UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2017

or

☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number 0-54249

 

(Exact name of Registrant as specified in its charter)

(Address of principal executive offices)

(Zip Code)

(Registrant's telephone number, including area code)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☐    No  ☒

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ☐    No  ☒

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of "accelerated filer," "large accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐
Smaller reporting company ☒		Emerging growth company ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  ☐     No  ☒

 

Shares of common stock outstanding at October 31, 2017: 6,868,314

DOCUMENTS INCORPORATED BY REFERENCE : None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements – Unaudited

 

 

OrangeHook, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
(unaudited)
		As of				As of
		September 30, 2017				December 31, 2016
Assets
Current assets:
Cash		$	22			$	159
Accounts receivable			213				132
Inventory			18				21
Prepaid expenses			314				294
Other current assets			89				-
Total current assets			656				606
Furniture, equipment and leasehold improvements, net			381				455
Intangible assets, net of amortization			13,715				16,272
Goodwill			12,302				12,302
Other assets			68				134
			26,085				28,708
Total assets		$	27,122			$	29,769

 

 

 

The accompanying notes are an intregal part of these consolidated financial statements.

 

 

 

 

 

OrangeHook, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
(unaudited)
		As of				As of
		September 30, 2017				December 31, 2016
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable		$	4,162			$	3,754
Accrued compensation			876				719
Accrued dividends			2,097				1,113
Accrued interest			1,632				624
Other accrued expenses			1,431				1,622
Current portion of installment payable to related party			341				-
Current portion of capital lease obligation			115				119
Current portion of deferred revenue			1,956				1,143
Line of credit			400				350
Current portion of notes payable to directors, net of discount			3,708				2,793
Current portion of convertible debentures, net of discount			3,438				3,352
Current portion of notes payable			3,577				1,297
Other current debt			65				49
Total current liabilities			23,798				16,935
Long-term liabilities:
Capital lease obligation, less current portion			94				171
Deferred revenue, less current portion			1,442				2,602
Put option obligations			1,886				1,886
Installment payable to related party, less current portion			341				364
Contingent consideration			967				967
Other long-term liabilities			214				158
Notes payable to directors, net, less current portion			1,156				-
Notes payable, less current portion			888				-
Total liabilities			30,786				23,265
Commitments and contingencies
Stockholders' equity (deficit)
OH-2 cumulative convertible redeemable preferred stock;
authorized 25,000 and 11,000 shares; 11,313 and 10,093 shares issued
and outstanding; liquidation preference of $13,285 and $11,206			-				-
Series A cumulative preferred stock;
authorized 9,000 and 9,000 shares; 0 and 0 shares issued
and outstanding;			-				-
Series B cumulative preferred stock;
authorized 200,000 and 200,000 shares; 0 and 20,000 shares issued
and outstanding; liquidation preference of $21 and $137			-				-
Series C cumulative preferred stock;
authorized 500,000 and 500,000 shares; 0 and 371,052 shares issued
and outstanding; liquidation preference of $321 and $2,575			-				-
Series D cumulative preferred stock;
authorized 2,000,000 and 2,000,000 shares; 0 and 0 shares issued
and outstanding			-				-
Common stock - Voting; $0.001 par value; authorized 100,000,000
shares; 6,954,232 and 6,838,084 shares issued as of September 30, 2017 and
December 31, 2016, respectively;  6,853,314 and 6,686,706 shares
outstanding as of September 30, 2017 and December 31, 2016, respectively			7				7
Additional paid-in capital			24,421				22,143
Accumulated deficit			(28,360	)			(16,038	)
Total stockholders' equity (deficit)			(3,932	)			6,112
Non-controlling interest			268				392
			(3,664	)			6,504
Total liabilities and stockholders' equity (deficit)		$	27,122			$	29,769

 

 

The accompanying notes are an intregal part of these consolidated financial statements.

 

 

 

 

 

 

OrangeHook, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
(unaudited)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Revenues		$	773			$	321			$	1,922			$	784
Cost of sales (exclusive of depreciation and amortization)			117				95				585				191
Gross profit			656				226				1,337				593
Operating expenses:
Product development			568				838				1,748				1,329
Sales and marketing			291				308				706				555
General and administrative			2,289				2,404				8,355				5,448
Total operating expenses			3,148				3,550				10,809				7,332
Loss from operations			(2,492	)			(3,324	)			(9,472	)			(6,739	)
Other income (expense):
Gain on debt extinguishment			-				172				-				742
Net loss on investment in LifeMed ID, Inc.			-				(46	)			-				(404	)
Interest expense			(1,155	)			(1,616	)			(1,990	)			(2,451	)
Loss before income taxes			(3,647	)			(4,814	)			(11,462	)			(8,852	)
Income tax expense			-				-				-				-
Net loss before non-controlling interest in subsidiary			(3,647	)			(4,814	)			(11,462	)			(8,852	)
Non-controlling interest in subsidiary			(40	)			(67	)			(124	)			(53	)
Net loss			(3,607	)			(4,747	)			(11,338	)			(8,799	)
Preferred stock dividends			(341	)			(265	)			(984	)			(678	)
Net loss attributable to common stockholders		$	(3,948	)		$	(5,012	)		$	(12,322	)		$	(9,477	)
Loss per common share, basic and diluted		$	(0.58	)		$	(0.97	)		$	(1.82	)		$	(2.15	)
Weighted average common shares outstanding, basic and diluted			6,829,936				5,187,211				6,752,505				4,403,585

 

 

 

 

 

 

 

 

 

 

