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EX-10.2 - EX-10.2 - Patriot National, Inc.pn-ex102_153.htm
EX-31.1 - EX-31.1 - Patriot National, Inc.pn-ex311_8.htm
EX-2.5 - EX-2.5 - Patriot National, Inc.pn-ex25_155.htm
EX-32.1 - EX-32.1 - Patriot National, Inc.pn-ex321_16.htm
EX-2.4 - EX-2.4 - Patriot National, Inc.pn-ex24_154.htm
EX-2.6 - EX-2.6 - Patriot National, Inc.pn-ex26_156.htm
EX-31.2 - EX-31.2 - Patriot National, Inc.pn-ex312_6.htm
EX-2.7 - EX-2.7 - Patriot National, Inc.pn-ex27_157.htm
EX-10.1 - EX-10.1 - Patriot National, Inc.pn-ex101_152.htm
EX-32.2 - EX-32.2 - Patriot National, Inc.pn-ex322_10.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2015

OR

o

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

For the transition period from                      to                     

Commission File Number: 001-36804

 

Patriot National, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

46-4151376

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

401 East Las Olas Boulevard, Suite 1650

Fort Lauderdale, Florida 33301

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (954) 670-2900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x   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  x   No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

x  (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨   No  x

The number of shares of the registrant’s common stock outstanding on November 12, 2015 was 27,050,694.

 

 

 

 

 


PATRIOT NATIONAL, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

Page
No.

 

 

 

 

 

PART I—Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements.

 

1

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014

 

1

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the three months ended September 30, 2015 and
September 30, 2014

 

2

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the nine months ended September 30, 2015 and
September 30, 2014

 

3

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2015 and
September 30, 2014

 

4

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) for the nine months ended
September 30, 2015

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

Item 2.

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

 

23

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

Item 4.

Controls and Procedures

 

38

 

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

39

 

 

 

 

Item 1A.

Risk Factors

 

39

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

39

 

 

 

 

Item 4.

Mine Safety Disclosures

 

39

 

 

 

 

Item 5.

Other Information

 

39

 

 

 

 

Item 6.

Exhibits

 

40

 

 

 

 

SIGNATURES

 

42

 

 

 

 


PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

PATRIOT NATIONAL, INC.

Consolidated Balance Sheets

(In thousands) 

 

 

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash

 

$

15,209

 

 

$

4,251

 

Equity and fixed income security investments

 

 

3,249

 

 

 

 

Total cash and investments

 

 

18,458

 

 

 

4,251

 

Restricted cash

 

 

16,289

 

 

 

6,923

 

Fee income receivable

 

 

13,372

 

 

 

1,942

 

Fee income receivable from related party

 

 

22,141

 

 

 

11,988

 

Net receivable from related parties

 

 

152

 

 

 

1,773

 

Deferred costs for initial public offering

 

 

 

 

 

2,682

 

Income taxes receivable

 

 

3,224

 

 

 

 

Other current assets

 

 

2,207

 

 

 

430

 

Total current assets

 

 

75,843

 

 

 

29,989

 

Fixed assets, net of depreciation

 

 

4,798

 

 

 

1,879

 

Deferred loan fees

 

 

2,343

 

 

 

5,911

 

Goodwill

 

 

119,408

 

 

 

61,493

 

Intangible assets

 

 

78,935

 

 

 

32,988

 

Other long term assets

 

 

11,557

 

 

 

9,842

 

Total Assets

 

$

292,884

 

 

$

142,102

 

Liabilities and Equity (Deficit)

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deferred claims administration services income

 

$

10,781

 

 

$

8,515

 

Net advanced claims reimbursements

 

 

7,040

 

 

 

6,803

 

Income taxes payable

 

 

 

 

 

11,548

 

Current earn-out payable

 

 

10,235

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

 

38,921

 

 

 

15,027

 

Deferred purchase consideration

 

 

16,831

 

 

 

 

Revolver borrowings outstanding

 

 

10,832

 

 

 

 

Current portion of notes payable

 

 

5,500

 

 

 

15,782

 

Current portion of capital lease obligation

 

 

2,409

 

 

 

2,332

 

Total current liabilities

 

 

102,549

 

 

 

60,007

 

Earn-out payable

 

 

1,827

 

 

 

 

Notes payable

 

 

102,375

 

 

 

95,039

 

Capital lease obligation

 

 

417

 

 

 

2,438

 

Warrant redemption liability

 

 

 

 

 

12,879

 

Total Liabilities

 

 

207,168

 

 

 

170,363

 

Equity (Deficit)

 

 

 

 

 

 

 

 

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

   and outstanding as of September 30, 2015 and December 31, 2014

 

 

 

 

 

 

Common stock, $.001 par value; 1,000,000 shares authorized, 27,051

   and 18,075 shares issued and outstanding as of September 30, 2015 and

   December 31, 2014, respectively

 

 

21

 

 

 

14

 

Additional paid in capital

 

 

113,867

 

 

 

 

Accumulated deficit

 

 

(27,938

)

 

 

(27,930

)

Total Patriot National, Inc. Stockholders' Equity (Deficit)

 

 

85,950

 

 

 

(27,916

)

Less Non-controlling interest

 

 

(234

)

 

 

(345

)

Total Equity (Deficit)

 

 

85,716

 

 

 

(28,261

)

Total Liabilities and Equity (Deficit)

 

$

292,884

 

 

$

142,102

 

 

See accompanying notes to consolidated financial statements.

1


PATRIOT NATIONAL, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

Fee income

 

$

34,759

 

 

$

15,630

 

Fee income from related party

 

 

23,773

 

 

 

15,803

 

Total fee income and fee income from related party

 

 

58,532

 

 

 

31,433

 

Net investment income

 

 

49

 

 

 

76

 

Net realized (losses) gains on investments

 

 

(58

)

 

 

13,960

 

Total Revenues

 

 

58,523

 

 

 

45,469

 

Expenses

 

 

 

 

 

 

 

 

Salaries and related expenses

 

 

21,549

 

 

 

9,726

 

Commission expense

 

 

8,173

 

 

 

5,891

 

Management fees to related party for administrative support services

 

 

 

 

 

861

 

Outsourced services

 

 

2,369

 

 

 

1,713

 

Allocation of marketing, underwriting and policy issuance costs from

   related party

 

 

 

 

 

333

 

Other operating expenses

 

 

11,974

 

 

 

4,538

 

Acquisition costs

 

 

1,453

 

 

 

 

Interest expense

 

 

806

 

 

 

2,836

 

Depreciation and amortization

 

 

4,380

 

 

 

1,652

 

Amortization of loan discounts and loan costs

 

 

62

 

 

 

650

 

Stock compensation expense

 

 

2,586

 

 

 

 

Decrease in fair value of warrant redemption liability

 

 

 

 

 

(8,760

)

Gain on disposal of fixed assets

 

 

(7

)

 

 

 

Total Expenses

 

 

53,345

 

 

 

19,440

 

Net Income before income tax expense

 

 

5,178

 

 

 

26,029

 

Income tax expense

 

 

1,331

 

 

 

9,101

 

Net Income Including Non-Controlling Interest in Subsidiary

 

 

3,847

 

 

 

16,928

 

Net Income attributable to non-controlling interest in subsidiary

 

 

59

 

 

 

26

 

Net Income

 

$

3,788

 

 

$

16,902

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

 

$

1.03

 

Diluted

 

 

0.14

 

 

 

0.46

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

Basic

 

 

26,802

 

 

 

16,368

 

Diluted

 

 

27,940

 

 

 

17,551

 

 

 

See accompanying notes to consolidated financial statements.

2


PATRIOT NATIONAL, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

Fee income

 

$

80,060

 

 

$

37,896

 

Fee income from related party

 

 

68,852

 

 

 

24,589

 

Total fee income and fee income from related party

 

 

148,912

 

 

 

62,485

 

Net investment income

 

 

85

 

 

 

496

 

Net realized (losses) gains on investments

 

 

(149

)

 

 

14,038

 

Total Revenues

 

 

148,848

 

 

 

77,019

 

Expenses

 

 

 

 

 

 

 

 

Salaries and related expenses

 

 

53,782

 

 

 

17,907

 

Commission expense

 

 

25,556

 

 

 

9,491

 

Management fees to related party for administrative support services

 

 

 

 

 

5,390

 

Outsourced services

 

 

7,623

 

 

 

3,118

 

Allocation of marketing, underwriting and policy issuance costs from

   related party

 

 

 

 

 

1,872

 

Other operating expenses

 

 

25,259

 

 

 

7,801

 

Acquisition costs

 

 

4,372

 

 

 

 

Interest expense

 

 

2,525

 

 

 

5,427

 

Depreciation and amortization

 

 

10,075

 

 

 

3,699

 

Amortization of loan discounts and loan costs

 

 

206

 

 

 

1,295

 

Stock compensation expense

 

 

8,791

 

 

 

 

Costs from debt payoff (1)

 

 

13,681

 

 

 

 

Decrease in fair value of warrant redemption liability

 

 

(1,385

)

 

 

(2,257

)

Gain on disposal of fixed assets

 

 

(7

)

 

 

 

Total Expenses

 

 

150,478

 

 

 

53,743

 

Net (Loss) Income before income tax expense

 

 

(1,630

)

 

 

23,276

 

Income tax (benefit) expense

 

 

(1,733

)

 

 

10,401

 

Net Income Including Non-Controlling Interest in Subsidiary

 

 

103

 

 

 

12,875

 

Net Income attributable to non-controlling interest in subsidiary

 

 

111

 

 

 

68

 

Net (Loss) Income

 

$

(8

)

 

$

12,807

 

(Loss) Earnings Per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

(0.00

)

 

$

0.85

 

Diluted

 

 

(0.00

)

 

 

0.65

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

Basic

 

 

26,006

 

 

 

14,981

 

Diluted

 

 

26,006

 

 

 

16,183

 

 

 

 

(1)

Costs from debt payoff include $4.3 million of early payment penalties and $9.3 million associated with the write-off of related deferred financing fees and original issue discounts.

 

See accompanying notes to consolidated financial statements.

3


PATRIOT NATIONAL, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

  

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Operating Activities

 

 

 

 

 

 

 

 

Net Income

 

$

103

 

 

$

12,875

 

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

 

 

 

 

 

 

 

 

Net (Income) attributable to business generated by GUI,

   exclusive of depreciation expense

 

 

 

 

 

(2,252

)

Depreciation and amortization

 

 

10,075

 

 

 

3,699

 

Amortization of loan discounts and loan costs

 

 

206

 

 

 

1,295

 

Decrease in fair value of warrant redemption liability

 

 

(1,385

)

 

 

(2,257

)

Stock compensation expense

 

 

8,791

 

 

 

 

Write-off of deferred financing and original issue discounts

 

 

9,342

 

 

 

 

Net realized losses (gains) on investments

 

 

149

 

 

 

(14,038

)

Deferred income taxes

 

 

 

 

 

(482

)

Provision for uncollectible fee income

 

 

351

 

 

 

100

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in:

 

 

 

 

 

 

 

 

Fee income receivable

 

 

(8,212

)

 

 

(719

)

Fee income receivable from related party

 

 

(10,153

)

 

 

(4,849

)

Other current assets

 

 

(1,715

)

 

 

(85

)

Increase (decrease) in:

 

 

 

 

 

 

 

 

Net payable to related parties

 

 

781

 

 

 

3,618

 

Deferred claims administration services income

 

 

539

 

 

 

569

 

Net advanced claims reimbursements

 

 

237

 

 

 

629

 

Income taxes payable

 

 

(14,081

)

 

 

8,833

 

Accounts payable and accrued expenses

 

 

11,963

 

 

 

8,593

 

Net Cash Provided by Operating Activities

 

 

6,991

 

 

 

15,529

 

Investment Activities:

 

 

 

 

 

 

 

 

Net increase in restricted cash

 

 

(4,528

)

 

 

(672

)

Net increase in note receivable from related party

 

 

 

 

 

(492

)

Purchase of equity securities

 

 

(3,662

)

 

 

(3,914

)

Proceeds from sale of equity securities

 

 

264

 

 

 

4,037

 

Purchase of fixed assets and other long-term assets

 

 

(4,565

)

 

 

(437

)

Acquisitions, net of $4,069 and $912 cash acquired in 2015 and 2014, respectively

 

 

(74,014

)

 

 

(52,744

)

Net Cash Used in Investment Activities

 

 

(86,505

)

 

 

(54,222

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net

 

 

98,275

 

 

 

 

Proceeds from senior secured term loans, net of fees

 

 

107,497

 

 

 

 

Proceeds from notes payable, net of detachable common stock warrants and loan fees

 

 

 

 

 

55,290

 

Repayment of senior secured term loans

 

 

(2,125

)

 

 

 

Payment of loan fees

 

 

 

 

 

(3,388

)

Payment of costs for initial public offering

 

 

(2,479

)

 

 

 

Revolver facility borrowings

 

 

51,900

 

 

 

 

Revolver facility repayments

 

 

(41,068

)

 

 

 

Repayment of note payable

 

 

(119,573

)

 

 

(6,656

)

Repayment of capital lease obligation

 

 

(1,955

)

 

 

(188

)

Net Cash Provided by Financing Activities

 

 

90,472

 

 

 

45,058

 

Increase in cash

 

 

10,958

 

 

 

6,365

 

Cash, beginning of period

 

 

4,251

 

 

 

1,661

 

Cash, end of period

 

$

15,209

 

 

$

8,026

 

 

 

See accompanying notes to consolidated financial statements.


4


PATRIOT NATIONAL, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

  

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Supplemental Cash Flow Data

 

 

 

 

 

 

 

 

Net Loss Attributable to Business Generated by GUI, Exclusive of Depreciation Expense

 

 

 

 

 

 

 

 

GUI total net loss

 

$

 

 

$

45

 

Depreciation expense

 

 

 

 

 

(2,297

)

 

 

$

 

 

$

(2,252

)

Non-Cash Capital Contribution Associated with Assets and Liabilities of GUI

 

 

 

 

 

 

 

 

Fixed assets and other long term assets acquired from GUI

 

$

 

 

$

334

 

Elimination of balances payable to GUI

 

 

 

 

 

3,168

 

Change in capital lease obligation assumed from GUI

 

 

 

 

 

1,304

 

Note receivable transferred to GUI

 

 

 

 

 

(492

)

Note payable associated with acquisition of assets and liabilities of GUI

 

 

 

 

 

(30,000

)

 

 

$

 

 

$

(25,686

)

Interest Paid

 

$

2,504

 

 

$

4,877

 

Income Taxes Paid

 

$

11,062

 

 

$

533

 

Non-Cash Stock Consideration Issued for the Acquisition of Global HR Research LLC

 

$

6,503

 

 

$

 

Non-Cash Financing Activities

 

 

 

 

 

 

 

 

Deemed dividend attributable to acquisition of MPCS assets

 

$

(750

)

 

$

 

Deemed dividend attributable to acquisition of GUI's contracts and certain

   other assets and assumption of certain liabilities

 

 

 

 

 

(49,150

)

Deemed dividend attributable to merger of SPV2 with and into Patriot Care, Inc.

 

 

 

 

 

(6,750

)

 

 

See accompanying notes to consolidated financial statements.

5


PATRIOT NATIONAL, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

 

 

 

Patriot National, Inc. Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid In

 

 

Accumulated

 

 

Non-Controlling

 

 

Total Equity

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

(Deficit)

 

Balance, January 1, 2015

 

 

18,075

 

 

$

14

 

 

$

 

 

$

(27,930

)

 

$

(345

)

 

$

(28,261

)

Issuance of common stock

 

 

7,350

 

 

 

7

 

 

 

97,824

 

 

 

 

 

 

 

 

 

97,831

 

Exercise of detachable common stock

   warrants

 

 

965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock consideration issued for acquisitions

 

 

350

 

 

 

 

 

 

6,503

 

 

 

 

 

 

 

 

 

6,503

 

Restricted stock awards exercised

 

 

311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

 

 

 

 

 

 

 

8,791

 

 

 

 

 

 

 

 

 

8,791

 

Deemed dividend attributable to acquisition

   of MPCS assets

 

 

 

 

 

 

 

 

(750

)

 

 

 

 

 

 

 

 

(750

)

Contribution of warrant redemption liability

 

 

 

 

 

 

 

 

1,499

 

 

 

 

 

 

 

 

 

1,499

 

Balance before Net Loss

 

 

27,051

 

 

 

21

 

 

 

113,867

 

 

 

(27,930

)

 

 

(345

)

 

 

85,613

 

Net (Loss) Income

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

111

 

 

 

103

 

Balance, September 30, 2015

 

 

27,051

 

 

$

21

 

 

$

113,867

 

 

$

(27,938

)

 

$

(234

)

 

$

85,716

 

 

 

See accompanying notes to consolidated financial statements.

