Notes to Condensed Consolidated Financial Statements
June 30, 2017
(unaudited)
Note 1: Basis of Presentation
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. Through the merger with Provant (defined below), which offers a similar set of services as Hooper Holmes, the combination provides a personalized, one-stop programming experience for customers, with proven outcomes powered by sophisticated data collection and management.
The Company operates under
one
reporting segment. The Company's screening and flu shot services are subject to seasonality, with the third and fourth quarters typically being the strongest quarters due to increased demand for screenings and flu shots from mid-September 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.
The accompanying unaudited condensed consolidated financial statements include the accounts of Hooper Holmes and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2016 Annual Report on Form 10-K, filed with the SEC on March 9, 2017, as amended by Amendment No. 1 on Form 10-K/A, which was filed with the SEC on May 1, 2017, Amendment No. 2 on Form 10-K/A, which was filed with the SEC on May 25, 2017, and Amendment No. 3 which was filed with the SEC on June 16, 2017.
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. The financial information included herein is unaudited; however, such information reflects all adjustments that are, in the opinion of the Company's management, necessary for a fair statement of results for the interim periods presented. 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 condensed consolidated financial statements in future periods.
The results of operations for the
three and six
month periods ended
June 30, 2017
and
2016
are not necessarily indicative of the results to be expected for any other interim period or the full year. See “Management's Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
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 Quarterly Report on Form 10-Q.
On May 11, 2017, the Company closed the transactions (the “Merger”) contemplated by the Agreement and Plan of Merger dated March 7, 2017 (the "Merger Agreement") by and among the Company, Piper Merger Corp., Provant Health Solutions, LLC (“Provant”), and Wellness Holdings, LLC . Provant was the surviving entity in the Merger, as a result of which it became a wholly-owned subsidiary of the Company. See Note 3 to the condensed consolidated financial statements for further discussion.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)", 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. In 2017, the Company established an implementation team consisting of internal and external representatives. The implementation team is in the process of beginning to assess the impact the new standard will have on the consolidated financial statements and assessing the impact on individual contracts in the Company's revenue streams. The assessment is in its early stages, and the implementation team will report findings and progress of the project to management and the Audit Committee on a frequent basis through the effective date. The Company will adopt the requirements of the new standard in the first quarter of 2018 and anticipates using the modified retrospective transition method. The Company has not yet determined the quantitative impact on its consolidated financial position, results of operations or cash flows.
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 was effective for public companies in fiscal years beginning after December 15, 2016, with early adoption permitted. The implementation of this ASU did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", 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 No. 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 was effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The implementation of this ASU did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. To be considered a business, the integrated set of activities and assets to be evaluated must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the integrated set or activities and assets is not considered a business. ASU 2017-01 provides a framework to assist entities in evaluating whether an integrated set of activities and assets include both an input and a substantive process when the assets’ fair value is not concentrated in a single identifiable asset or group of similar identifiable assets. This standard is effective, prospectively, for fiscal years and interim periods beginning after December 15, 2017, with early adoption allowed in certain circumstances. No disclosure is required at adoption. The early adoption of this ASU, in consideration of the Merger completed on May 11, 2017, did not have a material impact on the Company's 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.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting", which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award's fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-09 to have a material impact 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"), as amended through the Omnibus Joinder to Loan Documents and Third Amendment to Credit and Security Agreement and Limited Waiver dated as of May 11, 2017 (the “Third Amendment”). In addition, the Amended and Restated Credit Agreement dated as of May 11, 2017 (the “A&R Credit Agreement”) between the Company and SWK Funding, LLC (“SWK”) provides both a term loan of
$6.5 million
(the “Term Loan”) and a
$2.0 million
revolving credit facility (the “Seasonal Facility”) that the Company can use between June 1 and November 30, for both 2017 and 2018.
The Company has historically used availability under a revolving credit facility to fund operations due to 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, management expects to continue using a revolving credit facility in 2017 and beyond.
Going Concern
In accordance with ASC 205-40, 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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The Company had a working capital deficit of
$13.0 million
with
$1.3 million
in cash and cash equivalents at
June 30, 2017
. The Company had $
7.4
million of payables at
June 30, 2017
, 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
six
month period ended
June 30, 2017
, was
$6.6 million
, and 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
$8.5 million
for the
six
month period ended
June 30, 2017
; however, this includes
$1.8 million
of one-time transaction costs related to the Merger. 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
$4.5 million
of outstanding borrowings under the 2016 Credit and Security Agreement with SCM, borrowing the maximum available amount under the borrowing capacity. As of
August 10, 2017
, the Company had
$3.4 million
of outstanding borrowings and
$0.9 million
of unused borrowing capacity. Any borrowings on the unused borrowing capacity are at the discretion of SCM.
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•
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The Company owed
$6.5 million
at
June 30, 2017
, under the Term Loan with SWK, which was used to fund the Merger. In addition, the Company owed
$2.0 million
to SWK for the Seasonal Facility and
$2.1 million
to Century (as defined in Note 8 to the condensed consolidated financial statements) for the Subordinated Promissory Note issued in connection with the Merger.