OrangeHook, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
		Nine Months Ended September 30,
		2017				2016
Cash flows from operating activities
Net loss		$	(11,338	)		$	(8,799	)
Adjustments to reconcile net loss to net cash from
operating activities:
Interest on forward purchase contract			-				1,198
Stock-based compensation			541				-
Stock and options issued for services			213				436
Stock issued in legal settlements			70				-
Warrants granted to director			3				-
Amortization of cash conversion feature and
warrants on convertible debentures			72				216
Amortization of original issue discount on notes payable			121				83
Amortization of original issue discount on notes payable to directors			4				198
Amortization of debt issuance costs			31				96
Net loss from investment in LifeMed ID, Inc.			-				404
Gain on debt extinguishment			-				(742	)
Fair market value of installment payable to related party			317				-
Non-controlling interest in subsidiary			(124	)			(53	)
Depreciation and amortization			2,658				408
Interest earned on due from receivables			-				(16	)
Changes in operating assets and liabilities:
Accounts receivable			(81	)			(716	)
Inventory			3				8
Prepaid assets			(20	)			(93	)
Other assets			(89	)			-
Accounts payable			498				738
Accrued expenses			1,210				1,042
Deferred revenue			(347	)			1,309
Net cash flows used in operating activities			(6,258	)			(4,283	)
Cash flows from investing activities
Advances to Agilivant, LLC			-				(85	)
Advances to Nuvel Holdings, Inc.			-				(480	)
Advances to LifeMed ID, Inc.			-				(1,358	)
Decrease (increase) in restricted cash			-				(3	)
Purchase of Agilivant, LLC member units for stock, net of cash received of $9			-				9
Purchase of LifeMed ID, Inc., net of cash received of $130			-				179
Purchases of LifeMed ID, Inc. preferred and common stock			-				(1,310	)
Costs incurred in acquisition of LifeNexus assets			-				(19	)
Purchases of fixed assets			(26	)			(38	)
Net cash flows used in investing activities			(26	)			(3,105	)

 

 

 

 

 

 

 

OrangeHook, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
		Nine Months Ended September 30,
		2017				2016
Cash flows from financing activities
Proceeds from director loans			2,670				2,005
Proceeds from sale of preferred stock, net of fees			1,148				2,482
Proceeds from sale of convertible debentures			-				600
Proceeds from note payable, net of orginal issue discount of $121			5,367				3,184
Proceeds from stock subscription receivable			-				150
Proceeds from exercise of warrants			-				1
Debt issuance costs			(109	)			(28	)
Borrowings on line of credit			1,000				350
Payments on line of credit			(950	)			-
Payments on director loans			(555	)			(420	)
Payments of convertible debentures			-				(448	)
Payments of notes payable			(2,259	)			(19	)
Payments on other debt			(84	)			(463	)
Payments of capital lease obligations			(81	)			(2	)
Net cash flows provided by financing activities			6,147				7,392
Net increase (decrease) in cash			(137	)			4
Cash
Beginning of period			159				282
End of period		$	22			$	286

 

 

 

The accompanying notes are an intregal part of these consolidated financial statements.

 

 

 

 

 

 

 

 

OrangeHook, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
		Nine Months Ended September 30,
		2017				2016
Supplemental disclosure of cashflow information:
Interest paid		$	317			$	172
Taxes paid			-				-
Supplemental disclosure of noncash financing activities:
Financing fees accrued for issuance of warrants		$	3			$	-
Common stock issued for acquisition of Agilivant, LLC			-				897
Common stock issued for acquisition of LifeNexus assets			-				568
Common stock issued for acquisition of LifeMed ID, Inc.			-				4,625
Common stock issued to retire debt			-				369
Common stock issued under installment payable			182				-
Common stock cancelled in exchange for receivable			-				20
Common stock issued to retire payables			55				-
Original issue discount for warrants and beneficial conversion feature			15				413
Accrued dividends on preferred stock			984				678
Conversion of director loan into preferred stock			-				118
Put option obligation to related party			-				352
Installment payable to related party			317				-
Accrued interest converted to convertible debentures			-				226

 

 

 

 

 

 

 

 

 

 

 

OrangeHook, Inc., a Minnesota corporation ("OrangeHook MN"), was formed on October 17, 2014, to acquire select software applications and technology that service consumer, healthcare, and governmental organizations.  On December 1, 2016, OrangeHook MN was acquired by Nuvel Holdings, Inc., a Florida corporation ("Nuvel Holdings"), under an Agreement and Plan of Merger dated July 1, 2016, as amended by Amendment No. 1 dated October 14, 2016 (as amended, the "Merger Agreement"), between Nuvel Holdings, OH Acquisition Corp, a Minnesota corporation and wholly-owned subsidiary of Nuvel Holdings ("Merger Sub"), and OrangeHook MN. Under the terms of the Merger Agreement, Merger Sub merged with and into OrangeHook MN, with OrangeHook MN remaining as the surviving corporation and a wholly-owned subsidiary of Nuvel Holdings (the "Merger"). Although Nuvel Holdings was the legal acquirer due to the reverse triangular merger structure of the Merger, because OrangeHook MN shareholders received as merger consideration shares of Nuvel Holdings capital stock representing a substantial majority of the voting rights of Nuvel Holdings, OrangeHook MN was the acquirer for accounting purposes in the Merger. Subsequent to the Merger, Nuvel Holdings also adopted the name OrangeHook, Inc.("OrangeHook").

