CareCloud, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has been listed since July 23, 2014 and is trading on the Nasdaq Global Market under the symbol “MTBC”. Common Stockholders As of February 8, 2021, there were approximately 6,800 holders of record of our common stock. Dividends on Common Stock We have not declared a cash dividend on our common stock since we became public on July 23, 2014, and currently we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. The Company is prohibited from paying any dividends on common stock without the prior written consent of its senior lender, SVB. Recent Sales of Unregistered Securities There was no sale of unregistered equity securities during the three months ended December 31, 2020. Purchases of Equity Securities by the Issuer and Affiliated Purchasers There was no share repurchase activity during the three months ended December 31, 2020. 35 Securities Authorized for Issuance under the Equity Compensation Plan As of December 31, 2020, the following table shows the number of securities to be issued upon vesting under the equity compensation plan approved by the Company’s Board of Directors. Equity Compensation Plan Information Plan Category Number of securities to be issued upon vesting Number of securities remaining available for future issuance under equity incentive plan (excluding securities to be issued upon vesting) Equity compensation plan approved by security holders - common shares 369,436 1,718,012 Equity compensation plan approved by security holders - preferred shares 44,000 370,075 Total 413,436 2,088,087 Item 6. Selected Financial Data The selected consolidated statements of operations data presented below for the years ended December 31, 2020 and 2019, as well as the consolidated balance sheet data as of December 31, 2020 and 2019, are derived from our audited consolidated financial statements included in this Annual Report on Form 10-K. The selected consolidated statements of operations data presented below for the years ended December 31, 2018, 2017 and 2016, as well as the consolidated balance sheet data as of December 31, 2018, 2017 and 2016 are derived from our consolidated financial statements not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements appearing on page F-1 in this Annual Report on Form 10-K. Acquisitions by the Company in the last three years account for a significant portion of the increases in revenue and expenses in those years. Note 3 of our Consolidated Financial Statements discusses the acquisitions in the last two years. 36 Consolidated Statements of Operations Data Years ended December 31, 2020 2019 2018 2017 2016 ($ in thousands, except per share data) Net revenue $ 105,122 $ 64,439 $ 50,546 $ 31,811 $ 24,493 Operating expenses: Direct operating costs 64,821 41,186 31,253 17,679 13,417 Selling and marketing 6,582 1,522 1,612 1,106 1,224 General and administrative 22,811 17,912 16,264 11,738 12,459 Research and development 9,311 871 1,029 1,082 902 Change in contingent consideration (1,000 ) (344 ) 73 152 (716 ) Depreciation and amortization 9,905 3,006 2,854 4,300 5,108 Restructuring, impairment and unoccupied lease charges 963 219 - 276 - Total operating expenses 113,393 64,372 53,085 36,333 32,394 Operating (loss) income (8,271 ) 67 (2,539 ) (4,522 ) (7,901 ) Interest income - net (446 ) (121 ) (250 ) (1,307 ) (646 ) Other income (expense) - net 7 (625 ) 494 332 (53 ) Loss before provision (benefit) for income taxes (8,710 ) (679 ) (2,295 ) (5,497 ) (8,600 ) Income tax provision (benefit) 103 193 (157 ) 68 197 Net loss $ (8,813 ) $ (872 ) $ (2,138 ) $ (5,565 ) $ (8,797 ) Preferred stock dividend 13,877 6,386 4,824 2,030 753 Net loss attributable to common shareholders $ (22,690 ) $ (7,258 ) $ (6,962 ) $ (7,595 ) $ (9,550 ) Weighted average common shares outstanding basic and diluted 12,678,845 12,087,947 11,721,232 11,010,432 10,036,988 Net loss per common share: basic and diluted $ (1.79 ) $ (0.60 ) $ (0.59 ) $ (0.69 ) $ (0.95 ) Consolidated Balance Sheet Data As of December 31, 2020 2019 2018 2017 2016 ($ in thousands) Cash $ 20,925 $ 19,994 $ 14,472 $ 4,362 $ 3,477 Working capital - net (1) 15,795 19,823 17,916 4,608 (7,418 ) Total assets 137,999 56,402 47,623 25,526 28,324 Long-term debt 41 83 222 121 4,200 Shareholders’ equity 101,245 42,837 38,870 20,250 7,067 (1) Working capital-net is defined as current assets less current liabilities. Other Financial Data Years ended December 31, 2020 2019 2018 2017 2016 ($ in thousands) Adjusted EBITDA $ 10,871 $ 8,101 $ 4,802 $ 2,291 $ (605 ) To provide investors with additional insight and allow for a more comprehensive understanding of the information used by management in its financial and operational decision-making, we supplement our consolidated financial statements presented on a basis consistent with U.S. generally accepted accounting principles, or GAAP, with adjusted EBITDA, a non-GAAP financial measure of earnings. Adjusted EBITDA represents net income (loss) before income tax expense, interest income, interest expense, depreciation, amortization, transaction, integration, restructuring, impairment charges, unoccupied lease charges and change in contingent consideration. Our management uses adjusted EBITDA as a financial measure to evaluate the profitability and efficiency of our business model. We use this non-GAAP financial measure to assess the strength of the underlying operations of our business. These adjustments, and the non-GAAP financial measure that is derived from them, provide supplemental information to analyze our operations between periods and over time. Investors should consider our non-GAAP financial measure in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. The following table contains a reconciliation of net loss to adjusted EBITDA. Reconciliation of net loss Years ended December 31, to adjusted EBITDA 2020 2019 2018 2017 2016 ($ in thousands) Net loss $ (8,813 ) $ (872 ) $ (2,138 ) $ (5,565 ) $ (8,797 ) Depreciation 1,354 909 689 634 527 Amortization 8,551 2,097 2,165 3,666 4,581 Foreign exchange loss (gain) / other expense 71 827 (435 ) (249 ) 53 Interest expense - net 446 121 250 1,307 646 Income tax provision (benefit) 103 193 (157 ) 68 197 Stock-based compensation expense 6,502 3,216 2,464 1,487 1,928 Transaction and integration costs 2,694 1,735 1,891 515 976 Restructuring, impairment and unoccupied lease charges 963 219 - 276 - Change in contingent consideration (1,000 ) (344 ) 73 152 (716 ) Adjusted EBITDA $ 10,871 $ 8,101 $ 4,802 $ 2,291 $ (605 ) 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion of our consolidated financial