Quarterly report pursuant to Section 13 or 15(d)

ACQUISITIONS

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ACQUISITIONS
 9 Months Ended
Sep. 30, 2014
Business Combinations [Abstract]  
Business Combination Disclosure [Text Block]
4.
ACQUISITIONS
 
On July 28, 2014, the Company completed the acquisition of three revenue cycle management companies, Omni Medical Billing Services, LLC (“Omni”), Practicare Medical Management, Inc. (“Practicare”) and CastleRock Solutions, Inc. (“CastleRock”; and collectively with Omni and Practicare, the “Acquired Businesses”). The Company expects that these acquisitions will add a significant number of clients to the Company’s customer base and similar to other acquisitions, will broaden the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base and by increasing available customer relationship resources and specialized trained staff.
 
Subsequent to the acquisition, the Company agreed to accept 10% of the cash collected related to July 2014 revenue and pay 10% of the July 2014 expenses for July 2014 for two of the Acquired Businesses and to forego any collections related to July 2014 revenue and pay no expenses related to July 2014 for the remaining Acquired Business.
 
The aggregate preliminary purchase price for the Acquired Businesses amounted to approximately $17.8 million, based on the common stock price of $3.89 per share, consisting of cash in the amount of approximately $11.4 million, which was funded from the net proceeds from the Company’s IPO on that date and 1,699,796 shares of common stock with a fair value of approximately $6.2 million based on the common stock price, subject to certain adjustments. Included in the consideration paid is $590,302 of cash and 1,699,796 shares of common stock with a value of approximately $6.6 million that the Company deposited into escrow under the purchase agreements, less a fair value adjustment of $390,000 which reflects the estimated value of shares in escrow which might be forfeited by the Acquired Businesses based on changes in revenue during the 12 months after the acquisitions. The cash escrow will be released 120 days after the acquisitions were completed, unless required to satisfy certain indemnification claims. 254,970 shares will be released to the sellers after six months, 157,298 shares will be released after nine months, and the remaining shares will be released after 12 months, subject to adjustments for changes in revenue.
 
With respect to Omni, following the closing date an upward purchase price adjustment was made to the cash consideration payable to Omni to pay for the annualized revenue from new customers who executed one-year contracts prior to the closing, instead of the trailing 12 months’ revenue. This resulted in additional consideration of $100,582 and 15,700 shares, which are included in the amounts above.
 
The difference between the Acquired Businesses’ operating results for the period July 28 through 31, 2014 and the amount of net funds received by the Company from the previous owners for that period was accounted for as additional preliminary purchase price (“Acquired Backlog”). This intangible (approximately $148,000) was fully amortized from the date of acquisition to September 30, 2014. This amortization is included in depreciation and amortization in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014.
 
Under each purchase agreement, the Company may be required to issue or entitled to cancel shares issued to the Acquired Businesses in the event acquired customer revenues for the 12 months following the close are below or above a specified threshold. In the case of Practicare, the Company may also be required to make an additional cash payment, in the event post-closing revenues from customers acquired exceed a specified threshold.
 
The adjustments to the contingent consideration for each of the Acquired Businesses will be based on the revenues generated from the acquired customers in the 12 months following the closing, as compared to the revenues generated by each of the Acquired Businesses in the four quarters ended March 31, 2014.
 
For each of Omni, Practicare and CastleRock, no adjustment will be made unless the variance is greater than 10%, 5% and 20%, respectively.
 
For each of the Acquired Businesses, the number of shares to be cancelled or issued as applicable will be calculated using a pre-determined formula in each of the purchase agreements.
 
As of the acquisition date, the Company recorded $4.6 million as the preliminary fair value of the contingent consideration liability as additional purchase price. During the three and nine months ended September 30, 2014, the Company recorded a fair value reduction of $425,000 to the contingent consideration primarily due to a decrease in the Company’s stock price. Subsequent adjustments to the fair value of the contingent consideration liability will continue to be recorded in the Company’s results of operations. The portion of purchase price paid with the Company’ common stock that is not contingent upon achieving specified revenue targets has been recorded in equity.
 
If the performance measures required by the 2014 purchase agreements are not achieved, the Company may pay less than the recorded amount, depending on the terms of the agreement. If the price of the Company’s common stock increases, the Company may pay more than the recorded amount. Settlements will be exclusively in the form of the Company’s common stock.
 
As part of the acquisitions, the Company entered into short-term employee, office space and equipment customer lease agreements with each of the respective Acquired Businesses. These arrangements allow the Company to utilize certain personnel from the Acquired Businesses, as well as certain space and equipment located at the Acquired Business’ premises for a negotiated period of time.
 
