Chairman John Johnston said, “We are delighted that London-based, blue-chip investors have enthusiastically supported our AIM IPO, recognizing the significant opportunity available to Constellation in consolidating a large and highly fragmented market. AIM provides the ideal platform for M&A and access to additional capital, along with greatly enhancing our commercial profile and standing. We look forward to using the many benefits of AIM to help us drive aggressive growth in the business.”
Overview of Listing on London's AIM
Houston,
Texas-based Constellation Healthcare Technologies, Inc. raised $15.1 million in
its recent IPO on the London Stock Exchange’s AIM.
Constellation is a healthcare services
organization providing outsourced revenue cycle management (RCM), practice
management (PM) and group purchasing service to hospital-based physicians and physician
groups across 18 U.S. states. The
Company was formed in June 2013 through acquisitions.
The core strategy has been to move back office
functions to India. The staff of a
typical medical billing company comprises many low skilled workers performing
predominately linear tasks, such as explanation of benefits, coding and
customer payment processing. In the
U.S., such businesses typically employ lowly qualified workers and experience
high levels of turnover, resulting in an annual cost of employment of
$50,000. In India, the Company is able
to employ college graduates who are more motivated and stay in their jobs
longer, resulting in an annual cost of employment of $15,000. This differential has allowed the Company to
significantly decrease operating expenses and increase EBITDA by 169% during
2013.
RCM services accounted for 63% of the Company’s
revenue in 2013 at a relatively high margin.
These services are provided to hospital-based physicians and physicians
who are part of a larger group practice; including, pathologists,
anesthesiologists and radiologists. Physicians
utilizing the Company’s RCM services avoid the infrastructure investment and
costs associated with maintaining their own back office operations, thereby
reducing administrative costs and increasing the amount and velocity of cash
flow.
The Company has developed a proprietary
business intelligence platform, Pegasus, which provides the Company and its RCM
clients with transparency relating to payment and operational performance. It consists of web-based dashboards,
interactive reports and data visualization tools for effective financial and
operational decision making. Pegasus
captures data from across the revenue cycle continuum and transforms that data
into actionable information. The Company
has access to a team of 35 technology specialists based in the U.S. and India who
developed, maintain and are extending Pegasus, providing the Company with a
significant point-of-differentiation versus the wide range of outsourced RCM
vendors.
PM services accounted for 34% of the Company’s
revenue in 2013 at a relatively low margin.
These are comprehensive business and practice management services provided
to primary care practices. The Company
also offers a group purchasing service that helps physicians lower vaccine
costs through volume pricing with pharmaceutical suppliers such as Sanofi
Pasteur and Merck. This service accounted
for 3% of the Company’s revenue in 2013 at a relatively high margin given its
pass-through nature.
The Company retains all 387 front office jobs in
the U.S.; including, management, customer service and client relationship management. Since the Company was formed in June 2013 through
acquisitions, 340 back office jobs have been moved to two third-party Indian
BPO providers, one of whom is exclusive.
The
Company plans to act as a consolidator of the U.S. third-party medical billing
market, which consists of over 2,000 companies, many of whom have revenues
below $20m and low profitability.
Targets will typically have at least 75 employees, the majority of whom
are based in the U.S, $5m - $15m of revenue, EBITDA margins of 5% - 25%,
positive cash flow, an organizational structure based on skill sets with
well-documented jobs and procedures and owners willing to accept a significant
proportion of deferred consideration contingent upon achieving performance
targets for at least two years post-acquisition.
Key Financial Metrics
(in USD
millions)
|
Y/E 12/31/11
|
Y/E 12/31/12
|
Y/E 12/31/13
|
Δ ’11 - ‘12
|
Δ ’12 - ‘13
|
Revenue
|
$55.2
|
$51.7
|
$52.0
|
-6%
|
+1%
|
Operating
Expenses
|
56.5
|
54.1
|
48.9
|
-4%
|
-10%
|
Interest
Expense
|
5.1
|
7.2
|
4.2
|
+41%
|
-42%
|
Other
Income
|
-
|
-
|
1.6
|
N/A
|
N/A
|
Income
Tax Expense
|
0.3
|
-
|
1.3
|
-100%
|
N/A
|
Net Loss
|
6.7
|
9.6
|
0.8
|
+43%
|
-92%
|
EBITDA
|
4.5
|
2.6
|
7.0
|
-42%
|
+169%
|
Total
Assets
|
42.7
|
40.0
|
56.7
|
-6%
|
+42%
|
Cash
|
0.2
|
0.8
|
4.0
|
+300%
|
+400%
|
The
Company’s revenue was entirely generated from the U.S. The largest customer only accounted for 6% of
revenue in 2013 and the top ten only accounted for 29%. Since the 2013 financials were more than nine
months old, unaudited, comparative, six-month stub period financials were
required. The aggressive drive for
operational efficiency continued into 2014 with the generation of $7.2 million
of EBITDA during the six months ended June 30, 2014, a 320% increase over the
same period during 2013.
