UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): November 5, 2015 (August 20, 2015)
Premier, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 001-36092 | 35-2477140 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
13034 Ballantyne Corporate Place
Charlotte, NC 28277
(Address of Principal Executive Offices) (Zip Code)
(704) 357-0022
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Explanatory Note
On August 21, 2015, Premier, Inc. (the Company or Premier) filed a Current Report on Form 8-K (the Initial Filing) with the United States Securities and Exchange Commission to report the consummation of its acquisition of CECity.com, Inc. (CECity). This Current Report on Form 8-K/A amends and supplements Item 9.01 of the Initial Filing to present certain financial statements of CECity and to present certain unaudited pro forma condensed combined financial statements of the Company in connection with the acquisition of CECity.
Item 9.01 | Financial Statements and Exhibits. |
(a) Financial Statements of Business Acquired
The audited consolidated balance sheet of CECity as of December 31, 2014 and the related audited consolidated statements of loss, changes in stockholders deficit, and cash flows for the year ended December 31, 2014, together with the notes thereto and the auditors report thereon, are filed as Exhibit 99.1 hereto and are incorporated herein by reference.
The unaudited consolidated balance sheet of CECity as of June 30, 2015 and the related unaudited consolidated statements of income (loss), changes in stockholders equity (deficit), and cash flows for the six months ended June 30, 2015 and 2014, together with the notes thereto, are filed as Exhibit 99.2 hereto and are incorporated herein by reference.
(b) Pro Forma Financial Information
The unaudited pro forma condensed combined balance sheet of Premier as of June 30, 2015 and the unaudited pro forma condensed combined statement of income for the twelve months ended June 30, 2015 are filed as Exhibit 99.3 hereto and are incorporated herein by reference.
(d) Exhibits
Exhibit |
Description of Exhibit | |
23.1 | Consent of Ernst & Young LLP | |
99.1 | Audited consolidated balance sheet of CECity as of December 31, 2014 and the related audited consolidated statements of loss, changes in stockholders deficit, and cash flows for the year ended December 31, 2014 together with the notes thereto and the auditors report thereon. | |
99.2 | Unaudited consolidated balance sheet of CECity as of June 30, 2015 and the related unaudited consolidated statements of income (loss), changes in stockholders equity (deficit), and cash flows for the six months ended June 30, 2015 and 2014. | |
99.3 | Unaudited pro forma condensed combined balance sheet of Premier as of June 30, 2015 and the unaudited pro forma condensed combined statement of income for the twelve months ended June 30, 2015. |
SIGNATURE
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 hereunto duly authorized.
Premier, Inc. | ||||
By: | /s/ Susan D. DeVore | |||
Name: | Susan D. DeVore | |||
Title: | Chief Executive Officer and President |
Date: November 5, 2015
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration Statements:
(1) | Registration Statement (Form S-8 No. 333-191484) pertaining to the 2013 Equity Incentive Plan of Premier, Inc., |
(2) | Registration Statement (Form S-3 No. 333-199158) of Premier, Inc., |
(3) | Registration Statement (Form S-3/ASR No. 333-200136) of Premier, Inc., |
(4) | Registration Statement (Form S-8 No. 333-204628) pertaining to the 2015 Employee Stock Purchase Plan of Premier, Inc.; |
of our report dated November 5, 2015, with respect to the consolidated financial statements of CECity.com, Inc. for the year ended December 31, 2014, included in this Current Report on Form 8-K/A.
/s/ Ernst & Young LLP
Charlotte, North Carolina
November 5, 2015
Exhibit 99.1
CECITY.COM, INC.
Consolidated Financial Statements as of and for the year ending December 31, 2014
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS |
||||
Report of Independent Auditors |
2 | |||
Consolidated Balance Sheet |
3 | |||
Consolidated Statement of Loss |
4 | |||
Consolidated Statement of Changes in Stockholders Deficit |
5 | |||
Consolidated Statement of Cash Flows |
6 | |||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
7 17 |
1
Report of Independent Auditors
To the Board of Directors and Shareholders of Premier, Inc.
We have audited the accompanying consolidated financial statements of CECity.com, Inc., which comprise the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of loss, changes in stockholders deficit and cash flows for the year then ended, and the related notes to the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CECity.com, Inc. at December 31, 2014, and the consolidated results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Charlotte, North Carolina
November 5, 2015
2
CECITY.COM, INC
Consolidated Balance Sheet
December 31, 2014 | ||||
Assets |
||||
Cash |
$ | 1,713,977 | ||
Accounts receivable (net of $106,767 allowance for doubtful accounts) |
2,414,237 | |||
Employee advances |
2,412 | |||
Prepaid expenses |
259,982 | |||
|
|
|||
Total Current Assets |
4,390,608 | |||
|
|
|||
Property and equipment, net |
321,169 | |||
Intangible assets, net |
32,406 | |||
|
|
|||
Total Assets |
$ | 4,744,183 | ||
|
|
|||
Current Liabilities |
||||
Accounts payable |
$ | 671,420 | ||
Accrued expenses and other payables |
601,211 | |||
Shareholder revolving demand note |
1,195,000 | |||
Capital lease payable, current portion |
73,217 | |||
Deferred revenue, current portion |
5,410,789 | |||
|
|
|||
Total Current Liabilities |
7,951,637 | |||
|
|
|||
Capital lease payable, net of current portion |
45,039 | |||
Deferred revenue, net of current portion |
2,430,622 | |||
|
|
|||
Total Liabilities |
10,427,298 | |||
|
|
|||
Stockholders Deficit |
||||
Common stock; par value $0.01 per share; 100,000 shares authorized |
||||
Class A voting common stock, 100 shares issued and outstanding |
1 | |||
Class B nonvoting common stock, 9,900 shares issued and outstanding |
99 | |||
Paid in excess of par value |
100 | |||
Retained deficit |
(5,683,315 | ) | ||
|
|
|||
Total Stockholders Deficit |
(5,683,115 | ) | ||
|
|
|||
Total Liabilities and Stockholders Deficit |
$ | 4,744,183 | ||
|
|
See accompanying notes to the consolidated financial statements.
3
CECITY.COM, INC.
Consolidated Statement of Loss
For the Year Ended December 31, 2014 |
||||
Revenue |
$ | 14,041,174 | ||
Cost of revenue |
7,739,947 | |||
|
|
|||
Gross Profit |
6,301,227 | |||
|
|
|||
Operating Expenses: |
||||
Selling general and administrative |
7,051,138 | |||
Amortization of purchased intangible assets |
3,146 | |||
|
|
|||
Total Operating Expenses |
7,054,284 | |||
|
|
|||
Operating Loss |
(753,057 | ) | ||
|
|
|||
Other Income (Expense) |
||||
Loss from equity method investment |
(2,532 | ) | ||
Interest income |
5,732 | |||
Interest expense |
(6,218 | ) | ||
|
|
|||
Total Other Loss |
(3,018 | ) | ||
|
|
|||
Net Loss |
$ | (756,075 | ) | |
|
|
See accompanying notes to the consolidated financial statements.
4
CECITY.COM, INC.
Consolidated Statement of Changes in Stockholders Deficit
Class A Voting Common Stock |
Class B Nonvoting Common Stock |
Paid in Excess of Par Value |
Retained Deficit | Total | ||||||||||||||||
Balance at December 31, 2013 |
$ | 1 | $ | 99 | $ | 100 | $ | (4,927,240 | ) | $ | (4,927,040 | ) | ||||||||
Net loss |
| | | (756,075 | ) | (756,075 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at December 31, 2014 |
$ | 1 | $ | 99 | $ | 100 | $ | (5,683,315 | ) | $ | (5,683,115 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
5
CECITY.COM, INC.
Consolidated Statement of Cash Flows
For the Year Ended December 31, 2014 |
||||
Cash flows from operating activities |
||||
Net loss |
$ | (756,075 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||
Provision for doubtful accounts |
155,082 | |||
Depreciation |
103,966 | |||
Amortization of intangible assets |
3,146 | |||
Loss from equity method investment |
2,532 | |||
Write-off of intangible assets |
1,389 | |||
Changes in: |
||||
Receivables |
(208,448 | ) | ||
Prepaid expenses |
(97,710 | ) | ||
Accounts payable |
148,668 | |||
Accrued expenses and other payables |
168,805 | |||
Deferred revenue |
1,787,959 | |||
|
|
|||
Net cash provided by operating activities |
1,309,314 | |||
|
|
|||
Cash flows from investing activities: |
||||
Purchase of equipment |
(31,419 | ) | ||
Payments received on note receivable |
93,691 | |||
|
|
|||
Net cash provided by investing activities |
62,272 | |||
|
|
|||
Cash flows from financing activities: |
||||
Payments on capital lease payable |
(77,397 | ) | ||
|
|
|||
Net cash used in financing activities |
(77,397 | ) | ||
|
|
|||
Net increase in cash |
1,294,189 | |||
Cash balance, beginning of period |
419,788 | |||
|
|
|||
Cash balance, end of period |
$ | 1,713,977 | ||
|
|
|||
Supplemental Disclosure of Cash Flow Information: |
||||
Cash payments for Interest |
$ | 6,218 | ||
Supplemental Disclosure of Non-Cash Investing Activities |
||||
Equipment financed by capital lease |
$ | (63,246 | ) |
See accompanying notes to the consolidated financial statements.