As of the date of this Quarterly Report on Form 10-Q and in accordance with the terms set forth in the purchase agreements, the preliminary purchase price and purchase price allocation as it relates to the tangible and intangible assets acquired and goodwill have not been finalized. The preliminary purchase price is expected to be finalized by the end of the first quarter in 2015. The following table summarizes the preliminary consideration and the allocation of the purchase price to the net assets acquired:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent
 
 
 
 
 
 
 
Common Stock
 
 
 
 
Acquired
 
Consideration
 
Total
 
 
 
 
Shares
 
Value
 
Cash
 
Backlog
 
Adjustment
 
Consideration
 
 
      (in thousands)
 
Omni
 
 
1,049
 
$
4,079
 
$
6,655
 
$
103
 
$
(129)
 
$
10,708
 
Practicare
 
 
292
 
 
1,137
 
 
2,394
 
 
17
 
 
(260)
 
 
3,288
 
CastleRock
 
 
359
 
 
1,395
 
 
2,339
 
 
28
 
 
(1)
 
 
3,761
 
Total
 
 
1,700
 
$
6,611
 
$
11,388
 
$
148
 
$
(390)
 
$
17,757
 
 
We engaged a third-party valuation specialist to assist the Company in valuing the assets from our acquisition of the Acquired Businesses. The results of the valuation analysis are presented below:
 
Customer contracts and relationships
 
$
8,943,000
 
Non-compete agreements
 
 
971,000
 
Tangible assets
 
 
61,256
 
Acquired backlog
 
 
148,408
 
Goodwill
 
 
7,633,159
 
Total purchase consideration
 
$
17,756,823
 
 
The weighted average amortization period of the intangible assets is three years.
 
The fair value of the customer relationships was established using a form of the income approach known as the excess earnings method. Under the excess earnings method, value is estimated as the present value of the benefits anticipated from ownership of the subject intangible asset in excess of the returns required on the investment in the contributory assets necessary to realize those benefits. The fair value of the non-compete agreements were determined based on the difference in the expected cash flows for the business with the non-compete agreement in place and without the non-compete agreement in place.
 
The goodwill is deductible ratably for income tax purposes over 15 years and represents the Company’s ability to have a local presence in several markets throughout the United States and the further ability to expand in those markets.
 
The revenue from former customers of Acquired Businesses whose contracts were acquired has been included in the Company’s condensed consolidated statement of operations since the date of acquisition. Revenues of $3,635,033 related to Acquired Businesses are included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014.
 
Transaction-related costs associated with the acquisitions of the Acquired Businesses of $627,136 and $704,638 during the three and nine months ended September 30, 2014, respectively, and $51,175 for the nine months ended September 30, 2013, were expensed as incurred, and included in general and administrative expenses in the condensed consolidated statements of operations.
 
Metro Medical Management Services Acquisition
Effective at the close of business on June 30, 2013, the Company executed an Asset Purchase Agreement (the “Agreement”) to acquire Metro Medical Management Services, Inc. (“Metro Medical”). Metro Medical is a New York-based company that offers full-scale revenue cycle management services to small-to-medium sized healthcare practices. Metro Medical broadened the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base and by increasing available marketing resources and specialized trained staff. Under the terms of the Agreement, the Company paid cash consideration of $275,000 at closing and issued a promissory note to Metro Medical for $1,225,000. The principal amount of the promissory note is payable in monthly installments over a twenty-four month period from September 2013, and bears interest at the rate of 5% per year.
 
Cash paid on date of acquisition
 
$
275,000
 
Promissory note payable to Metro Medical
 
 
1,225,000
 
Total purchase consideration
 
$
1,500,000
 
 
Under purchase price accounting, we recognize the assets and liabilities acquired at their fair value on the acquisition date, with any excess in purchase price over these values being allocated to goodwill.
 
We engaged a third-party valuation specialist to assist the Company in valuing the assets from our acquisition of Metro Medical. The results of the valuation are presented below:
 
Customer contracts and relationships
 
$
904,000
 
Non-compete agreement
 
 
252,000
 
Goodwill
 
 
344,000
 
 
 
$
1,500,000
 
 
The revenue from former customers of Metro Medical whose contracts were acquired has been included in the Company’s statement of operations for each reporting period since the date of acquisition. Revenues of approximately $499,974 and $1,702,662 related to Metro Medical are included in the condensed consolidated statements of operations for the three months and nine months ended September 30, 2014, respectively.
 
Transaction-related costs associated with the acquisition of Metro Medical of approximately $111,500 and $181,500 during the three and nine months ended September 30, 2013, respectively were expensed as incurred, and included in general and administrative expenses in the condensed consolidated statements of operations.
 
The pro forma information below represents condensed consolidated results of operations as if the acquisition of the Acquired Businesses occurred on January 1, 2013 and Metro Medical occurred on January 1, 2012. The pro forma information has been included for comparative purposes and is not indicative of results of operations of the Company had the acquisitions occurred on the above respective dates, nor is it necessarily indicative of future results. For Metro Medical and each of the Acquired Businesses, we have identified revenue from customers who cancelled their contracts prior to MTBC’s acquisition of such customers’ contracts. Such revenue is excluded from the pro forma information below, since MTBC did not pay for these customers and will not generate revenues from those customers. The 2014 pro forma net (loss) was adjusted in exclude $29,000 and $134,000 of acquisition-related costs incurred during the three and nine months ended September 30, 2014. The 2013 pro forma net loss for the three and nine months ended September 30, 2013 was adjusted to include these charges. The pro forma net loss for the three and nine months ended September 30, 2014 includes the effect of the change in the contingent consideration of $425,000.
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
 
2014
 
2013
 
Total revenue
 
$
7,359,464
 
$
7,622,033
 
$
22,110,379
 
$
22,357,301
 
Net (loss)
 
$
(2,351,144)
 
$
(1,629,098)
 
$
(4,821,622)
 
$
(6,011,913)
 
Net (loss) per share
 
$
(0.28)
 
$
(0.32)
 
$
(0.78)
 
$
(1.18)