (benefit) for income taxes
Net interest expense
Other expense (income) - net
GAAP operating income (loss)
GAAP operating margin
Stock-based compensation expense
Amortization of purchased intangible assets
Transaction and integration costs
Restructuring and impairment charges
Change in contingent consideration
Non-GAAP adjusted operating income
Non-GAAP adjusted operating margin
December 31,
2019
2018
$
($ in thousands)
64,439
$
50,546
(872)
193
121
626
68
0.1%
3,215
1,877
1,736
219
(344)
6,771
$
10.5%
(2,138)
(157)
250
(494)
(2,539)
(5.0)%
2,464
1,828
1,891
-
73
3,717
7.4%
$
Adjusted net income and adjusted net income per share exclude the following elements which are included in GAAP net income (loss):
•
•
•
•
•
•
•
Foreign exchange (gains) and losses and other non-operating expenses;
Stock-based compensation expense and cash-settled awards, based on changes in the stock price;
Amortization of purchased intangible assets;
Integration costs, such as severance amounts paid to employees from acquired businesses and transaction costs, such as brokerage fees, pre-
acquisition accounting costs and legal fees, exit costs related to contractual agreements;
Restructuring and impairment charges;
Changes in contingent consideration; and
Income tax expense (benefit) resulting from the amortization of goodwill related to our acquisitions.
No tax effect has been provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per share as the Company has sufficient
carry forward losses to offset the applicable income taxes. The following table shows our reconciliation of GAAP net loss to non-GAAP adjusted net income for
the years ended December 31, 2019 and 2018:
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
GAAP net loss
Foreign exchange loss (gain) / other expense
Stock-based compensation expense
Amortization of purchased intangible assets
Transaction and integration costs
Restructuring and impairment charges
Change in contingent consideration
Income tax expense (benefit) related to goodwill
Non-GAAP adjusted net income
December 31,
2019
2018
($ in thousands except for per share amounts)
$
$
(872) $
827
3,215
1,877
1,736
219
(344)
80
6,738 $
December 31,
2019
2018
GAAP net loss attributable to common shareholders, per share
$
Impact of preferred stock dividend
Net loss per end-of-period share
Foreign exchange loss (gain) / other expense
Stock-based compensation expense
Amortization of purchased intangible assets
Transaction and integration costs
Restructuring and impairment charges
Change in contingent consideration
Income tax expense (benefit) related to goodwill
Non-GAAP adjusted net income per share
$
(0.60) $
0.53
(0.07)
0.07
0.26
0.15
0.14
0.02
(0.03)
0.01
0.55 $
(2,138)
(435)
2,464
1,828
1,891
-
73
(208)
3,475
(0.59)
0.41
(0.18)
(0.04)
0.21
0.15
0.16
-
0.01
(0.02)
0.29
End-of-period shares
12,237,686
11,829,758
For purposes of determining non-GAAP adjusted net income per share, the Company used the number of common shares outstanding at the end of the years
December 31, 2019 and 2018. Non-GAAP adjusted net income per share does not take into account dividends paid on Preferred Stock. No tax effect has been
provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per common share as the Company has sufficient carry forward net
operating losses to offset the applicable income taxes.
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Quarterly Results of Operations
$
Net revenue
Operating expenses:
Direct operating costs
Selling and marketing
General and administrative
Research and development
Change in contingent consideration
Depreciation and amortization
Restructuring and impairment charges
Total operating expenses
Operating income (loss)
Interest expense - net
Other (expense) income - net
Income (loss) before provision for
income taxes
Income tax provision (benefit)
Net income (loss)
Preferred stock dividend
Net loss attributable to common
shareholders
Loss per common share Basic and
diluted
Adjusted EBITDA
$
$
$
$
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
September 30,
2018
2018
June 30,
2018
March 31,
2018
15,758
$
16,851
$
16,750
($ in thousands, except per share data)
$
15,080
16,511
$
$
17,045
$
8,683
$
8,307
9,406
430
4,155
221
-
598
83
14,893
865
39
(402)
424
91
333
10,536
348
4,452
176
(280)
814
136
16,182
11,396
383
5,143
219
-
836
-
17,977
9,848
361
4,161
255
(64)
757
-
15,318
10,311
442
5,478
261
5
881
-
17,378
12,124
462
5,131
264
25
822
-
18,828
669
(1,227)
(238)
(867)
(1,783)
32
(688)
(51)
87
33
545
(715)
56
$
(138) $
(771) $
17
(81)
(336)
(41)
(296) $
57
343
(581)
(5)
(576) $
80
(219)
(2,082)
(250)
(1,832) $
4,334
403
3,054
249
11
560
-
8,611
72
44
218
246
51
195
$
1,804
1,603
1,486
1,493
1,744
1,056
1,249
(1,471)
$
(1,741) $
(2,257) $
(1,788) $
(2,320) $
(2,888) $
(1,054) $
(0.12)
$
(0.14) $
(0.19) $
(0.15) $
(0.20) $
(0.25) $
(0.09) $
4,484
305
2,601
255
32
591
-
8,268
39
69
152
122
47
75
775
(700)
(0.06)
2,786
$
2,594
$
1,141
$
1,580
$
1,406
$
865
$
1,557
$
974
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Reconciliation of net income (loss) to adjusted EBITDA
$
Net income (loss)
Depreciation
Amortization
Foreign exchange loss (gain) / other
expense
Interest expense - net
Income tax provision (benefit)
Stock-based compensation expense
Transaction and integration costs
Restructuring and impairment charges
Change in contingent consideration
Adjusted EBITDA
$
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
2019
2019
2019
2019
2018
2018
2018
2018
$
333
241
358
(138) $
238
576
(771) $
224
612
418
39
91
890
333
83
-
2,786
$
704
32
87
775
464
136
(280)
2,594
$
(539)
33
56
792
734
-
-
1,141
$
($ in thousands)
(296) $
207
550
244
17
(41)
758
205
-
(64)
1,580
$
(576) $
203
678
(330)
57
(5)
940
434
-
5
1,406
$
(1,832) $
189
633
$
195
145
415
227
80
(250)
987
806
-
25
865
$
(185)
44
51
409
472
-
11
1,557
$
75
151
440
(147)
69
47
128
179
-
32
974
Key Metrics
In addition to the line items in our consolidated financial statements, we regularly review the following key metrics to evaluate our business, measure our
performance, identify trends in our business, prepare financial projections, make strategic business decisions, and assess market share trends and working
capital needs. We believe information on these metrics is useful for investors to understand the underlying trends in our business.
Providers and Practices Served: As of December 31, 2019, we provided services to approximately 10,500 providers (which we define as physicians, nurses,
nurse practitioners, physician assistants and other clinical staff that render bills for their services), representing approximately 1,800 practices. In addition, we
served approximately 200 clients who were not medical practices, but are service organizations who serve the healthcare community. As of December 31, 2018,
we served approximately 10,000 providers representing approximately 1,800 practices.
Customer Renewal Rate: Our customer renewal rate measures the percentage of our RCM clients who utilize our technology platform who were a party to a
services agreement with us on January 1 of a particular year and continued to operate and be a client on December 31 of the same year. It also includes
acquired accounts, if they are a party to a services agreement with the company we acquired and are generating revenue for us, so long as the risk of client loss
under the respective purchase agreement has fully shifted to us by January 1 of the particular year. Our renewal rates for 2019 and 2018 were 90% and 89%,
respectively.
Sources of Revenue
Revenue: We primarily derive our revenues from bundled revenue cycle management services, typically billed as a percentage of payments collected by our
customers. This fee includes RCM, as well as the ability to use our EHR and practice management software as part of the bundled fee. These payments
accounted for approximately 67% and 76% of our revenues during the years ended December 31, 2019 and 2018, respectively. This includes customers utilizing
our proprietary product suite, PracticePro®, as well as customers from acquisitions which we are servicing utilizing third-party software. Key drivers of our
revenue include growth in the number of providers we are servicing, the number of patients served by those providers, and collections by those providers. We
also generate revenue from our practice management and group purchasing services which began in July 2018 as a result of the Orion acquisition. Revenue is
also generated from transcription, coding, indexing and other ancillary services. By the end of 2019 and 2018, we moved approximately 52% and 57%,
respectively, of the medical billing customers from prior years’ acquisitions that were on other platforms to our operating platform.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We earned approximately 8% and 7% of our revenue from printing and mailing operations, clearinghouse, EDI services and ancillary RCM services during the
years ended December 31, 2019 and 2018, respectively. We earned approximately 2% of our revenue from group purchasing services during the same period.
We also earned approximately 21% and 13% of our revenue from practice management services, including reimbursement of certain costs plus a percentage of
the operating profit, during the years ended December 31, 2019 and 2018, respectively. We began providing practice management services and group
purchasing services on July 1, 2018. In December 2019, we began the launch of the telemedicine service.
Operating Expenses
Direct Operating Costs. Direct operating costs consist primarily of salaries and benefits related to personnel who provide services to our customers and the
patients of the three managed medical practices, claims processing costs, and other direct costs related to our services. Costs associated with the
implementation of new customers are expensed as incurred. The reported amounts of direct operating costs do not include depreciation and amortization, which
are broken out separately in the consolidated statements of operations. Our Pakistan and Sri Lanka operations together accounted for approximately 13% and
22% of direct operating costs for the years ended December 31, 2019 and 2018, respectively. As we grow, we expect to achieve further economies of scale and
to see our direct operating costs decrease as a percentage of revenue.
Selling and Marketing Expense. Selling and marketing expense consists primarily of compensation and benefits, commissions, travel and advertising expenses.
Research and Development Expense. Research and development expense consists primarily of personnel-related costs and third-party contractor costs.
Because we incorporate our technology into our services as soon as technological feasibility is established, most costs are currently expensed as incurred.
General and Administrative Expense. General and administrative expense consists primarily of personnel-related expense for administrative employees,
including compensation, benefits, travel, occupancy and insurance, software license fees and outside professional fees. Our Pakistan and Sri Lanka offices
accounted for approximately 16% and 20% of general and administrative expenses for the years ended December 31, 2019 and 2018, respectively.
Contingent Consideration. Contingent consideration represents the portion of consideration payable to the sellers of some of our acquisitions, the amount of
which is based on the achievement of defined performance measures contained in the purchase agreements. The balance at December 31, 2018 was payable
in cash and the remaining balance was settled during 2019. Contingent consideration is adjusted to fair value at the end of each reporting period.
Depreciation and Amortization Expense. Depreciation expense is charged using the straight-line method over the estimated lives of the assets ranging from
three to five years. Amortization expense is charged on either an accelerated or on a straight-line basis over a period of three or four years for most intangible
assets acquired in connection with acquisitions including those intangibles related to the group purchasing services. Amortization expense related to the value of
our practice management clients is amortized on a straight-line basis over a period of twelve years.
Interest and Other Income (Expense). Interest expense consists of interest costs and loan origination costs related to our working capital line of credit and
amounts due in connection with acquisitions, offset by interest income. Our other income (expense) results primarily from foreign currency transaction gains
(losses), and amounted to a foreign exchange loss of $827,000 and a gain $435,000 for the years ended December 31, 2019 and 2018, respectively.
Income Tax. In preparing our consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate. This process involves
estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting
purposes. These differences result in deferred income tax assets and liabilities. Although the Company is forecasting a return to profitability, it incurred losses
historically and there is uncertainty regarding future US taxable income, which make realization of a deferred tax asset difficult to support in accordance with
ASC 740. Accordingly, a valuation allowance has been recorded against all deferred tax assets as of December 31, 2019 and December 31, 2018. Effective
January 1, 2018, there is a global intangible low-taxed income (“GILTI”) tax. Companies can either account for the GILTI inclusion in the period in which they are
incurred or establish deferred tax liabilities for the expected future taxes associated with GILTI. The Company elected to record the GILTI provisions as they are
incurred each period.
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of these financial statements requires us to make estimates and
assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense and related disclosures. We base
our estimates, assumptions and judgments on historical experience, current trends and various other factors that we believe to be reasonable under the
circumstances. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience
is acquired, as additional information is obtained and as our operating environment changes. On a regular basis, we review our accounting policies, estimates,
assumptions and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their
effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. The
methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations.
Critical accounting policies are those policies used in the preparation of our consolidated financial statements that require management to make difficult,
subjective, or complex adjustments, and to make estimates about the effect of matters that are inherently uncertain. As a result of our adoption of the new
revenue recognition standard on January 1, 2018, we re-assessed the estimates, assumptions, and judgments that are most critical in our recognition of
revenue.
Revenue from Contracts with Customers :
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers . Our revenue recognition policies require us to make significant
judgments and estimates, particularly as it relates to revenue cycle management and group purchasing revenue. Under ASC 606, certain significant accounting
estimates, such as payment-to-charge ratios, effective billing rates and the estimated contractual payment periods are required to measure the revenue cycle
management revenue. To measure group purchasing services revenue, we need to estimate the number of providers purchasing vaccines and the amount and
timing of those purchases. We analyze various factors including, but not limited to, contractual terms and conditions, the credit-worthiness of our customers and
our pricing policies. Changes in judgment on any of the above factors could materially impact the timing and amount of revenue recognized in a given period.
Revenue is recognized as the performance obligations are satisfied. We derive revenue from seven primary sources: revenue cycle management services,
practice management services, professional services, ancillary services, group purchasing services, printing and mailing services, and clearinghouse and EDI
(electronic data interchange) services. All of our revenue arrangements are based on contracts with customers. 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, each service represents
its own performance obligation. Selling or transaction prices are based on the contractual price for the service, which is consistent with the stand-alone selling
price.
Revenue cycle management services:
Revenue cycle management services are the recurring process of submitting and following up on claims with health insurance companies in order for the
healthcare providers to receive payment for the services they rendered. MTBC typically invoices customers on a monthly basis based on the actual collections
received by its customers and the agreed-upon rate in the sales contract. The services include use of practice management software and related tools (on a
software-as-a-service (“SaaS”) basis), electronic health records (on a SaaS basis), medical billing services and use of mobile health solutions. We consider the
services to be one performance obligation since the promises are not distinct in the context of the contract. The performance obligation consists of a series of
distinct services that are substantially the same and have the same periodic pattern of transfer to our customers.
In many cases, our clients may terminate their agreements with 90 days’ notice without cause, thereby limiting the term in which we have enforceable rights and
obligations, although this time period can vary between clients. Our payment terms are normally net 30 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.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
For the majority of our revenue cycle management contracts, the total transaction price is variable because our obligation is to process an unknown quantity of
claims, as and when requested by our customers over the contract period. When a contract includes variable consideration, we evaluate the estimate of the
variable consideration to determine whether the estimate needs to be constrained; therefore, we include variable consideration in the transaction price only to the
extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with variable
consideration is subsequently resolved. Estimates to determine variable consideration such as payment to charge ratios, effective billing rates, and the estimated
contractual payment periods are updated at each reporting date. Revenue is recognized over the performance period using the input method.
Group purchasing services:
We estimate the variable consideration which we expect to be entitled to for the group purchasing services based upon anticipated shipments to the medical
providers enrolled in the program, seasonality and the changes in the number of providers. The estimate of variable consideration includes adjusting historical
data for anticipated changes from prior periods. When reviewing our estimates, in order to ensure that our estimates do not pose a risk of significantly overstating
our revenue in any reporting period, we will apply constraints, when appropriate, to certain estimates around our variable consideration. Variable consideration
estimates are updated at each reporting period.
Practice management services:
We estimate the amount that will be collected on claims submitted to insurance carriers which is used to determine the compensation to be paid to the owners of
the managed practices. These compensation amounts reduce the revenue that the Company recognizes since they are deducted from gross billings. The
estimate of the amounts to be received from the insurance claims are updated at each reporting period.
Although we believe that our approach to estimates and judgments is reasonable, actual results could differ, and we may be exposed to increases or decreases
in revenue that could be material. Our estimates of variable consideration may prove to be inaccurate, in which case we may have understated or overstated the
revenue recognized in an accounting period. The amount of variable consideration recognized to date that remains subject to estimation is included within the
contract asset on the consolidated balance sheet.
Contingent Consideration:
If a business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date. The
Company adjusts the contingent consideration liability at the end of each reporting period based on fair value inputs representing changes in forecasted revenue
of the acquired entities and the probability of an adjustment to the purchase price. Critical estimates include determining the forecasted revenue for certain
acquisitions, probability and timing of cash collections and an appropriate discount rate. Changes in the fair value of the contingent consideration after the
acquisition date are included in earnings if the contingent consideration is recorded as a liability.
Goodwill Impairment:
Goodwill is evaluated for impairment annually as of October 31 st, referred to as the annual test date. The Company will also test for impairment between annual
test dates if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is performed at
the reporting-unit level. The Company has determined that its business consists of two operating segments and two reporting units (Healthcare IT and Practice
Management). Application of the goodwill impairment test requires judgment including the use of a discounted cash flow and market approach methodology.
These analyses require significant assumptions and judgments. These assumptions and judgments include estimation of future cash flows, which is dependent
on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, determination of
our weighted average cost of capital and the selection of comparable companies and the interpretation of their data. Future business and economic conditions,
as well as differences in actual financial results related to any of the assumptions, could materially impact the consolidated financial statements through
impairment of goodwill or intangible assets and acceleration of the amortization period of the purchased intangible assets which are finite-lived assets. No
impairment charges were recorded during the years ended December 31, 2019 or 2018.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Business Combinations:
The Company accounts for business combinations under the provisions of ASC 805, Business Combinations, which requires that the acquisition method of
accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values.
The fair value amount assigned to intangible assets is based on an exit price from a market participant’s viewpoint, and utilizes data such as discounted cash
flow analysis and replacement cost models. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected client
retention rates, expected future cash inflows and outflows, discount rates, and estimated useful lives of those intangible assets. ASC 805 also specifies criteria
that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess
purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are
recognized separately from the business combinations and are expensed as incurred.
Results of Operations
The following table sets forth our consolidated results of operations as a percentage of total revenue for the years shown.
Net revenue
Operating expenses:
Direct operating costs
Selling and marketing
General and administrative
Research and development
Change in contingent consideration
Depreciation and amortization
Restructuring and impairment charges
Total operating expenses
Operating profit (loss)
Interest expense - net
Other (expense) income - net
Loss before income taxes
Income tax provision (benefit)
Net loss
Comparison of 2019 and 2018
Net revenue
December 31,
2019
2018
100.0%
63.9%
2.4%
27.8%
1.4%
(0.5)%
4.7%
0.3%
100.0%
0.0%
0.2%
(1.0)%
(1.2)%
0.3%
(1.5)%
100.0%
61.8%
3.2%
32.2%
2.0%
0.1%
5.6%
0.0%
104.9%
(4.9)%
0.5%
1.0%
(4.4)%
(0.3)%
(4.1)%
December 31,
Change
2019
64,438,594 $
2018
50,545,781 $
$
Amount
Percent
13,892,813
27%
Net revenue. Net revenue of $64.4 million for the year ended December 31, 2019 increased by $13.9 million or 27% from revenue of $50.5 million for the year
ended December 31, 2018. Total revenue for the year ended December 31, 2019 included $5.1 million and $29 million from the acquisitions of ETM and Orion,
respectively offset by attrition from customers. Total revenue for the year ended December 31, 2018 included $17.8 million as a result of the Orion acquisition in
July 2018.
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December 31,
Change
$
Direct operating costs
Selling and marketing
General and administrative
Research and development
Change in contingent consideration
Depreciation
Amortization
Resturcturing and impairment charges
Total operating expenses
$
2019
41,186,024 $
1,521,815
17,911,797
870,780
(343,768)
909,157
2,096,449
219,013
64,371,267 $
2018
31,252,535 $
1,611,982
16,264,473
1,029,510
73,271
688,020
2,165,807
-
53,085,598 $
Amount
Percent
9,933,489
(90,167)
1,647,324
(158,730)
(417,039)
221,137
(69,358)
219,013
11,285,669
32%
(6)%
10%
(15)%
(569)%
32%
(3)%
100%
21%
Direct Operating Costs. Direct operating costs of $41.2 million for the year ended December 31, 2019 increased by $9.9 million o r 32% from direct operating
costs of $31.3 million for the year ended December 31, 2018. Salary costs increased b y $4.8 million primarily as a result of the Orion and ETM acquisitions.
Medical supplies increased by $2.7 million as a result of the addition of the managed practices. Outsourcing and other customer processing costs increased by
$752,000, facility costs increased by $968,000 and postage and delivery costs increased by $299,000.
Selling and Marketing Expense. Selling and marketing expense of $1.5 million for the year ended December 31, 2019 decreased by $90,000 or 6% from selling
and marketing expense of $1.6 million for the year ended December 31, 2018.
General and Administrative Expense. General and administrative expense of $17.9 million for the year ended December 31, 2019 increased by $1.6 million or
10% from general and administrative expense of $16.3 million for the year ended December 31, 2018. Salary costs increased by $1.4 million as a result of the
Orion and ETM acquisitions and stock compensation expense.
Research and Development Expense. Research and development expense of $871,000 for the year ended December 31, 2019 decreased by $159,000 or 15%
from research and development expense of $1 million in the prior year.
Contingent Consideration. The changes in contingent consideration of $(344,000) and $73,000 for the years ended December 31, 2019 and 2018, respectively,
relate to changes in the fair value of the contingent consideration. The losses in 2018 resulted primarily from increases in the revenue estimates for acquisitions
made in 2015 and 2016. The gain in 2019 primarily represents a favorable settlement related to previous acquisitions.
Depreciation. Depreciation of $909,000 for the year ended December 31, 2019 increased b y $221,000 or 32% from depreciation of $688,000 for the year ended
December 31, 2018, primarily as a result of additional property and equipment purchases and the property and equipment obtained from the Orion and ETM
acquisitions.
Amortization Expense. Amortization expense of $2.1 million for the year ended December 31, 2019, decreased by $69,000 or 3% from amortization expense of
$2.2 million for the year ended December 31, 2018. This decrease is due to intangibles being amortized using the double declining method resulting in increased
amortization expense in the initial years.
Restructuring and Impairment Charges. Restructuring charges represent the remaining lease costs for a facility no longer used by the Company as the
employees were transferred to another Company facility. Impairment charges represent charges recorded for a leased facility no longer being used by the
Company. The Company is marketing the facility for sublease and recorded the difference between the contractual rent obligation and the estimated sub lease
payments as an impairment charge. There were no similar costs incurred in 2018.
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December 31,
Change
2019
2018
Amount
Percent
Interest income
Interest expense
Other (expense) income - net
Income tax provision (benefit)
$
262,001 $
(382,673)
(625,675)
192,780
100,788 $
(351,168)
494,332
(157,385)
161,213
(31,505)
(1,120,007)
350,165
160%
9%
(227)%
(222)%
Interest Income. Interest income of $262,000 for the year ended December 31, 2019 increased b y $161,000 or 160% from interest income of $101,000 for the
year ended December 31, 2018. Interest income primarily represents interest earned on temporary cash investments and late fees from customers.
Interest Expense. Interest expense of $383,000 for the year ended December 31, 2019 increased by $32,000 or 9% from interest expense of $351,000 for the
year ended December 31, 2018 primarily as a result of the adoption of ASC 842. Interest expense also includes the amortization of deferred financing costs
which was approximately $192,000 during both the years ended December 31, 2019 and 2018.
Other Income (expense) - net. Other expense - net was $626,000 for the year ended December 31, 2019 compared to other income - net of $494,000 for the
year ended December 31, 2018. Included in other income (expense) - net are foreign currency transaction gains (losses) primarily resulting from transactions in
foreign currencies other than the functional currency. These transaction gains and losses are recorded in the consolidated statements of operations related to
the recurring measurement and settlement of such transactions.
Income Tax Provision (Benefit). There was a $193,000 provision for income taxes for the year ended December 31, 2019, compared to the benefit for income
taxes of $157,000 for the year ended December 31, 2018. Included in the tax provision for the year ended December 31, 2019 is an $80,000 deferred income
tax provision.
The current income tax provision for the year ended December 31, 2019 and 2018 was approximately $113,000 and $50,000, respectively and primarily relates
to state minimum taxes and foreign income taxes. The pre-tax loss was $679,000 and $2.3 million for the years ended December 31, 2019 and 2018,
respectively. The Company has incurred losses historically and there is uncertainty regarding future US taxable income, which make realization of a deferred tax
asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance was recorded against all deferred tax assets at December 31, 2019
and 2018.
