10-Q 1 pn-10q_20160930.htm 10-Q pn-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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     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     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

  (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  

The number of shares of the registrant’s common stock outstanding on November 14, 2016 was 26,856,799.

 

 

 

 


 

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 September 30, 2016 (Unaudited) and December 31, 2015

 

1

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the three months ended September 30, 2016 and
September 30, 2015

 

2

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the nine months ended September 30, 2016 and
     September 30, 2015

 

3

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2016 and
September 30, 2015

 

4

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (Unaudited) for the nine months ended
September 30, 2016

 

5

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2.

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

 

24

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

44

 

 

 

 

Item 4.

Controls and Procedures

 

44

 

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

45

 

 

 

 

Item 1A.

Risk Factors

 

45

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

45

 

 

 

 

Item 4.

Mine Safety Disclosures

 

45

 

 

 

 

Item 5.

Other Information

 

45

 

 

 

 

Item 6.

Exhibits

 

46

 

 

 

 

SIGNATURES

 

48

 

 

 

 


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

PATRIOT NATIONAL, INC.

Consolidated Balance Sheet

(In thousands) 

 

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash

 

$

13,193

 

 

$

8,372

 

Equity and fixed income security investments

 

 

 

 

 

3,173

 

Total cash and investments

 

 

13,193

 

 

 

11,545

 

Restricted cash

 

 

17,589

 

 

 

16,055

 

Fee income receivable

 

 

9,418

 

 

 

8,159

 

Fee income receivable from related party

 

 

35,306

 

 

 

27,036

 

Net receivable from related parties

 

 

2,698

 

 

 

499

 

Other current assets

 

 

1,769

 

 

 

2,046

 

Total current assets

 

 

79,973

 

 

 

65,340

 

Fixed assets, net

 

 

5,311

 

 

 

5,092

 

Goodwill

 

 

121,683

 

 

 

118,141

 

Intangible assets

 

 

75,344

 

 

 

75,681

 

Forward purchase asset

 

 

57,511

 

 

 

28,120

 

Deferred tax asset, net

 

 

13,626

 

 

 

 

Advance on facilitation agreement

 

 

1,547

 

 

 

2,000

 

Other long term assets

 

 

11,153

 

 

 

11,428

 

Total Assets

 

$

366,148

 

 

$

305,802

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deferred claims administration services income

 

$

9,432

 

 

$

10,639

 

Net advanced claims reimbursements

 

 

3,623

 

 

 

1,835

 

Income taxes payable

 

 

6,040

 

 

 

2,996

 

Current earn-out payable

 

 

4,746

 

 

 

10,556

 

Accounts payable, accrued expenses and other liabilities

 

 

42,867

 

 

 

32,809

 

Deferred purchase consideration

 

 

 

 

 

6,128

 

Revolver borrowings outstanding

 

 

33,932

 

 

 

18,032

 

Current portion of notes payable

 

 

6,875

 

 

 

5,500

 

Current portion of capital lease obligation

 

 

414

 

 

 

2,232

 

Total current liabilities

 

 

107,929

 

 

 

90,727

 

Earn-out payable

 

 

6,940

 

 

 

1,827

 

Notes payable, net of deferred loan fees

 

 

93,437

 

 

 

98,648

 

Warrant redemption liability

 

 

57,511

 

 

 

28,120

 

Total Liabilities

 

 

265,817

 

 

 

219,322

 

Equity

 

 

 

 

 

 

 

 

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

   and outstanding as of September 30, 2016 and December 31, 2015

 

 

 

 

 

 

Common stock, $.001 par value; 1,000,000 shares authorized, 26,845 issued

   and 26,487 outstanding as of September 30, 2016 and 28,105 issued and 27,550

   outstanding as of December 31, 2015

 

 

21

 

 

 

21

 

Additional paid in capital

 

 

114,311

 

 

 

119,999

 

Accumulated deficit

 

 

(13,869

)

 

 

(33,305

)

Total Patriot National, Inc. Stockholders' Equity

 

 

100,463

 

 

 

86,715

 

Less Non-controlling interest

 

 

(132

)

 

 

(235

)

Total Equity

 

 

100,331

 

 

 

86,480

 

Total Liabilities and Equity

 

$

366,148

 

 

$

305,802

 

 

 

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 September 30,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Fee income

 

$

37,967

 

 

$

34,759

 

Fee income from related party

 

 

22,253

 

 

 

23,773

 

Total fee income and fee income from related party

 

 

60,220

 

 

 

58,532

 

