Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to “ExamWorks,” “the Company,” “we,” “our,” and “us” mean ExamWorks Group, Inc. and its consolidated subsidiaries.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Forward-looking statements convey current expectations or forecasts of future events for ExamWorks. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking. You can identify forward-looking statements by terminology such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” “can,” “continue,” or “may,” or the negative of these terms or other similar expressions that convey uncertainty of future events or outcomes. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A. of this Quarterly Report on Form 10-Q and elsewhere in this report, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this report. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this report.
Our Business
We are a leading provider of IMEs, peer and bill reviews, Medicare compliance services, case management services and other related services, which include legal support services, administrative support services, medical record retrieval services and document management services. We were incorporated as a Delaware corporation on April 27, 2007. From July 14, 2008 through the date of this filing, we have acquired 57 IME services businesses, including a leading provider of software solutions to the IME industry. We currently operate out of 71 service centers servicing all 50 U.S. states, Canada, the United Kingdom and Australia. We conduct our business through four geographic segments: the United States, Canada, the United Kingdom and Australia.
We provide our services to property and casualty insurance carriers, law firms, third-party claim administrators, government agencies, and state funds that use independent services to confirm the veracity of claims by sick or injured individuals and to facilitate the delivery and quality of cost-effective care for workers’ compensation, automotive, personal injury liability and disability insurance coverage. We help our clients manage costs and enhance their risk management processes by verifying the validity, nature, cause and extent of claims, identifying fraud and providing fast, efficient and quality IME services.
We provide our clients with the local presence, expertise and broad geographic coverage they increasingly require. Our size and geographic reach give our clients access to our medical panel of credentialed physicians and other medical providers and our proprietary information technology infrastructure that has been specifically designed to streamline the complex process of coordinating referrals, scheduling appointments, complying with regulations and client reporting. Our primary service is to provide IMEs that give our clients authoritative and accurate answers to questions regarding the nature and permanency of medical conditions or personal injury, their cause and appropriate treatment. Additionally, we provide peer and bill reviews, which consist of medical opinions by members of our medical panel without conducting physical exams, and the review of physician and hospital bills to examine medical care rendered and its conformity to accepted standards of care. Further, we provide Medicare compliance services, including Medicare set-aside and reporting services that help mitigate costs and promote compliance, and case management services, which include managing the medical and vocational cases of injured workers to facilitate timely recovery and/or return to work. We also provide record retrieval, document management and electronic summary services, which services are critical for efficient and effective handling of claims and litigation processes, including the provision of IMEs. Prior to the MES acquisition in February 2011, we marketed our services primarily under the ExamWorks brand. Initially with the MES acquisition and subsequently with the Premex and MedHealth acquisitions, we began to market our services under several brands, including but not limited to, ExamWorks, MES, Premex and MedHealth. Further, with the acquisition of Gould & Lamb in February 2014 and Ability Services Network and MedAllocators in June 2014, we expanded our presence in Medicare compliance services, including Medicare set-aside and reporting services, that help mitigate costs and promote compliance, and case management services, which include managing the medical and vocational cases of injured workers to facilitate timely recovery and/or return to work. These services are marketed under ExamWorks Clinical Solutions. With the acquisition of ABI in January 2016, we entered the complementary record retrieval and document management services market of our industry which consists of retrieving, sorting and summarizing records and other documents used to resolve insurance claims or facilitate other IME services.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Significant Recent Developments
Merger
On April 27, 2016, we announced our entry into a definitive merger agreement to be acquired by an affiliate of Leonard Green & Partners, L.P., for $35.05 per share in cash, representing a total transaction value of approximately $2.2 billion. The merger is subject to approval by our stockholders and other customary closing conditions. In accordance with the merger agreement’s “go shop” provision, we will conduct a market test for 25 business days concluding June 1, 2016. There are no guarantees that the go shop process will result in a superior proposal. The merger is currently expected to close in the third quarter of 2016.
Acquisitions
A key feature of our strategy is to grow our business organically by selling additional services to existing clients, cross-selling into additional insurance lines of business and expanding our geographic footprint with existing clients. Because we operate in a highly fragmented industry, and have completed numerous acquisitions, another component of our business strategy has historically been and continues to be growth through acquisitions that expand our geographic coverage, provide new or complementary lines of business, expand our portfolio of services, and increase our market share. For example, our acquisition of MedHealth in August 2012 enabled us to enter the Australian market and expand our range of clients and services, and increase our international market presence. Similarly, our acquisitions of Gould & Lamb in February 2014 and Ability Services Network and MedAllocators in June 2014 enabled us to expand our presence in the Medicare compliance services and case management services markets, and our acquisition of ABI in January 2016 enabled us to establish our presence in the record retrieval and document management markets, and to expand our range of services to new and existing clients. To date, we have completed 57 acquisitions, and below we include the acquisitions completed in 2015 and 2016:
Acquisition Date
|
|
Name
|
April 5, 2016
|
|
•
|
Prizm
|
January 19, 2016
|
|
•
|
Advanced Medical Reviews
|
January 8, 2016
|
|
•
|
ABI
|
November 23, 2015
|
|
•
|
Argent
|
October 30, 2015
|
|
•
|
First Choice
|
July 13, 2015
|
|
•
|
Karen Rucas & Associates
|
April 14, 2015
|
|
•
|
Landmark Exams & Maven Exams
|
January 2, 2015
|
|
•
|
ReliableRS
|
Sources of Revenues and Expenses
Revenues
We derive revenue primarily from fees charged for independent medical examinations, peer and bill reviews, Medicare compliance services, case management services and other related services, which include litigation support services, administrative support services and medical record retrieval and document management services. Revenues are recognized at the time services have been performed and, if applicable, at the time the report is shipped to the end user. We expect revenue to continue to increase through acquisition and organic growth. Our revenue is derived from services performed in different geographic areas.