The Company has recorded goodwill as a result of its acquisitions. Goodwill is not amortized for financial reporting purposes. However, goodwill is tax deductible
and amortized over 15 years for tax purposes. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this
indefinitely lived asset. The resulting deferred tax liability, which is expected to continue to be recorded over the amortization period, will have an indefinite life. As
a result of the Company incurring tax losses for 2019 and 2018 which have an indefinite life under the recent tax reform legislation, the federal deferred tax
liability resulting from the amortization of goodwill was offset against these indefinite federal operating net loss deferred tax assets to the extent allowable. The
remaining deferred tax liability could remain on the Company’s consolidated balance sheet indefinitely unless there is an impairment of goodwill (for financial
reporting purposes) or a portion of the related business is sold.
The Company will maintain a full valuation allowance on deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of
these allowances. While the Company’s plan is to be profitable in the future and begin utilizing these deferred tax assets, the Company currently lacks sufficient
evidence to allow it to release the valuation allowance in 2019 and 2018. Release of the valuation allowance would result in the recognition of certain deferred
tax assets and an income tax benefit in the period of release.
The Company has a federal NOL carry forward of approximately $19.8 million of which approximately $15.8 million will expire between 2034 and 2037 and the
balance has an indefinite life. The Company has state NOL carry forwards of approximately $38.5 million, of which $17.9 million relates to the State of New
Jersey. These NOLs expire between 2034 to 2039.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Liquidity and Capital Resources
During the year ended December 31, 2019, there was positive cash flow from operations of approximately $7.6 million and at year-end the Company had $19.8
million in cash, positive working capital of $19.8 million and no bank debt. During the three months ended December 31, 2019, cash provided by operations was
$2.9 million. The Company has a revolving line of credit with SVB, and, as of December 31, 2019, there was no balance outstanding. During 2018, the
Company sold 1,020,000 shares of Preferred Stock and raised net proceeds of approximately $22.8 million. During the year ended December 31, 2019, the
Company sold 373,000 shares of Preferred Stock and raised $9.6 million in net proceeds after fees and expenses.
The following table summarizes our cash flows for the years presented.
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase in cash
December 31,
2019
7,617,987 $
(4,158,159)
1,422,201
639,622
5,521,651 $
2018
6,812,474
(13,628,249)
17,656,537
(730,511)
10,110,251
$
$
The loss before income taxes was $679,000 for the year ended December 31, 2019, of which $3.0 million was non-cash depreciation and amortization. The loss
before income tax for the year ended December 31, 2018 was $2.3 million, of which $2.9 million was non-cash depreciation and amortization.
Management continues to focus on the Company’s overall profitability, including growing revenue and managing expenses, and expects that these efforts will
continue to enhance our liquidity and financial position. Based on management’s forecasts, the Company will have sufficient liquidity to meet its obligations as
they become due for the next twelve months from the date of financial statements issuance.
We have not been adversely affected by inflation as typically we receive a percentage of the fees our clients collect from our revenue cycle management
services. Additionally, our practice management contracts are based on our costs plus a percentage of operating income. We continue to monitor the impact of
inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. In the event of inflation, we believe that we will
be able to pass on any price increases for fixed rate contracts to our customers, as the prices that we charge are not governed by long-term contracts.
Operating Activities
Cash provided by operating activities wa s $7.6 million and $6.8 million during the years ended December 31, 2019 and 2018, respectively. The decrease in the
net loss of $1.3 million included the following changes in non-cash items:
Increase in depreciation and amortization of $157,000 , increase in stock-based compensation of $752,000, and an increase in interest accretion of $307,000 .
Revenue increased by $13.9 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, and expenses increased by $11.3
million for the same period primarily due to the acquisition of ETM in second quarter of 2019 and Orion in the third quarter of 2018.
Cash generated by the reduction of accounts receivable was $765,000 for the year ended December 31, 2019, compared with a reduction of $1.5 million for the
year ended December 31, 2018. This excludes the acquired accounts receivable as part of the ETM and Orion acquisitions. Accounts payable, accrued
compensation and accrued expenses increased by $1.4 million during the year ended December 31, 2019, compared with a decrease of $2.1 million for the year
ended December 31, 2018.
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Investing Activities
Cash used in investing activities during the year ended December 31, 201 9 was $4.2 million, a decrease of $9.5 million compared to $13.6 million during the
year ended December 31, 2018. The change is due to the Company acquiring Orion for a cash consideration of $12.6 million during 2018, while in 2019 the
Company paid $1.6 million for the acquisition of ETM.
Financing Activities
Cash provided by financing activities during the year ended December 31, 2019 was $1.4 million, compared to $17.7 million in the year ended December 31,
2018. There was also $1.4 million of payments to settle the tax withholding obligations. Cash provided by financing activities during 2019 includes $9.6 million of
net proceeds after fees and expenses from issuing 373,030 shares of Preferred Stock, offset by $430,000 of repayments for debt obligations, and $6.1 million of
Preferred Stock dividends. Cash provided by financing activities during 2018 includes $22.8 million of net proceeds from issuing 1,020,000 shares of Preferred
Stock, offset by $464,000 of repayments for debt obligations, and $4.1 million of Preferred Stock dividends. In 2018, there were $333,000 of payments to settle
tax withholding obligations. There were no borrowings under the revolving line of credit for the year ended December 31, 2019 and no net borrowings for the
year ended December 31, 2018.
Contractual Obligations and Commitments
We have contractual obligations under our line of credit. We also maintain operating leases for property and certain office equipment. We were in compliance
with all SVB covenants in 2019, except for one instance where a waiver was obtained in conjunction with the acquisition of ETM.
The following table presents certain payments due by the Company under our long-term contractual obligations with minimum firm commitments as of December
31, 2019. In addition, based on the interest-bearing obligations as of December 31, 2019, we expect interest expense to be approximately $11,000 during the
years below. This excludes the amortization of bank financing costs which is recorded as interest expense.
Notes payable
Leases
Total
Off-Balance Sheet Arrangements
Year Ending December 31,
2021
2022
2023
2020
283,675 $
$
63,410 $
1,688,772
1,289,327
$ 1,972,447 $ 1,352,737 $
15,171 $
596,020
611,191 $
4,694 $
150,827
155,521 $
2024
- $
Total
366,950
4,598
3,729,544
4,598 $ 4,096,494
As of December 31, 2019, and 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special-purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. Other than our operating leases for office space, computer equipment and other property, we do not engage in off-
balance sheet financing arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by 17 C.F.R. 229.10(f)(1) and are not required to provide information under this item, pursuant to Item 305(e) of
Regulation S-K.
Item 8. Financial Statements and Supplementary Data
See “Index to Consolidated Financial Statements” which appears on page F-1 of this Annual Report on Form 10-K.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, based on the 2013 Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), evaluated the effectiveness of our disclosure controls and procedures as of
December 31, 2019 as required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act. The term “disclosure controls and procedures,” as defined in Rules 13a-
15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal
executive and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures, as of December 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and
15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance
with authorizations of our management; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on the financial statements.
Management is required to base its assessment on the effectiveness of our internal control over financial reporting on a suitable, recognized control framework.
Management has utilized the criteria established in COSO to evaluate the effectiveness of internal control over financial reporting.
Our management has performed its assessment according to the guidelines established by COSO. Based on the assessment, management has concluded that
our system of internal control over financial reporting, as of December 31, 2019, is effective.
Because of its inherent limitations, our internal controls over financial reporting provide reasonable, not absolute, assurance that the financial statements and
footnotes thereto are free of material error. In addition, no internal control structure can provide absolute assurance that all instances of fraud have been
detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the SEC that permit the
Company to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31,
2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On February 28, 2020, the Company and its wholly owned subsidiaries MTBC Acquisition Corp., MTBC Health, Inc., MTBC Practice Management Corp., MTBC-
Med, Inc., and CareCloud Corporation entered into a Joinder and Third Loan Modification Agreement (the “Joinder Agreement”) with SVB, whereby CareCloud
and MTBC-Med became parties to the Company’s credit agreement with SVB.
The foregoing description of the Joinder Agreement does not purport to be complete and is qualified entirely by reference to the complete text of such document,
a copy of which is attached as an exhibit to this Form 10-K and is incorporated herein by reference.
The above description has been included to provide investors and security holders with information regarding the terms thereof. Investors and security holders
are not third-party beneficiaries under the credit agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as
characterizations of the actual state of facts or condition thereto or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject
matter of representations and warranties may change after the date of the loan agreement, which subsequent information may or may not be fully reflected in
the Company’s disclosures.”
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item will be included in our definitive Proxy Statement for the 2020 Meeting of Shareholders which will be filed within 120 days of the
end of our fiscal year ended December 31, 2019 (“2020 Proxy Statement”) and is incorporated herein by reference.
Item 11. Executive Compensation
Information required by this item will be included in the 2020 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item will be included in the 2020 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be included in the 2020 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information required by this item will be included in our 2020 Proxy Statement and is incorporated herein by reference.
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1)
Financial Statements
Consolidated Balance Sheets as of December 31, 2019 and 2018
(i)
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018
(ii)
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018
(iii)
(iv) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019 and 2018
(v)
(vi) Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
(2)
Financial Statement Schedules
There are no Financial Statement Schedules filed as part of this Annual Report on Form 10-K, as the required information is not applicable or is
included in the Notes to Consolidated Financial Statements.
(b) Exhibit Index:
Exhibit
Number
Description
2.1
2.2
2.3
2.4
2.5
2.6
2.7
Assignment Agreement dated October 3, 2016, by and between the Company, The Prudential Insurance Company of America, and Prudential
Retirement Insurance and Annuity Company (filed as Exhibit 10.1 to the Company’s Form 8-K filed on October 5, 2016, and incorporated herein
by reference).
Strict Foreclosure Agreement dated October 3, 2016, by and between MTBC Acquisition, Corp., MediGain, LLC and Millennium Practice
Management Associates, LLC (filed as Exhibit 10.2 to the Company’s Form 8-K filed on October 5, 2016, and incorporated herein by reference).
Transition Services Agreement dated October 3, 2016, by and between MTBC Acquisition, Corp., MediGain, LLC and Millennium Practice
Management Associates, LLC (filed as Exhibit 10.3 to the Company’s Form 8-K filed on October 5, 2016, and incorporated herein by reference).
First Amendment to Assignment Agreement dated January 3, 2017, by and between the Company, The Prudential Insurance Company of
America, and Prudential Retirement Insurance and Annuity Company (filed as Exhibit 2.1 to the Company’s Form 8-K filed on January 6, 2017,
and incorporated herein by reference).
Second Amendment to Assignment Agreement dated January 23, 2017, by and between the Company, The Prudential Insurance Company of
America, and Prudential Retirement Insurance and Annuity Company (filed as Exhibit 2.1 to the Company’s Form 8-K filed on January 24, 2017,
and incorporated herein by reference).
Asset Purchase Agreement dated June 25, 2018, by and between MTBC, and Orion Healthcorp, Inc. (filed as Exhibit 10.1 to the Company’s Form
8-K filed on July 2, 2018, and incorporated herein by reference).
Transition Services Agreement dated June 25, 2018, by and between MTBC, and Orion Healthcorp, Inc. (filed as Exhibit 2.29 to the Company’s
Form S-1 filed on September 25, 2018, and incorporated herein by reference).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2.8
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
Agreement and Plan of Merger by and among MTBC, Inc., MTBC Merger Sub, Inc., CareCloud Corporation and Runway Growth Credit Fund Inc.,
as the Sellers’ Representative dated January 8, 2020 (filed as Exhibit 2.1 to the Company’s Form 8-K filed on January 8, 2020, and incorporated
herein by reference).
Amended and Restated Certificate of Incorporation of the Company dated April 4, 2014 (filed as Exhibit 3.1 to the Company’s Form S-1 filed on
September 25, 2018, and incorporated herein by reference).
Certificate of Amendment of Certificate of Incorporation of the Company dated June 28, 2016 (filed as Exhibit 3.2 to the Company’s Form S-1 filed
on September 25, 2018, and incorporated herein by reference).
Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company dated June 18, 2018 (filed as Exhibit 3.6 to the
Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference).
Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company dated February 6, 2019 (filed as Exhibit 3.1 to
the Company’s Form 8-K filed on February 7, 2019 and incorporated herein by reference).
Certificate of Amendment of Amended and Restated Certificate of Incorporation of MTBC, Inc. dated June 25, 2019 (filed as Exhibit 3.1 to the
Company’s Form 8-K filed on June 25, 2019 and incorporated herein by reference).
Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable Perpetual Preferred Stock
dated July 6, 2016 (filed as Exhibit 3.3 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference).
First Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable
Perpetual Preferred Stock dated September 15, 2017 (filed as Exhibit 3.4 to the Company’s Form S-1 filed on September 25, 2018, and
incorporated herein by reference).
Second Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable
Perpetual Preferred Stock dated March 23, 2018 (filed as Exhibit 3.5 to the Company’s Form S-1 filed on September 25, 2018, and incorporated
herein by reference).
Third Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable
Perpetual Preferred Stock dated September 25, 2018 (filed as Exhibit 3.7 to the Company’s Form S-1 filed on September 25, 2018, and
incorporated herein by reference).
3.10
Fourth Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable
Perpetual Preferred Stock (filed as Exhibit 3.1 to the Company’s Form 8-K filed on January 25, 2020 and incorporated herein by reference).
3.11
Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to the Company’s Amendment No. 1 to Form S-1 filed on April 7, 2014, and
incorporated herein by reference).
4.1
4.2
Form of common stock certificate of the Company (filed as Exhibit 4.1 to Amendment No. 2 to the Company’s Form S-1 filed on May 7, 2014, and
incorporated herein by reference).
Form of stock certificate of the 11% Series A Cumulative Redeemable Perpetual Preferred Stock (filed as Exhibit 4.2 to Amendment No. 2 to the
Company’s Form S-1 on October 19, 2015 and incorporated herein by reference).
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.3
4.4
4.5
4.6
Warrant to Purchase Stock dated as of October 13, 2017 issued by the Company to Silicon Valley Bank (filed as Exhibit 10.2 to the Company’s
Form 8-K filed on October 16, 2017, and incorporated herein by reference).
Warrant to Purchase Stock issued by the Company on September 20, 2018 to Silicon Valley Bank (filed as Exhibit 10.2 to the Company’s Form 8-
K filed on September 20, 2018, and incorporated herein by reference).
Warrant to Purchase Stock issued by the Company on January 8, 2020 to Runway Growth Credit Fund Inc.
Warrant to Purchase Stock issued by the Company on January 8, 2020 to Runway Growth Credit Fund Inc.
10.1
Form of Indemnification Agreement between the Company and each of its directors and executive officers (filed as Exhibit 10.1 to Amendment No.
2 to the Company’s Form S-1 filed on May 7, 2014, and incorporated herein by reference).
10.2 *
Amended and Restated Equity Incentive Plan of the Company (filed as Appendix B to the Company’s Proxy Statement on Schedule 14A filed on
February 10, 2017, and incorporated herein by reference).
10.3 *
First Amendment to the Amended and Restated Equity Incentive Plan of the Company (filed as Exhibit 10.16 to the Company’s Form 10-Q filed
on August 8, 2018, and incorporated herein by reference).
10.4 *
Form of Restricted Stock Unit Agreement under Amended and Restated Equity Incentive Plan (filed as Exhibit 10.3 to Amendment No. 1 to the
Company’s Form S-1 filed on April 7, 2014, and incorporated herein by reference).
10.5 *
Form of Restricted Stock Award Agreement under the Amended and Restated Equity Incentive Plan (filed as Exhibit 10.12 to the Company’s
Form 10-K filed on March 24, 2016, and incorporated herein by reference).
10.6
Lease between Company and Mahmud Haq with respect to offices located at 7 Clyde Road, Somerset, NJ 08873 (filed as Exhibit 10.4 to the
Company’s Form S-1 filed on December 20, 2013, and incorporated herein by reference).
10.7 *
Employment Agreement between the Company and Mahmud Haq dated as of May 1, 2018 (filed as Exhibit 10.1 to the Company’s Form 8-K filed
on May 7, 2018, and incorporated herein by reference).
10.8 *
Employment Agreement between the Company and Stephen Snyder dated as of May 1, 2018 (filed as Exhibit 10.2 to the Company’s Form 8-K
filed on May 7, 2018, and incorporated herein by reference).
10.9 *
Employment Agreement between the Company and A. Hadi Chaudhry dated as of May 1, 2018 (filed as Exhibit 10.3 to the Company’s Form 8-K
filed on May 7, 2018, and incorporated herein by reference).
10.10 *
Employment Agreement between the Company and Bill Korn dated as of May 1, 2018 (filed as Exhibit 10.4 to the Company’s Form 8-K filed on
May 7, 2018, and incorporated herein by reference).
10.11
Loan and Security Agreement dated as of October 13, 2017 between Medical Transcription Billing, Corp., MTBC Acquisition, Corp. and Silicon
Valley Bank (filed as Exhibit 10.1 to the Company’s Form 8-K filed on October 16, 2017, and incorporated herein by reference).
10.12
Joinder and First Loan Modification Agreement dated as of September 20, 2018 between Medical Transcription Billing, Corp., MTBC Acquisition,
Corp., MTBC Health, Inc. and MTBC Practice Management, Corp. and Silicon Valley Bank (filed as Exhibit 10.1 to the Company’s Form 8-K filed
on September 20, 2018, and incorporated herein by reference).
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.13
Asset Purchase Agreement dated March 27, 2019, by and between MTBC-Med, Inc., and Etransmedia Technology, Inc., et. al. (filed as Exhibit
10.1 to the Company’s Form 8-K filed on March 28, 2019, and incorporated herein by reference).
10.14
Amended and Restated Asset Purchase Agreement dated April 3, 2019, by and between MTBC-Med, Inc., and Etransmedia Technology, Inc., et.
al. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on April 4, 2019, and incorporated herein by reference).
10.15
Second Loan Modification Agreement dated November 15, 2019, by and between the Company and SVB (filed as Exhibit 1.1 to the Company’s
Form 8-K filed on November 21, 2019, and incorporated herein by reference).
10.16
Joinder and Third Loan Modification Agreement dated as of February 28, 2020 between MTBC, Inc., MTBC Acquisition Corp., MTBC Health, Inc.
and MTBC Practice Management Corp., MTBC-Med, Inc., CareCloud Corporation and Silicon Valley Bank.
10.17
Escrow Agreement dated January 8, 2020 by and among MTBC, Inc., Runway Growth Credit Fund Inc., and TD Bank
21.1
23.1
31.1
List of subsidiaries.
Consent of Grant Thornton LLP.
Certification of the Company’s Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), of the Securities Exchange Act of
1934, as amended.
31.2
Certification of the Company’s Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), of the Securities Exchange Act of
1934, as amended.
32.1
Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2
Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS
XBRL Instance
101.SCH XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
* Indicates management contract or compensatory plan or arrangement.
The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise
subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange
Act.
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Signatures
MTBC, Inc.
By:
/s/ Stephen Snyder
Stephen Snyder
Chief Executive Officer
Date: February 28, 2020
By:
/s/ Bill Korn
Bill Korn
Chief Financial Officer
Date: February 28, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature
/s/ Mahmud Haq
Mahmud Haq
/s/ Stephen Snyder
Stephen Snyder
/s/ Bill Korn
Bill Korn
/s/ Norman Roth
Norman Roth
/s/ A. Hadi Chaudhry
A. Hadi Chaudhry
/s/ Anne Busquet
Anne Busquet
/s/ Howard L. Clark, Jr.
Howard L. Clark, Jr.
/s/ John N. Daly
John N. Daly
/s/ Cameron Munter
Cameron Munter
Title
Date
Executive Chairman and Director
Principal Executive Officer and Director
Principal Financial Officer
Principal Accounting Officer
President and Director
Director
Director
Director
Director
56
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
MTBC, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of MTBC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31,
2019 and 2018, the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity and cash flows for each of the two years
in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of
America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2015.
Iselin, NJ
February 28, 2020
F-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
MTBC, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2019 AND 2018
ASSETS
CURRENT ASSETS:
Cash
Accounts receivable - net of allowance for doubtful accounts of $256,000 and $189,000 at
December 31, 2019 and December 31, 2018, respectively
Contract asset
Inventory
Current assets - related party
Prepaid expenses and other current assets
Total current assets
Property and equipment - net
Operating lease right-of-use assets
Intangible assets - net
Goodwill
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued compensation
Accrued expenses
Deferred rent (current portion)
Operating lease liability (current portion)
Deferred revenue (current portion)
Accrued liability to related party
Notes payable (current portion)
Contingent consideration
Dividend payable
Total current liabilities
Notes payable
Deferred rent
Operating lease liability
Deferred revenue
Deferred tax liability
Total liabilities
COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDERS’ EQUITY:
Preferred stock, $0.001 par value - authorized 7,000,000 and 4,000,000 shares at December 31,
2019 and December 31, 2018, respectively; issued and outstanding 2,539,325 and 2,136,289
shares at December 31, 2019 and December 31, 2018, respectively
Common stock, $0.001 par value - authorized 29,000,000 and 19,000,000 shares at December
31, 2019 and December 31, 2018, respectively; issued 12,978,485 and 12,570,557 shares at
December 31, 2019 and December 31, 2018, respectively; 12,237,686 and 11,829,758 shares
outstanding at December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Less: 740,799 common shares held in treasury, at cost at December 31, 2019 and December
31, 2018
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements.
F-3
December 31, 2019
December 31, 2018
$
19,994,134
$
14,472,483
$
$
6,995,343
2,385,334
491,088
13,200
1,123,036
31,002,135
2,907,516
3,526,315
5,977,225
12,633,696
356,578
56,403,465
3,490,834
1,836,309
2,111,515
-
1,688,772
20,277
663
283,675
-
1,745,791
11,177,836
83,275
-
2,040,772
18,745
244,512
13,565,140
7,331,474
2,608,631
444,437
25,203
1,191,445
26,073,673
1,832,187
-
6,634,003
12,593,795
489,703
47,623,361
2,438,267
1,731,063
1,589,009
90,657
-
25,355
10,663
277,776
526,432
1,468,724
8,157,946
222,400
189,366
-
18,949
164,346
8,753,007
2,539
2,136
12,979
69,403,366
(25,075,545)
(843,014)
(662,000)
42,838,325
56,403,465
$
12,571
65,142,460
(24,203,745)
(1,421,068)
(662,000)
38,870,354
47,623,361
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
MTBC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
NET REVENUE
OPERATING EXPENSES:
Direct operating costs
Selling and marketing
General and administrative
Research and development
Change in contingent consideration
Depreciation and amortization
Restructuring and impairment charges
Total operating expenses
OPERATING INCOME (LOSS)
OTHER:
Interest income
Interest expense
Other (expense) income - net
LOSS BEFORE PROVISION FOR INCOME TAXES
Income tax provision (benefit)
NET LOSS
Preferred stock dividend
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
Net loss per common share: basic and diluted
Weighted-average common shares used to compute basic and diluted loss per share
See notes to consolidated financial statements.
F-4
December 31,
2019
2018
$
64,438,594
$
50,545,781
41,186,024
1,521,815
17,911,797
870,780
(343,768)
3,005,606
219,013
64,371,267
67,327
262,001
(382,673)
(625,675)
(679,020)
192,780
(871,800)
6,386,154
(7,257,954)
(0.60)
12,087,947
$
$
$
31,252,535
1,611,982
16,264,473
1,029,510
73,271
2,853,827
-
53,085,598
(2,539,817)
100,788
(351,168)
494,332
(2,295,865)
(157,385)
(2,138,480)
4,823,987
(6,962,467)
(0.59)
11,721,232
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
MTBC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
NET LOSS
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Foreign currency translation adjustment (a)
COMPREHENSIVE LOSS
2019
2018
(871,800)
$
(2,138,480)
578,054
(293,746)
$
(699,998)
(2,838,478)
$
$
(a) No tax effect has been recorded as the Company recorded a valuation allowance against the tax benefit from its foreign currency translation adjustments.
See notes to consolidated financial statements.
