Exhibit 99.1
SourceHOV Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, Condensed Consolidated Statements of Operations and Comprehensive Loss for three and six months ended June 30, 2017 and 2016, and Stockholders’ Deficit and Cash Flows for the six months ended June 30, 2017 and 2016
SourceHOV Holdings, Inc. and Subsidiaries
Index to Unaudited Condensed Consolidated Financial Statements
Page(s) |
|
|
|
Condensed Consolidated Financial Statements |
|
|
|
Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 | 1 |
|
|
Condensed Consolidated Statements of Operations for the three and six months ended |
|
June 30, 2017 and 2016 | 2 |
|
|
Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016 | 3 |
|
|
Condensed Consolidated Statements of Stockholders’ Deficit for the six months ended |
|
June 30, 2017 and 2016 | 4 |
|
|
Condensed Consolidated Statements of Cash Flows for the six months ended |
|
June 30, 2017 and 2016 | 5 |
|
|
Notes to the Condensed Consolidated Financial Statements | 6-24 |
SourceHOV Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of June 30, 2017 and December 31, 2016
(in thousands of United States dollars except share and per share amounts)
|
| June 30, |
| December 31, |
| ||
|
| (Unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 23,973 |
| $ | 8,361 |
|
Restricted cash |
| 29,285 |
| 25,892 |
| ||
Accounts receivable, net of allowance for doubtful accounts of $3,351 and $3,219, respectively |
| 137,618 |
| 138,421 |
| ||
Inventories, net |
| 12,062 |
| 11,195 |
| ||
Prepaid expenses and other current assets |
| 12,898 |
| 12,202 |
| ||
Total current assets |
| 215,836 |
| 196,071 |
| ||
Property, plant and equipment, net |
| 74,980 |
| 81,600 |
| ||
Goodwill |
| 370,869 |
| 373,291 |
| ||
Intangible assets, net |
| 277,494 |
| 298,739 |
| ||
Deferred income tax assets |
| 8,495 |
| 9,654 |
| ||
Other noncurrent assets |
| 9,875 |
| 10,131 |
| ||
Total assets |
| $ | 957,549 |
| $ | 969,486 |
|
Liabilities and Stockholders’ Deficit |
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 40,479 |
| $ | 42,212 |
|
Related party payables |
| 1,319 |
| 9,344 |
| ||
Income tax payable |
| 1,652 |
| 1,031 |
| ||
Accrued liabilities |
| 51,648 |
| 29,492 |
| ||
Accrued compensation and benefits |
| 30,642 |
| 31,200 |
| ||
Customer deposits |
| 18,322 |
| 18,729 |
| ||
Deferred revenue |
| 18,798 |
| 17,235 |
| ||
Obligation for claim payment |
| 29,285 |
| 25,892 |
| ||
Current portion of capital lease obligations |
| 5,614 |
| 6,507 |
| ||
Current portion of long-term debt |
| 73,623 |
| 55,833 |
| ||
Total current liabilities |
| 271,382 |
| 237,475 |
| ||
Long-term debt, net of current maturities |
| 950,879 |
| 983,502 |
| ||
Capital lease obligations, net of current maturities |
| 16,732 |
| 18,439 |
| ||
Pension liability |
| 29,328 |
| 28,712 |
| ||
Deferred income tax liabilities |
| 26,852 |
| 26,223 |
| ||
Long-term income tax liability |
| 3,063 |
| 3,063 |
| ||
Other long-term liabilities |
| 11,585 |
| 11,973 |
| ||
Total liabilities |
| 1,309,821 |
| 1,309,387 |
| ||
Commitment and Contingencies |
|
|
|
|
| ||
Stockholders’ Deficit |
|
|
|
|
| ||
Common stock, par value of $0.001 per share; 331,000 shares authorized; 157,249 shares issued and outstanding at June 30, 2017 and 144,400 shares issued and outstanding December 31, 2016; |
|
|
|
|
| ||
Preferred stock, par value of $0.01 per share; 400,000 shares authorized and no shares issued or outstanding at June 30, 2017 and December 31, 2016 |
|
|
|
|
| ||
Additional paid in capital |
| (36,843 | ) | (57,389 | ) | ||
Equity-based compensation |
| 29,559 |
| 27,342 |
| ||
Accumulated deficit |
| (329,161 | ) | (293,968 | ) | ||
Accumulated other comprehensive loss: |
|
|
|
|
| ||
Foreign currency translation adjustment |
| (2,524 | ) | (3,547 | ) | ||
Unrealized pension actuarial losses, net of tax |
| (13,303 | ) | (12,339 | ) | ||
Total accumulated other comprehensive loss |
| (15,827 | ) | (15,886 | ) | ||
Total stockholders’ deficit |
| (352,272 | ) | (339,901 | ) | ||
Total liabilities and stockholders’ deficit |
| $ | 957,549 |
| $ | 969,486 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
SourceHOV Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Six Months ended June 30, 2017 and 2016
(in thousands of United States dollars except share and per share amounts )
(Unaudited)
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenue |
| 209,382 |
| 191,464 |
| 427,642 |
| 391,154 |
| ||||
Cost of revenue (exclusive of depreciation and amortization) |
| 140,418 |
| 122,577 |
| 284,126 |
| 255,920 |
| ||||
Gross profit |
| 68,964 |
| 68,887 |
| 143,516 |
| 135,234 |
| ||||
Selling, general and administrative expenses |
| 34,998 |
| 33,528 |
| 70,578 |
| 64,556 |
| ||||
Depreciation and amortization |
| 21,406 |
| 20,943 |
| 42,727 |
| 39,702 |
| ||||
Related party expense |
| 2,456 |
| 2,589 |
| 4,841 |
| 4,924 |
| ||||
Operating income |
| 10,104 |
| 11,827 |
| 25,370 |
| 26,052 |
| ||||
Other expense (income), net: |
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
| 27,869 |
| 26,913 |
| 54,088 |
| 54,313 |
| ||||
Sundry expense (income), net |
| (327 | ) | 1,503 |
| 2,397 |
| (428 | ) | ||||
Net loss before income taxes |
| (17,438 | ) | (16,589 | ) | (31,115 | ) | (27,833 | ) | ||||
Income tax (expense) benefit |
| (2,074 | ) | 3,130 |
| (4,078 | ) | 6,212 |
| ||||
Net loss |
| $ | (19,512 | ) | $ | (13,459 | ) | $ | (35,193 | ) | $ | (21,621 | ) |
Net loss per share - basic and diluted |
| $ | (124.08 | ) | $ | (93.21 | ) | $ | (223.80 | ) | $ | (149.73 | ) |
Shares used in computing basic and diluted net loss per share |
| 157,249 |
| 144,400 |
| 157,249 |
| 144,400 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
SourceHOV Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
For the Three Months and Six Months ended June 30, 2017 and 2016
(in thousands of United States dollars)
(Unaudited)
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (19,512 | ) | $ | (13,459 | ) | $ | (35,193 | ) | $ | (21,621 | ) |
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments |
| (1,391 | ) | (278 | ) | 1,023 |
| 1,733 |
| ||||
Unrealized pension actuarial (losses) gains, net of tax |
| (683 | ) | 251 |
| (964 | ) | 361 |
| ||||
Total other comprehensive loss, net of tax |
| $ | (21,586) |