 

6


PATRIOT NATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

1.

Description of Business and Basis of Presentation

Description of Business

Patriot National, Inc. (“Patriot National” or the “Company”) is an independent national provider of comprehensive technology-enabled outsourcing solutions that help insurance carriers, employers and other clients mitigate risk, comply with complex regulations, and save time and money. We offer a full suite of end-to-end insurance related and specialty services that allow our clients to improve efficiencies and reduce expenses through our value-added processes. The core of our value proposition includes the benefit of a “one-stop” solution with our broad array of offered services, scalable state-of-the-art technology, and solutions to complex business and regulatory processes. Our goal is to be the preferred provider of mandatory employer services such as risk management services, health and welfare services, employee onboarding and compliance services.

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

Our revenue is primarily fee-based, most of which is contractually committed or highly recurring. Unlike our insurance and reinsurance carrier clients, we do not generate underwriting income or assume underwriting risk on workers’ compensation plans. Patriot National is headquartered in Ft. Lauderdale, Florida.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been omitted pursuant to such rules and regulations. Included for comparative purposes are our combined financial statements for the three and nine month periods ended September 30, 2014, which combined the financial activity of Patriot National with the results of an acquisition under common control.  This acquisition was completed on August 6, 2014.  The combined financial statements presented for the periods ended September 30, 2014 are the Statement of Operations and the Statement of Cash Flows.  This acquisition is discussed fully in our annual report for the year ended December 31, 2014.

The unaudited consolidated financial statements included herein are, in the opinion of management, prepared on a basis consistent with our audited combined financial statements for the year ended December 31, 2014 and include all normal recurring adjustments necessary for a fair presentation of the information set forth. The quarterly results of operations are not necessarily indicative of the results of operations to be reported for subsequent quarters or the full year. These unaudited consolidated financial statements should be read in conjunction with the audited combined financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014. In the preparation of our unaudited consolidated financial statements as of September 30, 2015, management evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure therein.

For Contego Services Group, LLC (“Contego Services Group”), the Company’s combined subsidiary that is 97% owned, and for DecisionUR, LLC (“DecisionUR”), the Company’s combined subsidiary that is 98.8% owned, the third party holdings of equity interests are referred to as non-controlling interest. The portion of the third party members’ equity (deficit) of Contego Services Group and DecisionUR are presented as non-controlling interest in the accompanying consolidated balance sheets as of September 30, 2015 and combined balance sheet as of December 31, 2014. The Company discloses the following three measures of net income (loss): (i) net income (loss), including non-controlling interest in subsidiary, (ii) net income (loss) attributable to non-controlling interest in subsidiary, and (iii) net income (loss).

 

 

2.

Effect of Recently Issued Financial Accounting Standards

In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”, an update to Accounting Standard Codification (“ASC”) Topic 805, Business Combinations.  This update requires that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjusting amounts are determined. The amendment requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation,

7


amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued.  We will evaluate this guidance as potential adjustments arise.  

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. The update requires retrospective application. ASU 2015-03 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. Early adoption is permitted but we do not anticipate electing early adoption.  We are currently evaluating the financial impact of this standard.

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

In May 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued a deferral of effective date for this standard.  For public companies this standard applies to annual reporting period beginning after December 15, 2017, including interim reporting periods within that reporting period, and early adoption is not permitted. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations”, regarding ASC Topic 205, Presentation of Financial Statements, and ASC Topic 360, Property, Plant and Equipment. The updated guidance related to reporting discontinued operations and disclosures of disposals of components of an entity. Under the amendment, only those disposals of components of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. Additionally, the elimination of the component's operations, cash flows and significant continuing involvement conditions have been removed. Further, an equity method investment could be reported as discontinued operations. The updated guidance is effective prospectively for all disposals or classifications as held for sale that occur within annual periods beginning after December 15, 2014. The adoption of this guidance has not had a material impact on our combined financial statements.

 

 

 


8


3.

Business Combinations

The Company completed seventeen acquisitions during the nine-month period ended September 30, 2015. We acquired substantially all of the net assets of the following companies in cash and stock transactions. These acquisitions have been accounted for using the acquisition method for recording business combinations, except for DecisionUR, as further discussed below.

 

Name and Effective Date of Acquisition (In thousands):

 

Cash

Paid

 

 

Stock

Issued

 

 

Accrued Liability

 

 

Deferred Purchase Consideration

 

 

Recorded Earnout Payable

 

 

Maximum Potential Earnout Payable

 

 

Total Recorded Purchase Price

 

Phoenix Risk Management, Inc (January 31, 2015)

 

$

1,099

 

 

$

 

 

$

 

 

$

 

 

$

2,790

 

 

$

3,000

 

 

$

3,889

 

DecisionUR, LLC (February 5, 2015)

 

 

2,240

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

2,240

 

Capital & Guaranty, LLC (February 9, 2015)

 

 

175

 

 

 

 

 

 

 

 

 

 

 

 

175

 

 

 

175

 

 

 

350

 

TriGen Holding Group, Inc (March 31, 2015)

 

 

3,340

 

 

 

 

 

 

3,364

 

 

 

4,911

 

 

 

1,433

 

 

 

1,500

 

 

 

9,684

 

Hospitality Supportive Systems, LLC (April 1, 2015)

 

 

9,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,650

 

Selective Risk Management, LLC (April 1, 2015)

 

 

3,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,846

 

Vikaran Solutions, LLC (April 17, 2015)

 

 

8,500

 

 

 

 

 

 

152

 

 

 

 

 

 

 

 

 

 

 

 

8,500

 

Corporate Claims Management, Inc (April 24, 2015)

 

 

7,900

 

 

 

 

 

 

4,434

 

 

 

 

 

 

825

 

 

 

1,000

 

 

 

8,725

 

Candid Investigation Services, LLC (May 8, 2015)

 

 

1,033

 

 

 

 

 

 

 

 

 

 

 

 

367

 

 

 

450

 

 

 

1,400

 

Brandywine Insurance Advisors, LLC

  (May 22, 2015)

 

 

3,000

 

 

 

 

 

 

 

 

 

 

 

 

220

 

 

 

1,205

 

 

 

3,220

 

Infinity Insurance Solutions, LLC (June 1, 2015)

 

 

1,750

 

 

 

 

 

 

100

 

 

 

 

 

 

552

 

 

 

650

 

 

 

2,302

 

InsureLinx, Inc (June 12, 2015)

 

 

6,300

 

 

 

 

 

 

1,840

 

 

 

 

 

 

 

 

 

 

 

 

6,300

 

The Carman Corporation (June 15, 2015)

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

CWI Benefits, Inc (July 9, 2015)

 

 

2,750

 

 

 

 

 

 

2,061

 

 

 

 

 

 

3,400

 

 

 

4,675

 

 

 

6,150

 

Restaurant Coverage Associates, Inc (August 14, 2015)

 

 

750

 

 

 

 

 

 

 

 

 

 

 

 

1,725

 

 

 

1,825

 

 

 

2,475

 

Risk Control Associates, Inc (August 14, 2015)

 

 

250

 

 

 

 

 

 

650

 

 

 

 

 

 

575

 

 

 

675

 

 

 

825

 

Global HR Research LLC (August 21, 2015)

 

 

23,500

 

 

 

6,503

 

 

 

2,457

 

 

 

11,920

 

 

 

 

 

 

 

 

 

41,923

 

Total

 

$

78,083

 

 

$

6,503

 

 

$

15,081

 

 

$

16,831

 

 

$

12,062

 

 

$

15,155

 

 

$

113,479

 

 

The Company acquired DecisionUR from Six Points Investment Partners, LLC, a company under common control.  However, results of operations for DecisionUR are included from acquisition date, as its operations are immaterial with respect to the financial statements taken as a whole for all periods presented.

The “maximum potential earnout payables” disclosed in the foregoing table represent the maximum amount of additional consideration that could be paid pursuant to the terms of the purchase agreement for the applicable acquisition. The “recorded earnout payables” disclosed in the foregoing table are primarily based upon the estimated future operating results of the acquired entities over a one- to three-year period subsequent to the acquisition date. The recorded earnout payables are measured at fair value as of the acquisition date and are included on that basis in the total recorded purchase price in the foregoing table. We will record subsequent changes in these estimated earnout obligations, including the accretion of discount, in our statement of operations when incurred.

The fair value of these earnout obligations is based on the present value of the expected future payments to be made to the sellers of the acquired entities in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement, as discussed further in Note 11, Fair Value of Financial Assets and Liabilities. In determining fair value, we estimated the acquired entity’s future performance using financial projections developed by management for the acquired entity and market participant assumptions that were derived for revenue growth and/or profitability.  We estimated future payments using the earnout formula and performance targets specified in each purchase agreement and these financial projections. We then discounted these payments to present value using a risk-adjusted rate that takes into consideration market-based rates of return that reflect the ability of the acquired entity to achieve the targets. Changes in financial projections, market participant assumptions for revenue growth and/or profitability, or the risk-adjusted discount rate, would result in a change in the fair value of recorded earnout obligations.

The aggregate amount of maximum earnout obligations related to acquisitions made in 2015, as of September 30, 2015 was $15.2 million, of which $12.1 million was recorded in our consolidated balance sheet as of September 30, 2015, based on the aggregate estimated fair value of the expected future payments to be made.

   The purchase price for the Global HR Acquisition consists of (a) $24 million in cash, of which, $0.5 million is held in escrow, (b) 444,096 shares of our common stock (the “Stock Consideration”) of which 349,645 were issued and 94,451 are held in escrow, plus (c) certain deferred consideration payable, at our sole discretion, in either 618,478 shares of our common stock or $10,477,017 in cash (the “Deferred Consideration”). The Deferred Consideration is payable solely to In Touch Holdings LLC, one of the former principal stockholders of Global HR, on the earlier of (x) November 20, 2015, (y) the 21st day after the date we mail an information statement to the shareholders in connection with the Global HR Acquisition or (z) we file a registration statement with the SEC that is declared effective. As of the filing date, no decision has been made on the settlement of Deferred Consideration in cash or stock. If the revenues for Global HR for its fiscal year 2016 are less than $12.8 million, then In Touch Holdings LLC will forfeit and return 10% of its Stock Consideration and Deferred Stock Consideration to us.

9


The deferred purchase consideration disclosed in the foregoing table represents non-contingent purchase consideration payable to sellers.  These include $5.0 million payable to a seller of TriGen Holding Group, Inc. on the first anniversary of the effective date, and deferred stock consideration of $11.4 million and cash escrow amounts of $0.5 million to sellers of Global HR Research LLC payable on November 20, 2015, all recorded at fair value.

The following is a summary of the aggregate estimated fair values of the net assets acquired at the date of each of the acquisitions made in the nine months ended September 30, 2015:

 

In thousands

 

Total

 

Assets Acquired:

 

 

 

 

Cash

 

$

4,069

 

Restricted cash

 

 

4,838

 

Accounts receivable

 

 

5,069

 

Fixed assets

 

 

2,002

 

Other assets

 

 

2,272

 

Goodwill

 

 

57,915

 

Intangible assets:

 

 

 

 

Customer & carrier relationships

 

 

31,039

 

Service contracts

 

 

320

 

Non-compete agreements

 

 

4,739

 

Developed technology

 

 

13,268

 

Trade name portfolio

 

 

3,029

 

Total intangible assets

 

 

52,395

 

Total assets acquired

 

 

128,560

 

Liabilities assumed

 

 

15,081

 

Total net assets acquired

 

$

113,479

 

 

The net assets acquired are preliminary and subject to measurement period adjustments.

In accordance with FASB ASC 350, Intangibles—Goodwill and Other, intangible assets, which are comprised of the estimated fair value of the service contracts acquired, customer and carrier relationships, non-compete agreements, developed technology and trade names are being amortized over the respective estimated life, ranging from two to ten years, in a manner that, in management’s opinion, reflects the pattern in which the intangible asset’s future economic benefits are expected to be realized. Intangible assets are tested for impairment at least annually (more frequently if certain indicators are present). In the event that management determines that the value of the intangible asset has become impaired, the company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

Provisional estimates of fair value and the allocation of the purchase price are established at the time of each acquisition and are subsequently reviewed within the first year of operations, the measurement period, following the acquisition date to determine the necessity for adjustments. The fair value of the tangible assets and liabilities for each applicable acquisition at the acquisition date approximated their carrying values. We estimate the fair value as the present value of the benefits anticipated from ownership of the subject customer list in excess of returns required on the investment in contributory assets necessary to realize those benefits. The rate used to discount the net benefits was based on a risk-adjusted rate that takes into consideration market-based rates of return and reflects the risk of the asset relative to the acquired business. These discount rates generally ranged from 17% to 30% for our 2015 acquisitions through September 30, 2015. The fair value of non-compete agreements was established using estimated financial projections for the acquired company based on market participant assumptions and various non-compete scenarios.

Customer and carrier relationships, non-compete agreements and trade names related to our acquisitions are amortized using the straight-line method over their estimated useful lives (ten years for customer and carrier relationships, one to two years for non-compete agreements and five to seven years for trade names), while goodwill is not subject to amortization. We use the straight-line method to amortize these intangible assets because the pattern of their economic benefits cannot be reasonably determined with any certainty. We review all of our intangible assets for impairment periodically (at least annually) and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing intangible assets, if the fair value is less than the carrying amount of the respective (or underlying) asset, an indicator of impairment would exist, and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings. Based on the results of impairment reviews during the nine-month periods ended September 30, 2015 and 2014, no impairments were required.

10


Our consolidated financial statements for the nine months ended September 30, 2015 include the operations of the acquired entities from their respective acquisition dates, totaling $21.7 million of revenues and $2.1 million of net income.

The following is a summary of the unaudited pro forma historical results, as if these entities and Patriot Care Management, Inc. (“Patriot Care Management”), which was acquired on August 6, 2014, had been acquired at January 1, 2014 (in thousands, except per share data):

 

 

Nine Months Ended September 30,

 

In thousands (except per share data)

 

2015

 

 

2014

 

Total revenues

 

 

174,376

 

 

 

141,658

 

Net (loss) income

 

 

1,107

 

 

 

14,508

 

Basic net (loss) income per share

 

$

0.04

 

 

$

0.97

 

Diluted net (loss) income per share

 

$

0.04

 

 

$

0.76

 

 

This unaudited supplemental pro forma financial information includes the results of operations of acquired businesses presented as if they had been combined as of January 1, 2014. The unaudited supplemental pro forma financial information has been provided for illustrative purposes only. The unaudited supplemental pro forma financial information does not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented, or of the results that may be achieved by the combined companies in the future. Future results may vary significantly from the results reflected in the following unaudited supplemental pro forma financial information because of future events and transactions, as well as other factors, many of which are beyond the Company’s control.

 

4.

Equity and Fixed Income Security Investments

Equity and fixed income security investments are carried at fair value.  We classify these investments as a trading portfolio with changes to the fair value of investments marked-to-market value and reflected in the aggregate net income or loss for the period incurred.  The trading portfolio is utilized to generate investment income with available cash on hand.

As of September 30, 2015, our major classes of investments consisted of the following:

 

 

 

September 30, 2015

 

In thousands

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(Unaudited)

 

Equity and Fixed Income Security Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common and preferred stocks

 

$

429

 

 

$

 

 

$

(41

)

 

$

388

 

Corporate notes and bonds

 

 

2,969

 

 

 

 

 

 

(108

)

 

 

2,861

 

Total

 

$

3,398

 

 

$

 

 

$

(149

)

 

$

3,249

 

 

There were no investments as of December 31, 2014.

 

 

5.

Fixed Assets and Other Long Term Assets

Fixed Assets

Fixed assets are stated at cost, less accumulated depreciation and amortization. Expenditures for computer equipment, software, and furniture and fixtures are capitalized and depreciated on a straight-line basis over a five, three, and seven year estimated useful lives, respectively. Expenditures for building are capitalized and depreciated on a straight-line basis over a thirty-nine year estimated useful life. Expenditures for leasehold improvements on office space and facilities are capitalized and amortized on a straight-line basis over the term of the lease.