F-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
MTBC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
Preferred Stock
Shares Amount
Common Stock
Additional
Paid-in
Accumulated
Other
Accumulated
Comprehensive
Treasury
(Common)
Total
Shareholders’
Shares
Amount
Capital
Deficit
Loss
Stock
Equity
1,086,739 $ 1,087 12,271,390 $ 12,272 $ 45,129,517 $ (23,509,386) $
(721,070) $ (662,000) $
20,250,420
-
-
-
-
-
1,444,121
-
-
1,444,121
1,086,739 $ 1,087 12,271,390 $ 12,272 $ 45,129,517 $ (22,065,265) $
(2,138,480)
-
-
-
-
-
(721,070) $ (662,000) $
-
-
21,694,541
(2,138,480)
-
-
-
-
-
-
(699,998)
-
(699,998)
29,550
29
299,167
299
(328)
-
-
-
-
101,989
-
-
-
- 2,264,223
-
-
-
-
(345,500)
1,020,000 1,020
-
-
-
-
- 22,816,546
- (4,823,987)
-
-
-
-
-
-
-
-
-
-
-
101,989
-
-
2,264,223
-
-
(345,500)
-
-
-
22,817,566
-
(4,823,987)
2,136,289 $ 2,136 12,570,557 $ 12,571 $ 65,142,460 $ (24,203,745) $
(1,421,068) $ (662,000) $
38,870,354
2,136,289 $ 2,136 12,570,557 $ 12,571 $ 65,142,460 $ (24,203,745) $
(871,800)
-
-
-
-
-
(1,421,068) $ (662,000) $
-
-
38,870,354
(871,800)
-
-
-
-
-
-
578,054
-
578,054
30,006
30
407,928
408
(438)
373,030
373
-
- 9,585,769
-
-
-
- 1,920,533
-
-
-
-
-
-
-
(858,804)
- (6,386,154)
-
-
-
-
-
-
-
-
-
-
9,586,142
-
-
1,920,533
-
-
-
(858,804)
-
(6,386,154)
2,539,325 $ 2,539 12,978,485 $ 12,979 $ 69,403,366 $ (25,075,545) $
(843,014) $ (662,000) $
42,838,325
Balance - December
31, 2017 before
adoption of ASC 606
Cumulative effect of
adopting ASC 606
Balance - January 1,
2018 after adoption
Net loss
Foreign currency
translation adjustment
Issuance of stock under
the equity incentive
plan
Common stock
warrants issued
Stock-based
compensation, net of
cash settlements
Tax withholding
obligations on stock
issued to employees
Issuance of preferred
stock, net of fees and
expenses
Preferred stock
dividends
Balance - December
31, 2018
Balance - January 1,
2019
Net loss
Foreign currency
translation adjustment
Issuance of stock under
the equity incentive
plan
Issuance of preferred
stock, net of fees and
expenses
Stock-based
compensation, net of
cash settlements
Tax withholding
obligations on stock
issued to employees
Preferred stock
dividends
Balance - December
31, 2019
For all periods presented, the preferred stock dividends were paid monthly at the rate of $2.75 per share per annum.
See notes to consolidated financial statements.
F-6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2019
2018
$
(871,800)
$
(2,138,480)
3,070,497
-
1,888,443
(5,282)
118,429
80,166
827,121
497,598
(38,388)
3,215,661
(343,768)
765,079
362,466
(46,651)
(529,345)
(1,372,239)
7,617,987
(2,558,159)
(1,600,000)
(4,158,159)
9,586,142
(6,109,087)
(1,391,746)
-
-
(430,444)
(182,664)
(50,000)
1,422,201
639,622
5,521,651
14,472,483
19,994,134
24,909
1,745,791
301,359
-
119,265
67,273
$
$
$
$
$
$
$
2,913,866
(61,058)
-
(46,415)
723,611
(207,726)
(434,806)
191,065
-
2,463,599
73,271
1,479,297
(404,598)
(137,159)
248,347
2,149,660
6,812,474
(1,028,249)
(12,600,000)
(13,628,249)
22,817,566
(4,102,410)
(333,007)
11,276,862
(11,276,862)
(464,167)
(150,250)
(111,195)
17,656,537
(730,511)
10,110,251
4,362,232
14,472,483
90,284
1,468,724
271,248
101,989
42,057
64,669
$
$
$
$
$
$
$
MTBC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Deferred rent
Lease amortization
Deferred revenue
Provision for doubtful accounts
Provision (benefit) for deferred income taxes
Foreign exchange loss (gain)
Interest accretion
Gain on sale of assets
Stock-based compensation expense
Change in contingent consideration
Changes in operating assets and liabilities, net of businesses acquired:
Accounts receivable
Contract asset
Inventory
Other assets
Accounts payable and other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Capital expenditures and capitalized software, net
Cash paid for acquisitions
Net cash used in investing activities
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net of fees and expenses
Preferred stock dividends paid
Settlement of tax withholding obligations on stock issued to employees
Proceeds from line of credit
Repayments of line of credit
Repayments of notes payable, net
Contingent consideration payments
Other financing activities
Net cash provided by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET INCREASE IN CASH
CASH - beginning of the period
CASH - end of the period
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Vehicle financing obtained
Dividends declared, not paid
Purchase of prepaid insurance through assumption of note
Warrants issued
SUPPLEMENTAL INFORMATION - Cash paid during the period for:
Income taxes
Interest
See notes to consolidated financial statements.
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
MTBC, INC.
1. ORGANIZATION AND BUSINESS
MTBC, Inc., (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, comprehensive practice
management services, 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 client support teams throughout the U.S., in Pakistan and in 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 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, MTBC formed MTBC Health, Inc. (“MHI”) and MTBC Practice Management,
Corp. (“MPM”), each a Delaware corporation in connection MTBC’s acquisition of substantially all of the revenue cycle management, practice management and
group purchasing organization assets of Orion Healthcorp, Inc. and 13 of its affiliates (together, “Orion”). MHI is a direct, wholly owned subsidiary of MTBC, and
was formed to own and operate the revenue cycle management and group purchasing organization businesses acquired from Orion. MPM is a wholly owned
subsidiary of MHI and was formed to own and operate the practice management business acquired from Orion.
The Company’s previous subsidiary in Poland was liquated in 2018. The operations in the Indian subsidiary have been terminated and the subsidiary is being
liquidated.
In April 2019, MTBC formed MTBC-Med, Inc. (“MED”), a Delaware corporation in connection with MTBC’s acquisition of substantially all of the revenue cycle
management assets of Etransmedia Technology, Inc. (“ETM”). (See Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and include the accounts of MTBC, its wholly-owned subsidiaries; MAC (since October 3, 2016), MHI (since
May 2018), MPM (since May 2018), MED (since April 1, 2019) its majority-owned subsidiary MTBC Pvt. Ltd, MTBC-MED (since April 2019) and since October 3,
2016, the operating results and financial condition of the acquired subsidiary in Sri Lanka. The non-controlling interest of MTBC Pvt. Ltd. is inconsequential to the
consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting — The Company views its operations as comprising two operating segments, Healthcare IT and Practice Management. The chief operating
decision maker (“CODM”) monitors and reviews financial information at these segment levels for assessing operating results and the allocation of resources.
Use of Estimates — The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to: (1) impairment of long-lived
assets, (2) depreciable lives of assets, (3) allowance for doubtful accounts, (4) contingent consideration, (5) estimates of variable consideration related to the
contract asset, (6) fair value of identifiable purchased tangible and intangible assets, including determination of expected customer life, (7) stock-based
compensation, and (8) estimating lease terms and incremental borrowing rates. Actual results could significantly differ from those estimates.
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Revenue Recognition — On January 1, 2018, the Company adopted Accounting Standards Codification, “ Revenue from Contracts with Customers ,” (“ASC
606”) using the modified retrospective method as applied to certain medical billing services that were in process as of January 1, 2018. As a result, financial
information for reporting periods beginning on or after January 1, 2018, are presented in accordance with ASC 606. Comparative financial information for
reporting periods beginning prior to January 1, 2018, have not been adjusted and continue to be reported in accordance with the Company’s revenue recognition
policies prior to the adoption of ASC 606. The Company recorded a cumulative adjustment related to the adoption of ASC 606. The primary impact of adopting
ASC 606 was to accelerate the timing of revenue on certain medical billing services provided to customers. Beginning January 1, 2018, revenue is recognized as
the performance obligations are satisfied over time.
We derive revenue from seven primary sources: (1) revenue cycle management services, (2) professional services, (3) ancillary services, (4) group purchasing
services, (5) printing and mailing services, (6) clearinghouse and EDI (electronic data interchange) services and (7) practice management services. All of our
revenue arrangements are based on contracts with customers. Most of our contracts with customers contain single performance obligations, although certain
contracts do contain multiple performance obligations where we perform more than one service for the same customer. We account for individual performance
obligations separately if they are distinct within the context of the contract. For contracts where we provide multiple services such as where we perform multiple
ancillary services, each service represents its own performance obligation. Selling or transaction prices are based on the contractual price for the service.
A five-step approach is applied in the recognition of revenue under ASC 606: (1) identify the contract with a customer, (2) identify the performance obligations in
the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when
we satisfy a performance obligation.
Although we believe that our approach to estimates and judgments is reasonable, actual results could differ, and we may be exposed to increases or decreases
in revenue that could be material. Our estimates of variable consideration may prove to be inaccurate, in which case we may have understated or overstated the
revenue recognized in a reporting period. The amount of variable consideration recognized to date that remains subject to estimation is included within the
contract asset within the consolidated balance sheet.
Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of
control of the services to the customer. Since payment terms are less than a year, we have elected the practical expedient and do not assess whether a
customer contract has a significant financing component.
The Company’s revenue arrangements generally do not include a general right of refund for services provided (See Note 9, Revenue for additional information).
Direct Operating Costs — Direct operating costs consist primarily of salaries and benefits related to personnel who provide services to clients and at our
managed medical practices, claims processing costs, medical supplies at our managed practices and other direct costs related to the Company’s services. Costs
associated with the implementation of new clients are expensed as incurred. The reported amounts of direct operating costs include allocated amounts for rent
expense and overhead costs.
Selling and Marketing Expenses — Selling and marketing expenses consist primarily of compensation and benefits, travel and advertising expenses and are
expensed as incurred. The Company incurred approximately $810,000 and $950,000 of advertising costs for the years ended December 31, 2019 and 2018,
respectively.
Research and Development Expenses — Research and development expenses consist primarily of personnel-related costs incurred performing market
research, analyzing proposed products and developing new products.
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Internal-Use Software Costs — The Company capitalizes certain development costs incurred in connection with its internal-use software. Costs incurred in the
preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are
capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The
Company also capitalizes costs related to specific upgrades and enhancements when it is probable that the expenditures will result in additional functionality.
Capitalized costs are recorded as part of intangible assets. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a
straight line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for
impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. During the years ended December 31,
2019 and 2018, the Company capitalized approximately $538,000 and $62,000, respectively, of salaries and payroll-related costs of employees and consultants
who devoted time to the development of customer related projects.
Accounts Receivable — Accounts receivable are stated at their net realizable value. Accounts receivable are presented on the consolidated balance sheet net
of an allowance for doubtful accounts, which is established based on reviews of the accounts receivable aging, an assessment of the customers’ history and
current creditworthiness and the probability of collection. Accounts are written off when it is determined that collection of the outstanding balance is no longer
probable.
The movement in the allowance for doubtful accounts for the years ended December 31, 2019 and 2018 was as follows:
Beginning balance
Provision
Recoveries
Write-offs
Ending balance
December 31, 2019
December 31, 2018
$
$
189,000 $
118,000
316,000
(367,000)
256,000 $
185,000
724,000
-
(720,000)
189,000
Inventory — Inventory is stated at the lower of cost or market using the first-in, first out method of inventory valuation accounting. Inventory consists of vaccines
used at the managed practices and only includes the cost of the vaccines themselves.
Property and Equipment — Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line basis
over the estimated useful lives of the assets ranging from three to five years. Ordinary maintenance and repairs are expensed as incurred. Depreciation for
computers is calculated over three years, while remaining assets (except leasehold improvements) are depreciated over five years. The Company amortizes
leasehold improvements over the lesser of the lease term or the remaining economic life of those assets. Generally, the lease term is the base lease term plus
certain renewal option periods for which renewal is reasonably certain and for which failure to exercise the renewal option would result in an economic penalty to
the Company.
Intangible Assets — Intangible assets include customer relationships, covenants not-to-compete acquired in connection with acquisitions, software purchase
and development costs and trademarks acquired. Amortization for intangible assets related to revenue cycle management is recorded primarily using the double
declining balance method over three to four years. Amortization for intangible assets related to the group purchasing organization and practice management is
recorded on a straight line basis over four and twelve years, respectively.
Evaluation of Long-Lived Assets — The Company reviews its long-lived assets for impairment whenever changes in circumstances indicate that the carrying
value of an asset may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset group, the
Company will recognize an impairment loss based on the fair value of the asset.
There was no impairment of internal-use software costs, intangible assets or property and equipment during the years ended December 31, 2019 and 2018,
other than the impairment recorded on one right-of-use (“ROU”) asset of approximately $170,000 for the year ended December 31, 2019.
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Goodwill — Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. The Company tests
goodwill for impairment annually as of October 31st, referred to as the annual test date. Conditions that could trigger a more frequent impairment assessment
include, but are not limited to, a significant adverse change to the Company in certain agreements, significant underperformance relative to historical or
projected future operating results, loss of customer relationships, an economic downturn in customers’ industries, or increased competition. Impairment testing
for goodwill is performed at the reporting-unit level. The Company has determined that its business consists of two operating segments and two reporting units.
No impairment charges were recorded during the years ended December 31, 2019 or 2018.
Treasury Stock — Treasury stock is recorded at cost and represents shares repurchased by the Company. No shares were repurchased or issued from
treasury stock during the years ended December 31, 2019 and 2018.
Stock-Based Compensation — The Company recognizes compensation for all share-based payments granted based on the grant date fair value.
Compensation expense is generally recognized on a straight-line basis over the vesting period. The Company does not estimate forfeitures in recognizing the
expense for share-based payments, as historical forfeiture rates have not been significant. For restricted stock units (“RSUs”) classified as equity, the market
price of our common stock on the date of grant is used in recording the fair value of the award. For RSUs classified as a liability, the earned amount is marked to
market based on the end-of-period common stock price.
Business Combinations — The Company accounts for business combinations under the provisions of ASC 805, Business Combinations, which requires that
the acquisition method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at
their respective fair values. ASC 805 also specifies criteria that intangible assets acquired in a business combination must be recognized and reported apart from
goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination.
Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. If the business combination provides for
contingent consideration, the Company records the contingent consideration at fair value at the acquisition date with changes in the fair value recorded through
earnings.
Acquisition costs are expensed as incurred. During the years ended December 31, 2019 and 2018, the Company incurred approximately $125,000 and
$245,000 of professional fees related to the acquisitions discussed in Note 3, which are included in general and administrative expenses in the consolidated
statements of operations. Acquisition costs for the CareCloud acquisition discussed in Note 20 were approximately $129,000 for the year ended December 31,
2019 and are included in general and administrative expenses.
Income Taxes — The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax
assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in
operations in the period that includes the enactment date.
The Company records net deferred tax assets to the extent that these assets will more likely than not be realized. All available positive and negative evidence is
considered in making such a determination, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning
strategies, and results of recent operations. A valuation allowance would be recorded to reduce deferred income tax assets when it is determined that it is more
likely than not that the Company would not be able to realize its deferred income tax assets in the future in excess of their net recorded amount.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the
tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition
threshold, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related
tax authority. At December 31, 2019 and 2018, the Company did not have any uncertain tax positions that required recognition. Interest and penalties related to
uncertain tax positions are recognized in income tax expense.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
For the years ended December 31, 2019 and 2018, the Company did not recognize any penalties or interest related to unrecognized tax benefits in its
consolidated financial statements.
Dividends — Dividends are recorded when declared by the Company’s Board of Directors. The Board of Directors has declared monthly dividends on the
Series A Preferred Stock (“Preferred Stock”) through February 2020. Preferred Stock dividends are charged against paid in capital because the Company does
not have sufficient retained earnings. The Company is prohibited from paying dividends on its common stock without the prior written consent of its lender,
Silicon Valley Bank (“SVB”).
Deferred Rent — Deferred rent at December 31, 2018, consisted of rent escalation payment terms related to the Company’s operating leases for its facilities.
Deferred rent represented the difference between actual operating lease payments due and straight-line rent expense, which is recorded by the Company over
the term of the lease, including any construction period. The excess of the difference between actual operating lease payments due and straight-line rent
expense is recorded as a deferred credit in the early periods of the lease when cash payments are generally lower than straight-line rent expense, and is
reduced in the later periods of the lease when payments begin to exceed the straight-line expense. As a result of the Company’s adoption of ASC 842 as of
January 1, 2019, deferred rent is no longer recorded on the consolidated balance sheet.
Deferred Revenue — Deferred revenue primarily consists of payments received in advance of the revenue recognition criteria being met. Deferred revenue
includes certain deferred implementation services fees that are recognized as revenue ratably over the longer of the life of the agreement or the estimated
expected customer life, which is currently estimated to be three years. Deferred revenue that will be recognized during the succeeding 12-month period is
recorded as current deferred revenue and the remaining portion is recorded as non-current. At the time of customer termination, any unrecognized service fees
associated with implementation services are recognized as revenue.
Fair Value Measurements — ASC 820, Fair Value Measurement, requires the disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that value. The Company follows a fair value measurement hierarchy to measure financial
instruments. The fair value of the Company’s financial instruments is measured using inputs from the three levels of the fair value hierarchy as follows:
Level 1 — Inputs are unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access at the
measurement date.
Level 2 — Inputs are directly or indirectly observable, which include quoted prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability
and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 — Inputs are unobservable inputs that are used to measure fair value to the extent observable inputs are not available.
The Company’s contingent consideration is a Level 3 liability and is measured at fair value at the end of each reporting period. The Company has certain
financial instruments that are not measured at fair value on a recurring basis. These financial instruments are subject to fair value adjustments only in certain
circumstances and include cash, accounts receivable, accounts payable and accrued expenses, borrowings under term loans and line of credit, and notes
payable. Due to the short term nature of these financial instruments and that the borrowings, with the exception of the payable to the managed practices (see
Note 8) bear interest at prevailing market rates, the carrying value approximates the fair value.
F-12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Foreign Currency Translation — The financial statements of the Company’s foreign subsidiaries are translated from their functional currency into U.S. dollars,
the Company’s functional currency. All foreign currency assets and liabilities are translated at the period-end exchange rate, and all revenue and expenses are
translated at transaction date exchange rates. The effects of translating the financial statements of the foreign subsidiaries into U.S. dollars are reported as a
cumulative translation adjustment, a separate component of accumulated other comprehensive loss in the consolidated statements of shareholders’ equity,
except for transactions related to the intercompany receivable for which transaction adjustments are recorded in the consolidated statements of operations as
they are not deemed to be permanently reinvested. Foreign currency transaction gains/losses are reported as a component of other income – net in the
consolidated statements of operations and amounted to a loss of approximately $827,000 and a gain of approximately $435,000 for the years ended December
31, 2019 and 2018, respectively.
Stock Offering Costs — Common and Preferred Stock offering costs consist principally of professional fees, primarily legal and accounting, and other costs
such as printing and registration costs incurred in connection with the issuance of the common stock and the Preferred Stock in 2019 and 2018. In connection
with the 2019 and 2018 equity offerings, the Company incurred approximately $110,000 and $282,000, respectively, of such costs, excluding underwriting
commissions and placement agent fees.
Restructuring and Impairment Charges — Restructuring charges represent the remaining lease costs for a facility no longer used by the Company as the
employees were transferred to another Company facility. Impairment charges represent charges recorded for a leased facility no longer being used by the
Company. The Company is marketing the facility for sublease and recorded the difference between the contractual rent obligation and the estimated sub-lease
payments as an impairment charge.
Debt Acquisition Costs — Costs incurred in connection with the acquisition of bank financing are deferred and amortized over the estimated term of the related
financing. Such amortization is included in interest expense.
Recent Accounting Pronouncements — From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board
(“FASB”) and are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently adopted and recently
issued accounting pronouncements will not have a material impact on our consolidated financial position, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13, 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, 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.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires organizations that have leased assets, referred to as
“lessees,” to recognize on the balance sheet the assets and liabilities that represent the rights and obligations created by those leases, respectively. Under the
new guidance, a lessee is 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 requires both types of
leases to be recognized on the balance sheet. The FASB has subsequently issued further ASU’s related to the standard providing additional practical
expedients and an optional transition method allowing entities to not recast comparative periods. The amendments in ASU No. 2016-02 are now effective.
We adopted the standard on January 1, 2019 using the optional transition adjustment method. As part of the adoption of ASC 842, we performed an assessment
of the impact that the new lease recognition standard has on the consolidated financial statements. All of our leases, which consist of facility and equipment
leases, have been classified as operating leases. The Company does not have any financing leases. We adopted the requirements of the new standard without
restating the prior periods. There was no impact to the accumulated deficit as of the date of adoption. For leases in place at the transition date, we adopted the
package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any
expired or existing leases and (3) initial direct costs for any expired or existing leases.
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We have also adopted the practical expedients that allow us to treat the lease and non-lease components of our leases as a single component for our facility
leases. We elected the short-term lease recognition exemption for all leases that qualify. As such, for those leases that qualify, we did not recognize ROU asset
or lease liabilities as part of the transition adjustment. As of January 1, 2019, the impact on the consolidated assets was approximately $4.2 million and the
impact on the consolidated liabilities was approximately $4.4 million. The adoption of ASC 842 did not have a material effect on the Company’s results of
operations, stockholders’ equity, or statement of cash flows.
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 standard 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. There was no impact on the consolidated financial statements as a result of this standard.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplifies the accounting for
nonemployee share-based payments by aligning it with the accounting for share-based payments to employees, with exceptions. Under this guidance, the
measurement of equity-classified nonemployee awards will be fixed at the grant date, which may lower their cost and reduce volatility in the income statement.
Awards to nonemployees are measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services
received or the fair value of the equity instruments issued, whichever can be measured more reliably. Entities need to consider the probability that a performance
condition will be satisfied when an award contains such condition. The guidance is effective for public business entities for fiscal years beginning after December
15, 2018, including interim periods within that fiscal year. There was no impact on the consolidated financial statements as a result of this standard.
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 not required to be implemented until 2021 for public entities. The Company is in the process of investigating if this update
will have a significant impact on the consolidated financial statements.
3. ACQUISITIONS
2019 Acquisition
On April 3, 2019, the Company executed an asset purchase agreement (“APA”) to acquire substantially all of the assets of ETM. The purchase price was $1.6
million and the assumption of certain liabilities, excluding acquisition-related costs of approximately $125,000. Per the APA, the acquisition had an effective date
of April 1, 2019. The acquisition has been accounted for as a business combination.
The ETM 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.
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The purchase price allocation for ETM was performed by the Company and is summarized as follows:
Customer relationships
Accounts receivable
Contract asset
Operating lease right-of-use assets
Property and equipment
Goodwill
Operating lease liabilities
Accrued expenses
Total
$
$
856,000
547,377
139,169
1,224,480
91,277
39,901
(1,224,480)
(73,724)
1,600,000
The acquired accounts receivable are recorded at fair value which represents amounts that have subsequently been paid or are expected to be paid by clients.
The fair value of customer relationships was based on the estimated discounted cash flows generated by these intangibles. The goodwill from this acquisition is
deductible ratably for income tax purposes over fifteen years and represents the Company’s ability to have an expanded local presence in additional markets and
operational synergies that we expect to achieve that would not be available to other market participants.
The weighted-average amortization period of the acquired intangible assets is approximately three years.
Revenue earned beginning April 1, 2019, from the clients obtained from the ETM acquisition was approximately $5.1 million during the year ended December
31, 2019.
2018 Acquisition
On May 7, 2018, the Company executed an asset purchase agreement (“Orion APA”) to acquire substantially all of the revenue cycle, practice management,
and group purchasing organization assets of Orion. The purchase price was $12.6 million, excluding acquisition-related costs of approximately $245,000, which
are included in general and administrative expense in the consolidated statement of operations. Per the Orion APA, the acquisition had an effective date of July
1, 2018. The acquisition has been accounted for as a business combination.
The Orion acquisition added a significant number of clients to the Company’s customer base and, similar to previous acquisitions, broadened the Company’s
presence in the healthcare information technology industry through geographic expansion of its customer base and by increasing available customer relationship
resources and specialized trained staff. The acquisition also included Orion’s practice management and group purchasing services. The practice management
services provide three pediatric medical practices with the nurses, administrative support, facilities, supplies, equipment, marketing, RCM, accounting and other
non-clinical services needed to efficiently operate the practices. The group purchasing services enable medical providers to purchase various vaccines directly
from selected pharmaceutical companies at a discounted price.
