Debt

The following table summarizes the Company's outstanding debt:



(in thousands)	March 31, 2018			December 31, 2017
2016 Credit and Security Agreement	$	4,887		$	10,015
Term Loans	8,250			8,500
Discount on Term Loans	(555		)	(631		)
Unamortized debt issuance costs related to Term Loans	(207		)	(220		)
Subordinated Promissory Note, net	1,559			1,543
Capital Leases	45			107
Total debt	13,979			19,314
Short-term portion	(13,979		)	(19,314		)
Total long-term debt	$	—		$	—

The following table summarizes the components of interest expense:



	Three Months Ended
	March 31,
(in thousands)	2018		2017
Interest expense on Term Loans (effective interest rate at March 31, 2018 and 2017 was 28% and 15%, respectively)	$	349	$	138
Interest expense on 2016 Credit and Security Agreement	173		81
Interest expense on Subordinated Promissory Note	39		—
Interest expense on Capital Leases	5		—
Accretion of termination fees (over term of Term Loan at rate of 8%)	111		41
Amortization of debt issuance costs	75		140
Amortization of debt discount associated with SWK Warrants #1 and #2 (defined below)	77		367
Amortization of Subordinated Promissory Note Discount	15		—
Mark to market of SWK Warrant #2 (defined below)	42		—
Total	$	886	$	767

Credit Facilities

As of March 31, 2018, the Company had two primary credit facilities the 2016 Credit and Security Agreement with CNH and the A&R Credit Agreement with SWK. The 2016 Credit and Security Agreement provides us with a revolving credit facility, the proceeds of which are to be used for general working capital purposes and capital expenditures. The A&R Credit Agreement with SWK provides us with additional working capital with a $6.5 million term loan and two overdraft lines of $2.0 million each, one being the Seasonal Facility which is available to us throughout the year subject to certain conditions, and the second one, the 2017 August Term Loan, which was put in place in August 2017.

2016 Credit and Security Agreement

On April 29, 2016, the Company entered into the 2016 Credit and Security Agreement with CNH, as amended. The 2016 Credit and Security Agreement provides the Company with a revolving credit facility, the proceeds of which are to be used for general working capital purposes and capital expenditures. The 2016 Credit and Security Agreement replaced the 2013 Loan and Security Agreement, eliminating the requirement of the Company to issue SWK Warrant #2 (as defined below) for the purchase of common stock valued at $1.25 million to SWK, the holder of the Company’s Credit Agreement.

In connection with the Merger, the Company entered into the Third Amendment, which expanded 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, at the discretion of CNH. The Company evaluated the application of ASC 470-50 and ASC 470-60 for the Third Amendment and concluded that the transaction should be accounted for as a debt modification. CNH makes cash advances to the Company in an aggregate principal amount outstanding at any one time not to exceed the maximum borrowing capacity, subject to certain loan balance limits based on the value of the Company’s eligible collateral (the “Revolving Loan Commitment Amount”). The 2016 Credit and Security Agreement has a term of three years, expiring on April 29, 2019.

As of March 31, 2018, the Company had $4.9 million of outstanding borrowings under the 2016 Credit and Security Agreement, with an unused borrowing capacity of $0.2 million. As of April 30, 2018, the Company had $5.6 million of outstanding borrowings and $0.3 million of unused borrowing capacity. Any borrowings on the unused borrowing capacity are at the discretion of CNH. Immediately following the Merger, the Company paid off PHS's outstanding line of credit balance, noted in the purchase price allocation in Note 3 to the condensed consolidated financial statements, of $4.7 million.

Borrowings under the 2016 Credit and Security Agreement bear interest at a fluctuating rate that when annualized is equal to the Prime Rate plus 4.5%, subject to increase in the event of a default. The Company paid CNH a $0.1 million facility fee, and monthly, CNH will receive an unused line fee equal to one-half of one percent (0.5%) per annum of the difference derived by subtracting (i) the greater of (x) the average daily outstanding balance under the Revolving Facility during the preceding month and (y) the Minimum Balance, from (ii) the Revolving Loan Commitment Amount and also a collateral management fee equal to one-half of one percent (0.5%) per annum of the Revolving Loan Commitment Amount. In connection with the Third Amendment, the Company paid fees of $0.1 million to CNH that were capitalized in Other Assets. As of March 31, 2018, the remaining balance in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheet was $0.2 million.

