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EX-31.2 - EXHIBIT 31.2 - ExamWorks Group, Inc.ex31-2.htm
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EX-31.1 - EXHIBIT 31.1 - ExamWorks Group, Inc.ex31-1.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 March 31, 2016.

 

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Commission File Number: 001-34930

 

EXAMWORKS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

27-2909425

(State or other jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

3280 PEACHTREE ROAD, N.E., SUITE 2625

ATLANTA, GEORGIA 30305

(Address of principal executive offices)

 

Telephone Number (404) 952-2400

(Registrant’s telephone number, including area code)

 

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. (Check One):

 

Large accelerated filer

 

 

  

  

 

  

Accelerated filer

 

 

  

Non-accelerated filer

 

 

  

  

 

  

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☒

 

As of May 6, 2016, ExamWorks Group, Inc. had 41,654,000 shares of Common Stock outstanding.

  

 

 

 
 

 

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

March 31, 2016

FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

Page

PART I – Financial Information

 

 

  

 

Item 1.

Financial Statements

1

 

 

 

 

Consolidated Balance Sheets as of December 31, 2015 and March 31, 2016 (Unaudited)

1

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2015 and 2016 (Unaudited)

2

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2016 (Unaudited)

3

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

4

 

 

 

Item 2.

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

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

PART II – Other Information

 

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 1A.

Risk Factors

42

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

Item 3.

Defaults Upon Senior Securities

42

 

 

 

Item 4.

Mine Safety Disclosures

42

 

 

 

Item 5.

Other Information

42

 

 

 

Item 6.

Exhibits

43

 

 

 

Signatures

45

 

 

 
 i

 

 

PART 1. FINANCIAL INFORMATION

     ITEM 1. FINANCIAL STATEMENTS

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

   

December 31,

   

March 31,

 

 

 

2015

   

2016

 
Assets                

Current assets:

               

Cash and cash equivalents

  $ 47,865     $ 15,999  

Accounts receivable, net

    245,449       249,062  

Prepaid expenses

    16,809       19,914  

Other current assets

    1,958       1,078  

Total current assets

    312,081       286,053  

Property, equipment and leasehold improvements, net

    20,145       22,264  

Goodwill

    508,297       581,379  

Intangible assets, net

    84,673       109,409  

Long-term accounts receivable, less current portion

    62,717       67,495  

Deferred tax assets

    50,405       40,596  

Deferred financing costs, net

    2,520       2,386  

Other assets

    3,969       4,178  

Total assets

  $ 1,044,807     $ 1,113,760  

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 60,599     $ 65,948  

Accrued expenses

    60,748       55,261  

Accrued interest expense

    6,245       13,414  

Deferred revenue

    3,684       3,498  

Current portion of contingent earnout obligation

          2,556  

Other current liabilities

    9,056       7,282  

Total current liabilities

    140,332       147,959  

Notes payable

    493,126       493,359  

Senior secured revolving credit facility and working capital facilities

    35,243       82,578  

Long-term contingent earnout obligation, less current portion

          5,079  

Deferred tax liabilities

    3,333       3,250  

Other long-term liabilities

    12,738       14,225  

Total liabilities

    684,772       746,450  

Commitments and contingencies

               

Stockholders’ equity:

               

Preferred stock, $0.0001 par value; Authorized 50,000 shares; no shares issued and outstanding at December 31, 2015 and March 31, 2016

           

Common stock, $0.0001 par value; Authorized 250,000 shares; issued 42,983 and 43,222 shares at December 31, 2015 and March 31, 2016, respectively

    4       4  

Additional paid-in capital

    446,409       457,193  

Accumulated other comprehensive loss

    (26,003 )     (24,766 )

Accumulated deficit

    (30,619 )     (27,359 )

Treasury stock, at cost; Outstanding 1,705 and 2,015 shares at

               

December 31, 2015 and March 31, 2016, respectively

    (29,756 )     (37,762 )

Total stockholders’ equity

    360,035       367,310  

Total liabilities and stockholders' equity

  $ 1,044,807     $ 1,113,760  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 
1

 

   

 EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share amounts)

(Unaudited)

 

   

For the three months

ended March 31,

 
   

2015

   

2016

 

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:

               

Interest expense, net

    8,004       8,399  

Total 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  
                 

Comprehensive Income (Loss):

               

Net income

  $ 2,024     $ 3,260  

Foreign currency translation adjustments, net of tax

    (5,877 )     1,237  

Total comprehensive income (loss)

  $ (3,853 )   $ 4,497  
                 

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  

 

The accompanying notes are an integral part of these consolidated financial statements.

  

 

 
2

 

  

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited) 

 

   

For the three months ended March 31,

 
   

2015

   

2016

 

Operating activities:

               

Net income

  $ 2,024     $ 3,260  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    14,848       16,636  

Amortization of deferred rent

    138       99  

Share-based compensation

    6,136       5,419  

Excess tax benefit related to share-based compensation

    (2,086 )     (4,766 )

Provision for doubtful accounts

    1,918       2,116  

Amortization of deferred financing costs

    587       381  

Deferred income taxes

    (1,759 )     348  

Changes in operating assets and liabilities, net of effects of acquisitions:

               

Accounts receivable

    (14,763 )     (7,562 )

Prepaid expenses and other current assets

    1,010       (2,184 )

Accounts payable and accrued expenses

    4,668       (2,729 )

Accrued interest expense

    (5,640 )     7,169  

Deferred revenue and customer deposits

    (133 )     (108 )

Other liabilities

    (784 )     (2,313 )

Net cash provided by operating activities

    6,164       15,766  

Investing activities:

               

Cash paid for acquisitions, net

    (2,299 )     (92,348 )

Purchases of building, equipment and leasehold improvements, net

    (2,229 )     (2,737 )

Working capital and other settlements for acquisitions

    (91 )     (271 )

Proceeds from foreign currency net investment hedges

    4,812       1,649  

Other

    (1,250 )     (150 )

Net cash used in investing activities

    (1,057 )     (93,857 )

Financing activities:

               

Borrowings under senior secured revolving credit facility

    25,478       75,000  

Excess tax benefit related to share-based compensation

    2,086       4,766  

Proceeds from the exercise of options and warrants

    8,855       582  

Repayment of contingent earnout obligation

    (1,023 )      

Net repayments under working capital facilities

    (132 )     (1,623 )

Purchases of stock for treasury

          (8,006 )

Repayments under senior secured revolving credit facility

    (29,331 )     (25,000 )

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 )

Cash and cash equivalents, beginning of period

    9,751       47,865  

Cash and cash equivalents, end of period

  $ 20,282     $ 15,999  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 12,979     $ 825  

Cash paid for income taxes

  $ 2,703     $ 4,457  

  

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 
3

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(1)               Nature of Operations and Basis of Presentation

 

ExamWorks Group, Inc. (“ExamWorks” or the “Company”) is a leading provider of independent medical examinations (“IMEs”), peer and bill reviews, Medicare compliance services, case management services and other related services, which include litigation support services, administrative support services, medical record retrieval services and document management services (“IME services” or the “IME industry”). ExamWorks, Inc. was incorporated as a Delaware corporation on April 27, 2007. Since 2008 through the date of this filing, ExamWorks completed 57 acquisitions. As of March 31, 2016, ExamWorks, Inc. operated out of 71 service centers serving all 50 United States, Canada, the United Kingdom and Australia.

 

The consolidated financial statements of the Company as of March 31, 2016 and for the periods ended March 31, 2015 and 2016 included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and have not been audited by its independent registered public accounting firm. In the opinion of management, all adjustments of a normal and recurring nature necessary to present fairly the financial position and results of operations and cash flows for all periods presented have been made. Pursuant to SEC rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted from these statements unless significant changes have taken place since the end of the Company's most recent fiscal year. The Company's December 31, 2015 Consolidated Balance Sheet was derived from audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, (the “Form 10-K”), but does not include all disclosures required by U.S. GAAP. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Form 10-K. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

The consolidated financial statements include the accounts of ExamWorks and its 100% owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

 

(2)               Summary of Significant Accounting Policies

  

(a)               Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on certain assumptions which they believe are reasonable in the circumstances and actual results could differ from those estimates. The more significant estimates reflected in these consolidated financial statements include purchase price allocations, useful lives of intangible assets, potential impairment of goodwill and intangible assets, the allowance for doubtful accounts, the portion of accounts receivable deemed to be long term in nature, the valuation of deferred tax assets, the valuation of equity and share-based compensation and derivative instruments.

 

(b)              Foreign Currencies

 

Assets and liabilities recorded in foreign currencies are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (loss) and are reported net of the effect of income taxes on the consolidated financial statements (See Note 2 (p)).

 

(c)              Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of December 31, 2015 and March 31, 2016.