11


As of September 30, 2015 and December 31, 2014, our major classes of fixed assets consisted of the following:

 

In thousands

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

 

 

Fixed Assets

 

 

 

 

 

 

 

 

Computer equipment, software and furniture and fixtures

 

$

7,640

 

 

$

5,722

 

Building

 

 

1,428

 

 

 

-

 

Leasehold improvements

 

 

3,534

 

 

 

2,545

 

Total fixed assets

 

 

12,602

 

 

 

8,267

 

Less accumulated depreciation and amortization

 

 

(7,804

)

 

 

(6,388

)

Fixed assets, net of accumulated depreciation and amortization

 

$

4,798

 

 

$

1,879

 

 

Other Long Term Assets

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

As of September 30, 2015 and December 31, 2014, other long term assets consisted of the following:

 

In thousands

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

 

 

Other long term assets

 

 

 

 

 

 

 

 

Capitalized policy and claims administration system development costs

 

$

17,016

 

 

$

13,093

 

Less accumulated depreciation

 

 

(5,459

)

 

 

(3,251

)

Other long term assets, net of accumulated depreciation

 

$

11,557

 

 

$

9,842

 

 

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

 

 

6.

Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired. Goodwill is not amortized but is tested at least annually for impairment (or more frequently if certain indicators are present or management otherwise believes it is appropriate to do so). In the event that management determines that the value of goodwill has become impaired, we will record a charge for the amount of impairment during the fiscal quarter in which the determination is made. We determined that there was no impairment as of September 30, 2015.

The Company acquired $57.9 million of goodwill during the nine-month period ended September 30, 2015 as a result of the seventeen acquisitions discussed in Note 3, Business Combinations. Changes in goodwill are summarized as follows:

 

In thousands

 

 

 

 

Balance as of December 31, 2014

 

$

61,493

 

Goodwill acquired

 

 

57,915

 

Balance as of September 30, 2015

 

$

119,408

 

 

12


Intangible Assets

Intangible assets that have finite lives are amortized over their useful lives. The company acquired $52.4 million of intangible assets during the nine-month period ended September 30, 2015 as a result of the seventeen acquisitions discussed in Note 3, Business Combinations. The intangible assets, their original fair values, and their net book values are detailed below as of the dates presented:

 

 

 

 

September 30, 2015

 

 

December 31, 2014

 

In thousands

 

Gross Asset

 

 

Accumulated Amortization

 

 

Net Asset

 

 

Gross Asset

 

 

Accumulated Amortization

 

 

Net Asset

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service contracts

 

$

35,120

 

 

$

(5,105

)

 

$

30,015

 

 

$

34,800

 

 

$

(1,812

)

 

$

32,988

 

Customer and carrier relationships

 

 

31,039

 

 

 

(1,244

)

 

 

29,795

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

 

4,739

 

 

 

(914

)

 

 

3,825

 

 

 

 

 

 

 

 

 

 

Developed technology

 

 

13,268

 

 

 

(894

)

 

 

12,374

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

3,029

 

 

 

(103

)

 

 

2,926

 

 

 

 

 

 

 

 

 

 

Total

 

$

87,195

 

 

$

(8,260

)

 

$

78,935

 

 

$

34,800

 

 

$

(1,812

)

 

$

32,988

 

 

The table below reflects the estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter:

 

 

In thousands

 

September 30,

2015

 

Amortization expense

 

(Unaudited)

 

2015 (remaining three months)

 

$

3,286

 

2016

 

 

13,140

 

2017

 

 

11,625

 

2018

 

 

10,770

 

2019

 

 

10,770

 

Thereafter

 

 

29,344

 

Total

 

$

78,935

 

 

 

 

7.

Notes Payable and Lines of Credit

As of September 30, 2015 and December 31, 2014, notes payable were comprised of the following:

 

In thousands

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

 

 

BMO Senior Secured Term Loans

 

$

107,875

 

 

$

 

PennantPark Loan Agreement

 

 

 

 

 

63,285

 

UBS Credit Agreement

 

 

 

 

 

56,288

 

Gross Notes Payable and Current Portion of Notes Payable

 

 

107,875

 

 

 

119,573

 

Less original issue discount

 

 

 

 

 

(3,085

)

Less value attributable to stock warrants

 

 

 

 

 

(5,667

)

Notes Payable and Current Portion of Notes Payable

 

 

107,875

 

 

 

110,821

 

Less current portion of notes payable

 

 

(5,500

)

 

 

(15,782

)

Notes Payable

 

$

102,375

 

 

$

95,039

 

 

Senior Secured Credit Facility

On January 22, 2015, we entered into a Credit Agreement with BMO Harris Bank N.A., as administrative agent (the “Administrative Agent”), and the other lenders party thereto, which provides for a $40.0 million revolving credit facility and a $40.0 million term loan facility (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility has a maturity of five years, and borrowings thereunder bear interest, at our option, at LIBOR plus a margin ranging from 250 basis points to 325 basis points or at

13


base rate plus a margin ranging from 150 basis points to 225 basis points. Margins on all loans and fees will be increased by 2% per annum during the existence of an event of default. The revolving credit facility includes borrowing capacity available for letters of credit and borrowings on same-day notice, referred to as swing line loans. At any time prior to maturity, we have the right to increase the size of the revolving credit facility or the term loan facility by an aggregate amount of up to $20.0 million, but in minimum increments of $5.0 million. As of June 30, 2015, we increased the term loan facility by $20.0 million through two $10.0 million incremental term loans. Additionally, on August 14, 2015, we entered into a second amendment to our Senior Secured Credit Facility (the “Second Amendment”) which provides for an additional $50.0 million of term loans plus the ability to increase the term loan by and additional $50.0 million under certain conditions.  The Second Amendment also added a requirement that until we deliver a certificate certifying that (a) our total leverage ratio is equal to or less than 2.25 to 1.00 and (b) our Adjusted EBITDA for the twelve-months then ended is at least $70.0 million, the outstanding revolving loans (plus any swing line loans and the aggregate stated amount of all letters of credit) shall not exceed $30.0 million.  All other material terms and conditions in the Senior Secured Credit Facility were unchanged by the Second Amendment.

As of September 30, 2015, the outstanding balance under our Senior Secured Credit Facility was $118.7 million (comprised of $107.9 million outstanding under the term loan facility and $10.8 million outstanding under the revolving credit facility). Accordingly, we had $29.2 million available to borrow under the revolving credit facility.

In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we are required to pay a commitment fee to the Administrative Agent for the ratable benefit of the lenders under the revolving credit facility in respect of the unutilized commitments thereunder, ranging from 35 basis points to 50 basis points, depending on specified leverage ratios. With respect to letters of credit, we are also required to pay a per annum participation fee equal to the applicable LIBOR margin on the face amount of each letter of credit as well as a fee equal to 0.125% on the face amount of each letter of credit issued (or the term of which is extended). This latter 0.125% fee is payable to the issuer of the letter of credit for its own account, along with any standard documentary and processing charges incurred in connection with any letter of credit.

The term loan facility amortizes quarterly beginning the first full quarter after the closing date at a rate of 5% per annum of the original principal amount during the first two years, 7.5% per annum of the original principal amount during the third and fourth years and 10% per annum of the original principal amount during the fifth year, with the remainder due at maturity. Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity. In the event of any sale or other disposition by us or our subsidiaries guaranteeing the Senior Secured Credit Facility (as described below) of any assets with certain exceptions, we are required to prepay all proceeds received from such a sale towards the remaining scheduled payments of the term loan facility.

Additionally, all obligations under the Senior Secured Credit Facility (as described below) are guaranteed by all of our existing and future subsidiaries, other than foreign subsidiaries to the extent the assets of such foreign subsidiaries do not exceed 5% of our and our subsidiaries’ total assets on a consolidated basis, and secured by a first-priority perfected security interest in substantially all of our and our guaranteeing subsidiaries’ tangible and intangible assets, whether now owned or hereafter acquired, including a pledge of 100% of the stock of each guarantor.

The Senior Secured Credit Facility contains certain covenants that, among other things and subject to significant exceptions, limit our ability and the ability of our restricted subsidiaries to engage in certain business and financing activities and that require us to maintain certain financial covenants, including requirements to maintain (i) a maximum total leverage ratio of total outstanding debt to adjusted EBITDA for the most recently-ended four fiscal quarters of no more than 300% and (ii) a minimum fixed charge coverage ratio of adjusted EBITDA to the sum of cash interest expense (which amount shall be calculated on an annualized basis for the three-, six-, and nine-month periods ended March 31, 2015, June 30, 2015 and September 30, 2015) plus income tax expense (or less any income tax benefits) plus capital expenditures plus dividends, share repurchases and other restricted payments plus regularly scheduled principal payments of debt for the same period of a least 150% for the most recently ended four quarters. The Senior Secured Credit Facility allows us to pay dividends in an amount up to 50% of our net income if certain other financial conditions are met.

The Senior Secured Credit Facility contains other restrictive covenants, including those regarding: indebtedness (including capital leases) and guarantees; liens; operating leases; investments and acquisitions; loans and advances; mergers, consolidations and other fundamental changes; sales of assets; transactions with affiliates; no material changes in nature of business; dividends and distributions, stock repurchases, and other restricted payments; change in name, jurisdiction of organization or fiscal year; burdensome agreements; and capital expenditures.

The Senior Secured Credit Facility also has events of default that may result in acceleration of the borrowings thereunder, including: (i) nonpayment of principal, interest, fees or other amounts (subject to customary grace periods for items other than principal); (ii) failure to perform or observe covenants set forth in the loan documentation (subject to customary grace periods for certain affirmative covenants); (iii) any representation or warranty proving to have been incorrect in any material respect when made; (iv) cross-default to other indebtedness and contingent obligations in an aggregate amount in excess of an amount to be agreed upon; (v) bankruptcy and insolvency defaults (with grace period for involuntary proceedings); (vi) inability to pay debts; (vii) monetary judgment defaults in excess of an agreed upon amount; (viii) ERISA defaults; (ix) change of control; (x) actual invalidity or unenforceability of any loan document, any security interest on any material portion of the collateral or asserted (by any loan party) invalidity or unenforceability of any security interest on any collateral; (xi) actual or asserted (by any loan party) invalidity or

14


unenforceability of any guaranty; (xii) material unpaid, final judgments that have not been vacated, discharged, stayed or bonded pending appeal within a specified number of days after the entry thereof; and (xiii) any other event of default agreed to by us and the Administrative Agent.

As of September 30, 2015, we were in compliance with the financial and other restrictive covenants under our outstanding material debt obligations, including our Senior Secured Credit Facility.

Repayment of UBS Credit Agreement

On August 6, 2014, in connection with the Patriot Care Management Acquisition, we and certain of our subsidiaries entered into a credit agreement with UBS Securities LLC (the “UBS Credit Agreement”), which provided for a five-year term loan facility in an aggregate principal amount of $57.0 million that would mature on August 6, 2019. The loan was secured by the common stock of Patriot Care Management and guaranteed by Guarantee Insurance Group and its wholly owned subsidiaries. Following our initial public offering (the “IPO”), on January 22, 2015 we prepaid all outstanding borrowings under the UBS Credit Agreement, including accrued interest and applicable prepayment premium. This instrument was repaid in full upon closing on the Senior Secured Credit Facility.

Repayment of PennantPark Loan Agreement

On August 6, 2014, in connection with the GUI Acquisition, we and certain of our subsidiaries, as borrowers, and certain of our other subsidiaries and certain affiliated entities, as guarantors, entered into a loan agreement with the PennantPark Entities as lenders (the “PennantPark Loan Agreement”). Following our IPO, we prepaid all outstanding borrowings under the PennantPark Loan Agreement, including accrued interest and applicable prepayment premium. This instrument was repaid in full on January 22, 2015 upon closing on the Senior Secured Credit Facility.

 

 

8.

Capital Lease Obligations

Equipment subject to capital lease is comprised of capitalized policy and claims administration software development costs and related computer equipment. Monthly payments on the capital lease, which expires on December 3, 2016, were approximately $206,000 as of September 30, 2015. Payments may be adjusted in connection with a change in the interest rate swap rate quoted in the Bloomberg Swap Rate Report. The Company’s obligations for future payments on the capital lease as of September 30, 2015, based on the interest rate swap rate in effect on that date, are as follows:

 

 

In thousands

 

Principal

 

 

Interest

 

 

Total

 

Payments on Capital Lease

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

$

397

 

 

$

17

 

 

$

414

 

2016

 

 

2,429

 

 

 

51

 

 

 

2,480

 

Total

 

$

2,826

 

 

$

68

 

 

$

2,894

 

 

 

 

 

 


15


9.

Earnings Per Share

Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include detachable common stock warrants and stock-based awards of restricted shares and stock options, and contingent shares attributable to deferred purchase consideration.

The components of basic and diluted EPS are as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

In thousands (except earnings per share)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Basic net earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

3,788

 

 

$

16,902

 

 

$

(8

)

 

$

12,807

 

Weighted average number of common shares outstanding

 

 

26,802

 

 

 

16,368

 

 

 

26,006

 

 

 

14,981

 

Basic net earnings (loss) per share

 

$

0.14

 

 

$

1.03

 

 

$

(0.00

)

 

$

0.85

 

Diluted net earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

3,788

 

 

$

16,902

 

 

$

(8

)

 

$

12,807

 

Adjustments to net income (loss) applicable to dilutive shares

 

 

-

 

 

 

(8,760

)

 

 

-

 

 

 

(2,257

)

Net earnings (loss) attributable to diluted shares

 

$

3,788

 

 

$

8,142

 

 

$

(8

)

 

$

10,550

 

Weighted average number of common shares outstanding

 

 

26,802

 

 

 

16,368

 

 

 

26,006

 

 

 

14,981

 

Dilutive effect of warrants, options, and restricted shares

  using the treasury stock method

 

 

1,138

 

 

 

1,183

 

 

 

-

 

 

 

1,202

 

Weighted average number of common and common equivalent shares

  outstanding

 

 

27,940

 

 

 

17,551

 

 

 

26,006

 

 

 

16,183

 

Diluted net earnings (loss) per share

 

$

0.14

 

 

$

0.46

 

 

$

(0.00

)

 

$

0.65

 

 

Due to the net loss of $8,000 reported for the nine months ended September 30, 2015, weighted average outstanding detachable common stock warrants of 160,295, contingent shares attributable to deferred purchase consideration of 107,070, and restricted shares and stock options of 114,634 were not dilutive.  As a result, basic and diluted earnings per share both reflect a net loss of $0.00 per share for the nine months then ended. Adjustments to net income (loss) attributable to dilutive shares for the three and nine months ended September 30, 2014 represent income generated from a decrease in the fair value of the warrants as reported on the statement of operations.

 

 

10.

Stock-Based Compensation

Omnibus Incentive Plan

On January 15, 2015, the Board of Directors approved the Patriot National 2014 Omnibus Incentive Plan (the “Omnibus Incentive Plan”), subject to and with effect upon approval of such plan by the stockholders of the Company.

The Compensation Committee of our Board of Directors determines the participants under the Omnibus Incentive Plan. The Omnibus Incentive Plan provides for non-qualified and incentive stock options, restricted stock and restricted stock units, any or all of which may be made contingent upon the achievement of performance criteria. Subject to the Omnibus Incentive Plan limits, the compensation committee has the discretionary authority to determine the size of an award and on May 11, 2015 delegated the authority to Steven Mariano, our President, to award the grants without the consent of the Compensation Committee.

Shares of our common stock available for issuance under the Omnibus Incentive Plan include authorized and unissued shares of common stock or authorized and issued shares of common stock reacquired and held as treasury shares or otherwise, or a combination thereof. The number of available shares is reduced by the aggregate number of shares that become subject to outstanding awards granted under the Omnibus Incentive Plan. To the extent that shares subject to an outstanding award granted under either the Omnibus Incentive Plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the settlement of such award in cash, then such shares will again be available for grant under the Omnibus Incentive Plan. Shares withheld to satisfy tax withholding requirements upon the vesting of awards other than stock options will also be available for grant under the Omnibus Incentive Plan. Shares that are used to pay the exercise price of an option, shares delivered to or withheld by us to pay withholding taxes related to stock options, and shares that are purchased on the open market with the proceeds of an option exercise, may not again be made available for issuance. 

