Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2016
(unaudited)
Note 1: Basis of Presentation
Hooper Holmes, Inc. and its subsidiaries (“Hooper Holmes” or the "Company”) provides on-site screenings and flu shots, laboratory testing, risk assessment, and sample collection services to individuals as part of comprehensive health and wellness programs offered through corporate and government employers. The acquisition of Accountable Health Services, Inc. ("AHS") ("the Acquisition"), which is discussed further in Note 3 to the condensed consolidated financial statements, allows Hooper Holmes to also deliver telephonic health coaching, a wellness portal, data analytics, and reporting services. Hooper Holmes is engaged by the organizations sponsoring such programs, including health and care management companies, broker and wellness companies, disease management organizations, reward administrators, third party administrators, clinical research organizations, and health plans. Hooper Holmes provides these services through a national network of health professionals.
The Company's screening business is subject to some seasonality, with second quarter revenues typically dropping below other quarters. Third and fourth quarter revenues are typically the Company's strongest quarters due to increased demand for screenings from mid-August through November related to annual benefit renewal cycles. The Company's wellness services business is more constant, though there are some variations due to the timing of the health coaching programs, which are billed per participant and typically start soon after the conclusion of onsite screening events. In addition to its screening and health and wellness service operations, the Company generates ancillary revenue through the assembly of medical kits for sale to third parties.
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2015 Annual Report on Form 10-K, filed with the SEC on March 30, 2016.
Financial statements prepared in accordance with U.S. GAAP require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and other disclosures. The financial information included herein is unaudited; however, such information reflects all adjustments that are, in the opinion of the Company's management, necessary for a fair statement of results for the interim periods presented.
The results of operations for the
three and nine
month periods ended
September 30, 2016
and
2015
, are not necessarily indicative of the results to be expected for any other interim period or the full year. See “Management's Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
Prior to 2015, the Company completed the sale of certain assets comprising its Portamedic, Heritage Labs, and Hooper Holmes Services businesses. The operating results of these businesses have been segregated and reported as discontinued operations for all periods presented in this Quarterly Report on Form 10-Q.
On June 15, 2016, the Company completed a one-for-fifteen reverse stock split, in order to regain compliance with the NYSE MKT's minimum market price requirement. As a result, the share and per share information for all periods presented in these unaudited condensed consolidated financial statements have been adjusted to reflect the impact of the reverse stock split. The reverse stock split did not affect the total number of authorized shares of common stock of
240,000,000
shares or the par value of the Company’s common stock at
$0.04
. Accordingly, an adjustment was made between additional paid-in-capital and common stock in the condensed consolidated balance sheet to reflect the new values after the reverse stock split.
During the third quarter of 2016, the Company elected to update the presentation of its condensed consolidated balance sheet by adding an other current liabilities category and reclassifying certain liabilities such as escheatment, rent escalation reserve, and legal settlement reserve into this new category in the accompanying condensed consolidated balance sheet. The Company believes this provides a more useful and informative depiction of the Company's current liabilities and liquidity. Prior period comparatives have been reclassified to conform to the revised presentation.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This new guidance is effective for the Company in the first quarter of 2018, with early adoption permitted as of the original effective date or first quarter of 2017. The Company is currently evaluating the impact the adoption of ASU 2014-09 will have on the consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern". This ASU requires management to assess and evaluate whether conditions or events exist, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements issue date. This standard will be effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter; early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 will have on the disclosures in Note 2 of the condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs", which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The Company adopted the provisions of ASU 2015-03 in the first quarter of 2016. The retrospective application of the new standard resulted in a
$0.2 million
reduction to both noncurrent assets and current liabilities as of December 31, 2015. The debt issuance costs associated with the revolving credit facilities remain classified in noncurrent assets in accordance with ASU 2015-15.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory", which changes the measurement basis for inventory from the lower of cost or market to lower of cost and net realizable value and also eliminates the requirement for companies to consider replacement cost or net realizable value less an approximate normal profit margin when determining the recorded value of inventory. The standard is effective for public companies in fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2015-11 will have on its consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", which is intended to improve financial reporting about leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting (Topic 718)", which is intended to simplify the accounting for share-based compensation. This standard simplifies the accounting for income taxes in relation to share-based compensation, modifies the accounting for forfeitures, and modifies the statutory tax withholding requirements. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-09 will have on its consolidated financial position, results of operations or cash flows.
Note 2: Liquidity
The Company incurred a loss from continuing operations of
$7.6 million
during the
nine
month period ended
September 30, 2016
, and the Company’s net cash used in operating activities for the
nine
month period ended
September 30, 2016
, was
$7.1 million
. The Company has managed its liquidity through availability under a revolving credit facility, raising additional equity, and a series of cost reduction initiatives. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. The uncertainty regarding the Company's ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about its ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company expects to continue to monitor its liquidity carefully, work to reduce this uncertainty, and address its cash needs through a combination of one or more of the following actions:
|
|
•
|
On January 25, 2016, the Company received
$3.4 million
, net of issuance costs, in additional equity by issuing
2,601,789
shares of its common stock,
$0.04
par value, through a rights offering to current shareholders which was used to fund working capital;
|
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|
•
|
On March 28, 2016, the Company received
$1.2 million
, net of issuance costs, in additional equity by issuing
666,667
shares of its common stock,
$0.04
par value, to 200 NNH, LLC, which was used to fund working capital;
|
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•
|
On April 29, 2016, the Company entered into a new Credit and Security Agreement with SCM Specialty Finance Opportunities Fund, L.P. (as defined below) replacing the 2013 Loan and Security Agreement (as defined below). Refer to Note 9 to the condensed consolidated financial statements for additional discussion.
