10-K 1 hh1231201610-k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016

Commission file number: 001-09972

HOOPER HOLMES, INC.
(Exact name of Registrant as specified in its charter)

New York
22-1659359
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
560 N. Rogers Road
 
Olathe, KS
66062
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (913) 764-1045

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock ($.04 par value per share)
NYSE MKT

Securities registered pursuant to Section 12(g) of the Act: None

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

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 o No x

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 and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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 x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.   x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   (Check one):
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No x
The aggregate market value of the shares of common stock held by non-affiliates of the Registrant (7,800,000), based on the closing price of these shares on June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) on the NYSE MKT, was $9,400,000.

The number of shares outstanding of the Registrant’s common stock as of March 8, 2017, was 11,816,025.




Documents Incorporated by Reference

Items 10, 11, 12, 13 and 14 of Part III incorporate by reference information from the Registrant’s proxy statement for the Registrant’s Annual Meeting of Shareholders to be held on June 21, 2017, to be filed with the Securities and Exchange Commission within 120 days of the Registrant's fiscal year ended December 31, 2016.




Table of Contents
 
 
 
PART I
 
 
 
 
 
Mine Safety Disclosures
 
 
 
PART II
 
 
 
 
 
 
PART III
 
 
 
 
 
 
PART IV
 
 
 
 
 





FORM 10K
PART 1

In this Report, the terms “Hooper Holmes,” “Company,” “we,” “us” and “our” refer to Hooper Holmes, Inc. and its subsidiaries.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this "Report") contains forward-looking statements within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, but not limited to, statements about our plans, strategies and prospects.  When used in this Report, the words “expects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “could,” “will,” “may” and similar expressions are intended to identify forward-looking statements.  These are statements that relate to future periods and include statements as to our operating results, revenues, sources of revenues, cost of revenues, gross margins, and operating and net profits and losses.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, risks related to customer and supplier concerns about our financial health, our liquidity, uncertainty as to our working capital requirements over the next 12 to 24 months, our ability to maintain compliance with the financial covenants contained in our credit facility and term loan, declines in our business, our competition, our ability to retain and grow our customer base and its related impact on revenue, our ability to recognize operational efficiencies and reduce costs, our ability to realize the expected benefits from the acquisition of Accountable Health Solutions, as well as risks discussed in Item 1A Risk Factors, below.

Investors should consider these factors before deciding to make or maintain an investment in our securities. The forward-looking statements included in this Report are based on information available to us as of the date of this Report. We expressly disclaim any intent or obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances, or to reflect the occurrence of unanticipated events, after the date of this Report, except as required by law. 

ITEM 1
Business

Overview

Our Company was founded in 1899. We are a publicly-traded New York corporation whose shares of common stock are listed on the NYSE MKT (HH).  Our corporate headquarters are located in Olathe, Kansas. Over the last 40+ years, our business focus has been on providing health risk assessment services. With the acquisition of Accountable Health Solutions, Inc. ("AHS") ("the Acquisition") in 2015, we have expanded to also provide corporate wellness and health improvement services. This uniquely positions us to transform and capitalize on the large and growing health and wellness market as one of the only publicly-traded, end-to-end health and wellness companies.

We provide on-site screenings and flu shots, laboratory testing, risk assessment, and sample collection services to individuals as part of comprehensive health and wellness programs offered through organizations sponsoring such programs including corporate and government employers, health plans, hospital systems, health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations and academic institutions. Through our comprehensive health and wellness services, we also provide telephonic health coaching, access to a wellness portal with individual and team challenges, data analytics, and reporting services. We contract with health professionals to deliver these services nationwide, all of whom are trained and certified to deliver quality service. We leverage our national network of health professionals to support the delivery of other similar products and services.
The majority of large employers that offer health benefits today also offer at least some wellness programs in an effort to promote employee health and productivity as well as to reduce health related costs.  Through screenings, plan sponsors help employees learn of existing and/or potential health risks. Through corporate wellness, they provide education and health improvement tools and personalized challenges. Program sponsors also gain the ability to systematically reward employees for good, healthy behaviors and for actual health enhancement metrics. Some common examples of these rewards include reductions in annual medical premiums, contributions to an employee’s Health Savings Account (HSA), and credits that are redeemable

1


through an online merchandise mall. By combining both the screening and corporate wellness services under a single organization, we create a seamless, end-to-end experience for members and drives improved engagement and outcomes for our clients.
Today, we service approximately 200 direct clients representing nearly 3,000 employers and up to 1,000,000 participants. In 2016, we delivered nearly 500,000 screenings and are on track to continue year-over-year revenue growth through a combination of our direct, channel partner, and clinical research organization partners as well as through the addition of new customers.

We operate under one reporting segment. Our screening services are subject to some seasonality, with the third and fourth quarters typically being our strongest quarters due to increased demand for screenings from mid-August through November related to annual benefit renewal cycles. Our health and wellness service operations are more constant, though there are some variations due to the timing of the health coaching programs which are billed per participant and typically start shortly after the conclusion of onsite screening events. In addition to our screening and health and wellness services, we generate ancillary revenue through the assembly of medical kits for sale to third parties.

We believe that the overall market for our screening and health and wellness services is growing and we expect it will continue to grow with the increased nationwide focus on healthcare, cost-containment and well-being/productivity initiatives.

Rights Offering

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

Additional Equity Contributions

On March 28, 2016, we received $1.2 million in cash, net of issuance costs, in additional equity by issuing 666,667 shares of our common stock, $0.04 par value, to 200 NNH, LLC, (the "Investor") a new private investor, which was used to fund working capital. Pursuant to the Stock Purchase Agreement, there is a lock-up period of 18 months, during which time the Investor cannot sell the shares acquired.

Beginning on September 15, 2016, we received $1.7 million in cash, net of issuance costs, in additional equity by issuing 1,388,889 shares of its common stock, $0.04 par value, and warrants (the "Private Offering Warrants") to purchase up to an additional 1,388,889 shares of its common stock at an exercise price of $2.00 per share to various investors in a private offering (the "Private Offering"). The proceeds from the Private Offering were used to fund working capital.

Reverse Stock Split

On June 15, 2016, we completed a one-for-fifteen reverse stock split, in order to regain compliance with the NYSE MKT's minimum market price requirement. As a result, the share and per share information for all periods presented in this Annual Report on Form 10-K have been adjusted to reflect the impact of the reverse stock split. The reverse stock split did not affect the total number of authorized shares of common stock of 240,000,000 shares or the par value of our common stock at $0.04. Accordingly, an adjustment was made between additional paid-in-capital and common stock in the consolidated balance sheet to reflect the new values after the reverse stock split.

Merger Agreement

On March 7, 2017, we signed a merger agreement with Piper Merger Corp., Provant Health Solutions, LLC, and Wellness Holdings, LLC. See Note 15 to the consolidated financial statements for further discussion.

Liquidity

The accompanying consolidated financial statements have been prepared assuming that we 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 our ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about our ability to continue as a going concern within one year after issuance date of the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 2 to the consolidated financial statements and within the Liquidity and Capital Resources section in Item 7 for further discussion.




2


Description of Services

Our screening services are performed primarily at employee work locations, typically referred to as onsite screenings, for groups of all sizes, or for individual employees at remote work locations or residences. We provide many options for screening individuals at remote work locations or residences through our national network of health professionals as well as through our agreements with local retail clinics and lab testing centers. The information collected from our services is used by our customers to measure the populations they manage, identify risks in those populations, target intervention programs, promote positive lifestyle behaviors, and measure the results of their health and care management programs.

Our screening services include:

scheduling of individual and group screenings and organizing health and wellness events;
end-to-end screening event management;
provision and fulfillment of needed supplies (e.g., examination kits, blood pressure cuffs, stadiometers, scales, centrifuges) at screening events;
ScreeningProTM tablet technology that streamlines the screening experience for participants eliminating the need to fill out paper forms;
performing screenings (e.g., height, weight, body mass index, the taking of a person’s hip, waist and neck measurements, as well as his or her pulse and blood pressure) and blood draws via venipuncture or fingerstick;
administration of flu shots, cotinine and other specialized testing;
coordination of lab testing of blood specimens and other fluids;
onsite participant wellness coaching;
onsite health consultation services via Wellness Support NowSM program with ability to promote other wellness program initiatives during those meaningful face-to-face teachable moments;
data processing and transmission;
analytics to identify critical values of lab tests and notification services to individuals and customers to better manage risk;
the delivery of other onsite or in-home services, including health professional administration of EEG tests; and
support of data collection for academic and clinical research organizations.

Our comprehensive health and wellness services include:
screening services noted above;
access to a wellness portal;
wellness assessments;
incentive management services;
year-round education, activities, and individual and team challenges;
telephonic health coaching for lifestyle and health risk improvement;
data analytics and reporting services;
communication and engagement services; and
wellness program advisory services.

We provide patient results on an expedited basis through our web portal that enables participants to access test results within 48 hours of the screening.

In addition to our screening and health and wellness services, we generate ancillary revenue through the assembly of medical kits for sale to third parties.

3



Market Conditions and Strategic Initiatives

Our operating results for the past two years are discussed more fully in the Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.

The health and care management industry continues to grow. For every dollar invested in health and wellness programs, employers are seeing a positive return due to the reduced health risks and the associated costs for their employees, improved employee productivity and morale, as well as being an attractive employee benefit to potential new employees.

The PwC 2016 Health and Well-being Touchstone survey indicates that wellness is the #1 area of investment and #1 strategy for employers with 76% of employers offering wellness programs, many of which have expanded into well-being programs. The most common wellness initiatives are health risk questionnaires (80%), followed by biometric screening (77%), physical activity programs/fitness discounts (73%), and tobacco cessation programs (73%). Physical activity/fitness programs and tobacco cessation are approaching similar levels of prevalence as health risk assessments and biometric screenings.

The latest 2015 survey on wellness programs from Fidelity Investments and the National Business Group on Health (NBGH) reveals that employers are continuing to expand their corporate health improvement and wellness programs to improve employee health and create a more positive workplace culture. Almost 80 percent of employers are offering wellness and health improvement programs, spending on average a record $693 per worker. According to the survey, the three most popular incentive-based health improvement programs for 2015 are biometric screenings (72% of employers plan to offer this program), health risk assessments (70%), and physical activity programs (54%). Companies are also rewarding employees for participation. In 2015, 81% of employees received at least some amount of incentives, which is up from 73% in 2014.

There is also a growing trend to expand wellness programs beyond physical activity to focus on other well-being factors that impact productivity such as emotional stress and financial challenges. According to the survey noted previously from NBGH, more employers are investing in “total wellbeing” programs that address areas such as financial and emotional health. The survey revealed employers are adding programs that help employees manage stress, improve their resiliency, and assist with their financial challenges, recognizing a ‘healthy’ employee may be affected by non-health factors, focusing beyond solely physical health. In 2016, we launched an enhanced wellness and health improvement platform that delivers more meaningful, holistic wellbeing solutions. The new Year Round Wellbeing Program delivers twelve months of impactful health-related educational content, personal activities and challenges, and more, focused on the core areas of wellbeing: nutrition, physical activity, reducing stress, and managing personal finances. 

There are barriers to achieving employers' goals regarding such wellness programs including motivating participants to participate in screenings and to change their lifestyle based on these results, the unpredictability of health care costs, and the efficacy of health and wellness programs to manage these costs as well as government regulations managing the health of an aging workforce. Through our risk assessment and risk management services, we help companies identify and stratify risk of individuals for enrollment in care management programs. Through our health and wellness services, we tailor and personalize education and interventions, promote positive lifestyle behavior changes, and measure and reward risk reduction.

Sales and Marketing

We build our customer base through the typical sales management processes, with referrals being the largest source of new business closely followed by traditional requests for proposals. After we qualify new potential customers, we market our wellness solutions to “power and focus” their wellness programs while supporting their goal of integrating health and well-being into their organizational culture. This may take many forms, from a basic biometric screening to identifying potential health challenges for a participant to address on their own or with their family physician, to robust coaching and life changing activities that our screenings drive participants into.  Our onsite coaching and engagement services, post screening, answer many basic health questions and help thousands of participants “engage” in the appropriate programs offered by their employers to improve their health. Our telephonic coaching services allow participants to build their own personalized goals with achievable action steps and a plan to track progress toward those goals, with education and motivation along the way. Our wellness portal and communication/engagement services allow employers to promote their own wellness program and goals along with year-round health and wellness education, seminars, and challenges to support those goals and help build a greater focus on health and wellness company wide.





