UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  (Mark One)

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 2014.

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission File Number: 001-34930

EXAMWORKS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	27-2909425
(State or other jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

3280 PEACHTREE ROAD, N.E., SUITE 2625

ATLANTA, GEORGIA 30305

(Address of principal executive offices)

Telephone Number (404) 952-2400

(Registrant’s telephone number, including area code)

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 ☒ 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 ☒ 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. (Check One):

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	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 ☒

As of May 1, 2014, ExamWorks Group, Inc. had 38,535,539 shares of Common Stock outstanding.

1

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

March 31, 2014

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

			Page
PART I – Financial Information
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets as of December 31, 2013 and March 31, 2014 (Unaudited)	3
		Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2013 and 2014 (Unaudited)	4
		Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2014 (Unaudited)	5
		Notes to Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
	Item 4.	Controls and Procedures	39
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		43

2

PART 1. FINANCIAL INFORMATION

        ITEM 1. FINANCIAL STATEMENTS

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

	December 31, 2013			March 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	12,829		$	8,504
Accounts receivable, net		169,905			187,045
Prepaid expenses		5,785			8,196
Deferred tax assets		433			1,817
Other current assets		1,298			1,248
Total current assets		190,250			206,810
Property, equipment and leasehold improvements, net		10,950			11,238
Goodwill		369,312			438,998
Intangible assets, net		94,864			125,603
Long-term accounts receivable, less current portion		35,952			41,228
Deferred tax assets, noncurrent		21,491			14,213
Deferred financing costs, net		8,193			7,850
Other assets		1,501			1,685
Total assets	$	732,513		$	847,625
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	52,672		$	59,231
Accrued expenses		38,448			41,836
Accrued interest expense		10,431			4,974
Deferred revenue		5,795			6,290
Current portion of subordinated unsecured notes payable		318			—
Current portion of contingent earnout obligation		2,032			6,362
Other current liabilities		6,438			7,914
Total current liabilities		116,134			126,607
Senior unsecured notes payable		250,000			250,000
Senior secured revolving credit facility and working capital facilities		82,970			158,475
Long-term contingent earnout obligation, less current portion		2,373			4,923
Other long-term liabilities		8,165			8,743
Total liabilities		459,642			548,748
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value; Authorized 50,000,000 shares; no shares issued and outstanding at December 31, 2013 and March 31, 2014		—			—
Common stock, $0.0001 par value; Authorized 250,000,000 shares; issued and outstanding 36,298,212 and 38,217,266 shares at December 31, 2013 and March 31, 2014, respectively		4			4
Additional paid-in capital		333,996			361,116
Accumulated other comprehensive loss		(5,937	)		(6,762	)
Accumulated deficit		(46,704	)		(46,993	)
Treasury stock, at cost; Outstanding 905,349 shares at December 31, 2013 and March 31, 2014		(8,488	)		(8,488	)
Total stockholders’ equity		272,871			298,877
Total liabilities and stockholders' equity	$	732,513		$	847,625

The accompanying notes are an integral part of these consolidated financial statements.

3

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

	For the three months ended March 31,
	2013			2014
Revenues	$	148,703		$	173,028
Costs and expenses:
Costs of revenues		97,384			111,035
Selling, general and administrative expenses		33,257			40,528
Depreciation and amortization		16,326			14,342
Total costs and expenses		146,967			165,905
Income from operations		1,736			7,123
Interest and other expenses, net:
Interest expense, net		7,578			7,577
Gain on interest rate swap		(48	)		—
Total interest and other expenses, net		7,530			7,577
Loss before income taxes		(5,794	)		(454	)
Benefit for income taxes		(2,202	)		(165	)
Net loss	$	(3,592	)	$	(289	)
Comprehensive Loss:
Net loss	$	(3,592	)	$	(289	)
Foreign currency translation adjustments, net of tax		(4,251	)		(825	)
Total comprehensive loss	$	(7,843	)	$	(1,114	)
Per share data:
Net loss per share:
Basic and diluted	$	(0.10	)	$	(0.01	)
Weighted average number of common shares outstanding:
Basic and diluted		34,464,664			37,088,923

The accompanying notes are an integral part of these consolidated financial statements.

4

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	For the three months ended March 31,
	2013			2014
Operating activities:
Net loss	$	(3,592	)	$	(289	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gain on interest rate swap		(48	)		—
Depreciation and amortization		16,326			14,342
Amortization of deferred rent		(19	)		(44	)
Share-based compensation		4,131			5,353
Excess tax benefit related to share-based compensation		(407	)		(6,190	)
Provision for doubtful accounts		920			1,359
Amortization of deferred financing costs		580			571
Deferred income taxes		(6,037	)		(2,228	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(11,725	)		(12,501	)
Prepaid expenses and other current assets		(198	)		(1,715	)
Accounts payable and accrued expenses		4,643			9,612
Accrued interest expense		(5,990	)		(5,457	)
Deferred revenue and customer deposits		666			442
Other liabilities		(360	)		(50	)
Net cash provided by (used in) operating activities		(1,110	)		3,205
Investing activities:
Cash paid for acquisitions, net		—			(97,153	)
Cash paid for foreign currency net investment hedges		—			(3,356	)
Working capital and other settlements for acquisitions		—			(1,142	)
Purchases of equipment and leasehold improvements, net		(1,770	)		(712	)
Other		—			(839	)
Net cash used in investing activities		(1,770	)		(103,202	)
Financing activities:
Borrowings under senior secured revolving credit facility		10,000			121,012
Proceeds from the exercise of options and warrants		2,441			14,637
Excess tax benefit related to share-based compensation		407			6,190
Net borrowings (repayments) under working capital facilities		(800	)		4,123
Payment of deferred financing costs		(52	)		(225	)
Repayment of subordinated unsecured notes payable		—			(333	)
Repayments under senior secured revolving credit facility		(10,000	)		(50,000	)
Net cash provided by financing activities		1,996			95,404
Exchange rate impact on cash and cash equivalents		(34	)		268
Net decrease in cash and cash equivalents		(918	)		(4,325	)
Cash and cash equivalents, beginning of period		8,627			12,829
Cash and cash equivalents, end of period	$	7,709		$	8,504
Supplemental disclosures of cash flow information:
Cash paid for interest	$	12,796		$	12,488
Cash paid for (refund from) income taxes		3,404			(1,042	)

The accompanying notes are an integral part of these consolidated financial statements.

5

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) Nature of Operations and Basis of Presentation

ExamWorks Group, Inc. (“ExamWorks” or the “Company”) is a leading provider of independent medical examinations (“IMEs”), peer and bill reviews, Medicare compliance, and other related services (“IME services” or the “IME industry”). ExamWorks, Inc. was incorporated as a Delaware corporation on April 27, 2007 and in June 2010 effected a corporate reorganization creating a holding company, ExamWorks Group, Inc., with ExamWorks, Inc. becoming a 100% owned subsidiary of ExamWorks Group, Inc. From June 2008 through the date of this filing, the Company has acquired 46 IME services companies. As of March 31, 2014, ExamWorks, Inc. operated out of 62 service centers serving all 50 United States, Canada, the United Kingdom and Australia.

The consolidated financial statements of the Company as of March 31, 2014 and for the periods ended March 31, 2013 and 2014 included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and have not been audited by its independent registered public accounting firm. In the opinion of management, all adjustments of a normal and recurring nature necessary to present fairly the financial position and results of operations and cash flows for all periods presented have been made. Pursuant to SEC rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted from these statements unless significant changes have taken place since the end of the Company's most recent fiscal year. The Company's December 31, 2013 Consolidated Balance Sheet was derived from audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, (the “Form 10-K”), but does not include all disclosures required by U.S. GAAP. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Form 10-K. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The consolidated financial statements include the accounts of ExamWorks and its 100% owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

(2)              Summary of Significant Accounting Policies

(a)              Use of Estimates

The preparation of financial statements in conformity with 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on certain assumptions which they believe are reasonable in the circumstances and actual results could differ from those estimates. The more significant estimates reflected in these consolidated financial statements include the valuation of equity issued prior to the Company’s 2010 initial public offering (the “IPO”), purchase price allocations, useful lives of intangible assets, potential impairment of goodwill and intangible assets, the allowance for doubtful accounts, the portion of accounts receivable deemed to be long term in nature, and the valuation of deferred tax assets, share-based compensation and derivative instruments.

(b)              Foreign Currencies

Assets and liabilities recorded in foreign currencies are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (loss) and are reported net of the effect of income taxes on the consolidated financial statements (See Note 2 (p) to the Consolidated Financial Statements).

(c)              Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of December 31, 2013 and March 31, 2014.

(d)              Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts owed to the Company for services provided in the normal course of business and are reported net of allowance for doubtful accounts, which amounted to $7.2 million and $7.9 million as of December 31, 2013 and March 31, 2014, respectively. Generally, no collateral is received from customers and additions to the allowance are based on ongoing credit evaluations of customers with general credit experience being within the range of management’s expectations. Accounts are reviewed regularly for collectability and those deemed uncollectible are written off.  The Company assumes, that on average, all accounts receivable will be collected within one year and thus classifies these as current assets; however there are certain receivables, primarily in the U.K., that have aged longer than one year as of December 31, 2013 and March 31, 2014, and the Company has recorded an estimate for those receivables that will not be collected within one year as long-term in the Consolidated Balance Sheets.

6

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(e)               Concentrations of Credit Risk

The Company routinely assesses the financial strength of its customers and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. For the three months ended March 31, 2013 and 2014, no individual customer accounted for more than 10% of revenues. At December 31, 2013 and March 31, 2014 there was one individual customer that accounted for approximately 11% of the accounts receivable balance.

As of March 31, 2014, the Company had cash and cash equivalents totaling approximately $8.5 million. These amounts were held for future acquisition and working capital purposes and were held in non-interest bearing accounts, of which $1.2 million were held in the U.S. The U.S. amounts were insured under standard FDIC insurance coverage for deposit accounts up to $250,000, per depositor and account ownership category, at each separately insured depository institution.

(f)               Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets and accelerated methods for income tax purposes. Leasehold improvements are amortized over the lesser of their expected useful life or the remaining lease term. Maintenance and repair costs are expensed as incurred.

(g)              Long-Lived Assets

In accordance with Impairment or Disposal of Long-Lived Assets, Subsections of Financial Accounting Standards Board (“FASB”) ASC Subtopic 360-10 (“ASC 360”),  Property, Plant, and Equipment — Overall , long-lived assets, such as equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models (using market participant assumptions), quoted market values and third-party independent appraisals, as considered necessary. At December 31, 2013 and March 31, 2014, no impairment was noted.

(h)              Goodwill and Other Intangible Assets

Goodwill is an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually in accordance with the provisions of FASB ASC Topic 350,  Intangibles — Goodwill and Other  (“ASC 350”). The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting units are compared with their carrying values (including goodwill). If the fair value of a reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting units' goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis (using market participant assumptions). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

The Company performed its annual impairment review of goodwill in October of 2013 and it was determined that the carrying amount of goodwill was not impaired as the fair value of the reporting units substantially exceeded their carrying values and there have been no subsequent developments that would indicate impairment exists as of March 31, 2014. The goodwill impairment review will continue to be performed annually and more frequently if facts and circumstances warrant a review.

ASC 350 also requires that intangible assets with definite lives be amortized over their estimated useful lives. Currently, customer relationships, trade names, covenants not-to-compete and technology are amortized using the straight-line method over estimated useful lives.

7

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(i)                Deferred Financing Costs

In November 2010, the Company entered in to a senior secured revolving credit facility with Bank of America N.A. (“Senior Secured Revolving Credit Facility”) (see Note 10) and has incurred deferred financing costs of $8.3 million, of which $30,000 and $225,000 were incurred in the three months ended March 31, 2013 and 2014, respectively.  In July 2011, the Company closed a private offering of $250 million in aggregate principal amount of 9% senior notes due 2019 (the “Initial Notes”). In June 2012, in accordance with the registration rights granted to the original purchasers of the Initial Notes, the Company completed an exchange offer of the privately placed Initial Notes for new 9.0% Senior Notes due 2019 (the “Exchange Notes,” and together with the Initial Notes, the “Senior Unsecured Notes”) registered with the SEC with substantially identical terms to the Initial Notes. The Company has incurred deferred financing costs of $7.1 million associated therewith, of which $22,000 and were incurred in the three months ended March 31, 2013. There were no deferred financing costs incurred in relation to the Senior Unsecured Notes in the three months ended March 31, 2014.

The deferred financing costs associated with the Senior Secured Revolving Credit Facility and the Senior Unsecured Notes are being amortized to interest expense over the five-year term of the facility, as amended, and the eight-year term of the notes, respectively, using the straight-line method, which approximates the effective interest method.

The Company amortized $580,000 and $571,000 for the three months ended March 31, 2013 and 2014, respectively, to interest expense.

(j)               Revenue Recognition

Revenue related to IMEs, peer reviews, bill reviews, Medicare compliance services and administrative support services is recognized at the time services have been performed and the report is shipped to the end user. The Company believes that recognizing revenue at the time the report is shipped is appropriate because the Company’s revenue policies meet the following four criteria in accordance with ASC 605-10-S25,  Revenue Recognition: Overall,  (i) persuasive evidence that arrangement exists, (ii) shipment has occurred, (iii) the price is fixed and determinable and (iv) collectability is reasonably assured. The Company reports revenues net of any sales, use and value added taxes.

Revenue related to other IME services, including litigation support services and medical record retrieval services, where no report is generated, is recognized at the time the service is performed. The Company believes that recognizing revenue at the time the service is performed is appropriate because the Company’s revenue policies meet the following four criteria in accordance with ASC 605-10-S25, (i) persuasive evidence that arrangement exists, (ii) services have been rendered, (iii) the price is fixed and determinable and (iv) collectability is reasonably assured.

Certain agreements with customers in the U.K. include provisions whereby collection of the amounts billed are contingent on the favorable outcome of the claim.  The Company has deemed these provisions to preclude revenue recognition at the time of performance, as collectability is not reasonably assured and the cash payments are contingent, and is deferring these revenues, net of estimated costs, until the case has been settled, the contingency has been resolved and the cash has been collected.   As of December 31, 2013 and March 31, 2014, the Company had $5.4 million and $6.0 million, respectively, in U.K. net deferred revenues.

Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any subsequent reporting period could be adversely affected.

(k)              Costs of Revenues

Costs of revenues are comprised of fees paid to members of the Company’s medical panel; other direct costs including transcription, film and medical record obtainment and transportation; and other indirect costs including labor and overhead related to the generation of revenues.

