HOOPER HOLMES, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION
Exhibit 99.2
▇▇▇▇▇▇ ▇▇▇▇▇▇, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On April 17, 2015, ▇▇▇▇▇▇ ▇▇▇▇▇▇, Inc. (the "Company") entered into and consummated an Asset Purchase Agreement (the "Purchase Agreement") among the Company and certain of its subsidiaries, Accountable Health Solutions, Inc. ("AHS") and Accountable Health, Inc. (the "Seller" or "AHI"). Pursuant to the Purchase Agreement, the Company has acquired substantially all the operations, assets and certain liabilities representing the health and wellness business of AHI for approximately $7 million, $4 million in cash and 6,500,000 shares of the Company’s common stock, $0.04 par value, subject to a working capital adjustment as described in the Purchase Agreement (the "Acquisition"). There were 5,576,087 shares of Common Stock delivered to the Seller at closing and 326,087 shares of Common Stock were held back for the working capital adjustment, which were subsequently released on October 9, 2015, and 597,826 shares of Common Stock were held back for indemnification purposes.
The following unaudited pro forma balance sheet as of March 31, 2015, and the unaudited pro forma statement of operations for the three months ended March 31, 2015, is based on the historical financial statements of the Company and AHI after giving effect to the Acquisition, and after applying the assumptions, reclassifications and adjustments described in the accompanying notes. The pro forma financial information also gives effect to the term loan and issuance of shares of the Company's common stock.
The unaudited pro forma balance sheet gives pro forma effect to the Acquisition as if it had occurred on December 31, 2014. The unaudited pro forma statement of operations gives effect to the Acquisition as if it had occurred on January 1, 2014. The unaudited pro forma financial information is for illustrative and informational purposes only and should not be considered indicative of the results that would have been achieved had the transactions been consummated on the dates or for the periods indicated. The unaudited financial information do not purport to represent consolidated balance sheet data or consolidated statement of operations data or other financial data as of any future date or any future period.
The Acquisition has been accounted for as a business combination. The estimated purchase price has been allocated on a preliminary basis to tangible and intangible assets acquired and liabilities assumed. The allocation of the purchase price is preliminary and based on valuations derived from estimated fair value assessments and assumptions used by management and is subject to changes as additional information becomes available. The Company is still evaluating any income tax implications related to the Acquisition.
The unaudited pro forma financial information should be read in conjunction with the Company's historical consolidated financial statements and notes included in the Company's Report on Form 10-Q for the three months ended March 31, 2015, the AHI historical consolidated financial statements and notes for the three months ended March 31, 2015, which are included as Exhibit 99.1 to this Form 8-K/A, as well as with the unaudited pro forma financial information for the year ended December 31, 2014, included in the Company’s Current Report on Form 8-K/A filed on May 21, 2015.
▇▇▇▇▇▇ ▇▇▇▇▇▇ Inc.