|
|
|
•
|
Beginning on September 15, 2016, the Company received
$1.6 million
, net of issuance costs, in additional equity by issuing
1,333,333
shares of its common stock,
$0.04
par value, and warrants (the "Private Offering Warrants") to purchase up to an additional
1,333,333
shares of its common stock at an exercise price of
$2.00
per share to various investors in a private offering (the "Private Offering"). Also, on October 14, 2016, the Company issued an additional
55,556
shares of its common stock,
$0.04
par value, and Private Offering Warrants to purchase up to an additional
55,556
shares of its common stock at an exercise price of
$2.00
per share with a value of
$0.1 million
in the Private Offering. The proceeds from the Private Offering were used to fund working capital. The Private Offering Warrants are exercisable, exclusively on a cashless basis, beginning
six
months after the date of issuance and ending on the fourth anniversary of the date of issuance. The warrants provide that the Company can call the warrants if the closing price of its Common Stock equals or exceeds
$3.00
per share for
ten
consecutive trading days with a minimum trading volume of
100,000
shares per day, subject to certain additional conditions set forth in the warrants. The exercise price of the warrants is subject to customary adjustment provisions for stock splits, stock dividends, recapitalizations and the like. The warrants grant the holder certain piggyback registration rights. The warrants were classified as equity, and as such, the Company allocated the proceeds from the stock issuances, net of issuance costs, to the warrants using the relative fair value method.
|
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|
•
|
The Company will continue to aggressively seek new and return business from its existing customers and expand its presence in the health and wellness marketplace;
|
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•
|
The Company will continue to analyze and implement further cost reduction initiatives and efficiency improvements (see Note 10 to the condensed consolidated financial statements).
|
The Company's primary sources of liquidity are cash and cash equivalents as well as availability under a Credit and Security Agreement (the "2016 Credit and Security Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM"). At
September 30, 2016
, the Company had
$0.8 million
in cash and cash equivalents and had
$4.8 million
of outstanding borrowings under the 2016 Credit and Security Agreement, with unused borrowing capacity of
$1.1 million
. As of
November 10, 2016
, the Company had
$5.3 million
of outstanding borrowings with unused borrowing capacity of
$1.7 million
. Any borrowings on the unused borrowing capacity are at the discretion of SCM. As of
September 30, 2016
, the Company also owed approximately
$4.0 million
under an existing term loan (the "Term Loan"), which is governed by the terms of a credit agreement (the "Credit Agreement") with SWK Funding LLC ("SWK") and was used to fund the cash component of the Acquisition. Each of these agreements contain certain financial covenants, including various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements, which the Company did not comply with as of
September 30, 2016
. Noncompliance with these covenants constitutes an event of default. Accordingly, SCM reserves the right to terminate access to the unused borrowing capacity under the 2016 Credit and Security Agreement, while both lenders reserve the right to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral. The Company and the lenders are discussing the terms of waivers of the covenant violations, but there can be no assurance that the lenders will grant such waivers. If the Company is unable to obtain waivers, the lenders could elect to accelerate the repayment of all amounts outstanding under the 2016 Credit and Security Agreement and the Credit Agreement and they could exercise their remedies with respect to the Company’s collateral, which would have a material adverse impact on the Company’s business operations and financial condition. Similar results could arise if the Company is unable to comply with financial covenants in the future and is unable to modify the covenants, obtain applicable waivers, or find new or additional lenders. For additional information regarding the 2016 Credit and Security Agreement, Credit Agreement, and the related covenants, see Note 9 to the condensed consolidated financial statements.
The Company has historically used availability under a revolving credit facility to fund operations. The Company experiences a lag between the payment of certain operating expenses and the subsequent billing and collection of the associated revenue based on health and wellness customer payment terms. To illustrate, in order to conduct successful screenings, the Company must expend cash to deliver the equipment and supplies required for the screenings. The Company must also expend cash to pay the health professionals and site management conducting the screenings. All of these expenditures are incurred in advance of the customer invoicing process and ultimate cash receipts for services performed. Given the seasonal nature of the Company's operations, which
are largely dependent on second half volumes, management expects to continue using a revolving credit facility in 2016 and beyond.
The Company has contractual obligations related to operating leases and employment contracts which could adversely affect liquidity. The Company is currently in default on
three
real estate leases for space that the Company no longer needs. Two of the leases were assigned to the Company through the Acquisition, and the third, which is partially subleased, relates to the discontinued Hooper Holmes Services business. The Company is working with the landlords to terminate these leases on mutually acceptable terms.
The Company’s ability to satisfy its liquidity needs and meet future covenants is dependent on growing revenues and improving profitability. These profitability improvements primarily include expansion of the Company’s presence in the health and wellness marketplace through new sales to direct customers, retaining existing customers, and capitalizing on the opportunities presented by its channel partners. The Company must increase screening, telephonic health coaching, and wellness portal volumes in order to cover its fixed cost structure and improve gross profits. These improvements may be outside of management’s control. If the Company is unable to increase volumes or control operating costs, liquidity may be adversely affected.
There can be no assurance that cash flows from operations, combined with any potential additional borrowings available to the Company, will be obtainable in an amount sufficient to enable the Company to repay its indebtedness, cure matters of default, or to fund other liquidity needs. If the Company continues to be unable to comply with its financial covenants and in the event that the Company were unable to obtain waivers, modify the covenants, or find new or additional lenders, the lenders would then be able to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, and SCM would be able to restrict access to the Company's availability under the 2016 Credit and Security Agreement, which would have a material adverse impact on the Company's business.