The accompanying consolidated financial statements include those of the OrangeHook, as well as those of its subsidiaries, Salamander Technologies, LLC ("Salamander"), Agilivant, LLC ("Agilivant"), LifeMed ID, Inc. ("LifeMed") and Nuvel, Inc. ("Nuvel").

The interim consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by OrangeHook, Inc. ("we", "our", "us", the "Company", or "OrangeHook") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted, pursuant to such rules and regulations.  These consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company's 2016 Annual Report on Form 10-K and 10-K/A filed with the SEC.

 

The interim consolidated financial statements presented herein as of September 30, 2017, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented.  These adjustments are all of a normal, recurring nature.  The results of operations for any interim period are not necessarily indicative of results for the full year.

 

We are required to make estimates and assumptions about future events in preparing consolidated financial statements in conformity with GAAP.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses at the date of the unaudited consolidated financial statements.  While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events are made.  We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited consolidated financial statements.

 

A description of our significant accounting policies is included in our 2016 Annual Report on Form 10-K and 10-K/A. There have been no material changes to these policies for the three and nine months ended September 30, 2017.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

The Company has incurred losses from its operations, which include product development investments and merger and acquisition related expenses. These activities have resulted in an accumulated deficit of $28,360 and a working capital deficiency of $23,142 as of September 30, 2017.  The Company requires additional working capital to fund operations.  We are currently executing on growth initiatives with the intent to generate additional revenues and achieve meaningful profitability. However, we cannot currently predict the timing of when these improvements in operating results may occur.

 

 

 

 

Since inception, the Company has met its liquidity requirements principally through the issuance of debt, including related-party debt, and the sale of its equity. Our ability to continue operations and to pay obligations when they become due is contingent upon obtaining additional financing.

In April 2017, management negotiated a financing agreement which could provide for up to $10,000 over a period of twelve months. Through September 30, 2017, this financing arrangement has provided for $184 in funding. We no longer expect investments related to this agreement.

In June 2017, we agreed on material non-binding terms of a joint venture with a Shanghai, China based healthcare firm to deliver healthcare infrastructure solutions to the China healthcare market. As of September 30, 2017, the term to completed a definitive agreement has expired. The Company continues to evaluate opportunities in the China market.

Additionally, although still in the early stages of implementation, the Company has executed contracts with various partners that management believes will result in future revenue and cash flow from operations within the next twelve months.

The Company continues to seek additional funding through various equity or debt facilities. There are no assurances that the Company will be able to raise capital on acceptable terms to us, in an acceptable timeframe, or at all, or that cash flows generated from our operations will be sufficient to meet current operating costs and required debt service. If the Company is unable to obtain sufficient amounts of additional capital, it may be required to reduce the scope of its planned growth initiatives, which could impact its financial condition and operating results, or it may not be able to continue to fund its ongoing operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

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, this ASU did not have a material impact on our consolidated results of operations and financial condition.  

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. We 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.

We will adopt this standard beginning January 1, 2018 and expect to use the modified retrospective method of adoption. Under current revenue recognition guidance, a majority of our revenue is recorded over the term of our contracts with customers. Under ASU 2014-09, based on the nature of our contracts, we expect to continue to recognize our revenues related to our software and updates over the term of the contracts as we believe the updates available to customers are not distinct from the software license. We are continuing to assess the impact of implementation and training revenues; however, we believe any impact related to these revenues would not be material. These are the primary areas that we have identified may be different under ASU 2014-09 and we will continue to evaluate ASU 2014-09 as we near our adoption date. Additionally, as the Company continues to assess the new standard along with industry trends and additional interpretive guidance, the Company may adjust its implementation plan accordingly.

 

 

 

 

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.  We will begin the process of determining the impact this ASU will have on our consolidated results of operations and financial condition.

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.  The Company is evaluating the impact the adoption of this ASU will have on the consolidated results of operations and financial condition.

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. We do not expect this ASU to have a material impact on the 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 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. 2017-04, "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 do not expect this ASU to have a material impact on the consolidated results of operations and financial condition, however, we continue to monitor any potential impacts to this ASU.

 

 

 

 

 

In July 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting", to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718.  Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following remain unchanged immediately before and after the change of terms and conditions (1) the award's fair value (or calculated value or intrinsic value, if those measurement methods are used), (2) the award's vesting conditions, and (3) the award's classification as an equity or liability instrument. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for all entities. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued or made available for issuance. The ASU will be applied prospectively to awards modified on or after the adoption date. We do not expect this ASU to have a material impact on the consolidated results of operations and financial condition.   

 

Merger with Nuvel Holdings, Inc. ("Nuvel Holdings")

On December 1, 2016, Nuvel Holdings, Inc. acquired OrangeHook, Inc., a Minnesota corporation ("OrangeHook MN"), as the result of a reverse triangular merger, in which OH Acquisition Corp, a Minnesota corporation and wholly-owned subsidiary of the Nuvel Holdings, merged with and into OrangeHook MN, with OrangeHook MN remaining as the surviving corporation and a wholly-owned subsidiary of Nuvel Holdings (the "Merger"). OrangeHook MN shareholders received as merger consideration shares of Nuvel Holdings' 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.

In December 2016, the Company allocated the purchase price, which was calculated based on the issuance of 458,591 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 Holdings common stock based on the likelihood of achieving certain revenue results. This contingent consideration is payable in 357,143 shares of common stock, which was valued at $3.61 per share, net of a 25% discount. The evaluation of our common stock requires the Company to make assumptions about future cash flows of the Company 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. We engaged an independent specialist to assist us in evaluating the fair value of our common stock and we ultimately concluded on the fair value of our common stock.