16


Stock Options

In the nine months ended September 30 30, 2015, we issued stock options as incentive compensation for officers and certain key employees. The exercise price of each stock option is the closing market price of our common stock on the date of grant. The options will vest in three equal annual installments on the first, second and third anniversaries of grant and expire 10 years after the grant date. The fair values of these stock options were estimated using the Black-Scholes valuation model with the following weighted-average assumptions:

 

 

 

Nine Months Ended

September 30,

 

In thousands

 

2015

 

Expected dividend yield

 

 

0

%

Risk-free interest rate (1)

 

 

0.49

%

Expected volatility (2)

 

 

33.02

%

Expected life in years (3)

 

 

3.0

 

 

(1)

The risk-free interest rate for the periods within the contractual term of the options is based on the U.S. Treasury yield curve in effect at the time of the grant.

(2)

The expected volatility is a measure of the amount by which a stock price has fluctuated or is expected to fluctuate based primarily on our and our peers' historical data.

(3)

The expected life is the period of time, on average, that participants are expected to hold their options before exercise based primarily on our historical data.

For the nine months ended September 30, 2015, we awarded 1,366,791 options, of which 129,013 were forfeited, leaving 1,237,778 outstanding.  At September 30, 2015 the intrinsic value of these options was $1.9 million. Option activity for the nine months ended September 30, 2015 was as follows:

In thousands, except weighted-average price and remaining

contractual term

 

Number of Shares

 

 

Weighted-Average Exercise Price

 

 

Weighted-Average Remaining Contractual Term

 

 

Aggregate Intrinsic Value

 

Options outstanding at December 31, 2014

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Options granted

 

 

1,367

 

 

$

14.40

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Options cancelled or forfeited

 

 

(129

)

 

$

14.33

 

 

 

 

 

 

 

 

 

Options outstanding at September 30, 2015

 

 

1,238

 

 

$

14.39

 

 

 

9.4

 

 

$

1,932

 

Options expected to vest at September 30, 2015

 

 

1,238

 

 

$

14.39

 

 

 

9.4

 

 

$

1,932

 

Options exercisable at September 30, 2015

 

 

 

 

$

 

 

 

 

 

$

 

 

As of September 30, 2015, we recognized $1.2 million of stock compensation expense associated with these options, and there was $2.9 million of total unrecognized stock compensation cost related to unvested stock options that is expected to be recognized over a period of 3 years.

Restricted Stock Awards

In the nine months ended September 30, 2015, we issued 906,362 restricted shares as incentive compensation for officers, directors, and certain key employees. Subsequent to issuance, 22,059 restricted shares were forfeited and 310,652 were settled leaving 573,651 remaining restricted shares outstanding as of September 30, 2015. The fair value of outstanding restricted shares at September 30, 2015 was $8.3 million. Grants of restricted shares for the nine months ended September 30, 2015 were as follows:

 

In thousands, except weighted-average fair value price

 

Number of Shares

 

 

Weighted-Average Grant-Date Fair Value

 

Unvested restricted shares outstanding at December 31, 2014

 

 

 

 

$

 

Restricted shares granted

 

 

906

 

 

$

14.32

 

Restricted shares vested

 

 

(310

)

 

$

14.00

 

Restricted shares forfeited

 

 

(22

)

 

$

14.00

 

Unvested restricted shares outstanding as of September 30, 2015

 

 

574

 

 

$

14.51

 

 

17


 

As of September 30, 2015, we recognized $6.8 million of stock compensation expense associated with these restricted shares, and there was $5.9 million of total unrecognized stock compensation cost related to unvested restricted stock to be recognized over a  period of 3 years.

Restricted Stock Units

During the nine months ended September 30, 2015, we issued 193,290 restricted stock units.  Of those issued, 11,655 were subsequently forfeited, resulting in 181,635 restricted stock units outstanding as of September 30, 2015. The fair value of these awards at September 30, 2015 was $2.7 million.  During the nine months ended September 30, 2015, we recognized $0.8 million of stock compensation expense associated with these restricted stock units. Unrecognized stock compensation expense associated with RSUs is $2.0 million and will be recognized over the remaining contractual lives of these awards, 3 years.

 

In thousands, except weighted-average fair value price

 

Number of Shares

 

 

Weighted-Average Grant-Date Fair Value

 

Unvested restricted stock units outstanding at December 31, 2014

 

 

 

 

$

 

Restricted stock units granted

 

 

193

 

 

$

15.02

 

Restricted stock units vested

 

 

 

 

$

 

Restricted stock units forfeited

 

 

(11

)

 

$

14.20

 

Unvested restricted stock units outstanding as of September 30, 2015

 

 

182

 

 

$

15.06

 

 

 

11.

Fair Value Measurement of Financial Assets and Liabilities

With respect to the Company’s financial assets and liabilities, which include short term investments, notes payable, capital lease obligation, earnout obligations of acquisitions and warrant redemption liability, the Company has adopted current accounting guidance which establishes the authoritative definition of fair value, establishes a framework for measuring fair value, creates a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. This guidance defines fair value as the price that would be paid to transfer the warrant redemption liability in an orderly transaction between market participants at the measurement date.  As required under current accounting guidance, the Company has identified and disclosed its financial assets and liabilities in a fair value hierarchy, which consists of the following three levels:

 

 

  

 

 

  

Definition

Level 1

  

 

Observable unadjusted quoted prices in active markets for identical securities.

 

 

Level 2

  

 
 

Observable inputs other than quoted prices in active markets for identical securities,
including:

 

 

 

 

  

 

(i)

  

  

quoted prices in active markets for similar securities.

 

 

 

 

  

 

(ii)

  

  

quoted prices for identical or similar securities in markets that are not active.

 

 

 

 

  

 

(iii)

  

  

inputs other than quoted prices that are observable for the security (e.g., interest rates, yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates).

 

 

 

 

  

 

(iv)

  

  

inputs derived from or corroborated by observable market data by correlation or other means.

 

 

Level 3

  

 
 

Unobservable inputs, including the reporting entity’s own data, as long as there is no
contrary data indicating market participants would use different assumptions.

 

The Company’s equity and fixed income security investments for which carrying values were equal to fair values, classified by level within the fair value hierarchy, were as follows as of September 30, 2015:

 

 

 

Fair Value Measurement, Using

 

September 30, 2015 (in thousands)

 

Quoted Prices in

Active Markets for

Identical Securities

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Common and preferred stocks

 

$

388

 

 

$

 

 

$

 

 

$

388

 

Corporate notes and bonds

 

 

2,861

 

 

 

 

 

 

 

 

 

2,861

 

Total

 

$

3,249

 

 

$

 

 

$

 

 

$

3,249

 

18


 

There were no equity and fixed income security investments as of December 31, 2014.

The Company’s notes payable, capital lease obligation, earnout obligations of acquisitions and warrant redemption liability, for which carrying values were equal to fair values, classified by level within the fair value hierarchy, were as follows as of September 30, 2015 and December 31, 2014:

 

 

 

Fair Value Measurement, Using

 

September 30, 2015 (in thousands)

 

Quoted Prices in

Active Markets for

Identical Securities

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Earnout payable on acquisitions

 

$

 

 

$

 

 

$

12,062

 

 

$

12,062

 

Deferred purchase consideration

 

 

 

 

 

 

 

 

16,831

 

 

 

16,831

 

Warrant redemption liability

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

 

$

 

 

$

28,893

 

 

$

28,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement, Using

 

December 31, 2014 (in thousands)

 

Quoted Prices in

Active Markets for

Identical Securities

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Earnout payable on acquisitions

 

$

 

 

$

 

 

$

 

 

$

 

Deferred purchase consideration

 

 

 

 

 

 

 

 

 

 

 

 

Warrant redemption liability

 

 

 

 

 

 

 

 

12,879

 

 

 

12,879

 

Total

 

$

 

 

$

 

 

$

12,879

 

 

$

12,879

 

 

The following is a reconciliation of the fair value of the Company’s financial liabilities that were measured using significant unobservable (Level 3) inputs:

 

Nine Months Ended

September 30, 2015 (in thousands)

 

Earnout

Payable

 

 

Deferred

Purchase Consideration

 

 

Warrant

Redemption

Liability

 

 

Total

 

Fair value, January 1, 2015

 

$

 

 

$

 

 

$

12,879

 

 

$

12,879

 

Record present value earnout payable

   on acquisitions

 

 

19,163

 

 

 

 

 

 

 

 

 

19,163

 

Earnout payments made

 

 

(7,101

)

 

 

 

 

 

 

 

 

(7,101

)

Record deferred purchase consideration

   on acquisitions

 

 

 

 

 

16,831

 

 

 

 

 

 

16,831

 

Exercise of warrants

 

 

 

 

 

 

 

 

(9,995

)

 

 

(9,995

)

Decrease in fair value of common stock and

   warrant redemption liability

 

 

 

 

 

 

 

 

(1,385

)

 

 

(1,385

)

Contribute remaining liability balance

   due to equity warrants

 

 

 

 

 

 

 

 

(1,499

)

 

 

(1,499

)

Fair Value, September 30, 2015

 

$

12,062

 

 

$

16,831

 

 

$

 

 

$

28,893

 

 

12. Related Party Transactions

Fee income from related party represents fee income earned from Guarantee Insurance Company (“Guarantee Insurance”), a related party. Fee income from Guarantee Insurance for claims administration services is based on the net portion of claims expense retained by Guarantee Insurance pursuant to quota share reinsurance agreements between Guarantee Insurance, the third party insurance company customers of Patriot Underwriters, Inc. and the segregated portfolio cell reinsurers that assume business written by Guarantee Insurance. Certain fee income from third-party segregated portfolio cell reinsurers is remitted to the Company by Guarantee Insurance on behalf of the segregated portfolio cell reinsurers. Fee income from Guarantee Insurance for brokerage, underwriting and policyholder services represents fees for soliciting applications for workers’ compensation insurance for Guarantee Insurance, based on a percentage of premiums written or other amounts negotiated by the parties.

19


Our prices by customer for our brokerage and policyholder services and claims administration services were unchanged for the nine-month period ended September 30, 2015 relative to the nine-month period ended September 30, 2014, and, accordingly, the net increase in fee income was solely related to changes in the volume of business we managed.

Because fee income from related party for claims administration services is based on the net portion of claims expense retained by Guarantee Insurance, as described in Note 13, Concentration, the Company’s revenues attributable to contracts with Guarantee Insurance do not necessarily represent fee income from related party.

Fee income from related party for the three months ended September 30, 2015 was $23.8 million compared to $15.8 million for the three months ended September 30, 2014. For the nine months ended September 30, 2015, fee income from related party was $68.9 million compared to $24.6 million for the nine months ended September 30, 2014.  

Fee income receivable from related party was $22.1 million as of September 30, 2015, and$12.0 million at December 31, 2014.   

During the nine months ended September 30, 2014, the allocation of marketing, underwriting and policy issuance costs from related party in the accompanying combined statements of operations represents costs reimbursed to Guarantee Insurance Group for salaries and other costs incurred by Guarantee Insurance Group to provide its policyholder services. Management fees paid to related party for administrative support services in the accompanying combined statements of operations represent amounts paid to Guarantee Insurance Group for management oversight, legal, accounting, human resources and technology support services. Effective August 6, 2014, the management services agreement pursuant to which these fees were payable was terminated, and all costs associated with our operations began to be incurred directly by us. Accordingly, beginning August 6, 2014, such expenses, rather than being reflected in this item, are recorded in the line items to which they relate, which are primarily “salaries and salary related expenses,” “outsourced services” and “other operating expenses.”

As of September 30, 2015, we had a net receivable from related parties of $0.2 million due to entities controlled by Mr. Mariano, our founder, Chairman, President and Chief Executive Officer.

On April 17, 2015, the Company acquired Vikaran Solutions, LLC (“Vikaran”).  Prior to acquisition, Mr. Mariano held a non-controlling, 45% interest in Vikaran.  Upon closing, Mr. Mariano received proceeds of $3.8 million from the sale of Vikaran to Patriot National.

On July 20, 2015, the Company entered into a membership interest purchase agreement with Global HR Research LLC, a Florida limited liability company (“Global HR”), In Touch Holdings LLC, a Florida limited liability company (“ITH”), the members of Global HR, and Brandon G. Phillips as the sellers’ representative, pursuant to which, subject to the satisfaction or waiver of certain conditions, the Company will acquire all of the outstanding membership interest of Global HR.  The Global HR transaction closed on Augustst 21, 2015.  One of the Company’s independent directors, Austin J. Shanfelter, indirectly controlled Global HR.  Mr. Shanfelter owned 84% of the equity interests in ITH, which owned 75.5% of the equity interests of Global HR.

On July 31, 2015, we entered into a Purchase Agreement by and among Patriot Technology Solutions, Inc. and PN India Holdings (a wholly owned subsidiary of Patriot Technology Solutions, Inc. and Mehta and Pazol Consulting Services Private Limited (“MPCS”).  MPCS is an Indian company of computer programmers, solely focused on the development of Patriot’s WCE technology platform. Under the terms of the purchase agreement, PN India Holdings will acquire 100% of the capital stock of MPCS for the total purchase amount of $1.5 million.  The three sellers of MPCS include Sandeep Mehta, a 49.99% holder, Steven J. Pazol, a 49.99% holder, and Satyapal Mehta a 0.02% holder. Steven J. Pazol’s interest is beneficially owned by Steve M. Mariano who previously purchased it in a prior transaction, making this a related party transaction.  During the three months ended September 30, 2015, PN India Holdings executed the purchase of the interests held by Satyapal Mehta and Steven Mariano. Amounts paid to Steven Mariano totaled $0.7 million granting PN India Holdings a 51.1% ownership interest of MPCS, Ltd.  The purchase of Steven Mariano’s interest in MPCS was recorded as a deemed dividend of a common control transaction, rather than a business combination. Although, MPCS was acquired from a party under common control, the results of operations for MPCS are included from acquisition date, as its operations are immaterial with respect to the financial statements taken as a whole for all periods presented. The remaining $0.7 million portion of the transaction is pending approval from the government of India.  Upon approval, Patriot will acquire the remaining 49.9% interest in MPCS from Sandeep Mehta.

 

13.

Concentration

For the three months ended September 30, 2015, approximately 66% of total combined fee income and fee income from related party was attributable to contracts with Guarantee Insurance, the Company’s largest customer and a related party, and approximately 6% was attributable to contracts with the Company’s second largest customer. For the three months ended September 30, 2014, approximately 76% of total combined fee income and fee income from related revenues was attributable to contracts with Guarantee Insurance, and approximately 10% and 7% were attributable to contracts with the Company’s second and third largest customers, respectively.

For the nine months ended September 30, 2015, approximately 72% of total combined fee income and fee income from related party was attributable to contracts with Guarantee Insurance and approximately 8% was attributable to contracts with the Company’s second largest customer. For the nine months ended September 30, 2014, approximately 66% of total combined fee income and fee

20


income from related revenues was attributable to contracts with Guarantee Insurance, and approximately 22% was attributable to contracts with the Company’s second largest customer.

As of September 30, 2015, approximately 62% of combined fee income receivable and fee income receivable from related party was attributable to contracts with Guarantee Insurance and approximately 2% and 1% of combined fee income receivable and fee income receivable from related party were attributable to contracts with the Company’s second and third largest customers, respectively. As of December 31, 2014, approximately 86% of combined fee income receivable and fee income receivable from related party was attributable to contracts with Guarantee Insurance and approximately 8% and 2% of combined fee income receivable and fee income receivable from related party were attributable to contracts with the Company’s second and third largest customers, respectively.

Because fee income from related party for claims administration services is based on the net portion of claims expense retained by Guarantee Insurance, the Company’s revenues attributable to contracts with Guarantee Insurance do not necessarily represent fee income from related party.

 

14.

Commitments and Contingencies

Contractual Obligations and Commitments

 

In connection with the Senior Secured Credit Facility as described in Note 7, Notes Payable and Lines of Credit, the common stock of the Company and the common stock or units of each of the Company’s wholly and majority owned subsidiaries were pledged as collateral.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

The Company has employment agreements with certain executives and other employees, which provide for compensation and certain other benefits and for severance payments under certain circumstances. The employment agreements contain clauses that become effective upon a change of control of the Company. Upon the occurrence of any of the defined events in the employment agreements, the Company would be obligated to pay certain amounts to the relevant employees.

The Company maintains cash at various financial institutions, and, at times, balances may exceed federally insured limits. Management does not believe this results in any material effect on the Company’s financial position or results of operations.

In the normal course of business, the Company may be party to various legal actions that management believes will not result in any material effect on the Company’s financial position or results of operations.

 

15.

