The carrying value of OrangeHook MN's accounts receivable represents their estimated net realizable value. No collateral or other security is required to support accounts receivable, which are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts (90 to 120 days outstanding) are written off through a charge to the valuation allowance and a credit to accounts receivable. OrangeHook MN does not charge interest on past due accounts receivable balances. In management's opinion, no allowance for doubtful accounts was considered necessary as of December 31, 2016 and 2015.
Three and two customers accounted for approximately 54% and 49% of total accounts receivable as of December 31, 2016 and 2015, respectively.
Inventory
Inventory consists primarily of supplies held for resale and are valued at the lower of cost or market. Cost is determined by the average cost method, which approximates the first-in, first-out ("FIFO") method.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements include furniture, fixtures & equipment, computer software, and leasehold improvements, which are recorded at cost.
Depreciation and amortization of furniture, equipment and leasehold improvements are provided on the straight-line method over the lesser of the remaining useful life or lease term for leasehold improvements and 3 to 5 years for furniture, software, and equipment.
Maintenance, repairs and minor betterments which do not improve or extend the life of the respective assets are expensed as incurred. The assets and related depreciation and amortization accounts are adjusted for equipment and leasehold improvement retirements and disposals with the resulting gain or loss included in operations.
Purchase Accounting
We account for acquisitions by allocating the purchase price paid to affect the acquisition to the identifiable acquired assets and liabilities at fair value with excess purchase price being recorded as goodwill.
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased. Goodwill is tested at least annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. We review goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, we conclude that goodwill is not impaired. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then OrangeHook MN must perform the second step in order to determine the implied fair value of the reporting unit's goodwill and compare it to the carrying value of the reporting unit's goodwill. No goodwill impairments have been recognized in 2016 or 2015.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Intangible Assets
Intangible assets primarily include customer relationships, trade names, trademarks, patents, and software technology. Our intangible assets have definite lives ranging from 5 to 10 years. The straight-line method of amortization generally reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the OrangeHook MN in each reporting period.
Amortizable intangibles are measured for impairment consistent with the process utilized for long-lived assets as described below under the heading 'Long-lived Assets'. There was no impairment recorded to intangible assets as of December 31, 2016 and December 31, 2015.
Fair Value of Financial Instruments
Financial instruments include accounts receivable, accrued liabilities, accounts payable and long–term debt. Management believes that fair value of its financial instruments approximates their carrying value. The fair value of current financial instruments is estimated to approximate carrying value due to the short–term nature of these instruments and other market factors. The fair value of long–term debt is estimated to approximate carrying value given the debt's variable interest rates and other market factors.
Investments
Investments are carried at the lower of cost or market. As of December 31, 2015, investments consisted of equity investments in LifeMed ID, Inc. There is not a quoted market price for this investment. The valuation is based on all available financial information related to the investee. The investment is reviewed on a periodic basis to determine whether the cost of the investment is in excess of the fair value and if an impairment loss should be recorded. We acquired the remaining interest in this investment during 2016. The Company noted there was not an indicator of impairment as of December 31, 2015.
Segment Information
Our segments are organized based on the different products and services that we offer. We report our financial results in four operating segments: Salamander Technologies, Agilivant, LifeMed ID, and Corporate which includes Nuvel and LifeNexus, each of which is also a reportable segment.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based payments at fair value over the requisite service period. We use Black-Scholes option pricing model to determine the weighted average fair value of options. The determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Forfeitures for both option and restricted stock grants are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from estimates.
Stock Issued for Services
OrangeHook MN measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. In connection with these awards, the fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.
Software Development Costs
OrangeHook MN had not capitalized any of the costs incurred related to the development of its software products being marketed as the period of time between achieving technological feasibility and the general availability of OrangeHook MN's software products has been very short and any costs incurred subsequent to achieving technological feasibility have not been significant. These costs are expensed and included in product development expenses in the accompanying consolidated statements of operations.
Long-lived Assets
OrangeHook MN reviews its long-lived assets for events or changes in circumstances that may indicate that the carrying amount of a long-lived asset may not be recoverable or exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Fair value is defined as 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. OrangeHook MN's long-lived assets include property, equipment, leasehold improvements and definite-lived intangibles. There was
no
impairment recorded to long-lived assets as of December 31, 2016 and December 31, 2015.
Debt Issuance Costs
OrangeHook MN amortizes the debt issuance costs under the effective method over the life of the related debt instrument and reflects the unamortized costs as a reduction of the related debt in the accompanying consolidated balance sheets and amortization of debt issuance costs as interest expense in the accompanying consoldiated statements of operations.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Loss per Common Share
Basic loss per common share is computed by using loss attributable to common stockholders and the weighted average number of common shares outstanding. Diluted loss per common share reflects the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period. Potentially dilutive shares consist of shares issuable upon the exercise of stock options, stock warrants and unvested restricted stock (using treasury stock method) and conversion of preferred shares (using the as converted method). For the years ended December 31, 2016 and 2015, a total of 3,895,366 and 2,573,660, respectively, of common equivalent shares have been excluded from diluted loss per common share as they were anti-dilutive.
Revenue Recognition
We recognize revenue from our customers for sales of hardware and/or software components, sales of service contracts and subscription agreements and software licensing arrangements. Revenue is recognized in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605, "
Revenue Arrangements with Multiple Deliverables
." When multiple elements such as the product (e.g., hardware, software and other components), installation and training are contained in a single arrangement, or in related arrangements with the same customer, revenue is allocated to each element based upon its relative fair value. Management believes the individual elements within its contracts meet the ASC Topic 605 criteria for treatment as separate units of accounting. The price charged when the element is sold separately generally determines fair value.
Revenue from product sales is recognized when the related goods are shipped whereas revenue from installation and training activities is recognized when the services are performed. Discounts in multiple elements sold as a single arrangement are allocated proportionately to the individual elements based on the fair value charged when the element is sold separately.
Revenue from service contracts and subscription agreements is recorded on a straight-line basis over the term of the related agreement.
Revenue from software licensing arrangements is recognized when all of the following conditions exist: (1) the licensing agreement has been executed, (2) the license period has begun and the licensee can begin its use of the software, (3) the fee is fixed or determinable, (4) collection of the license fee is reasonably assured, and (5) there are no significant on-going obligations of OrangeHook MN relating to the licensing arrangement.
Advance payments received from customers, as well as unpaid amounts that customers are contractually obligated to pay, are deferred until all revenue recognition criteria are satisfied.
Income Taxes
OrangeHook MN accounts for deferred tax assets and liabilities under the liability method. Deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. OrangeHook MN regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable income. Realization of net operating loss carry-forward and other deferred tax temporary differences are contingent upon future taxable earnings. OrangeHook MN's deferred tax assets were reviewed for expected utilization by assessing the available positive and negative factors surrounding its recoverability.
We account for uncertainty in income taxes recognized in financial statements in accordance with ASC 740 (formerly FIN 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109,"). ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Only tax positions that meet the more-likely-than-not recognition threshold may be recognized.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Recent Accounting Pronouncements
During May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers." ASU No. 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. During August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09. ASU No. 2014-09 is effective for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. OrangeHook MN may elect to apply the guidance earlier, but no earlier than fiscal years beginning after December 15, 2016. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. OrangeHook MN is currently assessing the effect that ASU Nos. 2014-09 and 2015-14 will have on its consolidated results of operations, financial position and cash flows.
During April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in balance sheet as a direct deduction from the carrying amount of that debt liability instead of an asset. The recognition and measurement guidance for debt issuance costs are not affected by this update. ASU No. 2015-03 is effective for annual periods beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted. OrangeHook MN adopted the guidance for the year ended December 31, 2015 and debt issuance costs are presented as a reduction of long-term debt. The adoption did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-2, "Leases", under which lessees will recognize most leases on-balance sheet. This will generally increase reported assets and liabilities. For public entities, this ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018, and for private entities for annual reporting periods beginning after December 31, 2019. OrangeHook MN will begin the process of determining the impact this ASU will have on OrangeHook MN's consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting", which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. OrangeHook MN is evaluating the impact the adoption of this ASU will have on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting" which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by- step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendment is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. OrangeHook MN adopted the guidance in the first quarter of 2016 and applied the equity method for its investment in LifeMed ID, Inc. prospectively beginning with the three months ended June 30, 2016.
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments", which is intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The ASU also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. This ASU is effective January 1, 2018, with early adoption permitted. The standard requires application using a retrospective transition method. OrangeHook MN does not expect this ASU to have a material impact on the consolidated results of operations and financial condition.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
In October 2016, the FASB issued ASU No. 2016-17, "Interests Held Through Related Parties That Are Under Common Control", which modifies existing guidance with respect to how a decision maker that holds an indirect interest in a variable interest entity (VIE) through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party's interest in the VIE as if the decision maker held the interest itself. As a result of the ASU, in certain cases, previous consolidation conclusions may change. The standard is effective January 1, 2017 with retrospective application to January 1, 2016. We do not have significant involvement with entities subject to consolidation considerations impacted by VIE model factors. As a result, we do not expect this ASU to have a material impact on OrangeHook MN's consolidated results of operations and financial condition.
In November 2016, the FASB issued ASU No. 2016-18, "Restricted Cash", which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. This ASU is effective January 1, 2018, with early adoption permitted. Entities are required to apply the standard's provisions on a retrospective basis. We do not expect this ASU to have a material impact on the consolidated results of operations and financial condition.
In January 2017, the FASB issued ASU No. 2017-01, "Clarifying the Definition of a Business", which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired sets are expected to be considered businesses. This ASU is effective January 1, 2018 on a prospective basis with early adoption permitted. We will apply this guidance to applicable transactions after the adoption date.
In January 2017, the FASB issued ASU No. 2017-04, "Simplifying the Test for Goodwill Impairment." Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. We will apply this guidance to applicable impairment tests after the adoption date.
4.
Merger and Acquisitions
Merger with Nuvel Holdings, Inc. ("Nuvel")
Nuvel designs, develops and markets data acceleration solutions that are built for accelerating and optimizing the flow of information across enterprise networks. Nuvel's products are deployed by its customers throughout their network infrastructures to improve the performance of their networks and reduce network costs, while enhancing network speed and optimization.
On December 1, 2016, Nuvel Holdings, Inc. acquired OrangeHook, Inc., a Minnesota corporation ("OrangeHook MN"), in an acquisition structured as a reverse triangular merger, under which OH Acquisition Corp, a Minnesota corporation and wholly-owned subsidiary of the Company, merged with and into OrangeHook MN, with OrangeHook MN remaining as the surviving corporation and a wholly-owned subsidiary of Nuvel (the "Merger"). OrangeHook MN shareholders received as merger consideration shares of Nuvel's capital stock representing a substantial majority of the voting and financial rights of the Company. As a result, OrangeHook MN was the acquirer for accounting and financial reporting purposes.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Also under the terms of the Merger Agreement, (i) outstanding shares of OrangeHook MN's common stock and other outstanding securities convertible into OrangeHook MN's common stock were exchanged for a pro rata portion of 500,000 shares (or a corresponding security convertible into shares) of a new series of preferred stock, par value $0.001 per share, of Nuvel (the "Series OH-1 Convertible Preferred Stock") and (ii) each outstanding share of OrangeHook MN's preferred stock and other outstanding securities convertible into OrangeHook MN's preferred stock were exchanged for one share (or a corresponding security convertible into one share) of a new series of preferred stock, par value $0.001 per share, of Nuvel (the "Series OH-2 Convertible Preferred Stock").
On December 27, 2016, we amended and restated its Articles of Incorporation to, among other things, effect
a one-for-1,200,000 reverse stock split of former Nuvel issued and outstanding shares of common stock (the "Reverse Stock Split").
No fractional shares were issued as a result of the reverse stock split, but instead fractional share interests were rounded up to the nearest whole share of common stock. In connection with and immediately upon completion of the reverse stock split,
all outstanding shares of Series OH-1 Convertible Preferred Stock and Series D Convertible Preferred Stock, as well as approximately $1.166 million in aggregate principal amount of then-outstanding convertible promissory notes, converted automatically into fully paid and non-assessable shares of common stock (the "Conversions").