 

(d)              Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable consist of amounts owed to the Company for services provided in the normal course of business and are reported net of allowance for doubtful accounts, which amounted to $12.2 million and $12.5 million as of December 31, 2015 and March 31, 2016, respectively. Generally, no collateral is received from customers and additions to the allowance are based on ongoing credit evaluations of customers with general credit experience being within the range of management’s expectations. Accounts are reviewed regularly for collectability and those deemed uncollectible are written off.  The Company assumes, that on average, all accounts receivable will be collected within one year and thus classifies 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 the Company has recorded an estimate for those receivables that will not be collected within one year as long-term in the consolidated balance sheets.

 

 

 
4

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(e)              Concentrations of Credit Risk

 

The Company routinely assesses the financial strength of its customers and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. For the three months ended March 31, 2015 and 2016, no individual customer accounted for more than 10% of revenues. At December 31, 2015 and March 31, 2016, there was an individual customer that accounted for approximately 14% and 13%, respectively, of the accounts receivable balance.

 

As of March 31, 2016, the Company had cash and cash equivalents totaling approximately $16.0 million. These amounts were held for future acquisition and working capital purposes and were held in non-interest bearing accounts, of which $1.6 million was held in the U.S. The U.S. amounts were insured under standard FDIC insurance coverage for deposit accounts up to $250,000, per depositor and account ownership category, at each separately insured depository institution.

 

 (f)              Property, Equipment and Leasehold Improvements

 

Property, equipment and leasehold improvements are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets and accelerated methods for income tax purposes. Leasehold improvements are amortized over the lesser of their expected useful life or the remaining lease term. Maintenance and repair costs are expensed as incurred.

 

(g)              Long-Lived Assets

 

In accordance with Impairment or Disposal of Long-Lived Assets, Subsections of Financial Accounting Standards Board (“FASB”) ASC Subtopic 360-10 (“ASC 360”),  Property, Plant, and Equipment — Overall, long-lived assets, such as equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models (using market participant assumptions), quoted market values and third-party independent appraisals, as considered necessary. At December 31, 2015 and March 31, 2016, no impairment was noted.

 

 (h)               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. Goodwill is reviewed for impairment at least annually in accordance with the provisions of FASB ASC Topic 350, Intangibles — Goodwill and Other (“ASC 350”). The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting units are compared with their carrying values (including goodwill). If the fair value of a reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting units' goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis (using market participant assumptions). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

 

The Company performed its annual impairment review of goodwill in October of 2015, and it was determined that the carrying amount of goodwill was not impaired, as the fair value of the reporting units substantially exceeded their carrying values and there have been no subsequent developments that would indicate impairment existed as of March 31, 2016. The goodwill impairment review will continue to be performed annually or more frequently if facts and circumstances warrant a review.

 

ASC 350 also requires that intangible assets with definite lives be amortized over their estimated useful lives. Currently, customer relationships, trade names, covenants not-to-compete and technology are amortized using the straight-line method over estimated useful lives.

 

(i)              Deferred Financing Costs

 

In November 2010, the Company entered into a senior secured revolving credit facility with Bank of America N.A. (“Senior Secured Revolving Credit Facility”) (see Note 10). The Company has incurred deferred financing costs of $8.5 million associated with the Senior Secured Revolving Credit Facility and related amendments and restatements, none of which were incurred in the three months ended March 31, 2015 and 2016. In the second quarter of 2015, the Company amended and restated the Senior Secured Revolving Credit Facility in connection with the offering of the Notes as defined in Note 10, pursuant to an amended and restated credit agreement (the “Amended and Restated Credit Facility”), which resulted in a loss on extinguishment of debt of approximately $274,000 for the write-off of unamortized deferred financing costs in accordance with ASC Topic 470, Debt (“ASC 470”).

 

 

 
5

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The deferred financing costs associated with the Senior Secured Revolving Credit Facility are being amortized to interest expense over the five-year term of the facility, using the straight-line method, which approximates the effective interest method.

 

The Company amortized $361,000 and $148,000 for the three months ended March 31, 2015 and 2016, respectively, to interest expense.

 

(j)                 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. The Company believes that recognizing revenue at the time the report is shipped is appropriate because the Company’s revenue policies 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. The Company reports 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 services, where no report is generated, is recognized at the time the service is performed. The Company believes that recognizing revenue at the time the service is performed is appropriate because the Company’s revenue policies 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.  The Company has 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 is deferring these revenues, net of estimated costs, until the case has been settled, the contingency has been resolved and the cash has been collected.   As of December 31, 2015 and March 31, 2016, the Company had $2.7 million and $2.5 million, respectively, in U.K. net deferred revenues associated with such agreements.

 

Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any subsequent reporting period could be adversely affected.

 

(k)              Costs of Revenues

 

Costs of revenues are comprised of fees paid to members of the Company’s 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 revenues.

 

 (l)                Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company applies the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (included in FASB ASC Subtopic 740-10, Income Taxes — Overall ), and recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense.

 

(m)             Income (Loss) Per Common Share

 

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during each period. Diluted income (loss) per common share is calculated by dividing net income (loss), adjusted on an “as if converted” basis, by the weighted-average number of actual shares outstanding and, when dilutive, the share equivalents that would arise from the assumed conversion of convertible instruments. The effect of potentially dilutive stock options, warrants, shares of restricted stock with service restrictions that have not yet been satisfied and unvested restricted stock units (“RSUs”) is calculated using the treasury stock method.

  

 

 
6

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table sets forth basic and diluted net income per share computational data for the three months ended March 31, 2015 and 2016 (amounts in thousands):

 

   

Three months

ended March 31,

 
   

2015

   

2016

 

Net income

  $ 2,024     $ 3,260  
                 

Basic shares outstanding:

               

Common stock

    40,418       40,805  
                 

Diluted shares outstanding:

               

Common stock

    40,418       40,805  

Dilutive securities (1)

    2,262       1,557  

Total

    42,680       42,362  

  

(1)

For the three months ended March 31, 2015 and 2016, the Company's dilutive securities excluded options potentially exercisable in the future into 32,000 shares and 86,000 shares, respectively, because their inclusion would have been anti-dilutive.

 

(n)                Share-Based Compensation

 

The Company has an Amended and Restated 2008 Stock Incentive Plan, as amended, (the “Plan”) that provides for granting of stock options, restricted stock, RSUs and other equity awards. The Company accounts for share-based awards 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.

 

Stock Options

 

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 the Company’s stock options. Additionally, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because the Company’s 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 management’s opinion, the existing models may not provide a reliable single measure of the fair value of its share-based awards.

 

 The Company’s expected volatility assumptions are based upon the weighted average of the Company’s implied volatility, the Company’s mean reversion volatility and the median of the Company’s peer group’s most recent historical volatilities for 2015 stock option grants. Expected life assumptions are based upon the “simplified” method as for those options issued in 2015, 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.

 

In the three months ended March 31, 2016, the Company issued no stock option awards to employees. Share-based compensation expense related to stock option awards was $1.9 million and $1.2 million for the three months ended March 31, 2015 and 2016, respectively, of which $469,000 and $307,000, respectively, was included in costs of revenues, and $1.4 million and $921,000, respectively, was recorded in selling, general and administrative (“SGA”) expenses.

 

At March 31, 2016, the unrecognized compensation expense related to stock option awards was $3.4 million, with a remaining weighted average life of 1.2 years.

 

 

 
7

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

A summary of option activity for the three months ended March 31, 2016 is as follows:

 

   

Number

of options

   

Weighted

average

exercise

price

   

Weighted

average

remaining

contractual

life (years)

   

Aggregate

intrinsic

value

(in

thousands)

 

Outstanding at December 31, 2015

    3,766,868     $ 13.28                  

Options granted

                           

Options forfeited

    (46,346

)

    33.13                  

Options exercised

    (74,121

)

    9.99                  

Outstanding at March 31, 2016

    3,646,401     13.10                  
                                 

Exercisable at March 31, 2016

    3,377,368     11.51       5.1     61,718  

 

Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of the weighted average exercise price multiplied by the number of options outstanding or exercisable. The total intrinsic value of stock options exercised was approximately $860,000 during the three months ended March 31, 2016.

 

Restricted Stock and Restricted Stock Units

 

The Company has granted members of the Board of Directors, certain employees and outside consultants, time lapse restricted stock and RSUs which vest after a stipulated number of years from the grant date depending on the terms of the issue. 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. Time lapse restricted shares issued and RSUs vest over one to five-year periods. The agreements under which the restricted stock and RSUs are issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have been satisfied. The restriction on a majority of these awards could expire earlier than the stipulated time frame in the event of a change in control or merger or other acquisition. Share-based compensation expense related to shares of restricted stock and RSUs was $4.1 million and $4.2 million for the three months ended March 31, 2015 and 2016, respectively, all of which is included in SGA expenses.

