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EX-99.4 - EX-99.4 - Tabula Rasa HealthCare, Inc.a17-23997_1ex99d4.htm
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EX-23.1 - EX-23.1 - Tabula Rasa HealthCare, Inc.a17-23997_1ex23d1.htm
8-K/A - 8-K/A - Tabula Rasa HealthCare, Inc.a17-23997_18ka.htm

Exhibit 99.5

 

TABULA RASA HEALTHCARE, INC.

UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS

 

On September 6, 2017, Tabula Rasa HealthCare, Inc., a Delaware corporation (“TRHC” or the “Company”), TRCRD, Inc., a Delaware corporation and wholly-owned subsidiary of TRHC (“Merger Sub I”) and TRSHC Holdings, LLC, a Delaware limited liability company and a wholly-owned subsidiary of TRHC (“Merger Sub II,” and together with Merger Sub I, the “Merger Subs”), entered into, and consummated the transactions contemplated by, an Agreement and Plan of Merger (the “Merger Agreement”), by and among TRHC, the Merger Subs, Sinfonía HealthCare Corporation, a Delaware corporation (“Sinfonía”), Michael Deitch, Fletcher McCusker and Mr. Deitch in his capacity as the Stockholders’ Representative.  Under the terms of the Merger Agreement, TRHC acquired the SinfoniaRx business (“SRx”) as a result of Merger Sub I merging with and into Sinfonía, with Sinfonía surviving as a wholly-owned subsidiary of TRHC (the “First Merger”) and, immediately following the First Merger, Sinfonía merged with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of TRHC.  The closing consideration consisted of $35 million in cash, subject to adjustments set forth in the Merger Agreement, and 520,821 shares of TRHC common stock (valued at $19.20 per share) (the “Closing Consideration”). A portion of the cash merger consideration is being held in escrow to secure potential claims by TRHC for indemnification under the Merger Agreement and in respect of adjustments to Merger Consideration. In addition to the Closing Consideration, holders of Sinfonía’s capital stock and vested Sinfonía options with an exercise price less than the per share merger consideration (without taking into account any Contingent Payments (as defined below)) may be eligible to receive two additional contingent payments if SRx achieves certain performance goals for each of the twelve-month periods ended December 31, 2017 and December 31, 2018 (each a “Contingent Payment” and, together, the “Contingent Payments”). The Contingent Payments, if any, will be paid 50% in cash and 50% in TRHC common stock, subject to adjustments as set forth in the Merger Agreement. However, pursuant to the terms of the Merger Agreement, in no event will the aggregate number of shares of TRHC common stock issued as Closing Consideration and in connection with Contingent Payments exceed 19.9% of the issued and outstanding shares of TRHC common stock as of the close of September 5, 2017. In addition, TRHC is not obligated to pay more than $35 million in cash and TRHC common stock for the first Contingent Payment, or more than $130 million for the aggregate overall Closing Consideration (not taking into account certain adjustments set forth in the Merger Agreement) and Contingent Payments. The material terms of the Merger Agreement were previously disclosed by the Company  in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September 7, 2017 (the “Acquisition 8-K”) and the foregoing is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Acquisition 8-K.

 

The following unaudited pro forma financial statements should be read in conjunction with the historical financial statements and accompanying notes of the Company included in the Quarterly Report on Form 10-Q as of and for the three and six months ended June 30, 2017, filed with the SEC on August 8, 2017, the Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 14, 2017, the Acquisition 8-K, as well as Amendment No. 1 to the Acquisition 8-K, the notes to the unaudited pro forma combined financial statements included in this Amendment No. 1 to the Acquisition 8-K, and the historical financial statements and related notes of the SRx business included as Exhibits to this Amendment No. 1 to the Acquisition 8-K.

 

SRx’s audited financial statements and accompanying notes for the year ended December 31, 2016 and unaudited financial information for the six months ended June 30, 2017 are presented above. The presentation of the unaudited pro forma balance sheet gives effect to the acquisition as if it had occurred on June 30, 2017 and includes items that are directly attributable to the acquisition and are factually supportable regardless of whether they have a continuing impact or are nonrecurring. The presentation of the unaudited pro forma statement of income reflects the combined results of operations as if the acquisition had occurred on January 1, 2016, the beginning of the

 



 

Company’s 2016 fiscal year, and excludes items related to the acquisition that are nonrecurring and includes items that are directly attributable to the acquisition, expected to have a continuing impact, and are factually supportable.

