NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016
(UNAUDITED)
1.
|
Organization
and Business
|
Medical
Transcription Billing, Corp. (and together with its subsidiaries “MTBC” or the “Company”) is a healthcare
information technology company that offers an integrated suite of proprietary cloud-based electronic health records and practice
management solutions, together with related business services, to healthcare providers. The Company’s integrated services
are designed to help customers increase revenues, streamline workflows and make better business and clinical decisions, while
reducing administrative burdens and operating costs. The Company’s services include full-scale revenue cycle management,
electronic health records, and other technology-driven practice management services for private and hospital-employed healthcare
providers. MTBC has its corporate offices in Somerset, New Jersey and maintains account management teams in various US offices
and operates facilities in Pakistan and Sri Lanka.
MTBC
was founded in 1999 and incorporated under the laws of the State of Delaware in 2001. In 2004, MTBC formed MTBC Private Limited
(or “MTBC Pvt. Ltd.”) a 99.9% majority-owned subsidiary of MTBC based in Pakistan. The remaining 0.01% of the shares
of MTBC Pvt. Ltd. is owned by the founder and Chief Executive Officer of MTBC. MTBC formed MTBC-Europe Sp. z.o.o. (or “MTBC-Europe”),
a wholly-owned subsidiary of MTBC based in Poland in 2015. In 2016, MTBC formed MTBC Acquisition Corp. (“MAC”), a
Delaware corporation, in connection with its acquisition of substantially all the assets of MediGain, LLC and its subsidiary,
Millennium Practice Management Associates, LLC (together “MediGain). In conjunction with its continued growth of its offshore
operations in Pakistan and Sri Lanka, in April 2017, MTBC began the winding down of its operations in India and Poland. As of
June 30, 2017, these operations have been terminated and their liquidation is almost complete.
The Company previously adopted FASB Accounting
Standard Codification (“ASC”) Topic 205-40, Presentation of Financial Statements – Going Concern, which requires
that management evaluate whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about
the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after
the date that the financial statements are issued.
As part of the evaluation,
management considered that on June 30, 2017, the Company had $5.8 million of cash and had a working capital deficit of $4.1 million.
The loss before income taxes was $1.6 million for the three months ended June 30, 2017, of which $1.5 million represents non-cash
depreciation and amortization.
The Company has a credit facility
with Opus Bank (“Opus”) established in the third quarter of 2015, which provides additional liquidity. The credit
facility includes term loans, plus a line of credit that have a combined borrowing limit of $10 million, net of contractual repayments,
all of which were fully utilized as of June 30, 2017. During the second quarter, the Company paid down approximately $2.8 million
of its Opus term loans from the proceeds of the equity financings discussed below, plus $667,000 as part of the normal loan amortization
schedule. As of June 30, 2017 the Company owes a total of $5.2 million to Opus. The line of credit expires September 1, 2018 and
the term loans are scheduled to be paid by September 2018 based on the current payment schedule. The Company relies on the term
loans and line of credit for working capital purposes (see Note 8). The Company is in compliance with all covenants, and revised
its covenants with Opus in March 2017 to more favorable terms, which improves the likelihood that it will stay in compliance.
Since Opus publicly announced that it was exiting lending to technology-based companies, the Company is talking to other lenders
to replace Opus.
As of June 30, 2017, the Company
presently owes $5 million out of the total purchase price of $7 million for the MediGain acquisition to Prudential Insurance Company
of America and Prudential Retirement Insurance and Annuity Company (together “Prudential”), which is unsecured and
became due earlier in 2017. Opus’ approval is required for any payment to Prudential. While the Company, Prudential and
Opus all indicate a continuing intention to negotiate a mutually agreeable resolution, Opus has not yet approved of a mutually
agreeable payment amount between the Company and Prudential. The Company’s available cash will not be sufficient to meet
its current and anticipated cash requirements without additional financing. Accordingly, the factors noted above raise substantial
doubt about the Company’s ability to continue as a going concern. Management has taken various steps to mitigate this condition
as detailed below.
Management achieved extensive
expense reductions following the acquisition of MediGain in October 2016. The cost cutting included closing certain domestic and
foreign facilities, eliminating reliance on subcontractors, and reducing non-essential personnel, where work could be performed
by offshore employees more cost-effectively. Direct operating and general and administrative costs decreased by $1.9 million and
$1.5 million, respectively from the fourth quarter of 2016 as compared to the second quarter of 2017. This represented reductions
of 31% and 35%, respectively. This cost-reduction allowed the Company to achieve positive cash flow from operations for the quarter
of approximately $179,000.
During the second quarter of 2017, the Company
completed two equity financings. In May 2017, the Company completed a registered direct offering of 1 million shares of its common
stock at $2.30 per share, raising net proceeds of approximately $2.0 million. In June 2017, the Company completed a public offering
of approximately 295,000 shares of its 11% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Preferred Stock”)
at $25.00 per share, raising net proceeds of approximately $6.2 million.