  

The following is a summary of restricted share and RSU activity for the three months ended March 31, 2016:

 

   

Number

of awards

   

Weighted

average

grant date

fair value

 

Non-vested awards at December 31, 2015

    1,315,522     $ 34.30  

Awards granted

    685,280       27.68  

Awards vested

    (238,094

)

    24.28  

Awards forfeited

    (130,237

)

    35.96  

Non-vested awards at March 31, 2016

    1,632,471     32.85  

 

The total fair value of vested RSUs and shares of restricted stock during the three months ended March 31, 2015 and 2016 was $3.2 million and $5.8 million, respectively. At March 31, 2016, total unrecognized compensation costs related to non-vested restricted shares and RSUs was $41.4 million, which is expected to be recognized over a weighted average period of 2.2 years.

 

During the three months ended March 31, 2015 the Company recorded share-based compensation expense of $130,000 related to an annual incentive compensation plan established by the Compensation Committee of the Board of Directors, all of which was recorded in SGA expenses. No such share-based compensation expense was recorded for the three months ended March 31, 2016, as all amounts paid under the incentive compensation plan for the year ended December 31, 2016 will be settled in cash.

 

 

 
8

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(o)              Fair Value Measurements 

 

The Company’s 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). The fair value of the foreign currency derivative was determined using observable market inputs such as foreign currency exchange rates and considers nonperformance risk of the Company and that of its counterparties. 

 

(p)              Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. GAAP are recorded as a component of stockholders’ equity but are excluded from net income (loss). The Company’s accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, reported net of tax as appropriate, from those subsidiaries not using the U.S. dollar as their functional currency and unrealized gains and losses, reported net of tax as appropriate, resulting from its net investment hedge of its Australian and U.K. subsidiaries.

 

Accumulated other comprehensive income (loss) consists of the following (in thousands): 

   

Foreign

Currency

Translation

   

Net investment

hedge - foreign

exchange contract

   

Total

 

Balance at December 31, 2015

  $ (33,716

)

  $ 7,713     $ (26,003

)

Change during 2016:

                       

Before-tax amount

    818       (107

)

    711  

Tax (expense) benefit

    484       42       526

 

Total activity in 2016

    1,302       (65

)

    1,237  

Balance at March 31, 2016

  (32,414

)

  7,648     (24,766

)

 

(q)               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. The Company has 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 its ability to continue as a going concern. Adoption did not have a material impact on the Company's 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.

 

The Company 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 Company’s $500.0 million 5.625% Senior Unsecured Notes Payable due April 2023 (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. The Company elected to continue presenting the deferred financing costs associated with its 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. The Company adopted the provisions of this ASU prospectively in the first quarter of 2016, and did not retrospectively adjust the prior periods. The adoption of ASU 2015-16 did not have a significant impact on the Company’s financial position, results of operations or cash flows.

 

 
9

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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. This amendment may be applied either prospectively or retrospectively to all periods presented. The Company adopted the provisions of this ASU prospectively in the fourth quarter of 2015, and did not retrospectively adjust the prior periods. The adoption of ASU 2015-17 did not have a significant impact on the Company’s 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. The Company is currently evaluating the impact of this standard on its financial position, results of operations and cash flows.

 

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. The Company plans to adopt the provisions for the year ending December 31, 2018 and currently does not expect the adoption to have a material impact on its 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. The Company is currently evaluating the impact of this standard on its 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. The Company plans to adopt the provisions for the year ending December 31, 2017 and currently does not expect the adoption to have a material impact on its 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. The Company is currently evaluating the impact of this standard on its 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. The Company is currently evaluating the impact of this standard on its financial position, results of operations and cash flows.

 

There were various other accounting standards and interpretations issued during 2015 and 2016 the Company has not yet been required to adopt, none of which are expected to have a material impact on its financial position, results of operations and cash flows. 

 
10

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements 

 

(3)              Acquisitions

 

ExamWorks operates in a highly fragmented industry and has completed 57 acquisitions since July 14, 2008 through the date of this filing. A key component of ExamWorks’ acquisition strategy is growth through acquisitions that expand its geographic coverage, that provide new or complementary lines of business, expand its portfolio of services and that increase its market share.

 

The Company has accounted for all business combinations using the purchase method to record a new cost basis for the assets acquired and liabilities assumed. The Company recorded, based on a preliminary purchase price allocation, intangible assets representing client relationships, tradenames, covenants not to compete, technology and the excess of purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed as goodwill in the accompanying consolidated balance sheets. The goodwill is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence. The results of operations are reflected in the consolidated financial statements of the Company from the date of acquisition.

  

(a)             2015 Acquisitions

 

In 2015, the Company completed the following individually insignificant acquisitions, as defined in SEC Regulation S-X Rule 3-05, with an aggregate purchase price of $75.7 million, composed of $76.8 million cash consideration less cash acquired of $1.1 million. In conjunction with the 2015 acquisitions, the Company incurred aggregate transaction costs of $882,000, of which $35,000 was incurred in the three months ended March 31, 2015. The Company did not incur any costs associated with the indicated acquisitions in the first quarter of 2016. These amounts are reported in SGA expenses in the Company’s accompanying consolidated statements of comprehensive income (loss). These acquisitions enhanced and expanded the presence and service offerings of the Company. 

 

Company Name

Form of acquisition

Date of acquisition

ReliableRS (United States)

Substantially all of the assets and assumed certain liabilities

January 2, 2015

Landmark Exams & Maven Exams (United States)

Substantially all of the assets and assumed certain liabilities

April 14, 2015

Karen Rucas & Associates (Canada)

Substantially all of the assets and assumed certain liabilities

July 13, 2015

First Choice (United States)

Substantially all of the assets and assumed certain liabilities

October 30, 2015

Argent (United Kingdom)

Substantially all of the assets and assumed certain liabilities

November 23, 2015

  

The preliminary allocation of consideration for these acquisitions is summarized as follows (in thousands):    

   

Preliminary

purchase price

allocation

December 31, 2015

   

Adjustments/

reclassifications

   

Preliminary

purchase price

allocation

March 31,

2016

 

Equipment and leasehold improvements

  1,513         1,513  

Customer relationships

    28,530             28,530  

Tradenames

    1,965             1,965  

Covenants not to compete

    182             182  

Goodwill

    24,296       489       24,785  

Net deferred tax liability associated with step-up in book basis

    (18

)

          (18 )

Assets acquired and liabilities assumed, net

    18,931       (218

)

    18,713  

Totals

  75,399     271     75,670  

 

In 2016, the Company recorded adjustments to working capital resulting in an increase in total consideration paid of $271,000. Goodwill of $24.6 million and other intangible assets of $30.4 million are expected to be deductible for U.S. federal income tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.  

 

 
11

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(b)             2016 Acquisitions

 

In 2016, the Company completed the following individually insignificant acquisitions, as defined in SEC Regulation S-X Rule 3-05, with an aggregate purchase price of $99.6 million, composed of $92.0 million cash consideration and $7.6 million of contingent consideration. In conjunction with the 2016 acquisitions, the Company incurred aggregate transaction costs of $446,000, of which $82,000 were incurred in the three months ended March 31, 2016. The Company did not incur any costs associated with the acquisitions in the first quarter of 2015. These amounts are reported in SGA expenses in the Company’s accompanying consolidated statements of comprehensive income (loss). These acquisitions enhanced and expanded the presence and service offerings of the Company.

 

Company name

  

Form of acquisition

  

Date of acquisition

ABI (United States)

  

100% of the outstanding common stock

  

January 8, 2016

Advanced Medical Reviews (United States)

  

100% of the outstanding common stock

  

January 19, 2016

 

The preliminary allocation of consideration for these acquisitions is summarized as follows (in thousands): 

 

   

Preliminary

purchase price

allocation

March 31, 2016

 

Equipment and leasehold improvements

  $ 1,044  

Customer relationships

    32,201  

Tradename

    6,900  

Goodwill

    70,378  

Net deferred tax liability associated with step-up in book basis

    (15,104

)

Assets acquired and liabilities assumed, net

    4,219  

Total

  $ 99,638  

 

None of the goodwill or other intangibles are currently expected to be deductible for U.S. federal income tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. The 2016 acquisitions contributed $13.0 million in revenues and $231,000 in operating losses for the three months ended March 31, 2016.

 

(c)               Pro forma Financial Information

 

The following unaudited pro forma results of operations for the three months ended March 31, 2015 and 2016 assumes that the 2015 acquisitions were completed on January 1, 2014 and the 2016 acquisitions were completed on January 1, 2015.