4


We believe our fully integrated, end-to-end health and wellness solution gives us several competitive advantages in the market. Additionally, in 2016, we have

increased participant access with the addition of CVS MinuteClinic® for biometric screenings;
began marketing additional value-add services as part of our onsite screenings including flu shots, cotinine and other specialized testing including A1C and other many more flexible options;
expanded our Wellness Support Now onsite health consulting services, extending the program to our Channel Partner clients allowing them to increase enrollment into their health coaching programs, cut operational participant outreach costs, and improve the member experience;
increased the value of our wellness services with the expansion of our wellness and health improvement platform (the Year Round Wellbeing Program), delivering twelve months of impactful health-related educational content, personal activities and challenges and more, focused on the core areas of wellbeing: nutrition, physical activity, reducing stress and managing money; 
leveraged our national network of health professionals to support the delivery of other onsite or in-home services, including our new agreement with a predictive analytics company where our health professionals will deliver onsite or in-home Electroencephalogram (EEG) tests, which data will be sent to the company’s decision support tool to enable physicians to provide more personalized care to patients based on their brain waves;
secured a multi-year contract extension with one of our largest clinical research partners; and
expanded use of our proprietary ScreeningProTM tablet technology that streamlines the screening experience for participants and eliminates paperwork.
Given our additional capabilities and our diversified sales approaches - direct business, channel partners, and clinical research organizations (CROs) - we continue to identify additional areas to leverage our assets to further expand into targeted adjacent markets with substantial opportunity and a favorable competitive landscape.

Our strategic alliance with CRL gives us additional access to an expanded panel of laboratory testing and product offerings. We also enhanced participant reporting to give our customers more data. Our sales force and support staff were also realigned to provide more meaningful resources for new large employers, brokerages and wellness organizations, and clinical research customers.

We believe that we are well-positioned for continued growth in the health and care management market given our unique set of assets, our proprietary IT system, our expertise and offerings in the health and wellness market, and our national network of quality health professionals.  However, the success of our screening and health and wellness operations will also depend in part upon the success of our sponsors and their health and care management initiatives to encourage employers to adopt wellness programs based on screening results.

Information Technology

Information technology ("IT") systems are the foundation that enables all aspects of our business. We continue to enhance our IT systems as the need for services, products, and technology requirements advance. We firmly believe that technology can be a competitive differentiator for us. Our screening teams utilize a proprietary customer order, tracking, and scheduling system that is central to our operations. We continue to leverage ScreeningProTM, in conjunction with mobile device technology, as the preferred method of accurately collecting data at the point of care to accelerate data transmission and drive meaningful behavior change. Data integrity is driven by the Laboratory Information Management system that meticulously inspects and secures screening results for expedient delivery to customers. In addition, our health and wellness teams leverage a proprietary portal platform that can be easily customized to service the diverse needs of our client base. We are investing in improving our IT operating systems and expertise to enable innovation that meets or exceeds the needs of our customers.

During 2016, we continued the use of a state-of-the-art underground autonomous data center that employs three-factor biometric entrance security, 24x7 camera monitoring, and a highly resilient power grid solution that includes a centralized uninterrupted power supply with redundant generator backing. We also continued to utilize our highly available and secure private cloud operating

5


environment leveraging converged infrastructure that has maintained a core uptime of 100% for three years running. In addition, next generation security technologies provide robust security measures that extend into all layers of our IT systems and products. As we look ahead to 2017, efforts will continue around innovation to drive efficiencies and advance our technological capabilities in the health and wellness market.

Major Customers

Net sales to our two largest customers in 2016 and 2015, American Healthways Services, Inc. ("Healthways") and IncentiSoft Solutions, LLC ("Incentisoft"), were just over 30% of consolidated revenue. No other customers accounted for more than 10% of consolidated revenue in any of these fiscal years. We have agreements with each of our customers, although these agreements do not provide for specific minimum levels of purchase.

Competition

Our competition is largely fragmented. For screenings, it consists primarily of private companies who provide screenings in certain geographies in the United States. There are a small number of competitors who we believe have the ability to service customers nationally. For health and wellness, there are a number of companies in this space including established wellness and care management providers, startup companies, health plans that offer their own proprietary solutions and more. Many of these companies outsource key elements of their programs, leaving our company as one of the only health and wellness providers that offers a fully integrated, end-to-end screening and wellness solution.

In addition to direct screening and health and wellness sales (i.e., direct contracts with corporate and government employers, health plans, hospital systems, etc.), we provide screening services for many health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, and third party administrators (our “channel partner” customers). Several of the health and care management companies and wellness companies, in turn, serve their own suite of large employer groups, allowing us to tap into new business through these indirect sub-contractor relationships. We also provide specialized screening and data collection services for clinical research organizations and academic institutions across the country.
Leaders within the wellness market win on technology, engagement, and outcomes. We believe the combination of the Hooper Holmes infrastructure, screening capabilities, and national network of experienced health professionals with AHS’s scalable technology and engagement platform, health coaches, and analytics tools positions us to become a leader in a growing health and wellness market.

Governmental Regulation

We are subject to federal and state regulations relating to the collection, testing, transportation, handling, and disposal of the various specimens obtained in the course of a wellness screening. The health professionals we utilize are subject to certain licensing and certification requirements and regulations with respect to the drawing of blood and needle disposal. In addition, many of the services we provide are subject to certain provisions of the Health Information Portability and Accountability Act of 1996, as amended (“HIPAA”), and other federal and state laws relating to the privacy of health and other personal information.

Employees

As of December 31, 2016, we employed approximately 200 full time employees in our Company to perform activities other than direct health screenings. We also utilize part-time employees and independent third parties to fulfill our operations.

General Information
 
Hooper Holmes, Inc. is a New York corporation.  As of December 31, 2016, our principal executive offices were located at 560 North Rogers Road, Olathe, Kansas 66062. Our telephone number in Olathe, Kansas is (913) 764-1045.  Our website address is www.hooperholmes.com.  We have included our website address as an inactive textual reference only.  The information on our website is not incorporated by reference into this Report.

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC").  You may read and copy any document that we file with the SEC at the SEC's Public Reference Room located at 100 F Street, NE, Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330.  The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding companies that file electronically with the SEC.  The SEC’s website is

6


www.sec.gov.  We also make available free of charge, through our website, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statements, the Form 3, 4 and 5 filings of our directors and executive officers, and all amendments to these reports and filings, as soon as reasonably practicable after such material is electronically filed with the SEC.

ITEM 1A
Risk Factors

You should carefully consider all the information included in this Report, particularly the following risk factors, before deciding to invest in our shares of common stock.  Additional risks not presently known to or understood by us may also negatively affect our business, financial condition, results of operations or cash flows.

Our recurring losses from operations, negative operating cash flows and need to obtain cash flow from operations or adequate funding to fund our comprehensive recovery plan raise substantial doubt as to our ability to continue as a going concern within one year after issuance date of the consolidated financial statements.

In their report dated March 9, 2017, which is also included in this Form 10-K, our independent registered public accounting firm stated that our consolidated financial statements were prepared assuming we would continue as a going concern; however, our recurring losses from operations, negative cash flows from operations, and liquidity raise substantial doubt about our ability to continue as a going concern within one year after issuance date of the financial statements. Our accompanying consolidated financial statements have been prepared assuming that we 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). These financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 2 to the consolidated financial statements and within the Liquidity and Capital Resources section in Item 7 for further discussion.

Reduction in cash flow from operations in 2017 may limit our ability to make the desired level of investment in our businesses and may result in a continuation of our liquidity issues.
 
We are taking steps to address and correct the primary causes of recurring losses from operations, negative cash flows from operations, and liquidity concerns primarily through the acquisition of AHS and raising additional equity. We used approximately $4.4 million of cash in operations in 2016.  If revenue growth does not continue as expected, our cost reduction measures are not successful, or we are unable to maintain our current receivable collection results, we may be unable to make needed investments in our operations or to comply with our debt covenants and have sufficient eligible receivables to maintain borrowing capacity under our Credit and Security Agreement, as amended on August 15, 2016, and November 15, 2016, (the "2016 Credit and Security Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM"). In addition, see Note 15 to the consolidated financial statements for further discussion of the Merger Agreement signed on March 7, 2017.
 
Our liquidity may be adversely affected by the terms of our 2016 Credit and Security Agreement and the Credit Agreement.

 If we need to borrow in the future under our 2016 Credit and Security Agreement, the amount available for borrowing may be less than the $7 million under this facility at any given time due to the manner in which the maximum available amount is calculated.  We have an available borrowing base subject to reserves established at the lender's discretion of 85% of Eligible Receivables up to $7 million under this facility.  At December 31, 2016, the Company had $3.6 million of outstanding borrowings under the 2016 Credit and Security Agreement, with unused borrowing capacity of $0.1 million. As of February 28, 2017, the Company had $3.1 million of outstanding borrowings with unused borrowing capacity of $0.2 million.

The 2016 Credit and Security Agreement, as amended, contains customary representations and warranties and various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA (earnings before interest expense, income taxes, depreciation, and amortization), and consolidated unencumbered liquid assets requirements. Noncompliance with these covenants constitutes an event of default. As of December 31, 2016, we met the required minimum covenants. Refer to Note 2 and Note 9 to the consolidated financial statements for further discussion. There can be no assurance that cash flows from operations, combined with any additional borrowings available to us, will be obtainable in an amount sufficient to enable us to repay our indebtedness, or to fund other liquidity needs.  See Note 15 to the consolidated financial statements for further discussion of the Merger Agreement signed on March 7, 2017.

We incurred additional indebtedness in connection with our acquisition of AHS, and such increased indebtedness could adversely affect our business, cash flows and results of operations and did result in additional dilution to our stockholders.

7


In order to fund the Acquisition, we entered into and consummated a Credit Agreement (the "Credit Agreement") with SWK Funding LLC ("SWK") on April 17, 2015. The Credit Agreement provides us with a $5.0 million term loan (the "Term Loan"). As a result, we have indebtedness that is substantially greater than our indebtedness prior to the Acquisition of AHS. This higher level of indebtedness may:
require us to dedicate a greater percentage of our cash flow from operations to payments on our debt, thereby reducing the availability of cash flow to fund capital expenditures, pursue other investments, and use for general corporate purposes;
increase our vulnerability to adverse economic and industry conditions, including increases in interest rates on our borrowings that bear interest at variable rates or when such indebtedness is being refinanced;
limit our ability to obtain additional financing; and
limit our flexibility in planning for, or reacting to, changes in or challenges related to our business and industry, creating competitive disadvantages compared to other competitors with lower debt levels and borrowing costs.

We cannot assure you that cash flows from operations, combined with any additional borrowings available to us, will be obtainable in an amount sufficient to enable us to repay our indebtedness, or to fund our other liquidity needs. The Credit Agreement, as amended, 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. As of December 31, 2016, we met the required minimum covenants. Refer to Note 2 and Note 9 to the consolidated financial statements for further discussion. There can be no assurance that cash flows from operations, combined with any additional borrowings available to us, will be obtainable in an amount sufficient to enable us to repay our indebtedness, or to fund other liquidity needs.  See Note 15 to the consolidated financial statements for further discussion of the Merger Agreement signed on March 7, 2017.
Failure to complete the Merger may result in us paying a termination fee or reimbursing expenses to Provant and could harm our common stock price, future business and operations.

       If the merger is not completed, we are subject to the following risks:

if the Merger Agreement is terminated under certain circumstances, we would be required to pay Provant a termination fee equal to the greater of $500,000 or the third-party expenses incurred by Provant, up to a maximum of $750,000;
the price of our stock may decline and remain volatile; and
costs related to the merger, such as legal and accounting fees, must be paid even if the merger is not completed.

        In addition, if the Merger Agreement is terminated and the board of directors determines to seek another business combination, there can be no assurance that we would be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided to us in the Merger on a timely basis, or at all. See Note 15 to the consolidated financial statements for further discussion of the Merger Agreement signed on March 7, 2017.

Weakness in the economy in general, or the financial health or performance of the healthcare industry and healthcare sponsors in particular, could have a material adverse effect on our financial condition, results of operations or cash flows.

  We derive our revenues from customers in the healthcare industry, including healthcare sponsors.  If the condition of the U.S. economy weakens in certain areas, such as an increase in unemployment rates, demand for biometric screenings may decline in the future, resulting in less business for our Company.  If some of our healthcare customers fail or curtail operations in the healthcare industry, such failures or curtailments of operations would result in less business for our Company.  Either event would negatively affect our financial condition, results of operations and cash flows. Actions taken by Congress with respect to repeal or replacement of the Affordable Care Act could have a detrimental impact on the healthcare industry and our healthcare customers that could lead to or worsen the effects of the events described in this paragraph.

Our business results would be adversely affected if we were alleged or found to have violated certain regulatory requirements.

Our business is subject to varying degrees of state and federal regulation.  For example, our operations are subject to regulations regarding licensing (supervision of phlebotomists, the conduct of certain specimen draws, and requirements for conducting health screening fairs).  We are subject to federal and state laws, including testing and collection regulations and HIPAA rules, regarding security and privacy of personal health information and other personal information.  Although we devote substantial effort to comply with these regulatory requirements, there is a continuing risk that regulators may find compliance violations, which could subject us to significant liability and/or damage our relationship with our customers.



8



Our business results may be adversely affected if we are unable to attract, retain and deploy health professionals and other medical personnel.

We believe a key to growth in our health and wellness operations is maintaining and managing a large, national network of highly trained medical personnel who can meet our customers' needs in markets nationwide. Although many of our health professionals also work for competitors, our goal is to offer them equal or greater opportunities so that they will be available to provide services to our customers. If we are unable to recruit and retain an appropriate base of health professionals, it may limit our ability to maintain and/or grow our screening operations.
  
Future claims arising from the sale of our business units (discontinued operations) could negatively impact our financial condition, results of operations or cash flows.