Collectively, these developments
dramatically improved the financial position of the Company. As a result of the common and preferred stock sales and the positive
cash flow from operations in the second quarter (a $1 million improvement from the cash used by operations during the first quarter),
the Company’s cash position improved from $1.2 million in the first quarter to $5.8 million on June 30, 2017, and the working
capital deficit improved from $9.6 million at the end of the first quarter to $4.1 million on June 30, 2017. Management continues
to focus on the Company’ overall profitability, including growing revenue and managing expenses, and expects that these
efforts will continue to enhance our liquidity and financial position, allowing us to run our business, repay Prudential and comply
with all bank covenants.
Management has developed a
plan to further mitigate this condition, including replacing Opus with another lender, exploring additional means of financing,
such as raising more equity in transactions similar to the two completed during the second quarter, and waiting until the Company
generates enough cash flow from operations to repay Opus in full. Management’s plans are intended to mitigate the substantial
doubt raised by our need to repay Prudential and to satisfy our estimated liquidity needs 12 months from the issuance of the financial
statements. However, there can be no assurance that any of these initiatives will be successful.
The condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q have been prepared on a basis that assumes that the Company
will continue as a going concern. This basis of accounting contemplates the satisfaction of the Company’s liabilities and
commitments in the normal course of business and does not include any adjustments to reflect the possible future effects of the
recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial reporting and as required by Regulation
S-X, Rule 10-01. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain
all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the Company’s financial
position as of June 30, 2017, the results of operations for the three and six months ended June 30, 2017 and 2016 and cash flows
for the six months ended June 30, 2017 and 2016. When preparing financial statements in conformity with GAAP, the Company must
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ significantly from those estimates.
The
condensed consolidated balance sheet as of December 31, 2016 was derived from our audited consolidated financial statements. The
accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2016, which are included in the Company’s Annual Report
on Form 10-K, filed with the SEC on March 31, 2017.
Recent
Accounting Pronouncements
—
From time to time, new accounting pronouncements are
issued by the Financial Accounting Standards Board (“FASB”) and are adopted by us as of the specified effective date.
Unless otherwise discussed, we believe that the impact of recently adopted and recently issued accounting pronouncements will
not have a material impact on our consolidated financial position, results of operations and cash flows.
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers. The core principle of this amendment is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10,
ASU 2016-12 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, and interim periods
therein. These ASUs can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment
as of the date of adoption. The Company plans to adopt Topic 606 using the modified retrospective method when it becomes effective
for the Company in the first quarter of 2018. We have assigned internal resources to assist in the evaluation of the potential
impacts of this amendment. Implementation efforts to date have included training on the new standard, review of revenue agreements
and the performance obligations contained therein, and review of our commercial terms and practices across our revenue streams.
While the Company is continuing to assess the effects of the amendment, management currently believes that the new guidance will
not have a material impact on our revenue recognition policies, practices or systems. The Company is continuing to evaluate the
effect that Topic 606 will have on its consolidated financial statements and related disclosures, and preliminary assessments
are subject to change. We are in the process of finalizing the analysis of our revenue streams and quantifying the effects if
any, from the implementation which should be completed by the end of the third quarter of 2017.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). The new standard will require organizations that lease
assets — referred to as “lessees” — to recognize on the balance sheet the assets and liabilities for the
rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities
for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation
of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating
lease. However, unlike current GAAP — which requires only capital leases to be recognized on the balance sheet — the
new ASU will require both types of leases to be recognized on the balance sheet. The amendments in this ASU are effective for
financial statements issued for annual periods beginning after December 15, 2018 with earlier adoption permitted. The Company
is currently evaluating the impact of this new standard.
In
January 2017, the FASB issued ASU No. 2017-01
Business Combinations
(Topic 805):
Clarifying the Definition of a Business
.
The ASU clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations
with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or business. The amendments
in this ASU provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments
provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more
operable. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
Upon adoption, the Company will apply the guidance in this ASU when evaluating whether acquired assets and activities constitute
a business.
Also
in January 2017, the FASB issued ASU No. 2017-04,
Intangibles – Goodwill and Other
(Topic 350)
: Simplifying the
Accounting for Goodwill Impairment
. The ASU modifies the accounting for goodwill impairment with the objective of simplifying
the process of determining impairment levels. Specifically, the amendments in the ASU eliminate a step in the goodwill impairment
test which requires companies to develop a hypothetical purchase price allocation when analyzing goodwill impairment. This eliminates
the need for companies to estimate the fair value of individual existing assets and liabilities within a reporting unit. Instead,
goodwill impairment will now be the amount by which a reporting unit’s total carrying value exceeds its fair value, not
to exceed the carrying amount of goodwill. All other aspects of the goodwill impairment test process have remained the same. The
ASU is effective for annual periods beginning in the year 2020, with early adoption permitted for any impairment tests after January
1, 2017. The Company has elected to early adopt ASU 2017-04. There is currently no impact on the condensed consolidated financial
statements as a result of this adoption.
In
March 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-09,
Improvements to Employee Share-Based
Payment Accounting
(“ASU 2016-09”), which provides for simplification of
certain aspects of employee share-based payment accounting including income taxes, classification of awards as either equity or
liabilities, accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 was effective for
the Company in the first quarter of 2017.