Key Listing Metrics
·
$15.1m gross was raised, $12.9m net of offering
costs, intended to be used for:
o
Acquisitions and their integration
o
Organic growth
§ Investment
in sales and client relationship management strategies
§ Further
development of Pegasus business intelligence / analytical tools platform
o
Working capital
·
Offering costs amounted to 14.6% of the gross
capital raised
o
The offering was undertaken on a ‘best efforts’
basis, as opposed to being underwritten
§ Corporate
finance fee of £200k ($314k)
§ Broker
and sub-placing agent commission of £304k ($477k)
o
£251k ($394k) of which was settled in shares
·
U.S. placement agent fee of $400k
·
Opening market capitalization of $117.9m
·
Dilution to existing shareholders of 12.8%
·
Free float of 13.1%
·
Trailing pre-money revenue multiple of 2.0
·
Trailing pre-money EBITDA multiple of 14.7
·
Trailing pre-money P/E ratio N/A
The Company had 47.3 million shares outstanding prior to the AIM IPO, issued 7.1 million new shares for cash in the IPO, issued 1.0 million shares to an investment entity controlled by the Founder & CEO (see footnote 2 below) and issued 0.2 million shares to the AIM Broker and Sub-Placing Agent, leaving the Company with 55.6 million shares outstanding. The table below details those who held 3% or more of the Company prior to and after the IPO, along with other holdings that are of interest.
Shareholder
|
Pre-IPO
%
|
Post-IPO
%
|
Founder
& CEO
|
80.00
|
68.08[1]
|
Third-Party
Investment Entity
|
20.00
|
17.021
|
Global
Institution (Various Funds)
|
-
|
5.33
|
Investment
Entity Controlled by the Founder & CEO
|
-
|
|
AIM
Broker and Sub-Placing Agent
|
-
|
0.33[3]
|
Directors
|
-
|
0.081
|
Other
New U.K. and U.S. Investors
|
-
|
7.46
|
Totals
|
100.00
|
100.00
|
As a
result of the AIM IPO, and considering the fact that $17 million remains undrawn
on the Company’s $40 million Credit Facility, the Company now has an adequate
amount of capital to execute on its strategic acquisition and integration
campaign. The broadening of the
shareholder base as a result of the IPO, should allow the Company to access
further capital, if required, to support additional acquisitions and their
integration over the medium-to-longer-term.
In addition, the Company believes that its IPO and public market status
on AIM will enhance its commercial profile and standing and generally assist
with the growth of the business. Finally,
the Company intends to adopt a Share Option plan so as to enhance its ability to
attract, recruit and retain management, employees and consultants with
equity-based incentives.
Accounting Considerations
Since
the Company is incorporated in Delaware, and did not re-domicile into a
European Economic Area country, which includes the U.K., they chose to report
using U.S. GAAP. Since all of the
Company’s revenues are earned in U.S. Dollars, the U.S. Dollar is the
functional currency and was also chosen as the reporting currency.
The
U.K. Member Firm of an international accountancy network acted as Reporting
Accountant and the U.S. Member Firms of another international accountancy
network audited the 2011 - 2013 financials.
Since the 2013 financials were more than nine months old, unaudited,
comparative, six-month stub period financials were required.
An
unaudited pro forma statement of net assets is never required in connection
with an AIM IPO and was not provided in this instance since the effect of the
net proceeds from the IPO on the net assets of the Company is obvious.
Board of Directors and
Corporate Governance
The Board
of Directors consists of two Executive Directors (the Founder & CEO and the
CFO), an independent Non-Executive Chairman (NEC) and two independent Non-Executive
Directors (NEDs); all with solid resumes and a good blend of complementary
experiences and skill sets.
Companies listed on AIM are not required to comply with the U.K. Corporate Governance
Code published by the Financial Reporting Council, which is mandatory for companies
listed on the Main Market of the London Stock Exchange. AIM listed companies typically comply with,
and the Company intends, in so far as is practicable given its size, nature and
stage-of-development, the main provisions of the Quoted Companies Alliance
Guidelines. The Company also intends to
comply with the Policy and Voting Guidelines for AIM Companies issued by the
National Association of Pension Funds. The
overarching principle of corporate governance on AIM is to ensure that companies
are managed in an efficient, effective and entrepreneurial manner for the
benefit of all shareholders over the long term.
