CareCloud, Inc. (Medical Transcription Billing, Corp.) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing identifies the registrant as Medical Transcription Billing, Corp. (MTBC), a healthcare IT and revenue-cycle-management provider; it describes an acquisition completed in July 2018. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $8.68 million | $7.78 million | $16.99 million | $16.00 million |
| Operating income (loss) | $72,455 | ($1.38 million) | $111,577 | ($3.79 million) |
| Net income (loss) | $195,280 | ($1.69 million) | $270,316 | ($4.40 million) |
| Net loss attributable to common shareholders | ($1.05 million) | ($2.12 million) | ($1.75 million) | ($5.03 million) |
| Basic and diluted loss per share | ($0.09) | ($0.20) | ($0.15) | ($0.48) |
- Revenue increased 12% in Q2 and 6% for the half year. Medical billing remained the core business, representing about 91% of Q2 revenue and 90% for the half year.
- Q2 operating margin was 0.8%, versus negative 17.8% a year earlier; six-month operating margin was 0.7%, versus negative 23.7%. GAAP net margin was 2.3% for Q2 and 1.4% for the half year.
- Management-reported non-GAAP adjusted EBITDA was $1.56 million for Q2 and $2.53 million for the half year, compared with $468,000 and $154,000, respectively, in 2017. These measures exclude items including stock compensation, amortization and integration costs.
- Six-month operating cash flow was $1.97 million, versus cash use of $689,000 in 2017. Investing used $1.38 million, including a $1.0 million Orion acquisition deposit. Financing provided $7.20 million, primarily reflecting $9.4 million in net preferred-stock proceeds, partly offset by dividends and debt repayments.
- At June 30, cash was $11.72 million, working capital was $14.2 million, and total liabilities were $5.25 million. No bank debt was drawn; other notes payable totaled about $222,000. The $5 million Silicon Valley Bank revolving facility was available subject to its borrowing formula and covenants; the company reported covenant compliance.
Material changes and unusual items
- ASC 606 was adopted January 1, 2018. It changed medical-billing revenue recognition from recognition when fees became determinable to recognition over time as services are performed. The company reported a $1.34 million opening contract asset and a $1.44 million cumulative-effect adjustment to accumulated deficit/equity. The new standard increased reported Q2 revenue and net income by $280,000 and six-month revenue and net income by $327,000 and $338,000, respectively, versus the prior method.
- Operating expense reductions, especially lower amortization as older acquired intangibles became fully amortized, contributed to the return to GAAP operating and net income. Q2 selling and marketing expense rose 50%, and general and administrative expense rose 10%, with management attributing increases to marketing and Orion-related legal and professional costs.
- The company issued 420,000 preferred shares in April 2018, raising approximately $9.4 million net. Preferred dividends were $1.25 million in Q2 and $2.02 million for the half year, exceeding GAAP net income and leaving a loss attributable to common shareholders.
- Foreign-currency transaction gains contributed to other income; the half-year cash-flow statement also reflects a $435,000 adverse exchange-rate effect on cash. The company recorded a $43,000 increase in contingent-consideration fair value for the half year.
Outlook, risks and contingencies
- On July 2, 2018, MTBC completed its Orion asset acquisition for $12.6 million, including payment of the remaining $11.6 million purchase price after quarter-end. The filing says it expects the acquisition to expand RCM and group-purchasing offerings and add management of three pediatric practices. The purchase price was funded from cash; the company also borrowed $2.5 million briefly on its credit line in July and subsequently repaid it. The filing does not provide a clear post-acquisition cash balance.
- Management said it was forecasting a return to profitability, but provided no numerical earnings or revenue guidance. It expects integration costs and identifies acquisition integration, client retention and migration, competition, regulatory compliance, data privacy, offshore operations and lender covenant compliance as significant risks.
- Medical-billing revenue under ASC 606 depends on estimates of client collections, billing rates and contractual periods. At June 30, the contract asset was $1.67 million; management expected substantially all remaining performance obligations, estimated at about $1.7 million, to be recognized over the next three months. Estimation errors could materially affect revenue timing and amount.
- A former customer’s arbitration demand alleges breach of a billing-services agreement with a MediGain subsidiary and seeks damages and costs. MTBC and its subsidiary deny being bound by the agreement; the arbitration was stayed pending their appeal. Management said it did not consider the disclosed proceedings likely to have a material adverse effect.
- Management expects the new lease standard to materially increase balance-sheet assets and liabilities when adopted. The company also had not finalized its analysis of certain Tax Cuts and Jobs Act effects. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Post-Orion liquidity, integration costs, acquired revenue and the purchase-price allocation, none of which are fully reflected in the June 30 balance sheet.
- Cash generation excluding preferred-stock proceeds, and the continuing cost and terms of preferred dividends.
- The durability of reported profitability after considering ASC 606’s $280,000 Q2 revenue benefit and non-GAAP exclusions.
- Realization and collection of the contract asset, including the significant-customer portion and the assumptions used to estimate medical-billing revenue.
- Outcome of the arbitration appeal, continued compliance with SVB covenants, and future contingent consideration payments.