6
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
Note 1 Summary of significant accounting policies
Description of Business
CECity.com, Inc. (CECity or the Corporation) is a leading enterprise healthcare technology Corporation that combines its (patent-pending) cloud-based clinical data registry, performance measurement, advanced data analytics, qualified value-based reporting and data-driven learning management platforms with a broad network of strategic partners for data, distribution, education and quality improvement content, to achieve meaningful clinical, quality and financial improvement outcomes for key stakeholders across the healthcare paradigm.
CECitys platforms, programs, and related applications are made accessible to clients and related healthcare professionals and patients either through (i) private branded web portals (ii) neutrally branded, multi-tenant portals or (iii) via a data feed to provide CECity information or content via third party platforms. CECity provides access to its cloud platforms, programs, and related applications via a Software as a Service (SaaS) model which provides recurring revenue to the Corporation.
CECity also provides professional services (e.g. implementation, content acquisition and conversion, and platform customizations) in support of customers related to the hosting and support of the CECity platforms. These services are offered on a time and materials basis.
CECity customers include stakeholders directly involved in the delivery of care (e.g. health systems, Integrated Delivery Networks, academic medical centers, Accountable Care Organizations (ACOs), pharmacies, individual healthcare professionals and provider networks); payers of healthcare delivery (e.g. national commercial health plans and Center for Medicare and Medicaid Services (CMS)); regulators (e.g. medical specialty boards); professional associations (e.g. medical specialty societies); and life science companies (e.g. pharmaceutical manufacturers).
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Accordingly, the financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the periods shown, including normal recurring adjustments. There are no elements of other comprehensive income.
Use of Estimates
The preparation of the Corporations financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates are evaluated on an ongoing basis, including allowances for doubtful accounts, useful lives of property and equipment, and other contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Cash
Cash includes cash only as the Corporation does not have liquid investments.
7
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
Accounts Receivable
Receivables consist of amounts due from services provided to customers. All accounts receivable are reported net of an allowance for doubtful accounts. Accounts receivable are trade accounts created in the normal course of the Corporations business. Receivables arising from sales are not collateralized.
The Corporation maintains an allowance for doubtful accounts. This allowance is an estimate and is regularly evaluated by the Corporation for adequacy by taking into consideration factors such as past experience, credit quality and age of receivable balance. Accounts deemed uncollectible are written off, net of actual recoveries.
An allowance for doubtful accounts is established for all or any portion of an account where collections are considered to be at risk. Reserves are evaluated no less than annually to determine their adequacy. The provision for doubtful accounts is recorded in selling, general and administrative expenses in the Statement of Loss.
Judgments relative to at-risk accounts include the customers current financial condition, historical business relationships with the Corporation and current projected economic conditions. Accounts receivable are written off when the account is deemed uncollectible.
The Corporation has one customer, Genentech, Inc., that accounted for 22% of accounts receivable, net at December 31, 2014.
Property and Equipment, Net
Property and equipment are recorded at cost. Significant replacements and betterments which substantially increase the useful lives of existing property and equipment are capitalized, while maintenance and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the net gain or loss is reflected in income. The Corporation reviews the carrying value of property and equipment when events and circumstances indicate that the carrying value of the asset subject to depreciation may not be recoverable.
Depreciation is calculated on a straight-line basis over the estimated useful life of the depreciable asset. Leasehold improvements are amortized over the lesser of the life of the related improvement or the term of the lease. The Corporation amortizes costs associated with annual software licenses over the term of the individual licensing agreements.
Intangible Assets, Net
Intangible assets consist of patents and trademarks. The Corporation reviews the carrying value of intangible assets when events and circumstances indicate that the carrying value of the intangible asset subject to amortization may not be recoverable.
Amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from acquisitions.
8
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
Investments
Investments held by the Corporation in businesses that are not publicly traded and for which the Corporation has the ability to exercise significant influence over operating and financial management are accounted for under the equity method. In accordance with the equity method, these investments are originally recorded at cost and are adjusted for the Corporations proportionate share of earnings, losses and distributions. These investments are classified as long-term and included in other assets when there is a carrying amount to be presented (refer to Note 5 Investment).
The Corporation assesses and records impairment losses when events and circumstances indicate the investments might be impaired. Income or loss from equity method investments and impairment losses are recorded in other income (expense) in the accompanying Consolidated Statement of Loss.
Revenue Recognition
Revenue consists of service revenue which mainly consists of SaaS revenue, PQRSwizard.com revenue, channel partner revenue and pharmaceutical development project revenue. The Corporation recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the fee is fixed or determinable, (iii) services have been rendered and payment has been contractually earned, and (iv) collectability is reasonably assured. Any amounts invoiced but not yet recognized as revenue are recorded as deferred revenue.
SaaS Revenue
SaaS revenue consists primarily of fees generated by the Corporations SaaS subscriptions for Pay for Value Reporting, Performance Management and Improvement and Professionalism. Subscriptions provide the customer with a right to access the Corporations proprietary hosted technology on a SaaS basis. Pricing varies by application and size of the customer. Subscriptions are generally three to five year agreements with automatic renewal clauses and annual price escalators that typically do not allow for early termination. These agreements do not allow for physical possession of the software. Subscription fees are typically billed on a monthly basis and revenue is recognized as a single deliverable on a straight-line basis over the remaining contractual period following implementation.
The professional services that are offered as additional projects for customers are recognized at the time performance of the service is completed.
PQRSwizard.com Revenue
CECity also generates revenue through PQRSwizard.com. PQRSwizard.com is a website used by physicians and healthcare professionals to report to CMS for their participation in the Physician Quality Reporting System (PQRS). Under the PQRS program, physicians and healthcare professionals must report certain costs and indicators in a specific format and groupings pursuant to CMS standards as a result of opting in for Medicare and Medicaid coverage for reimbursement based on the quality of services, rather than based on costs of providing the services. PQRSwizard.com provides a step-by-step approach to help customers meet all of the data, scoring and attestation requirements before information is submitted to CMS. For the 2014 calendar year the PQRS
9
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
reporting submission deadline was March 31, 2014. Revenue is recognized once CECity has submitted the data provided by physicians and healthcare professionals to CMS, which begins in the month prior to the submission deadline.
Channel Partner Revenue
CECity collaborates with various healthcare organizations (e.g. channel partners) to identify customers for both its self-service and contracted sales programs, mainly related to the PQRS program. Channel partners typically contract for an interface from their website to PQRSwizard.com. Through the channel partners website, the customer is able to submit data to CMS. CECity processes customer payments as an accommodation for the channel partners, and recognizes its contractual revenue as cash is received.
Pharmaceutical Development Project Revenue
CECity engages in multiple demonstration projects funded by pharmaceutical sponsors. The demonstration projects provide the sponsor with market research related to a specific topic. The contractual service agreements for the demonstration projects are structured such that CECity is the primary vendor contracted with the sponsor, while healthcare institution partners and academic medical research centers act as sub-contractors to CECity.
The Sponsor provides funding to CECity for the performance of the contract and in return obtains a market research report from CECity based on the results of the demonstration project. Funding is typically provided either at the beginning of the project when the contract is executed or throughout the project.
CECity is responsible for the overall project, and develops an application (project Apps) to collect the required data. CECity provides the implementation and hosting services related to the project Apps to the academic medical research centers, who use the project Apps to enter and store data related to the research topic. CECity retains all rights to the intellectual property related to the demonstration project. The healthcare institution partners are responsible for managing the academic medical research centers and provide the research services, content, and data. CECity and the healthcare institution partners may share rights to the data that is generated during the project.
Once the demonstration projects are completed, CECity provides the final market research report to the sponsor.
Revenue is recognized on a straight-line basis over the expected project term. The pharmaceutical demonstration project revenue is presented on a gross basis, with the fees paid to healthcare institution partners and academic medical research centers recognized as cost of revenue. This is because CECity is the primary obligor as the demonstration projects cannot exist without CECitys involvement and CECity is responsible for providing the final report to the sponsor.