During the first quarter of 2017, the Company adopted the requirements of ASU
2016-09, requiring that employee taxes paid when an employer withholds shares for tax withholding purposes in connection with
a stock award be shown as a financing activity on the statement of cash flows. As a result of adopting ASU 2016-09, the Company
retrospectively adjusted the condensed consolidated statements of cash flows to conform to the current year presentation.
In
May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation: Scope of Modification Accounting
(Topic 718),
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting. An entity will account for the effects of a modification unless the fair value of the modified award
is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification
of the modified award as an equity instrument or liability instrument is the same as the original award. The guidance is effective
for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The update is to be adopted
prospectively to an award modified on or after the adoption date. Early adoption is permitted. The Company is currently evaluating
the effect of this update but does not believe it will have a material impact on its consolidated financial statements and related
disclosures.
2016
Acquisitions
On
February 15, 2016 (the “GCB Closing Date”), the Company entered into an Asset Purchase Agreement (“APA”)
with Gulf Coast Billing, LLC (“GCB”), pursuant to which the Company purchased substantially all of the assets of GCB.
The acquisition has been accounted for as a business combination. The aggregate final purchase price for GCB was
$1,480,000
which consisted of cash of
$1,250,000
and contingent consideration
of
$230,000
. During the quarter ended June 30, 2017, an agreement was reached with GCB
that no additional contingent consideration will be paid.
On
May 2, 2016 (the “RMB Closing Date”), the Company entered into an APA with Renaissance Medical Billing, LLC (“RMB”),
pursuant to which the Company purchased substantially all of the assets of RMB. The acquisition has been accounted for as a business
combination. In accordance with the RMB APA, the Company paid $175,000 in initial cash consideration (“RMB Initial Payment”),
on the RMB Closing Date. In addition, the Company will pay RMB twenty-seven percent (27%) of the revenue earned and received from
the acquired RMB accounts for three years, less the RMB Initial Payment which will be deducted in full from the required payments
(the “RMB Installment Payments”) before any additional payment is made to the seller. The aggregate purchase price
for RMB was
$325,000
which
consisted of cash of $175,000 and contingent consideration of
$150,000
. As of June 30,
2017, collected revenues have reached a threshold to require RMB Installment Payments beginning in the third quarter of 2017.
The contingent consideration liability recorded for RMB is still considered sufficient for the projected RMB Installment Payments.
Effective
July 1, 2016 (the “WFS Closing Date”), the Company entered into an APA with WFS Services, Inc. (“WFS”),
pursuant to which the Company purchased substantially all of the assets of WFS. The acquisition has been accounted for as a business
combination. In accordance with the WFS APA, the Company did not pay any initial cash consideration on the WFS Closing Date but
will make monthly payments of $5,000 for three years beginning July, 2016 subject to proportionate adjustment if annualized revenues
decrease below a threshold specified in the APA. In addition, each quarter the Company will pay WFS fifty percent (50%) of Adjusted
EBITDA, as defined in the WFS APA, generated from the WFS customer accounts acquired for three years. The aggregate purchase price
of WFS was determined to be $298,000, which was recorded as contingent consideration. Through June 30, 2017,
$45,000
of contingent consideration payments have been made.
On
October 3, 2016, MAC acquired substantially all of the assets of MediGain. Since MediGain was in default of its obligations to
Prudential prior to the acquisition, MAC purchased 100% of MediGain’s senior secured debt from Prudential.
The
debt was collateralized by substantially all of MediGain’s assets, so immediately after purchasing the debt, MAC entered
into a strict foreclosure agreement with MediGain transferring substantially all the assets (including accounts receivable, fixed
assets, client relationships, and MediGain’s wholly-owned subsidiaries in India and Sri Lanka) to MAC in satisfaction of
the outstanding obligations under the senior secured notes. The aggregate purchase price was $7 million which consists of $2 million
in cash paid at closing and $5 million remaining to be paid.
MediGain,
GCB, RMB and WFS are collectively referred to as the “2016 Acquisitions.” Revenue earned from the 2016 Acquisitions
was approximately $4.2 million and $8.7 million during the three and six months ended June 30, 2017, respectively. Revenues earned
from GCB were approximately $553,000 and $929,000 for the three and six months ended June 30, 2016, respectively. Revenue earned
from RMB was approximately $119,000 during the three months ended June 30, 2016.
2014
Acquisitions
As
part of the 2014 Acquisitions, the Company issued common stock as part of the purchase price, a portion of which was held in escrow
subject to meeting certain revenue levels in the 12 months after the purchase.
For
one revenue cycle management company purchased in 2014, there were 248,625 shares of common stock held in escrow which were part
of the contingent consideration. Although the earnout period ended in 2015, shares were held in escrow until the second quarter
of 2017, when the Company reached an agreement with the seller on the number of shares earned and agreed to release 212,375 shares
from escrow to the seller and the seller agreed to forfeit the remaining 36,250 shares. The forfeited shares were cancelled by
the Company. All of the share transactions were completed by June 30, 2017.
