Item
1. Business
Our
Company
Medical
Transcription Billing, Corp. (the “Company”) is a healthcare information technology company that provides a fully
integrated suite of proprietary web-based solutions, together with related business services, to healthcare providers. Our integrated
Software-as-a-Service (or SaaS) platform helps our customers increase revenues, streamline workflows and make better business
and clinical decisions, while reducing administrative burdens and operating costs. In addition to our experienced team in the
United States, we employ a highly educated workforce offshore, including approximately 1,700 people in Pakistan and 100 in Sri
Lanka. We believe labor costs in both of these countries are approximately one-half the cost of comparable India-based employees
and one-tenth the cost of comparable U.S. employees, thus enabling us to deliver our solutions at competitive prices.
Our
flagship offering, PracticePro, empowers healthcare practices with the core software and business services they need to address
industry challenges, on one unified SaaS platform. We deliver powerful, integrated and easy-to-use ‘big practice solutions’
to small and medium practices, which enable them to efficiently operate their businesses, manage clinical workflows and receive
timely payment for their services. PracticePro includes:
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Practice
management solutions and related tools, which facilitate the day-to-day operation of a medical practice;
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Electronic
health records (or EHR), which is easy to use, highly ranked, and allows our customers to reduce paperwork and qualify for
government incentives;
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Revenue
cycle management (or RCM) services, which include end-to-end medical billing, analytics, and related services; and
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Mobile
Health (or mHealth) solutions, including smartphone applications that assist patients and healthcare providers in the provision
of healthcare services.
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As
a result of an acquisition in 2015, the Company offers a clearinghouse service which allows clients to track claim status and
includes services such as batch electronic claim and payment transaction clearing and web access for claim corrections. Also as
result of this acquisition, the Company has an EDI service which provides a centralized electronic data interchange management
system to audit, manage and control the exchange of information.
As
of December 31, 2016, we served
approximately
1,080
customers,
of which
250
utilized our clearinghouse and Electronic Data Interchange (“EDI”)
services. We provided medical billing to approximately
830
medical practices representing
approximately
2,800
providers, (which we define as physicians, nurses, nurse practitioners,
physician assistants and other clinical staff that render bills for their services) practicing in
66
specialties
and subspecialties, in
41
states. As of December 31, 2015, we served approximately 1,070
customers, of which 340 utilized our clearinghouse and EDI services. We provided medical billing services to approximately 730
medical practices representing approximately 1,500 providers practicing in approximately 60 specialties and subspecialties, in
44 states. Approximately 95% of the practices we serve consist of one to ten providers, with the majority of the practices we
serve being primary care providers. However, our solutions are scalable and are appropriate for larger healthcare practices across
a wide range
of specialty areas. In fact, our customer with the largest number of providers is a hospital-based group with
more than 320 providers.
On
July 23, 2014, the Company completed its initial public offering (“IPO”) of common stock. The Company sold approximately
4 million shares at a price to the public of $5.00 per share.
On
July 28, 2014, the Company purchased the assets of three medical billing companies, Omni Medical Billing Services, LLC, (“Omni”),
Practicare Medical Management, Inc. (“Practicare”) and CastleRock Solutions, Inc. (“CastleRock,” and collectively
with Omni and Practicare, the “2014 Acquisitions”), for a combination of cash and stock.
During
the year 2015, the Company purchased the assets of Jesjam Holdings, LLC, a medical billing company doing business as MedTech Professional
Billing (“MedTech”) and those assets of SoftCare Solutions, Inc., a Nevada corporation, the U.S. subsidiary of QHR
Technologies, Inc., which represented SoftCare Solutions Inc.’s clearinghouse, EDI and billing divisions (“SoftCare”
and collectively with MedTech, the “2015 Acquisitions”). The SoftCare acquisition expanded the Company’s operations
to include EDI and clearinghouse services.
During
November 2015, the Company completed a preferred stock offering of 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 at $25.00 per share and received net proceeds of approximately $1.3 million.
During
the year 2016, the Company purchased substantially all of the assets of three medical billing companies, Gulf Coast Billing, Inc.
(“GCB”), Renaissance Medical Billing, LLC (“RMB”) and WFS Services, Inc. (“WFS”). WFS also
had a mailing service operation.