Warrant Redemption Liability

There was no warrant redemption liability as of September 30, 2015.  Concurrent with our IPO and repayment of the PennantPark Loan Agreement on January 22, 2015, the PennantPark Entities exercised 965,700 of their 1,110,555 detachable common stock warrants for common stock at an exercise price of $2.67 per share. The PennantPark Entities waived their put right on the remaining 144,855 detachable common stock warrants.  By eliminating the put right, the PennantPark Entities cannot require the Company to redeem the remaining detachable common stock warrants for cash, thereby eliminating the warrant redemption liability previously required. The remaining 144,855 detachable common stock warrants can be used to purchase shares of the Company’s common stock at an exercise price of $2.67 per share and expire on November 27, 2023.

On November 27, 2013, the Company issued 626,295 detachable common stock warrants to new lenders to purchase shares of the Company’s common stock at an exercise price of $2.67 per share. The warrants expire on November 27, 2023. Prior to the exercise and removal of the put right, at the fifth anniversary date of the warrants and any time after the eighth anniversary date of the warrants, the warrant holders could have required the Company to redeem the warrants for cash, in an amount equal to the estimated fair value of the warrants, as determined by an independent appraisal, less the total exercise price of the redeemed warrants. The value of the warrants was recorded as a discount on the loan and a warrant liability on November 27, 2013. The discount on the loan was amortized as interest expense over the term of the loan. The Company attributed a value to these warrants of approximately $7.3 million as of December 31, 2014.

On August 6, 2014, in connection with the additional tranche described in Note 7, Notes Payable and Lines of Credit, the Company issued 484,260 detachable common stock warrants to the PennantPark Entities to purchase shares of the Company’s common stock at an exercise price of $2.67 per share. The warrants expire on November 27, 2023. Prior to the exercise and removal of the put right, at

21


the fifth anniversary date of the warrants and any time after the eighth anniversary date of the warrants, the warrant holders could have required the Company to redeem the warrants for cash, in an amount equal to the estimated fair value of the warrants, as determined by an independent appraisal, less the total exercise price of the redeemed warrants. The value of the warrants was recorded as a discount on the loan and a warrant liability on August 6, 2014. The discount on the loan was amortized as interest expense over the term of the loan. The Company attributed a value to these warrants of approximately $5.6 million as of December 31, 2014.

 

 

16.

Income Taxes

The Company uses an estimated annual effective tax rate method of computing its interim tax provision. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rates. In these cases, the actual tax expense or benefit applicable to that item is treated discretely and is reported in the same period as the related item. For the nine-month period ended September 30, 2015, the tax effects of warrants were treated as a discrete item.

The effective tax rate is based on forecasted annual pre-tax income, permanent differences and statutory tax rates. For the nine months ended September 30, 2015, the effective income tax rate was 44%. The main drivers of the difference in the effective tax rate from the statutory rate are warrants, success based fees, and meals and entertainment.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax in multiple states with heavy concentration in Florida, California, and Pennsylvania. The net deferred tax asset as of September 30, 2015 was $10.9 million before valuation allowance. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence in concluding that a full valuation allowance was necessary against its net deferred tax assets at September 30, 2015.

At September 30, 2015 and December 31, 2014, the Company had no unrecognized tax benefits and no amounts recorded for uncertain tax positions.

 

17.Subsequent Events

On October 5, 2015 the Company publicly filed a registration statement on Form S-1 with the SEC relating to a proposed public offering by the Company and certain selling stockholders of $80.0 million of common stock. In response to market conditions, on October 20, 2015, the Company filed a Form RW with the SEC withdrawing the registration statement.

On October 29, 2015, TriGen Insurance Solutions, Inc. (“TriGen”) entered into a Facilitation Agreement with The Carman Corporation, a Pennsylvania corporation (“Carman”), pursuant to which Carman will provide Trigen with certain market-finding and consulting activities for an upfront payment of $2.0 million. In conjunction with the Facilitation Agreement, TriGen also entered into a Managing Producer Agreement with AmTrust International Underwriters Limited (“AmTrust”) as of October 15, 2015 pursuant to which TriGen will provide a hospitality-focused insurance program for AmTrust.

 

 

 

 

 

 

 

 

22


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Combined Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2014, and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014.

Disclosure Regarding Forward-Looking Statements

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 (the “Exchange Act”) relating to our operations, results of operations and other matters that are based on our current expectations, estimates, assumptions and projections. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “positioned,” “outlook” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to the following:

 

·

Because we have a limited operating history as a stand-alone, combined company and business, our historical financial condition and results of operations are not necessarily representative of the results we would have achieved as a stand-alone, combined, publicly-traded company and may not be a reliable indicator of our future results.

 

·

Our business may be materially adversely impacted by general economic and labor market conditions.

 

·

The workers’ compensation insurance industry is cyclical in nature, which may affect our overall financial performance.

 

·

We may be more vulnerable to negative developments in the workers’ compensation insurance industry than companies that also provide outsourced services for other lines of insurance.

 

·

If workers’ compensation claims decline, in frequency or severity, our results of operations and financial condition may be adversely affected.

 

·

Our total fee income and fee income from related party are currently substantially dependent on our relationships with Guarantee Insurance and a small number of other insurance carrier clients.

 

·

Our relationship with Guarantee Insurance may create conflicts of interest, and we cannot be certain that all our transactions with Guarantee Insurance will be conducted on the same terms as those available from unaffiliated third parties.

 

·

If we cannot sustain our relationships with independent retail agencies, we may be unable to operate profitably.

 

·

Our geographic concentration ties our performance to business, economic and regulatory conditions in certain states, and unfavorable conditions in these states could have a significant adverse impact on our business, financial condition and results of operations.

 

·

We are subject to extensive regulation and supervision, and our failure to comply with such regulation or adapt to new regulatory and legislative initiatives may adversely impact our business.

 

·

Changes in the healthcare industry could adversely impact our performance.

 

·

If we are unable to adapt to healthcare market changes with our existing services or by developing and providing new services, our business would be adversely affected.

 

·

We have limited experience in acquiring other companies and businesses, and we may have difficulty integrating the operations of companies or businesses that we may acquire and may incur substantial costs in connection therewith.

 

·

Our goodwill and intangible assets could become impaired, which could lead to material non-cash charges against earnings.

 

·

We operate in a highly competitive industry, and others may have greater financial resources to compete effectively.

 

·

We compete on the basis of the quality of our outcome-driven service model, and our failure to continue to perform at high levels could adversely affect our business.

 

·

Our business is dependent on the efforts of our senior management and other key employees who leverage their industry expertise, knowledge of our markets and services and relationships with independent retail agencies that sell the insurance products of our carrier partners.

23


 

·

We are reliant on our information processing systems, and any failure or inadequate performance of these systems could have a material adverse effect on our business, financial condition and results of operations.

 

·

Cyber-attacks or other security breaches involving our computer systems or the systems of one or more of our clients, independent retail agencies or vendors could materially and adversely affect our business.

 

·

If we infringe on the proprietary rights of others, our business operations may be disrupted, and any related litigation could be time consuming and costly.

 

·

We are, and may become, party to lawsuits or other claims that could adversely impact our business.

 

·

Our substantial indebtedness could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts and could expose us to interest rate risk to the extent of our variable debt and divert our cash flow from operations to make debt payments.

 

·

Servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are not within our control.

 

·

Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate the risks to our financial condition described above.

 

·

Our founder, Chairman, President and Chief Executive Officer owns a significant percentage of our outstanding capital stock and will be able to influence stockholder and management decisions, which may conflict with your interests as a stockholder.

 

·

Future sales, or the perception of future sales, by us or our affiliates could cause the market price for our common stock to decline.

 

·

Because we have no plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

 

·

Our ability to raise capital in the future may be limited, which could make us unable to fund our capital requirements.

 

·

If securities analysts do not publish research or reports about our business or if they downgrade or provide negative outlook on our stock or our sector, our stock price and trading volume could decline.

 

·

We are an “emerging growth company”, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

·

We have incurred, and will continue to incur, increased costs, and are subject to additional regulations and requirements as a result of being a public company, which could lower our profits or make it more difficult to run our business.

 

·

Our internal controls over financial reporting may not be effective, and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and material adverse effect on our business, financial condition, results of operations or prospects.

 

·

Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

 

·

We have acquired a number of insurance services firms in a short period of time, and there are risks associated with such acquisitions, which could adversely affect our growth and results of operations.

For a more detailed discussion of these factors, see the information under the heading “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2014. Our forward-looking statements speak only as of the date of this report or as of the date they are made, and we undertake no obligation to update any forward-looking statements.

Terms Used in this Quarterly Report on Form 10-Q

Unless otherwise specified or the context requires otherwise, the following terms used in this Quarterly Report on Form 10-Q have the meanings ascribed to them below:

 

·

references to “Guarantee Insurance” refer to Guarantee Insurance Company and references to “Guarantee Insurance Group” refer to Guarantee Insurance Group, Inc. (f/k/a Patriot National Insurance Group, Inc.), the parent company of Guarantee Insurance, entities that are both controlled by Steven M. Mariano, our founder, Chairman, President and Chief Executive Officer;

 

·

references to the “GUI Acquisition” refer to our acquisition, effective August 6, 2014, of contracts to provide marketing, underwriting and policyholder services and related assets and liabilities from a subsidiary of Guarantee Insurance Group;

24


 

·

references to the “Patriot Care Management Acquisition” refer to our acquisition, effective August 6, 2014, of a business that provides nurse case management and bill review services (the “Patriot Care Management Business”);

 

·

references to “Patriot National,” “the Company,” “we,” “us” or “our” refer to Patriot National, Inc. and its direct and indirect subsidiaries;

 

·

references to the “PennantPark Entities” or the “selling stockholders” refer to PennantPark Investment Corporation, PennantPark Floating Rate Capital Ltd., PennantPark SBIC II LP and PennantPark Credit Opportunities Fund LP;

 

·

references to the “PennantPark Debt” refer to debt pursuant to the PennantPark Loan Agreement;

 

·

references to the “UBS Debt” refer to debt pursuant to the UBS Credit Agreement;

 

·

references to “reference premiums written” refer to the aggregate premiums, grossed up for large deductible credits, written by or for our insurance carrier partners in respect of the policies we produce and service on their behalf;

 

·

references to “reinsurance captives” or “reinsurance captive entities” refer to segregated portfolio cell captive entities that assume underwriting risk written initially by an insurance carrier client;

 

·

references to “Zurich” refer to Zurich American Insurance Company, Zurich American Insurance Company of Illinois, American Guarantee and Liability Insurance Company, American Zurich Insurance Company, Steadfast Insurance Company, Empire Fire & Marine Insurance Company, Empire Indemnity Insurance Company, Maryland Casualty Company, Assurance Company of America, Maryland Insurance Company, Northern Insurance Company of New York, The Fidelity and Deposit Company of Maryland, Colonial American Casualty and Surety Company, Universal Underwriters Insurance Company, Universal Underwriters Life Insurance Company, Universal Underwriters of Texas Insurance Company, Zurich Insurance Company Canadian Branch collectively; and

 

·

references to “AIG” refer to AIG Property Casualty Company, American Home Assurance Company, AIG Assurance Company, AIU Insurance Company, Commerce and Industry Insurance Company, Granite State Insurance Company, Illinois National Insurance Co., National Union Fire Insurance Company of Pittsburgh, PA., New Hampshire Insurance Company, and The Insurance Company of the State of Pennsylvania, collectively.

Overview

Business

We are an independent national provider of comprehensive technology-enabled outsourcing solutions that help insurance carriers, employers and other clients mitigate risk, comply with complex regulations and save time and money. We offer a full suite of end-to-end insurance related and specialty services that allow our clients to improve efficiencies and reduce expenses through our value-added processes. The core of our value proposition includes the benefit of a “one-stop” solution with our broad array of offered services, scalable, state-of-the-art technology and solutions to complex business and regulatory processes. Our goal is to be the preferred provider of mandatory employer services such as risk management services, health and welfare services, employee onboarding and compliance services.

We principally offer two types of services: front-end services, such as brokerage, underwriting and policyholder services, and back-end services, such as claims adjudication and administration. We provide our services either on an individual basis, as bundles of two or more services tailored to a client’s specific needs or on a turnkey basis where we provide a comprehensive set of front-end and back-end services to a client. We also offer specialty services currently including technology outsourcing and other IT services, as well as employment pre-screening and background checks.

We generate fee revenue for our services from our clients based on (1) a percentage of premiums for the policies we service, (2) the cost savings we achieve for our clients or (3) a fixed fee for a particular service. Unlike our insurance and reinsurance carrier clients, we do not generate underwriting income or assume underwriting risk on workers’ compensation plans.

Recent Events

On July 9, 2015, Patriot Risk Services, Inc. (“PRS”), a wholly owned subsidiary of Patriot National, entered into a stock purchase agreement with CWIBenefits, Inc., a Delaware corporation (“CWI”), and the shareholders of CWI, pursuant to which PRS acquired all of the outstanding equity of CWI for a maximum of $7.4 million. Pursuant to the purchase agreement, PRS paid CWI $2.8 million in cash at closing. CWI will also be entitled to an earn-out payment of up to $4.7 million approximately six months after closing, subject to reduction on a pro-rata basis if EBITDA does not meet certain targets. Neither Patriot National nor the Company assumed any material liabilities under the Purchase Agreement.

On July 20, 2015 the Company entered into a membership interest purchase agreement with Global HR Research LLC, a Florida limited liability company (“Global HR”), In Touch Holdings LLC, a Florida limited liability company (“ITH”), the members of Global HR, and Brandon G. Phillips as the sellers’ representative, pursuant to which, subject to the satisfaction or waiver of certain

25


conditions, the Company will acquire all of the outstanding membership interests of Global HR. The Global HR transaction closed on August 21, 2015. One of the Company’s independent directors, Austin J. Shanfelter, indirectly controlled Global HR. Mr. Shanfelter owned 84% of the equity interests in ITH, which owned 75.5% of the equity interests of Global HR. The purchase price for the transaction was (i) $24.0 million in cash, of which, $0.5 million is held in escrow, (ii) 444,096 shares of common stock (“the stock consideration”), of which 349,645 were issued and 94,451 are held in escrow, plus (iii) certain deferred consideration payable, at our sole discretion, in either 618.478 shares of our commons stock or $10,477,017 in cash (“the Deferred Consideration”).  The Deferred Consideration is payable solely to In Touch Holdings, LLC, one of the former principal stockholders of Global HR on the earlier of  (a)November 20, 2015, (b)the 21st day after the date we mail an information statement to the shareholders in connection with the Global HR acquisition or  (c) we file a registration statement with the SEC that is declared effective, including in connection with this offering. The number of shares of common stock of the Company to be issued was determined by dividing $18.0 million by the closing stock price of the Company’s common stock on July 20, 2015, the signing date. As of the filing date, a decision has not been made whether the deferred consideration will be paid in cash or stock. If the revenues for Global HR for its fiscal year 2016 are less than $12.8 million, then ITH will forfeit and return 10% of its stock consideration to the Company.

On August 14, 2015, TriGen Insurance Solutions, Inc. (“TriGen”), a wholly-owned subsidiary of Patriot National, Inc. (the “Company”), entered into an asset purchase agreement (the “Restaurant Coverage Purchase Agreement”) with Restaurant Coverage Associates, Inc., a New Jersey corporation (“Restaurant Coverage Associates”), and the equity holders of Restaurant Coverage Associates, pursuant to which TriGen acquired substantially all of the assets of Restaurant Coverage Associates.

On August 14, 2015, PRS entered into an asset purchase agreement (the “Risk Control Purchase Agreement” and together with the Restaurant Coverage Purchase Agreement, the “Purchase Agreements”) with an affiliate of Restaurant Coverage Associates, Risk Control Associates, Inc., a New Jersey corporation (“Risk Control Associates” and together with Restaurant Coverage Associates, the “RCA Entities”), and the equity holders of Risk Control Associates, pursuant to which PRS acquired substantially all of the assets of Risk Control Associates.

Pursuant to the Purchase Agreements, the RCA Entities will be entitled to a combined total purchase price of up to $3,500,000, which includes a payment by TriGen to Restaurant Coverage Associates of $750,000 in cash at closing and a payment by PRS to Risk Control Associates of $250,000 in cash at closing. In addition, the RCA Entities will be entitled to a combined earn-out payment of up to $2,500,000 approximately one year after closing, subject to reduction on a pro-rata basis if combined EBITDA within a twelve-month measurement period does not meet certain targets.

Key Performance Measures

We use certain key performance measures in evaluating our business and results of operations, and we may refer to one or more of these key performance measures in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These key performance measures include:

 

·

Gross reference premium written: gross reference premium written refers to the aggregate premium, grossed up for large deductible credits, written by or for our insurance carrier partners in respect of the policies we produce and service on their behalf.