Pro
forma financial information (Unaudited)
The
unaudited pro forma information below represents condensed consolidated results of operations as if the 2016 Acquisitions occurred
on January 1, 2016. The pro forma information has been included for comparative purposes and is not indicative of results of operations
of the Company would have had if the acquisitions occurred on the above date, nor is it necessarily indicative of future results.
Pro forma information for the three and six months ended June 30, 2017 is not presented as there were no acquisitions during those
periods.
|
|
Three
Months Ended
June 30, 2016
|
|
|
Six
Months Ended
June 30, 2016
|
|
|
|
($
in thousands, except per share data)
|
|
Total
revenue
|
|
$
|
10,986
|
|
|
$
|
22,326
|
|
Net loss attributable
to common shareholders
|
|
$
|
(3,929
|
)
|
|
$
|
(9,411
|
)
|
Net loss per common share
|
|
$
|
(0.39
|
)
|
|
$
|
(0.94
|
)
|
5.
|
GOODWILL
AND INTANGIBLE ASSETS-NET
|
Goodwill
consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. There were
no additions to goodwill during the six months ended June 30, 2017.
Intangible
assets include customer contracts and relationships and covenants not-to-compete acquired in connection with acquisitions, as
well as software purchase and development costs and trademarks acquired. Amortization expense was
approximately
$2.6 million
and
$2.2 million for the six months ended June 30, 2017 and 2016, respectively,
and $1.3 million and $1.1 million for the three months ended June 30, 2017 and 2016, respectively. The weighted-average amortization
period is three years.
As
of June 30, 2017, future amortization expense scheduled to be expensed is as follows:
Years ending
|
|
|
|
|
December
31
|
|
|
|
|
2017 (six
months)
|
|
|
$
|
975,584
|
|
2018
|
|
|
|
1,540,674
|
|
2019
|
|
|
|
779,821
|
|
2020
|
|
|
|
34,320
|
|
Total
|
|
|
$
|
3,330,399
|
|
Financial
Risks
— As of June 30, 2017 and December 31, 2016, the Company held approximately $45,000 and $67,000 respectively,
in the name of its subsidiaries at banks in Pakistan, India, Sri Lanka and Poland. The banking systems in these countries do not
provide deposit insurance coverage. Additionally, from time to time, the Company maintains cash balances at financial institutions
in the United States in excess of federal insurance limits. The Company has not experienced any losses on such accounts.
Concentrations
of credit risk with respect to trade accounts receivable are managed by periodic credit evaluations of customers. The Company
does not require collateral for outstanding trade accounts receivable. No one customer accounts for a significant portion of the
Company’s trade accounts receivable portfolio and write-offs have not been significant. During the six months ended June
30, 2017, there was one customer with sales of
approximately 9% of
the total revenue. During
the six months ended June 30, 2016, there were no customers with sales of 4% or more of the total.
Geographical
Risks
— The Company’s offices in Islamabad and Bagh, Pakistan, and Colombo, Sri Lanka conduct significant back-office
operations for the Company. The Company has no revenue earned outside of the United States. The office in Bagh is located in a
different territory of Pakistan from the Islamabad office. The Bagh office was opened in 2009 for the purpose of providing operational
support and operating as a backup to the Islamabad office. The Company’s operations in Pakistan are subject to special considerations
and significant risks not typically associated with companies in the United States. The Company’s business, financial condition
and results of operations may be influenced by the political, economic, and legal environment in Pakistan and by the general state
of Pakistan’s economy. The Company’s results may be adversely affected by, among other things, changes in governmental
policies with respect to laws and regulations, changes in Pakistan’s telecommunications industry, regulatory rules and policies,
anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation.
The
carrying amounts of net assets located in Pakistan were
$510,000
and
$687,000
as of June 30, 2017 and December 31, 2016,
respectively. These balances exclude intercompany receivables of
$6.0 million
and $5.2
million as of June 30, 2017 and December 31, 2016, respectively. The following is a summary of the net assets located in
Pakistan as of June 30, 2017 and December 31, 2016:
|
|
June
30,
2017
|
|
|
December
31, 2016
|
|
Current assets
|
|
$
|
239,271
|
|
|
$
|
227,336
|
|
Non-current assets
|
|
|
1,209,704
|
|
|
|
1,280,736
|
|
|
|
|
1,448,975
|
|
|
|
1,508,072
|
|
Current liabilities
|
|
|
(924,863
|
)
|
|
|
(793,902
|
)
|
Non-current liabilities
|
|
|
(14,199
|
)
|
|
|
(27,288
|
)
|
|
|
$
|
509,913
|
|
|
$
|
686,882
|
|
The
net assets located in Poland, India and Sri Lanka were not significant at June 30, 2017 or December 31, 2016.
