Attached files
| file | filename |
|---|---|
| EX-99.3 - PRO FORMA FINANCIAL INFORMATION - MModal Inc. | mmexhibit993.htm |
| EX-99.1 - MULTIMODAL 2010 AUDITED FINANCIAL STATEMENTS - MModal Inc. | multimodaltech123110ex991.htm |
| EX-23.1 - AUDITOR CONSENT - MModal Inc. | exhibit231consentofyanekgr.htm |
| 8-K/A - MModal Inc. | medquist8kaformultimodal.htm |
Multimodal Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
Unaudited
Six Months Ended June 30, | |||||||
2011 | 2010 | ||||||
Net revenues | $ | 12,070,509 | $ | 9,350,024 | |||
Cost of revenues | 2,100,251 | 1,602,164 | |||||
Gross profit | 9,970,258 | 7,747,860 | |||||
Operating costs and expenses: | |||||||
Selling, general and administrative | 3,141,174 | 2,882,487 | |||||
Research and development | 3,563,966 | 1,832,896 | |||||
Depreciation and amortization | 462,991 | 246,290 | |||||
Acquisition and transaction expenses | 993,893 | - | |||||
Share‑based compensation and bonus to option holders | 291,921 | - | |||||
Total operating costs and expenses | 8,453,945 | 4,961,673 | |||||
Operating income | 1,516,313 | 2,786,187 | |||||
Other income (expense), net | (33,565 | ) | 8,850 | ||||
Income before income taxes | 1,482,748 | 2,795,037 | |||||
Income tax provision | 703,033 | 1,081,000 | |||||
Net income | $ | 779,715 | $ | 1,714,037 | |||
Net income per common share | |||||||
Basic | $ | 3.34 | $ | 7.40 | |||
Diluted | $ | 3.29 | $ | 7.26 | |||
Weighted average shares outstanding: | |||||||
Basic | 233,128 | 231,636 | |||||
Diluted | 236,713 | 236,044 | |||||
Multimodal Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
Unaudited
June 30, 2011 | June 30, 2010 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 4,916,215 | $ | 5,504,360 | |||
Investments in marketable securities | 1,081,425 | 1,055,019 | |||||
Accounts receivable, net of allowance of $178,675 and $69,408, respectively | 3,331,255 | 2,732,791 | |||||
Other current assets | 1,285,283 | 928,874 | |||||
Total current assets | 10,614,178 | 10,221,044 | |||||
Property and equipment, net | 2,019,162 | 1,210,585 | |||||
Goodwill | 1,939,012 | - | |||||
Other intangible assets, net | 797,194 | 749,400 | |||||
Other assets | 682,799 | 557,628 | |||||
Total assets | $ | 16,052,345 | $ | 12,738,657 | |||
Liabilities and Equity | |||||||
Current liabilities: | |||||||
Accounts payable | 1,291,178 | 304,357 | |||||
Accrued expenses and other current liabilities | 1,865,371 | 928,017 | |||||
Accrued compensation | 569,850 | 335,124 | |||||
Deferred revenue | 2,292,975 | 2,479,418 | |||||
Total current liabilities | 6,019,374 | 4,046,916 | |||||
Deferred income taxes | 437,000 | 233,000 | |||||
Total liabilities | 6,456,374 | 4,279,916 | |||||
Commitments and contingent liabilities | |||||||
Total equity: | |||||||
Preferred stock; authorized 1,000,000 shares; none issued or outstanding | - | - | |||||
Common stock; authorized 2,016,000 shares (1,986,000 Class A ("A") Voting, 30,000 Class B ("B") Non‑Voting); 233,146 (221,036 A, 12,110 B) and 231,636 (221,036 A, 10,600 B) shares issued and outstanding, respectively | 3,552,671 | 3,539,313 | |||||
Additional paid‑in capital | 1,149,964 | 984,469 | |||||
Retained earnings | 4,871,780 | 3,919,743 | |||||
Accumulated other comprehensive income | 21,556 | 15,216 | |||||
Total equity | 9,595,971 | 8,458,741 | |||||
Total liabilities and equity | $ | 16,052,345 | $ | 12,738,657 | |||
Multimodal Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Unaudited
Six Months Ended June 30, | |||||||
2011 | 2010 | ||||||
Operating activities: | |||||||
Net income | $ | 779,715 | $ | 1,714,037 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 462,991 | 246,290 | |||||
Deferred income taxes | 67,000 | (375,000 | ) | ||||
Share‑based compensation | 165,495 | - | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (474,726 | ) | (1,280,081 | ) | |||
Other current assets | (286,098 | ) | 310,265 | ||||
Accounts payable | (11,239 | ) | 59,738 | ||||
Accrued expenses and other current liabilities | 234,968 | 558,926 | |||||
Accrued compensation | 116,016 | 55,688 | |||||
Deferred revenue | 249,545 | 708,445 | |||||
Net cash provided by operating activities | $ | 1,303,667 | $ | 1,998,308 | |||