Note 3: Acquisition
The Company entered into and consummated the Purchase Agreement on April 17, 2015, among the Company and certain of its subsidiaries, Accountable Health Solutions, Inc. (the "Seller" or "AHS") and Accountable Health, Inc. (the "Shareholder"). Pursuant to the Purchase Agreement, the Company acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately
$7.0 million
-
$4.0 million
in cash and up to
433,333
shares of the Company’s common stock,
$0.04
par value, with a value of
$3.0 million
, which was subject to a working capital adjustment as described in the Purchase Agreement. At the closing of the Purchase Agreement, the Company issued and delivered
371,739
shares of Common Stock to the Shareholder at closing and issued and held back
21,739
shares of Common Stock for the working capital adjustment, which were subsequently released on October 9, 2015, and
39,855
shares of Common Stock for indemnification purposes.
No
additional shares will be issued under the terms of the Purchase Agreement. The shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, which provides an exemption for private offerings of securities.
In order to fund the Acquisition, the Company entered into and consummated the Credit Agreement with SWK on April 17, 2015. Refer to Note 9 of the condensed consolidated financial statements for discussion of the Credit Agreement and related warrants.
The Acquisition was treated as a purchase in accordance with Accounting Standards Codification (ASC) 805,
Business Combinations
, which requires allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the transaction. The allocation of purchase price is based on management’s judgment after evaluating several factors, including a valuation assessment.
The allocation of the purchase price was finalized in the first quarter of 2016 and is as follows:
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|
(in thousands)
|
|
|
Accounts receivable, net of allowance of $2
|
|
$
|
918
|
|
Inventory and other current assets
|
|
117
|
|
Fixed assets
|
|
123
|
|
Customer portal (existing technologies)
|
|
4,151
|
|
Customer relationships
|
|
2,097
|
|
Goodwill
|
|
633
|
|
Accounts payable and accrued expenses
|
|
(743
|
)
|
Deferred revenue
|
|
(296
|
)
|
Purchase Price
|
|
$
|
7,000
|
|
Intangible assets acquired include existing technology in the form of a customer-facing wellness portal and customer relationships. The fair value of the customer relationships acquired was determined using the excess earnings method under the income approach for customer relationships; and the fair value of the wellness portal software was determined using the replacement cost method. The estimated useful life for the wellness portal and customer relationships is
4 years
and
8 years
, respectively. Amortization is recorded on a straight-line basis over the estimated useful life of the asset. The Company recorded amortization
expense as a component of cost of operations of
$0.2 million
and
$0.8 million
, respectively, and amortization expense as a component of selling, general, and administrative expenses of
$0.1 million
and
$0.2 million
, respectively, during the
three and nine
month periods ended
September 30, 2016
. The Company recorded amortization expense as a component of cost of operations of
$0.2 million
and
$0.5 million
, respectively, and amortization expense as a component of selling, general and administrative expenses of
$0.1 million
and
$0.1 million
, respectively, during the
three and nine
month periods ended
September 30, 2015
. The goodwill of
$0.6 million
was recorded in one reporting unit, the health and wellness operations, and is deductible for tax purposes.
The consolidated statement of operations for the
three and nine
month periods ended
September 30, 2016
,
includes revenue of
$3.4 million
and
$8.6 million
, respectively, attributable to AHS. Disclosure of the earnings contribution from the AHS business is not practicable, as the Company has already integrated operations.
The following table provides unaudited pro forma results of operations for the
three and nine
month periods ended
September 30, 2015
,
as if AHS was part of operations on the first day of the 2014 fiscal year.
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(in thousands)
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|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
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|
September 30,
|
|
|
2015
|
|
2015
|
Pro forma revenues
|
|
$
|
9,272
|
|
|
$
|
25,023
|
|
|
|
|
|
|
Pro forma net loss from continuing operations
|
|
$
|
(2,060
|
)
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|
$
|
(7,912
|
)
|
These pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented, nor are they indicative of the consolidated results of operations in future periods. The pro forma results for the
nine
month period ended
September 30, 2015
, include pre-tax adjustments for amortization of intangible assets of
$0.3 million
. Pro forma results for the
three and nine
month periods ended
September 30, 2015
, include pre-tax adjustments for the elimination of acquisition costs of
$0.1 million
and
$0.7 million
, respectively.
Basic loss per share equals net loss divided by the weighted average common shares outstanding during the period. Diluted loss per share equals net loss divided by the sum of the weighted average common shares outstanding during the period plus dilutive common stock equivalents. The calculation of loss per common share on a basic and diluted basis was the same for the
three and nine
month periods ended
September 30, 2016
and
2015
, because the inclusion of dilutive common stock equivalents, the SWK Warrant #1 (as defined in Note 9 to the condensed consolidated financial statements) issued in connection with the Acquisition, and the Private Offering Warrants would have been anti-dilutive for all periods presented. The Company has granted options to purchase shares of the Company's common stock through employee stock plans with the weighted average options outstanding as of
September 30, 2016
and
2015
, being
356,288
and
277,529
, respectively, SWK Warrant #1 to purchase
543,478
shares issued to SWK, and the Private Offering Warrants to purchase
1,333,333
shares issued in the Private Offering were outstanding as of
September 30, 2016
, but are anti-dilutive because the Company is in a net loss position.
