CareCloud, Inc. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, based on the 2013 Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020 as required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures, as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Management is required to base its assessment on the effectiveness of our internal control over financial reporting on a suitable, recognized control framework. Management has utilized the criteria established in COSO to evaluate the effectiveness of internal control over financial reporting. Our management has performed its assessment according to the guidelines established by COSO. Management excluded Meridian from its assessment of internal controls over financial reporting, the most recent acquisition, as it was not possible to conduct an assessment of the acquired business’s internal control over financial reporting in the period between the commencement date and the date of management’s assessment. During 2020, the revenue recorded by the Company for Meridian was approximately $21.5 million. Based on the assessment, management has concluded that our system of internal control over financial reporting, as of December 31, 2020, is effective. 52 Because of its inherent limitations, our internal controls over financial reporting provide reasonable, not absolute, assurance that the financial statements and footnotes thereto are free of material error. In addition, no internal control structure can provide absolute assurance that all instances of fraud have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART III Item 10. Directors, Executive Officers and Corporate Governance Information required by this item will be included in our definitive Proxy Statement for the 2021 Meeting of Shareholders which will be filed within 120 days of the end of our fiscal year ended December 31, 2020 (“2021 Proxy Statement”) and is incorporated herein by reference. Item 11. Executive Compensation Information required by this item will be included in the 2021 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item will be included in the 2021 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Information required by this item will be included in the 2021 Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services Information required by this item will be included in our 2021 Proxy Statement and is incorporated herein by reference. 53 PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements (i) Consolidated Balance Sheets as of December 31, 2020 and 2019 (ii) Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 (iii) Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019 (iv) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020 and 2019 (v) Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 (vi) Notes to Consolidated Financial Statements (2) Financial Statement Schedules There are no Financial Statement Schedules filed as part of this Annual Report on Form 10-K, as the required information is not applicable or is included in the Notes to Consolidated Financial Statements. (b) Exhibit Index: Exhibit Number Description 2.1 Assignment Agreement dated October 3, 2016, by and between the Company, The Prudential Insurance Company of America, and Prudential Retirement Insurance and Annuity Company (filed as Exhibit 10.1 to the Company’s Form 8-K filed on October 5, 2016, and incorporated herein by reference). 2.2 Strict Foreclosure Agreement dated October 3, 2016, by and between MTBC Acquisition, Corp., MediGain, LLC and Millennium Practice Management Associates, LLC (filed as Exhibit 10.2 to the Company’s Form 8-K filed on October 5, 2016, and incorporated herein by reference). 2.3 Transition Services Agreement dated October 3, 2016, by and between MTBC Acquisition, Corp., MediGain, LLC and Millennium Practice Management Associates, LLC (filed as Exhibit 10.3 to the Company’s Form 8-K filed on October 5, 2016, and incorporated herein by reference). 2.4 First Amendment to Assignment Agreement dated January 3, 2017, by and between the Company, The Prudential Insurance Company of America, and Prudential Retirement Insurance and Annuity Company (filed as Exhibit 2.1 to the Company’s Form 8-K filed on January 6, 2017, and incorporated herein by reference). 2.5 Second Amendment to Assignment Agreement dated January 23, 2017, by and between the Company, The Prudential Insurance Company of America, and Prudential Retirement Insurance and Annuity Company (filed as Exhibit 2.1 to the Company’s Form 8-K filed on January 24, 2017, and incorporated herein by reference). 2.6 Asset Purchase Agreement dated June 25, 2018, by and between MTBC, and Orion Healthcorp, Inc. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on July 2, 2018, and incorporated herein by reference). 2.7 Transition Services Agreement dated June 25, 2018, by and between MTBC, and Orion Healthcorp, Inc. (filed as Exhibit 2.29 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference). 54 2.8 Asset Purchase Agreement dated March 27, 2019, by and between MTBC-Med, Inc., and Etransmedia Technology, Inc., et. al. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on March 28, 2019, and incorporated herein by reference). 2.9 Amended and Restated Asset Purchase Agreement dated April 3, 2019, by and between MTBC-Med, Inc., and Etransmedia Technology, Inc., et. al. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on April 4, 2019, and incorporated herein by reference). 2.10 Agreement and Plan of Merger by and among MTBC, Inc., MTBC Merger Sub, Inc., CareCloud Corporation and Runway Growth Credit Fund Inc., as the Seller’s representative dated January 8, 2020 (filed as Exhibit 2.1 to the Company’s Form 8-K filed on January 8, 2020, and incorporated herein by reference). 2.11 Escrow Agreement dated January 8, 2020 by and among MTBC, Inc., Runway Growth Credit Fund., Inc. and TD Bank (filed as Exhibit 10.17 to the Company’s Form 10-K filed on February 28, 2020, and incorporated herein by reference). 2.12 Stock Purchase Agreement dated June 16, 2020 by and among MTBC, Inc., Origin Holdings, Inc., Meridian Billing Management Co., Origin Holdings, Inc., and GMM II Holdings, LLC, (filed as Exhibit 2.1 to the Company’s Form 8-K on June 17, 2020, and incorporated herein by reference). 3.1 Amended and Restated Certificate of Incorporation of the Company dated April 4, 2014 (filed as Exhibit 3.1 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference). 3.2 Certificate of Amendment of Certificate of Incorporation of the Company dated June 28, 2016 (filed as Exhibit 3.2 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference). 3.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company dated June 18, 2018 (filed as Exhibit 3.6 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference). 3.4 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company dated February 6, 2019 (filed as Exhibit 3.1 to the Company’s Form 8-K filed on February 7, 2019 and incorporated herein by reference). 3.5 Certificate of Amendment of Amended and Restated Certificate of Incorporation of MTBC, Inc. dated June 25, 2019 (filed as Exhibit 3.1 to the Company’s Form 8-K filed on June 25, 2019 and incorporated herein by reference). 3.6 Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable Perpetual Preferred Stock dated July 6, 2016 (filed as Exhibit 3.3 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference). 3.7 First Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable Perpetual Preferred Stock dated September 15, 2017 (filed as Exhibit 3.4 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference). 3.8 Second Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable Perpetual Preferred Stock dated March 23, 2018 (filed as Exhibit 3.5 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference). 55 3.9 Third Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable Perpetual Preferred Stock dated September 25, 2018 (filed as Exhibit 3.7 to the Company’s Form S-1 filed on September 25, 2018, and incorporated herein by reference). 3.10 Fourth Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable Perpetual Preferred Stock dated January 9, 2020 (filed as Exhibit 3.1 to the Company’s Form 8-K filed on January 28, 2020, and incorporated herein by reference). 3.11 Fifth Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable Perpetual Preferred Stock dated May 19, 2020 (filed as Exhibit 3.2 to the Company’s Form 8-K filed on May 21, 2020, and incorporated herein by reference). 3.12 Sixth Amendment to Amended and Restated Certificate of Designations, Preferences and Rights of 11% Series A Cumulative Redeemable Perpetual Preferred Stock dated July 9, 2020 (filed as Exhibit 3.1 to the Company’s Form 8-K filed on July 9, 2020, and incorporated herein by reference). 3.13 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to the Company’s Amendment No. 1 to Form S-1 filed on April 7, 2014, and incorporated herein by reference). 4.1 Form of common stock certificate of the Company (filed as Exhibit 4.1 to Amendment No. 2 to the Company’s Form S-1 filed on May 7, 2014, and incorporated herein by reference). 4.2 Form of stock certificate of the 11% Series A Cumulative Redeemable Perpetual Preferred Stock (filed as Exhibit 4.2 to Amendment No. 2 to the Company’s Form S-1 on October 19, 2015, and incorporated herein by reference). 4.3 Warrant to Purchase Stock dated as of October 13, 2017 issued by the Company to Silicon Valley Bank (filed as Exhibit 10.2 to the Company’s Form 8-K filed on October 16, 2017, and incorporated herein by reference). 4.4 Warrant to Purchase Stock issued by the Company on September 20, 2018 to Silicon Valley Bank (filed as Exhibit 10.2 to the Company’s Form 8-K filed on September 20, 2018, and incorporated herein by reference). 4.5 Warrant to Purchase Stock issued by the Company on January 8, 2020 to Runway Growth Credit Fund Inc. (filed as Exhibit 4.5 to the Company’s Form 10-K filed on February 28, 2020, and incorporated herein by reference). 4.6 Warrant to Purchase Stock issued by the Company on January 8, 2020 to Runway Growth Credit Fund Inc. (filed as Exhibit 4.6 to the Company’s Form 10-K filed on February 28, 2020, and incorporated herein by reference). 4.7 Form of Warrant to Purchase Stock issued by the Company on June 16, 2020 with respect to the Meridian transaction (filed as Exhibit 4.7 to the Company’s Form S-1 filed on August 20, 2020, and incorporated herein by reference). 4.8 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. 10.1 Form of Indemnification Agreement between the Company and each of its directors and executive officers (filed as Exhibit 10.1 to Amendment No. 2 to the Company’s Form S-1 filed on May 7, 2014, and incorporated herein by reference). 10.2 * Amended and Restated Equity Incentive Plan of the Company (filed as Appendix B to the Company’s Proxy Statement on Schedule 14A filed on February 10, 2017, and incorporated herein by reference). 10.3 * First Amendment to the Amended and Restated Equity Incentive Plan of the Company (filed as Exhibit 10.16 to the Company’s Form 10-Q filed on August 8, 2018, and incorporated herein by reference). 56 10.4* Second Amendment to MTBC, Inc. Amended and Restated Equity Incentive Plan (filed as Exhibit 3.1 to the Company’s Form 8-K filed on May 21, 2020, and incorporated herein by reference). 10.5 * Form of Restricted Stock Unit Agreement under Amended and Restated Equity Incentive Plan (filed as Exhibit 10.3 to Amendment No. 1 to the Company’s Form S-1 filed on April 7, 2014, and incorporated herein by reference). 10.6 * Form of Restricted Stock Award Agreement under the Amended and Restated Equity Incentive Plan (filed as Exhibit 10.12 to the Company’s Form 10-K filed on March 24, 2016, and incorporated herein by reference). 10.7 Lease between Company and Mahmud Haq with respect to offices located at 7 Clyde Road, Somerset, NJ 08873 (filed as Exhibit 10.4 to the Company’s Form S-1 filed on December 20, 2013, and incorporated herein by reference). 10.8 * Employment Agreement between the Company and Mahmud Haq dated as of May 1, 2018 (filed as Exhibit 10.1 to the Company’s Form 8-K filed on May 7, 2018, and incorporated herein by reference). 10.9 * Employment Agreement between the Company and Stephen Snyder dated as of May 1, 2018 (filed as Exhibit 10.2 to the Company’s Form 8-K filed on May 7, 2018, and incorporated herein by reference). 10.10 * Employment Agreement between the Company and A. Hadi Chaudhry dated as of May 1, 2018 (filed as Exhibit 10.3 to the Company’s Form 8-K filed on May 7, 2018, and incorporated herein by reference). 10.11 * Employment Agreement between the Company and Bill Korn dated as of May 1, 2018 (filed as Exhibit 10.4 to the Company’s Form 8-K filed on May 7, 2018, and incorporated herein by reference). 10.12 Loan and Security Agreement dated as of October 13, 2017 between Medical Transcription Billing, Corp., MTBC Acquisition, Corp. and Silicon Valley Bank (filed as Exhibit 10.1 to the Company’s Form 8-K filed on October 16, 2017, and incorporated herein by reference). 10.13 J oinder and First Loan Modification Agreement dated as of September 20, 2018 between Medical Transcription Billing, Corp., MTBC Acquisition, Corp., MTBC Health, Inc. and MTBC Practice Management, Corp. and Silicon Valley Bank (filed as Exhibit 10.1 to the Company’s Form 8-K filed on September 20, 2018, and incorporated herein by reference). 10.14 Second Loan Modification Agreement dated November 15, 2019, by and between the Company and SVB (filed as Exhibit 1.1 to the Company’s Form 8-K filed on November 21, 2019, and incorporated herein by reference). 10.15 Joinder and Third Loan Modification Agreement dated as of February 28, 2020 between MTBC, Inc., MTBC Acquisition Corp., MTBC Health, Inc. and MTBC Practice Management Corp., MTBC-Med, Inc., CareCloud Corporation and Silicon Valley Bank (filed as Exhibit 10.16 to the Company’s Form 10-K filed on February 28, 2020, and incorporated herein by reference). 10.16 Joinder and Fourth Loan Modification Agreement dated September 21, 2020, by and between the Company and SVB (filed as Exhibit 1.1 to the Company’s Form 8-K filed on September 25, 2020, and incorporated herein by reference). 10.17 Asset Purchase Agreement dated March 27, 2019, by and between MTBC-Med, Inc., and Etransmedia Technology, Inc., et. al. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on March 28, 2019, and incorporated herein by reference). 57 10.18 Amended and Restated Asset Purchase Agreement dated April 3, 2019, by and between MTBC-Med, Inc., and Etransmedia Technology, Inc., et. al. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on April 4, 2019, and incorporated herein by reference). 10.19 Underwriting Agreement dated July 16, 2020 by and between the Company and B. Riley FBR, Inc. as representative of several underwriters names therein (filed as Exhibit 1.1 to the Company’s Form 8-K filed on July 17, 2020, and incorporated herein by reference). 21.1 List of subsidiaries. 23.1 Consent of Grant Thornton LLP. 31.1 Certification of the Company’s Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), of the Securities Exchange Act of 1934, as amended. 31.2 Certification of the Company’s Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), of the Securities Exchange Act of 1934, as amended. 32.1 Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * Indicates management contract or compensatory plan or arrangement. The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 58 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MTBC, Inc. By: /s/ Stephen Snyder Stephen Snyder Chief Executive Officer Date: February 25, 2021 By: /s/ Bill Korn Bill Korn Chief Financial Officer Date: February 25, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Mahmud Haq February 25, 2021 Mahmud Haq Executive Chairman and Director /s/ Stephen Snyder February 25, 2021 Stephen Snyder Principal Executive Officer and Director /s/ Bill Korn February 25, 2021 Bill Korn Principal Financial Officer /s/ Norman Roth February 25, 2021 Norman Roth Principal Accounting Officer /s/ A. Hadi Chaudhry February 25, 2021 A. Hadi Chaudhry President and Director /s/ Anne Busquet February 25, 2021 Anne Busquet Director /s/ Lawrence Sharnak February 25, 2021 Lawrence Sharnak Director /s/ John N. Daly February 25, 2021 John N. Daly Director /s/ Cameron Munter February 25, 2021 Cameron Munter Director 59 Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3 Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 F-4 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019 F-5 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020 and 2019 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders MTBC, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of MTBC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of certain Intangible Assets associated with the acquisitions of Meridian Billing Management Co. and CareCloud Corporation As described further in Note 3 to the consolidated financial statements, the Company completed the acquisitions of Meridian Billing Management Co. and CareCloud Corporation (collectively, the “Acquisitions”) during the year ended December 31, 2020. These transactions were accounted for as business combinations in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, which resulted in the identification and recognition of certain intangible assets. Intangible assets consisted primarily of customer relationships and technology (collectively, “the identifiable intangible assets”). The Company used a discounted cash flow model to measure the customer relationship intangible assets and a relief from royalty model to measure the technology acquired. We identified valuation of identifiable intangible assets associated with these acquisitions as a critical audit matter. The principal considerations for our determination that the valuation of the identifiable intangible assets is a critical audit matter is the complexity and high degree of subjectivity associated with auditing the Company’s fair value of identifiable intangible assets. The significant assumptions used to estimate the fair value of the identifiable intangible assets include certain assumptions that form the basis of the future net cash flows, such as assumed growth rates, discount rate, economic lives, royalty rates and customer attrition. These significant assumptions are forward looking and consider anticipated market conditions, which, in turn, requires subjective auditor judgement. Our audit procedures related to the valuation of intangible assets included the following, among others: ● We tested the significant assumptions used within the discounted cash flow model to estimate the fair value of the identifiable intangible assets which included certain assumptions such as assumed growth rates and economic lives as compared to historical data. ● We involved valuation professionals with specialized skills and knowledge who assisted in evaluating the appropriateness of the selected valuation methodology for the identifiable intangible assets and evaluating the reasonableness of certain significant assumptions used, including discount rates, economic lives, royalty rates, and customer attrition. ● We evaluated whether assumptions used were reasonable by considering past performance of similar assets, market data, current market forecasts, and whether such assumptions were consistent with evidence obtained in other areas of the audit. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2015. Iselin, New Jersey February 25, 2021 F- 2 MTBC, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2020 AND 2019 ($ in thousands, except share and per share amounts) December 31, December 31, 2020 2019 ASSETS CURRENT ASSETS: Cash $ 20,925 $ 19,994 Accounts receivable, net 12,089 6,995 Contract asset 4,105 2,385 Inventory 399 491 Current assets - related party 13 13 Prepaid expenses and other current assets 7,288 1,123 Total current assets 44,819 31,001 Property and equipment - net 4,921 2,908 Operating lease right-of-use assets 7,743 3,526 Intangible assets - net 29,978 5,977 Goodwill 49,291 12,634 Other assets 1,247 356 TOTAL ASSETS $ 137,999 $ 56,402 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 6,461 $ 3,491 Accrued compensation 2,590 1,836 Accrued expenses 8,501 2,111 Operating lease liability (current portion) 4,729 1,689 Deferred revenue (current portion) 1,173 20 Accrued liability to related party 1 1 Deferred payroll taxes 927 - Notes payable (current portion) 401 284 Dividend payable 4,241 1,746 Total current liabilities 29,024 11,178 Notes payable 41 83 Deferred payroll taxes 927 - Operating lease liability 6,297 2,041 Deferred revenue 305 19 Deferred tax liability 160 244 Total liabilities 36,754 13,565 COMMITMENTS AND CONTINGENCIES (NOTE 11) SHAREHOLDERS’ EQUITY: Preferred stock, $0.001 par value - authorized 7,000,000 shares at December 31, 2020 and December 31, 2019; issued and outstanding 5,475,279 and 2,539,325 shares at December 31, 2020 and December 31, 2019, respectively 5 2 Common stock, $0.001 par value - authorized 29,000,000 shares at December 31, 2020 and December 31, 2019; issued 14,121,044 and 12,978,485 shares at December 31, 2020 and December 31, 2019, respectively; 13,380,245 and 12,237,686 shares outstanding at December 31, 2020 and December 31, 2019, respectively 14 13 Additional paid-in capital 136,781 69,403 Accumulated deficit (33,889 ) (25,076 ) Accumulated other comprehensive loss (1,004 ) (843 ) Less: 740,799 common shares held in treasury, at cost at December 31, 2020 and December 31, 2019 (662 ) (662 ) Total shareholders’ equity 101,245 42,837 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 137,999 $ 56,402 See notes to consolidated financial statements. F- 3 MTBC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 ($ in thousands, except share and per share amounts) December 31, 2020 2019 NET REVENUE $ 105,122 $ 64,439 OPERATING EXPENSES: Direct operating costs 64,821 41,186 Selling and marketing 6,582 1,522 General and administrative 22,811 17,912 Research and development 9,311 871 Change in contingent consideration (1,000 ) (344 ) Depreciation and amortization 9,905 3,006 Restructuring, impairment and unoccupied lease charges 963 219 Total operating expenses 113,393 64,372 OPERATING (LOSS) INCOME (8,271 ) 67 OTHER: Interest income 42 262 Interest expense (488 ) (383 ) Other income (expense) - net 7 (625 ) LOSS BEFORE PROVISION FOR INCOME TAXES (8,710 ) (679 ) Income tax provision 103 193 NET LOSS $ (8,813 ) $ (872 ) Preferred stock dividend 13,877 6,386 NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (22,690 ) $ (7,258 ) Net loss per common share: basic and diluted $ (1.79 ) $ (0.60 ) Weighted-average common shares used to compute basic and diluted loss per share 12,678,845 12,087,947 See notes to consolidated financial statements. F- 4 MTBC, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 ($ in thousands) December 31, 2020 2019 NET LOSS $ (8,813 ) $ (872 ) OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX Foreign currency translation adjustment (a) (161 ) 578 COMPREHENSIVE LOSS $ (8,974 ) $ (294 ) (a) No tax effect has been recorded as the Company recorded a valuation allowance against the tax benefit from its foreign currency translation adjustments. See notes to consolidated financial statements. F- 5 MTBC, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 ($ in thousands, except for number of shares) Preferred Stock Common Stock Additional Paid-in Accumulated Accumulated Other Treasury Total Shareholders’ Shares Amount Shares Amount Capital Deficit Comprehensive Loss (Common) Stock Equity Balance - January 1, 2019 2,136,289 $ 2 12,570,557 $ 13 $ 65,142 $ (24,204 ) $ (1,421 ) $ (662 ) 38,870 Net income - - - - - (872 ) - - (872 ) Foreign currency translation adjustment - - - - - - 578 - 578 Issuance of stock under the equity incentive plan 30,006 - 407,928 - - - - - - Issuance of preferred stock, net of fees and expenses 373,030 - - - 9,586 - - - 9,586 Stock-based compensation, net of cash settlements - - - - 1,920 - - - 1,920 Tax withholding obligations on stock issued to employees - - - - (859 ) - - - (859 ) Preferred stock dividends - - - - (6,386 ) - - - (6,386 ) Balance - December 31, 2019 2,539,325 $ 2 12,978,485 $ 13 $ 69,403 $ (25,076 ) $ (843 ) $ (662 ) $ 42,837 Balance - January 1, 2020 2,539,325 $ 2 12,978,485 $ 13 $ 69,403 $ (25,076 ) $ (843 ) $ (662 ) $ 42,837 Net loss - - - - - (8,813 ) - - (8,813 ) Foreign currency translation adjustment - - - - - - (161 ) - (161 ) Issuance of stock under the equity incentive plan 43,954 - 549,210 - - - - - - Issuance of preferred stock, net of fees and expenses 1,932,000 2 - - 44,541 - - - 44,543 Issuance of preferred stock in connection with the CareCloud and Meridian acquisitions 960,000 1 - - 22,603 - - - 22,604 Issuance of warrants in connection with the CareCloud and Meridian acquisitions - - - - 5,070 - - - 5,070 Exercise of common stock warrants - - 593,349 1 4,449 - - - 4,450 Stock-based compensation, net of cash settlements - - - - 4,592 - - - 4,592 Preferred stock dividends - - - - (13,877 ) - - - (13,877 ) Balance - December 31, 2020 5,475,279 $ 5 14,121,044 $ 14 $ 136,781 $ (33,889 ) $ (1,004 ) $ (662 ) $ 101,245 For all years presented, the preferred stock dividends were paid monthly at the rate of $2.75 per share per annum. See notes to consolidated financial statements. F- 6 MTBC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 ($ in thousands) 2020 2019 OPERATING ACTIVITIES: Net loss $ (8,813 ) $ (872 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 10,134 3,071 Lease amortization 2,889 1,888 Deferred revenue 263 (5 ) Provision for doubtful accounts 369 118 (Benefit) provision for deferred income taxes (84 ) 80 Foreign exchange (gain) loss (14 ) 827 Interest accretion 677 498 Gain on sale of assets (5 ) (38 ) Stock-based compensation expense 6,502 3,216 Change in contingent consideration (1,000 ) (344 ) Changes in operating assets and liabilities, net of businesses acquired: Accounts receivable 394 765 Contract asset (300 ) 362 Inventory 92 (47 ) Other assets (118 ) (529 ) Accounts payable and other liabilities (11,878 ) (1,372 ) Net cash (used in) provided by operating activities (892 ) 7,618 INVESTING ACTIVITIES: Purchase of property and equipment (2,589 ) (2,020 ) Capitalized software (5,163 ) (538 ) Cash paid for acquisitions (net) (23,717 ) (1,600 ) Net cash used in investing activities (31,469 ) (4,158 ) FINANCING ACTIVITIES: Preferred stock dividends paid (11,382 ) (6,109 ) Settlement of tax withholding obligations on stock issued to employees (2,198 ) (1,392 ) Repayments of notes payable, net (666 ) (430 ) Contingent consideration payments - (183 ) Proceeds from exercise of warrants 4,450 - Net proceeds from issuance of preferred stock 44,543 9,586 Proceeds from line of credit 19,500 - Repayments of line of credit (19,500 ) - Settlement of contingent obligation (1,325 ) - Other financing activities - (50 ) Net cash provided by financing activities 33,422 1,422 EFFECT OF EXCHANGE RATE CHANGES ON CASH (130 ) 640 NET INCREASE IN CASH 931 5,522 CASH - beginning of the period 19,994 14,472 CASH - end of the period $ 20,925 $ 19,994 SUPPLEMENTAL NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES: Preferred stock issued in connection with CareCloud and Meridian acquisitions $ 24,000 $ - Vehicle financing obtained $ 28 $ 25 Dividends declared, not paid $ 4,241 $ 1,746 Purchase of prepaid insurance through assumption of note $ 668 $ 301 Warrants issued $ 5,070 $ - Escrow recorded as indemnification asset and offsetting accrual $ 4,000 $ - SUPPLEMENTAL INFORMATION - Cash paid during the year for: Income taxes $ 85 $ 119 Interest $ 165 $ 67 See notes to consolidated financial statements. F- 7 MTBC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 1. Organization and Business MTBC, Inc., (“MTBC” and together with its consolidated subsidiaries, the “Company”, “we”, “us” and/or “our”) is a healthcare information technology company that offers an integrated suite of proprietary cloud-based electronic health records and practice management solutions, together with related business services, to healthcare providers. The Company’s integrated services are designed to help customers increase revenues, streamline workflows and make better business and clinical decisions, while reducing administrative burdens and operating costs. The Company’s services include full-scale revenue cycle management, comprehensive practice management services, electronic health records, patient experience management solutions and other technology-driven practice management services for private and hospital-employed healthcare providers. MTBC has its corporate offices in Somerset, New Jersey and maintains client support teams throughout the U.S., in our Pakistan Offices and in Sri Lanka. MTBC was founded in 1999 and incorporated under the laws of the State of Delaware in 2001. In 2004, MTBC formed MTBC Private Limited (or “MTBC Pvt. Ltd.”), a 99.9% majority-owned subsidiary of MTBC based in Pakistan. The remaining 0.01% of the shares of MTBC Pvt. Ltd. is owned by the founder and Executive Chairman of MTBC. In 2016, MTBC formed MTBC Acquisition Corp. (“MAC”), a Delaware corporation, in connection with its acquisition of substantially all of the assets of MediGain, LLC and its subsidiary, Millennium Practice Management Associates, LLC (together “MediGain”). MAC has a wholly owned subsidiary in Sri Lanka, RCM MediGain Colombo, Pvt. Ltd. In May 2018, MTBC formed MTBC Health, Inc. (“MHI”) and MTBC Practice Management, Corp. (“MPM”), each a Delaware corporation in connection MTBC’s acquisition of substantially all of the revenue cycle management, practice management and group purchasing organization assets of Orion Healthcorp, Inc. and 13 of its affiliates (together, “Orion”). MHI is a direct, wholly owned subsidiary of MTBC, and was formed to own and operate the revenue cycle management and group purchasing organization businesses acquired from Orion. MPM is a wholly owned subsidiary of MHI and was formed to own and operate the practice management business acquired from Orion. In March 2019, MTBC formed MTBC-Med, Inc. (“MED”), a Delaware corporation, in connection with its acquisition of substantially all of the assets of Etransmedia Technology, Inc. and its subsidiaries (“Etransmedia”). In January 2020, MTBC purchased CareCloud Corporation (“CareCloud”). In June 2020, MTBC purchased Meridian Billing Management Co. (“MBM”) and its affiliate Origin Holdings, Inc. (collectively “Meridian” and sometimes referred to as “Meridian Medical Management”). See Note 3. 