Effective
September 23, 2016, the Company formed a new wholly-owned subsidiary, MTBC Acquisition, Corp. (“MAC”). On October
3, 2016, MAC acquired substantially all the medical billing business and assets of MediGain, LLC, a Texas limited liability company,
and its subsidiary Millennium Practice Management Associates, LLC, a New Jersey limited liability company (together “MediGain”).
The assets were acquired through a strict foreclosure process as MediGain was in default of its obligations to Prudential Insurance
Company of America and Prudential Retirement Insurance and Annuity Company (together “Prudential”) prior to the acquisition.
MAC purchased 100% of MediGain’s senior secured debt from Prudential and immediately thereafter foreclosed on the assets
in satisfaction of the senior secured notes. The total purchase price for the acquisition was $7 million. Of the total purchase
price, $2 million was paid at closing and the balance is still outstanding. As part of the agreement, MAC acquired the assets
and assumed certain specified liabilities. Cash and certain causes of action relating to pre-closing matters were excluded from
the acquired assets and retained by MediGain.
The
acquisitions of GCB, RMB, WFS and MediGain are collectively referred to as the “2016 Acquisitions.”
Employees
Including
the employees of our subsidiaries, as of February 2017 we employed approximately 2,050 people worldwide on a full-time basis.
We also use the services of a small number of part time employees. In addition, all officers work on a full-time basis. Over the
next twelve months, we anticipate increasing our total number of employees only if our revenues increase or our operating requirements
warrant such hiring, or for specific functions where we place additional emphasis, such as marketing and sales.
Our
Growth Strategy
Our
growth strategy includes acquiring smaller revenue cycle management companies and then migrating the customers of those companies
to our solutions. The revenue cycle management service industry is highly fragmented, with many local and regional revenue cycle
management companies serving small medical practices. We believe that the industry is ripe for consolidation and that we can achieve
significant growth through acquisitions. We estimate that there are more than 1,500 companies in the United States providing revenue
cycle management services and that no one company has more than a 5% share of the market. We further believe that it is becoming
increasingly difficult for traditional revenue cycle management companies to meet the growing technology and business service
needs of healthcare providers without a significant investment in information technology infrastructure.
In
addition, our growth strategy includes strategic partnerships with other industry participants, including electronic health records
vendors, in which the vendors refer customers to our services. While we offer our own electronic health records, our strategy
includes providing integrated offerings utilizing third party electronic health records while offering customers MTBC’s
revenue cycle management, practice management and mobile health capabilities. We have recently hired additional sales and marketing
executives and moved existing personnel into sales roles to spearhead our customer acquisition initiative, which will include
growing existing and developing new strategic partnerships. We believe that these new team members will also be able to successfully
leverage the network of relationships of the medical billing companies and the clearinghouse entity that we acquired and our existing
network. By devoting greater resources to sales and marketing, we expect that our organic growth will increase more rapidly, as
our current organic growth is driven primarily by customer referrals and internet search engine optimization techniques.
Industry
Overview
In
2015, U.S. healthcare spending increased by 5.8% as compared to 2014 to reach $3.2 trillion, or $9,990 per person. Faster growth
in total healthcare spending in 2015 was driven by stronger growth in spending for private health insurance, hospital care, physician
and clinical services, and the continued strong growth in Medicare, Medicaid and retail prescription drug spending. The overall
share of the U.S. economy devoted to healthcare spending was 17.8% in 2015, up from 17.4% in 2014.
Medicare
spending grew by 4.5% to $646 billion in 2015 which is slightly less than 2014’s 4.8% growth. Medicaid spending slowed slightly
in 2015 to 9.7%, but continued the strong growth that began in 2014 (11.6%), State and local Medicaid expenditures grew 4.9% while
Federal Medicaid expenditures increased 12.6% in 2015. Total private health insurance expenditures increased 7.2% to $1.1 trillion
in 2015, faster than the 5.8% growth in 2014. Out-of-pocket spending by patients grew 2.6% in 2015 to $338 billion, slightly faster
than the growth of 1.4% in 2014.
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 reimbursement.
Movement
toward healthcare information technology.
Since 2011, the federal government has offered financial incentives to eligible
healthcare providers who adopt and meaningfully use electronic health records technology. Beginning in 2015, providers who are
not meaningfully using this technology incurred penalties, which increase over time. While these incentives and penalties have
encouraged many providers to adopt and meaningfully use electronic health records 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.