condition and results of operations for the years ended December 31, 2020 and 2019 and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our Consolidated Financial Statements and related notes beginning on page F-1 of this Annual Report on Form 10-K. Some of the statements set forth in this section are forward-looking statements relating to our future results of operations. Our actual results may vary from the results anticipated by these statements. Please see “ Forward-Looking Statements ” on page 2 of this Annual Report on Form 10-K. Overview The Company is a healthcare information technology company that provides a full suite of proprietary cloud-based solutions, together with related business services to healthcare providers and hospitals throughout the United States. Our integrated Software-as-a-Service (“SaaS”) platform includes revenue cycle management (“RCM”), practice management (“PM”), electronic health record (“EHR”), business intelligence, telehealth, patient experience management (“PXM”) solutions and complementary software tools and business services for high-performance medical groups and health systems. At a high level, these solutions can be categorized as follows: ● RCM services, which include end-to-end medical billing, eligibility, analytics, and related services, all of which can often be provided either with our technology platform or through a third-party system. ● Proprietary healthcare IT software solutions, which can be bundled with our RCM services, including: ○ EHRs, which are easy to use, integrated with our business services or offered as SaaS solutions, and allow our healthcare provider clients to deliver better patient care, document their clinical visits effectively and thus potentially qualify for government incentives, reduce documentation errors and reduce paperwork; ○ PM software and related tools, which support our clients’ day-to-day business operations and workflows; ○ Mobile Health (“mHealth”) solutions, including smartphone applications that assist patients and healthcare providers in the provision of healthcare services; ○ Telehealth solutions, which allow healthcare providers to conduct remote patient visits; ○ Healthcare claims clearinghouse, which enables our clients to electronically scrub and submit claims to, and process payments from, insurance companies; and ○ Business intelligence, customized applications, interfaces and a variety of other technology solutions that support our healthcare clients. ● Medical Office Practice Management Services are provided to medical practices. In this service model, we provide the medical practice with appropriate facilities, equipment, supplies, support services and administrative support staff. We also provide management, bill-paying and financial advisory services. Our offshore operations in our Pakistan Offices and Sri Lanka together accounted for approximately 10% and 14% of total expenses for the years ended December 31, 2020 and 2019, respectively. A significant portion of those expenses were personnel-related costs (approximately 79% and 78% of foreign costs for the years ended December 31, 2020 and 2019, respectively). Because personnel-related costs are significantly lower in our Pakistan Offices and Sri Lanka than in the U.S. and many other offshore locations, we believe our offshore operations give us a competitive advantage over many industry participants. All of the medical billing companies that we have acquired used domestic labor or subcontractors from higher cost locations to provide all or a substantial portion of their services. We are able to achieve significant cost reductions as we shift these labor costs to our offshore operations. 38 Key Performance Measures We consider numerous factors in assessing our performance. Key performance measures used by management include adjusted EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share. These key performance measures are non-GAAP financial measures, which we believe better enable management and investors to analyze and compare the underlying business results from period to period. These non-GAAP financial measures should not be considered in isolation, or as a substitute for or superior to, financial measures calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of our business as determined in accordance with GAAP. We compensate for these limitations by analyzing current and future results on a GAAP basis, as well as a non-GAAP basis, and we provide reconciliations from the most directly comparable GAAP financial measures to the non-GAAP financial measures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. Adjusted EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share provide an alternative view of performance used by management and we believe that an investor’s understanding of our performance is enhanced by disclosing these adjusted performance measures. Adjusted EBITDA excludes the following elements which are included in GAAP net income (loss): ● Income tax provision (benefit) or the cash requirements to pay our taxes; ● Interest expense, or the cash requirements necessary to service interest on principal payments on our debt; ● Foreign exchange (gains) and losses and other non-operating expenses; ● Stock-based compensation expense and cash-settled awards, based on changes in the stock price; ● Depreciation and amortization charges; ● Integration costs, such as severance amounts paid to employees from acquired businesses and transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees, exit costs related to contractual agreements; ● Restructuring, impairment and unoccupied lease charges; and ● Changes in contingent consideration. Set forth below is a presentation of our adjusted EBITDA for the years ended December 31, 2020 and 2019: December 31, 2020 2019 ($ in thousands) Net revenue $ 105,122 $ 64,439 GAAP net loss (8,813 ) (872 ) Provision for income taxes 103 193 Net interest expense 446 121 Foreign exchange loss / other expense 71 827 Stock-based compensation expense 6,502 3,216 Depreciation and amortization 9,905 3,006 Transaction and integration costs 2,694 1,735 Restructuring, impairment and unoccupied lease charges 963 219 Change in contingent consideration (1,000 ) (344 ) Adjusted EBITDA $ 10,871 $ 8,101 39 Adjusted operating income and adjusted operating margin exclude the following elements which are included in GAAP operating income (loss): ● Stock-based compensation expense and cash-settled awards, based on changes in the stock price; ● Amortization of purchased intangible assets; ● Integration costs, such as severance amounts paid