Investing activities: | |||||||
Purchase of property and equipment | (710,652 | ) | (321,505 | ) | |||
Fees expended for patent applications | (95,439 | ) | (65,088 | ) | |||
Cash impact of purchase of M*Modal NV | 99,675 | - | |||||
Purchase of marketable securities | (4,206 | ) | (5,012 | ) | |||
Net cash used in investing activities | (710,622 | ) | (391,605 | ) | |||
Financing activities: | |||||||
Issuance of common stock from exercised options | 12,679 | - | |||||
Dividends paid | (2,373,574 | ) | (568,115 | ) | |||
Net cash used in financing activities | (2,360,895 | ) | (568,115 | ) | |||
Net increase (decrease) in cash and cash equivalents | (1,767,850 | ) | 1,038,588 | ||||
Cash and cash equivalents ‑ beginning of period | 6,684,065 | 4,465,772 | |||||
Cash and cash equivalents ‑ end of period | $ | 4,916,215 | $ | 5,504,360 | |||
Multimodal Technologies, Inc. and Subsidiary
Consolidated Statements of Equity and Comprehensive Income
Unaudited
Common Stock | Additional paid‑in | Retained | Comprehensive | Accumulated other comprehensive | Total | |||||||||||||||||||||
Shares | Amount | capital | earnings | income | income (loss) | equity | ||||||||||||||||||||
Balance, January 1, 2010 | 231,636 | $ | 3,539,313 | $ | 984,469 | $ | 2,205,706 | $ - | $ | (8,007 | ) | $ | 6,721,481 | |||||||||||||
Components of comprehensive income: | ||||||||||||||||||||||||||
Net income | - | - | - | 1,714,037 | 1,714,037 | - | 1,714,037 | |||||||||||||||||||
Unrealized holding gains on investments | - | - | - | - | 23,223 | 23,223 | 23,223 | |||||||||||||||||||
Total comprehensive income | $ | 1,737,260 | ||||||||||||||||||||||||
Balance, June 30, 2010 | 231,636 | $ | 3,539,313 | $ | 984,469 | $ | 3,919,743 | $ | 15,216 | $ | 8,458,741 | |||||||||||||||
Balance, January 1, 2011 | 231,641 | 3,539,992 | 984,469 | 6,465,639 | - | (1,097 | ) | 10,989,003 | ||||||||||||||||||
Stock option exercise | 1,500 | 12,000 | 165,495 | - | - | - | 177,495 | |||||||||||||||||||
Dividends declared of $10.18 per outstanding share | - | - | - | (2,373,574 | ) | - | - | (2,373,574 | ) | |||||||||||||||||
Stock option exercise | 5 | 679 | - | - | - | - | 679 | |||||||||||||||||||
Components of comprehensive income: | ||||||||||||||||||||||||||
Net income | - | - | - | 779,715 | 779,715 | - | 779,715 | |||||||||||||||||||
Unrealized holding gains on investments | - | - | - | - | 22,653 | 22,653 | 22,653 | |||||||||||||||||||
Total comprehensive income | — | — | — | — | $ | 802,368 | — | |||||||||||||||||||
Balance, June 30, 2011 | 233,146 | $ | 3,552,671 | $ | 1,149,964 | $ | 4,871,780 | $ | 21,556 | $ | 9,595,971 | |||||||||||||||
Multimodal Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Unaudited
1. Description of business
Multimodal Technologies, Inc. (the "Company") was incorporated in Pennsylvania on October 11, 2001. The Company is engaged in the development and commercialization of speech recognition processes and technologies. The Company's speech understanding software automatically encodes clinical facts in real‑time, translating the physician’s dictation into a rich blend of clinical reasoning and structured data – a meaningful clinical document. Meaningful clinical documents are based on HL7’s Clinical Document Architecture (CDA) standards. When created and shared, they provide an effective way to populate Electronic Health Record/Electronic Medical Record (EHR/EMR) systems or specialty information systems, such as radiology, pathology and emergency department, with structured, interoperable clinical documentation. The Company has acquired patents and will file additional patent applications to protect this intellectual property.
2. Significant accounting policies
Principles of Consolidation
The consolidated financial statements include the accounts of Multimodal Technologies, Inc. and its wholly‑owned subsidiary, M*Modal NV. Multimodal Technologies, Inc. purchased the stock of M*Modal NV (a Belgian limited liability company formerly named Telegentis NV) on June 27, 2011. All significant intercompany accounts and transactions are eliminated from the consolidated financial statements.
