Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share data, unless otherwise noted)
Note 1 — Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies
Description of the Business
Hooper Holmes, Inc. and its subsidiaries (“Hooper Holmes” or the "Company”) provide on-site screenings and flu shots, laboratory testing, risk assessment, and sample collection services to individuals as part of comprehensive health and wellness programs offered through organizations sponsoring such programs including corporate and government employers, health plans, hospital systems, health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations and academic institutions. Through its comprehensive health and wellness services, the Company also provides telephonic health coaching, access to a wellness portal with individual and team challenges, data analytics, and reporting services. The Company contracts with health professionals to deliver these services nationwide, all of whom are trained and certified to deliver quality service.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Hooper Holmes, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of receivable balances, property, plant and equipment, valuation of goodwill and other intangible assets, deferred tax assets, share based compensation expense and the assessment of contingencies, among others. These estimates and assumptions are based on the Company’s best estimates and judgment. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which the Company believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates will be reflected in the consolidated financial statements in future periods.
The Company operates under
one
reporting segment. The Company's screening services are subject to some seasonality, with the second quarter revenues typically dropping below other quarters. Third and fourth quarter revenues are typically the Company’s strongest quarters due to increased demand for screenings from mid-August through November related to annual benefit renewal cycles. The Company's health and wellness service operations are more constant, though there are some variations due to the timing of the health coaching programs, which are billed per participant and typically start shortly after the conclusion of onsite screening events. In addition to its screening and health and wellness services, the Company generates ancillary revenue through the assembly of medical kits for sale to third parties.
Prior to 2015, the Company completed the sale of certain assets comprising its Portamedic, Heritage Labs, and Hooper Holmes Services businesses. The operating results of these businesses have been segregated and reported as discontinued operations for all periods presented in this Form 10-K.
On June 15, 2016, the Company completed a one-for-fifteen reverse stock split, in order to regain compliance with the NYSE MKT's minimum market price requirement. As a result, the share and per share information for all periods presented in these consolidated financial statements have been adjusted to reflect the impact of the reverse stock split. The reverse stock split did not affect the total number of authorized shares of common stock of
240,000,000
shares or the par value of the Company’s common stock at
$0.04
. Accordingly, an adjustment was made between additional paid-in-capital and common stock in the consolidated balance sheet to reflect the new values after the reverse stock split.
Summary of Significant Accounting Policies
As of December 31, 2016, the Company adopted ASC 205-40, Presentation of Financial Statements - Going Concern.
This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern
and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. See Note 2 to the consolidated financial statements for the results of management’s assessment of its ability to continue as a going concern.
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(b)
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Cash and Cash Equivalents
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The Company considers highly liquid investments with original maturities at the date of purchase of less than 90 days to be cash equivalents.
Trade accounts receivable are recorded at the invoiced amount. Customer contracts state that we can charge interest but historically the Company has not. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowances for uncollectible accounts are estimated based on the Company's periodic review of historical losses and the current receivables aging. Account balances are charged off to the allowance after all means of collections have been exhausted and potential for recovery is considered remote. Customer billing adjustments are recorded against revenue whereas adjustments for bad debts are recorded within selling, general and administrative expenses. The Company does not have any off-balance sheet credit exposure related to its customers.
Inventories, which consist of finished goods and component inventory, are stated at the lower of average cost or market. Included in inventories at
December 31, 2016 and 2015
are
$0.7 million
and
$0.4 million
, respectively, of finished goods and
$0.4 million
and
$0.3 million
, respectively, of components.
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(e)
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Property, Plant and Equipment
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Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvement or the remaining lease term. The cost of maintenance and repairs is charged to expense as incurred.
Internal use software and website development costs are capitalized and included in property, plant and equipment in the consolidated balance sheet. These assets are depreciated over the estimated useful life of the asset using the straight-line method. Subsequent modifications or upgrades to internal use software are capitalized only to the extent that additional functionality is provided. See Note 6 to the consolidated financial statements for further discussion.
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(f)
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Long-Lived Assets Including Other Intangible Assets
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Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future sales, and estimated costs. See Notes 6 and 7 to the consolidated financial statements for further discussion.
Goodwill is accounted for under the provisions of ASC 350, Intangibles – Goodwill and Other. As the Company manages and operates its business as a single operating segment and, therefore, with a single reportable segment, all goodwill is assigned to the Company’s lone reporting unit. Goodwill is subject to at least an annual impairment assessment or more frequently if circumstances indicate that impairment is likely. Any one event or a combination of events such as change in the business climate, a negative change in relationships with significant customers and changes to strategic decisions, including decisions to expand made in response to economic or competitive conditions could require an interim assessment prior to the next required annual assessment. See Note 7 to the consolidated financial statements for further discussion.
The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease. As of
December 31, 2016 and 2015
, the Company has recorded
$0.1 million
and
$0.2 million
, respectively, related to deferred rent in the consolidated balance sheet.
Revenue is recognized for screening services when the screening is completed and the results are delivered to our customers. Revenue for wellness portal services are recognized on a per eligible member, per month basis, while revenue from wellness coaching services are recognized as services are performed. Revenue for kit assembly is recorded upon completion of the kit. In all cases, there must be evidence of an agreement with the customer, the sales price must be fixed or determinable, delivery of services must have occurred, and the ability to collect must be reasonably assured.
For contracts with multiple elements, the Company allocates consideration to the identified units of accounting based on the relative selling price hierarchy set forth in the relevant accounting guidance. The Company determines the selling price for each deliverable using vendor-specific objective evidence ("VSOE") of selling price or third-party evidence ("TPE") of selling price, if it exists. If neither VSOE nor TPE of selling price exist for a deliverable, the Company uses its best estimate of selling price ("BESP") for that deliverable. The Company estimates BESP for a deliverable by considering company-specific factors such as pricing strategies and direct product and other costs.
Sales tax collected from customers and remitted to governmental authorities is accounted for on a net basis and therefore is excluded from revenues in the consolidated statements of operations.
Management regularly assesses the financial condition of our customers, the markets in which these customers participate as well as historical trends relating to customer deductions and adjusts the allowance for doubtful accounts based on this review. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, the Company's ability to collect on accounts receivable could be negatively impacted, in which case additional allowances may be required. The Company must make management judgments and estimates in determining allowances for doubtful accounts in any accounting period. One uncertainty inherent in the Company's analysis is whether our past experience will be indicative of future periods. Adverse changes in general economic conditions could affect our allowance estimates, collection of accounts receivable, cash flows and results of operations.
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(j)
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Share-Based Compensation
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The Company recognizes all share-based compensation to employees, directors, and consultants, including grants of stock options and restricted stock, in the consolidated financial statements as compensation cost based on their fair value on the date of grant, in accordance with ASC 718, Compensation-Stock Compensation. This compensation cost is recognized over the vesting period on a straight-line basis for the fair value of awards expected to vest. See Note 4 to the consolidated financial statements for further discussion.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in income tax expense. See Note 11 to the consolidated financial statements for further discussion.
