| Business Combination | 3. Business combination
HT Systems, LLC Acquisition
On April 30, 2015, the Company acquired 100% of the equity of
HT Systems, LLC. (“HT Systems”), a provider of
palm-vein based biometric patient identification systems, to enter
into the positive patient identification market for a purchase
price of $19.1 million less $189,000 of working capital
adjustments, for total cash consideration paid of $18.9
million.
The acquisition of HT Systems and its PatientSecure biometric
patient identification technology supports the Company’s
long-term vision to be the leading provider of healthcare IT
security solutions that increase provider productivity, enable
patient engagement, and improve patient safety.
The Company may pay up to $5.0 million of potential additional
earn-out consideration to the selling equity-holders, which will be
determined based upon the achievement of certain sales targets over
the two-year period following the transaction, provided, that the
selling equity-holder remains an employee of the Company when the
earn-out consideration becomes payable. The earn-out consideration
will be recognized in the Company’s Consolidated Financial
Statements as compensation expense as earned. For the three and six
month ended June 30, 2015, the Company has not recorded any
compensation expense associated with the earn-out
consideration.
In addition, the Company will pay up to $1.9 million in
retention-based payments to the selling equity-holders payable in
cash two years from the closing date of April 30, 2015,
contingent upon continued employment as of the payment date.
Additional retention-based payments of $341,000, payable in cash,
are payable to other employees 8 to 20 months following the date of
acquisition, contingent upon their continued employment on the
payment dates. The retention-based payments will be recognized in
the Company’s Consolidated Statements of Operations as
compensation expense over the employment period.
During the three and six months ended June 30, 2015, $546,000
and $709,000, respectively, of acquisition-related costs were
incurred due to the HT Systems acquisition, which are included in
general and administrative expenses in the Consolidated Statement
of Operations.
Purchase Price Allocation
Under the acquisition method of accounting, the Company allocated
the purchase price to the identifiable assets and liabilities based
on their estimated fair value, which was determined by management
using the best information available as of the date of the
acquisition (Level 3 inputs). The allocation of the HT Systems
purchase consideration to the identifiable assets acquired and
liabilities assumed was as follows:
Useful lives
(dollars in thousands) Amount (in years)
Assets:
Accounts receivable $ 4,328
Prepaid expenses and other current assets 33
Property and equipment 59 3
Intangible assets 3,291 4 to 7
Liabilities assumed:
Accrued expenses (85 )
Deferred revenue (1,946 )
Net assets acquired 5,680
Goodwill 13,206
Total fair value consideration $ 18,886
Methodologies used in valuing the intangible assets include, but
are not limited to the relief from royalty method and multi-period
excess earnings method. The excess of the purchase price over the
total net identifiable assets has been recorded as goodwill, which
includes synergies expected from the expanded service capabilities
and the value of the assembled work force in accordance with GAAP.
The Company made an election under Internal Revenue Code section
338 to treat the acquisition of the stock as an asset purchase. As
a result, the Company will be entitled to corporate level tax
deductions associated with the fair market value of net tangible
assets, intangible assets, and goodwill.
The fair value estimates for the assets acquired and liabilities
assumed were based upon preliminary calculations and valuations,
and the Company’s estimates and assumptions for the
acquisition are subject to change as the Company obtains additional
information during the measurement periods, up to one year from the
acquisition date. As of June 30, 2015, substantially all of
the Company’s purchase accounting adjustments are preliminary
and not yet finalized.
Pro Forma Results of Operations (unaudited)
The Consolidated Financial Statements include the operating results
of HT Systems from the date of acquisition. The following unaudited
pro forma results of operations have been presented as if the HT
Systems acquisition occurred on January 1, 2014:
Three Months
Ended Six Months
Ended
June 30, June 30,
(dollars in thousands, except per share data) 2015 2014 2015 2014
Pro forma revenue (1) $ 30,262 $ 25,008 $ 56,791 $ 45,987
Pro forma operating expenses 25,967 20,636 50,394 41,420
Pro forma net loss (5,734 ) (2,965 ) (12,668 ) (9,441 )
Pro forma net loss per share basic and diluted $ (0.24 ) $ (0.95 ) $ (0.53 ) $ (2.96 )
(1) HT Systems defers all revenue related
to a customer engagement until PatientSecure is fully implemented
and in production. The revenue patterns can fluctuate between
periods due to customers delaying the start of implementation.
Consequently, comparisons between the interim periods may not be
indicative of future revenue patterns.
This information is based on historical results of operations,
adjusted for the allocations of purchase price and other
acquisition accounting adjustments, and is not necessarily
indicative of what the Company’s results would have been had
it operated the businesses since January 1, 2014.
For the three and six months ended June 30, 2015, the
Company’s consolidated revenues includes revenues from HT
Systems of $171,000. Due to the continued integration of the
combined business, it is impractical to determine the earnings of
HT Systems beyond the measure of revenue. |
