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May 14, 2020, 4:55 p.m. EDT

10-Q: MTBC, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our condensed consolidated financial condition and results of operations for the three months ended March 31, 2020 and 2019, and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our Condensed Consolidated Financial Statements and related notes beginning on page 4 of this Quarterly Report on Form 10-Q.

Some of the statements set forth in this section are forward-looking statements relating to our future results of operations. Our actual results may vary from the results anticipated by these statements. Please see "Forward-Looking Statements" on page 2 of this Quarterly Report on Form 10-Q.

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus, SARS-CoV-2, was reported to have surfaced in Wuhan, China. Since then, SARS-CoV-2, and the resulting disease COVID-19, has spread to most countries, and all 50 states within the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Further, the President of the United States declared the COVID-19 pandemic a national emergency, invoking powers under the Stafford Act, the legislation that directs federal emergency disaster response, and under the Defense Production Act, the legislation that facilitates the production of goods and services necessary for national security and for other purposes. Numerous governmental jurisdictions, including the State of New Jersey where we maintain our principal executive offices, and those in which many of our U.S. and international offices are based, have imposed, and others in the future may impose, "shelter-in-place" orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Most states and the federal government, including the State of New Jersey, together with foreign jurisdictions in which we have operations centers, have declared a state of emergency related to the spread of COVID-19.

While the COVID-19 pandemic did not materially adversely affect the Company's consolidated financial results and operations in the Company's first quarter ended March 31, 2020, economic and health conditions in the United States and across most of the globe have changed rapidly since the end of the quarter. The Company has expanded its tele-health operations, which is an alternative to office visits. However, not all physicians are using telehealth and not to the same extent as previous office visits.

The COVID-19 pandemic is affecting the Company's operations in the second quarter, and may continue to do so indefinitely thereafter. The pandemic may have an impact on the Company's business, operations, and financial results and conditions, directly and indirectly, including, without limitation, impacts on the health of the Company's management and employees, its operations, marketing and sales activities, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company's control, continue to evolve and the outcomes are uncertain.

Due to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, the Company's consolidated results of operations for the three month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. Management cannot predict the full impact of the COVID-19 pandemic on the Company's consolidated operations nor on economic conditions generally, including the effects on patient visits. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end. See Item 1A. "Risk Factors" below for additional details.

Overview

MTBC, Inc., together with its consolidated subsidiaries ("MTBC" or the "Company"), is a healthcare information technology company that provides a suite of proprietary web-based solutions and business services to healthcare providers. Our integrated Software-as-a-Service ("SaaS") platform and business services are designed to help our clients increase revenues, streamline workflows and make better business and clinical decisions, while reducing administrative burdens and operating costs. These solutions and services include:

Healthcare IT:

? Revenue cycle management ("RCM") services;

? Proprietary, healthcare IT solutions, which are part of our RCM services, including:

? Electronic health records,

? Group purchasing services.

Practice Management Services:

? Comprehensive practice management services.

We are able to deliver our industry-leading solutions at very competitive prices because we leverage a combination of our proprietary software, which automates our workflows and increases efficiency, together with our team of approximately 450 experienced health industry experts throughout the United States, who are supported by our highly educated and specialized offshore workforce of approximately 2,500 team members at labor costs that we believe are approximately one-tenth the cost of comparable U.S. employees. Our unique business model has also allowed us to become a leading consolidator in our industry sector, in which we have gained a reputation for being able to acquire and transform distressed competitors into profitable operations of MTBC.

Adoption of our RCM solutions requires little or no upfront expenditure by a practice. Additionally, for most of our solutions and customers, our financial performance is linked directly to the financial performance of our clients because the vast majority of our revenues are based on a percentage of our clients' collections. The standard fee for our complete, integrated, end-to-end solution is among the lowest in the industry. We currently provide services to more than 15,000 providers, (which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff that render bills for their services) practicing in approximately 2,000 independent medical practices and hospitals.

During April 2019, the Company acquired substantially all of the revenue cycle management business of Etransmedia Technology, Inc. and its subsidiaries (together "Etransmedia") through MTBC's wholly owned subsidiary MTBC-Med, Inc. 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 Company paid $1.6 million in cash for the acquisition.