Basic loss per share equals net loss divided by the weighted average common shares outstanding during the period. Diluted loss per share equals net loss divided by the sum of the weighted average common shares outstanding during the period plus dilutive common stock equivalents. The calculation of loss per common share on a basic and diluted basis was the same for the two years ended
December 31, 2016
, because the inclusion of dilutive common stock equivalents, the SWK Warrant #1 (as defined in Note 9 to the consolidated financial statements) issued in connection with the Acquisition, and the warrants that were issued beginning on September 15, 2016, (the "Private Offering Warrants") in a private offering to various investors (the "Private Offering") would have been anti-dilutive for all periods presented. The Company has granted options to purchase shares of the Company's common stock through employee stock plans with the weighted average options outstanding as of
December 31, 2016 and 2015
of
368,703
and
277,980
, respectively, as well as the SWK Warrant #1 to purchase
543,479
shares issued to SWK and the Private Offering Warrants to purchase
1,388,889
shares issued in the Private Offering, all of which were outstanding as of
December 31, 2016
, but are anti-dilutive because the Company is in a net loss position.
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(m)
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Concentration of Credit Risk
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The Company’s accounts receivable are due primarily from healthcare management and wellness companies and our direct customers. As of
December 31, 2016
, there were
two
customer balances that accounted for more than
10%
of the total consolidated accounts receivable. The accounts receivable balances for these customers represented approximately
40%
of total consolidated accounts receivable as of
December 31, 2016
. As of
December 31, 2015
, there were
two
customer balances that each accounted for more than
10%
of the total consolidated accounts receivable and represented approximately
34%
of total consolidated accounts receivable.
For the years ended
December 31, 2016 and 2015
, there were
two
customers that exceeded 10% of revenue from continuing operations and represented just over
30%
of the consolidated revenue for these periods. The Company has agreements with each of its customers, although these agreements do not provide for specific minimum level of purchases.
The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" in the first quarter of 2016. The retrospective application of the new standard resulted in a
$0.2 million
reduction to both noncurrent assets and current liabilities as of December 31, 2015. The debt issuance costs associated with the revolving credit facilities remain classified in noncurrent assets in accordance with ASU 2015-15, "Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements". This reclassification had no impact on the Company's results of operations.
During the third quarter of 2016, the Company elected to update the presentation of its consolidated balance sheet by adding an other current liabilities category and reclassifying certain liabilities such as reserve for unclaimed property, restructure reserves, and legal accrual into this new category in the consolidated balance sheet. The Company believes this provides a more useful and informative presentation of the Company's current liabilities and liquidity. Prior period comparatives have been reclassified to conform to the revised presentation. This reclassification had no impact on the Company's results of operations.
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(o)
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Recent Accounting Pronouncements
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In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This new guidance is effective for the Company in the first quarter of 2018, with early adoption permitted as of the original effective date or first quarter of 2017. The Company is currently evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" (ASC 205-40, Presentation of Financial Statements - Going Concern). This ASU requires management to assess and evaluate whether conditions or events exist, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements issue date. This standard is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter; early adoption is permitted. The Company adopted this guidance during the fourth quarter of 2016.
See Note 2 to the consolidated financial statements for the results of management’s assessment of its ability to continue as a going concern.
In April 2015, the FASB issued ASU 2015-03, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The Company adopted the provisions of ASU 2015-03 in the first quarter of 2016. The retrospective application of the new standard resulted in a
$0.2 million
reduction to both noncurrent assets and current liabilities as of December 31, 2015. The debt issuance costs associated with the revolving credit facilities remain classified in noncurrent assets in accordance with ASU 2015-15.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory", which changes the measurement basis for inventory from the lower of cost or market to lower of cost and net realizable value and also eliminates the requirement for companies to consider replacement cost or net realizable value less an approximate normal profit margin when determining the recorded value of inventory. The standard is effective for public companies in fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2015-11 will have on its consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting (Topic 718)", which is intended to simplify the accounting for share-based compensation. This standard simplifies the accounting for income taxes in relation to share-based compensation, modifies the accounting for forfeitures, and modifies the statutory tax withholding requirements. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-09 will have on its consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", which is intended to simplify goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The update instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. The standard is effective, prospectively, for public companies in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its consolidated financial position, results of operations or cash flows.
Note 2 — Liquidity and Going Concern Assessment
The Company's primary sources of liquidity are cash and cash equivalents as well as availability under a Credit and Security Agreement (the "2016 Credit and Security Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM"). The Company has historically used availability under a revolving credit facility to fund operations. The Company experiences a lag between the payment of certain operating expenses and the subsequent billing and collection of the associated revenue based on customer payment terms. To illustrate, in order to conduct successful screenings, the Company must expend cash to deliver the equipment and supplies required for the screenings. The Company must also expend cash to pay the health professionals and site management conducting the screenings. All of these expenditures are incurred in advance of the customer invoicing process and ultimate cash receipts for services performed. Given the seasonal nature of the Company's operations, which are largely dependent on second half volumes, management expects to continue using a revolving credit facility in 2017 and beyond.
Going Concern
As of December 31, 2016, the Company adopted ASC 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of management’s assessment of the Company's ability to continue as a going concern.
Principal conditions or events that require management's consideration
Following are conditions and events which require management's consideration:
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•
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The Company had a working capital deficit of
$9.3 million
with
$1.9 million
of cash and cash equivalents at December 31, 2016. The Company had
$5.7 million
of payables at
December 31, 2016
, that were past due date terms. The Company is working with its vendors to facilitate revised payment terms; however, the Company has had certain vendors who have threatened to terminate services due to aged outstanding payables and in order to accelerate invoice payments. If services were terminated and the Company wasn’t able to find alternative sources of supply, this could have a material adverse impact on the Company’s business.
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•
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The Company's net cash used in operating activities during the year ended
December 31, 2016
, was
$4.4 million
, and without giving consideration to the Merger mentioned below, current projections indicate that the Company will have continued negative cash flows for the foreseeable future.
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•
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The Company incurred a loss from continuing operations of
$9.9 million
for the year ended
December 31, 2016
, and without giving consideration to the Merger mentioned below, current projections indicate that the Company will have continued recurring losses for the foreseeable future.
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•
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The Company had
$3.6 million
of outstanding borrowings under the 2016 Credit and Security Agreement with SCM, with unused borrowing capacity of
$0.1 million
. As of
February 28, 2017
, the Company had
$3.1 million
of outstanding borrowings with unused borrowing capacity of
$0.2 million
. Any borrowings on the unused borrowing capacity are at the discretion of SCM.
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•
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The Company owed approximately
$3.7 million
at
December 31, 2016
under an existing term loan (the "Term Loan"), which is governed by the terms of a credit agreement (the "Credit Agreement") with SWK Funding LLC ("SWK") and was used to fund the cash component of the Acquisition.
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•
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Each of these debt agreements described above contain certain financial covenants, including various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. While the Company was able to comply with the debt covenants as of
December 31, 2016
, it was unable to meet its debt covenants for both the six month period ended June 30, 2016, and the nine month period ended September 30, 2016, and current projections indicate that it will not be able to meet the current March 31, 2017, debt covenants outlined in Note 9 to the consolidated financial statements. However, in conjunction with the Merger Agreement (defined below), the covenants going forward will be revised and the Company does anticipate meeting the revised covenants. Noncompliance with these covenants constitutes an event of default. If the Company is unable to comply with financial covenants in the future and in the event that it was unable to modify the covenants, find new or additional lenders, or raise additional equity, SCM reserves the right to terminate access to the unused borrowing capacity under the 2016 Credit and Security Agreement, while both lenders reserve the right to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business. Additionally, the negative covenants set forth in these debt agreements with SCM and SWK prohibit the Company from incurring additional debt of any kind. For additional information regarding the 2016 Credit and Security Agreement, the Credit Agreement, and the related covenants, refer to Note 9 to the consolidated financial statements.
