Annual report pursuant to Section 13 and 15(d)

ACQUISITIONS

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ACQUISITIONS
 12 Months Ended
Dec. 31, 2015
Business Combinations [Abstract]  
Business Combination Disclosure [Text Block]
4.
ACQUISITIONS
 
2015 Acquisitions
On July 10, 2015, the Company entered into an Asset Purchase Agreement (the “APA”) with SoftCare Solutions, Inc., a Nevada corporation, which is the U.S. subsidiary of QHR Corporation (“QHR”), a publicly traded, Canada-based healthcare technology company. Pursuant to this APA, the Company purchased substantially all of the assets of the RCM division of QHR Technologies, Inc. which represents SoftCare’s clearinghouse, electronic data interchange and billing divisions. The acquisition has been accounted for as a business combination.
 
The Company made an initial payment of $21,888 for SoftCare, which represented 5% of the trailing twelve months’ revenue from the customers of SoftCare (the “Acquired Customers”) less assumed liabilities totaling $58,127. In addition, on a semiannual basis for three years, the Company will pay QHR 30% of the gross fees earned and collected from the Acquired Customers (the “Revenue Share Payment”). The Company’s obligation to make the Revenue Share Payments is contingent upon achieving positive cash flow from SoftCare, as defined in the APA. Additionally, after 36 months, the Company will pay QHR an amount equal to 5% of the gross fees earned and received by the Company from the Acquired Customers during the 12-month period beginning on the second anniversary of the closing date of July 10, 2015. The aggregate purchase price of $705,248 consisted of cash of $21,888, deferred revenue of $58,127 and contingent consideration of $625,233.
 
On August 31, 2015, the Company completed the acquisition of customer contracts from Jesjam Holdings, LLC, doing business as Med Tech Professional Billing (“MedTech”), a revenue cycle management company. The acquisition has been accounted for as a business combination. Per the terms of the purchase agreement, the purchase price amounts are based on 5% of gross fees that were earned by MedTech during the 12 month period immediately preceding the closing date of August 31, 2015 plus 20% of gross fees that will be collected on or before the 60th day following the end of the term for services rendered by the Company to MedTech’s clients during the three year period commencing on the closing date, plus 5% of gross fees that are earned and received by the Company from clients during the 12 month period commencing on the second anniversary of the closing date subject to adjustments to the purchase price. The aggregate purchase price estimate for MedTech was $302,610 which consisted of cash of $39,316 and contingent consideration of $263,294.
 
Similar to previous acquisitions, these acquisitions were made to 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.
 
The Company engaged a third-party valuation specialist to assist the Company in valuing the assets acquired. The following table summarizes the final purchase price allocation for the 2015 Acquisitions. 
 
Allocation of Purchase Price:
 
 
 
 
 
 
 
 
 
SoftCare
 
MedTech
 
Customer relationships
 
$
373,000
 
$
134,200
 
Acquired technology
 
 
81,000
 
 
-
 
Goodwill
 
 
243,248
 
 
168,410
 
Tangible assets
 
 
8,000
 
 
-
 
 
 
$
705,248
 
$
302,610
 
 
Revenues earned from the 2015 Acquisitions were approximately $ 1,092,000 during the year ended December 31, 2015. The goodwill for both acquisitions 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.
 
2014 Acquisitions
On July 28, 2014, the Company completed the acquisition of three revenue cycle management companies, Omni, Practicare and CastleRock. These acquisitions added a significant number of clients to the Company’s customer base and, similar to other acquisitions, were made to 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. These acquisitions were accounted for as business combinations.
 
The aggregate purchase price at the time of the acquisition for the 2014 Acquisitions amounted to approximately $17.4 million. This consisted of cash in the amount of approximately $11.4 million, which was funded from the net proceeds from the Company’s IPO, and 1,699,796 shares of common stock with a fair value of approximately $6.0 million based on the common stock price of $3.89, less a fair value adjustment of $571,000, which reflected the estimated value of shares in escrow subject to forfeiture by the 2014 Acquisitions based on changes in revenue during the 12 months after the acquisitions. Included in the total consideration paid was $590,302 of cash and the 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.
 
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 cash escrow was released 120 days after the acquisitions were completed. After six months, 254,970 shares were scheduled to be released to the sellers; however, only the 201,173 shares for Omni and Practicare were released in February 2015. The balance of 53,797 shares, initially issued to CastleRock, were released from escrow to MTBC and cancelled on February 19, 2015, pursuant to the settlement agreements discussed below between CastleRock and MTBC. Of the remaining shares in escrow, 157,298 shares were released after nine months to Omni. In accordance with an agreement reached in December 2015, the 566,794 shares were released to Omni and 167,261 were forfeited and cancelled by the Company as of December 31, 2015. Also in January 2016, CastleRock agreed to the forfeiture of their remaining 304,849 shares which were then cancelled. The remaining shares for Practicare are scheduled to be released once the parties agree to the number of shares earned based on amount of revenue earned in the 12 months following the acquisitions.
 