If claims for which we may be liable arise related to our previous discontinued operations in the future, this may result in additional cost to us which could negatively impact our financial condition, results of operations or cash flows.
   
We derive a significant percentage of our revenue from a limited number of customers and a loss of some or all of the business of one or more customers could have a material adverse effect on our financial condition, results of operations or cash flows.

Much of our business is derived through our relationships with our channel partners.  Our two largest channel partners, combined, account for just over 30% of our consolidated revenue. While we have agreements with each of our channel partners, the vast majority of the agreements do not provide for any specified minimum level of purchases of services from us. If one or more of our channel partners was to significantly reduce its purchases of biometric screening and other sample collection services from us, it could significantly reduce our revenue and adversely affect our results of operations and cash flows.  If this were to occur, we would face significant challenges in replacing the lost revenues.
 
A number of circumstances could prompt the loss of one or more of our key customers or a substantial portion of its or their business.  For example, if one of our customers were to be acquired by or merged into another company for whom we do not provide services, we could lose the acquired company’s business.  We could lose one or more significant customers if they perceive one or more of our competitors to be superior in price or quality and choose not to renew our contract.

Competition could negatively impact our business.

The health and wellness industry is competitive, which could result in loss of our market share due to pressure to reduce prices or increase services without charging additional fees.  For screenings, we compete primarily with private companies who provide screenings in certain geographic areas in the United States with few having the ability to service customers nationally like we do.  For health and wellness, we compete primarily with established wellness and care management providers, startup companies, and health plans that offer their own proprietary solutions. We are one of the only health and wellness providers that offers a fully integrated, end-to-end screening and wellness solution to our customers which we believe gives us an advantage over our competitors who also serve companies with 500 to 5,000 employees, our primary target market. If one of the national health and wellness companies that currently focuses on larger employers were to develop a service offering in our target market at a lower price point than we offer, we could lose market share or be forced to cut our prices and lose margin in order to retain customers. 

We are dependent on Clinical Reference Laboratory, Inc. as our exclusive laboratory services provider.  If CRL fails to perform adequately under the Limited Laboratory and Administrative Services Agreement or we face difficulties in managing our relationship with CRL, our results of operations could be adversely affected.

Under the terms of the Limited Laboratory and Administrative Services Agreement ("LLASA") between the Company and CRL, which became effective August 31, 2014, CRL is the Company’s exclusive provider, with certain limited exceptions, of laboratory testing and reporting services in support of our screening services.  The LLASA has a term of 5 years and will automatically renew for an additional 5 year period unless sooner terminated.  Our dependence on CRL makes our operations vulnerable to CRL’s failure to perform adequately under our contract with them.  In addition, the services that CRL renders to us are services that we are required to provide under contracts with our clients, and we are responsible for such performance and could be held accountable by the client for any failure to perform.  The LLASA has service level requirements of CRL and we perform ongoing oversight activities to identify any performance or other issues related to our relationship with CRL. If CRL were to fail to provide the services that we require or expect, or fails to meet its contractual requirements, such as service levels or compliance with applicable laws, the failure could negatively impact our business by adversely affecting our ability to serve our customers and/or subject us to regulatory or litigation risk.  Such a failure could adversely affect our results of operations.
 

9


If we cannot successfully implement, maintain and upgrade our information technology platforms so that we can meet customer requirements, the competitiveness of our businesses will suffer.
 
The speed and accuracy with which we make information available to our customers is critical.  As a result, we are dependent on our information technology platforms and our ability to store, retrieve, process, manage and enable timely and secure customer access to the health-related and other data we gather on behalf of our customers.  Disruption of the operation of our IT systems for any extended period of time, loss of stored data, programming errors or other system failures could cause customers to turn elsewhere to address their service needs. In addition, we must continue to enhance our IT systems, with potentially substantial cost, as the need for service, product and technology requirements advances.  In addition, computer malware, viruses, hacking and phishing attacks, and spamming could harm our business and results of operations.
 
Allegations of negligent or improper actions by our health professionals or other personnel could result in claims against us and/or our incurring expenses to indemnify our clients.
 
Allegations of negligent or improper actions by our health or other medical professionals could result in claims against us, require us to indemnify our clients for any harm they may suffer, or damage our reputation and relationships with important clients.  Our clients rely on the accuracy of the medical data we gather on their behalf in aggregated form to manage their wellness program. We maintain professional liability insurance and such other coverage as we believe appropriate, but such insurance may prove insufficient.  Regardless of insurance, any such claims could damage our reputation and relationships with important clients.
Our ability to use net operating loss carry forwards to offset future taxable income or future tax may be limited due to the changes in ownership (within the meaning of IRC Section 382) that have occurred in the past and will occur upon the consummation of the Merger.
In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, and certain other tax assets to offset future taxable income, and an ownership change is generally defined as a cumulative change of 50% or more in the ownership positions of certain shareholders during a rolling three year period. The ownership change occurring as a result of the Merger is likely to eliminate or restrict our ability to use our NOL carry forwards.

Our operations could be adversely affected by the effects of a natural disaster or an act of terrorism.
 
Our operations would be adversely affected in the event of a natural disaster, such as a tornado or hurricane, or an act of terrorism.  A natural disaster or act of terrorism could disrupt our ability to provide testing services, which could have a material adverse effect on our operations.

We identified a material weakness in our internal control over financial reporting, and our business and stock price may be adversely affected if we do not adequately address that weakness or if we have other material weaknesses or significant deficiencies in our internal controls over financial reporting.

We have identified certain deficiencies in our internal control over financial reporting related to the accounting for non-routine transactions that we deemed to be a material weakness. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We determined that the complexities of the accounting for these non-routine transactions adversely affected management’s review of the accounting for non-routine, complex technical accounting matters to ensure proper application of generally accepted accounting principles in a timely manner.

While the material weakness continues to exist, we have taken steps to address this weakness in internal control. We plan to enhance our controls related to non-routine transactions by supplementing with additional resources as necessary, enhancing the design and documentation of management review controls, and improving the documentation of internal control procedures. Despite these measures and planned improvements, our remediation efforts could be insufficient to address the material weakness in the future.

We must increase our shareholders’ equity by May 8, 2017, to avoid a delisting action by the NYSE MKT.

The NYSE MKT notified us on April 1, 2016, that we have fallen out of compliance with Section 1003(a)(iii) of the NYSE MKT Company Guide because we reported shareholders’ equity of less than $6.0 million in our Form 10-K for the year ended December 31, 2015, and we have had net losses in our five most recent fiscal years. As a result, we were required to submit a

10


plan to regain compliance prior to May 8, 2017. The NYSE MKT accepted the plan. If we fail to fulfill it in the allotted time, our shares may be delisted from the Exchange.

ITEM 1B
Unresolved Staff Comments

Not applicable.

ITEM 2
Properties

We lease our corporate headquarters in Olathe, Kansas under an operating lease which expires in 2018. As of December 31, 2016, we were in default on two leased properties assigned to the Company through the Acquisition in Des Moines, IA and Indianapolis, IN under operating leases which also expire in 2018. We have determined that neither lease is necessary for our operations, so we are working with the Des Moines and Indianapolis landlords to terminate both leases on mutually acceptable terms.

We are obligated, and in default as of December 31, 2016, under a lease related to the discontinued Hooper Holmes Services operations center through 2018 and have ceased use of this facility. We have recorded a facility closure obligation $0.4 million as of December 31, 2016, in the consolidated balance sheet related to this lease, which is recorded in other current and long-term liabilities in the consolidated balance sheet. The Company has subleased out part of this space and is also working with this landlord to terminate the lease on mutually acceptable terms.

We believe that, in general, our facilities are suitable and adequate for our current and anticipated future levels of operations and are adequately maintained.  We believe that if we were unable to renew a lease on any of our facilities, we could find alternative space at competitive market rates and relocate our operations to such new location without material disruption to our business.

ITEM 3
Legal Proceedings

The Company, in the normal course of business, is a party to various claims and other legal proceedings. In the opinion of management, the Company has legal defenses and/or insurance coverage (subject to deductibles) with respect to all of its pending legal actions. If management believes that a material loss not covered by insurance arising from these actions is probable and can reasonably be estimated, the Company may record the amount of the estimated loss or, if a loss cannot be estimated but the minimum liability may be estimated using a range and no point is more probable than another, the Company may record the minimum estimated liability. As additional information becomes available, any potential liability related to these actions is assessed and the estimates are revised, if necessary. Management believes that the ultimate outcome of all pending legal actions, individually and in the aggregate, will not have a material adverse effect on the Company's financial position that is inconsistent with its loss reserves or on its overall trends in results of operations. However, litigation and claims are subject to inherent uncertainties and unfavorable outcomes can occur that exceed any amounts reserved for such losses. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the outcome occurs or in future periods.

ITEM 4
 
 
 
Mine Safety Disclosures
Not applicable

11


PART II

ITEM 5
Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on the NYSE MKT stock exchange under the symbol “HH.”

Common Stock Price Range

The following table shows, for the periods indicated, the high and low sales prices per share of our common stock based on published financial sources (dollars):

 
 
2016
 
2015
Quarter
 
High
 
Low
 
High

Low
First
 
$2.70
 
$0.75
 
$9.45
 
$6.60
Second
 
$2.70
 
$1.05
 
$7.90
 
$2.85
Third
 
$2.42
 
$1.16
 
$4.20
 
$1.65
Fourth
 
$1.36
 
$0.73
 
$3.45
 
$0.90

On June 15, 2016, we completed a one-for-fifteen reverse stock split, in order to regain compliance with the NYSE MKT's minimum market price requirement.  As a result, the share and per share information for all periods presented in this Annual Report on Form 10-K have been adjusted to reflect the impact of the reverse stock split, including the high and low sales prices of our common stock shown prior to June 15, 2016, in the table above.

Holders

According to the records of our transfer agent, American Stock Transfer & Trust Company, Brooklyn, New York, as of February 28, 2017, there were 865 holders of record of our common stock.

Dividends

No dividends were paid in 2016 or 2015.

We are precluded from declaring or making any dividend payments or other distributions of assets with respect to any class of our equity securities under the terms of our 2016 Credit and Security Agreement and our Credit Agreement (Refer to Note 9 to the consolidated financial statements).

Recent Sales of Unregistered Securities

We did not issue any shares of our common stock during the year ended December 31, 2016, in transactions not registered under the Securities Act of 1933, except as previously reported in our Current Reports on Form 8-K.

Purchase of Equity Securities by the Issuer and Affiliated Purchaser

We did not repurchase any shares of our common stock during the fourth quarter of our fiscal year ended December 31, 2016.

ITEM 6
Selected Financial Data

Not required for smaller reporting companies.





12


ITEM 7               Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations is designed to provide a reader of our consolidated financial statements included in Item 8 of this Report with a narrative from the perspective of management. The following discussion and analysis contains forward-looking statements.  Refer to Part 1 of this Report for information regarding our use of forward-looking statements in this Report.  

Overview

We provide on-site screenings and flu shots, laboratory testing, risk assessment, and sample collection services to individuals as part of comprehensive health and wellness programs offered through organizations sponsoring such programs including corporate and government employers, health plans, hospital systems, health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations and academic institutions. Through our comprehensive health and wellness services, we also provide telephonic health coaching, access to a wellness portal with individual and team challenges, data analytics, and reporting services. We contract with health professionals to deliver these services nationwide, all of whom are trained and certified to deliver quality service. We leverage our national network of health professionals to support the delivery of other similar products and services.
Today, we service approximately 200 direct clients representing nearly 3,000 employers and up to 1,000,000 participants. In 2016, we delivered nearly 500,000 screenings and are on track to continue year-over-year revenue growth through a combination of our direct, channel partner, and clinical research organization partners as well as through the addition of new customers.

We operate under one reporting segment. Our screening services are subject to some seasonality, with the third and fourth quarters typically being our strongest quarters due to increased demand for screenings from mid-August through November related to annual benefit renewal cycles. Our health and wellness service operations are more constant, though there are some variations due to the timing of the health coaching programs which are billed per participant and typically start shortly after the conclusion of onsite screening events. In addition to our screening and health and wellness services, we generate ancillary revenue through the assembly of medical kits for sale to third parties.

We believe that the overall market for our screening and health and wellness services is growing and we expect it will continue to grow with the increased nationwide focus on healthcare, cost-containment and well-being/productivity initiatives.

Rights Offering

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

Additional Equity Contributions

On March 28, 2016, we received $1.2 million in cash in additional equity by issuing 666,667 shares of our common stock, $0.04 par value, to 200 NNH, LLC, (the "Investor") a new private investor, which was used to fund working capital. Pursuant to the Stock Purchase Agreement, there is a lock-up period of 18 months, during which time the Investor cannot sell the shares acquired.

Beginning on September 15, 2016, we received $1.7 million in cash, net of issuance costs, in additional equity by issuing 1,388,889 shares of its common stock, $0.04 par value, and warrants (the "Private Offering Warrants") to purchase up to an additional 1,388,889 shares of its common stock at an exercise price of $2.00 per share to various investors in a private offering (the "Private Offering"). The proceeds from the Private Offering were used to fund working capital.