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. 2. Significant Accounting Policies Principles of Consolidation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the operating results and financial condition of MTBC, its wholly-owned subsidiaries; MAC, MHI, MPM, MED (since April 1, 2019), its majority-owned subsidiary MTBC Pvt. Ltd, MED (since April 2019), CareCloud (since January 2020), Meridian Medical Management (since June 2020) and the subsidiary in Sri Lanka. The non-controlling interest of MTBC Pvt. Ltd. is inconsequential to the consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation. Segment Reporting — The Company views its operations as comprising two operating segments, Healthcare IT and Practice Management. The chief operating decision maker (“CODM”) monitors and reviews financial information at these segment levels for assessing operating results and the allocation of resources. F- 8 Use of Estimates — The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to: (1) impairment of long-lived assets, (2) depreciable lives of assets, (3) allowance for doubtful accounts, (4) contingent consideration, (5) estimates of variable consideration related to the contract asset, (6) fair value of identifiable purchased tangible and intangible assets, including determination of expected customer life, (7) stock-based compensation, and (8) estimating lease terms and incremental borrowing rates. Actual results could significantly differ from those estimates. Revenue Recognition — We derive revenue from eight primary sources: (1) revenue cycle management services, (2) SaaS solutions, (3) professional services, (4) ancillary services, (5) group purchasing services, (6) printing and mailing services, (7) clearinghouse and EDI (electronic data interchange) services and (8) practice management services. All of our revenue arrangements are based on contracts with customers. Most of our contracts with customers contain single performance obligations, although certain contracts do contain multiple performance obligations where we perform more than one service for the same customer. We account for individual performance obligations separately if they are distinct within the context of the contract. 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. A five-step approach is applied in the recognition of revenue under ASC 606: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when we satisfy a performance obligation. 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 a reporting period. The amount of variable consideration recognized to date that remains subject to estimation is included within the contract asset within the consolidated balance sheet. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the services to the customer. Since payment terms are less than a year, we have elected the practical expedient and do not assess whether a customer contract has a significant financing component. The Company’s revenue arrangements generally do not include a general right of refund for services provided (See Note 9, Revenue, for additional information). Direct Operating Costs — Direct operating costs consist primarily of salaries and benefits related to personnel who provide services to clients and at our managed medical practices, claims processing costs, medical supplies at our managed practices and other direct costs related to the Company’s services. Costs associated with the implementation of new clients are expensed as incurred. The reported amounts of direct operating costs include allocated amounts for rent expense and overhead costs. Selling and Marketing Expenses — Selling and marketing expenses consist primarily of compensation and benefits, travel and advertising expenses and are expensed as incurred. The Company incurred approximately $2.1 million and $810,000 of advertising costs for the years ended December 31, 2020 and 2019, respectively. Research and Development Expenses — Research and development expenses consist primarily of personnel-related costs incurred performing market research, analyzing proposed products and developing new products. F- 9 Internal-Use Software Costs — The Company capitalizes certain development costs incurred in connection with its internal-use software. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable that the expenditures will result in additional functionality. Capitalized costs are recorded as part of intangible assets in the accompanying consolidated balance sheets. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. During the years ended December 31, 2020 and 2019, the Company capitalized approximately $5.2 million and $538,000, respectively, of salaries and payroll-related costs of employees and consultants who devoted time to the development of customer related projects. Accounts Receivable — Accounts receivable are stated at their net realizable value. Accounts receivable are presented on the consolidated balance sheet net of an allowance for doubtful accounts, which is established based on reviews of the accounts receivable aging, an assessment of the customers’ history and current creditworthiness and the probability of collection. Accounts are written off when it is determined that collection of the outstanding balance is no longer probable. The movement in the allowance for doubtful accounts for the years ended December 31, 2020 and 2019 was as follows: Year ended December 31, 2020 2019 ($ in thousands) Beginning balance $ 256 $ 189 Provision 369 118 Recoveries 268 316 Write-offs (371 ) (367 ) Ending balance $ 522 $ 256 Property and Equipment — Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line basis over the estimated useful lives of the assets ranging from three to five years. Ordinary maintenance and repairs are expensed as incurred. Depreciation for computers is calculated over three years, while remaining assets (except leasehold improvements) are depreciated over five years. The Company amortizes leasehold improvements over the lesser of the lease term or the remaining economic life of those assets. Generally, the lease term is the base lease term plus certain renewal option periods for which renewal is reasonably certain and for which failure to exercise the renewal option would result in an economic penalty to the Company. Intangible Assets — Intangible assets include customer relationships, covenants not-to-compete acquired in connection with acquisitions, software purchase and development costs and trademarks acquired. Amortization for intangible assets related to revenue cycle management is recorded primarily using the double declining balance method over three to four years. Amortization for intangible assets related to the group purchasing organization and practice management is recorded on a straight line basis over four and twelve years, respectively. Evaluation of Long-Lived Assets — The Company reviews its long-lived assets for impairment whenever changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset group, the Company will recognize an impairment loss based on the fair value of the asset. There was no impairment of internal-use software costs, intangible assets or property and equipment during the years ended December 31, 2020 and 2019, other than the impairment recorded on one right-of-use (“ROU”) asset of approximately $298,000 and $170,000 for the year ended December 31, 2020 and 2019, respectively. Goodwill — Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. The Company tests goodwill for impairment annually as of October 31 st , referred to as the annual test date. Conditions that could trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change to the Company in certain agreements, significant underperformance relative to historical or projected future operating results, loss of customer relationships, an economic downturn in customers’ industries, or increased competition. 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. No impairment charges were recorded during the years ended December 31, 2020 or 2019. F- 10 Treasury Stock — Treasury stock is recorded at cost and represents shares repurchased by the Company. No shares were repurchased or issued from treasury stock during the years ended December 31, 2020 and 2019. Stock-Based Compensation — The Company recognizes compensation for all share-based payments granted based on the grant date fair value. Compensation expense is generally recognized on a straight-line basis over the vesting period. The Company does not estimate forfeitures in recognizing the expense for share-based payments, as historical forfeiture rates have not been significant. For restricted stock units (“RSUs”) classified as equity, the market price of our common stock on the date of grant is used in recording the fair value of the award. For RSUs classified as a liability, the earned amount is marked to market based on the end-of-period common stock price. 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. ASC 805 also specifies criteria that intangible assets acquired in a business combination must 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. If the business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date with changes in the fair value recorded through earnings. Acquisition costs are expensed as incurred. During the years ended December 31, 2020 and 2019, the Company incurred approximately $275,000 and $125,000, respectively, of professional fees related to the acquisitions discussed in Note 3, which are included in general and administrative expenses in the consolidated statements of operations. Income Taxes — The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. The Company records net deferred tax assets to the extent that these assets will more likely than not be realized. All available positive and negative evidence is considered in making such a determination, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. A valuation allowance would be recorded to reduce deferred income tax assets when it is determined that it is more likely than not that the Company would not be able to realize its deferred income tax assets in the future in excess of their net recorded amount. The Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority. At December 31, 2020 and 2019, the Company did not have any uncertain tax positions that required recognition. Interest and penalties related to uncertain tax positions are recognized in income tax expense. For the years ended December 31, 2020 and 2019, the Company did not recognize any penalties or interest related to unrecognized tax benefits in its consolidated financial statements. Dividends — Dividends are recorded when declared by the Company’s Board of Directors. The Board of Directors has declared monthly dividends on the Series A Preferred Stock (“Preferred Stock”) through February 2021. Preferred Stock dividends are charged against paid in capital because the Company does not have sufficient retained earnings. The Company is prohibited from paying dividends on its common stock without the prior written consent of its lender, Silicon Valley Bank (“SVB”). F- 11 Deferred Revenue — Deferred revenue primarily consists of payments received in advance of the revenue recognition criteria being met. Deferred revenue includes certain deferred implementation services fees that are recognized as revenue ratably over the longer of the life of the agreement or the estimated expected customer life, which is currently estimated to be three years. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current. At the time of customer termination, any unrecognized service fees associated with implementation services are recognized as revenue. Fair Value Measurements — ASC 820, Fair Value Measurement , requires the disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. The Company follows a fair value measurement hierarchy to measure financial instruments. The fair value of the Company’s financial instruments is measured using inputs from the three levels of the fair value hierarchy as follows: Level 1 — Inputs are unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 — Inputs are directly or indirectly observable, which include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 — Inputs are unobservable inputs that are used to measure fair value to the extent observable inputs are not available. The Company’s contingent consideration is a Level 3 liability and is measured at fair value at the end of each reporting period. The Company has certain financial instruments that are not measured at fair value on a recurring basis. These financial instruments are subject to fair value adjustments only in certain circumstances and include cash, accounts receivable, accounts payable and accrued expenses, borrowings under term loans and line of credit, and notes payable. Due to the short term nature of these financial instruments and that the borrowings, with the exception of the payable to the managed practices (see Note 8) bear interest at prevailing market rates, the carrying value approximates the fair value. Foreign Currency Translation — The financial statements of the Company’s foreign subsidiaries are translated from their functional currency into U.S. dollars, the Company’s functional currency. All foreign currency assets and liabilities are translated at the period-end exchange rate, and all revenue and expenses are translated at transaction date exchange rates. The effects of translating the financial statements of the foreign subsidiaries into U.S. dollars are reported as a cumulative translation adjustment, a separate component of accumulated other comprehensive loss in the consolidated statements of shareholders’ equity, except for transactions related to the intercompany receivable for which transaction adjustments are recorded in the consolidated statements of operations as they are not deemed to be permanently reinvested. Foreign currency transaction gains/losses are reported as a component of other income – net in the consolidated statements of operations and amounted to a gain of approximately $14,000 and a loss of approximately $827,000 for the years ended December 31, 2020 and 2019, respectively. 