7
.
|
NET
LOss per COMMON share
|
The
following table reconciles the weighted-average shares outstanding for basic and diluted net loss per share for the three and
six months ended June 30, 2017 and 2016:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(2,121,478
|
)
|
|
$
|
(1,453,541
|
)
|
|
$
|
(5,032,002
|
)
|
|
$
|
(3,596,363
|
)
|
Weighted average
shares applicable to common shareholders used in computing basic and diluted loss per share
|
|
|
10,833,075
|
|
|
|
10,002,864
|
|
|
|
10,504,417
|
|
|
|
10,043,894
|
|
Net loss attributable
to common shareholders per share - Basic and Diluted
|
|
$
|
(0.20
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.36
|
)
|
The
unvested restricted share units (“RSUs”), the 200,000 warrants granted to Opus in 2015 and 2016 and the 2 million
warrants issued during the second quarter of 2017 as part of the sale of common stock have been excluded from the above calculations
as they were anti-
dilutive. Vested RSUs and vested restricted shares have been included in the above
calculations.
Opus
—
On September
2, 2015, the Company entered into a credit agreement with Opus. Opus extended a credit facility totaling $10 million to the Company,
inclusive of $8 million of term loans and a $2 million revolving line of credit. The Company’s obligations to Opus are secured
by substantially all of the Company’s domestic assets and 65% of the shares in its offshore subsidiaries.
The
interest rate on all Opus loans was initially equal to the higher of (a) the prime rate plus 1.75% and (b) 5.0%. The commitment
fee on the unused portion of the revolving line of credit is 0.5% per annum. As a result of an amendment made to the Opus credit
agreement in March, 2017, on June 30, September 30 and December 31, 2017, the interest rate on the Opus debt increases in steps
by a total of 3.5% from prime plus 1.75% as of March 31, 2017 to prime plus 5.25% on January 1, 2018. The term loans are scheduled
to be fully paid on September 1, 2018 as a result of the additional payments made to Opus during the quarter and the current repayment
schedule. The revolving line of credit will also terminate on September 1, 2018, unless extended. Beginning October 1, 2016 the
term loans require total monthly principal payments of approximately $222,000 per month until the term loans are fully repaid.
As of June 30, 2017, the term loans and the $2 million line of credit have been fully utilized and
the required principal and interest payments were made.
In
connection with the September 2015 Opus debt agreement and all subsequent amendments, the Company paid approximately $667,000
of fees and issued warrants for Opus to purchase 200,000 shares of its common stock. The warrants have a strike price equal to
$5.00 per share, a seven year exercise window, piggyback registration and net exercise rights, and were valued at approximately
$156,000. The Opus credit agreement contains various covenants and conditions governing the long term debt and the revolving line
of credit.
During
March 2017, the Company amended its agreement with Opus whereby the asset coverage ratio covenant was removed and replaced with
a requirement to maintain a month-end cash balance of at least $1 million. There is also a provision for a minimum balance during
the month, as well as the ability to go below the minimum as long as the balance recovers in 5 days. The new covenants also contain
minimum revenue and adjusted EBITDA requirements, as defined in the agreement. Additionally, as the Company raises additional
capital through a sale of equity, a portion of the net proceeds must be used to pay down the term loans. During the quarter ended
June 30, 2017, approximately $2.8 million was repaid to Opus from the proceeds of the equity sales.
As
of June 30, 2017, the Company was in compliance with all the covenants contained in the Opus credit agreement.
Total
debt issuance costs through June 30, 2017 were $667,000 and recorded as an offset to the face amount of the loan. Discounts from
the face amount of the loan are amortized over the life of the loan, adjusted for prepayments, using the effective interest rate
method. As a result of the loan discounts, the effective interest rate on the borrowings from Opus as of June 30, 2017 is approximately
10.6%.
The
term loans at June 30, 2017 are recorded at their accredited value and consist of the following:
Face amount of the loans
|
|
$
|
3,193,627
|
|
Unamortized debt issuance costs
|
|
|
(391,174
|
)
|
Unamortized discount on loan fees
|
|
|
(54,739
|
)
|
Unamortized discount
of amount allocated to warrants
|
|
|
(92,217
|
)
|
Balance at June 30, 2017
|
|
$
|
2,655,497
|
|
Prudential
Deferred Purchase Price
— As a result of the MediGain transaction, the Company has an unsecured obligation for the remainder
of the purchase price of $5 million, which is due during 2017.
On March 29, 2017 the Company received
a letter from Prudential that demanded immediate payment of the $3 million port
ion
of the MediGain
acquisition
consideration that was due on that date,
together with accrued interest at
18%,
and expressing Prudential’s intention to collect on said a
mounts. The balance of
$2 million was due on May 15, 2017. The Company is continuing to negotiate a mutually agreeable payment plan which is subject
to the approval of our senior secured lender.
Vehicle
Financing Notes
— The Company financed certain vehicle purchases both in the United States and in Pakistan. The vehicle
financing notes have 3 to 6 year terms and were issued at current market rates.