The Company engaged a third party valuation specialist to assist the Company in valuing the assets and assumed liabilities acquired from Orion. The following
table summarizes the purchase price allocation.
Customer relationships
Accounts receivable
Contract asset
Inventory
Property and equipment
Goodwill
Accounts payable
Accrued expenses
Total
$
$
6,250,000
5,654,919
861,341
307,278
319,352
329,852
(677,872)
(444,870)
12,600,000
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The acquired accounts receivable are recorded at fair value which represents amounts that have subsequently been paid or are expected to be paid by clients.
The inventory acquired represents vaccines held at the managed practices. The fair value of customer relationships was based on the estimated discounted
cash flows generated by these intangibles. The goodwill from this acquisition is deductible ratably for income tax purposes over fifteen years and represents the
Company’s ability to have an expanded local presence in additional markets, operational synergies that we expect to achieve that would not be available to other
market participants and the ability to offer group purchasing and practice management services.
The weighted-average amortization period of the acquired intangibles is eight years.
Revenue earned from the customers obtained from the Orion acquisition was approximately $29 million during the year ended December 31, 2019.
In connection with some of the Company’s acquisitions, contingent consideration as of December 31, 2018 was payable in the form of cash with payment terms
through 2019. Depending on the terms of the agreement, if the performance measures are not achieved, the Company may pay less than the recorded amount,
and if the performance measures are exceeded, the Company may pay more than the recorded amount. The contingent consideration liability was fully settled
during 2019.
Pro forma financial information (Unaudited)
The unaudited pro forma information below represents the consolidated results of operations as if the Orion and ETM acquisitions occurred on January 1, 2018.
It includes revenue from the clients who had cancelled prior to each acquisition and costs and expenses discontinued before each acquisition. The pro forma
information has been included for comparative purposes and is not indicative of results of operations of the Company would have had if the acquisitions occurred
on the above date, nor is it necessarily indicative of future results. The unaudited pro forma information reflects adjustments related to (a) additional amortization
of purchased intangible assets, (b) expenses are directly attributable to the acquisitions, (c) reversal of goodwill impairment, (d) adjustments for income taxes and
(e) adjustments of intercompany balances.
Total revenue
Net loss
Net loss attributable to common shareholders
Net loss per common share
4. GOODWILL AND INTANGIBLE ASSETS – NET
Year Ended
December 31,
2019
2018
($ in thousands except per share amounts)
$
$
$
$
66,480 $
(2,372) $
(8,758) $
(0.72) $
81,876
(12,387)
(17,211)
(1.47)
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 years ended December 31, 2019 and 2018:
Beginning gross balance
Acquisitions
Ending gross balance
Year Ended
December 31, 2019
Year Ended
December 31, 2018
$
$
12,593,795 $
39,901
12,633,696 $
12,263,943
329,852
12,593,795
At December 31, 2019, and 2018, approximately $90,000 of goodwill was allocated to the Practice Management segment and the balance was allocated to the
Healthcare IT segment.
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Below is a summary of intangible asset activity for the years ended December 31, 2019 and 2018:
Customer
Relationships
Non-Compete
Agreements
Other Intangible
Assets
Total
COST
Balance, January 1, 2019
Capitalized software costs and other intangible assets
Translation loss
Disposals
Allocation from 2019 acquisition
Balance, December 31, 2019
Useful lives
ACCUMULATED AMORTIZATION
Balance, January 1, 2019
Amortization expense
Balance, December 31, 2019
Net book value
COST
Balance, January 1, 2018
Capitalized software costs and other intangible assets
Translation loss
Allocation from 2018 acquisition
Balance, December 31, 2018
Useful lives
ACCUMULATED AMORTIZATION
Balance, January 1, 2018
Amortization expense
Balance, December 31, 2018
Net book value
$
$
$
$
$
$
$
$
22,741,300
-
-
-
856,000
23,597,300
3-12 Years
16,457,878
1,855,634
18,313,512
5,283,788
16,491,300
-
-
6,250,000
22,741,300
3-12 Years
14,685,190
1,772,688
16,457,878
6,283,422
$
$
$
$
$
$
$
$
1,236,377
-
-
-
-
1,236,377
3 Years
1,234,774
1,601
1,236,375
2
1,236,377
-
-
-
1,236,377
3 Years
1,227,601
7,173
1,234,774
1,603
$
$
$
$
$
$
$
$
1,477,059
591,509
(41,098)
-
-
2,027,470
3 Years
1,128,081
205,954
1,334,035
693,435
1,498,417
108,552
(129,910)
-
1,477,059
3 Years
803,759
324,322
1,128,081
348,978
$
$
$
$
$
$
$
$
25,454,736
591,509
(41,098)
-
856,000
26,861,147
18,820,733
2,063,189
20,883,922
5,977,225
19,226,094
108,552
(129,910)
6,250,000
25,454,736
16,716,550
2,104,183
18,820,733
6,634,003
Other intangible assets primarily represent software costs. Amortization expense was approximately $2.1 million for both the years ended December 31, 2019
and 2018. The weighted-average amortization period is seven years.
As of December 31, 2019, future amortization expense scheduled to be expensed is as follows:
Year ending
December 31
2020
2021
2022
2023
2024
Thereafter
Total
$
$
1,437,324
1,292,146
959,225
338,530
300,000
1,650,000
5,977,225
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2019 and 2018 consisted of the following:
Computer equipment
Office furniture and equipment
Transportation equipment
Leasehold improvements
Assets not placed in service
Total property and equipment
Less accumulated depreciation
Property and equipment – net
December 31, 2019
December 31, 2018
$
$
2,905,892 $
1,145,617
806,009
931,955
1,004,252
6,793,725
(3,886,209)
2,907,516 $
2,389,865
1,089,014
828,417
727,519
50,362
5,085,177
(3,252,990)
1,832,187
Depreciation expense was approximately $909,000 and $688,000 for the years ended December 31, 2019 and 2018, respectively.
6. CONCENTRATIONS
Financial Risks — As of December 31, 2019 and 2018, the Company held cash of approximately $1.0 million and $77,000 respectively, in the name of its
subsidiaries, at banks in Pakistan and Sri Lanka. The banking systems in these countries do not provide deposit insurance coverage. Additionally, from time to
time, the Company maintains cash balances at financial institutions in the United States in excess of federal insurance limits. The Company has not experienced
any losses on such accounts.
Concentrations of credit risk with respect to trade accounts receivable are managed by periodic credit evaluations of customers. The Company does not require
collateral for outstanding trade accounts receivable. As of December 31, 2019, two customers individually accounted for approximately 9% and 5% of accounts
receivable, respectively. As of December 31, 2018, two customers individually accounted for approximately 8% and 7% of accounts receivable respectively.
During both the years ended December 31, 2019 and 2018, there was one customer with sales of approximately 10% of total revenue.
Geographical Risks — The Company’s offices in Islamabad and Bagh, Pakistan, and Colombo, Sri Lanka conduct significant back-office operations for the
Company. The Company has no revenue earned outside of the United States. The office in Bagh is located in a different territory of Pakistan from the
Islamabad office. The Bagh office was opened in 2009 for the purpose of providing operational support and operating as a backup to the Islamabad office. The
Company’s operations outside the United States are subject to special considerations and significant risks not typically associated with companies in the United
States. The Company’s business, financial condition and results of operations may be influenced by the political, economic, and legal environment in the
countries in which it operates and by the general state of these countries’ economies. The Company’s results may be adversely affected by, among other things,
changes in governmental policies with respect to laws and regulations, changes in local countries’ telecommunications industries, regulatory rules and policies,
anti-inflationary measures, currency conversion and remittance, and rates and methods of taxation.
F-18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Carrying amounts of net assets located outside the United States were approximately $1.7 million and $162,000 as of December 31, 2019 and 2018,
respectively. These balances exclude intercompany receivables of approximately $7.1 million and $7.6 million as of December 31, 2019 and 2018, respectively.
The following is a summary of the net assets located outside the United States as of December 31, 2019 and 2018:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
7. NET LOSS PER COMMON SHARE
December 31,
2019
2018
1,082,233 $
2,242,816
3,325,049
(1,270,015)
(332,276)
1,722,758 $
156,265
1,259,446
1,415,711
(1,044,539)
(209,333)
161,839
$
$
The following table reconciles the weighted-average shares outstanding for basic and diluted net loss per common share for the years ended December 31,
2019 and 2018:
Year Ended
December 31,
2019
2018
Basic and Diluted:
Net loss attributable to common shareholders
Weighted-average common shares used to compute basic and diluted loss per share
Net loss attributable to common shareholders per share - Basic and Diluted
$
$
(7,257,954) $
12,087,947
(0.60) $
(6,962,467)
11,721,232
(0.59)
All unvested restricted stock units (“RSUs”), the 200,000 warrants granted to Opus Bank (“Opus”) and the 153,489 warrants granted to Silicon Valley Bank
(“SVB”) 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.
8. DEBT
SVB — During October 2017, the Company opened a revolving line of credit from SVB under a three-year agreement which replaced the previous credit facility
from Opus. The SVB credit facility is a secured revolving line of credit where borrowings are based on a formula of 200% of repeatable revenue adjusted by an
annualized attrition rate as defined in the credit agreement. During the third quarter of 2018, the credit line was increased from $5 million to $10 million and the
term was extended for an additional year. As of December 31, 2019, and 2018, there were no borrowings under the credit facility. Interest on the SVB revolving
line of credit is currently charged at the prime rate plus 1.50%. There is also a fee of one-half of 1% annually for the unused portion of the credit line. The debt is
secured by all of the Company’s domestic assets and 65% of the shares in its offshore subsidiaries. Future acquisitions are subject to approval by SVB.
In connection with the original SVB debt agreement, the Company paid SVB approximately $50,000 of fees upfront and issued warrants for SVB to purchase
125,000 shares of its common stock, and committed to pay an annual anniversary fee of $50,000 a year. Based on the terms in the original SVB credit
agreement, these warrants have a strike price equal to $3.92. They have a five-year exercise window and net exercise rights, and were valued at $3.12 per
warrant. As a result of the revision in the SVB credit line, which increased the credit line from $5 million to $10 million and reduced the interest rate by 25 basis
points, the Company paid approximately $50,000 of fees upfront and issued an additional 28,489 warrants, with a strike price equal to $5.26, a five-year exercise
window and net exercise rights. The additional warrants were valued at $3.58 per warrant. The SVB credit agreement contains various covenants and conditions
governing the revolving line of credit. These covenants include a minimum level of adjusted EBITDA and a minimum liquidity ratio. At December 31, 2019 and
2018, the Company was in compliance with all covenants.
F-19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During November 2019 the Company modified its loan agreement with SVB, which adjusted the required monthly EBITDA amounts and does not require the
Company to comply with financial covenants as long as there have been no borrowings on the revolving credit line for the prior six months.
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 4.52%.
Payable to Managed Practices — As a result of the Orion acquisition, the Company assumed a payable to the managed practices at that time of $236,000,
which is non-interest bearing. As of December 31, 2019, the balance was $110,000.
Maturities of the outstanding notes payable and other obligations as of December 31, 2019 are as follows:
Year ending
December 31
Vehicle
Financing
Notes
$
$
67,129 $
37,410
15,171
4,694
124,404 $
2020
2021
2022
2023
Total
9. REVENUE
Introduction
Insurance
Financing
132,546 $
-
-
-
132,546 $
Payable to
Managed
Practices
84,000 $
26,000
-
-
110,000 $
Total
283,675
63,410
15,171
4,694
366,950
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
revenue cycle management services begin on the medical billing claims, which is generally upon receipt of the claim from the provider. For revenue cycle
management services, the Company estimates the value of the consideration it will earn over the remaining contractual period as our services are provided and
recognizes the fees over the term; this estimation involves predicting the amounts our clients will ultimately collect associated with the services they provided.
Certain significant estimates, such as payment-to-charge ratios, effective billing rates and the estimated contractual payment periods are required to measure
revenue cycle management revenue under the new standard. The timing of the revenue recognition of our other revenue streams were not materially impacted
by the adoption of ASC 606.
Most of our current contracts with customers contain a single performance obligation. For contracts where we provide multiple services, such as where we
perform multiple ancillary services, each service represents its own performance obligation. Selling prices are based on the contractual price for the service.
We apply the portfolio approach as permitted by ASC 606 as a practical expedient to contracts with similar characteristics and we use estimates and
assumptions when accounting for those portfolios. Our contracts generally include standard commercial payment terms. We have no significant obligations for
refunds, warranties or similar obligations and our revenue does not include taxes collected from our customers.
Disaggregation of Revenue from Contracts with Customers
We derive revenue from seven primary sources: revenue cycle management services, practice management services, professional services, ancillary services,
group purchasing services, printing and mailing services, and clearinghouse and EDI (electronic data interchange) services.
F-20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following table represents a disaggregation of revenue for the years ended December 31, 2019 and 2018:
Healthcare IT:
Revenue cycle management services
Professional services
Ancillary services
Group purchasing services
Printing and mailing services
Clearinghouse and EDI services
Practice Management:
Practice management services
Total
Revenue cycle management services:
Year Ended
December 31,
2019
2018
$
42,919,944 $
1,769,129
3,220,372
1,020,031
1,650,069
591,963
38,559,180
1,244,894
1,594,364
654,805
1,344,011
647,446
13,267,086
64,438,594 $
6,501,081
50,545,781
$
Revenue cycle management services are the recurring process of submitting and following up on claims with health insurance companies in order for the
healthcare providers to receive payment for the services they rendered. MTBC typically invoices customers on a monthly basis based on the actual collections
received by its customers and the agreed-upon rate in the sales contract. The services include use of practice management software and related tools (on a
software-as-a-service (“SaaS”) basis), electronic health records (on a SaaS basis), medical billing services and use of mobile health solutions. We consider the
services to be one performance obligation since the promises are not distinct in the context of the contract. The performance obligation consists of a series of
distinct services that are substantially the same and have the same periodic pattern of transfer to our customers.
In many cases, our clients may terminate their agreements with 90 days’ notice without cause, thereby limiting the term in which we have enforceable rights and
obligations, although this time period can vary between clients. Our payment terms are normally net 30 days. Although our contracts typically have stated terms
of one or more years, under ASC 606 our contracts are considered month-to-month and accordingly, there is no financing component.
For the majority of our revenue cycle management contracts, the total transaction price is variable because our obligation is to process an unknown quantity of
claims, as and when requested by our customers over the contract period. When a contract includes variable consideration, we evaluate the estimate of the
variable consideration to determine whether the estimate needs to be constrained; therefore, we include variable consideration in the transaction price only to the
extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with variable
consideration is subsequently resolved. Estimates to determine variable consideration such as payment to charge ratios, effective billing rates, and the estimated
contractual payment periods are updated at each reporting date. Revenue is recognized over the performance period using the input method.
Other revenue streams:
MTBC also provides implementation and professional services to clearinghouse and other customers and records revenue monthly on a time and materials or a
fixed rate basis. This is a separate performance obligation from the clearinghouse and recurring EDI services provided, for which the Company receives and
records monthly fees. The performance obligation is satisfied over time as the implementation or professional services are rendered.
Ancillary services represent services such as coding and transcription that are rendered in connection with the delivery of revenue cycle management and
related medical services. The Company invoices customers monthly, based on the actual amount of services performed at the agreed upon rate in the contract.
These services are only offered to revenue cycle management customers. These services do not represent a material right because the services are optional to
the customer and customers electing these services are charged the same price for those services as if they were on a standalone basis. Each individual coding
or transcription transaction processed represents a performance obligation, which is satisfied over time as that individual service is rendered.
F-21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company provides group purchasing services which enable medical providers to purchase various vaccines directly from selected pharmaceutical
companies at a discounted price. Currently, there are approximately 4,056 medical providers who are members of the program. Revenue is recognized as the
vaccine shipments are made to the medical providers. Fees from the pharmaceutical companies are paid either quarterly or annually and the Company adjusts
its revenue accrual at the time of payment. The Company makes significant judgments regarding the variable consideration which we expect to be entitled to for
the group purchasing services which includes the anticipated shipments to the members enrolled in the program, anticipated volumes of purchases made by the
members, and the changes in the number of members. The amounts recorded are constrained by estimates of decreases in shipments and loss of members to
avoid a significant revenue reversal in the subsequent period. The only performance obligation is to provide the pharmaceutical companies with the medical
providers who want to become members in order to purchase vaccines. The performance obligation is satisfied once the medical provider agrees to purchase a
specific quantity of vaccines and the medical provider’s information is forwarded to the vaccine suppliers. The Company records a contract asset for revenue
earned and not paid as the ultimate payment is conditioned on achieving certain volume thresholds.
The Company provides printing and mailing services for both revenue cycle management customers and a non-revenue cycle management customer, and
invoices on a monthly basis based on the number of prints, the agreed-upon rate per print and the postage incurred. The performance obligation is satisfied once
the printing and mailing is completed.
The medical billing clearinghouse service takes claim information from customers, checks the claims for errors and sends this information electronically to
insurance companies. MTBC invoices customers on a monthly basis based on the number of claims submitted and the agreed-upon rate in the agreement. This
service is provided to medical practices and providers to medical practices who are not revenue cycle management customers. The performance obligation is
satisfied once the relevant submissions are completed.
For all of the above revenue streams other than group purchasing services, revenue is recognized over time, which is typically one month or less, which closely
matches the point in time that the customer simultaneously receives and consumes the benefits provided by the Company. For the group purchasing services,
revenue is recognized at a point in time. 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.
Practice management services:
The Company also provides practice management services under long-term management service agreements to three medical practices. We provide the
medical practices with the nurses, administrative support, facilities, supplies, equipment, marketing, RCM, accounting, and other non-clinical services needed to
efficiently operate their practices. Revenue is recognized as the services are provided to the medical practices. Revenue recorded in the consolidated
statements of operations represents the reimbursement of costs paid by the Company for the practices and the management fee earned each month for
managing the practice. The management fee is based on either a fixed fee or a percentage of the net operating income.
The Company assumes all financial risk for the performance of the managed medical practices. Revenue is impacted by amount of the costs incurred by the
practices and their operating income. The gross billing of the practices is impacted by billing rates, changes in current procedural terminology code
reimbursement and collection trends which in turn impacts the management fee that the Company is entitled to. Billing rates are reviewed at least annually and
adjusted based on current insurer reimbursement practices. The performance obligation is satisfied as the management services are provided.
Our contracts for practice management services have approximately an additional 20 years remaining and are only cancellable under very limited circumstances.
The Company receives a management fee each month for managing the day-to-day business operations of each medical group as a fixed fee or a percentage
payment of the net operating income which is included in revenue in the consolidated statements of operations.
F-22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our practice management services obligations consist of a series of distinct services that are substantially the same and have the same periodic pattern of
transfer to our customers. Revenue is recognized over time, however for reporting and convenience purposes management fee is computed at each month end.
Information about contract balances:
As of December 31, 2019, the estimated revenue expected to be recognized in the future related to the remaining revenue cycle management performance
obligations outstanding was approximately $2.0 million. We expect to recognize substantially all of the revenue for the remaining performance obligations over
the next three months. Approximately $374,000 of the contract asset represents revenue earned, not paid, from the group purchasing services.
Amounts that we are entitled to collect under the applicable contract are recorded as accounts receivable. Invoicing is performed at the end of each month when
the services have been provided. The contract asset includes our right to payment for services already transferred to a customer when the right to payment is
conditional on something other than the passage of time. For example, contracts for revenue cycle management services where we recognize revenue over time
but do not have a contractual right to payment until the customer receives payment of their claim from the insurance provider. The contract asset also includes
the revenue accrued, not received, for the group purchasing services.
Changes in the contract asset are recorded as adjustments to net revenue. The changes primarily result from providing services to revenue cycle management
customers that result in additional consideration and are offset by our right to payment for services becoming unconditional and changes in the revenue accrued
for the group purchasing services. The contract asset for our group purchasing services is reduced when we receive payments from vaccine manufacturers and
is increased for revenue earned, not received. The opening and closing balances of the Company’s accounts receivable, contract asset and deferred revenue
are as follows:
Balance as of January 1, 2018
Orion acquisition
(Decrease) increase, net
Balance as of December 31, 2018
Balance as of January 1, 2019
ETM acquisition
Decrease, net
Balance as of December 31, 2019
Deferred commissions:
Accounts
Receivable,
Net
Contract
Asset
Deferred
Revenue
(current)
Deferred Revenue
(long term)
$
$
$
$
3,879,463
5,654,919
(2,202,908)
7,331,474
7,331,474
-
(336,131)
6,995,343
$
$
$
$
1,342,692
861,341
404,598
2,608,631
2,608,631
139,169
(362,466)
2,385,334
$
$
$
$
62,104
-
(36,749)
25,355
25,355
-
(5,078)
20,277
$
$
$
$
28,615
-
(9,666)
18,949
18,949
-
(204)
18,745
Our sales incentive plans include commissions payable to employees and third parties at the time of initial contract execution that are capitalized as incremental
costs to obtain a contract. The capitalized commissions are amortized over the period the related services are transferred. As we do not offer commissions on
contract renewals, we have determined the amortization period to be the estimated client life, which is three years. Deferred commissions were approximately
$29,000 and $93,000 at December 31, 2019 and 2018, respectively, and are included in the Other Assets lines in the consolidated balance sheets.
10. SHAREHOLDERS’ EQUITY
Treasury stock
The Board of Directors of the Company previously approved stock repurchase programs. The last program expired January 25, 2017. As a result of these stock
repurchases, the Company has 740,799 shares held as treasury stock at an aggregate cost of $662,000.
F-23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Common stock
There were no common stock offerings during 2019 and 2018.
Holders of our common stock are entitled to one vote for each share held on all matters properly submitted to a vote of shareholders on which holders of
common stock are entitled to vote. Holders of common stocks are entitled to receive dividends only at times and amounts as determined by the Board of
Directors. The common stock is not entitled to pre-emptive rights, and is not subject to conversion, redemption or sinking fund provisions.
Preferred Stock
During the year ended December 31, 2019, the Company completed a public offering of 373,000 shares of its Preferred Stock at the prevailing market price,
raising net proceeds of approximately $9.6 million after underwriting commissions and other directly attributable expenses.
During the year ended December 31, 2018, the Company completed two public offerings of approximately one million shares of its Preferred Stock at $25.00 per
share, raising net proceeds of approximately $22.8 million after underwriting commissions and expenses.
Dividends on the Preferred Stock of $2.75 annually per share are cumulative from the date of issue and are payable each month when, as and if declared by the
Company’s Board of Directors. As of December 31, 2019, the Board of Directors has declared monthly dividends on the Preferred Stock payable through
February 2020.
Commencing on or after November 4, 2020, the Company may redeem, at its option, the Preferred Stock, in whole or in part, at a cash redemption price of
$25.00 per share, plus all accrued and unpaid dividends to, but not including, the redemption date. The Preferred Stock has no stated maturity, is not subject to
any sinking fund or other mandatory redemption, and is not convertible into or exchangeable for any of the Company’s other securities. Holders of the Preferred
Stock have no voting rights except for limited voting rights if dividends payable on the Preferred Stock are in arrears for eighteen or more consecutive or non-
consecutive monthly dividend periods. If the Company were to liquidate, dissolve or wind up, the holders of the Preferred Stock will have the right to receive
$25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any payment is made to the holders of the
common stock. The Preferred Stock is listed on the Nasdaq Global Market under the trading symbol “MTBCP.”
Warrants
The Company has issued 2,353,489 warrants for its common stock, of which 353,489 remained outstanding at December 31, 2018. The 2,000,000 warrants
previously issued at a $5 exercise price expired in May 2018. The outstanding warrants consist of 100,000 warrants at a $5 exercise price which will expire in
September, 2022, 125,000 warrants at a $3.92 exercise price which will expire in October 2022, 100,000 warrants at a $5 exercise price which will expire in July
2023 and 28,489 warrants at a $5.26 exercise price which will expire in September 2023.
11. 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 MTBC, Inc. (“MTBC”) 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. MTBC 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
MTBC 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 MTBC 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 have completed discovery in the remanded matter, and both MTBC 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 MTBC’s cross-motion for summary judgment. The
Chancery Court held that MTBC cannot be compelled to participate in the Arbitration. RPRWC has informed MTBC 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.