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•
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The Company has contractual obligations related to operating leases and employment contracts which could adversely affect liquidity. As of December 31, 2016, the Company was in default on
three
real estate leases for spaces that it no longer needs. Two of the leases were assigned to the Company through the Acquisition, and the third, which is partially subleased, relates to the discontinued Hooper Holmes Services business. The Company is working with the landlords to terminate these leases on mutually acceptable terms.
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Management's plans
The Company expects to continue to monitor its liquidity carefully, work to reduce this uncertainty, and address its cash needs through a combination of one or more of the following actions:
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•
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On March 7, 2017, the Company signed a merger agreement with Piper Merger Corp., Provant Health Solutions, LLC, and Wellness Holdings, LLC. See Note 15 to the consolidated financial statements for further discussion.
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•
|
The Company will continue to seek additional equity investments. During the year ended
December 31, 2016
, the Company was able to raise
$6.3 million
of additional equity through the issuance of common stock and warrants, net of issuance costs.
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•
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The Company will continue to aggressively seek new and return business from its existing customers and expand its presence in the health and wellness marketplace;
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•
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The Company will continue to analyze and implement further cost reduction initiatives and efficiency improvements (see Note 10 to the consolidated financial statements).
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Management's assessment and conclusion
Management has determined, based on its recent history and its liquidity issues, that it is not probable that management's plans will sufficiently alleviate or mitigate, to a sufficient level the relevant conditions or events noted above. Accordingly, management of the Company has concluded that there is substantial doubt about the Company's ability to continue as a going concern within one year after issuance date of the financial statements.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Note 3 — Acquisition
The Company entered into and consummated the Purchase Agreement on April 17, 2015, among the Company and certain of its subsidiaries, Accountable Health Solutions, Inc. (the "Seller" or "AHS") and Accountable Health, Inc. ("Shareholder") (the "Acquisition"). Pursuant to the Purchase Agreement, the Company has acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately
$7.0 million
-
$4.0 million
in cash and
433,333
shares of the Company’s common stock,
$0.04
par value, with a value of
$3.0 million
, which was subject to a working capital adjustment as described in the Purchase Agreement. At the closing of the Purchase Agreement, the Company issued and delivered
371,739
shares of Common Stock to the Shareholder and issued and held back
21,739
shares of Common Stock for the working capital adjustment, which were subsequently released on October 9, 2015, and
39,855
shares of Common Stock for indemnification purposes, which were subsequently released on November 8, 2016. No additional shares will be issued under the terms of the Purchase Agreement. The shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, which provides an exemption for private offerings of securities. During the year ended
December 31, 2015
, the Company recorded transaction costs of
$0.8 million
in connection with the Acquisition in the consolidated statement of operations.
The Acquisition has expanded the Company's capabilities to deliver telephonic health coaching, wellness portals, and data analytics and reporting services. These factors, combined with the synergies and economies of scale expected from combining the operations of the two companies, were the basis for the Acquisition and comprise the resulting goodwill recorded.
In order to fund the Acquisition, the Company entered into and consummated the Credit Agreement with SWK on April 17, 2015. Refer to Note 9 to the consolidated financial statements for further discussion.
The following table summarizes the net impact to cash, debt, and equity in conjunction with the Acquisition, as of the origination date:
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(in thousands)
|
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Credit Agreement
|
|
$
|
5,000
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Cash consideration
|
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(4,000
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)
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Net proceeds from Credit Agreement
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1,000
|
|
|
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Term Loan
|
|
5,000
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Debt discount associated with SWK Warrant #1 (see Note 9)
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(2,656
|
)
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Derivative liability associated with SWK Warrant #2 (see Note 9)
|
|
(908
|
)
|
Net debt recorded with Acquisition
|
|
1,436
|
|
|
|
|
Common Stock (6,500,000 shares at $0.04 par)
|
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260
|
|
|
|
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Additional paid-in capital: issuance of shares
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2,740
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|
Additional paid-in capital: fair value of SWK Warrant #1 (see Note 9)
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|
2,656
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Net increase to APIC with Acquisition
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|
$
|
5,396
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The Acquisition was treated as a purchase in accordance with Accounting Standards Codification (ASC) 805,
Business Combinations
, which requires allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the transaction. The allocation of purchase price is based on management’s judgment after evaluating several factors, including a valuation assessment.
The allocation of the purchase price was finalized in the first quarter of 2016 and is as follows:
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(in thousands)
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Accounts receivable, net of allowance of $2
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$
|
918
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Inventory and other current assets
|
|
117
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Fixed assets
|
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123
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Customer portal (existing technologies)
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4,151
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Customer relationships
|
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2,097
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Goodwill
|
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633
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Accounts payable and accrued expenses
|
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(743
|
)
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Deferred revenue
|
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(296
|
)
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Purchase Price
|
|
$
|
7,000
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Intangible assets acquired include existing technology in the form of a customer-facing wellness portal and customer relationships. The fair value of the customer relationships acquired was determined using the excess earnings method under the income approach for customer relationships; and the fair value of the wellness portal software was determined using the replacement cost method. The estimated useful life for the wellness portal and customer relationships is
4 years
and
8 years
, respectively. Amortization is recorded on a straight-line basis over the estimated useful life of the asset. The Company recorded amortization expense as a component of cost of operations of
$1.0 million
and
$0.7 million
, respectively, and amortization expense as a component of selling, general and administrative expenses of
$0.3 million
and
$0.2 million
, respectively, during the years ended
December 31, 2016 and 2015
. The goodwill of
$0.6 million
was recorded in the Company's single reporting unit and is deductible for tax purposes.
The consolidated statement of operations for the year ended
December 31, 2016
,
includes revenues of
$11.1 million
and
$9.6 million
for the period from April 17, 2015 (acquisition date) to
December 31, 2015
. Disclosure of the earnings contribution from AHS is not practicable, as the Company has integrated operations.
The following table provides unaudited pro forma results of operations
,
as if the acquisition had been in effect for the full year ended
December 31, 2015
:
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December 31, 2015
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(in thousands)
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|
Pro forma revenues
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$
|
34,996
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|
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Pro forma net loss from continuing operations
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$
|
(10,847
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)
|
These pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented, nor are they indicative of the consolidated results of operations in future periods. The pro forma results for the year ended
December 31, 2015
, includes pre-tax adjustments for amortization of intangible assets of
$0.3 million
and transaction costs of
$0.8 million
.
Note 4 — Share-Based Compensation
Employee
Stock-Based Compensation Plans
— On May 29, 2008, the Company's shareholders approved the 2008 Omnibus Employee Incentive Plan (the “2008 Plan”) providing for the grant of stock options, stock appreciation rights, non-vested stock and performance shares. The 2008 Plan provides for the issuance of an aggregate of
333,333
shares. During the years ended
December 31, 2016 and 2015
, options for the purchase of
187,832
and
90,000
shares, respectively, were granted under the 2008 Plan. During the years ended
December 31, 2016 and 2015
,
no
shares of restricted stock were granted. As of
December 31, 2016
,
36,013
shares remain available for grant under the 2008 Plan.