Cost of Revenue and Operating Expenses
Cost of revenue:
Cost of revenue includes expenses related to employees (including compensation and benefits) and outside consultants who directly provide services related to revenue-generating activities, including advisory services to members and implementation services related to products. Cost of revenue also includes expenses related to hosting services, related data center capacity costs, third-party product license expenses and amortization of the cost of internal use software as well as customer acquisition costs, which are incremental and direct costs, and are expensed when incurred.
10
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
Operating expenses:
Selling, general and administrative expenses consist of expenses directly associated with selling and administrative employees and indirect costs associated with employees that primarily support revenue-generating activities (including compensation and benefits) and travel-related expenses, as well as occupancy and other indirect costs, insurance costs, advertising costs, professional fees, bad debt expense, research and development costs, and other general overhead expenses.
Income Taxes
The Corporation has elected to be taxed under the provisions of Subchapter S of both the Internal Revenue and Pennsylvania Codes. Under these provisions, the Corporation does not pay federal or Pennsylvania income taxes on its taxable income. Instead, its earnings and losses are included in the stockholders personal income tax returns and are taxed based on their personal tax strategies. Accordingly, no provision has been made for federal or Pennsylvania income taxes in the accompanying financial statements.
Fair Value of Financial Instruments
The fair value of a financial asset or liability is based on the assumptions that market participants would use in pricing the asset or liability. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. The Corporation follows a three-tiered fair value hierarchy when determining the inputs to valuation techniques. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels in order to maximize the use of observable inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are as follows:
Level 1: consists of financial instruments whose values are based on quoted market prices for identical financial instruments in an active market;
Level 2: consists of financial instruments whose values are determined using models or other valuation methodologies that utilize inputs that are observable either directly or indirectly, including (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) pricing models whose inputs are observable for substantially the full term of the financial instrument and (iv) pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the financial instrument;
Level 3: consists of financial instruments whose values are determined using pricing models that utilize significant inputs that are primarily unobservable, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The Corporations current assets and liabilities which are considered financial instruments includes cash, accounts receivable, employee advances, accounts payable, accrued expenses and other payables, and the shareholder revolving demand note. These assets and liabilities are reflected at fair value, or at carrying amounts that approximate fair value because of the short maturity of the instrument (refer to Note 8 Related Party Notes). The PQS revolving promissory note has a carrying value of zero (refer to Note 8 - Related Party Notes) and a fair value of $232,099 at December 31, 2014.
11
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the update is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, an amendment to ASU 2014-09, which deferred the effective date of the update. The update will be effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted only as of an annual reporting period beginning after December 15, 2016, including interim periods within that reporting period, or an annual reporting period beginning after December 15, 2016 and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which an entity first applies the guidance under ASU 2014-09. The update allows for either full retrospective or modified retrospective adoption. The Corporation is currently evaluating the transition method that will be elected as well as the impact of the adoption of the update on its consolidated financial statements and related disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which effectively eliminates the presumption that a general partner should consolidate a limited partnership, modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, and affects the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). In some cases, consolidation conclusions will change under the new guidance and, in other cases, a reporting entity will need to provide additional disclosures if an entity that currently is not considered a VIE, is considered a VIE under the new guidance. The new standard will be effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017, with early adoption permitted. The new standard allows for either full retrospective or modified retrospective adoption. The new standard will be effective for the Corporation for the fiscal year ending December 31, 2017. The Corporation is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
Note 2 Prepaid Expenses
As of December 31, 2014 prepaid expenses consisted of the following:
Insurance |
$ | 154,032 | ||
Licenses |
98,608 | |||
Other prepaids |
7,342 | |||
|
|
|||
Total prepaid expenses |
$ | 259,982 | ||
|
|
12
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
Note 3 Property and Equipment, net
As of December 31, 2014 property and equipment, net consisted of the following:
Useful Life | ||||||
Computer equipment |
5 - 7 | $ | 530,905 | |||
Furniture and fixtures |
5 - 7 | 254,496 | ||||
Leasehold improvements |
15 | 138,123 | ||||
Computer software |
3 | 37,073 | ||||
Accumulated depreciation |
(639,428 | ) | ||||
|
|
|||||
Total property and equipment, net |
$ | 321,169 | ||||
|
|
Depreciation expense related to property and equipment for the year ended December 31, 2014 was $103,966.
Note 4 Intangible Assets, net
As of December 31, 2014 intangible assets, net consisted of the following:
Estimated Useful Life | ||||||
Patents |
15 | $ | 23,817 | |||
Trademark |
15 | 23,368 | ||||
Accumulated amortization |
(14,779 | ) | ||||
|
|
|||||
Total intangible assets, net |
$ | 32,406 | ||||
|
|
Amortization expense for the year ended December 31, 2014 was $3,146.
The estimated aggregate amortization expense for each of the next five fiscal years and thereafter is as follows:
2015 |
$ | 3,146 | ||
2016 |
3,146 | |||
2017 |
3,146 | |||
2018 |
3,146 | |||
2019 and beyond |
19,822 | |||
|
|
|||
Total amortization expense |
$ | 32,406 | ||
|
|
Note 5 Investment
In 2013, the Corporation became a 49 percent owner in a joint venture, Pharmacy Quality Solutions, Inc. (PQS). The other 51 percent is owned by PQA, Inc., a nonprofit organization. CECity determined that PQS is a variable interest entity (VIE), as it does not have sufficient equity at risk to finance its activities without additional subordinated financial support. CECity does not consolidate PQS, as the Corporation is not the primary beneficiary. CECity does not have power to direct the most important activities of PQS that most significantly impact PQS economic performance, since CECity does not have control of the Board of Directors and cannot directly influence the daily activities performed by PQS management.
13
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
CECity accounts for its interests in PQS under the equity method of accounting. CECitys equity method investment in PQS was initially recognized on the balance sheet at the amount of the initial capital contribution. Subsequently, CECity recognizes its share of PQSs income or losses by adjusting the carrying amount of the equity investment and reporting the recognized earnings or losses in income. As of December 31, 2014, CECitys investment in PQS has a carrying value of zero (refer to Note 8 Related Party Notes).
Note 6 Accrued Expenses and Other Payables
As of December 31, 2014 accrued expenses and other payables consisted of the following:
Accrued insurance and other |
$ | 238,822 | ||
Profit sharing and 401(k) payable |
171,199 | |||
Accrued bonus |
153,950 | |||
Wages |
37,240 | |||
|
|
|||
Total accrued expenses and other payables |
$ | 601,211 | ||
|
|
Note 7 Leases
Capital leases
At December 31, 2014, the amounts of computer equipment and related accumulated amortization recorded under capital leases were as follows:
Lease on equipment |
$ | 238,763 | ||
Less accumulated amortization |
(77,103 | ) | ||
|
|
|||
Net amount |
$ | 161,660 | ||
|
|
The total amount leased is pledged as security under the provisions of the long-term lease agreements.
Minimum lease payments have been capitalized for the financial statements. The leases are non-cancelable and expire at various times through March 2017. The following is a schedule of future minimum lease payments and the present value of the net minimum lease payments as of December 31, 2014:
Total minimum lease payments |
$ | 118,256 | ||
Less: Amount representing interest |
(3,539 | ) | ||
|
|
|||
Present value of net minimum payments |
114,717 | |||
Less: Current portion |
(73,217 | ) | ||
|
|
|||
Net amount |
$ | 41,500 | ||
|
|
14
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
As of December 31, 2014, future minimum lease payments required under capital leases for the next five years are as follows:
2015 |
$ | 73,217 | ||
2016 |
39,317 | |||
2017 |
5,722 | |||
2018 |
| |||
2019 and beyond |
| |||
|
|
|||
Total |
$ | 118,256 | ||
|
|
Operating leases
The Corporation leases its office facilities under a five-year operating lease, which began September 1, 2005. The lease contained an option to renew for five additional years, which the Corporation exercised in June 2010, effective September 1, 2010. Under the agreement, current payment terms require monthly payments of $30,289, plus the Corporations proportionate share of operating expenses and real estate taxes.
The Corporation leased computer equipment under a three year operating lease, which began August 15, 2014. Under the agreement, current payment terms require monthly payments of $7,397.
As of December 31, 2014, future minimum lease payments required under operating leases for the next five years are as follows:
2015 |
$ | 331,078 | ||
2016 |
88,766 | |||
2017 |
66,225 | |||
2018 |
| |||
2019 and beyond |
| |||
|
|
|||
Total |
$ | 486,069 | ||
|
|
Note 8 Related Party Notes
Transactions with PQS
Through the normal course of business, CECity sells hosting services to PQS. Revenue generated from the sale of these services to PQS represent $949,853 for the year ended December 31. 2014. In addition, CECity has recognized $3,887 in interest income from the PQS Revolving Promissory Note for the year ended December 31, 2014. Receivables from PQS have a carrying value of zero and a fair value of $72,077 at December 31, 2014.