The
North American RCM market has been estimated by MicroMarket Monitor to be approximately $20 billion in 2016, growing at a CAGR
of 12% per year. Standalone billing and practice management solutions are reported to be on the wane in the market today as medical
practices move towards integrated, end-to-end systems that integrate front and back office data flows, provide seamless access
to clinical data from EHRs, and rationalize 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.
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 and 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., eClinicalWorks, Allscripts Healthcare
Solutions, Inc. and Greenway Medical Technologies, Inc.
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 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.
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 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
is becoming increasingly complex, costly and time-consuming. Moreover, the standard offering fee for our complete, integrated,
end-to-end solution is typically 5% 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 small
and medium size healthcare practices
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We believe that physician practices 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.
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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 activities.
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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.
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Pursue
strategic acquisitions
.
Approximately 57% of our current practices and 69% of our current year’s revenue
were obtained through strategic transactions with revenue cycle management companies including the 2016, 2015 and 2014 Acquisitions
(collectively, the “Acquisitions”). 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. For the three acquisitions completed
in 2014, Omni, CastleRock and Practicare, we successfully migrated 94% of acquired customers to PracticePro as of December
31, 2016. Since the 2015 and 2016 acquisitions of MedTech, GCB and RMB, we have migrated 100%, 100%, and 86% of the customers,
respectively, to our platform. At the present time, it is more efficient to serve the customers of SoftCare, WFS and MediGain
on their previous platforms.
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Our
Service Offerings
We
offer a suite of fully-integrated, web-based SaaS platform 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 measureable 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.
Our
flagship product, PracticePro, provides our clients with a seamlessly integrated, end-to-end solution. Our web-based electronic
health records are 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.
Web-based
Practice Management Application
Our
proprietary, web-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 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
Our
web-based electronic health records solution has received ONC 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 MTBC placed number five in our target market of one to ten providers, outperforming most leading electronic
health records. A healthcare provider can use our solution to demonstrate “meaningful use” under federal law to earn
incentives and avoid penalties. Our web-based electronic health records allow a provider to view all patient information in one
online location, thus avoiding the need for numerous charts and records for each patient. Utilizing our web-based electronic health
records solution, 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 electronic health record 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.
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 an improvement in their collections, as illustrated by
the following for 2016:
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Our
first pass acceptance rate is approximately 96%
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Our
first pass resolution rate is approximately 94%
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Our
clients’ median days in accounts receivable is 33 days for primary care and 40 days for combined specialties.
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These
rates are among the most competitive in the industry and compare favorably with the performance of our largest competitor. 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.
Voting
Rights of Our Directors, Executive Officers, and Principal Stockholders
As
of December 31, 2016, 53% 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. 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 and A Unique Healthcare IT Company, 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
are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain
an emerging growth company until the earlier of the last day of the fiscal year following the fifth anniversary of the completion
of our IPO dated July 23, 2014, the last day of the fiscal year in which we have total annual gross revenue of at least $1 billion,
the date on which we are deemed to be a large accelerated filer (this means the market value of our common stock that is held
by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year), or the date on which we have
issued more than $1 billion in non-convertible debt securities during the prior three-year period. An emerging growth company
may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that
are otherwise generally applicable to public companies. As an emerging growth company:
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We
avail ourselves of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment
of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.
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We
will provide less extensive disclosure about our executive compensation arrangements.
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We
will not require shareholder non-binding advisory votes on executive compensation or golden parachute arrangements.
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However,
we are choosing to “opt out” of the extended transition periods available under the JOBS Act for complying with new
or revised accounting standards.
Where
You Can Find More Information
Our
website address, 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 site (www.sec.gov) contains reports,
proxy and information statements, and other information that we file electronically with the SEC.
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 the acquisition of additional RCM companies and through organic growth. Since 2006, we have acquired
seventeen RCM companies and entered into agreements with four additional RCM companies under which we service all of their customers.
Our future acquisitions may require greater than anticipated investment of operational and financial resources as we seek to migrate
customers of these companies to PracticePro. Acquisitions may also require the integration of different software and services,
assimilation of new employees, diversion of management and IT resources, increases in administrative costs and other additional
costs associated with any debt or equity financings undertaken in connection with 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 pay the remaining balance of the MediGain acquisition price and have difficulty paying for future acquisitions.