Unaudited Pro Forma Balance Sheet
As of March 31, 2015
(in thousands)
Historical | As of March 31, 2015 | |||||||||||||||||||
As of | Assets and Liabilities Excluded from Acquisition (A) | Pro Forma Adjustments for Acquisition (B) | Pro Forma Adjustments to Allocate Purchase Price (C) | HHI Pro Forma Post-AHS Acquisition | ||||||||||||||||
March 31, 2015 | ||||||||||||||||||||
▇▇▇▇▇▇ ▇▇▇▇▇▇ | AHI | |||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,387 | $ | 994 | $ | (994 | ) | $ | 1,000 | — | $ | 2,387 | ||||||||
Accounts receivable | 4,869 | 1,032 | (206 | ) | — | — | 5,695 | |||||||||||||
Inventories | 696 | 1,682 | (1,624 | ) | — | — | 754 | |||||||||||||
Other current assets | 274 | 239 | (188 | ) | — | — | 325 | |||||||||||||
Total current assets | 7,226 | 3,947 | (3,012 | ) | 1,000 | — | 9,161 | |||||||||||||
Property, plant and equipment, net | 2,974 | 2,552 | (2,274 | ) | — | — | 3,252 | |||||||||||||
Intangible assets and other | 491 | 6,310 | (1,079 | ) | 726 | 850 | 7,298 | |||||||||||||
Goodwill | — | 3,872 | — | — | (3,215 | ) | 657 | |||||||||||||
Total assets | $ | 10,691 | $ | 16,681 | $ | (6,365 | ) | $ | 1,726 | $ | (2,365 | ) | $ | 20,368 | ||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||
Accounts payable | 1,962 | 466 | (105 | ) | 1,521 | — | 3,844 | |||||||||||||
Accrued expenses | 4,305 | 1,364 | (924 | ) | — | — | 4,745 | |||||||||||||
Total current liabilities | 6,267 | 1,830 | (1,029 | ) | 1,521 | — | 8,589 | |||||||||||||
Long-term debt | — | — | — | 2,344 | — | 2,344 | ||||||||||||||
Other long-term liabilities | 1,084 | 3,002 | (1,783 | ) | — | (1,219 | ) | 1,084 | ||||||||||||
Stockholders' Equity: | ||||||||||||||||||||
Common stock | 2,835 | 22 | — | 260 | (22 | ) | 3,095 | |||||||||||||
Additional paid-in capital | 150,837 | 26,937 | — | 5,396 | (26,937 | ) | 156,233 | |||||||||||||
Accumulated (deficit) earnings | (150,261 | ) | (15,110 | ) | — | (645 | ) | 15,110 | (150,906 | ) | ||||||||||
3,411 | 11,849 | — | 5,011 | (11,849 | ) | 8,422 | ||||||||||||||
Less: Treasury stock | (71 | ) | — | — | — | — | (71 | ) | ||||||||||||
Total stockholders' equity | 3,340 | 11,849 | — | 5,011 | (11,849 | ) | 8,351 | |||||||||||||
Total liabilities and stockholders' equity | $ | 10,691 | $ | 16,681 | $ | (2,812 | ) | $ | 8,876 | $ | (13,068 | ) | $ | 20,368 | ||||||
See accompanying Notes to Unaudited Pro Forma Financial Information.
▇▇▇▇▇▇ ▇▇▇▇▇▇ Inc.
Unaudited Pro Forma Statement of Operations
For the three months ended March 31, 2015 | |||||||||||||||||||||
Historical ▇▇▇▇▇▇ ▇▇▇▇▇▇ | Historical AHI | AHS Adjustments (D) | Pro Forma AHS | Acquisition Pro Forma Adjustments (E) | HH Pro Forma Post-AHS Acquisition | ||||||||||||||||
Revenues | $ | 5,681 | $ | 2,788 | $ | (349 | ) | $ | 2,439 | $ | — | $ | 8,120 | ||||||||
Cost of operations | 4,949 | 704 | — | 704 | 614 | 6,267 | |||||||||||||||
Gross profit | 732 | 2,084 | (349 | ) | 1,735 | (614 | ) | 1,853 | |||||||||||||
Selling, general and administrative | 2,747 | 3,134 | (242 | ) | 2,892 | (D) | (658 | ) | 4,981 | ||||||||||||
Gain on sale of real estate | — | — | — | — | — | — | |||||||||||||||
Impairment | — | — | — | — | — | — | |||||||||||||||
Restructuring charges | — | — | — | — | — | — | |||||||||||||||
Total operating expenses | 2,747 | 3,134 | (242 | ) | 2,892 | (658 | ) | 4,981 | |||||||||||||
Operating loss from continuing operations | (2,015 | ) | (1,050 | ) | (107 | ) | (1,157 | ) | 44 | (3,128 | ) | ||||||||||
Other (expense) income | (83 | ) | 1 | — | 1 | (475 | ) | (557 | ) | ||||||||||||
Loss from continuing operations before income taxes | (2,098 | ) | (1,049 | ) | (107 | ) | (1,156 | ) | (431 | ) | (3,685 | ) | |||||||||
Income tax expense (benefit) | 5 | (194 | ) | — | (194 | ) | 194 | 5 | |||||||||||||
Loss from continuing operations | (2,103 | ) | (855 | ) | (107 | ) | (962 | ) | (625 | ) | (3,690 | ) | |||||||||
Discontinued operations: | |||||||||||||||||||||
Loss from discontinued operations, net of tax | (4 | ) | — | — | — | — | (4 | ) | |||||||||||||
Gain on sale of subsidiaries, net of adjustments | — | — | — | — | — | — | |||||||||||||||
(Loss) income from discontinued operations | (4 | ) | — | — | — | — | (4 | ) | |||||||||||||
Net loss | $ | (2,107 | ) | $ | (855 | ) | $ | (107 | ) | $ | (962 | ) | $ | (625 | ) | $ | (3,694 | ) | |||
Basic and diluted loss per share | $ | (0.03 | ) | $ | (0.05 | ) | |||||||||||||||
Basic weighted average shares outstanding | 70,866,603 | 6,500,000 | 77,366,603 | ||||||||||||||||||
Diluted weighted average shares outstanding | 70,866,603 | 6,500,000 | 77,366,603 | ||||||||||||||||||
See accompanying Notes to Unaudited Pro Forma Financial Information.