Certain agreements with customers in the U.K. include provisions whereby collection of the amounts billed are contingent on the favorable outcome of the claim. We have deemed these provisions to preclude revenue recognition at the time of performance, as collectability is not reasonably assured and the cash payments are contingent, and are deferring these revenues, net of estimated costs, until the case has been settled and the contingency has been resolved and the cash has been collected.
Costs of revenues
Costs of revenues are comprised of fees paid to members of our medical panel; other direct costs including transcription, film and medical record obtainment and transportation; and other indirect costs including labor and overhead related to the generation of revenue. We expect these operationally driven costs to increase to support future revenue growth and as we continue to grow through acquisitions.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Selling, general and administrative expenses
Selling, general and administrative (“SGA”) expenses consist primarily of expenses for administrative, human resource related, corporate information technology support, legal (primarily from transaction costs related to acquisitions), finance and accounting personnel, professional fees (primarily from transaction costs related to acquisitions), insurance and other corporate expenses. We expect that SGA expenses will increase as we continue to add personnel to support the growth of our business and pursue acquisition growth. As a result, we expect that our SGA expenses will continue to increase in the future but decrease as a percentage of revenue over time as our revenue increases.
Depreciation and amortization
Depreciation and amortization (“D&A”) expense consists primarily of amortization of our finite lived intangible assets obtained through acquisitions completed to date and, to a lesser extent, depreciation of property, equipment and leasehold improvements. We expect that depreciation and amortization expense will decrease as a percentage of revenues as our finite lived intangible assets become fully amortized.
Results of Operations
As stated previously, our revenues consist primarily of fees charged for IME services performed. What we are able to charge per IME service performed depends on many factors relating to the type of IME services that our clients request. Those factors include, among others, (1) the line of business (e.g., worker’s compensation, automotive or liability claim), (2) product group (e.g., IME or peer review), (3) the geographic location of the claimant and (4) the medical panel provider we are able to use and his or her specialty. These factors impact the revenue generated by each IME service request differently and are largely out of our control. As a result, our management team focuses its efforts on increasing the volume of IME service requests received and completed and not necessarily their type. Changes in revenue that we cannot attribute to increases or decreases in volume we attribute to changes in sales mix. Our largest cost is payments made to members of our medical panel. For the majority of our revenues, these costs are variable, as most of the medical panel members are independent contractors, allowing us to maintain and manage our costs of revenues more effectively. The following table sets forth our consolidated statements of operations data for each of the periods indicated (in thousands, except per share data):
|
|
For the three months
ended
March 31
,
|
|
|
|
201
5
|
|
|
201
6
|
|
Revenues
|
|
$
|
196,316
|
|
|
$
|
226,503
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Costs of revenues
|
|
|
128,176
|
|
|
|
149,126
|
|
Selling, general and administrative expenses
|
|
|
42,152
|
|
|
|
47,339
|
|
Depreciation and amortization
|
|
|
14,848
|
|
|
|
16,636
|
|
Total costs and expenses
|
|
|
185,176
|
|
|
|
213,101
|
|
Income from operations
|
|
|
11,140
|
|
|
|
13,402
|
|
Interest and other expenses, net
|
|
|
8,004
|
|
|
|
8,399
|
|
Income before income taxes
|
|
|
3,136
|
|
|
|
5,003
|
|
Provision for income taxes
|
|
|
1,112
|
|
|
|
1,743
|
|
Net income
|
|
$
|
2,024
|
|
|
$
|
3,260
|
|
|
|
|
|
|
|
|
|
|
Per share data
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,418
|
|
|
|
40,805
|
|
Diluted
|
|
|
42,680
|
|
|
|
42,362
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
31,952
|
|
|
$
|
37,484
|
|
(1)
|
Adjusted EBITDA is a non-GAAP measure that is described and reconciled to net income in the next section and is not a substitute for the GAAP equivalent.
|
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Adjusted EBITDA
In connection with the ongoing operation of our business, our management regularly reviews Adjusted EBITDA, a non-GAAP financial measure, to assess our performance. We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, acquisition-related transaction costs, share-based compensation expenses, and other (income) expenses. We believe that Adjusted EBITDA is an important measure of our operating performance because it allows management, lenders, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of changes to our capitalization structure, acquisition related costs, income tax status, and other items of a non-operational nature that affect comparability.
We believe that various forms of the Adjusted EBITDA metric are often used by analysts, investors and other interested parties to evaluate companies such as ours for the reasons discussed above. Additionally, Adjusted EBITDA is used to measure certain financial covenants in our credit facility. Adjusted EBITDA is also used for planning purposes and in presentations to our Board of Directors as well as in our incentive compensation programs for our employees.
Non-GAAP information should not be construed as an alternative to GAAP information, as the items excluded from the non-GAAP measures often have a material impact on our financial results. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results.