PQS Revolving Promissory Note
CECity provided PQS with a revolving promissory note in 2013. The note bears a maximum principal sum of $700,000, an interest rate of 1.01 percent per annum and matures on February 28, 2017. The note has a fair value of $232,099 at December 31, 2014. Advances under this note were in lieu of payment in full for outstanding invoices for services rendered by the Corporation for PQS.
15
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
Principal and interest payments are due to the Corporation on a semi-annual basis (February 28 and August 31) commencing February 28, 2014. Principal due is equal to the actual principal amount outstanding under this note divided by the number of remaining principal payment dates.
CECity has not committed to provide additional financial support to PQS, nor can the Corporation be assured that PQS will have imminent profitable returns. Therefore, CECity continues to recognize its share of additional subsequent losses, after the equity method investment is reduced to zero, to the extent that the 2013 advance of the Revolving Loan to PQS and any other receivables from PQS remain outstanding. As of December 31, 2014, both CECitys notes receivable from PQS and its other receivables from PQS have carrying values of zero as a result of CECitys share of PQSs losses exceeding the Corporations investment in PQS. PQS made certain payments on the note receivable which were offset by the write-down of the other receivables resulting in a net loss of $2,532 for the year ended December 31, 2014.
CECity has no additional exposure related to its investment in PQS and has no further obligations to fund PQS.
Shareholder Revolving Demand Note
The Corporation has available for its use a $2,000,000 revolving demand note from the majority shareholder that was entered into on January 13, 2012. The note does not bear interest and expires January 31, 2017. The note requires no security and does not contain debt covenants. As of December 31, 2014, the Corporation had $1,195,000 outstanding under the demand note classified as a current liability as it can be called at any time.
Note 9 Employee Benefit Plan
The Corporation has a 401(k) plan covering substantially all of its employees. To participate, employees must complete one-half year of service with the Corporation and have reached the age of 21. Eligible employees may elect to contribute any amount between a minimum of 1 percent to the maximum allowable under law.
The Corporation has elected not to match employee deferral contributions. Instead, the Board of Directors has elected to make non-elective contributions to all eligible participants equal to 3% of each participants pay. For the year ended December 31, 2014, the Corporation made 401(k) plan contributions in the amount of $161,835.
Note 10 Stockholders Equity
The Class A voting and Class B nonvoting shares of the Corporations common stock have equal income sharing and distribution rights.
Note 11 Subsequent Events
Renewal of office lease
The Corporation agreed to an amendment of its lease on January 19, 2015. Under the amendment the lease for its current facilities will be extended until August 31, 2020. The amendment also included an expansion to the Corporations facilities. Payment terms on the expanded facilities require no monthly payments until April 1, 2015.
16
CECITY.COM, INC.
Notes to the Consolidated Financial Statements
Sale of corporation
On August 20, 2015, Premier Healthcare Solutions, Inc. purchased 100% of the outstanding shares of capital stock of the Corporation for approximately $400 million, subject to post-closing adjustments based on CECitys actual (i) net working capital, (ii) cash and cash equivalents and (iii) indebtedness at closing.
All subsequent events have been evaluated through November 5, 2015, which is the date the financial statements were issued.
17
Exhibit 99.2
CECITY.COM, INC.
Consolidated Financial Statements as of June 30, 2015 and
December 31, 2014 (unaudited) and for the six months
ending June 30, 2015 and 2014 (unaudited)
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
||||
Consolidated Balance Sheets (Unaudited) |
2 | |||
Consolidated Statements of Income (Loss) (Unaudited) |
3 | |||
Consolidated Statements of Changes in Stockholders Equity (Deficit) (Unaudited) |
4 | |||
Consolidated Statements of Cash Flows (Unaudited) |
5 | |||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
6 - 11 |
1
CECITY.COM, INC.
Consolidated Balance Sheets
(unaudited)
June 30, 2015 | December 31, 2014 | |||||||
Assets |
||||||||
Cash |
$ | 3,752,452 | $ | 1,713,977 | ||||
Accounts receivable (net of $25,000 and $106,767 allowance for doubtful accounts, respectively) |
5,098,159 | 2,414,237 | ||||||
Employee advances |
11,814 | 2,412 | ||||||
Prepaid expenses |
237,774 | 259,982 | ||||||
Other assets |
68,844 | | ||||||
|
|
|
|
|||||
Total Current Assets |
9,169,043 | 4,390,608 | ||||||
|
|
|
|
|||||
Property and equipment, net |
574,643 | 321,169 | ||||||
Intangible assets, net |
43,210 | 32,406 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 9,786,896 | $ | 4,744,183 | ||||
|
|
|
|
|||||
Current Liabilities |
||||||||
Accounts payable |
$ | 663,383 | $ | 671,420 | ||||
Accrued expenses and other payables |
417,623 | 601,211 | ||||||
Shareholder revolving demand note |
1,045,000 | 1,195,000 | ||||||
Capital lease payable, current portion |
120,163 | 73,217 | ||||||
Deferred revenue, current portion |
4,392,620 | 5,410,789 | ||||||
|
|
|
|
|||||
Total Current Liabilities |
6,638,789 | 7,951,637 | ||||||
|
|
|
|
|||||
Capital lease payable, net of current portion |
119,150 | 45,039 | ||||||
Deferred revenue, net of current portion |
2,887,443 | 2,430,622 | ||||||
|
|
|
|
|||||
Total Liabilities |
9,645,382 | 10,427,298 | ||||||
|
|
|
|
|||||
Stockholders Equity (Deficit) |
||||||||
Common stock; par value $0.01 per share; 100,000 shares authorized |
||||||||
Class A voting common stock, 100 shares issued and outstanding |
1 | 1 | ||||||
Class B nonvoting common stock, 9,900 shares issued and outstanding |
99 | 99 | ||||||
Paid in excess of par value |
100 | 100 | ||||||
Retained earnings (deficit) |
141,314 | (5,683,315 | ) | |||||
|
|
|
|
|||||
Total Stockholders Equity (Deficit) |
141,514 | (5,583,115 | ) | |||||
|
|
|
|
|||||
Total Liabilities and Stockholders Equity (Deficit) |
$ | 9,786,896 | $ | 4,744,183 | ||||
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
2
CECITY.COM, INC.
Consolidated Statements of Income (Loss)
(unaudited)
For the six months ended | ||||||||
June 30, 2015 | June 30, 2014 | |||||||
Revenue |
$ | 14,803,702 | $ | 7,074,001 | ||||
Cost of revenue |
4,373,477 | 4,153,202 | ||||||
|
|
|
|
|||||
Gross Profit |
10,430,225 | 2,920,799 | ||||||
|
|
|
|
|||||
Operating Expenses: |
||||||||
Selling general and administrative |
4,017,158 | 3,391,671 | ||||||
Amortization of purchased intangible assets |
1,593 | 1,573 | ||||||
|
|
|
|
|||||
Total Operating Expenses |
4,018,751 | 3,393,244 | ||||||
|
|
|
|
|||||
Operating Income (Loss) |
6,411,474 | (472,445 | ) | |||||
|
|
|
|
|||||
Other Income (Expense) |
||||||||
Income from sale of tax credit |
192,870 | | ||||||
Income from equity method investment |
21,070 | 23,126 | ||||||
Interest income |
4,270 | 3,087 | ||||||
Interest expense |
(5,055 | ) | (3,695 | ) | ||||
|
|
|
|
|||||
Total Other Income |
213,155 | 22,518 | ||||||
|
|
|
|
|||||
Net Income (Loss) |
$ | 6,624,629 | $ | (449,927 | ) | |||
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
3
CECITY.COM, INC.
Consolidated Statements of Changes in Stockholders Equity (Deficit)
(unaudited)
Class A Voting Common Stock |
Class B Nonvoting Common Stock |
Paid in Excess of Par Value |
Retained Earnings (Deficit) |
Total | ||||||||||||||||
Balance at December 31, 2013 |
$ | 1 | $ | 99 | $ | 100 | $ | (4,927,240 | ) | $ | (4,927,040 | ) | ||||||||
Net loss |
| | | (756,075 | ) | (756,075 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at December 31, 2014 |
$ | 1 | $ | 99 | $ | 100 | $ | (5,683,315 | ) | $ | (5,683,115 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
| | | 6,624,629 | 6,624,629 | |||||||||||||||
Stockholders distributions |
| | | (800,000 | ) | (800,000 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at June 30, 2015 |
$ | 1 | $ | 99 | $ | 100 | $ | 141,314 | $ | 141,514 | ||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
4
CECITY.COM, INC.