 

The preliminary allocation of the purchase consideration presented in Note 2 and used to prepare the unaudited pro forma financial statements is based on a preliminary valuation of assets acquired and liabilities assumed. Accordingly, the purchase price allocation is considered preliminary and may materially change before final determination. The preliminary pro forma purchase price adjustments have been made solely for the purpose of providing the unaudited pro forma financial statements included herewith. A final determination of these fair values shall be based on the actual net tangible and intangible assets of SRx that exist as of the closing date of the transaction. In addition, the unaudited pro forma financial statements do not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies expected to result from the acquisition.  No assurance can be given with respect to the estimated revenue opportunities and operating cost savings that are expected to be realized as a result of the acquisition. The unaudited pro forma financial statements also does not reflect pro forma adjustments for non-recurring charges related to integration activities or exit costs that may be incurred by the Company or SRx in connection with the acquisition.

 

The unaudited pro forma financial statements are based on the estimates and assumptions set forth in the notes hereto. The unaudited pro forma financial statements are provided for informational purposes only and are not necessarily indicative of results that would have occurred had the acquisition been completed as of the dates indicated. In addition, the unaudited pro forma financial statements does not purport to be indicative of the future financial position or operating results of the combined operations. There were no transactions between the Company and Sinfonia Rx during the periods presented in the unaudited pro forma financial statements that would need to be eliminated.

 



 

TABULA RASA HEALTHCARE, INC.

UNAUDITED PROFORMA COMBINED BALANCE SHEETS

JUNE 30, 2017

(In thousands, except share and per share amounts)

 

 

 

Historical

 

Sinfonia Rx

 

Proforma

 

Proforma

 

 

 

Tabula Rasa HealthCare, Inc.

 

Acquisition

 

Adjustments

 

Tabula Rasa HealthCare, Inc.

 

 

 

 

 

 

 

(Note 3)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash

 

$

2,811

 

$

521

 

$

(202

)(a)

$

3,130

 

Accounts receivable, net

 

8,547

 

7,941

 

 

16,488

 

Inventories

 

3,202

 

 

 

3,202

 

Rebates receivable

 

325

 

 

 

325

 

Prepaid expenses

 

964

 

707

 

 

1,671

 

Other current assets

 

354

 

 

 

354

 

Total current assets

 

16,203

 

9,169

 

(202

)

25,170

 

Property and equipment, net

 

7,794

 

1,494

 

 

9,288

 

Software development costs, net

 

4,026

 

 

 

4,026

 

Goodwill

 

21,686

 

 

56,080

(b)

77,766

 

Intangible assets, net

 

23,400

 

4,078

 

41,425

(c)

68,903

 

Other assets

 

308

 

30

 

202

(a)

540

 

Total assets

 

$

73,417

 

$

14,771

 

$

97,505

 

$

185,693

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

686

 

$

247

 

$

 

$

933

 

Acquisition-related consideration payable

 

590

 

 

 

590

 

Acquisition-related contingent consideration

 

1,547

 

 

21,078

(d)

22,625

 

Accounts payable

 

6,166

 

8,396

 

 

14,562

 

Accrued expenses and other liabilities

 

4,129

 

2,417

 

 

6,546

 

Total current liabilities

 

13,118

 

11,060

 

21,078

 

45,256

 

Line of credit

 

 

 

35,000

(a)

35,000

 

Acquisition-related contingent consideration

 

 

 

16,536

(d)

16,536

 

Long-term debt

 

775

 

469

 

 

1,244

 

Deferred income tax liability

 

1,070

 

1,190

 

8,528

(e)

10,788

 

Warrant liability

 

 

2,113

 

(2,113

)(f)

 

Other long-term liabilities

 

2,671

 

 

 

2,671

 

Total liabilities

 

17,634

 

14,832

 

79,029

 

111,495

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 100,000,000 shares authorized, 17,360,302 shares issued and 17,286,836 shares outstanding at June 30, 2017, actual, 17,881,123 shares issued and 17,807,657 shares outstanding, pro forma

 

2

 

 

 

2

 

Additional paid-in capital

 

96,008

 

 

10,000

(g)

106,008

 

Treasury stock, at cost; 73,466 shares at June 30, 2017

 

(959

)

 

 

(959

)

Accumulated deficit

 

(39,268

)

(61

)

8,476

(h)

(30,853

)

Total stockholders’ equity

 

55,783

 

(61

)

18,476

 

74,198

 

Total liabilities and stockholders’ equity

 

$

73,417

 

$

14,771

 

$

97,505

 

$

185,693

 

 

See accompanying notes to unaudited pro forma financial statements.