Use of Estimates and Assumptions in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, valuation of long‑lived and intangible assets and goodwill, valuation allowances for receivables, deferred income taxes, revenue recognition and share‑based compensation. Actual results could differ from those estimates.
Revenue Recognition
The Company’s revenues come primarily from software licensing and related services. Revenues from software licenses include all fees earned from granting customers the right to use the software. For software licensing arrangements that do not require significant customization, revenues are recognized when: 1) there is a binding arrangement with the customer, 2) the products are delivered, 3) customer payment is deemed fixed or determinable and free of significant uncertainties or contingencies, and 4) collection is probable. Substantially all new software license revenues are recognized in this manner.
Many of the Company’s revenue arrangements include multiple elements. Initialization fees are payable upon or within the first six to nine months after the effective date of license agreements and cover configuration, training and enrollment of dictating physicians. Initialization fees are deferred upon receipt and are recognized into revenue over the initialization period, which ranges from six to nine months. Production license fees are calculated based on the peak load designated by the customer and the number of minutes processed. Production license fees are recognized monthly. Maintenance and support fees are waived during the initialization period and are charged at then‑current rates thereafter. Maintenance and support revenues are recognized when the services are performed.
The Company’s license agreements vary in term and generally are able to be terminated by the customer with sixty days’ notice prior to the beginning of a renewal term. Due to the unique and separable nature of each deliverable provided under the Company’s license agreements, the Company uses the relative fair value method to allocate the selling price, as separate units of accounting, to the production license fees and to the performance of integration and maintenance services. Moreover, multiple contracts with a single customer are accounted for as separate arrangements.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, using statutory tax rates in effect for the period in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that includes the enactment date.
Share‑Based Compensation
The Company estimated the fair value of stock options granted in 2010 using an independent professional valuation and in 2009 and prior using the Two‑Stage FCFF Discount Model. The value of the portion of awards that is ultimately expected to vest is recognized as compensation expense over the requisite service periods.
Share‑based compensation expense related to stock options for the six months ended June 30, 2011 and 2010 was $165,495 and $‑, respectively.
Net Income per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted net income per share is computed by dividing net income by the weighted average shares outstanding, as adjusted for the dilutive effect of stock options which may be settled by the Company through the issuance of shares using the treasury stock method. The table below reflects basic and diluted net income per share for the six months ended June 30, 2011 and 2010:
2011 | 2010 | ||||||
Net income available for common shareholders | $ | 779,715 | $ | 1,714,037 | |||
Weighted average shares outstanding: | |||||||
Basic | 233,128 | 231,636 | |||||
Effect of dilutive stock | 3,585 | 4,408 | |||||
Diluted | 236,713 | 236,044 | |||||
Potentially dilutive shares having an anti‑dilutive effect on net income per share, and, therefore, excluded from the calculation of diluted net income per share, totaled 10,780 and ‑ for the six months ended June 30, 2011 and 2010, respectively.
Advertising Costs
Advertising costs are expensed as incurred and for the six months ended June 30, 2011 and 2010 were $727,781 and $427,059, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Deposits held with banks may exceed the amount of insurance
provided on such deposits. Consequently, the Company’s cash equivalents are subject to potential credit risk. As of June 30, 2011 and 2010, cash equivalents consisted of money market investments. The carrying value of cash and cash equivalents approximates fair value.
Investments in Marketable Securities
Investments in marketable securities are classified as available‑for‑sale and are recorded on the consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of tax. Marketable securities consist of municipal bond‑based mutual funds. As of June 30, 2011, the total cost basis of the securities was $1,059,869. The cost of investments sold is determined using the specific identification method.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The carrying value of accounts receivable approximates fair value. The allowance for doubtful accounts is management's best estimate for losses inherent in the Company's accounts receivable portfolio.
Management estimates uncollectible amounts based upon the Company's historical write‑off experience, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic conditions. Historically, these estimates have
been adequate to cover the Company's accounts receivable exposure. The Company changes the allowance if circumstances or economic conditions change.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight‑line basis over the estimated useful lives of the assets which range from three to seven years for furniture, equipment and software, and the lesser of the lease term or estimated useful life for leasehold improvements. Repairs and maintenance costs are charged to expense as incurred while additions and betterments are capitalized. Gains or losses on disposals are charged to operations. Upon retirement, sale or other disposition, the related cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in operations.
Software Development Costs
The Company capitalizes internally generated software development costs after technological feasibility has been established and amortizes the costs over an estimated useful life of five years. Capitalization ceases no later than the point at which the project is substantially complete and ready for its intended use. There were no software development costs qualifying for capitalization during the six months ended June 30, 2011 and 2010. Prior capitalized software development costs were fully amortized at June 30, 2011 and 2010.