On May 24, 2011, the Company's shareholders approved the 2011 Omnibus Employee Incentive Plan (as subsequently amended and restated, the "2011 Plan") providing for the grant of stock options and non-vested stock awards. The 2011 Plan provides for the issuance of an aggregate of
633,333
shares. During the years ended
December 31, 2016 and 2015
, the Company granted a total of
166,665
and
40,000
stock awards, respectively, to non-employee members of the Board of Directors that immediately vested. During the years ended December 31,
2016 and 2015
, options for the purchase of
7,500
and
46,667
shares, respectively, were granted under the 2011 Plan. As of
December 31, 2016
,
239,028
shares remain available for grant under the 2011 Plan. Effective December 31, 2015, the Company amended certain 2014 and 2015 employee award agreements to specify that any exercise of options under the agreement would be satisfied by an issuance of shares authorized under the 2008 Plan rather than the 2011 Plan. The award agreements were not amended in any other respect, and the options granted thereunder have not been amended in any respect and remain subject to their original exercise prices and vesting schedules.
Options under the 2008 and 2011 Plans are granted at fair value on the date of grant, are exercisable in accordance with various vesting schedules specified in the individual grant agreements, and have contractual lives of
10
years from the date of grant.
The fair value of each stock option granted during the year was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Expected life (years)
|
|
4.8
|
|
|
4.9
|
|
Expected volatility
|
|
83
|
%
|
|
69
|
%
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
Risk-free interest rate
|
|
1.4
|
%
|
|
1.7
|
%
|
Weighted average fair value of options granted during the year
|
|
$1.21
|
|
$2.70
|
The expected life of options granted is derived from the Company’s historical experience and represents the period of time that options granted are expected to be outstanding. Expected volatility is based on the Company’s historical volatility. The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of the grant.
The following table summarizes stock option activity for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted Average
|
|
Average Remaining
|
|
Aggregate Intrinsic
|
|
|
Number of Shares
|
|
Exercise Price Per Share
|
|
Contractual Life (years)
|
|
Value (in thousands)
|
Outstanding at December 31, 2015
|
|
286,568
|
|
|
$6.46
|
|
|
|
|
Granted
|
|
195,332
|
|
|
$1.86
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited and Expired
|
|
(77,914
|
)
|
|
$4.46
|
|
|
|
|
Outstanding at December 31, 2016
|
|
403,986
|
|
|
$4.62
|
|
8.1
|
|
$0
|
Exercisable at December 31, 2016
|
|
196,776
|
|
|
$6.74
|
|
7.0
|
|
$0
|
There were
no
options exercised for the year ended
December 31, 2016
, under either the 2008 or 2011 plans. For the year ended
December 31, 2015
,
3,333
stock options valued with a weighted average exercise price of
$6.75
were exercised under the 2008 Plan.
No
stock options were exercised during the year ended
December 31, 2015
under the 2011 Plan.
Options for the purchase of
86,736
and
56,208
shares of common stock, respectively, vested during the years ended
December 31, 2016 and 2015
, and the aggregate fair value at grant date of these options was
$0.3 million
and
$0.3 million
, respectively. As of
December 31, 2016
, there was approximately
$0.2 million
of unrecognized compensation cost related to stock options which is expected to be recognized over a weighted average period of
1.9
years.
The Company recorded
$0.6 million
and
$0.4 million
, of share-based compensation expense in selling, general and administrative expenses for each of the years ended
December 31, 2016 and 2015
, respectively, related to stock options, non-vested stock, and restricted stock awards.
Note 5 — Restructuring Charges
At
December 31, 2016
, there was a
$0.4 million
liability related to the Company's obligation under a lease related to the discontinued Hooper Holmes Services operations center, which is recorded in other current and long-term liabilities in the accompanying consolidated balance sheet. Charges and adjustments recorded during the year ended
December 31, 2016
, were recorded as a component of discontinued operations.
At
December 31, 2015
, there was a
$0.7 million
liability, of which
$0.6 million
is related to the discontinued Hooper Holmes Services operations center and
$0.1 million
is related to the discontinued Portamedic operations. The facility closure obligations were recorded in other current and long-term liabilities in the accompanying consolidated balance sheet. Charges and adjustments recorded during the year ended
December 31, 2015
, were recorded as a component of discontinued operations.
The following table provides a summary of the activity in the restructure accrual for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2014
|
|
Adjustments
|
|
Payments
|
|
December 31, 2015
|
Facility closure obligation
|
$
|
1,074
|
|
|
$
|
(15
|
)
|
|
$
|
(402
|
)
|
|
$
|
657
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Adjustments
|
|
Payments
|
|
December 31, 2016
|
Facility closure obligation
|
$
|
657
|
|
|
$
|
249
|
|
|
$
|
(534
|
)
|
|
$
|
372
|
|
Note 6 — Property, Plant and Equipment, net
Property, plant and equipment, at cost, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
December 31,
|
|
Useful Life
|
(in thousands)
|
|
2016
|
|
2015
|
|
In Years
|
Leasehold improvements
|
|
$
|
1,125
|
|
|
$
|
1,386
|
|
|
10
|
Furniture, fixtures, and equipment
|
|
4,090
|
|
|
4,040
|
|
|
2 – 10
|
Software
|
|
3,245
|
|
|
3,001
|
|
|
1 – 7
|
|
|
8,460
|
|
|
8,427
|
|
|
|
Less: accumulated depreciation and amortization
|
|
6,700
|
|
|
5,656
|
|
|
|
Total
|
|
$
|
1,760
|
|
|
$
|
2,771
|
|
|
|
In accordance with guidance in ASC 360, the Company assessed its property, plant and equipment and recorded impairment charges of
$0.1 million
at
December 31, 2016
. There was
no
impairment for property, plant and equipment recorded at
December 31, 2015
.
Note 7 — Goodwill and Other Intangible Assets
The Company recorded goodwill of
$0.6 million
as of
December 31, 2016 and 2015
. The Company performed its annual assessment of goodwill for impairment during the fourth quarter 2016, and based on the Company’s analysis of the qualitative factors in ASC 350, management identified several adverse conditions that could potentially indicate that it is more likely than not that the Company’s goodwill was impaired. Due to the Company's negative shareholders' equity as of
December 31, 2016
, the Company continued directly to Step 2 of the goodwill impairment test and assigned fair values to its assets and liabilities (both recognized and unrecognized) and compared that to the equity value of the Company, with the difference resulting in the implied fair value of goodwill. The equity value of the Company was determined using the market capitalization and stock price as of the assessment date. In comparing the implied fair value of goodwill with the carrying value, the Company concluded that goodwill was
no
t impaired as of
December 31, 2016
. There was also
no
impairment charges recorded for goodwill during the year ended
December 31, 2015
.
Intangible assets subject to amortization are amortized on a straight-line basis, with the estimated useful life for the wellness portal and customer relationships as
4 years
and
8 years
, respectively. Intangible assets are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
(in thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
Portal
|
|
$
|
4,151
|
|
|
$
|
1,770
|
|
|
$
|
2,381
|
|
|
|
$
|
4,151
|
|
|
$
|
732
|
|
|
$
|
3,419
|
|
Customer relationships
|
|
2,097
|
|
|
447
|
|
|
1,650
|
|
|
|
2,097
|
|
|
185
|
|
|
1,912
|
|
Total
|
|
$
|
6,248
|
|
|
$
|
2,217
|
|
|
$
|
4,031
|
|
|
|
$
|
6,248
|
|
|
$
|
917
|
|
|
$
|
5,331
|
|
Amortization expense for the years ended
December 31, 2016 and 2015
was
$1.3 million
and
$0.9 million
, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
|
|
|
|
|
|
(in thousands)
|
|
|
Year ending December 31,
|
|
|
2017
|
|
$
|
1,300
|
|
2018
|
|
1,300
|
|
2019
|
|
565
|
|
2020
|
|
262
|
|
2021
|
|
262
|
|
Based on the Company's recent financial performance and negative shareholders' equity, management determined a review of impairment of the Company's long-lived intangible assets was necessary during the fourth quarter 2016. The Company performed an assessment of the recoverability of the long-lived intangible assets and determined they were recoverable, and thus
no
impairment charge for long-lived intangible assets was required at
December 31, 2016
. There were also
no
impairment charges for long-lived intangible assets recorded during the year ended
December 31, 2015
.