 

For the three months ended March 31, 2015 and 2016, the pro forma results include adjustments to reflect interest and other expenses of $2.3 million and $128,000, respectively, associated with the funding of the acquisitions assuming that acquisition related debt was incurred as referenced above. In addition, incremental depreciation and amortization expense was recorded as if the acquisitions had occurred on the dates referenced above and amounted to $5.1 million and $315,000 for the three months ended March 31, 2015 and 2016, respectively. Finally, adjustments of $948,000 and $1.2 million were made to reduce SGA expenses for the three months ended March 31, 2015 and 2016, respectively, principally related to certain salary and other personal expenses attributable to the previous owners and employees of the acquired businesses.  These adjustments represent contractual reductions and are considered to be non-recurring and are not expected to have a continuing impact on the operations of the Company.

 

   

Three months ended

March 31,

 
   

2015

   

2016

 
    (In thousands, except per share data)  

Pro forma revenues

  $ 224,914     228,389  

Pro forma net income

    139       3,812  

Pro forma income per share: Basic

  $ 0.00     0.09  

Pro forma income per share: Diluted

  $ 0.00     0.09  

 

The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions been effective as of January 1 of the respective years or of future operations of the Company. 

 

 
12

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(4)              Property, Equipment and Leasehold Improvements 

 

Property, equipment and leasehold improvements at December 31, 2015 and March 31, 2016, consist of the following (in thousands):

 

   

Estimated

useful lives

   

December 31,

   

March 31,

 
   

(years)

   

2015

   

2016

 

Building

    15       $ 3,669     $ 3,701  

Computer and office equipment

    3         23,162       24,982  

Furniture and fixtures

  3 to 5       5,051       5,461  

Leasehold improvements

 

Lease term

      6,272       7,695  
                38,154       41,839  

Less accumulated depreciation and amortization

              18,009       19,575  

Totals

            $ 20,145     $ 22,264  

 

Depreciation expense was $1.7 million and $1.9 million for the three months ended March 31, 2015 and 2016, respectively.

 

(5)              Goodwill and Intangible Assets

 

Goodwill by segment at December 31, 2015 and March 31, 2016 consists of the following (in thousands) (1):

 

   

United

           

United

                 
   

States

   

Canada

   

Kingdom

   

Australia

   

Total

 

Balance at December 31, 2015

  $ 412,502     $ 15,364     $ 49,428     $ 31,003     $ 508,297  

Goodwill acquired during the year

    70,378                         70,378  

Adjustments to prior year acquisitions

    738       2       (251 )           489  

Effect of foreign currency translation

          1,435       (1,531 )     2,311       2,215  

Balance at March 31, 2016

  $ 483,618     16,801     47,646     33,314     581,379  

 

 

(1)

Goodwill recorded in connection with certain tax benefits to be realized in the Company’s U.S. income tax returns has been reflected in the United States segment.

 

Intangible assets at December 31, 2015 and March 31, 2016, consist of the following (in thousands):

 

             

December 31, 2015

 
   

Estimated

useful lives

(months)

   

Gross

carrying

amount

   

Accumulated

amortization

   

Net

carrying

value

 

Amortizable intangible assets:

                                 

Customer relationships

  40  to 60     $ 263,293     $ (199,266

)

  $ 64,027  

Tradenames

  45  to 84       68,172       (52,354

)

    15,818  

Covenants not to compete

    36         10,254       (6,047

)

    4,207  

Technology

  24  to 40       9,014       (8,393

)

    621  

Totals

            $ 350,733     $ (266,060

)

  $ 84,673  

  

 

 
13

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

             

March 31, 2016

 
   

Estimated

useful lives

(months)

   

Gross

carrying

amount

   

Accumulated

amortization

   

Net

carrying

value

 

Amortizable intangible assets:

                                 

Customer relationships

  40 to 60     $ 296,657     (212,493

)

  84,164  

Tradenames

  45 to 84       75,323       (54,651

)

    20,672  

Covenants not to compete

    36         10,729       (6,605

)

    4,124  

Technology

  24 to 40       8,973       (8,524

)

    449  

Totals

            $ 391,682     (282,273

)

  109,409  

 

The aggregate intangible amortization expense was $13.1 million and $14.7 million for the three months ended March 31, 2015 and 2016, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):

 

   

Amount

 

Nine months ended December 31, 2016

  $ 37,682  

Years ended December 31:

       

2017

    40,480  

2018

    21,131  

2019

    10,062  

2020

    54  

Total

  $ 109,409  

 

(6)              Accrued Expenses

 

Accrued expenses at December 31, 2015 and March 31, 2016 consist of the following (in thousands):

   

December 31,

2015

   

March 31,

2016

 

Accrued compensation and benefits

  $ 13,266     $ 12,020  

Accrued selling and professional fees

    5,457       5,143  

Accrued income, value added and other taxes

    30,774       28,827  

Accrued medical panel fees

    7,598       6,239  

Other accrued expenses

    3,653       3,032  

Totals

  $ 60,748     $ 55,261  

 

(7)              Stockholders’ Equity

 

During the three months ended March 31, 2016, the Company issued approximately 74,000 shares of common stock to settle options exercised during the period.

 

During the three months ended March 31, 2016, the Company issued approximately 67,000 shares of restricted stock with a fair value of $1.7 million to certain officers and employees for services to be provided during the next three years. The Company is recording the expenses related to these awards in SGA expenses over the requisite service period.

 

During the three months ended March 31, 2016, the Company issued approximately 98,000 shares of common stock to settle restricted stock units whose restrictions were lifted during the period.

 

Repurchased shares of the Company’s common stock are held as treasury shares until they are reissued or retired. When the Company reissues treasury stock, if the value of the transaction is greater than the average price paid to acquire the shares, an increase in additional paid-in capital is recorded. Conversely, if the value of the transaction is less than the average price paid to acquire the shares, a decrease is recorded to additional paid-in capital to the extent of increases previously recorded for similar transactions, and a decrease is recorded in retained earnings for any remaining amount. During the three months ended March 31, 2016, the Company repurchased approximately 310,000 shares of common stock under the share repurchase program. These shares were repurchased at an average cost of $25.85 per share for a total cost of $8.0 million. As of March 31, 2016, the Company has approximately 2.0 million shares of common stock held as treasury shares with an average value of $18.74 per share, and the ability to repurchase an additional $35.9 million in shares of its common stock.

 

 

 
14

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(8)              Related Party Transactions 

 

The previous and existing revolving credit facilities contain a provision requiring the Company to use a third party to perform financial due diligence for acquisitions exceeding a certain size. With the approval of the senior lender, the Company engaged RedRidge Finance Group (“RedRidge”) to assist it with financial due diligence and incurred $118,000 and $176,000 in fees, respectively, pertaining to acquisition-related work performed during the three months ended March 31, 2015 and 2016, respectively. P&P Investment, LLC (“P&P”), a company owned by Richard Perlman and James Price, the Executive Chairman and Chief Executive Officer, respectively, of the Company, is a minority owner of RedRidge. P&P, Mr. Perlman and Mr. Price had historically waived any right P&P had to any portion of the diligence fees paid by the Company to RedRidge. This waiver terminated as of August 1, 2013.

 

(9)              Commitments and Contingencies

 

(a)              Lease Commitments

 

The Company and its subsidiaries lease office space and office related equipment under noncancelable operating leases with various expiration dates from 2016 through 2023.

 

Future minimum lease payments under the operating leases for the nine months ended December 31, 2016 and each of the years subsequent to December 31, 2016 are as follows (in thousands):

 

   

Amount

 

Nine months ended December 31, 2016

  $ 11,780  

Years ended December 31:

       

2017

    14,162  

2018

    11,771  

2019

    8,185  

2020

    5,134  

Thereafter

    3,874  

Total

  $ 54,906  

 

Related rent expense was $4.2 million and $5.1 million for the three months ended March 31, 2015 and 2016, respectively.

 

(b)              Employee Benefit Plans

 

The Company and certain of its subsidiaries each sponsor separate voluntary defined contribution pension plans. The plans cover employees that meet specific age and length of service requirements. The Company and certain of its subsidiaries have various matching and vesting arrangements within their individual plans. For the three months ended March 31, 2015 and 2016, the Company recorded $370,000 and $238,000, respectively, in compensation expense related to these plans.

 

(10)            Long-Term Debt

 

Long-term debt at December 31, 2015 and March 31, 2016 consists of the following (in thousands):

 

   

December 31,

   

March 31,

 
   

2015

   

2016

 

Notes Payable (a)

  $ 500,000     $ 500,000  

Deferred financing costs related to Notes Payable (a)

    (6,874 )     (6,641 )

Senior Secured Revolving Credit Facility, Bank of America, N.A. (b)

          50,000  

Working capital facilities, Barclays (c)

    35,243       32,578  
Totals   $ 528,369     $ 575,937  

 

(a)      On April 16, 2015, the Company closed a public offering of the Notes. The Notes were issued at a price of 100% of their principal amount. The Notes are senior obligations of ExamWorks and are guaranteed by certain of ExamWorks’ existing and future U.S. subsidiaries. The gross proceeds of $500.0 million were used to repay all of the Company’s outstanding borrowings under the Senior Secured Revolving Credit Facility, to redeem all of the Company’s prior $250.0 million, 9.0% senior notes due 2019 the (“Senior Unsecured Notes”), to pay related fees and expenses, and for general corporate purposes, including acquisitions. The Company incurred deferred financing costs of $7.5 million related to this offering, none of which were incurred in the three months ended March 31, 2015 or 2016. These costs are amortized on a straight-line basis over the 8-year life of the Notes which approximates the effective interest method. Additionally, the Company amortized deferred financing costs of approximately $226,000 in the three months ended March 31, 2015 related to previous Senior Unsecured Notes which were extinguished in April 2015.