F-24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
RPRWC seeks compensatory damages of $6.6 million, plus costs, for MPMA’s alleged breach of the billing services agreement. RPRWC’s breach of contract
and compensatory damages claims have not been the subject of the ongoing court proceedings, which have focused solely on whether RPRWC can compel
MTBC and MAC to arbitrate its claim. Thus, RPRWC has not yet provided MAC with information sufficient to enable it to estimate a range of possible losses that
may arise from the Arbitration. MAC intends to vigorously defend against RPRWC’s claims. If RPRWC is successful in the Arbitration, MAC anticipates 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 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.
12. LEASES
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, current operating lease liability and non-
current operating lease liability in our consolidated balance sheet as of December 31, 2019. The Company does not have any finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from
the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease
term.
We use our estimated incremental borrowing rates, which are derived from information available at the lease commencement date, in determining the present
value of lease payments. For leases in existence at the adoption of ASC 842, we used the incremental borrowing rate as of January 1, 2019. We give
consideration to our bank financing arrangements, geographical location and collateralization of assets when calculating our incremental borrowing rates.
Our lease terms include options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of less than 12 months
are not recorded in the consolidated balance sheet. Our lease agreements do not contain any residual value guarantees. For real estate leases, we account for
the lease and non-lease components as a single lease component. Some leases include escalation clauses and termination options that are factored in the
determination of the lease payments when appropriate.
If a lease is modified after the effective date, the operating lease ROU asset and liability is re-measured using the current incremental borrowing rate. During the
year ended December 31, 2019, a lease impairment of approximately $170,000 was recorded since the Company is no longer using one of its leased facilities
and is currently in the process of subleasing the space. Restructuring charges of approximately $49,000 were recorded in the year ended December 31, 2019
which represent the remaining lease costs for another leased facility that was closed and the employees were transferred to another Company facility.
We lease all of our facilities and some equipment. Lease expense is included in direct operating costs and general and administrative expenses in the
consolidated statements of operations based on the nature of the expense. As of December 31, 2019, we had 29 leased properties, five in Practice Management
and 24 in Healthcare IT, with remaining terms ranging from less than one year to four years. Our lease terms are determined taking into account lease renewal
options, the Company’s anticipated operating plans and leases that are on a month-to-month basis. We also have some related party leases – see Note 13.
F-25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The components of lease expense were as follows:
Operating lease cost
Short-term lease cost
Variable lease cost
Total- net lease cost
Year Ended
December 31, 2019
$
$
2,184,880
229,263
41,714
2,455,857
Short-term lease cost represents leases that were not capitalized as the lease term as of the later of January 1, 2019 or the beginning of the lease was less than
12 months. Variable lease costs include utilities, real estate taxes and common area maintenance costs.
Supplemental balance sheet information related to leases was as follows:
December 31, 2019
Operating leases:
Operating lease ROU assets, net
Current operating lease liabilities
Non-current operating lease liabilities
Total operating lease liabilities
Operating leases:
ROU assets
Asset lease expense
Foreign exchange loss
ROU assets, net
Weighted average remaining lease term (in years):
Operating leases
Weighted average discount rate:
Operating leases
Supplemental cash flow and other information related to leases was as follows:
$
$
$
$
$
3,526,315
1,688,772
2,040,772
3,729,544
5,467,749
(1,888,443)
(52,991)
3,526,315
2.46
7.05%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
ROU assets obtained in exchange for lease liabilities:
Operating leases, net of restructuring, impairment and terminations
Year Ended
December 31, 2019
$
$
2,332,167
1,221,989
F-26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Maturities of lease liabilities are as follows:
Operating leases - Year ended December 31,
2020
2021
2022
2023
2024
Total lease payments
Less: imputed interest
Total lease obligations
Less: current obligations
Long-term lease obligations
$
$
1,887,651
1,382,639
624,528
154,492
4,694
4,054,004
(324,460)
3,729,544
1,688,772
2,040,772
As of December 31, 2019, we have one operating lease commitment with a six year term that commences on January 1, 2020 aggregating approximately $1.0
million.
For comparative periods prior to the adoption of the new accounting guidance on January 1, 2019, we have retained the following disclosures as previously
reported. Future minimum lease payments under non-cancelable operating leases as of December 31, 2018 were as follows:
Operating leases
2019
2020
2021
2022
2023
Total
13. RELATED PARTIES
$
$
932,068
715,059
510,927
412,585
91,797
2,662,436
The Company had sales to a related party, a physician who is the wife of the Executive Chairman. Revenues from this customer were approximately $21,000 for
the year ended December 31, 2019 and approximately $20,000 for the year ended December 31, 2018. As of December 31, 2019 and 2018, the accounts
receivable balance due from this customer was approximately $2,000 and $1,600, respectively and is included in accounts receivable in the consolidated
balance sheets.
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 expense of approximately $137,000 and $128,000, for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and
2018, the Company had liabilities outstanding to KAI of approximately $1,000 and $11,000, which are included in accrued liability to related party in the
consolidated balance sheets. The original aircraft lease expired on March 31, 2019 and was not included in the ROU asset at January 1, 2019. A lease for a
different aircraft at the same lease rate was entered into as of April 1, 2019 and has been included in the ROU asset and operating lease liability at December
31, 2019.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company leases its corporate offices in New Jersey, its temporary housing for its foreign visitors, an office/storage facility and its backup operations center
in Bagh, Pakistan, from the Executive Chairman. The related party rent expense for the years ended December 31, 2019 and 2018 was approximately $192,000
and $187,000, respectively, and is included in direct operating costs and general and administrative expense in the consolidated statements of operations.
During the year ended December 31, 2019, the Company spent approximately $330,000 to upgrade two of the leased facilities. Current assets-related party in
the consolidated balance sheets includes security deposits and prepaid rent related to the leases of the Company’s corporate offices in the amount of $13,000
and $25,000 as December 31, 2019 and 2018, respectively.
Included in the ROU asset at December 31, 2019 is approximately $566,000 applicable to the related party leases. Included in the current and non-current
operating lease liability at December 31, 2019 is approximately $275,000 and $298,000, respectively, applicable to the related party leases.
14. EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) plan covering all U.S. employees of MTBC, Inc. and MAC who have completed one month of service. The plan provides for
matching contributions by the Company equal to 100% of the first 3% of qualified compensation, plus 50% of the next 2%. The Company also maintain a
qualified 401(k) plan for MHI, MPM and MED employees who have completed one month of service. There is a discretionary match for MHI and MED employees
equal to 50% of the first 3% of qualified compensation. There is no match for MPM employees. Employer contributions to the plans for the years ended
December 31, 2019 and 2018 were approximately $255,000 and $161,000, respectively.
Additionally, the Company has a defined contribution retirement plan covering all employees located in Pakistan who have completed three months of service.
The plan provides for monthly contributions by the Company which are the lower of 10% of qualified employees’ basic monthly compensation or 2,500 Pakistani
rupees. The Company’s contributions for the years ended December 31, 2019 and 2018 were approximately $245,000 and $110,000, respectively.
The Company maintains a defined contribution retirement plan covering all employees in Sri Lanka. The employee and employer contribute 8% and 12%,
respectively, of the employee’s gross salary. The Company’s contribution for the year ended December 31, 2019 and 2018 were approximately $40,000 and
$56,000, respectively. The contributions are required to be deposited with the Employees’ Provident Fund Organization, a government owned entity.
15. STOCK-BASED COMPENSATION
In April 2014, the Company adopted the Medical Transcription Billing, Corp. 2014 Equity Incentive Plan (the “2014 Plan”), reserving a total of 1,351,000 shares
of common stock for grants to employees, officers, directors and consultants. During 2017, the 2014 Plan was amended whereby an additional 1,500,000 shares
of common stock and 100,000 shares of Preferred Stock were added to the plan for future issuance. During 2018, an additional 200,000 shares of Preferred
Stock was 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”). As of December 31, 2019, 401,738 shares of common stock and 133,654 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 common
share per RSU, immediately after a change in control, as defined in the award agreement.
Common stock
During the third quarter of 2018, 68,000 RSUs of common stock were granted over two years equally to the four outside members of the Board of Directors with
25% of the shares vesting every six months. Also, during 2018, a total of 558,000 RSUs of common stock were granted to certain Company executive officers
and employees which vest over the next three years, at six-month intervals. A total of 81,200 cash settled common stock RSUs were granted to employees in
Pakistan and Sri Lanka.
F-28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During 2019, 108,000 RSUs of common stock were granted to employees and independent contractors to vest at different dates during the year 2020. In
addition, 72,000 RSUs of common stock were granted over two years equally to the four outside members of the Board of Directors with 25% of the shares
vesting every six months.
The following table summarizes the RSU and restricted stock transactions related to the common and Preferred Stock under the Amended and Restated
Incentive Plan for the years ended December 31, 2019 and 2018:
Outstanding and unvested shares at January 1, 2018
Granted
Vested
Forfeited
Outstanding and unvested shares at December 31, 2018
Granted
Vested
Forfeited
Outstanding and unvested shares at December 31, 2019
Common Stock
Preferred Stock
605,969
707,200
(340,066)
(43,756)
929,347
180,000
(624,315)
(33,948)
451,084
39,800
44,800
(39,800)
-
44,800
48,746
(49,546)
-
44,000
As of December 31, 2019, and 2018, there was approximately $2.1 million and $2.5 million, respectively, of total unrecognized compensation cost related to the
common stock RSUs classified as equity that will be expensed through 2021. There was no unrecognized compensation cost related to the Preferred Stock
RSUs.
Of the total outstanding and unvested common stock RSUs at December 31, 2019, 421,751 RSUs are classified as equity and 29,333 RSUs are classified as a
liability. All of the Preferred Stock RSUs are classified as equity.
The following table summarizes the share activity during the years ended December 31, 2019 and 2018 and the amount of common and Preferred Shares
available for grant at December 31, 2019:
Shares available for grant at January 1, 2018
Additional shares available for grant
RSUs granted
RSUs forfeited
Shares available for grant at December 31, 2018
RSUs granted
RSUs forfeited
Shares available for grant at December 31, 2019
Common Stock
Preferred Stock
1,211,234
-
(707,200)
43,756
547,790
(180,000)
33,948
401,738
27,200
200,000
(44,800)
-
182,400
(48,746)
-
133,654
The liability for the cash-settled awards was approximately $741,000 and $118,000 at December 31, 2019 and 2018, respectively, and is included in accrued
compensation in the consolidated balance sheets. During the years ended December 31, 2019 and 2018, approximately $184,000 and $39,000, respectively,
was paid in connection with the cash-settled awards.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Preferred Stock
In 2019 and 2018, the Compensation Committee approved executive bonuses to be paid in 44,000 and 40,000 shares respectively of Preferred Stock, with the
final number of shares and the amount based on specified performance criteria being achieved during 2019 and 2018. In 2019, 4,746 shares of Preferred Stock
were granted as performance bonuses and in lieu of sales commissions. In 2018, an additional Preferred Stock award of 4,800 shares was granted as a
performance bonus to one employee. Stock-based compensation expense recorded during 2019 and 2018 for these awards was approximately $1.3 million and
$1.2 million respectively, based on the fair value of the Preferred Shares on the grant date. During January 2020 and February 2019, the Compensation
Committee determined that the financial objectives were attained and all of the shares were issued including the performance bonus shares.
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. The weighted average grant date fair value of
the common stock price in connection with the RSUs classified as equity was $4.87 and $4.53 for the years ended December 31, 2019 and 2018, respectively.
The weighted average grant date fair value of the Preferred Stock in connection with the RSUs was $26.77 and $25.00 for the years ended December 31, 2019
and 2018, respectively. The following table summarizes the components of stock-based compensation expense for the years ended December 31, 2019 and
2018:
Stock-based compensation included in the
consolidated statements of operations:
Direct operating costs
General and administrative
Research and development
Selling and marketing
Total stock-based compensation expense
16. INCOME TAXES
December 31,
2019
2018
$
$
196,956 $
2,735,178
33,029
250,498
3,215,661 $
88,195
2,352,850
14,506
8,048
2,463,599
For the years ended December 31, 2019 and 2018, the Company estimated its income tax provision based upon the annual pre-tax loss. Although the
Company is forecasting a return to profitability, it incurred cumulative losses which make realization of a deferred tax asset difficult to support in accordance with
ASC 740. Accordingly, a valuation allowance has been recorded against all federal and state deferred tax assets as of December 31, 2019 and December 31,
2018, with the exception of a net deferred tax liability relating to the amortization of intangibles for tax purposes.
As of January 1, 2018, all adjusted foreign income amounts became taxable due to a change in U.S. tax law under the recent tax reform legislation discussed
below. For state tax purposes, the Company’s foreign earnings may be taxable depending on each individual state’s legislative stance on the recent tax reform
legislation. The activity in the deferred tax valuation allowance was as follows for the years ended December 31, 2019 and 2018:
Beginning balance
Provision
Adjustments/true-ups
Ending balance
Year ended December 31,
2019
2018
$
$
7,176,391 $
371,468
(393,349)
7,154,510 $
6,620,464
400,158
155,769
7,176,391
The adjustments/true-ups for 2019 primarily represent the deferred tax effect of the Company’s adoption of ASC 606. The adjustments/true-ups for 2018
primarily represent the use of federal net operating losses to offset the Transition Tax as defined below. Accordingly, additional valuation allowances needed to
be provided. Since a full valuation allowance is recorded on the Company’s deferred tax assets, there was no effect on the Company’s consolidated balance
sheet.
F-30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The loss before tax for financial reporting purposes during the years ended December 31, 2019 and 2018 consisted of the following:
United States
Foreign
Total
Year ended December 31,
2019
(1,154,831) $
475,811
(679,020) $
2018
(4,111,539)
1,815,674
(2,295,865)
$
$
The provision (benefit) for income taxes for the years ended December 31, 2019 and 2018 consisted of the following:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Total income tax provision (benefit)
Year ended December 31,
2019
2018
$
$
- $
102,677
9,937
112,614
27,689
52,477
80,166
192,780 $
-
49,000
1,341
50,341
(225,347)
17,621
(207,726)
(157,385)
The components of the Company’s deferred income taxes as of December 31, 2019 and 2018 are as follows:
December 31, 2019
December 31, 2018
Deferred tax assets:
Allowance for doubtful accounts
Deferred revenue
Deferred rent
Property and intangible assets
State net operating loss (“NOL”) carryforwards
Federal net operating loss (“NOL”) carryforwards
Section 163(j) interest limitation
Cumulative translation adjustment
Stock based compensation
ASC 606 - Section 481(A) adjustment
ASC 842-ROU asset
ASC 842 - Lease liability
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Goodwill amortization
Net deferred tax liability
$
$
65,529 $
4,807
-
2,301,987
910,274
4,146,274
13,499
216,255
118,377
(185,162)
(790,446)
799,376
18,238
(7,154,510)
464,498
(709,010)
(244,512) $
46,492
4,664
4,275
2,336,221
636,578
3,789,618
51,319
349,834
335,785
-
-
-
(24,654)
(7,176,391)
353,741
(518,087)
(164,346)
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as
from net operating loss carryforwards. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future
years.
F-31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company has recorded goodwill as a result of its acquisitions. Goodwill is generally not amortized for financial reporting purposes. For tax purposes,
goodwill is tax deductible and amortized over 15 years. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility
of this indefinitely lived asset (also known as a naked credit). The resulting deferred tax liability, which is expected to continue to increase over the amortization
period, will have an indefinite life. As a result of the Company incurring a tax loss for 2018 which has an indefinite life under the recent tax reform legislation, the
federal deferred tax liability resulting from the amortization of goodwill was offset against the 2019 federal operating net loss, to the extent allowable. This
resulted in a deferred tax benefit of approximately $208,000 in 2018. The remaining deferred tax liability could remain on the Company’s consolidated balance
sheet indefinitely unless there is an impairment of goodwill (for financial reporting purposes) or a portion of the business is sold.
Due to the fact that the aforementioned deferred tax liability could have an indefinite life, it is not netted against the Company’s deferred tax assets when
determining the required valuation allowance in accordance with ASC 740 guidelines. Doing so would result in the understatement of the valuation allowance
and related deferred income tax expense.
A reconciliation of the federal statutory income tax rate (21%) for 2019 and 2018 to the Company’s effective income tax rate (determined in dollars) for the years
ended December 31, 2019 and 2018 is as follows:
Federal benefit at statutory rate
Increase (decrease) in income taxes resulting from:
State tax expense, net of federal benefit
Non-deductible items
Impact of foreign operations
Subpart F GILTI inclusion
Deferred true-up
Valuation allowance
Additional tax goodwill/contingent consideration
Total income tax provision (benefit)
$
Year ended December 31,
2019
2018
$
(142,594) $
(482,132)
142,079
24,883
31,408
69,862
332,792
(304,009)
38,359
192,780 $
29,646
15,332
(525,583)
360,742
(142,869)
555,927
31,553
(157,385)
At December 31, 2019 and 2018, the Company did not record any uncertain tax positions based on the technical merits. Therefore, a tabular roll forward was
excluded and there has been no accrued interest and penalties. The Company is subject to taxation in the United States, various states, Pakistan and Sri Lanka.
As of December 31, 2019, tax years 2016 through 2018 remain open to examination in the United States by major taxing jurisdictions in which the Company is
subject to tax. The Pakistan Federal Board of Revenue issued a tax holiday, which precludes the Pakistan subsidiary from being subject to income taxes through
June 2025. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense.
The Pakistan tax holiday does not have a significant impact on the Company’s effective tax rate as all of its earnings in Pakistan have been fully included in the
U.S. federal tax rate of 21% for 2019 and 2018. The Pakistan statutory corporate tax rate is 29% before consideration of the aforementioned tax holiday.
The Company has a federal NOL carry forward of approximately $19.8 million of which approximately $15.8 million will expire between 2034 and 2037 and $4.0
million has an indefinite life. The Company has state NOL carry forwards which mainly consists of approximately $38.5 million, of which $17.9 million relates to
the State of New Jersey. These NOLs expire between 2034 to 2039.
The Company has a full valuation allowance on its deferred tax assets in the U.S. which results in there being no U.S. deferred tax assets or liabilities recorded
on the consolidated balances sheet. Other than the deferred tax liability related to the amortization of goodwill.
F-32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
17. OTHER (EXPENSE) INCOME – NET
Other (expense) income - net for the years ended December 31, 2019 and 2018 consisted of the following:
Foreign exchange (loss) gain
Other income
Other (expense) income - net
Year Ended December 31,
2019
2018
$
$
(827,121) $
201,446
(625,675) $
434,806
59,526
494,332
Foreign currency transaction gains and losses primarily result from transactions in foreign currencies other than the functional currency. These transaction gains
and losses are recorded in the consolidated statements of operations related to the recurring measurement and settlement of such transactions.
18. SEGMENT REPORTING
Both our Chief Executive Officer and Executive Chairman serve as the CODM, organize the Company, manage resource allocations and measure performance
among two operating and reportable segments: (i) Healthcare IT and (ii) Practice Management.
The Healthcare IT segment includes revenue cycle management and other services. The 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, which are mainly corporate overhead costs. Our CODM does not evaluate operating segments using asset
or liability information. The accounting policies of the segments are the same as those disclosed in the summary of significant accounting policies. The following
tables present revenues, operating expenses and operating income (loss) by reportable segment for the years ended December 31, 2019 and 2018:
Net revenue
Operating expenses:
Direct operating costs
Selling and marketing
General and administrative
Research and development
Change in contingent consideration
Depreciation and amortization
Restructuring and impairment charges
Total operating expenses
Operating income (loss)
Year Ended December 31, 2019
Healthcare IT
Practice
Management
Unallocated
Corporate
Expenses
Total
$
51,171,508
$
13,267,086
$
-
$
64,438,594
30,798,404
1,487,196
11,124,271
870,780
(343,768)
2,689,240
219,013
46,845,136
4,326,372
F-33
$
$
10,387,620
34,619
2,066,522
-
-
316,366
-
12,805,127
461,959
$
-
-
4,721,004
-
-
-
-
4,721,004
(4,721,004)
$
41,186,024
1,521,815
17,911,797
870,780
(343,768)
3,005,606
219,013
64,371,267
67,327
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Net revenue
Operating expenses:
Direct operating costs
Selling and marketing
General and administrative
Research and development
Change in contingent consideration
Depreciation and amortization
Total operating expenses
Operating income (loss)
$
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Year Ended December 31, 2018
Healthcare IT
Practice
Management
Unallocated
Corporate
Expenses
Total
$
44,044,700
$
6,501,081
$
-
$
50,545,781
26,289,770
1,593,052
9,834,749
1,029,510
73,271
2,700,577
41,520,929
2,523,771
$
4,962,765
18,930
1,164,505
-
-
153,250
6,299,450
201,631
$
-
-
5,265,219
-
-
-
5,265,219
(5,265,219)
$
31,252,535
1,611,982
16,264,473
1,029,510
73,271
2,853,827
53,085,598
(2,539,817)
As of December 31, 2019, and December 31, 2018, the carrying amounts of accounts receivable, 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. As a result, the Company
categorizes these borrowings as Level 2 in the fair value hierarchy.
Contingent Consideration
The Company’s contingent consideration of approximately $526,000 as of December 31, 2018, is a Level 3 liability. The fair value of the contingent consideration
at December 31, 2018 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 was not possible to determine a range of outcomes. During
2019, the contingent consideration liability was fully 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
Year Ended December 31,
2019
2018
526,432 $
(343,768)
(182,664)
- $
603,411
73,271
(150,250)
526,432
Balance - January 1,
Change in fair value
Payments
Balance - December 31,
$
$
20. SUBSEQUENT EVENT
On January 8, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CareCloud Corporation, a Delaware
corporation (“CareCloud”), 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 CareCloud (the “Merger”), with
CareCloud surviving as a wholly-owned subsidiary of the Company. The Merger became effective simultaneously with the execution of the Merger Agreement.
CareCloud was the surviving corporation of the Merger and became a wholly-owned subsidiary of the Company.
The total consideration for the Merger paid at closing was $11.9 million in cash, 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 provides that if CareCloud’s 2020 revenues exceed $36 million, there will be an
earn-out payment to the seller equal to such excess, up to $3 million. 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.
Of the Preferred Stock consideration, 160,000 shares will be held in escrow for up to 24 months, and an additional 100,000 shares will be held 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. Shares net of such
losses will be released upon joint instruction of the Company and Runway in accordance with the applicable escrow terms.
The Company’s Preferred Stock and warrants being 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 Company has agreed that, as soon as practicable after the completion of CareCloud’s 2019
financial statements audit, the Company will register for resale under the Securities Act the Preferred Stock and the securities underlying the warrants.
F-34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-4.5 2 ex4-5.htm
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN SECTIONS 5.3 AND 5.4 BELOW, MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION
OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT
FROM SUCH REGISTRATION.
WARRANT TO PURCHASE STOCK
Exhibit 4.5
Company: MTBC, Inc., a Delaware corporation
Number of Shares: 1,000,000, subject to adjustment
Type/Series of Stock: Common Stock, $0.001 par value per share
Warrant Price: $7.50 per share
Issue Date: January 8, 2020
Expiration Date: January 8, 2022
THIS WARRANT CERTIFIES THAT, for good and valuable consideration, Runway Growth Credit Fund Inc., a Maryland corporation (together with any
successor or permitted assignee or transferee of this Warrant or of any shares issued upon exercise hereof, “Holder”) is entitled to purchase the above-stated
number of fully paid and non-assessable shares (the “Shares”) of the above-stated Type/Series of Stock (the “ Class”) of the above-named company (the
“Company”) at a purchase price per Share equal to the Warrant Price (as defined below) all as set forth above and as adjusted pursuant to Section 2 of this
Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.
This Warrant is issued pursuant to an Agreement and Plan of Merger, dated as of January 8, 2020 (the “ Merger Agreement”). Capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth in the Merger Agreement.
A. Warrant Price . The purchase price per Share hereunder (the “ Warrant Price”) shall be $7.50 per share.
SECTION 1. EXERCISE.
1.1 Method of Exercise. Holder may at any time and from time to time exercise this Warrant, in whole or in part, by delivering to the Company
the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached hereto as Appendix 1 and a check, wire transfer of
same-day funds (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the
Shares being purchased.