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. Recent Accounting Pronouncements — From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) and are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently adopted and recently issued accounting pronouncements will not have a material impact on our consolidated financial position, results of operations and cash flows. F- 12 In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. The guidance in Accounting Standards Update (“ASU”) 2016-13 replaces the incurred loss impairment methodology under current GAAP. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. It will apply to all entities. For trade receivables, loans and held-to-maturity debt securities, entities will be required to estimate lifetime expected credit losses. This may result in the earlier recognition of credit losses. In November, the FASB issued ASU No. 2019-10, which delays this standard’s effective date for SEC smaller reporting companies to the fiscal years beginning on or after December 15, 2022. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires organizations that have leased assets, referred to as “lessees,” to recognize on the balance sheet the assets and liabilities that represent the rights and obligations created by those leases, respectively. Under the new guidance, a lessee is required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU requires both types of leases to be recognized on the balance sheet. The FASB has subsequently issued further ASU’s related to the standard providing additional practical expedients and an optional transition method allowing entities to not recast comparative periods. The amendments in ASU No. 2016-02 are now effective. We adopted the standard on January 1, 2019 using the optional transition adjustment method. As part of the adoption of ASC 842, we performed an assessment of the impact that the new lease recognition standard has on the consolidated financial statements. All of our leases, which consist of facility and equipment leases, have been classified as operating leases. The Company does not have any financing leases. We adopted the requirements of the new standard without restating the prior periods. There was no impact to the accumulated deficit as of the date of adoption. For leases in place at the transition date, we adopted the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We have also adopted the practical expedients that allow us to treat the lease and non-lease components of our leases as a single component for our facility leases. We elected the short-term lease recognition exemption for all leases that qualify. As such, for those leases that qualify, we did not recognize ROU asset or lease liabilities as part of the transition adjustment. As of January 1, 2019, the impact on the consolidated assets was approximately $4.2 million and the impact on the consolidated liabilities was approximately $4.4 million. The adoption of ASC 842 did not have a material effect on the Company’s results of operations, stockholders’ equity, or statement of cash flows. On February 14, 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. These amendments provide financial statement preparers with an option to reclassify standard tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The Company adopted this guidance effective January 1, 2019. There was no impact on the consolidated financial statements as a result of this standard. In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting . This ASU simplifies the accounting for nonemployee share-based payments by aligning it with the accounting for share-based payments to employees, with exceptions. Under this guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, which may lower their cost and reduce volatility in the income statement. Awards to nonemployees are measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. Entities need to consider the probability that a performance condition will be satisfied when an award contains such condition. The Company adopted this guidance effective January 1, 2019. There was no impact on the consolidated financial statements as a result of this standard. F- 13 In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes . This ASU simplifies accounting for income taxes to reduce complexity in the accounting standards. The amendments consist of the removal of certain exceptions to the general principles of ASC 740 and some additional simplifications. The amendments are not required to be implemented until 2021 for public entities. The Company is in the process of investigating if this update will have a significant impact on the consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendments are not required to be implemented until 2022 for public entities. The Company is in the process of investigating if this update will have a significant impact on the consolidated financial statements. 3. ACQUISITIONS 2020 Acquisitions On June 16, 2020, MTBC entered into a Stock Purchase Agreement with Meridian Billing Management Co., a Vermont corporation, Origin Holdings, Inc., a Delaware corporation and GMM II Holdings, LLC, a Delaware limited liability company (“Seller”), pursuant to which MTBC purchased all of the issued and outstanding capital stock of Meridian from the Seller. Meridian is in the business of providing medical billing, revenue cycle management, electronic medical records, medical coding and related services. These revenues have been included in the Company’s Healthcare IT segment. The acquisition has been accounted for as a business combination. The total consideration paid at closing was $11.9 million, net of cash received, 200,000 shares of the Company’s Preferred Stock plus warrants to purchase 2,250,000 shares of the Company’s common stock, with an exercise price per share of $7.50 and a term of two years. The Company also assumed Meridian’s negative net working capital and certain long-term lease liabilities where the leased space is either not being utilized or was to be vacated shortly, with an aggregate value of approximately $4.8 million. A summary of the total consideration is as follows: Meridian Purchase Price ($ in thousands) Cash $ 11,864 Preferred stock 5,000 Warrants 4,770 Total purchase price $ 21,634 Of the Preferred Stock consideration, 100,000 shares were held in escrow for up to one month pending completion of technical migration and customer acceptance. The shares held in escrow were released on August 3, 2020. The Company’s Preferred Stock and warrants issued as part of the acquisition consideration were issued in a transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). The warrants were valued using the Black-Scholes method. The Company registered for resale under the Securities Act the Preferred Stock and the common stock underlying the warrants. During 2020, 593,349 warrants were exercised at $7.50 each. The Meridian acquisition added additional clients to the Company’s customer base, along with additional technology, most notably a widely used business intelligence solution and robotic process automation. Similar to previous acquisitions, Meridian broadened the Company’s presence in the healthcare information technology industry through expansion of its customer base, both geographically and to an increasing number of larger health systems, and by increasing available customer relationship resources and specialized trained staff. F- 14 The Company engaged a third-party valuation specialist to assist the Company in valuing the assets acquired and liabilities assumed from Meridian. The following table summarizes the preliminary purchase price allocation. The Company expects to finalize the purchase price allocation during the first or second quarter of 2021 and is finalizing the projections and the valuation of the acquired assets and assumed liabilities. The preliminary purchase price allocation for Meridian is summarized as follows: ($ in thousands) Accounts receivable $ 3,558 Prepaid expenses 704 Contract asset 881 Property and equipment 426 Operating lease right-of-use assets 2,776 Customer relationships 12,900 Technology 900 Goodwill 13,789 Accounts payable (3,373 ) Accrued expenses & compensation (3,932 ) Deferred revenue (907 ) Operating lease liabilities (6,025 ) Other current liabilities (63 ) Total preliminary purchase price allocation $ 21,634 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 Meridian acquisition was approximately $21.5 million for the year ended December 31, 2020. 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 revenues related to CareCloud have been included in the Company’s Healthcare IT segment. The acquisition has been accounted for as a business combination. 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. Based on the 2020 revenues, no earn-out payment was required. 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 $10.00 and a term of three years. F- 15 A summary of the total consideration is as follows: CareCloud Purchase Price ($ in thousands) Cash $ 11,853 Preferred stock 19,000 Warrants 300 Contingent consideration 1,000 Total purchase price $ 32,153 Of the Preferred Stock consideration, 160,000 shares were placed in escrow for up to 24 months, and an additional 100,000 shares were placed 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. During July 2020, it was determined that 55,726 shares of the Preferred Stock would be released from escrow and cancelled since one of the contingent liabilities was settled for the amount of the cancelled shares. This included a cash payment of approximately $1.3 million. Dividends previously accrued on these shares of $102,000 were reversed as of June 30, 2020, since the amounts will not need to be paid. The remaining shares continue to be held in escrow. The Company’s Preferred Stock and warrants issued as part of the Merger consideration were issued in a transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). The warrants were valued using the Black-Scholes method. The Company registered for resale under the Securities Act the Preferred Stock and the securities underlying the warrants. The CareCloud acquisition added additional clients to the Company’s customer base. The Company acquired CareCloud’s software technology and related business, of which certain elements are currently subject to a civil regulatory investigation. Similar to previous acquisitions, this transaction broadened the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base and by increasing available customer relationship resources and specialized trained staff. The Company engaged a third-party valuation specialist to assist the Company in valuing the assets acquired and liabilities assumed from CareCloud. The following table summarizes the purchase price allocation: ($ in thousands) Accounts receivable $ 2,299 Prepaid expenses 1,278 Contract asset 538 Property and equipment 403 Operating lease right-of-use assets 2,859 Customer relationships 8,000 Trademark 800 Software 4,800 Goodwill 22,868 Other long term assets 540 Accounts payable (6,943 ) Accrued expenses (2,081 ) Current loan payable (80 ) Operating lease liabilities (2,859 ) Deferred revenue (269 ) Total purchase price allocation $ 32,153 F- 16 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 $31.7 million during the year ended December 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 $125,000. Per the APA, the acquisition had an effective date of April 1, 2019. The acquisition has been accounted for as a business combination. The Etransmedia acquisition added additional clients to the Company’s customer base and, similar to previous acquisitions, broadened the Company’s presence in the healthcare information technology industry through geographic expansion of its customer base and by increasing available customer relationship resources and specialized trained staff. The purchase price allocation for Etransmedia was performed by the Company and is summarized as follows: ($ in thousands) Customer relationships $ 856 Accounts receivable 547 Contract asset 139 Operating lease right-of-use assets 1,225 Property and equipment 91 Goodwill 40 Operating lease liabilities (1,224 ) Accrued expenses (74 ) Total $ 1,600 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 $3.9 million during the year ended December 31, 2020. F- 17 Pro forma financial information (Unaudited) The unaudited pro forma information below represents the condensed consolidated results of operations as if the Etransmedia, CareCloud and Meridian 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 for the year ended December 31, 2020 is approximately $17.6 million of additional revenue recorded by Meridian as well as approximately $617,000 recorded by CareCloud prior to their acquisitions by MTBC. The difference between the actual revenue and the pro forma revenue for the year ended December 31, 2019 is approximately $50.8 million of additional revenue recorded by Meridian, $33.4 million of revenue recorded by CareCloud and $2.1 million of revenue recorded by Etransmedia prior to their acquisition by MTBC. Year ended December 31, 2020 2019 ($ in thousands except per share amounts) Total revenue $ 123,329 $ 150,692 Net loss $ (8,690 ) $ (26,968 ) Net loss attributable to common shareholders $ (22,796 ) $ (35,994 ) Net loss per common share $ (1.80 ) $ (2.98 ) 4. GOODWILL AND Intangible Assets – NET Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. The following is the summary of the changes to the carrying amount of goodwill for the years ended December 31, 2020 and 2019: Year ended December 31, 2020 2019 ($ in thousands) Beginning gross balance $ 12,634 $ 12,594 Acquisitions 36,657 40 Ending gross balance $ 49,291 $ 12,634 At December 31, 