 

 

 
15

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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 Company, the Guarantors and U.S. Bank, National Association, as trustee (the “Trustee”).  The Notes are the Company’s general senior unsecured obligations, and rank equally with the Company’s existing and future senior unsecured obligations and senior to all of the Company’s 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, the Company 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, the Company 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, the Company 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 the Company and its 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 the Company or the restricted subsidiaries, engage in asset sales and enter into transactions with affiliates. Upon a change of control (as defined in the Indenture), the Company 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.

 

(b)      On November 2, 2010, the Company entered into the Senior Secured Revolving Credit Facility with Bank of America, N.A. The facility initially consisted of a $180.0 million revolving credit facility.

 

On May 6, 2011, the Company increased and fully exercised the accordion features of the Senior Secured Revolving Credit Facility.  The increase and exercise of the accordion feature increased the committed capacity of the credit facility by $55.0 million, from a total of $245.0 million to a total of $300.0 million.

 

On July 7, 2011, the Company entered into a second amendment to its Senior Secured Revolving Credit Facility (the “Second Amendment”) which became effective simultaneously with the consummation of the Company’s private offering of the Senior Unsecured Notes.  The Second Amendment amended the Senior Secured Revolving Credit Facility to, among other things, (i) extend the maturity date of the Senior Secured Revolving Credit Facility from November 2013 to July 2016; (ii) permit the issuance and sale of the Senior Unsecured Notes; (iii) replace the consolidated senior leverage ratio with a consolidated senior secured leverage ratio while permitting the maximum consolidated senior secured leverage ratio to be 3.00 to 1; (iv) permit the Company’s maximum consolidated leverage ratio to increase from 3.5 to 1 to 4.75 to 1; (v) reduce the borrowing cost; and (vi) allow the Company to complete acquisitions with a purchase price of up to $75.0 million (previously $50.0 million) without prior lender consent. The Second Amendment also reduced the aggregate revolving commitments under the Senior Secured Revolving Credit Facility by $37.5 million for a maximum commitment of $262.5 million, subject to the Company’s right to increase the aggregate revolving commitments by $37.5 million for a maximum commitment of $300.0 million, so long as the Company is not in default and the Company satisfies certain other customary conditions.

 

On February 27, 2012, the Company entered into a third amendment to its Senior Secured Revolving Credit Facility (the “Third Amendment”). The Third Amendment amended the Senior Secured Revolving Credit Facility as to the definitions of consolidated fixed charges and consolidated fixed charge coverage ratio and does not permit the consolidated fixed charge coverage ratio as of the end of any fiscal quarter to be less than (i) for any fiscal quarter ending during the period from December 31, 2011 to and including September 30, 2012, 1.75 to 1.00 and (ii) for any fiscal quarter ending thereafter, 2.00 to 1.00.

 

 

 
16

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

On August 27, 2012, the Company entered into a fourth amendment to its Senior Secured Revolving Credit Facility (the “Fourth Amendment”). The Fourth Amendment amended the Senior Secured Revolving Credit Facility to add the Australian dollar as an alternative currency and increased the alternative currency sublimit from USD $60.0 million to USD $100.0 million.

 

On June 27, 2013, the Company entered into a fifth amendment to its Senior Secured Revolving Credit Facility (the “Fifth Amendment”). Among other changes, the Fifth Amendment modified the Credit Agreement to permit an implementation of an auto-borrow agreement between the swing line lender and the Company to facilitate cash management, incorporated new provisions related to swap regulations and updated various provisions related to the LIBOR rate, Foreign Account Tax Compliance Act and the International Financial Reporting Standards.

 

On February 3, 2014, the Company entered into a sixth amendment to its Senior Secured Revolving Credit Facility (the “Sixth Amendment”). The Sixth Amendment (i) allowed the Company to consummate the acquisition of Gould & Lamb, and (ii) allows the Company to acquire a target (a) with negative trailing twelve month adjusted EBITDA (as defined in the senior secured revolving credit facility) if the purchase price of such acquisition is less than $5.0 million, (b) with trailing twelve month adjusted EBITDA (as defined in the senior secured revolving credit facility) of less than or equal to $3.0 million without delivering to the lenders a quality of earnings report regarding such target and (c) without delivering pro forma projections of the Company to the lenders if the purchase price of such acquisition is less than $75.0 million, in each case, without prior lender consent.

 

On April 16, 2015, the Company entered into 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, the Company has 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. The term of the Amended and Restated Credit Facility was extended for five years from the date of the amendment to April 2020. 

 

Borrowings under the Amended and Restated Credit Facility, as amended, 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 the Company elects. 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 facility will bear interest at an additional 2%.

 

The Amended and Restated Credit Facility contains restrictive covenants, including, among other things, financial covenants requiring the Company 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 the Company’s 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.

 

On June 1, 2015 the Company entered into a first amendment to the Amended and Restated Credit Facility (“First Amendment”). The First Amendment amended the definition of “Change of Control” in the Amended and Restated Credit Facility.

 

As of March 31, 2016, the Company had $50.0 million outstanding under the Amended and Restated Credit Facility, resulting in $250.0 million of undrawn commitments. 

 

(c)       On September 29, 2010, the Company’s 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.

 

 

 
17

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

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 Amended and Restated 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, the Company’s indirect 100% owned subsidiary Premex Group Limited (“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.

 

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% at 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 Amended and Restated 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.  

 

As of March 31, 2016, future maturities of long-term debt were as follows (in thousands):

 

   

Amount

 

Nine months ended December 31, 2016

  $  

Years ended December 31:

       

2017

     

2018

    32,578  

2019

     

2020

    50,000  

Thereafter

    500,000  

Total

  $ 582,578  

 

(11)             Financial Instruments

 

The FASB issued ASC Topic 815, Derivatives and Hedging (“ASC 815”) which establishes accounting and reporting standards for derivative instruments. ASC 815 requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If the derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments or recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a hedge’s change in fair value will be immediately recognized in earnings.

 

Beginning in the second quarter of 2013, in order to protect against foreign currency exposure in its Australian operations, the Company entered into forward foreign currency contracts as a hedge of AUD $60.0 million of its net investment in Australia. Beginning in the third quarter of 2013, the Company also entered into forward foreign currency contracts as a hedge of £40.0 million of its net investment in the U.K. During the fourth quarter of 2015, the Company entered into a foreign exchange agreement to hedge an additional £35.0 million related to its investment in the U.K. concurrent with funding of the acquisition of Argent.

 

As of December 31, 2015, the Company had a net liability of $367,000, with $1.2 million recorded in other current liabilities and $848,000 recorded in other current assets with the offsetting net unrealized loss being recorded in accumulated other comprehensive income (loss) in its consolidated balance sheets associated with open forward foreign currency contracts which matured in January of 2016. As of March 31, 2016, the Company had a net liability of $2.1 million recorded in other current liabilities with the offsetting net unrealized loss being recorded in accumulated other comprehensive income (loss) in its consolidated balance sheets associated with open forward foreign currency contracts which matured in April 2016.

 

 

 
18

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The Company does not enter into derivative transactions for speculative purposes.

 

(12)            Income Taxes

 

In preparing its consolidated financial statements, the Company estimates income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities.

 

Additionally, the Company currently has significant deferred tax assets and other deductible temporary differences including basis differences between intangible assets. The Company does not provide a valuation allowance against its deferred tax assets as the Company believes that it is more likely than not that all of the deferred tax assets will be realized based on available evidence including scheduled reversal of deferred tax liabilities, projected future taxable income and other tax planning considerations.

 

The Company applies the provisions of ASC 740 as it relates to uncertain tax positions. This interpretation prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740 states that a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

 

The following table summarizes the activity related to the unrecognized tax benefits for the three months ended March 31, 2016, (in thousands):

 

Balance at January 1, 2016

  $ 1,924  

Increase to prior year tax positions

    95  

Increase to current year tax positions

    445  

Expiration of the statute of limitations for the assessment of taxes

     

Decrease related to settlements

     

Balance at March 31, 2016

  $ 2,464  

 

The Company is no longer subject to U.S. federal income and state tax return examinations by tax authorities for tax years before 2010 and 2009, respectively. The Company operates in multiple taxing jurisdictions and experiences audits from various tax authorities. The Company remains subject to possible examination until the statute of limitations expires for the respective tax jurisdiction. The Company does not anticipate that the amount of the unrecognized benefit will significantly increase or decrease within the next 12 months.