 



 

TABULA RASA HEALTHCARE, INC.

UNAUDITED PROFORMA COMBINED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2017

(In thousands, except share and per share amounts)

 

 

 

Historical

 

Sinfonia Rx

 

Proforma

 

Proforma

 

 

 

Tabula Rasa HealthCare, Inc.

 

Acquisition

 

Adjustments

 

Tabula Rasa HealthCare, Inc.

 

 

 

 

 

 

 

(Note 3)

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

46,770

 

$

 

$

 

$

46,770

 

Service revenue

 

10,575

 

15,315

 

 

25,890

 

Total revenue

 

57,345

 

15,315

 

 

72,660

 

Cost of revenue, exclusive of depreciation and amortization shown below:

 

 

 

 

 

 

 

 

 

Product cost

 

35,868

 

 

 

35,868

 

Service cost

 

4,755

 

11,824

 

 

16,579

 

Total cost of revenue

 

40,623

 

11,824

 

 

52,447

 

Gross profit

 

16,722

 

3,491

 

 

20,213

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

2,510

 

 

 

2,510

 

Sales and marketing

 

2,544

 

169

 

 

2,713

 

General and administrative

 

11,999

 

2,293

 

474

(i)

14,766

 

Change in fair value of acquisition-related contingent consideration expense

 

37

 

 

 

37

 

Depreciation and amortization

 

3,564

 

734

 

2,687

(j)

6,985

 

Total operating expenses

 

20,654

 

3,196

 

3,161

 

27,011

 

(Loss) income from operations

 

(3,932

)

295

 

(3,161

)

(6,798

)

Other expense:

 

 

 

 

 

 

 

 

 

Interest expense

 

153

 

29

 

782

(k)

964

 

Total other expense

 

153

 

29

 

782

 

964

 

(Loss) income before income taxes

 

(4,085

)

266

 

(3,943

)

(7,762

)

Income tax expense (benefit)

 

260

 

(291

)

(3,308

)(l)

(3,339

)

Net (loss) income

 

$

(4,345

)

$

557

 

$

(635

)

$

(4,423

)

 

 

 

 

 

 

 

 

 

 

Net loss income attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic and diluted

 

$

(4,345

)

 

 

 

 

$

(4,423

)

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.27

)

 

 

 

 

$

(0.26

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

16,373,413

 

 

 

520,821

(m)

16,894,234

 

 

See accompanying notes to unaudited pro forma financial statements.

 



 

TABULA RASA HEALTHCARE, INC.

UNAUDITED PROFORMA COMBINED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2016

(In thousands, except share and per share amounts)

 

 

 

Historical

 

Sinfonia Rx

 

Proforma

 

Proforma

 

 

 

Tabula Rasa HealthCare, Inc.

 

Acquisition

 

Adjustments

 

Tabula Rasa HealthCare, Inc.

 

 

 

 

 

 

 

(Note 3)

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

79,446

 

$

 

$

 

$

79,446

 

Service revenue

 

14,616

 

27,056

 

 

41,672

 

Total revenue

 

94,062

 

27,056

 

 

121,118

 

Cost of revenue, exclusive of depreciation and amortization shown below:

 

 

 

 

 

 

 

 

 

Product cost

 

59,901

 

 

 

59,901

 

Service cost

 

5,276

 

19,277

 

 

24,553

 

Total cost of revenue

 

65,177

 

19,277

 

 

84,454

 

Gross profit

 

28,885

 

7,779

 

 

36,664

 

Operating (income) expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

3,811

 

 

 

3,811

 

Sales and marketing

 

3,860

 

309

 

 

4,169

 

General and administrative

 

11,831

 

7,595

 

(2,266

)(i)

17,160

 

Change in fair value of acquisition-related contingent consideration (income) expense

 

(338

)

 

 

(338

)

Change in fair value of acquisition-related consideration expense

 

55

 

 

 

55

 

Depreciation and amortization

 

5,115

 

1,517

 

5,372

(j)

12,004

 

Total operating expenses

 

24,334

 

9,421

 

3,106

 

36,861

 

Income (loss) from operations

 

4,551

 

(1,642

)

(3,106

)

(197

)

Other (income) expense:

 

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

(639

)

 

 

(639

)

Interest expense

 

4,488

 

47

 

1,579

(k)

6,114

 

Loss on extinguishment of debt

 

6,411

 

 

 

6,411

 

