Quarterly report pursuant to Section 13 or 15(d)

ACQUISITIONS

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ACQUISITIONS
 9 Months Ended
Sep. 30, 2015
Business Combinations [Abstract]  
Business Combination Disclosure [Text Block]
3.
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 (collectively “SoftCare”). 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 Revenue Share Payments is contingent upon achieving positive cash flow of 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 preliminary purchase price of $849,413 consisted of cash of $21,888, deferred revenue of $58,127 and contingent consideration of $769,398.
 
On August 31, 2015, the Company completed the acquisition of customer contracts from Jesjam Holdings, LLC, DBA Med Tech Professional Billing (“Med Tech”), a revenue cycle management company. The acquisition has been accounted for as a business combination. The aggregate preliminary purchase price estimate for Med Tech was $272,363 which consisted of cash of $39,316 and contingent consideration of $233,047. Per the terms of the purchase agreement, the amounts are based on 5% of gross fees that were earned by Med Tech 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 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 above acquisitions, collectively the (“2015 Acquisitions”), added a significant number of 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 used an internal valuation model to determine the preliminary purchase price allocation. The Company has engaged a third-party valuation specialist to assist the Company in valuing the assets which should be completed during the fourth quarter of 2015. The following table summarizes the preliminary purchase price allocation for the 2015 Acquisitions.
 
Preliminary Allocation of Purchase Price:
 
 
 
SoftCare
 
Med Tech
 
Intangible assets
 
$
559,000
 
$
134,000
 
Goodwill
 
 
281,554
 
 
138,363
 
Tangible assets
 
 
8,859
 
 
-
 
 
 
$
849,413
 
$
272,363
 
 
Revenues earned from the 2015 Acquisitions were approximately $450,000 during the three and nine months ended September 30, 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 Medical Billing Services, LLC (“Omni”), Practicare Medical Management, Inc. (“Practicare”) and CastleRock Solutions, Inc. (“CastleRock”), collectively the (“2014 Acquisitions”). These acquisitions added a significant number of clients to the Company’s customer base and, similar to other 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 aggregate purchase price at the time of the acquisition for the 2014 Acquisitions amounted to approximately $17.4 million. This was based on the common stock price of $3.89 per share, and 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, less a fair value adjustment of $571,000, which reflects the estimated value of shares in escrow which might be forfeited 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.
  
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, and the remaining shares 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.
 
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 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 condensed consolidated statement of operations for the three and nine months ended September 30, 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 was also 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 is 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 the three and nine months ended September 30, 2015, the Company recorded a $367,479 and $1,283,294 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 purchase price 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
 
$
(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 final purchase price allocation is presented below:
 
Customer contracts and relationships
 
$
8,225,000
 
Non-compete agreements
 
 
925,000
 
Tangible assets
 
 
61,256
 
Acquired backlog
 
 
148,408
 
Goodwill
 
 
8,216,336
 
 
 
$
17,576,000
 
 
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.
 
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.
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
Total revenue
 
$
5,664,852
 
$
7,987,948
 
$
18,861,932
 
$
23,895,870
 
Net loss
 
$
(1,224,712)
 
$
(2,823,991)
 
$
(5,898,149)
 
$
(6,011,833)
 
Net loss per share
 
$
(0.13)
 
 
(0.34)
 
$
(0.61)
 
$
(0.97)