 (l)              Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company applies the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes , (included in FASB ASC Subtopic 740-10,  Income Taxes — Overall ), and recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company records interest and penalties related to unrecognized tax benefits in income tax expense.

8

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(m)              Loss Per Common Share

Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during each period. Diluted loss per common share is calculated by dividing net loss, adjusted on an “as if converted” basis, by the weighted-average number of actual shares outstanding and, when dilutive, the share equivalents that would arise from the assumed conversion of convertible instruments. The effect of potentially dilutive stock options, warrants, shares of restricted stock with service restrictions that have not yet been satisfied and unvested restricted stock units (“RSUs”) is calculated using the treasury stock method.

For the three months ended March 31, 2013 and 2014, the potentially dilutive securities include options, warrants, shares of restricted stock with a service restriction not yet satisfied and RSUs exercisable into 10.4 million and 7.8 million shares of common stock, respectively.

For the three months ended March 31, 2013 and 2014, all of the potentially dilutive securities were excluded from the calculation of shares applicable to loss per share, because their inclusion would have been anti-dilutive.

(n)              Share-Based Compensation

The Company has an Amended and Restated 2008 Stock Incentive Plan, as amended, (the “Plan”) that provides for granting of stock options, restricted stock, RSUs and other equity awards. The Company accounts for share-based awards in accordance with ASC Topic 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 requires measurement of compensation cost for all share-based awards at fair value on the grant date (or measurement date if different) and recognition of compensation expense, net of forfeitures, over the requisite service period for awards expected to vest.

Stock Options

The fair value of stock option grants is determined using the Black-Scholes valuation model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in the Company’s stock options. Additionally, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of its share-based awards. The Company’s expected volatility assumptions are based upon the weighted average of the Company’s implied volatility, the Company’s mean reversion volatility and the median of the Company’s peer group’s most recent historical volatilities for 2014 stock option grants. Expected life assumptions are based upon the “simplified” method for those options issued in 2014, which were determined to be issued approximately at-the-money. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.

The assumptions utilized for stock option grants during the three months ended March 31, 2014 were as follows:

	2014
Volatility		49.01%	–	49.27%
Expected life (years)			6.00
Risk-free interest rate		1.81%	–	2.08%
Dividend yield			—
Fair value		$14.71	–	$17.26

In the three months ended March 31, 2014, the Company issued approximately 448,000 stock option awards to employees and outside consultants.  The weighted average fair value of each stock option was $15.49 per option and the aggregate fair value was $6.9 million.  All of these awards vest over a three-year period.  Additionally, a majority these options could vest earlier in the event of a change in control or merger or other acquisition.  Share-based compensation expense related to stock option awards was $2.9 million and $2.8 million for the three months ended March 31, 2013 and 2014, respectively, of which $728,000 and $694,000, respectively was included in costs of revenues, and $2.2 million and $2.1 million, respectively, was recorded in SGA expenses.

At March 31, 2014, the unrecognized compensation expense related to stock option awards was $13.1 million, with a remaining weighted average life of 2.1 years.

9

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

A summary of option activity for the three months ended March 31, 2014 is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual life (years)		Aggregate intrinsic value (in thousands)
Outstanding at December 31, 2013		7,334,745		$	12.33
Options granted		448,125			31.51
Options forfeited		(65,839	)		20.34
Options exercised		(973,146	)		14.58
Outstanding at March 31, 2014		6,743,885		$	13.13
Exercisable at March 31, 2014		4,992,036		$	11.20		6.7	$	118,849

Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of the weighted average exercise price multiplied by the number of options outstanding or exercisable. The total intrinsic value of stock options exercised was approximately $19.1 million during the three months ended March 31, 2014.

Restricted Stock and Restricted Stock Units

The Company has granted members of the Board of Directors, certain employees and outside consultants, time lapse restricted stock and RSUs which vest after a stipulated number of years from the grant date depending on the terms of the issue. The fair value of shares of restricted stock and RSUs is determined based upon the market price of the underlying common stock as of the date of grant. Time lapse restricted shares issued and RSUs vest over one, two and three-year periods. The agreements under which the restricted stock and RSUs are issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have been satisfied. The restriction on a majority of these awards could expire earlier than the stipulated time frame in the event of a change in control or merger or other acquisition. Share-based compensation expense related to shares of restricted stock and RSUs was $803,000 and $2.0 million for the three months ended March 31, 2013 and 2014, respectively, all of which is included in SGA expenses.

The following is a summary of restricted share and RSU activity for the three months ended March 31, 2014:

	Number of awards			Weighted average grant date fair value
Non-vested awards at December 31, 2013		754,214		$	15.57
Awards granted		293,304			32.51
Awards vested		(139,659	)		14.12
Awards forfeited		(3,430	)		13.99
Non-vested awards at March 31, 2014		904,429		$	21.30

The total fair value of vested RSUs and shares of restricted stock during the three months ended March 31, 2014 was $2.0 million. No RSUs or shares of restricted stock vested during the three months ended March 31, 2013. At March 31, 2014, total unrecognized compensation costs related to non-vested restricted shares and RSUs was $13.5 million which is expected to be recognized over a weighted average period of 1.7 years.

During the three months ended March 31, 2013 and 2014, the Company recorded share-based compensation expense of $446,000 and $539,000, respectively, related to annual incentive compensation plans established by the Compensation Committee of the Board of Directors, all of which was recorded in SGA expenses. The 2013 obligation was settled in February 2014 via the issuance of approximately 83,000 shares of restricted stock, and the 2014 plan year obligation is recorded as accrued expenses in the accompanying Consolidated Balance Sheets.  The 2014 incentive compensation plan contains a performance metric based on the Company’s 2014 financial performance and a subsequent time-based service requirement. If the performance metric is met, the associated liability will be settled in the first quarter of 2015 with the granting of an indeterminate number of restricted shares which will vest equally on June 1, 2015 and 2016.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

  (o)            Fair Value Measurements

The Company’s financial assets and (liabilities), which are measured at fair value on a recurring basis, are categorized using the fair value hierarchy at December 31, 2013 and March 31, 2014, and are as follows (in thousands):

	Level 1		Level 2			Level 3			Total
As of December 31, 2013
Financial instruments:
Contingent consideration	$	—	$	—		$	(4,834	)	$	(4,834	)
Foreign currency derivative asset		—		61			—			61
Foreign currency derivative liability		—		(683	)		—			(683	)
As of March 31, 2014
Financial instruments:
Contingent consideration	$	—	$	—		$	(11,285	)	$	(11,285	)
Foreign currency derivative liability		—		(1,000	)		—			(1,000	)

The contingent consideration relates to earnout provisions recorded in conjunction with certain acquisitions completed in 2009, 2010, 2013 and 2014 (see Note 3). Of the total increase in fair value of the contingent consideration of $6.5 million in 2014, $7.1 million was added as the result of a 2014 acquisition and, $83,000 was recorded in interest and other expenses, net in the Consolidated Statements of Comprehensive Loss due to changes in the fair value of the contingent consideration. These increases were offset by a purchase accounting adjustment to a 2013 acquisition in the amount of $373,000 for the change in the fair value of the contingent consideration, $333,000 settled as cash consideration to satisfy an installment related to a 2009 acquisition, and approximately $110,000 of the change in value relates to the release of a restriction associated with shares previously issued related to a 2009 acquisition.

The fair value of the foreign currency derivative was determined using observable market inputs such as foreign currency exchange rates and considers nonperformance risk of the Company and that of its counterparties.

(p)              Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. GAAP are recorded as a component of stockholders’ equity but are excluded from net loss. The Company’s accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, reported net of tax as appropriate, from those subsidiaries not using the U.S. dollar as their functional currency and unrealized gains and losses, reported net of tax as appropriate, resulting from its net investment hedge of its Australian and U.K. subsidiaries. Accumulated other comprehensive income (loss) consists of the following (in thousands):

	Foreign Currency Translation			Net investment hedge - foreign exchange contract			Net investment hedge - Australian denominated debt		Total
Balance at December 31, 2013	$	(6,625	)	$	483		$	205	$	(5,937	)
Change during 2014:
Before-tax amount		3,279			(3,734	)		—		(455	)
Tax (expense) benefit		(1,847	)		1,477			—		(370	)
Total activity in 2014		1,432			(2,257	)		—		(825	)
Balance at March 31, 2014	$	(5,193	)	$	(1,774	)	$	205	$	(6,762	)

(q)              Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”) which amends accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This new guidance requires entities, if certain criteria are met, to present an unrecognized tax benefit, or portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The provisions of ASU 2013-11 are effective for fiscal years and interim periods beginning after December 15, 2013 and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company adopted these provisions effective January 1, 2014 and the adoption of these provisions did not have a material impact on its financial position, results of operations and cash flows.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

There were various other accounting standards and interpretations issued during 2013 and 2014 the Company has not yet been required to adopt, none of which are expected to have a material impact on its financial position, results of operations and cash flows.

(3)             Acquisitions

ExamWorks operates in a highly fragmented industry and has completed 46 acquisitions since July 14, 2008. A key component of ExamWorks’ acquisition strategy is growth through acquisitions that expand its geographic coverage, that provide new or complementary lines of business, expand its portfolio of services and that increase its market share.

The Company has accounted for all business combinations using the purchase method to record a new cost basis for the assets acquired and liabilities assumed. The Company recorded, based on a preliminary purchase price allocation, intangible assets representing client relationships, tradenames, covenants not to compete, technology and the excess of purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed as goodwill in the accompanying consolidated financial statements. The goodwill is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence. The results of operations are reflected in the consolidated financial statements of the Company from the date of acquisition.

(a)              2013 Acquisitions

In 2013, the Company completed the following individually insignificant acquisitions, as defined in SEC Regulation S-X Rule 3-05, with an aggregate purchase price of $7.3 million, comprised of $3.3 million cash consideration less cash acquired of $8,000, and $4.0 million of contingent consideration. In conjunction with these 2013 acquisitions, the Company incurred transaction costs of $108,000 of which $25,000 were incurred in each of the three months ended March 31, 2013 and 2014, respectively. These amounts are reported in SGA expenses in the Company’s accompanying Consolidated Statements of Comprehensive Loss. These acquisitions enhanced the service offerings of the Company.

Company name	Form of acquisition	Date of acquisition
AGS Risk Limited (United Kingdom)	Substantially all of the assets and assumed certain liabilities	December 10, 2013
Evaluation Resource Group (United States)	Substantially all of the assets and assumed certain liabilities	December 20, 2013

The preliminary allocation of consideration for these acquisitions is summarized as follows (in thousands):

	Preliminary purchase price allocation December 31, 2013		Adjustments/ reclassifications			Preliminary purchase price allocation March 31, 2014
Equipment and leasehold improvements		130		—			130
Customer relationships		3,141		—			3,141
Tradename		710		—			710
Goodwill		3,024		(309	)		2,715
Assets acquired and liabilities assumed, net		688		(64	)		624
Totals		7,693		(373	)		7,320

Goodwill of $2.7 million and other intangible assets of $3.9 million are expected to be deductible for U.S. federal income tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(b)             2014 Acquisitions

In 2014, the Company completed the following individually insignificant acquisitions, as defined in SEC Regulation S-X Rule 3-05, with an aggregate purchase price of $104.1 million, comprised of $97.8 million cash consideration less cash acquired of $599,000, and $6.9 million of contingent consideration. In conjunction with these 2014 acquisitions, the Company incurred transaction costs of $1.3 million, of which $739,000 was incurred in the three months ended March 31, 2014. The Company did not incur any costs associated with the indicated acquisitions in the first quarter of 2013. These amounts are reported in SGA expenses in the Company’s accompanying Consolidated Statements of Comprehensive Loss. These acquisitions enhanced and expanded the presence of the service offerings of the Company.

Company name	Form of acquisition	Date of acquisition
Cheselden (United Kingdom)	Substantially all of the assets and assumed certain liabilities	January 13, 2014
Newton Medical Group (United States)	Substantially all of the assets and assumed certain liabilities	January 16, 2014
Gould & Lamb Intermediate Holdings (United States)	100% of the outstanding common stock	February 3, 2014
Assess Medical Group Pty Limited (Australia)	100% of the outstanding common stock	February 14, 2014

The preliminary allocation of consideration for these acquisitions is summarized as follows (in thousands):

	Preliminary purchase price allocation March 31, 2014
Equipment and leasehold improvements	$	480
Customer relationships		33,869
Tradename		5,535
Covenants not to compete		343
Technology		1,490
Goodwill		68,201
Net deferred tax liability associated with step-up in book basis		(12,375	)
Assets acquired and liabilities assumed, net		6,543
Total	$	104,086

Goodwill of $14.2 million and other intangible assets of $14.9 million are expected to be deductible for U.S. federal income tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. The 2014 acquisitions contributed $8.5 million in revenues and $724,000 in operating income for the three months ended March 31, 2014.

(d)             Pro forma Financial Information

The following unaudited pro forma results of operations for the three months ended March 31, 2013 and 2014 assumes that the 2013 acquisitions were completed on January 1, 2012 and the 2014 acquisitions were completed on January 1, 2013.

For the three months ended March 31, 2013 and 2014, the pro forma results include adjustments to reflect reduced interest and other expenses of $1.5 million and $1.2 million respectively, associated with the funding of the acquisitions assuming that acquisition related debt was incurred as referenced above.  In addition, incremental depreciation and amortization expense was recorded as if the acquisitions had occurred on the dates referenced above and amounted to $2.9 million and $756,000 for the three months ended March 31, 2013 and 2014, respectively.  Finally, adjustments of $943,000 and $4.4 million were made to reduce SGA expenses for the three months ended March 31, 2013 and 2014, respectively, principally related to certain salary and other personal expenses attributable to the previous owners of the acquired businesses.  These adjustments represent contractual reductions and are considered to be non-recurring and are not expected to have a continuing impact on the operations of the Company.

	Three months ended March 31,
	2013			2014
	(In thousands, except per share data)
Pro forma revenues	$	161,915		$	176,732
Pro forma net income (loss)		(3,520	)		77
Pro forma loss per share: Basic and diluted	$	(0.10	)	$	0.00

The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions been effective as of January 1 of the respective years or of future operations of the Company.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(4)              Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements at December 31, 2013 and March 31, 2014, consist of the following (in thousands):

	Estimated useful lives (years)		December 31, 2013		March 31, 2014
Building		15	$	600	$	600
Computer and office equipment		3		19,551		14,874
Furniture and fixtures		3 to 5		3,364		3,015
Leasehold improvements	Lease term			3,251		3,338
				26,766		21,827
Less accumulated depreciation and amortization				15,816		10,589
Totals			$	10,950	$	11,238

Depreciation expense was $1.4 million for the both three months ended March 31, 2013 and 2014.