All former Nuvel historical share and per share amounts included in this report respecting securities affected by the Reverse Stock Split and subsequent Conversions has been adjusted to reflect the effects thereof.
In addition, Nuvel performed a parent-subsidiary merger of OrangeHook MN with and into Nuvel, and Nuvel is changed its name to OrangeHook, Inc. ("OrangeHook") after which OrangeHook MN became a publicly-held Florida corporation.
Upon consummation of the reverse stock split and without any action by the holders of Series OH-1 Convertible Preferred Stock, all outstanding shares of Series OH-1 Convertible Preferred Stock converted into shares of fully paid and non-assessable Nuvel common stock at a conversion ratio equal to the quotient derived by dividing the number of outstanding shares of OrangeHook MN common stock and other outstanding securities convertible into OrangeHook MN common stock, in each case immediately prior to the Merger, by 500,000 (the "OrangeHook Preferred Conversion"). The reverse stock split did not impact the number of outstanding shares of Series OH-2 Convertible Preferred Stock or the conversion ratio applicable thereto. As a result of the reverse stock split, shares of Nuvel common stock outstanding immediately prior to the reverse stock split, represents a mere nominal interest in Nuvel. The economic benefit to holders of Nuvel common stock prior to the Merger, is the right to participate in the contingent issuance of the Earn-Out Shares (see Note 7).
As of September 30, 2016 and prior to the Merger, OrangeHook MN did not have sufficient authorized and unissued shares for all commitments common stock to be issued in connection with warrants, restricted stock, stock options, conversion of preferred shares and debt. As a result, a total of 967,879 shares were issued and committed in excess of the 10,000,000 authorized shares of OrangeHook MN common stock, which resulted in the excess shares being reclassified as a liability with an offsetting reduction of preferred stock and additional paid in capital of $36 and $596, respectively. As a result of the Merger, sufficient shares of common stock were authorized and the related liability was reversed.
In December, 2016, OrangeHook MN allocated the purchase price, which was calculated based on the issuance of 458,767 shares of common stock at a value of $3.61 per share, based on the fair value of the assets acquired and liabilities assumed. In addition, included in the allocation below, is a contingent consideration liability which represents the fair value of additional consideration due to holders of pre-merger Nuvel common stock based on the likelihood of achieving certain revenue results. This contingent consideration is payable in 357,143 shares of common stock, which had also been valued at $3.61 per share, net of a 25% discount factor (see Note 7). The evaluation of the OrangeHook MN's common stock requires OrangeHook MN to make assumptions about future cash flows of OrangeHook MN that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. OrangeHook MN engaged an independent specialist to assist OrangeHook MN in evaluating the fair value of OrangeHook MN's common stock and ultimately concluded on the fair value of OrangeHook MN's common stock.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
A summary of the assets acquired and liabilities assumed as of the closing date is as follows:
Current assets
|
|
$
|
16
|
|
Software technology
|
|
|
5,824
|
|
Goodwill
|
|
|
2,616
|
|
Current Liabilities
|
|
|
(1,529
|
)
|
Deferred Tax Liability
|
|
|
(2,122
|
)
|
Assumed Obligations to OrangeHook Inc.
|
|
|
(1,562
|
)
|
Assumed Debt
|
|
|
(620
|
)
|
Contingent Consideration
|
|
|
(967
|
)
|
|
|
|
|
|
Value of net assets acquired
|
|
$
|
1,656
|
|
Transaction costs of $622 and $16 were expensed as incurred during the years ended December 31, 2016 and 2015, respectively. The value assigned to goodwill is not deductible for income tax purposes. The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum and expected corporate synergies. As shown in the table above, the allocation of the purchase price created an intangible asset of $5,824, which will be amortized for financial reporting purposes in future periods. This temporary difference created a deferred tax liability of $2,122 which resulted in the recording of additional goodwill of $2,122.
In addition, upon the closing of the merger, certain shares of Nuvel Holdings, Inc. Series B and Series C Preferred Stock did not convert their holdings into common stock and remain outstanding. The shares outstanding as of December 31, 2016 and December 31, 2015 were 20,000 and 371,052, respectively (see Note 10). We believe the Nuvel Holdings, Inc. Preferred Stock to be permanent equity.
Since 2014 through the acquisition date, OrangeHook MN had provided Nuvel with unsecured loans to fund their operating losses which included expenses incurred to complete all the required SEC filings to be current in its reporting. The notes were due on demand and carried an annual interest rate of 2%. The amounts advanced, which were included in Due from Nuvel Holdings, Inc. in the accompanying consolidated balance sheets prior to merger, were eliminated at the execution of the Merger. As such, there are no amounts of principal or interest outstanding as of December 31, 2016. There were amounts outstanding of $856 of principal and $10 of interest outstanding as of December 31, 2015.
Based on the relationship which existed between OrangeHook MN and Nuvel, OrangeHook MN evaluated the requirements of ASC 810-10 "Consolidation" and determined that Nuvel qualified as a variable interest entity ("VIE"). Since OrangeHook MN did not meet the definition of the primary beneficiary due to lack of power to direct activities of Nuvel and lack of obligation to absorb Nuvel losses, the financial results of Nuvel were not consolidated with those of OrangeHook MN for the year ended December 31, 2015 or prior to the acquisition on December 1, 2016.
Acquisition of LifeMed ID, Inc. ("LMID")
LMID, a California corporation, offers a suite of software solutions that overlays with existing systems and equipment which automates patient identity validation, record matching, insurance and payment requirements and access to information.
Through March 31, 2016, OrangeHook MN's investment in LifeMed ID, Inc. was carried on a cost basis. Based on OrangeHook MN's acquisition of additional shares of LifeMed ID, Inc. common stock on March 31, 2016, OrangeHook MN's ownership percentage totaled 24%. As a result, OrangeHook MN began to account for this investment using the equity method of accounting as of April 1, 2016. OrangeHook MN adopted the guidance of ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting during the first quarter of 2016 and has applied the equity method for its investment in LifeMed ID, Inc. prospectively from April 1, 2016, until acquisition date of July 20, 2016. For this period, OrangeHook MN recorded a loss representing its proportionate share of the net loss incurred by LMID of $438. The amount invested of $4,425 was reported as Investment in LMID in the accompanying consolidated balance sheet as of December 31, 2015. Based on the number of shares of these securities that were held, on an as-converted basis, OrangeHook MN had an effective ownership position of 24% and 17%, as of July 20, 2016, and December 31, 2015, respectively.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
As of July 19, 2016, prior to the acquisition, OrangeHook MN owned a total of 1,750,000 shares of LMID Series B Convertible Preferred Stock at a price of $2.00 per share. Dividends, when declared by the issuer's board of directors, were payable at a rate of $0.10 per share, or 5% per year. The dividends were not cumulative. The shares had a preference in liquidation equal to $2.00 per share. The stock was convertible into an equivalent number of shares of common stock and had voting rights on an as-converted basis. In addition, OrangeHook MN owned a total of 1,640,000 shares of LMID common stock at a price of $2.00 per share, which included 80,000 shares acquired from David Batchelor, a member of its Board of Directors and the current CEO of LMID.
On July 20, 2016, OrangeHook MN completed a stock-for-stock exchange with LMID and acquired the remaining 76% of the outstanding shares of LMID in exchange for 1,454,261 shares of OrangeHook MN's common stock with an implied value of $3.18 per share and an aggregate value of $4,625. OrangeHook MN currently owns 100% of LMID; although we have recorded $196 due to one dissenting shareholder.
Prior to July 20, 2016, certain of OrangeHook MN's directors were also directors and shareholders in LMID. One such director is an officer of LMID, serving as its CEO.
As of December 31, 2015, OrangeHook MN had made non-interest bearing advances to LMID totaling $1,045, which are included in Due from LMID in the accompanying consolidated balance sheets. During 2016, through July 20, OrangeHook MN made additional non-interest bearing advances totaling $1,359. The advances were due on demand but were classified as a long-term asset in the consolidated balance sheets since the advances were applied as part of the acquisition transaction that closed on July 20, 2016.
Based on the relationship which existed between OrangeHook MN and LMID, OrangeHook MN evaluated the requirements of ASC 810-10 Consolidation and determined that LMID qualified as a variable interest entity ("VIE"). Once a reporting entity determines that it had an interest in a VIE, it must determine if it qualified as the primary beneficiary. If it determined that it met the definition of a primary beneficiary, it must consolidate the results of the VIE with its own and report them as if it owned that entity as of the reporting period. A primary beneficiary is defined as an entity that meets both of the following criteria: a) Power Criterion- power to direct activities of the VIE that most significantly impact the economic performance, b) Loss/Benefits Criterion- obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. Because OrangeHook MN did not meet the definition of the primary beneficiary due to lack of power to direct activities of LMID and lack of obligation to absorb LMID losses, the financial results of LMID were not consolidated with those of OrangeHook MN for the periods prior to acquisition date of July 20, 2016.
Amounts related to the investment held and advances made as of the acquisition date of July 20, 2016 have been included in purchase consideration in the preliminary estimate of the fair value of the identifiable assets acquired and liabilities as shown in the table below. On July 21, 2016, OrangeHook MN allocated the purchase price, which was calculated based on the number of shares of common stock issued at a value of $3.18 per share, based on the fair value of assets acquired and liabilities assumed. The evaluation of the OrangeHook MN's common stock requires OrangeHook MN to make assumptions about future cash flows of OrangeHook MN that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. OrangeHook MN engaged an independent specialist to assist OrangeHook MN in evaluating the fair value of OrangeHook MN's common stock and ultimately concluded on the fair value of OrangeHook MN's common stock.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
A summary of the assets acquired and liabilities assumed are as follows:
Current assets
|
|
$
|
206
|
|
Property and Equipment
|
|
|
21
|
|
Other Assets
|
|
|
108
|
|
Intangible assets:
|
|
|
|
|
Marketing asset portfolio
|
|
|
350
|
|
Software technology
|
|
|
4,600
|
|
Customer relationships
|
|
|
3,960
|
|
Goodwill
|
|
|
4,960
|
|
Cash paid prior to merger
|
|
|
(6,376
|
)
|
Due to dissenter
|
|
|
(196
|
)
|
Assumed obligation to OrangeHook
|
|
|
(1,358
|
)
|
Current Liabilities
|
|
|
(1,549
|
)
|
Assumed Debt
|
|
|
(103
|
)
|
Value of net assets acquired
|
|
$
|
4,623
|
|
Transactions costs of $270 and $121 were expensed as incurred during the years ended December 31, 2016 and 2015. The value that will be assigned to goodwill will not be deductible for tax purposes. The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce. We completed our valuation at the date of acquisition and have reflected the adjustments, which essentially allocated the appropriate value to the intangible assets with the offset to goodwill. We have completed a valuation of the assets and liabilities acquired in the business combination, noted above, and also identified additional measurement period adjustments of $44, which impacted property of $6 and liabilities of $50, which are reflected in the amounts above.
In connection with this transaction, OrangeHook MN has entered into a six-year employment agreement with David Batchelor, the founder and CEO of LMID. Under the terms of this agreement, Mr. Batchelor receives a base salary of $321 per year. In addition, he is eligible to receive quarterly incentive payments based on LMID gross revenue equal to 5% for 2016, 3% for 2017-2018 and 0.5% for 2019-2022. In November 2015, in connection with his employment agreement, OrangeHook MN granted to Mr. Batchelor a seven-year non-qualified stock option to purchase up to 178,561 shares of common stock at an exercise price of $0.16 per share. The fair value of the stock option was determined to be $559 which is included in general and administrative expenses in the accompanying consolidated statements of operations for the year ended December 31, 2015. In addition, OrangeHook MN agreed to repurchase shares of common stock owned by Mr. Batchelor as a result of the merger with OrangeHook MN under a Registration Rights and Put Agreement (see Note 7).