| $ | (13,486 | ) | $ | (35,134 | ) | $ | (19,527 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SourceHOV Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit
For the Six Months ended June 30, 2017 and 2016
(in thousands of United States dollars, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
| Accumulated Other Comprehensive Loss |
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
| Foreign Currency |
| Unrealized Pension |
|
|
| Total |
| |||||||
|
| Common Stock |
| Additional |
| Equity-Based |
| Translation |
| Actuarial Losses, |
| Accumulated |
| Stockholders’ |
| |||||||||
|
| Shares |
| Amount |
| Paid in Capital |
| Compensation |
| Adjustment |
| net of tax |
| Deficit |
| Deficit |
| |||||||
Balances at December 31, 2015 |
| 144,400 |
| $ | — |
| $ | (57,389 | ) | $ | 20,256 |
| $ | (3,415 | ) | $ | (5,076 | ) | $ | (245,865 | ) | $ | (291,489 | ) |
Net loss January 1 to June 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
| (21,621 | ) | (21,621) |
| |||||||
Equity-based compensation |
|
|
|
|
|
|
| 3,707 |
|
|
|
|
|
|
| 3,707 |
| |||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| 1,733 |
|
|
|
|
| 1,733 |
| |||||||
Net realized pension actuarial gains, net of tax |
|
|
|
|
|
|
|
|
|
|
| 361 |
|
|
| 361 |
| |||||||
Balances at June 30, 2016 |
| 144,400 |
| $ | — |
| $ | (57,389 | ) | $ | 23,963 |
| $ | (1,682 | ) | $ | (4,715 | ) | $ | (267,486 | ) | $ | (307,309 | ) |
|
|
|
|
|
|
|
|
|
| Accumulated Other Comprehensive Loss |
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
| Foreign Currency |
| Unrealized Pension |
|
|
| Total |
| |||||||
|
| Common Stock |
| Additional |
| Equity-Based |
| Translation |
| Actuarial Losses, |
| Accumulated |
| Stockholders’ |
| |||||||||
|
| Shares |
| Amount |
| Paid in Capital |
| Compensation |
| Adjustment |
| net of tax |
| Deficit |
| Deficit |
| |||||||
Balances at December 31, 2016 |
| 144,400 |
| $ | — |
| $ | (57,389 | ) | $ | 27,342 |
| $ | (3,547 | ) | $ | (12,339 | ) | $ | (293,968 | ) | $ | (339,901 | ) |
Net loss January 1 to June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
| (35,193 | ) | (35,193 | ) | |||||||
Equity-based compensation |
|
|
|
|
|
|
| 2,217 |
|
|
|
|
|
|
| 2,217 |
| |||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| 1,023 |
|
|
|
|
| 1,023 |
| |||||||
Capital infusion from Shareholders |
| 12,849 |
|
|
| 20,546 |
|
|
|
|
|
|
|
|
| 20,546 |
| |||||||
Net realized pension actuarial gains, net of tax |
|
|
|
|
|
|
|
|
|
|
| (964 | ) |
|
| (964 | ) | |||||||
Balances at June 30, 2017 |
| 157,249 |
| $ | — |
| $ | (36,843 | ) | $ | 29,559 |
| $ | (2,524 | ) | $ | (13,303 | ) | $ | (329,161 | ) | $ | (352,272 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SourceHOV Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2017 and 2016
(in thousands of United States dollars)
(Unaudited)
|
| Six Months ended June 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Cash flows from operating activities |
|
|
|
|
| ||
Net loss |
| $ | (35,193 | ) | $ | (21,621 | ) |
Adjustments to reconcile net loss |
|
|
|
|
| ||
Depreciation and amortization |
| 42,727 |
| 39,702 |
| ||
Original issue discount and debt issuance cost amortization |
| 7,027 |
| 6,725 |
| ||
Provision (recovery) for doubtful accounts |
| 192 |
| (661 | ) | ||
Deferred income tax benefit (expense) |
| 617 |
| (7,219 | ) | ||
Share-based compensation expense |
| 2,217 |
| 3,707 |
| ||
Foreign currency remeasurement |
| 972 |
| 174 |
| ||
Gain on sale of Meridian |
| (251 | ) | — |
| ||
Loss on sale of property, plant and equipment |
| 277 |
| 1,213 |
| ||
Change in operating assets and liabilities, net of effect from acquisitions: |
|
|
|
|
| ||
Accounts receivable |
| (49 | ) | 11,777 |
| ||
Prepaid expenses and other assets |
| (1,794 | ) | (3,563 | ) | ||
Accounts payable and accrued liabilities |
| 21,150 |
| 2,696 |
| ||
Related party payables |
| (8,025 | ) | (1,496 | ) | ||
Net cash provided by operating activities |
| 29,867 |
| 31,434 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities |
|
|
|
|
| ||
Purchases of property, plant and equipment |
| (3,409 | ) | (3,285 | ) | ||
Additions to internally developed software |
| (4,731 | ) | (4,676 | ) | ||
Additions to outsourcing contract costs |
| (6,038 | ) | (9,138 | ) | ||
Proceeds from sale of Meridian |
| 4,381 |
| — |
| ||
Proceeds from sale of property, plant and equipment |
| 11 |
| 615 |
| ||
Net cash used in by investing activities |
| (9,786) |
| (16,484 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities |
|
|
|
|
| ||
Change in bank overdraft |
| (210 | ) | (1,080 | ) | ||
Proceeds from financing obligations |
| 3,008 |
| 4,704 |
| ||
Contribution from Shareholders |
| 20,546 |
| — |
| ||
Borrowings from revolver and swing-line loan |
| 72,600 |
| 35,000 |
| ||
Repayments on revolver and swing line loan |
| (72,500 | ) | (37,500 | ) | ||
Principal payments on long-term obligations |
| (28,153 | ) | (23,728 | ) | ||
Net cash used in financing activities |
| (4,709 | ) | (22,604 | ) | ||
Effect of exchange rates on cash |
| 240 |
| (215 | ) | ||
Net increase (decrease) in cash and cash equivalents |
| 15,612 |
| (7,869 | ) | ||
Cash and cash equivalents |
|
|
|
|
| ||
Beginning of period |
| 8,361 |
| 16,619 |
| ||
End of period |
| $ | 23,973 |
| $ | 8,750 |
|
|
|
|
|
|
| ||
Supplemental cash flow data: |
|
|
|
|
| ||
Income tax payments, net of refunds received |
| $ | 2,032 |
| $ | 1,722 |
|
Interest paid |
| 32,566 |
| 56,091 |
| ||
Noncash investing and financing activities: |
|
|
|
|
| ||
Assets acquired through capital lease arrangements |
| 187 |
| 2,484 |
| ||
Leasehold improvements funded by lessor |
| — |
| 322 |
| ||
Accrued capital expenditures |
| $ | 1,026 |
| $ | 301 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
1. Description of the Business
Organization
SourceHOV Holdings, Inc. and subsidiaries (collectively “the Company”) is a holding company with no operations, which owns 100% of SourceHOV LLC and its wholly owned subsidiaries (“SourceHOV LLC”). The Company provides mission-critical information and transaction processing solutions services to clients across three major industry verticals. The Company manages information and document driven business processes and offers solutions and services to fulfill specialized knowledge-based processing and consulting requirements, enabling clients to concentrate on their core competencies.