Maturities
of the outstanding notes payable, the term loans and other obligations as of June 30, 2017 are as follows:
Years
ending
December 31
|
|
|
Vehicle
Financing
Notes
|
|
|
Opus
Term
Loans
|
|
|
Prudential
Payable
|
|
|
Total
|
|
2017
(six months)
|
|
|
$
|
39,502
|
|
|
$
|
1,333,333
|
|
|
$
|
5,000,000
|
|
|
$
|
6,372,835
|
|
2018
|
|
|
|
69,967
|
|
|
|
1,860,294
|
|
|
|
-
|
|
|
|
1,930,261
|
|
2019
|
|
|
|
50,281
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,281
|
|
2020
|
|
|
|
39,966
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,966
|
|
2021
|
|
|
|
18,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,385
|
|
Thereafter
|
|
|
|
12,437
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,437
|
|
Total
|
|
|
$
|
230,538
|
|
|
$
|
3,193,627
|
|
|
$
|
5,000,000
|
|
|
$
|
8,424,165
|
|
9.
|
Commitments
and Contingencies
|
Legal
Proceedings
— The Company is subject to legal proceedings and claims which have arisen in the ordinary course of business
and have not been fully adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management,
have a material adverse effect upon the consolidated financial position, results of operations, or cash flows of the Company.
Leases
— The Company leases certain office space and other facilities under operating leases expiring through 2021. Certain
of these leases contain renewal options.
Future
minimum lease payments under non-cancelable operating leases for office space as of June 30, 2017 are as follows:
Years
Ending
|
|
|
|
|
December
31
|
|
|
Total
|
|
2017
(six months)
|
|
|
$
|
184,739
|
|
2018
|
|
|
|
304,398
|
|
2019
|
|
|
|
163,179
|
|
Total
|
|
|
$
|
652,316
|
|
Total
rental expense, included in direct operating costs and general and administrative expense in the condensed consolidated statements
of operations, amounted to approximately $453,000 and $379,000 for the six months ended June 30, 2017 and 2016, respectively,
and $224,000 and $194,000 for the three months ended June 30, 2017 and 2016, respectively.
Acquisitions
—
In connection with some of the Company’s acquisitions, contingent consideration as of June 30, 2017 is payable
in the form of cash with payment terms through 2019. Depending on the terms of the agreement, if the performance measures are
not achieved, the Company may pay less than the recorded amount, and if the performance measures are exceeded, the Company may
pay more than the recorded amount.
10.
|
SHAREHOLDERS’
EQUITY TRANSACTIONS
|
Common
Stock
In
May 2017, the Company completed a registered direct offering whereby 1 million shares of the Company’s common stock were
sold at $2.30 per share to a single institutional investor. Concurrently the Company issued warrants to purchase up to 2 million
shares of its common stock to this investor, with an exercise price of $5.00 per share and a one year term. The Company subsequently
registered the shares of common stock underlying these warrants in a registration statement dated June 30, 2017. As a result of
the common stock sale, the Company received net proceeds of approximately $2.0 million. One-third of the net proceeds were used
to pay down the debt with Opus in accordance with the Opus credit agreement.
Preferred
Stock
In
June 2017, the Company completed a public preferred stock offering whereby 294,698 shares of its Preferred Stock were sold at
$25.00 per share. As a result of this sale, the Company received net proceeds of approximately $6.2 million. One-third of the
net proceeds were used to pay down the debt with Opus in accordance with the credit agreement. Dividends on the Preferred Stock
of $2.75 annually per share are cumulative from the date of issue and are payable each month when, as and if declared by the Company’s
Board of Directors. As of June 30, 2017, the Board of Directors has declared monthly dividends on the Preferred Stock payable
through August, 2017.
Commencing
on or after November 4, 2020, the Company may redeem, at its option, the Preferred Stock, in whole or in part, at a cash redemption
price of $25.00 per share, plus all accrued and unpaid dividends to, but not including the redemption date. The Preferred Stock
has no stated maturity, is not subject to any sinking fund or other mandatory redemption, and is not convertible into or exchangeable
for any of the Company’s other securities. Holders of the Preferred Stock have no voting rights except for limited voting
rights if dividends payable on the Preferred Stock are in arrears for eighteen or more consecutive or non-consecutive monthly
dividend periods. If the Company were to liquidate, dissolve or wind up, the holders of the Preferred Stock will have the right
to receive $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any
payment is made to the holders of the common stock. The Preferred Stock is listed on the Nasdaq Capital Market under the trading
symbol “MTBCP.”
The
Company had sales to a related party, a physician who is the wife of the CEO. Revenues from this customer were approximately
$8,000
for both the six months ended June 30, 2017 and 2016 and approximately $4,000 for both the three months ended June 30, 2017 and
2016
. As of June 30, 2017 and December 31, 2016, the receivable balance due from this customer
was approximately
$1,400 and $1,600, respectively.
The
Company is a party to a nonexclusive aircraft dry lease agreement with Kashmir Air, Inc. (“KAI”), which is owned by
the CEO. The Company recorded expense of approximately
$64,000
for both the six months ended June 30, 2017 and 2016 and approximately
$32,000
for
both the three months ended June 30, 2017 and 2016. As of June 30, 2017 and December 31, 2016, the Company had a liability outstanding
to KAI of approximately
$11,000
and $17,000, respectively
, which is included in
accrued liability to related party in the condensed consolidated balance sheets.