to employees from acquired businesses and transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees, exit costs related to contractual agreements; ● Restructuring, impairment and unoccupied lease charges; and ● Changes in contingent consideration. Set forth below is a presentation of our adjusted operating income and adjusted operating margin, which represents adjusted operating income as a percentage of net revenue, for the years ended December 31, 2020 and 2019: December 31, 2020 2019 ($ in thousands) Net revenue $ 105,122 $ 64,439 GAAP net loss (8,813 ) (872 ) Provision for income taxes 103 193 Net interest expense 446 121 Other (income) expense - net (7 ) 625 GAAP operating (loss) / income (8,271 ) 67 GAAP operating margin (7.9 )% 0.1 % Stock-based compensation expense 6,502 3,216 Amortization of purchased intangible assets 8,127 1,877 Transaction and integration costs 2,694 1,735 Restructuring, impairment and unoccupied lease charges 963 219 Change in contingent consideration (1,000 ) (344 ) Non-GAAP adjusted operating income $ 9,015 $ 6,770 Non-GAAP adjusted operating margin 8.6 % 10.5 % Adjusted net income and adjusted net income per share exclude the following elements which are included in GAAP net income (loss): ● Foreign exchange (gains) and losses and other non-operating expenses; ● Stock-based compensation expense and cash-settled awards, based on changes in the stock price; ● Amortization of purchased intangible assets; ● Integration costs, such as severance amounts paid to employees from acquired businesses and transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees, exit costs related to contractual agreements; ● Restructuring, impairment and unoccupied lease charges; ● Changes in contingent consideration; and ● Income tax expense (benefit) resulting from the amortization of goodwill related to our acquisitions. 40 No tax effect has been provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per share as the Company has sufficient carry forward losses to offset the applicable income taxes. The following table shows our reconciliation of GAAP net loss to non-GAAP adjusted net income for the years ended December 31, 2020 and 2019: December 31, 2020 2019 ($ in thousands except for per share amounts) GAAP net loss $ (8,813 ) $ (872 ) Foreign exchange loss / other expense 71 827 Stock-based compensation expense 6,502 3,216 Amortization of purchased intangible assets 8,127 1,877 Transaction and integration costs 2,694 1,735 Restructuring, impairment and unoccupied lease charges 963 219 Change in contingent consideration (1,000 ) (344 ) Income tax (benefit) expense related to goodwill (85 ) 80 Non-GAAP adjusted net income $ 8,459 $ 6,738 December 31, 2020 2019 GAAP net loss attributable to common shareholders, per share $ (1.79 ) $ (0.60 ) Impact of preferred stock dividend 1.13 0.53 Net loss per end-of-period share (0.66 ) (0.07 ) Foreign exchange loss / other expense 0.01 0.07 Stock-based compensation expense 0.49 0.26 Amortization of purchased intangible assets 0.60 0.15 Transaction and integration costs 0.20 0.14 Restructuring, impairment and unoccupied lease charges 0.07 0.02 Change in contingent consideration (0.07 ) (0.03 ) Income tax (benefit) expense related to goodwill (0.01 ) 0.01 Non-GAAP adjusted earnings per share $ 0.63 $ 0.55 End-of-period common shares 13,380,245 12,237,686 In-the-money warrants and outstanding unvested RSUs 3,392,575 576,084 Total fully diluted shares 16,772,820 12,813,770 Non-GAAP adjusted diluted earnings per share $ 0.50 $ 0.53 For purposes of determining non-GAAP adjusted earnings per share, the Company used the number of common shares outstanding at the end of December 31, 2020 and 2019. Non-GAAP adjusted diluted earnings per share was computed using an as-converted method and includes warrants that are in-the-money as of that date as well as outstanding unvested RSUs. Non-GAAP adjusted earnings per share and non-GAAP adjusted diluted earnings per share do not take into account dividends paid on Preferred Stock. No tax effect has been provided in computing non-GAAP adjusted earnings per share and non-GAAP adjusted diluted earnings per share as the Company has sufficient carry forward net operating losses to offset the applicable income taxes. 41 Quarterly Results of Operations December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2020 2020 2020 2020 2019 2019 2019 2019 ($ in thousands, except per share data) Net revenue $ 32,037 $ 31,639 $ 19,579 $ 21,867 $ 15,758 $ 16,851 $ 16,750 $ 15,080 Operating expenses: Direct operating costs 18,979 19,719 12,556 13,567 9,406 10,536 11,396 9,848 Selling and marketing 1,805 1,571 1,625 1,581 430 348 383 361 General and administrative 5,634 6,191 5,393 5,593 4,156 4,452 5,143 4,161 Research and development 2,465 2,367 2,146 2,333 221 176 219 255 Change in contingent consideration (500 ) (500 ) - - - (280 ) - (64 ) Depreciation and amortization 2,961 3,206 2,405 1,333 598 815 836 757 Restructuring, impairment and unoccupied lease charges 282 320 63 298 83 136 - - Total operating expenses 31,626 32,874 24,188 24,705 14,894 16,183 17,977 15,318 Operating income (loss) 411 (1,235 ) (4,609 ) (2,838 ) 864 668 (1,227 ) (238 ) Interest expense - net (94 ) (130 ) (142 ) (80 ) (39 ) (32 ) (33 ) (17 ) Other (expense) income - net (77 ) (247 ) (114 ) 445 (401 ) (688 ) 545 (81 ) Income (loss) before provision for income taxes 240 (1,612 ) (4,865 ) (2,473 ) 424 (52 ) (715 ) (336 ) Income tax provision (benefit) 85 62 (74 ) 30 91 87 56 (41 ) Net income (loss) $ 155 $ (1,674 ) $ (4,791 ) $ (2,503 ) $ 333 $ (139 ) $ (771 ) $ (295 ) Preferred stock dividend 3,727 4,230 3,277 2,643 1,804 1,603 1,486 1,493 Net loss attributable to common shareholders $ (3,572 ) $ (5,904 ) $ (8,068 ) $ (5,146 ) $ (1,471 ) $ (1,742 ) $ (2,257 ) $ (1,788 ) Loss per common share: Basic and diluted $ (0.28 ) $ (0.47 ) $ (0.65 ) $ (0.42 ) $ (0.12 ) $ (0.14 ) $ (0.19 ) $ (0.15 ) Adjusted EBITDA $ 5,702 $ 4,213 $ 191 $ 765 $ 2,786 $ 2,594 $ 1,141 $ 1,580 42 Reconciliation of net income (loss) to adjusted EBITDA December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2020 2020 2020 2020 2019 2019 2019 2019 ($ in thousands) Net income (loss) $ 155 $ (1,674 ) $ (4,791 ) $ (2,503 ) $ 333 $ (139 ) $ (771 ) $ (295 ) Depreciation 409 383 287 275 241 238 224 207 Amortization 2,553 2,823 2,118 1,058 358 576 612 550 Foreign exchange loss (gain) / other expense 88 296 111 (424 ) 418 704 (539 ) 244 Interest expense - net 94 130 142 80 39 32 33 17 Income tax provision (benefit) 85 62 (74 ) 30 91 87 56 (41 ) Stock-based compensation expense 1,551 1,763 1,881 1,307 890 