Net investment income

 

 

2

 

 

 

49

 

Net realized losses on investments

 

 

 

 

 

(58

)

Total Revenues

 

 

60,222

 

 

 

58,523

 

Expenses

 

 

 

 

 

 

 

 

Salaries and related expenses

 

 

23,449

 

 

 

21,549

 

Commission expense

 

 

11,865

 

 

 

8,173

 

Outsourced services

 

 

3,930

 

 

 

2,369

 

Other operating expenses

 

 

10,139

 

 

 

11,967

 

Acquisition costs

 

 

383

 

 

 

1,453

 

Interest expense

 

 

1,555

 

 

 

868

 

Depreciation and amortization

 

 

4,743

 

 

 

4,380

 

Stock compensation expense

 

 

1,037

 

 

 

2,586

 

Increase in fair value of earn-out liability

 

 

19

 

 

 

 

Total Expenses

 

 

57,120

 

 

 

53,345

 

Net Income before income tax (benefit) expense

 

 

3,102

 

 

 

5,178

 

Income tax expense

 

 

1,188

 

 

 

1,331

 

Net Income Including Non-Controlling Interest in Subsidiary

 

 

1,914

 

 

 

3,847

 

Net Income attributable to non-controlling interest in subsidiary

 

 

38

 

 

 

59

 

Net Income

 

$

1,876

 

 

$

3,788

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

0.14

 

Diluted

 

 

0.06

 

 

 

0.14

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

Basic

 

 

31,316

 

 

 

26,802

 

Diluted

 

 

32,105

 

 

 

27,940

 

 

 

 

See accompanying notes to consolidated financial statements.


2


 

PATRIOT NATIONAL, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Fee income

 

$

118,867

 

 

$

80,060

 

Fee income from related party

 

 

62,690

 

 

 

68,852

 

Total fee income and fee income from related party

 

 

181,557

 

 

 

148,912

 

Net investment income

 

 

37

 

 

 

85

 

Net realized losses on investments

 

 

(295

)

 

 

(149

)

Total Revenues

 

 

181,299

 

 

 

148,848

 

Expenses

 

 

 

 

 

 

 

 

Salaries and related expenses

 

 

69,430

 

 

 

53,782

 

Commission expense

 

 

35,992

 

 

 

25,556

 

Outsourced services

 

 

11,125

 

 

 

7,623

 

Other operating expenses

 

 

29,437

 

 

 

25,252

 

Acquisition costs

 

 

1,408

 

 

 

4,372

 

Interest expense

 

 

4,343

 

 

 

2,731

 

Depreciation and amortization

 

 

14,160

 

 

 

10,075

 

Stock compensation expense

 

 

3,738

 

 

 

8,791

 

Decrease in fair value of earn-out liability

 

 

(1,913

)

 

 

 

Decrease in fair value of warrant redemption liability

 

 

 

 

 

(1,385

)

Costs related to extinguishment of debt (1)

 

 

 

 

 

13,681

 

Total Expenses

 

 

167,720

 

 

 

150,478

 

Net Income (Loss) before income tax benefit

 

 

13,579

 

 

 

(1,630

)

Income tax benefit

 

 

(5,960

)

 

 

(1,733

)

Net Income Including Non-Controlling Interest in Subsidiary

 

 

19,539

 

 

 

103

 

Net Income attributable to non-controlling interest in subsidiary

 

 

103

 

 

 

111

 

Net Income (Loss)

 

$

19,436

 

 

$

(8

)

Earnings Per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

0.65

 

 

$

(0.00

)

Diluted

 

 

0.64

 

 

 

(0.00

)

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

Basic

 

 

29,881

 

 

 

26,006

 

Diluted

 

 

30,566

 

 

 

26,006

 

 

 

 

(1)

Costs related to extinguishment of debt 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)

  

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Operating Activities

 

 

 

 

 

 

 

 

Net Income

 

$

19,539

 

 

$

103

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,160

 

 

 

10,075

 

Amortization of loan costs in interest expense

 

 

473

 

 

 

206

 

Amortization of facilitation agreement

 

 

453

 

 

 

 

Decrease in fair value of warrant redemption liability

 

 

 

 

 

(1,385

)

Decrease in fair value of earn-out liability

 

 

(1,913

)

 

 

 

Net realized losses on investments

 

 

295

 

 

 

149

 

Stock compensation expense

 

 

3,738

 

 

 

8,791

 

Deferred tax benefit from release of valuation allowance

 

 

(13,626

)

 

 

 

