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Section 1: 10-Q (10-Q)

pn-10q_20150630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36804

 

Patriot National, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

46-4151376

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

401 East Las Olas Boulevard, Suite 1650

Fort Lauderdale, Florida 33301

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (954) 670-2900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x   No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x   No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

x  (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨   No  x

The number of shares of the registrant’s common stock outstanding on August 14, 2015 was 26,701,049.

 

 

 

 

 


PATRIOT NATIONAL, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

Page
No.

 

 

 

 

 

PART I—Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements.

 

1

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014

 

1

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2015 and
June 30, 2014

 

2

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the six months ended June 30, 2015 and
June 30, 2014

 

3

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2015 and
June 30, 2014

 

4

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) for the six months ended June 30, 2015 and June 30, 2014

 

5

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

Item 4.

Controls and Procedures

 

36

 

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

37

 

 

 

 

Item 1A.

Risk Factors

 

37

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

37

 

 

 

 

Item 4.

Mine Safety Disclosures

 

37

 

 

 

 

Item 5.

Other Information

 

37

 

 

 

 

Item 6.

Exhibits

 

38

 

 

 

 

SIGNATURES

 

40

 

 

 

 


PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

PATRIOT NATIONAL, INC.

Consolidated Balance Sheets

(In thousands) 

 

 

June 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash

 

$

9,893

 

 

$

4,251

 

Equity and fixed income security investments

 

 

3,293

 

 

 

 

Total cash and investments

 

 

13,186

 

 

 

4,251

 

Restricted cash

 

 

15,149

 

 

 

6,923

 

Fee income receivable

 

 

8,171

 

 

 

1,942

 

Fee income receivable from related party

 

 

16,603

 

 

 

11,988

 

Net receivable from related parties

 

 

 

 

 

1,773

 

Deferred costs for initial public offering

 

 

 

 

 

2,682

 

Income taxes receivable

 

 

4,168

 

 

 

 

Other current assets

 

 

1,616

 

 

 

430

 

Total current assets

 

 

58,893

 

 

 

29,989

 

Fixed assets, net of depreciation

 

 

2,319

 

 

 

1,879

 

Deferred loan fees

 

 

1,111

 

 

 

5,911

 

Goodwill

 

 

85,766

 

 

 

61,493

 

Intangible assets

 

 

67,084

 

 

 

32,988

 

Other long term assets

 

 

10,379

 

 

 

9,842

 

Total Assets

 

$

225,552

 

 

$

142,102

 

Liabilities and Equity (Deficit)

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deferred claims administration services income

 

$

10,095

 

 

$

8,515

 

Net advanced claims reimbursements

 

 

10,393

 

 

 

6,803

 

Net payables to related parties

 

 

20

 

 

 

 

Income taxes payable

 

 

 

 

 

11,548

 

Current earn-out payable

 

 

5,668

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

 

35,588

 

 

 

15,027

 

Revolver borrowings outstanding

 

 

25,582

 

 

 

 

Current portion of notes payable

 

 

3,000

 

 

 

15,782

 

Current portion of capital lease obligation

 

 

2,377

 

 

 

2,332

 

Total current liabilities

 

 

92,723

 

 

 

60,007

 

Earn-out payable

 

 

1,827

 

 

 

 

Notes payable

 

 

56,250

 

 

 

95,039

 

Capital lease obligation

 

 

1,222

 

 

 

2,438

 

Warrant redemption liability

 

 

 

 

 

12,879

 

Total Liabilities

 

 

152,022

 

 

 

170,363

 

Equity (Deficit)

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value; 100,000 shares authorized, no shares issued

   and outstanding as of June 30, 2015 and December 31, 2014

 

 

 

 

 

 

Common stock, $.001 par value; 1,000,000 shares authorized, 26,390

   and 18,075 shares issued and outstanding as of June 30, 2015 and

   December 31, 2014, respectively

 

 

21

 

 

 

14

 

Additional paid in capital

 

 

105,528

 

 

 

 

Accumulated deficit

 

 

(31,726

)

 

 

(27,930

)

Total Patriot National, Inc. Stockholders' Equity (Deficit)

 

 

73,823

 

 

 

(27,916

)

Less Non-controlling interest

 

 

(293

)

 

 

(345

)

Total Equity (Deficit)

 

 

73,530

 

 

 

(28,261

)

Total Liabilities and Equity (Deficit)

 

$

225,552

 

 

$

142,102

 

See accompanying notes to consolidated financial statements.