A summary of the assets acquired and liabilities assumed as of the closing date is as follows:

Current assets		$	16
Intangible asset - 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

 

As shown in the table above, the allocation of the purchase price created an intangible asset of $5,824, which is being amortized for financial reporting purposes over its estimated useful life.

 

 

 

 

 

Acquisition of LifeMed ID, Inc. ("LifeMed")

LifeMed ID, Inc., 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 was carried on a cost basis. Based on OrangeHook MN's acquisition of additional shares of LifeMed 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 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 LifeMed of $438. The amount invested of $4,425 was reported as Investment in LifeMed 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.

At July 19, 2016, prior to the acquisition, OrangeHook MN owned a total of 1,750,000 shares of LifeMed 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 LifeMed 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 LifeMed.

On July 20, 2016, OrangeHook MN completed a stock-for-stock exchange with LifeMed and acquired the remaining 76% of the outstanding shares of LifeMed 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 LifeMed, although we have recorded $196 due to one dissenting shareholder, with whom have reached a settlement agreement, which is described in Part II Item 1 Legal Proceedings on this Form 10-Q, which resulted in additional expense of $31.

 

As of December 31, 2015, OrangeHook MN had made non-interest bearing advances to LifeMed totaling $1,045, which are included in Due from LifeMed in the accompanying consolidated balance sheets. During 2016, through July 20, OrangeHook MN made additional non-interest bearing advances totaling $1,358. 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.

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 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. We engaged an independent specialist to assist us in evaluating the fair value of our common stock and we ultimately concluded on the fair value of our common stock.

 

 

 

 

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, Inc.			(1,358	)
Current liabilities			(1,549	)
Assumed debt			(103	)
Value of net assets acquired		$	4,623

 

5.    Furniture, equipment and leasehold improvements, net:

Furniture, equipment and leasehold improvements, net consisted of the following:

 

		September 30, 2017				December 31, 2016
Furniture and equipment		$	139			$	129
Furniture and equipment acquired under capital lease			247				247
Computer software			68				51
Leasehold improvements			104				104
			558				531
Less accumulated depreciation and amortization			(177	)			(76	)
Furniture, equipment and leasehold improvements		$	381			$	455

 

Depreciation and amortization expense for the three and nine months ended September 30, 2017 and 2016 follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Depreciation and amortization expense		$	34			$	22			$	101			$	44

Goodwill as of both September 30, 2017 and December 31, 2016, by reportable segment consists of the following:

		Corporate				Salamander				Agilivant				LifeMed				Total
Balances as of December 31, 2016		$	2,616			$	1,567			$	3,159			$	4,960			$	12,302
Changes			-				-				-				-				-
Balances as of September 30, 2017		$	2,616			$	1,567			$	3,159			$	4,960			$	12,302

 

 

 

 

 

 

Intangible assets as of September 30, 2017 and December 31, 2016 consist of the following:

		September 30, 2017
						Accumulated												Estimated Useful
		Cost				Amortization				Impairment				Net				Life (in years)
Definite-life intangibles
Trademarks, patents and
marketing asset portfolio		$	564			$	(76	)		$	-			$	488				5 - 10
Tradenames			891				(178	)			-				713				10
Software technology			12,024				(2,554	)			-				9,470				5
Customer relationships			4,005				(961	)			-				3,044				5
Total intangible assets		$	17,484			$	(3,769	)		$	-			$	13,715

		December 31, 2016
						Accumulated												Estimated Useful
		Cost				Amortization				Impairment				Net				Life (in years)
Definite-life intangibles
Trademarks, patents and
marketing asset portfolio		$	564			$	(34	)		$	-			$	530				5-10
Tradenames			891				(111	)			-				780				10
Software technology			12,024				(706	)			-				11,318				5
Customer relationships			4,005				(361	)			-				3,644				5
Total intangible assets		$	17,484			$	(1,212	)		$	-			$	16,272

Total amortization expense for the three and nine months ended September 30, 2017 and 2016 follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Amortization expense		$	838			$	227			$	2,557			$	364

 

 

 

 

 

 

We measure certain financial assets and liabilities at fair value. 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.

		Fair Value as of September 30, 2017																Fair Value as of December 31, 2016
		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Contingent consideration		$	-			$	-			$	967			$	967			$	-			$	-			$	967			$	967
Put agreements			-				-				1,886				1,886				-				-				1,886				1,886
Installment payable to related party			-				681				-				681				-				-				546				546
		$	-			$	681			$	2,853			$	3,534			$	-			$	-			$	3,399			$	3,399

A reconciliation of the beginning and ending balances for the Level 3 measurement are as follows:

Balances as of December 31, 2016		$	3,399
Additions			-
Transfers to Level 2			(364	)
Payments and reclassifications			(182	)
Balances as of September 30, 2017		$	2,853

Contingent Consideration

In December 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 Holdings (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 September 30, 2017, no shares were earned.

 

 

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 LifeMed which allows him to require us to repurchase, as amended, 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.  In 2016, in accordance with the contract, Mr. Batchelor requested that OrangeHook MN purchase a total of 114,778 shares of his common stock at a price of $14 per share, an aggregate purchase price of $1,607, of which $1,550 will be repurchased in accordance with the agreement. The Company is temporarily relieved from fulfilling its obligation under this agreement until certain settlement provisions and statutory considerations 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 September 30, 2017 and December 31, 2016.