Note 5: Share-Based Compensation
Employee
Share-Based Compensation Plans
- On May 29, 2008, the Company's shareholders approved the 2008 Omnibus Employee Incentive Plan (the "2008 Plan") providing for the grant of stock options, stock appreciation rights, non-vested stock, and performance shares. There were no options for the purchase of shares granted under the 2008 Plan during the
three
month periods ended
September 30, 2016 and 2015
. During the
nine
month periods ended
September 30, 2016 and 2015
, the Company granted
153,332
and
40,000
options, respectively, for the purchase of shares under the 2008 Plan. As of
September 30, 2016
,
42,124
shares remain available for grant under the 2008 Plan.
On May 24, 2011, the Company's shareholders approved the 2011 Omnibus Employee Incentive Plan, as subsequently amended and restated, (the "2011 Plan") providing for the grant of stock options and non-vested stock awards. During the
three and nine
month periods ended
September 30, 2016
, there were
no
options for the purchase of shares granted under the 2011 Plan. During the
three and nine
month periods ended
September 30, 2015
, there were
16,667
and
46,667
options, respectively, for the purchase of shares granted under the 2011 Plan. There were
no
stock awards granted under the 2011 Plan during the
three
month period ended
September 30, 2016
. During the
nine
month period ended
September 30, 2016
, the Company granted a total of
166,665
stock awards under the 2011 Plan to non-employee members of the Board of Directors that immediately vested. During the
three and nine
month periods ended
September 30, 2015
, the Company granted
33,333
and
36,111
stock awards, respectively, under the 2011 Plan to non-employee members of the Board of Directors that immediately vested. As of
September 30, 2016
,
243,693
shares remain available for grant under the 2011 Plan.
There were no options granted during
three
month period ended
September 30, 2016
. The fair value of the stock options granted during the
nine
month period ended
September 30, 2016
, were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
|
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Nine Months Ended September 30,
|
|
2016
|
Expected life (years)
|
5.1
|
Expected volatility
|
81.0%
|
Expected dividend yield
|
—%
|
Risk-free interest rate
|
1.4%
|
Weighted average fair value of options granted during the period
|
$1.33
|
The following table summarizes stock option activity for the
nine
month period ended
September 30, 2016
:
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Number of Options
|
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Weighted Average Exercise Price Per Option
|
|
Weighted Average remaining Contractual Life (years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding balance at December 31, 2015
|
|
286,568
|
|
|
$
|
6.46
|
|
|
|
|
|
Granted
|
|
153,332
|
|
|
2.05
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited and Expired
|
|
(46,690
|
)
|
|
5.43
|
|
|
|
|
|
Outstanding balance at September 30, 2016
|
|
393,210
|
|
|
4.87
|
|
|
8.23
|
|
$0
|
Options exercisable at September 30, 2016
|
|
177,807
|
|
|
$
|
7.15
|
|
|
7.07
|
|
$0
|
There were
no
options exercised during the
nine
month period ended
September 30, 2016
. There were
3,333
options with a weighted average exercise price of
$6.75
exercised during the
nine
month period ended
September 30, 2015
. Options for the purchase of an aggregate of
66,668
shares of common stock vested during the
nine
month period ended
September 30, 2016
, and the aggregate fair value at grant date of these options was
$0.3 million
. As of
September 30, 2016
, there was approximately
$0.2 million
of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of
1.93
years.
The Company recorded
$0.1 million
and
$0.5 million
, respectively, of share-based compensation expense in selling, general, and administrative expenses for the
three and nine
month periods ended
September 30, 2016
. The Company recorded
$0.2 million
and
$0.4 million
, respectively, of share-based compensation expense in selling, general and administrative expenses for the
three and nine
month periods ended
September 30, 2015
.
Note 6: Inventories
Included in inventories at
September 30, 2016
, and
December 31, 2015
, are
$0.9 million
and
$0.3 million
, respectively, of finished goods and
$0.6 million
and
$0.3 million
, respectively, of components.
Note 7: Goodwill and Other Intangible Assets
The Company recorded Goodwill of
$0.6 million
as of
September 30, 2016
, and
December 31, 2015
.
Intangible assets subject to amortization are amortized on a straight-line basis and are summarized in the table below.
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|
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|
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|
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|
|
September 30, 2016
|
|
December 31, 2015
|
(in thousands)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangibles Assets, net
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangibles Assets, net
|
Portal
|
$
|
4,151
|
|
|
$
|
1,510
|
|
|
$
|
2,641
|
|
|
$
|
4,151
|
|
|
$
|
732
|
|
|
$
|
3,419
|
|
Customer relationships
|
2,097
|
|
|
382
|
|
|
1,715
|
|
|
2,097
|
|
|
185
|
|
|
1,912
|
|
Total
|
$
|
6,248
|
|
|
$
|
1,892
|
|
|
$
|
4,356
|
|
|
$
|
6,248
|
|
|
$
|
917
|
|
|
$
|
5,331
|
|
Amortization expense for the
three and nine
month periods ended
September 30, 2016
, was
$0.3 million
and
$1.0 million
, respectively. Amortization expense for the
three and nine
month periods ended
September 30, 2015
, was
$0.3 million
and
$0.6 million
, respectively.
Based on the Company's recent financial performance and negative equity, management determined a review of impairment of long-lived assets and goodwill was necessary as of
September 30, 2016
. The analysis indicated
no
impairment charges for long-lived assets or goodwill was required at
September 30, 2016
.