Exercise of stock awards

 

 

(182

)

 

 

 

Write-off of deferred financing and original issue discounts

 

 

 

 

 

9,342

 

Provision for uncollectible fee income

 

 

460

 

 

 

351

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in:

 

 

 

 

 

 

 

 

Fee income receivable

 

 

(244

)

 

 

(8,212

)

Fee income receivable from related party

 

 

(8,270

)

 

 

(10,153

)

Other current assets

 

 

138

 

 

 

(1,715

)

Increase (decrease) in:

 

 

 

 

 

 

 

 

Net payable to related parties

 

 

(2,199

)

 

 

781

 

Deferred claims administration services income

 

 

(1,207

)

 

 

539

 

Net advanced claims reimbursements

 

 

1,788

 

 

 

237

 

Income taxes payable

 

 

3,044

 

 

 

(14,081

)

Accounts payable and accrued expenses

 

 

9,845

 

 

 

11,963

 

Net Cash Provided by Operating Activities

 

 

26,292

 

 

 

6,991

 

Investment Activities:

 

 

 

 

 

 

 

 

Net increase in restricted cash

 

 

(1,534

)

 

 

(4,528

)

Purchase of equity securities

 

 

(300

)

 

 

(3,662

)

Proceeds from sale of equity securities

 

 

3,178

 

 

 

264

 

Purchase of fixed assets and other long-term assets

 

 

(3,548

)

 

 

(4,565

)

Acquisitions, net of $28 and $4,069 cash acquired in 2016 and 2015, respectively

 

 

(8,969

)

 

 

(74,014

)

Net Cash Used in Investment Activities

 

 

(11,173

)

 

 

(86,505

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net

 

 

 

 

 

98,275

 

Proceeds from senior secured term loans, net of fees

 

 

 

 

 

107,497

 

Repayment of senior secured term loans

 

 

(4,125

)

 

 

(2,125

)

Payment of loan fees

 

 

(165

)

 

 

 

Payment of costs for initial public offering

 

 

 

 

 

(2,479

)

Revolver facility borrowings

 

 

15,900

 

 

 

51,900

 

Revolver facility repayments

 

 

 

 

 

(41,068

)

Payment of acquisition earn-outs

 

 

(6,529

)

 

 

 

Payment of deferred purchase consideration

 

 

(4,850

)

 

 

 

Repurchase of common stock

 

 

(8,711

)

 

 

 

Repayment of note payable

 

 

 

 

 

(119,573

)

Repayment of capital lease obligation

 

 

(1,818

)

 

 

(1,955

)

Net Cash (Used in) Provided by Financing Activities

 

 

(10,298

)

 

 

90,472

 

Increase in cash

 

 

4,821

 

 

 

10,958

 

Cash, beginning of period

 

 

8,372

 

 

 

4,251

 

Cash, end of period

 

$

13,193

 

 

$

15,209

 

Supplemental Cash Flow Data

 

 

 

 

 

 

 

 

Interest Paid

 

$

3,795

 

 

$

2,504

 

Income Taxes Paid

 

$

4,626

 

 

$

11,062

 

 

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

 

 

Treasury

 

 

Additional Paid In

 

 

Accumulated

 

 

Non-Controlling

 

 

Total Equity

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

(Deficit)

 

Balance, January 1, 2016

 

 

28,105

 

 

$

21

 

 

$

 

 

$

119,999

 

 

$

(33,305

)

 

$

(235

)

 

$

86,480

 

Repurchase of common stock

 

 

(1,360

)

 

 

 

 

 

(8,711

)

 

 

 

 

 

 

 

 

 

 

 

(8,711

)

Retirement of treasury stock

 

 

 

 

 

 

 

 

8,711

 

 

 

(8,711

)

 

 

 

 

 

 

 

 

 

Non-cash stock compensation

 

 

 

 

 

 

 

 

 

 

 

3,738

 

 

 

 

 

 

 

 

 

3,738

 

Purchase of minority interest

   in MPCS Pvt Ltd

 

 

 

 

 

 

 

 

 

 

 

(1,096

)

 

 

 

 

 

 

 

 

(1,096

)

Issuance of common stock for deferred

   purchase consideration

 

 

 

 

 

 

 

 

 

 

 

563

 

 

 

 

 

 

 

 

 

563

 

Restricted stock awards issued,

   net of forfeitures

 

 

100

 

 

 

 

 

 

 

 

 

(182

)

 

 

 

 

 

 

 

 

(182

)

Balance before Net Income

 