Borrowings under the 2016 Credit and Security Agreement are secured by a security interest in all existing and after-acquired property of the Company, including, but not limited to, its receivables (which are subject to a lockbox account arrangement), inventory, and equipment.

The Third Amendment revised the previous covenants, and contains customary representations and warranties and various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. Noncompliance with these covenants constitutes an event of default. The covenants are summarized in the tables below and are on a pro forma basis as if the Merger with PHS happened as of April 1, 2017:



(in thousands)	Minimum Aggregate Revenue (LTM) as of the end of:
Months Ending	Twelve	Twelve	Twelve	Twelve	Twelve
Period Ended	March 31, 2018	June 30, 2018	September 30, 2018	December 31, 2018	each fiscal quarter thereafter
	$69,000	$70,000	$71,000	$74,000	$75,000

	Minimum Adjusted EBITDA as of the end of:
Months Ending	Twelve	Twelve	Twelve	Twelve	Twelve
Period Ended	March 31, 2018	June 30, 2018	September 30, 2018	December 31, 2018	each fiscal quarter thereafter
	$5,000	$5,200	$6,000	$8,000	$9,000

	Minimum Consolidated Unencumbered Liquid Assets as of:
	The end of each fiscal quarter
	$1,000

The Company was not in compliance with the covenants as of March 31, 2018, and was in default, which enables its lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral. Due to the covenant violations, the debt has been classified as short term on the condensed consolidated balance sheet as of March 31, 2018.

A&R Credit Agreement

In order to fund the acquisition of Accountable Health Solutions in 2015, the Company entered into the Credit Agreement with SWK on April 17, 2015, as amended on February 25, 2016, March 28, 2016, August 15, 2016, and November 15, 2016. The Credit Agreement provided the Company with a $5.0 million Term Loan. 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 increased the Term Loan balance from $3.7 million to $6.5 million on May 11, 2017. The A&R Credit Agreement provides the Company a principal repayment holiday until February 2019. Interest, fees, costs, and expenses are payable quarterly beginning in the third quarter of 2017. All mandatory payments of principal, interest, fees, costs, and expenses are determined by the revenue-based formula that has been in effect since the original Credit Agreement. Principal payments, once they begin, are capped at $0.5 million per quarter. The Company will be required to make the quarterly revenue-based payments in an amount equal to fifteen percent (15.0%) of yearly aggregate revenue up to and including $20 million plus ten percent (10%) of yearly aggregate revenue greater than $20 million less any revenue-based payments made in prior quarters in the same fiscal year. The Company evaluated the application of ASC 470-50 and ASC 470-60 for the A&R Credit Agreement and concluded that the revised terms did constitute a troubled debt restructuring ("TDR"), and thus has expensed all direct costs in the period in which they were incurred, discussed further below.

The outstanding principal balance under the A&R Credit Agreement bears interest at an adjustable rate per annum equal to the LIBOR Rate (subject to a minimum amount of one percent (1.0%)) plus twelve-and-a-half percent (12.5%) and is due and payable quarterly, in arrears, commencing in the third quarter of 2017. Upon the earlier of (a) the maturity date on May 11, 2021, or (b) full repayment of the Term Loan, whether by acceleration or otherwise, the Company is required to pay an exit fee equal to eight percent (8%) of the aggregate principal amount of all term loans advanced under the A&R Credit Agreement. The Company is recognizing the exit fee over the term of the Term Loan through an accretion accrual to interest expense using the effective interest method. In connection with the A&R Credit Agreement, the Company paid a $97,500 origination fee to SWK and $150,000 of legal fees, which per the TDR guidance noted above were recorded as transaction costs in 2017. The Company was also required to pay the $0.4 million exit fee from the original Credit Agreement to SWK at the time of the Merger.