The Company consists of the following segments:
· Information & Transaction Processing Solutions (“ITPS”). ITPS provides industry solutions for banking and financial services, including lending solutions for mortgages and auto loans, and banking solutions for clearing, anti-money laundering, sanctions, and interbankcross-border settlement; property and casualty insurance solutions for origination, enrollments, claims processing, and benefits administration communications; public sector solutions for income tax processing, benefits administration, and record management; multi-industry solutions for payment processing and reconciliation, integrated receivable and payables management, document logistics and location services, records management and electronic storage of data / documents; and software, hardware, professional services and maintenance related to information and transaction processing automation, among others.
· Healthcare Solutions (“HS”). HS offerings include revenue cycle solutions, integrated accounts payable and accounts receivable, and information management for both the healthcare payer and provider markets. Payer service offerings include claims processing, claims adjudication and auditing services, enrollment processing and policy management, and scheduling and prescription management. Provider service offerings include medical coding and insurance claim generation, underpayment audit and recovery, and medical records management.
· Legal and Loss Prevention Services (“LLPS”) Solutions. LLPS solutions include processing of legal claims for class action and mass action settlement administrations, involving project management support, notification and outreach to claimants, collection, analysis and distribution of settlement funds. Additionally, LLPS provides data and analytical services in the context of litigation consulting, economic and statistical analysis, expert witness services, and revenue recovery services for delinquent accounts receivable.
The Reorganization
Prior to October 31, 2014, SourceHOV LLC was wholly owned by Solaris Holding Corporation (“Solaris”). On October 31, 2014, Solaris merged with SHC Merger Sub Inc. (“SHC”), a Delaware corporation (“First Merger”). Upon consummation of this First Merger, SHC ceased to exist and Solaris continued to be the sole surviving corporation of the First Merger. At this time, Solaris and SourceHOV Holdings, Inc. were merged, resulting in the common stock of Solaris becoming common stock of the Company. Immediately following the First Merger, the Company, BT Merger Sub Inc. (“BT”) and Pangea Acquisitions, Inc. (“Pangea”) merged (“Second Merger”). Upon consummation of the Second Merger, BT ceased to exist and Pangea became a wholly-owned subsidiary of the Company. As part of the transaction, the Company redeemed all preferred shares owned directly, or indirectly, by The Rohatyn Group (“TRG”) for $357.5 million, of which $353.0 million was paid on October 31, 2014 and the remaining $4.5 million is payable over two years. All remaining preferred holders in the Company converted their preferred shares into common shares of the Company, resulting in a change of control from a collaborative group to one affiliated group of entities. Shareholders of Pangea received common shares of the Company in exchange for their Pangea shares. In addition, all existing debt facilities of Pangea and Solaris were refinanced as part of the reorganization (the “Reorganization”). Because Pangea was controlled by the same shareholders that now control the Company at the date of the Reorganization, the merger with Pangea was reflected at carrying value.
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
The TransCentra Acquisition
On September 28, 2016, SourceHOV LLC acquired TransCentra Inc. (“TransCentra”), a wholly-owned subsidiary of FTS Parent, Inc. (“FTS”), a Delaware corporation. TransCentra is an outsourced biller, outsourced payment processor, and a provider of insourced imaging and payment processing platforms and software. TransCentra’s outsourced business operated through wholly-owned subsidiary Regulus Holding Inc. provides printing and payment processing to its customers. The outsourced business utilizes internally developed software to provide printing and remittance services to customers and is the predominant revenue contributor for TransCentra. TransCentra’s insourced business operated through wholly-owned subsidiary J&B Software, Inc. provides imaging and payment processing software to customers who choose to process their own remittances. TransCentra was incorporated in the State of Delaware on May 12, 2011 as Columbus Acquisition Corporation, Inc. and changed its name to TransCentra, Inc. via an amended and restated certificate of incorporation in December 2011. The acquisition was accounted for as a business combination using the acquisition method of accounting.
Disposal of Meridian Consulting Group, LLC
On March 17, 2017, the Company sold certain assets and liabilities of Meridian Consulting Group, LLC (“Meridian”) business, a legal entity included in the LLPS segment, for $5.0 million to J.S. Held LLC, a Delaware limited liability company. Management concluded Meridian was providing no added benefit to the LLPS segment, resulting in a reorganization disposal of Meridian. The Company received net cash proceeds of $4.4 million. The transaction was accounted for as a sale of a business for accounting purposes. The Company recognized a gain of $0.3 million (net of a goodwill adjustment of $2.7 million) reported as part of Selling, general and administrative expenses in the condensed consolidated statement of operations.
2. Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments that, in the opinion of the Company, are necessary for a fair presentation of the results for the periods presented in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting. No material changes have been made to the Company’s accounting policies from those that were disclosed in the Company’s audited financial statements for the year ended December 31, 2016.
The condensed consolidated financial statements and accompanying notes do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim consolidated financial statements should read in conjunction with the December 31, 2016 audited financial statements and related notes.