 

26,845

 

 

 

21

 

 

 

 

 

 

114,311

 

 

 

(33,305

)

 

 

(235

)

 

 

80,792

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,436

 

 

 

103

 

 

 

19,539

 

Balance, September 30, 2016

 

 

26,845

 

 

$

21

 

 

$

 

 

$

114,311

 

 

$

(13,869

)

 

$

(132

)

 

$

100,331

 

 

 

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 an independent national provider of comprehensive technology-enabled outsourcing solutions that help insurance carriers, employers and other clients mitigate risk, comply with complex regulations, and save time and money. We offer end-to-end insurance related and specialty services that allow our clients to improve efficiencies and reduce expenses through our value-added processes. The core of our value proposition includes the benefit of a “one-stop” solution with our broad array of offered services, scalable state-of-the-art technology, and support for complex business and regulatory processes.

We principally offer two types of services: front-end services, such as brokerage, underwriting and policyholder services, and back-end services, such as claims adjudication and administration. We provide our services either on an individual basis, as bundles of two or more services tailored to a client’s specific needs or on a turnkey basis where we provide a comprehensive set of front-end and back-end services to a client. We also offer specialty services currently including technology outsourcing and other IT services, as well as employment pre-screening and background checks. As a service company, we do not assume any underwriting or insurance risk. Our revenue is primarily fee-based, most of which is contractually committed or highly recurring.

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 consolidated financial statements for the nine month period ended September 30, 2015.

The unaudited consolidated financial statements included herein are, in the opinion of management, prepared on a basis consistent with our audited consolidated financial statements for the year ended December 31, 2015 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 consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015. In the preparation of our unaudited consolidated financial statements as of September 30, 2016, 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 the Company’s two consolidated subsidiaries, Contego Services Group, LLC (“Contego Services Group”) that is 97% owned, and DecisionUR, LLC (“DecisionUR”) that is 98.8% owned, the third party equity interests are referred to as non-controlling interests. The portion of the third party members’ equity (deficit) of Contego Services Group and DecisionUR are presented as non-controlling interests in the accompanying consolidated balance sheets as of September 30, 2016 and consolidated balance sheet as of December 31, 2015. 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 August, 2016 the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15 to clarify whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class of cash flows.  The new standard takes effect in 2018 for public companies. If an entity elects early adoption, it must adopt all of the amendments in the same period. The company is reviewing the impact of this update and the impact on its financial statements.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting”, an update to Accounting Standard Codification (“ASC”) Topic 718, Compensation – Stock Compensation. This new accounting guidance requires that all companies recognize the income tax effects of awards in the income statement when the awards vest or are settled, rather than maintaining an additional paid-in capital (APIC) pool and recognizing the tax benefits in excess of compensation costs through equity. As it relates to forfeitures, the guidance allows

6


 

for companies to choose whether to continue to estimate forfeitures or account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the new guidance may be applied either retrospectively or on a prospective basis. The Company is currently reviewing the guidance, and the impact from its adoption on our consolidated financial statements cannot be determined at this time.

In February 2016, the FASB issued ASU 2016-02, intended to improve financial reporting about leasing transactions. ASU 2016-02 affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. ASU 2016-02 will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—ASU 2016-02 will require both types of leases to be recognized on the balance sheet. ASU 2016-02 also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The Company is currently reviewing the guidance, and the impact from its adoption on our consolidated financial statements cannot be determined at this time.

ASU 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other organizations, ASU 2016-02 will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application will be permitted for all organizations. The Company is currently reviewing the impact that implementing this guidance will have.

 

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective for us beginning on January 1, 2017 with early application permitted as of the beginning of any interim or annual reporting period. We adopted the new guidance on January 1, 2016, which did not have a material impact on our consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”, an update to ASC Topic 805, Business Combinations.  This update requires that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjusting amounts are determined. The amendment requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update 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 provisional amounts had been recognized as of the acquisition date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued.  We adopted the new guidance on January 1, 2016, which did not have a material impact on our consolidated financial statements.  

In April 2015, the FASB issued 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. We adopted this new guidance beginning January 1, 2016.

In August 2014, the FASB issued ASU 2014-15 regarding ASC Topic 205, Presentation of Financial Statements – Going Concern. The updated guidance related to determining whether substantial doubt exists about an entity's ability to continue as a going concern. The amendment provides guidance for determining whether conditions or events give rise to substantial doubt that an entity has the ability to continue as a going concern within one year following issuance of the financial statements and requires specific disclosures regarding the conditions or events leading to substantial doubt. The updated guidance is effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2016. Earlier adoption is permitted, but we do not anticipate electing early adoption. We do not expect the adoption of this guidance to have a material impact on our combined financial statements.