 

·

Reference premium written: reference premium written refers to the earned aggregate premium, grossed up for large deductible credits, written by or for our insurance carrier partners in respect of the policies we produce and service on their behalf. For Guarantee Insurance, which records written premium on the effective date of the policy based on the estimated total premium for the term of the policy, reference written premium is equal to written premium based on the estimated total premium for the term of the policy, earned as of the effective date of the policy, grossed up for large deductible credits. Subsequent adjustments to the estimated total premium for the term of the policy are reflected as adjustments to reference written premium when the adjustments become known. For our third party insurance carrier clients, for whom record written premium as premium is collected, reference written premium is equal to collected premium, grossed up for large deductible credits. We evaluate our business (in respect of revenue both from brokerage and policyholder services and from claims administrative services) both in respect of the overall revenue generated by reference premium written, and the margin on such revenue. With respect to our brokerage and policyholder services, changes in reference premium written generally correspond to changes in total revenues.

The policies we write for our insurance and reinsurance carrier clients generally have a term of one year, and reference premium written is earned by our insurance and reinsurance carrier clients on a pro rata basis over the terms of the underlying policies. Likewise, the claims associated with these policies are generally incurred on a pro rata basis over the terms of the underlying policies. Generally, we perform our claims administration services on a claim from the date it is incurred through the date it is closed. We refer to claims that have been incurred, but not yet closed, for a particular period as “managed claims exposures.” With respect to our claims administration services, changes in managed claims exposures generally correspond to changes in total revenues.

 

·

Adjusted EBITDA: We define Adjusted EBITDA as net income (loss) adjusted for income tax expense (benefit), interest expense, depreciation and amortization expense, and certain non-cash and/or non-recurring transactions as shown in the Reconciliation from Net Income(Loss) to Adjusted EBITDA .

26


 

·

Adjusted EBITDA Margins: we define Adjusted EBITDA Margins as Adjusted EBITDA divided by the sum of fee income and fee income from related party.

 

·

Operating Cash Flow: we define Operating Cash Flow as Adjusted EBITDA less income tax expense, interest expense, and capital expenditures.

 

·

Adjusted Earnings: we define Adjusted Earnings or Loss and Adjusted Earnings or Loss per share as net income (loss) adjusted for cost for debt payoff, non-cash stock compensation costs,  net realized gains (losses) on investments, increase/(decrease) in fair value of warrant redemption liability, acquisition costs and loss on exchange of units and warrants.

We present Adjusted EBITDA, Adjusted EBITDA Margins, Operating Cash Flow and Adjusted Earnings in this report because they are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operational plans.  In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA, Operating Cash Flow and Adjusted Earnings can provide useful measures for period-to-period comparisons of our core business.  Accordingly, we believe that Adjusted EBITDA, Operating Cash Flow and Adjusted Earnings provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA, Adjusted EBITDA Margins, Operating Cash Flow and Adjusted Earnings have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our financial results under GAAP.  Some of these limitations are as follows:

 

·

Although depreciations and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

 

·

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs or tax payments that may represent a reduction in cash available to us; and

 

·

Other companies, including companies in our industry, may calculate Adjusted EBITDA, Operating Cash Flow and Adjusted Earnings or similarly titled measured differently, which reduce their usefulness as a comparative measure.

Reference Premium Written

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

In thousands

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Gross Reference Premium Written

 

$

126,038

 

 

$

89,283

 

 

$

347,660

 

 

$

257,819

 

Reference Premium Written

 

$

126,958

 

 

$

95,845

 

 

$

333,008

 

 

$

277,941

 

 

Gross reference premium written for the three months ended September 30, 2015 was $126.0 million compared to $89.3 million for the three months ended September 30, 2014, an increase of $36.8 million. The increase was attributable to a $4.2 million increase in Guarantee Insurance gross reference premium written and the inception of new contracts with Scottsdale Insurance Company (“Scottsdale”), AIG and certain other insurance carrier clients, which generated $35.6 million for the three months of gross reference premium written. This increase was partially offset by a $3.1 million decrease in gross reference premium written on behalf of Zurich as a result of Zurich reducing its volumes in California, where business covered by our initial program with Zurich was solely written. In September 2014, we entered into a second program with Zurich that further expands coverage in multiple other states.

Gross reference premium written for the nine months ended September 30, 2015 was $347.7 million compared to $257.8 million for the nine months ended September 30, 2014, an increase of $89.8 million.  This increase was attributable to a $11.4 million increase in Guarantee Insurance gross premium written and the inception of new contracts with Scottsdale, AIG and certain other carrier clients, which generated $90.7 million of gross reference premium written. This increase was partially offset by a $12.3 million decrease in gross reference premium written on behalf of Zurich as a result of Zurich reducing its volumes in California, where business covered by our initial program with Zurich was solely written.

Reference premium written for the three months ended September 30, 2015 was $127.0 million compared to $95.8 million for the three months ended September 30, 2014, an increase of $31.1 million.  The increase was attributable to a $4.2 million increase in Guarantee Insurance reference premium written and the inception of new contracts with Scottsdale, AIG, and certain other insurance carrier clients, which generated $33.3 million of reference premium written. This increase was partially offset by a $6.4 million decrease in reference premium written on behalf of Zurich as a result of Zurich reducing its volumes in California, where business covered by our initial program with Zurich was solely written.

Reference premium for the nine months ended September 30, 2015 was $333.0 million compared with $277.9 million for the nine months ended September 30, 2014.  The increase of $55.1 million was attributable to $11.4 million in Guarantee Insurance reference premium written and the inception of new contracts with Scottsdale, AIG, and certain other insurance carrier clients, which generated $65.6 million of reference premium written. This increase was partially offset by a $22.0 million decrease in reference premium

27


written on behalf of Zurich as a result of Zurich reducing its volumes in California, where business covered by our initial program with Zurich was solely written.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure and is not in accordance with, or an alternative to, the GAAP information provided in this Quarterly Report on Form 10-Q. For further information regarding our use of non-GAAP financial measures and a reconciliation of Adjusted EBITDA to Net income (loss), see “—Reconciliations to Non-GAAP Key Performance Measures”.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

In thousands

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income (loss)

 

$

3,788

 

 

$

16,902

 

 

$

(8

)

 

$

12,807

 

Adjusted EBITDA

 

$

14,629

 

 

$

8,421

 

 

$

36,838

 

 

$

17,334

 

 

Adjusted EBITDA for the three months ended September 30, 2015 was $14.6 million compared to $8.4 million for the three months ended September 30, 2014, an increase of $6.2 million. The increase was attributable to a $27.1 million increase in total fee income and fee income from related party, partially offset by a $20.9 million increase in total expenses (excluding depreciation and amortization, changes in fair value of warrant liabilities, non-cash stock compensation, interest expense and income tax expense which are added back to net income to arrive at Adjusted EBITDA), all of which are discussed more fully below.

Adjusted EBITDA for the nine months ended September 30, 2015 was $36.8 million compared to $17.3 million for the nine months ended September 30, 2014, an increase of $19.5 million. The increase was attributable to a $86.4 million increase in total fee income and fee income from related party, partially offset by a $66.6 million increase in total expenses (excluding depreciation and amortization, changes in fair value of warrant liabilities, non-cash stock compensation and costs incurred for the extinguishment of debt, income tax expense and interest expense which are added back to net income to arrive at Adjusted EBITDA), all of which are discussed more fully below.

Operating Cash Flow

Operating cash flow is a non-GAAP financial measure and is not in accordance with, or an alternative to, the GAAP information provided in this Quarterly Report on Form 10-Q. For further information regarding our use of non-GAAP financial measures and a reconciliation of Operating cash flow to Net income (loss), see “—Reconciliations to Non-GAAP Key Performance Measures”.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

In thousands

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income (loss)

 

$

3,788

 

 

$

16,902

 

 

$

(8

)

 

$

12,807

 

Net cash provided by operating activities

 

$

2,347

 

 

$

8,427

 

 

$

6,991

 

 

$

15,529

 

Operating cash flow

 

$

10,751

 

 

$

(3,688

)

 

$

29,748

 

 

$

1,069

 

 

Operating cash flow for the three months ended September 30, 2015 was $10.8 million compared to ($3.7) million for the three months ended September 30, 2014, an increase of $14.5 million.  The increase was primarily attributable to the increase in cash earnings as reflected in the $6.2 million increase in Adjusted EBITDA and a $7.8 million decrease in income taxes for the three months then ended.

For the nine months ended September 30, 2015, operating cash flow was $29.7 million compared to $1.1 million for the nine months ended September 30, 2014, an increase of $28.6 million. The increase was primarily attributable to the increase in cash earnings as reflected in the $19.5 million increase in Adjusted EBITDA and a $10.4 million decrease in income taxes for nine months then ended.

Adjusted Earnings

Adjusted Earnings is a non-GAAP financial measure and is not in accordance with, or an alternative to, the GAAP information provided in this Quarterly Report on Form 10-Q. For further information regarding our use of non-GAAP financial measures and a reconciliation of Operating cash flow to Net income (loss), see “—Reconciliations to Non-GAAP Key Performance Measures”.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

In thousands

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income (loss)

 

$

3,788

 

 

$

16,902

 

 

$

(8

)

 

$

12,807

 

Adjusted earnings

 

$

6,388

 

 

$

3,043

 

 

$

15,714

 

 

$

2,867

 

28


 

 Adjusted Earnings for the three months ended September 30, 2015 were $6.4 million as compared to $3.0 million for the three months ended September 30, 2014, an increase of $3.4 million.  The increase was primarily attributable to a $6.2 million increase in cash earnings as reflected in Adjusted EBITDA, partially offset by the income tax effect related to reconciling items in computing Adjusted Earnings.

For the nine months ended September 30, 2015, Adjusted Earnings were $15.7 million compared to $2.9 million for the nine months ended September 30, 2014, an increase of $12.8 million. The increase was primarily attributable to the increase in Adjusted EBITDA of $19.5 million, partially offset by the income tax effect related to reconciling items in computing Adjusted Earnings.

Results of Operations

The following table sets forth certain combined statement of operations data derived from our unaudited combined financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

In thousands

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Combined Statement of Operations Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee income

 

$

34,759

 

 

$

15,630

 

 

$

80,060

 

 

$

37,896

 

Fee income from related party

 

 

23,773

 

 

 

15,803

 

 

 

68,852

 

 

 

24,589

 

Total fee income and fee income from related party

 

 

58,532

 

 

 

31,433

 

 

 

148,912

 

 

 

62,485

 

Net investment income

 

 

49

 

 

 

76

 

 

 

85

 

 

 

496

 

Net realized (losses) gains on investments

 

 

(58

)

 

 

13,960

 

 

 

(149

)

 

 

14,038

 

Total Revenues

 

 

58,523

 

 

 

45,469

 

 

 

148,848

 

 

 

77,019

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and related expenses

 

 

21,549

 

 

 

9,726

 

 

 

53,782

 

 

 

17,907

 

Commission expense

 

 

8,173

 

 

 

5,891

 

 

 

25,556

 

 

 

9,491

 

Management fees to related party for administrative

   support services

 

 

 

 

 

861

 

 

 

 

 

 

5,390

 

Outsourced services

 

 

2,369

 

 

 

1,713

 

 

 

7,623

 

 

 

3,118

 

Allocation of marketing, underwriting and policy

   issuance costs from related party

 

 

 

 

 

333

 

 

 

 

 

 

1,872

 

Other operating expenses

 

 

11,974

 

 

 

4,538

 

 

 

25,259

 

 

 

7,801

 

Acquisition costs

 

 

1,453

 

 

 

 

 

 

4,372

 

 

 

 

Interest expense

 

 

806

 

 

 

2,836

 

 

 

2,525

 

 

 

5,427

 

Depreciation and amortization

 

 

4,380

 

 

 

1,652

 

 

 

10,075

 

 

 

3,699

 

Amortization of loan discounts and loan costs

 

 

62

 

 

 

650

 

 

 

206

 

 

 

1,295

 

Stock compensation expense

 

 

2,586

 

 

 

 

 

 

8,791

 

 

 

 

Costs from debt payoff

 

 

 

 

 

 

 

 

13,681

 

 

 

 

Decrease in fair value of warrant redemption liability

 

 

 

 

 

(8,760

)

 

 

(1,385

)

 

 

(2,257

)

Gain on disposal of fixed assets

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Total Expenses

 

 

53,345

 

 

 

19,440

 

 

 

150,478

 

 

 

53,743

 

Net Income (Loss) before income tax (benefit) expense

 

 

5,178

 

 

 

26,029

 

 

 

(1,630

)

 

 

23,276

 

Income tax expense (benefit)

 

 

1,331

 

 

 

9,101

 

 

 

(1,733

)

 

 

10,401

 

Net Income (Loss) Including Non-Controlling Interest in

   Subsidiary

 

 

3,847

 

 

 

16,928

 

 

 

103

 

 

 

12,875

 

Net Income attributable to Non-controlling interest

   in subsidiary

 

 

59

 

 

 

26

 

 

 

111

 

 

 

68

 

Net Income (Loss)

 

$

3,788

 

 

$

16,902

 

 

$

(8

)

 

$

12,807

 

 

Three and Nine Months Ended September 30, 2015 Compared to Three and Nine Months Ended September 30, 2014

 

Revenues:

Total Fee Income and Fee Income from Related Party. Total fee income and fee income from related party for the three months ended September 30, 2015 was $58.5 million compared to $31.4 million for the three months ended September 30, 2014, an increase of $27.1 million or approximately 86%. The increase in fee income and fee income from related party was primarily related to increases in the volume of business we managed as a result of transactions that occurred in August of 2014 and from acquisitions completed in the first three quarters of 2015.

29


Total fee income and fee income from related party for the nine months ended September 30, 2015 was $148.9 million compared with $62.5 million for the same period in 2014, an increase of $86.4 million or approximately 138%.  The increase in fee income and fee income from related party was primarily related to increases in the volume of business we managed as a result of transactions that occurred in August of 2014 and from acquisitions completed in the first three quarters of 2015.

For the three and nine months ended September 30, 2015, approximately 66% and 72%, respectively, of our total fee income and fee income from related party was attributable to our contracts with Guarantee Insurance, a related party, and approximately 6% and 8% of our total fee income and fee income from related party was attributable to contracts with our second largest client for both the three and nine months ended September 30, 2015.

For the three and nine months ended September 30, 2014, approximately 76% and 66%, respectively, of our total fee income and fee income from related party was attributable to our contracts with Guarantee Insurance, and approximately 10% and 22%, respectively, of our total fee income and fee income from related party were attributable to our contracts with our second largest client.

Fee Income. Fee income, which represents fee income from non-related parties, for the three months ended September 30, 2015 was $34.8 million compared to $15.6 million for the three months ended September 30, 2014, an increase of $19.2 million.  For the nine months ended September 30, 2015, fee income was $80.1 million compared to $37.9 million for the nine months ended September 30, 2014, an increase of $42.2 million.

Our prices by customer for our brokerage and policyholder services and claims administration services were unchanged for the nine-month period ended September 30, 2015 relative to the nine-month period ended September 30, 2014, and, accordingly, the net increase in fee income was solely related to changes in the volume of business we managed.

Fee Income from Related Party. Fee income from related party for the three months ended September 30, 2015 was $23.8 million compared to $15.8 million for the three months ended September 30, 2014, an increase of $8.0 million. For the nine months ended September 30, 2015, fee income from related party was $68.9 million compared to $24.6 million for the nine months ended September 30, 2014, an increase of $44.3 million.

Our prices by customer for our brokerage and policyholder services and claims administration services were unchanged for the nine-month period ended September 30, 2015 relative to the nine-month period ended September 30, 2014, and, accordingly, the net increase in fee income was solely related to changes in the volume of business we managed.

“Fee income from related party” represents a portion of fee income earned from Guarantee Insurance, a related party as described in Note 12, Related Party Transactions. Fee income from Guarantee Insurance for claims administration services is based on the net portion of claims expense retained by Guarantee Insurance pursuant to quota share reinsurance agreements between Guarantee Insurance, PUI’s third party insurance company customers and the segregated portfolio cell reinsurers that assume business written by Guarantee Insurance. Certain fee income from third-party segregated portfolio cell reinsurers is remitted to the Company by Guarantee Insurance on behalf of the segregated portfolio cell reinsurers. Fee income from Guarantee Insurance for brokerage, underwriting and policyholder services represents fees for soliciting applications for workers’ compensation insurance for Guarantee Insurance, based on a percentage of premiums written or other amounts negotiated by the parties.