1.2 Delivery of Certificate and New Warrant . Within a reasonable time after Holder exercises this Warrant in the manner set forth in Section 1.1
above, the Company shall deliver to Holder a certificate representing the Shares issued to Holder upon such exercise and, if this Warrant has not been fully
exercised and has not expired, a new warrant of like tenor representing the Shares not so acquired.
1.3 Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this
Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form, substance and amount to the
Company or, in the case of mutilation, on surrender of this Warrant to the Company for cancellation, the Company shall, within a reasonable time, execute and
deliver to Holder, in lieu of this Warrant, a new warrant of like tenor and amount.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
1.4 Treatment of Warrant Upon Acquisition of Company.
(a) Acquisition. For the purpose of this Warrant, “ Acquisition” means any transaction or series of related transactions involving: (i) the sale,
lease, exclusive license, or other disposition of all or substantially all of the assets of the Company; (ii) any merger or consolidation of the Company into or with
another person or entity (other than a merger or consolidation effected exclusively to change the Company’s domicile), or any other corporate reorganization, in
which the stockholders of the Company in their capacity as such immediately prior to such merger, consolidation or reorganization, own less than a majority of
the Company’s (or the surviving or successor entity’s) outstanding voting power immediately after such merger, consolidation or reorganization (or, if such
Company stockholders beneficially own a majority of the outstanding voting power of the surviving or successor entity as of immediately after such merger,
consolidation or reorganization, such surviving or successor entity is not the Company); or (iii) any sale or other transfer by the stockholders of the Company of
shares representing at least a majority of the Company’s then-total outstanding combined voting power.
(b) Treatment of Warrant at Acquisition. In the event of an Acquisition in which the consideration to be received by the Company’s stockholders
consists solely of cash, solely of Marketable Securities or a combination of cash and Marketable Securities (a “Cash/Public Acquisition”), and the fair market
value of one Share would be greater than the Warrant Price in effect on such date immediately prior to such Cash/Public Acquisition, and Holder has not
exercised this Warrant pursuant to Section 1.1 above as to all Shares, then Holder shall have the option to exercise this Warrant immediately prior to and
contingent upon the consummation of a Cash/Public Acquisition, and upon such exercise, Holder shall be deemed to have restated each of the representations
and warranties in Section 4 of the Warrant as of the date thereof. In the event of a Cash/Public Acquisition where the fair market value of one Share would be
less than the Warrant Price in effect immediately prior to such Cash/Public Acquisition, then this Warrant will expire immediately prior to the consummation of
such Cash/Public Acquisition.
(c) Upon the closing of any Acquisition other than a Cash/Public Acquisition, the acquiring, surviving or successor entity shall assume the
obligations of this Warrant, and this Warrant shall thereafter be exercisable for the same securities and/or other property as would have been paid for the Shares
issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on and as of the closing of such Acquisition, subject to
further adjustment from time to time in accordance with the provisions of this Warrant.
(d) As used in this Warrant, “ Marketable Securities” means securities meeting all of the following requirements: (i) the issuer thereof is then
subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is then
current in its filing of all required reports and other information under the Act and the Exchange Act; (ii) the class and series of shares or other security of the
issuer that would be received by Holder in connection with the Acquisition were Holder to exercise this Warrant on or prior to the closing thereof is then traded in
a Trading Market, and (iii) following the closing of such Acquisition, Holder would not be restricted from publicly re-selling all of the issuer’s shares and/or other
securities that would be received by Holder in such Acquisition were Holder to exercise this Warrant in full on or prior to the closing of such Acquisition, except to
the extent that any such restriction (x) arises solely under federal or state securities laws, rules or regulations, and (y) does not extend beyond six (6) months
from the closing of such Acquisition.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SECTION 2. ADJUSTMENTS TO THE SHARES AND WARRANT PRICE .
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend or distribution on the outstanding shares of the Class payable in
additional shares of the Class or other securities or property (other than cash), then upon exercise of this Warrant, for each Share acquired, Holder shall receive,
without additional cost to Holder, the total number and kind of securities and property which Holder would have received had Holder owned the Shares of record
as of the date the dividend or distribution occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater
number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If
the outstanding shares of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be
proportionately increased and the number of Shares shall be proportionately decreased.
2 . 2 Reclassification, Exchange, Combinations or Substitution. Upon any event whereby all of the outstanding shares of the Class are
reclassified, exchanged, combined, substituted, or replaced for, into, with or by Company securities of a different class and/or series, then from and after the
consummation of such event, this Warrant will be exercisable for the number, class and series of Company securities that Holder would have received had the
Shares been outstanding on and as of the consummation of such event, and subject to further adjustment thereafter from time to time in accordance with the
provisions of this Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, combinations substitutions,
replacements or other similar events.
2.3 No Fractional Share . No fractional Share shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be
rounded down to the nearest whole Share. If a fractional Share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional
Share interest by paying Holder in cash the amount computed by multiplying the fractional interest by (i) the fair market value of a full Share, less (ii) the then-
effective Warrant Price.
2.4 Notice/Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company, at the
Company’s expense, shall notify Holder in writing within a reasonable time setting forth the adjustments to the Warrant Price, Class and/or number of Shares
and facts upon which such adjustment is based. The Company shall, upon written request from Holder, furnish Holder with a certificate of its Chief Financial
Officer, including computations of such adjustment and the Warrant Price, Class and number of Shares in effect upon the date of such adjustment.
SECTION 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY .
3.1 Representations and Covenants . The Company represents and warrants to, and agrees with, the Holder as follows:
(a) All Shares which may be issued upon the exercise of this Warrant shall, upon issuance, be duly authorized, validly issued, fully paid
and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state
securities laws.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
stock such number of shares of the Class and other securities as will be sufficient to permit the exercise in full of this Warrant.
(b) The Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued capital
3.2 Notice of Certain Events. If the Company proposes at any time to:
and whether or not a regular cash dividend;
(a) declare any dividend or distribution upon the outstanding shares of the Class, whether in cash, property, stock, or other securities
series of the Company’s stock (other than pursuant to contractual pre-emptive rights);
(b) offer for subscription or sale pro rata to the holders of the outstanding shares of the Class any additional shares of any class or
Class; or
(c) effect any reclassification, exchange, combination, substitution, reorganization or recapitalization of the outstanding shares of the
(d) effect an Acquisition or to liquidate, dissolve or wind up;
then, in connection with each such event, the Company shall give Holder notice thereof at the same time and in the same manner as given to holders of the
outstanding shares of the Class.
The Holder represents and warrants to the Company as follows:
SECTION 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER .
4.1 Purchase for Own Account. This Warrant and the Shares to be acquired upon exercise of this Warrant by Holder are being acquired for
investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Securities Act.
Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares.
4.2 Disclosure of Information. Holder is aware of the Company’s business affairs and financial condition and has received or has had full access
to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its
underlying securities. Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the
offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire
it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.
4.3 Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder
has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s
investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of
evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the
Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen
and financial circumstances of such persons.
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.4 Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Securities Act and
has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of this Warrant and the Shares
issuable hereunder.
4.5 Warrant Not Registered. Holder understands that this Warrant has not been registered under the Securities Act in reliance upon a specific
exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder’s investment intent as expressed herein.
4.6 No Voting Rights. This Warrant does not contain or give any voting rights to any Holder hereof.
SECTION 5. MISCELLANEOUS.
5.1 Term. Subject to the provisions of Section 1.4 above, this Warrant is exercisable in whole or in part at any time and from time to time on or
before 6:00 PM, Pacific time, on the Expiration Date and shall be void thereafter.
5.2 Legends. Each certificate evidencing Shares shall be imprinted with a legend in substantially the following form:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET
FORTH IN THAT CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY THE ISSUER TO RUNWAY GROWTH CREDIT
FUND INC. DATED JANUARY 8, 2020, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION OF LEGAL COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT
FROM SUCH REGISTRATION.
5.3 Compliance with Securities Laws on Transfer . This Warrant and the Shares issued upon exercise of this Warrant may not be transferred or
assigned in whole or in part except in compliance with applicable federal and state securities laws by the transferor and the transferee (including, without
limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the
Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to a parent company or any other affiliate of Holder, provided
that any such transferee is an “accredited investor” as defined in Regulation D promulgated under the Securities Act.
5 . 4 Transfer Procedure. Subject to the provisions of Section 5.3 and upon providing the Company with written notice, Holder and any
subsequent Holder may transfer all or part of this Warrant or the Shares issued upon exercise of this Warrant to any transferee, provided, however, in
connection with any such transfer, any subsequent Holder will give the Company notice of the portion of the Warrant and/or Shares being transferred with the
name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s)
(and Holder if applicable); and provided further, that any subsequent transferee shall agree in writing with the Company to be bound by all of the terms and
conditions of this Warrant.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5.5 Notices. All notices and other communications hereunder from the Company to the Holder, or vice versa, shall be deemed delivered and
effective (i) when given personally, (ii) on the third (3rd) Business Day after being mailed by first-class registered or certified mail, postage prepaid, (iii) upon
actual receipt if given by facsimile or electronic mail and such receipt is confirmed in writing by the recipient, or (iv) on the first Business Day following delivery to
a reliable overnight courier service, courier fee prepaid, in any case at such address as may have been furnished to the Company or Holder, as the case may
be, in writing by the Company or such Holder from time to time in accordance with the provisions of this Section 5.5. All notices to Holder shall be addressed as
follows until the Company receives notice of a change of address in connection with a transfer or otherwise:
Runway Growth Credit Fund Inc.
205 N Michigan Ave., Suite 4200
Chicago, IL 60601
Attention: Legal Reporting
Email: legalreporting@runwaygrowth.com
runwayagency@cortlandglobal.com
Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:
MTBC, Inc.
Attn: General Counsel
7 Clyde Road
Somerset, NJ 08873
Telephone: (732) 873-5133
Email: spatel@mtbc.com
5.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated (either generally or in a particular instance
and either retroactively or prospectively) only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or
termination is sought.
5.7 Counterparts; Facsimile/Electronic Signatures. This Warrant may be executed in counterparts, all of which together shall constitute one and
the same agreement. Any signature page delivered electronically or by facsimile shall be binding to the same extent as an original signature page with regards to
any agreement subject to the terms hereof or any amendment thereto.
5.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving
effect to its principles regarding conflicts of law. The parties irrevocably agree that any action to enforce the provisions of this Agreement or arising under or by
reason of this Agreement shall be brought solely in the Superior Court of New Jersey, Somerset County venue.
5.9 Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any
provision of this Warrant.
5.10 Business Days. “Business Day” is any day that is not a Saturday, Sunday or a day on which banks in New York City are closed.
[Remainder of page left blank intentionally]
[Signature page follows]
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the parties have caused this Warrant to Purchase Stock to be executed by their duly authorized representatives effective as of
the Issue Date written above.
“COMPANY”
MTBC, INC.
/s/ Shruti Patel
By:
Name: Shruti Patel
Title: General Counsel
“HOLDER”
RUNWAY GROWTH CREDIT FUND INC.
/s/ David Spreng
By:
Name: David Spreng
(Print)
CEO
Title:
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned Holder hereby exercises its right to purchase ___________ shares of the Common Stock of __________________ (the
“Company”) in accordance with the attached Warrant To Purchase Stock, and tenders payment of the aggregate Warrant Price for such shares as follows:
[ ]
[ ]
[ ]
check in the amount of $________ payable to order of the Company enclosed herewith
Wire transfer of immediately available funds to the Company’s account
Other [Describe] __________________________________________
2. Please issue a certificate or certificates representing the Shares in the name specified below:
Holder’s Name
(Address)
3. By its execution below and for the benefit of the Company, Holder hereby restates each of the representations and warranties in Section 4 of the
Warrant to Purchase Stock as of the date hereof.
HOLDER:
By:
Name:
Title:
(Date):
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-4.6 3 ex4-6.htm
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN SECTIONS 5.3 AND 5.4 BELOW, MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION
OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT
FROM SUCH REGISTRATION.
WARRANT TO PURCHASE STOCK
Exhibit 4.6
Company: MTBC, Inc., a Delaware corporation
Number of Shares: 1,000,000, subject to adjustment
Type/Series of Stock: Common Stock, $0.001 par value per share
Warrant Price: $10.00 per share
Issue Date: January 8, 2020
Expiration Date: January 8, 2023
THIS WARRANT CERTIFIES THAT, for good and valuable consideration, Runway Growth Credit Fund Inc., a Maryland corporation (together with any
successor or permitted assignee or transferee of this Warrant or of any shares issued upon exercise hereof, “Holder”) is entitled to purchase the above-stated
number of fully paid and non-assessable shares (the “Shares”) of the above-stated Type/Series of Stock (the “ Class”) of the above-named company (the
“Company”) at a purchase price per Share equal to the Warrant Price (as defined below) all as set forth above and as adjusted pursuant to Section 2 of this
Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.
This Warrant is issued pursuant to an Agreement and Plan of Merger, dated as of January 8, 2020 (the “ Merger Agreement”). Capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth in the Merger Agreement.
A. Warrant Price . The purchase price per Share hereunder (the “ Warrant Price”) shall be $10.00 per share.
SECTION 1. EXERCISE.
1.1 Method of Exercise. Holder may at any time and from time to time exercise this Warrant, in whole or in part, by delivering to the Company
the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached hereto as Appendix 1 and a check, wire transfer of
same-day funds (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the
Shares being purchased.
1.2 Delivery of Certificate and New Warrant . Within a reasonable time after Holder exercises this Warrant in the manner set forth in Section 1.1
above, the Company shall deliver to Holder a certificate representing the Shares issued to Holder upon such exercise and, if this Warrant has not been fully
exercised and has not expired, a new warrant of like tenor representing the Shares not so acquired.
1.3 Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this
Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form, substance and amount to the
Company or, in the case of mutilation, on surrender of this Warrant to the Company for cancellation, the Company shall, within a reasonable time, execute and
deliver to Holder, in lieu of this Warrant, a new warrant of like tenor and amount.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
1.4 Treatment of Warrant Upon Acquisition of Company.
(a) Acquisition. For the purpose of this Warrant, “ Acquisition” means any transaction or series of related transactions involving: (i) the sale,
lease, exclusive license, or other disposition of all or substantially all of the assets of the Company; (ii) any merger or consolidation of the Company into or with
another person or entity (other than a merger or consolidation effected exclusively to change the Company’s domicile), or any other corporate reorganization, in
which the stockholders of the Company in their capacity as such immediately prior to such merger, consolidation or reorganization, own less than a majority of
the Company’s (or the surviving or successor entity’s) outstanding voting power immediately after such merger, consolidation or reorganization (or, if such
Company stockholders beneficially own a majority of the outstanding voting power of the surviving or successor entity as of immediately after such merger,
consolidation or reorganization, such surviving or successor entity is not the Company); or (iii) any sale or other transfer by the stockholders of the Company of
shares representing at least a majority of the Company’s then-total outstanding combined voting power.
(b) Treatment of Warrant at Acquisition. In the event of an Acquisition in which the consideration to be received by the Company’s stockholders
consists solely of cash, solely of Marketable Securities or a combination of cash and Marketable Securities (a “Cash/Public Acquisition”), and the fair market
value of one Share would be greater than the Warrant Price in effect on such date immediately prior to such Cash/Public Acquisition, and Holder has not
exercised this Warrant pursuant to Section 1.1 above as to all Shares, then Holder shall have the option to exercise this Warrant immediately prior to and
contingent upon the consummation of a Cash/Public Acquisition, and upon such exercise, Holder shall be deemed to have restated each of the representations
and warranties in Section 4 of the Warrant as of the date thereof. In the event of a Cash/Public Acquisition where the fair market value of one Share would be
less than the Warrant Price in effect immediately prior to such Cash/Public Acquisition, then this Warrant will expire immediately prior to the consummation of
such Cash/Public Acquisition.
(c) Upon the closing of any Acquisition other than a Cash/Public Acquisition, the acquiring, surviving or successor entity shall assume the
obligations of this Warrant, and this Warrant shall thereafter be exercisable for the same securities and/or other property as would have been paid for the Shares
issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on and as of the closing of such Acquisition, subject to
further adjustment from time to time in accordance with the provisions of this Warrant.
(d) As used in this Warrant, “ Marketable Securities” means securities meeting all of the following requirements: (i) the issuer thereof is then
subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is then
current in its filing of all required reports and other information under the Act and the Exchange Act; (ii) the class and series of shares or other security of the
issuer that would be received by Holder in connection with the Acquisition were Holder to exercise this Warrant on or prior to the closing thereof is then traded in
a Trading Market, and (iii) following the closing of such Acquisition, Holder would not be restricted from publicly re-selling all of the issuer’s shares and/or other
securities that would be received by Holder in such Acquisition were Holder to exercise this Warrant in full on or prior to the closing of such Acquisition, except to
the extent that any such restriction (x) arises solely under federal or state securities laws, rules or regulations, and (y) does not extend beyond six (6) months
from the closing of such Acquisition.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SECTION 2. ADJUSTMENTS TO THE SHARES AND WARRANT PRICE .
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend or distribution on the outstanding shares of the Class payable in
additional shares of the Class or other securities or property (other than cash), then upon exercise of this Warrant, for each Share acquired, Holder shall receive,
without additional cost to Holder, the total number and kind of securities and property which Holder would have received had Holder owned the Shares of record
as of the date the dividend or distribution occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater
number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If
the outstanding shares of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be
proportionately increased and the number of Shares shall be proportionately decreased.
2 . 2 Reclassification, Exchange, Combinations or Substitution. Upon any event whereby all of the outstanding shares of the Class are
reclassified, exchanged, combined, substituted, or replaced for, into, with or by Company securities of a different class and/or series, then from and after the
consummation of such event, this Warrant will be exercisable for the number, class and series of Company securities that Holder would have received had the
Shares been outstanding on and as of the consummation of such event, and subject to further adjustment thereafter from time to time in accordance with the
provisions of this Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, combinations substitutions,
replacements or other similar events.
2.3 No Fractional Share . No fractional Share shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be
rounded down to the nearest whole Share. If a fractional Share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional
Share interest by paying Holder in cash the amount computed by multiplying the fractional interest by (i) the fair market value of a full Share, less (ii) the then-
effective Warrant Price.
2.4 Notice/Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company, at the
Company’s expense, shall notify Holder in writing within a reasonable time setting forth the adjustments to the Warrant Price, Class and/or number of Shares
and facts upon which such adjustment is based. The Company shall, upon written request from Holder, furnish Holder with a certificate of its Chief Financial
Officer, including computations of such adjustment and the Warrant Price, Class and number of Shares in effect upon the date of such adjustment.
SECTION 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY .
3.1 Representations and Covenants . The Company represents and warrants to, and agrees with, the Holder as follows:
(a) All Shares which may be issued upon the exercise of this Warrant shall, upon issuance, be duly authorized, validly issued, fully paid
and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state
securities laws.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
stock such number of shares of the Class and other securities as will be sufficient to permit the exercise in full of this Warrant.
(b) The Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued capital
3.2 Notice of Certain Events. If the Company proposes at any time to:
and whether or not a regular cash dividend;
(a) declare any dividend or distribution upon the outstanding shares of the Class, whether in cash, property, stock, or other securities
series of the Company’s stock (other than pursuant to contractual pre-emptive rights);
(b) offer for subscription or sale pro rata to the holders of the outstanding shares of the Class any additional shares of any class or
Class; or
(c) effect any reclassification, exchange, combination, substitution, reorganization or recapitalization of the outstanding shares of the
(d) effect an Acquisition or to liquidate, dissolve or wind up;
then, in connection with each such event, the Company shall give Holder notice thereof at the same time and in the same manner as given to holders of the
outstanding shares of the Class.
The Holder represents and warrants to the Company as follows:
SECTION 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER .
4.1 Purchase for Own Account. This Warrant and the Shares to be acquired upon exercise of this Warrant by Holder are being acquired for
investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Securities Act.
Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares.
4.2 Disclosure of Information. Holder is aware of the Company’s business affairs and financial condition and has received or has had full access
to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its
underlying securities. Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the
offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire
it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.
4.3 Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder
has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s
investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of
evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the
Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen
and financial circumstances of such persons.
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.4 Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Securities Act and
has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of this Warrant and the Shares
issuable hereunder.
4.5 Warrant Not Registered. Holder understands that this Warrant has not been registered under the Securities Act in reliance upon a specific
exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder’s investment intent as expressed herein.
4.6 No Voting Rights. This Warrant does not contain or give any voting rights to any Holder hereof.
SECTION 5. MISCELLANEOUS.
5.1 Term. Subject to the provisions of Section 1.4 above, this Warrant is exercisable in whole or in part at any time and from time to time on or
before 6:00 PM, Pacific time, on the Expiration Date and shall be void thereafter.
5.2 Legends. Each certificate evidencing Shares shall be imprinted with a legend in substantially the following form:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN THAT
CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY THE ISSUER TO RUNWAY GROWTH CREDIT FUND INC. DATED
JANUARY 8, 2020, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL
REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH
REGISTRATION.
5.3 Compliance with Securities Laws on Transfer . This Warrant and the Shares issued upon exercise of this Warrant may not be transferred or
assigned in whole or in part except in compliance with applicable federal and state securities laws by the transferor and the transferee (including, without
limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the
Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to a parent company or any other affiliate of Holder, provided
that any such transferee is an “accredited investor” as defined in Regulation D promulgated under the Securities Act.
5 . 4 Transfer Procedure. Subject to the provisions of Section 5.3 and upon providing the Company with written notice, Holder and any
subsequent Holder may transfer all or part of this Warrant or the Shares issued upon exercise of this Warrant to any transferee, provided, however, in
connection with any such transfer, any subsequent Holder will give the Company notice of the portion of the Warrant and/or Shares being transferred with the
name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s)
(and Holder if applicable); and provided further, that any subsequent transferee shall agree in writing with the Company to be bound by all of the terms and
conditions of this Warrant.
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5.5 Notices. All notices and other communications hereunder from the Company to the Holder, or vice versa, shall be deemed delivered and
effective (i) when given personally, (ii) on the third (3rd) Business Day after being mailed by first-class registered or certified mail, postage prepaid, (iii) upon
actual receipt if given by facsimile or electronic mail and such receipt is confirmed in writing by the recipient, or (iv) on the first Business Day following delivery to
a reliable overnight courier service, courier fee prepaid, in any case at such address as may have been furnished to the Company or Holder, as the case may
be, in writing by the Company or such Holder from time to time in accordance with the provisions of this Section 5.5. All notices to Holder shall be addressed as
follows until the Company receives notice of a change of address in connection with a transfer or otherwise:
Runway Growth Credit Fund Inc.
205 N Michigan Ave., Suite 4200
Chicago, IL 60601
Attention: Legal Reporting
Email: legalreporting@runwaygrowth.com
runwayagency@cortlandglobal.com
Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:
MTBC, Inc.
Attn: General Counsel
7 Clyde Road
Somerset, NJ 08873
Telephone: (732) 873-5133
Email: spatel@mtbc.com
5.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated (either generally or in a particular instance
and either retroactively or prospectively) only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or
termination is sought.
5.7 Counterparts; Facsimile/Electronic Signatures. This Warrant may be executed in counterparts, all of which together shall constitute one and
the same agreement. Any signature page delivered electronically or by facsimile shall be binding to the same extent as an original signature page with regards to
any agreement subject to the terms hereof or any amendment thereto.
5.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving
effect to its principles regarding conflicts of law. The parties irrevocably agree that any action to enforce the provisions of this Agreement or arising under or by
reason of this Agreement shall be brought solely in the Superior Court of New Jersey, Somerset County venue.
5.9 Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any
provision of this Warrant.
5.10 Business Days. “Business Day” is any day that is not a Saturday, Sunday or a day on which banks in New York City are closed.
[Remainder of page left blank intentionally]
[Signature page follows]
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the parties have caused this Warrant to Purchase Stock to be executed by their duly authorized representatives effective as of
the Issue Date written above.
“COMPANY”
MTBC, INC.
/s/ Shruti Patel
By:
Name: Shruti Patel
Title: General Counsel
“HOLDER”
RUNWAY GROWTH CREDIT FUND INC.