Note 8: Restructuring Charges
At
September 30, 2016
, there was a
$0.5 million
liability related to the Company's obligation under a lease related to the discontinued Hooper Holmes Services operations center, which is recorded in other current and long-term liabilities in the accompanying condensed consolidated balance sheet. Charges recorded during the
three and nine
month periods ended
September 30, 2016
, were recorded as a component of discontinued operations. The following table provides a summary of the activity in the restructure accrual for the
nine
month period ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2015
|
|
Adjustments
|
|
Payments
|
|
September 30, 2016
|
Facility closure obligation
|
$
|
657
|
|
|
$
|
166
|
|
|
$
|
(351
|
)
|
|
$
|
472
|
|
Note 9: Debt
As of
September 30, 2016
, the Company maintained the 2016 Credit and Security Agreement and the Term Loan provided by the Credit Agreement. The following table summarizes the Company's outstanding borrowings:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
2016 Credit and Security Agreement (2013 Loan and Security Agreement as of December 31, 2015)
|
|
$
|
4,769
|
|
|
$
|
3,278
|
|
Term Loan
|
|
4,046
|
|
|
5,000
|
|
Discount on Term Loan
|
|
(1,500
|
)
|
|
(2,785
|
)
|
Unamortized debt issuance costs related to Term Loan
|
|
(391
|
)
|
|
(163
|
)
|
Total debt
|
|
6,924
|
|
|
5,330
|
|
Short-term portion
|
|
(6,924
|
)
|
|
(5,330
|
)
|
Total long-term debt, net
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table summarizes the components of interest expense for the
three and nine
month periods ended
September 30, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Interest expense on Term Loan (interest at LIBOR, plus 14%)
|
|
$
|
171
|
|
|
$
|
188
|
|
|
$
|
512
|
|
|
$
|
342
|
|
Interest expense on 2013 Loan and Security Agreement
|
|
—
|
|
|
20
|
|
|
49
|
|
|
24
|
|
Interest expense on 2016 Credit and Security Agreement
|
|
72
|
|
|
—
|
|
|
120
|
|
|
—
|
|
Accretion of termination fees (over term of Term Loan at rate of 8%)
|
|
53
|
|
|
21
|
|
|
144
|
|
|
48
|
|
Amortization of debt issuance costs
|
|
103
|
|
|
48
|
|
|
226
|
|
|
328
|
|
Write-off of debt issuance costs related to 2013 Loan and Security Agreement
|
|
—
|
|
|
—
|
|
|
282
|
|
|
—
|
|
Amortization of debt discount associated with the SWK warrants
|
|
479
|
|
|
185
|
|
|
1,286
|
|
|
429
|
|
Mark to market of SWK Warrant #2
|
|
—
|
|
|
(74
|
)
|
|
59
|
|
|
(74
|
)
|
Total
|
|
$
|
878
|
|
|
$
|
388
|
|
|
$
|
2,678
|
|
|
$
|
1,097
|
|
2016 Credit and Security Agreement
On April 29, 2016, the Company entered into the 2016 Credit and Security Agreement with SCM, as amended on August 15, 2016. The 2016 Credit and Security Agreement provides the Company with a revolving credit facility, the proceeds of which are to be used for general working capital purposes and capital expenditures. The 2016 Credit and Security Agreement replaced the 2013 Loan and Security Agreement, eliminating the requirement of the Company to issue SWK Warrant #2 (as defined below) for the purchase of common stock valued at
$1.25 million
to SWK, the holder of the Company’s Credit Agreement. An early termination fee of
$140,000
, approximately
$30,000
of legal fees, and approximately
$107,000
of other ordinary course fees were accelerated due to the termination of the 2013 Loan and Security Agreement and were rolled into the opening outstanding borrowings under the 2016 Credit and Security Agreement with SCM. The corresponding expense is reflected in transaction costs in the condensed consolidated statement of operations during the nine month period ended
September 30, 2016
. In addition, approximately
$0.3 million
of unamortized debt issuance costs related to the 2013 Loan and Security Agreement were written off and recorded in interest expense in the condensed consolidated statement of operations during the nine month period ended
September 30, 2016
.
Under the terms of the 2016 Credit and Security Agreement, SCM makes cash advances to the Company in an aggregate principal at any
one
time outstanding not to exceed
$7 million
, subject to certain loan balance limits based on the value of the Company’s eligible collateral (the “Revolving Loan Commitment Amount”). The 2016 Credit and Security Agreement has a term of
three years
, expiring on April 29, 2019. As of
September 30, 2016
, the Company had
$4.8 million
of outstanding borrowings under the 2016 Credit and Security Agreement with unused borrowing capacity of
$1.1 million
. As of
November 10, 2016
, the Company had
$5.3 million
of outstanding borrowings, with unused borrowing capacity of
$1.7 million
. Any borrowings on the unused borrowing capacity are at the discretion of SCM.
Borrowings under the 2016 Credit and Security Agreement bear interest at a fluctuating rate that when annualized is equal to the Prime Rate plus
5.5%
, subject to increase in the event of a default. The Company paid SCM a
$140,000
facility fee, and monthly, SCM will receive an unused line fee equal to one-half of one percent (
0.5%
) per annum of the difference derived by subtracting (i) the greater of (x) the average daily outstanding balance under the Revolving Facility during the preceding month and (y) the Minimum Balance, from (ii) the Revolving Loan Commitment Amount and also a collateral management fee equal to one-half of one percent (
0.5%
) per annum of the Revolving Loan Commitment Amount. As of
September 30, 2016
, the remaining balance in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheet was
$0.3 million
.