Note 8 — Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Vendor-related accruals
|
|
$
|
540
|
|
|
$
|
1,324
|
|
Accrued wages
|
|
762
|
|
|
712
|
|
Accrued interest
|
|
402
|
|
|
197
|
|
Accrued income and other taxes
|
|
43
|
|
|
25
|
|
Other
|
|
—
|
|
|
55
|
|
Total
|
|
$
|
1,747
|
|
|
$
|
2,313
|
|
Other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Legal accrual
|
|
$
|
450
|
|
|
$
|
300
|
|
Reserve for unclaimed property
|
|
1,107
|
|
|
1,035
|
|
Restructure reserves
|
|
756
|
|
|
443
|
|
Deferred revenue
|
|
211
|
|
|
1,031
|
|
Other
|
|
97
|
|
|
64
|
|
Total
|
|
$
|
2,621
|
|
|
$
|
2,873
|
|
Note 9 — Debt
As of
December 31, 2016
, the Company maintained the 2016 Credit and Security Agreement and the Term Loan provided by the Credit Agreement. The following table summarizes the Company's outstanding borrowings:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
2016 Credit and Security Agreement (2013 Loan and Security Agreement as of December 31, 2015)
|
|
$
|
3,603
|
|
|
$
|
3,278
|
|
Term Loan
|
|
3,676
|
|
|
5,000
|
|
Discount on Term Loan
|
|
(1,122
|
)
|
|
(2,785
|
)
|
Unamortized debt issuance costs related to Term Loan
|
|
(336
|
)
|
|
(163
|
)
|
Total debt
|
|
5,821
|
|
|
5,330
|
|
Short-term portion
|
|
(5,821
|
)
|
|
(5,330
|
)
|
Total long-term debt, net
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table summarizes the components of interest expense for the years ended
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
Interest expense on Term Loan (effective interest rate at December 31, 2016 and 2015 was 15%)
|
|
$
|
658
|
|
|
$
|
529
|
|
Interest expense on 2013 Loan and Security Agreement
|
|
48
|
|
|
94
|
|
Interest expense on 2016 Credit and Security Agreement
|
|
311
|
|
|
—
|
|
Accretion of termination fees (over term of Term Loan at rate of 8%)
|
|
187
|
|
|
88
|
|
Amortization of debt issuance costs
|
|
362
|
|
|
385
|
|
Write-off of debt issuance costs related to 2013 Loan and Security Agreement
|
|
282
|
|
|
—
|
|
Amortization of debt discount associated with SWK Warrants #1 and #2 (defined below)
|
|
1,663
|
|
|
780
|
|
Mark to market of SWK Warrant #2 (defined below)
|
|
59
|
|
|
(80
|
)
|
Total
|
|
$
|
3,570
|
|
|
$
|
1,796
|
|
2013 Loan and Security Agreement
Prior to April 29, 2016, the Company maintained a loan and security agreement (the “2013 Loan and Security Agreement”) with ACF FinCo I LP ("ACF"), the assignee of Keltic Financial Partners II, LP, which was scheduled to expire on February 28, 2019. On April 29, 2016, in conjunction with entering into a new three year 2016 Credit and Security Agreement with SCM, the Company terminated the 2013 Loan and Security Agreement with ACF. An early termination fee of
$0.1 million
, approximately
$0.03 million
of legal fees, and approximately
$0.1 million
of other ordinary course fees were accelerated due to the termination of the 2013 Loan and Security Agreement and were rolled into the opening outstanding borrowings under the 2016 Credit and Security Agreement with SCM along with
$2.6 million
of remaining borrowings from the 2013 Loan and Security Agreement. The corresponding expenses are reflected in transaction costs in the consolidated statement of operations during the year ended
December 31, 2016
. In addition, approximately
$0.3 million
of unamortized debt issuance costs related to the 2013 Loan and Security Agreement were written off and recorded in interest expense in the consolidated statement of operations during the year ended
December 31, 2016
.
2016 Credit and Security Agreement
On April 29, 2016, the Company entered into the 2016 Credit and Security Agreement with SCM, as amended on August 15, 2016, and November 15, 2016. The 2016 Credit and Security Agreement provides the Company with a revolving credit facility, the proceeds of which are to be used for general working capital purposes and capital expenditures. The 2016 Credit and Security Agreement replaced the 2013 Loan and Security Agreement, eliminating the requirement of the Company to issue SWK Warrant #2 (as defined below) for the purchase of common stock valued at
$1.25 million
to SWK, the holder of the Company’s Credit Agreement.
Under the terms of the 2016 Credit and Security Agreement, SCM makes cash advances to the Company in an aggregate principal at any
one
time outstanding not to exceed
$7 million
, subject to certain loan balance limits based on the value of the Company’s eligible collateral (the “Revolving Loan Commitment Amount”). The 2016 Credit and Security Agreement has a term of
three years
, expiring on April 29, 2019. As of
December 31, 2016
, the Company had
$3.6 million
of outstanding borrowings under the 2016 Credit and Security Agreement with unused borrowing capacity of
$0.1 million
. As of
February 28, 2017
, the Company had
$3.1 million
of outstanding borrowings, with unused borrowing capacity of
$0.2 million
. Any borrowings on the unused borrowing capacity are at the discretion of SCM.
Borrowings under the 2016 Credit and Security Agreement bear interest at a fluctuating rate that when annualized is equal to the Prime Rate plus
5.5%
, subject to increase in the event of a default. The Company paid SCM a
$0.1 million
facility fee, and monthly, SCM will receive an unused line fee equal to one-half of one percent (
0.5%
) per annum of the difference derived by subtracting (i) the greater of (x) the average daily outstanding balance under the Revolving Facility during the preceding month and (y) the Minimum Balance, from (ii) the Revolving Loan Commitment Amount and also a collateral management fee equal to one-half of one percent (
0.5%
) per annum of the Revolving Loan Commitment Amount. As of
December 31, 2016
, the remaining balance in debt issuance costs recorded in Other Assets on the consolidated balance sheet was
$0.3 million
.
Borrowings under the Agreement are secured by a security interest in all existing and after-acquired property of the Company, including, but not limited to, its receivables (which are subject to a lockbox account arrangement), inventory, and equipment.