1


PATRIOT NATIONAL, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended June 30,

 

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

Fee income

 

$

26,932

 

 

$

9,181

 

Fee income from related party

 

 

20,456

 

 

 

6,272

 

Total fee income and fee income from related party

 

 

47,388

 

 

 

15,453

 

Net investment income

 

 

35

 

 

 

211

 

Net realized (losses) gains on investments

 

 

(91

)

 

 

78

 

Total Revenues

 

 

47,332

 

 

 

15,742

 

Expenses

 

 

 

 

 

 

 

 

Salaries and related expenses

 

 

17,765

 

 

 

4,280

 

Commission expense

 

 

8,494

 

 

 

1,878

 

Management fees to related party for administrative support services

 

 

 

 

 

2,342

 

Outsourced services

 

 

2,792

 

 

 

747

 

Allocation of marketing, underwriting and policy issuance costs from

   related party

 

 

 

 

 

929

 

Other operating expenses

 

 

6,954

 

 

 

1,633

 

Acquisition costs

 

 

2,315

 

 

 

 

Interest expense

 

 

546

 

 

 

1,278

 

Depreciation and amortization

 

 

3,392

 

 

 

1,041

 

Amortization of loan discounts and loan costs

 

 

59

 

 

 

324

 

Stock compensation expense

 

 

3,670

 

 

 

 

Increase in fair value of warrant redemption liability

 

 

 

 

 

6,503

 

Total Expenses

 

 

45,987

 

 

 

20,955

 

Net Income (Loss) before income tax expense

 

 

1,345

 

 

 

(5,213

)

Income tax expense

 

 

288

 

 

 

363

 

Net Income (Loss) Including Non-Controlling Interest in Subsidiary

 

 

1,057

 

 

 

(5,576

)

Net Income attributable to non-controlling interest in subsidiary

 

 

37

 

 

 

21

 

Net Income (Loss)

 

$

1,020

 

 

$

(5,597

)

Earnings (Loss) Per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

(0.39

)

Diluted

 

 

0.04

 

 

 

(0.39

)

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

Basic

 

 

26,390

 

 

 

14,288

 

Diluted

 

 

26,793

 

 

 

14,288

 

 

 

 

See accompanying notes to consolidated financial statements.

2


PATRIOT NATIONAL, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

Fee income

 

$

45,301

 

 

$

22,266

 

Fee income from related party

 

 

45,079

 

 

 

8,786

 

Total fee income and fee income from related party

 

 

90,380

 

 

 

31,052

 

Net investment income

 

 

36

 

 

 

420

 

Net realized (losses) gains on investments

 

 

(91

)

 

 

78

 

Total Revenues

 

 

90,325

 

 

 

31,550

 

Expenses

 

 

 

 

 

 

 

 

Salaries and related expenses

 

 

32,233

 

 

 

8,181

 

Commission expense

 

 

17,383

 

 

 

3,600

 

Management fees to related party for administrative support services

 

 

 

 

 

4,529

 

Outsourced services

 

 

5,254

 

 

 

1,405

 

Allocation of marketing, underwriting and policy issuance costs from

   related party

 

 

 

 

 

1,539

 

Other operating expenses

 

 

13,285

 

 

 

3,263

 

Acquisition costs

 

 

2,919

 

 

 

 

Interest expense

 

 

1,719

 

 

 

2,591

 

Depreciation and amortization

 

 

5,695

 

 

 

2,047

 

Amortization of loan discounts and loan costs

 

 

144

 

 

 

645

 

Stock compensation expense

 

 

6,205

 

 

 

 

(Decrease) Increase in fair value of warrant redemption liability

 

 

(1,385

)