/s/ David Spreng
By:
Name: David Spreng
(Print)
CEO
Title:
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
1. The undersigned Holder hereby exercises its right to purchase ___________ shares of the Common Stock of __________________ (the
“Company”) in accordance with the attached Warrant To Purchase Stock, and tenders payment of the aggregate Warrant Price for such shares as follows:
APPENDIX 1
NOTICE OF EXERCISE
[ ]
[ ]
[ ]
check in the amount of $________ payable to order of the Company enclosed herewith
Wire transfer of immediately available funds to the Company’s account
Other [Describe] __________________________________________
2. Please issue a certificate or certificates representing the Shares in the name specified below:
Holder’s Name
(Address)
3. By its execution below and for the benefit of the Company, Holder hereby restates each of the representations and warranties in Section 4 of the
Warrant to Purchase Stock as of the date hereof.
HOLDER:
By:
Name:
Title:
(Date):
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-10.16 4 ex10-16.htm
JOINDER AND THIRD LOAN MODIFICATION AGREEMENT
Exhibit 10.16
This Joinder and Third Loan Modification Agreement (this “Agreement”) is entered into as of February 28, 2020, by and among (a) SILICON VALLEY
BANK, a California corporation, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office
located at 275 Grove Street, Suite 2-200, Newton, Massachusetts 02466 (“Bank”), (b) (i) MTBC, INC. (formerly known as MEDICAL TRANSCRIPTION
BILLING, CORP.), a Delaware corporation with its principal place of business at 7 Clyde Road, Somerset, New Jersey 08873 (“ Parent”), (ii) MTBC
ACQUISITION, CORP., a Delaware corporation with its principal place of business at 7 Clyde Road, Somerset, New Jersey 08873 (“ Acquisition”), (iii) MTBC
HEALTH, INC., a Delaware corporation with its principal place of business at 7 Clyde Road, Somerset, New Jersey 08873 (“ Health”), and (iv) MTBC PRACTICE
MANAGEMENT, CORP., a Delaware corporation with its principal place of business at 7 Clyde Road, Somerset, New Jersey 08873 (“ Management” and,
together with Parent, Acquisition, and Health, jointly and severally, individually and collectively, “Existing Borrower”), and (c) (i) MTBC-MED, INC., a Delaware
corporation with its principal place of business at 7 Clyde Road, Somerset, New Jersey 08873 (“MTBC-Med”) and (ii) CARECLOUD CORPORATION, a
Delaware corporation with its principal place of business at 7 Clyde Road, Somerset, New Jersey 08873 (“CareCloud”, and, together with MTBC-Med jointly,
severally, individually and collectively, “New Borrower”, and New Borrower, together with Existing Borrower, jointly, severally, individually and collectively,
“Borrower”).
1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS . Among other indebtedness and obligations which may be owing by Existing Borrower
to Bank, Existing Borrower is indebted to Bank pursuant to a loan arrangement dated as of October 13, 2017, evidenced by, among other documents, a certain
Loan and Security Agreement dated as of October 13, 2017, between Existing Borrower and Bank, as amended and affected by a certain Joinder and First Loan
Modification Agreement dated as of September 20, 2018, and as further amended by a certain Second Loan Modification Agreement dated as of November 15,
2019 (as has been and as may be further amended, modified, restated, replaced or supplemented from time to time, the “Loan Agreement”). Capitalized terms
used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.
2. JOINDER TO LOAN AGREEMENT. New Borrower hereby joins the Loan Agreement and each of the Loan Documents, and agrees to comply with and be
bound by all of the terms, conditions and covenants of the Loan Agreement and Loan Documents, as if it were originally named a “Borrower” therein. Without
limiting the generality of the preceding sentence, New Borrower agrees that it will be jointly and severally liable, together with Existing Borrower, for the payment
and performance of all obligations and liabilities of Borrower under the Loan Agreement, including, without limitation, the Obligations. Each Borrower hereby
appoints each other Borrower as its agent for all purposes hereunder. Each Borrower hereunder shall be obligated to repay all Credit Extensions made pursuant
to the Loan Agreement, regardless of which Borrower actually receives said Credit Extension, as if each Borrower hereunder directly received all Credit
Extensions.
3. SUBROGATION AND SIMILAR RIGHTS . Each Borrower waives any suretyship defenses available to it under the Code or any other applicable law until all
Obligations are indefeasibly paid in full (except for inchoate indemnification obligations). Each Borrower waives any right to require Bank to: (i) proceed against
any other Borrower or any other person; (ii) proceed against or exhaust any security; or (iii) pursue any other remedy. Bank may exercise or not exercise any
right or remedy it has against any Borrower or any security it holds (including the right to foreclose by judicial or non-judicial sale) without affecting any
Borrower’s liability. Notwithstanding any other provision of this Agreement, the Loan Agreement or other Loan Documents, each Borrower irrevocably fully
subordinates and defers, until all Obligations are indefeasibly paid in full (except for inchoate indemnification obligations) all rights that it may have at law or in
equity (including, without limitation, any law subrogating Borrower to the rights of Bank under the Loan Agreement) to seek contribution, indemnification or any
other form of reimbursement from any other Borrower, or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, for any
payment made by Borrower with respect to the Obligations in connection with the Loan Agreement or otherwise and all rights that it might have to benefit from,
or to participate in, any security for the Obligations as a result of any payment made by Borrower with respect to the Obligations in connection with the Loan
Agreement or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this Section 3 shall be null and
void. If any payment is made to a Borrower in contravention of this Section 3, such Borrower shall hold such payment in trust for Bank and such payment shall be
promptly delivered to Bank for application to the Obligations, whether matured or unmatured.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4 . GRANT OF SECURITY INTEREST . To secure the prompt payment and performance of all of the Obligations, New Borrower hereby grants to Bank a
continuing lien upon and security interest in all of New Borrower’s now existing or hereafter arising rights and interest in the Collateral, whether now owned or
existing or hereafter created, acquired, or arising, and wherever located, including, without limitation, all of New Borrower’s assets, and all of New Borrower’s
books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories,
accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing. New Borrower further covenants
and agrees that by its execution hereof it shall provide all such information, complete all such forms, and take all such actions, and enter into all such
agreements, in form and substance reasonably satisfactory to Bank that are reasonably deemed necessary by Bank in order to grant a valid, perfected first
priority security interest to Bank in the Collateral (subject only to Permitted Liens that are permitted pursuant to the terms of the Loan Agreement to have
superior priority to Bank’s lien under the Loan Agreement). New Borrower hereby authorizes Bank to file financing statements, without notice to Borrower, with
all appropriate jurisdictions in order to perfect or protect Bank’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either
Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code. Any such financing statement may indicate the Collateral as “all
assets of Debtor” or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in Bank’s discretion.
5 . REPRESENTATIONS AND WARRANTIES. New Borrower hereby represents and warrants to Bank that all representations and warranties in the Loan
Documents made on the part of Existing Borrower are true and correct on the date hereof with respect to New Borrower, with the same force and effect as if
New Borrower was named as “Borrower” in the Loan Documents in addition to Existing Borrower.
6 . DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by, among other property, the Collateral as defined in the Loan Agreement
(together with any other collateral security granted to Bank, as amended the “Security Documents”). Hereinafter, the Security Documents, together with all other
documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.
7. DELIVERY OF DOCUMENTS. Each Borrower hereby agrees that the following documents shall be delivered to Bank prior to or contemporaneously with
delivery of this Agreement, each in form and substance satisfactory to Bank:
a. a secretary’s corporate borrowing certificate for each New Borrower with respect to such Borrower’s certificate of incorporation, by-laws, incumbency
and resolutions authorizing the execution and delivery of this Agreement and the other documents required by Bank in connection with this
Agreement;
b. consent of the shareholders of each New Borrower authorizing the execution and delivery of this Agreement and the other documents required by
Bank in connection with this Agreement (if required by such New Borrower’s corporate documents);
c. a long-form Certificate of Good Standing for each New Borrower from the State of Delaware;
d.
the results of a UCC search for each New Borrower indicating that there are no Liens other than Permitted Liens, and otherwise in form and
substance satisfactory to Bank;
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
e. a Perfection Certificate for each Borrower;
f.
evidence of insurance (on Acord 28 and Acord 25 certificates, together with endorsements to the liability and property policies, as acceptable to
Bank) for each New Borrower; and
g. such other documents as Bank may reasonably request.
8. DESCRIPTION OF CHANGE IN TERMS .
A.
Modifications to Loan Agreement.
1
Borrower hereby acknowledges and agrees that, on or before the date that is thirty (30) days from the date of this Agreement, Borrower
will deliver to Bank, in form and substance satisfactory to Bank, (a) an Acord 25 liability insurance certificate, (b) an Acord 28 property
insurance certificate, (c) an endorsement to Borrower’s liability insurance policy naming Bank as an additional insured, (d) an
endorsement to Borrower’s property insurance policy naming Bank as lender’s loss payable, and (e) endorsements to Borrower’s liability
and property insurance policies stating that the insurer will provide Bank with thirty (30) days’ prior written notice before any such policy
or policies shall be materially altered or canceled. Borrower acknowledges and agrees that the failure of Borrower to satisfy the
requirements set forth in the immediately preceding sentence on or before the date that is thirty (30) days from the date of this
Agreement shall result in an immediate Event of Default under the Loan Agreement for which there shall be no grace or cure period.
2
The Loan Agreement shall be amended by deleting the following text, appearing in Section 6.9 thereof:
“(a) Liquidity Ratio. Maintain at all times, to be tested as of the last day of each month, a Liquidity Ratio of at least 1.0 to
1.0.”
and inserting in lieu thereof the following:
“(a) Liquidity Ratio. Maintain: (i) at all times during the period commencing on the Effective Date through February 27,
2020, to be tested as of the last day of each month, a Liquidity Ratio of at least 1.0 to 1.0; (ii) at all times during the period
commencing on February 28, 2020 through and including September 30, 2020, to be tested as of the last day of each month, a
Liquidity Ratio of at least 1.25 to 1.0; and (iii) at all times on and after October 1, 2020, to be tested as of the last day of each
month, a Liquidity Ratio of at least 1.0 to 1.0.”
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
3
The Loan Agreement shall be amended by deleting the following text, appearing in Section 6.9(b) thereof:
“(ii) to be tested as of the last day of each month commencing with the month ending November 30, 2019, Adjusted
EBITDA, measured for the six (6) month period ending on the last day of such month, of at least (A) One Million Four Hundred
Fifty Thousand Dollars ($1,450,000.00) for the six (6) month period ending November 30, 2019, (B) One Million Five Hundred
Thousand Dollars ($1,500,000.00) for the six (6) month period ending December 31, 2019, (C) One Million Six Hundred
Thousand Dollars ($1,600,000.00) for the six (6) month periods ending January 31, 2020, February 29, 2020, and March 31,
2020, (D) One Million Eight Hundred Fifty Thousand Dollars ($1,850,000.00) for the six (6) month periods ending April 30,
2020, May 31, 2020, and June 30, 2020, (E) Two Million Fifty Thousand Dollars ($2,050,000.00) for the six (6) month periods
ending July 31, 2020, August 31, 2020, and September 30, 2020, and (F) Two Million Two Hundred Fifty Thousand Dollars
($2,250,000.00) for the six (6) month period ending October 31, 2020 and for the six (6) month period ending on the last day of
each month thereafter.”
and inserting in lieu thereof the following:
“(ii) to be tested as of the last day of each month set forth below commencing with the month ending November 30,
2019, Adjusted EBITDA, measured for the six (6) month period ending on the last day of such month, of at least (A) One Million
Four Hundred Fifty Thousand Dollars ($1,450,000.00) for the six (6) month period ending November 30, 2019 and (B) Two
Million Two Hundred Fifty Thousand Dollars ($2,250,000.00) for the six (6) month period ending October 31, 2020 and for the
six (6) month period ending on the last day of each month thereafter.”
4
The Loan Agreement shall be amended by deleting the following text, appearing in the definition of “Permitted Indebtedness” in Section
13.1 thereof:
“(f) Indebtedness consisting of the financing of insurance premiums not exceeding Four Hundred Fifty Thousand Dollars
($450,000.00) in the aggregate outstanding at any time; and”
and inserting in lieu thereof the following:
“(f) Indebtedness consisting of the financing of insurance premiums not exceeding Six Hundred Thousand Dollars
($600,000.00) in the aggregate outstanding at any time; and”
5
The Loan Agreement shall be amended by inserting the following new definitions, appearing alphabetically in Section 13.1 thereof:
“CareCloud” is CareCloud Corporation, a Delaware corporation.”
“MTBC-Med” is MTBC-Med, Inc., a Delaware corporation.”
6
The Loan Agreement shall be amended by deleting the following definition, appearing in Section 13.1 thereof:
“Borrower” means, individually and collectively, jointly and severally, Parent Borrower, Acquisition, Health and
Management.”
and inserting in lieu thereof the following:
“Borrower” means, individually and collectively, jointly and severally, Parent Borrower, Acquisition, Health,
Management, MTBC-Med and CareCloud.”
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
7
8
The Loan Agreement shall be amended in the definition of Permitted Investments in Section 13.1 thereof by (i) deleting “and” appearing
at the end of subsection (g) and (ii) deleting subsection (h) in its entirety and inserting in lieu thereof:
“(h) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and
suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (h) shall not apply to
Investments of Borrower in any Subsidiary; and
(i) Investments by Borrower in an independent telehealth entity in an aggregate amount not to exceed One Million
Dollars ($1,000,000.00).”
The Compliance Certificate appearing as Exhibit B to the Loan Agreement is hereby replaced with the Compliance Certificate attached
as Schedule 1 hereto.
9 . FEES AND EXPENSES. Borrower shall pay to Bank a modification fee equal to Two Thousand Five Hundred Dollars ($2,500.00), which fee shall be fully
earned, due and payable as of the date hereof. Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with this amendment
to the Existing Loan Documents.
10. PERFECTION CERTIFICATES.
(a) Parent hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as of
February 28, 2020 (the “Parent Perfection Certificate”) delivered by Parent to Bank, and acknowledges, confirms and agrees that the disclosures and
information Parent provided to Bank in the Parent Perfection Certificate have not changed, as of the date hereof.
(b) Acquisition hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as of
February 28, 2020 (the “Acquisition Perfection Certificate”) delivered by Acquisition to Bank, and acknowledges, confirms and agrees that the disclosures and
information Acquisition provided to Bank in the Acquisition Perfection Certificate have not changed, as of the date hereof.
(c) Health hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as of
February 28, 2020 (the “Health Perfection Certificate ”) delivered by Health to Bank, and acknowledges, confirms and agrees that the disclosures and
information Health provided to Bank in the Health Perfection Certificate have not changed, as of the date hereof.
(d) Management hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as
of February 28, 2020 (the “Management Perfection Certificate”) delivered by Management to Bank, and acknowledges, confirms and agrees that the
disclosures and information Management provided to Bank in the Management Perfection Certificate have not changed, as of the date hereof.
(e) In connection with this Agreement, MTBC-Med delivered to Bank a Perfection Certificate signed by MTBC-Med dated as of the date of this Agreement
(the “MTBC-Med Perfection Certificate”). MTBC-Med represents and warrants to Bank that: (i) MTBC-Med’s exact legal name is that indicated on the MTBC-
Med Perfection Certificate and on the signature page hereof; and (ii) MTBC-Med is an organization of the type, and is organized in the jurisdiction, set forth in
the MTBC-Med Perfection Certificate; and (iii) the MTBC-Med Perfection Certificate accurately sets forth MTBC-Med’s organizational identification number or
accurately states that MTBC-Med has none; (iv) the MTBC-Med Perfection Certificate accurately sets forth MTBC-Med’s place of business, or, if more than one,
its chief executive office as well as MTBC-Med’s mailing address if different, and (v) all other information set forth on the MTBC-Med Perfection Certificate
pertaining to MTBC-Med is accurate and complete.
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(f) In connection with this Agreement, CareCloud delivered to Bank a Perfection Certificate signed by CareCloud dated as of the date of this Agreement
(the “CareCloud Perfection Certificate ”). CareCloud represents and warrants to Bank that: (i) CareCloud’s exact legal name is that indicated on the CareCloud
Perfection Certificate and on the signature page hereof; and (ii) CareCloud is an organization of the type, and is organized in the jurisdiction, set forth in the
CareCloud Perfection Certificate; and (iii) the CareCloud Perfection Certificate accurately sets forth CareCloud’s organizational identification number or
accurately states that CareCloud has none; (iv) the CareCloud Perfection Certificate accurately sets forth CareCloud’s place of business, or, if more than one, its
chief executive office as well as CareCloud’s mailing address if different, and (v) all other information set forth on the CareCloud Perfection Certificate pertaining
to CareCloud is accurate and complete.
Borrower hereby acknowledges and agrees that all references in the Loan Agreement to the “Perfection Certificate” shall mean and include, collectively,
the Parent Perfection Certificate, the Acquisition Perfection Certificate, the Health Perfection Certificate, the Management Perfection Certificate, the MTBC-Med
Perfection Certificate, and the CareCloud Perfection Certificate.
11. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.
12. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted
to Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.
13. RELEASE BY BORROWER.
A.
FOR GOOD AND VALUABLE CONSIDERATION, Borrower hereby forever relieves, releases, and discharges Bank and its present or former
employees, officers, directors, agents, representatives, attorneys, and each of them, from any and all claims, debts, liabilities, demands,
obligations, promises, acts, agreements, costs and expenses, actions and causes of action, of every type, kind, nature, description or character
whatsoever, whether known or unknown, suspected or unsuspected, absolute or contingent, arising out of or in any manner whatsoever
connected with or related to facts, circumstances, issues, controversies or claims existing or arising from the beginning of time through and
including the date of execution of this Agreement (collectively “Released Claims”). Without limiting the foregoing, the Released Claims shall
include any and all liabilities or claims arising out of or in any manner whatsoever connected with or related to the Loan Documents, the Recitals
hereto, any instruments, agreements or documents executed in connection with any of the foregoing or the origination, negotiation,
administration, servicing and/or enforcement of any of the foregoing.
B.
In furtherance of this release, Borrower expressly acknowledges and waives any and all rights under Section 1542 of the California Civil Code,
which provides as follows:
“A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at
the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or
released party.” (Emphasis added.)
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
C.
D.
By entering into this release, Borrower recognizes that no facts or representations are ever absolutely certain and it may hereafter discover facts
in addition to or different from those which it presently knows or believes to be true, but that it is the intention of Borrower hereby to fully, finally
and forever settle and release all matters, disputes and differences, known or unknown, suspected or unsuspected; accordingly, if Borrower
should subsequently discover that any fact that it relied upon in entering into this release was untrue, or that any understanding of the facts was
incorrect, Borrower shall not be entitled to set aside this release by reason thereof, regardless of any claim of mistake of fact or law or any other
circumstances whatsoever. Borrower acknowledges that it is not relying upon and has not relied upon any representation or statement made by
Bank with respect to the facts underlying this release or with regard to any of such party’s rights or asserted rights.
This release may be pleaded as a full and complete defense and/or as a cross-complaint or counterclaim against any action, suit, or other
proceeding that may be instituted, prosecuted or attempted in breach of this release. Borrower acknowledges that the release contained herein
constitutes a material inducement to Bank to enter into this Agreement, and that Bank would not have done so but for Bank’s expectation that
such release is valid and enforceable in all events.
E.
Borrower hereby represents and warrants to Bank, and Bank is relying thereon, as follows:
1
2
3
4
5
Except as expressly stated in this Agreement, neither Bank nor any agent, employee or representative of Bank has made any statement
or representation to Borrower regarding any fact relied upon by Borrower in entering into this Agreement.
Borrower has made such investigation of the facts pertaining to this Agreement and all of the matters appertaining thereto, as it deems
necessary.
The terms of this Agreement are contractual and not a mere recital.
This Agreement has been carefully read by Borrower, the contents hereof are known and understood by Borrower, and this Agreement
is signed freely, and without duress, by Borrower.
Borrower represents and warrants that it is the sole and lawful owner of all right, title and interest in and to every claim and every other
matter which it releases herein, and that it has not heretofore assigned or transferred, or purported to assign or transfer, to any person,
firm or entity any claims or other matters herein released. Borrower shall indemnify Bank, defend and hold it harmless from and against
all claims based upon or arising in connection with prior assignments or purported assignments or transfers of any claims or matters
released herein.
14. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Agreement, the terms of the Existing
Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this Agreement in no
way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Agreement shall constitute a satisfaction of the Obligations. It is the
intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No
maker will be released by virtue of this Agreement.
15. COUNTERSIGNATURE. This Agreement shall become effective only when it shall have been executed by Borrower and Bank.
[The remainder of this page is intentionally left blank]
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the Commonwealth of
Massachusetts as of the date first written above.
EXISTING BORROWER:
BANK:
MTBC, INC.
/s/ Bill Korn
By
Name: Bill Korn
Title:
CFO
MTBC ACQUISITION, CORP.
/s/ Bill Korn
By
Name: Bill Korn
Title:
CFO
MTBC HEALTH, INC.
/s/ Bill Korn
By
Name: Bill Korn
Title:
CFO
MTBC PRACTICE MANAGEMENT, CORP.
/s/ Bill Korn
By
Name: Bill Korn
Title:
CFO
SILICON VALLEY BANK
/s/ Michael McMahon
By
Name: Michael McMahon
Title: Director
[Signatures continue on the next page]
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NEW BORROWER
MTBC-MED, INC.
/s/ Bill Korn
By
Name: Bill Korn
Title: CFO
CARECLOUD CORPORATION
/s/ Bill Korn
By
Name: Bill Korn
Title: CFO
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SCHEDULE 1
EXHIBIT B
COMPLIANCE CERTIFICATE
Date:_________________
TO:
FROM:
SILICON VALLEY BANK
MTBC, INC., MTBC ACQUISITION, CORP.,
MTBC HEALTH, INC., MTBC PRACTICE
MANAGEMENT, CORP., MTBC-MED, INC. and
CARECLOUD CORPORATION
The undersigned authorized officer of MTBC, INC., MTBC ACQUISITION, CORP., MTBC HEALTH, INC., MTBC PRACTICE MANAGEMENT,
CORP., MTBC-MED, INC. and CARECLOUD CORPORATION (jointly and severally, individually and collectively, “Borrower”) certifies that under the terms and
conditions of the Loan and Security Agreement between Borrower and Bank (the “Agreement”), (1) Borrower is in complete compliance for the period ending
_______________ with all required covenants except as noted below, (2) there are no Events of Default, (3) all representations and warranties in the Agreement
are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and
warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, (4) Borrower, and each of its
Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits
and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement, and (5) no Liens have been levied or
claims made against Borrower or any of its Subsidiaries, if any, relating to unpaid employee payroll or benefits of which Borrower has not previously provided
written notification to Bank. Attached are the required documents supporting the certification. The undersigned certifies that these are prepared in accordance
with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no
borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that
compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given
them in the Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.
Reporting Covenants
Required
Monthly financial statements with Compliance Certificate
Annual financial statements (CPA Audited) on Form 10-K
Monthly within 30 days
Within 5 days after filing with
10-Q and 8-K
A/R & A/P Agings
Repeatable Revenue Reports
Board-approved projections
SEC
Within 5 days after filing with
SEC
Monthly within 30 days
Monthly within 30 days
FYE within 30 days, and as updated/
amended
Complies
Yes No
Yes No
Yes No
Yes No
Yes No
Financial Covenants
Required
Actual
Complies
Maintain as indicated:
Liquidity Ratio (at all times; tested monthly)
Adjusted EBITDA (trailing six-month; tested
monthly)
* As set forth in Section 6.9(a) of the Agreement
** As set forth in Section 6.9(b) of the Agreement
> ____* : 1.0
______ : 1.0
Yes No
> _______**
______ : 1.0
Yes No N/A
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following financial covenant analyses and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.
The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)
MTBC, INC.
MTBC ACQUISITION, CORP.
MTBC HEALTH, INC.
MTBC PRACTICE MANAGEMENT, CORP.
MTBC-MED, INC.
CARECLOUD CORPORATION
By:
Name:
Title:
BANK USE ONLY
Received by: _____________________
AUTHORIZED SIGNER
Date: _________________________
Verified: ________________________
AUTHORIZED SIGNER
Date: _________________________
Compliance Status: Yes No
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In the event of a conflict between this Schedule and the Loan Agreement, the terms of the Loan Agreement shall govern.
Schedule 1 to Compliance Certificate
Financial Covenants of Borrower
Dated: ____________________
I. Liquidity Ratio (at all times) (tested monthly) (Section 6.9(a))
Required: > ____*: 1.0
*As set forth in Section 6.9(a) of the Agreement
Actual: ___ : 1:0
A.
B.
C.
D.