The grant date fair value was determined using the Black Scholes pricing model with the following weighted-average assumptions:
Risk-free interest rate
|
|
|
2.1
|
%
|
Expected volatility
|
|
|
100.0
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected option life (years)
|
|
|
7
|
|
On May 31, 2016, this option was rescinded and replaced with a seven-year non-qualified stock option to purchase up to 228,413 shares of common stock at an exercise price of $3.18 per share. The grant date fair value was determined using the Black Scholes pricing model with the following weighted-average assumptions:
Risk-free interest rate
|
|
|
2.0
|
%
|
Expected volatility
|
|
|
36.1
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected option life (years)
|
|
|
7
|
|
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Based on that calculation, the relative fair value of the replacement options was lower than the value of the options that were issued in 2015. As a result, no additional compensation expense was recorded related to the replacement options.
Acquisition of Assets
On June 2, 2016, OrangeHook MN purchased certain intellectual property, furniture, fixtures, computers, equipment and other assets of LifeNexus, Inc. ("LifeNexus"). LifeNexus filed a bankruptcy petition under Chapter 7 of the United States Bankruptcy Code in February 2016. Under the bankruptcy petition, Spring Grove Finance, S.A. purchased the assets from the Chapter 7 bankruptcy estate of LifeNexus, and then sold the assets to OrangeHook MN in exchange for 178,571 shares of common stock with an implied value of $3.18 per share and an aggregate value of $567.
The purchase was recorded as an asset purchase and transaction costs of $20 were capitalized. The intangible assets have an estimated life of ten years as such they are being amortized on a straight-line basis over their useful lives.
Based on the results of an independent appraisal, the fair value of the assets acquired were determined to be as follows:
Tangible assets
|
|
$
|
-
|
|
Intangible assets:
|
|
|
|
|
Trademarks and Patents
|
|
|
25
|
|
Software technology
|
|
|
562
|
|
Value of net assets acquired
|
|
$
|
587
|
|
Acquisition of Agilivant LLC ("AGL")
AGL, a Washington limited liability company, offers a real-time debit based banking and payment system. On February 12, 2016, OrangeHook MN and AGL signed a Membership Unit Purchase Agreement ("MUPA") that provided for the exchange of OrangeHook MN's common stock for AGL membership units. As of the closing date, OrangeHook MN received 82% of the membership units in exchange for a total of 433,551 shares of its common stock. The remaining 18% of AGL's membership units are reflected as a minority interest until the time that OrangeHook MN acquires the remaining membership units. If that occurs, OrangeHook MN would issue an additional 95,170 shares of its common stock to acquire those membership units. Under the terms of the MUPA, OrangeHook MN has held 57,400 shares of the common stock issuable to all sellers in escrow for certain defined indemnification events. These shares will be released to the sellers in June 2017. In addition, OrangeHook MN held an additional 50,000 shares of common stock issuable to two sellers pending a final accounting of the amount of liabilities assumed. The shares which were held pending the final accounting of liabilities were released to the sellers during the fourth quarter of 2016.
Under a separate agreement with Rene Babi, AGL's founder and Executive Chairman, OrangeHook MN has agreed to distribute his shares of OrangeHook MN common stock over a three-year period. Accordingly, as of the closing date, OrangeHook MN held a total of 151,378 shares of its common stock that are due to Mr. Babi. These shares will be released based on the following schedule: 50,460 shares on April 17, 2017, 50,459 shares on April 17, 2018 and 50,459 shares on April 17, 2019. During the period of time that these shares are held, Mr. Babi has no rights of ownership. Accordingly, OrangeHook MN recorded the fair value of these held shares of $546 as an installment payable to related party as of December 31, 2016 (see Note 7).
During the first quarter of 2016, OrangeHook MN allocated the purchase price, which was calculated based on the number of shares of common stock issued at a value of $3.18 per share, based on the fair value of assets acquired and liabilities assumed. The evaluation of the OrangeHook MN's common stock requires OrangeHook MN to make assumptions about future cash flows of OrangeHook MN that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. OrangeHook MN engaged an independent specialist to assist OrangeHook MN in evaluating the fair value of OrangeHook MN's common stock and ultimately concluded on the fair value of OrangeHook MN's common stock.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
A summary of the assets acquired and liabilities assumed as of the closing date is as follows:
Current assets
|
|
$
|
56
|
|
Intangible assets:
|
|
|
|
|
Trademarks
|
|
|
189
|
|
Software technology
|
|
|
1,038
|
|
Customer relationships
|
|
|
45
|
|
Goodwill
|
|
|
3,159
|
|
Current Liabilities
|
|
|
(587
|
)
|
Assumed debt
|
|
|
(2,218
|
)
|
|
|
|
1,682
|
|
Noncontrolling interest
|
|
|
(303
|
)
|
Value of net assets acquired
|
|
$
|
1,379
|
|
Transaction costs of $32 and $148 were expensed as incurred during the years ended December 31, 2016 and 2015, respectively. Because AGL was a limited liability company, the fair value of the assets acquired are stepped up and the value assigned to goodwill is deductible for income tax purposes
.
The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce.
On July 1, 2016, OrangeHook MN entered into an agreement with Mr. Babi whereby he agreed to resign from his role as Chief Executive Officer of Agilivant. Under the terms of this agreement, Mr. Babi is entitled to certain payments including a contract fees of $13 per month for a period of six months, a one-time payment equal to $75 plus certain commissions that could be earned based on the achievement of pre-established revenue targets. OrangeHook MN recorded an expense equal to the contract fees of $75, which is included in general and administrative expense in the accompanying consolidated statements of operations for the year ended December 31, 2016. During the same period, there have been no commissions earned by or paid to Mr. Babi.
In addition, OrangeHook MN agreed to redeem a total of 6,214 shares of its common stock held by Mr. Babi in exchange for the extinguishment of an amount due to AGL by Mr. Babi and also agreed to purchase 1,000 shares per month of OrangeHook MN's common stock owned by Mr. Babi at a price of $14.00 per share for a period of 24 months beginning in January 2017 (see Note 7).
Prior to the acquisition, OrangeHook MN provided a total of $1,225 to AGL to fund their operating losses, which were included in notes receivable in the accompanying consolidated balance sheets as of December 31, 2015.
For the period from January 1 to February 12, 2016 (the date OrangeHook MN acquired a controlling interest in AGL), OrangeHook MN provided an additional $85 to AGL for working capital needs. The advances were due on demand but were classified as a long-term asset in the consolidated balance sheets since the advances were applied as part of the acquisition transaction that closed February 12, 2016.
Based on the relationship which existed between OrangeHook MN and AGL, OrangeHook MN evaluated the requirements of ASC 810-10 "Consolidation" and has determined that AGL qualifies as a variable interest entity ("VIE"). OrangeHook MN did not meet the definition of the primary beneficiary due to lack of power to direct activities of AGL and lack of obligation to absorb AGL losses, the financial results of AGL were not consolidated with those of OrangeHook MN for the year ended December 31, 2015.
Extinguishment of assumed debt
On June 30, 2016, OrangeHook MN issued 70,996 shares of common stock in exchange for the extinguishment of certain assumed debt and accrued interest with a value of $795. In accordance with Accounting Standards Codification 470-50-40 "Debt- Modifications and Extinguishments", OrangeHook MN recorded the reacquisition price at the fair value of the securities issued to extinguish the debt which it estimated to be $3.18 per share. Accordingly, the difference between the reacquisition price and the carrying amount of the debt and accrued interest was recorded as a gain on debt extinguishment of $569, which is included in other income (expense) in the accompanying consolidated statements of operations for the year ended December 31, 2016.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Acquisition of Salamander Technologies, Inc.
On October 1, 2015, OrangeHook MN acquired 100% of the outstanding stock of Salamander Technologies, Inc. in exchange for 144,846 shares of common stock of OrangeHook MN, valued at a price of $3.18 per share, and $500 in cash by merging Salamander Technologies, Inc. into Salamander Technologies, LLC. ("Salamander"), a wholly-owned Minnesota limited liability company. Salamander Technologies, Inc. is a homeland security leader addressing a national imperative – the situational awareness of all resources (first responders, assets, volunteers, and civilian victims) during field events ranging from routine or planned events to mass disasters such as hurricanes, tornados, and public health emergencies.
OrangeHook MN allocated the purchase price, at the estimated fair value of the shares exchanged of $3.18 per share, based on the fair value of identifiable assets acquired and liabilities assumed. The evaluation of OrangeHook MN's common stock requires OrangeHook MN to make assumptions about future cash flows of OrangeHook MN that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. OrangeHook MN engaged an independent specialist to assist OrangeHook MN in evaluating the fair value of OrangeHook MN's common stock and ultimately concluded on the fair value of OrangeHook MN's common stock.
A summary of the transaction is as follows:
Cash
|
|
$
|
6
|
|
Accounts receivable
|
|
|
243
|
|
Other current assets
|
|
|
36
|
|
Fixed assets
|
|
|
34
|
|
Intangible assets:
|
|
|
|
|
Trade name
|
|
|
891
|
|
Goodwill
|
|
|
1,567
|
|
Accounts payable
|
|
|
(210
|
)
|
Accrued expenses
|
|
|
(149
|
)
|
Deferred revenue
|
|
|
(332
|
)
|
Line of credit
|
|
|
(200
|
)
|
Other debt
|
|
|
(925
|
)
|
Value of net assets acquired
|
|
$
|
961
|
|
There were $336 of transaction costs were expensed as incurred during the year ended December 31, 2015. The value assigned to goodwill is not deductible for income tax purposes. The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce.
Royalty Obligation
OrangeHook MN assumed an obligation to pay former shareholders of Salamander Technologies, Inc. a percentage of gross revenue until an amount of $3,500 is paid. Royalties are earned based on the following:
|
|
Gross Revenue
|
|
|
|
Royalty Percentage
|
|
2014 through 2017
|
|
|
5
|
%
|
2018 through 2019
|
|
|
3
|
%
|
2020 and thereafter
|
|
|
2
|
%
|
Royalty payments are scheduled to be made quarterly on or before two months after the end of each calendar quarter, apart from payments for the years ended December 31, 2014 and 2015, which are due, without interest, in twenty equal quarterly installments, on or before two months after the end of each calendar quarter, beginning on May 31, 2016 and ending on February 28, 2021.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Royalty expense was $48 and $12 for the years ended December 31, 2016 and 2015 and is included in cost of sales on the consolidated statements of operations, respectively. Accrued royalties as of December 31, 2016 and 2015 were $168 and $137, respectively, which are included in other accrued expenses in the accompanying consolidated balance sheets. During 2016, we made payments of $17.
Extinguishment of Assumed Debt
In October 2015, the OrangeHook MN issued 37,297 shares of common stock in exchange for the extinguishment of certain assumed debt and accrued interest with a value of $522. In accordance with Accounting Standards Codification 470-50-40 "Debt- Modifications and Extinguishments", OrangeHook MN recorded the reacquisition price at the fair value of the securities issued to extinguish the debt of $3.18 per share. Accordingly, the difference between the reacquisition price and the carrying amount of the debt and accrued interest was recorded as a gain on debt extinguishment of $404, which is included in other income (expense) in the accompanying consolidated statements of operations for the year ended December 31, 2015.
Short-term bank borrowings consisted of an outstanding balance on a $200 revolving line-of-credit that was assumed as part of the acquisition of Salamander Technologies, Inc. on October 1, 2015. Interest was charged at the bank's prime rate plus 1%, with a floor of 6%. Borrowings were collateralized by the assets of Salamander Technologies, Inc. which included inventory, accounts receivable, equipment, and intangibles. On October 29, 2015, this line of credit was repaid and cancelled.
5.
Furniture, equipment and leasehold improvements, net:
Furniture, equipment and leasehold improvements, net consisted of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
129
|
|
|
$
|
88
|
|
Furniture and equipment acquired under capital lease
|
|
|
247
|
|
|
|
-
|
|
Computer Software
|
|
|
51
|
|
|
|
22
|
|
Leasehold improvements
|
|
|
104
|
|
|
|
35
|
|
|
|
|
531
|
|
|
|
145
|
|
Less accumulated depreciation and amortization
|
|
|
(76
|
)
|
|
|
(18
|
)
|
Total furniture, equipment and leasehold improvements
|
|
$
|
455
|
|
|
$
|
127
|
|
Depreciation and amortization expense was $57 and $17 for the years ended December 31, 2016 and 2015, respectively.