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•
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On August 8, 2017, the Company entered into a First Amendment to the A&R Credit Agreement (the “First Amendment”) that provides for an additional
$2.0 million
term loan (the “August 2017 Term Loan”) to provide additional liquidity to strengthen the Company's entrance into busy season. The Company is required to repay the August 2017 Term Loan by February 1, 2018, but plans to repay it by November 30, 2017. In consideration for the First Amendment, the Company issued a new warrant (the “August Warrant”) for SWK to purchase up to
450,000
shares of the Company’s common stock for a strike price of
$0.80
per share, paid a fee of
$0.03 million
, and will pay an exit fee of
$0.14 million
if the August 2017 Term Loan is repaid by November 30, 2017, or
$0.28 million
if it is repaid later.
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•
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The debt agreements with SCM and SWK described above contain certain financial covenants, including various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements, which the Company did comply with as of
June 30, 2017
. Current projections indicate that the Company will continue to be able to meet the revised debt covenants outlined in Note 8 to the condensed consolidated financial statements. Noncompliance with these covenants would constitute an event of default. If the Company is unable to comply with financial covenants in the future and cannot 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 SCM and SWK 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 the debt agreements with SCM and SWK prohibit the Company from incurring additional debt of any kind without prior approval from the lenders. For additional information regarding the 2016 Credit and Security Agreement, the A&R Credit Agreement, and the related covenants, refer to Note 8 to the condensed consolidated financial statements.
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•
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The Company has contractual obligations related to operating leases for the Company's
two
major locations in Olathe, KS and East Greenwich, RI, capital leases obtained in the Merger and employment contracts which could adversely affect liquidity. Refer to Note 9 to the condensed consolidated financial statements.
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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 May 11, 2017, the Company closed the Merger with Provant pursuant to the Merger Agreement. In conjunction with the Merger, new debt agreements were signed which reset all of the debt covenants, and the Company met the covenants as of
June 30, 2017
, and anticipates being able to meet the revised covenants in the future. The Company expects the Merger to increase the scale of the Company, improving gross margins due to combined revenues and combined operations which will produce operational synergies by reducing fixed costs. While the Company expects its financial condition to improve after the Merger, Provant has a history of operating losses as well, and the Company has incurred significant costs and additional debt for the transaction and will continue to incur transition costs to integrate the two companies.
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•
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The Company will continue to seek additional equity investments. During the
six
month period ended
June 30, 2017
, the Company was able to raise
$3.4 million
of additional equity through the issuance of common stock and warrants, net of issuance costs.
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•
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As discussed in Note 9 to the condensed consolidated financial statements, the Company reached settlement agreements for the remaining lease obligations owed under
three
operating leases for spaces the Company no longer utilizes. The terms of the three lease settlements reduce the Company's obligation by approximately
$0.7 million
compared to the original stated lease terms.
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•
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The Company has been able to obtain more favorable payment terms with some of its vendors and will continue to pursue revised terms, based on the new consolidated company model after the Merger. The Company and Provant had several of the same vendors and have been able to work with them on a combined basis to come up with more favorable terms for the Company going forward which will improve liquidity.
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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 9 to the condensed consolidated financial statements).
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Management's assessment and conclusion
In light of the Company's recent history of liquidity challenges, the Company has evaluated its plans described above to determine the likelihood that they will be effectively implemented and, if so, the likelihood that they will alleviate or mitigate the conditions and events that raise substantial doubt about the Company's ability to continue as a going concern. Successful implementation of these plans involves both the Company's efforts and factors that are outside its control, such as its ability to attract and retain new and existing customers and to negotiate suitable terms with vendors and financing sources. As a result, the Company can give no assurance that its plans will be effectively implemented in such a way that they will sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company's ability to continue as a going concern within one year after the date that the financial statements are issued.
The condensed 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: Merger
On May 11, 2017, the Company closed the Merger contemplated by the Merger Agreement by and among the Company, Piper Merger Corp., Provant, and Wellness Holdings, LLC. Provant was the surviving entity in the Merger, as a result of which it became a wholly-owned subsidiary of the Company. As Merger consideration, the Company issued
10,448,849
shares to the Provant equity holders (the “Former Provant Owners”). The Former Provant Owners now hold approximately
48%
of the Company’s approximately
25.9 million
outstanding shares of common stock. During the
three and six
month periods ended
June 30, 2017
, the Company incurred
$1.1 million
and
$1.8 million
, respectively, of transaction costs in connection with the Merger in the condensed consolidated statement of operations.
The Company expects the Merger to increase the scale of the Company, improving gross margins due to combined revenues and combined operations which will produce operational synergies by reducing fixed costs, which is the basis for the merger and comprises the resulting goodwill recorded. While the Company expects its financial condition to improve after the Merger, Provant has a history of operating losses as well, and the Company has incurred significant costs and additional debt for the transaction.
In order to provide additional working capital for the consolidated Company after the Merger, the Company entered into the A&R Credit Agreement with SWK which increases the principal balance under the existing Term Loan from
$3.7 million
to
$6.5 million
and provides the
$2.0 million
Seasonal Facility. The Company also entered into the Third Amendment with SCM to expand the Company's revolving credit facility from
$7.0 million
to
$10.0 million
with an accordion to
$15.0 million
during high-volume months. See Note 8 to the condensed consolidated financial statements for further discussion of the debt and warrants issued in connection with the Merger.
The Merger was treated as a purchase in accordance with Accounting Standards Codification (ASC) 805,
Business Combinations
, which requires allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the transaction, and the Company was determined to be the acquirer in the Merger. The allocation of purchase price is based on management’s judgment after evaluating several factors, including a preliminary valuation assessment. The allocation of purchase price is preliminary and subject to changes, which could be significant, as the valuation of tangible and intangible assets are finalized, working capital adjustments are finalized, and additional information becomes available.