The
Company leases its corporate offices, temporary housing for its foreign visitors and a storage facility in New Jersey and its
backup operations center in Bagh, Pakistan, from the CEO. The related party rent expense for the six months ended June 30, 2017
and 2016 was approximately $94,000 and $89,000, respectively,
and
$47,000
and
$44,000 for the three months ended June 30, 2017 and 2016, respectively, and is included in direct operating costs and general
and administrative expense in the condensed consolidated statements of operations. Current assets-related party on the consolidated
balance sheets includes security deposits related to the leases of the Company’s corporate offices in the amount of approximately
$13,000
as of both June 30, 2017 and December 31, 2016. The June 30, 2017 balance also
includes prepaid rent paid to the CEO of approximately
$12,000
.
12.
|
Employee
Benefit PlanS
|
The
Company has a qualified 401(k) plan covering all U.S. employees who have completed three months of service. The plan provides
for matching contributions by the Company equal to 100% of the first 3% of the qualified compensation, plus 50% of the next 2%.
Employer contributions to the plan for the six months ended June 30, 2017 and 2016 were approximately
$77,000
and $49,000, respectively, and approximately $39,000 and $23,000 for the three months ended June 30, 2017 and 2016, respectively.
Additionally,
the Company has a defined contribution retirement plan covering all employees located in Pakistan who have completed three months
of service. The plan provides for monthly contributions by the Company which are the lower of 10% of qualified employees’
basic monthly compensation or 750 Pakistani rupees. The Company’s contributions for both the six months ended June 30, 2017
and 2016 were approximately $61,000, and approximately $31,000 and $30,000 for the three months ended June 30, 2017 and 2016,
respectively.
The
Company maintains a defined contribution retirement plan covering all employees in Sri Lanka. The Company’s contributions
for the three and six months ended June 30, 2017 were approximately $18,000 and $32,000
, respectively
.
13.
|
STOCK-BASED
COMPENSATION
|
In
April 2014, the Company adopted the Medical Transcription Billing, Corp. 2014 Equity Incentive Plan (the “2014 Plan”),
reserving a total of 1,351,000 shares of common stock for grants to employees, officers, directors and consultants. During April
2017, the 2014 Plan was amended whereby an additional 1,500,000 shares of common stock and 100,000 shares of Preferred Stock were
added to the plan for future issuance. The name of the 2014 Plan was changed to the Amended and Restated Equity Incentive Plan
(the “Incentive Plan”). As of June 30,
2017, 1,763,067 shares or common stock and 67,000
shares of Preferred Stock are available for grant. Permissible awards include incentive stock options, non-statutory stock options,
stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance stock and cash-settled awards
and other stock-based awards in the discretion of the Compensation Committee of the Board of Directors including unrestricted
stock grants.
The
RSUs contain a provision in which the units shall immediately vest and become converted into the right to receive a cash payment
payable on the original vesting date after a change in control, as defined in the award agreement.
During
November 2016, 120,000 restricted shares were granted to the four outside members of the Board of Directors which vested on January
3, 2017.
In
November 2016, the Compensation Committee granted cash bonuses to three executives for the successful MediGain acquisition to
be paid upon the closing of additional funding, which did not occur in 2016. In January 2017, the Board recommended that these
bonuses be paid in shares of Preferred Stock, subject to shareholder approval. The value of those incentives was included in accrued
compensation as of December 31, 2016 in the accompanying condensed consolidated balance sheets. In April 2017, shareholder approval
was obtained and shares of Preferred Stock were issued.
The
Company recognizes compensation expense on a straight-line basis over the total requisite service period for the entire award.
For stock awards classified as equity, the market price of our common or Preferred Stock on the date of grant is used in recording
the fair value of the award. For stock awards classified as a liability, the earned amount is marked to market based on the end
of period common stock price. The following table summarizes the components of share-based compensation expense for the three
and six months ended June 30, 2017 and 2016:
Stock-based
compensation included in the Condensed
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
Consolidated
Statement of Operations:
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Direct operating
costs
|
|
$
|
2,680
|
|
|
$
|
2,583
|
|
|
$
|
5,457
|
|
|
$
|
5,338
|
|
General and administrative
|
|
|
68,791
|
|
|
|
122,046
|
|
|
|
194,081
|
|
|
|
600,612
|
|
Research and development
|
|
|
7,218
|
|
|
|
1,396
|
|
|
|
8,497
|
|
|
|
3,143
|
|
Selling
and marketing
|
|
|
-
|
|
|
|
6,354
|
|
|
|
-
|
|
|
|
12,708
|
|
Total
stock-based compensation expense
|
|
$
|
78,689
|
|
|
$
|
132,379
|
|
|
$
|
208,035
|
|
|
$
|
621,801
|
|
The
following table summarizes the RSU and restricted stock transactions related to the common stock under the Incentive Plan for
the six months ended June 30, 2017:
Outstanding and unvested
at January 1, 2017
|
|
|
406,959
|
|
Granted
|
|
|
-
|
|
Vested
|
|
|
(216,065
|
)
|
Forfeited
|
|
|
(25,664
|
)
|
Outstanding and
unvested at June 30, 2017
|
|
|
165,230
|
|
Of
the total outstanding and unvested at June 30, 2017, 119,165 RSUs and restricted stock awards are classified as equity and 46,065
RSUs are classified as a liability.