Principles of Consolidation
The accompanying consolidated financial statements and related notes to the consolidated financial statements include the accounts of the Company and subsidiaries. Newly acquired subsidiaries have been included in the consolidated financial statements from the date of acquisition. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, Consolidation and whether the Company is the primary beneficiary. Consolidation is required if both of these criteria are met. All intercompany accounts and transactions have been eliminated in consolidation.
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
Use of Estimates
The preparation of consolidated financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Key estimates and judgments relied upon in preparing these consolidated financial statements include revenue recognition for multiple element arrangements, allowance for doubtful accounts, income taxes, depreciation, amortization, employee benefits, equity-based compensation, contingencies, goodwill, intangible assets, fair value of assets and liabilities acquired in acquisitions, and liability valuations. The Company regularly assesses these estimates and records changes in estimates in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Revenue Recognition
The majority of the Company’s revenues are comprised of: (1) ITPS, (2) HS offerings, (3) LLPS solutions, and (4) some combination thereof. Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is probable. Delivery does not occur until services have been provided to the client, risk of loss has transferred to the client, and either client acceptance has been obtained, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in the client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.
ITPS revenues are primarily generated from a transaction-based pricing model for the various types of volumes processed, licensing and maintenance fees for technology sales, and a mix of fixed management fee and transactional revenue for document logistics and location services. HS revenues are primarily generated from a transaction-based pricing model for the various types of volumes processed for healthcare payers and providers. LLPS revenues are primarily based on a time and materials pricing as well as through transactional services priced on a per item basis.
If a contract involves the provision of a single element, revenue is generally recognized when the product or service is provided and the amount earned is not contingent upon any future event. Revenue from time and materials arrangements is recognized as the services are performed.
The Company records deferred revenue when it receives payments or invoices in advance of the delivery of products or the performance of services. The deferred revenue is recognized into earnings when underlying performance obligations are achieved.
The Company includes reimbursements from clients, such as postage costs, in revenue, while the related costs are included in cost of revenue in the consolidated statement of operations.
Multiple Element Arrangements
Certain of the Company’s revenue is generated from multiple element arrangements involving various combinations. The deliverables within these arrangements are evaluated at contract inception to determine whether they represent separate units of accounting, and if so, contract consideration is allocated to each deliverable based on relative selling price. The relative selling price of each deliverable within these arrangements is determined using vendor specific objective evidence (“VSOE”) of fair value, third-party
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
evidence or best estimate of selling price. Revenue is then recognized in accordance with the appropriate revenue recognition guidance applicable to the respective elements.
If the multiple element arrangements criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized on a straight-line basis over the period of delivery or being deferred until the earlier of when such criteria are met or when the last element is delivered.
Recently Adopted Accounting Pronouncements
Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) no. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This amendment replaced the method of measuring inventories at lower of cost or market with a lower of cost and net realizable value method. The adoption had no material impact on the Company’s financial position, results of operations and cash flows.
Effective January 1, 2017, the Company adopted ASU no. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The ASU changes how companies account for certain aspects of equity-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard requires that all tax effects related to share-based payments be recorded as income tax expense or benefit in the income statement at settlement or expiration and, accordingly, excess tax benefits and tax deficiencies be presented as operating activities in the statement of cash flows. Upon adoption of this standard, the Company elected to continue its current practice of estimating expected forfeitures. The adoption had no material impact on the Company’s financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU no. 2014-09, Revenue from Contracts with Customers (ASC 606). Under the update, revenue will be recognized based on a five-step model. The core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective date by one year (ASU no. 2015-14). This ASU will now be effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in ASC 605 (ASU 2016-11); 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12); and 5) technical corrections and improvements (ASU 2016-20). The new standard will be effective for us beginning January 1, 2018. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In February 2016, the FASB issued ASU no. 2016-02, Leases (842). This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU are effective for fiscal years beginning after December 31, 2018 and interim periods within those fiscal years and early application is permitted. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In June 2016, the FASB issued ASU no. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In August 2016, the FASB issued ASU no. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230), which adds or clarifies guidance on the presentation and classification of eight specific types of cash receipts and cash payments in the statement of cash flows such as debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees, with the intent of reducing diversity in practice. For public entities, ASU 2016-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Entities must apply the guidance retrospectively to all periods presented unless retrospective application is impracticable. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In October 2016, the FASB issued ASU no. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which eliminates the current prohibition on immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory, with the intent of reducing complexity and diversity in practice. Under ASU 2016-16, entities must recognize the income tax consequences when the transfer occurs rather than deferring recognition. For public entities, ASU 2016-16 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted as of the beginning of a fiscal year (i.e., early adoption is permitted only in the first interim period). Entities must apply the guidance on a modified retrospective basis though a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In November 2016, the FASB issued ASU no. 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230). The ASU addresses diversity in practice that exists in the classification and presentation of changes in restricted cash and requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In January 2017, the FASB issued ASU no. 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805). The ASU clarifies the definition of a business and provides guidance on evaluating as to whether transactions should be accounted for as acquisitions (or disposals) of assets or business combinations. The definition clarification as outlined in this ASU affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of the ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update (“ASU”) no. 2017-04, Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 of
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
the goodwill impairment test that had required a hypothetical purchase price allocation. Rather, entities should apply the same impairment assessment to all reporting units and recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be effective prospectively for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, or those beginning after January 1, 2017 if early adopted. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In March 2017, the FASB issued ASU no. 2017-07, Compensation Retirement Benefits (Topic 715); Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments to this ASU require the service cost component of net periodic benefit cost be reported in the same income statement line or lines as other compensation costs for employees. The other components of net periodic benefit cost are required to be reported separately from service costs and outside a subtotal of income from operations. Only the service cost component is eligible for capitalization. The guidance is effective for annual periods beginning after December 15, 2017. The amendments should be applied retrospectively for the income statement presentations and prospectively for the capitalization of service costs. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
In May 2017, the FASB issued ASU no. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The amendments in this update will be applied on a prospective basis to an award modified on or after the adoption date. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.
3. Accounts Receivable
Accounts receivable, net consist of the following:
|
| June 30, |
| December 31, |
| ||
Billed receivables |
| $ | 117,142 |
| $ | 116,148 |
|
Unbilled receivables |
| 20,352 |
| 20,982 |
| ||
Other |
| 3,475 |
| 4,510 |
| ||
Less: Allowance for doubtful accounts |
| (3,351 | ) | (3,219 | ) | ||
|
| $ | 137,618 |
| $ | 138,421 |
|
Unbilled receivables represent balances recognized as revenue that have not been billed to the customer. The Company’s allowance for doubtful accounts is based on a policy developed by historical experience and management judgment. Adjustments to the allowance for doubtful accounts may occur based on market conditions or specific client circumstances.