6.
Goodwill and Intangible Assets
Goodwill as of December 31, 2016 and 2015, by reportable segment (see Note 17), consists of the following:
|
|
Corporate
|
|
|
Sal-Tech
|
|
|
AGL
|
|
|
LMID
|
|
|
Total
|
|
Balances as of December 31, 2015
|
|
$
|
-
|
|
|
$
|
1,567
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,567
|
|
Acquisitions
|
|
|
2,616
|
|
|
|
-
|
|
|
|
3,159
|
|
|
|
4,960
|
|
|
|
10,735
|
|
Balances as of December 31, 2016
|
|
$
|
2,616
|
|
|
$
|
1,567
|
|
|
$
|
3,159
|
|
|
$
|
4,960
|
|
|
$
|
12,302
|
|
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Our intangible assets as of December 31, 2016 and 2015 consist of the following:
|
|
December 31, 2016
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Net
|
|
|
Useful Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-life intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, patents and
marketing asset portfolio
|
|
$
|
564
|
|
|
$
|
(34
|
)
|
|
$
|
-
|
|
|
$
|
530
|
|
|
10 years
|
|
Tradenames
|
|
|
891
|
|
|
|
(111
|
)
|
|
|
-
|
|
|
|
780
|
|
|
10 years
|
|
Software technology
|
|
|
12,024
|
|
|
|
(706
|
)
|
|
|
-
|
|
|
|
11,318
|
|
|
5 - 10 years
|
|
Customer relationships
|
|
|
4,005
|
|
|
|
(361
|
)
|
|
|
-
|
|
|
|
3,644
|
|
|
5 years
|
|
Total intangible assets
|
|
$
|
17,484
|
|
|
$
|
(1,212
|
)
|
|
$
|
-
|
|
|
$
|
16,272
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Net
|
|
|
Useful Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-life intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
$
|
891
|
|
|
$
|
(22
|
)
|
|
$
|
-
|
|
|
$
|
869
|
|
|
10 years
|
|
Total intangible assets
|
|
$
|
891
|
|
|
$
|
(22
|
)
|
|
$
|
-
|
|
|
$
|
869
|
|
|
|
|
Total amortization expense related to intangible assets was $1,192 and $22 for the years ended December 31, 2016, and 2015, respectively. There were no impairment charges during 2016 or 2015 with respect to intangible assets.
As of December 31, 2016, future estimated amortization expense related to intangible assets for each of the years ending December 31, 2017 to 2021 and later is estimated as follows:
2017
|
|
$
|
2,834
|
|
2018
|
|
|
2,834
|
|
2019
|
|
|
2,834
|
|
2020
|
|
|
2,834
|
|
2021
|
|
|
1,820
|
|
Thereafter
|
|
|
3,116
|
|
Future amortization expense is an estimate. Actual amounts may change due to additional intangible asset acquisitions, impairment, accelerated amortization or other events.
7.
Fair Value Measurement
We measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring fair value. The three hierarchy levels are defined as follows:
·
|
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets.
|
·
|
Level 2 - Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
|
·
|
Level 3 - Valuations based on inputs that are unobservable and involve management judgment and the reporting entity's own assumptions about market participants and pricing.
|
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
|
|
Fair Value as of December 31, 2016
|
|
|
Fair Value as of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Contingent Consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
967
|
|
|
$
|
967
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Put Agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
1,886
|
|
|
|
1,886
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Installment payable to related party
|
|
|
-
|
|
|
|
-
|
|
|
|
546
|
|
|
|
546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,399
|
|
|
$
|
3,399
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the beginning and ending balances for the Level 3 measurement are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Balance as of December, 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
Additions
|
|
|
3,399
|
|
|
|
-
|
|
Payments
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2016
|
|
$
|
3,399
|
|
|
$
|
-
|
|
Contingent Consideration
During 2016, we recorded a contingent consideration liability of $967, in the form of an earn-out payment of shares of common stock, related to our merger with Nuvel (see Note 4). The contingent consideration is based on achieving certain revenue results and is payable in shares of common stock. The fair value of the liability was estimated using a weighted probability approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future revenues during the earn-out period related to the assets acquired and appropriately weighting the uncertainties associated with the obligation. The assumptions used in preparing the analyses included estimates of the amount and timing of revenues. Through December 31, 2016, no shares were earned.
Installment Payable to Related Party
Under an agreement with Rene Babi, AGL's founder and former executive chairman, OrangeHook MN has agreed to distribute his shares of OrangeHook MN common stock over a three-year period. Accordingly, OrangeHook MN has a total of 151,378 shares of its common stock that are due to Mr. Babi. These shares will be released based on the following schedule: 50,460 shares on April 17, 2017, 50,459 shares on April 17, 2018 and 50,459 shares on April 17, 2019. During the period of time that these shares are held by OrangeHook MN, Mr. Babi has no rights of ownership. As of December 31, 2016, we recorded an installment payable to related party of $546 for the outstanding shares of 151,378 at fair value per share of $3.61.
Put Agreements
Batchelor put option obligation
In March 2016, OrangeHook MN entered into a Registration Rights and Put Agreement, a related party transaction with David Batchelor, the founder and CEO of LMID which allows him to require OrangeHook MN to repurchase up to 142,857 shares of his common stock. A subsequent amendment reduced this amount to 110,714 shares of his common stock. OrangeHook MN is required to repurchase the shares at $14 per share up to a maximum of $1,550. The put options are exercisable as follows:
•
$550 during June 2016 and
•
$1,000 during October 2016
Additionally, Mr. Batchelor was granted piggyback registration rights under this agreement which allow him to include his shares in any registration agreement filed by OrangeHook MN.
On May 18, 2016, OrangeHook MN received a Put Option Notice from Mr. Batchelor whereby he requested that OrangeHook MN purchase a total of 39,285 shares of his common stock at a price of $14 per share, an aggregate purchase price of $550. At that date, Mr. Batchelor held no shares of OrangeHook MN's common stock to redeem. On October 30, 2016, OrangeHook MN received a Put Option Notice from Mr. Batchelor whereby he requested that OrangeHook MN purchase a total of 75,493 shares of his common stock at a price of $14 per share, an aggregate purchase price of $1,057.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
As a result of the acquisition of LifeMed ID as discussed in Note 4, Mr. Batchelor owned a total of 676,865 shares of common stock. In accordance with ASC 480 "Distinguishing Liabilities from Equity", the put option represents a forward purchase contract. Upon the completion of the acquisition of LifeMed ID on July 20, 2016, at which time Mr. Batchelor became a shareholder of OrangeHook MN, a share repurchase liability was recorded in an amount equal to the fair value of the underlying shares of $352 based on an independent external third party valuation specialist. In addition, interest expense of $1,198 was accredited and recorded and the share repurchase liability was increased to $1,550, which represents the amount due to Mr. Batchelor under this agreement. The evaluation of OrangeHook MN's common stock requires OrangeHook MN to make assumptions about future cash flows of OrangeHook MN that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. OrangeHook MN engaged an independent specialist to assist OrangeHook MN in evaluating the fair value of OrangeHook MN's common stock and ultimately concluded on the fair value of OrangeHook MN's common stock. As of December 31, 2016, OrangeHook MN is temporarily relieved from fulfilling its obligation to repurchase under this agreement until certain settlement provisions are met. The balance of the put obligation due to Mr. Batchelor of $1,550 is included in put option obligations in the consolidated balance sheets as of December 31, 2016.
Babi put option obligation
OrangeHook MN also agreed to purchase 1,000 shares per month of OrangeHook MN's common stock owned by Rene Babi, AGL's founder and Executive Chairman, at a price of $14.00 per share for a period of 24 months beginning in January 2017. In accordance with ASC 480 "Distinguishing Liabilities from Equity", the put options represents a forward purchase contract. During the fourth quarter of 2016, a liability was recorded in an amount equal to the fair value of the underlying shares of $76. In addition, interest expense of $260 was recorded and the liability was recorded at $336, which represents the amount due to Mr. Babi under this agreement. We measure this liability based on the fair value of common stock, which is calculated as of $3.61 at December 31, 2016 based on an independent external third party valuation specialist. The evaluation of OrangeHook MN's common stock requires OrangeHook MN to make assumptions about future cash flows of OrangeHook MN that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. OrangeHook MN engaged an independent specialist to assist OrangeHook MN in evaluating the fair value of OrangeHook MN's common stock and ultimately concluded on the fair value of OrangeHook MN's common stock. OrangeHook MN is temporarily relieved from fulfilling its obligation to repurchase under this agreement until certain settlement provisions are met. The balance of the put obligation due to Mr. Babi of $336 is included in put option obligations in the consolidated balance sheets as of December 31, 2016.
8.
Debt
Total debt as of December 31, 2016 and 2015 consists of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
350
|
|
|
$
|
-
|
|
Notes payable to directors
|
|
|
2,793
|
|
|
|
2,276
|
|
Convertible debentures, gross
|
|
|
3,428
|
|
|
|
3,050
|
|
Other debt
|
|
|
1,361
|
|
|
|
-
|
|
|
|
|
7,932
|
|
|
|
5,326
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized portion of debt issuance costs
|
|
|
(14
|
)
|
|
|
(89
|
)
|
Less: unamortized portion of original issue discount
|
|
|
(77
|
)
|
|
|
(199
|
)
|
Total debt, net of debt issuance costs and original issue discount
|
|
|
7,841
|
|
|
|
5,038
|
|
|
|
|
|
|
|
|
|
|
Less: short term portion
|
|
|
(7,841
|
)
|
|
|
(601
|
)
|
Long-term debt, net of debt issuance costs and original issue discount
|
|
$
|
-
|
|
|
$
|
4,437
|
|
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Line of credit
On March 30, 2016, OrangeHook MN entered into an unsecured revolving line of credit with a bank which provides for borrowings up to $350,000. The line of credit is for general working capital purposes and borrowings are subject to an interest charge of 4.5% per annum. Amounts borrowed under this line of credit have been personally guaranteed by four of OrangeHook MN's directors. This revolving line of credit originally was to expire on December 31, 2016 but has since been extended to September 30, 2017. The balance outstanding under this line of credit is $350 as of December 31, 2016.
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Contractual interest expense
|
|
$
|
10
|
|
|
$
|
-
|
|
Interest paid
|
|
|
10
|
|
|
|
-
|
|
Notes Payable to Directors
Since inception, OrangeHook MN has received interest-bearing advances from various directors and their affiliates, as related parties. During 2016, we received interest-bearing advances from certain directors and their affiliates of $2,255 and made payments of $660. The maturity dates of these are generally less than twelve months. Original issuance discount and debt issuance costs are being amortized over the term of the notes and amortization expense is recorded in interest expense in the accompanying statements of operations.
They accrue interest at a range of 5% to 10% per annum. Interest related amounts are listed below:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Contractual interest expense
|
|
$
|
229
|
|
|
$
|
88
|
|
Amortization of original issue discounts
|
|
|
198
|
|
|
|
-
|
|
Interest paid
|
|
|
272
|
|
|
|
10
|
|
Two notes issued in January 2016, for $100 and $500, and one note issued in February 2016 for $300, that carried an annual interest rate of 10%, were convertible into shares of common stock at a price of $7.00 per share. In addition, the director received a seven-year warrant to purchase up to 50,000 shares and 250,000 shares, and 150,000 shares, respectively, of OrangeHook MN's common stock at an exercise price of $7.00 per share. These notes, representing $960 of notes payable from directors plus $62 of accrued interest were converted into 1,022 units of Series A-1 Convertible Preferred Stock during October 2016. The fair value of stock warrants was determined to be $22 and $110, and $66, respectively, which represents the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions:
Risk-free interest rate
|
|
|
1.7
|
%
|
Expected volatility
|
|
|
36.1
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected option life (years)
|
|
|
7
|
|
The expense associated with the warrant granted is included in interest expense, net of interest income.