 

 

6,503

 

Costs from debt payoff (1)

 

 

13,681

 

 

 

 

Total Expenses

 

 

97,133

 

 

 

34,303

 

Net Loss before income tax expense

 

 

(6,808

)

 

 

(2,753

)

Income tax (benefit) expense

 

 

(3,064

)

 

 

1,300

 

Net Loss Including Non-Controlling Interest in Subsidiary

 

 

(3,744

)

 

 

(4,053

)

Net Income attributable to non-controlling interest in subsidiary

 

 

52

 

 

 

42

 

Net Loss

 

$

(3,796

)

 

$

(4,095

)

Loss Per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

(0.15

)

 

$

(0.29

)

Diluted

 

 

(0.15

)

 

 

(0.29

)

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

Basic

 

 

25,601

 

 

 

14,288

 

Diluted

 

 

25,601

 

 

 

14,288

 

 

(1)

Costs from debt payoff include $4.3 million of early payment penalties and $9.3 million associated with the write-off of related deferred financing fees and original issue discounts.

 

See accompanying notes to consolidated financial statements.

3


PATRIOT NATIONAL, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

Operating Activities

 

 

 

 

 

 

 

 

Net Loss

 

$

(3,744

)

 

$

(4,053

)

Adjustments to reconcile net (loss) income to net cash from operating activities:

 

 

 

 

 

 

 

 

Net (Income) attributable to business generated by GUI,

   exclusive of depreciation expense

 

 

 

 

 

(2,213

)

Depreciation and amortization

 

 

5,695

 

 

 

2,047

 

Amortization of loan discounts and loan costs

 

 

144

 

 

 

645

 

(Decrease) Increase in fair value of warrant redemption liability

 

 

(1,385

)

 

 

6,503

 

Stock compensation expense

 

 

6,205

 

 

 

 

Write-off of deferred financing and original issue discounts

 

 

9,342

 

 

 

 

Net realized losses (gains) on investments

 

 

91

 

 

 

(78

)

Deferred income taxes

 

 

 

 

 

(10

)

Provision for uncollectible fee income

 

 

301

 

 

 

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in:

 

 

 

 

 

 

 

 

Fee income receivable

 

 

(5,016

)

 

 

(373

)

Fee income receivable from related party

 

 

(4,615

)

 

 

(515

)

Other current assets

 

 

(1,172

)

 

 

(53

)

Increase (decrease) in:

 

 

 

 

 

 

 

 

Net payable to related parties

 

 

1,703

 

 

 

2,564

 

Deferred claims administration services income

 

 

(147

)

 

 

369

 

Net advanced claims reimbursements

 

 

3,590

 

 

 

433

 

Income taxes payable

 

 

(15,025

)

 

 

781

 

Accounts payable and accrued expenses

 

 

8,677

 

 

 

1,055

 

Net Cash Provided by Operating Activities

 

 

4,644

 

 

 

7,102

 

Investment Activities:

 

 

 

 

 

 

 

 

Net increase in restricted cash

 

 

(4,017

)

 

 

(465

)

Net increase in note receivable from related party

 

 

 

 

 

(420

)

Purchase of equity securities

 

 

(3,648

)

 

 

(3,564

)

Proceeds from sale of equity securities

 

 

264

 

 

 

3,642

 

Purchase of fixed assets and other long-term assets

 

 

(2,824

)

 

 

(265

)

Acquisitions, net of $2,248 cash acquired

 

 

(47,452

)

 

 

 

Net Cash Used in Investment Activities

 

 

(57,677

)

 

 

(1,072

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net

 

 

98,275

 

 

 

 

Proceeds from senior secured term loan, net of fees

 

 

38,891

 

 

 

 

Proceeds from incremental senior secured term loan, net of fees

 

 

19,900

 

 

 

 

Repayment of senior secured term loans

 

 

(750

)

 

 

 

Payment of loan fees

 

 

 

 

 

(121

)

Payment of costs for initial public offering

 

 

(2,479

)

 

 

 

Revolver facility borrowings

 

 

43,150

 

 

 

 

Revolver facility repayments

 

 

(17,568

)

 

 

 

Repayment of note payable

 

 

(119,573

)

 

 

(4,200

)

Repayment of capital lease obligation

 

 

(1,171

)

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

 

58,675

 

 

 

(4,321

)

Increase in cash

 

 

5,642

 

 

 

1,709

 

Cash, beginning of period

 

 

4,251

 

 

 

1,661

 

Cash, end of period

 

$

9,893

 

 

$

3,370

 

 

See accompanying notes to consolidated financial statements.