At
the present time, we owe five million dollars to Prudential for the balance of the MediGain acquisition price, three million dollars
of which is now due. On March 29, 2017 we received a letter from Prudential that demanded immediate payment of the three million
dollar portion of the consideration that is now due, together with accrued interest, and expressing Prudential’s intention
to collect on said amounts. The balance is due at a later date. We have not paid this amount, which may give rise
to breach of contract claims by Prudential. Furthermore, our credit agreement with Opus Bank, our senior secured lender, was amended
to include a provision that prevents us from amending our contractual terms with Prudential, and by extension making payments,
without Opus Bank’s prior consent, which consent may not be unreasonably withheld. If we are unable to secure additional
financing, we will continue to be unable to meet our payment obligations to Prudential unless Opus Bank permits us to modify our
contractual terms with Prudential. Furthermore, our amended terms with Opus Bank prevent us from consummating additional acquisitions
without the prior consent of Opus Bank. Although the Company plans to raise additional capital during 2017, there is no assurance
that this raise will be successful or will generate sufficient funding for the Company to enable it to meet its payment obligations
to Prudential or to make additional acquisitions. In the event we are unable to pay the balance of the consideration due to Prudential
in the MediGain acquisition, Prudential may seek all possible monetary and/or equitable remedies. Our inability to make the remaining
payments due in the MediGain acquisition or renegotiate these payments would have a material adverse effect on our business.
In
prior acquisitions, we have encountered difficulties in retaining all the customers we acquired, which has resulted in a decrease
in our revenues and operating results. Similarly, we may be unable to retain customers of acquired businesses following their
acquisition, which may likewise result in a decrease in our revenues and operating results.
Customers
of the businesses we acquire usually 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. In the past, our failure to retain acquired customers has resulted in decreases in our revenues.
The customers of the thirteen businesses we acquired in 2012 through 2016, excluding CastleRock, generated a total of approximately
$7.6 million of revenue per quarter at the time of their acquisition. On average, this amount decreased by 37% one year after
each acquisition occurred. For CastleRock, in part due to prohibited competitive activities of a selling stockholder which we
later resolved through a mutually satisfactory settlement, including the forfeiture of all shares granted to CastleRock, this
decrease was 73%. Our inability to retain customers of the businesses we acquire could adversely affect our ability to benefit
from those acquisitions and increase our future revenues and operating income.
Acquisitions
may subject us to liability with regard to the creditors, customers, and shareholders of the sellers.
While
our acquisitions are typically structured as asset purchase agreements in which we attempt to limit our risk and exposure relative
to the respective sellers’ liabilities, we cannot guarantee that we will be successful in avoiding all liability. In the
past, sellers’ creditors have sought to hold us accountable for the respective sellers’ liabilities and certain customers
of sellers attempt to hold us liable for the respective sellers’ breaches of the controlling services agreements. We attempt
to minimize the possibility that disaffected shareholders of the businesses we acquire will be able to interfere with our business
acquisitions, through due diligence, obtaining relevant representations from sellers, and leveraging experienced professionals
when appropriate.
We
may be unable to negotiate favorable prices for the RCM companies we acquire and even if we do negotiate favorable prices, we
must obtain the approval of senior secured lender to proceed with any acquisitions.
Our
acquisition strategy and the consideration we pay for potential targets is influenced by many factors, including the market demand
for our securities and the condition of the healthcare industry in general. There can be no assurance that we will be able to
negotiate and acquire medical billing companies on favorable financial terms, or that we will not be required to pay a premium
for a desired acquisition opportunity. Also, our senior secured lender has the right to review and approve or veto acquisitions
and we cannot guarantee that the lender will approve further transactions.
We
may be unable to implement our strategy of acquiring additional RCM companies due to competition.
We
have no unconditional commitments with respect to any other acquisition as of the date of this Annual Report on 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 any additional
RCM companies at all or on terms favorable to us, and we may not be able to secure financing for such acquisitions on favorable
terms. Certain of our larger, better capitalized competitors may seek to acquire some of the RCM companies we may be interested
in. Competition for acquisitions would likely increase acquisition prices and result in us having fewer acquisition opportunities.
Acquisitions
may subject us to additional unknown risks which may affect our customer retention and cause a reduction in our revenues.
In
completing any future acquisitions, we will rely upon the representations and 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.
We
may have difficulty integrating future acquisitions into our operations and onto our software platform.
Part
of our typical acquisition strategy is to migrate the customer accounts obtained to our platform software and have our off- shore
teams perform the majority of the services for the customer. If we cannot migrate acquired customers to our platform software
or have our offshore teams service the acquired customer, we would incur additional costs.