The preliminary allocation of purchase price is as follows:
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(in thousands)
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Cash
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$
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1,936
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Accounts receivable
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3,134
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Inventory and other assets
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1,208
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Fixed assets
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1,032
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Technology
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4,200
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Customer relationships
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3,400
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Trade name/trademark
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200
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Non-compete agreements
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|
10
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Goodwill
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6,544
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Accounts payable
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(2,945
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)
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Accrued expenses and other liabilities
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(4,617
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)
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Line of credit
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(4,684
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)
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Capital leases
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|
(334
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)
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Deferred revenue
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(200
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)
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Subordinated promissory note
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(2,092
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)
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Preliminary Purchase Price
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$
|
6,792
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Intangible assets acquired include existing technologies including a customer-facing wellness portal, customer relationships, trade name/trademark, and an executive non-compete agreement. The fair value assessment of the acquired assets and liabilities utilized Level 3 inputs. The method used to determine the fair value of the intangible assets acquired and their estimated useful lives are as follows:
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Intangible Asset
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Fair Value Method
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Estimated Useful Life
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Technology
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Income Approach, Relief from Royalty
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6 years
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Customer relationships
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Income Approach, Multi-Period Excess Earnings
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8 years
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Trade name/trademark
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Income Approach, Relief from Royalty
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9 months
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Non-compete agreements
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Income Approach Lost Profits Method
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1 year
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Amortization is expected to be recorded on a straight-line basis over the estimated useful life of the asset. The Company recorded amortization expense of
$0.2 million
during the
three
month period ended
June 30, 2017
, related to the intangible assets acquired in the Merger, of which
$0.1 million
is recorded as a component of cost of operations and
$0.1 million
is recorded as a component of selling, general and administrative expenses. The goodwill of
$6.5 million
was recorded in
one
reporting unit as the Company does not report segments, and is expected to be deductible for tax purposes.
The consolidated statement of operations for the
three and six
month periods ended
June 30, 2017
,
includes revenue of
$1.9 million
attributable to Provant since the Merger date of May 11, 2017. Disclosure of the earnings contribution from the Provant business is not practicable, as the Company has already integrated operations in many areas.
The following table provides unaudited pro forma results of operations for the
three and six
month periods ended
June 30, 2017 and 2016
,
as if the Merger had been completed on the first day of the Company's 2016 fiscal year.
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Three Months Ended June 30,
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Six Months Ended June 30,
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(in thousands)
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2017
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2016
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2017
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2016
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Pro forma revenues
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$
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10,884
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$
|
12,426
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$
|
24,034
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$
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26,390
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Pro forma net loss from continuing operations
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$
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(5,768
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)
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$
|
(7,884
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)
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$
|
(11,575
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)
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$
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(15,504
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)
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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, as they do not reflect the operational synergies expected to be achieved by reducing fixed costs by combining operations. Additionally, during the
three and six
month periods ended
June 30, 2016
, Provant had pass-through gift card revenues of
$1.0 million
and
$2.0 million
, respectively, that was a non-recurring transaction. The pro forma results for the
three and six
periods ended
June 30, 2017
, include immaterial pre-tax adjustments for net amortization of intangible assets and the elimination of transaction costs of
$2.0 million
and $
3.1 million
, respectively. Pro forma results for the
three and six
month periods ended
June 30, 2016
, include immaterial pre-tax adjustments for net amortization of intangible assets and the addition of transaction costs of $
2.0 million
and
$3.1 million
, respectively.
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
three and six
month periods ended
June 30, 2017
and
2016
, because the inclusion of dilutive common stock equivalents, the A&R Warrant (
543,479
shares), the 10% Warrant (
326,052
shares), and the 2017 Private Offering Warrants (
2,187,500
shares) (all as defined in Note 8 to the condensed consolidated financial statements) issued in connection with the Merger, 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
June 30, 2017
and
2016
, of
938,062
and
355,092
, respectively, all of which were outstanding as of
June 30, 2017
, but are anti-dilutive because the Company is in a net loss position.
Note 5: Share-Based Compensation
Employee
Share-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. There were
no
options for the purchase of shares granted under the 2008 Plan during the
three and six
month periods ended
June 30, 2017
. During the
three and six
month periods ended
June 30, 2016
, the Company granted
100,000
and
153,332
options, respectively, for the purchase of shares under the 2008 Plan. As of
June 30, 2017
,
53,566
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
three
month period ended
June 30, 2017
, the Company granted
2,075,000
options for the purchase of shares granted under the 2011 Plan conditioned on shareholder approval which was granted at the August 10, 2017, annual meeting of the Company’s shareholders of a proposed increase in the number of shares subject to issuance under the 2011 Plan. During the
six
month period ended
June 30, 2017
, the Company granted a total of
19,800
stock awards under the 2011 Plan to non-employee Board of Directors that immediately vested. During the
three and six
month periods ended
June 30, 2016
, the Company granted a total of
166,665
stock awards to non-employee Board of Directors that immediately vested. As of
June 30, 2017
, assuming shareholder approval of the increase of shares available for issuance under the 2011 Plan,
226,728
shares remained available for grant under the 2011 Plan.