Borrowings under the Agreement are secured by a security interest in all existing and after-acquired property of the Company, including, but not limited to, its receivables (which are subject to a lockbox account arrangement), inventory, and equipment.
On August 15, 2016, the Company entered into the First Amendment to Credit and Security Agreement and Limited Waiver and Forbearance (the “First Amendment”), which required certain conditions to be satisfied as of September 30, 2016, for the First Amendment to become permanent. The First Amendment contains customary representations and warranties and various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. Noncompliance with these covenants constitutes an event of default. Minimum aggregate revenue must not be less than
$34.0 million
for the twelve months ended September 30, 2016,
$38.0 million
for the twelve months ending
December 31, 2016,
$41.0 million
for the twelve months ending March 31, 2017, and
$42.0 million
for the twelve months ending each fiscal quarter thereafter. Adjusted EBITDA must not be less than negative
$2.0 million
for the nine months ended September 30, 2016, negative
$0.5 million
for the twelve months ending December 31, 2016,
$0.5 million
for the twelve months ending March 31, 2017,
$0.9 million
for the twelve months ending June 30, 2017, and
$2.5 million
for the twelve months ending each fiscal quarter thereafter. In addition, consolidated unencumbered liquid assets must not be less than
$1
on the last day of the fiscal quarter ended September 30, 2016,
$0.5 million
on the last day of the fiscal quarter ending December 31, 2016, and
$0.75 million
on the last day of any fiscal quarter thereafter. The Company was not in compliance with the adjusted EBITDA covenant under the First Amendment as of
September 30, 2016
.
The Company and SCM are discussing the terms of a waiver of the covenant violation, but there can be no assurance that SCM will grant such a waiver. If the Company is unable to obtain a waiver, SCM could elect to accelerate the repayment of all amounts outstanding under the 2016 Credit and Security Agreement and exercise their remedies with respect to the Company’s collateral, which would have a material adverse impact on the Company’s business. Similar results could arise if the Company is unable to comply with financial covenants in the future and is unable to modify the covenants or find new or additional lenders.
Credit Agreement
In order to fund the Acquisition, the Company entered into the Credit Agreement with SWK on April 17, 2015, as amended on February 25, 2016, March 28, 2016, and August 15, 2016. The Credit Agreement provides the Company with a
$5.0 million
Term Loan. The proceeds of the Term Loan were used to pay certain fees and expenses related to the negotiation and consummation of the Purchase Agreement and the Acquisition described in Note 3 and general corporate purposes. The Company paid SWK an origination fee of
$0.1 million
. The Term Loan is due and payable on April 17, 2018. The Company is also required to make quarterly revenue-based payments in an amount equal to eight and one-half percent (
8.5%
) of yearly aggregate revenue up to and including
$20 million
, seven percent (
7%
) of yearly aggregate revenue greater than
$20 million
up to and including
$30 million
, and five percent (
5%
) of yearly aggregate revenue greater than
$30 million
. The revenue-based payment will be applied to fees and interest, and any excess to the principal of the Term Loan. Revenue-based payments commenced in February 2016, and the maximum principal portion of the aggregate revenue-based payment is capped at
$600,000
per quarter. The Third Amendment (defined below) waived the August 2016 payment and revised the November 2016 payment such that the maximum principal portion of the aggregate revenue-based payment is capped at
$300,000
. The Company evaluated the application of ASC 470-50 and ASC 470-60 and concluded that the revised terms in the Third Amendment did not constitute a troubled debt restructuring, and the amendment was accounted for as a debt modification rather than a debt extinguishment. During the
nine
month period ended
September 30, 2016
, the Company made principal payments to SWK of
$1.0 million
, and paid approximately
$0.4 million
of interest.
The outstanding principal balance under the Credit Agreement bears interest at an adjustable rate per annum equal to the LIBOR Rate (subject to a minimum amount of one percent (
1.0%
)) plus fourteen percent (
14.0%
) and is due and payable quarterly, in arrears, which commenced on August 14, 2015. Upon the earlier of (a) the maturity date on April 17, 2018, or (b) full repayment of the Term Loan, whether by acceleration or otherwise, the Company is required to pay an exit fee equal to eight percent (
8%
) of the aggregate principal amount of all term loans advanced under the Credit Agreement. The Company is recognizing the exit fee over the term of the Term Loan through an accretion accrual to interest expense using the effective interest method.
The Credit Agreement contains a cross-default provision that can be triggered if the Company has more than
$0.25 million
in debt outstanding under the 2016 Credit and Security Agreement and the Company fails to make payments to SCM when due or if SCM is entitled to accelerate the maturity of debt in response to a default situation under the 2016 Credit and Security Agreement, which may include violation of any financial covenants.
As security for payment and other obligations under the 2016 Credit and Security Agreement, SCM holds a security interest in all of the Company's, and its subsidiary guarantors', existing and after-acquired property, including receivables (which are subject to a lockbox account arrangement), inventory and equipment. Additionally, SWK holds a security interest for final and indefeasible payment. The security interest held by SWK is in substantially all of the Company's assets and the Company's subsidiaries.