4


PATRIOT NATIONAL, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

 

 

 

Patriot National, Inc. Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional paid In

 

 

Accumulated

 

 

Non-Controlling

 

 

Total Equity

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

(Deficit)

 

Balance, January 1, 2015

 

 

18,075

 

 

$

14

 

 

$

 

 

$

(27,930

)

 

$

(345

)

 

$

(28,261

)

Issuance of common stock

 

 

7,350

 

 

 

7

 

 

 

97,824

 

 

 

 

 

 

 

 

 

97,831

 

Exercise of detachable common stock warrants

 

 

965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

 

 

 

 

 

 

 

6,205

 

 

 

 

 

 

 

 

 

6,205

 

Contribution of warrant redemption liability

 

 

 

 

 

 

 

 

1,499

 

 

 

 

 

 

 

 

 

1,499

 

Balance before Net Loss

 

 

26,390

 

 

 

21

 

 

 

105,528

 

 

 

(27,930

)

 

 

(345

)

 

 

77,274

 

Net (Loss) Income

 

 

 

 

 

 

 

 

 

 

 

(3,796

)

 

 

52

 

 

 

(3,744

)

Balance, June 30, 2015

 

 

26,390

 

 

$

21

 

 

$

105,528

 

 

$

(31,726

)

 

$

(293

)

 

$

73,530

 

 

See accompanying notes to consolidated financial statements.

 

5


PATRIOT NATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

1.

Description of Business and Basis of Presentation

Description of Business

Patriot National, Inc. (“Patriot National” or the “Company”) is a national provider of comprehensive technology and outsourcing solutions within the property and casualty marketplace, primarily in workers’ compensation, for insurance companies, employers, local governments and reinsurance captives. We offer an end-to-end portfolio of services to increase business production, contain costs, and reduce claims experience for our clients. We leverage our strong distribution relationships, proprietary business processes, advanced technology infrastructure, and management expertise to deliver valuable solutions to our clients. We strive to deliver these value-added services to our clients in order to help them navigate the workers’ compensation landscape, ensure compliance with state regulations, handle all aspects of the claims process and ultimately contain costs.

The Company offers two types of services: brokerage, underwriting and policyholder services (or our “brokerage and policyholder services”) and claims administration services (or our “claims administration services”).

We generate fee income for our services from our clients based on (i) a percentage of premiums for the policies we service, (ii) the cost savings we achieve for our clients or (iii) a fixed fee for a particular service. Unlike our insurance and reinsurance carrier clients, we do not generate underwriting income or assume underwriting risk on workers’ compensation plans. Patriot National is headquartered in Ft. Lauderdale, Florida.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been omitted pursuant to such rules and regulations. Included for comparative purposes are our combined financial statements for the six-month period ended June 30, 2014, which combined the financial activity of Patriot National with the results of an acquisition under common control.  This acquisition was completed on August 6, 2014.  The combined financial statements presented for the period ended June 30, 2014 are the Statement of Operations and the Statement of Cash Flows.  This acquisition is discussed fully in our annual report for the year ended December 31, 2014.

The unaudited consolidated financial statements included herein are, in the opinion of management, prepared on a basis consistent with our audited combined financial statements for the year ended December 31, 2014 and include all normal recurring adjustments necessary for a fair presentation of the information set forth. The quarterly results of operations are not necessarily indicative of the results of operations to be reported for subsequent quarters or the full year. These unaudited consolidated financial statements should be read in conjunction with the audited combined financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014. In the preparation of our unaudited consolidated financial statements as of June 30, 2015, management evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure therein.