 (5)            Goodwill and Intangible Assets

Goodwill by segment at December 31, 2013 and March 31, 2014 consists of the following (in thousands) (1):

	United States		Canada			United Kingdom			Australia		Total
Balance at December 31, 2013	$	273,070	$	19,279		$	39,593		$	37,370	$	369,312
Goodwill acquired during the year		60,430		—			1,588			6,183		68,201
Adjustments to prior year acquisitions		64		—			(373	)		—		(309	)
Effect of foreign currency translation		—		(939	)		399			2,334		1,794
Balance at March 31, 2014	$	333,564	$	18,340		$	41,207		$	45,887	$	438,998

(1) Goodwill recorded in connection with certain tax benefits to be realized in the Company’s U.S. income tax returns has been reflected in the United States segment.

   Intangible assets at December 31, 2013 and March 31, 2014, consist of the following (in thousands):

			December 31, 2013
	Estimated useful lives (months)		Gross carrying amount		Accumulated amortization			Net carrying value
Amortizable intangible assets:
Customer relationships		40 to 60	$	201,395	$	(132,153	)	$	69,242
Tradenames		45 to 84		59,813		(36,164	)		23,649
Covenants not to compete		36		4,714		(2,986	)		1,728
Technology		24 to 40		7,507		(7,262	)		245
Totals			$	273,429	$	(178,565	)	$	94,864

14

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

			March 31, 2014
	Estimated useful lives (months)		Gross carrying amount		Accumulated amortization			Net carrying value
Amortizable intangible assets:
Customer relationships		40 to 60	$	236,373	$	(141,607	)	$	94,766
Tradenames		45 to 84		65,807		(39,186	)		26,621
Covenants not to compete		36		5,892		(3,255	)		2,637
Technology		24 to 40		9,026		(7,447	)		1,579
Totals			$	317,098	$	(191,495	)	$	125,603

The aggregate intangible amortization expense was $14.9 million and $12.9 million for the three months ended March 31, 2013 and 2014, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):

	Amount
Nine months ended December 31, 2014	$	37,863
Year ended December 31:
2015		42,564
2016		28,862
2017		15,900
2018		414
Total	$	125,603

(6)              Accrued Expenses

Accrued expenses at December 31, 2013 and March 31, 2014 consist of the following (in thousands):

	December 31, 2013		March 31, 2014
Accrued compensation and benefits	$	9,056	$	11,159
Accrued selling and professional fees		4,317		4,935
Accrued income, value added and other taxes		17,164		18,823
Accrued medical panel fees		3,460		3,197
Other accrued expenses		4,451		3,722
Totals	$	38,448	$	41,836

(7)              Stockholders’ Equity

During the three months ended March 31, 2014, the Company issued approximately 973,000 shares of common stock to settle options exercised during the period.

During the three months ended March 31, 2014, the Company issued approximately 69,000 shares of common stock to settle warrants exercised during the period.

During the three months ended March 31, 2014, the Company issued approximately 98,000 shares of restricted stock with a fair value of $3.2 million to certain officers and employees for services to be provided during the next three years. The Company is recording the expenses related to these awards in SGA expenses over the requisite service period.

During the three months ended March 31, 2014, the Company issued approximately 62,000 shares of common stock to settle restricted stock units whose restrictions were lifted during the period.

During the three months ended March 31, 2014, the Company issued approximately 83,000 shares of restricted stock to certain officers and employees in settlement of its 2013 incentive compensation plan liability. The restriction on these shares will be lifted in 50% increments on June 1, 2014 and 2015. The Company is recording the remaining expenses related to these awards in SGA expenses over the remaining service period.

During the three months ended March 31, 2014, the Company did not repurchase any shares under the share repurchase program. As of March 31, 2014, the Company has approximately 905,000 shares of common stock held as treasury shares with an average value of $9.38 per share, and the ability to repurchase an additional $10.2 million in shares of its common stock.

15

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(8)              Related Party Transactions

The Senior Secured Revolving Credit Facility contains a provision requiring the Company to use a third party to perform financial due diligence for acquisitions exceeding a certain size. With the approval of the senior lender, the Company engaged RedRidge Finance Group (“RedRidge”) to assist it with financial due diligence and incurred $176,000 in fees, pertaining to acquisition-related work performed during the three months ended March 31, 2014. The Company did not incur any such fees during the three months ended March 31, 2013. P&P Investment, LLC (“P&P”), a company owned by Richard Perlman and James Price, the Chairman and Chief Executive Officer, respectively, of the Company, are minority owners and lenders of RedRidge. P&P, Mr. Perlman and Mr. Price have historically waived any right P&P had to any portion of the diligence fees paid by the Company to RedRidge. This waiver terminated as of August 1, 2013.

In June 2010, the Company entered into a lease agreement with Compass Partners ("Compass") for corporate office space located at 655 Madison Avenue, 23rd Floor, New York, NY. Compass is an entity owned and controlled by Mr. Perlman. Pursuant to the lease, which runs from April 1, 2010 through June 30, 2014, the Company paid Compass a rental fee of $10,080 per month in 2010, which fee was subject to increase commencing January 1, 2011 based on a proportionate pass through of base rent increases and increases for property taxes and building operating expenses. For the three months ended March 31, 2013 and 2014, the Company made rental and related payments to Compass of $34,000 and $14,000, respectively. Prior to the entry into this lease agreement, the Company did not incur costs in excess of $120,000 per year with respect to leasing this corporate office space. 

(9)              Commitments and Contingencies

(a)              Lease Commitments

The Company and its subsidiaries lease office space and office related equipment under noncancelable operating leases with various expiration dates from 2014 through 2023.

Future minimum lease payments under the operating leases for the nine months ended December 31, 2014 and in each of the years subsequent to December 31, 2014 are as follows (in thousands):

	Amount
Nine months ended December 31, 2014	$	9,433
Year ended December 31:
2015		10,855
2016		8,003
2017		6,062
2018		4,384
Thereafter		4,168
Total	$	42,905

Related rent expense was $3.0 million and $3.5 million for the three months ended March 31, 2013 and 2014, respectively.

(b)               Employee Benefit Plans

The Company and certain of its subsidiaries each sponsor separate voluntary defined contribution pension plans. The plans cover employees that meet specific age and length of service requirements. The Company and certain of its subsidiaries have various matching and vesting arrangements within their individual plans. For the three months ended March 31, 2013 and 2014, the Company recorded $139,000 and $228,000, respectively, in compensation expense related to these plans.

16

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(10)            Long-Term Debt

	December 31, 2013		March 31, 2014
	(in thousands)
Senior Unsecured Notes Payable (a)	$	250,000	$	250,000
Senior Secured Revolving Credit Facility, Bank of America, N.A. (b)		45,027		116,039
Working capital facilities, Barclays (c)		37,943		42,436
Various subordinated unsecured notes payable; maturing at various dates from 2011 through 2014 (d)		318		—
		333,288		408,475
Less current portion		318		—
	$	332,970	$	408,475

(a)     On July 19, 2011, the Company closed a private offering of $250.0 million in aggregate principal amount of 9.0% senior notes due 2019 (the “Initial Notes”). The Initial Notes were issued at a price of 100% of their principal amount. A portion of the gross proceeds of $250.0 million were used to repay borrowings outstanding under the Company’s Senior Secured Revolving Credit Facility and pay related fees and expenses, and the remainder was used for general corporate purposes, including acquisitions. In June 2012, in accordance with the registration rights granted to the original purchasers of the Initial Notes, the Company completed an exchange offer of the privately placed Initial Notes for new 9.0% senior notes due 2019 (the “Exchange Notes,” and together with the Initial Notes, the “Senior Unsecured Notes”) registered with the SEC with substantially identical terms to the Initial Notes. The Senior Unsecured Notes are senior obligations of ExamWorks and are guaranteed by ExamWorks’ existing and future U.S. subsidiaries (the “Guarantors”).

The Senior Unsecured Notes were issued under an Indenture, dated as of July 19, 2011 (the “Indenture”), among the Company, the Guarantors and U.S. Bank, National Association, as trustee (the “Trustee”).  The Senior Unsecured Notes are the Company’s general senior unsecured obligations, and rank equally with the Company’s existing and future senior unsecured obligations and senior to all of the Company’s further subordinated indebtedness. The Senior Unsecured Notes accrue interest at a rate of 9.0% per year, payable semi-annually in cash in arrears on January 15 and July 15 of each year, commencing January 15, 2012.

At any time on or after July 15, 2015, the Company may redeem some or all of the Senior Unsecured Notes at the redemption prices stated in the Indenture, plus accrued and unpaid interest to the date of redemption. Prior to July 15, 2014, the Company may redeem up to 35% of the aggregate principal amount of the Senior Unsecured Notes with net cash proceeds from certain equity offerings at a redemption price equal to 109% of the aggregate principal amount of the Senior Unsecured Notes, plus accrued and unpaid interest, if any, provided that at least 65% of the original aggregate principal amount of the Senior Unsecured Notes remains outstanding after redemption. Further, the Company may redeem some or all of the of the Senior Unsecured Notes at any time prior to July 15, 2015 at a redemption price equal to 100% of the principal amount of the Senior Unsecured Notes plus a make whole premium described in the Indenture, plus accrued and unpaid interest.

The Indenture includes covenants which, subject to certain exceptions, limit the ability of the Company and its restricted subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness, make certain types of restricted payments, incur liens on assets of the Company or the restricted subsidiaries, engage in asset sales and enter into transactions with affiliates. Upon a change of control (as defined in the Indenture), the Company may be required to make an offer to repurchase the Senior Unsecured Notes at 101% of their principal amount, plus accrued and unpaid interest. The Indenture also contains customary events of default.

(b)     The Company entered into a Senior Secured Revolving Credit Facility agreement dated November 2, 2010 (the “Senior Secured Revolving Credit Facility”) with Bank of America, N.A. The facility initially consisted of a $180.0 million revolving credit facility. The facility is available to finance the Company’s acquisition program and working capital needs. On February 9, 2011, the Company exercised the accordion feature of the Senior Secured Revolving Credit Facility, increasing the facility from $180.0 million to $245.0 million.

On May 6, 2011, the Company increased and fully exercised the accordion features of the Senior Secured Revolving Credit Facility.  The increase and exercise of the accordion feature increased the committed capacity of the credit facility by $55.0 million, from a total of $245.0 million to a total of $300.0 million.

On July 7, 2011, the Company entered into a second amendment to its Senior Secured Revolving Credit Facility (the “Second Amendment”) which became effective simultaneously with the consummation of the Company’s private offering of the Senior Unsecured Notes.  The Second Amendment amended the Senior Secured Revolving Credit Facility to, among other things, (i) extend the maturity date of the Senior Secured Revolving Credit Facility from November 2013 to July 2016; (ii) permit the issuance and sale of the Senior Unsecured Notes; (iii) replace the consolidated senior leverage ratio with a consolidated senior secured leverage ratio while permitting the maximum consolidated senior secured leverage ratio to be 3.00 to 1; (iv) permit the Company’s maximum consolidated leverage ratio to increase from 3.5 to 1 to 4.75 to 1; (v) reduce the borrowing cost; and (vi) allow the Company to complete acquisitions with a purchase price of up to $75.0 million (previously $50.0 million) without prior lender consent. The Second Amendment also reduced the aggregate revolving commitments under the Senior Secured Revolving Credit Facility by $37.5 million for a maximum commitment of $262.5 million, subject to the Company’s right to increase the aggregate revolving commitments by $37.5 million for a maximum commitment of $300.0 million, so long as the Company is not in default and the Company satisfies certain other customary conditions.

17

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On February 27, 2012, the Company entered into a third amendment to its Senior Secured Revolving Credit Facility (the “Third Amendment”). The Third Amendment amended the Senior Secured Revolving Credit Facility as to the definitions of consolidated fixed charges and consolidated fixed charge coverage ratio and does not permit the consolidated fixed charge coverage ratio as of the end of any fiscal quarter to be less than (i) for any fiscal quarter ending during the period from December 31, 2011 to and including September 30, 2012, 1.75 to 1.00 and (ii) for any fiscal quarter ending thereafter, 2.00 to 1.00.

On August 27, 2012, the Company entered into a fourth amendment to its Senior Secured Revolving Credit Facility (the “Fourth Amendment”). The Fourth Amendment amended the Senior Secured Revolving Credit Facility to add the Australian dollar as an alternative currency and increased the alternative currency sublimit from USD $60.0 million to USD $100.0 million.

On June 27, 2013, the Company entered into a fifth amendment to its Senior Secured Revolving Credit Facility (the “Fifth Amendment”). Among other changes, the Fifth Amendment modifies the Credit Agreement to permit an implementation of an auto-borrow agreement between the swing line lender and the Company to facilitate cash management, incorporates new provisions related to swap regulations and updates various provisions related to the LIBOR rate, Foreign Account Tax Compliance Act and the International Financial Reporting Standards.

On February 3, 2014, the Company entered into a sixth amendment to its Senior Secured Revolving Credit Facility (the “Sixth Amendment”). The Sixth Amendment (i) allowed the Company to consummate the acquisition of Gould & Lamb, and (ii) allows the Company to acquire a target (a) with negative trailing twelve month adjusted EBITDA (as defined in the Senior Secured Revolving Credit Facility) if the purchase price of such acquisition is less than $5.0 million, (b) with trailing twelve month adjusted EBITDA (as defined in the Senior Secured Revolving Credit Facility) of less than or equal to $3,000,000 without delivering to the lenders a quality of earnings report regarding such target and (c) without delivering pro forma projections of the Company to the lenders if the purchase price of such acquisition is less than $75.0 million, in each case, without prior lender consent.

Borrowings under the Senior Secured Revolving Credit Facility, as amended, bear interest, at either (i) LIBOR plus the applicable margin or (ii) a base rate (equal to the highest of (a) the federal funds rate plus 0.5%, (b) the Bank of America prime rate and (c) LIBOR (using a one-month period) plus 1.0%), plus the applicable margin, as the Company elects. The applicable margin means a percentage per annum determined in accordance with the following table: 

Pricing Tier		Consolidated Senior Secured Leverage Ratio	Commitment Fee/Unused Line Fee			Letter of Credit Fee			Eurocurrency Rate Loans			Base Rate Loans
	1	≥ 2.50 to 1.0		0.50	%		3.75	%		3.75	%		2.75	%
	2	≥ 2.00 to 1.0 but < 2.50 to 1.0		0.45	%		3.50	%		3.50	%		2.50	%
	3	≥ 1.50 to 1.0 but < 2.00 to 1.0		0.40	%		3.25	%		3.25	%		2.25	%
	4	≥ 1.00 to 1.0 but < 1.50 to 1.0		0.35	%		3.00	%		3.00	%		2.00	%
	5	< 1.00 to 1.0		0.30	%		2.75	%		2.75	%		1.75	%

In the event of default, the outstanding indebtedness under the facility will bear interest at an additional 2%.