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
| June 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Prepaids |
| $ | 11,715 |
| $ | 10,906 |
|
Deposits |
| 1,183 |
| 1,296 |
| ||
|
| $ | 12,898 |
| $ | 12,202 |
|
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
5. Property, Plant and Equipment, Net
Property, plant, and equipment, which include assets recorded under capital leases, are stated at cost less accumulated depreciation and amortization, and consist of the following:
|
| Estimated Useful |
| June 30, |
| December 31, |
| ||
Land |
| N/A |
| $ | 7,743 |
| $ | 7,637 |
|
Buildings and improvements |
| 7 - 40 |
| 16,889 |
| 16,989 |
| ||
Leasehold improvements |
| Lesser of the useful life or lease term |
| 32,487 |
| 31,342 |
| ||
Vehicles |
| 5 - 7 |
| 630 |
| 784 |
| ||
Machinery and equipment |
| 5 - 15 |
| 24,258 |
| 23,297 |
| ||
Computer equipment and software |
| 3 - 8 |
| 102,328 |
| 98,544 |
| ||
Furniture and fixtures |
| 5 - 15 |
| 4,980 |
| 5,007 |
| ||
|
|
|
| 189,315 |
| 183,600 |
| ||
Less: Accumulated depreciation and amortization |
|
|
| (114,335 | ) | (102,000 | ) | ||
Property, plant and equipment, net |
|
|
| $ | 74,980 |
| $ | 81,600 |
|
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
6. Intangibles Assets and Goodwill
Intangibles
Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization and consists of the following:
|
| June 30, 2017 |
| |||||||
|
| Gross Carrying |
| Accumulated |
| Intangible |
| |||
Customer relationships |
| 274,643 |
| (115,989 | ) | $ | 158,654 |
| ||
Outsource contract costs |
| 34,362 |
| (12,300 | ) | 22,062 |
| |||
Developed technology |
| 89,076 |
| (68,416 | ) | 20,660 |
| |||
Internally developed software |
| 21,473 |
| (2,792 | ) | 18,681 |
| |||
Trademarks |
| 5,370 |
| (403 | ) | 4,967 |
| |||
Trade names |
| 52,470 |
| — |
| 52,470 |
| |||
|
| $ | 477,394 |
| $ | (199,900 | ) | $ | 277,494 |
|
|
| December 31, 2016 |
| |||||||
|
| Gross Carrying |
| Accumulated |
| Intangible |
| |||
Customer relationships |
| $ | 274,643 |
| $ | (100,172 | ) | $ | 174,471 |
|
Outsource contract costs |
| 27,619 |
| (7,378 | ) | 20,241 |
| |||
Developed technology |
| 89,076 |
| (59,539 | ) | 29,537 |
| |||
Internally developed software |
| 16,742 |
| (858 | ) | 15,884 |
| |||
Trademarks |
| 5,370 |
| (134 | ) | 5,236 |
| |||
Trade names |
| 53,370 |
| — |
| 53,370 |
| |||
|
| $ | 466,820 |
| $ | (168,081 | ) | $ | 298,739 |
|
Goodwill
Goodwill by reporting segment consists of the following:
|
| Goodwill |
| Additions |
| Reductions |
| Currency |
| Goodwill |
| |||||
ITPS |
| $ | 145,562 |
| $ | 13,558 |
| $ | — |
| $ | 274 |
| $ | 159,394 |
|
HS |
| 86,786 |
| — |
| — |
| — |
| 86,786 |
| |||||
LLPS |
| 127,111 |
| — |
| — |
| — |
| 127,111 | (a) | |||||
Balance as of December 31, 2016 |
| $ | 359,459 |
| $ | 13,558 |
| $ | — |
| $ | 274 |
| $ | 373,291 |
|
ITPS |
| 159,394 |
|
|
|
|
| 299 |
| 159,693 |
| |||||
HS |
| 86,786 |
|
|
|
|
|
|
| 86,786 |
| |||||
LLPS |
| 127,111 |
| — |
| (2,721 | )(b) | — |
| 124,390 | (a) | |||||
Balance as of June 30, 2017 |
| $ | 373,291 |
| $ | — |
| $ | (2,721 | ) | $ | 299 |
| $ | 370,869 |
|
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
7. Accrued Liabilities and Other Long-Term Liabilities
Accrued liabilities consist of the following:
|
| June 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Accrued taxes (exclusive of income taxes) |
| $ | 3,285 |
| $ | 3,309 |
|
Accrued lease exit obligations |
| 1,577 |
| 3,949 |
| ||
Accrued professional and legal fees |
| 16,118 |
| 8,289 |
| ||
Deferred rent |
| 1,076 |
| 989 |
| ||
Accrued interest |
| 23,180 |
| 8,459 |
| ||
Other accruals |
| 6,412 |
| 4,497 |
| ||
|
| $ | 51,648 |
| $ | 29,492 |
|
Other Long-term liabilities consist of the following:
|
| June 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Deferred revenue |
| $ | 163 |
| $ | 235 |
|
Deferred rent |
| 6,043 |
| 6,110 |
| ||
Accrued lease exit obligations |
| 1,713 |
| 672 |
| ||
Accrued compensation expense |
| 2,866 |
| 3,783 |
| ||
Other |
| 800 |
| 1,173 |
| ||
|
| $ | 11,585 |
| $ | 11,973 |
|
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
8. Long-Term Debt and Credit Facilities
|
| June 30, |
| December 31, |
| ||
First lien revolving credit facility (a) |
| $ | 63,837 |
| $ | 63,337 |
|
First lien secured term loan (b) |
| 673,251 |
| 687,884 |
| ||
Second lien secured term loan (c) |
| 238,005 |
| 236,344 |
| ||
Transcentra revolving credit facility |
| 5,000 |
| 5,000 |
| ||
Transcentra term loan |
| 17,750 |
| 19,250 |
| ||
FTS unsecured term loan |
| 15,911 |
| 15,911 |
| ||
Other (d) |
| 10,748 |
| 11,609 |
| ||
Total debt |
| 1,024,502 |
| 1,039,335 |
| ||
Less: Current portion of long-term debt |
| (73,623 | ) | (55,833 | ) | ||
Long-term debt, net of current maturities |
| $ | 950,879 |
| $ | 983,502 |
|
(a) Net of unamortized debt issuance costs of $1.8 million and $2.3 million as of June 30, 2017 and December 31 2016, respectively.