On January 8, 2020, through a merger with a subsidiary, the Company acquired CareCloud Corporation ("CareCloud"), which has developed a highly acclaimed cloud-based platform including EHR, PM and patient experience capabilities. The Company paid $11.9 million in cash, assumed a working capital deficiency of approximately $5.1 million and issued 760,000 shares of the Company's Series A Preferred Stock and two million warrants for the purchase of the Company's common stock at prices ranging from $7.50 to $10.00 per share.

Our offshore operations in Pakistan and Sri Lanka accounted for approximately 11% and 18% of total expenses for the three months ended March 31, 2020 and 2019, respectively. A significant portion of those foreign expenses were personnel-related costs (approximately 80% for both the three months ended March 31, 2020 and 2019). Because personnel-related costs are significantly lower in Pakistan and Sri Lanka than in the U.S. and many other offshore locations, we believe our offshore operations give us a competitive advantage over many industry participants. We are able to achieve significant cost reductions as leverage technology to reduce manual work and strategically transition a portion of the remaining manual tasks to our highly-specialized, cost-efficient team in the U.S., Pakistan and Sri Lanka.

Key Performance Measures

We consider numerous factors in assessing our performance. Key performance measures used by management, including adjusted EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share, are non-GAAP financial measures, which we believe better enable management and investors to analyze and compare the underlying business results from period to period.

These non-GAAP financial measures should not be considered in isolation, or as a substitute for or superior to, financial measures calculated in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of our business as determined in accordance with GAAP. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis, and we provide reconciliations from the most directly comparable GAAP financial measures to the non-GAAP financial measures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Adjusted EBITDA, adjusted operating income, adjusted operating margin, adjusted net income and adjusted net income per share provide an alternative view of performance used by management and we believe that an investor's understanding of our performance is enhanced by disclosing these adjusted performance measures.

Adjusted EBITDA excludes the following elements which are included in GAAP net income (loss):

? Income tax expense (benefit) or the cash requirements to pay our taxes; ? Interest expense, or the cash requirements necessary to service interest on principal payments, on our debt;

Set forth below is a presentation of our adjusted EBITDA for the three months ended March 31, 2020 and 2019:







                                                         Three Months Ended
                                                              March 31,
                                                          2020          2019
                                                          ($ in thousands)
        Net revenue                                    $   21,867     $ 15,080
        GAAP net loss                                      (2,502 )       (296 )
        Provision (benefit) for income taxes                   30          (41 )
        Net interest expense                                   80           17
        Foreign exchange (gain) loss / other expense         (424 )        244
        Stock-based compensation expense                    1,307          758
        Depreciation and amortization                       1,333          757
        Transaction and integration costs                     645          205
        Impairment charges                                    298            -
        Change in contingent consideration                      -          (64 )
        Adjusted EBITDA                                $      767     $  1,580
        


Adjusted operating income and adjusted operating margin exclude the following elements which are included in GAAP operating income (loss):

? Stock-based compensation expense includes cash-settled awards and the related taxes, based on changes in the stock price; ? Amortization of purchased intangible assets; ? Integration costs, such as severance amounts paid to employees from acquired businesses, transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees and exit costs related to contractual agreements;

Set forth below is a presentation of our adjusted operating income and adjusted operating margin, which represents adjusted operating income as a percentage of net revenue, for the three months ended March 31, 2020 and 2019:







                                                                Three Months Ended
                                                                     March 31,
                                                                2020           2019
                                                                 ($ in thousands)
                Net revenue                                   $  21,867      $ 15,080
                GAAP net loss                                    (2,502 )        (296 )
                Provision (benefit) for income taxes                 30           (41 )
                Net interest expense                                 80            17
                Other (income) expense - net                       (445 )          82
                GAAP operating loss                              (2,837 )        (238 )
                GAAP operating margin                             (13.0 )%       (1.6 )%
                Stock-based compensation expense                  1,307           758
                Amortization of purchased intangible assets       1,015           486
                Transaction and integration costs                   645           205
                Impairment charges                                  298             -
                Change in contingent consideration                    -           (64 )
                Non-GAAP adjusted operating income            $     428      $  1,147
                Non-GAAP adjusted operating margin                  2.0 %         7.6 %
        


