Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.20.1
Acquisitions
3 Months Ended
Mar. 31, 2020
Business Combinations [Abstract]  
Acquisitions

3. ACQUISITIONS

 

2020 Acquisition

 

On January 8, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CareCloud Corporation, a Delaware corporation (“CareCloud”), MTBC Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”) and Runway Growth Credit Fund Inc. (“Runway”), solely in its capacity as a seller representative, pursuant to which Merger Sub merged with and into CareCloud (the “Merger”), with CareCloud surviving as a wholly-owned subsidiary of the Company. The Merger became effective simultaneously with the execution of the Merger Agreement.

 

The total consideration for the Merger included approximately $11.9 million paid in cash at closing, the assumption of a working capital deficiency of approximately $5.1 million and 760,000 shares of the Company’s Preferred Stock. The Merger Agreement provides that if CareCloud’s 2020 revenues exceed $36 million, there will be an earn-out payment to the seller equal to such excess, up to $3 million. Additional consideration included warrants to purchase 2,000,000 shares of the Company’s common stock, 1,000,000 of which have an exercise price per share of $7.50 and a term of two years, and the other 1,000,000 warrants have an exercise price per share of $10.00 and a term of three years.

 

A summary of the total consideration is as follows:

 

CareCloud Purchase Price

 

Cash   $ 11,852,526  
Preferred stock     19,000,000  
Warrants     300,000  
Contingent consideration     1,050,000  
Total purchase price   $ 32,202,526  

 

Of the Preferred Stock consideration, 160,000 shares will be held in escrow for up to 24 months, and an additional 100,000 shares will be held in escrow for up to 18 months, in both cases, to satisfy indemnification obligations of the seller for losses arising from certain specified contingent liabilities. Shares net of such losses will be released upon the joint instruction of the Company and Runway in accordance with the applicable escrow terms. Such shares are entitled to the monthly dividend, which will be paid when, and if, the shares are released. The Company accrues the dividend monthly on the Preferred Stock held in escrow.

 

The Company’s Preferred Stock and warrants issued as part of the Merger consideration were issued in a transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). The Company has agreed to register for resale under the Securities Act the Preferred Stock and the securities underlying the warrants.

 

The CareCloud acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened 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 and liabilities assumed from CareCloud. The following table summarizes the preliminary purchase price allocation. The Company expects to finalize the purchase price allocation by the end of the second quarter and is finalizing the projections and the valuation of the acquired assets and assumed liabilities. The preliminary purchase price allocation for CareCloud is summarized as follows:

 

Accounts receivable   $ 2,298,716  
Prepaid expenses     1,277,990  
Contract asset     537,722  
Property and equipment     402,970  
Operating lease right-of-use assets     2,858,626  
Customer relationships     5,300,000  
Trademark     800,000  
Software     4,700,000  
Goodwill     25,718,078  
Other long term assets     539,560  
Accounts payable     (6,942,710 )
Accrued expenses     (2,080,977 )
Current loan payable     (79,655 )
Operating lease liability     (2,858,544 )
Deferred revenue     (269,250 )
Total preliminary purchase price allocation   $ 32,202,526  

 

The acquired accounts receivable are recorded at fair value which represents amounts that have subsequently been paid or are expected to be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by these intangibles. The goodwill from this acquisition is not deductible for income tax purposes and represents the Company’s ability to have an expanded local presence in additional markets and operational synergies that we expect to achieve that would not be available to other market participants.

The weighted-average amortization period of the acquired intangible assets is approximately three years.

 

Revenue earned from the clients obtained from the CareCloud acquisition was approximately $7.6 million during the three months ended March 31, 2020.

 

2019 Acquisition

 

On April 3, 2019, the Company executed an asset purchase agreement (“APA”) to acquire substantially all of the assets of Etransmedia. The purchase price was $1.6 million and the assumption of certain liabilities, excluding acquisition-related costs of approximately $125,000. Per the APA, the acquisition had an effective date of April 1, 2019. The acquisition has been accounted for as a business combination.

 

The Etransmedia acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened 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 purchase price allocation for Etransmedia was performed by the Company and is summarized as follows:

 

Customer relationships   $ 856,000  
Accounts receivable     547,377  
Contract asset     139,169  
Operating lease right-of-use assets     1,224,480  
Property and equipment     91,277  
Goodwill     39,901  
Operating lease liabilities     (1,224,480 )
Accrued expenses     (73,724 )
Total   $ 1,600,000  

 

The acquired accounts receivable are recorded at fair value which represents amounts that have subsequently been paid or are expected to be paid by clients. The fair value of customer relationships was based on the estimated discounted cash flows generated by these intangibles. The goodwill from this acquisition is deductible ratably for income tax purposes over fifteen years and represents the Company’s ability to have an expanded local presence in additional markets and operational synergies that we expect to achieve that would not be available to other market participants.

 

The weighted-average amortization period of the acquired intangible assets is approximately three years.

 

Revenue earned from the clients obtained from the Etransmedia acquisition was approximately $1.2 million during the three months ended March 31, 2020.

 

Pro forma financial information (Unaudited)

 

The unaudited pro forma information below represents the condensed consolidated results of operations as if the Etransmedia and CareCloud acquisitions occurred on January 1, 2019. The pro forma information has been included for comparative purposes and is not indicative of results of operations that the Company would have had if the acquisitions occurred on the above date, nor is it necessarily indicative of future results. The unaudited pro forma information reflects material, non-recurring pro forma adjustments directly attributable to the business combinations. The difference between the actual revenue and the pro forma revenue is approximately $2.1 million of additional revenue recorded by Etransmedia and approximately $8 million of additional revenue recorded by CareCloud for the three months ended March 31, 2019.

 

    Three Months Ended  
    March 31,  
    2020     2019  
    ($ in thousands except per share amounts)  
Total revenue   $ 22,485     $ 25,196  
Net loss   $ (2,265 )   $ (8,769 )
Net loss attributable to common shareholders   $ (4,908 )   $ (10,262 )
Net loss per common share   $ (0.40 )   $ (0.86 )