776 792 758 Transaction and integration costs 986 609 454 644 333 464 734 204 Restructuring, impairment and unoccupied lease charges 281 321 63 298 83 136 - - Change in contingent consideration (500 ) (500 ) - - - (280 ) - (64 ) Adjusted EBITDA $ 5,702 $ 4,213 $ 191 $ 765 $ 2,786 $ 2,594 $ 1,141 $ 1,580 Key Metrics In addition to the line items in our consolidated financial statements, we regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, make strategic business decisions, and assess market share trends and working capital needs. We believe information on these metrics is useful for investors to understand the underlying trends in our business. Providers and Practices Served: As of December 31, 2020, we provided services to approximately 40,000 providers (which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff that render bills for their services), representing approximately 2,600 practices. In addition, we served approximately 200 clients who were not medical practices, but are service organizations who serve the healthcare community. As of December 31, 2019, we served approximately 10,500 providers representing approximately 1,800 practices. Customer Renewal Rate: Our customer renewal rate measures the percentage of our RCM clients who utilize our technology platform who were a party to a services agreement with us on January 1 of a particular year and continued to operate and be a client on December 31 of the same year. It also includes acquired accounts, if they are a party to a services agreement with the company we acquired and are generating revenue for us, so long as the risk of client loss under the respective purchase agreement has fully shifted to us by January 1 of the particular year. Our renewal rates for 2020 and 2019 were 88% and 90%, respectively. Sources of Revenue Revenue: We primarily derive our revenues from revenue cycle management services and bundled services, reported in our Healthcare IT segment, which is typically billed as a percentage of payments collected by our customers. This fee includes RCM, as well as the ability to use our EHR and practice management software as part of the bundled fee. These bundled fees are included in revenue cycle management revenue. These services accounted for approximately 62% and 66% of our revenues during the years ended December 31, 2020 and 2019, respectively. This includes customers utilizing our proprietary product suite, PracticePro ® , as well as customers from acquisitions which we are servicing utilizing third-party software. Key drivers of our revenue include growth in the number of providers we are servicing, the number of patients served by those providers, and collections by those providers. Software-as-a-service (“SaaS”) fees, for clients not utilizing revenue cycle management services, accounted for approximately 18% and 1% of revenue during the year ended December 31, 2020 and 2019, respectively. When clients utilize our revenue cycle management services, basic SaaS services are included at no additional charge. We also generate revenue from our practice management and group purchasing services which began in July 2018 as a result of the Orion acquisition. Revenue is also generated from transcription, coding, indexing and other ancillary services. 43 We earned approximately 6% and 8% of our revenue from printing and mailing operations, clearinghouse, EDI services and ancillary RCM services during the years ended December 31, 2020 and 2019, respectively. We earned approximately 1% and 2% of our revenue from group purchasing services during the years ended December 31, 2020 and 2019, respectively. We also earned approximately 11% and 21% of our revenue from practice management services, including reimbursement of certain costs plus a percentage of the operating profit, during the years ended December 31, 2020 and 2019, respectively. We began providing practice management services and group purchasing services on July 1, 2018. In December 2019, we launched the telehealth service. Revenues from the telehealth source were approximately $7,000 for the year ended December 31, 2020 and are included within our revenue cycle management services revenue. Operating Expenses Direct Operating Costs. Direct operating costs consist primarily of salaries and benefits related to personnel who provide services to our customers and the patients of the three managed medical practices, claims processing costs, and other direct costs related to our services. Costs associated with the implementation of new customers are expensed as incurred. The reported amounts of direct operating costs do not include depreciation and amortization, which are broken out separately in the consolidated statements of operations. Operations in our Pakistan Offices and Sri Lanka together accounted for approximately 10% and 13% of direct operating costs for the years ended December 31, 2020 and 2019, respectively. As we grow, we expect to achieve further economies of scale and to see our direct operating costs decrease as a percentage of revenue. Selling and Marketing Expense. Selling and marketing expense consists primarily of compensation and benefits, commissions, travel and advertising expenses. Research and Development Expense. Research and development expense consists primarily of personnel-related costs and third-party contractor costs. General and Administrative Expense. General and administrative expense consists primarily of personnel-related expense for administrative employees, including compensation, benefits, travel, occupancy and insurance, software license fees and outside professional fees. Our Pakistan Offices and Sri Lanka office accounted for approximately 15% and 16% of general and administrative expenses for the years ended December 31, 2020 and 2019, respectively. Contingent Consideration. Contingent consideration represents the portion of consideration payable to the sellers of some of our acquisitions, the amount of which is based on the achievement of defined performance measures contained in the purchase agreements. Contingent consideration is adjusted to fair value at the end of each reporting period. Depreciation and Amortization Expense. Depreciation expense is charged using the straight-line method over the estimated lives of the assets ranging from three to five years. Amortization expense is charged on either an accelerated or on a straight-line basis over a period of three or four years for most intangible assets acquired in connection with acquisitions including those intangibles related to the group purchasing services. Amortization expense related