Consolidated Statements of Cash Flows
(unaudited)
June 30, 2015 | June 30, 2014 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 6,624,629 | $ | (449,927 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for doubtful accounts |
1,653 | 54,415 | ||||||
Depreciation |
65,386 | 51,616 | ||||||
Amortization of intangible assets |
1,593 | 1,573 | ||||||
Income from equity method investment |
(21,070 | ) | (23,126 | ) | ||||
Changes in: |
||||||||
Receivables |
(2,720,327 | ) | 454,826 | |||||
Prepaid expenses |
22,208 | (46,205 | ) | |||||
Other assets |
(68,844 | ) | | |||||
Accounts payable |
(8,037 | ) | 14,257 | |||||
Accrued expenses and other payables |
(183,588 | ) | (44,355 | ) | ||||
Deferred revenue |
(561,348 | ) | 879,030 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
3,152,255 | 892,104 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchase of equipment |
(153,400 | ) | (23,532 | ) | ||||
Payments received on note receivable |
46,420 | 47,272 | ||||||
|
|
|
|
|||||
Net cash (used in) provided by investing activities |
(106,980 | ) | 23,740 | |||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Payments on capital lease payable |
(56,800 | ) | (38,379 | ) | ||||
Payments on shareholder loan |
(150,000 | ) | | |||||
Distributions to shareholders |
(800,000 | ) | | |||||
|
|
|
|
|||||
Net cash used in financing activities |
(1,006,800 | ) | (38,379 | ) | ||||
|
|
|
|
|||||
Net increase in cash |
2,038,475 | 877,465 | ||||||
Cash balance, beginning of period |
1,713,977 | 419,788 | ||||||
|
|
|
|
|||||
Cash balance, end of period |
$ | 3,752,452 | $ | 1,297,253 | ||||
|
|
|
|
|||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash payments for Interest |
$ | 5,055 | $ | 3,695 | ||||
Supplemental Disclosure of Non-Cash Investing Activities |
||||||||
Equipment financed by capital lease |
(177,857 | ) | (63,245 | ) |
See accompanying notes to the unaudited consolidated financial statements.
5
CECITY.COM, INC.
Notes to the Consolidated Financial Statements (unaudited)
Note 1 Business and Basis of Presentation
Description of Business
CECity.com, Inc. (CECity or the Corporation) is a leading enterprise healthcare technology Corporation that combines its (patent-pending) cloud-based clinical data registry, performance measurement, advanced data analytics, qualified value-based reporting and data-driven learning management platforms with a broad network of strategic partners for data, distribution, education and quality improvement content, to achieve meaningful clinical, quality and financial improvement outcomes for key stakeholders across the healthcare paradigm.
CECitys platforms, programs, and related applications are made accessible to clients and related healthcare professionals and patients either through (i) private branded web portals (ii) neutrally branded, multi-tenant portals or (iii) via a data feed to provide CECity information or content via third party platforms. CECity provides access to its cloud platforms, programs, and related applications via a Software as a Service (SaaS) model which provides recurring revenue to the Corporation.
CECity also provides professional services (e.g. implementation, content acquisition and conversion, and platform customizations) in support of customers related to the hosting and support of the CECity platforms. These services are offered on a time and materials basis.
CECity customers include stakeholders directly involved in the delivery of care (e.g. health systems, Integrated Delivery Networks, academic medical centers, Accountable Care Organizations (ACOs), pharmacies, individual healthcare professionals and provider networks); payers of healthcare delivery (e.g. national commercial health plans and Center for Medicare and Medicaid Services (CMS)); regulators (e.g. medical specialty boards); professional associations (e.g. medical specialty societies); and life science companies (e.g. pharmaceutical manufacturers).
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Accordingly, the financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of consolidated results of operations and consolidated financial condition for the periods shown, including normal recurring adjustments. There are no elements of other comprehensive income.
Use of Estimates
The preparation of the Corporations financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates are evaluated on an ongoing basis, including allowances for doubtful accounts, useful lives of property and equipment, and other contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
6
CECITY.COM, INC.
Notes to the Consolidated Financial Statements (unaudited)
Significant Accounting Policies
There have been no material changes to the Companys significant accounting policies as described in the December 31, 2014 Consolidated Financial Statements.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the update is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, an amendment to ASU 2014-09, which deferred the effective date of the update. The update will be effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted only as of an annual reporting period beginning after December 15, 2016, including interim periods within that reporting period, or an annual reporting period beginning after December 15, 2016 and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which an entity first applies the guidance under ASU 2014-09. Early adoption is not permitted. The update allows for either full retrospective or modified retrospective adoption. The Corporation is currently evaluating the transition method that will be elected as well as the impact of the adoption of the update on its consolidated financial statements and related disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which effectively eliminates the presumption that a general partner should consolidate a limited partnership, modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, and affects the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). In some cases, consolidation conclusions will change under the new guidance and, in other cases, a reporting entity will need to provide additional disclosures if an entity that currently is not considered a VIE, is considered a VIE under the new guidance. The new standard will be effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017, with early adoption permitted. The new standard allows for either full retrospective or modified retrospective adoption. The new standard will be effective for the Corporation for the fiscal year ending December 31, 2017. The Corporation is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
Note 2 Prepaid Expenses
Prepaid expenses consisted of the following:
June 30, 2015 | December 31, 2014 | |||||||
Insurance |
$ | 119,640 | $ | 154,032 | ||||
Licenses |
110,792 | 98,608 | ||||||
Other prepaids |
7,342 | 7,342 | ||||||
|
|
|
|
|||||
Total prepaid expenses |
$ | 237,774 | $ | 259,982 | ||||
|
|
|
|
7
CECITY.COM, INC.
Notes to the Consolidated Financial Statements (unaudited)
Note 3 Investment
Investment in Pharmacy Quality Solutions, Inc.
In 2013, the Corporation became a 49 percent owner in a joint venture, Pharmacy Quality Solutions, Inc. (PQS). The other 51 percent is owned by PQA, Inc., a nonprofit organization. CECity determined that PQS is a variable interest entity (VIE), as it does not have sufficient equity at risk to finance its activities without additional subordinated financial support. CECity does not consolidate PQS, as the Corporation is not the primary beneficiary. CECity does not have power to direct the most important activities of PQS that most significantly impact PQS economic performance, since CECity does not have control of the Board of Directors and cannot directly influence the daily activities performed by PQS management.
CECity accounts for its interests in PQS under the equity method of accounting. CECitys equity method investment in PQS was initially recognized on the balance sheet at the amount of the initial capital contribution. Subsequently, CECity recognizes its share of PQSs income or losses by adjusting the carrying amount of the equity investment and reporting the recognized earnings or losses in income. As of June 30, 2015, CECitys investment in PQS has a carrying value of zero (refer to Note 6 Related Party Notes).
Note 4 Accrued Expenses and Other Payables
Accrued expenses and other payables consisted of the following:
June 30, 2015 | December 31, 2014 | |||||||
Profit sharing and 401(k) payable |
$ | 252,529 | $ | 171,199 | ||||
Accrued bonus |
76,976 | 153,950 | ||||||
Wages |
52,000 | 37,240 | ||||||
Deferred rent |
32,697 | | ||||||
Accrued insurance and other |
3,421 | 238,822 | ||||||
|
|
|
|
|||||
Total accrued expenses and other payables |
$ | 417,623 | $ | 601,211 | ||||
|
|
|
|
8
CECITY.COM, INC.
Notes to the Consolidated Financial Statements (unaudited)
Note 5 Leases
Capital leases
The amounts of computer equipment and related accumulated amortization recorded under capital leases were as follows:
June 30, 2015 | December 31, 2014 | |||||||
Lease on equipment |
$ | 385,754 | $ | 238,763 | ||||
Less accumulated amortization |
(93,482 | ) | (77,103 | ) | ||||
|
|
|
|
|||||
Net amount |
$ | 292,272 | $ | 161,660 | ||||
|
|
|
|
The total amount leased is pledged as security under the provisions of the long-term lease agreements.
On January 23, 2015, the Corporation entered into a three year capital lease for computer equipment of $134,602. On March 23, 2015, the Corporation entered into a three year capital lease for computer equipment of $31,620.
