Merger

On May 11, 2017, the Company closed the Merger by and among Hooper Holmes, Piper Merger Corp., PHS, and Wellness Holdings, LLC. Hooper Holmes was determined to be the acquiring entity, both from a legal and accounting perspective. PHS was the only other surviving entity in the Merger, and as a result it became a wholly-owned subsidiary of Hooper Holmes. As Merger consideration, the Company issued 10,448,849 shares to the PHS equity holders (the “Former PHS Owners”). The Former PHS Owners now hold approximately 47% of approximately 26.8 million outstanding shares of our common stock as of December 31, 2017. During the year ended December 31, 2017, the Company incurred $2.5 million of transaction costs in connection with the Merger in the consolidated statement of operations.

The Company expects the Merger to increase its scale, 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, PHS 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 increased the principal balance under the existing Term Loan from $3.7 million to $6.5 million and provided the $2.0 million Seasonal Facility. The Company also entered into the Third Amendment with CNH 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 9 to the consolidated financial statements for further discussion of the debt and warrants issued in connection with the Merger.

The Company allocated the purchase price to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The allocation of the purchase price was based on management's estimates and assumptions at the time of acquisition. As of December 31, 2017, the Company has made adjustments to certain accrued expenses, subordinated debt discount, and tax balances during the measurement period, resulting in a $1.6 million increase in goodwill.

The allocation of purchase price is as follows:



(in thousands)	December 31, 2017
Cash	$	1,936
Accounts receivable	3,128
Inventory and other assets	1,209
Fixed assets	1,041
Technology	4,200
Customer relationships	3,400
Trade name/trademark	200
Non-compete agreements	10
Goodwill	8,126
Accounts payable	(2,945		)
Accrued expenses and other liabilities (including deferred income tax liability)	(6,789		)
Line of credit	(4,684		)
Capital leases	(334		)
Deferred revenue	(200		)
Subordinated promissory note	(1,917		)
Subordinated promissory note, discount	411
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
Portal (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 $0.9 million during the year ended December 31, 2017, related to the intangible assets acquired in the Merger, of which $0.5 million is recorded as a component of cost of operations and $0.4 million is recorded as a component of selling, general and administrative expenses. The goodwill of $8.1 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 year ended December 31, 2017, includes revenue of $25.0 million attributable to PHS since the Merger date of May 11, 2017. Disclosure of the earnings contribution from the PHS 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 twelve months ended December 31, 2017 and 2016, as if the Merger had been completed on the first day of our 2016 fiscal year.



(in thousands)	2017			2016
Pro forma revenues	$	63,849		$	70,990
Pro forma loss from continuing operations	$	(18,103	)	$	(24,129	)

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 we 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 year ended December 31, 2016, PHS had pass-through gift card revenues of $3.8 million that was a non-recurring transaction. The pro forma results for the twelve months ended December 31, 2017 and 2016, include immaterial pre-tax adjustments for net amortization of intangible assets and the elimination of transaction costs of $3.3 million.