In addition, SWK is providing a $2.0 million seasonal revolving credit facility (the "Seasonal Facility"), which was guaranteed by the parent company of one of the Former PHS Owners, Century Focused Fund III, LP (“Century”). In exchange for Century’s guaranty of the Seasonal Facility pursuant to a Limited Guaranty Agreement dated May 11, 2017, among Century, SWK and the Company (the “Century Guaranty”), the Company issued to WH-HH Blocker, Inc., a subsidiary of Century (“WH-HH Blocker”), a Common Stock Purchase Warrant to purchase 326,052 shares of Common Stock, with a strike price of $0.6134 per share (the “10% Warrant”). If the guaranty is called, the Company would issue to WH-HH Blocker an additional Common Stock Purchase Warrant to purchase 2,934,468 shares of Common Stock, with a strike price of $0.6134 per share (the “90% Contingent Warrant”) (together with the 10% Warrant, the "Century Warrants"). The Century Warrants will be exercisable for seven years and will each have a strike price equal to the average trading price used to determine the number of shares subject to such warrant. The 10% Warrant will not be exercisable during the first year after closing of the Merger. The 10% Warrant was issued by the Company in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, and Rule 506 thereunder. Pursuant to a Credit Agreement Side Letter between the Company and Century executed on May 11, 2017 (the “Side Letter”), the Company is also obligated, if it fails to pay the amount outstanding under the Seasonal Facility by November 30 each year to SWK, regardless if the Century Guaranty is called by SWK, to pay interest to Century at an annual rate of 25% on the outstanding balance from November 30 until the outstanding balance under the Seasonal Facility is paid in full to SWK. As noted above, as the modification of the Term Loan was treated as a TDR, the Century Warrants issued as part of the TDR were treated similarly to the cash transaction costs discussed above and thus the fair value of the Century Warrants was recorded as transaction costs in the three-month period ended March 31, 2018. The Century Warrants are being accounted for as derivatives and thus will be re-measured at fair value at each reporting date with the change in fair value reflected in earnings. The Company valued the Century Warrants using the Black-Scholes pricing model, which utilizes Level 3 Inputs. The Company utilized volatility of 80.6%, a risk-free rate of 2.22%, dividend rate of zero, and term of 7 years, which is consistent with the exercise period of the Century Warrants.

To fulfill a condition of the A&R Credit Agreement, the Company issued 4,375,000 shares of its common stock to various investors in a private offering for an aggregate purchase price of $3.4 million, net of issuance costs, between February 1, 2017 and May 11, 2017 (the "2017 Private Offering"). These shares were sold at a purchase price of $0.80 per share plus one-half warrant per share with a strike price of $1.35 per share. Warrants to purchase up to an additional 2,187,500 shares of common stock were issued (the "2017 Private Offering Warrants"). The 2017 Private Offering Warrants are exercisable for a period of four years from the date of issuance but are not exercisable during the first six months after closing of the 2017 Private Offering.