For Contego Services Group, LLC (“Contego Services Group”), the Company’s combined subsidiary that is 97% owned, and for DecisionUR, LLC (“DecisionUR”), the Company’s combined subsidiary that is 98.8% owned, the third party holdings of equity interests are referred to as non-controlling interest. The portion of the third party members’ equity (deficit) of Contego Services Group and DecisionUR are presented as non-controlling interest in the accompanying consolidated balance sheets as of June 30, 2015 and combined balance sheet as of December 31, 2014. The Company discloses the following three measures of net income (loss): (i) net income (loss), including non-controlling interest in subsidiary, (ii) net income (loss) attributable to non-controlling interest in subsidiary, and (iii) net income (loss).

 

 

2.

Effect of Recently Issued Financial Accounting Standards

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. The update requires retrospective application. ASU 2015-03 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. Early adoption is permitted but we do not anticipate electing early adoption. We are currently evaluating the financial impact of this standard.

In May 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to

6


which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a proposed ASU to defer the effective date to annual reporting periods beginning after December 15, 2017 using one of two retrospective application methods with earlier adoption permitted for annual periods beginning after December 15, 2016. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

 

 

 

3.

Business Combinations

The Company completed thirteen acquisitions during the six-month period ended June 30, 2015. We acquired substantially all of the net assets of the following firms in cash transactions. These acquisitions have been accounted for using the acquisition method for recording business combinations, except for DecisionUR, as further discussed.

 

Name and Effective Date of Acquisition (In thousands):

 

Cash Paid

 

 

Accrued Liability

 

 

Recorded Payable to Seller

 

 

Recorded Earnout Payable

 

 

Maximum Potential Earnout Payable

 

 

Total Recorded Purchase Price

 

Phoenix Risk Management, Inc (January 31, 2015)

 

$

1,099

 

 

$

 

 

$

 

 

$

2,790

 

 

$

3,000

 

 

$

3,889

 

DecisionUR, LLC (February 5, 2015)

 

 

2,240

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

2,240

 

Capital & Guaranty, LLC (February 9, 2015)

 

 

175

 

 

 

 

 

 

 

 

 

175

 

 

 

175

 

 

 

350

 

TriGen Holding Group, Inc (March 31, 2015)

 

 

3,340

 

 

 

3,453

 

 

 

4,822

 

 

 

1,433

 

 

 

1,500

 

 

 

9,595

 

Hospitality Supportive Systems, LLC (April 1, 2015)

 

 

9,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,650

 

Selective Risk Management, LLC (April 1, 2015)

 

 

3,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,846

 

Vikaran Solutions, LLC (April 17, 2015)

 

 

8,500

 

 

 

152

 

 

 

 

 

 

 

 

 

 

 

 

8,500

 

Corporate Claims Management, Inc (April 24, 2015)

 

 

7,900

 

 

 

4,434

 

 

 

 

 

 

825

 

 

 

1,000

 

 

 

8,725

 

Candid Investigation Services, LLC (May 8, 2015)

 

 

900

 

 

 

 

 

 

 

 

 

500

 

 

 

600

 

 

 

1,400

 

Brandywine Insurance Advisors, LLC

  (May 22, 2015)

 

 

2,000

 

 

 

 

 

 

 

 

 

1,220

 

 

 

2,205

 

 

 

3,220

 

Infinity Insurance Solutions, LLC (June 1, 2015)

 

 

1,750

 

 

 

100

 

 

 

 

 

 

552

 

 

 

650

 

 

 

2,302

 

InsureLinx, Inc (June 12, 2015)

 

 

6,300

 

 

 

1,840

 

 

 

 

 

 

 

 

 

 

 

 

6,300

 

The Carman Corporation (June 15, 2015)

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

Total

 

$

49,700

 

 

$

10,002

 

 

$

4,822

 

 

$

7,495

 

 

$

9,130

 

 

$

62,017

 

 

The Company acquired DecisionUR from Six Points Investment Partners, LLC, a company under common control.  However, results of operations for DecisionUR are included from acquisition date, as its operations are immaterial with respect to the financial statements taken as a whole for all periods presented.