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 the stock options granted during the
three and six
month periods ended
June 30, 2017
, was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
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Three Months Ended June 30,
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Six Months Ended June 30,
|
|
2017
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2017
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Expected life (years)
|
4.2
|
|
4.2
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Expected volatility
|
90.0%
|
|
90.0%
|
Expected dividend yield
|
—%
|
|
—%
|
Risk-free interest rate
|
1.8%
|
|
1.8%
|
Weighted average fair value of options granted during the period
|
$0.43
|
|
$0.43
|
The following table summarizes stock option activity for the
six
month period ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted Average Exercise Price Per Option
|
|
Weighted Average remaining Contractual Life (years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding balance at December 31, 2016
|
|
403,986
|
|
|
$
|
4.62
|
|
|
|
|
|
Granted
|
|
2,075,000
|
|
|
0.65
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited and Expired
|
|
(25,053
|
)
|
|
3.17
|
|
|
|
|
|
Outstanding balance at June 30, 2017
|
|
2,453,933
|
|
|
1.28
|
|
|
9.49
|
|
$0
|
Options exercisable at June 30, 2017
|
|
241,041
|
|
|
$
|
6.11
|
|
|
6.78
|
|
$0
|
There were
no
options exercised during the
six
month periods ended
June 30, 2017 and 2016
. Options for the purchase of an aggregate of
48,084
shares of common stock vested during the
six
month period ended
June 30, 2017
, and the aggregate fair value at grant date of these options was
$0.1 million
. As of
June 30, 2017
, there was approximately
$0.7 million
of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of
2.10
years.
The Company recorded
$0.1 million
and
$0.2 million
, respectively, of share-based compensation expense in selling, general and administrative expenses for the
three and six
month periods ended
June 30, 2017
. The Company recorded
$0.4 million
and
$0.5 million
, respectively, of share-based compensation expense in selling, general and administrative expenses for the
three and six
month periods ended
June 30, 2016
.
Note 6: Inventories
Included in inventories at
June 30, 2017
, and
December 31, 2016
, are
$0.7 million
and
$0.7 million
, respectively, of finished goods and
$0.7 million
and
$0.4 million
, respectively, of components.
Note 7: Goodwill and Other Intangible Assets
The Company recorded goodwill of
$7.2 million
as of
June 30, 2017
, and
$0.6 million
as of
December 31, 2016
.
Intangible assets subject to amortization are amortized on a straight-line basis. Intangible assets are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
(in thousands)
|
Estimated Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
AHS acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portal
|
4 years
|
|
$
|
4,151
|
|
|
$
|
2,289
|
|
|
$
|
1,862
|
|
|
|
$
|
4,151
|
|
|
$
|
1,770
|
|
|
$
|
2,381
|
|
Customer relationships
|
8 years
|
|
2,097
|
|
|
578
|
|
|
1,519
|
|
|
|
2,097
|
|
|
447
|
|
|
1,650
|
|
Provant Merger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
6 years
|
|
4,200
|
|
|
98
|
|
|
4,102
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Customer relationships
|
8 years
|
|
3,400
|
|
|
59
|
|
|
3,341
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Trade name/trademark
|
9 years
|
|
200
|
|
|
38
|
|
|
162
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-compete agreements
|
1 year
|
|
10
|
|
|
1
|
|
|
9
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
14,058
|
|
|
$
|
3,063
|
|
|
$
|
10,995
|
|
|
|
$
|
6,248
|
|
|
$
|
2,217
|
|
|
$
|
4,031
|
|
Amortization expense for the
three
month periods ended
June 30, 2017 and 2016
was
$0.5 million
and
$0.3 million
, respectively. Amortization expense for the
six
month periods ended
June 30, 2017 and 2016
was
$0.8 million
and
$0.7 million
, respectively.
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 as of
June 30, 2017
. 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
June 30, 2017
. Note that due to the Merger with Provant, there have been discussions around discontinuing the use of the Company's current portal and moving to the Provant portal. As of
June 30, 2017
, however, these discussions were still very preliminary and no firm decisions have been made. Therefore, this impairment analysis was not adjusted to reflect any potential changes from the Merger. The Company will continue to evaluate the likelihood of this potential transition going forward.