(b) Net of unamortized original issue discount and debt issance costs of $12.1 million and $11.8 million and $14.6 million and $14.2 million as of June 30, 2017 and December 31 2016, respectively.
(c) Net of unamortized original issue discount and debt issance costs of $6.4 million and $5.6 million and $7.3 million and $6.3 million as of June 30, 2017 and December 31 2016, respectively.
(d) Other debt represents the Company’s outstanding loan balances associated with various hardware and software purchases along with loans entered into by subsidiaries of the Company.
Credit Facilities
As of both June 30, 2017 and December 31, 2016, the Company had outstanding irrevocable letters of credit totaling approximately $9.3 million under the revolving credit facility. As of June 30, 2017, these letters of credit consisted of approximately $7.1 million related to security for the Company’s self-insured workers’ compensation program and approximately $2.2 million for the landlord in Irving.
9. Income Taxes
The Company applies an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods, as required under GAAP. The Company recorded an income tax expense of $2.1 million and an income tax benefit of $3.1 million for the three months ended June 30, 2017 and 2016, respectively. The Company recorded an income tax expense of $4.1 million and an income tax benefit of $6.2 million for the six months ended June 30, 2017 and 2016, respectively.
The Company’s ETR of (11.89%) and (13.10%) for the three months and six months ended June 30, 2017, respectively, differed from the expected U.S. statutory tax rate of 35.0%, and was primarily impacted by permanent tax adjustments, Meridian goodwill impairment, foreign operations, Indian prior year tax expense true-up, and a valuation allowance against certain domestic deferred tax assets that are not more-likely-than-not to be realized.
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
The Company’s ETR of 18.87% and 22.32% for the three months and six months ended June 30, 2016, respectively, differed from the expected U.S. statutory tax rate of 35.0%, and was impacted by permanent tax adjustments, foreign operations, FIN48 liability release due to statute of limitation expiration, and a valuation allowance against certain domestic and foreign deferred tax assets that are not more-likely-than-not to be realized.
As of June 30, 2017, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2016.
10. Employee Benefit Plans
German Pension Plan
The Company’s subsidiary in Germany provides pension benefits to retirees. Employees eligible for participation includes all employees who started working for the Company prior to September 30, 1987 and have finished a qualifying period of at least 10 years. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan.
U.K. Pension Plan
The Company’s subsidiary in the United Kingdom provides pension benefits to retirees and eligible dependents. Employees eligible for participation included all full-time regular employees who were more than three years from retirement prior to October 2001. A retirement pension or a lump-sum payment may be paid dependent upon length of service at the mandatory retirement age. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan.
The Germany plan is an unfunded plan and therefore has no plan assets. The expected rate of return assumptions for plan assets relate solely to the UK plan and are based mainly on historical performance achieved over a long period of time (15 to 20 years) encompassing many business and economic cycles. The Company assumed a weighted average expected long-term rate on plan assets for the overall scheme of 5.16%.
Tax Effect on Accumulated Other Comprehensive Loss
As of June 30, 2017 and December 31, 2016, the Company recorded actuarial losses of $13.3 million and $12.3 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which is net of a deferred tax benefit of $2.3 million and $2.5 million, respectively.
Pension and Post Retirement Expense
The components of the net periodic benefit cost are as follows:
|
| Three Months ended June 30, |
| Six Months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Service cost |
| $ | 2 |
| $ | 3 |
| $ | 4 |
| $ | 6 |
|
Interest cost |
| 571 |
| 667 |
| 1,124 |
| 1,334 |
| ||||
Expected return on plan assets |
| (595 | ) | (656 | ) | (1,172 | ) | (1,312 | ) | ||||
Amortization: |
|
|
|
|
|
|
|
|
| ||||
Amortization of prior service cost |
| (33 | ) | (35 | ) | (65 | ) | (70 | ) | ||||
Amortization of net loss |
| 516 |
| 223 |
| 1,016 |
| 446 |
| ||||
Net periodic benefit cost |
| $ | 461 |
| $ | 202 |
| $ | 907 |
| $ | 404 |
|
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
Employer Contributions
The Company’s funding is based on governmental requirements and differs from those methods used to recognize pension expense. The Company made contributions of $0.8 million and $1.1 million to its pension plans during the six months ended June 30, 2017 and 2016, respectively. The Company expects to contribute $0.9 million to the pension plans during the remainder of 2017, based on current plan provisions.
Executive Deferred Compensation Plan
The Company has individual arrangements with seven former executive in the U.S. which provide for fixed payments to be made to each individual beginning at age 65 and continuing for 20 years. This is an unfunded plan with payments to be from operating cash of the Company. Benefit payments of $0.1 million for both three months ended June 30, 2017 and 2016. Benefit payments of $0.1 million were made during both six months ended June 30, 2017 and 2016 respectively. There was no expense for both three months ended June 30, 2017 and 2016. The expense for both the six months ended June 30, 2017 and 2016 was $0.2 million. Benefit payments expected to be paid to plan participants during the remainder of 2017 are $0.1 million.
11. Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The carrying amount of assets and liabilities including cash and cash equivalents, accounts receivable and accounts payable approximated their fair value as of June 30, 2017 and December 31, 2016 due to the relative short maturity of these instruments. Management estimates the fair values of the first and second lien debt at approximately 99.3% and 100.0% respectively, of the respective principal balance outstanding as of June 30, 2017. The carrying value approximates the fair value for the long-term debt related to TransCentra and the other debt. TransCentra’s debt was recently issued in 2016 and represents the most updated rates that would be offered for similar debt maturities. Other debt represents the Company’s outstanding loan balances associated with various hardware and software purchases along with loans entered into by subsidiaries of the Company and as such, the cost incurred would approximate fair value. Property and equipment, intangible assets, and goodwill, are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the respective asset is written down to its fair value.
The Company determined the fair value of its long-term debt using Level 2 inputs including the recent issue of the debt, June 2017 trades of the Company’s debt on an inactive market, the Company’s credit rating, and the current risk-free rate. The Company’s contingent liabilities related to prior acquisitions are re-measured each period and represent a Level 2 measurement as it is based on using an earn out method based on the agreement terms.