Since
the Company’s Founder & CEO remains a substantial shareholder, he entered
into a Relationship Agreement with the Company.
The Relationship Agreement regulates certain aspects of the continuing
relationship between the parties so as to enable the Company to conduct its
business affairs independently from the Founder & CEO and at arm’s-length and
on normal commercial terms. In addition,
and more specifically, the Relationship Agreement prevents the Founder &
CEO from taking any action that would cause non-compliance with the AIM Rules,
proposing or procuring the proposal of a shareholder resolution intended to
circumvent the pre-emption rights of shareholders (see the Legal Considerations
section on the next page) or voting in favor of the cancellation of the
Company’s shares to admission and trading on AIM. There is also a requirement that independent
Directors constitute at least 50% of the Board and any dealings or disputes
between the Founder & CEO and the Company be handled on behalf of the
Company by a committee comprising only the independent Directors. Finally, the Relationship Agreement includes
standard non-compete clauses that extend for one year following termination of
the Relationship Agreement. The Relationship
Agreement terminates if the Founder & CEO’s shareholding drops below 15%, another
party holds 30% or more of the Company or the Company’s shares are no longer
listed on AIM or the Main Market.
The
Company has established an Audit Committee and a Compensation Committee with
the Board retaining responsibility for nominations to the Board at this early stage
of the Company’s development. The Audit
Committee is chaired by one of the NEDs with the other NED and the NEC serving
as the other members and will meet at least two times a year. The CFO will, where appropriate, be invited
to attend meetings and the Company’s auditors will be regularly invited to
attend meetings, including at the planning and reporting stages of the
audit. The Compensation Committee is
chaired by the NEC with both NEDs serving as the other members and will meet as
and when required.
Since
the Company is not incorporated in the U.K. or one of its Crown Dependencies, the
Channel Islands and the Isle of Man, but rather in Delaware, and its ‘place of
central management and control’ is also outside these jurisdictions, the three
most important elements of English corporate law do not automatically apply. As is customary, the Company amended its constitutional
documents for these three main differences as outlined below.
1. Pre-emption
rights (i.e. anti-dilution) – Shareholders may participate in, or the Company
has to obtain approval from at least 75% of them for, the issuance of shares
for cash of more than 10% of the then outstanding shares during any 12-month
period.[4]
2. Notifiable
Interests – Shareholders are required to notify the Company of, and the Company
is required to publicly announce, holdings at or above the 3% level and
whenever a full percentage point is breached in either direction.
3. Takeovers
(i.e. mandatory offer) – If any party, or parties acting in concert, accumulates
a holding of 30% or more, they must make a cash offer to the other shareholders
at the highest price they paid for the Company’s shares during the last 12
months.
The
Company relied on the safe harbor afforded by Regulation S of the U.S.
Securities Act of 1933 so as to not have to file a registration statement with
the U.S. SEC. Shares subject to Reg. S
(generally, those issued in the IPO for a period of one year, issued within one
year prior to the AIM IPO and/or held by affiliates) are not currently eligible for
dematerialization and, as such, are held and traded in certificated form.
Since
the Company did not re-domicile into the U.K. or one of its Crown Dependencies,
the Channel Islands and the Isle of Man, its shares that are not subject to
Reg. S are not eligible for direct trading within CREST; the most common
electronic system for the holding and transfer of shares in the U.K., however,
a Depository could be appointed and Depository Interests (DIs), which represent
an entitlement to shares, could be created, allowing for the immediate trading
of these non-Reg. S DIs within CREST.
Article
3(2) of the EU Regulation on Central Securities Depositories, which was
published in August 2014, will require that all AIM listed shares be
dematerialized and eligible for electronic trading and settlement. The London Stock Exchange is working with the
companies who own and manage CREST on the technology solution necessary to accommodate
‘restricted securities’, implementation of which is scheduled for June 2015. At or around that time, the Company will
apply for all of its common shares to be evidenced in CREST, and therefore eligible
for electronic trading and settlement, in the form of DIs.
[1] Subject to a 12-month lock-in and customary
orderly market provisions for a further 12 months.
[2] This shareholding arose from 1) the conversion
of $1.2 million owed by the Company to an investment entity controlled by the
Founder & CEO who made a prepayment
under the Company’s $40 million Credit Facility which was triggered by the
actual
and expected costs of the AIM IPO and 2) a
$0.8 million Subscription.
[3] Subject to orderly market provisions for 12
months.
[4] This is the typical level at which AIM-listed
companies seek an annual standing authorization from their shareholders for the
issuance of additional shares for cash.
This flexibility increases the certainty and speed of small capital
raises during the year and reduces transaction costs, since further
communications with, and approvals from, shareholders are not required.
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