The following table presents a reconciliation to Adjusted EBITDA from net income, the most comparable GAAP measure, for each of the periods indicated (in thousands):
|
|
For the three months
ended
March 31
,
|
|
|
|
2015
|
|
|
201
6
|
|
Net income
|
|
$
|
2,024
|
|
|
$
|
3,260
|
|
Share-based compensation expense (1)
|
|
|
6,136
|
|
|
|
5,419
|
|
Depreciation and amortization
|
|
|
14,848
|
|
|
|
16,636
|
|
Acquisition-related transaction costs
|
|
|
559
|
|
|
|
1,058
|
|
Other (income) expenses (2)
|
|
|
(731
|
)
|
|
|
969
|
|
Interest and other expenses, net
|
|
|
8,004
|
|
|
|
8,399
|
|
Provision for income taxes
|
|
|
1,112
|
|
|
|
1,743
|
|
Adjusted EBITDA
|
|
$
|
31,952
|
|
|
$
|
37,484
|
|
(1)
|
Share-based compensation expense of $469,000 and $307,000 is included in costs of revenues for the three months ended March 31, 2015 and 2016, respectively, and the remainder is included in SGA expenses.
|
(2)
|
Other (income) expenses consist principally of integration related expenses, such as facility termination, severance and relocation costs and gains or losses on earnout settlements associated with our acquisition strategy.
|
Comparison of the Three Months Ended March 31, 201
6
and 201
5
Revenues.
Revenues were $226.5 million for the three months ended March 31, 2016 compared to $196.3 million for the three months ended March 31, 2015, an increase of $30.2 million, or 15%. Of the increase in revenues compared to 2015, $23.6 million, or 12%, was attributable to acquisitions completed in 2015 and 2016 net of the impact of a U.K. business line closed in late 2015, and $6.6 million, or 3%, was due to growth in our existing businesses.
●
|
U.S. segment revenues were $149.4
million for the three months ended March 31, 2016 compared to $121.7
million for the three months ended March 31, 2015, an increase of $27.7
million, or 23%
. Of the increase in U.S. revenues compared to 2015, $21.5 million, or 18%
, was attributable to acquisitions completed in 2015 and 2016 and $6.2
million, or 5%
, was due to growth in our existing businesses, of which approximately 75%
related to increases in our IME and other related services product group. Of the 5%
growth in our existing businesses, approximately 4%
of the growth was due to increased service volumes, and the balance was due to a favorable change in sales mix.
|
|
|
●
|
Canada segment revenues were $9.5
million for the three months ended March 31, 2016 compared to $8.0
million for the three months ended March 31, 2015, an increase of $1.5
million, or 19%
. Of the increase in Canada revenues compared to 2015, $222,000, or 3%
, was attributable to an acquisition completed in 2015 and $1.3
million, or 16%
, was due to growth in our existing businesses. Excluding the impact of currency, the existing Canada businesses grew 29%
. The constant currency growth in Canada revenues compared to 2015 was primarily due to increased IME service volumes, and to a lesser extent, a favorable change in sales mix.
|
|
|
●
|
U.K. segment revenues were $47.9
million for the three months ended March 31, 2016 compared to $47.4
million for the three months ended March 31, 2015, an increase of $489,000, or 1%
. Of the increase in U.K. revenues compared to 2015, $1.8
million, or 4%
, was attributable to an acquisition completed in 2015 net of the impact of a business line closed in late 2015, offset by a decline of $1.3
million, or 3%
, in our existing businesses. Excluding the impact of currency, the existing U.K. businesses grew by 3%. The constant currency increase in U.K. revenues compared to 2015 was due to increased service volumes.
|
|
|
●
|
Australia segment revenues were $19.7
million for the three months ended March 31, 2016 compared to $19.2
million for the three months ended March 31, 2015, an increase of $471,000
, or 3%, due to growth in our existing business. Excluding the impact of currency, the existing Australia business grew 12%
. The constant currency growth in Australian revenues compared to 2015 was primarily due to a favorable change in sales mix, and to a lesser extent, increased IME service volumes.
|
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Costs of revenues.
Costs of revenues were $149.1 million for the three months ended March 31, 2016 compared to $128.2 million for the three months ended March 31, 2015, an increase of $21.0 million, or 16%. Of the increase in costs of revenues compared to 2015, $17.1 million, or 13%, was attributable to acquisitions completed in 2015 and 2016 and $3.8 million, or 3%, was related to our existing businesses and was primarily attributable to an increase in fees paid to members of our medical panel, as these fees are variable in nature, and, to a lesser extent, an increase in other direct costs. Costs of revenues as a percentage of revenues was 65.8% for the three months ended March 31, 2016, a 0.5% increase from 65.3% for the three months ended March 31, 2015.
Selling, general and administrative.
SGA expenses were $47.3 million for the three months ended March 31, 2016 compared to $42.2 million for the three months ended March 31, 2015, an increase of $5.2 million, or 12%. Of the increase in SGA expenses compared to 2015, $4.1 million, or 10%, was attributable to acquisitions completed in 2015 and 2016, and $1.1 million, or 3%, related to our existing businesses primarily attributable to $423,000 in increased personnel expenses, offset by decreases in referral commissions in our U.K. business. In addition, acquisition-related transaction costs and other expenses increased $2.2 million primarily due to higher acquisition activity in the first quarter of 2016.
Depreciation and amortization.
D&A expenses were $16.6 million for the three months ended March 31, 2016 compared to $14.8 million for the of D&A attributable three months ended March 31, 2015, an increase of $1.8 million, or 12%. D&A attributable to our existing businesses decreased $2.9 million as historic, finite-lived intangible and tangible assets became fully amortized, offset by an increase of $4.7 million to acquisitions completed in 2015 and 2016.
Interest and other expenses, net.
Interest and other expenses, net were $8.4 million for the three months ended March 31, 2016 compared to $8.0 million for the three months ended March 31, 2015, an increase of $395,000, or 5%. Interest and other expenses, net, increased primarily due to higher average debt balances, offset by decreased rates of interest charged.
Provision for income taxes.