Note 8: Debt
As of
June 30, 2017
, the following table summarizes the Company's outstanding debt:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
2016 Credit and Security Agreement
|
|
$
|
4,473
|
|
|
$
|
3,603
|
|
Term Loan
|
|
6,500
|
|
|
3,676
|
|
Discount on Term Loan
|
|
(586
|
)
|
|
(1,122
|
)
|
Unamortized debt issuance costs related to Term Loan
|
|
(175
|
)
|
|
(336
|
)
|
Seasonal Facility
|
|
2,000
|
|
|
—
|
|
Subordinated Promissory Note
|
|
2,092
|
|
|
—
|
|
Capital Leases
|
|
281
|
|
|
—
|
|
Total debt
|
|
14,585
|
|
|
5,821
|
|
Short-term portion
|
|
(6,754
|
)
|
|
(5,821
|
)
|
Total long-term debt
|
|
$
|
7,831
|
|
|
$
|
—
|
|
The following table summarizes the components of interest expense for the
three and six
month periods ended
June 30, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest expense on Term Loan (effective interest rate at June 30, 2017 and 2016 was 13.5% and 15%, respectively)
|
|
$
|
179
|
|
|
$
|
161
|
|
|
$
|
317
|
|
|
$
|
341
|
|
Interest expense on 2013 Loan and Security Agreement
|
|
—
|
|
|
16
|
|
|
—
|
|
|
49
|
|
Interest expense on 2016 Credit and Security Agreement
|
|
117
|
|
|
48
|
|
|
198
|
|
|
48
|
|
Interest expense on Seasonal Facility
|
|
23
|
|
|
—
|
|
|
23
|
|
|
—
|
|
Interest expense on Subordinated Promissory Note
|
|
23
|
|
|
—
|
|
|
23
|
|
|
—
|
|
Interest expense on Capital Leases
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Interest expense, other
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Accretion of termination fees (over term of Term Loan at rate of 8%)
|
|
98
|
|
|
45
|
|
|
140
|
|
|
91
|
|
Amortization of debt issuance costs
|
|
79
|
|
|
62
|
|
|
219
|
|
|
123
|
|
Write-off of debt issuance costs related to 2013 Loan and Security Agreement
|
|
—
|
|
|
282
|
|
|
—
|
|
|
282
|
|
Amortization of debt discount associated with SWK Warrants #1 and #2 (defined below)
|
|
170
|
|
|
397
|
|
|
537
|
|
|
807
|
|
Mark to market of SWK Warrant #2 (defined below)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59
|
|
Total
|
|
$
|
693
|
|
|
$
|
1,011
|
|
|
$
|
1,461
|
|
|
$
|
1,800
|
|
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, November 15, 2016, and May 11, 2017. 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.
In connection with the Merger, the Company entered into the Third Amendment, which expands the Company's revolving credit facility from
$7.0 million
to
$10.0 million
with an accordion to
$15.0 million
during high-volume months. The Company evaluated the application of ASC 470-50 and ASC 470-60 for the Third Amendment and concluded that the revised terms did not constitute a troubled debt restructuring ("TDR"), and the amendment was accounted for as debt modification rather than debt extinguishment. SCM makes cash advances to the Company in an aggregate principal amount outstanding at any
one
time not to exceed the maximum borrowing capacity, 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
June 30, 2017
, the Company had
$4.5 million
of outstanding borrowings under the 2016 Credit and Security Agreement, borrowing the maximum available amount under the borrowing capacity. As of
August 10, 2017
, the Company had
$3.4 million
of outstanding borrowings and
$0.9 million
of unused borrowing capacity. Any borrowings on the unused borrowing capacity are at the discretion of SCM. Immediately following the Merger, the Company paid off Provant's outstanding line of credit balance, noted in the preliminary purchase price allocation in Note 3 to the condensed consolidated financial statements, of
$4.7 million
.
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. In connection with the Third Amendment,
the Company paid fees of
$0.1 million
to SCM that were capitalized in Other Assets. As of
June 30, 2017
, the remaining balance in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheet was
$0.3 million
.
Borrowings under the 2016 Credit and Security 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.
The Third Amendment revised the previous covenants, and contains customary representations and warranties and various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. Noncompliance with these covenants constitutes an event of default. The covenants are summarized in the tables below and are on a pro forma basis as if the Merger with Provant happened at the beginning of the quarter ended
June 30, 2017
:
`
|
|
|
|
|
|
|
|
|
(in thousands)
|
Minimum Aggregate Revenue (LTM) as of the end of:
|
Three months
ended
June 30, 2017
|
Six months
ending
September 30, 2017
|
Nine months
ending
December 31, 2017
|
Twelve months
ending
March 31, 2018
|
Twelve months
ending
June 30, 2018
|
Twelve months
ending
September 30, 2018
|
Twelve months
ending
December 31, 2018
|
Twelve months ending
each fiscal quarter
thereafter
|
$10,500
|
$26,000
|
$53,000
|
$69,000
|
$70,000
|
$71,000
|
$74,000
|
$75,000
|
|
|
|
|
|
|
|
|
|
Minimum Adjusted EBITDA as of the end of:
|
|
|
Twelve months
ending
December 31, 2017
|
Twelve months
ending
March 31, 2018
|
Twelve months
ending
June 30, 2018
|
Twelve months
ending
September 30, 2018
|
Twelve months
ending
December 31, 2018
|
Twelve months ending
each fiscal quarter
thereafter
|
|
|
$3,000
|
$5,000
|
$5,200
|
$6,000
|
$8,000
|
$9,000
|
|
|
|
|
|
|
|
|
|
Minimum Consolidated Unencumbered Liquid Assets as of:
|
June 30, 2017
|
September 30, 2017
|
The end of each fiscal quarter thereafter
|
|
|
|
|
|
$500
|
$750
|
$1,000
|
|
|
|
|
|
The Company was in compliance with the covenants under the Third Amendment as of
June 30, 2017
. 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.
A&R Credit Agreement
In order to fund the acquisition of Accountable Health Solutions in 2015, 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 provided the Company with a
$5.0 million
Term Loan. In order to provide additional working capital for the consolidated Company after the Merger, the Company entered into the A&R Credit Agreement with SWK which increases the Term Loan balance as of
June 30, 2017
, from
$3.7 million
to
$6.5 million
. The A&R Credit Agreement provides the Company a principal repayment holiday until February 2019. Interest, fees, costs, and expenses are payable quarterly beginning in the third quarter of 2017. All mandatory payments of principal, interest, fees, costs, and expenses are determined by the revenue-based formula that has been in effect since the original Credit Agreement. Principal payments, once they begin, are capped at
$0.5 million
per quarter. The Company will be required to make the quarterly revenue-based payments in an amount equal to fifteen percent (
15.0%
) of yearly aggregate revenue up to and including
$20 million
plus ten percent (
10%
) of yearly aggregate revenue greater than
$20 million
less any revenue-based payments made in prior quarters in the same fiscal year. The Company evaluated
the application of ASC 470-50 and ASC 470-60 for the A&R Credit Agreement and concluded that the revised terms did constitute a TDR, and thus has expensed all direct costs in the period in which they were incurred, discussed further below.