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.
We
generally structure our acquisitions as asset purchases, which may limit the ability of some of the acquired assets to be transferred
to us due to contractual provisions restricting the assignment of assets, and subjects us to the risk that creditors of the seller
may seek payment from us of liabilities retained by the sellers or challenge these transactions.
Our
acquisitions are typically structured as the purchase of assets, primarily consisting of medical billing contracts with healthcare
providers. This structure may limit the transferability of some of the acquired assets, including contracts that have contractual
provisions limiting their assignment. In our prior acquisitions, most of the medical billing contracts we acquired did not have
restrictions on their assignment to us. However, other medical billing contracts we may seek to acquire in the future may be subject
to these restrictions. Furthermore, certain software and vendor contracts which we may seek to acquire for use during the transition
period following our acquisitions may not be assignable to us, which may disrupt the operations of the acquired customers. Moreover,
even those that are assignable may be terminable by either party upon little or no notice.
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, 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 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.
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 the
Pakistani employees that we bring over to the U.S., which could negatively impact our business.
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 introduce new products and services
accordingly. If we cannot adapt to changing technologies and industry standards and meet the requirements of our customers, our
products and services may become obsolete, and our business would suffer. 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 or emerging industry standards, and, as a result, our business and reputation could 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. A failure
by us to introduce new products or to introduce these products on schedule could cause us to not only lose our current customers
but to fail to grow our business by attracting new customers.
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 1,700 employees in Pakistan which
has experienced, and continues to experience, political and social unrest and acts of terrorism. 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.
Our
operations in Pakistan may be negatively impacted by any number of factors, including political unrest; social unrest; terrorism;
war; failure of the Pakistani power grid, which is subject to frequent outages; vandalism; currency fluctuations; changes to the
law of Pakistan, the United States or any of the states in which we do business; client mandates or preferences for on-shore service
providers; or increases in the cost of labor and supplies in Pakistan. Our operations in Pakistan 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 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.
Additionally,
while approximately 80% of our offshore employees are in Pakistan, we maintain smaller offshore operation centers in India, Poland
and Sri Lanka. We believe that the labor costs Pakistan and Sri Lanka are approximately 10% of the cost of comparably educated
and skilled workers in the U.S, and that labor costs in India and Poland are approximately 20% 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.
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, or 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.
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
results of the November 2016 elections created uncertainty for the future of the Affordable Care Act (“ACA”) and
other health care-related legislation. The current administration and Congress have been critical of the ACA and have taken
steps toward materially revising or even repealing it. This health care reform legislation could include changes in Medicare
and Medicaid payment policies and other health care delivery administrative reforms that could potentially negatively impact
our business and the business of our clients. Presently there is an executive order that erodes the individual insurance
coverage mandate. Congress has yet to develop a consensus on whether to make changes to the ACA, and if so what changes
should be made. The ACA included specific reforms for the individual and small group marketplace, including an expansion of
Medicaid. While we do not believe that healthcare reform initiatives are likely to have any material adverse impact on our
operational results or the manner in which we operate the business, there can be no assurances regarding the same.
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 Affordable Care Act;
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a
rollback of the expansion of Medicaid or other governmental programs;
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reduction
of customer revenue resulting from increased competition or other changes in the marketplace for physician services;
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failure
of our customers to adopt or maintain effective business practices;
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actions
by third-party payers of medical claims to reduce reimbursement;
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government
regulations and government or other payer actions or inaction reducing or delaying reimbursement;
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interruption
of customer access to our system; and
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our
failure to provide services in a timely or high-quality manner.
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We
have incurred recent operating losses and net losses, and we may not be able to achieve or subsequently maintain profitability
in the future.
We
generated net losses of
$8.8
million
and
$4.7
million for the years ended December 31, 2016 and 2015, respectively. Our net losses
for the years ended December 31, 2016 and 2015 include
$4.4
million and
$4.1 million
of amortization expense of purchased intangible assets, respectively.
We
may not succeed in achieving the efficiencies we anticipate from future acquisitions, including moving sufficient labor to our
offshore subsidiary 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.
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.
If
we are required to collect sales and use taxes on the 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 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 Chief
Executive Officer, who among other things, 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.
We
may be unable to adequately establish, protect or enforce our intellectual property rights.