Minimum lease payments have been capitalized for the financial statements. The leases are non-cancelable and expire at various times through March 2018. The following is a schedule of future minimum lease payments and the present value of the net minimum lease payments:
June 30, 2015 | December 31, 2014 | |||||||
Total minimum lease payments |
$ | 212,881 | $ | 118,256 | ||||
Less: Amount representing interest |
(20,731 | ) | (3,539 | ) | ||||
|
|
|
|
|||||
Present value of net minimum payments |
192,150 | 114,717 | ||||||
Less: Current portion |
(106,762 | ) | (73,217 | ) | ||||
|
|
|
|
|||||
Net amount |
$ | 85,388 | $ | 41,500 | ||||
|
|
|
|
Future minimum lease payments required under capital leases for the next five years for the twelve months ending June 30, are as follows:
2016 |
$ | 106,762 | ||
2017 |
66,167 | |||
2018 |
39,952 | |||
2019 |
| |||
2020 and beyond |
| |||
|
|
|||
Total |
$ | 212,881 | ||
|
|
Operating leases
The Corporation leases its office facilities under a five-year operating lease, which began September 1, 2005. The lease contained an option to renew for five additional years, which the Corporation exercised in June 2010, effective September 1, 2010. The Corporation agreed to an amendment of its lease on January 19, 2015. Under the amendment the lease for its current facilities will be extended until August 31, 2020. Monthly payments are required of $33,321 plus the Corporations proportionate share of operating expenses and real estate taxes. The amendment also included an expansion to the Corporations facilities. Under the agreement current payment terms on the expanded facilities require no monthly payments until April 1, 2015. As such, the total expense is recognized over the lease term resulting in a deferred rent balance as of June 30, 2015 of $32,697. Under the agreement, payment terms on the expansion includes monthly base rent of $9,600 plus the Corporations proportionate share of operating expenses and real estate taxes. The payment period starts April 1 to August 31, 2015 with 2 percent escalations going forward.
The Corporation leased computer equipment under a three year operating lease, which began August 15, 2014. Under the agreement, current payment terms require monthly payments of $7,397. On January 15, 2015, the Corporation amended the original lease by adding additional computer equipment with monthly payments of $6,588 for two years and eight months.
9
CECITY.COM, INC.
Notes to the Consolidated Financial Statements (unaudited)
Future minimum lease payments required under operating leases for the next five years for the twelve months ending June 30, are as follows:
2016 |
$ | 686,370 | ||
2017 |
696,457 | |||
2018 |
577,037 | |||
2019 |
533,838 | |||
2020 and beyond |
626,012 | |||
|
|
|||
Total |
$ | 3,119,714 | ||
|
|
Note 6 Related Party Notes
Transactions with PQS
Through the normal course of business, CECity sells hosting services to PQS. Revenue generated from the sale of these services to PQS represent $778,747 and $416,234 for the six months ended June 30, 2015 and June 30, 2014, respectively. In addition, CECity has recognized $1,159 and $2,473 in interest income from the PQS Revolving Promissory Note for the six months ended June 30, 2015 and 2014, respectively. Receivables from PQS have carrying values of zero and zero and fair values of $97,427 and $72,077 at June 30, 2015 and December 31, 2014, respectively.
PQS Revolving Promissory Note
CECity provided PQS with a revolving promissory note in 2013. The note bears a maximum principal sum of $700,000, an interest rate of 1.01 percent per annum and matures on February 28, 2017. The fair value of the note was $232,099 at December 31, 2014 and $185,679 at June 30, 2015. Advances under this note were in lieu of payment in full for outstanding invoices for services rendered by the Corporation for PQS.
Principal and interest payments are due to the Corporation on a semi-annual basis (February 28 and August 31) commencing February 28, 2014. Principal due is equal to the actual principal amount outstanding under this note divided by the number of remaining principal payment dates.
CECity has not committed to provide additional financial support to PQS, nor can the Corporation be assured that PQS will have imminent profitable returns. Therefore, CECity continues to recognize its share of additional subsequent losses, after the equity method investment is reduced to zero, to the extent that the 2013 advance of the Revolving Loan to PQS and any other receivables from PQS remain outstanding. As of June 30, 2015 and December 31, 2014, both CECitys notes receivable from PQS and its other receivables from PQS have a carrying value of zero as a result of CECitys share of PQSs losses exceeding the Corporations investment in PQS. PQS made certain payments on the note receivable which were offset by the write-down of the other receivables resulting in a net gain of $21,070 and $23,126 for the six months ended June 30, 2015 and June 30, 2014, respectively.
CECity has no additional exposure related to its investment in PQS and has no further obligations to fund PQS.
Shareholder Revolving Demand Note
The Corporation has available for its use a $2,000,000 revolving demand note from the majority shareholder that was entered into on January 13, 2012. The note does not bear interest and expires January 31, 2017. The note requires no security and does not contain debt covenants. The Corporation made a payment on the shareholder loan of $150,000 during the first six months of 2015. As of June 30, 2015, the Corporation had $1,045,000 outstanding under the demand note classified as a current liability as it can be called at any time.
10
CECITY.COM, INC.
Notes to the Consolidated Financial Statements (unaudited)
Note 7 Subsequent Events
Sale of corporation
On August 20, 2015, Premier Healthcare Solutions, Inc. purchased 100% of the outstanding shares of capital stock of the Corporation for approximately $400,000,000, subject to post-closing adjustments based on CECitys actual (i) net working capital, (ii) cash and cash equivalents and (iii) indebtedness at closing.
All subsequent events have been evaluated through November 5, 2015, which is the date the financial statements were issued.
11
Exhibit 99.3
Premier, Inc.
Unaudited Pro Forma Condensed Combined Financial Statements
On August 20, 2015 (the Acquisition Date), Premier, Inc. a Delaware corporation (Premier, the Company, or the Purchaser), completed the purchase of all of the outstanding shares of capital stock of CECity.com, Inc. (CECity), (the Acquisition).
Upon closing of the Acquisition, the Company paid $400.0 million in cash, less adjustments for expenses incurred in connection with the transaction. The Company funded the Acquisition with $250.0 million in cash and $150.0 million in borrowings under the Companys revolving credit facility. The Company did not issue common stock or offer contingent consideration as other forms of consideration in the purchase.
The unaudited condensed combined pro forma balance sheet as of June 30, 2015 is based on Premiers audited consolidated balance sheet and CECitys unaudited consolidated balance sheet as of June 30, 2015. The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition as if it had occurred on June 30, 2015, and includes all adjustments that give effect to events that are directly attributable to the Acquisition and are factually supportable. The unaudited pro forma condensed combined statement of income for the fiscal year ended June 30, 2015 gives effect to the Acquisition as if it had occurred on July 1, 2014 and includes all adjustments that give effect to events that are directly attributable to the Acquisition, are expected to have a continuing impact, and are factually supportable.
The unaudited pro forma adjustments have been made solely for informational purposes. The actual results reported by the combined company in periods following the Acquisition may differ significantly from that reflected in these unaudited pro forma condensed combined financial statements for a number of reasons, including but not limited to cost savings from operating efficiencies, synergies, and the impact of the incremental costs incurred in integrating the two companies. As a result, the unaudited pro forma condensed combined financial information is not intended to represent and does not purport to be indicative of what the combined companys financial condition or results of operations would have been had the Acquisition and its funding been completed on the applicable dates of this unaudited pro forma condensed combined financial information. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial condition and results of operations of the combined company. In the opinion of management, all necessary adjustments to the unaudited pro forma financial information have been made.
The unaudited pro forma condensed combined financial statements reflect certain adjustments that are directly attributable to the Acquisition and factually supportable and are based on managements estimates of the fair values of tangible and intangible assets acquired. The Company may make additional adjustments to the fair values, and these valuations could change significantly from those used to determine certain adjustments in the pro forma condensed combined financial statements.