▇▇▇▇▇▇ ▇▇▇▇▇▇, Inc.
Notes to Unaudited Pro Forma Financial Information
(dollars in thousands, except per share data)
1. | Purchase Price |
On April 17, 2015, ▇▇▇▇▇▇ ▇▇▇▇▇▇, Inc. (the "Company") entered into and consummated an Asset Purchase Agreement (the "Purchase Agreement") among the Company, and certain of its subsidiaries, Accountable Health Solutions, Inc. ("AHS") and Accountable Health, Inc. (the "Seller" or "AHI"). Pursuant to the Purchase Agreement, the Company has effectively acquired the assets and certain liabilities representing the health and wellness business of the Seller (the "Acquisition") for approximately $7.0 million, $4.0 million in cash and 6,500,000 shares of the Company’s common stock, $0.04 par value.
In order to fund the Acquisition, the Company entered into and consummated a Credit Agreement (the "Credit Agreement") with SWK Funding LLC as the agent ("Agent"), and the lenders (including SWK Funding LLC) party thereto from time to time (the "Lenders"). The Credit Agreement provides the Company with a $5.0 million term loan (the "Term Loan"). Refer to Note 3 for additional discussion regarding the Credit Agreement. The Company also issued 6,500,000 shares of the Company’s common stock, $0.04 par value, subject to working capital adjustments. The purchase price is subject to certain post-closing adjustments for working capital and indemnification purposes, as specified in the Purchase Agreement.
The sources of funds used in connection with the Acquisition (reflected in the Unaudited Pro Forma Balance Sheet) are as follows:
Proceeds from Term Loan | $ | 4,000 | ||
Issuance of common stock | 3,000 | |||
Preliminary purchase price | $ | 7,000 | ||
Transaction costs | 1,521 | |||
Total | 8,521 | |||
The Company incurred transaction costs of $1.5 million in connection with the Acquisition, which include investment banking, legal and accounting fees, and other external costs directly related to the transaction (Refer to Note 4).
2. | Preliminary Allocation of Purchase Price |
The Acquisition will be 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 preliminary valuation assessment. The allocation of purchase price is preliminary and subject to changes, which could be significant, as the valuation of tangible and intangible assets are finalized, working capital adjustments are finalized, and additional information becomes available.
The Company purchased substantially all of the operations and assets of AHI. Assets and operations not included in the Acquisition relate to the diabetes program product line, which is a start-up operation with nominal revenue. The assets excluded consist primarily of cash and restricted cash and diabetes inventory as well as leasehold improvements utilized in connection with a leased facility that was not assumed by the Company.