Valuation of Long‑Lived and Other Intangible Assets and Goodwill
In connection with acquisitions, the Company allocates portions of the purchase price to tangible and intangible assets, with the remainder allocated to goodwill. The Company assesses the realizability of goodwill and intangible assets with indefinite useful lives at least annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable.
Long‑Lived and Other Intangible Assets
Long‑lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To determine the recoverability of long‑lived assets, the estimated future undiscounted cash flows expected to be generated by an asset is compared to the carrying value of the asset. If the carrying value of the long‑lived asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized in the amount by
which the carrying value of the asset exceeds its fair value. Management evaluates the reasonableness of the useful lives of these assets annually.
Other intangible assets include patented technology, unpatented technology and trade secrets, and databases. Patents are being amortized using the straight‑line method through their expiration dates.
Other Assets
Other assets consist of patent development costs, which will be amortized over the lives of the related patents, when awarded, or written off if not awarded.
Foreign Currency
Net losses from foreign currency transactions were $54,176 and $5,561 for the six months ended June 30, 2011 and 2010, respectively. Foreign currency gains and losses are included as a component of other income (expense) in the accompanying consolidated statements of operations.
Business Enterprise Segments
The Company operates in one reportable segment, which is speech recognition software for the healthcare industry.
Concentrations of Risk, Geographic Data and Enterprise‑wide Disclosures
Two customers accounted for 46% and 51% of the Company's net revenues for the six months ended June 30, 2011 and 2010, respectively. These customers accounted for $1,781,796 and $1,304,473 of the Company's accounts receivable at June 30, 2011 and 2010, respectively.
The following table summarizes revenues by the categories of the Company's services as a percentage of total net revenues:
Six months ended June 30, | ||||||
2011 | 2010 | |||||
Net revenues | ||||||
Healthcare | 92 | % | 92 | % | ||
Technology consulting | 3 | % | 3 | % | ||
Royalties | 5 | % | 5 | % | ||
Total | 100 | % | 100 | % | ||
The following summarizes net revenues by geography:
Six months ended June 30, | |||||||
2011 | 2010 | ||||||
Net revenues | |||||||
United States | $ | 11,141,980 | $ | 8,640,283 | |||
Japan | 871,316 | 659,741 | |||||
Other | 57,213 | 50,000 | |||||
Total | $ | 12,070,509 | $ | 9,350,024 | |||
At June 30, 2011 and 2010, all long‑lived assets of the Company were located in the United States.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, related party receivables, accounts payable and accrued expenses are reflected in the accompanying balance sheets at carrying values which approximate fair value.
The Company's assets measured at fair value consist of investments in marketable securities. The valuation methodology used to measure the fair value of these funds is the net asset value ("NAV") of shares held at quarter‑end, which is classified as Level 1 in the fair value hierarchy established by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements. There have been no changes to the methodology used at June 30, 2011 and 2010. The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income consists of unrealized holding gains on investments in marketable securities. Other comprehensive income and comprehensive income are displayed separately in the consolidated statements of equity and comprehensive income.
Operating Lease
Rent expense on the Company's operating lease for office space is charged to expense over the lease term. The operating lease agreement provides for scheduled rent increases over the lease term. Rent expense is recognized on a straight‑line basis over the lease term.
Supplemental Cash Flow Information
Six months ended June 30, | |||||||
2011 | 2010 | ||||||
Cash paid for income taxes | $ | 1,151,000 | $ | 1,177,000 | |||
Share‑based compensation and paid‑in capital | 165,495 | - | |||||
Reclassification of other assets as patents | 30,750 | 82,542 | |||||
Additionally, during the six months ended June 30, 2011, the Company acquired the outstanding stock of Telegentis NV, which was funded primarily with accrued expenses (see Note 3).
3. Acquisition of Telegentis NV
Effective June 27, 2011, the Company acquired all of the outstanding stock of Telegentis NV ("Telegentis"), a Belgian limited liability company, to expand geographic presence of the Company. The Company accounted for the transaction as a purchase and, accordingly, allocated the purchase price to the assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. The fair value of experienced management, which was one of the key drivers for the acquisition, was not separately recognized and has been included in the value of goodwill.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Cash | $ | 99,675 | |
Accounts receivable | 83,124 | ||
Other current assets | 1,348 | ||
Goodwill | 1,939,012 | ||
Total assets | 2,123,159 | ||
Accounts payable | 905,226 | ||
Purchase price | $ | 1,217,933 | |
The purchase price was financed with accrued payables due to the former shareholders of Telegentis of $1,164,708 and outstanding notes receivable from Telegentis of $53,225. The Company expects to satisfy the accrued payables to the former shareholders of Telegentis in the third quarter of 2011. Acquisition costs of $374,030 were incurred and charged to 2011 operating expenses. Goodwill is expected to be deductible for tax purposes over 15 years.