In connection with the execution of the Credit Agreement in 2015, the Company issued SWK a warrant (the "SWK Warrant #1") to purchase 543,479 shares of the Company’s common stock. As part of the conditions in the Third Amendment to Credit Agreement and Limited Waiver and Forbearance (the “Third SWK Amendment”) dated August 15, 2016, the Company modified the exercise price of the SWK Warrant #1 to $1.30 per share, recording the change in fair value of the SWK Warrant #1 of $0.3 million in accumulated paid-in capital in the condensed consolidated balance sheet. The warrant was considered equity classified, and as such, the Company allocated the proceeds from the Term Loan to the warrant using the relative fair value method. Further, pursuant to the Credit Agreement, if the 2013 Loan and Security Agreement was not repaid in full and terminated, and all liens securing the 2013 Loan and Security Agreement were not released, on or prior to April 30, 2016, as amended in the First Amendment to the Credit Agreement dated February 25, 2016, the Company agreed to issue an additional warrant (“SWK Warrant #2”) to SWK to purchase common stock valued at $1.25 million, with an exercise price of the closing price on April 30, 2016. In accordance with the relevant accounting guidance, SWK Warrant #2 was determined to be an embedded derivative. The fair value of both of the SWK warrants at the inception of the Credit Agreement of approximately $3.6 million was recorded as a debt discount, and has been amortized through interest expense over the term of the Credit Agreement using the effective interest method. In accordance with the relevant accounting guidance for a TDR, the debt discount is now being amortized through expense over the revised term of the A&R Credit Agreement. The Company valued both warrants using the Black-Scholes pricing model, which utilizes Level 3 Inputs. For SWK Warrant #1, the Company utilized volatility of 85.0%, a risk-free rate of 1.4%, dividend rate of zero, and term of 7 years, which is consistent with the exercise period of the Warrant. For the SWK Warrant #2, the Company utilized volatility of 80.0%, a risk-free rate of 2.1%, dividend rate of zero, and a term of 7 years, which is consistent with the exercise period of the warrant. The requirement of the Company to issue the SWK Warrant #2 was eliminated when the Company entered into the 2016 Credit and Security Agreement with CNH, which is discussed further above.

In connection with the execution of the A&R Credit Agreement, the Company issued to SWK a Second Amended and Restated Closing Date Warrant (the “A&R Warrant”) to replace SWK Warrant #1 to purchase 543,479 shares of the Company’s common stock. The A&R 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 A&R Warrant will be exercisable for seven years, and upon exercise, the total number of shares of the Company’s common stock to be issued to SWK will be approximately 1.3 million at a strike price of $0.84 per share. The A&R Warrant is being issued by the Company in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 thereunder. As noted above, as the modification of the Term Loan was treated as a TDR, the A&R Warrant issued as part of the TDR was treated similarly to the cash transaction costs discussed above and thus the change in the fair value of SWK Warrant #1 and the A&R Warrant was recorded as a transaction cost at the time of the Merger. The Company valued the A&R Warrant using the Black-Scholes pricing model, which utilizes Level 3 Inputs. The Company utilized volatility of 80.6%, a risk-free rate of 2.22%, dividend rate of zero, and a term of 7 years, which is consistent with the exercise period of the A&R Warrant.

On August 8, 2017, the Company entered into the First Amendment that provides for an additional $2.0 million term loan (the “August 2017 Term Loan”). The Company was originally required to repay the August 2017 Term Loan by February 1, 2018 but that date has been extended to June 1, 2018. In consideration for the First Amendment, the Company issued a new warrant (the “August Warrant” (together with SWK Warrant #1, SWK Warrant #2, and the A&R Warrant, the "SWK Warrants") for SWK to purchase up to 450,000 shares of the Company’s common stock for a strike price of $0.80 per share, paid a fee of $0.03 million, and will pay an exit fee of $0.14 million if the August 2017 Term Loan is repaid by November 30, 2017, or $0.28 million if it is repaid later. The warrant was considered equity classified, and as such, the Company allocated the proceeds from the August 2017 Term Loan to the warrant using the relative fair value method. The fair value of the August Warrant at the inception of the First Amendment of approximately $0.2 million was recorded as a debt discount, and will be amortized through interest expense over the term of the A&R Credit Agreement using the effective interest method. The Company valued the August Warrant using the Black-Scholes pricing model, which utilizes Level 3 Inputs. The Company utilized volatility of 79.3%, a risk-free rate of 2.1%, a dividend rate of zero, and a term of 7 years, which is consistent with the exercise period of the August Warrant. The warrant was being issued by the Company in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 thereunder.