The preliminary allocation of purchase price (reflected in the Unaudited Pro Forma Balance Sheet) is as follows:
Accounts receivable | $ | 876 | ||
Inventory and other current assets | 132 | |||
Fixed assets | 274 | |||
Customer portal (existing technologies) | 4,151 | |||
Customer relationships | 1,930 | |||
Goodwill | 657 | |||
Accounts payable | (764 | ) | ||
Accrued expenses | (256 | ) | ||
Preliminary Purchase Price | $ | 7,000 | ||
Intangible Assets
Intangible assets acquired include existing technology in the form of a customer-facing wellness portal and customer relationships. The estimated useful life for the wellness portal and customer relationships is expected to be 4 years and 8 years, respectively. Amortization is expected to be recorded on a straight-line basis over the estimated useful life of the asset.
3. | Financing Activities |
2015 Credit Agreement
In order to fund the Acquisition, the Company entered into and consummated a Credit Agreement with SWK Funding LLC. The Credit Agreement provides the Company with a $5.0 million Term Loan. The proceeds of the Term Loan were used to fund the Acquisition described in Note 1 and to finance transaction costs. The Company paid SWK Funding LLC an origination fee of $0.1 million. The 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 first be applied to fees and interest, and any excess to the principal of the Term Loan. Revenue-based payments commence in February 2016, and the maximum aggregate revenue-based payment is capped at $600,000 per quarter.
In addition, on April 17, 2015, in connection with the execution of the Credit Agreement, the Company issued SWK Funding, LLC a warrant (the "Warrant") to purchase 8,152,174 shares of the Company’s common stock. The Warrant is exercisable after October 17, 2015, and up to and including April 17, 2022, at an exercise price of $0.46 per share. The Warrant is exercisable on a cashless basis. The exercise price of the Warrant is subject to customary adjustment provisions for stock splits, stock dividends, recapitalizations and the like. The Warrant grants the holder certain piggyback registration rights. The 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. The fair value of the Warrant of $2.7 million was recorded as debt discount, which is being recognized as interest expense over the term of the Credit Agreement using the effective interest method. The Company valued the Warrant using the Black-Scholes pricing model using 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 and is a Level 3 valuation technique.
Further, pursuant to the Credit Agreement, if the 2013 Loan and Security Agreement is not repaid in full and terminated, and all liens securing the 2013 Loan and Security Agreement are not released, on or prior to February 28, 2016, the Company has agreed to issue an additional warrant to SWK Funding LLC to purchase common stock valued at $1.25 million, with an exercise price of one cent over the closing price on February 28, 2016. The additional warrant will become exercisable six months after issuance, remain exercisable for 7 years and have customary anti-dilution protection similar to the Warrants. The Company considered whether the issuance of this additional warrant was a “credit sensitive payment”, as the issuance of the additional warrant is contingent upon the repayment of debt (the 2013 Loan and Security Agreement). However, as the repayment date specified in the Term Loan is prior to the maturity date of the 2013 Loan and Security Agreement and therefore this is an incentive feature, rather than a reflection of the Company’s creditworthiness, the Company did not think it was appropriate to consider this feature credit related. Therefore, the feature is not clearly and closely related to the debt host. The Company determined that the additional warrant feature does not contain an explicit limit on the number of warrants to be delivered for settlement. As the Company is required
to deliver a number of additional warrants that will satisfy the fixed monetary amount of $1.25 million, the number of warrants (and underlying shares) to be delivered cannot be determined. Therefore, the additional warrant feature is considered an embedded derivative.
As the issuance of the additional warrant is contingent, the evaluation of the likelihood of the occurrence of the contingency was considered in determining the fair value of the embedded derivative. As the Company does believe that the contingency (i.e. not repaying in full and terminating the 2013 Loan and Security Agreement by February 28, 2016) is likely to occur, the value of the embedded derivative was recognized on the financial statements. Consequently, the value of the Term Loan was reduced by the fair value of the additional warrant. The Company determined the value of the additional warrant was $0.9 million as of the Acquisition date. The Company valued the additional warrant using the Black-Scholes pricing model using 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 additional warrant. The value of the embedded derivative will continue to be evaluated every reporting period through February 28, 2016.