Provision for income taxes was $1.7 million for the three months ended March 31, 2016 compared with a provision for income taxes of $1.1 million for the three months ended March 31, 2015, an increase of $631,000, or 57%. Our effective income tax rate was approximately 34.8% and 35.5% for the three months ended March 31, 2016 and 2015, respectively. The tax rates in the 2016 and 2015 periods were impacted primarily by elections made for certain foreign acquisitions, foreign rate differentials and non-deductible items.
Net income.
For the foregoing reasons, net income was $3.3 million for the three months ended March 31, 2016 compared to $2.0 million for the three months ended March 31, 2015.
Adjusted EBITDA.
Adjusted EBITDA was $37.5 million for the three months ended March 31, 2016 compared to $32.0 million for the three months ended March 31, 2015, an increase of $5.5 million, or 17%. The increase in Adjusted EBITDA was primarily due to the 15% increase in revenues and the positive operating leverage resulting from this increased revenue. Adjusted EBITDA is also described as Segment Profit elsewhere in this Report.
●
|
U.S. segment Adjusted EBITDA was $22.9
million for the three months ended March 31, 2016 compared to $19.5
million for the three months ended March 31, 2015, an increase of $3.4
million, or 17%
. The increase in U.S. segment Adjusted EBITDA was due to the 23%
increase in U.S. segment revenues and a similar percentage increase in costs of revenues and SGA expenses primarily due to an increase in fees paid to members of our medical panel, as these fees are variable in nature, and increased personnel expense to support the growth in our business, excluding share-based compensation.
|
|
|
●
|
Canada segment Adjusted EBITDA was $968,000
for the three months ended March 31, 2016 compared to $634,000
for the three months ended March 31, 2015, an increase of $334,000, or 53%
. On a constant currency basis, Canada segment Adjusted EBITDA increased 74%
. The constant currency increase in Canada segment Adjusted EBITDA was due to the 32%
increase in Canada segment revenues, partially offset by a 28% increase in costs of revenues and SGA expenses primarily due to increased fees paid to members of our medical panel, as these fees are variable in nature, reflecting positive operating leverage.
|
|
|
●
|
U.K. segment Adjusted EBITDA was $9.8
million for the three months ended March 31, 2016 compared to $7.7
million for the three months ended March 31, 2015, an increase of $2.1
million, or 27%
. On a constant currency basis, U.K. segment Adjusted EBITDA increased 34%. The constant currency increase in U.K segment Adjusted EBITDA was due to the 7%
increase in U.K. segment revenues, partially offset by a 5%
increase in costs of revenues and SGA expenses primarily due to increased fees paid to members of our medical panel, as these fees are variable in nature, reflecting positive operating leverage.
|
|
|
●
|
Australia segment Adjusted EBITDA was $3.8
million for the three months ended March 31, 2016 compared to $4.1
million for the three months ended March 31, 2015, a decrease of $265,000, or 7%
. On a constant currency basis, Australia segment Adjusted EBITDA increased 2%
. The constant currency increase in Australia segment Adjusted EBITDA was due to the 12%
increase in Australia segment revenues, partially offset by a 14% increase in costs of revenues and SGA expenses primarily due to increased fees paid to members of our medical panel, as these fees are variable in nature, and increased personnel expenses.
|
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
Our principal capital requirements are to fund operations and acquisitions. We fund our capital needs from cash flow generated from operations and borrowings under our Amended and Restated Credit Facility and working capital facilities. We have historically also funded our acquisition program with equity issuances to sellers. We expect that cash and cash equivalents, availability under our existing credit and working capital facilities, as amended and restated, and cash flow from operations will be sufficient to support our operations, planned capital expenditures and acquisitions for at least the next 12 months.
Although we believe that our current cash and cash equivalents, funds available under our Amended and Restated Credit Facility and working capital facilities will be sufficient to meet our working capital and acquisition plans for at least the next 12 months, we may need to raise additional funds through the issuance of equity or convertible debt securities or increase borrowings to fund acquisitions. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. Additional financing may not be available or, if available, such financing may not be obtained on terms favorable to our stockholders and us.
Information related to our credit facilities, the Notes and cash flows as of March 31, 2016 follows below.
Credit Facilities
Credit Facility
On November 2, 2010, we entered into a senior secured revolving credit facility (the “Senior Secured Revolving Credit Facility”) with Bank of America, N.A. The facility initially consisted of a $180.0 million revolving credit facility. The facility was initially available to finance the Company’s acquisition program and working capital needs.
On April 16, 2015, we amended and restated the terms of our Senior Secured Revolving Credit Facility in connection with the offering of the Notes (See “Senior Unsecured Notes” below) pursuant to an amended and restated credit agreement (the “Amended and Restated Credit Facility”). The Amended and Restated Credit Facility provides for up to $300.0 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans and letters of credit). During the term of the Amended and Restated Credit Facility, we have the right, subject to compliance with the covenants specified in the Amended and Restated Credit Facility and the Notes, to increase the revolving extensions under the Amended and Restated Credit Facility to a maximum of $400.0 million. This amendment and restatement also extended the term of the Senior Secured Revolving Credit Facility for five years from the date of the amendment to April 2020.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Borrowings under the Amended and Restated Credit Facility bear interest at either (i) LIBOR plus the applicable margin or (ii) a base rate (equal to the highest of (a) the federal funds rate plus 0.5%, (b) the Bank of America prime rate and (c) LIBOR (using a one-month period) plus 1.0%, plus the applicable margin, as we elect. The applicable margin means a percentage per annum determined in accordance with the following table:
Pricing
Tier
|
|
Consolidated Leverage Ratio
|
|
Commitment
Fee/Unused
Line Fee
|
|
|
Letter of
Credit Fee
|
|
|
Eurocurrency
Rate Loans
|
|
|
Base Rate
Loans
|
|
1
|
|
≥ 4.00 to 1.0
|
|
0.45%
|
|
|
2.75%
|
|
|
2.75%
|
|
|
1.75%
|
|
2
|
|
≥ 3.50 to 1.0 but <4.00 to 1.0
|
|
0.40%
|
|
|
2.50%
|
|
|
2.50%
|
|
|
1.50%
|
|
3
|
|
≥ 3.00 to 1.0 but <3.50 to 1.0
|
|
0.35%
|
|
|
2.25%
|
|
|
2.25%
|
|
|
1.25%
|
|
4
|
|
≥ 2.50 to 1.0 but <3.00 to 1.0
|
|
0.30%
|
|
|
2.00%
|
|
|
2.00%
|
|
|
1.00%
|
|
5
|
|
< 2.50 to 1.0
|
|
0.30%
|
|
|
1.75%
|
|
|
1.75%
|
|
|
0.75%
|
|
In the event of default, the outstanding indebtedness under the Amended and Restated Credit Facility will bear interest at an additional 2%.