The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as of June 30, 2017 and December 31, 2016:
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
|
| Carrying |
| Fair |
| Fair Value Measurements |
| |||||||||
As of June 30, 2017 |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| |||||
Recurring and nonrecurring assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Acquisition contingent liability |
| $ | 721 |
| $ | 721 |
| $ | — |
| $ | — |
| $ | 721 |
|
Long-term debt |
| 950,879 |
| 983,383 |
| — |
| 983,383 |
| — |
| |||||
|
| $ | 951,600 |
| $ | 984,104 |
| $ | — |
| $ | 983,383 |
| $ | 721 |
|
|
| Carrying |
| Fair |
| Fair Value Measurements |
| |||||||||
As of December 31, 2016 |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| |||||
Recurring and nonrecurring assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Acquisition contingent liability |
| $ | 721 |
| $ | 721 |
| $ | — |
| $ | — |
| $ | 721 |
|
Long-term debt |
| 983,502 |
| $ | 1,009,913 |
| — |
| 1,009,913 |
|
|
| ||||
|
| $ | 984,223 |
| $ | 1,010,634 |
| $ | — |
| $ | 1,009,913 |
| $ | 721 |
|
The significant unobservable inputs used in the fair value of the Company’s acquisition contingent liabilities are the discount rate, growth assumptions, and revenue thresholds. Significant increases (decreases) in the discount rate would have resulted in a lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a higher (lower) fair value measurement. For all significant unobservable inputs used in the fair value measurement of the Level 3 liabilities, a change in one of the inputs would not necessarily result in a directionally similar change in the other based on the current level of billings.
The following table reconciles the beginning and ending balances of net assets and liabilities classified as Level 3 for which a reconciliation is required:
Balance as of January 1, 2016 |
| $ | 1,513 |
|
Payments/Reductions |
| (792 | ) | |
Balance as of December 31, 2016 |
| $ | 721 |
|
Payments/Reductions |
| — |
| |
Balance as of June 30, 2017 |
| $ | 721 |
|
12. Equity-Based Compensation
Under the Company’s 2013 Long Term Incentive Plan (“2013 Plan”), the Board of Directors may grant equity-based awards to certain employees, officers, directors, consultants and advisors of the Company. Compensation expense for equity-based awards is measured at the fair value on the grant date and recognized as compensation expense on a straight-line basis over the vesting period.
Stock Options
No stock options were granted under the 2013 Plan.
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
Restricted Stock Units
RSUs granted to employees contain service requirements that must be met for the shares to vest. Stock awards granted to non-employee directors as part of the compensation for service on the Board are unrestricted on the grant date. No RSUs were granted in the first six months of 2017.
The compensation expense for stock incentive plans was $1.9 million and $1.7 million for the three months ended June 30, 2017 and 2016, and $2.2 million and $3.7 million for the six months ended June 30, 2017 and 2016.
During the three and six months ended June 30, 2017 and 2016, no shares were issued.
13. Related-Party Transactions
Leasing Transactions
Certain operating companies lease their operating facilities from previous owners of the businesses who remained as employees. These leases are for various lengths and annual amounts. No rental expense was incurred for the three and six months ended June 30, 2017 and 2016 for these operating leases.
In addition, certain operating companies lease their operating facilities from HOV RE, LLC an affiliate through common interest held by certain shareholders. The rental expense for these operating leases was $0.2 million for both the three months ended June 30, 2017 and 2016, and $0.3 million for both the six months ended June 30, 2017 and 2016.
Relationship with HandsOn Global Management
The Company incurred management fees to HGM of $1.5 million for both the three months ended June 30, 2017 and 2016, and $3.0 million for both the six months ended June 30, 2017 and 2016.
The Company incurred travel expenses to HGM of $0.3 million and $0.4 million for the three months ended June 30, 2017 and 2016, and $0.5 million and $0.6 million for the six months ended June 30, 2017 and 2016.
The Company incurred marketing fees to Rule 14 of $0.1 million for both the three months ended June 30, 2017 and 2016, and $0.1 million and $0.2 million for the six months ended June 30, 2017 and 2016, respectively.
Relationship with HOV Services, Ltd.
HOV Services, Ltd. provides the Company data capture and technology services. HOV Services, Ltd owns shareholding interests in HOV Services, LLC. The expense recognized for these services was approximately $0.5 million and $0.4 million for the three months ended June 30, 2017 and 2016, and $0.9 million and $0.8 million for the six months ended June 30, 2017 and 2016, respectively and is included in cost of revenue in the consolidated statements of operations.
The Company licenses the use of the trademark “HOV” on a nonexclusive basis from an affiliate through common interest held by certain shareholders.
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
Payable Balances with Affiliates
Payable balances with affiliates as of June 30, 2017 and December 31, 2016 are as follows:
|
| June 30, |
| December 31, |
| ||
HOV Services, Ltd |
| $ | 505 |
| $ | 352 |
|
Rule 14 |
| 35 |
| 134 |
| ||
HGM |
| 779 |
| 8,858 |
| ||
|
| $ | 1,319 |
| $ | 9,344 |
|
14. Segment and Geographic Area Information
The Company’s operating segments are significant strategic business units that align its products and services with how it manages its business, approach the markets and interacts with its clients. The Company is organized into three segments: ITPS, HS, and LLPS.
ITPS: Our ITPS segment provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning and distribution to customers primarily in the financial services, commercial, public sector and legal industries.
HS: Our HS segment operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets.
LLPS: Our LLPS segment provides a broad and active array of legal services in connection with class action, bankruptcy labor, claims adjudication and employment and other legal matters.
The chief operating decision maker reviews operating segment revenue and gross profit. The Company does not allocate SG&A, depreciation and amortization, interest expense and sundry, net. The Company manages assets on a total company basis, not by operating segment, and therefore asset information and capital expenditures by operating segments are not presented.