Telegentis was incorporated on July 23, 2009 and was still considered to be in the development stage at June 27, 2011, as the planned principal operations had not yet produced revenues. The net loss of Telegentis for the period from July 23, 2009 to June 27, 2011 was $2,427,684.
For the period from January 1, 2011 to June 27, 2011, marketing and other professional services provided by Telegentis to the Company totaled $460,566 and are included in 2011 operating expenses.
Upon closing, the name of Telegentis NV was changed to M*Modal NV. The activity of M*Modal NV was not significant during the period from June 27, 2011 to June 30, 2011.
4. Allowance for doubtful accounts
The activity in the allowance for doubtful accounts for the six months ended June 30, 2011 and 2010 is as follows:
2011 | 2010 | ||||||
Beginning balance | $ | 110,022 | $ | 55,000 | |||
Bad debt provision | 68,653 | 50,408 | |||||
Doubtful accounts written off | - | (36,000 | ) | ||||
Ending balance | 178,675 | 69,408 | |||||
5. Other current assets
Other current assets consisted of the following as of June 30:
2011 | 2010 | ||||||
Prepaid expenses | $ | 802,430 | $ | 665,981 | |||
Related party receivables | 275,231 | 262,893 | |||||
Prepaid and refundable income taxes | 143,622 | - | |||||
Deferred taxes | 39,000 | - | |||||
Other | 25,000 | - | |||||
Total other current assets | $ | 1,285,283 | $ | 928,874 | |||
6. Property and equipment
Property and equipment consisted of the following as of June 30:
2011 | 2010 | ||||||
Computer equipment | $ | 2,886,789 | $ | 1,618,226 | |||
Software | 159,598 | 58,537 | |||||
Leasehold improvements | 97,014 | 90,756 | |||||
Furniture and equipment | 621,830 | 457,967 | |||||
Total | 3,765,231 | 2,225,486 | |||||
Less: accumulated depreciation | 1,746,069 | 1,014,901 | |||||
Property and equipment, net | $ | 2,019,162 | $ | 1,210,585 | |||
Depreciation and amortization totaled $449,543 and $236,110 for the six months ended June 30, 2011 and 2010, respectively.
7. Goodwill and other intangible assets
Goodwill
In connection with the acquisition of Telegentis NV effective June 27, 2011, the Company allocated a portion of the purchase price to goodwill in the amount of $1,939,012. The Company assesses the realizability of goodwill at least annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is considered to be impaired if the carrying value of a "reporting unit" exceeds its estimated fair value. Management determines fair value using discounted future cash flow analyses or other accepted valuation techniques. Management does not believe any impairment of its goodwill exists at June 30, 2011.
Other Intangible Assets
The Company reviews its long‑lived assets for impairment when events indicate that their carrying amount may not be recoverable. When the Company determines that one or more impairment indicators are present for an asset, it compares the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to generate, it compares the fair value to the book value of the asset. If the fair value is less than the book value, the Company recognizes an impairment loss. The impairment loss is the excess of the carrying amount of the asset over its fair value.
Some of the events that the Company considers as impairment indicators for its long‑lived assets are:
‑ net book value compared to fair value;
‑ significant adverse economic and industry trends;
‑ significant decrease in the market value of the assets;
‑ the extent that the Company uses an asset or changes in the manner that it uses it; and
‑ significant changes to the asset since acquired
During the six months ended June 30, 2011 and 2010, the Company reviewed the carrying value of its long‑lived assets and determined that the carrying amounts of such assets was less than the
undiscounted cash flows and, accordingly, no impairment charge was recorded.
As of June 30, 2011 and 2010, other intangible asset balances were:
June 30, 2011 | |||||||||||
Cost | Accumulated Amortization | Net Book Value | |||||||||
Patented technology | $ | 467,491 | $ | 161,498 | $ | 305,993 | |||||
Unpatented technology and trade secrets | 245,201 | - | 245,201 | ||||||||
Databases | 246,000 | - | 246,000 | ||||||||
Total | $ | 958,692 | $ | 161,498 | $ | 797,194 | |||||
June 30, 2010 | |||||||||||
Cost | Accumulated Amortization | Net Book Value | |||||||||
Patented technology | $ | 387,477 | $ | 129,278 | $ | 258,199 | |||||
Unpatented technology and trade secrets | 245,201 | - | 245,201 | ||||||||
Databases | 246,000 | - | 246,000 | ||||||||
Total | $ | 878,678 | $ | 129,278 | $ | 749,400 | |||||
The estimated useful life and the weighted average remaining lives of the patented technology as of June 30, 2011 were as follows:
Estimated Useful Life | Weighted Average Remaining Lives | ||
Patented technology | 16‑18 years | 12 years | |
Estimated annual amortization expense for other intangible assets is as follows:
2012 | $ | 27,334 | |
2013 | 27,334 | ||
2014 | 27,334 | ||
2015 | 27,334 | ||
2016 | 27,334 | ||
Thereafter | 169,323 | ||
Total | $ | 305,993 | |
The Company recorded amortization expense of $13,448 and $10,180 for the six months ended June 30, 2011 and 2010, respectively.
8. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following as of June 30:
2011 | 2010 | ||||||
Payable to former shareholders of Telegentis | $ | 1,164,708 | - | ||||
Accrued taxes | - | 397,197 | |||||
Deferred taxes | - | 75,000 | |||||
Other accrued expenses | 700,663 | 455,820 | |||||
Total accrued expenses | $ | 1,865,371 | $ | 928,017 | |||
9. Line of credit
The Company has a line of credit from PNC Bank with maximum borrowings of $800,000 and interest at the prime rate plus 1%. The prime rate was 3.25% at June 30, 2011 and 2010. The line of credit is secured by the Company's marketable securities, accounts receivable and intangible assets. There were no borrowings under this line of credit during the six months ended June 30, 2011 and 2010.
10. Operating lease
The Company leases office space under an operating lease expiring in June 2014. Minimal rental payments under the lease are recognized on a straight‑line basis over the term of the lease. Rent expense for the operating lease for the six months ended June 30, 2011 and 2010 was $196,721 and $190,768, respectively. Future annual minimum lease payments under the non‑cancelable lease are as follows as of June 30, 2011:
2012 | $ | 385,135 | |
2013 | 385,135 | ||
2014 | 385,135 | ||
Total | $ | 1,155,405 | |
11. Stock option plans
In November 2001, the Company's Board of Directors approved the 2001 Stock Incentive Plan, to grant stock‑based incentives to key employees and other related parties. The Plan provides for both qualified incentive stock options (ISO's), as defined under Section 422 of the Internal Revenue Code, and nonqualified stock options. A total of 14,000 shares of the Class B Non‑Voting Common Stock were authorized for grants under the 2001 Stock Incentive Plan. In April 2003, the Company's Board of Directors approved the 2003 Stock Incentive Plan. This Plan, which is substantially similar to the 2001 Stock Incentive Plan, authorizes an additional 16,000 shares of the Class B Non‑Voting Common Stock for grants. The ISO's are exercisable at a price not less than the fair market value (110% of fair market value for participants holding more than 10% of the voting stock, as defined) on the date of the grant. The options carry exercise prices, vesting provisions and expiration terms, as defined by their respective agreements.
Information with respect to the Company's common stock options is as follows:
Number of options | Weighted average exercise price | Weighted average remaining contractual life in years | Aggregate intrinsic value | ||||||||||
Outstanding, January 1, 2010 | 9,818 | $ | 54.28 | ||||||||||
Granted | - | - | |||||||||||
Exercised | - | - | |||||||||||
Forfeited | (1,875 | ) | 80.00 | ||||||||||
Expired | (625 | ) | 80.00 | ||||||||||
Outstanding, June 30, 2010 | 7,318 | $ | 45.49 | 5.3 | $ | 456,954 | |||||||
Outstanding, January 1, 2011 | 18,103 | 99.33 | |||||||||||
Granted | - | - | |||||||||||
Exercised | (1,505 | ) | 8.42 | ||||||||||
Forfeited | - | - | |||||||||||
Expired | - | - | |||||||||||
Outstanding, June 30, 2011 | 16,598 | $ | 107.57 | 8.0 | $ | 469,556 | |||||||
Exercisable, June 30, 2011 | 12,253 | $ | 98.05 | 7.5 | $ | 463,340 | |||||||
Options vested and expected to vest as of June 30, 2011 | 16,598 | $ | 107.57 | 8.0 | $ | 469,556 | |||||||
The aggregate intrinsic value is calculated using the difference between the estimated fair market value at period‑end and the option exercise price, multiplied by the number of in‑the‑money options. As of June 30, 2011, 5,818 options were in the money. The options granted during November 2010 carry an exercise price of $135.86 and an estimated fair market value of $135.86 at June 30, 2011. Therefore, they not considered to be in the money at June 30, 2011.
Compensation expense recognized during the six months ended June 30, 2011 totaled $165,495.
A summary of outstanding and exercisable options as of June 30, 2011 is as follows:
Options outstanding | Options exercisable | |||||||
Exercise price | Number of shares | Weighted average remaining contractual life (in years) | Number of shares | |||||
$25.53 | 2,750 | 5.1 | 2,750 | |||||
$65.00 | 1,018 | 4.8 | 1,018 | |||||
$90.00 | 2,050 | 5.9 | 1,915 | |||||
$135.86 | 10,780 | 9.4 | 6,570 | |||||
16,598 | 8.0 | 12,253 | ||||||
The aggregate intrinsic value of shares vested during the six months ended June 30, 2011 is $14,721.