Aggregate value of Borrower’s unrestricted and unencumbered cash and Cash Equivalents maintained with Bank and Bank’s Affiliates
$
Aggregate value of Borrower’s net billed accounts receivable
The sum of lines A and B
All obligations and liabilities of Borrower to Bank (other than any obligations related to Bank Services that are secured by specifically
pledged and segregated cash on terms and in amounts satisfactory to Bank in its sole discretion)
$
$
$
E.
Liquidity Ratio (line C divided by line D)
Is line E equal to or greater than the amount set forth above?
___________No, not in compliance __________Yes, in compliance
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
II. Adjusted EBITDA (trailing six-month) (tested monthly) (Section 6.9(b))
Required: $_________________**
**As set forth in Section 6.9(b) of the Agreement.
Actual: $_________________
A.
B.
C.
D.
E.
F.
Net Income
To the extent included in the determination of Net Income
1.
2.
3.
4.
5.
6.
7.
8.
9.
Interest Expense
Income tax expense
Depreciation
Amortization expense
Non-cash stock-based compensation expense
Stock-based compensation payable in cash (not to exceed $250,000 per fiscal year)
Foreign currency gains and losses
Gain or loss resulting from the change in the value of contingent consideration and non-recurring transaction and
integration costs related to acquisitions that occurred prior to the Effective Date
Gain or loss resulting from the change in the value of contingent consideration and non-recurring transaction and
integration costs related to acquisitions occurring on or after the Effective Date to the extent approved by Bank on a case-
by-case basis in its sole discretion
10.
The sum of lines 1 through 9
Unfinanced capital expenditures
Capitalized software expenses
The sum of lines C and D
Adjusted EBITDA (line A plus line B.10 minus line E)
Is line F equal to or greater than the required amount set forth above?
____________ No, not in compliance __________Yes, in compliance
ny-1861516
$__________
$__________
$__________
$__________
$__________
$__________
$__________
$__________
$__________
$__________
$__________
$__________
$__________
$__________
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-10.17 5 ex10-17.htm
ESCROW AGREEMENT
Exhibit 10.17
THIS ESCROW AGREEMENT (this “Agreement”) is entered into as of January 8, 2020, by and among MTBC, Inc. a Delaware corporation
(“Purchaser”), Runway Growth Credit Fund Inc (the “Sellers’ Representative”) and TD Bank, NA (the “ Escrow Agent”). Purchaser, Sellers’ Representative and
Escrow Agent are each referred to herein as a “Party” and collectively, as the “ Parties”.
WHEREAS, Purchaser and Sellers’ Representative, among others, have entered into an Agreement and Plan of Merger dated as of January 8, 2020 (the
“Merger Agreement”);
WHEREAS, except as otherwise provided herein, capitalized terms used in this Escrow Agreement have the meanings assigned to them in the Merger
Agreement; and
WHEREAS, pursuant to the Merger Agreement, the Parties have agreed that a portion of the Merger Consideration consisting of 260,000 shares of
MTBC 11% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Escrow Shares”) be deposited with the Escrow Agent subject to the terms and
conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth, the Parties hereto agree as follows:
1 . Appointment. The Parties hereby appoint Escrow Agent as their escrow agent for the purposes set forth herein, and Escrow Agent hereby accepts such
appointment under the terms and conditions set forth herein.
2 . Disposition. The Escrow Agent shall disburse the Escrow Shares in accordance with any written direction executed by both the Purchaser and Sellers’
Representative.
3. Escrow Shares.
(a) Transferability. Except in accordance with Section 3, none of the Escrow Shares shall be transferred, assigned or pledged by the Escrow Agent or
any other Party.
(b) Voting. No Party will have any voting rights with respect to the Escrow Shares.
(c) Dividends, Etc. No cash dividends or other distributions paid on the Escrow Shares shall be paid to any Party until such shares have been released
from escrow. If and when Escrow Shares are released to Sellers’ Representative (the “Released Escrow Shares”), Purchaser will pay to Escrow Agent, for
distribution to Sellers’ Representative, all dividends and distributions that were declared on such Released Escrow Shares while they were held in escrow.
Escrow Agent has no duty to solicit any dividends, redemption or other distributions hereunder.
(d) Fractional Shares. No fractional shares of MTBC Preferred Stock or other securities shall be retained in or released from the escrow account
pursuant to this Agreement. In connection with any release of Escrow Shares from the escrow account, Purchaser shall be permitted to round to the nearest
whole number or to follow such other rounding procedures as Purchaser reasonably determines to be appropriate in order to avoid retaining any fractional
shares in the escrow account and in order to avoid releasing any fractional shares from the escrow account.
1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. Communications with Escrow Agent. Any instructions setting forth, claiming, containing, objecting to, or in any way related to the transfer or distribution of
the Escrow Shares must be in writing or set forth in a Portable Document Format (“PDF”), executed by the appropriate Party or Parties as evidenced by the
signatures of the person or persons signing this Agreement or one of their designated persons as set forth in Schedule 1 (each an “Authorized Representative”),
and delivered to Escrow Agent only by confirmed facsimile or attached to an email on a Business Day only at the fax number or email address set forth in
Section 10 below. No instruction for or related to the transfer or distribution of Escrow Shares shall be deemed delivered and effective unless Escrow Agent
actually shall have received it on a Business Day by facsimile or as a PDF attached to an email only at the fax number or email address set forth in Section 10
and as evidenced by a confirmed transmittal to the Party’s or Parties’ transmitting fax number or email address and Escrow Agent has been able to satisfy any
applicable security procedures as may be required hereunder. Escrow Agent shall not be liable to any Party or other person for refraining from acting upon any
instruction for or related to the transfer or distribution of the Escrow Shares if delivered to any other fax number or email address, including but not limited to a
valid email address of any employee of Escrow Agent. As used in this Section 5, “Business Day” shall mean any day other than a Saturday, Sunday or any other
day on which Escrow Agent located at the notice address set forth below is authorized or required by law or executive order to remain closed. The Parties
acknowledge that the security procedures set forth in this Section 5 are commercially reasonable. Upon delivery of the Escrow Shares by Escrow Agent, this
Agreement shall terminate, subject to the provisions of Section 9.
5 . Escrow Agent. Escrow Agent shall have only those duties as are specifically and expressly provided herein, which shall be deemed purely ministerial in
nature, and no other duties, including but not limited to any fiduciary duty, shall be implied. Escrow Agent has no knowledge of, nor any obligation to comply with,
the terms and conditions of any other agreement between the Parties, nor shall Escrow Agent be required to determine if any Party has complied with any other
agreement. Notwithstanding the terms of any other agreement between the Parties, the terms and conditions of this Agreement shall control the actions of
Escrow Agent. Escrow Agent may conclusively rely upon any written notice, document, instruction or request delivered by the Parties believed by it to be
genuine and to have been signed by an Authorized Representative(s), as applicable, without inquiry and without requiring substantiating evidence of any kind and
Escrow Agent shall be under no duty to inquire into or investigate the validity, accuracy or content of any such document, notice, instruction or request. Escrow
Agent shall not be liable for any action taken, suffered or omitted to be taken by it in good faith except to the extent that Escrow Agent’s gross negligence or
willful misconduct was the cause of any direct loss to either Party. Escrow Agent may execute any of its powers and perform any of its duties hereunder directly
or through affiliates or agents. In the event Escrow Agent shall be uncertain, or believes there is some ambiguity, as to its duties or rights hereunder or receives
instructions, claims or demands from any Party hereto which in Escrow Agent’s judgment conflict with the provisions of this Agreement, or if Escrow Agent
receives conflicting instructions from the Parties, Escrow Agent shall be entitled either to: (a) refrain from taking any action until it shall be given (i) a joint written
direction executed by Authorized Representatives of the Parties which eliminates such conflict or (ii) a court order issued by a court of competent jurisdiction (it
being understood that the Escrow Agent shall be entitled conclusively to rely and act upon any such court order and shall have no obligation to determine
whether any such court order is final); or (b) file an action in interpleader. Escrow Agent shall have no duty to solicit any payments which may be due it,
including, without limitation, the Escrow Shares nor shall the Escrow Agent have any duty or obligation to confirm or verify the accuracy or correctness of any
amounts deposited with it hereunder. Anything in this Agreement to the contrary notwithstanding, in no event shall Escrow Agent be liable for special, incidental,
punitive, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if Escrow Agent has been advised of the
likelihood of such loss or damage and regardless of the form of action.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
6. Resignation; Succession. Escrow Agent may resign and be discharged from its duties or obligations hereunder by giving thirty (30) days advance notice in
writing of such resignation to the Parties. Escrow Agent’s sole responsibility after such thirty (30) day notice period expires shall be to hold the Escrow Shares
and to deliver the same to a designated substitute escrow agent, if any, appointed by the Parties, or such other person designated by the Parties, or in
accordance with the directions of a final court order, at which time of delivery, Escrow Agent’s obligations hereunder shall cease and terminate. If prior to the
effective resignation date, the Parties have failed to appoint a successor escrow agent, or to instruct the Escrow Agent to deliver the Escrow Shares to another
person as provided above, at any time on or after the effective resignation date, Escrow Agent either (a) may interplead the Escrow Shares with a court located
in the State of New York and the costs, expenses and reasonable attorney’s fees which are incurred in connection with such proceeding may be charged
against and withdrawn from the Escrow Shares; or (b) appoint a successor escrow agent of its own choice. Any appointment of a successor escrow agent shall
be binding upon the Parties and no appointed successor escrow agent shall be deemed to be an agent of Escrow Agent. Escrow Agent shall deliver the Escrow
Shares to any appointed successor escrow agent, at which time Escrow Agent’s obligations under this Agreement shall cease and terminate. Any entity into
which Escrow Agent may be merged or converted or with which it may be consolidated, or any entity to which all or substantially all the escrow business may
be transferred, shall be the Escrow Agent under this Agreement without further act.
7 . Compensation. The Parties agree severally and not jointly to pay Escrow Agent upon execution of this Agreement and from time to time thereafter
reasonable compensation for the services to be rendered hereunder, which unless otherwise agreed in writing, shall be as described in Schedule 2. Each of the
Parties further agrees to the disclosures set forth in Schedule 2.
8. Indemnification and Reimbursement. The Parties agree jointly and severally to indemnify, defend, hold harmless, pay or reimburse Escrow Agent and its
affiliates and their respective successors, assigns, directors, agents and employees (the “Indemnitees”) from and against any and all losses, damages, claims,
liabilities, penalties, judgments, settlements, litigation, investigations, costs or expenses (including, without limitation, the fees and expenses of outside counsel
and experts and their staffs and all expense of document location, duplication and shipment) (collectively “Losses”), arising out of or in connection with (a)
Escrow Agent’s performance of this Agreement, except to the extent that such Losses are determined by a court of competent jurisdiction to have been caused
by the gross negligence, willful misconduct, or bad faith of such Indemnitee; and (b) Escrow Agent’s following any instructions or directions, whether joint or
singular, from the Parties received in accordance with this Agreement. The Parties hereby grant Escrow Agent a lien on, right of set-off against and security
interest in the Escrow Shares for the payment of any claim for indemnification, fees, expenses and amounts due to Escrow Agent or an Indemnitee. In
furtherance of the foregoing, Escrow Agent is expressly authorized and directed, but shall not be obligated, to charge against and withdraw from the Escrow
Shares for its own account or for the account of an Indemnitee any amounts due to Escrow Agent or to an Indemnitee under Section 8 or 9. The obligations set
forth in this Section 9 shall survive the resignation, replacement or removal of Escrow Agent or the termination of this Agreement.
9. Notices. All communications hereunder shall be in writing or set forth in a PDF attached to an email, and all instructions from a Party or the Parties to the
Escrow Agent shall be executed by an Authorized Representative, and shall be delivered in accordance with the terms of this Agreement by facsimile, email or
overnight courier only to the appropriate fax number, email address, or notice address set forth for each party as follows:
If to Purchaser:
MTBC, Inc.
7 Clyde Road
Somerset, NJ 08873
Attn: General Counsel
Facsimile: (732) 227-8575
Email: legal@mtbc.com
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
If to Seller’s Representative:
Runway Growth Credit Fund Inc.
205 North Michigan Avenue, Suite 4200
Chicago, Illinois 60601
Attention: Tom Raterman, CFO
Facsimile:
Email:
If to Escrow Agent:
TD Bank, N.A.
2059 Springdale Road
Cherry Hill, NJ 08003
Attention: David Leondi
Fax No.: 856-685-5267
Email Address: david.leondi@td.com
10. Compliance with Court Orders. In the event that a legal garnishment, attachment, levy, restraining notice or court order is served with respect to any of the
Escrow Shares, or the delivery thereof shall be stayed or enjoined by an order of a court, Escrow Agent is hereby expressly authorized, in its sole discretion, to
obey and comply with all such orders so entered or issued, which it is advised by legal counsel of its own choosing is binding upon it, whether with or without
jurisdiction, and in the event that Escrow Agent obeys or complies with any such order it shall not be liable to any of the Parties hereto or to any other person by
reason of such compliance notwithstanding such order be subsequently reversed, modified, annulled, set aside or vacated.
11. Miscellaneous. The provisions of this Agreement may be waived, altered, amended or supplemented only by a writing signed by the Escrow Agent and the
Parties. Neither this Agreement nor any right or interest hereunder may be assigned by any Party without the prior consent of Escrow Agent and the other Party.
This Agreement shall be governed by and construed under the laws of the State of New Jersey. Each Party and Escrow Agent irrevocably waives any objection
on the grounds of venue, forum non-conveniens or any similar grounds and irrevocably consents to service of process by mail or in any other manner permitted
by applicable law and consents to the jurisdiction of the courts located in the State of New Jersey. To the extent that in any jurisdiction either Party may now or
hereafter be entitled to claim for itself or its assets, immunity from suit, execution, attachment (before or after judgment) or other legal process, such Party shall
not claim, and hereby irrevocably waives, such immunity. Escrow Agent and the Parties further hereby waive any right to a trial by jury with respect to any lawsuit
or judicial proceeding arising or relating to this Agreement. No party to this Agreement is liable to any other party for losses due to, or if it is unable to perform its
obligations under the terms of this Agreement because of, acts of God, fire, war, terrorism, floods, strikes, electrical outages, equipment or transmission failure,
or other causes reasonably beyond its control. This Agreement and any joint instructions from the Parties may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute one and the same instrument or instruction, as applicable. All signatures of the
parties to this Agreement may be transmitted by facsimile or as a PDF attached to an email, and such facsimile or PDF will, for all purposes, be deemed to be
the original signature of such party whose signature it reproduces, and will be binding upon such party. If any provision of this Agreement is determined to be
prohibited or unenforceable by reason of any applicable law of a jurisdiction, then such provision shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions thereof, and any such prohibition or unenforceability in such jurisdiction shall not
invalidate or render unenforceable such provisions in any other jurisdiction. The Parties represent, warrant and covenant that each document, notice, instruction
or request provided by such Party to Escrow Agent shall comply with applicable laws and regulations. Except as expressly provided in Section 9 above, nothing
in this Agreement, whether express or implied, shall be construed to give to any person or entity other than Escrow Agent and the Parties any legal or equitable
right, remedy, interest or claim under or in respect of the Account or this Agreement.
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above.
MTBC, Inc.
/s/ Shruti Patel
By:
Name: Shruti Patel
Title: General Counsel
TD Bank, N.A.
/s/ David C. Leondi
By:
Name: David C. Leondi
Title:
Vice President
Runway Growth Credit Fund Inc.
/s/ David Spreng
By:
Name: David Spreng
Title: CEO
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SCHEDULE 1
Telephone Numbers and Authorized Signatures for
Person(s) Designated to Give Instructions and Confirm Funds Transfer Instructions
For Purchaser:
Name
Telephone Number
Signature
Shruti Patel, General Counsel
732-873-5133 x146
1.
2.
3.
For Sellers’ Representative:
Name
Telephone Number
Signature
1.
2.
3.
All instructions, including but not limited to funds transfer instructions, whether transmitted by facsimile or set forth in a PDF attached to an email, must include
the signature of the Authorized Representative authorizing said funds transfer on behalf of such Party.
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SCHEDULE 2
TD Bank
Based upon our current understanding of your proposed transaction, our fee proposal is as follows:
Account Acceptance Fee . $0
Schedule of Fees for Escrow Agent Services
Encompassing review, negotiation and execution of governing documentation, opening of the account, and completion of all due diligence documentation.
Payable upon closing.
Annual Administration Fee $6,000
The Administration Fee covers our usual and customary ministerial duties, including record keeping, distributions, document compliance and such other duties
and responsibilities expressly set forth in the governing documents for each transaction. Payable upon closing and annually in advance thereafter, without pro-
ration for partial years.
Extraordinary Services and Out-of Pocket Expenses
Any additional services beyond our standard services as specified above, and all reasonable out-of-pocket expenses including attorney’s or accountant’s fees
and expenses will be considered extraordinary services for which related costs, transaction charges, and additional fees will be billed at the Escrow Agent’s then
standard rate. Disbursements, receipts, investments or tax reporting exceeding 25 items per year may be treated as extraordinary services thereby incurring
additional charges. The Escrow Agent may impose, charge, pass-through and modify fees and/or charges for any account established and services provided by
the Escrow Agent, including but not limited to, transaction, maintenance, balance-deficiency, and service fees, agency or trade execution fees, and other
charges, including those levied by any governmental authority.
Fee Disclosure & Assumptions: Please note that the fees quoted are based on a review of the transaction documents provided and an internal due diligence
review. The Escrow Agent reserves the right to revise, modify, change and supplement the fees quoted herein if the assumptions underlying the activity in the
account, level of balances, market volatility or conditions or other factors change from those used to set our fees. Payment of the invoice is due upon receipt
The escrow deposit shall be continuously invested in a TD Bank, NA money market deposit account (“MMDA”). MMDA have rates of interest or
compensation that may vary from time to time as determined by the Escrow Agent.
Disclosures and Agreements
Patriot Act Disclosure. Section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (“USA PATRIOT Act”) requires Escrow Agent to implement reasonable procedures to verify the identity of any person that opens a new account
with it. Accordingly, you acknowledge that Section 326 of the USA PATRIOT Act and Escrow Agent’s identity verification procedures require Escrow Agent to
obtain information which may be used to confirm your identity including without limitation name, address and organizational documents (“identifying
information”). You agree to provide Escrow Agent with and consent to Escrow Agent obtaining from third parties any such identifying information required as
a condition of opening an account with or using any service provided by the Escrow Agent.
OFAC Disclosure. Escrow Agent is required to act in accordance with the laws and regulations of various jurisdictions relating to the prevention of money
laundering and the implementation of sanctions, including but not limited to regulations issued by the U.S. Office of Foreign Assets Control. Escrow Agent is
not obligated to execute payment orders or effect any other transaction where the beneficiary or other payee is a person or entity with whom the Escrow
Agent is prohibited from doing business by any law or regulation applicable to Escrow Agent, or in any case where compliance would, in Escrow Agent’s
opinion, conflict with applicable law or banking practice or its own policies and procedures. Where Escrow Agent does not execute a payment order or effect
a transaction for such reasons, Escrow Agent may take any action required by any law or regulation applicable to Escrow Agent including, without limitation,
freezing or blocking funds.
Abandoned Property. Escrow Agent is required to act in accordance with the laws and regulations of various states relating to abandoned property and,
accordingly, shall be entitled to remit dormant funds to any state as abandoned property in accordance with such laws and regulations.
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
THE FOLLOWING DISCLOSURES ARE REQUIRED TO BE PROVIDED UNDER APPLICABLE U.S. REGULATIONS, INCLUDING, BUT NOT LIMITED
TO, FEDERAL RESERVE REGULATION D. WHERE SPECIFIC INVESTMENTS ARE NOTED BELOW, THE DISCLOSURES APPLY ONLY TO THOSE
INVESTMENTS AND NOT TO ANY OTHER INVESTMENT.
Deposit Account Disclosure. Escrow Agent is authorized, for regulatory reporting and internal accounting purposes, to divide an escrow demand deposit
account maintained in the U.S. in which the Fund is held into a non-interest bearing demand deposit internal account and a non-interest bearing savings
internal account, and to transfer funds on a daily basis between these internal accounts on Escrow Agent’s general ledger in accordance with U.S. law at no
cost to the Parties. Escrow Agent will record the internal accounts and any transfers between them on Escrow Agent’s books and records only. The internal
accounts and any transfers between them will not affect the Fund, any investment or disposition of the Fund, use of the escrow demand deposit account or
any other activities under this Agreement, except as described herein. Escrow Agent will establish a target balance for the demand deposit internal account,
which may change at any time. To the extent funds in the demand deposit internal account exceed the target balance, the excess will be transferred to the
savings internal account, unless the maximum number of transfers from the savings internal account for that calendar month or statement cycle has already
occurred. If withdrawals from the demand deposit internal account exceeds the available balance in the demand deposit internal account, funds from the
savings internal account will be transferred to the demand deposit internal account up to the entire balance of available funds in the savings internal account
to cover the shortfall and to replenish any target balance that Escrow Agent has established for the demand deposit internal account. If a sixth transfer is
needed during a calendar month or statement cycle, it will be for the entire balance in the savings internal account, and such funds will remain in the
demand deposit internal account for the remainder of the calendar month or statement cycle.
MMDA Disclosure and Agreement. If MMDA is the investment for the escrow deposit as set forth above or anytime in the future, you acknowledge and
agree that U.S. law limits the number of pre-authorized or automatic transfers or withdrawals or telephonic/electronic instructions that can be made from an
MMDA to a total of six (6) per calendar month or statement cycle or similar period. Escrow Agent is required by U.S. law to reserve the right to require at
least seven (7) days’ notice prior to a withdrawal from a money market deposit account.
Unlawful Internet Gambling . The use of any account to conduct transactions (including, without limitation, the acceptance or receipt of funds through an
electronic funds transfer, or by check, draft or similar instrument, or the proceeds of any of the foregoing) that are related, directly or indirectly, to unlawful
Internet gambling is strictly prohibited.
8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-21.1 6 ex21-1.htm
EXHIBIT 21.1
Subsidiary List of MTBC, Inc.
1. MTBC Acquisition, Corp. (Delaware, US)
2. MTBC Health, Inc. (Delaware, US)
3. MTBC Practice Management, Corp. (Delaware, US)
4. MTBC-Med, Inc. (Delaware, US)
5. CareCloud Corporation (Delaware, US)
6. Medical Transcription Billing, Corp. (Private) Limited (Pakistan)
7. RCM – MediGain India, Pvt. Ltd. (India)
8. RCM – MediGain Colombo, Pvt. Ltd. (Sri Lanka)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-23.1 7 ex23-1.htm
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated February 28, 2020, with respect to the consolidated financial statements included in the Annual Report of MTBC, Inc. on Form
10-K for the year ended December 31, 2019. We consent to the incorporation by reference of said reports in the Registration Statements of MTBC, Inc. on Form
S-3 (File No. 333-232493) and Forms S-8 (File No. 333-203228, 333-217317 and File No. 333-226685).
Exhibit 23.1
/s/ GRANT THORNTON LLP
Iselin, New Jersey
February 28, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-31.1 8 ex31-1.htm
I, Stephen Snyder, certify that:
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of MTBC, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosures controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
MTBC, Inc.
By:
/s/ Stephen Snyder
Stephen Snyder
Chief Executive Officer (Principal Executive Officer)
Dated:
February 28, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-31.2 9 ex31-2.htm
I, Bill Korn, certify that:
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of MTBC, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosures controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
MTBC, Inc.
By:
/s/ Bill Korn
Bill Korn
Chief Financial Officer (Principal Financial Officer )
Dated:
February 28, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-32.1 10 ex32-1.htm
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Based on my knowledge, I, Stephen Snyder, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Annual Report of MTBC, Inc. on Form 10-K for the year ended December 31, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of
operations of MTBC, Inc.
MTBC, Inc.
By:
/s/ Stephen Snyder
Stephen Snyder
Chief Executive Officer(Principal Executive Officer)
Dated:
February 28, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-32.2 11 ex32-2.htm
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Based on my knowledge, I, Bill Korn, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Annual Report of MTBC, Inc. on Form 10-K for the year ended December 31, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of
operations of MTBC, Inc.
MTBC, Inc.
By:
/s/ Bill Korn
Bill Korn
Chief Financial Officer (Principal Financial Officer)
Dated:
February 28, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.