In March 2016, a note with a balance due of $118 was converted into 118 units of Series A-1 Convertible Preferred Stock, with a redemption price of $1,000 per unit.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
In connection with a loan of $450 in October 2015, OrangeHook MN paid one director a fee of $5 and granted a five-year warrant to purchase up to 12,500 shares of OrangeHook MN's common stock at a price of $7.00 per share. The expense associated with the fee paid and the warrant granted is included in interest expense, net of interest income. The fair value of stock warrant was determined to be $28, which represents the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions:
Risk-free interest rate
|
|
|
2.1
|
%
|
Expected volatility
|
|
|
100.0
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected option life (years)
|
|
|
7
|
|
Convertible Debentures
Convertible debentures as of December 31, 2016 and 2015 consists of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Face amount of debentures
|
|
$
|
3,428
|
|
|
$
|
3,050
|
|
Unamortized original issue discount
|
|
|
(77
|
)
|
|
|
(89
|
)
|
Unamortized debt issuance costs
|
|
|
(14
|
)
|
|
|
(199
|
)
|
|
|
|
3,337
|
|
|
|
2,762
|
|
Less: short-term portion
|
|
|
3,337
|
|
|
|
(383
|
)
|
Convertible Debentures, net
|
|
$
|
-
|
|
|
$
|
2,379
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Contractual interest expense
|
|
$
|
163
|
|
|
$
|
144
|
|
Amortization of original issuance discount
|
|
|
250
|
|
|
|
213
|
|
Amortization of debt issuance costs
|
|
|
103
|
|
|
|
94
|
|
Interest paid
|
|
|
81
|
|
|
|
-
|
|
As of December 31, 2015, OrangeHook MN had outstanding convertible debentures of $3,050 which accrued interest at 10% per annum. This issuance had 12-month maturity dates which ranged from April to October of 2016. The debentures are convertible, at the option of the holder, into shares of common stock at a rate of $7.00 per share. In addition, the debentures include an attached three-year warrant equal to 10% of the principal, or 305,000 shares, of common stock exercisable at a rate of $0.01 per share. Through December 31, 2016, warrants to purchase a total of 200,000 shares have been exercised which generated proceeds of $2. Original issuance discount and debt issuance costs are being amortized over the term of the debentures and amortization expense is recorded in interest expense in the accompanying statements of operations.
The value of the embedded equity of $412 was allocated as original issue discount and additional paid-in capital reflecting the estimated value of the underlying cash conversion feature and attached warrants, using the Black Scholes pricing model with the following weighted-average assumptions:
Risk-free interest rate
|
|
|
2.3
|
%
|
Expected volatility
|
|
|
100.0
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected option life (years)
|
|
|
3
|
|
During 2016 and 2015, OrangeHook MN incurred debt acquisition costs of $28 and $183, respectively, which are being amortized to interest expense over the term of the debentures. Amortization of debt issuance costs of $103 and $94 has been included in interest expense for the years ended December 31, 2016 and 2015, respectively. The remaining unamortized balance of debt issuance costs of $14 will be charged to operations in fiscal 2017.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
During 2016, we entered extended and amended agreements with holders of $2,650 of our convertible debentures, which extended the maturity date to October 15, 2017 and capitalized then accrued and unpaid interest of $226 into principal. The extended convertible debentures accrue interest at 10% per annum.
In conjunction with these extensions, we issued an additional $600 of convertible debentures under the same terms. Proceeds of the new debentures were primarily used to retire certain convertible debentures with principal and interest of $441. As part of these agreements, OrangeHook MN issued five-year warrants to the lenders for a total of 464,301 shares of common stock at a weighted average exercise price of $8.29 per share.
OrangeHook MN has analyzed the provisions of ASC 470 to determine if these extensions meet the criteria of a substantial modification which would require treatment as a debt extinguishment. Based on this analysis, it has been determined that a substantial modification did not occur. Accordingly, in accordance with ASC 470, OrangeHook MN has separately accounted for the value of the embedded equity features within this debenture by allocating a total of $128 as original issue discount and additional paid-in capital reflecting the estimated value of the underlying cash conversion feature and the attached warrants, using the Black Scholes pricing model with the following weighted-average assumptions:
Risk-free interest rate
|
|
|
1.7
|
%
|
Expected volatility
|
|
|
36.1
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected option life (years)
|
|
|
5
|
|
In addition, the amended agreements contained a provision whereby OrangeHook MN would issue an additional two-year warrant, at an exercise price of $7.00 per share, if the debenture is paid off in cash at any time prior to the maturity date. If this would occur, OrangeHook MN would include the value of the warrants issued in its extinguishment accounting for the debentures.
As additional security under this offering, certain of OrangeHook MN's directors provided a joint and several personal guaranties to certain lenders. Convertible debentures subject to these guaranties as of December 31, 2016 and 2015 is $2,455 and $1,875, respectively.
The outstanding balance of convertible debentures includes $1,193 and $1,075 from board members, officers and their affiliates, as related parties, as of December 31, 2016 and 2015, respectively. Interest expense on these amounts of $118 and $54 were recorded for the years ended December 31, 2016 and 2015, respectively. Accrued interest payable on these amounts were $61 and $54 as of December 31, 2016 and 2015, respectively.
Convertible revolving promissory note
On May 25, 2016, OrangeHook MN entered into an unsecured, convertible revolving promissory note which provides for borrowings up to $1,000 at an interest rate of 10% per annum. Any balance outstanding together with all accrued and unpaid interest was due on October 31, 2016. Subsequently, the lender agreed to extend the maturity date to January 15, 2017. At the option of the lender, the note was convertible into shares of convertible preferred stock at a price of $1,000 per share. If converted, the lender would also receive a seven-year warrant to purchase up to 71.5 shares of common stock for each share of convertible preferred stock. In addition, upon a change in control, as defined in the agreement, the lender had the option to receive either cash or shares of OrangeHook MN's common stock based on a value of $7.00 per share, subject to certain adjustments. In the event that this note was not paid in full on or before the maturity date, OrangeHook MN was required to issue to the lender a seven-year warrant to purchase up to 240,000 shares of common stock at a price of $1.00 per share. On October 31, 2016, OrangeHook MN entered into an agreement to issue 387,912 shares of common stock plus seven-year warrants for an additional 78,000 shares of common stock at an exercise price of $7.00 per share in exchange for the cancellation of this note plus accrued interest of $40 and a cash payment of $250, which OrangeHook MN received on November 1, 2016. There are no amounts of principal or interest outstanding as of December 31, 2016.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Other Short-Term Debt
Other short-term debt as of December 31, 2016 and 2015 consists of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Short-term notes
|
|
$
|
950
|
|
|
$
|
-
|
|
Assumed convertible notes
|
|
|
15
|
|
|
|
-
|
|
Assumed notes payable
|
|
|
347
|
|
|
|
-
|
|
Financing contracts
|
|
|
49
|
|
|
|
-
|
|
|
|
|
1,361
|
|
|
|
-
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Contractual interest expense
|
|
$
|
244
|
|
|
$
|
-
|
|
Amortization of original issue discount
|
|
|
87
|
|
|
|
-
|
|
Interest paid
|
|
|
166
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
To meet our short-term liquidity needs, we received multiple unsecured short-term loans from various lenders. During the year ended December 31, 2016, we received unsecured, short-term on demand loans of $3,873 and made principal payments of $1,487. There was $950 of short-term loans outstanding as of December 31, 2016. These short-term borrowings generally had maturities of 1 month, but ranged to 12 months. The interest rates on these borrowings ranged from 5% to 47% per annum.
On August 30, 2016, one lender converted one outstanding loan with a principal amount of the note of $300 plus accrued interest of $16 into 45,143 shares of OrangeHook MN's common stock at a value of $7.00 per share plus seven-year warrants to purchase up to 286,667 shares at an exercise price of $7.00 per share. In accordance with ASC 470-50-40 "Debt- Modifications and Extinguishments", we recorded the reacquisition price at the fair value of the securities issued to extinguish the debt estimated to be $3.18 per share. Accordingly, the difference between the reacquisition price and the carrying amount of the debt and accrued interest was recorded as a gain on debt extinguishment of $173 which is included in other income in the accompanying consolidated statements of operations for the year ended December 31, 2016.
On November 10, 2016, one lender converted one outstanding loan with a principal amount of the note of $100 into 30,769 shares of OrangeHook MN's common stock at a value of $3.25 per share.
Included in the short-term notes, for the year ended December 31, 2016, $350 of short-term notes from one director, a related party, was received. There were no payments made on these advances and $350 was outstanding as of December 31, 2016.
Assumed convertible notes
We assumed $15 of notes payable, which are convertible into shares of common stock, as a result of the merger with Nuvel. These notes were 12 month notes, which matured in August 2015. They accrue interest at a default rate of 18% per annum, which is a 10% increase from the stated interest rate of 8%. As of December 31, 2016, there was $6 of accrued and unpaid interest.
Assumed notes payable
As part of the merger with Nuvel, we assumed $295 of other notes payable, all of which had maturity dates in 2014 and are past due. These notes accrue interest under a default rate of 20% per annum, an increase from the stated interest rate of 12% per annum, retrospective to the inception date. As of December 31, 2016, there was accrued and unpaid interest of $309, including $304 that was assumed as part of the merger with Nuvel.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
We assumed $507 of notes payable, which accrue interest at a weighted average rate of 61% per annum, as a result of the acquisition of Agilivant. Certain of these notes were settled in stock, as described in Note 4, under '
Acquisition of Agilivant',
leaving a remaining principle balance of $55, of which $3 was repaid in December 2016, resulting in $52 outstanding at December 31, 2016. As of December 31, 2016 there is $72 of accrued and unpaid interest.
Financing contracts
We finance certain of our contracts for insurance premiums. The contracts are generally for one year of coverage and include interest at rates of 6.7% and 11.0%. The balance of these contracts was $49 as of December 31, 2016.
9.
Commitments and Contingencies
We lease office space for our corporate offices and for each of our subsidiaries, through noncancelable operating leases. Rent expense for the year ended December 31, 2016 and 2015 was $440 and $114, respectively, which includes charges for common area and maintenance expenses. The operating lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments, if exercised. We recognize rent expense on a straight-line basis over the period in which we benefit from the lease and we have accrued for rent expense incurred but not paid. One of our office operating leases, which was assumed as a result of the acquisition of LifeMed is with Mr. Batchelor, the Co-CEO of one of our subsidiaries, who owns the building in which we rent office space. As of December 31, 2016, OrangeHook MN was committed under various non-cancellable operating leases for its corporate and other operating locations with annual base rental commitments for each of the years ending December 31, 2017 to 2021 and thereafter of the following:
Year
|
|
Operating
Leases
|
|
|
Operating
Lease with
Related Party
|
|
2017
|
|
$
|
343
|
|
|
$
|
71
|
|
2018
|
|
|
361
|
|
|
|
73
|
|
2019
|
|
|
368
|
|
|
|
75
|
|
2020
|
|
|
363
|
|
|
|
78
|
|
2021
|
|
|
261
|
|
|
|
80
|
|
Thereafter
|
|
|
1,347
|
|
|
|
20
|
|
|
|
$
|
3,043
|
|
|
$
|
397
|
|
Capital Leases
In December 2016, we entered into a 36-month capital lease for certain furniture, fixtures and technology equipment in the amount of $246 for our LifeMed offices in Roseville, CA. The annual interest rate is 12.6% and we are required to make 36 payments of $8 after which we are able to purchase the assets for one dollar. Amortization of this capital lease is included in depreciation expense. Accumulated amortization is $4 as of December 31, 2016.
Future minimum lease payments under this capital lease are as follows:
Year
|
|
Capital
Leases
|
|
2017
|
|
$
|
101
|
|
2018
|
|
|
101
|
|
2019
|
|
|
91
|
|
Total minimum lease payments
|
|
|
293
|
|
Less: Interest
|
|
|
(3
|
)
|
|
|
|
290
|
|
Less: current portion
|
|
|
(119
|
)
|
Capital lease obligation
|
|
$
|
171
|
|
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Unasserted Claims
OrangeHook MN, in the ordinary course of business, could be subject to liability claims related to employees or the services it provides. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. While the ultimate resolution of these actions may have an impact on OrangeHook MN's financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of OrangeHook MN and the chance of a negative outcome on outstanding litigation is considered remote.
