Business context and reporting period
MTBC, Inc. (Nasdaq: MTBC; preferred shares: MTBCP) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company provides healthcare information technology, revenue-cycle management, SaaS and practice-management services. CareCloud Corporation is an acquired subsidiary, not the registrant. 2020 results include the CareCloud acquisition, completed in January, and Meridian, acquired in June.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $31.64m | $16.85m | $73.08m | $48.68m |
| Operating income (loss) | $(1.24)m | $0.67m | $(8.68)m | $(0.80)m |
| Net income (loss) | $(1.67)m | $(0.14)m | $(8.97)m | $(1.20)m |
| Net loss attributable to common shareholders | $(5.90)m | $(1.74)m | $(19.12)m | $(5.79)m |
| GAAP diluted loss per share | $(0.46) | $(0.14) | $(1.53) | $(0.48) |
| Operating margin | (3.9)% | 4.0% | (11.9)% | (1.6)% |
| Adjusted EBITDA (non-GAAP) | $4.21m | $2.59m | $5.17m | $5.32m |
Reported revenue grew 88% in Q3 and 50% year to date, substantially reflecting acquired businesses: acquisitions contributed approximately $19.1m and $37.6m of revenue in those periods, respectively. Direct operating costs were 62.3% of Q3 revenue and 62.7% year to date; corresponding implied gross margins were 37.7% and 37.3%. Adjusted operating margin, a non-GAAP measure, was 11.5% in Q3 and 5.4% year to date, versus 13.5% and 8.8% a year earlier.
Cash and cash equivalents were $22.84m at September 30, 2020, compared with $19.99m at December 31, 2019. Working capital was $17.9m. Operating cash flow was negative $4.33m for the first nine months, compared with positive $4.75m in 2019; investing cash outflow was $28.77m, including $23.72m for acquisitions and $3.77m of capitalized software. Financing cash inflow was $36.14m, chiefly reflecting $44.54m net preferred-stock proceeds. Notes payable totaled approximately $0.68m; no borrowings were outstanding on the $10m SVB revolving facility at quarter-end. Operating lease liabilities were $11.28m. Preferred dividends declared but unpaid were $4.10m.
Material changes versus the prior comparable period
- Acquisitions drove much of the reported revenue increase and expanded assets: total assets were $137.35m versus $56.40m at year-end 2019, including goodwill of $48.95m and net intangibles of $31.12m.
- Despite higher revenue, GAAP operating and net results weakened. Year-to-date operating expenses rose 65%, including increased selling and marketing, research and development, and depreciation and amortization; amortization chiefly increased with acquired intangibles.
- Q3 RCM revenue was $20.37m and SaaS revenue $3.95m. Practice-management revenue fell to $3.45m from $3.91m in Q3 2019; for the first nine months it was $8.93m versus $10.16m.
- Year-to-date operating cash flow turned negative, partly because the company paid past-due amounts assumed in the acquisitions. Preferred-stock issuances increased financing cash and shareholders’ equity.
Outlook, risks, contingencies and unusual items
- No numerical financial guidance is provided. Management said it was forecasting a return to profitability, but gave no timing or quantified outlook.
- Management reported that COVID-19 had not materially adversely affected results through the first three quarters, but warned that reduced patient visits could pressure customer collections and revenue; about 64% of revenue was directly tied to provider collections. The duration and full impact remain uncertain.
- Integration of CareCloud and Meridian, customer retention, acquisition execution, regulatory compliance, data privacy, offshore operations and SVB covenant compliance are cited risks. Management reported compliance with SVB covenants at September 30.
- The CareCloud-acquired software and related business were described as subject to a civil regulatory investigation. Meridian’s purchase-price allocation remained preliminary, with valuation work ongoing.
- A $0.5m contingent-consideration liability was reversed after management concluded it would not be earned; $0.5m remained accrued at quarter-end. The company also recorded $0.68m of year-to-date restructuring, impairment and unoccupied-lease charges, including impairment of a facility no longer in use.
- In an arbitration involving subsidiary MAC, the claimant disclosed damages estimates ranging from approximately $11m to $20m, plus costs; MAC intends to defend the claims. The filing says the claimed damages appear speculative and management anticipates any award, if the claimant succeeds, would be substantially below the amount claimed.
- Preferred dividends were $10.15m for the nine-month period and materially increased the loss attributable to common shareholders. The company deferred approximately $1.3m of payroll taxes under the CARES Act.
Important facts for investors to verify
- How much of revenue growth and future performance is attributable to acquisitions versus organic growth, and whether acquired operations can be integrated successfully.
- Whether operating cash flow improves as assumed acquisition-related payables are settled, and whether cash and available liquidity are adequate for operations, lease obligations and preferred dividends.
- The sustainability of non-GAAP adjusted profitability alongside GAAP losses, significant amortization and stock-based compensation; review the company’s non-GAAP reconciliations.
- Developments in the CareCloud regulatory investigation and the MAC arbitration, including any material change in exposure or outcome.
- Progress toward management’s stated profitability outlook and the effects of COVID-19 on customer collections and patient activity.