Reverse Stock Split

On June 15, 2016, we completed a one-for-fifteen reverse stock split, in order to regain compliance with the NYSE MKT's minimum market price requirement. As a result, the share and per share information for all periods presented in this Report have been adjusted to reflect the impact of the reverse stock split. The reverse stock split did not affect the total number of authorized shares of common stock of 240,000,000 shares or the par value of our common stock at $0.04. Accordingly, an adjustment was made between additional paid-in-capital and common stock in the consolidated balance sheet to reflect the new values after the reverse stock split.
 


13


Merger Agreement

On March 7, 2017, we signed a merger agreement with Piper Merger Corp., Provant Health Solutions, LLC, and Wellness Holdings, LLC. See Note 15 to the consolidated financial statements for further discussion.

Liquidity

The accompanying financial statements have been prepared assuming that we 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 our ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about our ability to continue as a going concern within one year after issuance date of the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 2 to the consolidated financial statements and within the Liquidity and Capital Resources below for further discussion.

Business Outlook for 2017

We believe there are significant growth opportunities for our screening and health and wellness services. During 2016, we expanded our capabilities further to include administration of flu shots, cotinine testing, and other specialized testing and are exploring other offerings for delivery through our health professional network. In late 2016, we also announced a new agreement with a predictive analytics company that has developed a decision support system to help physicians reduce trial and error treatment in mental health. Under this agreement, our health professionals will deliver onsite or in-home Electroencephalogram (EEG) tests, which data will be sent to the company’s decision support tool to enable physicians to provide more personalized care to patients based on their brain waves.

The United States spends more on healthcare than any other country, with more than 80% of healthcare costs due to chronic conditions. With the focus on health care cost management and the risk of reduced productivity in the workplace from health issues arising among the employee population, we believe employers of all sizes will adopt health and wellness programs at an increasing rate. We expect the market for health and wellness to grow over the next three to five years, and we believe that we are well positioned to increase revenues from our screening and other related services given our unique set of assets, including our proprietary health and wellness technology platform and our national network of health professionals. However, the success of health and wellness will also depend in part upon the success of our channel partners and their health and care management initiatives to employers.

A key corporate strength is our extensive network of health professionals, providing coverage in every zip code nationwide and allowing us to offer screenings for smaller sites. We also have national agreements with retail clinics and local lab offices, and offer physician form and at-home-kit services, providing our customers more robust, convenient options to maximize member participation with annual screenings. We also have logistical expertise in staffing and supply chain capabilities that allow us to stock, calibrate, pack, and ship the materials our health professionals need to collect accurate health information. This centralized fulfillment model allows us to deliver a reliable, consistent experience for our customers nationwide, regardless of location, as well as consistent and reliable equipment to provide a strong degree of accuracy and quality.

We monitor our operational performance and are constantly refining metrics to improve operational performance. We believe our attention to the details of a health and wellness event, from the set-up, staffing, and post event follow-up, contributes to making our services efficient and effective.

We gained several new customers in 2016, both through our direct sales efforts and through our channel partners, including a large multi-year clinical research study extension, and already have several new opportunities in 2017 in the contracting phase. As previously noted, we also signed a merger agreement on March 7, 2017, that is expected to improve our financial condition going forward. As one of only a few pure-play publicly-traded health and wellness companies that offer a fully-integrated end-to-end solution to our customers, we believe we are positioned to capitalize on market need in 2017 and beyond. There are, however, events as noted in Item 1A Risk Factors above that could negatively affect our financial condition, results of operations, and cash flows.

Key Financial and Other Metrics Monitored by Management

In our periodic reports filed with the SEC, we provide certain financial information and metrics about our business, and information that our management uses in evaluating our performance and financial condition.  Our objective in providing this information is to help our shareholders and investors generally understand our overall performance and assess the profitability of and prospects for our business.

14



We monitor the following key metrics related to our operations:

the number of screenings completed;
the number of enrollments in health coaching services;
the number of subscribers to the wellness portal services;
the quality scores of our health professionals;
the aggregate of travel expenditures incurred by our health professionals;
budget to actual performance; and
Adjusted EBITDA

Certain of the above-cited metrics are discussed in the comparative discussion and analysis of our results of operations that follows.

Adjusted EBITDA

The following table sets forth our reconciliation of Adjusted EBITDA for the years ended December 31, 2016 and 2015:
 
 
 
 
(in thousands)
2016
 
2015
Net loss
$
(10,324
)
 
$
(10,874
)
Plus:
 
 
 
   Interest expense
1,017

 
623

Other debt related costs included in interest expense
2,553

 
1,173

Income tax expense
25

 
19

Depreciation and amortization
2,633

 
2,211

Share-based compensation expense
579

 
440

Severance costs
444

 

Stock payments in connection with debt amendments
50

 

Transaction costs
559

 
1,027

Transition costs
56

 
701

Write-off of SWK Warrant #2
(887
)
 

Impairment of property, plant and equipment, net
88

 

Portamedic contingent liability
150

 
300

   Close-out cost of 2013 Portamedic sale

 
168

Adjusted EBITDA
$
(3,057
)

$
(4,212
)

We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, (ii) net income tax provision (benefit) and (iii) depreciation and amortization, as further adjusted to eliminate the impact of certain non-recurring items that we do not consider indicative of our ongoing operating performance, as consistent with the definition of Adjusted EBITDA in our debt agreements discussed in Note 9 to the consolidated financial statements. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Adjusted EBITDA is a non-GAAP financial measure and should not be construed as an alternative to net earnings (loss) as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (as determined in accordance with GAAP). Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. We have included Adjusted EBITDA because we believe it provides management and investors with additional information to measure our performance and liquidity, estimate our value and evaluate our ability to service debt.


15


Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA:
• does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments;
• does not reflect changes in, or cash requirements for, our working capital needs;
• does not reflect the cash requirements necessary to service interest or principal payments on our debt;
• excludes income tax payments that represent a reduction in cash available to us; and
• does not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future.

Results of Operations

Comparative Discussion and Analysis of Results of Operations in 2016 and 2015

Revenue - The table below sets forth our consolidated revenue for the periods indicated: 



For the years ended December 31,
 
%
(dollars in thousands)

2016

2015

Change
Revenue

$
34,271


$
32,115


6.7
%

Consolidated revenues for the year ended December 31, 2016, were $34.3 million, an increase of 6.7% from 2015, which is primarily due to the addition of $1.5 million in additional portal, coaching, and screening revenue from the Acquisition and from increased revenue from new long-term clinical study contracts obtained during the current year. The increase in revenue was partially offset by the variations in our screening volume.

Cost of Operations - The table below sets forth our consolidated cost of operations for the periods indicated:

 
 
For the Years Ended December 31,
(dollars in thousands)
 
2016
 
% of Revenue
 
2015
 
% of Revenue
Cost of Operations
 
$
26,416

 
77.1
%
 
$
25,590

 
79.7
%

Cost of operations, as a percentage of revenue for the year ended December 31, 2016, decreased 2.6% compared to the year ended December 31, 2015, primarily due to the higher margin offerings acquired through AHS.

Selling, General and Administrative Expenses (SG&A) - The table below sets forth our consolidated SG&A expenses for the periods indicated:

 
 
For the years ended December 31,
 
%
(dollars in thousands)
 
2016
 
2015
 
Change
Selling, general and administrative expenses
 
$
14,532

 
$
14,037

 
3.5
%

SG&A expenses for the year ended December 31, 2016, increased 3.5% compared to the year ended December 31, 2015, primarily due to the addition of AHS expenses for the full year, the stock compensation payments made to the Board of Directors, and severance charges, partially offset by fewer transition costs related to the AHS acquisition.

Transaction Costs

Transaction costs represent legal and professional fees incurred for non-recurring transactions. For the year ended December 31, 2016, we incurred $0.6 million of transaction costs primarily in connection with the termination of the 2013 Loan

16


and Security Agreement and other transactional legal fees. For the year ended December 31, 2015, we incurred $1.0 million of transaction costs in connection with the Acquisition and the rights offering.

Operating Loss from Continuing Operations

Our consolidated operating loss from continuing operations for the year ended December 31, 2016, was $7.2 million, compared to a loss of $8.5 million in 2015.

Interest Expense, Net

Interest expense, net, for the year ended December 31, 2016, was $3.6 million, compared to $1.8 million for the year ended December 31, 2015. The increase is due to the financing obtained for the Acquisition, including interest on the Term Loan and accretion of the termination fees and debt discount as well as the write-off of debt issuance costs related to the termination of the 2013 Loan and Security Agreement. A detail of the components of interest expense is included in Note 9 to the consolidated financial statements.

Other Income

Other income for the year ended December 31, 2016, was $0.9 million, which is due to the elimination of the SWK Warrant #2 (see Note 9 to the consolidated financial statements). There was no activity in other income during the year ended December 31, 2015.

Loss from Discontinued Operations
   
The loss from discontinued operations was $0.4 million and $0.5 million, respectively, for the years ended December 31, 2016 and 2015, primarily due to a contingent liability related to the Portamedic service line. Discontinued operations represent the net results of operations and adjustments during the periods presented for the Heritage Labs, Hooper Holmes Services, and Portamedic businesses.

Net Loss

Net loss for the year ended December 31, 2016, was $10.3 million, or $1.15 per share on both a basic and diluted basis, compared to a net loss of $10.9 million, or $2.14 per share on both a basic and diluted basis, reported for the year ended December 31, 2015.  

Liquidity and Capital Resources
 
Our 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"). We have historically used availability under a revolving credit facility to fund operations due to a lag between the payment of certain operating expenses and the subsequent billing and collection of the associated revenue based on customer payment terms. To illustrate, in order to conduct successful screenings, we must expend cash to deliver the equipment and supplies required for the screenings. We 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 our operations, which are largely dependent on second half volumes, management expects to continue using a revolving credit facility in 2017 and beyond.

Going Concern

As of December 31, 2016, we adopted ASC 205-40, Presentation of Financial Statements - Going Concern. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of management’s assessment of our ability to continue as a going concern.

Principal conditions or events that require management's consideration

Following are conditions and events which require management's consideration:

17



We had a working capital deficit of $9.3 million with $1.9 million of cash and cash equivalents at December 31, 2016. We had $5.7 million of payables at December 31, 2016, that were past due date terms. We are working with our vendors to facilitate revised payment terms; however, we have had certain vendors who have threatened to terminate services due to aged outstanding payables and in order to accelerate invoice payments.  If services were terminated and we weren’t able to find alternative sources of supply, this could have a material adverse impact on our business.

Our net cash used in operating activities during the year ended December 31, 2016 was $4.4 million, and without giving consideration to the Merger mentioned below, current projections indicate that we will have continued negative cash flows for the foreseeable future.

We incurred a loss from continuing operations of $9.9 million for the year ended December 31, 2016, and without giving consideration to the Merger mentioned below, current projections indicate that we will have continued recurring losses for the foreseeable future.
 
We had $3.6 million of outstanding borrowings under the 2016 Credit and Security Agreement with SCM, with unused borrowing capacity of $0.1 million at December 31, 2016. As of February 28, 2017, we had $3.1 million of outstanding borrowings with unused borrowing capacity of $0.2 million. Any borrowings on the unused borrowing capacity are at the discretion of SCM.

We owed approximately $3.7 million at December 31, 2016 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 debt agreements described above contain certain financial covenants, including various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. While we were able to comply with the debt covenants as of December 31, 2016, we were unable to meet our debt covenants for both the six month period ended June 30, 2016, and the nine month period ended September 30, 2016, and current projections indicate that we will not be able to meet the current March 31, 2017, debt covenants outlined in Note 9 to the consolidated financial statements. However, in conjunction with the Merger Agreement (defined below), the covenants going forward will be revised and we do anticipate meeting the revised covenants. Noncompliance with these covenants constitutes an event of default. If we are unable to comply with financial covenants in the future and in the event that we were unable to modify the covenants, find new or additional lenders, or raise additional equity, 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, which would have a material adverse impact on our business. Additionally, the negative covenants set forth in these debt agreements with SCM and SWK prohibit us from incurring additional debt of any kind. For additional information regarding the 2016 Credit and Security Agreement, the Credit Agreement, and the related covenants, refer to Note 9 to the consolidated financial statements.

We have contractual obligations related to operating leases and employment contracts which could adversely affect liquidity. As of December 31, 2016, we were in default on three real estate leases for spaces that we no longer need. Two of the leases were assigned to us through the Acquisition, and the third, which is partially subleased, relates to the discontinued Hooper Holmes Services business. We are working with the landlords to terminate these leases on mutually acceptable terms.

Management's plans

We expect to continue to monitor our liquidity carefully, work to reduce this uncertainty, and address our cash needs through a combination of one or more of the following actions:

On March 7, 2017, we signed a merger agreement with Piper Merger Corp., Provant Health Solutions, LLC, and Wellness Holdings, LLC. See Note 15 to the consolidated financial statements for further discussion.

We will continue to seek additional equity investments. During the year ended December 31, 2016, we were able to raise $6.3 million of additional equity through the issuance of common stock and warrants, net of issuance costs.

We will continue to aggressively seek new and return business from our existing customers and expand our presence in the health and wellness marketplace.