10.
Preferred Stock
OrangeHook MN Preferred Stock
Since OrangeHook MN commenced operations, it has sold two separate offerings of preferred stock, Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock, at a price of $1,000 per unit. Each unit consists of one share of preferred stock plus a warrant to purchase up to 71.5 shares of common stock at a price of $7.00 per share. The preferred stock has a cumulative dividend equal to 12% per year which is payable in cash or at the option of the holder, convertible into shares of common stock at a rate of $7.00 per share. The preferred stock has a preference in liquidation equal to $1,000 per share. Additionally, the preferred stock is convertible, at the option of the holder, into shares of common stock at a rate of 1:143. The preferred stock also contains an automatic conversion feature whereby OrangeHook MN may elect to force conversion under certain circumstances. OrangeHook MN has the right to redeem the shares of preferred stock at a price of $1,000 per share plus any accrued but unpaid dividends.
Through December 1, 2016, OrangeHook MN had issued 9,943 and 6,188 units, in 2016 and 2015 respectively, of Series A and Series A-1 Convertible Preferred Stock in exchange for proceeds of $9,943 and $6,188, respectively. At the effective time of the Merger, each outstanding share of OrangeHook preferred stock and other outstanding securities convertible into OrangeHook preferred stock was exchanged for one share (or a corresponding security convertible into one share) of a new series of preferred stock of Nuvel entitled "Series OH-2 Convertible Preferred Stock."
In December 2016, OrangeHook MN authorized an additional offering of preferred stock, Series OH-2 Convertible Preferred Stock under the same term as the previously issued Series A and A-1 and retained an independent outside firm to sell the offering in exchange for a cash commission of 7% plus an amount payable in five year warrants equal to 5% of the shares of common stock that the preferred is converted into at an exercise price of $7.00 per share. Through December 31, 2016, we issued 150 units of OH-2 Convertible Preferred Stock in exchange for $150 under the terms of this agreement.
Additionally, as part of these offerings, during the years ended December 31, 2016 and 2015, OrangeHook MN issued warrants to purchase up to 279,208 and 442,442 shares, respectively, of common stock at an exercise price of $7.00 per share. The warrants are vested immediately and have a term of seven years. There was no intrinsic value for warrants outstanding and vested as of December 31, 2016 and 2015.
As of December 31, 2016 and December 31, 2015, there have been no redemptions of the preferred stock.
During the years ended December 31, 2016 and 2015, dividends on Series A/A-1 and OH-2 of $971 and $405, respectively, were earned. As of December 31, 2016 and 2015, accrued and unpaid dividends were $1,113 and $144, respectively. Dividends paid during the year ended December 31, 2015 totaled $283, which includes dividends paid in shares of common stock, as elected by the holders, valued at $7.00 per share. OrangeHook MN issued a total of 28,583 shares of common stock as payment of dividends in 2015. No dividends were paid in cash or shares of common stock in 2016.
Nuvel Holdings, Inc. Preferred Stock
On December 1, 2016, prior to the Merger, Nuvel Holdings, Inc. had the following classes of preferred stock issued and outstanding:
·
|
Series A- 7,150,000 shares authorized, 0 shares outstanding
|
·
|
Series B- 2,000,000 shares authorized, 408,484 shares outstanding
|
·
|
Series C- 2,000,000 shares authorized, 1,471,121 shares outstanding
|
·
|
Series D- 2,000,000 shares authorized, 1,767,358 shares outstanding
|
Subsequently, holders of 388,484 shares of Nuvel Series B Convertible Preferred Stock and 1,100,069 of Nuvel Series C Convertible Preferred Stock converted their shares into common stock based on the conversion rates in effect. The shares were not impacted by the reverse stock split except the conversion ratios applicable thereto were adjusted proportionally. As part of the Merger, the converted shares of former Nuvel Series B Convertible Preferred Stock and Nuvel Series C Convertible Preferred Stock waived the right to any accrued dividends and OrangeHook MN waived the satisfaction of the Nuvel preferred stock conversion with respect to 20,000 shares of unconverted Nuvel Series B Convertible Preferred Stock and 371,052 shares of Nuvel Series C Convertible Preferred Stock. As of December 31, 2016, the unconverted shares remain outstanding.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
In addition, all the outstanding shares of Nuvel Series D Preferred Stock was converted into fully paid and non-assessable shares of common stock. The converted shares of former Nuvel Series D Convertible Preferred Stock waived the right to any accrued dividends.
As of December 31, 2016, there were no Series A Preferred shares issued and outstanding. Cumulative dividends in arrears assumed on the former Nuvel Series A Preferred Stock totaled $3 as of December 31, 2016 and have not been declared by Board of Directors.
The Nuvel Series B Preferred Stock has a par value of $0.001 and is convertible into 20 shares of common stock. Dividends are 6% cumulative and can be paid in common stock at a share price equal to the average of the weighted volume average price for the 20 business days preceding the dividend date. Voting rights for the preferred stock are one vote for each whole share of common stock that the Series B Preferred Stock can convert into. Automatic conversion into common stock will occur at the earlier of the third anniversary of the original issuance date or six months after the final closing of a qualified rate which is calculated by dividing the original purchase price by the conversion price, adjusted for the effects of the Reverse Stock Split, if during 20 consecutive trading days the weighted volume average of Common Stock is at least $0.60, and trading volume is at least $150. Series B Preferred Stock have liquidation rights at 130% of the original purchase price. As of December 31, 2016, there were 20,000 shares of former Nuvel Series B Preferred issued and outstanding. Cumulative dividends in arrears assumed on the former Nuvel Series B Preferred Stock totaled $17 as of December 31, 2016 and have not been declared by Board of Directors.
The Nuvel Series C Preferred Stock has a par value of $0.001 and is convertible into 20 shares of common stock. Dividends are 6% cumulative and can be paid in common stock at a share price equal to the average of the weighted volume average price for the 20 business days preceding the dividend date. Voting rights for the preferred stock are one vote for each whole share of common stock that the Series C Preferred Stock can convert into. Automatic conversion into common stock will occur at the earlier of the third anniversary of the original issuance date or six months after the final closing of a qualified rate which is calculated by dividing the original purchase price by the conversion price, adjusted for the effects of the reverse Stock Split, if during 20 consecutive trading days the weighted volume average of Common Stock is at least $0.60, and trading volume is at least $150. Series C Preferred Stock have liquidation rights at 100% of the original purchase price. As of December 31, 2016, there were 371,052 shares of former Nuvel Series B Preferred issued and outstanding. Cumulative dividends in arrears assumed on the former Nuvel Series C Preferred Stock totaled $260 as of December 31, 2016 and have not been declared by Board of Directors.
11.
Stock Based Compensation
2016 Equity Incentive Plan
In August 2016, OrangeHook MN adopted the 2016 Equity Incentive Plan which authorized one million shares of common stock to be used for the granting of incentive awards to employees, directors or consultants.
The options allow for the purchase of shares of common stock at prices equal to the fair market value of our common stock on the date of grant. Options granted had a ten-year contractual term and vest over approximately three years. Forfeited options are available for future issue. OrangeHook MN issues new stock when non-qualified stock options are exercised.
A summary of our non-qualified stock options as of and for the years ended December 31, 2016 and 2015 is detailed below:
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|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
Weighted
|
|
Aggregate
|
|
|
remaining
|
|
|
|
Number of
|
|
|
average
|
|
intrinsic
|
|
|
contractual
|
|
(in thousands except number of options, exercise price and years)
|
|
options
|
|
|
exercise price
|
|
value
|
|
|
term (years)
|
|
Outstanding as of December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
-
|
|
Granted
|
|
|
378,571
|
|
|
|
0.16
|
|
|
|
|
|
10.0
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Outstanding as of December 31, 2015
|
|
|
378,571
|
|
|
$
|
0.16
|
|
|
$
|
1,143
|
|
|
|
8.6
|
|
Exercisable as of December 31, 2015
|
|
|
378,571
|
|
|
$
|
0.16
|
|
|
$
|
1,143
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
378,571
|
|
|
$
|
0.16
|
|
|
$
|
1,143
|
|
|
|
8.6
|
|
Granted
|
|
|
1,258,137
|
|
|
|
6.05
|
|
|
|
|
|
|
|
7.3
|
|
Exercised
|
|
|
(50,000
|
)
|
|
|
0.16
|
|
|
$
|
151
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(207,142
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
-
|
|
Outstanding as of December 31, 2016
|
|
|
1,379,566
|
|
|
$
|
5.40
|
|
|
$
|
848
|
|
|
|
7.8
|
|
Exercisable as of December 31, 2016
|
|
|
674,290
|
|
|
$
|
5.08
|
|
|
$
|
628
|
|
|
|
7.6
|
|
Remaining authorized options available for issue
|
|
|
98,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the number of non-qualified options shown above are non-qualified stock options issued outside the plan of 478,413 and 378,571 as of December 31, 2016 and 2015, respectively.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
The intrinsic value of a stock award is the amount by which the fair value of the underlying stock exceeds the exercise price of the award. The fair value of our common stock is determined by a valuation completed by external third party for options granted during the year. The evaluation of the OrangeHook MN's common stock requires OrangeHook MN to make assumptions about future cash flows of OrangeHook MN that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. OrangeHook MN engaged an independent specialist to assist OrangeHook MN in evaluating the fair value of OrangeHook MN's common stock and ultimately concluded on the fair value of OrangeHook MN's common stock.
A summary of outstanding and exercisable stock options by exercise price and the weighted average remaining contractual term as of December 31, 2016 and 2015 are as follows:
Outstanding
|
|
As of December 31, 2016
|
|
Number of
shares
|
|
|
Exercise price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
|
|
|
|
|
150,000
|
|
|
$
|
0.16
|
|
|
|
8.4
|
|
|
769,701
|
|
|
$
|
3.18
|
|
|
|
9.8
|
|
|
173,189
|
|
|
$
|
5.60
|
|
|
|
6.3
|
|
|
286,676
|
|
|
$
|
14.00
|
|
|
|
8.4
|
|
|
1,379,566
|
|
|
|
|
|
|
|
7.8
|
|
As of December 31, 2015
|
|
Number of
shares
|
|
|
Exercise price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
|
|
|
|
|
378,571
|
|
|
$
|
0.16
|
|
|
|
8.6
|
|
Exercisable
|
|
As of December 31, 2016
|
|
Number of
shares
|
|
|
Exercise price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
|
|
|
|
|
150,000
|
|
|
$
|
0.16
|
|
|
|
8.4
|
|
|
256,748
|
|
|
$
|
3.18
|
|
|
|
9.7
|
|
|
138,015
|
|
|
$
|
5.60
|
|
|
|
6.3
|
|
|
129,527
|
|
|
$
|
14.00
|
|
|
|
8.4
|
|
|
674,290
|
|
|
|
|
|
|
|
7.6
|
|
As of December 31, 2015
|
|
Number of
shares
|
|
|
Exercise price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
|
|
|
|
|
378,571
|
|
|
$
|
0.16
|
|
|
|
8.6
|
|
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
For the years ended December 31, 2016 and 2015, we recognized non-cash non-qualified stock option compensation expense of $316 and $559, respectively, which is included in general and administrative expenses.
We determine the fair value of options using the Black-Scholes option pricing model. The weighted average grant date fair value during the years ended December 31, 2016 and 2015 was $1.31 and $1.56, respectively. The estimated fair value of options is recognized as expense on a straight-line basis over the options' vesting periods. The assumptions in the table below was used to determine the Black-Scholes fair value of stock options granted during the years ended December 31, 2016 and 2015.