The outstanding principal balance under the A&R 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 twelve-and-a-half percent (
12.5%
) and is due and payable quarterly, in arrears, commencing in the third quarter of 2017. Upon the earlier of (a) the maturity date on May 11, 2021, 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 A&R 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. In connection with the A&R Credit Agreement, the Company paid a
$97,500
origination fee to SWK and
$150,000
of legal fees, which per the TDR guidance noted above were recorded as transaction costs in the quarter ended
June 30, 2017
. The Company was also required to pay the
$0.4 million
exit fee from the original Credit Agreement to SWK, which the Company had been accreting to interest expense, recording the remaining balance of
$75,000
in interest expense in the quarter ended
June 30, 2017
. The Company will also pay an unused line fee going forward.
In addition, SWK is providing a
$2.0 million
seasonal revolving credit facility (the "Seasonal Facility"), which is guaranteed by the parent company of
one
of the Former Provant Owners, Century Focused Fund III, LP (“Century”). In exchange for Century’s guarantee of the Seasonal Facility pursuant to a Limited Guaranty Agreement dated May 11, 2017, among Century, SWK and the Company (the “Century Guaranty”), the Company issued to WH-HH Blocker, Inc., a subsidiary of Century (“WH-HH Blocker”), a Common Stock Purchase Warrant to purchase
326,052
shares of Common Stock, with a strike price of
$0.6134
per share (the “
10%
Warrant”). If the guarantee is called, the Company would issue to WH-HH Blocker an additional Common Stock Purchase Warrant to purchase
2,934,468
shares of Common Stock, with a strike price of
$0.6134
per share (the “
90%
Contingent Warrant”) (together with the 10% Warrant, the "Century Warrants"). The Century Warrants will be exercisable for
seven
years and will each have a strike price equal to the average trading price used to determine the number of shares subject to such warrant. The 10% Warrant will not be exercisable during the first year after closing of the Merger. The 10% Warrant was issued by the Company in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, and Rule 506 thereunder. Pursuant to a Credit Agreement Side Letter between the Company and Century executed on May 11, 2017 (the “Side Letter”), the Company is also obligated, if it fails to pay the amount outstanding under the Seasonal Facility by November 30 each year to SWK, regardless if the Century Guaranty is called by SWK, to pay interest to Century at an annual rate of
25%
on the outstanding balance from November 30 until the outstanding balance under the Seasonal Facility is paid in full to SWK. As noted above, as the modification of the Term Loan was treated as a TDR, the Century Warrants issued as part of the TDR were treated similarly to the cash transaction costs discussed above and thus the fair value of the Century Warrants was recorded as transaction costs in the quarter ended
June 30, 2017
. The Century Warrants are being accounted for as derivatives and thus will be re-measured at fair value at each reporting date with the change in fair value reflected in earnings. The Company valued the Century Warrants using the Black-Scholes pricing model, which utilizes Level 3 Inputs. The Company utilized volatility of
80.6%
, a risk-free rate of
2.22%
, dividend rate of
zero
, and term of
7
years, which is consistent with the exercise period of the Century Warrants.
To fulfill a condition of the A&R Credit Agreement, the Company issued
4,375,000
shares of its common stock to various investors in a private offering for an aggregate purchase price of
$3.4 million
, net of issuance costs, between February 1, 2017 and May 11, 2017 (the "2017 Private Offering"). These shares were sold at a purchase price of
$0.80
per share plus one-half warrant per share with a strike price of
$1.35
per share. Warrants to purchase up to an additional
2,187,500
shares of common stock were issued (the "2017 Private Offering Warrants"). The 2017 Private Offering Warrants 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.
In connection with the execution of the Credit Agreement in 2015, 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 to Credit Agreement and Limited Waiver and Forbearance (the “Third SWK Amendment”) dated August 15, 2016, 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 condensed consolidated balance sheet. 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 (“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, 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 has been amortized through interest expense over the term of the Credit Agreement using the effective interest method. In accordance with the relevant accounting guidance for a TDR, the debt discount is now being amortized through expense over the
revised term of the A&R Credit Agreement. The Company valued both warrants using the Black-Scholes pricing model, which utilizes Level 3 Inputs. For 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.
In connection with the execution of the A&R Credit Agreement, the Company issued to SWK a Second Amended and Restated Closing Date Warrant (the “A&R Warrant”) to replace SWK Warrant #1 to purchase
543,479
shares of the Company’s common stock. The A&R Warrant 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 A&R Warrant will be exercisable for
seven
years, and upon exercise, the total number of shares of the Company’s common stock to be issued to SWK will be approximately
1.3 million
at a strike price of
$0.84
per share. The A&R Warrant is being issued by the Company in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 thereunder. As noted above, as the modification of the Term Loan was treated as a TDR, the A&R Warrant issued as part of the TDR was treated similarly to the cash transaction costs discussed above and thus the change in the fair value of SWK Warrant #1 and the A&R Warrant was recorded as a transaction cost in the quarter ended
June 30, 2017
. The Company valued the A&R Warrant using the Black-Scholes pricing model, which utilizes Level 3 Inputs. The Company utilized volatility of
80.6%
, a risk-free rate of
2.22%
, dividend rate of
zero
, and term of
7
years, which is consistent with the exercise period of the A&R Warrant.