These unaudited pro forma condensed combined financial statements should be read in conjunction with:
| Premiers historical consolidated financial statements and notes thereto contained in Premiers Annual Report on Form 10-K for the year ended June 30, 2015 filed with the SEC on August 26, 2015; |
| The historical audited financial statements of CECity for the year ended December 31, 2014 included herein as Exhibit 99.1, and |
| The historical unaudited interim financial statements of CECity for the six months ended June 30, 2015 and 2014 included herein as Exhibit 99.2. |
Premier, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2015
(In thousands)
Premier Historical |
CECity Historical |
Pro Forma Adjustments |
Ref. | Combined Pro Forma |
||||||||||||||
ASSETS | ||||||||||||||||||
Cash and cash equivalents |
$ | 146,522 | $ | 3,752 | $ | (470 | ) | B2 | $ | 3,752 | ||||||||
(146,052 | ) | A1 | ||||||||||||||||
Marketable securities |
240,667 | | (103,018 | ) | A1 | 137,649 | ||||||||||||
Accounts receivable, net |
99,120 | 5,098 | | 104,218 | ||||||||||||||
Inventory |
33,058 | | | 33,058 | ||||||||||||||
Due from related parties |
3,444 | | | 3,444 | ||||||||||||||
Deferred income taxes |
8,005 | | | 8,005 | ||||||||||||||
Prepaid expenses and other current assets |
22,353 | 319 | | 22,672 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
553,169 | 9,169 | (249,540 | ) | 312,798 | |||||||||||||
Marketable securities |
174,745 | | | 174,745 | ||||||||||||||
Property and equipment, net |
147,625 | 575 | (575 | ) | C1 | 148,230 | ||||||||||||
605 | C2 | |||||||||||||||||
Intangible assets, net |
38,669 | 43 | (43 | ) | D1 | 164,069 | ||||||||||||
125,400 | D2 | |||||||||||||||||
Goodwill |
215,645 | | 269,601 | F | 485,246 | |||||||||||||
Deferred income taxes |
345,718 | | | 345,718 | ||||||||||||||
Deferred compensation plan assets |
37,483 | | | 37,483 | ||||||||||||||
Other assets |
17,137 | | | 17,137 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 1,530,191 | $ | 9,787 | $ | 145,448 | $ | 1,685,426 | ||||||||||
|
|
|
|
|
|
|
|
Premier, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet (continued)
As of June 30, 2015
(In thousands)
Premier Historical |
CECity Historical |
Pro Forma Adjustments |
Ref. | Combined Pro Forma |
||||||||||||||
LIABILITIES, REDEEMABLE LIMITED PARTNERS CAPITAL AND STOCKHOLDERS DEFICIT |
||||||||||||||||||
Accounts payable |
$ | 37,634 | $ | 663 | $ | 512 | B3 | $ | 38,809 | |||||||||
Accrued expenses |
41,261 | 418 | | 41,679 | ||||||||||||||
Revenue share obligations |
59,259 | | | 59,259 | ||||||||||||||
Limited partners distribution payable |
22,432 | | | 22,432 | ||||||||||||||
Accrued compensation and benefits |
51,066 | | | 51,066 | ||||||||||||||
Deferred revenue |
39,824 | 7,280 | (7,280 | ) | E1 | 43,164 | ||||||||||||
3,340 | E2 | |||||||||||||||||
Current portion of tax receivable agreements |
11,123 | | | 11,123 | ||||||||||||||
Current portion of notes payable and line of credit |
2,256 | 1,045 | | 3,301 | ||||||||||||||
Other liabilities |
4,776 | 120 | | 4,896 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
269,631 | 9,526 | (3,428 | ) | $ | 275,729 | ||||||||||||
Notes payable and line of credit, less current portion |
15,679 | | 150,000 | A2 | 165,679 | |||||||||||||
Tax receivable agreements, less current portion |
224,754 | | | 224,754 | ||||||||||||||
Deferred compensation plan obligations |
37,483 | | | 37,483 | ||||||||||||||
Other liabilities |
20,914 | 119 | | 21,033 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
568,461 | 9,645 | 146,572 | 724,678 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Commitments and contingencies |
||||||||||||||||||
Redeemable limited partners capital |
4,079,832 | | | 4,079,832 | ||||||||||||||
Stockholders (deficit) equity |
||||||||||||||||||
Class A common stock, $0.01 par value |
377 | | | 377 | ||||||||||||||
Class B common stock, $0.000001 par value |
| | | | ||||||||||||||
(Accumulated deficit) retained earnings |
(3,118,474 | ) | 142 | (142 | ) | A3 | (3,119,456 | ) | ||||||||||
(470 | ) | B2 | ||||||||||||||||
(512 | ) | B3 | ||||||||||||||||
Accumulated other comprehensive loss |
(5 | ) | | | (5 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders (deficit) equity |
(3,118,102 | ) | 142 | (1,124 | ) | (3,119,084 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities, redeemable limited partners capital and stockholders (deficit) equity |
$ | 1,530,191 | $ | 9,787 | $ | 145,448 | $ | 1,685,426 | ||||||||||
|
|
|
|
|
|
|
|
See the accompanying notes to the unaudited pro forma condensed combined financial statements.
Premier, Inc.
Unaudited Pro Forma Condensed Combined Statement of Income
For the Twelve Months ended June 30, 2015
(In thousands, except per share amounts)
Premier Historical |
CECity Historical |
Pro Forma Adjustments |
Ref. | Combined Pro Forma |
||||||||||||||
Net revenue: |
||||||||||||||||||
Net administration fees |
$ | 457,020 | $ | | $ | | $ | 457,020 | ||||||||||
Other services and support |
270,748 | 21,771 | (5,239 | ) | E3 | 290,620 | ||||||||||||
3,340 | E4 | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Services |
727,768 | 21,771 | (1,899 | ) | 747,640 | |||||||||||||
Products |
279,261 | | | 279,261 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net revenue |
$ | 1,007,029 | $ | 21,771 | $ | (1,899 | ) | $ | 1,026,901 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Cost of revenue: |
||||||||||||||||||
Services |
143,290 | 7,960 | (59 | ) | C3 | 151,271 | ||||||||||||
80 | C4 | |||||||||||||||||
Products |
253,620 | | | 253,620 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Cost of revenue |
$ | 396,910 | $ | 7,960 | $ | 21 | $ | 404,891 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
$ | 610,119 | $ | 13,811 | $ | (1,920 | ) | $ | 622,010 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||||||
Selling, general and administrative |
$ | 332,004 | $ | 7,677 | $ | (796 | ) | B1 | $ | 338,906 | ||||||||
(58 | ) | C3 | ||||||||||||||||
79 | C4 | |||||||||||||||||
Research and development |
2,937 | | | 2,937 | ||||||||||||||
Amortization of purchased intangible assets |
9,136 | 3 | (3 | ) | D3 | 32,047 | ||||||||||||
22,911 | D4 | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
$ | 344,077 | $ | 7,680 | $ | 22,133 | $ | 373,890 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
$ | 266,042 | $ | 6,131 | $ | (24,053 | ) | $ | 248,120 | |||||||||
|
|
|
|
|
|
|
|
Premier, Inc.
Unaudited Pro Forma Condensed Combined Statement of Income (continued)
For the Twelve Months ended June 30, 2015
(In thousands, except per share amounts)
Premier Historical |
CECity Historical |
Pro Forma Adjustments |
Ref. | Combined Pro Forma |
||||||||||||||
Equity in net income of unconsolidated affiliates |
$ | 21,285 | $ | (5 | ) | $ | | $ | 21,280 | |||||||||
Interest and investment income (expense), net |
866 | (1 | ) | (217 | ) | G1 | (1,550 | ) | ||||||||||
(2,198 | ) | G2 | ||||||||||||||||
Loss on investment |
(1,000 | ) | | | (1,000 | ) | ||||||||||||
Loss on disposal of long-lived assets |
(15,243 | ) | | | (15,243 | ) | ||||||||||||
Other (expense) income, net |
(823 | ) | 193 | | (630 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Other income, net |
5,085 | 187 | (2,415 | ) | 2,857 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
$ | 271,127 | $ | 6,318 | $ | (26,468 | ) | $ | 250,977 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Income tax expense |
36,342 | | 847 | H | 37,189 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 234,785 | $ | 6,318 | $ | (27,315 | ) | $ | 213,788 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net income attributable to noncontrolling interest in S2S Global |
(1,836 | ) | | | (1,836 | ) | ||||||||||||
Net income attributable to noncontrolling interest in Premier LP |
(194,206 | ) | | 4,676 | I | (189,530 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net income attributable to noncontrolling interest |
$ | (196,042 | ) | $ | | $ | 4,676 | $ | (191,366 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||||
Adjustment of redeemable limited partners capital to redemption amount |
(904,035 | ) | | | (904,035 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income attributable to stockholders |
$ | (865,292 | ) | $ | 6,318 | $ | (22,639 | ) | $ | (881,613 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||||
Weighted average number of shares outstanding: |
||||||||||||||||||
Basic |
35,681 | 35,681 | ||||||||||||||||
Diluted |
35,681 | 35,681 | ||||||||||||||||
Net loss per common share: |
||||||||||||||||||
Basic |
$ | (24.25 | ) | $ | (24.71 | ) | ||||||||||||
Diluted |
$ | (24.25 | ) | $ | (24.71 | ) |
See the accompanying notes to the unaudited pro forma condensed combined financial statements.
Premier, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. | Description of the Transaction and Basis of Presentation |
Description of Transaction
On August 20, 2015 (the Acquisition Date), Premier, Inc. (Premier) acquired one hundred percent of the outstanding capital stock of CECity.com, Inc. (CECity) for approximately $400.0 million (subject to certain purchase price adjustments). Premier funded the Acquisition with cash on hand in the amount of $250.0 million and borrowings under its existing credit facility of $150.0 million.
The purchase price paid for CECity and the resulting goodwill reflects a premium relative to the value of identified assets due to the strategic importance of the transaction to Premier and because CECitys business model does not rely intensively on fixed assets.
Basis of Presentation
The unaudited pro forma condensed combined financial statements have been prepared based on Premiers and CECitys historical financial information, and were prepared in accordance with accounting principles generally accepted in the U.S.
The unaudited pro forma condensed combined balance sheet as of June 30, 2015 is based on Premiers audited consolidated balance sheet and CECitys unaudited consolidated balance sheet as of June 30, 2015. The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition as if it had occurred on June 30, 2015, and includes all adjustments that give effect to events that are directly attributable to the Acquisition and are factually supportable.