 

Undistributed earnings of the Company’s controlled foreign corporation subsidiaries are considered indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been recorded. Deferred taxes are provided for earnings outside the United States when those earnings are not considered indefinitely reinvested.

 

(13)            Segment and Geographical Information

 

The Company applies the provisions of ASC Topic 280, Segment Reporting, (“ASC 280”). ASC 280, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker (“CODM”) and for which discrete financial information is available. Based on the provisions of ASC 280, the Company has determined that it operates in four geographic segments: the United States, Canada, the United Kingdom and Australia. The CODM evaluates segment performance based on revenues and segment profit, as defined below. The Company’s corporate costs and assets are all incurred in the United States and are included in the United States segment, as this is consistent with how they are presented and reviewed by the CODM. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

 

 

 
19

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Information relating to the Company’s product groups (IMEs, peer review, bill review, Medicare compliance, case management, medical record retrieval, document management and other related services) is as follows (in thousands):

 

Revenues:

 

For the three months

ended March 31,

 
   

2015

   

2016

 

IME and other related services (1)

  $ 167,345     $ 182,997  

Peer and bill reviews, Medicare compliance, case management, medical record retrieval and document management services (1)

    28,971       43,506  

Total revenues

  $ 196,316     $ 226,503  

 

(1) Includes the results of certain of the Company’s service centers acquired whose revenues are generated substantially through the indicated product group. Outside of this presentation, other product groups are not tracked within the Company’s financial systems. Additionally, other related services, which include any Medicare compliance services and case management services completed at the Company’s historic service centers in the periods presented, are not separately captured within the Company’s financial systems and have been included with IME services in the above presentation as separate presentation is not practicable. With the Company’s acquisition of Gould & Lamb in February 2014 and Ability Services Network and MedAllocators in June 2014, Medicare compliance services and case management services have been added to the presentation above. Additionally, with the acquisition of ABI in January 2016, medical record retrieval and document management services have been added to the presentation above. None of the individual services within the peer and bill reviews, Medicare compliance, case management, medical record retrieval and document management services categories above represent more than 10% of consolidated revenues. 

 

Information relating to the Company’s geographic segments is as follows (in thousands)(1):  

 

   

United

           

United

                 
   

States

   

Canada

   

Kingdom

   

Australia

   

Total

 

Three months ended March 31, 2015

                                       

Revenues

  $ 121,718     $ 7,949     $ 47,444     $ 19,205     $ 196,316  

Segment profit

    19,522       634       7,699       4,097       31,952  

Depreciation and amortization expense

    9,411       582       2,383       2,472       14,848  

Capital expenditures

    (1,670

)

    (114

)

    (189

)

    (256

)

    (2,229

)

Total assets (3)

    598,165       22,343       236,186       83,228       939,922  

Long-lived assets (2)(3)

    471,040       15,613       92,703       68,227       647,583  
                                         

Three months ended March 31, 2016

                                       

Revenues

  $ 149,440     $ 9,454     $ 47,933     $ 19,676     $ 226,503  

Segment profit

    22,905       968       9,779       3,832       37,484  

Depreciation and amortization expense

    10,752       56       3,539       2,289       16,636  

Capital expenditures

    (1,178

)

    (27

)

    (178

)

    (1,354

)

    (2,737

)

Total assets (3)

    702,747       29,341       295,222       86,450       1,113,760  

Long-lived assets (2)(3)

    570,681       17,515       133,337       63,192       784,725  

 

(1) For segment purposes, the Company defines “segment profit” as earnings before interest expenses, income taxes, depreciation and amortization, share-based compensation expenses, acquisition related transaction costs and other expenses. A consolidated reconciliation from segment profit to income from operations is included below.

(2) Long-lived assets are noncurrent assets excluding deferred tax assets and deferred financing costs.

(3) Total assets and long-lived assets include goodwill. Goodwill recorded in connection with certain tax benefits to be realized in the Company’s U.S. income tax returns has been reflected in the United States segment.

 

 

 
20

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

A reconciliation of segment profit to consolidated income from operations is as follows (in thousands):

 

   

For the three months ended March 31,

 
   

2015

   

2016

 

Segment Profit

  $ 31,952     $ 37,484  

Depreciation and amortization

    (14,848

)

    (16,636

)

Share-based compensation expense

    (6,136

)

    (5,419

)

Acquisition related transaction costs

    (559

)

    (1,058

)

Other income (expenses)

    731       (969

)

Income from operations

  $ 11,140     $ 13,402  

 

(14)            Condensed Consolidating Financial Information of Guarantor Subsidiaries

 

The Company has outstanding certain indebtedness that is guaranteed by certain of its U.S. subsidiaries. However, the indebtedness is not guaranteed by the Company’s foreign subsidiaries. The guarantor subsidiaries are 100% owned and the guarantees are made on a joint and several basis, and are full and unconditional. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of December 31, 2015 and March 31, 2016, and for the three months ended March 31, 2015 and 2016 is presented below. The Company (issuer of the Senior Unsecured Notes, and subsequently the Notes in April of 2015) was formed in June 2010 to implement a holding company organizational structure. As a result, all operating activities are conducted through the Company’s 100% owned subsidiaries.

 

Condensed Consolidating Statement of Operations

for the three months ended March 31, 2015

(In thousands)

 

   

Guarantor Subsidiaries

   

Non-

Guarantor

Subsidiaries

   

ExamWorks

Group, Inc.

(Parent

Corporation)

   

Consolidation

and

Elimination

Entries

   

Consolidated

Totals

 
                                         

Revenues

  $ 121,718     $ 74,598     $     $     $ 196,316  

Costs and expenses:

                                       

Costs of revenues

    82,334       45,842                   128,176  

Selling, general and administrative expenses

    23,014       19,138                   42,152  

Depreciation and amortization

    9,411       5,437                   14,848  

Total costs and expenses

    114,759       70,417                   185,176  

Income from operations

    6,959       4,181                   11,140  

Interest and other expenses, net

    6,409       1,595                   8,004  

Loss before income taxes

    550       2,586                   3,136  

Provision (benefit) for income taxes

    (594 )     1,706                   1,112  

Net loss before earnings of consolidated subsidiaries

  $ 1,144     $ 880     $     $     $ 2,024  

Net income (loss) of consolidated subsidiaries

    880             880       (1,760      

Net income (loss)

  $ 2,024     $ 880     $ 880     $ (1,760   $ 2,024  

 

 

 
21

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Condensed Consolidating Statement of Operations

for the three months ended March 31, 2016

(In thousands)

 

   

Guarantor Subsidiaries

   

Non-

Guarantor Subsidiaries

   

ExamWorks

Group, Inc.

(Parent

Corporation)

   

Consolidation

and

Elimination

Entries

   

Consolidated

Totals

 
                                         

Revenues

  $ 149,439     $ 77,064     $     $     $ 226,503  

Costs and expenses:

                                       

Costs of revenues

    102,001       47,125                   149,126  

Selling, general and administrative expenses

    27,807       19,532                   47,339  

Depreciation and amortization

    10,753       5,883                   16,636  

Total costs and expenses

    140,561       72,540                   213,101  

Income from operations

    8,878       4,524                   13,402  

Interest and other expenses, net

    7,074       1,325                   8,399  

Income before income taxes

    1,804       3,199                   5,003  

Provision for income taxes

    492       1,251                   1,743  

Net income before earnings of consolidated subsidiaries

  $ 1,312     $ 1,948     $     $     $ 3,260  

Net income (loss) of consolidated subsidiaries

    1,948             1,948       (3,896 )      

Net income (loss)

  $ 3,260     $ 1,948     $ 1,948     $ (3,896 )   $ 3,260  
                                         
 
22

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

 Notes to Consolidated Financial Statements

 

Condensed Consolidating Balance Sheet as of December 31, 2015

(In thousands)

 

   

Guarantor Subsidiaries

   

Non-

Guarantor Subsidiaries

   

ExamWorks

Group, Inc.