Our
success depends in part upon our ability to establish, protect and enforce our intellectual property and other proprietary rights.
If we fail to establish, protect or enforce our intellectual property rights, we may lose an important advantage in the market
in which we compete. We rely on a combination of 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.
We
have no patents pending and none issued, and primarily rely on trade secrets to protect our proprietary technology. 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 technology, and adequate remedies may not be available
in the event of unauthorized use or disclosure of our trade secrets and proprietary technology. Moreover, others may reverse engineer
or independently develop technologies that are competitive to ours or infringe our intellectual property.
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;
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require
us to stop providing products or services that use the technology that allegedly infringes the other party’s intellectual
property;
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divert
the attention of our technical and managerial resources;
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require
us to enter into royalty or licensing agreements with third-parties, which may not be available on terms that we deem acceptable;
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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;
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subject
us to significant liability for damages or result in significant settlement payments; or
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require
us to indemnify our customers.
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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.
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 our 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.
Our
proprietary software or service delivery 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 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. We provide a limited warranty, have not paid warranty claims in the past, and do not have a reserve for warranty
claims.
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.
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, Sri Lanka, India and Poland. 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.
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 visits
and record patient health information. If content in the third-party databases, we use is incorrect or incomplete, adverse consequences,
including death, may occur and 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
common stock.
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.
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 Chief Executive Officer, Mahmud Haq, which have significant
contractual obligations. These agreements were not reviewed by our Audit Committee prior to their adoption and may not reflect
terms that would be available from unaffiliated third parties.
Since
inception, we have entered into several related-party transactions with our founder and Chief Executive Officer, Mahmud Haq, which
subject us to significant contractual obligations. Since our audit committee was not formed until February 14, 2014, these related
party transactions were not reviewed by our audit committee prior to their adoption, whose charter prescribes procedures for the
review and approval of related party transactions. Although we believe these transactions reflect terms comparable to those that
would be available from third parties, and the audit committee has now reviewed these arrangements, the lack of prior review of
these transactions by our independent audit committee may have caused us to enter into agreements with Mr. Haq that we may not
otherwise have entered into or upon terms less favorable to us than we may have obtained from unaffiliated third parties.
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.
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. 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.
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.
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 recent presidential election may pave
the way for changes to the Affordable Care Act, 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 (CMS) 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.
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 (up to $1.5 million
for identical incidences) and the possibility of civil litigation.
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.
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 the 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
The
market for our common stock may not provide adequate liquidity.
The
public market for our common stock has limited trading volume. We cannot predict the extent to which investor interest in our
company will lead to the development of a more active trading market in our common stock, or how liquid that market might be.
If an active market does not develop, investors may have difficulty selling shares of our common stock.
We
may not be able to maintain our listing on the Nasdaq Capital Market.
Our
common stock currently trades on the Nasdaq Capital Market. This market has continued listing requirements that we must continue
to maintain to avoid delisting. The standards include, among others, a minimum bid price requirement of $1.00 per share (the “Bid
Price Rule”) and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities
of $35 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in the
two of the last three fiscal years. Our results of operations and our fluctuating stock price directly impact our ability to satisfy
these listing standards. In the event we are unable to maintain these listing standards, we may be subject to delisting.
On
June 24, 2016, we received a letter from Nasdaq notifying us that for the 30 consecutive trading days preceding the date of the
letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued inclusion on the
Nasdaq Capital Market pursuant to Nasdaq Marketplace Rule 5550(a)(2). The letter also stated that we will be provided 180 calendar
days, or until December 21, 2016, to regain compliance with the minimum bid price requirement.
On
December 22, 2016 we received a letter from Nasdaq granting us an additional 180 days, or until June 19, 2017, to regain compliance
with the Bid Price Rule. As a condition to this extension, MTBC confirmed to Nasdaq that, if necessary to regain compliance by
the extended deadline, MTBC would effect a reverse stock split to increase our bid price above the $1.00 minimum amount. If we
fail to regain compliance by the extended deadline, we could be delisted. In February 2017, a special proxy was sent to shareholders
asking them to authorize the Board of Directors to approve a reverse stock split. The shareholder meeting for this special proxy
is on April 14, 2017.