The Amended and Restated Credit Facility contains restrictive covenants, including among other things financial covenants requiring us to not exceed a maximum consolidated senior secured leverage coverage ratio, a maximum total consolidated leverage ratio and to maintain a minimum consolidated fixed charge coverage ratio. The Amended and Restated Credit Facility also restricts our ability (subject to certain exceptions) to incur indebtedness, prepay or amend other indebtedness, create liens, make certain fundamental changes including mergers or dissolutions, pay dividends and make other payments in respect of capital stock, make certain investments, sell assets, change its lines of business, enter into transactions with affiliates and other corporate actions. As of March 31, 2016, the Company was in compliance with the financial covenants in the Amended and Restated Credit Facility.
The Amended and Restated Credit Facility also includes events of default typical of these types of credit facilities and transactions, including, but not limited to, the nonpayment of principal, interest, fees or other amounts owing under the new Amended and Restated Credit Facility, the violation of covenants, the inaccuracy of representations and warranties, cross defaults, insolvency, certain ERISA events, material judgments and change of control. The occurrence of an event of default could result in the lenders not being required to lend any additional amounts and the acceleration of obligations under the Amended and Restated Credit Facility, causing such obligations to be due and payable immediately, which could materially and adversely affect us.
As of March 31, 2016, we had $50.0 million outstanding under the Amended and Restated Credit Facility, resulting in $250.0 million of undrawn commitments.
Working Capital Facilities
On September 29, 2010, our indirect 100% owned subsidiary UK Independent Medical Services Limited (“UKIM”) entered into a Sales Finance Agreement (the “UKIM SFA”) with Barclays Bank PLC (“Barclays”), pursuant to which Barclays provides UKIM a working capital facility of up to £5,000,000, subject to the terms and conditions of the UKIM SFA. The working capital facility bore a discount margin of 2.5% over Base Rate and served to finance UKIM’s unpaid account receivables. The working capital facility had a minimum term of 36 months.
On June 28, 2013, UKIM entered into an amendment to extend the term of the existing UKIM SFA by 24 months from June 28, 2013, to amend the discount margin to 2.4% over Base Rate and to provide that payments by UKIM for certain non-working capital purposes are permitted under the UKIM SFA. Further, on April 16, 2015, UKIM entered into an amendment to extend the term of the existing UKIM SFA for an additional 36 months from the amendment date and to amend the discount margin to 2.05% over Base Rate (0.5% rate on March 31, 2016). The working capital facility operates on a co-terminus and cross-default basis with other facilities provided by Barclays and with the Senior Secured Revolving Credit Facility. As of March 31, 2016, UKIM had $6.0 million outstanding under the working capital facility, resulting in approximately $1.2 million in availability.
On May 12, 2011, Premex entered into a Sales Finance Agreement (the “Premex SFA”) with Barclays, pursuant to which Barclays provides Premex a working capital facility of up to £26,500,000, subject to the terms and conditions of the Premex SFA. The working capital facility bore a discount margin of 2.4% over Base Rate and served to finance Premex’s unpaid account receivables. The working capital facility had a minimum term of 36 months.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
On June 28, 2013, Premex entered into an amendment to extend the term of the existing Premex SFA by 24 months from June 28, 2013, and to provide that payments by Premex for certain non-working capital purposes are permitted under the Premex SFA. Further, on April 16, 2015, Premex entered into an amendment to extend the term of the existing Premex SFA for an additional 36 months from the amendment date and to amend the discount margin to 2.05% over Base Rate (0.5% rate on March 31, 2016). The working capital facility operates on a co-terminus and cross-default basis with other facilities provided by Barclays and with the Senior Secured Revolving Credit Facility. As of March 31, 2016, Premex had $26.6 million outstanding under the working capital facility, resulting in approximately $11.5 million in availability.
Senior Unsecured Notes
On July 19, 2011, we closed a private offering of $250.0 million in aggregate principal amount of 9.0% senior notes due 2019 which were subsequently registered through a public exchange offer (the “Senior Unsecured Notes”). The Senior Unsecured Notes were issued at a price of 100% of their principal amount. A portion of the gross proceeds of $250.0 million were used to repay borrowings outstanding under our Senior Secured Revolving Credit Facility and pay related fees and expenses, and the remainder was used for general corporate purposes, including acquisitions.
On April 16, 2015, we closed a public offering of $500.0 million in aggregate principal amount of 5.625% senior notes due 2023 (the “Notes”). The Notes were issued at a price of 100% of their principal amount. The Notes are our senior obligations and are guaranteed by certain of our existing and future U.S. subsidiaries. The gross proceeds of $500.0 million were used to repay all of our outstanding borrowings under the Senior Secured Revolving Credit Facility, to redeem all of the Senior Unsecured Notes, to pay related fees and expenses, and for general corporate purposes, including acquisitions.