Babi Put Option Obligation

In 2016, OrangeHook MN also agreed to purchase 1,000 shares per month of OrangeHook MN's common stock owned by Rene Babi, Agilivant's founder and former Executive Chairman, at a price of $14.00 per share for a period of 24 months beginning in January 2017. The Company is temporarily relieved from fulfilling its obligation to repurchase under the agreement until certain settlement provisions and statutory considerations 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 September 30, 2017 and December 31, 2016.

Total debt as of September 30, 2017 and December 31, 2016 consists of the following:

		September 30, 2017				December 31, 2016
Line of credit		$	400			$	350
Notes payable to directors, gross			4,908				2,793
Convertible debentures, gross			3,443				3,428
Notes payable, gross			4,526				1,312
Other debt			65				49
			13,342				7,932
Less: unamortized portion of original issue discount			(17	)			(77	)
Less: unamortized portion of debt issuance costs			(93	)			(14	)
Total debt, net of debt issuance costs and original issue discount			13,232				7,841
Less: current portion			(11,188	)			(7,841	)
Long-term debt		$	2,044			$	-

 

Line of credit

On March 30, 2016, OrangeHook MN entered into an unsecured revolving line of credit with a bank which provided for borrowings up to $350. 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 the Company's directors. This revolving line of credit originally was set to expire on December 31, 2016 but on February 8, 2017, was extended to January 30, 2018 and the line of credit was increased by $200 to $550. The increase is secured by cash collateral provided by the Company'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. The fair value of the stock warrant, which was expensed during the period, was determined to be $3, 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			1.5	%
Expected volatility			36.1	%
Dividend yield			0.0	%
Expected option life (years)			3

 

 

 

 

Interest related amounts are listed below:

 

		Nine Months Ended September 30,
		2017				2016
Contractual interest expense		$	15			$	7
Interest paid			15				7

Notes Payable to Directors

Since inception, the Company has received interest-bearing advances from various directors and their affiliates, as related parties. During the nine months ended September 30, 2017, we received interest-bearing advances from two directors which totaled $2,670 and made payments to directors of $555. Proceeds of $1,200 were part of the senior notes authorized on March 31, 2017, as described below under 2017 Debt Participation Program. The maturity dates of the notes payable to directors are generally less than twelve months; however, the $1,200 of the notes payable issued under the 2017 Debt Participation Program during the nine months ended September 30, 2017, have initial terms of two years from issuance. As of September 30, 2017, $1,500 of our Notes Payable to Directors are a weighted average 9.2 months past due from the original maturity dates. Our directors have indicated the delated repayment is not an event of default.  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 consolidated statements of operations.

		September 30, 2017				December 31, 2016
Face amount of notes payable to directors		$	4,908			$	2,793
Unamortized original issue discount			(12	)			-
Unamortized debt issuance costs			(33	)			-
			4,863				2,793
Less: current portion			(3,708	)			(2,793	)
Notes payable to directors, net, less current portion		$	1,156			$	-

Notes payable to directors accrue interest at a range of 0% to 12% per annum. The weighted average interest rate on outstanding notes payable to directors at September 30, 2017 was 7.1%. Interest related amounts are listed below:

		Nine Months Ended September 30,
		2017				2016
Contractual interest expense		$	277			$	184
Amortization of original issue discounts			4				198
Amortization of debt issuance costs			10				-
Interest paid			2				45

As of September 30, 2017, and December 31, 2016, there was $313 and $42, respectively, of accrued and unpaid interest on notes payable to directors.

 

 

 

 

Convertible Debentures

Convertible debentures as of September 30, 2017 and December 31, 2016, which includes convertible notes assumed in the Merger of $15, consist of the following:

 

		September 30, 2017				December 31, 2016
Face amount of debentures		$	3,443			$	3,443
Unamortized original issue discount			(5	)			(77	)
Unamortized debt issuance costs			-				(14	)
			3,438				3,352
Less: current portion			(3,438	)			(3,352	)
Convertible debentures, net		$	-			$	-

	Nine Months Ended September 30,
	2017				2016
Contractual interest expense		$	258			$	239
Amortization of original issuance discount			72				321
Amortization of debt issuance costs			14				82
Interest paid			-				81

Convertible debentures accrue interest at an annual rate of 10%, except for the assumed convertible notes of $15, which accrue interest at the default rate of 18% per annum. As of September 30, 2017, and December 31, 2016, there was $427 and $163, respectively, of accrued and unpaid interest on convertible notes.

Certain of the Company's directors provided joint and several personal guaranties to certain lenders. Convertible debentures subject to these guaranties as of September 30, 2017 and December 31, 2016 is $2,455 and $2,455, respectively.

The outstanding balance of convertible debentures includes $1,193 from board members, officers and their affiliates, as related parties, as of both September 30, 2017 and December 31, 2016. Interest expense related to these amounts of $89 and $78 was recorded for the nine months ended September 30, 2017 and 2016, respectively. Accrued interest payable on these amounts was $181 and $61 as of September 30, 2017 and December 31, 2016, respectively.

On October 30, 2017, we retired $2,696 of convertible debentures, of which none was held by board members, officers or their affiliates. See additional information in Note 18 "Subsequent Events".

Notes Payable

Notes payable as of September 30, 2017 and December 31, 2016 consists of the following:

 

		September 30, 2017				December 31, 2016
Notes payable		$	4,178			$	950
Assumed notes payable			347				347
Unamortized debt issuance costs			(60	)			-
			4,465				1,297
Less: current portion			(3,577	)			(1,297	)
Notes payable, less current portion		$	888			$	-

		Nine Months Ended September 30,
		2017				2016
Contractual interest expense		$	754			$	4
Amortization of original issue discount			121				53
Amortization of debt issuance costs			7				-
Interest paid			297				2

 

During the nine months ended September 30, 2017, we received unsecured, short-term loans of $5,488, less original issue discount of $121 and made principal payments of $2,259.