A
delisting from Nasdaq Capital Market would result in our common stock being eligible for listing on the Over-The-Counter Bulletin
Board. The OTCBB is generally considered to be a less efficient system than markets such as Nasdaq Capital Market or other national
exchanges because of lower trading volumes, transaction delays and reduced security analyst and news media coverage. These factors
could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. Additionally, trading of our
common stock on the OTCBB may make us less desirable to institutional investors and may, therefore, limit our future equity funding
options and could negatively affect the liquidity of our 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;
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government
or commercial healthcare reimbursement policies;
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physician
and patient acceptance of any of our current or future products;
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introduction
of competing products;
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our
operating expenses which fluctuate due to growth of our business;
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timing
and size of any new product or technology acquisitions we may complete; and
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variable
sales cycle and implementation periods for our products and services.
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The
Company’s available cash will not be sufficient to meet its current and anticipated cash requirements without additional
financing. Accordingly, these factors, among others, raise substantial doubt about the Company’s ability to continue as
a going concern.
We cannot predict the reaction of investors
to this conclusion, which might cause the price of our common stock to decline. We cannot predict with certainty
whether we will remain in compliance with the covenants of our senior secured lender, Opus Bank, which include, among other things,
generating and increasing adjusted EBITDA, maintaining minimum cash balances and eligible accounts receivable, complying with
leverage and fixed charge ratios, and achieving specified revenue targets (as further defined in our loan agreement with Opus
Bank). If we fall out of compliance, our lender may exercise any of its rights and remedies under the loan agreement, which might
cause the price of our common stock to decline.
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 48.4% of our outstanding shares of common stock, which will prevent investors from influencing significant
corporate decisions.
Mahmud
Haq, our founder and Chief Executive Officer, beneficially owns 48.4% 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 corporate law 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.
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 2,000,000 shares of preferred stock and to determine the price, privileges
and other terms of these shares, of which 294,656 shares were issued in our offerings of Series A Preferred Stock. Our board of
directors may exercise its authority with respect to the remaining shares of preferred stock without any further approval of 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 and particularly after we cease to be an “emerging growth 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, 2016, 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” 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
when we cease to be an “emerging growth company” and, when our independent registered public accounting firm is required
to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will
correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting
expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices
and comply with reporting requirements. Moreover, if we are not able to comply 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.
The
JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations and to reduce the amount of
information provided in reports filed with the SEC. We cannot be certain if the reduced disclosure requirements applicable to
emerging growth companies will make our Common and Series A Preferred Stock less attractive to investors.
We
are and we will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal
year during which our total annual revenues equal or exceed $1 billion (subject to adjustment for inflation), (ii) the last day
of the fiscal year following the fifth anniversary of our IPO (iii) the date on which we have, during the previous three-year
period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a “large accelerated
filer” under the Securities and Exchange Act of 1934, as amended, or the Exchange Act. For so long as we remain an “emerging
growth company” as defined in the JOBS Act, we may 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.
Under
the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, will therefore be subject
to the same new or revised accounting standards at the same time as other public companies that are not emerging growth companies.
We
cannot predict if investors will find our Common and Series A Preferred Stock less attractive because we rely on some of the exemptions
available to us under the JOBS Act. If some investors find our Common and Series A Preferred Stock less attractive as a result,
there may be a less active trading market for our Common and Series A Preferred Stock and our respective stock prices may be more
volatile. If we avail ourselves of certain exemptions from various reporting requirements, our reduced disclosure may make it
more difficult for investors and securities analysts to evaluate us and may result in less investor confidence.
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 have incurred and may in the future incur substantial amounts
of debt and other obligations that will rank senior to the Series A Preferred Stock. At December 31, 2016, our total liabilities
(excluding contingent consideration) equaled approximately $20.3 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 Opus Bank 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 Opus
Credit Agreement, and if we default, we may be contractually prohibited from paying dividends on the Series A Preferred Stock.
Further, if we are unable to renegotiate our agreements with Opus Bank or obtain additional financing from another source before
May 31, 2018, we anticipate being in noncompliance with the terms of our credit agreement, which would prohibit us from paying
dividends on the Series A Preferred Stock without Opus Bank’s written consent. 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.
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, 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, Opus Bank,
which include, among other things, generating and increasing adjusted EBITDA, maintaining minimum cash balances and eligible accounts
receivable, complying with leverage and fixed charge ratios, and achieving specified revenue targets (as further defined in our
loan agreement with Opus Bank). 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 Opus, which we may be unable to do in the future and near term, 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.