On November 15, 2016, the Company entered into the Second Amendment to Credit and Security Agreement (the “Second Amendment”) with SCM. The Second Amendment cured the default reported in the Company’s Form 10-Q for the quarter ended September 30, 2016, by revising the minimum adjusted EBITDA covenant in the 2016 Credit and Security Agreement. In addition, the Second Amendment revised the minimum adjusted EBITDA and aggregate revenue covenants going forward. Noncompliance with these covenants constitutes an event of default. Minimum aggregate revenue must not be less than
$34.0 million
for the twelve months ending December 31, 2016,
$41.0 million
for the twelve months ending March 31, 2017, and
$42.0 million
for the twelve months ending each fiscal quarter thereafter. Adjusted EBITDA must not be less than negative
$3.5 million
for the twelve months ending December 31, 2016,
$0.5 million
for the twelve months ending March 31, 2017,
$0.9 million
for the twelve months ending June 30, 2017, and
$2.5 million
for the twelve months ending each fiscal quarter thereafter. In addition, consolidated unencumbered liquid assets must not be less than
$0.5 million
on the last day of the fiscal quarter ending December 31, 2016, and
$0.75 million
on the last day of any fiscal quarter thereafter. The Company was in compliance with the covenants under the Second Amendment as of
December 31, 2016
.
If the Company is unable to comply with financial covenants in the future and in the event that the Company was unable to modify the covenants, find new or additional lenders, or raise additional equity, it would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business.
Credit Agreement
In order to fund the Acquisition, the Company entered into the Credit Agreement with SWK on April 17, 2015, as amended on February 25, 2016, March 28, 2016, August 15, 2016, and November 15, 2016. The Credit Agreement provides the Company with a
$5.0 million
Term Loan. The proceeds of the Term Loan were used to pay certain fees and expenses related to the negotiation and consummation of the Purchase Agreement and the Acquisition described in Note 3 to the consolidated financial statements and general corporate purposes. The Company paid SWK an origination fee of
$0.1 million
. The Term Loan is due and payable on April 17, 2018. The Company is also required to make quarterly revenue-based payments in an amount equal to eight and one-half percent (
8.5%
) of yearly aggregate revenue up to and including
$20 million
, seven percent (
7%
) of yearly aggregate revenue greater than
$20 million
up to and including
$30 million
, and five percent (
5%
) of yearly aggregate revenue greater than
$30 million
. The revenue-based payment will be applied to fees and interest, and any excess to the principal of the Term Loan. Revenue-based payments commenced in February 2016, and the maximum aggregate revenue-based principal payment is capped at
$0.6 million
per quarter. On August 15, 2016, the Company entered into the Third Amendment to Credit Agreement and Limited Waiver and Forbearance (the “Third Amendment”) which, among other things, waived the August 2016 revenue-based principal payment. On November 15, 2016, the Company entered into the Fourth Amendment to Credit Agreement (the "Fourth Amendment") which revised the November 2016 payment such that the maximum principal portion of the aggregate revenue-based payment is capped at
$0.4 million
and revised the debt covenants (see below for further information on the covenants). The Company evaluated the application of ASC 470-50 and ASC 470-60 for both the Third and Fourth Amendments and concluded that the revised terms did not constitute troubled debt restructurings, and the amendments were accounted for as debt modifications rather than debt extinguishments. During the year ended
December 31, 2016
, the Company made principal payments to SWK of
$1.3 million
, and paid approximately
$0.5 million
of interest.
The outstanding principal balance under the Credit Agreement bears interest at an adjustable rate per annum equal to the LIBOR Rate (subject to a minimum amount of one percent (
1.0%
)) plus fourteen percent (
14.0%
) and is due and payable quarterly, in arrears, commencing on August 14, 2015. Upon the earlier of (a) the maturity date on April 17, 2018, or (b) full repayment of the Term Loan, whether by acceleration or otherwise, the Company is required to pay an exit fee equal to eight percent (
8%
) of the aggregate principal amount of all term loans advanced under the Credit Agreement. The Company is recognizing the exit fee over the term of the Term Loan through an accretion accrual to interest expense using the effective interest method.
The Credit Agreement contains a cross-default provision that can be triggered if the Company has more than
$0.25 million
in debt outstanding under the 2016 Credit and Security Agreement and the Company fails to make payments to SCM when due or if SCM is entitled to accelerate the maturity of debt in response to a default situation under the 2016 Credit and Security Agreement, which may include violation of any financial covenants.
As security for payment and other obligations under the 2016 Credit and Security Agreement, SCM holds a security interest in all of the Company's, and its subsidiary guarantors', existing and after-acquired property, including receivables (which are subject to a lockbox account arrangement), inventory, and equipment. Additionally, SWK holds a security interest for final and indefeasible payment. The security interest held by SWK is in substantially all of the Company's assets and the Company's subsidiaries.
In connection with the execution of the Credit Agreement, the Company issued SWK a warrant (the "SWK Warrant #1") to purchase
543,479
shares of the Company’s common stock. As part of the conditions in the Third Amendment, the Company
modified the exercise price of the SWK Warrant #1 to
$1.30
per share, recording the change in fair value of the SWK Warrant #1 of
$0.3 million
in accumulated paid-in capital in the consolidated balance sheet. The SWK Warrant #1 is exercisable after October 17, 2015, and up to and including April 17, 2022. The SWK Warrant #1 is exercisable on a cashless basis. The exercise price of the warrant is subject to customary adjustment provisions for stock splits, stock dividends, recapitalizations and the like. The warrant grants the holder certain piggyback registration rights. The warrant was considered equity classified, and as such, the Company allocated the proceeds from the Term Loan to the warrant using the relative fair value method. Further, pursuant to the Credit Agreement, if the 2013 Loan and Security Agreement was not repaid in full and terminated, and all liens securing the 2013 Loan and Security Agreement were not released, on or prior to April 30, 2016, as amended in the First Amendment to the Credit Agreement dated February 25, 2016, the Company agreed to issue an additional warrant (the “SWK Warrant #2”) to SWK to purchase common stock valued at
$1.25 million
, with an exercise price of the closing price on April 30, 2016. In accordance with the relevant accounting guidance, the SWK Warrant #2 was determined to be an embedded derivative. The fair value of both of the SWK warrants at the inception of the Credit Agreement of approximately
$3.6 million
was recorded as a debt discount, and is being amortized through interest expense over the term of the Credit Agreement using the effective interest method. The Company valued both warrants using the Black-Scholes pricing model, which utilizes Level 3 Inputs. For the SWK Warrant #1, the Company utilized volatility of
85.0%
, a risk-free rate of
1.4%
, dividend rate of
zero
, and term of
7
years, which is consistent with the exercise period of the Warrant. For the SWK Warrant #2, the Company utilized volatility of
80.0%
, a risk-free rate of
2.1%
, dividend rate of
zero
, and term of
7
years, which is consistent with the exercise period of the warrant.
The requirement of the Company to issue the SWK Warrant #2 was eliminated when the Company entered into the 2016 Credit and Security Agreement with SCM, which is discussed further above. Accordingly, during the year ended
December 31, 2016
, the Company recorded
$0.9 million
in other income in the consolidated statement of operations related to the write-off of the derivative liability associated with the SWK Warrant #2.
On March 28, 2016, the Company entered into the Second Amendment to the Credit Agreement (the "Second Amendment") which required the Company to issue shares of its common stock,
$0.04
par value, with a value of
$0.1 million
to SWK, which the Company issued during the first quarter of 2016 and recorded as debt issuance costs as a direct deduction to short-term debt on the consolidated balance sheet as of
December 31, 2016
.