The Senior Secured Revolving Credit Facility contains restrictive covenants, including among other things financial covenants requiring the Company to not exceed a maximum consolidated senior secured leverage coverage ratio, a maximum total consolidated leverage ratio and to maintain a minimum consolidated fixed charge coverage ratio. The Senior Secured Revolving Credit Facility also restricts the Company’s ability (subject to certain exceptions) to incur indebtedness, prepay or amend other indebtedness, create liens, make certain fundamental changes including mergers or dissolutions, pay dividends and make other payments in respect of capital stock, make certain investments, sell assets, change its lines of business, enter into transactions with affiliates and other corporate actions.

As of March 31, 2014, the Company had $116.0 million outstanding under the Senior Secured Revolving Credit Facility, bearing interest at a rate of LIBOR plus 3.00%, resulting in $146.5 million of undrawn commitments.  

(c)            On September 29, 2010, the Company’s indirect 100% owned subsidiary UKIM entered into a Sales Finance Agreement (the “UKIM SFA”) with Barclays Bank PLC (“Barclays”), pursuant to which Barclays provides UKIM a working capital facility of up to £5,000,000, subject to the terms and conditions of the UKIM SFA. The working capital facility bore a discount margin of 2.5% over Base Rate and served to finance UKIM’s unpaid account receivables.  The working capital facility had a minimum term of 36 months.

18

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On June 28, 2013, UKIM entered into an amendment to extend the term of the existing UKIM SFA by 24 months from June 28, 2013, to amend the discount margin to 2.4% over Base Rate (0.5% rate on March 31, 2014) and to provide that payments by UKIM for certain non-working capital purposes are permitted under the UKIM SFA. The working capital facility operates on a co-terminus and cross-default basis with other facilities provided by Barclays and with the Senior Secured Revolving Credit Facility. As of March 31, 2014, UKIM had $7.9 million outstanding under the working capital facility, resulting in approximately $412,000 in availability.

On May 12, 2011, the Company’s indirect 100% owned subsidiary Premex entered into a Sales Finance Agreement (the “Premex SFA”) with Barclays, pursuant to which Barclays provides Premex a working capital facility of up to £26,500,000, subject to the terms and conditions of the Premex SFA. The working capital facility bears a discount margin of 2.4% over Base Rate (0.5% rate on March 31, 2014) and serves to finance Premex’s unpaid account receivables.  The working capital facility had a minimum term of 36 months.

On June 28, 2013, Premex entered into an amendment to extend the term of the existing Premex SFA by 24 months from June 28, 2013, and to provide that payments by Premex for certain non-working capital purposes are permitted under the Premex SFA. The working capital facility operates on a co-terminus and cross-default basis with other facilities provided by Barclays and with the Senior Secured Revolving Credit Facility. As of March 31, 2014, Premex had $34.5 million outstanding under the working capital facility, resulting in approximately $9.6 million in availability.

(d)            During 2009 and 2010, the Company issued seller debt in the form of subordinated unsecured notes payable with an estimated fair value of approximately $6.9 million relating to certain acquisitions. These notes were unsecured and subordinated to the Senior Secured Revolving Credit Facility and the Senior Unsecured Notes issued in July 2011. . The Company made principal payments totaling $333,000 during the three months ended March 31, 2014, fully settling its unsecured notes payable obligation.

As of March 31, 2014, future maturities of long-term debt were as follows (in thousands):

	Amount
Nine months ended December 31, 2014	$	—
Year ended December 31:
2015		42,436
2016		116,039
2017		—
2018		—
Thereafter		250,000
Total	$	408,475

(11)           Financial Instruments

The FASB issued ASC 815 which establishes accounting and reporting standards for derivative instruments. ASC 815 requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If the derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments or recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a hedge’s change in fair value will be immediately recognized in earnings.

In August 2008, in order to protect against interest rate exposure on its variable-rate debt, the Company entered into an interest rate swap to fix the interest rate applicable to certain of its variable-rate debt. The agreement swapped one-month LIBOR for a fixed interest rate of 4.36% and matured on July 15, 2013. The Company did not meet the criteria for hedge accounting under ASC 815, thus the difference between its amortized cost and its fair value resulted in an unrealized gain for the three months ended March 31, 2013 of $48,000, and such amount was reported in interest and other expenses, net on the accompanying Consolidated Statements of Comprehensive Loss.

Beginning in the second quarter of 2013, in order to protect against foreign currency exposure in its Australian operations, the Company entered into forward foreign currency contracts as a hedge of AUD $60.0 million of its net investment in Australia. Beginning in the third quarter of 2013, the Company also entered into forward foreign currency contracts as a hedge of £40.0 million of its net investment in the U.K. The Company settled certain of its hedge positions during the 2014 year and made $3.4 million in net payments. This amount was classified in accumulated other comprehensive loss in the Company’s Consolidated Balance Sheet (see Note 2), offsetting the currency translation adjustment of the related net investment that is also recorded in accumulated other comprehensive loss, and is reported net of the effect of income taxes.

19

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2013, the Company had a net liability of $622,000, with $683,000 recorded in other current liabilities and $61,000 recorded in other current assets with the offsetting net unrealized loss being recorded in accumulated other comprehensive loss in its Consolidated Balance Sheets associated with open forward foreign currency contracts which matured in January of 2014. As of March 31, 2014, the Company had a net liability of $1.0 million, all of which was recorded in other current liabilities with the offsetting net unrealized loss being recorded in accumulated other comprehensive loss in its Consolidated Balance Sheets associated with open forward foreign currency contracts which matured in April of 2014.

The Company does not enter into derivative transactions for speculative purposes.

(12)            Income Taxes

In preparing its consolidated financial statements, the Company estimates income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities.

Additionally, the Company currently has significant deferred tax assets and other deductible temporary differences including basis differences between intangible assets. The Company does not provide a valuation allowance against its deferred tax assets as the Company believes that it is more likely than not that all of the deferred tax assets will be realized based on available evidence including scheduled reversal of deferred tax liabilities, projected future taxable income and other tax planning considerations.

The Company applies the provisions of ASC 740 as it relates to uncertain tax positions. This interpretation prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740 states that a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

The following table summarizes the activity related to the unrecognized tax benefits for the three months ended March 31, 2014, (in thousands)

Balance at January 1, 2014	$	355
Increase to prior year tax positions		5
Increase to current year tax positions		—
Expiration of the statute of limitations for the assessment of taxes		—
Decrease related to settlements		—
Balance at March 31, 2014	$	360

The Company is no longer subject to U.S. federal income and state tax return examinations by tax authorities for tax years before 2009 and 2008, respectively. The Company operates in multiple taxing jurisdictions and faces audits from various tax authorities. The Company remains subject to examination until the statute of limitations expires for the respective tax jurisdiction. The Company does not anticipate that the amount of the unrecognized benefit will significantly increase or decrease within the next 12 months.

Undistributed earnings of the Company’s foreign subsidiaries are considered indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been recorded. Deferred taxes are provided for earnings outside the United States when those earnings are not considered indefinitely reinvested.

(13)           Segment and Geographical Information

The Company applies the provisions of ASC Topic 280, Segment Reporting, (“ASC 280”). ASC 280, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker (“CODM”) and for which discrete financial information is available. Based on the provisions of ASC 280, the Company has determined that it operates in four geographic segments: the United States, Canada, the United Kingdom and Australia. The CODM evaluates segment performance based on revenues and segment profit, as defined below. The Company’s corporate costs and assets are all incurred in the United States and are included in the United States segment, as this is consistent with how they are presented and reviewed by the CODM. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

20

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Information relating to the Company’s product groups (IMEs, peer review, bill review, Medicare compliance and other related services) is as follows (in thousands):

Revenues:	For the three months ended March 31,
	2013		2014
IME and other related services (1)	$	137,334	$	154,540
Peer and bill reviews and Medicare compliance services (1)		11,369		18,488
Total revenues	$	148,703	$	173,028

(1) Includes the results of certain of the Company’s service centers acquired whose revenues are generated substantially through the indicated product group. Outside of this presentation, other product groups are not tracked within the Company’s financial systems. Additionally, other related services, which include any Medicare compliance services completed at the Company’s historic service centers in the periods presented, are not separately captured within the Company’s financial systems and have been included with IME services in the above presentation as separate presentation is not practicable. With the Company’s acquisition of Gould & Lamb in February of 2014, Medicare compliance services related to this business have been included with Peer and bill reviews in the presentation above. None of the individual services within the peer and bill reviews and Medical compliance services category above represent more than 10% of consolidated revenues.

Information relating to the Company’s geographic segments is as follows (in thousands)(1)(2): 

	United States			Canada			United Kingdom			Australia			Total
2013
Revenues	$	91,178		$	7,421		$	33,767		$	16,337		$	148,703
Segment profit		10,919			1,285			6,844			3,957			23,005
Depreciation and amortization expense		8,623			2,037			3,042			2,624			16,326
Capital expenditures		(919	)		(11	)		(736	)		(104	)		(1,770	)
Total assets (3)		398,040			40,321			190,671			102,578			731,610
Long-lived assets (3)		329,947			31,995			92,642			92,189			546,773
2014
Revenues	$	106,049		$	7,507		$	42,053		$	17,419		$	173,028
Segment profit		15,954			1,098			7,081			3,877			28,010
Depreciation and amortization expense		7,720			811			3,175			2,636			14,342
Capital expenditures		(402	)		—			(290	)		(20	)		(712	)
Total assets (3)		488,362			28,293			230,597			100,373			847,625
Long-lived assets (3)		403,354			21,169			105,373			88,856			618,752

(1) For segment purposes, the Company defines segment profit as earnings before interest expenses, income taxes, depreciation and amortization, share-based compensation expenses, acquisition related transaction costs and other expenses. A consolidated reconciliation from segment profit to income from operations is included below.

(2) Long-lived assets are noncurrent assets excluding deferred tax assets and deferred financing costs.

(3) Total assets and long-lived assets include goodwill. Goodwill recorded in connection with certain tax benefits to be realized in the Company’s U.S. income tax returns has been reflected in the United States segment.

21

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

A reconciliation of segment profit to consolidated income from operations is as follows (in thousands):

	For the three months ended March 31,
	2013			2014
Segment Profit		23,005			28,010
Depreciation and amortization		(16,326	)		(14,342	)
Share-based compensation expense		(4,131	)		(5,353	)
Acquisition related transaction costs		(449	)		(1,192	)
Other expenses		(363	)		—
Income from operations	$	1,736		$	7,123

(14)           Condensed Consolidating Financial Information of Guarantor Subsidiaries

The Company has outstanding certain indebtedness that is guaranteed by all of its U.S. subsidiaries. However, the indebtedness is not guaranteed by the Company’s foreign subsidiaries. The guarantor subsidiaries are 100% owned and the guarantees are made on a joint and several basis, and are full and unconditional. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of December 31, 2013 and March 31, 2014, and for the three months ended March 31, 2013 and 2014 is presented below. The Company (issuer of the Senior Unsecured Notes) was formed in June 2010 to implement a holding company organizational structure. As a result, all operating activities are conducted through the Company’s 100% owned  subsidiaries.

Condensed Consolidating Statement of Operations

for the three months ended March 31, 2013

(In thousands)

	Guarantor Subsidiaries			Non-Guarantor Subsidiaries			ExamWorks Group, Inc. (Parent Corporation)			Consolidation and Elimination Entries		Consolidated Totals
Revenues	$	91,178		$	57,525		$	—		$	—	$	148,703
Costs and expenses:
Costs of revenues		64,131			33,253			—			—		97,384
Selling, general and administrative expenses		18,124			15,133			—			—		33,257
Depreciation and amortization		8,623			7,703			—			—		16,326
Total costs and expenses		90,878			56,089			—			—		146,967
Income from operations		300			1,436			—			—		1,736
Interest and other expenses, net		5,559			1,971			—			—		7,530
Loss before income taxes		(5,259	)		(535	)		—			—		(5,794	)
Provision (benefit) for income taxes		(3,058	)		856			—			—		(2,202	)
Net loss before earnings of consolidated subsidiaries	$	(2,201	)	$	(1,391	)	$	—		$	—	$	(3,592	)
Net income (loss) of consolidated subsidiaries		(1,391	)		—			(1,391	)		2,782		—
Net income (loss)	$	(3,592	)	$	(1,391	)	$	(1,391	)	$	2,782	$	(3,592	)

22

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Condensed Consolidating Statement of Operations

for the three months ended March 31, 2014

(In thousands)

	Guarantor Subsidiaries			Non-Guarantor Subsidiaries			ExamWorks Group, Inc. (Parent Corporation)			Consolidation and Elimination Entries		Consolidated Totals
Revenues	$	106,049		$	66,979		$	—		$	—	$	173,028
Costs and expenses:
Costs of revenues		71,067			39,968			—			—		111,035
Selling, general and administrative expenses		21,705			18,823			—			—		40,528
Depreciation and amortization		7,720			6,622			—			—		14,342
Total costs and expenses		100,492			65,413			—			—		165,905
Income from operations		5,557			1,566			—			—		7,123
Interest and other expenses, net		5,692			1,885			—			—		7,577
Loss before income taxes		(135	)		(319	)		—			—		(454	)
Provision (benefit) for income taxes		(1,642	)		1,477			—			—		(165	)
Net loss before earnings of consolidated subsidiaries	$	1,507		$	(1,796	)	$	—		$	—	$	(289	)
Net income (loss) of consolidated subsidiaries		(1,796	)		—			(1,796	)		3,592		—
Net income (loss)	$	(289	)	$	(1,796	)	$	(1,796	)	$	3,592	$	(289	)

23

Condensed Consolidating Balance Sheet as of December 31, 2013

(In thousands)