The Notes were issued under an indenture, dated as of April 16, 2015, as supplemented by a supplemental indenture dated April 16, 2015 (collectively, the “Indenture”), among the Guarantors, U.S. Bank, National Association, as trustee (the “Trustee”), and us. The Notes are our general senior unsecured obligations, and rank equally with our existing and future senior unsecured obligations and senior to all of our further subordinated indebtedness. The Notes accrue interest at a rate of 5.625% per year, payable semi-annually in cash in arrears on April 15 and October 15 of each year, commencing October 15, 2015. Interest accrues from the date of issuance of the Notes.
At any time on or after April 15, 2018, we may redeem some or all of the Notes at the redemption prices specified in the Indenture, plus accrued and unpaid interest to the date of redemption. Prior to April 15, 2018, we may redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 105.625% of the aggregate principal amount of the Notes, plus accrued and unpaid interest, if any, provided that at least 60% of the original aggregate principal amount of the Notes remains outstanding after redemption. In addition, we may redeem some or all of the Notes at any time prior to April 15, 2018 at a redemption price equal to 100% of the principal amount of the Notes plus a make whole premium described in the Indenture, plus accrued and unpaid interest.
The Indenture includes covenants which, subject to certain exceptions, limit the ability of we and our restricted subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness, make certain types of restricted payments, incur liens on assets of us or the restricted subsidiaries, engage in asset sales and enter into transactions with affiliates. Upon a change of control (as defined in the Indenture), we may be required to make an offer to repurchase the Notes at 101% of their principal amount, plus accrued and unpaid interest. The Indenture also contains customary events of default.
Cash Flow Summary
Cash and cash equivalents were $16.0 million at March 31, 2016 as compared with $20.3 million at March 31, 2015.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Our cash flows from operating, investing and financing activities, as reported in our consolidated financial statements included elsewhere in this report, are summarized as follows (in thousands):
|
|
For the
three
months ended
March
3
1
,
|
|
|
|
2015
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
6,164
|
|
|
$
|
15,766
|
|
Net cash used in investing activities
|
|
|
(1,057
|
)
|
|
|
(93,857
|
)
|
Net cash provided by financing activities
|
|
|
5,933
|
|
|
|
45,719
|
|
Exchange rate impact on cash and cash equivalents
|
|
|
(509
|
)
|
|
|
506
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
10,531
|
|
|
$
|
(31,866
|
)
|
Operating Activities.
Net cash provided by operating activities was $15.8 million for the three months ended March 31, 2016, compared with net cash provided by operating activities of $6.2 million for the three months ended March 31, 2015. Net cash provided by operating activities for 2016 consisted of our net income of $3.3 million and net non-cash charges of $20.2 million (principally including $16.6 million in depreciation and amortization and $5.4 million in share-based compensation, offset by the excess tax benefit related to share-based compensation of $4.8 million), offset by a net increase in working capital of approximately $7.7 million in 2016. The increase in working capital in 2016 primarily consisted of increases in accounts receivable and decreases to accounts payable and accrued expenses, offset by increased accrued interest expense.
Net cash provided by operating activities for 2015 consisted of our net income of $2.0 million and net non-cash charges of $19.8 million (principally including $14.8 million in depreciation and amortization and $6.1 million in share-based compensation, offset by the excess tax benefit related to share-based compensation of $2.1 million), offset by a net increase in working capital of approximately $15.6 million. The 2015 increase in working capital primarily consisted of increases in accounts receivable in our U.K. business and decreased accrued interest expense, offset by increased accounts payable and accrued expenses.
Investing Activities.
Net cash used in investing activities was $93.9 million for the three months ended March 31, 2016 as compared to net cash used in investing activities of $1.1 million for the three months ended March 31, 2015. The increased use was due primarily to greater acquisition activity in the first quarter of 2016.
Net cash used in investing activities for 2015 was primarily attributable to cash paid for acquisitions and working capital and other settlements for acquisitions of $4.5 million and cash paid for other investing activities of $1.3 million, offset by proceeds from foreign currency net investment hedges of $4.8 million.
Financing Activities.
Net cash provided by financing activities was $45.7 million for the three months ended March 31, 2016 as compared to net cash provided by financing activities of $5.9 million for the three months ended March 31, 2015. This 2016 cash provision was primarily attributable to net borrowings under our Amended and Restated Credit Facility of $50.0 million and the excess tax benefit related to share-based compensation of $4.8 million, offset by purchases of stock for treasury of $8.0 million.
Net cash provided by financing activities for 2015 was primarily attributable to the proceeds from the exercise of options and warrants of $8.9 million and the excess tax benefit related to share-based compensation of $2.1 million, offset by net repayments under our Senior Secured Revolving Credit Facility of $3.9 million.
Contingencies
We record contingent liabilities resulting from asserted and unasserted claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. We currently are not involved in any material legal proceedings. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to any future proceedings. Contingent liabilities are described in Note 9 to the consolidated financial statements included elsewhere in this report.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Contractual Obligations and Commitments
Our contractual cash payment obligations as of March 31, 2016 are set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
Payments due by year ending December 31,
|
|
|
|
Total
|
|
|
Period from
April 1, 2016 to December 31, 2016
|
|
|
201
7
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
Amounts outstanding under notes payable
|
|
$
|
500,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts outstanding under senior secured revolving credit facility
|
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
54,906
|
|
|
|
11,780
|
|
|
|
14,162
|
|
|
|
11,771
|
|
|
|
8,185
|
|
|
|
5,134
|
|
|
|
3,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts outstanding under working capital facilities
|
|
|
32,578
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,578
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
637,484
|
|
|
$
|
11,780
|
|
|
$
|
14,162
|
|
|
$
|
44,349
|
|
|
$
|
8,185
|
|
|
$
|
55,134
|
|
|
$
|
503,874
|
|
As of March 31, 2016, we leased our office spaces for our corporate locations in Atlanta, Georgia and New York, New York and also for our 71 service centers in various cities under non-cancelable lease agreements. We own office facilities in Sarasota, Florida and Buffalo, New York.