The Fourth Amendment cured the default reported in the Company’s Form 10-Q for the quarter ended September 30, 2016, by providing a waiver of the Company's noncompliance with the minimum adjusted EBITDA covenant in the Credit Agreement. In addition, the Fourth Amendment revised the minimum adjusted EBITDA and aggregate revenue covenants going forward. Noncompliance with these covenants constitutes an event of default. Minimum aggregate revenue must not be less than
$34.0 million
for the twelve months ending December 31, 2016,
$41.0 million
for the twelve months ending March 31, 2017, and
$42.0 million
for the twelve months ending each fiscal quarter thereafter. Adjusted EBITDA must not be less than negative
$3.5 million
for the twelve months ending December 31, 2016,
$0.5 million
for the twelve months ending March 31, 2017,
$0.9 million
for the twelve months ending June 30, 2017, and
$2.5 million
for the twelve months ending each fiscal quarter thereafter. In addition, consolidated unencumbered liquid assets must not be less than
$0.5 million
on the last day of the fiscal quarter ending December 31, 2016, and
$0.75 million
on the last day of any fiscal quarter thereafter. The Company was in compliance with the covenants under the Fourth Amendment as of
December 31, 2016
. If the Company is unable to comply with financial covenants in the future and in the event that the Company was unable to modify the covenants, find new or additional lenders, or raise additional equity, it would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business.
Note 10 — Commitments and Contingencies
Lease obligations
The Company leases its corporate headquarters in Olathe, Kansas under an operating lease which expires in
2018
. As of December 31, 2016, the Company was in default on
two
leased properties assigned to the Company through the Acquisition in Des Moines, IA and Indianapolis, IN under operating leases which also expire in 2018. The Company determined that neither lease were necessary for its operations, so the Company is working with the Des Moines and Indianapolis landlords to terminate both leases on mutually acceptable terms. The Company also leases vehicles, copiers, and other miscellaneous office equipment. These leases expire at various times through
2019
.
The Company is obligated, and in default as of December 31, 2016, under a lease related to the discontinued Hooper Holmes Services operations center through 2018 and has ceased use of this facility. The Company has recorded a facility closure obligation of
$0.4 million
as of
December 31, 2016
, related to this lease, which is recorded in other current and long-term liabilities in the consolidated balance sheet. The Company has subleased out part of this space and is also working with this landlord to terminate the lease on mutually acceptable terms.
The table below presents future minimum lease payments for operating leases (with initial or remaining terms in excess of one year) as of
December 31, 2016
, and includes leases from both continuing and discontinued operations, as described above. This table does not reflect any changes related to the lease negotiations noted above.
|
|
|
|
|
|
(in thousands)
|
|
|
Year ending December 31,
|
|
Operating
Leases
|
2017
|
|
$
|
1,743
|
|
2018
|
|
1,278
|
|
2019
|
|
4
|
|
2020
|
|
—
|
|
2021
|
|
—
|
|
Thereafter
|
|
—
|
|
Total minimum lease payments
|
|
$
|
3,025
|
|
Estimated sublease payments (not included in minimum lease payments)
|
|
(633
|
)
|
|
|
$
|
2,392
|
|
Rental expense under operating leases of continuing operations totaled
$1.2 million
and
$1.1 million
in
2016 and 2015
, respectively.
Employment obligations
The Company has employment agreements with certain executive employees that provide for payment of base salary for a
one year
period in the event their employment with the Company is terminated in certain circumstances, including following a change in control, as further defined in the agreements.
The Company incurred certain severance and other costs related to its ongoing initiatives to increase the flexibility of its cost structure that were recorded in selling, general, and administrative expenses, and at
December 31, 2016
, the Company recorded a
$0.3 million
liability related to these initiatives in other current liabilities in the accompanying consolidated balance sheet.
Legal contingencies and obligations
The Company, in the normal course of business, is a party to various claims and other legal proceedings. In the opinion of management, the Company has legal defenses and/or insurance coverage (subject to deductibles) with respect to all of its pending legal actions. If management believes that a material loss not covered by insurance arising from these actions is probable and can reasonably be estimated, the Company may record the amount of the estimated loss or, if a loss cannot be estimated but the minimum liability may be estimated using a range and no point is more probable than another, the Company may record the minimum estimated liability. As additional information becomes available, any potential liability related to these actions is assessed and the estimates are revised, if necessary. Management believes that the ultimate outcome of all pending legal actions, individually and in the aggregate, will not have a material adverse effect on the Company's financial position that is inconsistent with its loss reserves or on its overall trends in results of operations. However, litigation and claims are subject to inherent uncertainties and unfavorable outcomes can occur that exceed any amounts reserved for such losses. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the outcome occurs or in future periods.
On August 5, 2016, the Company agreed to a settlement of
$0.45 million
related to a lawsuit involving the former Portamedic service line for which the Company retained liability. Accordingly, as of
December 31, 2016 and 2015
, the Company has recorded a liability of
$0.45 million
and
$0.3 million
, respectively, related to this matter. The litigation accrual for all periods was included in the other current liabilities line item on the accompanying consolidated balance sheet. The additional expense of
$0.15 million
recorded during the year ended
December 31, 2016
, was included in the discontinued operations line item on the consolidated statements of operations. The claim is not covered by insurance, and the Company incurred legal costs to defend the litigation which are also recorded in discontinued operations.
Note 11 — Income Taxes
The components of the income tax provision are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2016
|
|
2015
|
Federal - current
|
|
$
|
—
|
|
|
$
|
—
|
|
State and local - current
|
|
16
|
|
|
12
|
|
Federal - deferred
|
|
8
|
|
|
6
|
|
State and local - deferred
|
|
1
|
|
|
1
|
|
Total income tax expense
|
|
$
|
25
|
|
|
$
|
19
|
|
The following reconciles the “statutory” federal income tax rate to the effective income tax rate:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Computed "expected" income tax benefit
|
|
(35
|
)%
|
|
(35
|
)%
|
Reduction (increase) in income tax benefit and increase (reduction) in income tax expense resulting from:
|
|
|
|
|
State tax, net of federal benefit
|
|
—
|
|
|
—
|
|
Change in federal valuation allowance
|
|
35
|
|
|
35
|
|
Other
|
|
—
|
|
|
—
|
|
Effective income tax rate
|
|
—
|
%
|
|
—
|
%
|
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at
December 31, 2016 and 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
|
Receivable allowance
|
|
$
|
17
|
|
|
$
|
43
|
|
Accumulated depreciation
|
|
371
|
|
|
214
|
|
Restructuring accrual
|
|
454
|
|
|
376
|
|
Intangible assets
|
|
813
|
|
|
484
|
|
Compensation expense
|
|
634
|
|
|
417
|
|
Federal net operating loss carryforward
|
|
61,688
|
|
|
58,532
|
|
State net operating loss carryforward
|
|
5,736
|
|
|
6,040
|
|
Accrued expenses
|
|
160
|
|
|
344
|
|
Deferred rent
|
|
57
|
|
|
102
|
|
Deferred revenue
|
|
83
|
|
|
343
|
|
Interest
|
|
180
|
|
|
—
|
|
Other
|
|
10
|
|
|
43
|
|
Gross deferred income tax assets
|
|
$
|
70,203
|
|
|
$
|
66,938
|
|
Valuation allowance
|
|
(70,203
|
)
|
|
(66,929
|
)
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
Goodwill
|
|
(16
|
)
|
|
(7
|
)
|
Gross deferred income tax liabilities
|
|
(16
|
)
|
|
(16
|
)
|
Net deferred income tax assets
|
|
$
|
(16
|
)
|
|
$
|
(7
|
)
|
The Company has significant deferred tax assets attributable to tax deductible intangibles and federal and state net operating loss carryforwards, which may reduce taxable income in future periods. Based on the cumulative tax and operating losses, the lack of taxes in the carryback period, and the uncertainty surrounding the extent or timing of future taxable income, the Company believes it is not more likely than not that it will realize the tax benefits of its deferred tax assets. Accordingly, the Company continues to record a full valuation allowance on its net deferred tax assets as of
December 31, 2016 and 2015
, with the exception of deferred income tax on the liabilities of certain indefinite-lived intangibles.