18



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

Management's assessment and conclusion

We have determined, based on our recent history and our liquidity issues, that it is not probable that our plans will sufficiently alleviate or mitigate, to a sufficient level the relevant conditions or events noted above. Accordingly, management of the Company has concluded that there is substantial doubt about our ability to continue as a going concern within one year after issuance date of the financial statements.

The consolidated financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

Cash Flows from Operating, Investing and Financing Activities

We believe that as a result of our continued focus on cost reduction initiatives, efficiency improvements, and the Merger noted above, cash flow from operations will improve. We have reduced our corporate fixed cost structure in 2016 and plan to continue to evaluate professional fees and other expenses in the future. We have ongoing initiatives to increase the flexibility of our cost structure to improve our scalability with changes in screening volumes.

Cash Flows used in Operating Activities

For the year ended December 31, 2016, net cash used in operating activities was $4.4 million. Our net cash used in operating activities for the year ended December 31, 2015 was $6.3 million.

The net cash used in operating activities for the year ended December 31, 2016, reflects a net loss of $10.3 million, which was offset by non-cash charges of $5.5 million in depreciation and amortization expense, other debt related costs included in interest expense, and termination fees paid on behalf of the Company; and $0.6 million in share-based compensation expense. Changes in working capital included a decrease in accounts receivable of $1.3 million and an increase in accounts payable, accrued expenses, and other liabilities of $0.2 million.

The net cash used in operating activities for the year ended December 31, 2015, reflects a net loss of $10.9 million, which was offset by non-cash charges of $3.4 million in depreciation and amortization expense and other debt related costs included in interest expense; and $0.4 million in share-based compensation expense. Changes in working capital included an increase in accounts receivable of $1.5 million and an increase in accounts payables, accrued expenses, and other liabilities of $2.5 million.

Our consolidated days sales outstanding ("DSO"), measured on a rolling 90-day basis, was 37.4 days at December 31, 2016, compared to 46.0 days at December 31, 2015. The decrease in DSO in 2016 was primarily due to timing of large customer receipts in December 2016 and our aggressive pursuit of outstanding accounts receivable balances in December 2016. Historically, our accounts receivable balances and our DSO are near their highest point in September and their lowest point in December.

Cash Flows used in Investing Activities

For the year ended December 31, 2016, net cash used in investing activities was $0.4 million. Our net cash used in investing activities for the year ended December 31, 2015 was $4.8 million.

We used $0.4 million and $0.8 million, respectively, for the years ended December 31, 2016 and December 31, 2015, for capital expenditures. We used $4.0 million for the year ended December 31, 2015, to acquire AHS on April 17, 2015.

Cash Flows provided by Financing Activities

For the year ended December 31, 2016, net cash provided by financing activities was $4.6 million. Our net cash provided by financing activities for the year ended December 31, 2015 was $7.9 million.

For the year ended December 31, 2016, we received $6.3 million, net of issuance costs, in connection with the additional equity raised as noted above which was partially offset by the principal payments made of $1.3 million on the Term Loan and net borrowings under the credit facilities of $0.2 million.


19


For the year ended December 31, 2015, we received $5.0 million related to the proceeds from the Term Loan which was partially offset by $0.4 million incurred for debt issuance costs and net borrowings under the credit facility of $3.3 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Share Repurchases

We did not purchase any shares of our common stock during 2016 and 2015.

Dividends

No dividends were paid in 2016 and 2015. We are precluded from declaring or making any dividend payments or other distributions of assets with respect to any class of our equity securities under the terms of our 2016 Credit and Security Agreement and our Credit Agreement, each as described in Note 9 to the consolidated financial statements.
 
Inflation

  Inflation has not had, nor is it expected to have, a material impact on our consolidated financial results.

Critical Accounting Policies

A critical accounting policy is one that is important to the portrayal of a company’s operating results and/or financial condition and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Our consolidated financial statements and accompanying notes are prepared in accordance with US generally accepted accounting principles (US GAAP).  Preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these determinations upon the best information available to us during the period in which we are accounting for our results.  Our estimates and assumptions could change materially as conditions within and beyond our control change or as further information becomes available.  Further, these estimates and assumptions are affected by management’s application of accounting policies.  Changes in our estimates are recorded in the period the change occurs.

We have identified the accounting policies discussed below as critical to us. The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 1 to the consolidated financial statements.

Revenue Recognition

Revenue is recognized for screening services when the screening is completed and the results are delivered to our customers. Revenue for wellness portal services are recognized on a per eligible member, per month basis, while revenue from wellness coaching services are recognized as services are performed. Revenue for kit assembly is recorded upon completion of the kit. In all cases, there must be evidence of an agreement with the customer, the sales price must be fixed or determinable, delivery of services must have occurred, and the ability to collect must be reasonably assured.

For contracts with multiple elements, we allocate consideration to the identified units of accounting based on the relative selling price hierarchy set forth in the relevant accounting guidance. We determine the selling price for each deliverable using vendor-specific objective evidence ("VSOE") of selling price or third-party evidence ("TPE") of selling price, if it exists. If neither VSOE nor TPE of selling price exist for a deliverable, we use its best estimate of selling price ("BESP") for that deliverable. We estimate BESP for a deliverable by considering company-specific factors such as pricing strategies and direct product and other costs.

Sales tax collected from customers and remitted to governmental authorities is accounted for on a net basis and therefore is excluded from revenues in the consolidated statements of operations.

Management regularly assesses the financial condition of our customers, the markets in which these customers participate as well as historical trends relating to customer deductions and adjusts the allowance for doubtful accounts based on this review.  If

20


the financial condition of our customers were to deteriorate, resulting in their inability to make payments, our ability to collect on accounts receivable could be negatively impacted, in which case additional allowances may be required. We must make management judgments and estimates in determining allowances for doubtful accounts in any accounting period.  One uncertainty inherent in our analysis is whether our past experience will be indicative of future periods.  Adverse changes in general economic conditions could affect our allowance estimates, collection of accounts receivable, cash flows and results of operations.
  
Share-Based Compensation

Authoritative accounting literature addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  This literature establishes accounting principles which require companies to recognize compensation cost in an amount equal to the fair value of the share-based payments, such as stock options or non-vested stock granted to employees. Compensation cost for stock options and non-vested stock is recognized over the vesting period based on the estimated fair value on the date of the grant.  The accounting principles also require that we estimate a forfeiture rate for all share based awards.  We monitor share option exercise and employee termination patterns to estimate forfeiture rates within the valuation model.  The estimated fair values of options are based on assumptions, including estimated lives, volatility, dividend yield, and risk-free interest rates.  These estimates also consider the probability that the options will be exercised prior to the end of their contractual lives and the probability of termination or retirement of the holder, which are based on reasonable estimates and historical trends but are subject to change based on a variety of external factors. See Note 4 to the consolidated financial statements for further discussion.

Business Combinations

Assets acquired and liabilities assumed as part of a business acquisition are recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses.

Goodwill and Other Intangible Assets

Goodwill is accounted for under the provisions of ASC 350, Intangibles - Goodwill and Other.  All goodwill is assigned to one reporting unit, where it is subject to an annual impairment assessment, or more frequently if circumstances indicate that impairment is likely.  Any one event or a combination of events such as change in the business climate, a negative change in relationships with significant customers and changes to strategic decisions, including decisions to expand made in response to economic or competitive conditions could require an interim assessment prior to the next required annual assessment. See Note 7 to the consolidated financial statements for further discussion.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future sales, and estimated costs. We cannot predict the occurrence of certain future events that might adversely affect the reported value of long-lived assets, which include, but are not limited to, a change in the business climate, government incentives, a negative change in relationships with significant customers, and changes to strategic decisions made in response to economic and competitive conditions. Changes in these facts, circumstances and management’s estimates and judgment could result in an impairment of long-lived assets resulting in a material charge to earnings. See Note 7 to the consolidated financial statements for further discussion.

Going Concern

As of December 31, 2016, we adopted ASC 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. See Note 2 to the consolidated financial statements for the results of management’s assessment of our ability to continue as a going concern.


21


ITEM 7A
Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.


ITEM 8
Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Consolidated Financial Statements:
 
 
 
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets – December 31, 2016 and 2015
Consolidated Statements of Operations – Years ended December 31, 2016 and 2015
Consolidated Statements of Stockholders’ (Deficit) Equity – Years ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows – Years ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements

22




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Hooper Holmes, Inc.:

We have audited the accompanying consolidated balance sheet of Hooper Holmes, Inc. and subsidiaries (the "Company") as of December 31, 2016, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the year ended December 31, 2016.  In connection with our audit of the consolidated financial statements, we also have audited the consolidated financial statement schedule, Schedule II - Valuation and Qualifying Accounts for the year ended December 31, 2016. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hooper Holmes, Inc. and subsidiaries as of December 31, 2016 and the results of their operations and their cash flows for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements and the financial statement schedule taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, as of December 31, 2016, the Company adopted provisions of ASC 205-40, Presentation of Financial Statements - Going Concern, which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. The Company has suffered recurring losses from operations, negative cash flows from operations and other related liquidity concerns, which raises substantial doubt about the Company’s ability to continue as a going concern. These matters and management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.


//s/ Mayer Hoffman McCann P.C.
 

Kansas City, Missouri
March 9, 2017


23



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Hooper Holmes, Inc.:

We have audited the accompanying consolidated balance sheet of Hooper Holmes, Inc. and subsidiaries (the "Company") as of December 31, 2015, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the year ended December 31, 2015.  In connection with our audit of the consolidated financial statements, we also have audited the consolidated financial statement schedule, Schedule II - Valuation and Qualifying Accounts for the year ended December 31, 2015.  These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hooper Holmes, Inc. and subsidiaries as of December 31, 2015 and the results of their operations and their cash flows for the year ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements and the financial statement schedule taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, negative cash flows from operations and other related liquidity concerns, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.


 

//s/ KPMG LLP
 

Kansas City, Missouri
March 30, 2016


24


Hooper Holmes, Inc.
Consolidated Balance Sheets
 (In thousands, except share and per share data)
 
 
December 31, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
1,866

 
$
2,035

Accounts receivable, net of allowance for doubtful accounts of $43 and $112 at December 31, 2016 and 2015, respectively
 
4,155

 
5,565

Inventories
 
1,112

 
567

Other current assets
 
345

 
331

Total current assets
 
7,478

 
8,498

Property, plant and equipment, net
 
1,760

 
2,771

Intangible assets
 
4,031

 
5,331

Goodwill
 
633

 
633

Other assets
 
352

 
450

               Total assets
 
$
14,254

 
$
17,683

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
 
 
 
 

Current liabilities:
 
 
 
 

Accounts payable
 
$
6,612

 
$
5,339

Accrued expenses
 
1,747

 
2,313

Short-term debt
 
5,821

 
5,330

Other current liabilities
 
2,621

 
2,873

Total current liabilities
 
16,801

 
15,855

Other long-term liabilities
 
317

 
1,611

Commitments and contingencies (Note 10)
 


 


Stockholders’ (deficit) equity:
 
 
 
 

Common stock, par value $.04 per share; Authorized 240,000,000 shares; Issued: 10,103,525 shares and 5,201,733 shares at December 31, 2016 and 2015, respectively. Outstanding: 10,103,525 shares and 5,201,107 shares at December 31, 2016 and 2015, respectively
 
404

 
3,121

Additional paid-in capital
 
166,084

 
156,195

Accumulated deficit
 
(169,352
)
 
(159,028
)
 
 
(2,864
)
 
288

Less: Treasury stock, at cost; 0 and 626 shares at December 31, 2016 and 2015, respectively
 

 
(71
)
Total stockholders' (deficit) equity
 
(2,864
)
 
217

Total liabilities and stockholders' (deficit) equity
 
$
14,254

 
$
17,683

See accompanying notes to consolidated financial statements.


25


      Hooper Holmes Inc.
Consolidated Statements of Operations
 (In thousands, except share and per share data)
 
 
Years ended December 31,
 
 
2016
 
2015
Revenues
 
$
34,271

 
$
32,115

Cost of operations
 
26,416

 
25,590

Gross profit
 
7,855

 
6,525

Selling, general and administrative expenses
 
14,532

 
14,037

Transaction costs
 
559

 
1,027

Operating loss from continuing operations
 
(7,236
)
 
(8,539
)
Interest expense, net
 
3,570

 
1,796

Other income
 
(887
)
 

Loss from continuing operations before income tax expense
 
(9,919
)
 
(10,335
)
Income tax expense
 
25

 
19

Loss from continuing operations
 
(9,944
)
 
(10,354
)
Loss from discontinued operations
 
(380
)
 
(520
)
 
 
 
 
 
Net loss
 
$
(10,324
)
 
$
(10,874
)
 
 
 
 
 
Basic and diluted loss per share:
 
 

 
 

Continuing operations
 
 

 
 

Basic
 
$
(1.11
)
 
$
(2.04
)
Diluted
 
$
(1.11
)
 
$
(2.04
)
Discontinued operations
 
 
 
 
Basic
 
$
(0.04
)
 
$
(0.10
)
Diluted
 
$
(0.04
)
 
$
(0.10
)
Net loss
 
 
 
 
Basic
 
$
(1.15
)
 
$
(2.14
)
Diluted
 
$
(1.15
)
 
$
(2.14
)
Weighted average number of shares:
 
 

 
 

Basic
 
8,981,563

 
5,069,877

Diluted
 
8,981,563

 
5,069,877

See accompanying notes to consolidated financial statements.