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
1.6
|
%
|
|
|
2.3
|
%
|
Expected volatility
|
|
|
36.1
|
%
|
|
|
100.0
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected option life (years)
|
|
|
10
|
|
|
|
10
|
|
Expected volatility is based on an independent valuation of the stock of companies within our peer group. Given the lack of a true comparable company, the peer group consists of selected SaaS holdings companies and healthcare software companies representing potential suppliers, customers or competitors. The risk free-interest rate is based on the U.S. Treasury yield curve in effect at the grant date based on the expected option life. OrangeHook MN has not paid any common stock dividends and does not expect to in the future. The expected option life is estimated based on the contractual term of the option.
Stock Grants to Employees and Consultants
During 2016, OrangeHook MN granted a total of 50,000 shares of common stock to certain employees in exchange for their services. The shares vested immediately and have been recorded based on the fair value of OrangeHook MN's common stock at the date of the grant using a value of $3.18 per share. Non-cash compensation expense of $159 has been recorded for the year ended December 31, 2016 and is included in general and administrative expenses in the accompanying consolidated statements of operations.
During 2015, OrangeHook MN granted a total of 1,500,000 shares of common stock to certain employees and consultants in exchange for their services. One such employee is also a director of the OrangeHook MN. The shares vested immediately and have been recorded based on the fair value of OrangeHook MN's common stock at the date of the grant using a value of $0.16 per share. Non-cash compensation expense of $240 has been recorded for the year ended December 31, 2015 and is included in general and administrative expenses in the accompanying consolidated statements of operations.
12.
Stock Warrants
Warrants to purchase shares of OrangeHook MN's common stock have been issued in connection with issuances of preferred stock (See Note 12), convertible debentures (See Note 8) and for certain other situations. Warrants outstanding and exercisable as of December 31, 2016 and 2015 by exercise price are as follows:
|
|
Number of
|
|
|
|
|
|
|
|
|
|
shares
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
and
|
|
|
average
|
|
|
intrinsic
|
|
(in thousands except number of options, exercise price and years)
|
|
vested
|
|
|
exercise price
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable as of December 31, 2014
|
|
|
156,524
|
|
|
$
|
7.00
|
|
|
$
|
-
|
|
Granted
|
|
|
677,962
|
|
|
|
3.86
|
|
|
|
|
|
Exercised
|
|
|
(160,000
|
)
|
|
|
0.01
|
|
|
$
|
507
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding and exercisable as of December 31, 2015
|
|
|
674,486
|
|
|
$
|
5.50
|
|
|
$
|
460
|
|
Granted
|
|
|
1,896,314
|
|
|
|
7.36
|
|
|
|
|
|
Exercised
|
|
|
(55,000
|
)
|
|
|
0.01
|
|
|
$
|
198
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding and exercisable as of December 31, 2016
|
|
|
2,515,800
|
|
|
$
|
7.02
|
|
|
$
|
378
|
|
During 2016, OrangeHook MN granted a warrant to purchase up of 185,000 shares of common stock to a director for his services. The shares vested immediately and have been recorded based on the fair value of OrangeHook MN's common stock at the date of the grant using a value of $3.18 per share. Non-cash compensation expense of $108 has been recorded for the year ended December 31, 2016 and is included in general and administrative expenses in the accompanying consolidated statements of operations.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
During 2016, a director exercised a warrant to purchase 50,000 shares of common stock at an exercise price of $0.16 per share which resulted in proceeds of $8. Upon issuance, the shares were valued based on the fair value of OrangeHook MN's common stock at the date of exercise using a value of $3.18 per share. Non-cash compensation expense of $151, representing the difference between the fair value and exercise price times the number of shares acquired by the director, has been recorded for the year ended December 31, 2016 and is included in general and administrative expenses in the accompanying consolidated statements of operations.
The intrinsic value of a stock award is the amount by which the fair market value of the underlying stock exceeds the exercise price of the award. The fair market value of our common stock is determined by a valuation completed by external third party for options granted during the year. The evaluation of the OrangeHook MN's common stock requires OrangeHook MN to make assumptions about future cash flows of OrangeHook MN that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. OrangeHook MN engaged an independent specialist to assist OrangeHook MN in evaluating the fair value of OrangeHook MN's common stock and ultimately concluded on the fair value of OrangeHook MN's common stock.
A summary of outstanding and exercisable stock warrants by exercise price and the weighted average remaining contractual term as of December 31, 2016 and 2015 are as follows:
As of December 31, 2016
|
|
Number of
shares
outstanding
and
exercisable
|
|
|
Exercise price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
|
|
|
|
|
105,000
|
|
|
$
|
0.01
|
|
|
|
1.5
|
|
|
2,146,497
|
|
|
$
|
7.00
|
|
|
|
5.6
|
|
|
264,303
|
|
|
$
|
10.00
|
|
|
|
4.5
|
|
|
2,515,800
|
|
|
|
|
|
|
|
5.2
|
|
As of December 31, 2015
|
|
Number of
shares
outstanding
and
exercisable
|
|
|
Exercise price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
|
|
|
|
|
145,0001
|
|
|
$
|
0.01
|
|
|
|
2.5
|
|
|
529,491
|
|
|
$
|
7.00
|
|
|
|
6.3
|
|
|
674,491
|
|
|
|
|
|
|
|
5.6
|
|
13.
Restricted Stock Grants
In December 2014, OrangeHook MN granted a total of 100,000 shares of common stock to each of its four outside directors in exchange for their services. The shares vest as follows: 25% immediately with the remaining 75% vesting equally over the next three years, assuming the director remains in their position on the anniversary date. The Company has recorded the fair value of the shares using an estimate of fair value of $0.16 per share as of the grant date. The grants also included a change in control provision which accelerated the vesting of the underlying shares. Upon the closing of the merger with Nuvel Holdings, Inc. (see Note 4), 100% of the unvested shares at the time of merger became fully vested. Non-cash compensation of $32 and $16 was recorded for the years ended December 31, 2016 and 2015, respectively.
The following table sets forth a summary of restricted stock activity for the years ended December 31, 2016 and 2015:
|
|
Number of Restricted Shares
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Outstanding and not vested, January 1
|
|
|
200,000
|
|
|
|
300,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(200,000
|
)
|
|
|
(100,000
|
)
|
Outstanding and not vested, December 31
|
|
|
-
|
|
|
|
200,000
|
|
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
14.
Stock Subscription Receivable
In December 2015, OrangeHook MN sold 400 units of Series A Convertible Preferred Stock in exchange for proceeds of $400. Under a separate agreement with the shareholder, 150 units representing $150 of the proceeds, were held in escrow pending the completion of the transaction between OrangeHook MN and Nuvel Holdings, Inc. (see Note 4). During the period of time that these shares were held in escrow, the holder received all rights and privileges as a holder of this security. On August 15, 2016, the funds held in escrow were released to OrangeHook MN and there are no amounts related to the stock subscription receivable as of December 31, 2016.
15.
Net loss per share
Basic and diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including our outstanding stock options, outstanding warrants, common stock related to unvested early exercised stock options, common stock related to warrants and convertible senior notes to the extent dilutive. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive.
The following table presents the calculation of basic and diluted net loss attributable to common stockholders per share (in thousands, except per share data):
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Basic and diluted net loss attributable to common stockholders per share:
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Allocation of distributed net loss attributable to common stockholders
|
|
$
|
(11,746
|
)
|
|
$
|
(4,085
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
4,687,039
|
|
|
|
1,766,030
|
|
Basic and diluted net loss per share
|
|
$
|
(2.51
|
)
|
|
$
|
(2.31
|
)
|
The anti-dilutive securities excluded from the weighted-average shares used to calculate the diluted net loss per common share were as follows:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Restricted stock
|
|
|
-
|
|
|
|
200,000
|
|
Non-qualified stock options
|
|
|
1,379,566
|
|
|
|
378,571
|
|
Stock warrants
|
|
|
2,515,800
|
|
|
|
674,486
|
|
|
|
|
3,895,366
|
|
|
|
1,253,057
|
|
16.
Income Taxes
Income tax computed at the federal statutory rate reconciled to the effective tax rate is as follows for the years ended December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Federal statutory tax benefit rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State tax, net of federal benefit
|
|
|
(2.4
|
)
|
|
|
(2.1
|
)
|
Permanent differences
|
|
|
9.0
|
|
|
|
8.5
|
|
Other
|
|
|
(14.1
|
)
|
|
|
(11.6
|
)
|
Change in valuation allowance
|
|
|
24.9
|
|
|
|
39.2
|
|
|
|
|
(16.6
|
)%
|
|
|
-
|
%
|
OrangeHook MN assesses the potential realization of net deferred tax assets on an annual basis, or on an interim basis if the circumstances warrant. If OrangeHook MN's actual results and updated projections vary significantly from the projections used as a basis for this determination, OrangeHook MN may need to increase or decrease the valuation allowance against the gross deferred tax assets. OrangeHook MN would adjust its valuation allowance in the period the determination was made. OrangeHook MN considers projected future taxable income and ongoing tax planning strategies and then records a valuation allowance to reduce the carrying value of the net deferred taxes for amounts that are unable to be realized. For the years ended December 31, 2016 and 2015, OrangeHook MN recorded a change in the valuation allowance of $3,223 and $1,446, respectively, as OrangeHook MN believes it is not more-likely-than-not to realize the benefit of the deferred tax asset.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Below is a summary of deferred income tax assets and liabilities as of December 31, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
8,685
|
|
|
$
|
1,106
|
|
R&D credit carryforwards
|
|
|
395
|
|
|
|
395
|
|
Start-up costs
|
|
|
14
|
|
|
|
15
|
|
Accruals and reserves
|
|
|
759
|
|
|
|
292
|
|
Depreciation
|
|
|
27
|
|
|
|
17
|
|
Deferred revenue
|
|
|
23
|
|
|
|
-
|
|
Deferred rent
|
|
|
25
|
|
|
|
-
|
|
|
|
|
9,928
|
|
|
|
1,825
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
(5,142
|
)
|
|
|
(286
|
)
|
Non-cash compensation costs
|
|
|
-
|
|
|
|
(12
|
)
|
Deferred revenue
|
|
|
-
|
|
|
|
(10
|
)
|
Investment in Partnership
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
|
(5,188
|
)
|
|
|
(308
|
)
|
Net deferred income tax assets
|
|
|
4,740
|
|
|
|
1,517
|
|
Less: Valuation allowance
|
|
|
(4,740
|
)
|
|
|
(1,517
|
)
|
Net deferred income tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, OrangeHook MN has the following federal and state net operating losses and research and development credit carryforwards:
|
|
Net Operating Losses
|
|
|
Research and
|
|
|
|
|
|
|
|
|
|
Development
|
|
Year of Expiration
|
|
Federal
|
|
|
State
|
|
|
Credits
|
|
2025
|
|
|
173
|
|
|
|
-
|
|
|
|
24
|
|
2026
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
2027
|
|
|
312
|
|
|
|
-
|
|
|
|
51
|
|
2028
|
|
|
40
|
|
|
|
-
|
|
|
|
44
|
|
2029
|
|
|
40
|
|
|
|
180
|
|
|
|
45
|
|
2030
|
|
|
51
|
|
|
|
711
|
|
|
|
39
|
|
2031
|
|
|
856
|
|
|
|
3,833
|
|
|
|
16
|
|
2032
|
|
|
2,420
|
|
|
|
2,421
|
|
|
|
21
|
|
2033
|
|
|
2,607
|
|
|
|
2,528
|
|
|
|
27
|
|
2034
|
|
|
3,864
|
|
|
|
3,645
|
|
|
|
44
|
|
2035
|
|
|
4,240
|
|
|
|
2,403
|
|
|
|
45
|
|
2036
|
|
|
8,174
|
|
|
|
444
|
|
|
|
-
|
|
|
|
$
|
22,777
|
|
|
$
|
16,165
|
|
|
$
|
395
|
|
OrangeHook MN's ability to utilize a portion of its net operating loss carryforwards to offset future taxable income may be subject to certain limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of OrangeHook MN. OrangeHook MN has not performed an analysis to determine if an ownership change has occurred.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
In connection with the acquisition of LifeMed in 2016, the purchase accounting included a net increase of deferred tax assets of $1,780, which includes primarily federal and state net operating loss ("NOL") carryforwards and amortization of intangibles. It is not more likely than not the assets will be realized and OrangeHook MN has recorded a full valuation allowance against those assets.