(Parent

Corporation)

   

Consolidation

and

Elimination

Entries

   

Consolidated

Totals

 

Assets

                                       

Current assets:

                                       

Cash and cash equivalents

  $ 33,011     $ 14,854     $     $     $ 47,865  

Accounts receivable, net

    68,896       176,553                   245,449  

Intercompany receivable

    57,394             6,245       (63,639 )      

Prepaid expenses

    10,398       6,411                   16,809  

Other current assets

    848       1,110                   1,958  

Total current assets

    170,547       198,928       6,245       (63,639 )     312,081  

Property, equipment and leasehold improvements, net

    12,695       7,450                   20,145  

Investment in subsidiaries

    280,114             800,743       (1,080,857 )      

Intercompany notes receivable

    174,421             174,421       (348,842 )      

Goodwill

    398,045       110,252                   508,297  

Intangible assets, net

    46,423       38,250                   84,673  

Long-term accounts receivable, less current portion

          62,717                   62,717  

Deferred tax assets, noncurrent

    47,363       3,042                   50,405  

Deferred financing costs, net

    2,416       104                   2,520  

Other assets

    725       3,244                   3,969  

Total assets

  $ 1,132,749     $ 423,987     $ 981,409     $ (1,493,338 )   $ 1,044,807  

Liabilities and Stockholders’ Equity (Deficit)

                                       

Current liabilities:

                                       

Accounts payable

  $ 24,072     $ 36,527     $     $     $ 60,599  

Intercompany payable

    6,245       57,394             (63,639 )      

Accrued expenses

    13,150       47,598                   60,748  

Accrued interest expense

                6,245             6,245  

Deferred revenue

    138       3,546                   3,684  

Other current liabilities

    3,383       5,673                   9,056  

Total current liabilities

    46,988       150,738       6,245       (63,639 )     140,332  

Senior unsecured notes payable

                493,126             493,126  

Senior secured revolving credit facility and working capital facilities, less current portion

          35,243                   35,243  

Intercompany notes payable

    174,421       174,421             (348,842 )      

Deferred tax liability, noncurrent

          3,333                   3,333  

Other long-term liabilities

    2,950       9,788                   12,738  

Total liabilities

    224,359       373,523       499,371       (412,481 )     684,772  

Commitments and contingencies

                                       

Stockholders’ equity (deficit)

    908,390       50,464       482,038       (1,080,857 )     360,035  

Total liabilities and stockholders' equity (deficit)

  $ 1,132,749     $ 423,987     $ 981,409     $ (1,493,338 )   $ 1,044,807  

   

 
23

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

  

Condensed Consolidating Balance Sheet as of March 31, 2016

(In thousands) 

 

   

Guarantor Subsidiaries

   

Non-

Guarantor Subsidiaries

   

ExamWorks

Group, Inc.

(Parent

Corporation)

   

Consolidation

and

Elimination

Entries

   

Consolidated

Totals

 

Assets

                                       

Current assets:

                                       

Cash and cash equivalents

  $ 1,554     $ 14,445     $     $     $ 15,999  

Accounts receivable, net

    77,277       171,785                   249,062  

Intercompany receivable

    61,586             13,414       (75,000 )      

Prepaid expenses

    8,083       11,831                   19,914  

Other current assets

          1,078                   1,078  

Total current assets

    148,500       199,139       13,414       (75,000 )     286,053  

Property, equipment and leasehold improvements, net

    13,877       8,387                   22,264  

Investment in subsidiaries

    282,062             895,039       (1,177,101 )      

Intercompany notes receivable

    174,413             174,413       (348,826 )      

Goodwill

    469,161       112,218                   581,379  

Intangible assets, net

    76,555       32,854                   109,409  

Long-term accounts receivable, less current portion

          67,495                   67,495  

Deferred tax assets, noncurrent

    37,467       3,129                   40,596  

Deferred financing costs, net

    2,296       90                   2,386  

Other assets

    885       3,293                   4,178  

Total assets

  $ 1,205,216     $ 426,605     $ 1,082,866     $ (1,600,927 )   $ 1,113,760  

Liabilities and Stockholders’ Equity (Deficit)

                                       

Current liabilities:

                                       

Accounts payable

  $ 29,192     $ 36,756     $     $     $ 65,948  

Intercompany payable

    13,414       61,586             (75,000 )      

Accrued expenses

    11,967       43,294                   55,261  

Accrued interest expense

                13,414             13,414  

Deferred revenue

    222       3,276                   3,498  

Current portion of contingent earnout obligation

    2,556                         2,556  

Other current liabilities

    4,432       2,850                   7,282  

Total current liabilities

    61,783       147,762       13,414       (75,000 )     147,959  

Senior unsecured notes payable

                493,359             493,359  

Senior secured revolving credit facility and working capital facilities, less current portion

          32,578       50,000             82,578  

Intercompany notes payable

    174,413       174,413             (348,826 )      

Long-term contingent earnout obligation, less current portion

    5,079                         5,079  

Deferred tax liability, noncurrent

          3,250                   3,250  

Other long-term liabilities

    3,232       10,993                   14,225  

Total liabilities

    244,507       368,996       556,773       (423,826 )     746,450  

Commitments and contingencies

                                       

Stockholders’ equity (deficit)

    960,709       57,609       526,093       (1,177,101 )     367,310  

Total liabilities and stockholders' equity (deficit)

  $ 1,205,216     $ 426,605     $ 1,082,866     $ (1,600,927 )   $ 1,113,760  

 

 
24

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

   

Condensed Consolidating Statement of Cash Flows for the three months ended March 31, 2015

(In thousands)

 

   

Guarantor Subsidiaries

   

Non-

Guarantor Subsidiaries

   

ExamWorks

Group, Inc.

(Parent

Corporation)

   

Consolidation

and

Elimination

Entries

   

Consolidated

Totals

 
                                         

Net cash provided by operating activities

  $ 2,226     $ 3,938     $     $     $ 6,164  

Investing activities:

                                       

Cash paid for acquisitions, net

    (2,299 )                       (2,299 )

Purchases of building, equipment and leasehold improvements, net

    (1,670 )     (559 )                 (2,229 )

Working capital and other settlements for acquisitions

    (91 )                       (91 )

Proceeds from foreign currency net investment hedges

    4,812                         4,812  

Other

    (1,250 )                       (1,250 )

Net cash used in investing activities

    (498 )     (559 )                 (1,057 )

Financing activities:

                                       

Borrowings under senior secured revolving credit facility

                25,478             25,478  

Proceeds from the exercise of options and warrants

                8,855             8,855  

Excess tax benefit related to share-based compensation

                2,086             2,086  

Net repayments under working capital facilities

          (132 )                 (132 )

Repayment of contingent earnout obligation

          (1,023 )                 (1,023 )

Repayment under senior secured revolving credit facility

                (29,331 )           (29,331 )

Intercompany notes and investments and other

    7,088             (7,088 )            

Net cash provided by (used in) financing activities

    7,088       (1,155 )                 5,933  

Exchange rate impact on cash and cash equivalents

          (509 )                 (509 )

Net increase in cash and cash equivalents

    8,816       1,715                   10,531  

Cash and cash equivalents, beginning of period

    388       9,363                   9,751  

Cash and cash equivalents, end of period

  $ 9,204     $ 11,078     $     $     $ 20,282  

   

 

 
25

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    

Condensed Consolidating Statement of Cash Flows for the three months ended March 31, 2016

(In thousands) 

 

   

Guarantor Subsidiaries

   

Non-

Guarantor Subsidiaries

   

ExamWorks

Group, Inc.

(Parent

Corporation)

   

Consolidation

and

Elimination

Entries

   

Consolidated

Totals

 
                                         

Net cash provided by operating activities

  $ 13,500     $ 2,266     $     $     $ 15,766  

Investing activities:

                                       

Cash paid for acquisitions, net

    (92,348 )                       (92,348 )

Purchases of building, equipment and leasehold improvements, net

    (1,179 )     (1,558 )                 (2,737 )

Working capital and other settlements for acquisitions

    (271 )                       (271 )

Proceeds from foreign currency net investment hedge

    1,649                         1,649  

Other

    (150 )                       (150 )

Net cash used in investing activities

    (92,299 )     (1,558 )                 (93,857 )

Financing activities:

                                       

Borrowings under senior secured revolving credit facility

                75,000             75,000  

Excess tax benefit related to share-based compensation

                4,766             4,766  

Proceeds from the exercise of options and warrants

                582             582  

Net repayments under working capital facilities

          (1,623 )                 (1,623 )

Purchases of stock for treasury

                (8,006 )           (8,006 )

Repayment under senior secured revolving credit facility

                (25,000 )           (25,000 )

Intercompany notes and investments and other

    47,342             (47,342 )            

Net cash provided by (used in) financing activities

    47,342       (1,623 )                 45,719  

Exchange rate impact on cash and cash equivalents

          506                   506  

Net decrease in cash and cash equivalents

    (31,457 )     (409 )                 (31,866 )

Cash and cash equivalents, beginning of period

    33,011       14,854                   47,865  

Cash and cash equivalents, end of period

  $ 1,554     $ 14,445     $     $     $ 15,999  

 

 
26

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(15)            Subsequent Events

 

(a)              Acquisitions

 

     On April 5, 2016, the Company completed the acquisition of substantially all of the assets of Prizm LLC and certain of its affiliates, an IME provider based in Marlton, New Jersey, with annual revenues of approximately $10.0 million, strengthening the Company's market position in the IME Industry.