to the value of our practice management clients is amortized on a straight-line basis over a period of twelve years. Restructuring, Impairment and Unoccupied Lease Charges . Restructuring charges represent the remaining lease costs for a facility no longer used by the Company as the employees were transferred to another Company facility. Impairment charges represent charges recorded for a leased facility no longer being used by the Company. Unoccupied lease charges represent the portion of lease and related costs for vacant space not being utilized by the Company. The Company is marketing both the unused facilities and the unused space for sub-lease. In February 2021, the Company was able to settle one lease obligation. Interest and Other Income (Expense). Interest expense consists of interest costs and loan origination costs related to our working capital line of credit and amounts due in connection with acquisitions, offset by interest income. Our other income (expense) results primarily from foreign currency transaction gains (losses), and amounted to a foreign exchange gain of $14,000 and a loss of $827,000 for the years ended December 31, 2020 and 2019, respectively. 44 Income Taxes. In preparing our consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities. Although the Company is forecasting a return to profitability, it incurred losses historically and there is uncertainty regarding future US taxable income, which make realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all deferred tax assets as of December 31, 2020 and December 31, 2019. Effective January 1, 2018, there is a global intangible low-taxed income (“GILTI”) tax. Companies can either account for the GILTI inclusion in the period in which they are incurred or establish deferred tax liabilities for the expected future taxes associated with GILTI. The Company elected to record the GILTI provisions as they are incurred each period. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense and related disclosures. We base our estimates, assumptions and judgments on historical experience, current trends and various other factors that we believe to be reasonable under the circumstances. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. On a regular basis, we review our accounting policies, estimates, assumptions and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Critical accounting policies are those policies used in the preparation of our consolidated financial statements that require management to make difficult, subjective, or complex adjustments, and to make estimates about the effect of matters that are inherently uncertain. Revenue from Contracts with Customers : We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers . Our revenue recognition policies require us to make significant judgments and estimates, particularly as it relates to revenue cycle management. Under ASC 606, certain significant accounting estimates, such as payment-to-charge ratios, effective billing rates and the estimated contractual payment periods are required to measure the revenue cycle management revenue. To measure group purchasing services revenue, we need to estimate the number of providers purchasing vaccines and the amount and timing of those purchases. We analyze various factors including, but not limited to, contractual terms and conditions, the credit-worthiness of our customers and our pricing policies. Changes in judgment on any of the above factors could materially impact the timing and amount of revenue recognized in a given period. Revenue is recognized as the performance obligations are satisfied. We derive revenue from seven primary sources: revenue cycle management services, SaaS, practice management services, professional services, ancillary services, group purchasing services, printing and mailing services, and clearinghouse and EDI (electronic data interchange) services. All of our revenue arrangements are based on contracts with customers. Most of our 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 or transaction prices are based on the contractual price for the service, which is consistent with the stand-alone selling price. Revenue cycle management services: Revenue cycle management services are 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 typically 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 services include use of practice management software and related tools (on a software-as-a-service (“SaaS”) basis), electronic health records (on a SaaS basis), medical billing services and use of mobile health solutions. We consider the services to be one performance obligation since the promises are not distinct in the context of the contract. The performance obligation consists of a series of distinct services that are substantially the same and have the same periodic pattern of transfer to our customers. 45 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. Although our contracts typically 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. For the majority of our revenue cycle management contracts, the total transaction price is variable because our obligation is to process an unknown quantity of claims, as and when requested by our customers over the contract period. 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 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 variable consideration is subsequently resolved. Estimates to determine variable consideration such as payment to charge ratios, effective billing rates, and the estimated contractual payment periods are updated at each reporting date. Revenue is recognized over the performance period using the input method. Practice management services: We estimate the amount that will be collected on claims submitted to insurance carriers which is used to determine the compensation to be paid to the owners of the managed practices. These compensation amounts reduce the revenue that the Company recognizes since they are deducted from gross billings. The estimate of the amounts to be received from the insurance claims are updated at each reporting period. Although we believe that our approach to estimates and judgments is reasonable, actual results could differ, and we may be exposed to increases or decreases in revenue that could be material. Our estimates of variable consideration may prove to be inaccurate, in which case we may have understated or overstated the revenue recognized in an accounting period. The amount of variable consideration recognized to date that remains subject to estimation is included within the contract asset in the consolidated