Business Context and Reporting Period
MTBC, Inc. (Nasdaq: MTBC; preferred shares: MTBCP) filed this unaudited Form 10-Q for the quarter ended March 31, 2020. Although the request identifies CareCloud, Inc., the filing is by MTBC, which acquired CareCloud Corporation on January 8, 2020. MTBC provides healthcare information technology, revenue cycle management (RCM), SaaS and practice management services.
Financial Results and Liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $21.9 million | $15.1 million; up 45% |
| Operating loss | $2.84 million | $238,000 loss |
| Net loss | $2.50 million | $296,000 loss |
| Net loss attributable to common shareholders | $5.14 million; $0.42 per share | $1.79 million; $0.15 per share |
| Adjusted EBITDA (non-GAAP) | $767,000 | $1.58 million |
| Adjusted operating margin (non-GAAP) | 2.0% | 7.6% |
| Operating cash flow | $(3.88) million | $938,000 provided |
| Cash and working capital at March 31 | $8.40 million cash; $5.2 million working capital | — |
GAAP operating margin declined to negative 13.0% from negative 1.6%. Direct operating costs were 62.0% of revenue versus 65.3%; selling and marketing rose to 7.2% from 2.4%, and research and development to 10.7% from 1.7%. The filing reports a $9.75 million draw on the revolving credit line at quarter-end; it was repaid in full in April. Notes payable were $228,000, and operating lease liabilities totaled $7.03 million. Current assets were $23.4 million and current liabilities $18.2 million.
Material Changes and Unusual Items
- CareCloud acquisition consideration was approximately $32.2 million: $11.9 million cash, $19.0 million in preferred stock, $300,000 in warrants and $1.05 million contingent consideration. MTBC also assumed a working-capital deficiency of approximately $5.1 million. CareCloud contributed about $7.6 million of Q1 revenue.
- Revenue growth also included approximately $1.2 million from Etransmedia. SaaS revenue increased to $3.6 million from $41,000, primarily reflecting the acquired CareCloud business. Results are not directly comparable because of acquisitions.
- Operating expenses increased 61%, exceeding revenue growth. Selling and marketing increased 338% and R&D increased 816%; management attributed much of the cost growth to acquisitions and investment. Q1 included $298,000 of impairment for a leased facility no longer in use, $645,000 of transaction and integration costs, and $1.31 million of stock-based compensation.
- Investing cash outflow was $14.0 million, including $11.9 million paid for CareCloud and $1.6 million of capitalized software development. Cash fell by $11.6 million during the quarter.
- In April, MTBC issued 828,000 preferred shares for approximately $19.1 million net proceeds and used a portion to repay the credit line.
Outlook, Risks and Contingencies
The company gave no quantified financial guidance. Management said COVID-19 had not materially adversely affected Q1 results, but was affecting Q2 and could continue to affect operations and results indefinitely. Approximately 60% of revenue is tied to customer collections, which management said could decline as patient visits fall. Telehealth activity was expanded, but management noted it did not fully replace office visits. The company cautioned that Q1 results may not indicate full-year performance and that the pandemic’s effects were uncertain.
Management reported compliance with SVB credit covenants at March 31 and effective disclosure controls. It forecasts a return to profitability but maintains a valuation allowance against deferred tax assets due to cumulative losses and uncertainty about future taxable income. A customer dispute seeks $6.6 million in arbitration against subsidiary MAC; the filing says a loss range cannot be estimated and the company intends to defend the claim. The CareCloud purchase-price allocation remained preliminary, and an earn-out of up to $3 million may be payable if CareCloud’s 2020 revenue exceeds $36 million.
Important Facts for Investors to Verify
- Confirm the reporting issuer: this is MTBC, Inc.’s filing, not a CareCloud, Inc. filing.
- Track post-acquisition revenue, operating costs and integration progress, distinguishing organic growth from acquired revenue.
- Review subsequent liquidity, preferred-stock proceeds and repayment of the credit line, as well as cash flow and preferred dividend obligations.
- Assess COVID-19 effects on provider collections, patient volumes, customer retention and Q2 results.
- Monitor final CareCloud purchase accounting, any earn-out, and the outcome of the MAC arbitration and related contingencies.