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 which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued a deferral of effective date for this standard.  For public companies this standard applies to annual reporting period beginning after December 15, 2017, including interim reporting periods within that reporting period, and early adoption is not permitted. We are currently evaluating

7


 

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 one acquisition during the nine-month period ended September 30, 2016. We acquired substantially all of the net assets of Mid Atlantic Insurance Services, Inc. in a cash transaction, and have accounted for it using the acquisition method for recording business combinations.

The total purchase price was comprised of the following consideration (in thousands):

 

Name and Effective Date of Acquisition (In thousands):

 

Cash

Paid

 

 

Stock

Issued

 

 

Accrued Liability

 

 

Recorded Earnout Payable

 

 

Maximum Potential Earnout Payable

 

 

Total Recorded Purchase Price

 

Mid Atlantic Insurance Services, Inc (January 28, 2016)

 

$

7,901

 

 

$

 

 

$

926

 

 

$

7,750

 

 

$

8,500

 

 

$

15,651

 

 

In addition to the Mid Atlantic acquisition, the Company consummated the purchase of the minority interest in Mehta and Pazol Consulting Services Private Limited (“MPCS”) in the amount of $1.1 million. In connection with the acquisition of Vikaran Solutions, LLC on April 1, 2015, we also agreed to purchase all of the outstanding stock of MPCS, an Indian company which holds Vikaran’s software development center located in Pune, India, for a purchase price of approximately $1.5 million. During 2015, we consummated the purchase of 51% of the MPCS stock, treated as a deemed dividend for the common control interest contributed by Mr. Mariano. Effective with the acquisition of the remaining interest on April 19, 2016, the Company now holds 100% of the MPCS stock.

The “maximum potential earnout payable” disclosed in the foregoing table represents 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 payable” disclosed in the foregoing table are primarily based upon the estimated future operating results of the acquired entity over a five-year period subsequent to the acquisition date.  The recorded earnout payable is measured at fair value as of the acquisition date and is included on that basis in the total recorded purchase price in the foregoing table. We will record subsequent changes in the fair value of these estimated earnout obligations 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 Company recorded income of $1.9 million for the nine months ended September 30, 2016 related to a decrease in the fair value of earnout obligations. The decrease in fair value reflects the final computations and management estimates of certain earnouts pursuant to the respective purchase agreements for acquisitions as of September 30, 2016.

The aggregate amount of maximum earnout obligations related to acquisitions as of September 30, 2016 was $13.2 million, of which $11.7 million was recorded in our consolidated balance sheet as of September 30, 2016, based on the aggregate estimated fair value of the expected future payments to be made.

 

8


 

The following is a summary of the aggregate estimated fair values of the net assets acquired at the date of the acquisition made during the nine months ended September 30, 2016:

 

In thousands

 

Total

 

Assets Acquired:

 

 

 

 

Cash

 

$

28

 

Restricted cash

 

 

 

Accounts receivable

 

 

1,481

 

Fixed assets

 

 

50

 

Other assets

 

 

 

Goodwill

 

 

4,893

 

Intangible assets:

 

 

 

 

Customer & carrier relationships

 

 

9,205

 

Service contracts

 

 

 

Non-compete agreements

 

 

120

 

Developed technology

 

 

 

Trade name portfolio

 

 

800

 

Total intangible assets

 

 

10,125

 

Total assets acquired

 

 

16,577

 

Liabilities assumed

 

 

926

 

Total net assets acquired

 

$

15,651

 

 

 

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  acquisitions through September 30, 2016. 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 nine-month periods ended September 30, 2016 and 2015, no impairments were required.

9


 

Our consolidated financial statements for the nine months ended September 30, 2016 include the operations of the acquired entity from the acquisition date totaling $4.6 million of revenues and $36 thousand of net loss.

The following is a summary of the unaudited pro forma historical results, as if the entities acquired in 2015 and 2016 had been acquired at January 1, 2015 (in thousands, except per share data):

 

 

 

Nine Months Ended September 30,

 

In thousands (except per share data)

 

2016

 

 

2015

 

Total revenues

 

 

181,834

 

 

 

178,998

 

Net income (loss)

 

 

19,438

 

 

 

1,541

 

Basic net income (loss) per share

 

$

0.65

 

 

$

0.06

 

Diluted net income (loss) per share

 

$

0.64

 

 

$

0.06

 

 

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, 2015. 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 December 31, 2015 the fair value of our investments was $3.2 million. There were no investments held as of September 30, 2016.