2020, and 2019, approximately $90,000 of goodwill was allocated to the Practice Management segment and the balance was allocated to the Healthcare IT segment. F- 18 Below is a summary of intangible asset activity for the years ended December 31, 2020 and 2019: Customer Capitalized Other Intangible Relationships Software Assets Total COST ($ in thousands) Balance, January 1, 2020 $ 23,597 $ 600 $ 2,664 $ 26,861 Capitalized software costs - 5,163 4,800 9,963 Other intangible assets - - 1,700 1,700 Translation loss - (3 ) (22 ) (25 ) Allocation from 2020 acquisitions 20,900 - - 20,900 Balance, December 31, 2020 $ 44,497 $ 5,760 $ 9,142 $ 59,399 Useful lives 3-12 years 3 years 3 years ACCUMULATED AMORTIZATION Balance, January 1, 2020 $ 18,314 $ 6 $ 2,564 $ 20,884 Amortization expense 7,694 239 604 8,537 Balance, December 31, 2020 26,008 245 3,168 29,421 Net book value $ 18,489 $ 5,515 $ 5,974 $ 29,978 COST Balance, January 1, 2019 $ 22,741 $ 62 $ 2,651 $ 25,454 Capitalized software costs - 538 54 592 Translation loss - - (41 ) (41 ) Allocation from 2019 acquisition 856 - - 856 Balance, December 31, 2019 $ 23,597 $ 600 $ 2,664 $ 26,861 Useful lives 3-12 years 3 years 3 years ACCUMULATED AMORTIZATION Balance, January 1, 2019 $ 16,458 $ - $ 2,363 $ 18,821 Amortization expense 1,856 6 201 2,063 Balance, December 31, 2019 18,314 6 2,564 20,884 Net book value $ 5,283 $ 594 $ 100 $ 5,977 Other intangible assets primarily represent software costs. Amortization expense was approximately $8.6 million and $2.1 million for the years ended December 31, 2020 and 2019, respectively. The weighted-average amortization period is four years. As of December 31, 2020, future amortization expense scheduled to be expensed is as follows: Years ending December 31, ($ in thousands) 2021 $ 9,186 2022 8,887 2023 7,105 2024 3,150 2025 300 Thereafter 1,350 Total $ 29,978 F- 19 5. Property and Equipment Property and equipment consisted of the following: Year ended December 31, 2020 2019 ($ in thousands) Computer equipment $ 5,496 $ 2,906 Office furniture and equipment 1,781 1,146 Transportation equipment 922 806 Leasehold improvements 954 932 Assets not placed in service 909 1,004 Total property and equipment 10,062 6,794 Less accumulated depreciation (5,141 ) (3,886 ) Property and equipment – net $ 4,921 $ 2,908 Depreciation expense was approximately $1.4 million and $909,000 for the years ended December 31, 2020 and 2019, respectively. 6. Concentrations Financial Risks — As of December 31, 2020 and 2019, the Company held cash of approximately $1.4 million and $1.0 million, respectively, in the name of its subsidiaries, at banks in Pakistan and Sri Lanka. The banking systems in these countries do not provide deposit insurance coverage. Additionally, from time to time, the Company maintains cash balances at financial institutions in the United States in excess of federal insurance limits. The Company has not experienced any losses on such accounts. Concentrations of credit risk with respect to trade accounts receivable are managed by periodic credit evaluations of customers. The Company does not require collateral for outstanding trade accounts receivable. As of December 31, 2020, two customers individually accounted for approximately 10% and 6% of accounts receivable, respectively. As of December 31, 2019, two customers individually accounted for approximately 9% and 5% of accounts receivable, respectively. During the years ended December 31, 2020 and 2019, there was one customer with sales of approximately 7% and 10% of total revenue, respectively. Geographical Risks — The Company’s offices in Islamabad and Bagh, Pakistan, and Colombo, Sri Lanka conduct significant back-office operations for the Company. The Company has no revenue earned outside of the United States. The office in Bagh is located in a different territory of Pakistan from the Islamabad office. The Bagh office was opened in 2009 for the purpose of providing operational support and operating as a backup to the Islamabad office. The Company’s operations outside the United States are subject to special considerations and significant risks not typically associated with companies in the United States. The Company’s business, financial condition and results of operations may be influenced by the political, economic, and legal environment in the countries in which it operates and by the general state of these countries’ economies. The Company’s results may be adversely affected by, among other things, changes in governmental policies with respect to laws and regulations, changes in local countries’ telecommunications industries, regulatory rules and policies, anti-inflationary measures, currency conversion and remittance, and rates and methods of taxation. F- 20 Carrying amounts of net assets located outside the United States were approximately $4.5 million and $1.7 million as of December 31, 2020 and 2019, respectively. These balances exclude intercompany receivables of approximately $5.6 million and $7.1 million as of December 31, 2020 and 2019, respectively. The following is a summary of the net assets located outside the United States as of December 31, 2020 and 2019: Year ended December 31, 2020 2019 ($ in thousands) Current assets $ 1,619 $ 1,082 Non-current assets 4,534 2,243 6,153 3,325 Current liabilities (1,496 ) (1,270 ) Non-current liabilities (110 ) (332 ) Net assets $ 4,547 $ 1,723 7. NET LOss per COMMON share The following table reconciles the weighted-average shares outstanding for basic and diluted net loss per common share for the years ended December 31, 2020 and 2019: December 31, 2020 2019 ($ in thousands, except share and per share amounts) Basic and Diluted: Net loss attributable to common shareholders $ (22,690 ) $ (7,258 ) Weighted-average common shares used to compute basic and diluted loss per share 12,678,845 12,087,947 Net loss attributable to common shareholders per share - Basic and Diluted $ (1.79 ) $ (0.60 ) All unvested restricted stock units (“RSUs”) and unexercised warrants have been excluded from the above calculations as they were anti-dilutive. Vested RSUs, vested restricted shares and exercised warrants have been included in the above calculations. 8. Debt SVB — During October 2017, the Company opened a revolving line of credit from Silicon Valley Bank (“SVB”) under a three-year agreement which replaced the previous credit facility from Opus. The SVB credit facility is a secured revolving line of credit where borrowings are based on a formula of 200% of repeatable revenue adjusted by an annualized attrition rate as defined in the credit agreement. During the third quarter of 2018, the credit line was increased from $5 million to $10 million and the term was extended for an additional year. As of December 31, 2020, and 2019, there were no borrowings under the credit facility. Interest on the SVB revolving line of credit is currently charged at the prime rate plus 1.50%. There is also a fee of one-half of 1% annually for the unused portion of the credit line. The debt is secured by all of the Company’s domestic assets and 65% of the shares in its offshore subsidiaries. Future acquisitions are subject to approval by SVB. In connection with the original SVB debt agreement, the Company paid SVB approximately $50,000 of fees upfront and issued warrants for SVB to purchase 125,000 shares of its common stock, and committed to pay an annual anniversary fee of $50,000 a year. Based on the terms in the original SVB credit agreement, these warrants have a strike price equal to $3.92. They have a five-year exercise window and net exercise rights, and were valued at $3.12 per warrant. As a result of the revision in the SVB credit line, which increased the credit line from $5 million to $10 million and reduced the interest rate by 25 basis points, the Company paid approximately $50,000 of fees upfront and issued an additional 28,489 warrants, with a strike price equal to $5.26, a five-year exercise window and net exercise rights. The additional warrants were valued at $3.58 per warrant. The SVB credit agreement contains various covenants and conditions governing the revolving line of credit. These covenants include a minimum level of adjusted EBITDA and a minimum liquidity ratio. At December 31, 2020 and 2019, the Company was in compliance with all covenants. F- 21 During November 2019, the Company modified its loan agreement with SVB, which adjusted the required monthly EBITDA amounts and does not require the Company to comply with financial covenants as long as there have been no borrowings on the revolving credit line for the prior six months. During September 2020, the agreement with SVB was modified to include CareCloud and Meridian as borrowers. The annual covenants were set for the following year. Vehicle Financing Notes — The Company financed certain vehicle purchases both in the United States and in Pakistan. The vehicle financing notes have three to six year terms and were issued at current market rates. Insurance Financing — The Company finances certain insurance purchases over the term of the policy life. The interest rate charged is 4.0%. Payable to Managed Practices — As a result of the Orion acquisition, the Company assumed a payable to the managed practices at that time of $236,000, which is non-interest bearing. As of December 31, 2020, the balance was $26,000. Maturities of the outstanding notes payable and other obligations as of December 31, 2020 are as follows: Year ending December 31 Vehicle Financing Notes Insurance Financing Payable to Managed Practices Total ($ in thousands) 2021 $ 38 $ 337 $ 26 $ 401 2022 19 - - 19 2023 9 - - 9 2024 5 - - 5 2025 5 - - 5 2026 3 - - 3 Total $ 79 $ 337 $ 26 $ 442 9. REVENUE Introduction The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers . All revenue is recognized as our performance obligations are satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under ASC 606. The Company recognizes revenue when the revenue cycle management services begin on the medical billing claims, which is generally upon receipt of the claim from the provider. For revenue cycle management services, the Company estimates the value of the consideration it will earn over the remaining contractual period as our services are provided and recognizes the fees over the term; this estimation involves predicting the amounts our clients will ultimately collect associated with the services they provided. Certain significant estimates, such as payment-to-charge ratios, effective billing rates and the estimated contractual payment periods are required to measure revenue cycle management revenue under the new standard. The timing of the revenue recognition of our other revenue streams were not materially impacted by the adoption of ASC 606. Most of our current 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 prices are based on the contractual price for the service. We apply the portfolio approach as permitted by ASC 606 as a practical expedient to contracts with similar characteristics and we use estimates and assumptions when accounting for those portfolios. Our contracts generally include standard commercial payment terms. We have no significant obligations for refunds, warranties or similar obligations and our revenue does not include taxes collected from our customers. F- 22 Disaggregation of Revenue from Contracts with Customers We derive revenue from eight primary sources: (1) revenue cycle management services, (2) SaaS solutions, (3) professional services, (4) ancillary services, (5) group purchasing services, (6) printing and mailing services, (7) clearinghouse and EDI (electronic data interchange) services and (8) practice management services. The following table represents a disaggregation of revenue for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 Healthcare IT: ($ in thousands) Revenue cycle management services $ 65,335 $ 42,682 SaaS solutions 18,684 297 Professional services 2,559 1,764 Ancillary services 3,977 3,234 Group purchasing services 859 1,020 Printing and mailing services 1,453 1,650 Clearinghouse and EDI services 457 525 Practice Management: Practice management services 11,798 13,267 Total $ 105,122 $ 64,439 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. The Company 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 fee for these services typically includes 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. 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. SaaS solutions: Our proprietary, cloud-based practice management application automates the labor-intensive workflow of a medical office in a unified and streamlined SaaS platform. The Company has a large number of clients who utilize the Company’s practice management software, electronic health records software, patient experience management solutions, business intelligence software and/or robotic process automation software on a SaaS basis, but who do not utilize the Company’s revenue cycle management services. SaaS fees may be fixed based on the number of providers, or may be variable. F- 23 Other revenue streams: The Company also provides implementation and professional services to clearinghouse and other customers and records revenue monthly on a time and materials or a fixed rate basis. This is a separate performance obligation from the clearinghouse and recurring EDI services provided, for which the Company receives and records monthly fees. The performance obligation is satisfied over time as the implementation or professional services are rendered. Ancillary services represent services such as coding and transcription that are rendered in connection with the delivery of revenue cycle management and related medical services. The Company invoices customers monthly, based on the actual amount of services performed at the agreed upon rate in the contract. These services are only offered to revenue cycle management customers. These services do not represent a material right because the services are optional to the customer and customers electing these services are charged the same price for those services as if they were on a standalone basis. Each individual coding or transcription transaction processed represents a performance obligation, which is satisfied over time as that individual service is rendered. The Company provides group purchasing services which enable medical providers to purchase various vaccines directly from selected pharmaceutical companies at a discounted price. Currently, there are approximately 4,000 medical providers who are members of the program. Revenue is recognized as the vaccine shipments are made to the medical providers. Fees from the