	Guarantor Subsidiaries		Non-Guarantor Subsidiaries		ExamWorks Group, Inc. (Parent Corporation)		Consolidation and Elimination Entries			Consolidated Totals
Assets
Current assets:
Cash and cash equivalents	$	760	$	12,069	$	—	$	—		$	12,829
Accounts receivable, net		46,828		123,077		—		—			169,905
Intercompany receivable		19,120		—		10,431		(29,551	)		—
Prepaid expenses		2,889		2,896		—		—			5,785
Deferred tax assets		437		—		—		(4	)		433
Other current assets		61		1,237		—		—			1,298
Total current assets		70,095		139,279		10,431		(29,555	)		190,250
Property, equipment and leasehold improvements, net		6,760		4,190		—		—			10,950
Investment in subsidiaries		217,034		—		414,802		(631,836	)		—
Intercompany notes receivable		174,826		—		174,826		(349,652	)		—
Goodwill		259,316		109,996		—		—			369,312
Intangible assets, net		37,172		57,692		—		—			94,864
Long-term accounts receivable, less current portion		—		35,952		—		—			35,952
Deferred tax assets, noncurrent		15,470		6,021		—		—			21,491
Deferred financing costs, net		8,100		93		8,100		(8,100	)		8,193
Other assets		497		1,004		—		—			1,501
Total assets	$	789,270	$	354,227	$	608,159	$	(1,019,143	)	$	732,513
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	17,524	$	35,148	$	—	$	—		$	52,672
Intercompany payable		10,431		19,120		—		(29,551	)		—
Accrued expenses		10,839		27,609		—		—			38,448
Accrued interest expense		—		—		10,431		—			10,431
Deferred revenue		100		5,695		—		—			5,795
Current portion of subordinated unsecured notes payable		318		—		—		—			318
Deferred tax liability		—		4		—		(4	)		—
Current portion of contingent earnout obligation		—		2,032		—		—			2,032
Other current liabilities		2,116		4,322		—		—			6,438
Total current liabilities		41,328		93,930		10,431		(29,555	)		116,134
Senior unsecured notes payable		—		—		250,000		—			250,000
Senior secured revolving credit facility and working capital facilities		—		37,943		45,027		—			82,970
Intercompany notes payable		174,826		174,826		—		(349,652	)		—
Long-term contingent earnout obligation, less current portion		—		2,373		—		—			2,373
Other long-term liabilities		1,791		6,374		—		—			8,165
Total liabilities		217,945		315,446		305,458		(379,207	)		459,642
Commitments and contingencies
Stockholders’ equity (deficit)		571,325		38,781		302,701		(639,936	)		272,871
Total liabilities and stockholders' equity (deficit)	$	789,270	$	354,227	$	608,159	$	(1,019,143	)	$	732,513

24

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Condensed Consolidating Balance Sheet as of March 31, 2014

(In thousands)

	Guarantor Subsidiaries		Non-Guarantor Subsidiaries		ExamWorks Group, Inc. (Parent Corporation)		Consolidation and Elimination Entries			Consolidated Totals
Assets
Current assets:
Cash and cash equivalents	$	1,198	$	7,306	$	—	$	—		$	8,504
Accounts receivable, net		55,230		131,815		—		—			187,045
Intercompany receivable		23,547		—		4,974		(28,521	)		—
Prepaid expenses		4,272		3,924		—		—			8,196
Deferred tax assets		1,821		—		—		(4	)		1,817
Other current assets		—		1,248		—		—			1,248
Total current assets		86,068		144,293		4,974		(28,525	)		206,810
Property, equipment and leasehold improvements, net		6,972		4,266		—		—			11,238
Investment in subsidiaries		215,238		—		518,166		(733,404	)		—
Intercompany notes receivable		174,877		—		174,877		(349,754	)		—
Goodwill		319,810		119,188		—		—			438,998
Intangible assets, net		63,463		62,140		—		—			125,603
Long-term accounts receivable, less current portion		—		41,228		—		—			41,228
Deferred tax assets, noncurrent		7,995		6,218		—		—			14,213
Deferred financing costs, net		7,772		78		—		—			7,850
Other assets		533		1,152		—		—			1,685
Total assets	$	882,728	$	378,563	$	698,017	$	(1,111,683	)	$	847,625
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	20,245	$	38,986	$	—	$	—		$	59,231
Intercompany payable		4,974		23,547		—		(28,521	)		—
Accrued expenses		14,507		27,329		—		—			41,836
Accrued interest expense		—		—		4,974		—			4,974
Deferred revenue		4		6,286		—		—			6,290
Deferred tax liability		—		4		—		(4	)		—
Current portion of contingent earnout obligation		—		6,362		—		—			6,362
Other current liabilities		2,779		5,135		—		—			7,914
Total current liabilities		42,509		107,649		4,974		(28,525	)		126,607
Senior unsecured notes payable		—		—		250,000		—			250,000
Senior secured revolving credit facility and working capital facilities		—		42,436		116,039		—			158,475
Intercompany notes payable		174,877		174,877		—		(349,754	)		—
Long-term contingent earnout obligation, less current portion		—		4,923		—		—			4,923
Other long-term liabilities		1,717		7,026		—		—			8,743
Total liabilities		219,103		336,911		371,013		(378,279	)		548,748
Commitments and contingencies
Stockholders’ equity (deficit)		663,625		41,652		327,004		(733,404	)		298,877
Total liabilities and stockholders' equity (deficit)	$	882,728	$	378,563	$	698,017	$	(1,111,683	)	$	847,625

25

Condensed Consolidating Statement of Cash Flows for the three months ended March 31, 2013

(In thousands)

	Guarantor Subsidiaries			Non-Guarantor Subsidiaries			ExamWorks Group, Inc. (Parent Corporation)			Consolidation and Elimination Entries		Consolidated Totals
Net cash provided by (used in) operating activities	$	(3,794	)	$	2,684		$	—		$	—	$	(1,110	)
Investing activities:
Purchases of equipment and leasehold improvements, net		(919	)		(851	)		—			—		(1,770	)
Net cash used in investing activities		(919	)		(851	)		—			—		(1,770	)
Financing activities:
Borrowings under senior secured revolving credit facility		—			—			10,000			—		10,000
Proceeds from the exercise of options and warrants		—			—			2,441			—		2,441
Excess tax benefit related to share-based compensation		—			—			407			—		407
Net repayment under working capital facilities		—			(800	)		—			—		(800	)
Payment of deferred financing costs		—			—			(52	)		—		(52	)
Repayment under senior secured revolving credit facility		—			—			(10,000	)		—		(10,000	)
Intercompany notes and investments and other		2,796			—			(2,796	)		—		—
Net cash provided by (used in) financing activities		2,796			(800	)		—			—		1,996
Exchange rate impact on cash and cash equivalents		—			(34	)		—			—		(34	)
Net increase (decrease) in cash and cash equivalents		(1,917	)		999			—			—		(918	)
Cash and cash equivalents, beginning of period		4,125			4,502			—			—		8,627
Cash and cash equivalents, end of period	$	2,208		$	5,501		$	—		$	—	$	7,709

26

EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Condensed Consolidating Statement of Cash Flows for the three months ended March 31, 2014

(In thousands)

	Guarantor Subsidiaries			Non-Guarantor Subsidiaries			ExamWorks Group, Inc. (Parent Corporation)			Consolidation and Elimination Entries		Consolidated Totals
Net cash provided by operating activities	$	1,369		$	1,836		$	—		$	—	$	3,205
Investing activities:
Cash paid for acquisitions, net		(87,615	)		(9,538	)		—			—		(97,153	)
Working capital and other settlements for acquisitions		—			(1,142	)		—			—		(1,142	)
Purchases of equipment and leasehold improvements, net		(402	)		(310	)		—			—		(712	)
Cash paid for foreign currency net investment hedge		(3,356	)		—			—			—		(3,356	)
Other		(839	)		—			—			—		(839	)
Net cash used in investing activities		(92,212	)		(10,990	)		—			—		(103,202	)
Financing activities:
Borrowings under senior secured revolving credit facility		—			—			121,012			—		121,012
Proceeds from the exercise of options and warrants		—			—			14,637			—		14,637
Excess tax benefit related to share-based compensation		—			—			6,190			—		6,190
Net borrowings under working capital facilities		—			4,123			—			—		4,123
Payment of deferred financing costs		—			—			(225	)		—		(225	)
Repayment of subordinated unsecured notes payable		(333	)		—			—			—		(333	)
Repayment under senior secured revolving credit facility		—			—			(50,000	)		—		(50,000	)
Intercompany notes and investments and other		91,614			—			(91,614	)		—		—
Net cash provided by financing activities		91,281			4,123			—			—		95,404
Exchange rate impact on cash and cash equivalents		—			268			—			—		268
Net increase (decrease) in cash and cash equivalents		438			(4,763	)		—			—		(4,325	)
Cash and cash equivalents, beginning of period		760			12,069			—			—		12,829
Cash and cash equivalents, end of period	$	1,198		$	7,306		$	—		$	—	$	8,504

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking Statements

Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to “ExamWorks”, “the Company,” “we,” “our,” and “us” mean ExamWorks Group, Inc. and its consolidated subsidiaries.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. 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, that involve risks and uncertainties. Forward-looking statements convey current expectations or forecasts of future events for ExamWorks. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking. You can identify forward-looking statements by terminology such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” “can,” “continue,” or “may,” or the negative of these terms or other similar expressions that convey uncertainty of future events or outcomes. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A. of this Quarterly Report on Form 10-Q and elsewhere in this report, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this report. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this report.

Our Business

We are a leading provider of IMEs, peer and bill reviews, Medicare compliance and other related services, which include legal support services, administrative support services and medical record retrieval services. We were incorporated as a Delaware corporation on April 27, 2007. From July 14, 2008 through the date of this filing, we have acquired 46 IME services businesses, including a leading provider of software solutions to the IME industry. We currently operate out of 63 service centers servicing all 50 U.S. states, Canada, the United Kingdom and Australia. We conduct our business through four geographic segments: the United States, Canada, the United Kingdom and Australia.

We provide our services to property and casualty insurance carriers, law firms, third-party claim administrators, government agencies, and state funds that use independent services to confirm the veracity of claims by sick or injured individuals for workers’ compensation, automotive, personal injury liability and disability insurance coverage. We help our clients manage costs and enhance their risk management processes by verifying the validity, nature, cause and extent of claims, identifying fraud and providing fast, efficient and quality IME services.

We provide our clients with the local presence, expertise and broad geographic coverage they increasingly require. Our size and geographic reach give our clients access to our medical panel of credentialed physicians and other medical providers and our proprietary information technology infrastructure that has been specifically designed to streamline the complex process of coordinating referrals, scheduling appointments, complying with regulations and client reporting. Our primary service is to provide IMEs that give our clients authoritative and accurate answers to questions regarding the nature and permanency of medical conditions or personal injury, their cause and appropriate treatment. Additionally, we provide peer and bill reviews, which consist of medical opinions by members of our medical panel without conducting physical exams, and the review of physician and hospital bills to examine medical care rendered and its conformity to accepted standards of care. With the acquisition of Gould & Lamb in February 2014, we significantly expanded our presence in the Medicare compliance services market. Prior to the MES acquisition in February 2011, we marketed our services primarily under the ExamWorks brand.  After the MES acquisition and subsequently with the Premex, MedHealth and Gould & Lamb acquisitions, we began to market our services under several brands, including but not limited to, ExamWorks, MES, Premex, MedHealth and Gould & Lamb. 

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

We operate in a highly fragmented industry and have completed numerous acquisitions. A key component of our business strategy is growth through acquisitions that expand our geographic coverage, provide new or complementary lines of business, expand our portfolio of services, and increase our market share. For example, our acquisition of MedHealth in August 2012 enabled us to enter the Australian market and, expand our range of clients and services, and increase our international market presence.  Another central feature of our business strategy is to grow our business organically by selling additional services to existing clients, cross-selling into additional insurance lines of business and expanding our geographic footprint with existing clients. For example, our acquisition of Gould & Lamb in February 2014 enabled us to expand our presence in the Medicare compliance market, and offer a wider range of services to new and existing clients. To date, we have completed the following 46 acquisitions:

Acquisition Date	Name
February 14, 2014	●	Assess Medical
February 3, 2014	●	Gould & Lamb
January 16, 2014	●	Newton Medical Group
January 13, 2014	●	Cheselden
December 20, 2013	●	Evaluation Resource Group
December 10, 2013	●	AGS Risk Limited
December 19, 2012	●	PMG
August 31, 2012	●	MedHealth
July 12, 2012	●	Makos
October 27, 2011	●	Bronshvag
October 24, 2011	●	Matrix Health Management
October 3, 2011	●	Capital Vocational Specialists
	●	North York Rehabilitation Centre
September 28, 2011	●	MLS Group of Companies
	●	Medicolegal Services
May 10, 2011	●	Premex Group
February 28, 2011	●	MES Group
February 18, 2011	●	National IME Centres
December 20, 2010	●	Royal Medical Consultants
October 1, 2010	●	BMEGateway
September 7, 2010	●	UK Independent Medical Services
September 1, 2010	●	Health Cost Management
August 6, 2010	●	Verity Medical
	●	Exigere
June 30, 2010	●	SOMA Medical Assessments
	●	Direct IME
	●	Network Medical Review
	●	Independent Medical Services
	●	401 Diagnostics
March 26, 2010	●	Metro Medical Services
March 15, 2010	●	American Medical Bill Review
	●	Medical Evaluations
December 31, 2009	●	Abeton
	●	Medical Assurance Group
	●	MedNet I.M.S.
	●	Qualmed
	●	IME Operations of Physicians' Practice
August 14, 2009	●	The Evaluation Group
August 4, 2009	●	Benchmark Medical Consultants
July 7, 2009	●	IME Software Solutions
May 21, 2009	●	Florida Medical Specialists
	●	Marquis Medical Administrators
April 17, 2009	●	Ricwel
July 14, 2008	●	CFO Medical Services
	●	Crossland Medical Review Services
	●	Southwest Medical

Sources of Revenues and Expenses

Revenues

We derive revenue primarily from fees charged for independent medical examinations, peer and bill reviews, Medicare compliance and other related services, which include litigation support services, administrative support services and medical record retrieval services. Revenues are recognized at the time services have been performed and, if applicable, at the time the report is shipped to the end user. We expect revenue to continue to increase through acquisition and organic growth.  Our revenue is derived from services performed in different geographic areas.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Certain agreements with customers in the U.K. include provisions whereby collection of the amounts billed are contingent on the favorable outcome of the claim.  We have deemed these provisions to preclude revenue recognition at the time of performance, as collectability is not reasonably assured and the cash payments are contingent, and are deferring these revenues, net of estimated costs, until the case has been settled and the contingency has been resolved and the cash has been collected.