If
our common stock is delisted, the ability to transfer or sell shares of the Series A Preferred Stock may be limited and the market
value of the Series A Preferred Stock will likely be materially adversely affected.
The
Series A Preferred Stock does not contain provisions that are intended to protect investors if our common stock is delisted from
the Nasdaq Capital Market. Since the Series A Preferred Stock has no stated maturity date, investors may be forced to hold shares
of the Series A Preferred Stock and receive stated dividends on the Series A Preferred Stock when, as and if authorized by our
board of directors and paid by us with no assurance as to ever receiving the liquidation value thereof. Also, if our common stock
is delisted from the Nasdaq Capital Market, it is likely that the Series A Preferred Stock will be delisted from the Nasdaq Capital
Market as well. Accordingly, if our common stock is delisted from the Nasdaq Capital Market, the ability to transfer or sell shares
of the Series A Preferred Stock may be limited and the market value of the Series A Preferred Stock will likely be materially
adversely affected.
The
trading market for the Series A Preferred Stock may not provide investors with adequate liquidity.
Our
Series A Preferred Stock is listed on the Nasdaq Capital 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 equally
to or above the Series A Preferred Stock as to dividend payments and rights upon our liquidation, dissolution or winding up of
our affairs pursuant to our articles of incorporation and the articles of amendment 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 articles of incorporation and the articles of amendment 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, as described in the prospectus section entitled
“Description of the Series A Preferred Stock—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.
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, which have recently exhibited heightened volatility but have generally been at low levels relative to historical
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 significant 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:
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demand
and pricing for our products and services;
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government
or commercial healthcare reimbursement policies;
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physician
and patient acceptance of any of our current or future products;
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introduction
of competing products;
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our
operating expenses which fluctuate due to growth of our business;
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timing
and size of any new product or technology acquisitions we may complete; and
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variable
sales cycle and implementation periods for our products and services.
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The Company’s available
cash will not be sufficient to meet its current and anticipated cash requirements without additional financing. Accordingly, these
factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
We
cannot predict the reaction of investors to this conclusion, which might cause the price of our Series A Preferred
Stock to decline. We cannot predict with certainty whether we will remain in compliance with the covenants of our senior secured
lender, Opus Bank, which include, among other things, generating and increasing adjusted EBITDA, maintaining minimum cash balances
and eligible accounts receivable, complying with leverage and fixed charge ratios, and achieving specified revenue targets (as
further defined in our loan agreement with Opus Bank). If we fall out of compliance, our lender may exercise any of its rights
and remedies under the loan agreement, which might cause the price of our Series A Preferred Stock to decline.
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, 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 (as defined below under “Description of the Series A Preferred
Stock - Redemption”), 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. The price
of the Series A Preferred Stock that will prevail in the market after this offering may be higher or lower than the offering price
depending on many factors, some of which are beyond our control and may not be directly related to our operating performance.
These factors include, but are not limited to, the following:
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prevailing
interest rates, increases in which may have an adverse effect on the market price of the Series A Preferred Stock;
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trading
prices of similar securities;
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our
history of timely dividend payments;
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the
annual yield from dividends on the Series A Preferred Stock as compared to yields on other financial instruments;
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price
and volume fluctuations in the overall stock market from time to time, including increased volatility due to changes in the
worldwide credit and financial markets and general economic conditions;
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government
action or regulation;
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the
financial condition, performance and prospects of us and our competitors;
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changes
in financial estimates or recommendations by securities analysts with respect to us or our competitors in our industry;
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continued
listing on the Nasdaq Capital Market;
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material
announcements by us regarding business performance, financings, mergers and acquisitions or other transactions;
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our
ability to comply with the financial covenants and our other obligations under our loan documents with Bank;
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our
ability to (i) raise sufficient funds to timely pay the remainder of the MediGain purchase price due in May 2017 and (ii)
remain in compliance with our obligations with Bank, which may prohibit or restrict our ability to pay the remainder of the
MediGain purchase price;
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our
issuance of additional preferred equity or debt securities;
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departures
of key personnel; and
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actual
or anticipated variations in quarterly operating results of us and our competitors.
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As
a result of these and other factors, investors who purchase the Series A Preferred Stock in this offering may experience a decrease,
which could be substantial and rapid, in the market price of the Series A Preferred Stock, including decreases unrelated to our
operating performance or prospects.
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 Chief Executive Officer, beneficially owns approximately 48.4% 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.
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.