 

 

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 lives, respectively. Expenditures for building are capitalized and depreciated on a straight-line basis over a thirty-nine year estimated useful life. Expenditures for leasehold improvements on office space and facilities are capitalized and amortized on a straight-line basis over the term of the lease.

As of September 30, 2016 and December 31, 2015, our major classes of fixed assets consisted of the following:

 

In thousands

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

Fixed Assets

 

 

 

 

 

 

 

 

Computer equipment, software and furniture and fixtures

 

$

9,384

 

 

$

8,124

 

Building

 

 

1,428

 

 

 

1,428

 

Leasehold improvements

 

 

3,822

 

 

 

3,733

 

Total fixed assets

 

 

14,634

 

 

 

13,285

 

Less accumulated depreciation and amortization

 

 

(9,323

)

 

 

(8,193

)

Fixed assets, net of accumulated depreciation and amortization

 

$

5,311

 

 

$

5,092

 

 

Other Long Term Assets

Other long term assets, which are solely comprised of capitalized policy and claims administration system development costs, are also stated at cost, net of accumulated depreciation. Expenditures for capitalized policy and claims administration system development costs are capitalized and depreciated on a straight line basis over a five-year estimated useful life.

10


 

As of September 30, 2016 and December 31, 2015, other long term assets consisted of the following:

 

In thousands

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

Other long term assets

 

 

 

 

 

 

 

 

Capitalized policy and claims administration system development costs

 

$

19,982

 

 

$

17,712

 

Less accumulated depreciation

 

 

(8,829

)

 

 

(6,284

)

Other long term assets, net of accumulated depreciation

 

$

11,153

 

 

$

11,428

 

 

We periodically review all fixed assets and other long term assets that have finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Upon sale or retirement, the cost and related accumulated depreciation and amortization of assets disposed of are removed from the accounts, and any resulting gain or loss is reflected in earnings.

 

 

6.

Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired. Goodwill is not amortized but is tested at least annually for impairment (or more frequently if certain indicators are present or management otherwise believes it is appropriate to do so). In the event that management determines that the value of goodwill has become impaired, we will record a charge for the amount of impairment during the fiscal quarter in which the determination is made. We determined that there was no impairment as of September 30, 2016.

The Company acquired $4.9 million of goodwill during the nine-month period ended September 30, 2016 as a result of the acquisitions discussed in Note 3, Business Combinations. Changes in goodwill are summarized as follows:

 

 

In thousands

 

 

 

 

Balance as of December 31, 2015

 

$

118,141

 

Goodwill acquired

 

 

4,893

 

Acquisition adjustments

 

 

(1,351

)

Balance as of September 30, 2016

 

$

121,683

 

 

For the nine months ended September 30, 2016, the Company recorded measurement period adjustments to Goodwill of $1.4 million, which reflects an increase in the carrying amount of tangible net assets related to certain acquisitions. Provisional estimates of fair value of the tangible assets and liabilities for each applicable acquisition at the acquisition date were established and reviewed within the first year of operation.

 

Intangible Assets

Intangible assets that have finite lives are amortized over their useful lives. The Company acquired $10.1 million of intangible assets during the nine-month period ended September 30, 2016 as a result of the acquisitions discussed in Note 3, Business Combinations. The intangible assets, their original fair values, and their net book values are detailed below as of the dates presented:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

In thousands

 

Gross Asset

 

 

Accumulated Amortization

 

 

Net Asset

 

 

Gross Asset

 

 

Accumulated Amortization

 

 

Net Asset

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service contracts

 

$

35,120

 

 

$

(9,501

)

 

$

25,619

 

 

$

35,120

 

 

$

(6,204

)

 

$

28,916

 

Customer and carrier relationships

 

 

40,243

 

 

 

(4,899

)

 

 

35,344

 

 

 

31,039

 

 

 

(1,947

)

 

 

29,092

 

Non-compete agreements

 

 

4,860

 

 

 

(3,326

)

 

 

1,534

 

 

 

4,739

 

 

 

(1,505

)

 

 

3,234

 

Developed technology

 

 

13,268

 

 

 

(3,636

)

 

 

9,632

 

 

 

13,268

 

 

 

(1,647

)

 

 

11,621

 

Trade names

 

 

3,829

 

 

 

(614

)

 

 

3,215