The A&R Credit Agreement revised the previous covenants, and contains customary representations and warranties and various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. Noncompliance with these covenants constitutes an event of default. The covenants are summarized in the tables below and are on a pro forma basis as if the Merger with Provant happened at the beginning of the quarter ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Minimum Aggregate Revenue (LTM) as of the end of:
|
Three months
ended
June 30, 2017
|
Six months
ending
September 30, 2017
|
Nine months
ending
December 31, 2017
|
Twelve months
ending
March 31, 2018
|
Twelve months
ending
June 30, 2018
|
Twelve months
ending
September 30, 2018
|
Twelve months
ending
December 31, 2018
|
Twelve months ending
each fiscal quarter
thereafter
|
$10,500
|
$26,000
|
$53,000
|
$69,000
|
$70,000
|
$71,000
|
$74,000
|
$75,000
|
|
|
|
|
|
|
|
|
|
Minimum Adjusted EBITDA as of the end of:
|
|
|
Twelve months
ending
December 31, 2017
|
Twelve months
ending
March 31, 2018
|
Twelve months
ending
June 30, 2018
|
Twelve months
ending
September 30, 2018
|
Twelve months
ending
December 31, 2018
|
Twelve months ending
each fiscal quarter
thereafter
|
|
|
$3,000
|
$5,000
|
$5,200
|
$6,000
|
$8,000
|
$9,000
|
|
|
|
|
|
|
|
|
|
Minimum Consolidated Unencumbered Liquid Assets as of:
|
June 30, 2017
|
September 30, 2017
|
The end of each fiscal quarter thereafter
|
|
|
|
|
|
$500
|
$750
|
$1,000
|
|
|
|
|
|
The Company was in compliance with the covenants under the A&R Credit Agreement as of
June 30, 2017
. 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.
Borrowings under the A&R Credit Agreement are secured by a security interest in all existing and after acquired property of the Company and its subsidiaries, including Provant, including, but not limited to, its receivables (which are subject to a lockbox account arrangement), inventory and equipment.
The A&R 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.
On August 8, 2017, the Company entered into a First Amendment to the A&R Credit Agreement (the “First Amendment”) that provides for an additional
$2.0 million
term loan (the “August 2017 Term Loan”). Refer to Note 12 to the condensed consolidated financial statements Part II, Item 5 of this Report for further discussion.
Subordinated Promissory Note
Century invested
$2.5 million
in Provant prior to the Merger in the form of subordinated, convertible debt bearing interest at
8.25%
. Immediately prior to closing of the Merger, approximately
$0.4 million
of the balance of the note converted to equity in Provant. Subject to a net debt calculation in the Merger Agreement, which included a postclosing true-up, the remaining approximately
$2.1 million
remained outstanding as subordinated debt (not convertible anymore) of Provant to Century pursuant to the Subordinated Promissory Note dated May 11, 2017 (the “Subordinated Promissory Note”). As noted in Note 3 to the condensed consolidated financial statements, the Subordinated Promissory Note was part of the Provant purchase price allocation and is recorded in long-term liabilities on the condensed consolidated balance sheet as of
June 30, 2017
.
The unpaid principal balance of the Subordinated Promissory Note is due on May 11, 2022, or if earlier, the date on which the Term Loan to SWK and the 2016 Credit and Security Agreement with SCM is discharged, repaid, refinanced or otherwise satisfied (the "Maturity Date"). The Subordinated Promissory Note bears interest at annual rate of
8.25%
. Interest shall accrue daily and be paid in full on the Maturity Date; provided that a minimum amount of interest equal to the “Tax Distribution” shall be paid on or before March 31 of each year. “Tax Distribution” means
40%
of the accrued interest for the most recently completed calendar year. The Subordinated Promissory Note is subordinated to the Term Loan with SWK and the 2016 Credit and Security Agreement with SCM, pursuant to the terms outlined in the Subordinated Promissory Note.
Capital Leases
As a result of the Merger with Provant, the Company acquired
two
leases accounted for as capital leases, which related to a phone system, which expires in October 2017, and a data center, which expires in June 2018. The underlying assets and accumulated depreciation are recorded in property, plant and equipment, with the corresponding liability of
$0.3 million
recorded in short-term debt in the condensed consolidated balance sheet as of
June 30, 2017
.
Note 9: Commitments and Contingencies
Lease obligations
After the Merger with Provant, the Company has
two
major locations located in Olathe, Kansas and East Greenwich, RI under operating leases which expire in 2018. Through the acquisition of AHS in 2015, the Company acquired
two
leased properties in Des Moines, IA and Indianapolis, IN under operating leases which also expired in 2018. The Company determined that neither lease was necessary for its operations, thus, in April 2017, settlement agreements for the remaining lease obligations were reached with both landlords. Additionally, the Company was under obligation under a lease related to the discontinued Hooper Holmes Services operations center through 2018 and had ceased use of this facility, and on March 9, 2017, the parties to the lease reached a settlement agreement for the remaining lease obligation. A
$0.1 million
gain from discontinued operations was recorded during the
six
month period ended
June 30, 2017
, based on this settlement agreement. The lease settlement liabilities for the
three
settled lease agreements of
$0.5 million
are accrued in other current and long-term liabilities in the accompanying condensed consolidated balance sheet as of
June 30, 2017
. The Company had recorded a facility closure obligation of
$0.4 million
, related to the discontinued Hooper Holmes Services operations center, which was recorded in other current and long-term liabilities in the accompanying condensed consolidated balance sheet as of
December 31, 2016
.