The difference between the 2014 Acquisitions’ operating results for the period July 28 through July 31, 2014 and the amount of net funds received by the Company from the previous owners for that period was accounted for as additional purchase price (“Acquired Backlog”). This intangible (approximately $148,000) was fully amortized from the date of acquisition to December 31, 2014. This amortization is included in depreciation and amortization in the condensed consolidated statements of operations for the year ended December 31, 2014.
 
On February 19, 2015, the Company entered into settlement agreements with certain parties that the Company believed had violated (or tortuously interfered with) an agreement restricting them from directly or indirectly soliciting customers of the Company pursuant to the acquisition agreement between the Company and CastleRock.
 
In accordance with the settlement agreements, the Company paid $110,000 which had been accrued at December 31, 2014 and has agreed to release its claims in consideration for (i) the forfeiture of 53,797 shares of Company stock that were otherwise issuable to CastleRock in connection with the acquisition of the CastleRock businesses, (ii) changing the provision which governs the reduction of the CastleRock purchase price to exclude revenues from customers not in good standing when calculating the number of shares to be issued as discussed below, (iii) terminating the consulting agreement between the Company and CastleRock, and (iv) an agreement between the Company, EA Health Corporation, Inc. (“EA Health”) and a former CastleRock employee prohibiting EA Health and that former employee from soliciting or creating business relationships with any additional current or former customers of the Company for a period of six (6) months, which expired on June 17, 2015. The obligations of the Company and CastleRock contained in the acquisition agreement remain intact aside from the modifications contained in the settlement agreements. The effect of this settlement reduced the outstanding number of shares by 53,797 and resulted in a settlement gain for the fair value of those shares, which was determined to be $133,000. The settlement gain is recorded within the change in contingent consideration in the consolidated statement of operations year ended December 31, 2015.
 
Under each purchase agreement, the Company was required to issue or entitled to cancel shares issued to the 2014 Acquisitions in the event acquired customer revenues for the 12 months following the closing of the acquisition are above or below a specified threshold. In the case of Practicare, the Company would also have been required to make an additional cash payment in the event post-closing revenues from customers acquired exceed a specified threshold.
 
For each of the 2014 Acquisitions, the number of shares to be cancelled or issued as applicable was calculated using a pre-determined formula in each of the purchase agreements. Based on the revenues earned for the twelve months following the acquisition, the Company determined the number of shares expected to be earned and forfeited by the acquired companies. Accordingly, as of the acquisition date, the Company recorded $4.4 million as the fair value of the contingent consideration liability.
 
During each of the years ended December 31, 2015 and 2014, the Company recorded a $1.8 million per year change to the contingent consideration, respectively. These amounts consist of a reduction in the liability primarily due to a combination of the decrease in the revenues that the 2014 Acquisitions achieved and the 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 until all contingencies are settled.
 
The following table summarizes the final historical purchase price consideration as of July 28, 2014 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
 
$
(329)
 
$
10,508
 
Practicare
 
 
293
 
 
1,137
 
 
2,394
 
 
17
 
 
(242)
 
 
3,306
 
CastleRock
 
 
359
 
 
1,395
 
 
2,339
 
 
28
 
 
-
 
 
3,762
 
Total
 
 
1,701
 
$
6,611
 
$
11,388
 
$
148
 
$
(571)
 
$
17,576
 
 
The actual purchase price of CastleRock and Omni were $2.4 million and $8.7 million, respectively. The actual purchase price of Practicare cannot be determined until the contingency regarding the remaining shares held in escrow has been resolved.
 
In connection with both the valuations for the 2015 and 2014 Acquisitions, and the fair value of the customer contracts and 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 weighted-average amortization period of the acquired intangible assets is 3 years.
 
Revenues earned from the 2014 Acquisitions were approximately $12.4 million and $8.2 million for the years ended December 31, 2015 and 2014, respectively.
 
Pro forma financial information
The pro forma information below represents condensed consolidated results of operations as if the acquisition of the 2014 Acquisitions and SoftCare occurred on January 1, 2014. The results of operations of Med Tech were not significant and not included in the pro forma information. 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 date, nor is it necessarily indicative of future results.
 
 
 
For the year ended December 31,
 
 
 
2015
 
2014
 
 
 
(Unaudited)
 
(Unaudited)
 
Total revenue
 
$
24,225,004
 
$
31,571,078
 
Net loss attributable to common shareholders
 
$
(6,757,720)
 
$
(8,727,316)
 
Net loss per common share
 
$
(0.69)
 
$
(1.23)