(NASDAQ Global Market: MTBC)

Comments on Proposal to Amend Rules 3-05 and 8-04

Bill Korn, Chief Financial Officer
Background on MTBC

1

Revenue

($ in millions)

Significant Acquisitions Requiring 8-04 Financial Statements

July 2013 Metro Medical Management Services, Inc. 

July 2014 Omni Medical Billing Services, LLC

Practicare Medical Management, Inc.

CastleRock Solutions, Inc.

July 2015 SoftCare Solutions, Inc.

October 2016 MediGain, LLC

July 2018 Orion Healthcorp, Inc.

April 2019 Etransmedia Technologies, Inc.

• MTBC is a healthcare information technology company that provides proprietary 

web-based solutions and business services to healthcare providers

• Emerging growth company and smaller reporting company

• IPO on Nasdaq in July 2014

• 15 acquisitions over the last six years ... all asset purchases
Objective

• Provide investors with useful information to make informed investment decisions 

without:

– Spending shareholder money unnecessarily on information that doesn’t help them

– Limiting investment opportunities for smaller reporting companies

– Limiting exit choices for private companies without audited financials

• Challenges:

– Significance tests based on the size of the acquirer disproportionately increase the 

transaction costs for smaller companies

– Tests that don’t distinguish between asset purchases and stock purchases require 

production of financial statements that aren’t relevant to the buyer

– Repeated inclusion of Rule 3-05 financial statements long after a transaction closes 

and the seller has exited creates the need for representations that may be difficult 

and unreasonable for anyone to make

mHealth • EHR • PM • RCM | A Fully Integrated Practice Solution 2
1. Eliminate Repeated Filing of Rule 3-05/8-04 Financials

• The proposal no longer requires separate acquired business financial statements once 

the business has been included in the registrant’s post-acquisition financial statements 

for a complete fiscal year

– Today there is a convention that 9 months can be considered one year for some 

purposes

– Once a seller has exited a business, it is difficult to get them to sign representation 

letters when they have no basis to know what might have changed

– But the buyer can’t represent to the auditor events before the acquisition

– Ideally the Form 8-K should include the auditor’s evergreen consent to the Form 8-K 

financial statements being incorporated by reference in future registration 

statements, with no further consents or rep letters needed

– Alternatively, limit the requirement to include Rule 3-05 or 8-04 financial statements 

to 3 or 4 complete quarters (even if they span 2 fiscal years)

mHealth • EHR • PM • RCM | A Fully Integrated Practice Solution 3
2. Encourage Carve-out Financial Statements when Appropriate 

• Carve-out financial statements are permitted when less than the full business is acquired, 

but many auditors find these difficult to audit

– For asset purchases, the only value to investors is the operations actually acquired, 

and any assets and liabilities acquired, not the full balance sheet

– Much work goes into creating opening balance sheets and reconstructing prior years’ 

equity amounts, which has no significance in an asset purchase

– Valuing intangibles and goodwill from prior acquisitions also has no value to 

investors (these just get eliminated with the new acquisition)

– Allocating overhead which isn’t acquired adds no value to investors

• I would encourage carve-out or partial financial statements for all asset purchases

– If a situation couldn’t be audited, I would rather see partial financial statements 

reviewed, as long as they match the assets actually acquired

– The proposal uses the term “tested subsidiary,” so stock deals were the primary focus

mHealth • EHR • PM • RCM | A Fully Integrated Practice Solution 4
3. Revenue Test may be better for Smaller Reporting Companies

• The proposal mentions revenue tests, but doesn’t go far enough

– It mentions businesses with “annual recurring revenues,” without defining the term

• I would simplify, saying “two or more years of revenue”

– For a business whose net income is small, or which flips from positive to negative after 

an acquisition based on amortization of acquired intangibles, anything divided by 

income close to $0 is significant

– I would modify the smaller reporting company standard (Rule 8-04) to rely on a 

revenue test, and let Rule 3-05, for larger companies, use the smaller of the two tests

– For situations where an income test is used, I would:

• Use pre-tax income before extraordinary items, since that better predicts the future

• Eliminate goodwill impairment and amortization of intangibles from target 

company financial statements, since these get eliminated after acquisition

mHealth • EHR • PM • RCM | A Fully Integrated Practice Solution 5
4. Investment Test Using Aggregate Worldwide Market Value

• Using aggregate worldwide market value makes sense

– I would compute the value on the date of the transaction, to make it more 

comparable

– Since Rules 3-05 and 8-04 only apply to public companies, their value should be easy 

to ascertain on any day (unless the acquirer is pursuing an IPO, in which case their 

market value may be hard to prove, and the current methodology of using total 

assets is more reasonable)

• But why consider only the value of common equity?

– I would include the value of all equity, as long as its market value can be ascertained

– If preferred stock is listed, or is convertible into listed securities, it seems just as 

relevant

mHealth • EHR • PM • RCM | A Fully Integrated Practice Solution 6
5. Pro Formas should include Management Adjustments 

• Management Adjustments would make Pro Forma financial statements more relevant 

in many cases

– The question is how to get auditors to sign off on some adjustments, or include in 

comfort letters to underwriters, when they are based on management’s assessment 

of the future, not auditable actions taken in the past

– Guidance should explicitly say that these adjustments need to be justified by 

management, but since there will need to be management judgement, this needs to 

be presented in a way which doesn’t complicate the auditor’s comfort letter ... or 

else companies may feel it is easier to omit such adjustments

– Adjustments will be easier to justify for acquirers with a history of repeated 

acquisitions

mHealth • EHR • PM • RCM | A Fully Integrated Practice Solution 7
Summary

• The SEC’s efforts to streamline Rule 3-05 and 8-04 financial statements will make the 

playing field more level 

• Many smaller reporting companies don’t have the resources or the patience to deal with 

these audits, and as a result, their shareholders, and the investors in private companies 

looking to exit, lose opportunities

• Analysts and investors don’t care about past performance of acquisition targets ... they 

want to understand the impact the investment would make on the acquiring company

• Eliminating the system which requires repeated consents from an auditor would eliminate 

frustration and confusion of who can represent prior periods:

– The buyer, who wasn’t present and has no firsthand knowledge of the period audited

– The seller, who is no longer involved, and knows nothing more than the last time they 

signed a management rep letter

• The SEC’s proposal is a good step forward, but these few tweaks might make it even better

mHealth • EHR • PM • RCM | A Fully Integrated Practice Solution 8
Thank you!

Bill Korn

Chief Financial Officer, MTBC, Inc.

bkorn@mtbc.com

732-873-5133 x133