The “maximum potential earnout payables” disclosed in the foregoing table represent the maximum amount of additional consideration that could be paid pursuant to the terms of the purchase agreement for the applicable acquisition. The “recorded earnout payables” disclosed in the foregoing table are primarily based upon the estimated future operating results of the acquired entities over a one- to three-year period subsequent to the acquisition date. The recorded earnout payables are measured at fair value as of the acquisition date and are included on that basis in the total recorded purchase price in the foregoing table. We will record subsequent changes in these estimated earnout obligations, including the accretion of discount, in our statement of operations when incurred.

The fair value of these earnout obligations is based on the present value of the expected future payments to be made to the sellers of the acquired entities in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement, as discussed further in Note 11, Fair Value of Financial Assets and Liabilities. In determining fair value, we estimated the acquired entity’s future performance using financial projections developed by management for the acquired entity and market participant assumptions that were derived for revenue growth and/or profitability.  We estimated future payments using the earnout formula and performance targets specified in each purchase agreement and these financial projections. We then discounted these payments to present value using a risk-adjusted rate that takes into consideration market-based rates of return that reflect the ability of the acquired entity to achieve the targets. Changes in financial projections, market participant assumptions for revenue growth and/or profitability, or the risk-adjusted discount rate, would result in a change in the fair value of recorded earnout obligations.

The aggregate amount of maximum earnout obligations related to acquisitions made in 2015, as of June 30, 2015 was $9.1 million, of which $7.5 million was recorded in our consolidated balance sheet as of June 30, 2015, based on the aggregate estimated fair value of the expected future payments to be made.

The “recorded payable to seller” disclosed in the foregoing table represents the consideration payable to a seller of TriGen Holding Group, Inc. on the first anniversary of the effective date.  The payable was recorded at present value and reported in our consolidated balance sheet as of June 30, 2015 within accounts payable, accrued expenses and other liabilities.

7


The following is a summary of the aggregate estimated fair values of the net assets acquired at the date of each of the acquisitions made in the six months ended June 30, 2015:

 

In thousands

 

Total

 

Assets Acquired:

 

 

 

 

Cash

 

$

2,248

 

Restricted cash

 

 

4,209

 

Accounts receivable

 

 

3,014

 

Fixed assets

 

 

143

 

Other assets

 

 

839

 

Goodwill

 

 

24,273

 

Intangible assets:

 

 

 

 

Customer & carrier relationships

 

 

22,336

 

Service contracts

 

 

320

 

Non-compete agreements

 

 

2,999

 

Developed technology

 

 

11,009

 

Trade name portfolio

 

 

629

 

Total intangible assets

 

 

37,293

 

Total assets acquired

 

 

72,019

 

Liabilities assumed

 

 

10,002

 

Total net assets acquired

 

$

62,017

 

 

The net assets acquired are preliminary and subject to measurement period adjustments.

In accordance with FASB ASC 350, Intangibles—Goodwill and Other, intangible assets, which are comprised of the estimated fair value of the service contracts acquired, customer and carrier relationships, non-compete agreements, developed technology and trade names are being amortized over the respective estimated life, ranging from two to ten years, in a manner that, in management’s opinion, reflects the pattern in which the intangible asset’s future economic benefits are expected to be realized. Intangible assets are tested for impairment at least annually (more frequently if certain indicators are present). In the event that management determines that the value of the intangible asset has become impaired, the company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

Provisional estimates of fair value and the allocation of the purchase price are established at the time of each acquisition and are subsequently reviewed within the first year of operations, the measurement period, following the acquisition date to determine the necessity for adjustments. The fair value of the tangible assets and liabilities for each applicable acquisition at the acquisition date approximated their carrying values. We estimate the fair value as the present value of the benefits anticipated from ownership of the subject customer list in excess of returns required on the investment in contributory assets necessary to realize those benefits. The rate used to discount the net benefits was based on a risk-adjusted rate that takes into consideration market-based rates of return and reflects the risk of the asset relative to the acquired business. These discount rates generally ranged from 17% to 30% for our 2015 acquisitions through June 30, 2015. The fair value of non-compete agreements was established using estimated financial projections for the acquired company based on market participant assumptions and various non-compete scenarios.