Issuance of Common Shares
The Company also issued 6,500,000 shares of the Company’s common stock, $0.04 par value, subject to working capital adjustments. The purchase price is subject to certain post-closing adjustments for working capital and indemnification purposes, as specified in the Purchase Agreement. The Company delivered 5,576,087 shares of common stock to AHI at closing and 923,913 shares of common stock were retained (the "Holdback Shares") for the working capital adjustment and for indemnification purposes, of which 326,087 shares held back for the working capital adjustment were subsequently released on October 9, 2015. AHI shall be the record holder of the Holdback Shares, and shall be entitled to vote those shares, but shall not otherwise be entitled to sell or transfer those shares unless and until they are released and delivered to AHI. Any Holdback Shares not released and delivered to AHI shall be retained by and transferred to the Company, with the Company becoming the holder of record of such shares.
4. | Transaction Costs |
The Company incurred transaction costs of $1.5 million in connection with the Acquisition, which include investment banking, legal and accounting fees, and other external costs directly related to the transaction. Included in transaction costs are approximately $0.9 million of deferred financing costs which will be deferred and recognized over the term of the Credit Agreement through April 17, 2018, or three years. Annual amortization of deferred financing costs is calculated using the effective interest method and is reflected as a component of other expense in the Unaudited Pro Forma Statement of Operations.
5. | Reclassifications |
Certain reclassification adjustments are reflected in the Unaudited Pro Forma Statement of Operations in order to conform the presentation of AHI historical amounts on a consistent basis with the Company's historical presentation. The AHI historical financial statements do not separately present cost of operations and selling, general and administrative ("SG&A") expenses. The Company has reclassified costs directly associated with providing services as a component of cost of operations, primarily external screening costs, salaries and benefits associated with providing coaching services and costs associated with the customer portal. Refer to Note 6 below for the details of reclassifications in Section (E).
6. | Pro Forma Adjustments |
The Company has recorded pro forma adjustments which are included in the Unaudited Pro Forma Balance Sheet and Unaudited Pro Forma Statement of Operations as follows:
(A) The Company purchased substantially all of the operations and assets of AHI. Assets and operations not included in the Acquisition relate to the diabetes program product line, which is a start-up operation with nominal revenue. The assets excluded consist primarily of cash and restricted cash and diabetes inventory as well as leasehold improvements utilized in connection with a leased facility that was not assumed by the Company. Such assets are identified separately in the Unaudited Pro Forma Balance Sheet as 'Assets and Liabilities Excluded from Acquisition'.
The following table summarizes the assets and liabilities excluded from the Acquisition:
Cash | $ | 994 | ||
Accounts receivable | 206 | |||
Inventory - diabetes program | 1,624 | |||
Other current assets | 188 | |||
Property | 2,274 | |||
Restricted cash and investments | 1,079 | |||
Accounts payable and accrued expenses | (1,029 | ) | ||
Deferred tax liabilities | (1,783 | ) | ||
Total | $ | 3,553 | ||
Cash of $1.0 million and restricted cash and investments of $1.1 million were excluded from the Acquisition. The diabetes program product line had inventory of $1.6 million as of March 31, 2015, which was excluded from the Acquisition. Property of $2.3 million represents leasehold improvements and computer equipment located at a leased facility that was not assumed by the Company. Accounts payable and accrued expenses excluded from the Acquisition relate to payables for the diabetes program product line and salaries and benefits for individuals that were excluded from the Acquisition. Deferred tax liabilities of $1.8 million were not a part of the Acquisition as the transaction was an asset purchase and the corporate tax structure remained with AHI.
(B) The pro forma adjustments for the purchase represent the sources of funding for the Acquisition. The Company used proceeds from the Credit Agreement for the $4 million cash consideration. The remaining consideration of $3 million was funded through the issuance of shares of the Company's common stock.
In connection with the Credit Agreement, the Company issued a Warrant to SWK Funding LLC with a fair value of $2.7 million. The Company has determined that the Warrant will be classified as equity. As the Warrant was issued in connection with the Term Loan, the proceeds will be allocated based on relative fair value to each of the Term Loan and Warrant, resulting in a discount associated with the Term Loan which will be recognized as interest expense over the term of the Credit Agreement using the effective interest method.