As of June 30, 2011, there were 1,292 additional options available for grant under the Company's stock option plans.
12. Income taxes
The provision for income taxes is comprised of the following components for the six months ended June 30, 2011 and 2010:
2011 | 2010 | ||||||
Current income tax provision: | |||||||
Federal | $ | 385,146 | $ | 1,089,000 | |||
State | 250,887 | 367,000 | |||||
Current income tax provision | 636,033 | 1,456,000 | |||||
Deferred income tax provision (benefit): | |||||||
Federal | 62,000 | (283,000 | ) | ||||
State | 5,000 | (92,000 | ) | ||||
Deferred income tax provision (benefit) | 67,000 | (375,000 | ) | ||||
Income tax provision | $ | 703,033 | $ | 1,081,000 | |||
The reconciliation of the income tax provision at the U.S. statutory federal income tax rate to the Company's tax provision follows:
2011 | 2010 | ||||
Provision at statutory tax rate | 34.0 | % | 34.0 | % | |
Impact of Telegentis acquisition costs | 18.3 | % | — | % | |
State taxes | 17.3 | % | 9.8 | % | |
Tax credits | (9.7 | )% | (1.3 | )% | |
Return to accrual differences | (9.6 | )% | — | % | |
Permanent differences | (1.2 | )% | 0.5 | % | |
Other, net | (1.7 | )% | (4.3 | )% | |
Income tax provision | 47.4 | % | 38.7 | % | |
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of June 30, 2011 and 2010 were as follows:
2011 | 2010 | ||||||
Deferred tax assets | |||||||
Deferred revenue | $ | 671,000 | $ | 313,000 | |||
Stock options | 157,000 | 111,000 | |||||
Accrued vacation | 80,000 | 45,000 | |||||
Allowance for bad debts | 75,000 | 28,000 | |||||
Other | 62,000 | 23,000 | |||||
Total deferred tax assets | 1,045,000 | 520,000 | |||||
Deferred tax liabilities | |||||||
Property and equipment | (727,000 | ) | (337,000 | ) | |||
Patent development costs | (266,000 | ) | — | ||||
Change in tax reporting method from cash to accrual | (233,000 | ) | (370,000 | ) | |||
Intangibles | (217,000 | ) | (121,000 | ) | |||
Total deferred tax liabilities | (1,443,000 | ) | (828,000 | ) | |||
Net deferred tax liabilities | $ | (398,000 | ) | $ | (308,000 | ) | |
After an assessment of the Company's tax positions, management has determined that there are no material uncertain tax positions to be accounted for in the consolidated financial statements for the six months ended June 30, 2011 and 2010. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years prior to 2008.
13. Employee benefit plan
The Company sponsors a tax‑qualified retirement savings plan named the Multimodal Technologies, Inc. 401(k) Savings Plan covering substantially all of its employees whereby participants may defer up to 100% of their earnings, subject to applicable Internal Revenue Code limits. Elective deferral contributions are allocated to each participant's individual account and are then invested in selected investment alternatives according to the participant's directives. Employee elective deferrals are 100% vested at all times. The plan provides for employer matching contributions equal to 100% of participant contributions not in excess of 3% of employee compensation plus 50% of participant contributions that exceed 3% but do not exceed 5% of employee compensation. Additional Company contributions may be made on a discretionary basis. Company contributions to the plan were $87,299 and $57,534 for the six months ended June 30, 2011 and 2010, respectively.
14. Related party transactions
Advanced Media, Inc. ("AMI") is a significant stockholder of the Company. The Company is party to a Master Agreement for software development and consulting services and remarketing of software with AMI. The contract, as renegotiated in July 2004, has a term of three years with provisions for automatic renewals. The contract provides for time and material costs for ongoing development and maintenance of the software at various rates based upon job classification. A supplemental agreement was added in July 2006 which provides certain nonexclusive licenses to AMI.
Among other things, the contract provides for royalties to be paid to the Company based on licenses granted by AMI. Further, the contract and supplemental agreement provide for minimum services to be purchased by AMI of $250,000 per quarter through March 31, 2013 and for any renewal periods thereafter. The Company has waived these minimum amounts through the quarter ending September 30, 2011.
The following is a summary of the financial statement activity related to AMI for the six months ended June 30, 2011 and 2010:
2011 | 2010 | ||||||
Royalties revenues | $ | 613,224 | $ | 433,303 | |||
Royalties receivable at June 30 | $ | 147,283 | $ | 136,035 | |||
Technology consulting revenues | $ | 258,092 | $ | 226,438 | |||
Technology consulting receivable at June 30 | $ | 127,948 | $ | 126,858 | |||
Cost of revenues | $ | 126,398 | $ | 224,632 | |||
15. Quarterly financial information
The following table sets forth selected quarterly financial information for the six months ended June 30, 2011 and 2010. The operating results for any given quarter are not necessarily indicative of results for any future period.