We have certain contractual obligations including various debt agreements with requirements to make interest payments. Amounts outstanding under the Notes are subject to a fixed interest rate of 5.625% and interest is expected to be $28.1 million annually with semi-annual payments that began in October 2015 and end in April 2023. Additionally, certain amounts are subject to the level of borrowings in future periods and the interest rate for the applicable periods, and therefore the amounts of these payments are not determinable. Based upon amounts outstanding at March 31, 2016 and applicable interest rates currently ranging between 2.55% and 4.75%, interest amounts are expected to be approximately $1.8 million for the nine months ended December 31, 2016, approximately $2.4 million for the year ended December 31, 2017 and approximately $1.8 million for the year ended December 31, 2018.
Off-Balance Sheet Arrangements
We engage in no activities, obligations or exposures associated with off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Overview and Definitions
We have identified the policies below as critical to our business operations and understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this management’s discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results. Our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include those related to accounts receivable reserves, goodwill and other intangible assets, share-based compensation other equity instruments, income and other taxes, derivative instruments and contingent obligations. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and the impact of changes in key assumptions may not be linear. Our management has reviewed the application of these policies with the audit committee of our Board of Directors. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this report. We believe that our most critical accounting policies and estimates relate to the following:
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Revenue Recognition
Revenue related to IMEs, peer reviews, bill reviews, administrative support services and Medicare compliance services is recognized at the time services have been performed and the report is shipped to the end user. We believe that recognizing revenue at the time the report is shipped is appropriate because we meet the following four criteria in accordance with ASC 605-10-S25,
Revenue Recognition: Overall
, (i) persuasive evidence that arrangement exists, (ii) shipment has occurred, (iii) the price is fixed and determinable and (iv) collectability is reasonably assured. We report revenues net of any sales, use and value added taxes.
Revenue related to other IME services, including litigation support services, medical record retrieval services, document management services and case management, where no report is generated, is recognized at the time the service is performed. We believe that recognizing revenue at the time the service is performed is appropriate because we meet the following four criteria in accordance with ASC 605-10-S25, (i) persuasive evidence that arrangement exists, (ii) services have been rendered, (iii) the price is fixed and determinable and (iv) collectability is reasonably assured.
Certain agreements with customers in the U.K. include provisions whereby collection of the amounts billed are contingent on the favorable outcome of the claim. We have deemed these provisions to preclude revenue recognition at the time of performance, as collectability is not reasonably assured and the cash payments are contingent, and are deferring these revenues, net of estimated costs, until the case has been settled, the contingency has been resolved and the cash has been collected.
Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable balances consist of amounts owed to us for services provided in the normal course of business and are reported net of an allowance for doubtful accounts. Generally, no collateral is received from clients and the collectability of trade receivable balances is regularly evaluated based on a combination of factors such as client credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns and additions to the allowance are made based on these trends. Accounts are reviewed regularly for collectability and those deemed uncollectible are written off.
We assume, that on average, all accounts receivable will be collected within one year and thus classify these as current assets; however, there are certain receivables, principally in the U.K., that have aged longer than one year as of December 31, 2015 and March 31, 2016, and we have recorded an estimate for those receivables that will not be collected within one year as long-term in the consolidated balance sheets contained elsewhere in this report.
Goodwill and Other Intangible Assets
Goodwill is an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Based on the provisions of ASC 350,
Intangibles—Goodwill and Other
(“ASC 350”), goodwill and indefinite lived intangible assets are tested for impairment annually or more frequently if impairment indicators arise. We evaluate the carrying value of goodwill during the fourth quarter of each fiscal year and between annual valuations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting units below their carrying amount. Such circumstances include: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, we compare the fair value of the reporting units to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting units is estimated using primarily the income, or discounted cash flows, approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated in a hypothetical analysis to all of the other assets and liabilities, including any unrecognized intangible assets, of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
Intangible assets, including client relationships, trade names, covenants not to compete and technology that have finite lives are amortized over their useful lives.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
We performed our annual impairment review of goodwill in October 2015 and reviewed subsequent events through March 31, 2016 and determined that the fair value of our reporting units substantially exceed their carrying value, and goodwill was not impaired as of March 31, 2016. Further, we believe that there have been no facts or circumstances through the date of this filing that indicate an impairment of goodwill or other intangible assets exists.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statements of comprehensive income (loss). Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets.
Share-Based Compensation and Other Equity Instruments
Our stock incentive plan provides for the granting of stock options and other share-based awards including warrants, restricted stock units (“RSUs”) and shares of restricted stock, in accordance with ASC Topic 718,
Compensation—Stock Compensation
(“ASC 718”). ASC 718 requires measurement of compensation cost for all share-based awards at fair value on the grant date (or measurement date, if different) and recognition of compensation expense, net of forfeitures, over the requisite service period for awards expected to vest. We use the straight-line amortization method for recognizing share-based compensation expense.
The fair value of stock option grants is determined using the Black-Scholes valuation model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in these stock options. Additionally, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because our stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in our opinion, the existing models may not provide a reliable single measure of the fair value of its share-based awards.
