Liquidity

The Company incurred a loss from continuing operations of $7.6 million during the nine month period ended September 30, 2016, and the Company’s net cash used in operating activities for the nine month period ended September 30, 2016, was $7.1 million. The Company has managed its liquidity through availability under a revolving credit facility, raising additional equity, and a series of cost reduction initiatives. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. The uncertainty regarding the Company's ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about its ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company expects to continue to monitor its liquidity carefully, work to reduce this uncertainty, and address its cash needs through a combination of one or more of the following actions:


•	On January 25, 2016, the Company received $3.4 million, net of issuance costs, in additional equity by issuing 2,601,789 shares of its common stock, $0.04 par value, through a rights offering to current shareholders which was used to fund working capital;


•	On March 28, 2016, the Company received $1.2 million, net of issuance costs, in additional equity by issuing 666,667 shares of its common stock, $0.04 par value, to 200 NNH, LLC, which was used to fund working capital;


•	On April 29, 2016, the Company entered into a new Credit and Security Agreement with SCM Specialty Finance Opportunities Fund, L.P. (as defined below) replacing the 2013 Loan and Security Agreement (as defined below). Refer to Note 9 to the condensed consolidated financial statements for additional discussion.

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Beginning on September 15, 2016, the Company received $1.6 million, net of issuance costs, in additional equity by issuing 1,333,333 shares of its common stock, $0.04 par value, and warrants (the "Private Offering Warrants") to purchase up to an additional 1,333,333 shares of its common stock at an exercise price of $2.00 per share to various investors in a private offering (the "Private Offering"). Also, on October 14, 2016, the Company issued an additional 55,556 shares of its common stock, $0.04 par value, and Private Offering Warrants to purchase up to an additional 55,556 shares of its common stock at an exercise price of $2.00 per share with a value of $0.1 million in the Private Offering. The proceeds from the Private Offering were used to fund working capital. The Private Offering Warrants are exercisable, exclusively on a cashless basis, beginning six months after the date of issuance and ending on the fourth anniversary of the date of issuance. The warrants provide that the Company can call the warrants if the closing price of its Common Stock equals or exceeds $3.00 per share for ten consecutive trading days with a minimum trading volume of 100,000 shares per day, subject to certain additional conditions set forth in the warrants. The exercise price of the warrants is subject to customary adjustment provisions for stock splits, stock dividends, recapitalizations and the like. The warrants grant the holder certain piggyback registration rights. The warrants were classified as equity, and as such, the Company allocated the proceeds from the stock issuances, net of issuance costs, to the warrants using the relative fair value method.


•	The Company will continue to aggressively seek new and return business from its existing customers and expand its presence in the health and wellness marketplace;


•	The Company will continue to analyze and implement further cost reduction initiatives and efficiency improvements (see Note 10 to the condensed consolidated financial statements).

The Company's primary sources of liquidity are cash and cash equivalents as well as availability under a Credit and Security Agreement (the "2016 Credit and Security Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM"). At September 30, 2016, the Company had $0.8 million in cash and cash equivalents and had $4.8 million of outstanding borrowings under the 2016 Credit and Security Agreement, with unused borrowing capacity of $1.1 million. As of November 10, 2016, the Company had $5.3 million of outstanding borrowings with unused borrowing capacity of $1.7 million. Any borrowings on the unused borrowing capacity are at the discretion of SCM. As of September 30, 2016, the Company also owed approximately $4.0 million under an existing term loan (the "Term Loan"), which is governed by the terms of a credit agreement (the "Credit Agreement") with SWK Funding LLC ("SWK") and was used to fund the cash component of the Acquisition. Each of these agreements contain certain financial covenants, including various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements, which the Company did not comply with as of September 30, 2016. Noncompliance with these covenants constitutes an event of default. Accordingly, SCM reserves the right to terminate access to the unused borrowing capacity under the 2016 Credit and Security Agreement, while both lenders reserve the right to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral. The Company and the lenders are discussing the terms of waivers of the covenant violations, but there can be no assurance that the lenders will grant such waivers. If the Company is unable to obtain waivers, the lenders could elect to accelerate the repayment of all amounts outstanding under the 2016 Credit and Security Agreement and the Credit Agreement and they could exercise their remedies with respect to the Company’s collateral, which would have a material adverse impact on the Company’s business operations and financial condition. Similar results could arise if the Company is unable to comply with financial covenants in the future and is unable to modify the covenants, obtain applicable waivers, or find new or additional lenders. For additional information regarding the 2016 Credit and Security Agreement, Credit Agreement, and the related covenants, see Note 9 to the condensed consolidated financial statements.

The Company has historically used availability under a revolving credit facility to fund operations. The Company experiences a lag between the payment of certain operating expenses and the subsequent billing and collection of the associated revenue based on health and wellness customer payment terms. To illustrate, in order to conduct successful screenings, the Company must expend cash to deliver the equipment and supplies required for the screenings. The Company must also expend cash to pay the health professionals and site management conducting the screenings. All of these expenditures are incurred in advance of the customer invoicing process and ultimate cash receipts for services performed. Given the seasonal nature of the Company's operations, which are largely dependent on second half volumes, management expects to continue using a revolving credit facility in 2016 and beyond.

The Company has contractual obligations related to operating leases and employment contracts which could adversely affect liquidity. The Company is currently in default on three real estate leases for space that the Company no longer needs. Two of the leases were assigned to the Company through the Acquisition, and the third, which is partially subleased, relates to the discontinued Hooper Holmes Services business. The Company is working with the landlords to terminate these leases on mutually acceptable terms.

The Company’s ability to satisfy its liquidity needs and meet future covenants is dependent on growing revenues and improving profitability. These profitability improvements primarily include expansion of the Company’s presence in the health and wellness marketplace through new sales to direct customers, retaining existing customers, and capitalizing on the opportunities presented by its channel partners. The Company must increase screening, telephonic health coaching, and wellness portal volumes in order to cover its fixed cost structure and improve gross profits. These improvements may be outside of management’s control. If the Company is unable to increase volumes or control operating costs, liquidity may be adversely affected.

There can be no assurance that cash flows from operations, combined with any potential additional borrowings available to the Company, will be obtainable in an amount sufficient to enable the Company to repay its indebtedness, cure matters of default, or to fund other liquidity needs. If the Company continues to be unable to comply with its financial covenants and in the event that the Company were unable to obtain waivers, modify the covenants, or find new or additional lenders, the lenders would then be able to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, and SCM would be able to restrict access to the Company's availability under the 2016 Credit and Security Agreement, which would have a material adverse impact on the Company's business.