Costs of revenues

Costs of revenues are comprised of fees paid to members of our medical panel; other direct costs including transcription, film and medical record obtainment and transportation; and other indirect costs including labor and overhead related to the generation of revenue. We expect these operationally driven costs to increase to support future revenue growth and as we continue to grow through acquisitions.

Selling, general and administrative expenses

Selling, general and administrative (“SGA”) expenses consist primarily of expenses for administrative, human resource related, corporate information technology support, legal (primarily from transaction costs related to acquisitions), finance and accounting personnel, professional fees (primarily from transaction costs related to acquisitions), insurance and other corporate expenses. We expect that SGA expenses will increase as we continue to add personnel to support the growth of our business and pursue acquisition growth. In addition, we may incur additional personnel expenses, professional service fees, including audit and legal, investor relations, costs of compliance with securities laws and regulations, and higher director and officer insurance costs related to operating as a public company. As a result, we expect that our SGA expenses will continue to increase in the future but decrease as a percentage of revenue over time as our revenue increases.

Depreciation and amortization

Depreciation and amortization (“D&A”) expense consists primarily of amortization of our finite lived intangible assets obtained through acquisitions completed to date and, to a lesser extent, depreciation of equipment and leasehold improvements. We expect that depreciation and amortization expense will decrease as a percentage of revenues as our finite lived intangible assets become fully amortized.

Results of Operations

The following table sets forth our consolidated statements of operations data for each of the periods indicated (in thousands except share and per share data):

	For the three months ended March 31,
	2013			2014
Revenues	$	148,703		$	173,028
Costs and expenses:
Costs of revenues		97,384			111,035
Selling, general and administrative expenses		33,257			40,528
Depreciation and amortization		16,326			14,342
Total costs and expenses		146,967			165,905
Income from operations		1,736			7,123
Interest and other expenses, net		7,530			7,577
Loss before income taxes		(5,794	)		(454	)
Benefit for income taxes		(2,202	)		(165	)
Net loss	$	(3,592	)	$	(289	)
Per share data
Net loss per share — basic and diluted	$	(0.10	)	$	(0.01	)
Weighted average number of common shares outstanding — basic and diluted		34,464,664			37,088,923
Other Financial Data:
Adjusted EBITDA(1)	$	23,005		$	28,010

(1) Adjusted EBITDA is a non-GAAP measure that is described and reconciled to net loss in the next section and is not a substitute for the GAAP equivalent.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Adjusted EBITDA

In connection with the ongoing operation of our business, our management regularly reviews Adjusted EBITDA, a non-GAAP financial measure, to assess our performance. We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, acquisition-related transaction costs, share-based compensation expenses, and other expenses. We believe that Adjusted EBITDA is an important measure of our operating performance because it allows management, lenders, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of changes to our capitalization structure, acquisition related costs, income tax status, and other items of a non-operational nature that affect comparability.

We believe that various forms of the Adjusted EBITDA metric are often used by analysts, investors and other interested parties to evaluate companies such as ours for the reasons discussed above. Additionally, Adjusted EBITDA is used to measure certain financial covenants in our credit facility. Adjusted EBITDA is also used for planning purposes and in presentations to our Board of Directors as well as in our incentive compensation programs for our employees.

Non-GAAP information should not be construed as an alternative to GAAP information, as the items excluded from the non-GAAP measures often have a material impact on our financial results. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results.

The following table presents a reconciliation to Adjusted EBITDA from net loss, the most comparable GAAP measure, for each of the periods indicated (in thousands):

	For the three months ended March 31,
	2013			2014
Reconciliation to Adjusted EBITDA:
Net loss	$	(3,592	)	$	(289	)
Share-based compensation expense (i)		4,131			5,353
Depreciation and amortization		16,326			14,342
Acquisition-related transaction costs		449			1,192
Other expenses (ii)		363			—
Interest and other expenses, net		7,530			7,577
Benefit for income taxes		(2,202	)		(165	)
Adjusted EBITDA	$	23,005		$	28,010

(i)  Share-based compensation expense of $728,000 and $694,000 is included in costs of revenues for the three months ended March 31, 2013 and 2014, respectively, and the remainder is included in SGA expenses.

(ii)  Other expenses consist principally of integration related expenses, such as facility termination, severance and relocation costs, associated with our acquisition strategy.

Comparison of the Three Months Ended March 31, 2014 and 2013

Revenues. Revenues were $173.0 million for the three months ended March 31, 2014 compared to $148.7 million for the three months ended March 31, 2014, an increase of $24.3 million, or 16%. Of the increase in revenues compared to 2013, $10.5 million, or 7%, was attributable to acquisitions completed in 2013 and 2014 and $13.8 million, or 9%, was due to growth in our existing businesses primarily due to increased IME service volumes.

● U.S. segment revenues were $106.0 million for the three months ended March 31, 2014 compared to $91.2 million for the three months ended March 31, 2013, an increase of $14.8 million, or 16%. Of the increase in U.S. revenues compared to 2013, $7.1 million, or 8%, was attributable to acquisitions completed in 2013 and 2014 and $7.7 million, or 8%, was due to growth in our existing businesses, equally due to increased IME service volumes and a favorable change in sales mix.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

● Canada segment revenues were $7.5 million for the three months ended March 31, 2014 compared to $7.4 million for the three months ended March 31, 2013, an increase of $86,000, or 1%. Excluding the impact of currency, the existing Canada businesses grew 11%. The constant currency growth in Canada revenues compared to 2013 was attributable to increased IME service volumes, offset by an unfavorable change in sales mix.

● U.K. segment revenues were $42.1 million for the three months ended March 31, 2014 compared to $33.8 million for the three months ended March 31, 2013, an increase of $8.3 million, or 24%. Of the increase in U.K. revenues compared to 2013, $1.8 million, or 5%, was attributable to acquisitions completed in 2013 and 2014 and $6.5 million, or 19%, was due to growth in our existing businesses. Excluding the impact of currency, the existing U.K. businesses grew 12%. The constant currency growth in the existing businesses was primarily due to increased IME service volumes, and to a lesser extent, a favorable change in sales mix.

● Australia segment revenues were $17.4 million for the three months ended March 31, 2014 compared to $16.3 million for the three months ended March 31, 2013, an increase of $1.1 million, or 7%. Of the increase in Australia revenues compared to 2013, $1.5 million, or 9%, was attributable to an acquisition completed in 2014, offset by a decline of $437,000, or 2%, in our existing businesses. Excluding the impact of currency, the existing Australian businesses grew 13%. The constant currency growth in the existing business was primarily due to increased IME service volumes, offset by an unfavorable change in sales mix.

Costs of revenues. Costs of revenues were $111.0 million for the three months ended March 31, 2014 compared to $97.4 million for the three months ended March 31, 2013, an increase of $13.6 million, or 14%. Of the increase in costs of revenues compared to 2013, $4.7 million, or 5%, was attributable to acquisitions completed in 2013 and 2014 and $8.9 million, or 9%, was related to our existing businesses primarily attributable to increased fees paid to members of our medical panel and, to a lesser extent, an increase in other direct costs. Costs of revenues as a percentage of revenues was 64.2% for the three months ended March 31, 2014, a 1.3% improvement over the 65.5% for the three months ended March 31, 2013.

Selling, general and administrative. SGA expenses $40.5 million for the three months ended March 31, 2014 compared to $33.3 million for the three months ended March 31, 2013, an increase of $7.2 million, or 22%. Of the increase in SGA expenses compared to 2013, $2.9 million, or 9%, was attributable to acquisitions completed in 2013 and 2014 and $4.3 million, or 13%, was related to our existing businesses primarily attributable to $2.8 million in increased personnel expenses, including share-based compensation, and the remainder resulting primarily from increases in acquisition related transaction costs and referral commissions.

Depreciation and amortization. D&A expenses were $14.3 million for the three months ended March 31, 2014 compared to $16.3 million for the three months ended March 31, 2013, a decrease of $2.0 million, or 12%. Of the decrease in D&A expenses compared to 2013, $4.1 million, or 25%, was attributable to our existing businesses as historic finite-lived intangible and tangible assets became fully amortized, offset by increases resulting from acquisitions completed in 2013 and 2014.

Interest and other expenses, net. Interest and other expenses, net were $7.6 million for the three months ended March 31, 2014 compared to $7.5 million for the three months ended March 31, 2013, an increase of $47,000. Interest and other expenses, net, increased primarily due to the termination of our interest rate swap in 2013, which reduced net interest expense in 2013 by $48,000, which was not realized in the comparable 2014 period.

Income tax benefit. Income tax benefit was $165,000 for the three months ended March 31, 2014 compared to $2.2 million for the three months ended March 31, 2013, a decreased benefit of $2.0 million, or 93%. Our effective income tax rate was 36.3% and 38.0% for the three months ended March 31, 2014 and 2013, respectively. The tax rates in the 2014 and 2013 periods were impacted primarily by foreign tax rate differentials and non-deductible items.

Net loss. For the foregoing reasons, net loss was $289,000 for the three months ended March 31, 2014 compared to $3.6 million for the three months ended March 31, 2013.

Liquidity and Capital Resources

Our principal capital requirements are to fund operations and acquisitions. We fund our capital needs from cash flow generated from operations, borrowings under the Senior Secured Revolving Credit Facility and working capital facilities.  We have also funded our acquisition program with equity issuances to sellers. We expect that cash and cash equivalents, availability under our existing credit and working capital facilities and cash flow from operations will be sufficient to support our operations, planned capital expenditures and acquisitions for at least the next 12 months.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Although we believe that our current cash and cash equivalents and funds available under our Senior Secured Revolving Credit Facility and working capital facilities will be sufficient to meet our working capital and acquisition plans for at least the next 12 months, we may need to raise additional funds through the issuance of equity or convertible debt securities or increase borrowings to fund acquisitions. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. Additional financing may not be available or, if available, such financing may not be obtained on terms favorable to our stockholders and us.

Credit Facilities

Credit Facility

In November 2010, in conjunction with the IPO, we repaid $102.4 million of outstanding debt and terminated a credit facility.  This facility was replaced with a new senior secured revolving credit facility with Bank of America, N.A., as administrative agent and the other lenders party thereto (the “Senior Secured Revolving Credit Facility”), which following the exercises of the accordion feature in February 2011 and, subsequently in May 2011, and as amended, provides for borrowings of up to $262.5 million. Up to $15.0 million of the Senior Secured Revolving Credit Facility may be in the form of letters of credit, and up to $15.0 million may be in the form of swingline loans. Loans under the Senior Secured Revolving Credit Facility, which terminates in July 2016, were used to fund our acquisition program (plans) and for general corporate purposes, including permitted acquisitions.

On May 6, 2011, we increased and fully exercised the accordion features of the Senior Secured Revolving Credit Facility.  The increase and exercise of the accordion feature increased the committed capacity of the credit facility by $55.0 million, from a total of $245.0 million to a total of $300.0 million.  Concurrently with the foregoing, we amended the Senior Secured Revolving Credit Facility to, among other things, (i) permit its maximum senior leverage ratio to temporarily increase from 3.0 to 1 to 3.50 to 1 for the quarters ending June 30 and September 30, 2011 and 3.25 to 1 for the quarter ending December 31, 2011 and 3.0 to 1 thereafter;  and (ii) permit the netting of unrestricted domestic cash in excess of $2.5 million but not exceeding $12.5 million against funded indebtedness for purposes of calculating leverage ratios. 

On July 7, 2011, we entered into a second amendment to our Senior Secured Revolving Credit Facility (the “Second Amendment”), which became effective simultaneously with the consummation of our private offering of $250.0 million aggregate principal senior notes. The Second Amendment amended the Senior Secured Revolving Credit Facility to, among other things, (i) extend the maturity date of the Senior Secured Revolving Credit Facility from November 2013 to July 2016; (ii) permit the issuance and sale of the Senior Unsecured Notes; (iii) replace the consolidated senior leverage ratio with a consolidated senior secured leverage ratio while permitting the maximum consolidated senior secured leverage ratio to be 3.00 to 1; (iv) permit our maximum consolidated leverage ratio to increase from 3.5 to 1 to 4.75 to 1; (v) reduce the borrowing cost; and (vi) allow us to complete acquisitions with a purchase price of up to $75.0 million (previously $50.0 million) without prior lender consent. The Second Amendment also reduced the aggregate revolving commitments under the Senior Secured Revolving Credit Facility by $37.5 million for a maximum commitment of $262.5 million, subject to our right to increase the aggregate revolving commitments by $37.5 million for a maximum commitment of $300.0 million, so long as we are not in default and we satisfy certain other customary conditions.

On February 27, 2012, we entered into a third amendment to our Senior Secured Revolving Credit Facility (the “Third Amendment”). The Third Amendment amended the Senior Secured Revolving Credit Facility as to the definitions of consolidated fixed charges and consolidated fixed charge coverage ratio and does not permit the consolidated fixed charge coverage ratio as of the end of any fiscal quarter to be less than (i) for an fiscal quarter ending during the period from December 31, 2011 to and including September 30, 2012, 1.75 to 1.00 and (ii) for an fiscal quarter ending thereafter, 2.00 to 1.00.

On August 27, 2012, we entered into a fourth amendment to our Senior Secured Revolving Credit Facility (the “Fourth Amendment”). The Fourth Amendment amended the Senior Secured Revolving Credit Facility to add the Australian dollar as an alternative currency and increased the alternative currency sublimit from USD $60.0 million to USD $100.0 million.

On June 27, 2013, we entered into a fifth amendment to our Senior Secured Revolving Credit Facility (the “Fifth Amendment”). Among other changes, the Fifth Amendment modifies the Credit Agreement to permit an implementation of an auto-borrow agreement between the swing line lender and us to facilitate cash management, incorporates new provisions related to swap regulations and updates various provisions related to the LIBOR rate, Foreign Account Tax Compliance Act and the International Financial Reporting Standards.

On February 3, 2014, we entered into a sixth amendment to our Senior Secured Revolving Credit Facility (the “Sixth Amendment”). The Sixth Amendment (i) allowed us to consummate the acquisition of Gould & Lamb, and (ii) allows us to acquire a target (a) with negative trailing twelve month adjusted EBITDA (as defined in the Senior Secured Revolving Credit Facility) if the purchase price of such acquisition is less than $5.0 million, (b) with trailing twelve month adjusted EBITDA (as defined in the Senior Secured Revolving Credit Facility) of less than or equal to $3,000,000 without delivering to the lenders a quality of earnings report regarding such target and (c) without delivering pro forma projections to our lenders if the purchase price of such acquisition is less than $75.0 million, in each case, without prior lender consent. We financed the $75.0 million purchase price for the Gould & Lamb acquisition in February 2014 with proceeds from the Senior Secured Revolving Credit Facility.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Our obligations under the Senior Secured Revolving Credit Facility are guaranteed by each of our existing and future direct and indirect domestic subsidiaries, and such obligations are secured by substantially all of the assets of us and our domestic subsidiaries; however, in the case of our foreign subsidiaries, no more than 65% of the capital stock of first-tier subsidiaries shall be pledged, and no assets will be encumbered by liens in favor of our lenders.