2011 | 1st Quarter | 2nd Quarter | |||||
Net revenues | $ | 6,003,269 | $ | 6,067,240 | |||
Gross profit | $ | 4,980,037 | $ | 4,990,221 | |||
Net income | $ | 731,760 | $ | 47,955 | |||
Net income per share | |||||||
Basic | $ | 3.13 | $ | 0.21 | |||
Diluted | $ | 3.09 | $ | 0.20 | |||
Weighted average shares outstanding: | |||||||
Basic | 233,109 | 233,146 | |||||
Diluted | 236,694 | 236,731 | |||||
2010 | 1st Quarter | 2nd Quarter | |||||
Net revenues | $ | 4,523,746 | $ | 4,826,278 | |||
Gross profit | $ | 3,749,257 | $ | 3,998,603 | |||
Net income | $ | 969,120 | $ | 744,917 | |||
Net income per share | |||||||
Basic | $ | 4.18 | $ | 3.22 | |||
Diluted | $ | 4.13 | $ | 3.16 | |||
Weighted average shares outstanding: | |||||||
Basic | 231,636 | 231,636 | |||||
Diluted | 234,632 | 236,045 | |||||
16. Subsequent events
Sale of the Company
On August 18, 2011 (the “Closing Date”), the Company was acquired by MedQuist Holdings Inc. ("MedQuist") through a series of mergers between the Company and direct, wholly‑owned subsidiaries of MedQuist. As a result of the merger, the Company became a direct, wholly‑owned subsidiary of MedQuist. On the Closing Date, MedQuist paid an aggregate of approximately $49.0 million in cash to the Company's shareholders, optionholders and other third parties and issued an aggregate of 4,134,896 shares of the its common stock (the “Shares”) to the Company's shareholders who are “accredited investors” within the meaning of Regulation D promulgated under the Securities Act of 1933 (the “Accredited Investors”). MedQuist is also obligated to pay up to approximately $28.8 million of additional cash consideration in three installments of approximately $16.3 million, $4.8 million and $7.7 million, respectively, following the first, second and third anniversaries of the Closing Date.
In connection with the merger with MedQuist, the Company declared dividends of approximately $5.3 million. Also, coincident with the merger, various options to purchase stock of the Company were redeemed for approximately $5.8 million. Acquisition costs of $809,350 and $619,863 related to this transaction were incurred and charged to 2011 operating expenses through October 19, 2011 and June 30, 2011, respectively.
The Company has no prior material relationship with MedQuist other than the agreements related to the merger and certain commercial arrangements between the Company and certain affiliates of MedQuist related to the provision of products and services.
In connection with the merger and on the Closing Date, the Accredited Investors and MedQuist entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”). The Stockholders’ Agreement provides for, among other things, certain registration rights and trading restrictions for
the Accredited Investors. With respect to the registration rights, MedQuist will register the Shares for resale on a “shelf” registration statement no later than April 2012 and the Accredited Investors have “piggyback” registration rights to participate in certain public offerings of the MedQuist’s common stock. With respect to the restrictions on trading, those Accredited Investors that were not employees of the Company as of the Closing Date are prohibited from selling (i) 75% of the Shares received by such persons in the merger during the period beginning on the six month anniversary of the Closing Date and ending immediately prior to the one year anniversary of the Closing Date and (ii) 25% of the Shares received by such persons in the merger during the period beginning on the one year anniversary of the Closing Date and ending immediately prior to the eighteen month anniversary of the Closing Date. In addition, three Accredited Investors are restricted, in general, to selling Shares equal to no more than 20% of the average daily trading volume of MedQuist’s common stock in any given day during the period beginning on the six month anniversary of the Closing Date and ending on the one year anniversary of the Closing Date. The Accredited Investors have no prior material relationship with MedQuist other than the agreements related to the merger.
The following is a summary of the financial statement activity between the Company and MedQuist and its subsidiaries for the six months ended June 30, 2011 and 2010:
2011 | 2010 | ||||||
Net revenues | $ | 3,478,859 | $ | 3,717,156 | |||
Cost of revenues | $ | 712,000 | $ | 711,000 | |||
Accounts receivable at June 30 | $ | 1,386,640 | $ | 1,295,510 | |||
Deferred revenue | $ | 110,000 | $ | 110,000 | |||
Date of Management's Review
The Company has analyzed subsequent events for recognition and disclosure purposes through August 25, 2011, the date the consolidated financial statements as originally issued were available to be issued, and through October 19, 2011, the date the reissued consolidated financial statements were available to be issued.