The unaudited pro forma condensed combined statement of income for the fiscal year ended June 30, 2015, gives effect to the acquisition as if it occurred on July 1, 2014 and includes all adjustments that give effect to events that are directly attributable to the Acquisition, are expected to have a continuing impact, and are factually supportable.
The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only and does not purport to represent what the actual consolidated financial position or results of operations of the combined entity would have been had the acquisition and its funding occurred on the dates assumed, nor are they indicative of the combined entitys future consolidated financial position or results of operations. The pro forma adjustments have been developed based on assumptions and estimates, including assumptions related to the preliminary allocation of the consideration paid to the assets acquired and liabilities assumed of CECity. The final allocation may differ from that reflected in the pro forma financial information after final valuation procedures are performed and amounts are finalized. In addition, the unaudited condensed combined pro forma financial information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition.
Premier accounts for business combinations in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) 805, Business Combinations. The unaudited pro forma condensed combined financial statements reflect certain adjustments based on managements estimates of the fair values of tangible and intangible assets acquired. Premier may make additional adjustments to the fair values, and these valuations could change significantly from those used to determine certain adjustments in the unaudited pro forma condensed combined financial statements.
2. | Purchase Price |
The following table summarizes the consideration paid for CECity and the amounts of the assets acquired and liabilities assumed as if the acquisition occurred on June 30, 2015 (in thousands):
Asset / Liability | Amount | |||
Current assets |
$ | 9,169 | ||
Property and equipment |
605 | |||
Intangible assets |
125,400 | |||
Current liabilities |
(2,246 | ) | ||
Long-term liabilities |
(119 | ) | ||
Deferred revenue |
(3,340 | ) | ||
|
|
|||
Total identifiable net assets |
$ | 129,469 | ||
|
|
|||
Goodwill |
$ | 269,601 | ||
|
|
|||
Total purchase price |
$ | 399,070 | ||
|
|
Fair value of total consideration transferred was $399.1 million. The Company funded the acquisition with $249.1 million in cash and $150.0 million in borrowings under the Companys revolving credit facility. As of the pro forma balance sheet date, Premiers cash balance was less than the consideration transferred. As such, an additional unaudited pro forma adjustment was recorded to reduce the short-term marketable securities balance by $103.0 million (representing the sale of marketable securities) which would have occurred had the transaction closed on June 30, 2015, in order to provide the Company with additional funds for the consideration transferred.
Included in the purchase price allocation are the fair value of acquired identified intangible assets of $125.4 million. The fair value of the acquired identifiable assets was primarily determined by applying the income approach, using several significant inputs for projected cash flows and a discount rate. The amortization of the identified intangible assets with a definite life is based on the discounted cash flows for each identified intangible asset. The preliminary fair value estimates and estimated useful lives are as follows (in thousands):
Identified Intangible Assets | Estimated Fair Value |
Estimated Useful Life Years | ||||
Developed technology |
$ | 88,000 | 5 | |||
Hosting agreement |
16,000 | 9 | ||||
Value-added referral partners |
2,000 | 9 | ||||
Online referral channel partners |
5,000 | 5 | ||||
Trade names and trademarks |
7,400 | 3 9 | ||||
Non-competition agreements |
4,000 | 5 | ||||
Proprietary data |
3,000 | 5 | ||||
|
|
|||||
Total |
$ | 125,400 | ||||
|
|
As a result of allocating the acquisition purchase price, Premier recorded an adjustment to recognize deferred revenue of $3.3 million, an amount representing an estimate of the fair value of the service obligation yet to be provided related to implementation, hosting and ecommerce services. The fair value of the deferred revenue balance is based on the estimated costs of fulfilling the obligation to be provided after the Acquisition Date. The estimated costs to fulfill the obligation are then increased based on the gross profit margin on these estimated costs generated by market participants. The deferred revenue fair value related to implementation services is amortized over two months, while the deferred revenue fair value balance related to hosting and ecommerce services is recognized over six months.
In connection with the Acquisition, Premier has incurred approximately $1.7 million in transaction costs through September 30, 2015, primarily related to legal, financial, and accounting professional advisors. Of this amount, costs of $1.2 million were incurred in fiscal year 2016, through September 30, 2015 and $524 thousand in fiscal year 2015. CECity also incurred $272 thousand in costs through June 30, 2015. These costs were expensed as incurred and are included in selling, general and administrative expense in the respective periods. The transaction costs incurred and expensed in the fiscal year ending June 30, 2015 are included as an adjustment in the pro forma financial statements as described in further detail in Note 3 below.
Goodwill is calculated as the difference between the fair value of the consideration transferred and the fair value of the assets acquired and liabilities assumed as if the acquisition occurred on June 30, 2015. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.
3. | Pro Forma Adjustments |
The pro forma adjustments are as follows:
A. | Consideration adjustments to: |
1. | Remove the cash consideration transferred excluding the $150 million in cash from the drawdown on the credit facility to the former owners of CECity. As of the pro forma balance sheet date, Premiers cash balance was less than the consideration transferred, as such, an additional pro forma adjustment was recorded to reduce the short-term marketable securities balance by $103.0 million (representing the sale of marketable securities) which would have occurred had the transaction closed on June 30, 2015, in order to provide the Company with additional funds for the consideration transferred. |
2. | Record the drawdown on the credit facility by Premier as part of the consideration transferred to the former owners of CECity (refer to Note 2). The additional borrowings is classified as a long-term liability, as Premier does not expect to make payments within the next 12 months. |
3. | Eliminate the historical equity and retained earnings of CECity. |
B. | Nonrecurring transaction cost adjustments to: |
1. | Eliminate the nonrecurring transaction costs incurred and recognized by Premier, of $0.5 million, and CECity, of $0.3 million, through June 30, 2015. |
2. | Record the transaction costs incurred subsequent to June 30, 2015 and paid for before the Acquisition Date. |
3. | Record the transaction costs incurred subsequent to June 30, 2015 and paid after the Acquisition Date. |
C. | Property, plant and equipment (PP&E) adjustments to: |
1. | Eliminate the book value of the PP&E. |
2. | Record the fair value of the PP&E as of the Acquisition Date. |
3. | Remove depreciation expense related to the book value of PP&E. |
4. | Record depreciation expense related to the fair value of the PP&E as of the Acquisition Date. The pro forma depreciation is calculated using the straight-line method based on the estimated useful lives of the acquired PP&E which ranges from three to 15 years. |
D. | Intangible assets and goodwill adjustments to: |
1. | Eliminate the intangible assets recorded on CECitys balance sheet as of June 30, 2015. |
2. | Recognize the acquired identifiable intangible assets at fair value (refer to Note 2). |
3. | Eliminate the historical amortization expense recognized by CECity. |
4. | Record amortization expense related to the identifiable intangible assets acquired (refer to Note 2). |
E. | Deferred revenue adjustments to: |
1. | Eliminate the book value of CECitys deferred revenue balance. |
2. | Record the fair value of deferred revenue acquired as of the Acquisition Date. |
3. | Eliminate the revenue recognized from the amortization of CECitys historical deferred revenue balance as of July 1, 2014. |
4. | Recognize the amortization of the deferred revenue balance (refer to Note 2). |
F. | Recognize the goodwill resulting from the allocation of the purchase price (refer to Note 2). |
G. | Interest income and interest expense adjustments to: |
1. | Eliminate the interest income earned and recognized during fiscal year 2015 on the marketable securities sold as part of the consideration transferred (see adjustment (A1) above). An average interest rate of 0.21 percent was used based on the actual interest earned during the period and the average marketable security balances from July 1, 2014 to June 30, 2015. |
2. | Record the additional interest expense incurred due to the draw down on Premiers credit facility (see adjustment (A2) above), which is expected to be outstanding for more than one year. The pro forma adjustment is estimated based on an interest rate of 1.465 percent, which is the interest rate as of September 30, 2015 for the three month Eurodollar Loans under the Credit Facility. |
H. | Recognize the amount of income taxes on the income earned as a result of the pro forma adjustments during the year ended June 30, 2015. The pro forma adjustment is based on Premiers effective tax rate of 13.4% for the year ended June 30, 2015 as disclosed in Premiers Annual Report on Form 10-K for the year ended June 30, 2015 filed with the SEC on August 26, 2015. |
I. | Record the income attributable to noncontrolling interest earned as a result of the pro forma adjustments during the year ended June 30, 2015. The pro forma adjustment is based on the 74% limited partners ownership percentage of Premier LP as of June 30, 2015 as disclosed in Premiers Annual Report on Form 10-K for the year ended June 30, 2015 filed with the SEC on August 26, 2015. |