9. REVENUE

The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers, which was adopted January 1, 2018 using the modified retrospective method. All revenue is recognized as our performance obligations are satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under ASC 606. Under the new standard, the Company recognizes revenue when the services begin on the medical billing claims, which is generally upon receipt of the claim from the provider. For medical billing services, the Company estimates the value of the consideration it will earn over the remaining contractual period as our services are provided and recognizes the fees over the term; this estimation involves predicting the amounts our clients will ultimately collect associated with the services they provided. Certain significant estimates, such as payment-to-charge ratios, effective billing rates and the estimated contractual payment periods are required to measure medical billing revenue under the new standard. The timing of the revenue recognition of our other revenue streams were not materially impacted by the adoption of ASC 606.

All of our revenue is derived from contracts with customers and is reported as revenue in the condensed consolidated statements of operations. In many cases, our clients may terminate their agreements with 90 days’ notice without cause, thereby limiting the term in which we have enforceable rights and obligations, although this time period can vary between clients. Our payment terms are normally net 30 days. We provide value to our clients over the term of the contract and recognize revenue ratably over the term, which is consistent with the measure of progress. In the event that we are entitled to variable consideration for services provided during a specific time period, fees for these services are allocated to and recognized over the specific time period. Our contracts contain penalty clauses for early termination. Although our contracts have stated terms of one or more years, under ASC 606 our contracts are considered month to month, and accordingly, there is no financing component.

Disaggregation of Revenue from Contracts with Customers

We derive revenue from six primary sources: medical billing services, ancillary services, printing and mailing, clearinghouse and EDI (electronic data interchange) services, EnrollmentPlus^TM and professional services. All of our current contracts with customers contain a single performance obligation. For contracts where we provide multiple services such as where we perform multiple ancillary services, each service represents its own performance obligation. Selling prices are based on the contractual price for the service.

The following table represents a disaggregation of revenue for the three months ended March 31:

We apply the portfolio approach as permitted by ASC 606 as a practical expedient to contracts with similar characteristics and we use estimates and assumptions when accounting for those portfolios. Our contracts generally include standard commercial payment terms. We have no significant obligations for refunds, warranties or similar obligations and our revenue does not include taxes collected from our customers.

Medical billing revenue:

Medical billing is the recurring process of submitting and following up on claims with health insurance companies in order for the healthcare providers to receive payment for the services they rendered. MTBC invoices customers on a monthly basis based on the actual collections received by its customers and the agreed-upon rate in the sales contract. The series of services under medical billing revenue includes practice management software and related tools, electronic health records, revenue cycle management services and mobile health solutions. We consider the series of services provided under our medical billing contracts to be one performance obligation since the promises are not distinct in the context of the contract.

Substantially all of our medical billing contracts contain variable consideration and we estimate the variable consideration which we expect to be entitled to over the contractual period associated with our medical billing contracts, which begins no earlier than go-live and recognize the fees over the term. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. For the majority of our medical billing contracts, the total contractual price is variable because our obligation is to process an unknown quantity of transactions, as and when requested by our customers, over the contract period. We allocate the variable price to each claim processed using the time-series concept and recognize revenue based on the most likely amount of consideration to which we will be entitled to, which is generally the amount we have the right to invoice. Estimates to determine the variable consideration such as payment to charge ratios, effective billing rates, and the estimated contractual payment periods are updated at each reporting date.

The contract asset in the condensed consolidated balance sheet represents the revenue associated with the amounts our clients will ultimately collect associated with the services they have provided and the relative fee we charge associated with those collections. The performance obligations as of January 1, 2018 were substantially recognized in the quarter ended March 31, 2018. As of March 31, 2018, the estimated revenue expected to be recognized in the future related to the remaining performance obligations was approximately $1.4 million. We expect to recognize substantially all of the revenue for the remaining performance obligations over the next 3 months.

Our medical billing performance obligations consist of a series of distinct services that are substantially the same and have the same periodic pattern of transfer to our customers. We consider each periodic rendering of service to be a distinct performance obligation and, accordingly, recognize revenue over time.

Other revenue streams:

Ancillary services represent services such as coding and transcription that are rendered in connection with the delivery of medical billing and related services. The Company invoices customers monthly, based on the actual amount of services performed at the agreed upon rate in the contract. These services are only offered to medical billing customers. These services do not represent a material right because the services are optional to the customer and customers electing these services are charged the same price for those services as if they were on a standalone basis. Each individual coding or transcription transaction processed represents a performance obligation, which is satisfied once that individual service is completed.

The Company provides printing and mailing services for a non-medical billing customer and invoices on a monthly basis based on the number of prints, the agreed-upon rate per print and the postage incurred. The performance obligation is satisfied once the printing and mailing is completed.

The medical billing clearinghouse takes claim information from customers, checks the claims for errors and sends this information electronically to insurance companies. MTBC invoices customers on a monthly basis based on the number of claims submitted and the agreed-upon rate in the agreement. This service is provided to non-medical billing customers. The performance obligation is satisfied once the relevant submissions are completed.

MTBC also provides implementation and professional services to clearinghouse customers and records revenue monthly on a time and materials basis. This is a separate performance obligation from the clearinghouse and EDI services provided. The performance obligation is satisfied once the implementation or professional services is completed.

For the EnrollmentPlus product, the Company receives a monthly fee per member for providing an electronic interchange for the enrollment of a customer’s members using a platform that the Company developed. EnrollmentPlus automates the customer’s processing and enrollment of new members. The performance obligation is satisfied once the enrollment of members is completed.

For all of the above revenue streams, revenue is recognized over time, when invoiced, which closely matches point in time recognition, as the customer simultaneously receives and consumes the benefits provided by the Company. Each of the services provided above is considered a separate performance obligation and is satisfied over time, which is typically one month or less.

Information about contract balances:

Accounts receivable are shown separately at their net realizable value in our condensed consolidated balance sheets. Amounts that we are entitled to collect under the applicable contract are recorded as accounts receivable. Invoicing is performed at the end of each month when the services have been provided. The contract asset results from our medical billing services and is due to the timing of revenue recognition, submission of claims from our customers and payments from the insurance providers. The contract asset includes our right to payment for services already transferred to a customer when the right to payment is conditional on something other than the passage of time. For example, contracts for medical billing services where we recognize revenue over time but do not have a contractual right to payment until the customer receives payment of their claim from the insurance provider. The contract asset was approximately $1.4 million as of March 31, 2018. Changes in the contract asset are recorded as adjustments to net revenues and primarily result from providing services to customers that result in additional consideration and are offset by our right to payment for services becoming unconditional. Deferred revenue represents sign-up fees received from customers that are amortized over 3 years. The opening and closing balances of the Company’s accounts receivable, contract asset and deferred revenue are as follows:

Deferred commissions:

Our sales incentive plans include commissions payable to employees and third parties at the time of initial contract execution that are capitalized as incremental costs to obtain a contract. The capitalized commissions are amortized over the period the related services are transferred. As we do not offer commissions on contract renewals, we have determined the amortization period to be the estimated client life, which is 3 years. Deferred commissions were approximately $105,000 at March 31, 2018 and are included in the Other Assets lines in our condensed consolidated balance sheets.