On January 19, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $300. Interest accrued at a rate of 20 basis points or $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 $600 principal and $42 of accrued interest.

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 May 23, 2017, we repaid $75 of principal.

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. Interest of a fixed amount of $5 is due at maturity. In connection with this transaction, for a fee of $4 plus interest of $11, OrangeHook MN extended, to March 25, 2017, an outstanding loan of $500, from the same lender, which was originally issued in July 2016. 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. On April 15, 2017, OrangeHook entered into an agreement with a current lender which extended the maturity date on these two loans from April 15, 2017 to May 27, 2017. In consideration for the extension granted by the lender, we agreed to pay additional loan discount points totaling $33 plus a fixed amount of interest of $52. In addition, we paid interest accrued to that date of $63. These loans may be extended until June 30, 2017 upon payment by OrangeHook MN of an amount equal to one-half of the interest amount due of $26 on May 27, 2017. On May 30, 2017, we paid $26 of interest as required by the agreement, which resulted in the agreement being extended through June 30, 2017.

On July 5, 2017, we repaid $525 and $173 of notes payable principal on two notes issued July 7, 2016 and February 27, 2017, respectively, along with accrued interest of $26. From this same lender, on July 7, 2017, we received a new loan in the amount $250. The principal of $250 and interest of $15 was due September 5, 2017 and has been extended as described below.

On July 31, 2017, we entered into a Commercial Promissory Note with the same lender in the principal amount of $1,000, the principal of which is now $1,054. The maturity date of the note is October 30, 2017. We are required to pay a loan discount fee of $50 and interest of $90 by August 30, 2017. The note may be extended for an additional 90-day period until January 28, 2018 under the same terms if there has been no default under the note or personal guaranties. The note is supported by a confession of judgment by the Company and five personal guarantees and confessions of judgment, including four members of the Board of Directors. The interest and principal payments required on August 30, 2017, and September 5, 2017 were not made and constituted an event of default. On September 8, 2017, we entered into a forbearance agreement with the lender, which required payments of $278 and $90 on October 1, 2017, which were made. On October 30, 2017 we exercised the option to extend our $1,054 Commerical Promissory Note, consistent with the terms of the agreement.  The maturity date is extended to January 28, 2018, as described in Note 18 Subsequent Events.

On March 31, 2017 and April 20, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $250 and $100, respectively. Interest accrues at a rate of 20 basis points, or $0.7 per day and is due no later than May 29, 2017. On May 26, 2017, OrangeHook MN repaid this note together with accrued interest of $36.

 

 

 

 

 

On April 27, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $250. Interest is a fixed amount of $10 per week, regardless of when the loan is repaid. On May 19, 2017, we paid $30 of accrued interest and there is $180 of accrued interest as of September 30, 2017.

On May 26, 2017, OrangeHook MN entered into a financing agreement with a lender in the amount of $600. Under the terms of the agreement, $850 of proceeds from five active contracts in LifeMed segment have been assigned to the individual lender. The contract terms extend through July 2020, as such, the proceeds from the contracts will continue to be collected by the individual lender.  The annual interest rate is 27.8% and is being recorded as interest expense. As of September 30, 2017, $136 of payments had been made, leaving an amount of $463 outstanding. There were $66 of debt issuance costs associated with this agreement, which are being amortized over the term of the agreement.

On June 22, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $150 which is due July 21, 2017. Interest accrues at a rate of 20 basis points and a minimum of $8, due no later than July 21, 2017. This note and accrued interest was paid on July 28, 2017.

On June 5, 2017, OrangeHook MN received an advance in the amount of $184, which has a maturity date of June 5, 2019 and accrues interest at 6.5% per annum.

On July 25, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $100 which matures March 1, 2018. Interest accrues at a rate of 15.0% per annum. The note is supported by four personal guarantees, including three members of the Board of Directors.

On August 7, 2017, OrangeHook MN entered into a short-term debt agreement with a lender, which is a corporation owned by the children of a related-party, in the amount of $500, and matures on November 4, 2017. Stated interest for the period is $50, or 41.0% per annum.

On August 15, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $20 which matures November 15, 2017. Interest accrues at a rate of 10.0% per annum. The note is supported by two personal guarantees by member of the Board of Directors.

On August 30, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $250 which matures March 1, 2017. Interest accrues at a rate of 15.0% per annum. The note is supported by three personal guarantees by members of the Board of Directors.

On August 31, 2017, OrangeHook MN entered into a short-term debt agreement with a lender in the amount of $50 which matures February 28, 2019. Interest accrues at a rate of 24.0% per annum. On September 12, 2017, OrangeHook MN entered into a short-term debt agreement with the same lender in the amount of $25 which matures February 28, 2019. Interest accrues at a rate of 24.0% per annum. In addition, on September 29, 2017, OrangeHook MN entered into an on-demand advance with the same lender in the amount of $35, which did not accrue interest and was repaid on October 5, 2017.

On September 15, 2017, OrangeHook MN entered into a promissory note with a lender in the amount of $300 which matures March 14, 2018. Interest accrues at a rate of 24.0% per annum.

On September 29, 2017, we received an on-demand advance of $50, which accrues interest at 24.0% per annum. This advance was repaid on October 5, 2017.