Customer and carrier relationships, non-compete agreements and trade names related to our acquisitions are amortized using the straight-line method over their estimated useful lives (ten years for customer and carrier relationships, one to two years for non-compete agreements and five to seven years for trade names), while goodwill is not subject to amortization. We use the straight-line method to amortize these intangible assets because the pattern of their economic benefits cannot be reasonably determined with any certainty. We review all of our intangible assets for impairment periodically (at least annually) and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing intangible assets, if the fair value is less than the carrying amount of the respective (or underlying) asset, an indicator of impairment would exist, and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings. Based on the results of impairment reviews during the six-month periods ended June 30, 2015 and 2014, no impairments were required.

8


Our consolidated financial statements for the six months ended June 30, 2015 include the operations of the acquired entities from their respective acquisition dates, totaling $8.5 million of revenues and $1.9 million of net income.

The following is a summary of the unaudited pro forma historical results, as if these entities and Patriot Care Management, Inc. (“Patriot Care Management”), which was acquired on August 6, 2014, had been acquired at January 1, 2014 (in thousands, except per share data):

 

 

 

Six Months Ended June 30,

 

In thousands (except per share data)

 

2015

 

 

2014

 

Total revenues

 

 

99,015

 

 

 

67,279

 

Net (loss) income

 

 

(3,810

)

 

 

(2,322

)

Basic net (loss) income per share

 

$

(0.15

)

 

$

(0.16

)

Diluted net (loss) income per share

 

$

(0.15

)

 

$

(0.16

)

 

This unaudited supplemental pro forma financial information includes the results of operations of acquired businesses presented as if they had been combined as of January 1, 2014. The unaudited supplemental pro forma financial information has been provided for illustrative purposes only. The unaudited supplemental pro forma financial information does not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented, or of the results that may be achieved by the combined companies in the future. Future results may vary significantly from the results reflected in the following unaudited supplemental pro forma financial information because of future events and transactions, as well as other factors, many of which are beyond the Company’s control.

 

4.

Equity and Fixed Income Security Investments

Equity and fixed income security investments are carried at fair value.  We classify these investments as a trading portfolio with changes to the fair value of investments marked-to-market value and reflected in the aggregate net income or loss for the period incurred.  The trading portfolio is utilized to generate investment income with available cash on hand.

As of June 30, 2015, our major classes of investments consisted of the following:

 

 

 

June 30, 2015

 

In thousands

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(Unaudited)

 

Equity and Fixed Income Security Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common and preferred stocks

 

$

429

 

 

$

 

 

$

(34

)

 

$

395

 

Corporate notes and bonds

 

 

2,955

 

 

 

 

 

 

(57

)

 

 

2,898

 

Total

 

$

3,384

 

 

$

 

 

$

(91

)

 

$

3,293

 

There were no investments as of December 31, 2014.

 

 

5.

Fixed Assets and Other Long Term Assets

Fixed Assets

Fixed assets are stated at cost, less accumulated depreciation and amortization. Expenditures for computer equipment, software, and furniture and fixtures are capitalized and depreciated on a straight-line basis over a five, three, and seven year estimated useful life, respectively. Expenditures for leasehold improvements on office space and facilities are capitalized and amortized on a straight-line basis over the term of the lease.

9


As of June 30, 2015 and December 31, 2014, our major classes of fixed assets consisted of the following:

 

In thousands

 

June 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

 

 

Fixed Assets

 

 

 

 

 

 

 

 

Computer equipment, software and furniture and fixtures

 

$

7,505

 

 

$

5,722

 

Leasehold improvements

 

 

2,727

 

 

 

2,545

 

Total fixed assets

 

 

10,232

 

 

 

8,267

 

Less accumulated depreciation and amortization

 

 

(7,913

)

 

 

(6,388

)

Fixed assets, net of accumulated depreciation and amortization

 

$