The
liability for the cash-settled awards was approximately $31,000 at June 30, 2017 and December 31, 2016, and is included in accrued
compensation in the condensed consolidated balance sheets.
The
income tax expense for the six months ended June 30, 2017 and 2016 was approximately
$127,000
and
$81,000
, respectively, and approximately
$67,000
and $38,000 during the three months ended June 30, 2017 and 2016, respectively. The current portion
of the income tax provision of approximately $17,000 and $8,000 for the six months ended June 30, 2017 and 2016 represents state
minimum taxes and taxes attributable to foreign operations, net of the Pakistan foreign tax holiday benefit. The deferred income
tax provision for the six months ended June 30, 2017 and 2016 of approximately
$110,000
and
$73,000, respectively relates to the amortization of goodwill.
Although
the Company is forecasting a return to profitability, it has incurred cumulative losses which make realization of a deferred tax
asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all Federal
and state deferred tax assets as of June 30, 2017 and December 31, 2016. Some of the Federal NOL carry forward is currently subject
to certain utilization limitations under Section 382 of the Internal Revenue Code.
The
Company’s plan to repatriate earnings in its foreign locations to the United States requires that U.S. federal income taxes
be provided on the Company’s earnings in those foreign locations. For state tax purposes, the Company’s foreign earnings
generally are not taxed due to an exemption available in states where the Company currently transacts business.
15.
RESTRUCTURING CHARGES
During
March 2017, the Company decided to close its operations in Poland and India. In connection with the closing of these subsidiaries,
in the first quarter of 2017, the Company expensed approximately
$276,000
of restructuring charges representing primarily employee severance costs, remaining lease and
termination fees, disposal of property and equipment and professional fees. The remaining amounts to be paid of approximately
$45,000
are included in accrued expenses in the condensed consolidated balance sheet as
of June 30, 2017. The Company anticipates that it will take approximately three additional months to wind down the operations
of these two subsidiaries.
16.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As
of June 30, 2017 and December 31, 2016, the carrying amounts of receivables, accounts payable, accrued and expenses and the amount
due to Prudential approximated their estimated fair values because of the short term nature of these financial instruments.
Fair
value measurements-Level 2
Our
notes payable are carried at cost and approximate fair value since the interest rates being charged approximate market rates.
The fair value of our term loans at June 30, 2017 and December 31, 2016 was approximately $3.2 million and $7.3 million, respectively.
The Company’s outstanding borrowings under the line of credit with Opus had a carrying value of $2 million as of both June
30, 2017 and December 31, 2016. The fair value of the outstanding borrowings under the term loans and line of credit with Opus
approximated the carrying value at June 30, 2017 and December 31, 2016, respectively, as these borrowings bear interest based
on prevailing variable market rates currently available. As a result, the Company categorizes these borrowings as Level 2 in the
fair value hierarchy.
Contingent
Consideration
The
Company’s contingent consideration of approximately $716,000 and $930,000 as of June 30, 2017 and December 31, 2016, respectively,
are Level 3 liabilities. The fair value of the contingent consideration at June 30, 2017 and December 31, 2016 was primarily driven
by changes in revenue estimates related to the acquisitions during 2015 and 2016, the price of the Company’s common stock
on the Nasdaq Capital Market (only for the December 31, 2016 contingent consideration amount), the passage of time and the associated
discount rate. Due to the number of factors used to determine contingent consideration, it is not possible to determine a range
of outcomes. Subsequent adjustments to the fair value of the contingent consideration liability will continue to be recorded in
the Company’s results of operations until all contingencies are settled.
The
following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair
value using significant unobservable inputs (Level 3):
|
|
Fair Value Measurement at Reporting Date Using Significant Unobservable Inputs, Level 3
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balance - January 1,
|
|
$
|
929,549
|
|
|
$
|
1,172,508
|
|
Acquisitions
|
|
|
-
|
|
|
|
420,000
|
|
Change in fair value
|
|
|
151,423
|
|
|
|
(411,097
|
)
|
Settlement in the form of shares issued
|
|
|
(331,676
|
)
|
|
|
-
|
|
Payments
|
|
|
(33,114
|
)
|
|
|
(57,917
|
)
|
Balance - June 30,
|
|
$
|
716,182
|
|
|
$
|
1,123,494
|
|
17.
SUBSEQUENT EVENT
Effective
July 1, 2017, the Company purchased substantially all of the assets of Washington Medical Billing, LLC (“WMB”), a
Washington state company. In accordance with the asset purchase agreement, the Company agreed to a non-refundable initial payment
(the “Initial Payment Amount”) of $205,000. In addition to the Initial Payment Amount, the Company agreed to pay the
sellers 22%, 23% and 24% of revenue collected from the WMB accounts in the first, second and third year, respectively, to the
extent such amounts in the aggregate exceed the Initial Payment Amount (the “WMB Installment Payments”). The WMB Installment
Payments are to be paid quarterly commencing October, 2017.