pharmaceutical companies are paid either quarterly or annually and the Company adjusts its revenue accrual at the time of payment. The Company makes significant judgments regarding the variable consideration which we expect to be entitled to for the group purchasing services which includes the anticipated shipments to the members enrolled in the program, anticipated volumes of purchases made by the members, and the changes in the number of members. The amounts recorded are constrained by estimates of decreases in shipments and loss of members to avoid a significant revenue reversal in the subsequent period. The only performance obligation is to provide the pharmaceutical companies with the medical providers who want to become members in order to purchase vaccines. The performance obligation is satisfied once the medical provider agrees to purchase a specific quantity of vaccines and the medical provider’s information is forwarded to the vaccine suppliers. The Company records a contract asset for revenue earned and not paid as the ultimate payment is conditioned on achieving certain volume thresholds. The Company provides printing and mailing services for both revenue cycle management customers and a non- revenue cycle management customer, and invoices on a monthly basis based on the number of prints, the agreed-upon rate per print and the postage incurred. The performance obligation is satisfied once the printing and mailing is completed. The medical billing clearinghouse service takes claim information from customers, checks the claims for errors and sends this information electronically to insurance companies. The Company invoices customers on a monthly basis based on the number of claims submitted and the agreed-upon rate in the agreement. This service is provided to medical practices and providers to medical practices who are not revenue cycle management customers. The performance obligation is satisfied once the relevant submissions are completed. For all of the above revenue streams other than group purchasing services, revenue is recognized over time, which is typically one month or less, which closely matches the point in time that the customer simultaneously receives and consumes the benefits provided by the Company. For the group purchasing services, revenue is recognized at a point in time. Each service is substantially the same and has the same periodic pattern of transfer to the customer. Each of the services provided above is considered a separate performance obligation. Practice management services: The Company also provides practice management services under long-term management service agreements to three medical practices. We provide the medical practices with the nurses, administrative support, facilities, supplies, equipment, marketing, RCM, accounting, and other non-clinical services needed to efficiently operate their practices. Revenue is recognized as the services are provided to the medical practices. Revenue recorded in the consolidated statements of operations represents the reimbursement of costs paid by the Company for the practices and the management fee earned each month for managing the practice. The management fee is based on either a fixed fee or a percentage of the net operating income. F- 24 The Company assumes all financial risk for the performance of the managed medical practices. Revenue is impacted by the amount of the costs incurred by the practices and their operating income. The gross billing of the practices is impacted by billing rates, changes in current procedural terminology code reimbursement and collection trends which in turn impacts the management fee that the Company is entitled to. Billing rates are reviewed at least annually and adjusted based on current insurer reimbursement practices. The performance obligation is satisfied as the management services are provided. Our contracts for practice management services have approximately an additional 20 years remaining and are only cancellable under very limited circumstances. The Company receives a management fee each month for managing the day-to-day business operations of each medical group as a fixed fee or a percentage payment of the net operating income which is included in revenue in the consolidated statements of operations. Our practice management services obligations consist of a series of distinct services that are substantially the same and have the same periodic pattern of transfer to our customers. Revenue is recognized over time, however for reporting and convenience purposes, the management fee is computed at each month end. Information about contract balances: As of December 31, 2020, the estimated revenue expected to be recognized in the future related to the remaining revenue cycle management performance obligations outstanding was approximately $3.7 million. We expect to recognize substantially all of the revenue for the remaining performance obligations over the next three months. Approximately $355,000 of the contract asset represents revenue earned, not paid, from the group purchasing services. Amounts that we are entitled to collect under the applicable contract are recorded as accounts receivable. Invoicing is performed at the end of each month when the services have been provided. The contract asset includes our right to payment for services already transferred to a customer when the right to payment is conditional on something other than the passage of time. For example, contracts for revenue cycle management services where we recognize revenue over time but do not have a contractual right to payment until the customer receives payment of their claim from the insurance provider. The contract asset also includes the revenue accrued, not received, for the group purchasing services. Changes in the contract asset are recorded as adjustments to net revenue. The changes primarily result from providing services to revenue cycle management customers that result in additional consideration and are offset by our right to payment for services becoming unconditional and changes in the revenue accrued for the group purchasing services. The contract asset for our group purchasing services is reduced when we receive payments from vaccine manufacturers and is increased for revenue earned, not received. The opening and closing balances of the Company’s accounts receivable, contract asset and deferred revenue are as follows: Accounts Receivable, Net Contract Asset Deferred Revenue (current) Deferred Revenue (long term) ($ in thousands) Balance as of January 1, 2020 $ 6,995 $ 2,385 $ 20 $ 19 CareCloud acquisition 2,299 538 - 269 Meridian acquisition 3,558 881 907 - (Decrease) increase, net (763 ) 301 246 17 Balance as of December 31, 2020 $ 12,089 $ 4,105 $ 1,173 $ 305 Balance as of January 1, 2019 $ 7,331 $ 2,609 $ 25 $ 19 Etransmedia acquisition - 139 - - Decrease, net (336 ) (363 ) (5 ) - Balance as of December 31, 2019 $ 6,995 $ 2,385 $ 20 $ 19 F- 25 Deferred commissions: Our sales incentive plans include commissions payable to employees and third parties at the time of initial contract execution that are capitalized as incremental costs to obtain a contract. The capitalized commissions are amortized over the period the related services are transferred. As we do not offer commissions on contract renewals, we have determined the amortization period to be the estimated client life, which is three years. Deferred commissions were approximately $970,000 and $29,000 at December 31, 2020 and 2019, respectively, and are included in the Other Assets amounts in the consolidated balance sheets. 10. SHAREHOLDERS’ EQUITY Treasury stock The Board of Directors of the Company previously approved stock repurchase programs. The last program expired January 25, 2017. As a result of these stock repurchases, the Company has 740,799 shares held as treasury stock at an aggregate cost of $662,000. Common stock There were no common stock offerings during 2020 and 2019. Holders of our common stock are entitled to one vote for each share held on all matters properly submitted to a vote of shareholders on which holders of common stock are entitled to vote. Holders of common stocks are entitled to receive dividends only at times and amounts as determined by the Board of Directors. The common stock is not entitled to pre-emptive rights, and is not subject to conversion, redemption or sinking fund provisions. Preferred Stock During the year ended December 31, 2020, the Company completed two public offerings totaling 1,932,000 shares of its Preferred Stock at $25 per share, raising net proceeds of approximately $44.5 million after underwriting commissions and other directly attributable expenses. During the year ended December 31, 2019, the Company completed a public offering of 373,000 shares of its Preferred Stock at the prevailing market price, raising net proceeds of approximately $9.6 million after underwriting commissions and other directly attributable expenses. Dividends on the Preferred Stock of $2.75 annually per share are cumulative from the date of issue and are payable each month when, as and if declared by the Company’s Board of Directors. As of December 31, 2020, the Board of Directors has declared monthly dividends on the Preferred Stock payable through February 2021. Since November 4, 2020, the Company may redeem, at its option, the Preferred Stock, in whole or in part, at a cash redemption price of $25.00 per share, plus all accrued and unpaid dividends to, but not including, the redemption date. The Preferred Stock has no stated maturity, is not subject to any sinking fund or other mandatory redemption, and is not convertible into or exchangeable for any of the Company’s other securities. Holders of the Preferred Stock have no voting rights except for limited voting rights if dividends payable on the Preferred Stock are in arrears for eighteen or more consecutive or non-consecutive monthly dividend periods. If the Company were to liquidate, dissolve or wind up, the holders of the Preferred Stock will have the right to receive $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any payment is made to the holders of the common stock. The Preferred Stock is listed on the Nasdaq Global Market under the trading symbol “MTBCP.” Warrants The Company has issued 6,603,489 warrants for its common stock, of which 4,010,140 remained outstanding at December 31, 2020. The 2,000,000 warrants previously issued at a $5.00 exercise price expired in May 2018. The outstanding warrants consist of 100,000 warrants at a $5.00 exercise price which will expire in September 2022, 125,000 warrants at a $3.92 exercise price which will expire in October 2022, 100,000 warrants at a $5.00 exercise price which will expire in July 2023, 28,489 warrants at a $5.26 exercise price which will expire in September 2023, 1,000,000 warrants at a $7.50 exercise price which will expire in January 2022, 1,000,000 warrants at a $10.00 exercise price which will expire in January 2023 and 2,250,000 warrants at a $7.50 exercise price which will expire in June 2022. During 2020, 593,349 warrants were exercised at the $7.50 exercise price. Subsequent to December 31, 2020, 858,000 warrants were exercised at the $7.50 exercise price. F- 26 The Company incurs common and Preferred Stock offering costs which consist principally of professional fees, primarily legal and accounting, and other costs such as printing and registration costs. In connection with the 2020 and 2019 equity offerings, the Company incurred approximately $205,000 and $110,000, respectively, of such costs, excluding underwriting commissions and placement agent fees. 11. Commitments and Contingencies Legal Proceedings — On April 4, 2017, Randolph Pain Relief and Wellness Center (“RPRWC”) filed an arbitration demand with the American Arbitration Association (the “Arbitration”) seeking to arbitrate claims against MTBC, Inc. (“MTBC”) and MTBC Acquisition Corp. (“MAC”). The claims relate solely to services provided by Millennium Practice Management Associates, Inc. (“MPMA”), a subsidiary of MediGain, LLC, pursuant to a billing services agreement that contains an arbitration provision. MTBC and MAC jointly moved in the Superior Court of New Jersey, Chancery Division, Somerset County (the “Chancery Court”) to enjoin the Arbitration on the grounds that neither were a party to the billing services agreement. On May 30, 2018, the Chancery Court denied that motion and MTBC and MAC appealed. The Chancery Court ordered the Arbitration stayed pending the appeal. On April 23, 2019, the Appellate Division reversed the Chancery Court’s ruling that MTBC is required to participate in the Arbitration and remanded the case for further proceedings before the Chancery Court on that issue. The Appellate Division upheld the Chancery Court’s ruling that MAC was required to participate in the Arbitration. The parties completed discovery in the remanded matter, and both MTBC and RPRWC filed cross-motions for summary judgement in their favor. On February 6, 2020, the Chancery Court denied RPRWC’s motion for summary judgment and granted MTBC’s motion for summary judgment, holding that MTBC cannot be compelled to participate in the Arbitration. RPRWC has informed MTBC that it does not intend to appeal the Chancery Court’s ruling and that it intends to move forward solely against MAC in the Arbitration. On March 25, 2020, the Chancery Court lifted the stay of arbitration relative to RPRWC and MAC. Due to conflicting information provided by RPRWC, it is unclear what the extent of the claimed damages are in this matter which at this time appear to be entirely speculative. According to its arbitration demand, RPRWC seeks compensatory damages of $6.6 million, plus costs, for MPMA’s alleged breach of the billing services agreement. On June 12, 2020, in response to a directive from the arbitrator, RPRWC disclosed a statement of damages to MAC in which it increased its alleged damages from $6.6 million and costs to $20 million and costs. On July 24, 2020, RPRWC disclosed a declaration to MAC, in which RPRWC estimates its damages to be approximately $11 million plus costs. MAC intends to vigorously defend against RPRWC’s claims. If RPRWC is successful in the Arbitration, MTBC and MAC anticipate the award would be substantially less than the amount claimed. Through the CareCloud transaction, we acquired its software technology and related business, of which certain elements are currently subject to a civil investigation to determine compliance with certain federal regulatory requirements pre-acquisition. The Company has continued to cooperate with the inquiry as CareCloud has historically done since the commencement of the investigation in July of 2018. This element was considered as part of the transaction and we believe that the continued investigation will have no material impact on our consolidated financial statements, and that we have properly protected ourselves from liability through the negotiated structure of the transaction. Specifically, $4 million of the transaction’s consideration was held in escrow for the resolution of this investigation. Based on the Company’s discussions with the U.S. Department of Justice, we believe that $3.8 million is a reasonable estimate to resolve this investigation, in addition to an estimated $400,000 in additional costs and fees. The Company has accrued $4.2 million dollars to resolve this investigation, of which up to $4 million is the escrow, which has been recorded as an indemnification asset which is included in the consolidated balance sheet in prepaid expenses and other current assets with an offsetting amount in accrued expenses. The Company currently believes that any potential settlement will be substantially within the range covered by the escrowed funds. However, the outcome cannot yet be determined. F- 27 From time to time, we may become involved in other legal proceedings arising in the ordinary course of our business. Including the proceedings described above, we are not presently a party to any legal proceedings that, in the opinion of our management, would individually or taken together have a material adverse effect on our business, consolidated results of operations, financial position or cash flows of the Company. 12. Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, current operating lease liability and non-current operating lease liability in our consolidated balance sheets as of December 31, 2020 and 2019. The Company does not have any finance leases. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rates, which are derived from information available at the lease commencement date, in determining the present value of lease payments. For leases in existence at the adoption of ASC 842, we used the incremental borrowing rate as of January 1, 2019. We give consideration to our bank financing arrangements, geographical location and collateralization of assets when calculating our incremental borrowing rates. Our lease terms include options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of less than 12 months are not recorded in the consolidated balance sheets. Our lease agreements do not contain any residual value guarantees. For real estate leases, we account for the lease and non-lease components as a single lease component. Some leases include escalation clauses and termination options that are factored in the determination of the lease payments when appropriate. If a lease is modified after the effective date, the operating lease ROU asset and liability is re-measured using the current incremental borrowing rate. We review our incremental borrowing rate for our portfolio of leases on a quarterly basis. During the years ended December 31, 2020 and 2019, lease impairment of approximately $298,000 and $170,000 was recorded since the Company is no longer using certain leased facilities and is currently in the process of subleasing the space. Restructuring charges of approximately $49,000 were recorded in the year ended December 31, 2019 which represent the remaining lease costs for another leased facility that was closed and the employees were transferred to another Company facility. There were no restructuring charges in the year ended December 31, 2020. We lease all of our facilities and some equipment. Lease expense is included in direct operating costs and general and administrative expenses in the consolidated statements of operations based on the nature of the expense. As of December 31, 2020, we had 38 leased properties, five in Practice Management and 33 in Healthcare IT, with remaining terms ranging from less than one year to five years. Our lease terms are determined taking into account lease renewal options, the Company’s anticipated operating plans and leases that are on a month-to-month basis. We also have some related party leases – see Note 13. The components of lease expense were as follows: Year Ended December 31, 2020 2019 ($ in thousands) Operating lease cost $ 3,348 $ 2,185 Short-term lease cost 57 229 Variable lease cost 28 42 Total- net lease cost $ 3,433 $ 2,456 F- 28 Short-term lease cost represents leases that were not capitalized as the lease term as of the later of January 1, 2019 or the beginning of the lease was less than 12 months. Variable lease costs include utilities, real estate taxes and common area maintenance costs. Supplemental balance sheet information related to leases was as follows: December 31, 2020 December 31, 2019 Operating leases: ($ in thousands) Operating lease ROU assets, net $ 7,743 $ 3,526 Current operating lease liabilities $ 4,729 $ 1,689 Non-current operating lease liabilities 6,297 2,041 Total operating lease liabilities $ 11,026 $ 3,730 Operating leases: ROU assets $ 10,648 $ 5,468 Asset lease expense (2,889 ) (1,889 ) Foreign exchange loss (16 ) (53 ) ROU assets, net $ 7,743 $ 3,526 Weighted average remaining lease term (in years): Operating leases 2.71 2.46 Weighted average discount rate: Operating leases 6.76 % 7.05 % Supplemental cash flow and other information related to leases was as follows: Year Ended December 31, 2020 2019 ($ in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 4,458 $ 2,332 ROU assets obtained in exchange for lease liabilities: Operating leases, net of impairment and terminations $ 7,559 $ 1,222 F- 29 Maturities of lease liabilities are as follows: Operating leases - Year ending December 31, ($ in thousands) 2021 $ 5,308 2022 4,061 2023 1,778 2024 570 2025 309 2026 40 Total lease payments 12,066 Less: imputed interest (1,040 ) Total lease obligations 11,026 Less: current obligations (4,729 ) Long-term lease obligations $ 6,297 As of December 31, 2020, we have two operating lease commitments that have not yet commenced with an aggregate gross lease liability of approximately $1.6 million. 13. Related PARTIES The Company had sales to a related party, a physician who is the wife of the Executive Chairman. Revenues from this customer were approximately $17,000 for the year ended December 31, 2020 and approximately $21,000 for the year ended December 31, 2019. As of both December 31, 2020 and 2019, the accounts receivable balance due from this customer was approximately $2,000 and is included in accounts receivable in the consolidated balance sheets. The Company is a party to a nonexclusive aircraft dry lease agreement with Kashmir Air, Inc. (“KAI”), which is owned by the Executive Chairman. The Company recorded expense of approximately $120,000 and $137,000, for the years ended December 31, 2020 and 2019, respectively. As of both December 31, 2020 and 2019, the Company had liabilities outstanding to KAI of approximately $1,000, which are included in accrued liability to related party in the consolidated balance sheets. The original aircraft lease expired on March 31, 2019 and was not included in the ROU asset at January 1, 2019. A lease for a different aircraft at the same lease rate was entered into as of April 1, 2019 and has been included in the ROU asset and operating lease liabilities at December 31, 2020 and 2019. The Company leases its corporate offices in New Jersey, its temporary housing for its foreign visitors, an office/storage facility and its backup operations center in Bagh, Pakistan, from the Executive Chairman. The related party rent expense for the years ended December 31, 2020 and 2019 was approximately $185,000 and $192,000, respectively, and is included in direct operating costs and general and administrative expense in the consolidated statements of operations. During the year ended December 31, 2020, the Company spent approximately $554,000 to upgrade two of the leased facilities. Current assets-related party in the consolidated balance sheets includes security deposits and prepaid rent related to the leases of the Company’s corporate offices in the amount of $13,000 for both the years ended December 31, 2020 and 2019. Included in the ROU asset at December 31, 2020 is approximately $283,000 applicable to the related party leases. Included in the current and non-current operating lease liability at December 31, 2020 is approximately $202,000 and $92,000, respectively, applicable to the related party leases. Included in the ROU asset at December 31, 2019 is approximately $566,000 applicable to the related party leases. Included in the current and non-current operating lease liability at December 31, 2019 is approximately $275,000 and $298,000, respectively, applicable to the related party leases. During the first quarter of 2020, talkMD Clinicians, PA, a New Jersey corporation was formed to provide telehealth services. This entity is owned by the wife of the Executive Chairman since an entity providing medical services must be owned by a physician. The Company did not have any transactions with this entity during the year ended December 31, 2020. F- 30 14. Employee Benefit PlanS The Company has qualified 401(k) plans covering all U.S. employees who have completed one month of service. The plans provide for matching contributions by the Company for employees of MTBC, Inc. and most U.S. subsidiaries, although there is no match for MPM employees. Employer contributions to the plans for the years ended December 31, 2020 and 2019 were approximately $641,000 and $255,000, respectively. Additionally, the Company has a defined contribution retirement plan covering all employees located in our Pakistan Offices who have completed three months of service. The plan provides for monthly contributions by the Company which are equal to 10% of qualified employees’ basic monthly compensation. The Company’s contributions for the years ended December 31, 2020 and 2019 were approximately $341,000 and $245,000, respectively. The Company maintains a defined contribution retirement plan covering all employees in Sri Lanka. The employee and employer contribute 8% and 12%, respectively, of the employee’s gross salary. The Company’s contribution for the year ended December 31, 2020 and 2019 was approximately $37,000 and $40,000, respectively. The contributions are required to be deposited with the Employees’ Provident Fund Organization, a government owned entity. 15. STOCK-BASED COMPENSATION In April 2014, the Company adopted the Medical Transcription Billing, Corp. 2014 Equity Incentive Plan (the “2014 Plan”), reserving a total of 1,351,000 shares of common stock for grants to employees, officers, directors and consultants. During 2017, the 2014 Plan was amended whereby an additional 1,500,000 shares of common stock and 100,000 shares of Preferred Stock were added to the plan for future issuance. During 2018, an additional 200,000 shares of Preferred Stock was added to the plan for future issuance. During 2020, an additional 2,000,000 shares of common stock and an additional 300,000 shares of Preferred Stock were added to the 2014 Plan for future issuance. The 2014 Plan was amended and restated on April 14, 2017 (the “Amended and Restated Equity Incentive Plan”). As of December 31, 2020, 1,718,012 shares of common stock and 370,075 shares of Preferred Stock are available for grant. Permissible awards include incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, RSUs, performance stock and cash-settled awards and other stock-based awards in the discretion of the Compensation Committee of the Board of Directors including unrestricted stock grants. The equity based RSUs contain a provision in which the units shall immediately vest and become converted into common shares at the rate of one common share per RSU, immediately after a change in control, as defined in the award agreement. Common stock During 2019, 180,000 RSUs of common stock were granted to employees and independent contractors to vest at different dates during the years 2019 and 2020. Included therein were 72,000 RSUs of common stock granted over two years equally to the four outside members of the Board of Directors with 25% of the shares vesting every six months. During 2020, 788,955 RSUs of common stock were granted to employees and independent contractors to vest at different dates during the year 2020 and 2021. Included therein were 32,000 RSUs of common stock granted over two years equally to the four outside members of the Board of Directors with 25% of the shares vesting every six months. F- 31 The following table summarizes the RSU and restricted stock transactions related to the common and Preferred Stock under the Amended and Restated Incentive Plan for the years ended December 31, 2020 and 2019: Common Stock Preferred Stock Outstanding and unvested shares at January 1, 2020 451,084 44,000 Granted 788,955 63,579 Vested (752,375 ) (63,579 ) Forfeited (105,229 ) - Outstanding and unvested shares at December 31, 2020 382,435 44,000 Outstanding and unvested shares at January 1, 2019 929,347 44,800 Granted 180,000 48,746 Vested (624,315 ) (49,546 ) Forfeited (33,948 ) - Outstanding and unvested shares at December 31, 2019 451,084 44,000 As of December 31, 2020, and 2019, there was approximately $2.5 million and $2.1 million, respectively, of total unrecognized compensation cost related to the common stock RSUs classified as equity that will be expensed through 2022. There was no unrecognized compensation cost related to the Preferred Stock RSUs. Of the total outstanding and unvested common stock RSUs at December 31, 2020, 369,435 RSUs are classified as equity and 13,000 RSUs are classified as a liability. All of the Preferred Stock RSUs are classified as equity. The following table summarizes the share activity during the years ended December 31, 2020 and 2019 and the amount of common and Preferred Shares available for grant at December 31, 2020: Common Stock Preferred Stock Shares available for grant at January 1, 2020 401,738 133,654 Additional shares available for grant 2,000,000 300,000 RSUs granted (788,955 ) (63,579 ) RSUs forfeited 105,229 - Shares available for grant at December 31, 2020 1,718,012 370,075 Shares available for grant at January 1, 2019 547,790 182,400 RSUs granted (180,000 ) (48,746 ) RSUs forfeited 33,948 - Shares available for grant at December 31, 2019 401,738 133,654 The liability for the cash-settled awards was approximately $976,000 and $741,000 at December 31, 2020 and 2019, respectively, and is included in accrued compensation in the consolidated balance sheets. During the