The A&R Credit Agreement revised the previous covenants, and contains customary representations and warranties and various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. Additional covenants have been subsequently adopted as disclosed in Note 13. Noncompliance with these covenants constitutes an event of default. The covenants are summarized in the tables below and are on a pro forma basis as if the Merger with PHS happened as of April 1, 2017:



(in thousands)	Minimum Aggregate Revenue (LTM) as of the end of:
Months Ending	Twelve	Twelve	Twelve	Twelve	Twelve
Period Ended	March 31, 2018	June 30, 2018	September 30, 2018	December 31, 2018	each fiscal quarter thereafter
	$69,000	$70,000	$71,000	$74,000	$75,000

	Minimum Adjusted EBITDA as of the end of:
Months Ending	Twelve	Twelve	Twelve	Twelve	Twelve
Period Ended	March 31, 2018	June 30, 2018	September 30, 2018	December 31, 2018	each fiscal quarter thereafter
	$5,000	$5,200	$6,000	$8,000	$9,000

	Minimum Consolidated Unencumbered Liquid Assets as of:
	The end of each fiscal quarter
	$1,000

The Company was not in compliance with the covenants under the A&R Credit Agreement as of March 31, 2018, and on March 15, 2018, the Company did not make its $0.25 million payment; therefore, is in default. This enables the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, but subsequent to March 31, 2018 the lenders have agreed to forbear from enforcing these rights until June 1, 2018. Due to the covenant violations, the debt has been classified as short term on the condensed consolidated balance sheet as of March 31, 2018.

Borrowings under the A&R Credit Agreement are secured by a security interest in all existing and after our acquired property, including PHS, including, but not limited to, its receivables (which are subject to a lockbox account arrangement), inventory and equipment.

The A&R Credit Agreement contains a cross-default provision that can be triggered if the Company has more than $0.25 million in debt outstanding under the 2016 Credit and Security Agreement and the Company fails to make payments to CNH when due or if CNH is entitled to accelerate the maturity of debt in response to a default situation under the 2016 Credit and Security Agreement, which may include violation of any financial covenants.

Subordinated Promissory Note

Century invested $2.5 million in PHS prior to the Merger in the form of subordinated, convertible debt bearing interest at 8.25%. Immediately prior to closing of the Merger, approximately $0.4 million of the balance of the note converted to equity in PHS. Subject to a net debt calculation in the Merger Agreement, which included a post-closing true-up, the remaining approximately $1.9 million remained outstanding as subordinated debt (not convertible anymore) of PHS to Century pursuant to the Subordinated Promissory Note dated May 11, 2017 (the “Subordinated Promissory Note”). As noted in Note 3 to the condensed consolidated financial statements, the Subordinated Promissory Note was part of the PHS purchase price allocation and is recorded in short-term liabilities on the condensed consolidated balance sheet as of March 31, 2018.

The unpaid principal balance of the Subordinated Promissory Note is due on May 11, 2022, or if earlier, the date on which the Term Loan to SWK and the 2016 Credit and Security Agreement with CNH is discharged, repaid, refinanced or otherwise satisfied (the "Maturity Date"). The Subordinated Promissory Note bears interest at annual rate of 8.25%. Interest shall accrue daily and be paid in full on the Maturity Date; provided that a minimum amount of interest equal to the “Tax Distribution” shall be paid on or before March 31 of each year. “Tax Distribution” means 40% of the accrued interest for the most recently completed calendar year. The Subordinated Promissory Note is subordinated to the Term Loan with SWK and the 2016 Credit and Security Agreement with CNH, pursuant to the terms outlined in the Subordinated Promissory Note. This debt is subject to acceleration in the event of default. This acceleration can be the result of the Company’s default with the CNH and SWK debt agreements if CNH or SWK were to accelerate the Company's obligations. Given the going concern described in Note 2 and the covenant violations on the CNH and SWK debt agreements described above, this debt has been classified as short term on the condensed consolidated balance sheet as of March 31, 2018.

Capital Leases

As a result of the Merger with PHS, the Company acquired two leases accounted for as capital leases, which related to a phone system, which expired in October 2017, and a data center, which expires in June 2018. The underlying assets and accumulated depreciation are recorded in property, plant and equipment, with the corresponding liability of $0.1 million recorded in short-term debt in the condensed consolidated balance sheet as of March 31, 2018.