Total other expense

 

10,260

 

47

 

1,579

 

11,886

 

Loss before income taxes

 

(5,709

)

(1,689

)

(4,685

)

(12,083

)

Income tax expense (benefit)

 

541

 

(170

)

(4,200

)(l)

(3,829

)

Net loss

 

$

(6,250

)

$

(1,519

)

$

(485

)

$

(8,254

)

 

 

 

 

 

 

 

 

 

 

Net loss income attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic

 

$

(3,811

)

 

 

 

 

$

(5,815

)

Net loss attributable to common stockholders, diluted

 

$

(6,889

)

 

 

 

 

$

(8,893

)

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic

 

$

(0.51

)

 

 

 

 

$

(0.73

)

Net loss per share attributable to common stockholders, diluted

 

$

(0.59

)

 

 

 

 

$

(0.73

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

7,486,131

 

 

 

520,821

(m)

8,006,952

 

Weighted average common shares outstanding, diluted

 

11,591,210

 

 

 

520,821

(m)

12,112,031

 

 

See accompanying notes to unaudited pro forma financial statements.

 



 

TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Note 1. Basis of pro forma preparation

 

The unaudited pro forma combined financial statements are based on the historical consolidated financial statements of the Company and the historical financial statements of SinfoniaRx Business (“SRx”), a Business of Sinfonia Healthcare Corporation, after giving effect to the acquisition using the purchase method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and applying the assumptions and adjustments described in the accompanying notes. The unaudited pro forma balance sheet is presented as if the acquisition had occurred on June 30, 2017. The unaudited pro forma statement of operations for the year ended December 31, 2016 and six months ended June 30, 2017 is presented as if the acquisition had occurred on January 1, 2016, the beginning of the Company’s fiscal year.

 

Note 2. Total purchase consideration and preliminary purchase price allocation

 

On September 6, 2017, Tabula Rasa HealthCare, Inc., a Delaware corporation (the “Company” or “TRHC”), TRCRD, Inc., a Delaware corporation and wholly-owned subsidiary of TRHC (“Merger Sub I”) and TRSHC Holdings, LLC, a Delaware limited liability company and a wholly-owned subsidiary of TRHC (“Merger Sub II,” and together with Merger Sub I, the “Merger Subs”), entered into, and consummated the transactions contemplated by, an Agreement and Plan of Merger (the “Merger Agreement”), by and among TRHC, the Merger Subs, Sinfonía HealthCare Corporation, a Delaware corporation (“Sinfonía”), Michael Deitch, Fletcher McCusker and Mr. Deitch in his capacity as the Stockholders’ Representative.  Under the terms of the Merger Agreement, TRHC acquired SRx as a result of Merger Sub I merging with and into Sinfonía, with Sinfonía surviving as a wholly-owned subsidiary of TRHC (the “First Merger”) and, immediately following the First Merger, Sinfonía merged with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of TRHC. The consideration for the acquisition was comprised of (i) cash consideration of $35,000 payable upon closing, subject to certain customary post-closing adjustments, in each case upon the terms and subject to the conditions contained in the Merger Agreement; (ii) stock consideration issued upon closing valued at $10,000; and (iii) contingent purchase price consideration with a preliminary estimated fair value of $37,614 to be paid 50% in cash and 50% in TRHC common stock, subject to adjustments as set forth in the Merger Agreement, based on the achievement of certain performance goals for each of the twelve-month periods ended December 31, 2017 and December 31, 2018. In addition, TRHC is not obligated to pay more than $35 million in cash and TRHC common stock for the first contingent payment, or more than $130 million for the aggregate overall closing consideration (not taking into account certain adjustments set forth in the Merger Agreement) and contingent payments.

 

The total purchase price described above has been allocated to SRx’s tangible and intangible assets acquired and liabilities assumed for purposes of these unaudited pro forma combined financial statements, based on their estimated relative fair values. The final allocation will be based upon valuations and other analysis for which there is currently insufficient information to make a definitive allocation. Accordingly, the purchase price allocation adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma combined financial statements. The final purchase price allocation will be determined after a complete and thorough analysis within one year after the closing date of the Merger. As a result, the final acquisition accounting adjustments could differ materially from the pro forma adjustments presented herein. The purchase price of SRx is allocated to the assets and liabilities to be assumed on the following preliminary basis:

 



 

Purchase Consideration

 

 

 

 

 

 

 

Cash consideration at closing

 

$

35,000

 

Stock consideration at closing

 

10,000

 