Adjusted net income and adjusted net income per share exclude the following elements which are included in GAAP net income (loss):

? Foreign currency gains and losses and other non-operating expenditures; ? Stock-based compensation expense includes cash-settled awards and the related taxes, based on changes in the stock price; ? Amortization of purchased intangible assets; ? Integration costs, such as severance amounts paid to employees from acquired businesses, transaction costs, such as brokerage fees, pre-acquisition accounting costs and legal fees and exit costs related to contractual agreements;

No tax effect has been provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per share as the Company has sufficient carry forward net operating losses to offset the applicable income taxes. The following table shows our reconciliation of GAAP net loss to non-GAAP adjusted net income for the three months ended March 31, 2020 and 2019:







                                                             Three Months Ended
                                                                  March 31,
                                                              2020          2019
                                                              ($ in thousands)
        GAAP net loss                                      $    (2,502 )   $  (296 )
        Foreign exchange (gain) loss / other expense              (424 )       244
        Stock-based compensation expense                         1,307         758
        Amortization of purchased intangible assets              1,015         486
        Transaction and integration costs                          645         205
        Impairment charges                                         298           -
        Change in contingent consideration                           -         (64 )
        Income tax expense (benefit) related to goodwill            15         (56 )
        Non-GAAP adjusted net income                       $       354     $ 1,277
        


Set forth below is a reconciliation of our GAAP net loss attributable to common shareholders, per share to our non-GAAP adjusted net income per share:







                                                                    Three Months Ended
                                                                         March 31,
                                                                  2020              2019
        GAAP net loss attributable to common shareholders,
        per share                                             $       (0.42 )   $       (0.15 )
        Impact of preferred stock dividend                             0.22              0.13
        Net loss per end-of-period share                              (0.20 )           (0.02 )
        Foreign exchange (gain) loss / other expense                  (0.03 )            0.02
        Stock-based compensation expense                               0.11              0.06
        Amortization of purchased intangible assets                    0.08              0.04
        Transaction and integration costs                              0.05              0.02
        Impairment charges                                             0.02                 -
        Change in contingent consideration                                -             (0.01 )
        Income tax expense (benefit) related to goodwill               0.00             (0.00 )
        Non-GAAP adjusted net income per share                $        0.03     $        0.11
        End-of-period shares                                     12,367,293        12,009,742
        


For purposes of determining non-GAAP adjusted net income per share, the Company used the number of common shares outstanding at the end of March 31, 2020 and 2019. Non-GAAP adjusted net income per share does not take into account dividends paid on our preferred stock. No tax effect has been provided in computing non-GAAP adjusted net income and non-GAAP adjusted net income per common share as the Company has sufficient carry forward net operating losses to offset the applicable income taxes.

Key Metrics

In addition to the line items in our condensed consolidated financial statements, we regularly review the following metrics. We believe information on these metrics is useful for investors to understand the underlying trends in our business.

Providers and Practices Served: As of March 31, 2020, we provided services to an estimated universe of more than 15,000 providers (which we define as physicians, nurses, nurse practitioners, physician assistants and other clinical staff that render bills for their services), representing approximately 2,000 independent medical practices and hospitals. In addition, we served approximately 160 clients who were not medical practices, but are service organizations who serve the healthcare community. As of March 31, 2019, we served approximately more than 11,000 providers representing approximately 1,800 practices. The foregoing numbers include clients leveraging any of our products or services and are based in part upon estimates in cases where the precise number of practices or providers is unknown.

Sources of Revenue

Revenue: We primarily derive our revenues from revenue cycle management services, reported in our Healthcare IT segment, which is typically billed as a percentage of payments collected by our customers. This fee includes RCM, as well as the ability to use our EHR and practice management software as part of the bundled fee. These bundled fees are classified as revenue cycle management revenue. These services accounted for approximately 60% and 70% of our revenues during the three months ended March 31, 2020 and 2019, respectively. Software-as-a-service fees, for clients not utilizing revenue cycle management services, accounted for approximately 17% of revenue during the three months ended March 31, 2020. Other Healthcare IT services, including printing and mailing operations and professional services, represented approximately 9% of revenues for both the three months ended March 31, 2020 and 2019.

