Merger

On May 11, 2017, the Company closed the Merger contemplated by the Merger Agreement by and among the Company, Piper Merger Corp., Provant, and Wellness Holdings, LLC. Provant was the surviving entity in the Merger, as a result of which it became a wholly-owned subsidiary of the Company. As Merger consideration, the Company issued 10,448,849 shares to the Provant equity holders (the “Former Provant Owners”). The Former Provant Owners now hold approximately 48% of the Company’s approximately 25.9 million outstanding shares of common stock. During the three and six month periods ended June 30, 2017, the Company incurred $1.1 million and $1.8 million, respectively, of transaction costs in connection with the Merger in the condensed consolidated statement of operations.

The Company expects the Merger to increase the scale of the Company, improving gross margins due to combined revenues and combined operations which will produce operational synergies by reducing fixed costs, which is the basis for the merger and comprises the resulting goodwill recorded. While the Company expects its financial condition to improve after the Merger, Provant has a history of operating losses as well, and the Company has incurred significant costs and additional debt for the transaction.

In order to provide additional working capital for the consolidated Company after the Merger, the Company entered into the A&R Credit Agreement with SWK which increases the principal balance under the existing Term Loan from $3.7 million to $6.5 million and provides the $2.0 million Seasonal Facility. The Company also entered into the Third Amendment with SCM to expand the Company's revolving credit facility from $7.0 million to $10.0 million with an accordion to $15.0 million during high-volume months. See Note 8 to the condensed consolidated financial statements for further discussion of the debt and warrants issued in connection with the Merger.

The Merger was treated as a purchase in accordance with Accounting Standards Codification (ASC) 805, Business Combinations, which requires allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the transaction, and the Company was determined to be the acquirer in the Merger. The allocation of purchase price is based on management’s judgment after evaluating several factors, including a preliminary valuation assessment. The allocation of purchase price is preliminary and subject to changes, which could be significant, as the valuation of tangible and intangible assets are finalized, working capital adjustments are finalized, and additional information becomes available.

The preliminary allocation of purchase price is as follows:



(in thousands)
Cash	$	1,936
Accounts receivable	3,134
Inventory and other assets	1,208
Fixed assets	1,032
Technology	4,200
Customer relationships	3,400
Trade name/trademark	200
Non-compete agreements	10
Goodwill	6,544
Accounts payable	(2,945		)
Accrued expenses and other liabilities	(4,617		)
Line of credit	(4,684		)
Capital leases	(334		)
Deferred revenue	(200		)
Subordinated promissory note	(2,092		)
Preliminary Purchase Price	$	6,792

Intangible assets acquired include existing technologies including a customer-facing wellness portal, customer relationships, trade name/trademark, and an executive non-compete agreement. The fair value assessment of the acquired assets and liabilities utilized Level 3 inputs. The method used to determine the fair value of the intangible assets acquired and their estimated useful lives are as follows:



Intangible Asset	Fair Value Method	Estimated Useful Life
Technology	Income Approach, Relief from Royalty	6 years
Customer relationships	Income Approach, Multi-Period Excess Earnings	8 years
Trade name/trademark	Income Approach, Relief from Royalty	9 months
Non-compete agreements	Income Approach Lost Profits Method	1 year

Amortization is expected to be recorded on a straight-line basis over the estimated useful life of the asset. The Company recorded amortization expense of $0.2 million during the three month period ended June 30, 2017, related to the intangible assets acquired in the Merger, of which $0.1 million is recorded as a component of cost of operations and $0.1 million is recorded as a component of selling, general and administrative expenses. The goodwill of $6.5 million was recorded in one reporting unit as the Company does not report segments, and is expected to be deductible for tax purposes.

The consolidated statement of operations for the three and six month periods ended June 30, 2017, includes revenue of $1.9 million attributable to Provant since the Merger date of May 11, 2017. Disclosure of the earnings contribution from the Provant business is not practicable, as the Company has already integrated operations in many areas.

The following table provides unaudited pro forma results of operations for the three and six month periods ended June 30, 2017 and 2016, as if the Merger had been completed on the first day of the Company's 2016 fiscal year.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2017			2016			2017			2016
Pro forma revenues	$	10,884		$	12,426		$	24,034		$	26,390

Pro forma net loss from continuing operations	$	(5,768	)	$	(7,884	)	$	(11,575	)	$	(15,504	)

These pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented, nor are they indicative of the consolidated results of operations in future periods, as they do not reflect the operational synergies expected to be achieved by reducing fixed costs by combining operations. Additionally, during the three and six month periods ended June 30, 2016, Provant had pass-through gift card revenues of $1.0 million and $2.0 million, respectively, that was a non-recurring transaction. The pro forma results for the three and six periods ended June 30, 2017, include immaterial pre-tax adjustments for net amortization of intangible assets and the elimination of transaction costs of $2.0 million and $3.1 million, respectively. Pro forma results for the three and six month periods ended June 30, 2016, include immaterial pre-tax adjustments for net amortization of intangible assets and the addition of transaction costs of $2.0 million and $3.1 million, respectively.