Included in notes payable is $350 of short-term notes due to a related party. There were no payments made on these notes and $350 was outstanding as of September 30, 2017 and December 31, 2016.

Additionally, on September 29, 2017, we reclassified $150 to notes payable from accrued expenses as a result of the settlement of the dissenting shareholder suit described in Part II – Other Information; Item 1. Legal Proceedings on this Form 10-Q.

As of September 30, 2017, and December 31, 2016, there was $892 and $341, respectively, of accrued and unpaid interest on notes payable.

 

 

 

 

 

Other Debt

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%, 9.6% and 11.0%.

		September 30, 2017				December 31, 2016
Insurance premium financing contracts current portion			65				49

		Nine Months Ended September 30,
		2017				2016
Contractual interest expense		$	3			$	3
Interest paid			3				2

We made payments of $84 during the nine months ended September 30, 2017. The balance of these contracts was $65 and $49 as of September 30, 2017 and December 31, 2016.

2017 Debt Participation Program

On March 31, 2017, the Board of Directors authorized the issuance of up to $7,000 of senior notes pursuant to the terms of a participation and payment priority agreement. Terms of the senior notes include interest of 10% per annum, payable quarterly, unless negotiated otherwise, with a maturity date of two years from the issue date. In addition, lenders 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 over the term of the note. As of September 30, 2017, OrangeHook has received a total of $1,300 of proceeds under this offering, $1,200 of which have been received from the Company's Chairman of the Board. Warrants to purchase 182,000 shares of common stock were issued in conjunction with the program. The fair value of these stock warrants, which will be amortized as original issue discount over the term of the notes, was determined to be $15, which represents the estimated present value at grant date using the Black-Scholes pricing model with the following assumptions:

Risk-free interest rate			1.48 - 1.50	%
Expected volatility			36.1 - 38.2	%
Dividend yield			0.0	%
Expected option life (years)			3

 

We lease office space for our corporate offices and for each of our subsidiaries, through noncancelable operating leases. Rent expense, which includes charges for common area and maintenance expenses, was $176 and $99 for the three months ended September 30, 2017 and 2016, respectively, and $527 and $260 for the nine months ended September 30, 2017 and 2016, respectively.

Unasserted Claims

In the ordinary course of business, the Company 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 the Company'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 the Company and the chance of a negative outcome on outstanding litigation is considered remote.

 

 

 

 

 

 

During the three and nine months ended September 30, 2017, we issued 125 and 1,220 units, respectively, of OH-2 preferred stock in exchange for proceeds of $125 and $1,220, respectively, net of financing fees of $2 and $72, respectively. Attached to the units of preferred stock which were issued during the three and nine months ended September 30, 2017, were seven-year warrants to purchase up to 8,938 shares and 87,230 shares, respectively, of common stock at a price of $7.00 per share.

Preferred stock dividends, related to OH-2 preferred stock of $341 and $265 were recorded for the three months ended September 30, 2017 and 2016, respectively and $984 and $678 were recorded for the nine months ended September 30, 2017 and 2016, respectively. Dividends on OH-2 preferred stock are legally obligated regardless of whether they are declared by the Company's Board of Directors.

During the three months ended September 30, 2017, in accordance with the Certificate of Designation, all 20,000 shares of Series B Preferred stock were converted into shares of common stock, which resulted in one share of common stock being issued. As of September 30, 2017, there were no shares of Series B Preferred stock issued and outstanding. Cumulative dividends in arrears totaled $21 and $17 as of September 30, 2017 and December 31, 2016, respectively, and have not been declared by Board of Directors.

During the three months ended September 30, 2017, in accordance with the Certificate of Designation, all 371,052 shares of Series C Preferred stock were converted into shares of common stock, which resulted in four shares of common stock being issued. As of September 30, 2017, there were no shares of Series C Preferred stock issued and outstanding. Cumulative dividends in arrears totaled $321 and $260 as of September 30, 2017 and December 31, 2016, respectively, and have not been declared by the Company's Board of Directors.

 

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. The Company issues new stock when non-qualified stock options are exercised.

During the nine months ended September 30, 2017, non-qualified stock option activity was as follows:

														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, 2016			1,379,566			$	5.40			$	848				8.9
Granted			105,707				3.36				-				-
Exercised			-				-				-				-
Forfeited or expired			(378,480	)			7.29				-				-
Outstanding as of September 30, 2017			1,106,793			$	4.56			$	3,456				8.2
Exercisable as of September 30, 2017			749,035			$	4.44			$	2,426				7.9
Remaining authorized options available for issue			271,620

Included in the number of non-qualified options shown above are non-qualified stock options issued outside the plan of 378,413 as of September 30, 2017 and 478,413 as of December 31, 2016.

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. On June 21, 2017, shares of our common stock began to trade on the OTCQB market. As such, for the three months ended September 30, 2017, the fair market value of our common stock is determined by the average of the bid price and ask price on the OTCQB market.  As of September 30, 2017, and December 31, 2016, the fair value of our common stock was $6.75 and $3.61 per share, respectively.

 

 

 

 

		Nine Months Ended September 30,
		2017				2016
Risk-free interest rate			2.3	%			1.6	%
Expected volatility			39.0	%			36.1	%
Dividend yield			0.0	%			0.0	%
Expected option life (years)			10				10

We recognized non-cash non-qualified stock option compensation expense for the three months ended September 30, 2017 and 2016, of $371 and $71, respectively, and for the nine months ended September 30, 2017 and 2016, we recognized $331 and $187, respectively. Non-cash non-qualified stock option compensation expense is included in general and administrative expenses. As of September 30, 2017, there was a total of $258 in unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average period of approximately 1.3 years.