Because fee income from related party for claims administration services is based on the net portion of claims expense retained by Guarantee Insurance, as described in Note 13, Concentration, the Company’s revenues attributable to contracts with Guarantee Insurance do not necessarily represent fee income from related party.

Net Investment Income. Net investment income was $49,000 for the three months ended September 30, 2015 compared to $76,000 for the three months ended September 30, 2014.  For the nine months ended September 30, 2015, net investment income was $85,000 compared with $496,000 for the nine months ended September 30, 2014. Net investment income for the three- and nine-month periods ended September 30, 2014 was principally attributable to a surplus note from prior years.

Expenses:

Salaries and Related Expenses. Salaries and related expenses for the three months ended September 30, 2015 were $21.5 million compared to $9.7 million for the three months ended September 30, 2014, an increase of $11.8 million.

Salaries and related expenses for the nine months ended September 30, 2015 were $53.8 million compared to $17.9 million for the nine months ended September 30, 2014, an increase of $35.9 million.

This increase was principally due to additional salary and salary related costs, beginning August 6, 2014 (as discussed in this Quarterly Report on Form 10-Q), as a result of directly incurring salary and salary related costs associated with our brokerage and policyholder services and administrative support services, including executive management, information technology, accounting, human resources and legal services. Prior to August 6, 2014, we received an allocation for such brokerage and policyholder services costs from Guarantee Insurance Group as described below under “—Allocation of Marketing, Underwriting and Policy Issuance Costs from Related Party” below, and a portion of such administrative support services costs was incurred in the form of a management fee paid to Guarantee Insurance Group as described under “—Management Fees to Related Party for Administrative Support Services”

30


below. Salary and salary related costs further increased in the period since August 6, 2014 as a result of the new agreement we entered into with Guarantee Insurance to provide all of our brokerage and policyholder services to Guarantee Insurance. In addition, the increase was in part due to an increase in the volume of business we manage.

Commission Expense. Commission expense for the three months ended September 30, 2015 was $8.2 million compared to $5.9 million for the three months ended September 30, 2014, an increase of $2.3 million. For the nine months ended September 30, 2015, commission expense was $25.6 million compared to $9.5 million for the nine months ended September 30, 2014, an increase of $16.1 million. This increase was a direct result of the increased fee income and fee income from related party recognized as a result of the increased volume in business we manage.

Management Fees to Related Party for Administrative Support Services. There were no management fees to related party for administrative support services for the three and nine months ended September 30, 2015 compared to $0.9 million and $5.4 million, respectively, for the three and nine months ended September 30, 2014. Effective August 6, 2014, these support services expenses became incurred directly by us, and from that date forward we no longer pay management fees to Guarantee Insurance Group. Accordingly, beginning August 6, 2014, such expenses, rather than being reflected in this item, are recorded in the line items to which they relate, which are primarily “salaries and related expenses,” “outsourced services” and “other operating expenses.”

Outsourced Services. Outsourced services for the three months ended September 30, 2015 were $2.4 million compared to $1.7 million for the three months ended September 30, 2014, an increase of $0.7 million or approximately 41%. For the nine months ended September 30, 2015 outsourced services were $7.6 million compared to $3.1 million for the nine months ended September 30, 2014, an increase of $4.5 million or approximately 145%. This increase was principally due to the acquisition of Patriot Care Management, effective August 6, 2014.

Allocation of Marketing, Underwriting and Policy Issuance Costs from Related Party. There was no allocation of marketing, underwriting and policy issuance costs from Guarantee Insurance Group, a related party, for the three and six months ended September 30, 2015 compared to $0.3 million and $1.9 million for the three and six months ended September 30, 2014, respectively. Effective August 6, 2014, such costs became incurred directly by us, and from that date forward, Guarantee Insurance Group is no longer allocating these costs to us. Accordingly, beginning August 6, 2014, such expenses, rather than being reflected in this item, are recorded in the line items to which they relate.

Other Operating Expenses. Other operating expenses for the three months ended September 30, 2015 were $12.0 million compared to $4.5 million for the three months ended September 30, 2014, an increase of $7.5 million or approximately 166%.  For the nine months ended September 30, 2015, other operating expenses were $25.3 million compared with $7.8 million for the nine months ended September 30, 2014. The increase of other operating expense corresponds to the direct costs incurred as a result of eliminating management fees and expense allocations from Guarantee Insurance and from increased volume in business we manage.

Acquisition Costs. For the three and nine months ended September 30, 2015, we incurred $1.5 million and $4.4 million of acquisition costs, respectively. These costs were predominantly comprised of salary and related expenses, professional costs and other fees associated with acquisition activities.

Interest Expense. Interest expense for the three months ended September 30, 2015 was $0.8 million compared to $2.8 million for the three months ended September 30, 2014, a decrease of $2.0 million. Interest expense for the nine months ended September 30, 2015, was $2.5 million compared to $5.4 million for the nine months ended September 30, 2014, a decrease of $2.9 million.  The interest expense for the nine months ended September 30, 2015 was comprised of $0.9 million of interest accrued for the PennantPark Debt and the UBS Debt prior to repayment on January 22, 2015 and $1.6 million on the Senior Secured Credit Facility from January 22, 2015 until September 30, 2015. Interest expense for the nine months ended September 30, 2014 was comprised of interest on the PennantPark Debt and UBS Debt then outstanding. The decrease in interest expense was the result of lower outstanding debt balances and more favorable interest rates from refinancing of our debt with more favorable terms.

Depreciation and Amortization. Depreciation and amortization for the three months ended September 30, 2015 was $4.4 million compared to $1.7 million for the three months ended September 30, 2014, an increase of $2.7 million. For the nine months ended September 30, 2015 and 2014, depreciation and amortization was $10.1 million and $3.7 million, respectively, representing a period over period increase of $6.4 million. The increase was attributable mainly to the increased intangible asset amortization associated with our acquisitions.

Amortization of Loan Discounts and Loan Costs. Amortization of loan discounts and loan costs was $0.1 million for the three months ended September 30, 2015, compared to $0.7 million for the three months ended September 30, 2014, a decrease of $0.6 million. For the nine-month periods ended September 30, 2015 and 2014, amortization of loan discounts and loan costs was $0.2 million and $1.3 million, respectively, a decrease of $1.1 million. The decrease was attributable to the write-off of loan discounts and deferred loan costs upon repayment of the PennantPark Debt and UBS Debt on January 22, 2015.

Stock Compensation Expense. The Company recognized $2.6 million of stock compensation expense during the three months ended September 30, 2015 and $8.8 million of stock compensation expense for the nine months ended September 30, 2015.  Stock compensation expense is related to restricted stock and stock option awards. See Note 10, Stock-Based Compensation, for further detail related to these awards and the recognized expense.

31


Decrease (Increase) in Fair Value of Warrant Redemption Liability. The decrease in fair value of warrant redemption liability was $1.4 million for the nine months ended September 30, 2015 which reflects the change in fair value from estimated valuation on December 31, 2014 to the exercise of the detachable common stock warrants on January 22, 2015. The decrease to the fair value of the warrant redemption liability for the nine months ended September 30, 2014 was $2.3 million. Additionally, there was no remaining warrant redemption liability as of September 30, 2015, and no future fair value adjustments are required.

Cost from Debt Payoff. The Company recognized expenses for “make-whole” payments upon repayment of the PennantPark Debt and UBS Debt on January 22, 2015. These expenses were comprised of $3.8 million to the PennantPark Entities and $0.6 million to UBS.  Additionally, the Company recognized expenses for the write-off of existing deferred financing of $6.3 million and original issue discounts of $3.1 million associated with the PennantPark Debt and UBS Debt upon repayment on January 22, 2015.  Due to the non-recurring nature of these expenses, they are presented separately from interest expense and amortization expense, respectively, in our combined results for the nine months ended September 30, 2015. Total cost from debt payoff was $13.7 million for the nine months ended September 30, 2015.

Income Tax Expense. Income tax expense was $1.3 million for the three months ended September 30, 2015 compared to income tax expense of $9.1 million for the three months ended September 30, 2014, a decrease in income tax expense of $7.8 million. For the nine months ended September 30, 2015 we had an income tax benefit of $1.7 million compared to a $10.4 million income tax expense for the nine months ended September 30, 2014. For the nine months ended September 30, 2015, the effective income tax rates were approximately 43.9%.  The effective tax rate is based on forecasted annual pre-tax income, permanent differences and statutory tax rates.  The main difference in the effective tax rate from the statutory rate is warrants, success based fees, and meals and entertainment.

 

Net Income:

As a result of the factors described above, net income decreased by $13.1 million to $3.8 million for the three months ended September 30, 2015 as compared to a net income of $16.9 million for the three months ended September 30, 2014.  For the nine months ended September 30, 2015, there was a $0.0 million net loss compared to a $12.8 million net income for the nine months ended September 30, 2014, a decrease of $12.8 million.

Seasonality

Although our revenue and operating results associated with our claims administration services are generally not subject to seasonality, our revenue and operating results associated with our brokerage and policyholder services are generally subject to seasonal variations as a result of the distribution of renewal dates of existing policies throughout the year, with slightly more renewals occurring in the first and third calendar quarter based on the current distribution of such dates.

Impact of Inflation

Although we cannot accurately anticipate the effect of inflation on our operations, we believe that inflation has not had a material impact on our results of operations during the last two fiscal years, nor do we believe it is likely to have such a material impact in the foreseeable future.

Liquidity and Capital Resources

Sources and Uses of Funds

Our principal needs for liquidity have been, and for the foreseeable future will continue to be, working capital, capital expenditures and funding potential acquisitions, potential redemption of detachable common stock warrants, as well as servicing our Senior Secured Credit Facility. Our primary sources of liquidity include cash flows from operations and available cash and cash equivalents.

We believe that our cash flow from operations and available cash and cash equivalents will be sufficient to meet our liquidity needs for the foreseeable future. As of September 30, 2015, our unrestricted cash and cash equivalents were $15.2 million. In addition, as of September 30, 2015, we had $3.2 million of equity and fixed income security investments and $16.3 million of restricted cash, which are funds we receive from our insurance carrier clients and are earmarked exclusively for payments of claims on behalf of such clients. We cannot use restricted cash for other purposes.

To the extent we require additional liquidity, we anticipate that it will be funded through the incurrence of other indebtedness (which may include capital markets indebtedness, our Senior Secured Credit Facility or indebtedness under other credit facilities), equity financings or a combination thereof. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions.

32


Cash Flows

The following table summarizes our cash flow activities for the three months ended September 30, 2015 and 2014.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

In thousands

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cash flow activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

$

2,347

 

 

$

8,427

 

 

$

6,991

 

 

$

15,529

 

Net Cash Used in Investment Activities

 

 

(28,828

)

 

 

(53,150

)

 

 

(86,505

)

 

 

(54,222

)

Net Cash Provided by (Used in) Financing Activities

 

 

31,797

 

 

 

49,379

 

 

 

90,472

 

 

 

45,058

 

 

  Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2015 was $7.0 million compared to $15.5 million for the nine months ended September 30, 2014, a decrease of $8.5 million. The decrease was largely attributable to a $14.1 million reduction in income taxes payable as a result of payments made in 2015 related to the 2014 tax year.  This decrease was partially offset by an increase in cash earnings as reflected in the earlier discussion of Adjusted EBITDA, net of working capital fluctuations.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2015 was $86.5 million compared to $54.2 million for the nine months ended September 30, 2014, an increase of $32.3 million. This increase was attributable to funding of acquisitions of $74.0 million in 2015 from $52.7 million in 2014, an increase of $21.3 million, the purchase of fixed assets and other long-term assets of $4.6 million in 2015 from $0.4 million in 2014, an increase of $4.2 million, and an increase in restricted cash of $4.5 million in 2015 from $0.7 million in 2014, an increase of $3.8 million.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2015 was $90.5 million compared to $45.1 million for the nine months ended September 30, 2014, an increase of $45.4 million. This increase was attributable to the proceeds from the IPO and our new debt structure less the repayment of previous debt and capital lease payments.

Capital Expenditures

For the nine months ended September 30, 2015, we made capital expenditures of $4.6 million attributable to $2.2 million of fixed assets and $2.3 million of capitalized software development. For the nine months ended September 30, 2014, we made capital expenditures of $0.4 million.

Indebtedness

As of September 30, 2015, we had a total of $107.9 million of term loan debt outstanding under our Senior Secured Credit Facility, $10.8 million outstanding under our revolving credit facility, and $2.8 million of capital leases outstanding.

Senior Secured Credit Facility

On January 22, 2015, we entered into a credit agreement which provides for a $40.0 million revolving credit facility and a $40.0 million term loan facility (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility has a maturity of five years, and borrowings thereunder bear interest, at our option, at LIBOR plus a margin ranging from 250 basis points to 325 basis points or at base rate plus a margin ranging from 150 basis points to 225 basis points. Margins on all loans and fees will be increased by 2% per annum during the existence of an event of default. The revolving credit facility includes borrowing capacity available for letters of credit and borrowings on same-day notice, referred to as swing line loans. At any time prior to maturity, we have the right to increase the size of the revolving credit facility or the term loan facility by an aggregate amount of up to $20.0 million, but in minimum increments of $5.0 million.

As of June 30, 2015, we increased the term loan facility by $20.0 million through two $10.0 million incremental term loans. On August 14, 2015, we entered into a second amendment to the Senior Secured Credit Facility (the “Second Amendment”) which provides for an additional $50.0 million of term loans plus the ability to increase the term loan by an additional $50.0 million under certain conditions. The Second Amendment also added a requirement that until the we deliver a certificate certifying that (a) our total leverage ratio is equal to or less than 2.25 to 1.00 and (b) our Adjusted EBITDA for the twelve-months then ended is at least $70.0 million, the outstanding revolving loans (plus any swing line loans and the aggregate stated amount of all letters of credit) shall not

33


exceed $30.0 million. All other material terms and conditions in the Senior Secured Credit Facility were unchanged by the Second Amendment.

As of September 30, 2015, the outstanding balance under our Senior Secured Credit Facility was $118.7 million (comprised of $107.9 million outstanding under the term loan facility and $10.8 million outstanding under the revolving credit facility), and we had $29.2 million available to borrow under the revolving credit .

In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we are required to pay a commitment fee to the Administrative Agent for the ratable benefit of the lenders under the revolving credit facility in respect of the unutilized commitments thereunder, ranging from 35 basis points to 50 basis points, depending on specified leverage ratios. With respect to letters of credit, we are also required to pay a per annum participation fee equal to the applicable LIBOR margin on the face amount of each letter of credit as well as a fee equal to 0.125% on the face amount of each letter of credit issued (or the term of which is extended). This latter 0.125% fee is payable to the issuer of the letter of credit for its own account, along with any standard documentary and processing charges incurred in connection with any letter of credit.

The term loan facility amortizes quarterly beginning the first full quarter after the closing date at a rate of 5% per annum of the original principal amount during the first two years, 7.5% per annum of the original principal amount during the third and fourth years and 10% per annum of the original principal amount during the fifth year, with the remainder due at maturity. Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity. In the event of any sale or other disposition by us or our subsidiaries guaranteeing the Senior Secured Credit Facility of any assets with certain exceptions, we are required to prepay all proceeds received from such a sale towards the remaining scheduled payments of the term loan facility.

In addition, all obligations under the Senior Secured Credit Facility are guaranteed by all of our existing and future subsidiaries, other than foreign subsidiaries to the extent the assets of such foreign subsidiaries do not exceed 5% of our and our subsidiaries’ total assets on a combined basis, and secured by a first-priority perfected security interest in substantially all of our and our guaranteeing subsidiaries’ tangible and intangible assets, whether now owned or hereafter acquired, including a pledge of 100% of the stock of each guarantor.

The Senior Secured Credit Facility contains certain covenants that, among other things and subject to significant exceptions, limit our ability and the ability of our restricted subsidiaries to engage in certain business and financing activities and that require us to maintain certain financial covenants, including requirements to maintain (i) a maximum total leverage ratio of total outstanding debt to adjusted EBITDA for the most recently ended four fiscal quarters of no more than 300% and (ii) a minimum fixed charge coverage ratio of adjusted EBITDA to the sum of cash interest expense (which amount shall be calculated on an annualized basis for the three-, six- and nine-month periods ended March 31, 2015, June 30, 2015 and September 30, 2015) plus income tax expense (or less any income tax benefits) plus capital expenditures plus dividends, share repurchases and other restricted payments plus regularly scheduled principal payments of debt for the same period of a least 150% for the most recently-ended four quarters. The Senior Secured Credit Facility allows us to pay dividends in an amount up to 50% of our net income if certain other financial conditions are met.