Our expected volatility assumptions are based upon the weighted average of our implied volatility, our mean reversion volatility and the median of our peer group’s most recent historical volatilities for 2015 stock option grants. Expected life assumptions are based upon the “simplified” method for those options issued in 2015 and prior, which were determined to be issued approximately at-the-money. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.
The fair value of shares of restricted stock and RSUs is determined based upon the market price of the underlying common stock as of the date of grant. Additional information regarding our valuation of common stock and equity awards is set forth in Note 2 to our consolidated financial statements included elsewhere in this report.
Accounting for Acquisitions
Accounting for acquisitions requires us to recognize and measure identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired entity. Our accounting for acquisitions involves significant judgments and estimates, including the fair value of certain forms of consideration such as our common stock, the fair value of acquired intangible assets, which involve projections of future revenues, cash flows and terminal value, which are then discounted at an estimated discount rate, the fair value of other acquired assets and assumed liabilities, including potential contingencies, and the useful lives of the assets. The projections are developed using internal forecasts, available industry and market data and estimates of long-term rates of growth for our business. The impact of prior or future acquisitions on our financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Financial Instruments
Our financial assets and (liabilities), which are measured at fair value on a recurring basis, are categorized using the fair value hierarchy at December 31, 2015 and March 31, 2016, and are as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative asset
|
|
$
|
—
|
|
|
$
|
848
|
|
|
$
|
—
|
|
|
$
|
848
|
|
Foreign currency derivative liability
|
|
|
—
|
|
|
|
(1,215
|
)
|
|
|
—
|
|
|
|
(1,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,635
|
)
|
|
$
|
(7,635
|
)
|
Foreign currency derivative liability
|
|
|
—
|
|
|
|
(2,122
|
)
|
|
|
—
|
|
|
|
(2,122
|
)
|
The contingent consideration relates to earnout provisions recorded in conjunction with a 2016 acquisition (see Note 3 to the consolidated financial statements included elsewhere in this report). The fair value of the foreign currency derivative was determined using observable market inputs such as foreign currency exchange rates and considers our nonperformance risk and that of our counterparties.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, “
Presentation of Financial Statements – Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
” (“ASU 2014-05”), which define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Currently, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. This going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. This ASU provides guidance regarding management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern and the related footnote disclosures. The amendments are effective for the year ending December 31, 2016, and for interim periods beginning the first quarter of 2017, with early adoption permitted. We have adopted the provisions during the year ending December 31, 2016 and will provide such disclosures as required if there are conditions and events that raise substantial doubt about our ability to continue as a going concern. Adoption did not have a material impact on our financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, “
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
” (“ASU 2015-03”) which 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 that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. Additionally, in August 2015, the FASB issued ASU No. 2015-15,
“Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”
(“ASU 2015-15”) which amends ASU 2015-03, which did not address the balance sheet presentation of debt issuance costs incurred in connection with line-of-credit arrangements. Under ASU 2015-15, a Company may defer debt issuance costs associated with line-of-credit arrangements and present such costs as an asset, subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. The amendments in these updates were effective for fiscal periods beginning on or after December 15, 2015, and interim periods within those fiscal years, were applied retrospectively and represent a change in accounting principle.
We adopted the provisions of these amendments in January of 2016. As a result, approximately $6.9 million and $6.6 million of debt issuance costs related to the Notes were reclassified from deferred financing costs to Notes payable in the accompanying consolidated balance sheets as of December 31, 2015 and March 31, 2016, respectively. We elected to continue presenting the deferred financing costs associated with our Senior Secured Revolving Credit Facility as deferred financing costs, net in the accompanying consolidated balance sheets.
In September 2015, the FASB issued ASU No. 2015-16, “
Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments
” (“ASU 2015-16”) which requires that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. We adopted the provisions of this ASU prospectively in the first quarter of 2016, and did not retrospectively adjust prior periods. The adoption of ASU 2015-16 did not have a significant impact on our financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, “
Balance Sheet Classification of Deferred Taxes
” (“ASU 2015-17”), which requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance is effective for financial statements issued for interim and annual periods beginning after December 15, 2016. Earlier adoption is permitted for all entities as of the beginning of an interim or annual reporting period. This amendment may be applied either prospectively or retrospectively to all periods presented. We adopted the provisions of this ASU prospectively in the fourth quarter of 2015, and did not retrospectively adjust prior periods. The adoption of ASU 2015-17 did not have a significant impact on our financial position, results of operations or cash flows.
Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, (Topic 606):
Revenue from Contracts with Customers
(“ASU 2014-09”) which supersedes the revenue recognition requirements in “
Topic 605, Revenue Recognition
” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact of this standard on our financial position, results of operations and cash flows.
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
” (“ASU 2016-01”), which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We plan to adopt the provisions for the year ending December 31, 2018 and currently do not expect the adoption to have a material impact on our financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)”
(“ASU 2016-02”), which requires lessees to recognize on the balance sheet a right-of-use asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than twelve months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this standard on our financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-06,
“
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments”
(“ASU 2016-06”), which will reduce diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative. The amendments in this update are effective for fiscal period beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. We plan to adopt the provisions for the year ending December 31, 2017 and currently do not expect the adoption to have a material impact on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-08,
“Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
”
(“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations. The amendments in this update are effective for fiscal period beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this standard on our financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09,
“Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The amendments in this update are effective for fiscal period beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this standard on our financial position, results of operations and cash flows.
There were various other accounting standards and interpretations issued during 2015 and 2016 we have not yet been required to adopt, none of which are expected to have a material impact on our financial position, results of operations and cash flows.