In connection with the execution of the Credit Agreement, the Company issued SWK a warrant (the "SWK Warrant #1") to purchase
543,478
shares of the Company’s common stock. As part of the conditions in the Third Amendment (defined below), the Company modified the exercise price of the SWK Warrant #1 to
$1.30
per share as of September 30, 2016, recording the change in fair value of the SWK Warrant #1 of
$0.3 million
in accumulated paid-in capital in the condensed consolidated balance sheet. The SWK Warrant #1 is exercisable after October 17, 2015, and up to and including April 17, 2022. The SWK Warrant #1 is exercisable on a cashless basis. The exercise price of the warrant is subject to customary adjustment provisions for stock splits, stock dividends, recapitalizations and the like. The warrant grants the holder certain piggyback registration rights. The
warrant was considered equity classified, and as such, the Company allocated the proceeds from the Term Loan to the warrant using the relative fair value method. Further, pursuant to the Credit Agreement, if the 2013 Loan and Security Agreement was not repaid in full and terminated, and all liens securing the 2013 Loan and Security Agreement were not released, on or prior to April 30, 2016, as amended in the First Amendment to the Credit Agreement dated February 25, 2016, the Company agreed to issue an additional warrant (the “SWK Warrant #2”) to SWK to purchase common stock valued at
$1.25 million
, with an exercise price of the closing price on April 30, 2016. In accordance with the relevant accounting guidance, the SWK Warrant #2 was determined to be an embedded derivative. The fair value of both of the SWK warrants at the inception of the Credit Agreement of approximately
$3.6 million
was recorded as a debt discount, and is being amortized through interest expense over the term of the Credit Agreement using the effective interest method. The Company valued both warrants using the Black-Scholes pricing model, which utilizes Level 3 Inputs. For the SWK Warrant #1, the Company utilized volatility of
85.0%
, a risk-free rate of
1.4%
, dividend rate of
zero
, and term of
7
years, which is consistent with the exercise period of the Warrant. For the SWK Warrant #2, the Company utilized volatility of
80.0%
, a risk-free rate of
2.1%
, dividend rate of
zero
, and term of
7
years, which is consistent with the exercise period of the warrant.
The requirement of the Company to issue the SWK Warrant #2 was eliminated when the Company entered into the 2016 Credit and Security Agreement with SCM, which is discussed further above. Accordingly, during the
nine
month period ended
September 30, 2016
, the Company recorded
$0.9 million
in other income in the condensed consolidated statement of operations related to the write-off of the derivative liability associated with the SWK Warrant #2.
On March 28, 2016, the Company entered into the Second Amendment to the Credit Agreement (the "Second Amendment") which required the Company to issue shares of its common stock,
$0.04
par value, with a value of
$100,000
to SWK, which the Company issued during the first quarter of 2016 and recorded as debt issuance costs as a direct deduction to short-term debt on the condensed consolidated balance sheet as of
September 30, 2016
.
On August 15, 2016, the Company entered into the Third Amendment to Credit Agreement and Limited Waiver and Forbearance (the “Third Amendment”), which required certain conditions to be satisfied as of September 30, 2016, for the Third Amendment to become permanent. The Third Amendment contains customary representations and warranties and various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. Noncompliance with these covenants constitutes an event of default. Minimum aggregate revenue must not be less than
$34.0 million
for the twelve months ended September 30, 2016,
$38.0 million
for the twelve months ending December 31, 2016,
$41.0 million
for the twelve months ending March 31, 2017, and
$42.0 million
for the twelve months ending each fiscal quarter thereafter. Adjusted EBITDA must not be less than negative
$2.0 million
for the nine months ended September 30, 2016, negative
$0.5 million
for the twelve months ending December 31, 2016,
$0.5 million
for the twelve months ending March 31, 2017,
$0.9 million
for the twelve months ending June 30, 2017, and
$2.5 million
for the twelve months ending each fiscal quarter thereafter. In addition, consolidated unencumbered liquid assets must not be less than
$1
on the last day of the fiscal quarter ended September 30, 2016,
$0.5 million
on the last day of the fiscal quarter ending December 31, 2016, and
$0.75 million
on the last day of any fiscal quarter thereafter. The Company was not in compliance with the adjusted EBITDA covenant under the Third Amendment as of
September 30, 2016
. The Company and SWK are discussing the terms of a waiver of the covenant violation, but there can be no assurance that SWK will grant such a waiver. If the Company is unable to obtain a waiver, SWK could elect to accelerate the repayment of all amounts outstanding under the Credit Agreement and exercise their remedies with respect to the Company’s collateral, which would have a material adverse impact on the Company’s business. Similar results could arise if the Company is unable to comply with financial covenants in the future and is unable to modify the covenants or find new or additional lenders.
Note 10: Commitments and Contingencies
The Company leases its corporate headquarters in Olathe, Kansas, which includes the health and wellness operations center, under an operating lease which expires in 2018. The Company leases its AHS operations centers in Des Moines, Iowa and Indianapolis, IN, under operating leases which expire in 2018. The Company also leases copiers and other miscellaneous equipment. These leases expire at various times through 2017.
The Company is obligated under a lease related to the discontinued Hooper Holmes Services operations center through 2018 and has ceased use of this facility. The Company has recorded a facility closure obligation of
$0.5 million
as of
September 30, 2016
, related to this lease, which is recorded in other current and long-term liabilities in the accompanying condensed consolidated balance sheet.
The Company has employment agreements with certain employees that provide for payment of base salary for up to a
one year
period in the event their employment with the Company is terminated in certain circumstances, including following a change in control, as further defined in the agreements.
The Company incurred certain severance and other costs related to its ongoing initiatives to increase the flexibility of its cost structure that were recorded in selling, general, and administrative expenses, and at
September 30, 2016
, the Company recorded a
$0.2 million
liability related to these initiatives in other current liabilities in the accompanying condensed consolidated balance sheet.