Preliminary estimated fair value of contingent consideration

 

37,614

 

Total fair value of acquistion consideration

 

$

82,614

 

 

Purchase Price Allocation

 

 

 

 

 

 

 

 

 

June 30, 2017

 

Cash

 

$

521

 

Accounts receivable, net

 

7,941

 

Prepaid expenses

 

707

 

Property and equipment, net

 

1,494

 

Intangible assets, net

 

45,503

 

Other assets

 

30

 

Total identifiable assets

 

56,196

 

Accounts payable

 

(8,396

)

Accrued expenses and other current liabilities

 

(2,417

)

Debt assumed

 

(716

)

Deferred income tax liability

 

(18,133

)

Total liabilities assumed

 

(29,662

)

Total pro forma goodwill

 

$

56,080

 

 

Note 3. Pro forma adjustments

 

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change including with respect to final purchase price and allocation thereof. Final adjustments could result in a materially different purchase price and/or allocations of the purchase price, which would affect the values assigned to tangible or intangible assets and the amount of depreciation and amortization expense recorded in the combined financial statements. The effect of any changes to the combined statements would depend on the final purchase price and the nature and amount of final purchase price allocations and could be material. The following adjustments have been reflected in the unaudited pro forma combined financial information:

 

Adjustments to the pro forma combined balance sheet

 

(a)     Debt transaction

 

On September 6, 2017 in connection with the acquisition of SRx, the Company entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) that provides for a $40,000 revolving credit facility, with a $1 million sublimit for cash management services and letters of credit and foreign exchange transactions (the “Credit Facility”). Under the Loan Agreement, the Company may request an increase in the size of the Credit Facility up to $10 million upon the successful syndication of such additional amounts. The Company incurred debt issuance costs of $202 in connection with the Loan Agreement. The pro forma adjustments reflect the funds that were drawn from the Credit Facility to finance the closing cash consideration payment and agreed upon transaction costs related to the acquisition of SRx and the capitalization of the debt issuance costs incurred related to the amended Loan Agreement.

 



 

(b)     Goodwill

 

Reflects the preliminary estimate of goodwill, which represents the excess of the purchase price over the fair value of SRx’s identifiable assets acquired and liabilities assumed as shown in Note 2.

 

(c)     Acquired intangible assets

 

Represents the difference between the historical amounts of SRx net intangible assets and the preliminary fair values of SRx intangible assets acquired. The acquired intangible assets and related amortization expense based on the preliminary estimate of fair values for the six months ended June 30, 2017 and year ended December 31, 2016 is as follows:

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

Amortization Period

 

Preliminary

 

Amortization Expense

 

Amortization Expense

 

 

 

(in years)

 

Fair Value

 

December 31, 2016

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

10.00

 

$

4,903

 

$

490

 

$

245

 

Client relationships

 

7.78

 

22,230

 

2,856

 

1,428

 

Non-competition agreements

 

5.00

 

4,846

 

969

 

485

 

Developed technology

 

8.00

 

13,524

 

1,691

 

846

 

Total

 

 

 

45,503

 

6,006

 

3,004

 

 

 

 

 

 

 

 

 

 

 

To eliminate the historical SRx net intangible assets and amortization

 

 

 

(4,078

)

(634

)

(317

)

Pro forma adjustment

 

 

 

$

41,425

 

$

5,372

 

$

2,687

 

 

These estimated fair values and useful lives are considered preliminary and are subject to change based on final purchase price valuation amounts. Changes in fair value or useful life of the acquired intangible assets may be material. The fair values of the intangible assets were preliminarily estimated using income based approaches. Specifically, the fair values of trademarks and technology were estimated using the relief from royalty method. The Company, with the assistance of a third party appraiser, derived the hypothetical royalty income from the projected revenues of SRx. The fair value of client relationships was estimated using a discounted present value income approach. To calculate fair value, the Company, with the assistance of a third party appraiser, used cash flows discounted at a rate considered appropriate given the inherent risks associated with each client grouping. The fair value of the non-competition agreement was estimated using the differential approach which involves valuing the business under two different scenarios. The first valuation assumes the non-compete agreement is in place and the second valuation assumes that it is not. The difference in the value of the business under each approach is attributed to the non-compete agreement.

 

The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and is being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method.

 

(d)     Contingent consideration

 

Represents the preliminary estimated fair value of the contingent purchase price consideration that may be payable pursuant to the terms of the Merger Agreement. The Company, with the assistance of a third-party appraiser, utilized a Monte Carlo simulation to derive at preliminary estimates of the contingent consideration payments that were then discounted back to a present value.