There was
no
current federal tax expense recorded in the years ended December 31,
2016 and 2015
. The current state tax expense recorded for the years ended
December 31, 2016 and 2015
reflects a state tax liability to
one
state. Deferred tax expense is recorded as of
December 31, 2016 and 2015
.
The tax years 2013 through 2016 may be subject to federal examination and assessment. Tax years from 2008 through 2012 remain open solely for purposes of federal and certain state examination of net operating loss and credit carryforwards. State income tax returns may be subject to examination for tax years 2012 through 2016, depending on state tax statute of limitations.
As of
December 31, 2016
, the Company had U.S. federal and state net operating loss carryforwards of approximately
$176.2 million
and
$143.0 million
, respectively. The net operating loss carryforwards, if not utilized, will expire in the years 2017 through 2036. No tax benefit has been reported since a full valuation allowance offsets these tax attributes. However, limitations could apply upon the release of the valuation allowance.
Since the Company had changes in ownership during 2015 and continuing into 2016, additional limitations under IRC Section 382 of the Internal Revenue Code of 1986 may apply to the future utilization of certain tax attributes including net operating loss (“NOL”) carryforwards, other tax carryforwards, and certain built-in losses. Limitations on future net operating losses apply when a greater than 50% ownership change occurs under the rules of IRC Section 382. The Company has not had a formal study completed with respect to IRC Section 382, but the Company did complete its own analysis and determined that there has not been a greater than
50%
change in ownership as of
December 31, 2016
. However, if the merger discussed in Note 15 to the consolidated financial statements is approved, the Company has determined that it is more likely than not that a greater than
50%
change in ownership may occur by May 2017. If confirmed, the allowance of future net operating losses will be limited to the market capitalization value multiplied by the “long-term tax-exempt rate” for the month in which the ownership change takes place. It is estimated that the Company would be limited to approximately
$0.2 million
of NOL per year, and due to expiring net operating loss provisions, the Company has estimated it would be unable to utilize approximately
$172.7 million
and
$140.0 million
of remaining federal and state net operating losses, respectively, in the future.
Note 12 — Common Stock
The 2016 Credit and Security Agreement prohibits the Company from repurchasing or retiring shares of its common stock and paying dividends (see Note 9 to the consolidated financial statements). The Company did not repurchase any shares of its common stock in
2016 and 2015
. The Company did retire its treasury stock in the amount of
$0.1 million
in connection with the reverse stock split discussed in Note 1 to the consolidated financial statements. Refer to Note 2 to the consolidated financials for discussion of issuance of common stock and warrants during the year ended December 31, 2016.
Note 13 — 401(k) Savings and Retirement Plan
The Company’s 401(k) Savings and Retirement Plan (the “401(k) Plan”) is available to all employees with at least
one
year of employment service, who have worked at least
1,000
hours in a service year and who are at least
21
years of age. There were
no
Company contributions related to the 401(k) Plan during the years ended December 31,
2016 and 2015
. The Company’s common stock is not an investment option to employees participating in the 401(k) Plan.
Note 14 — Fair Value Measurements
The Company determines the fair value measurements used in our consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
|
|
•
|
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
•
|
Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 - Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company estimated the fair value of the Term Loan and the derivative liability using Level 3 valuation techniques. The estimated fair value of the Term Loan was determined by discounting future projected cash flows using a discount rate commensurate with the risks involved and by using the Black-Scholes valuation model, while the estimated fair value of the derivative liability was determined using the Black-Scholes valuation model.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
(in thousands)
|
|
Face Value
|
|
Fair Value
|
|
Carrying Amount
|
|
|
Face Value
|
|
Fair Value
|
|
Carrying Amount
|
Term Loan
|
|
$
|
5,000
|
|
|
$
|
4,865
|
|
|
$
|
2,218
|
|
|
|
$
|
5,000
|
|
|
$
|
3,837
|
|
|
$
|
2,052
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
1,250
|
|
|
$
|
828
|
|
|
$
|
828
|
|
Note 15 — Subsequent Events
On March 7, 2017, the Company signed a merger agreement with Piper Merger Corp., Provant Health Solutions, LLC ("Provant"), and Wellness Holdings, LLC (the "Merger Agreement" or the "Merger"). As Merger consideration, the Company will issue a number of shares equal to its total number of shares of common stock outstanding, less shares issued to fulfill the SWK Equity Requirement (as defined below) (the “Merger Shares”), to the Provant equity holders (the “ Former Provant Owners”). The Company expects to issue
10,448,849
million Merger Shares. At the closing of the Merger, which is conditioned on shareholder approval of the issuance of the Merger Shares, it is anticipated that the Former Provant Owners will hold approximately
48%
of the Company’s approximately
26.4 million
outstanding shares of common stock, including shares issued to fulfill the SWK Equity Requirement.
The Company has received commitment letters for financing to support the Merger and provide working capital to the Company. Upon closing of the Merger, the Company's Term Loan balance with SWK will increase from
$3.7 million
to
$6.5 million
. Principal repayments will start in the first quarter of 2019. In addition, SWK has agreed to provide a
$2.0 million
seasonal revolving credit facility, which will be guaranteed by
one
of the Former Provant Owners. The Company's revolving credit facility with SCM will be expanded from
$7.0 million
to
$10.0 million
with an accordion to
$15.0 million
during high-volume months.
Additionally, as a condition to increasing the Term Loan balance, SWK has required the Company to raise
$3.5 million
of new equity ("SWK Equity Requirement"). To meet this requirement, the Company is presently conducting a private offering (the “2017 Private Offering”) for up to
2.0 million
shares of the Company's common stock,
$0.04
par value, at a price of
$0.80
plus one-half warrant per share. The warrants have a strike price of
$1.35
per share and are exercisable for a period of
four
years from the date of issuance but are not exercisable during the first
six
months after closing of the 2017 Private Offering. As of March 8, 2017, the Company has issued
1,712,500
shares and
856,250
warrants in the 2017 Private Offering for proceeds of approximately
$1.4 million
. The Private Offering Warrants issued in 2016 were canceled as part of the 2017 Private Offering. The Former Provant Owners have agreed to match up to
$1.75 million
of new equity raised by the Company at the closing of the Merger.
Upon closing of the Merger, Henry Dubois and Steven Balthazor will continue to serve as Chief Executive Officer and Chief Financial Officer, respectively, of the Company. Provant’s Chief Executive Officer, Heather Provino, will serve as Chief Strategy Officer of the Company, and Mark Clermont, Provant’s President, will serve as President and Chief Operating Officer of the Company.
The Board of Directors will consist of seven members, three of which will be current Company directors (the “Continuing Directors”), three of which will be chosen by the Former Provant Owners and one of which will be an independent director jointly nominated by the Continuing Directors and Former Provant Owners. Initially, the independent director will be the director who
currently chairs the Company’s audit committee. The Company will continue to trade under the HH stock symbol. The Company will have two major locations in Olathe, Kansas and East Greenwich, Rhode Island.