|
| Three months ended June 30, 2017 |
| |||||||
|
| ITPS |
| HS |
| LLPS |
| Total |
| |
Revenue |
| 129,741 |
| 58,065 |
| 21,576 |
| 209,382 |
| |
Cost of revenue |
| 89,246 |
| 37,872 |
| 13,300 |
| 140,418 |
| |
Gross profit |
| 40,495 |
| 20,193 |
| 8,276 |
| 68,964 |
| |
Selling, general and administrative expenses |
|
|
|
|
|
|
| 34,998 |
| |
Depreciation and amortization |
|
|
|
|
|
|
| 21,406 |
| |
Related party expense |
|
|
|
|
|
|
| 2,456 |
| |
Interest expense, net |
|
|
|
|
|
|
| 27,869 |
| |
Sundry expense, net |
|
|
|
|
|
|
| (327 | ) | |
Net loss before income taxes |
|
|
|
|
|
|
| $ | (17,438 | ) |
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
|
| Three months ended June 30, 2016 |
| |||||||
|
| ITPS |
| HS |
| LLPS |
| Total |
| |
Revenue |
| 105,294 |
| 60,982 |
| 25,188 |
| 191,464 |
| |
Cost of revenue |
| 69,729 |
| 36,910 |
| 15,938 |
| 122,577 |
| |
Gross profit |
| 35,565 |
| 24,072 |
| 9,250 |
| 68,887 |
| |
Selling, general and administrative expenses |
|
|
|
|
|
|
| 33,528 |
| |
Depreciation and amortization |
|
|
|
|
|
|
| 20,943 |
| |
Related party expense |
|
|
|
|
|
|
| 2,589 |
| |
Interest expense, net |
|
|
|
|
|
|
| 26,913 |
| |
Sundry expense, net |
|
|
|
|
|
|
| 1,503 |
| |
Net loss before income taxes |
|
|
|
|
|
|
| $ | (16,589 | ) |
|
| Six months ended June 30, 2017 |
| |||||||
|
| ITPS |
| HS |
| LLPS |
| Total |
| |
Revenue |
| 265,538 |
| 117,143 |
| 44,961 |
| 427,642 |
| |
Cost of revenue |
| 180,846 |
| 75,700 |
| 27,580 |
| 284,126 |
| |
Gross profit |
| 84,692 |
| 41,443 |
| 17,381 |
| 143,516 |
| |
Selling, general and administrative expenses |
|
|
|
|
|
|
| 70,578 |
| |
Depreciation and amortization |
|
|
|
|
|
|
| 42,727 |
| |
Related party expense |
|
|
|
|
|
|
| 4,841 |
| |
Interest expense, net |
|
|
|
|
|
|
| 54,088 |
| |
Sundry expense, net |
|
|
|
|
|
|
| 2,397 |
| |
Net loss before income taxes |
|
|
|
|
|
|
| $ | (31,115 | ) |
|
| Six months ended June 30, 2016 |
| |||||||
|
| ITPS |
| HS |
| LLPS |
| Total |
| |
Revenue |
| 211,710 |
| 128,389 |
| 51,055 |
| 391,154 |
| |
Cost of revenue |
| 141,910 |
| 81,972 |
| 32,038 |
| 255,920 |
| |
Gross profit |
| 69,800 |
| 46,417 |
| 19,017 |
| 135,234 |
| |
Selling, general and administrative expenses |
|
|
|
|
|
|
| 64,556 |
| |
Depreciation and amortization |
|
|
|
|
|
|
| 39,702 |
| |
Related party expense |
|
|
|
|
|
|
| 4,924 |
| |
Interest expense, net |
|
|
|
|
|
|
| 54,313 |
| |
Sundry expense, net |
|
|
|
|
|
|
| (428 | ) | |
Net loss before income taxes |
|
|
|
|
|
|
| $ | (27,833 | ) |
The following table presents revenues by principal geographic area where the Company’s customers are located for the three and six months ended June 30, 2017 and 2016:
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
(Unaudited)
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
United States |
| $ | 177,215 |
| $ | 156,617 |
| $ | 366,024 |
| $ | 324,179 |
|
Europe |
| 31,130 |
| 33,845 |
| 59,431 |
| 65,116 |
| ||||
Other |
| 1,037 |
| 1,002 |
| 2,187 |
| 1,859 |
| ||||
Total Consolidated Revenue |
| $ | 209,382 |
| $ | 191,464 |
| $ | 427,642 |
| $ | 391,154 |
|
15. Subsequent Events
On July 12, 2017, Exela Technologies, Inc. (formerly known as Quinpario Acquisition Corp. 2) completed its acquisition of the Company and Novitex Holdings, Inc. pursuant to the (“Business Combination”) agreement dated February 21, 2017. The Business Combination, which was structured as a stock purchase, was approved at a special meeting of shareholders of Quinpario Acquisition Corp. 2 on July 11, 2017, and subsequently Quinpario Acquisition Corp. 2 was renamed as Exela Technologies, Inc. A new capital structure consisting of $1.35 billion in new debt was put in place at Exela along with a $100.0 million senior secured revolving facility. The proceeds of the new debt financing was used to refinance the existing debt of SourceHOV and Novitex, pay fees and expenses incurred in connection with the Business Combination, and for general corporate purposes. The new capital structure at Exela includes a $350.0 million senior secured term loan, $100.0 million senior secured revolving facility, and $1.0 billion in Senior Secured Notes.
The Business Combination was accounted for as a reverse merger for which SourceHOV was determined to be the accounting acquirer based on the following predominate factors: New SourceHOV LLC will have the largest portion of voting rights in the newly formed entity, the largest minority shareholder of the combined entity is a current SourceHOV shareholder, the Board will have more individuals coming from SourceHOV than either Quinpario or Novitex, and SourceHOV is the largest entity by revenue and by assets.
As SourceHOV was determined to be the accounting acquirer in the reverse merger with Quinpario, the accounting for the merger is similar to that of a capital infusion as the only pre-combination asset of Quinpario is cash held in the Trust Account. The assets and liabilities of Quinpario will be carried at historical cost and the Company will not record any step-up in basis or any intangible assets or goodwill as a result of the merger with Quinpario. The acquisition of Novitex will be treated as a business combination under ASC 805 and will be accounted for using the acquisition method. SourceHOV will record the fair value of assets and liabilities acquired from Novitex.
The following pro forma results for the three and six months ended June 30, 2017 and 2016 assumes the Business Combination occurred as of the January 1, 2016 and are inclusive of preliminary estimates for purchase price adjustments. The Company is currently evaluating the purchase price allocation following the consummation of the Merger. Given the short period of time between the date of the Business Combination and the issuance of these unaudited condensed consolidated financial statements, it is not practicable to disclose the purchase price allocation.
Additionally, the following pro forma results are inclusive of the TransCentra Acquisition for the three and six month periods ended June 30, 2016. These pro forma results were based on estimates and assumptions, which the Company believe are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative of the Company’s consolidated results of operations in future periods.
SourceHOV Holdings, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars unless otherwise stated)
|
| Three months ended June 30 |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net Sales |
| $ | 349,965 |
| $ | 357,745 |
| $ | 711,826 |
| $ | 731,515 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net Loss |
| (18,079 | ) | (13,146 | ) | (33,092 | ) | (30,783 | ) | ||||
The unaudited pro forma results have been prepared to illustrate the effect of the Business Combination and related financing transactions and have been prepared for informational purposes only and should not be relied upon.
The Company performed its subsequent event procedures through dd mm 2017, the date these consolidated financial statements were made available for issuance.