In connection with the merger with Nuvel in 2016, there were not any deferred tax assets acquired. The allocation of the purchase price included definite-lived intangible assets of $5,824. There is a temporary difference creating a deferred tax liability of $2,122 due to future amortization. In accordance with ASC 740 "Accounting for Income Taxes", OrangeHook MN can evaluate its valuation allowance based on attributes of the acquired company. As a result, this reduced the valuation allowance by $2,122 and is recorded as a tax benefit in the accompanying consolidated statements of operations for the year ended December 31, 2016.
During 2015, OrangeHook MN recorded additional deferred tax assets primarily related to the acquisition of Salamander Technologies, Inc. The net increase was $382 which includes a research and development ("R&D") credit carryforward, a net operating loss ("NOL") carryforward and amortization of intangibles
.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority. As of December 31, 2016, and 2015, we did not have any material uncertain tax positions.
It is our practice to recognize interest and penalties related to income tax matters as a component of income tax expense in the consolidated statements of operations. There have been no interest or penalties incurred for the years ended December 31, 2016 and 2015.
17.
Business Segments
A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. OrangeHook MN has three operating segments: (1) SalTech, which includes the results of the business operation within Salamander Technologies, LLC, which provides an asset tagging and tracking software solution used to manage incidents or events, (2) AGL, which includes the results of the business operation of Agilivant, LLC, offers a real-time debit based banking and payment system, (3) LMID, which offers a suite of software solutions that overlays with existing systems and equipment which automates patient identity validation, record matching, insurance and payment requirements and access to information. We reconcile the results of our operating segments to our consolidated results by including the results of our corporate headquarters and centralized functions, which includes corporate expenses (e.g. corporate administrative costs) and interest expense. Segment disclosures are provided to the extent practicable under OrangeHook MN's accounting system. Transactions within and between the segments are generally made on a basis to reflect the market value of the services and have been eliminated in consolidation.
The SalTech segment was created as a result of OrangeHook MN's acquisition of Salamander Technologies, Inc. which occurred on October 1, 2015. The AGL segment was created as a result of OrangeHook MN's acquisition of Agilivant, LLC which occurred on February 12, 2016. The LMID segment was created as a result of OrangeHook MN's acquisition of LifeMed ID, Inc. which occurred on July 20, 2016.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
Segment disclosures are as follows:
|
|
For the year ended December 31, 2016
|
|
|
|
Sal-Tech
|
|
|
AGL
|
|
|
LMID
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
959
|
|
|
$
|
1,234
|
|
|
$
|
118
|
|
|
$
|
-
|
|
|
$
|
2,311
|
|
Loss from operations
|
|
|
(951
|
)
|
|
|
(17
|
)
|
|
|
(2,671
|
)
|
|
|
(6,447
|
)
|
|
|
(10,086
|
)
|
Net income (loss)
|
|
|
(952
|
)
|
|
|
405
|
|
|
|
(2,677
|
)
|
|
|
(7,552
|
)
|
|
|
(10,775
|
)
|
Total Assets
|
|
|
1,560
|
|
|
|
2,860
|
|
|
|
2,735
|
|
|
|
20,431
|
|
|
|
29,769
|
|
Depreciation and amortization
|
|
|
104
|
|
|
|
209
|
|
|
|
783
|
|
|
|
153
|
|
|
|
1,249
|
|
Capital expenditures
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(73
|
)
|
|
|
(29
|
)
|
|
|
(109
|
)
|
Net loss on Investment in LifeMed ID, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(438
|
)
|
|
|
(438
|
)
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
569
|
|
|
|
-
|
|
|
|
173
|
|
|
|
742
|
|
Interest expense, net of interest income
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
(6
|
)
|
|
|
(2,962
|
)
|
|
|
(3,027
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,122
|
|
|
|
2,122
|
|
|
|
For the year ended December 31, 2015
|
|
|
|
Sal-Tech
|
|
|
AGL
|
|
|
LMID
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
245
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
245
|
|
Loss from operations
|
|
|
(337
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,253
|
)
|
|
|
(3,590
|
)
|
Net income (loss)
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,745
|
)
|
|
|
(3,680
|
)
|
Total Assets
|
|
|
2,698
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,981
|
|
|
|
10,679
|
|
Depreciation and amortization
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
40
|
|
Capital expenditures
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
|
|
(78
|
)
|
Net loss on Investment in LifeMed ID, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense, net of interest income
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(493
|
)
|
|
|
(494
|
)
|
Income tax provision (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
18.
Global Licensing Fee
On September 26, 2016, OrangeHook MN executed an agreement with a business partner that grants them exclusive global rights to bundle software products sold by LMID in exchange for a non-refundable licensing fee of $5,000. The fee is payable in three installments: $1,250 upon contract signing, $1,250 million no later than December 31, 2016 and $2,500 when OrangeHook MN sells its first contract in China that equals or exceeds $5,000 of revenue or April 30, 2017, whichever is later. OrangeHook MN received the payments that were due through December 31, 2016.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
19.
Proforma Combined Financial Information- Unaudited
The following presents the unaudited pro forma combined financial information as if the acquisitions of Salamander, Agilivant, LMID, and Nuvel occurred as of January 1, 2015.
|
|
For the Year Ended December 31, 2016
|
|
|
For the Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
$
|
2,620
|
|
|
$
|
1,954
|
|
|
|
|
|
|
|
|
|
|
Pro forma loss from operations
|
|
$
|
(14,547
|
)
|
|
$
|
(13,062
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss before non-controlling interest in subsidiary and income tax benefit
|
|
$
|
(17,359
|
)
|
|
$
|
(13,481
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders
|
|
$
|
(16,309
|
)
|
|
$
|
(13,886
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma loss per common share – basic and diluted
|
|
$
|
(2.75
|
)
|
|
$
|
(3.41
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding – basic and diluted
|
|
|
5,938,157
|
|
|
|
4,069,964
|
|
The unaudited pro forma combined financial information present above is not necessarily indicative of the results of operations that actually would have occurred had the acquisitions been completed as of January 1, 2015, nor are they necessarily indicative of future consolidated results.
Unaudited pro forma combined balance sheet information is not present herein, as the financial position of Salamander, Agilivant, LMID and Nuvel are included in OrangeHook MN's condensed consolidated balance sheet as of December 31, 2016.
20.
Related-Party Transactions
Lease obligations
Our subsidiary LifeMed is obligated under a non-cancellable operating lease with Mr. Batchelor, Co-CEO of LifeMed and his spouse, as owners of the property. The non-cancellable operating lease of its former headquarters and operating facilities located in Citrus Heights, California, commenced on April 1, 2012 for a term of ten years. The lease payments increase, beginning in 2014 and each year thereafter, consistent with the Consumer Price Index-All Items – All Urban Consumers-Oakland-San Francisco-Sacramento (1982-84 = 100) as published by the United States Department of Labor, Bureau of Labor Statistics. Annual rent increases, if any, are not to exceed 15% of the prior year's monthly rent. OrangeHook MN has the option to extend the lease for one additional three (3) year term at the then fair market lease rate, as defined in the agreement. OrangeHook MN is responsible for (a) its pro-rata share (14.63%) of the real property taxes on the building; (b) all utilities; (c) maintaining the plumbing, heating and air conditioning systems; and (d) property management fees. Base rent paid to Mr. Batchelor during the year ended December 31, 2016 was $28.
OrangeHook MN subleases office space in Wayzata, Minnesota from a company controlled by family members of OrangeHook MN's Chief Executive Officer and director under an operating lease dated December 15, 2014. Lease payments, covering 2,100 square feet, are approximately $5 per month through September 30, 2017. On September 1, 2015 and December 1, 2015, OrangeHook MN entered two additional operating leases for approximately 5,100 square feet in the same location in Wayzata, Minnesota. The term of both leases is 60 months with lease payments totaling approximately $10 per month. One of the leases (covering 850 square feet) has been subleased to an independent party in exchange for a lease payment of $1 per month. The leases are personally guaranteed by OrangeHook MN's Chief Executive Officer. During the year ended December 31, 2016 and 2015, we paid rent to the related company of $58 and $58, respectively. There was $5 and no amounts accrued at December 31, 2016 and 2015, respectively.
Business Relationship
OrangeHook MN engaged with a corporation to provide business advisory services of which an individual director and officer of OrangeHook MN is also the Chairman. The corporation provides business advisory services which include identifying potential investors, general business development, and other services as required. During the year ended December 31, 2016 and 2015, we paid to the related company of $145 and $60, respectively. There was $22 and $6 accrued at December 31, 2016 and 2015, respectively.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2016 and 2015 and
For the years ended December 31, 2016 and 2015
(in thousands, except for share and per share amounts)
21.
Subsequent Events
Subsequent to December 31, 2016 and through April 17, 2017, the following subsequent events have occurred:
Short-term Debt
On January 19, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $300. Interest accrues at a rate of 20 basis points ($0.6) per day. On March 2, 2017, this lender provided an additional amount of $300 under the same terms as the previous loan. Both amounts were due no later than March 17, 2017. On March 15, 2017, OrangeHook MN repaid both amounts ($600) together with accrued interest of $42.
On February 8, 2017, OrangeHook MN negotiated an increase to its current line of credit with its bank in the amount of $200. The increase is secured by cash collateral provided by OrangeHook MN's Chairman of the Board who received three-year warrants to purchase up to 28,000 shares of common stock at an exercise price of $10.00 per share as consideration. These warrants were valued at $3 and will be amortized as debt issuance costs over the term of the line of credit. In connection with this transaction, the maturity date of the line of credit has been extended to January 30, 2018.
On February 17, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $75. The loan is non-interest bearing and is due on demand.
On February 23, 2017, OrangeHook MN entered into a short-term debt agreement with two parties totaling $250. On March 1, 2017, OrangeHook MN repaid this note together with accrued interest of $10.
On February 24, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $165 with a due date of March 24, 2017. Net proceeds of $147 were received representing the principal amount less an original issue discount of $15 and fees of $3. The original issue discount will be charged to interest expense over the term of the debt agreement. Interest of $5 is fixed and due at maturity. In connection with this transaction, OrangeHook MN also received an extension on another outstanding loan from the same lender in the amount of $500 in exchange for a fee of $4 plus interest of $11. This loan was originally issued in July 2016 and has been extended numerous times and is currently due on March 25, 2017. On March 24, 2017, OrangeHook MN exercised an extension for both loans through April 15, 2017, in exchange for a fee of $5 plus additional interest of $13. We are currently negotiating an extension with this lender. These loans are personally guaranteed by our Chief Executive Officer, a director and one shareholder.
On March 31, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $250. Interest accrues at a rate of 20 basis points ($0.5) per day and is due no later than May 29, 2017.
Senior Notes
On March 31, 2017, the Board of Directors authorized the issuance of up to $7 million of senior notes. Terms of the senior notes include interest of 10% per annum, payable either quarterly or monthly at the lender's option, with a maturity date of two years from the issue date. In addition, the lender will receive an up-front participation fee equal to 3.5% of the amount of the note and three-year warrants equal to 14% of the amount of the note at an exercise price of $10.00 per share which vest ratably on a monthly basis over the term of the related note. As of March 31, 2017, OrangeHook MN has received a total of $1,150 of proceeds under this offering, $1,050 of which have been received from the Chairman of the Board. Warrants to purchase up to 161,000 shares of common stock have been issued to date. These warrants were valued at $12 which will be amortized as original issue discount over the term of the notes.
Sales of OH-2 Convertible Preferred Stock
Through April 17, 2017, a total of 838 units of OH-2 Convertible Preferred stock have been sold in exchange for cash proceeds of $838. Attached to the units of preferred stock were warrants to purchase up to 59,917 shares of common stock at a price of $7 per share.
See the exhibit index immediately following the signature page to this annual report on Form 10-K, which is incorporated herein by reference.