26


 Hooper Holmes, Inc.
Consolidated Statements of Stockholders’ (Deficit) Equity
 (In thousands, except share data)

 
 
Common Stock
 
 
 
 
 
Treasury Stock
 
 
 
 
Number
of Shares
 
Amount
 
Additional Paid-in
Capital
 
Accumulated
Deficit
 
Number of
Shares
 
Amount
 
Total Stockholders' (Deficit) Equity
Balance, December 31, 2014
 
4,725,067

 
$
2,835

 
$
150,747

 
$
(148,154
)
 
626

 
$
(71
)
 
$
5,357

Net loss
 

 

 

 
(10,874
)
 

 

 
(10,874
)
Exercise of share-based awards
 
3,333

 
2

 
21

 

 

 

 
23

Share-based compensation
 
40,000

 
24

 
416

 

 

 

 
440

Issuance of common stock
 
433,333

 
260

 
2,740

 

 

 

 
3,000

Issuance of SWK Warrant #1
 

 

 
2,656

 

 

 

 
2,656

Amortization of debt issuance costs related to warrants
 

 

 
(385
)
 

 

 

 
(385
)
Balance, December 31, 2015
 
5,201,733

 
3,121

 
156,195

 
(159,028
)
 
626

 
(71
)
 
217

Net loss
 

 

 

 
(10,324
)
 

 

 
(10,324
)
Issuance of common stock and warrants, net of issuance costs
 
4,657,345

 
2,016

 
4,234

 

 

 

 
6,250

Issuance of common stock in connection with amendments to Credit Agreement
 
77,922

 
47

 
103

 

 

 

 
150

Share-based compensation
 
166,665

 
100

 
479

 

 

 

 
579

Reverse stock split re-allocation
 

 
(4,880
)
 
4,880

 

 

 

 

Other adjustments due to reverse stock split
 
486

 

 

 

 

 

 

Retirement of treasury stock
 
(626
)
 

 
(71
)
 

 
(626
)
 
71

 

Repricing of SWK Warrant #1
 

 

 
264

 

 

 

 
264

Balance, December 31, 2016
 
10,103,525

 
$
404

 
$
166,084

 
$
(169,352
)
 

 
$

 
$
(2,864
)
See accompanying notes to consolidated financial statements.


27


Hooper Holmes, Inc.
Consolidated Statements of Cash Flows
 (In thousands)
 
Years ended December 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(10,324
)
 
$
(10,874
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,633


2,211

Other debt related costs included in interest expense
2,553

 
1,165

Termination fees included in payoff of 2013 Loan and Security Agreement
277

 

Provision for bad debt expense
75

 
61

Share-based compensation expense
579


440

Issuance of common stock in connection with First Amendment to Credit Agreement
50

 

Write-off of SWK Warrant #2
(887
)
 

Impairment of property, plant and equipment, net
88

 

Change in assets and liabilities:
 
 
 
Accounts receivable
1,335

 
(1,530
)
Inventories
(545
)
 
215

Other assets
(34
)
 
(459
)
Accounts payable, accrued expenses and other liabilities
(244
)
 
2,474

Net cash used in operating activities
(4,444
)
 
(6,297
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(364
)
 
(793
)
Acquisition of Accountable Health Solutions

 
(4,000
)
Net cash used in investing activities
(364
)
 
(4,793
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
35,332

 
19,190

Payments under credit facility
(35,533
)
 
(15,912
)
Principal payments on Term Loan
(1,324
)
 

Proceeds from issuance of Term Loan

 
5,000

Issuance of common stock and warrants, net of issuance costs
6,250

 

Proceeds related to the exercise of stock options

 
23

Debt issuance costs
(86
)
 
(377
)
Net cash provided by financing activities
4,639

 
7,924

Net decrease in cash and cash equivalents
(169
)
 
(3,166
)
Cash and cash equivalents at beginning of year
2,035

 
5,201

Cash and cash equivalents at end of year
$
1,866

 
$
2,035

 
 
 
 
Supplemental disclosure of non-cash investing activities:
 
 
 
Fixed assets and prepaid expenses vouchered but not paid
$
217

 
$
97

Supplemental disclosure of non-cash financing activities:
 
 
 
Issuance of common stock in connection with the Acquisition
$

 
$
3,000

Issuance of common stock in connection with Second Amendment to Credit Agreement
$
100

 
$

Debt issuance costs vouchered but not paid
$

 
$
500

Payoff of 2013 Loan and Security Agreement by SCM
$
(2,552
)
 
$

Opening outstanding borrowings under 2016 Credit and Security Agreement
$
3,028

 
$

Non-cash debt issuance costs
$
550

 
$

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
987

 
$
516

Income taxes
$
32

 
$
41

See accompanying notes to consolidated financial statements

28


HOOPER HOLMES, INC.
Notes to Consolidated Financial Statements
 (amounts in thousands, except share and per share data, unless otherwise noted)

Note 1 — Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies

Description of the Business

Hooper Holmes, Inc. and its subsidiaries (“Hooper Holmes” or the "Company”) provide on-site screenings and flu shots, laboratory testing, risk assessment, and sample collection services to individuals as part of comprehensive health and wellness programs offered through organizations sponsoring such programs including corporate and government employers, health plans, hospital systems, health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations and academic institutions. Through its comprehensive health and wellness services, the Company also provides telephonic health coaching, access to a wellness portal with individual and team challenges, data analytics, and reporting services. The Company contracts with health professionals to deliver these services nationwide, all of whom are trained and certified to deliver quality service.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Hooper Holmes, Inc. and its wholly owned subsidiaries.  All intercompany transactions and balances have been eliminated in consolidation.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events.  These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses.  Such estimates include the valuation of receivable balances, property, plant and equipment, valuation of goodwill and other intangible assets, deferred tax assets, share based compensation expense and the assessment of contingencies, among others.  These estimates and assumptions are based on the Company’s best estimates and judgment.  The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which the Company believes to be reasonable under the circumstances.  The Company adjusts such estimates and assumptions when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.  Changes in those estimates will be reflected in the consolidated financial statements in future periods.

The Company operates under one reporting segment. The Company's screening services are subject to some seasonality, with the second quarter revenues typically dropping below other quarters. Third and fourth quarter revenues are typically the Company’s strongest quarters due to increased demand for screenings from mid-August through November related to annual benefit renewal cycles. The Company's health and wellness service operations are more constant, though there are some variations due to the timing of the health coaching programs, which are billed per participant and typically start shortly after the conclusion of onsite screening events. In addition to its screening and health and wellness services, the Company generates ancillary revenue through the assembly of medical kits for sale to third parties.

Prior to 2015, the Company completed the sale of certain assets comprising its Portamedic, Heritage Labs, and Hooper Holmes Services businesses. The operating results of these businesses have been segregated and reported as discontinued operations for all periods presented in this Form 10-K.

On June 15, 2016, the Company completed a one-for-fifteen reverse stock split, in order to regain compliance with the NYSE MKT's minimum market price requirement. As a result, the share and per share information for all periods presented in these consolidated financial statements have been adjusted to reflect the impact of the reverse stock split. The reverse stock split did not affect the total number of authorized shares of common stock of 240,000,000 shares or the par value of the Company’s common stock at $0.04. Accordingly, an adjustment was made between additional paid-in-capital and common stock in the consolidated balance sheet to reflect the new values after the reverse stock split.

Summary of Significant Accounting Policies

(a)
Going Concern

As of December 31, 2016, the Company adopted ASC 205-40, Presentation of Financial Statements - Going Concern. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern

29


and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. See Note 2 to the consolidated financial statements for the results of management’s assessment of its ability to continue as a going concern.

(b)
Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities at the date of purchase of less than 90 days to be cash equivalents.

(c)
Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. Customer contracts state that we can charge interest but historically the Company has not. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowances for uncollectible accounts are estimated based on the Company's periodic review of historical losses and the current receivables aging. Account balances are charged off to the allowance after all means of collections have been exhausted and potential for recovery is considered remote.  Customer billing adjustments are recorded against revenue whereas adjustments for bad debts are recorded within selling, general and administrative expenses.  The Company does not have any off-balance sheet credit exposure related to its customers.

(d)
Inventories

Inventories, which consist of finished goods and component inventory, are stated at the lower of average cost or market. Included in inventories at December 31, 2016 and 2015 are $0.7 million and $0.4 million, respectively, of finished goods and $0.4 million and $0.3 million, respectively, of components.

(e)
Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvement or the remaining lease term.  The cost of maintenance and repairs is charged to expense as incurred.

Internal use software and website development costs are capitalized and included in property, plant and equipment in the consolidated balance sheet. These assets are depreciated over the estimated useful life of the asset using the straight-line method. Subsequent modifications or upgrades to internal use software are capitalized only to the extent that additional functionality is provided. See Note 6 to the consolidated financial statements for further discussion.

(f)
Long-Lived Assets Including Other Intangible Assets

Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future sales, and estimated costs. See Notes 6 and 7 to the consolidated financial statements for further discussion.

(g)
Goodwill

Goodwill is accounted for under the provisions of ASC 350, Intangibles – Goodwill and Other. As the Company manages and operates its business as a single operating segment and, therefore, with a single reportable segment, all goodwill is assigned to the Company’s lone reporting unit. Goodwill is subject to at least an annual impairment assessment or more frequently if circumstances indicate that impairment is likely. Any one event or a combination of events such as change in the business climate, a negative change in relationships with significant customers and changes to strategic decisions, including decisions to expand made in response to economic or competitive conditions could require an interim assessment prior to the next required annual assessment. See Note 7 to the consolidated financial statements for further discussion.






30


(h)
Deferred Rent

The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease. As of December 31, 2016 and 2015, the Company has recorded $0.1 million and $0.2 million, respectively, related to deferred rent in the consolidated balance sheet.

(i)
Revenue Recognition

Revenue is recognized for screening services when the screening is completed and the results are delivered to our customers. Revenue for wellness portal services are recognized on a per eligible member, per month basis, while revenue from wellness coaching services are recognized as services are performed. Revenue for kit assembly is recorded upon completion of the kit. In all cases, there must be evidence of an agreement with the customer, the sales price must be fixed or determinable, delivery of services must have occurred, and the ability to collect must be reasonably assured.

For contracts with multiple elements, the Company allocates consideration to the identified units of accounting based on the relative selling price hierarchy set forth in the relevant accounting guidance. The Company determines the selling price for each deliverable using vendor-specific objective evidence ("VSOE") of selling price or third-party evidence ("TPE") of selling price, if it exists. If neither VSOE nor TPE of selling price exist for a deliverable, the Company uses its best estimate of selling price ("BESP") for that deliverable. The Company estimates BESP for a deliverable by considering company-specific factors such as pricing strategies and direct product and other costs.

Sales tax collected from customers and remitted to governmental authorities is accounted for on a net basis and therefore is excluded from revenues in the consolidated statements of operations.

Management regularly assesses the financial condition of our customers, the markets in which these customers participate as well as historical trends relating to customer deductions and adjusts the allowance for doubtful accounts based on this review.  If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, the Company's ability to collect on accounts receivable could be negatively impacted, in which case additional allowances may be required. The Company must make management judgments and estimates in determining allowances for doubtful accounts in any accounting period.  One uncertainty inherent in the Company's analysis is whether our past experience will be indicative of future periods.  Adverse changes in general economic conditions could affect our allowance estimates, collection of accounts receivable, cash flows and results of operations.

(j)
Share-Based Compensation
 
The Company recognizes all share-based compensation to employees, directors, and consultants, including grants of stock options and restricted stock, in the consolidated financial statements as compensation cost based on their fair value on the date of grant, in accordance with ASC 718, Compensation-Stock Compensation. This compensation cost is recognized over the vesting period on a straight-line basis for the fair value of awards expected to vest. See Note 4 to the consolidated financial statements for further discussion.

(k)
Income Taxes

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.  The Company records interest related to unrecognized tax benefits in interest expense and penalties in income tax expense. See Note 11 to the consolidated financial statements for further discussion.

31



(l)
Loss per Share

Basic loss per share equals net loss divided by the weighted average common shares outstanding during the period.  Diluted loss per share equals net loss divided by the sum of the weighted average common shares outstanding during the period plus dilutive common stock equivalents. The calculation of loss per common share on a basic and diluted basis was the same for the two years ended December 31, 2016, because the inclusion of dilutive common stock equivalents, the SWK Warrant #1 (as defined in Note 9 to the consolidated financial statements) issued in connection with the Acquisition, and the warrants that were issued beginning on September 15, 2016, (the "Private Offering Warrants") in a private offering to various investors (the "Private Offering") would have been anti-dilutive for all periods presented. The Company has granted options to purchase shares of the Company's common stock through employee stock plans with the weighted average options outstanding as of December 31, 2016 and 2015 of 368,703 and 277,980, respectively, as well as the SWK Warrant #1 to purchase 543,479 shares issued to SWK and the Private Offering Warrants to purchase 1,388,889 shares issued in the Private Offering, all of which were outstanding as of December 31, 2016, but are anti-dilutive because the Company is in a net loss position.