 

Warrants to purchase shares of the Company's common stock have been issued in connection with issuances of preferred stock (See Note 10), convertible debentures (See Note 8) and for certain other situations. Warrants outstanding and exercisable as of September 30, 2017 are as follows:

		Number of												Weighted
		shares												average
		outstanding			Weighted				Aggregate					remaining
		and			average				intrinsic					contractual
(in thousands except number of options, exercise price and years)		vested			exercise price				value					term (years)
Outstanding and exercisable as of December 31, 2016			2,515,919			$	20.08			$	378				5.7
Granted			451,802				8.66				-				4.1
Exercised			(76,087	)			3.10				-				-
Forfeited or expired			(33,585	)			-				-				-
Outstanding as of September 30, 2017			2,858,049			$	18.88			$	421				4.8
Exercisable as of September 30, 2017			2,636,019			$	19.72			$	421				5.0

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. During the three months ended September 30, 2017, shares of our common stock began to trade on the OTCQB market. As such, for the three months ended September 30, 2017, the fair market value of our common stock is determined by the average of the bid price and ask price on the OTCQB market.   As of September 30, 2017 and December 31, 2016, the fair value of our common stock was $6.75 per share and $3.61 per share, respectively.

During the three months ended September 30, 2017, the Company had identified 20,556,642 warrants which were assumed during the Merger transaction. After giving effect to the Merger transaction and the related reverse stock split, 119 warrants remain outstanding with a weighted average exercise price per share of $276,000. The weighted average remaining term of the warrants is 2.0 years. These shares have been retrospectively included in the December 31, 2016 amounts as noted above.  The weighted average exercise price at September 30, 2017, excluding these 119 warrants was $7.39.

 

 

 

 

 

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 for share and per share amounts):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Basic and diluted net loss attributable to common stockholders per share:
Numerator:
Allocation of distributed net loss attributable to common stockholders		$	(3,948	)		$	(5,012	)		$	(12,322	)		$	(9,477	)
Denominator:
Weighted-average common shares outstanding			6,829,936				5,187,211				6,752,505				4,403,585
Basic and diluted net loss per share		$	(0.58	)		$	(0.97	)		$	(1.82	)		$	(2.15	)

As of September 30, 2017, and 2016 the following anti-dilutive securities were outstanding. These anti-dilutive securities were excluded from the weighted-average shares used to calculate the diluted net loss per common share as follows:

		As of September 30,
		2017				2016
Restricted stock			-				200,000
Non-qualified stock options			1,106,793				916,888
Stock warrants			2,858,049				2,338,279
			3,964,842				3,455,167

 

The Company assesses the potential realization of net deferred tax assets on an annual basis, or on an interim basis if the circumstances warrant. If our actual results and updated projections vary significantly from the projections used as a basis for this determination, we may need to increase or decrease the valuation allowance against the gross deferred tax assets. We would adjust our valuation allowance in the period the determination was made. The Company 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. As of September 30, 2017, the Company had available unused federal net operating loss carryforwards of approximately $31,985. The net operating loss carryforwards will expire at various dates from 2025 through 2036. The Company'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 the Company. We have not performed an analysis to determine if an ownership change has occurred. 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 September 30, 2017, and December 31, 2016, we did not have any material uncertain tax positions.

 

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. The Company has three operating segments: (1) Salamander, 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) Agilivant, which includes the results of the business operation of Agilivant, LLC, offers a real-time debit based banking and payment system, (3) LifeMed,  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 the Company'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. Management continues to evaluate the interoperability of our software solutions and related operational framework.

 

 

 

The Salamander segment was created as a result of OrangeHook MN's acquisition of Salamander Technologies, Inc. which occurred on October 1, 2015. The Agilivant segment was created as a result of OrangeHook MN's acquisition of Agilivant, LLC which occurred on February 12, 2016. The LifeMed segment was created as a result of OrangeHook MN's acquisition of LifeMed ID, Inc. which occurred on July 20, 2016.

Segment disclosures are as follows:

 

(in thousands)		For the Three Months Ended September 30, 2017
		Salamander				Agilivant				LifeMed				Corporate				Total
Revenue		$	256			$	5			$	512			$	-			$	773
Loss from operations			(206	)			(217	)			(940	)			(1,129	)			(2,492	)
Net loss			(206	)			(184	)			(952	)			(2,265	)			(3,607	)
Total assets			(374	)			894				(1,601	)			28,203				27,122
Depreciation and amortization			26				59				458				330				873
Capital expenditures			(2	)			-				-				(2	)			(4	)
Interest expense, net of interest income			-				(8	)			(12	)			(1,135	)			(1,155	)
		For the Three Months Ended September 30, 2016
		Salamander				Agilivant				LifeMed				Corporate				Total
Revenue		$	223			$	25			$	73			$	-			$	321
Loss from operations			(275	)			(367	)			(972	)			(1,710	)			(3,324	)
Net loss			(275	)			(307	)			(975	)			(3,190	)			(4,747	)
Total assets			183				1,888				1,321				20,985				24,377
Depreciation and amortization			26				59				156				9				250
Capital expenditures			-				-				(7	)			(6	)			(13	)
Net loss on Investment in LifeMed ID, Inc.			-				-				-				(46	)			(46	)
Gain on extinguishment of debt			-				-				-				172				172
Interest expense, net of interest income			-				(7	)			(3	)			(1,606	)			(1,616	)