The following table summarizes the net impact to cash for the proceeds of the Credit Agreement, debt assumed (Term Loan less the fair value of the Warrant), issuance of common shares, the impact to additional paid-in capital for the issuance of shares and fair value of the Warrant, and transaction costs as of the origination date:
Credit Agreement | $ | 5,000 | ||
Cash consideration | (4,000 | ) | ||
Net proceeds from Credit Agreement | $ | 1,000 | ||
Estimated fair value of Term Loan | $ | 5,000 | ||
Debt discount associated with Warrant | (2,656 | ) | ||
Derivative liability with additional warrant feature | $ | (908 | ) | |
Net debt recorded with Acquisition | $ | 1,436 | ||
Common Stock (6,500,000 shares at $0.04 par) | $ | 260 | ||
Additional paid-in capital: issuance of shares | $ | 2,740 | ||
Additional paid-in capital: fair value of Warrant | 2,656 | |||
Net increase to APIC with Acquisition | $ | 5,396 | ||
Transaction costs expensed at time of Acquisition | $ | 645 | ||
Deferred financing costs | 876 | |||
Total transaction costs | $ | 1,521 | ||
(C) The pro forma adjustments to allocate the preliminary purchase price represent the fair value adjustments to the assets and liabilities acquired. Refer to Note 2 for the estimated useful life of the intangible assets acquired in connection with the Acquisition.
Historical Amounts | Fair Value | Increase (Decrease) | |||||||
Wellness portal | $ | 2,881 | $ | 4,151 | $ | 1,270 | |||
Customer relationships | 2,200 | 1,930 | 270 | ||||||
Goodwill | 3,872 | 657 | (3,215 | ) | |||||
Deferred rent | 1,219 | — | (1,219 | ) | |||||
Stockholders' equity (1) | 11,849 | — | (11,849 | ) | |||||
(1) Elimination of historical AHI stockholders' equity. | |||||||||
The following table summarizes the impact of the fair value adjustments to depreciation and amortization for the three months ended March 31, 2015, in the Unaudited Pro Forma Statement of Operations. The pro forma depreciation and amortization expense is calculated using the preliminary fair value allocated to the assets noted below to determine the annual expense. Refer to Note 2 for the preliminary fair value estimates and estimated useful lives. The net decrease in depreciation and amortization expense is reflected as a pro forma adjustment in the Unaudited Pro Forma Statement of Operations as a component of SG&A.
Three months ended March 31, 2015 | |||||||||
Historical Expense | Pro Forma Expense | (Decrease) Increase in Expense | |||||||
Wellness portal | $ | 205 | $ | 260 | $ | 55 | |||
Customer relationships | 157 | 60 | (97 | ) | |||||
Goodwill | — | — | — | ||||||
Property | 25 | 23 | (2 | ) | |||||
$ | 387 | $ | 343 | $ | (44 | ) | |||
(D) The classification of pro forma adjustments in the Unaudited Pro Forma Statement of Operations include activity excluded from the Acquisition for the three months ended March 31, 2015. Revenue and SG&A costs of $0.3 million and $0.2 million, respectively, excluded from the Acquisition are related to the start-up activity for the diabetes program product line, which was excluded from the transaction.
(E) The AHI historical financial statements did not separately present Cost of Operations (COS) and SG&A on the statements of operations, and thus have been re-classified here to conform with the Company’s historical financial presentation. The reclassification to COGS of $0.6 million for the three months ended March 31, 2015, represents the amortization expense of the wellness portal of $0.2 million, which is directly associated with providing services for this product line, with the remaining $0.4 million related to salaries and benefits associated with providing services.
Acquisition pro forma adjustments include interest expense and amortization of deferred financing costs associated with the Credit Agreement. The Company did not include a tax impact to the pro forma adjustments to the statement of operations. The Company's effective tax rate is zero due to the valuation allowance recorded on its net deferred tax assets attributable to tax deductible intangible assets and note operating loss carryforwards. The Company believes it is not more likely than not that it will realize the tax benefits of its deferred tax assets.