balance sheets. Contingent Consideration: If a business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date. The Company adjusts the contingent consideration liability at the end of each reporting period based on fair value inputs representing changes in forecasted revenue of the acquired entities and the probability of an adjustment to the purchase price. Critical estimates include determining the forecasted revenue for certain acquisitions, probability and timing of cash collections and an appropriate discount rate. Changes in the fair value of the contingent consideration after the acquisition date are included in earnings if the contingent consideration is recorded as a liability. Goodwill Impairment: Goodwill is evaluated for impairment annually as of October 31 st , referred to as the annual test date. The Company will also test for impairment between annual test dates if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is performed at the reporting-unit level. The Company has determined that its business consists of two operating segments and two reporting units (Healthcare IT and Practice Management). Application of the goodwill impairment test requires judgment including the use of a discounted cash flow and market approach methodology. These analyses require significant assumptions and judgments. These assumptions and judgments include estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, determination of our weighted average cost of capital and the selection of comparable companies and the interpretation of their data. Future business and economic conditions, as well as differences in actual financial results related to any of the assumptions, could materially impact the consolidated financial statements through impairment of goodwill or intangible assets and acceleration of the amortization period of the purchased intangible assets which are finite-lived assets. No impairment charges were recorded during the years ended December 31, 2020 or 2019. Business Combinations: The Company accounts for business combinations under the provisions of ASC 805, Business Combinations , which requires that the acquisition method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. The fair value amount assigned to intangible assets is based on an exit price from a market participant’s viewpoint, and utilizes data such as discounted cash flow analysis and replacement cost models. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected client retention rates, expected future cash inflows and outflows, discount rates, and estimated useful lives of those intangible assets. ASC 805 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. 46 Results of Operations The following table sets forth our consolidated results of operations as a percentage of total revenue for the years shown. December 31, 2020 2019 Net revenue 100.0 % 100.0 % Operating expenses: Direct operating costs 61.7 % 63.9 % Selling and marketing 6.3 % 2.4 % General and administrative 21.7 % 27.8 % Research and development 8.9 % 1.4 % Change in contingent consideration (1.0 )% (0.5 )% Depreciation and amortization 9.4 % 4.7 % Restructuring, impairment and unoccupied lease charges 0.9 % 0.3 % Total operating expenses 107.9 % 100.0 % Operating (loss) income (7.9 )% 0.0 % Interest expense - net 0.4 % 0.2 % Other income (expense) - net 0.0 % (1.0 )% Loss before income taxes (8.3 )% (1.2 )% Income tax provision 0.1 % 0.3 % Net loss (8.4 )% (1.5 )% Comparison of 2020 and 2019 December 31, Change 2020 2019 Amount Percent ($ in thousands) Net revenue $ 105,122 $ 64,439 $ 40,683 63 % Net revenue. Net revenue of $105.1 million for the year ended December 31, 2020 increased by $40.7 million or 63% from revenue of $64.4 million for the year ended December 31, 2019. Total revenue for the year ended December 31, 2020 included $53.3 million from customers acquired in the CareCloud and Meridian acquisitions. Revenue for the year ended December 31, 2020 includes $65.3 million relating to RCM and bundled services, $18.7 million related to SaaS services and $11.8 million for practice management services. 47 December 31, Change 2020 2019 Amount Percent ($ in thousands) Direct operating costs $ 64,821 $ 41,186 $ 23,635 57 % Selling and marketing 6,582 1,522 5,060 332 % General and administrative 22,811 17,912 4,899 27 % Research and development 9,311 871 8,440 969 % Change in contingent consideration (1,000 ) (344 ) (656 ) 191 % Depreciation 1,354 909 445 49 % Amortization 8,551 2,097 6,454 308 % Restructuring, impairment and unoccupied lease charges 963 219 744 340 % Total operating expenses $ 113,393 $ 64,372 $ 49,021 76 % Direct Operating Costs. Direct operating costs of $64.8 million for the year ended December 31, 2020 increased by $23.6 million or 57% from direct operating costs of $41.2 million for the year ended December 31, 2019. Salary costs increased by $12.2 million primarily as a result of the CareCloud and Meridian acquisitions. Outsourcing and other customer processing costs increased by $9.2 million, outside consultant costs increased by $873,000 and facility costs increased by $962,000. Selling and Marketing Expense. Selling and marketing expense of $6.6 million for the year ended December 31, 2020 increased by $5.1 million or 332% from selling and marketing expense of $1.5 million for the year ended December 31, 2019. The increase was primarily related to additional emphasis on sales and marketing activities which accelerated as a result of the CareCloud acquisition. General and Administrative Expense. General and administrative expense of $22.8 million for the year ended December 31, 2020 increased by $4.9 million or 27% from general and administrative expense of $17.9 million for the year ended December 31, 2019. Salary costs increased by $2.3 million as a result of the CareCloud and Meridian acquisitions. Computer expenses in subsidiaries increased by $771,000 and legal and professional fees increased by $965,000. Research and Development Expense. Research and development expense of $9.3 million for the year ended December 31, 2020 increased by $8.4 million or 969% from research and development expense of $871,000 in the prior year. The increase primarily represented additional salaries and outsourced development expense and cloud services related to new and enhanced product development, primarily on technologies acquired as a result of the CareCloud and Meridian acquisitions. Contingent Consideration. The changes in contingent consideration of ($1.0 million) and ($344,000) for the years ended December 31, 2020 and 2019, respectively, relate to changes