 



 

(e)     Deferred taxes

 

The pro forma adjustment includes the recognition of a deferred tax liability with the offset to goodwill of $16,943 relating to the intangible assets identified in Note 3(c) above. The deferred tax liability represents the tax effect of the difference between the estimated fair value of identified intangible assets and the estimated tax basis of the assets, which is calculated using a tax rate applicable to the jurisdiction in which the assets are estimated to reside.

 

The adjustment also reflects the partial reversal of the Company’s deferred tax asset valuation allowance in the amount of $8,415. Because SRx will be included in the Company’s consolidated tax return following the acquisition, the Company has determined that the deferred tax liabilities related to the acquisition provide sufficient taxable income to realize the Company’s deferred tax assets associated with those jurisdictions that file consolidated returns. However, the income tax benefit of $8,415 related to the reduction in the Company’s valuation allowance is not reflected in the pro forma statement of operations because it will not have a continuing impact.

 

As noted above, the estimated fair values and useful lives of the acquired intangible assets are considered preliminary and are subject to change based on final purchase price valuation amounts. Accordingly, the estimates related to deferred taxes are also subject to change.

 

(f)     Warrant liability

 

Reflects the elimination of the warrant liability upon the closing of the acquisition.

 

(g)     Common stock

 

Represents the issuance of common stock as part of the closing consideration for the acquisition of SRx.

 

(h)     Equity

 

Pro forma adjustment includes the elimination of the historical net parent investment of SRx. The adjustment also reflects the partial reversal of the Company’s deferred tax asset valuation allowance in the amount of $8,415 as discussed in Note 3(e) above.

 

Adjustments to the pro forma statement of operations

 

(i)    Acquisition-related costs, management fee allocations, and change in fair value of warrant liability

 

The Company incurred $94 of acquisition costs primarily related to legal and advisory fees in the second quarter of 2017. These costs are reversed in the unaudited pro forma income statement as they represent non-recurring charges directly related to the acquisition of SRx.

 

During the six months ended June 30, 2017 and the fiscal year ended December 31, 2016 SRx was allocated approximately $500 and $1,063, respectively, of management fee expenses related to general corporate oversight. The pro forma adjustments reflect the elimination of these management fee expenses from SRx’s historical financials as they are not expected to have a continuing impact on the results of the combined entity.

 

During the six months ended June 30, 2017 SRx recorded a gain of $1,068 to general and administrative expenses related to the change in the fair value of warrant liabilities and an expense of $1,203 for the fiscal year ended December 31, 2016. The pro forma adjustments reflect the elimination of these remeasurment adjustments from SRx’s historical financials as they are not expected to have a continuing impact on the results of the combined entity as noted in Note 3(f) above.

 



 

(j)    Amortization expense

 

Reflects the additional estimated amortization expense related to the acquired intangible assets discussed at Note 3(c) above.

 

(k)    Interest expense

 

Represents the increased interest expense of $748 for the six months ended June 30, 2017 and $1,512 for the year ended December 31, 2016 associated with the draw down of $35,000 on the Company’s credit facility to finance the closing cash payment of the SRx acquisition as discussed in Note 3(a), with interest expense based on the current rate of 4.25% which represents Prime Rate, as defined, plus an Applicable Margin, initially set at 0.0%.

 

In addition, the pro forma adjustment includes interest expense of $34 for the six months ended June 30, 2017 and $67 for the fiscal year ended December 31, 2016 related to the amortization of debt issuance costs incurred in conjunction with the credit facility that are being amortized over the 3 year term of the Loan Agreement.

 

(l)    Provision for income taxes

 

This represents the tax effect of adjustments to income before income taxes at the estimated tax rates applicable to the jurisdictions in which the pro forma adjustments are expected to be recorded and includes the recognition of tax benefits as a result of the acquired deferred tax liabilities being a source of income to support recognition of the Company’s deferred tax assets historically reserved.

 

As discussed in Note 3(e), the acquisition of SRx will result in the partial reversal of the Company’s valuation allowance. However, the income tax benefit related to the reduction in the Company’s valuation allowance is not reflected in the pro forma statement of operations because it will not have a continuing impact.

 

(m)    Weighted average common shares outstanding

 

Reflects the adjustment to weighted average shares used in computing basic and diluted net loss per share to account for the number of shares of TRHC common stock issued in connection with the closing stock consideration payment for the acquisition of SRx.