From time to time, the Company is subject to federal and state tax audits and related governmental inquiries into matters such as income tax returns, sales and use tax returns, employment classification of its workers, and wage and hour law compliance. The Company is currently under examination by the Internal Revenue Service (the “IRS”) for the calendar years 2013, 2014, and 2015 with respect to its classification of certain of its health professionals as independent contractors rather than employees. This examination could lead to proposed adjustments to its federal employment taxes for the periods in question, but the IRS has not yet issued an assessment. The Company believes that it has properly classified these workers as independent contractors, but there can be no assurances of a favorable outcome for the Company and given the ongoing status of the examination, we are unable at this time to provide an estimate of the range of loss, if any.
Note 11: Litigation
The Company, in the normal course of business, is a party to various claims and other legal proceedings. In the opinion of management, the Company has legal defenses and/or insurance coverage (subject to deductibles) with respect to all of its pending legal actions. If management believes that a material loss not covered by insurance arising from these actions is probable and can reasonably be estimated, the Company may record the amount of the estimated loss or, if a loss cannot be estimated but the minimum liability may be estimated using a range and no point is more probable than another, the Company may record the minimum estimated liability. As additional information becomes available, any potential liability related to these actions is assessed and the estimates are revised, if necessary. Management believes that the ultimate outcome of all pending legal actions, individually and in the aggregate, will not have a material adverse effect on the Company's financial position that is inconsistent with its loss reserves or on its overall trends in results of operations. However, litigation and claims are subject to inherent uncertainties and unfavorable outcomes can occur that exceed any amounts reserved for such losses. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the outcome occurs or in future periods.
On May 24, 2012, a complaint was filed against the Company in the United States District Court for the District of New Jersey alleging, among other things, that the Company failed to pay overtime compensation to a purported class of certain independent contractor examiners who, the complaint alleged, should be treated as employees for purposes of federal law. The complaint sought an award of an unspecified amount of allegedly unpaid overtime wages to certain examiners. The Company filed an answer denying the substantive allegations therein. On August 1, 2014, the Magistrate Judge issued a Report and Recommendation to conditionally certify the class of all contract examiners from August 16, 2010, to the present. On August 29, 2014, the Company submitted its objections to the Report and Recommendation of the Magistrate Judge. The Magistrate suspended ruling concerning those objections while the parties pursued the possibility of a settlement. On April 29, 2016, the Company reached a preliminary understanding with the plaintiffs with respect to a settlement of the lawsuit involving a release of all claims by the plaintiffs and the Company's establishment of a settlement fund of
$0.45 million
. Accordingly, as of
September 30, 2016
, the Company had accrued $
0.45 million
related to this matter versus
$0.3 million
as of December 31, 2015. The litigation accrual for all periods was included in the other current liabilities line item on the condensed consolidated balance sheet. The additional expense of
$0.15 million
recorded during the
nine
month period ended
September 30, 2016
, is included in the discontinued operations line item on the condensed consolidated statements of operations. On August 5, 2016, the Magistrate approved the parties’ definitive settlement agreement. The claim is not covered by insurance, and the Company incurred legal costs to defend the litigation which are recorded in discontinued operations. This matter relates to the former Portamedic service line for which the Company retained liability.
Note 12: Income Taxes
The Company's income tax expense was not material for any period presented in the condensed consolidated statement of operations. No amounts were recorded for unrecognized tax benefits or for the payment of interest and penalties during the
three and nine
month periods ended
September 30, 2016
and
2015
. No federal or state tax benefits were recorded relating to the current year loss. The Company continues to believe that a full valuation allowance is required on its net deferred tax assets, with the exception of deferred income tax on the liabilities of certain indefinite-lived intangibles.
The tax years 2012 through 2015 may be subject to federal examination and assessment. Tax years from 2007 through 2011 remain open solely for purposes of federal and certain state examination of net operating loss and credit carryforwards. State income tax returns may be subject to examination for tax years 2011 through 2015, depending on state tax statute of limitations.
As of
December 31, 2015
, the Company had U.S. federal and state net operating loss carryforwards of
$167.2 million
and
$149.8 million
, respectively. There has been no significant change in these balances as of
September 30, 2016
. The net operating loss carryforwards, if not utilized, will expire in the years
2016
through
2035
.
Since the Company had changes in ownership during 2015 and continuing into 2016, additional limitations under IRC Section 382 of the Internal Revenue Code of 1986 may apply to the future utilization of certain tax attributes including net operating loss (“NOL”) carryforwards, other tax carryforwards, and certain built-in losses. The Company has not yet completed its analysis of any impact of these ownership changes. No tax benefit has been reported since a full valuation allowance offsets these tax attributes. However, limitations could apply even if the valuation allowance was released.
Note 13: Fair Value Measurements
The Company determines the fair value measurements used in our consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
|
|
•
|
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
•
|
Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 - Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company estimated the fair value of the Term Loan and the derivative liability using Level 3 valuation techniques. The estimated fair value of the Term Loan was determined by discounting future projected cash flows using a discount rate commensurate with the risks involved and by using the Black-Scholes valuation model, while the estimated fair value of the derivative liability was determined using the Black-Scholes valuation model.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
(in thousands)
|
|
Face Value
|
|
Fair Value
|
|
Carrying Amount
|
|
Face Value
|
|
Fair Value
|
|
Carrying Amount
|
Term Loan
|
|
$
|
5,000
|
|
|
$
|
3,865
|
|
|
$
|
2,155
|
|
|
$
|
5,000
|
|
|
$
|
3,837
|
|
|
$
|
2,052
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,250
|
|
|
$
|
828
|
|
|
$
|
828
|
|