(m)
Concentration of Credit Risk

The Company’s accounts receivable are due primarily from healthcare management and wellness companies and our direct customers.  As of December 31, 2016, there were two customer balances that accounted for more than 10% of the total consolidated accounts receivable. The accounts receivable balances for these customers represented approximately 40% of total consolidated accounts receivable as of December 31, 2016. As of December 31, 2015, there were two customer balances that each accounted for more than 10% of the total consolidated accounts receivable and represented approximately 34% of total consolidated accounts receivable.

For the years ended December 31, 2016 and 2015, there were two customers that exceeded 10% of revenue from continuing operations and represented just over 30% of the consolidated revenue for these periods. The Company has agreements with each of its customers, although these agreements do not provide for specific minimum level of purchases.

(n)
Reclassifications

The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" in the first quarter of 2016. The retrospective application of the new standard resulted in a $0.2 million reduction to both noncurrent assets and current liabilities as of December 31, 2015. The debt issuance costs associated with the revolving credit facilities remain classified in noncurrent assets in accordance with ASU 2015-15, "Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements". This reclassification had no impact on the Company's results of operations.

During the third quarter of 2016, the Company elected to update the presentation of its consolidated balance sheet by adding an other current liabilities category and reclassifying certain liabilities such as reserve for unclaimed property, restructure reserves, and legal accrual into this new category in the consolidated balance sheet. The Company believes this provides a more useful and informative presentation of the Company's current liabilities and liquidity. Prior period comparatives have been reclassified to conform to the revised presentation. This reclassification had no impact on the Company's results of operations.

(o)
Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This new guidance is effective for the Company in the first quarter of 2018, with early adoption permitted as of the original effective date or first quarter of 2017. The Company is currently evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" (ASC 205-40, Presentation of Financial Statements - Going Concern). This ASU requires management to assess and evaluate whether conditions or events exist, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements issue date. This standard is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter; early adoption is permitted. The Company adopted this guidance during the fourth quarter of 2016.

32


See Note 2 to the consolidated financial statements for the results of management’s assessment of its ability to continue as a going concern.

In April 2015, the FASB issued ASU 2015-03, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The Company adopted the provisions of ASU 2015-03 in the first quarter of 2016. The retrospective application of the new standard resulted in a $0.2 million reduction to both noncurrent assets and current liabilities as of December 31, 2015. The debt issuance costs associated with the revolving credit facilities remain classified in noncurrent assets in accordance with ASU 2015-15.

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory", which changes the measurement basis for inventory from the lower of cost or market to lower of cost and net realizable value and also eliminates the requirement for companies to consider replacement cost or net realizable value less an approximate normal profit margin when determining the recorded value of inventory. The standard is effective for public companies in fiscal years beginning after December 15, 2016, with early adoption permitted.  The Company is currently evaluating the impact the adoption of ASU 2015-11 will have on its consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting (Topic 718)", which is intended to simplify the accounting for share-based compensation. This standard simplifies the accounting for income taxes in relation to share-based compensation, modifies the accounting for forfeitures, and modifies the statutory tax withholding requirements. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-09 will have on its consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", which is intended to simplify goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The update instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. The standard is effective, prospectively, for public companies in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its consolidated financial position, results of operations or cash flows.

Note 2 — Liquidity and Going Concern Assessment

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"). 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 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 2017 and beyond.

Going Concern

As of December 31, 2016, the Company adopted ASC 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of management’s assessment of the Company's ability to continue as a going concern.


33


Principal conditions or events that require management's consideration

Following are conditions and events which require management's consideration:

The Company had a working capital deficit of $9.3 million with $1.9 million of cash and cash equivalents at December 31, 2016. The Company had $5.7 million of payables at December 31, 2016, that were past due date terms. The Company is working with its vendors to facilitate revised payment terms; however, the Company has had certain vendors who have threatened to terminate services due to aged outstanding payables and in order to accelerate invoice payments.  If services were terminated and the Company wasn’t able to find alternative sources of supply, this could have a material adverse impact on the Company’s business.

The Company's net cash used in operating activities during the year ended December 31, 2016, was $4.4 million, and without giving consideration to the Merger mentioned below, current projections indicate that the Company will have continued negative cash flows for the foreseeable future.

The Company incurred a loss from continuing operations of $9.9 million for the year ended December 31, 2016, and without giving consideration to the Merger mentioned below, current projections indicate that the Company will have continued recurring losses for the foreseeable future.

The Company had $3.6 million of outstanding borrowings under the 2016 Credit and Security Agreement with SCM, with unused borrowing capacity of $0.1 million. As of February 28, 2017, the Company had $3.1 million of outstanding borrowings with unused borrowing capacity of $0.2 million. Any borrowings on the unused borrowing capacity are at the discretion of SCM.

The Company owed approximately $3.7 million at December 31, 2016 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 debt agreements described above contain certain financial covenants, including various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. While the Company was able to comply with the debt covenants as of December 31, 2016, it was unable to meet its debt covenants for both the six month period ended June 30, 2016, and the nine month period ended September 30, 2016, and current projections indicate that it will not be able to meet the current March 31, 2017, debt covenants outlined in Note 9 to the consolidated financial statements. However, in conjunction with the Merger Agreement (defined below), the covenants going forward will be revised and the Company does anticipate meeting the revised covenants. Noncompliance with these covenants constitutes an event of default. If the Company is unable to comply with financial covenants in the future and in the event that it was unable to modify the covenants, find new or additional lenders, or raise additional equity, 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, which would have a material adverse impact on the Company's business. Additionally, the negative covenants set forth in these debt agreements with SCM and SWK prohibit the Company from incurring additional debt of any kind. For additional information regarding the 2016 Credit and Security Agreement, the Credit Agreement, and the related covenants, refer to Note 9 to the consolidated financial statements.

The Company has contractual obligations related to operating leases and employment contracts which could adversely affect liquidity. As of December 31, 2016, the Company was in default on three real estate leases for spaces that it 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.

Management's plans

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 March 7, 2017, the Company signed a merger agreement with Piper Merger Corp., Provant Health Solutions, LLC, and Wellness Holdings, LLC. See Note 15 to the consolidated financial statements for further discussion.


34


The Company will continue to seek additional equity investments. During the year ended December 31, 2016, the Company was able to raise $6.3 million of additional equity through the issuance of common stock and warrants, net of issuance costs.

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 consolidated financial statements).

Management's assessment and conclusion

Management has determined, based on its recent history and its liquidity issues, that it is not probable that management's plans will sufficiently alleviate or mitigate, to a sufficient level the relevant conditions or events noted above. Accordingly, management of the Company has concluded that there is substantial doubt about the Company's ability to continue as a going concern within one year after issuance date of the financial statements.

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

Note 3 — Acquisition

The Company entered into and consummated the Purchase Agreement on April 17, 2015, among the Company and certain of its subsidiaries, Accountable Health Solutions, Inc. (the "Seller" or "AHS") and Accountable Health, Inc. ("Shareholder") (the "Acquisition"). Pursuant to the Purchase Agreement, the Company has acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately $7.0 million - $4.0 million in cash and 433,333 shares of the Company’s common stock, $0.04 par value, with a value of $3.0 million, which was subject to a working capital adjustment as described in the Purchase Agreement. At the closing of the Purchase Agreement, the Company issued and delivered 371,739 shares of Common Stock to the Shareholder and issued and held back 21,739 shares of Common Stock for the working capital adjustment, which were subsequently released on October 9, 2015, and 39,855 shares of Common Stock for indemnification purposes, which were subsequently released on November 8, 2016. No additional shares will be issued under the terms of the Purchase Agreement. The shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, which provides an exemption for private offerings of securities. During the year ended December 31, 2015, the Company recorded transaction costs of $0.8 million in connection with the Acquisition in the consolidated statement of operations.

The Acquisition has expanded the Company's capabilities to deliver telephonic health coaching, wellness portals, and data analytics and reporting services. These factors, combined with the synergies and economies of scale expected from combining the operations of the two companies, were the basis for the Acquisition and comprise the resulting goodwill recorded.

In order to fund the Acquisition, the Company entered into and consummated the Credit Agreement with SWK on April 17, 2015. Refer to Note 9 to the consolidated financial statements for further discussion.


















35


The following table summarizes the net impact to cash, debt, and equity in conjunction with the Acquisition, as of the origination date:

(in thousands)
 
 
Credit Agreement
 
$
5,000

Cash consideration
 
(4,000
)
Net proceeds from Credit Agreement
 
1,000

 
 
 
Term Loan
 
5,000

Debt discount associated with SWK Warrant #1 (see Note 9)
 
(2,656
)
Derivative liability associated with SWK Warrant #2 (see Note 9)
 
(908
)
Net debt recorded with Acquisition
 
1,436

 
 
 
Common Stock (6,500,000 shares at $0.04 par)
 
260

 
 
 
Additional paid-in capital: issuance of shares
 
2,740

Additional paid-in capital: fair value of SWK Warrant #1 (see Note 9)
 
2,656

Net increase to APIC with Acquisition
 
$
5,396


The Acquisition 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. The allocation of purchase price is based on management’s judgment after evaluating several factors, including a valuation assessment.

The allocation of the purchase price was finalized in the first quarter of 2016 and is as follows:

(in thousands)
 
 
Accounts receivable, net of allowance of $2
 
$
918

Inventory and other current assets
 
117

Fixed assets
 
123

Customer portal (existing technologies)
 
4,151

Customer relationships
 
2,097

Goodwill
 
633

Accounts payable and accrued expenses
 
(743
)
Deferred revenue
 
(296
)
Purchase Price
 
$
7,000


Intangible assets acquired include existing technology in the form of a customer-facing wellness portal and customer relationships. The fair value of the customer relationships acquired was determined using the excess earnings method under the income approach for customer relationships; and the fair value of the wellness portal software was determined using the replacement cost method. The estimated useful life for the wellness portal and customer relationships is 4 years and 8 years, respectively. Amortization is recorded on a straight-line basis over the estimated useful life of the asset. The Company recorded amortization expense as a component of cost of operations of $1.0 million and $0.7 million, respectively, and amortization expense as a component of selling, general and administrative expenses of $0.3 million and $0.2 million, respectively, during the years ended December 31, 2016 and 2015. The goodwill of $0.6 million was recorded in the Company's single reporting unit and is deductible for tax purposes.

The consolidated statement of operations for the year ended December 31, 2016, includes revenues of $11.1 million and $9.6 million for the period from April 17, 2015 (acquisition date) to December 31, 2015. Disclosure of the earnings contribution from AHS is not practicable, as the Company has integrated operations.


36


The following table provides unaudited pro forma results of operations, as if the acquisition had been in effect for the full year ended December 31, 2015:

 
 
December 31, 2015
(in thousands)
 
 
Pro forma revenues
 
$
34,996

 
 
 
Pro forma net loss from continuing operations
 
$
(10,847
)

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. The pro forma results for the year ended December 31, 2015, includes pre-tax adjustments for amortization of intangible assets of $0.3 million and transaction costs of $0.8 million.

Note 4 — Share-Based Compensation

Employee Stock-Based Compensation Plans — On May 29, 2008, the Company's shareholders approved the 2008 Omnibus Employee Incentive Plan (the “2008 Plan”) providing for the grant of stock options, stock appreciation rights, non-vested stock and performance shares. The 2008 Plan provides for the issuance of an aggregate of 333,333 shares. During the years ended December 31, 2016 and 2015, options for the purchase of 187,832 and 90,000 shares, respectively, were granted under the 2008 Plan. During the years ended December 31, 2016 and 2015, no shares of restricted stock were granted. As of December 31, 2016, 36,013 shares remain available for grant under the 2008 Plan.

On May 24, 2011, the Company's shareholders approved the 2011 Omnibus Employee Incentive Plan (as subsequently amended and restated, the "2011 Plan") providing for the grant of stock options and non-vested stock awards. The 2011 Plan provides for the issuance of an aggregate of 633,333 shares. During the years ended December 31, 2016 and 2015, the Company granted a total of 166,665 and 40,000 stock awards, respectively, to non-employee members of the Board of Directors that immediately vested. During the years ended December 31, 2016 and 2015, options for the purchase of 7,500 and 46,667 shares, respectively, were granted under the 2011 Plan. As of December 31, 2016, 239,028 shares remain available for grant under the 2011 Plan. Effective December 31, 2015, the Company amended certain 2014 and 2015 employee award agreements to specify that any exercise of options under the agreement would be satisfied by an issuance of shares authorized under the 2008 Plan rather than the 2011 Plan. The award agreements were not amended in any other respect, and the options granted thereunder have not been amended in any respect and remain subject to their original exercise prices and vesting schedules.

Options under the 2008 and 2011 Plans are granted at fair value on the date of grant, are exercisable in accordance with various vesting schedules specified in the individual grant agreements, and have contractual lives of 10 years from the date of grant.
      