years ended December 31, 2020 and 2019, approximately $61,000 and $184,000, respectively, was paid in connection with the cash-settled awards. Preferred Stock In both 2020 and 2019, the Compensation Committee approved executive bonuses to be paid in 44,000 shares of Preferred Stock, with the final number of shares and the amount based on specified performance criteria being achieved during 2020 and 2019. In 2020 and 2019, 19,579 and 4,746 shares of Preferred Stock were granted as performance bonuses and in lieu of sales commissions, respectively. Stock-based compensation expense recorded during 2020 and 2019 for these awards was approximately $1.6 million and $1.3 million, respectively, based on the fair value of the Preferred Shares on the grant date. During January 2021 and January 2020, the Compensation Committee determined that the financial objectives were attained and all of the performance bonus shares were issued. F- 32 Stock-based compensation expense The Company recognizes compensation expense on a straight-line basis over the total requisite service period for the entire award. For stock awards classified as equity the market price of our common stock or Preferred Stock on the date of grant is used in recording the fair value of the award. For stock awards classified as a liability, the earned amount is marked to market based on the end of period common stock price. The weighted average grant date fair value of the common stock price in connection with the RSUs classified as equity was $6.20 and $4.87 for the years ended December 31, 2020 and 2019, respectively. The weighted average grant date fair value of the Preferred Stock in connection with the RSUs was $27.06 and $26.77 for the years ended December 31, 2020 and 2019, respectively. The following table summarizes the components of stock-based compensation expense for the years ended December 31, 2020 and 2019: Stock-based compensation included in the Year ended December 31, consolidated statements of operations: 2020 2019 ($ in thousands) Direct operating costs $ 1,094 $ 197 General and administrative 3,599 2,735 Research and development 729 33 Selling and marketing 1,080 251 Total stock-based compensation expense $ 6,502 $ 3,216 16. INCOME TAXES For the years ended December 31, 2020 and 2019, the Company estimated its income tax provision based upon the annual pre-tax loss. Although the Company is forecasting a return to profitability, it incurred cumulative losses 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 federal and state deferred tax assets as of December 31, 2020 and December 31, 2019, with the exception of a net deferred tax liability relating to the amortization of intangibles for tax purposes. As of December 31, 2017, the accumulated undistributed earnings and profits (“E&P”) of our foreign affiliates became taxable in the U.S. under Section 965. This accumulated foreign E&P was absorbed against our U.S. net operating losses and, hence, no transition tax was paid. From January 1, 2018 forward, the annual adjusted earnings and profits of our foreign affiliates pass through to the U.S. as federal and state taxable income under the Global Intangible Low-Taxed Income (“GILTI”) regime - passed as part of the 2017 Tax Cuts & Jobs Act. For the tax years ended December 31, 2020 and 2019, the net GILTI from our foreign affiliates was absorbed against our current year U.S. consolidated loss. For state tax purposes, the Company’s foreign earnings may be taxable depending on each individual state’s legislative stance on the recent tax reform legislation. The activity in the deferred tax valuation allowance was as follows for the years ended December 31, 2020 and 2019: Year ended December 31, 2020 2019 ($ in thousands) Beginning balance $ 7,154 $ 7,176 Impact of acquisitions 77,034 - Provision 5,674 371 Adjustments/true-ups 132 (393 ) Ending balance $ 89,994 $ 7,154 The adjustments/true-ups for 2019 primarily represent the deferred tax effect of the Company’s adoption of ASC 606. Accordingly, additional valuation allowances needed to be provided. Since a full valuation allowance is recorded on the Company’s deferred tax assets, there was no effect on the Company’s consolidated balance sheet. F- 33 The loss before tax for financial reporting purposes during the years ended December 31, 2020 and 2019 consisted of the following: Year ended December 31, 2020 2019 ($ in thousands) United States $ (10,230 ) $ (1,155 ) Foreign 1,520 476 Total $ (8,710 ) $ (679 ) The provision for income taxes for the years ended December 31, 2020 and 2019 consisted of the following: Year ended December 31, 2020 2019 ($ in thousands) Current: Federal $ - $ - State 182 103 Foreign 5 10 187 113 Deferred: Federal (116 ) 28 State 32 52 (84 ) 80 Total income tax provision $ 103 $ 193 The components of the Company’s deferred income taxes as of December 31, 2020 and 2019 are as follows: December 31, December 31, 2020 2019 ($ in thousands) Deferred tax assets: Allowance for doubtful accounts $ 134 $ 66 Deferred revenue 49 5 Property and intangible assets 4,436 2,302 State net operating loss (“NOL”) carryforwards 23,048 910 Federal net operating loss (“NOL”) carryforwards 56,890 4,146 Section 163(j) interest limitation 2,186 15 Cumulative translation adjustment - 216 Stock based compensation 325 118 ASC 606 - Section 481(A) adjustment (104 ) (185 ) ASC 842 - ROU asset (1,994 ) (790 ) Prepaid commissions (820 ) - Section 267 limitation 291 - Deferred payroll taxes 300 - Credit carryovers 3,112 - ASC 842 - Lease liability 2,803 799 Other 56 17 Valuation allowance (89,994 ) (7,154 ) Total deferred tax assets 718 465 Deferred tax liabilities: Goodwill amortization (878 ) (709 ) Net deferred tax liability $ (160 ) $ (244 ) F- 34 Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss carryforwards. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. The Company has recorded goodwill as a result of its acquisitions. Goodwill is generally not amortized for financial reporting purposes. For tax purposes, goodwill from asset acquisitions is tax deductible and amortized over 15 years. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this indefinitely lived asset (also known as a naked credit). The resulting deferred tax liability, which is expected to continue to increase 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. This resulted in a deferred tax benefit of approximately $84,000 in 2020. The remaining deferred tax liability could remain on the Company’s consolidated balance sheet indefinitely unless there is an impairment of goodwill (for financial reporting purposes) or a portion of the business is sold. Due to the fact that the aforementioned deferred tax liability could have an indefinite life, it is not netted against the Company’s deferred tax assets when determining the required valuation allowance in accordance with ASC 740 guidelines. Doing so would result in the understatement of the valuation allowance and related deferred income tax expense. A reconciliation of the federal statutory income tax rate (21%) for 2020 and 2019 to the Company’s effective income tax rate (determined in dollars) for the years ended December 31, 2020 and 2019 is as follows: Year ended December 31, 2020 2019 ($ in thousands) Federal benefit at statutory rate $ (1,739 ) $ (142 ) Increase (decrease) in income taxes resulting from: State tax expense, net of federal benefit 138 142 Non-deductible items 49 25 Impact of foreign operations (348 ) 31 Subpart F GILTI inclusion 246 70 Stock based compensation (580 ) - Change in contingent consideration (210 ) 38 R&D credit (614 ) - Deferred true-up (71 ) 333 Valuation allowance 3,232 (304 ) Total income tax provision $ 103 $ 193 At December 31, 2020 and 2019, the Company did not record any uncertain tax positions based on the technical merits. Therefore, a tabular roll forward was excluded and there has been no accrued interest and penalties. The Company is subject to taxation in the United States, various states, Pakistan and Sri Lanka. As of December 31, 2020, tax years 2017 through 2019 remain open to examination in the United States by major taxing jurisdictions in which the Company is subject to tax. The Pakistan Federal Board of Revenue issued a tax holiday, which precludes the Pakistan subsidiary from being subject to income taxes through June 2025. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense. The Pakistan tax holiday does not have a significant impact on the Company’s effective tax rate as all of its earnings in Pakistan have been fully included in the U.S. federal tax rate of 21% for 2020 and 2019. The Pakistan statutory corporate tax rate is 29% before consideration of the aforementioned tax holiday. 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 $85.8 million relates to the State of New Jersey. These NOLs expire between 2034 and 2040. F- 35 The Company has a full valuation allowance on its deferred tax assets in the U.S. which results in there being no U.S. deferred tax assets or liabilities recorded on the consolidated balances sheet, other than the deferred tax liability related to the amortization of goodwill. The Appropriations Act was signed into law on December 27, 2020 and contains many tax-related provisions. Some of the more notable provisions are (1) clarifying the tax treatment of expenses paid with Paycheck Protection Program (PPP) loan proceeds, (2) temporarily providing for a 100% deduction of business meal expenses, (3) modifying the Employee Retention Tax Credit previously enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), (4) extending the repayment period of certain deferred payroll taxes, and (5) extending the tax credits available to employers under the Families First Coronavirus Response Act (FFCRA) and Section 45S of the Internal Revenue Code of 1986, as amended (the Code) for employer-paid family and medical leave. The Company believes these new provisions will not have a significant impact on the consolidated financial statements. 17. OTHER (EXPENSE) INCOME – NET Other income (expense) - net for the years ended December 31, 2020 and 2019 consisted of the following: Year Ended December 31, 2020 2019 ($ in thousands) Foreign exchange gain (loss) $ 14 $ (827 ) Other (expense) income (7 ) 202 Other income (expense) - net $ 7 $ (625 ) Foreign currency transaction gains and losses primarily result 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. 18. segment reporting Both our Chief Executive Officer and Executive Chairman serve as the CODM, organize the Company, manage resource allocations and measure performance among two operating and reportable segments: (i) Healthcare IT and (ii) Practice Management. F- 36 The Healthcare IT segment includes revenue cycle management and other services. The Practice Management segment includes the management of three medical practices. Each segment is considered a reporting unit. The CODM evaluates financial performance of the business units on the basis of revenue and direct operating costs excluding unallocated amounts, which are mainly corporate overhead costs. Our CODM does not evaluate operating segments using asset or liability information. The accounting policies of the segments are the same as those disclosed in the summary of significant accounting policies. The following tables present revenues, operating expenses and operating income (loss) by reportable segment for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 ($ in thousands) Healthcare IT Practice Management Unallocated Corporate Expenses Total Net revenue $ 93,324 $ 11,798 $ - $ 105,122 Operating expenses: Direct operating costs 55,653 9,168 - 64,821 Selling and marketing 6,549 33 - 6,582 General and administrative 14,578 1,978 6,255 22,811 Research and development 9,311 - - 9,311 Change in contingent consideration (1,000 ) - - (1,000 ) Depreciation and amortization 9,587 318 - 9,905 Impairment and unoccupied lease charges 963 - - 963 Total operating expenses 95,641 11,497 6,255 113,393 Operating (loss) income $ (2,317 ) $ 301 $ (6,255 ) $ (8,271 ) Year Ended December 31, 2019 ($ in thousands) Healthcare IT Practice Management Unallocated Corporate Expenses Total Net revenue $ 51,172 $ 13,267 $ - $ 64,439 Operating expenses: Direct operating costs 30,798 10,388 - 41,186 Selling and marketing 1,487 35 - 1,522 General and administrative 11,124 2,067 4,721 17,912 Research and development 871 - - 871 Change in contingent consideration (344 ) - - (344 ) Depreciation and amortization 2,689 317 - 3,006 Restructuring and impairment charges 219 - - 219 Total operating expenses 46,844 12,807 4,721 64,372 Operating income (loss) $ 4,328 $ 460 $ (4,721 ) $ 67 19. FAIR VALUE OF FINANCIAL INSTRUMENTS As of December 31, 2020, and December 31, 2019, the carrying amounts of accounts receivable, accounts payable and accrued expenses approximated their estimated fair values because of the short term nature of these financial instruments. Fair Value Measurements-Level 2 Our notes payable are carried at cost and approximate fair value since the interest rates being charged approximate market rates. As a result, the Company categorizes these borrowings as Level 2 in the fair value hierarchy. Contingent Consideration The Company’s contingent consideration is a Level 3 liability. The fair value of the contingent consideration is primarily driven by changes in revenue estimates related to the acquisitions, the passage of time and the associated discount rate. During both 2020 and 2019, the contingent consideration liability was fully settled. F- 37 The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3): Fair Value Measurement at Reporting Date Using Significant Unobservable Inputs, Level 3 Year ended December 31, 2020 2019 ($ in thousands) Balance - January 1, $ - $ 526 Acquisition 1,000 - Change in fair value (1,000 ) (343 ) Payments - (183 ) Balance - December 31, $ - $ - 20. SUBSEQUENT EVENTS Effective January 1, 2021, MHI and MED were merged into MTBC, and MBM was merged into Origin Holdings, Inc. Accordingly, MHI, MED and MBM no longer exist as of that date. Simultaneously with the merger, the name of Origin Holdings, Inc. was changed to Meridian Medical Management, Inc. The Company entered into a lease in Ohio for a newly built 8,000 square feet pediatric office in February 2021 with a lease term of 15 years. Also, in February 2021, the Company was able to settle one of the lease obligations assumed in connection with the Meridian acquisition for an amount that approximated the remaining lease liability. Additionally, in February 2021, the Company’s Board of Directors approved changing the name of the Company to CareCloud, Inc. F- 38