 

(b)              Merger

 

 On April 27, 2016, the Company announced that it had entered 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 the Company’s stockholders and other customary closing conditions. In accordance with the merger agreement’s “go shop” provision, the Company 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.

 

 

 
27

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

   

 

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.

 

 

 
28

 

 

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.

 

 
29

 

 

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,

 
   

2015

   

2016

 

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.

 

 

 
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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

   

2016

 

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, 2016 and 2015

 

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.

 

 

 
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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.

 

 

 
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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.

 

 

 
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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.

 

 

 
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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. 

 

 

 
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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 31,

 
   

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.

 

 

 
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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

   

2017

   

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:

 

 

 
37

 

 

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.

 

 

 
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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.

 

 

 
39

 

 

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.

 

 
40

 

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in interest rates, foreign exchange rates and inflation. In the normal course of business, we are exposed to market risks, including changes in interest rates and foreign exchange rates which affect our debt and cash flows. We may also face additional exchange rate risk in the future as we expand our business internationally.

 

Interest Rate Risk. As of March 31, 2016, we had cash and cash equivalents totaling approximately $16.0 million. These amounts were held for future acquisition and working capital purposes and were held in non-interest bearing accounts, of which $1.6 million was held in the U.S. The U.S. amounts were insured under standard FDIC insurance coverage for deposit accounts up to $250,000, per depositor and account ownership category, at each separately insured depository institution.

 

Our outstanding debts of $32.6 million and $50.0 million at March 31, 2016 related to indebtedness under our working capital facilities and Amended and Restated Credit Facility contain floating interest rates. Thus, our interest rate is subject to market risk in the form of fluctuations in interest rates. The effect of a hypothetical one percentage point increase in our variable rate debt would result in a decrease of approximately $826,000 in our annual pre-tax income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at March 31, 2016.

 

 
41

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

 

Foreign Exchange Risk. As of March 31, 2016, we have foreign currency risks related to our revenues and operating expenses denominated in currencies other than the U.S. dollar, namely, the Canadian dollar, the Pound Sterling and the Australian dollar. Our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. We do not currently hedge our exposure to foreign currency exchange rate fluctuations related to the Canadian dollar given that the net difference between foreign currency denominated revenue and expenses is immaterial. In the future, however, we may hedge such exposure to foreign currency exchange rate fluctuations in this currency.

 

Beginning in the second quarter of 2013, in order to protect against foreign currency exposure in our Australian operations, we entered into forward foreign currency contracts as a hedge of AUD $60.0 million of our net investment in Australia. Beginning in the third quarter of 2013, we also entered into forward foreign currency contracts as a hedge of £40.0 million of our net investment in the U.K. During the fourth quarter of 2015, we entered into a foreign exchange agreement to hedge an additional £35.0 million related to our investment in the U.K. concurrent with funding of our acquisition of Argent.  

 

We settled certain of our hedge positions during the three months ended March 31, 2015 and 2016 and received $4.8 million and $1.6 million, respectively, in net proceeds. This amount was classified in accumulated other comprehensive income (loss) in our consolidated balance sheet (see Note 2 to the consolidated financial statements included elsewhere in this report), offsetting the currency translation adjustment of the related net investment that is also recorded in accumulated other comprehensive income (loss), and is reported net of the effect of income taxes. As of March 31, 2016, we had a net liability of $2.1 million recorded in other current liabilities with the offsetting net unrealized loss being recorded in accumulated other comprehensive income (loss) in our consolidated balance sheets associated with open forward foreign currency contracts which matured in April 2016.

 

Item 4. Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2016. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2016, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

There were no changes in our internal control over financial reporting during the period ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is currently a party to various legal proceedings arising from the normal course of business activities. While the Company does not presently believe that the ultimate outcome of such proceedings will have a material impact on its business, operating results or financial condition, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, it is possible that such ruling could have a material adverse impact on our business, operating results or financial condition in the period in which the ruling occurs. Our current estimates of the potential impact from such legal proceedings could change in the future.

 

Item 1A. Risk Factors

 

There have been no material changes in the risks facing the Company as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Dividend Policy

 

Since the Company’s incorporation in 2007, the Company has not declared or paid any dividends on its common stock. The Company currently intends to retain all of the Company’s future earnings, if any, to finance the growth and development of the Company’s business and does not anticipate paying cash dividends for the foreseeable future. The Amended and Restated Credit Facility and the Indenture restrict the Company’s ability to pay cash dividends, and any future financing agreements may restrict the Company from paying any type of dividends.

 

Item 3. Defaults Upon Senior Securities

 

None. 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None. 

 

 
42

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

 

 

Item 6. Exhibits

 

Exhibit 

Number

  

Title

 

 

 

2.1

  

Agreement and Plan of Merger, dated September 23, 2010, by and among ExamWorks Group, Inc., ExamWorks, Inc. and ExamWorks Merger Sub, Inc. (filed as Exhibit 2.1 to ExamWorks’ Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 13, 2010 and incorporated by reference herein).

     

2.2*

  

Agreement for the sale and purchase of the entire issued share capital of Premex Group Limited dated May 10, 2011, among ExamWorks Group, Inc., ExamWorks UK Ltd. and the shareholders of Premex Group Limited set forth therein (filed as Exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission on May 13, 2011 and incorporated by reference herein).

     

2.3*

  

Tax Deed dated May 10, 2011, relating to the sale and purchase of the entire issued share capital of Premex Group between ExamWorks UK Ltd. And Covenantors set forth therein (filed as Exhibit 2.2 to Form 8-K filed with the Securities and Exchange Commission on May 13, 2011 and incorporated by reference herein).

     
2.4   Agreement and Plan of Merger, dated January 8, 2016, by and among ExamWorks, Inc., Orange 12, Inc., ABI Document Support Services Inc., certain Stockholders of ABI Document Support Services Inc., and Bill Glassman, as stockholder representative (filed as Exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission on January 12, 2016 and incorporated by reference herein).
     
2.5   Share Purchase Agreement, dated January 19, 2016, by and among ExamWorks Group, Inc., Advanced Medical Reviews, Inc., Eytan Alpern, MD, and Barak Mevorak, MD (filed as Exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission on January 20, 2016 and incorporated by reference herein).
     

3.1.1

 

Amended and Restated Certificate of Incorporation of ExamWorks (incorporated by reference to Exhibit 3.1 to Form 10-K filed with the Securities and Exchange Commission on March 11, 2011).

     

3.1.2

  

Second Amended and Restated Bylaws of ExamWorks (incorporated by reference to Exhibit 3.1 to Form 8-K filed with the Securities and Exchange Commission on October 30, 2013).

     

4.1

  

Form of Common Stock Certificate of ExamWorks (filed as Exhibit 4.1 to Amendment No. 3 to ExamWorks’ Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 21, 2010 and incorporated by reference herein).

     

 4.2

  

Indenture dated July 19, 2011, by and among ExamWorks Group, Inc., the Guarantors party thereto, and U.S. Bank, National Association, as Trustee (including Form of 9% Note Due 2019) (filed as Exhibit 4.1 to Form 8-K filed with the Securities and Exchange Commission on July 22, 2011 and incorporated by reference herein).

     

4.3

  

Form of 9% Senior Unsecured Exchange Note Due 2019 and Form of Exchange Guarantee (filed as Exhibit 4.4 to Form S-4 filed with the Securities and Exchange Commission on April 4, 2012 and incorporated by reference herein).

     

4.4

 

Indenture, dated April 16, 2015, among ExamWorks Group, Inc., the Guarantors party thereto, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 17, 2015 and incorporated by reference herein).

 

 

 
 43

 

 

4.5

 

Supplemental Indenture, dated April 16, 2015, among ExamWorks Group, Inc., the Guarantors party thereto, and U.S. Bank National Association, as Trustee (including the Form of 5.625% Note Due 2023) (filed as Exhibit 4.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 17, 2015 and incorporated by reference herein).

     

4.6

 

Form of 5.625% Senior Unsecured Note Due 2023 and Form of Guarantee (filed as Exhibit 4.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 17, 2015 and incorporated by reference herein).

     

31.1

  

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)

     

31.2

  

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)

     

32.1

  

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

     

101.INS

  

XBRL Instance Document

     

101.SCH

  

XBRL Taxonomy Extension Schema Document

     

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document

     

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document

     

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document

     

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase Document

 

*Schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K.  The Company agrees to furnish supplementary copies of any omitted schedules to the Securities and Exchange Commission upon request. 

 

 

 
44

 

 

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

   

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

EXAMWORKS GROUP, INC.

 

 

 

 

 

 

 

 

Date: May 10, 2016

By:

/s/ J. Miguel Fernandez de Castro

 

 

 

J. Miguel Fernandez de Castro

 

 

 

Senior Executive Vice President and Chief

 

 

45