The Senior Secured Credit Facility contains other restrictive covenants, including those regarding: indebtedness (including capital leases) and guarantees; liens; operating leases; investments and acquisitions; loans and advances; mergers, consolidations and other fundamental changes; sales of assets; transactions with affiliates; no material changes in nature of business; dividends and distributions, stock repurchases, and other restricted payments; change in name, jurisdiction of organization or fiscal year; burdensome agreements; and capital expenditures.

The Senior Secured Credit Facility also has events of default that may result in acceleration of the borrowings thereunder, including: (i) nonpayment of principal, interest, fees or other amounts (subject to customary grace periods for items other than principal); (ii) failure to perform or observe covenants set forth in the loan documentation (subject to customary grace periods for certain affirmative covenants); (iii) any representation or warranty proving to have been incorrect in any material respect when made; (iv) cross-default to other indebtedness and contingent obligations in an aggregate amount in excess of an amount to be agreed upon; (v) bankruptcy and insolvency defaults (with grace period for involuntary proceedings); (vi) inability to pay debts; (vii) monetary judgment defaults in excess of an agreed upon amount; (viii) ERISA defaults; (ix) change of control; (x) actual invalidity or unenforceability of any loan document, any security interest on any material portion of the collateral or asserted (by any loan party) invalidity or unenforceability of any security interest on any collateral; (xi) actual or asserted (by any loan party) invalidity or unenforceability of any guaranty; (xii) material unpaid, final judgments that have not been vacated, discharged, stayed or bonded pending appeal within a specified number of days after the entry thereof; and (xiii) any other event of default agreed to by us and the Administrative Agent.

As of September 30, 2015, we were in compliance with the financial and other restrictive covenants under our outstanding material debt obligations, including our Senior Secured Credit Facility.

34


Repayment of UBS Credit Agreement

On August 6, 2014, in connection with the Patriot Care Management Acquisition, we and certain of our subsidiaries entered into the UBS Credit Agreement, which provided for a five-year term loan facility in an aggregate principal amount of $57.0 million that would mature on August 6, 2019. The loan was secured by the common stock of Patriot Care Management, Inc. and guaranteed by Guarantee Insurance Group and its wholly owned subsidiaries. Following our initial public offering, on January 22, 2015 we prepaid all outstanding borrowings under the UBS Credit Agreement, including accrued interest and applicable prepayment premium.

Repayment of PennantPark Loan Agreement

On August 6, 2014, in connection with the GUI Acquisition, we and certain of our subsidiaries, as borrowers, and certain of our other subsidiaries and certain affiliated entities, as guarantors, entered into the PennantPark Loan Agreement with the PennantPark Entities, as lenders. Following our initial public offering, on January 22, 2015 we prepaid all outstanding borrowings under the PennantPark Loan Agreement, including accrued interest and applicable prepayment premium.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

The Company has employment agreements with certain executives and other employees, which provide for compensation and certain other benefits and for severance payments under certain circumstances.  The employment agreements contain clauses that become effective upon a change of control of the Company.  Upon the occurrence of any of the defined events in the employment agreements, the Company would be obligated to pay certain amounts to the relevant employees.

The Company maintains cash at various financial institutions, and, at times, balances may exceed federal insured limits.  Management does not believe this results in any material effect on the Company’s financial position or results of operations.  In the normal course of business, the Company may be party to various legal actions that management believes will not result in any material effect on the Company’s financial position or results of operations.

 

Effect of Recently Issued Financial Accounting Standards

In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”, an update to Accounting Standard Codification (“ASC”) Topic 805, Business Combinations.  This update requires that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjusting amounts are determined. The amendment requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued.  We will evaluate this guidance as potential adjustments arise.  

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. The update requires retrospective application. ASU 2015-03 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. Early adoption is permitted but we do not anticipate electing early adoption.  We are currently evaluating the financial impact of this standard.

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

In May 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued a deferral of

35


effective date for this standard.  For public companies this standard applies to annual reporting period beginning after December 15, 2017, including interim reporting periods within that reporting period, and early adoption is not permitted. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations”, regarding ASC Topic 205, Presentation of Financial Statements, and ASC Topic 360, Property, Plant and Equipment. The updated guidance related to reporting discontinued operations and disclosures of disposals of components of an entity. Under the amendment, only those disposals of components of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. Additionally, the elimination of the component's operations, cash flows and significant continuing involvement conditions have been removed. Further, an equity method investment could be reported as discontinued operations. The updated guidance is effective prospectively for all disposals or classifications as held for sale that occur within annual periods beginning after December 15, 2014. The adoption of this guidance has not had a material impact on our combined financial statements.

JOBS Act

The JOBS Act contains provisions that, among other things, allow an emerging growth company to take advantage of specified reduced reporting requirements. In particular, the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have elected to take advantage of such extended transition period, and, as a result, we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies.

Reconciliations to Non-GAAP Key Performance Measures

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

 

(In thousands)

 

Reconciliation from Net Income (Loss) to Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

3,788

 

 

$

16,902

 

 

$

(8

)

 

$

12,807

 

Income tax expense (benefit)

 

 

1,331

 

 

 

9,101

 

 

 

(1,733

)

 

 

10,401

 

Interest expense

 

 

806

 

 

 

2,836

 

 

 

2,525

 

 

 

5,427

 

Depreciation and amortization

 

 

4,442

 

 

 

2,302

 

 

 

10,281

 

 

 

4,994

 

EBITDA

 

 

10,367

 

 

 

31,141

 

 

 

11,065

 

 

 

33,629

 

Net realized losses (gains) on investments

 

 

58

 

 

 

(13,960

)

 

 

149

 

 

 

(14,038

)

Costs from debt payoff

 

 

 

 

 

 

 

 

13,681

 

 

 

 

Decrease in fair value of warrant redemption liability

 

 

 

 

 

(8,760

)

 

 

(1,385

)

 

 

(2,257

)

Stock compensation expense

 

 

2,586

 

 

 

 

 

 

8,791

 

 

 

 

Acquisition costs

 

 

1,453

 

 

 

 

 

 

4,372

 

 

 

 

Severance expense

 

 

172

 

 

 

 

 

 

172

 

 

 

 

Gain on disposal of fixed assets

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Adjusted EBITDA

 

$

14,629

 

 

$

8,421

 

 

$

36,838

 

 

$

17,334

 

Calculation of Adjusted EBITDA margins:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fee Income

 

$

58,532

 

 

$

31,433

 

 

$

148,912

 

 

$

62,485

 

Adjusted EBITDA

 

 

14,629

 

 

 

8,421

 

 

 

36,838

 

 

 

17,334

 

Adjusted EBITDA margins

 

 

25.0

%

 

 

26.8

%

 

 

24.7

%

 

 

27.7

%

 

36


 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

 

(In thousands)

 

Reconciliation to Operating Cash Flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (calculated above)

 

$

14,629

 

 

$

8,421

 

 

$

36,838

 

 

$

17,334

 

Less: Income tax expense

 

 

(1,331

)

 

 

(9,101

)

 

 

 

 

 

(10,401

)

Less: Interest expense

 

 

(806

)

 

 

(2,836

)

 

 

(2,525

)

 

 

(5,427

)

Less: Purchase of fixed assets and other long-term assets

 

 

(1,741

)

 

 

(172

)

 

 

(4,565

)

 

 

(437

)

Operating cash flow

 

$

10,751

 

 

$

(3,688

)

 

$

29,748

 

 

$

1,069

 

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

 

(In thousands)

 

Reconciliation from Net Cash Provided by Operating Activities to

   Operating Cash Flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

$

2,347

 

 

$

8,427

 

 

$

6,991

 

 

$

15,529

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee income receivable

 

 

3,196

 

 

 

346

 

 

 

8,212

 

 

 

719

 

Fee income receivable from related party

 

 

5,538

 

 

 

4,334

 

 

 

10,153

 

 

 

4,849

 

Other current assets

 

 

543

 

 

 

32

 

 

 

1,715

 

 

 

85

 

Decrease (increase) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net payable to related parties

 

 

922

 

 

 

(1,054

)

 

 

(781

)

 

 

(3,618

)

Deferred claims administration services income

 

 

(686

)

 

 

(200

)

 

 

(539

)

 

 

(569

)

Net advanced claims reimbursements

 

 

3,353

 

 

 

(196

)

 

 

(237

)

 

 

(629

)

Income taxes payable, net of income tax benefit of

  $1.7 million for the nine months ended september 30, 2015

  and $0 in 2014, respectively

 

 

(944

)

 

 

(8,052

)

 

 

12,348

 

 

 

(8,833

)

Accounts payable and accrued expenses

 

 

(3,286

)

 

 

(7,538

)

 

 

(11,963

)

 

 

(8,593

)

Net income or (loss) attributable to business generated by GUI,

   exclusive of depreciation expense

 

 

 

 

 

39

 

 

 

 

 

 

2,252

 

Net (income) loss attributable to non-controlling interest in subsidiary

 

 

(59

)

 

 

(26

)

 

 

(111

)

 

 

(68

)

Deferred income taxes

 

 

 

 

 

472

 

 

 

 

 

 

482

 

Early payment penalties on repayment of debt

 

 

 

 

 

 

 

 

4,339

 

 

 

 

Acquisition costs

 

 

1,453

 

 

 

 

 

 

4,372

 

 

 

 

Severance expense

 

 

172

 

 

 

 

 

 

172

 

 

 

 

Gain on disposal of fixed assets

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Provision for uncollectible fee income, not related to Ullico

 

 

(50

)

 

 

(100

)

 

 

(351

)

 

 

(100

)

Purchase of fixed assets and other long-term assets

 

 

(1,741

)

 

 

(172

)

 

 

(4,565

)

 

 

(437

)

Operating cash flow

 

$

10,751

 

 

$

(3,688

)

 

$

29,748

 

 

$

1,069

 

 

37


 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

 

(In thousands)

 

Reconciliation from Net (Loss) Income to Adjusted Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

3,788

 

 

$

16,902

 

 

$

(8

)

 

$

12,807

 

Net realized losses (gains) on investments

 

 

58

 

 

 

(13,960

)

 

 

149

 

 

 

(14,038

)

Costs from debt payoff

 

 

 

 

 

 

 

 

13,681

 

 

 

 

Decrease in fair value of warrant redemption liability

 

 

 

 

 

(8,760

)

 

 

(1,385

)

 

 

(2,257

)

Stock compensation expense

 

 

2,586

 

 

 

 

 

 

8,791

 

 

 

 

Acquisition costs

 

 

1,453

 

 

 

 

 

 

4,372

 

 

 

 

Severance expense

 

 

172

 

 

 

 

 

 

172

 

 

 

 

Gain on disposal of fixed assets

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Income tax effect related to reconciling items

 

 

(1,662

)

 

 

8,861

 

 

 

(10,051

)

 

 

6,355

 

Adjusted Earnings

 

$

6,388

 

 

$

3,043

 

 

$

15,714

 

 

$

2,867

 

Calculation of Adjusted Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

 

$

0.19

 

 

$

0.60

 

 

$

0.19

 

Diluted

 

 

0.23

 

 

 

0.17

 

 

 

0.60

 

 

 

0.18

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

26,802

 

 

 

16,368

 

 

 

26,006

 

 

 

14,981

 

Diluted

 

 

27,940

 

 

 

17,551

 

 

 

26,388

 

 

 

16,183

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2015, we were not subject to any material interest rate risk or credit risk, and we had no exposure to foreign currency risk.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

38


PART II — OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

We are not a party to any pending legal proceedings that we believe are material to us. We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of our business. In the normal course of the workers’ compensation insurance services business, we have been named as a defendant in suits related to decisions by us or our clients with respect to the settlement of claims or other matters arising out of the services we provide. In the opinion of management, adequate reserves have been provided for such matters. However, we cannot provide any assurances that the result of any such actions, claims or proceedings, now known or occurring in the future, individually or in the aggregate, will not result in a material adverse effect on our business, financial condition or results of operations.

 

 

ITEM 1A.

RISK FACTORS

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. Other than as described below, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

We have acquired a number of insurance services firms in a short period of time, and there are risks associated with such acquisitions, which could adversely affect our growth and results of operations.

     We have recently acquired a number of insurance services firms in a short period of time. We believe that similar acquisition activity will be important to maintaining comparable growth in the future. Failure to successfully identify and complete acquisitions likely would likely result in slower growth. Even if we are able to identify appropriate acquisition targets, we may not be able to execute transactions on favorable terms or integrate targets in a manner that allows us to fully realize the anticipated benefits from these acquisitions. Our ability to finance and integrate acquisitions may also suffer if we expand the number or size of our acquisitions.

     Post-acquisition risks include those relating to retention of personnel, retention of clients, entry into unfamiliar markets or lines of business, contingencies or liabilities, such as violations of sanctions laws or anti-corruption laws, risks relating to ensuring compliance with licensing and regulatory requirements, tax and accounting issues, distractions to  management and personnel from our existing business and integration difficulties relating to accounting, information technology, human resources, or organizational culture and fit, some or all of which could have an adverse effect on our results of operations and growth. Post-acquisition deterioration of targets could also result in lower or negative earnings contribution and/or goodwill impairment charges.

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

(a) None.

(b) None.

 

 

39


ITEM 6.

EXHIBITS

 

Exhibit
Number

  

Exhibit Description

 

 

 

2.1

 

Agreement and Plan of Merger dated as of April 17, 2015, by and among Patriot National, Inc., Vikaran Technology Solutions, Inc., Vikaran Solutions, LLC and certain members of Vikaran Solutions, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on April 20, 2015 (File No. 001-36804))

 

 

 

2.2

 

Stock Purchase Agreement dated as of July 9, 2015, by and between Patriot Risk Services, Inc. and CWIBenefits, Inc. (incorporated by reference to Exhibit 2.15 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2015 (File no. 001-36804))

 

 

 

2.3

 

Membership Interest Purchase Agreement dated as of July 20, 2015, by and between Patriot National, Inc. and Global HR Research LLC, In Touch Holdings LLC, the members of Global HR Research LLC, and Brandon G. Phillips (the “Global HR Membership Interest Purchase Agreement”) (incorporated by reference to Exhibit 2.16 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2015 (File no. 001-36804))

 

 

 

2.4

 

Amendment No. 1 to the Global HR Membership Interest Purchase Agreement, dated as of August 21, 2015, by and between Patriot National, Inc. and Global HR Research LLC, In Touch Holdings LLC, the members of Global HR Research LLC, and Brandon G. Phillips

 

 

 

2.5

 

Asset Purchase Agreement dated as of August 14, 2015, by and between TriGen Insurance Solutions, Inc. and Restaurant Coverage Associates, Inc.

 

 

 

2.6

 

Asset Purchase Agreement dated as of August 14, 2015, by and between Patriot Risk Services, Inc. and Risk Control Associates, Inc.

 

 

 

2.7

 

Facilitation Agreement dated as of October 29, 2015, by and between TriGen Insurance Solutions, Inc. and The Carman Corporation

 

 

 

3.1

  

Amended and Restated Certificate of Incorporation of Patriot National, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on January 22, 2015 (File no. 001-36804))

 

 

 

3.2

  

Amended and Restated By-Laws of Patriot National, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on January 22, 2015 (File no. 001-36804))

 

 

 

10.1

 

Second Amendment to the Credit Agreement, dated as of August 14, 2015, by and among Patriot National, Inc., the lenders party thereto and BMO Harris Bank N.A., as administrative agent

 

 

 

10.2*

 

Patriot National, Inc. Acquisition Incentive Plan Under the Patriot National, Inc. 2014 Omnibus Incentive Plan

 

 

 

31.1

 

Certificate of Steven M. Mariano, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certificate of Thomas C. Shields, Executive Vice President, Chief Financial Officer and Treasurer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certificate of Steven M. Mariano, President and Chief Executive Officer, pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

 

 

 

32.2

 

Certificate of Thomas C. Shields, Executive Vice President, Chief Financial Officer and Treasurer, pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

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*

This document has been identified as a management contract or compensatory plan or arrangement.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

 

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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.

 

 

PATRIOT NATIONAL, INC.

 

 

 

Date: November 12, 2015

By:

/s/ Thomas C. Shields 

 

 

Executive Vice President, Chief Financial Officer

 

 

& Treasurer, Authorized Signatory

 

 

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