We earned approximately 14% and 20% of our revenue from practice management services during the three months ended March 31, 2020 and 2019, respectively. This revenue represents fees based on our actual costs plus a percentage of the operating profit and is reported in our Practice Management segment.

Operating Expenses

Direct Operating Costs. Direct operating cost consists primarily of salaries and benefits related to personnel who provide services to our customers, claims processing costs, costs to operate the three managed practices, including facility lease costs, supplies, insurance and other direct costs related to our services. Costs associated with the implementation of new customers are expensed as incurred. The reported amounts of direct operating costs do not include depreciation and amortization, which are broken out separately in the condensed consolidated statements of operations.

Selling and Marketing Expense. Selling and marketing expense consists primarily of compensation and benefits, commissions, travel and advertising expenses.

Research and Development Expense. Research and development expense consists primarily of personnel-related costs and third-party contractor costs.

General and Administrative Expense. General and administrative expense consists primarily of personnel-related expense for administrative employees, including compensation, benefits, travel, facility lease costs and insurance, software license fees and outside professional fees.

Contingent Consideration. Contingent consideration represents the portion of consideration payable to the sellers of some of our acquisitions, the amount of which is based on the achievement of defined performance measures contained in the purchase agreements. Contingent consideration is adjusted to fair value at the end of each reporting period.

Depreciation and Amortization Expense. Depreciation expense is charged using the straight-line method over the estimated lives of the assets ranging from three to ten years. Amortization expense is charged on either an accelerated or on a straight-line basis over a period of three or four years for most intangible assets acquired in connection with acquisitions including those intangibles related to the group purchasing services. Amortization expense related to the value of our practice management clients is amortized on a straight-line basis over a period of twelve years.

Impairment Charges. Impairment charges represent charges recorded for a leased facility no longer being used by the Company. The Company is marketing the facility for sublease but has recorded an impairment for the remainder of the lease term.

Interest and Other Income (Expense). Interest expense consists primarily of interest costs related to our line of credit, term loans and amounts due in connection with acquisitions, offset by interest income. Other income (expense) results primarily from foreign currency transaction gains (losses) and income earned from temporary cash investments.

Income Tax. In preparing our condensed consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities. Although the Company is forecasting a return to profitability, it incurred losses historically and there is uncertainty regarding future U.S. taxable income, which makes realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all deferred tax assets as of March 31, 2020 and December 31, 2019.

Critical Accounting Policies and Estimates

The critical accounting policies and estimates used in the preparation of our condensed consolidated financial statements that we believe affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements presented in this Report are described in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Leases:

We adopted ASU 2016-02: Leases (Topic 842) as of January 1, 2019. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, operating lease liability (current portion) and operating lease liability (noncurrent portion) in our condensed consolidated balance sheet at March 31, 2020. 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. We give consideration to bank financing arrangements, geographical location and collateralization of assets when calculating our incremental borrowing rates.

Our lease term includes 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 condensed consolidated balance sheet. Our lease agreements do not contain any residual value guarantees. For real estate leases, we account for the leased and non-leased components as a single lease component. Some leases include escalation clauses and termination options that are factored into the determination of the future lease payments when appropriate.

There have been no material changes in our critical accounting policies and estimates from those described in the Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020.







        Results of Operations
        The following table sets forth our consolidated results of operations as a
        percentage of total revenue for the periods shown:
                                                           Three Months Ended
                                                                March 31,
                                                           2020           2019
                    Net revenue                              100.0 %       100.0 %
                    Operating expenses:
                    Direct operating costs                    62.0 %        65.3 %
                    Selling and marketing                      7.2 %         2.4 %
                    General and administrative                25.6 %        27.6 %
                    Research and development                  10.7 %         1.7 %
                    Change in contingent consideration         0.0 %        (0.4 )%
                    Depreciation and amortization              6.1 %         5.0 %
                    Impairment charges                         1.4 %         0.0 %
                    Total operating expenses                 113.0 %       101.6 %
                    Operating loss                           (13.0 )%       (1.6 )%
                    Interest expense - net                     0.4 %         0.1 %
                    Other income (expense) - net               2.0 %        (0.5 )%
        . . .
        


May 14, 2020

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