in the fair value of the contingent consideration. Depreciation. Depreciation of $1.4 million for the year ended December 31, 2020 increased by $445,000 or 49% from depreciation of $909,000 for the year ended December 31, 2019, primarily as a result of additional property and equipment purchases and the property and equipment obtained from the CareCloud and Meridian acquisitions. Amortization Expense. Amortization expense of $8.6 million for the year ended December 31, 2020, increased by $6.5 million or 308% from amortization expense of $2.1 million for the year ended December 31, 2019. The increase was primarily related to the intangible assets acquired from the CareCloud and Meridian acquisitions. Restructuring, Impairment and Unoccupied Lease Charges. Restructuring charges represent the remaining lease costs for a facility no longer used by the Company as the employees were transferred to another Company facility. Impairment charges represent charges recorded for a leased facility no longer being used by the Company. Unoccupied lease charges represent the portion of lease and related costs for space not being utilized by the Company. The Company is marketing the unused facilities and unused space for sub-lease. In February 2021, the Company was able to settle one lease obligation. 48 December 31, Change 2020 2019 Amount Percent ($ in thousands) Interest income $ 42 $ 262 $ (220 ) (84 )% Interest expense (488 ) (383 ) (105 ) 27 % Other income (expense) - net 7 (625 ) 632 101 % Income tax provision 103 193 (90 ) 47 % Interest Income. Interest income of $42,000 for the year ended December 31, 2020 decreased by $220,000 or 84% from interest income of $262,000 for the year ended December 31, 2019. Interest income primarily represents interest earned on temporary cash investments and late fees from customers. Interest Expense. Interest expense of $488,000 for the year ended December 31, 2020 increased by $105,000 or 27% from interest expense of $383,000 for the year ended December 31, 2019. Interest expense also includes the amortization of deferred financing costs which was approximately $180,000 and $192,000 during the years ended December 31, 2020 and 2019, respectively. Other Income (Expense) - net. Other income - net was $7,000 for the year ended December 31, 2020 compared to other expense - net of $625,000 for the year ended December 31, 2019. Included in other income (expense) - net are foreign currency transaction gains (losses) primarily resulting from transactions in foreign currencies other than the functional currency. These transaction gains and losses are recorded in the consolidated statements of operations related to the recurring measurement and settlement of such transactions. Income Tax Provision (Benefit). There was a $103,000 provision for income taxes for the year ended December 31, 2020, compared to the provision for income taxes of $193,000 for the year ended December 31, 2019. Included in the tax provision for the year ended December 31, 2020 is an $84,000 deferred income tax benefit. The current income tax provision for the years ended December 31, 2020 and 2019 was approximately $187,000 and $113,000, respectively, and primarily relates to state minimum taxes and foreign income taxes. The pre-tax loss was $8.7 million and $679,000 for the years ended December 31, 2020 and 2019, respectively. The Company has incurred losses historically and there is uncertainty regarding future U.S. taxable income, which make realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance was recorded against all deferred tax assets at December 31, 2020 and 2019. The Company has recorded goodwill as a result of its acquisitions. Goodwill is generally not amortized for financial reporting purposes. However, goodwill from asset acquisitions is tax deductible and amortized over 15 years for tax purposes. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this indefinitely lived asset. The resulting deferred tax liability, which is expected to continue to be recorded over the amortization period, will have an indefinite life. As a result of the Company incurring tax losses for 2020 and 2019 which have an indefinite life under the recent tax reform legislation, the federal deferred tax liability resulting from the amortization of goodwill was offset against these indefinite federal operating net loss deferred tax assets to the extent allowable. The remaining deferred tax liability could remain on the Company’s consolidated balance sheet indefinitely unless there is an impairment of goodwill (for financial reporting purposes) or a portion of the related business is sold. The Company will maintain a full valuation allowance on deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. While the Company’s plan is to be profitable in the future and begin utilizing these deferred tax assets, the Company currently lacks sufficient evidence to allow it to release the valuation allowance in 2020 and 2019. Release of the valuation allowance would result in the recognition of certain deferred tax assets and an income tax benefit in the period of release. As of December 31, 2020, the Company has a total federal NOL carry forward of approximately $270.9 million of which approximately $198.8 million will expire between 2029 and 2037, and the balance of approximately $72.1 million has an indefinite life. Out of the total federal NOL carry forward, approximately $237.6 million is from the CareCloud and Meridian acquisitions and is subject to the federal Section 382 NOL annual usage limitations. The Company has state NOL carry forwards of approximately $161.0 million, of which $85.8 million relates to the State of New Jersey. These NOLs expire between 2034 and 2040. 