The Company also leases copiers and other miscellaneous equipment. These leases expire at various times through 2017.
Employment obligations
The Company has employment agreements with certain employees that provide for payment of base salary for up to 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 in 2016 and throughout 2017 related to its ongoing initiatives to increase the flexibility of its cost structure and integrate Provant that were recorded in selling, general, and administrative expenses, and at
June 30, 2017
, the Company recorded a
$0.3 million
liability related to these initiatives in other current liabilities in the accompanying condensed 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, that was subsequently paid during the
three
months ended
June 30, 2017
. As of
December 31, 2016
, the Company had recorded a liability of
$0.45 million
related to this matter in other current liabilities in the condensed consolidated balance sheet. An expense of
$0.15 million
recorded during the
six
month period ended
June 30, 2016
, was included in the discontinued operations line item on the condensed consolidated statement of operations. The claim was not covered by insurance, and the Company incurred legal costs to defend the litigation which are also recorded in discontinued operations during the
six
month period ended
June 30, 2016
. There were
no
such costs incurred during the
three and six
month periods ended
June 30, 2017
.
Prior to the Company’s merger with Provant, Provant settled a lawsuit filed in California state court in which a former employee claimed that Provant failed to follow specific requirements under California wage and hour laws and regulations. Under the settlement agreement, Provant agreed to pay the plaintiff approximately
$0.75 million
, a portion of which was covered by Provant’s insurance, by March 2018. The uninsured balance of
$0.7 million
has been accrued in other current liabilities in the condensed consolidated balance sheet as of
June 30, 2017
.
Note 10: Income Taxes
The Company's income tax expense was not material for any period presented in the condensed consolidated statement of operations. No amounts were recorded for unrecognized tax benefits or for the payment of interest and penalties during the
three and six
month periods ended
June 30, 2017
and
2016
. No federal or state tax benefits were recorded relating to the current year loss. The Company continues to believe that a full valuation allowance is required on its net deferred tax assets, with the exception of deferred income tax on the liabilities of certain indefinite-lived intangibles.
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 ("NOL") 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
$176.2 million
and
$143.0 million
, respectively. There has been a significant change in these balances as of May 11, 2017, following the changes in ownership due to the Merger with Provant, in addition to the previous changes in ownership since 2015. 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, continuing into 2016 and 2017, the Company has determined that additional limitations under IRC Section 382 of the Internal Revenue Code of 1986 apply to the future utilization of certain tax
attributes including NOL carryforwards, other tax carryforwards, and certain built-in losses. Limitations on future net operating losses apply when a greater than
50%
ownership change over a
three
-year period occurs under the rules of IRC Section 382. The Company has not had a formal study completed with respect to IRC Section 382; however, the Company did complete its own analysis and determined that there has been a greater than
50%
change in ownership following the Merger on May 11, 2017. The allowance of future net operating losses is limited to the market capitalization value multiplied by the “long-term tax-exempt rate” as of May 2017, the month in which the ownership change took place. It is estimated that the Company will be limited to approximately
$0.2 million
of NOL per year, and due to expiring net operating loss provisions, the Company has estimated it will be unable to utilize approximately
$172.9 million
and
$140.2 million
of remaining federal and state net operating losses, respectively, in the future. The net operating loss carryforwards expiring prior to utilization as a result of the Section 382 limitations reduce the deferred tax assets, with a corresponding reduction of the valuation allowance.
In addition to the Company’s existing net operating losses, the Company is confirming that the net operating losses of Provant are acquired as part of the Merger, satisfying the continuity of business requirements. Provant has an estimated
$5.8 million
and
$2.8 million
of federal and state net operating losses, respectively, as of the Merger date after applying the limitations of IRC Section 382. Preliminary calculations indicate the Provant losses will be limited to
$0.3 million
of NOL per year.
Note 11: 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
(in thousands)
|
|
Face Value
|
|
Fair Value
|
|
Carrying Amount
|
|
|
Face Value
|
|
Fair Value
|
|
Carrying Amount
|
Term Loan
|
|
$
|
6,500
|
|
|
$
|
6,141
|
|
|
$
|
5,739
|
|
|
|
$
|
5,000
|
|
|
$
|
4,865
|
|
|
$
|
2,218
|
|
Note 12: Subsequent Events
On August 8, 2017, the Company entered into a First Amendment to the A&R Credit Agreement (the “First Amendment”) that provides for an additional
$2.0 million
term loan (the “August 2017 Term Loan”). The Company is required to repay the August 2017 Term Loan by February 1, 2018, but plans to repay it by November 30, 2017. In consideration for the First Amendment, the Company issued a new warrant (the “August Warrant”) for SWK to purchase up to
450,000
shares of the Company’s common stock for a strike price of
$0.80
per share, paid a fee of
$0.03 million
, and will pay an exit fee of
$0.14 million
if the August 2017 Term Loan is repaid by November 30, 2017, or
$0.28 million
if it is repaid later.