Borrowings under the Senior Secured Revolving Credit Facility, as amended, bear interest, at either (i) LIBOR plus the applicable margin or (ii) a base rate (equal to the highest of (a) the federal funds rate plus 0.5%, (b) the Bank of America prime rate and (c) LIBOR (using a one-month period) plus 1.0%), plus the applicable margin, as we elect. The applicable margin means a percentage per annum determined in accordance with the following table:

Pricing Tier	Consolidated Senior Secured Leverage Ratio	Commitment Fee/Unused Line Fee	Letter of Credit Fee	Eurocurrency Rate Loans	Base Rate Loans
1	≥ 2.50 to 1.0	0.50%	3.75%	3.75%	2.75%
2	≥ 2.00 to 1.0 but < 2.50 to 1.0	0.45%	3.50%	3.50%	2.50%
3	≥ 1.50 to 1.0 but < 2.00 to 1.0	0.40%	3.25%	3.25%	2.25%
4	≥ 1.00 to 1.0 but < 1.50 to 1.0	0.35%	3.00%	3.00%	2.00%
5	< 1.00 to 1.0	0.30%	2.75%	2.75%	1.75%

In the event of default, the outstanding indebtedness under the Senior Secured Revolving Credit Facility will bear interest at an additional 2%.

The Senior Secured Revolving Credit Facility contains restrictive covenants, including among other things financial covenants requiring us to not exceed a maximum consolidated senior secured leverage coverage ratio, a maximum total consolidated leverage ratio and to maintain a minimum consolidated fixed charge coverage ratio. The Senior Secured Revolving Credit Facility also restricts our ability (subject to certain exceptions) to incur indebtedness, prepay or amend other indebtedness, create liens, make certain fundamental changes including mergers or dissolutions, pay dividends and make other payments in respect of capital stock, make certain investments, sell assets, change our lines of business, enter into transactions with affiliates and other corporate actions.  As of March 31, 2014, the Company was in compliance with the financial covenants in the Senior Secured Revolving Credit Facility.

The Senior Secured Revolving Credit Facility also includes events of default typical of these types of credit facilities and transactions, including, but not limited to, the nonpayment of principal, interest, fees or other amounts owing under the new Senior Secured Revolving Credit Facility, the violation of covenants, the inaccuracy of representations and warranties, cross defaults, insolvency, certain ERISA events, material judgments and change of control. The occurrence of an event of default could result in the lenders not being required to lend any additional amounts and the acceleration of obligations under the new senior secured revolving credit facility, causing such obligations to be due and payable immediately, which could materially and adversely affect us.

As of March 31, 2014, we had $116.0 million outstanding under the Senior Secured Revolving Credit Facility, bearing interest at a rate of LIBOR plus 3.00%, resulting in $146.5 million of undrawn commitments.

Working Capital Facilities

On September 29, 2010, our indirect 100% owned subsidiary UKIM entered into a Sales Finance Agreement (the “UKIM SFA”) with Barclays Bank PLC (“Barclays”), pursuant to which Barclays provides UKIM a working capital facility of up to £5,000,000, subject to the terms and conditions of the UKIM SFA. The working capital facility bore a discount margin of 2.5% over Base Rate and served to finance UKIM’s unpaid account receivables.  The working capital facility had a minimum term of 36 months.

On June 28, 2013, UKIM entered into an amendment to extend the term of the existing UKIM SFA by 24 months from June 28, 2013, to amend the discount margin to 2.4% over Base Rate (0.5% rate on March 31, 2014) and to provide that payments by UKIM for certain non-working capital purposes are permitted under the UKIM SFA. The working capital facility operates on a co-terminus and cross-default basis with other facilities provided by Barclays and with the Senior Secured Revolving Credit Facility. As of March 31, 2014, UKIM had $7.9 million outstanding under the working capital facility, resulting in approximately $412,000 in availability.

On May 12, 2011, our indirect 100% owned subsidiary Premex entered into a Sales Finance Agreement (the “Premex SFA”) with Barclays, pursuant to which Barclays provides Premex a working capital facility of up to £26,500,000, subject to the terms and conditions of the Premex SFA. The working capital facility bears a discount margin of 2.4% over Base Rate (0.5% rate on March 31, 2014) and serves to finance Premex’s unpaid account receivables.  The working capital facility had a minimum term of 36 months.

On June 28, 2013, Premex entered into an amendment to extend the term of the existing Premex SFA by 24 months from June 28, 2013, and to provide that payments by Premex for certain non-working capital purposes are permitted under the Premex SFA. The working capital facility operates on a co-terminus and cross-default basis with other facilities provided by Barclays and with the Senior Secured Revolving Credit Facility. As of March 31, 2014, Premex had $34.5 million outstanding under the working capital facility, resulting in approximately $9.6 million in availability.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Senior Unsecured Notes

On July 19, 2011, we closed a private offering of $250.0 million in aggregate principal amount of 9.0% senior notes due 2019 (the “Initial Notes”). The Initial Notes were issued at a price of 100% of their principal amount. A portion of the gross proceeds of $250.0 million were used to repay borrowings outstanding under our Senior Secured Revolving Credit Facility and pay related fees and expenses, and the remainder was used for general corporate purposes, including acquisitions. In June 2012, in accordance with the registration rights granted to the original purchasers of the Initial Notes, we completed an exchange offer of the privately placed Initial Notes for new 9.0% Senior Notes due 2019 (the “Exchange Notes,” and together with the Initial Notes, the “Senior Unsecured Notes”) registered with the SEC with substantially identical terms to the Initial Notes. The Senior Unsecured Notes are senior obligations of ExamWorks and are guaranteed by ExamWorks’ existing and future U.S. subsidiaries (the “Guarantors”).

The Senior Unsecured Notes were issued under an Indenture, dated as of July 19, 2011 (the “Indenture”), among the Company, the Guarantors and U.S. Bank, National Association, as trustee (the “Trustee”).  The Senior Unsecured Notes are our general senior unsecured obligations, and rank equally with our existing and future senior unsecured obligations and senior to all of our further subordinated indebtedness. The Senior Unsecured Notes accrue interest at a rate of 9.0% per year, payable semi-annually in cash in arrears on January 15 and July 15 of each year, commencing January 15, 2012.

At any time on or after July 15, 2015, we may redeem some or all of the Senior Unsecured Notes at the redemption prices stated in the Indenture, plus accrued and unpaid interest to the date of redemption. Prior to July 15, 2014, we may redeem up to 35% of the aggregate principal amount of the Senior Unsecured Notes with net cash proceeds from certain equity offerings at a redemption price equal to 109% of the aggregate principal amount of the Senior Unsecured Notes, plus accrued and unpaid interest, if any, provided that at least 65% of the original aggregate principal amount of the Senior Unsecured Notes remains outstanding after redemption. Further, we may redeem some or all of the of the Senior Unsecured Notes at any time prior to July 15, 2015 at a redemption price equal to 100% of the principal amount of the Senior Unsecured Notes plus a make whole premium described in the Indenture, plus accrued and unpaid interest.

The Indenture includes covenants which, subject to certain exceptions, limit the ability of the Company and its restricted subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness, make certain types of restricted payments, incur liens on assets of the Company or the restricted subsidiaries, engage in asset sales and enter into transactions with affiliates. Upon a change of control (as defined in the Indenture), we may be required to make an offer to repurchase the Senior Unsecured Notes at 101% of their principal amount, plus accrued and unpaid interest. The Indenture also contains customary events of default.

Cash Flow Summary

Cash and cash equivalents were $8.5 million at March 31, 2014 as compared with $7.7 million at March 31, 2013.

Our cash flows from operating, investing and financing activities, as reported in our Consolidated Financial Statements included elsewhere in this report, are summarized as follows (in thousands): 

	For the three months ended March 31,
	2013			2014
Net cash provided by (used in) operating activities	$	(1,110	)	$	3,205
Net cash used in investing activities		(1,770	)		(103,202	)
Net cash provided by financing activities		1,996			95,404
Exchange rate impact on cash and cash equivalents		(34	)		268
Net decrease in cash and cash equivalents	$	(918	)	$	(4,325	)

Operating Activities. Net cash provided by operating activities was $3.2 million for the three months ended March 31, 2014 compared with net cash used in operating activities of $1.1 million for the three months ended March 31, 2013. Net cash provided by operating activities for 2014 consisted of net non-cash charges of $13.2 million (principally including $14.3 million in depreciation and amortization and $5.4 million in share-based compensation, offset by the excess tax benefit related to share-based compensation of $6.2 million) offset by our net loss of $289,000 and a net increase in working capital of approximately $9.7 million. The 2014 increase in working capital primarily consisted of increases in accounts receivable in our U.K. business, increased prepaid expenses and other current assets and decreased accrued interest expense offset by increased accounts payable and accrued expenses and deferred revenues and customer deposits. 

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Net cash used in operating activities for 2013 consisted of our net loss of $3.6 million and a net increase in working capital of approximately $13.0 million in 2013, which was offset by net non-cash charges of $15.5 million (principally including $16.3 million in depreciation and amortization and $4.1 million in share-based compensation, offset by a net decrease in deferred income taxes of $6.0 million). The 2013 increase in working capital primarily consisted of increases in accounts receivable in our U.K. business and decreased accrued interest expense offset by increased accounts payable and accrued expenses and deferred revenues and customer deposits. 

Investing Activities. Net cash used in investing activities was $103.2 million for the three months ended March 31, 2014 as compared to net cash used in investing activities of $1.8 million for the three months ended March 31, 2013.  The 2014 use of cash was due primarily to increased payments associated with acquisitions and related settlement activity and cash payments related to our foreign currency net investment hedges, offset by decreased purchases of fixed assets as compared to the comparable prior year period.

Financing Activities. Net cash provided by financing activities was $95.4 million for the three months ended March 31, 2014 as compared to net cash provided by financing activities of $2.0 million for the three months ended March 31, 2013.  The 2014 cash provided was primarily attributable to net borrowings under our Senior Secured Revolving Credit Facility of $71.0 million, the proceeds from the exercise of options and warrants of $14.6 million, excess tax benefit related to share-based compensation of $6.2 million and net borrowings under our U.K. facilities of $4.1 million.

The 2013 cash provided was primarily attributable to from the exercise of options and warrants of $2.4 million, offset by repayments under our working capital facilities of $800,000.

Contingencies

We record contingent liabilities resulting from asserted and unasserted claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. We currently are not involved in any material legal proceedings. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to any future proceedings. Contingent liabilities are described in Note 9 to the consolidated financial statements included elsewhere in this report.

Contractual Obligations and Commitments

Our contractual cash payment obligations as of March 31, 2014 are set forth below (in thousands):

					Payments due by year ending December 31,
	Total		Period from April 1, 2014 to December 31, 2014		2015		2016		2017		2018		Thereafter
Amounts outstanding under senior unsecured notes payable	$	250,000	$	—	$	—	$	—	$	—	$	—	$	250,000
Amounts outstanding under senior secured revolving credit facility		116,039		—		—		116,039		—		—		—
Operating leases		42,905		9,433		10,855		8,003		6,062		4,384		4,168
Amounts outstanding under working capital facilities		42,436		—		42,436		—		—		—		—
Totals	$	451,380	$	9,433	$	53,291	$	124,042	$	6,062	$	4,384	$	254,168

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

As of March 31, 2014, we leased our office spaces for our corporate locations in Atlanta, Georgia and New York, New York and also for our 62 service centers in various cities under non-cancelable lease agreements. We own an office facility in Warren, Michigan.

We have certain contractual obligations including various debt agreements with requirements to make interest payments. Amounts outstanding under the Senior Unsecured Notes are subject to a fixed interest rate of 9.0% and interest is expected to be $22.5 million annually with semi-annual payments that began in January 2012 and end in July 2019.  Additionally, certain amounts are subject to the level of borrowings in future periods and the interest rate for the applicable periods, and therefore the amounts of these payments are not determinable. Based upon amounts outstanding at March 31, 2014 and applicable interest rates currently ranging between 2.9% and 5.25%, interest amounts are expected to be approximately $3.8 million for the nine months ended December 31, 2014, approximately $4.5 million for the year ended December 31, 2015 and approximately $1.9 million for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

We engage in no activities, obligations or exposures associated with off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Overview and Definitions

We have identified the policies below as critical to our business operations and understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this management’s discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results. Our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include those related to accounts receivable reserves, goodwill and other intangible assets, share-based compensation other equity instruments, income and other taxes, derivative instruments and contingent obligations. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and the impact of changes in key assumptions may not be linear. Our management has reviewed the application of these policies with the audit committee of our Board of Directors. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this report. We believe that our most critical accounting policies and estimates relate to the following:

Revenue Recognition

Revenue related to IMEs, peer reviews, bill reviews, Medicare compliance services and administrative support services is recognized at the time services have been performed and the report is shipped to the end user. We believe that recognizing revenue at the time the report is shipped is appropriate because we meet the following four criteria in accordance with ASC 605-10-S25,  Revenue Recognition: Overall , (i) persuasive evidence that arrangement exists, (ii) shipment has occurred, (iii) the price is fixed and determinable and (iv) collectability is reasonably assured. We report revenues net of any sales, use and value added taxes.

Revenue related to other IME services, including litigation support services and medical record retrieval services, where no report is generated, is recognized at the time the service is performed. We believe that recognizing revenue at the time the service is performed is appropriate because we meet the following four criteria in accordance with ASC 605-10-S25, (i) persuasive evidence that arrangement exists, (ii) services have been rendered, (iii) the price is fixed and determinable and (iv) collectability is reasonably assured.

Certain agreements with customers in the U.K. include provisions whereby collection of the amounts billed are contingent on the favorable outcome of the claim.  We have deemed these provisions to preclude revenue recognition at the time of performance, as collectability is not reasonably assured and the cash payments are contingent, and are deferring these revenues, net of estimated costs, until the case has been settled the cash has been collected and the contingency has been resolved.  

Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Trade Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable balances consist of amounts owed to us for services provided in the normal course of business and are reported net of an allowance for doubtful accounts. Generally, no collateral is received from clients and the collectability of trade receivable balances is regularly evaluated based on a combination of factors such as client credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns and additions to the allowance are made based on these trends. Accounts are reviewed regularly for collectability and those deemed uncollectible are written off.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

We assume, that on average, all accounts receivable will be collected within one year and thus classify these as current assets; however, there are certain receivables, primarily in the U.K., that have aged longer than one year as of December 31, 2013 and March 31, 2014, and we have recorded an estimate for those receivables that will not be collected within one year as long-term in the Consolidated Balance Sheets contained elsewhere in this report.

Goodwill and Other Intangible Assets

Goodwill is an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Based on the provisions of ASC 350, Intangibles—Goodwill and Other (“ASC 350”), goodwill and indefinite lived intangible assets are tested for impairment annually or more frequently if impairment indicators arise. We evaluate the carrying value of goodwill during the fourth quarter of each fiscal year and between annual valuations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting units below their carrying amount. Such circumstances include: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, we compare the fair value of the reporting units to which the goodwill is assigned to the reporting units’ carrying amount, including goodwill. The fair value of the reporting units is estimated using primarily the income, or discounted cash flows, approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated in a hypothetical analysis to all of the other assets and liabilities, including any unrecognized intangible assets, of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

Intangible assets, including client relationships, trade names, covenants not to compete and technology that have finite lives are amortized over their useful lives.

We performed our annual impairment review of goodwill in October 2013 and reviewed subsequent events through March 31, 2014 and determined that the fair value of our reporting units substantially exceed their carrying value, and goodwill was not impaired as of year end. Further, we believe that there have been no facts or circumstances through the date of this filing that indicate an impairment of goodwill exists.

Deferred Income Taxes

We provide for deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. Our deferred and other tax balances are based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense and liabilities recognized by us also reflect our best estimates and assumptions regarding, among other things, the level of future taxable income, the effect of our various tax planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by us. We follow the provisions under FASB ASC Subtopic 740-10, Income Taxes - Overall ("ASC 740") that provides a recognition threshold and measurement criteria for the financial statement recognition of a tax benefit taken or expected to be taken in a tax return. Tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. Tax benefits that meet the more-likely-than-not recognition threshold are measured using a probability weighting of the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a particular tax benefit is a matter of judgment based on the individual facts and circumstances evaluated in light of all available evidence as of the balance sheet date.

We are no longer subject to U.S. federal income and state tax return examinations by tax authorities before 2009 and 2008, respectively. We operate in multiple taxing jurisdictions and face audits from various tax authorities. We remain subject to examination until the statute of limitations expires for the respective tax jurisdiction. We do not anticipate that the amount of the unrecognized benefit will significantly increase or decrease within the next twelve months. We record interest and penalties related to unrecognized tax benefits in income tax expense.

Undistributed earnings of our foreign subsidiaries are considered indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been recorded. Deferred taxes are provided for earnings outside the United States when those earnings are not considered indefinitely reinvested.

Share-Based Compensation and Other Equity Instruments

Our stock incentive plan provides for the granting of stock options and other share-based awards including warrants, restricted stock units (“RSUs”) and shares of restricted stock, in accordance with ASC Topic 718, Compensation—Stock Compensation  (“ASC 718”). ASC 718 requires measurement of compensation cost for all share-based awards at fair value on the grant date (or measurement date, if different) and recognition of compensation expense, net of forfeitures, over the requisite service period for awards expected to vest. We use the straight-line amortization method for recognizing share-based compensation expense.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

The fair value of stock option grants is determined using the Black-Scholes valuation model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in these stock options. Additionally, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because our stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in our opinion, the existing models may not provide a reliable single measure of the fair value of its share-based awards.

Our expected volatility assumptions are based upon the weighted average of our implied volatility, our mean reversion volatility and the median of our peer group’s most recent historical volatilities for 2014 stock option grants. Expected life assumptions are based upon the “simplified” method for those options issued since our IPO which were determined to be issued approximately at-the-money. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.

The fair value of shares of restricted stock and RSUs is determined based upon the market price of the underlying common stock as of the date of grant. Additional information regarding our valuation of common stock and equity awards is set forth in Note 2 to our consolidated financial statements included elsewhere in this report.

Accounting for Acquisitions

Accounting for acquisitions requires us to recognize and measure identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired entity. Our accounting for acquisitions involves significant judgments and estimates, including the fair value of certain forms of consideration such as our common stock, the fair value of acquired intangible assets, which involve projections of future revenues, cash flows and terminal value, which are then discounted at an estimated discount rate, the fair value of other acquired assets and assumed liabilities, including potential contingencies, and the useful lives of the assets. The projections are developed using internal forecasts, available industry and market data and estimates of long-term rates of growth for our business. The impact of prior or future acquisitions on our financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates. 

Financial Instruments

Our financial assets and (liabilities), which are measured at fair value on a recurring basis, are categorized using the fair value hierarchy at December 31, 2013 and March 31, 2014, and are as follows (in thousands):

	Level 1		Level 2			Level 3			Total
As of December 31, 2013
Financial instruments:
Contingent consideration	$	—	$	—		$	(4,834	)	$	(4,834	)
Foreign currency derivative asset		—		61			—			61
Foreign currency derivative liability		—		(683	)		—			(683	)
As of March 31, 2014
Financial instruments:
Contingent consideration	$	—	$	—		$	(11,285	)	$	(11,285	)
Foreign currency derivative liability		—		(1,000	)		—			(1,000	)

The contingent consideration relates to earnout provisions recorded in conjunction with certain acquisitions completed in 2009, 2010, 2013 and 2014 (see Note 3 to the Consolidated Financial Statements contained elsewhere in this report). Of the total increase in fair value of the contingent consideration of $6.5 million in 2014, $7.1 million was added as the result of a 2014 acquisition and, $83,000 was recorded in interest and other expenses, net in the Consolidated Statements of Comprehensive Loss due to changes in the fair value of the contingent consideration. These increases were offset by a purchase accounting adjustment to a 2013 acquisition in the amount of $373,000 for the change in the fair value of the contingent consideration, $333,000 settled as cash consideration to satisfy an installment related to a 2009 acquisition, and approximately $110,000 of the change in value relates to the release of a restriction associated with shares previously issued related to a 2009 acquisition.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

The fair value of the foreign currency derivative was determined using observable market inputs such as foreign currency exchange rates and considers our nonperformance risk and that of our counterparties.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”) which amends accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This new guidance requires entities, if certain criteria are met, to present an unrecognized tax benefit, or portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The provisions of ASU 2013-11 are effective for fiscal years and interim periods beginning after December 15, 2013 and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. We adopted these provisions effective January 1, 2014 and the adoption of these provisions did not have a material impact on our financial position, results of operations and cash flows.

There were various other accounting standards and interpretations issued during 2013 and 2014 we have not yet been required to adopt, none of which are expected to have a material impact on our financial position, results of operations and cash flows.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in interest rates as well as inflation. In the normal course of business, we are exposed to market risks, including changes in interest rates which affect our debt as well as cash flows. We may also face additional exchange rate risk in the future as we expand our business internationally.

Interest Rate Risk. As of March 31, 2014, we had cash and cash equivalents totaling approximately $8.5 million. These amounts were held for future acquisition and working capital purposes and were held in non-interest bearing accounts, of which $1.2 million were held in the U.S. Therefore, the U.S. amounts were insured under standard FDIC insurance coverage for deposit accounts up to $250,000, per depositor and account ownership category, at each separately insured depository institution.

Our outstanding debts of $42.4 million and $116.0 million at March 31, 2014 related to indebtedness under our working capital facilities and Senior Secured Revolving Credit Facility, respectively, contain floating interest rates. Thus, our interest rate is subject to market risk in the form of fluctuations in interest rates. The effect of a hypothetical one percentage point increase in our variable rate debt would result in an increase of approximately $1.6 million in our annual pre-tax net loss assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at March 31, 2014.

Foreign Exchange Risk. As of March 31, 2014, we have foreign currency risks related to our revenues and operating expenses denominated in currencies other than the U.S. dollar, namely, the Canadian dollar, the Pound Sterling and the Australian dollar. Our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. We do not currently hedge our exposure to foreign currency exchange rate fluctuations related to the Canadian dollar given that the net difference between foreign currency denominated revenue and expenses is immaterial. In the future, however, we may hedge such exposure to foreign currency exchange rate fluctuations in this currency.

Beginning in the second quarter of 2013, in order to protect against foreign currency exposure in our Australian operations, we entered into forward foreign currency contracts as a hedge of AUD $60.0 million of its net investment in Australia. Beginning in the third quarter of 2013, we also entered into forward foreign currency contracts as a hedge of £40.0 million of our net investment in the U.K. We settled certain of our hedge positions during the 2014 year and paid $3.4 million in net settlements. This amount was classified in accumulated other comprehensive loss in our Consolidated Balance Sheet (see Note 2), offsetting the currency translation adjustment of the related net investment that is also recorded in accumulated other comprehensive loss, and is reported net of the effect of income taxes.

As of December 31, 2013, we had a net liability of $622,000, with $683,000 recorded in other current liabilities and $61,000 recorded in other current assets with the offsetting net unrealized loss being recorded in accumulated other comprehensive loss in our Consolidated Balance Sheets associated with open forward foreign currency contracts which matured in January of 2014. As of March 31, 2014, we had a net liability of $1.0 million, all of which was recorded in other current liabilities with the offsetting net unrealized loss being recorded in accumulated other comprehensive loss in our Consolidated Balance Sheets associated with open forward foreign currency contracts which matured in April of 2014.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Item 4. Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the period ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is currently a party to various legal proceedings arising from the normal course of business activities. While the Company does not presently believe that the ultimate outcome of such proceedings will have a material impact on its business, operating results or financial condition, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, it is possible that such ruling could have a material adverse impact on our business, operating results or financial condition in the period in which the ruling occurs. Our current estimates of the potential impact from such legal proceedings could change in the future.

Item 1A. Risk Factors

There have been no material changes in the risks facing the Company as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Dividend Policy

Since the Company’s incorporation in 2007, the Company has not declared or paid any dividends on its common stock. The Company currently intends to retain all of the Company’s future earnings, if any, to finance the growth and development of the Company’s business and does not anticipate paying cash dividends for the foreseeable future. The Company’s existing credit facility and the Indenture restrict the Company’s ability to pay cash dividends, and any future financing agreements may restrict the Company from paying any type of dividends.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

Item 6. Exhibits

Exhibit Number	Title
2.1	Agreement and Plan of Merger, dated June 23, 2010, by and among ExamWorks Group, Inc., ExamWorks, Inc. and ExamWorks Merger Sub, Inc. (filed as Exhibit 2.1 to ExamWorks’ Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 13, 2010 and incorporated by reference herein).
2.2	Stock Purchase Agreement dated as of January 11, 2011, by and among ExamWorks Group, Inc., ExamWorks, Inc., MES Group, Inc., George C. Turek and the minority shareholders of MES Group, Inc. set forth therein (filed as Exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission on January 13, 2011 and incorporated by reference herein).
2.3*	Agreement for the sale and purchase of the entire issued share capital of Premex Group Limited dated May 10, 2011, among ExamWorks Group, Inc., ExamWorks UK Ltd. and the shareholders of Premex Group Limited set forth therein (filed as Exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission on May 13, 2011 and incorporated by reference herein).
2.4*	Tax Deed dated May 10, 2011, relating to the sale and purchase of the entire issued share capital of Premex Group between ExamWorks UK Ltd. And Covenantors set forth therein (filed as Exhibit 2.2 to Form 8-K filed with the Securities and Exchange Commission on May 13, 2011 and incorporated by reference herein).
2.5*	Sale and Purchase Deed relating to the sale and purchase of MedHealth Holdings Pty Limited dated August 31, 2012 among EW Pacific Pty Ltd, the shareholders of MedHealth Holdings Pty Limited set forth therein, and certain additional restrained parties set forth therein (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on August 31, 2012).
2.6*	Additional Sellers Deed relating to the sale and purchase of MedHealth Holdings Pty Limited dated August 31, 2012 among EW Pacific Pty Ltd and certain minority shareholders of MedHealth Holdings Pty Limited (incorporated by reference to Exhibit 2.2 to the Company’s Form 8-K filed on August 31, 2012).
2.7*	Stock Purchase Agreement dated as of February 3, 2014, by and among Exam Works, Inc., G&L Intermediate Holdings, Inc., G&L Investment Holdings, Inc., ABRY Partners V, L.P. and ABRY Senior Equity II, L.P (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on February 4, 2014).
3.1.1	Amended and Restated Certificate of Incorporation of ExamWorks (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 11, 2011).
3.1.2	Second Amended and Restated Bylaws of ExamWorks (incorporated by reference to Exhibit 3.1 to Form 8-K filed October 30, 2013).
4.1	Form of Common Stock Certificate of ExamWorks (filed as Exhibit 4.1 to Amendment No. 3 to ExamWorks’ Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 21, 2010 and incorporated by reference herein).
4.2	Indenture dated July 19, 2011, by and among ExamWorks Group, Inc., the Guarantors party thereto, and U.S. Bank, National Association, as Trustee (including Form of 9% Note Due 2019) (filed as Exhibit 4.1 to Form 8-K filed with the Securities and Exchange Commission on July 22, 2011 and incorporated by reference herein).
4.3	Registration Rights Agreement dated July 19, 2011 by and among ExamWorks Group, Inc., the Guarantors party thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several Initial Purchasers (filed as Exhibit 4.2 to Form 8-K filed with the Securities and Exchange Commission on July 22, 2011 and incorporated by reference herein).
4.4	Form of 9% Senior Unsecured Exchange Note Due 2019 and Form of Exchange Guarantee (filed as Exhibit 4.4 to From S-4 filed with the Securities and Exchange Commission on April 4, 2012 and incorporated by reference herein).
10.1	Sixth Amendment to Credit Agreement and Consent dated as of February 3, 2014, by and among ExamWorks Group, Inc., as Borrower, Bank of America, N.A., as Administrative Agent, and the Guarantors and Lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 4, 2014).
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

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EXAMWORKS GROUP, INC. AND SUBSIDIARIES

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

*   Schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K.  The Company agrees to furnish supplementary copies of any omitted schedules to the Securities and Exchange Commission upon request.

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.

	EXAMWORKS GROUP, INC.
Date: May 7, 2014	By:	/s/ J. Miguel Fernandez de Castro
		J. Miguel Fernandez de Castro
		Senior Executive Vice President and Chief
		Financial Officer (Principal Financial Officer)

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