49 Liquidity and Capital Resources During the year ended December 31, 2020, there was negative cash flow from operations of approximately $892,000 and at year-end the Company had $20.9 million in cash and positive working capital of $15.8 million. Cash used by operations in 2020 includes $10.3 million used to pay outstanding obligations assumed with the acquisitions of CareCloud and Meridian, which were anticipated at the time of acquisition and factored into the purchase prices. During the three months ended December 31, 2020, cash provided by operations was $3.4 million. The Company has a revolving line of credit with SVB, and, as of December 31, 2020, there was no balance outstanding. During 2019, the Company sold 373,000 shares of Preferred Stock and raised $9.6 million in net proceeds after fees and expenses. During the year ended December 31, 2020, the Company sold 1,932,000 shares of Preferred Stock and raised $44.5 million in net proceeds after fees and expenses. The following table summarizes our cash flows for the years presented. Year ended December 31, Change 2020 2019 Amount Percent ($ in thousands) Net cash (used in) provided by operating activities $ (892 ) $ 7,618 $ (8,510 ) (112 )% Net cash used in investing activities (31,469 ) (4,158 ) (27,311 ) (657 )% Net cash provided by financing activities 33,422 1,422 32,000 2,250 % Effect of exchange rate changes on cash (130 ) 640 (770 ) (120 )% Net increase in cash $ 931 $ 5,522 $ (4,591 ) (83 )% The loss before income taxes was $8.7 million for the year ended December 31, 2020, of which $9.9 million was non-cash depreciation and amortization. The loss before income taxes for the year ended December 31, 2019 was $679,000, of which $3.0 million was non-cash depreciation and amortization. Management continues to focus on the Company’s overall profitability, including growing revenue and managing expenses, and expects that these efforts will continue to enhance our liquidity and financial position. Based on management’s forecasts, the Company will have sufficient liquidity to meet its obligations as they become due for the next twelve months from the date of financial statements issuance. We have not been adversely affected by inflation as typically we receive a percentage of the fees our clients collect from our revenue cycle management services. Additionally, our practice management contracts are based on our costs plus a percentage of operating income. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. In the event of inflation, we believe that we will be able to pass on any price increases for fixed rate contracts to our customers, as the prices that we charge are not governed by long-term contracts. During the second quarter of 2020, patient volumes decreased due to COVID-19, but returned to near normal levels during the third and fourth quarters. The Company did not have any significant employee terminations or furloughs as a result of COVID -19. During 2021, the Company currently estimates that it will need to pay approximately $4.2 million to resolve a civil investigation which one of the subsidiaries it acquired in 2020 has been subject to since July 2018. Of this amount, $4.0 million will come from escrowed shares of preferred stock that the Company holds. Operating Activities Cash used by operating activities was $892,000 and cash generated by operating activities was $7.6 million during the years ended December 31, 2020 and 2019, respectively. The increase in the net loss of $7.9 million included the following changes in non-cash items: increase in depreciation and amortization of $7.1 million, increase in stock-based compensation of $3.3 million, and an increase in lease amortization of $1.0 million. Revenue increased by $40.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, and operating expenses increased by $49.0 million for the same period primarily due to the acquisitions of CareCloud and Meridian. 50 Cash generated by the reduction of accounts receivable was $394,000 for the year ended December 31, 2020, compared with a reduction of $765,000 for the year ended December 31, 2019. This excludes the acquired accounts receivable as part of the ETM, CareCloud and Meridian acquisitions. Accounts payable, accrued compensation and accrued expenses increased by $11.9 million during the year ended December 31, 2020, compared with an increase of $1.4 million for the year ended December 31, 2019. While the cash used to pay pre-acquisition accounts payable, accrued compensation and accrued expenses was anticipated at the time of the CareCloud and Meridian acquisitions, and was considered as part of the purchase prices of these transactions, it is shown as cash used by operations to conform with GAAP. Investing Activities Cash used in investing activities during the year ended December 31, 2020 was $31.5 million, an increase of $27.3 million compared to $4.2 million during the year ended December 31, 2019. The change is due to the Company acquiring ETM for a cash consideration of $1.6 million during 2019, while in 2020 the Company paid $23.7 million for the acquisitions of CareCloud and Meridian. Capitalized software was $5.2 million and $538,000 during the years ended December 31, 2020 and 2019, respectively. Financing Activities Cash provided by financing activities during the year ended December 31, 2020 was $33.4 million, compared to $1.4 million for the year ended December 31, 2019. Cash provided by financing activities during 2020 includes $44.5 million of net proceeds after fees and expenses from issuing 1,932,000 shares of Preferred Stock, offset by $666,000 of repayments for debt obligations, and $11.4 million of Preferred Stock dividends. Cash provided by financing activities during 2019 includes $9.6 million of net proceeds from issuing 373,000 shares of Preferred Stock, offset by $430,000 of repayments for debt obligations, and $6.1 million of Preferred Stock dividends. There was also $2.2 million of payments to settle the tax withholding obligations in 2020 compared to $1.4 million in 2019. There were no borrowings under the revolving line of credit as of December 31, 2020 and 2019. Contractual Obligations and Commitments We have contractual obligations under our line of credit. We also maintain operating leases for property and certain office equipment. We were in compliance with all SVB covenants in 2020. Off-Balance Sheet Arrangements As of December 31, 2020, and 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special-purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the first quarter of 2020, a New Jersey corporation, talkMD Clinicians, PA (“talkMD”), was formed by the wife of the Executive Chairman, who is a licensed physician, to provide telehealth services. talkMD was determined to be a variable interest entity (“VIE”) for financial reporting purposes because the entity will be controlled by the Company. As of December 31, 2020, talkMD had not yet commenced operations or had any transactions or agreements with the Company or otherwise. We do not engage in off-balance sheet financing arrangements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined by 17 C.F.R. 229.10(f)(1) and are not required to provide information under this item, pursuant to Item 305(e) of Regulation S-K. Item 8. Financial Statements and Supplementary Data See “Index to Consolidated Financial Statements” which appears on page F-1 of this Annual Report on Form 10-K. 51 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.