The fair value of each stock option granted during the year was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
 
 
2016
 
2015
Expected life (years)
 
4.8

 
4.9

Expected volatility
 
83
%
 
69
%
Expected dividend yield
 

 

Risk-free interest rate
 
1.4
%
 
1.7
%
Weighted average fair value of options granted during the year
 
$1.21
 
$2.70

The expected life of options granted is derived from the Company’s historical experience and represents the period of time that options granted are expected to be outstanding.  Expected volatility is based on the Company’s historical volatility.  The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of the grant.
 



37


The following table summarizes stock option activity for the year ended December 31, 2016:
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Weighted Average
 
Average Remaining
 
Aggregate Intrinsic
 
 
 Number of Shares
 
Exercise Price Per Share
 
Contractual Life (years)
 
 Value (in thousands)
Outstanding at December 31, 2015
 
286,568

 
$6.46
 
 
 
 
Granted
 
195,332

 
$1.86
 
 
 
 
Exercised
 

 

 
 
 
 
Forfeited and Expired
 
(77,914
)
 
$4.46
 
 
 
 
Outstanding at December 31, 2016
 
403,986

 
$4.62
 
8.1
 
$0
Exercisable at December 31, 2016
 
196,776

 
$6.74
 
7.0
 
$0
 
There were no options exercised for the year ended December 31, 2016, under either the 2008 or 2011 plans. For the year ended December 31, 2015, 3,333 stock options valued with a weighted average exercise price of $6.75 were exercised under the 2008 Plan. No stock options were exercised during the year ended December 31, 2015 under the 2011 Plan.

Options for the purchase of 86,736 and 56,208 shares of common stock, respectively, vested during the years ended December 31, 2016 and 2015, and the aggregate fair value at grant date of these options was $0.3 million and $0.3 million, respectively. As of December 31, 2016, there was approximately $0.2 million of unrecognized compensation cost related to stock options which is expected to be recognized over a weighted average period of 1.9 years.

The Company recorded $0.6 million and $0.4 million, of share-based compensation expense in selling, general and administrative expenses for each of the years ended December 31, 2016 and 2015, respectively, related to stock options, non-vested stock, and restricted stock awards.

Note 5 — Restructuring Charges

At December 31, 2016, there was a $0.4 million liability related to the Company's obligation under a lease related to the discontinued Hooper Holmes Services operations center, which is recorded in other current and long-term liabilities in the accompanying consolidated balance sheet. Charges and adjustments recorded during the year ended December 31, 2016, were recorded as a component of discontinued operations.

At December 31, 2015, there was a $0.7 million liability, of which $0.6 million is related to the discontinued Hooper Holmes Services operations center and $0.1 million is related to the discontinued Portamedic operations. The facility closure obligations were recorded in other current and long-term liabilities in the accompanying consolidated balance sheet. Charges and adjustments recorded during the year ended December 31, 2015, were recorded as a component of discontinued operations.

The following table provides a summary of the activity in the restructure accrual for the years ended December 31, 2016 and 2015:

(In thousands)
December 31, 2014
 
Adjustments
 
Payments
 
December 31, 2015
Facility closure obligation
$
1,074

 
$
(15
)
 
$
(402
)
 
$
657

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Adjustments
 
Payments
 
December 31, 2016
Facility closure obligation
$
657

 
$
249

 
$
(534
)
 
$
372


Note 6 — Property, Plant and Equipment, net

Property, plant and equipment, at cost, net, consists of the following:


38


 
 
 
 
Estimated
 
 
December 31,
 
Useful Life
(in thousands)
 
2016

2015
 
In Years
Leasehold improvements
 
$
1,125

 
$
1,386

 
10
Furniture, fixtures, and equipment
 
4,090

 
4,040

 
2 – 10
Software
 
3,245

 
3,001

 
1 – 7
 
 
8,460

 
8,427

 
 
Less: accumulated depreciation and amortization
 
6,700

 
5,656

 
 
Total
 
$
1,760

 
$
2,771

 
 

In accordance with guidance in ASC 360, the Company assessed its property, plant and equipment and recorded impairment charges of $0.1 million at December 31, 2016. There was no impairment for property, plant and equipment recorded at December 31, 2015.

Note 7 — Goodwill and Other Intangible Assets

The Company recorded goodwill of $0.6 million as of December 31, 2016 and 2015. The Company performed its annual assessment of goodwill for impairment during the fourth quarter 2016, and based on the Company’s analysis of the qualitative factors in ASC 350, management identified several adverse conditions that could potentially indicate that it is more likely than not that the Company’s goodwill was impaired.  Due to the Company's negative shareholders' equity as of December 31, 2016, the Company continued directly to Step 2 of the goodwill impairment test and assigned fair values to its assets and liabilities (both recognized and unrecognized) and compared that to the equity value of the Company, with the difference resulting in the implied fair value of goodwill.  The equity value of the Company was determined using the market capitalization and stock price as of the assessment date. In comparing the implied fair value of goodwill with the carrying value, the Company concluded that goodwill was not impaired as of December 31, 2016. There was also no impairment charges recorded for goodwill during the year ended December 31, 2015.

Intangible assets subject to amortization are amortized on a straight-line basis, with the estimated useful life for the wellness portal and customer relationships as 4 years and 8 years, respectively. Intangible assets are summarized in the table below:

 
 
December 31, 2016
 
 
December 31, 2015
(in thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangible Assets, net
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangible Assets, net
Portal
 
$
4,151

 
$
1,770

 
$
2,381

 
 
$
4,151

 
$
732

 
$
3,419

Customer relationships
 
2,097

 
447

 
1,650

 
 
2,097

 
185

 
1,912

        Total
 
$
6,248

 
$
2,217

 
$
4,031

 
 
$
6,248

 
$
917

 
$
5,331


Amortization expense for the years ended December 31, 2016 and 2015 was $1.3 million and $0.9 million, respectively.

Estimated aggregate amortization expense for each of the next five years is as follows:
(in thousands)
 
 
Year ending December 31,
 
 
2017
 
$
1,300

2018
 
1,300

2019
 
565

2020
 
262

2021
 
262



39


Based on the Company's recent financial performance and negative shareholders' equity, management determined a review of impairment of the Company's long-lived intangible assets was necessary during the fourth quarter 2016. The Company performed an assessment of the recoverability of the long-lived intangible assets and determined they were recoverable, and thus no impairment charge for long-lived intangible assets was required at December 31, 2016. There were also no impairment charges for long-lived intangible assets recorded during the year ended December 31, 2015.

Note 8 — Accrued Expenses and Other Current Liabilities

Accrued expenses consisted of the following:


December 31,
(in thousands)

2016

2015
Vendor-related accruals

$
540

 
$
1,324

Accrued wages

762

 
712

Accrued interest

402

 
197

Accrued income and other taxes
 
43

 
25

Other
 

 
55

Total

$
1,747

 
$
2,313

 
Other current liabilities consisted of the following:

 
 
December 31,
(in thousands)
 
2016
 
2015
Legal accrual
 
$
450

 
$
300

Reserve for unclaimed property
 
1,107

 
1,035

Restructure reserves
 
756

 
443

Deferred revenue
 
211

 
1,031

Other
 
97

 
64

Total
 
$
2,621

 
$
2,873


Note 9 — Debt
 
As of December 31, 2016, the Company maintained the 2016 Credit and Security Agreement and the Term Loan provided by the Credit Agreement. The following table summarizes the Company's outstanding borrowings:

(in thousands)
 
December 31, 2016
 
December 31, 2015
 
 
 
 
 
2016 Credit and Security Agreement (2013 Loan and Security Agreement as of December 31, 2015)
 
$
3,603

 
$
3,278

Term Loan
 
3,676

 
5,000

Discount on Term Loan
 
(1,122
)
 
(2,785
)
Unamortized debt issuance costs related to Term Loan
 
(336
)
 
(163
)
Total debt
 
5,821

 
5,330

Short-term portion
 
(5,821
)
 
(5,330
)
Total long-term debt, net
 
$

 
$


The following table summarizes the components of interest expense for the years ended December 31, 2016 and 2015:


40


(in thousands)
 
December 31, 2016
 
December 31, 2015
 
 
 
 
 
Interest expense on Term Loan (effective interest rate at December 31, 2016 and 2015 was 15%)
 
$
658

 
$
529

Interest expense on 2013 Loan and Security Agreement
 
48

 
94

Interest expense on 2016 Credit and Security Agreement
 
311

 

Accretion of termination fees (over term of Term Loan at rate of 8%)
 
187

 
88

Amortization of debt issuance costs
 
362

 
385

Write-off of debt issuance costs related to 2013 Loan and Security Agreement
 
282

 

Amortization of debt discount associated with SWK Warrants #1 and #2 (defined below)
 
1,663

 
780

Mark to market of SWK Warrant #2 (defined below)
 
59

 
(80
)
Total
 
$
3,570

 
$
1,796


2013 Loan and Security Agreement

Prior to April 29, 2016, the Company maintained a loan and security agreement (the “2013 Loan and Security Agreement”) with ACF FinCo I LP ("ACF"), the assignee of Keltic Financial Partners II, LP, which was scheduled to expire on February 28, 2019. On April 29, 2016, in conjunction with entering into a new three year 2016 Credit and Security Agreement with SCM, the Company terminated the 2013 Loan and Security Agreement with ACF. An early termination fee of $0.1 million, approximately $0.03 million of legal fees, and approximately $0.1 million of other ordinary course fees were accelerated due to the termination of the 2013 Loan and Security Agreement and were rolled into the opening outstanding borrowings under the 2016 Credit and Security Agreement with SCM along with $2.6 million of remaining borrowings from the 2013 Loan and Security Agreement. The corresponding expenses are reflected in transaction costs in the consolidated statement of operations during the year ended December 31, 2016. In addition, approximately $0.3 million of unamortized debt issuance costs related to the 2013 Loan and Security Agreement were written off and recorded in interest expense in the consolidated statement of operations during the year ended December 31, 2016.

2016 Credit and Security Agreement

On April 29, 2016, the Company entered into the 2016 Credit and Security Agreement with SCM, as amended on August 15, 2016, and November 15, 2016. 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.

Under the terms of the 2016 Credit and Security Agreement, SCM makes cash advances to the Company in an aggregate principal at any one time outstanding not to exceed $7 million, 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 December 31, 2016, the Company had $3.6 million of outstanding borrowings under the 2016 Credit and Security Agreement with unused borrowing capacity of $0.1 million. As of February 28, 2017, the Company had $3.1 million of outstanding borrowings, with unused borrowing capacity of $0.2 million. Any borrowings on the unused borrowing capacity are at the discretion of SCM.

Borrowings under the 2016 Credit and Security Agreement bear interest at a fluctuating rate that when annualized is equal to the Prime Rate plus 5.5%, subject to increase in the event of a default. The Company paid SCM a $0.1 million facility fee, and monthly, SCM 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. As of December 31, 2016, the remaining balance in debt issuance costs recorded in Other Assets on the consolidated balance sheet was $0.3 million.

Borrowings under the 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.


41


On November 15, 2016, the Company entered into the Second Amendment to Credit and Security Agreement (the “Second Amendment”) with SCM. The Second Amendment cured the default reported in the Company’s Form 10-Q for the quarter ended September 30, 2016, by revising the minimum adjusted EBITDA covenant in the 2016 Credit and Security Agreement. In addition, the Second Amendment revised the minimum adjusted EBITDA and aggregate revenue covenants going forward. Noncompliance with these covenants constitutes an event of default. Minimum aggregate revenue must not be less than $34.0 million for the twelve months ending December 31, 2016, $41.0 million for the twelve months ending March 31, 2017, and $42.0 million for the twelve months ending each fiscal quarter thereafter. Adjusted EBITDA must not be less than negative $3.5 million for the twelve months ending December 31, 2016, $0.5 million for the twelve months ending March 31, 2017, $0.9 million for the twelve months ending June 30, 2017, and $2.5 million for the twelve months ending each fiscal quarter thereafter. In addition, consolidated unencumbered liquid assets must not be less than $0.5 million on the last day of the fiscal quarter ending December 31, 2016, and $0.75 million on the last day of any fiscal quarter thereafter. The Company was in compliance with the covenants under the Second Amendment as of December 31, 2016. If the Company is unable to comply with financial covenants in the future and in the event that the Company was unable to modify the covenants, find new or additional lenders, or raise additional equity, it would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business.

Credit Agreement

In order to fund the Acquisition, 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 provides the Company with a $5.0 million Term Loan. The proceeds of the Term Loan were used to pay certain fees and expenses related to the negotiation and consummation of the Purchase Agreement and the Acquisition described in Note 3 to the consolidated financial statements and general corporate purposes. The Company paid SWK an origination fee of $0.1 million. The Term Loan is due and payable on April 17, 2018. The Company is also required to make quarterly revenue-based payments in an amount equal to eight and one-half percent (8.5%) of yearly aggregate revenue up to and including $20 million, seven percent (7%) of yearly aggregate revenue greater than $20 million up to and including $30 million, and five percent (5%) of yearly aggregate revenue greater than $30 million. The revenue-based payment will be applied to fees and interest, and any excess to the principal of the Term Loan. Revenue-based payments commenced in February 2016, and the maximum aggregate revenue-based principal payment is capped at $0.6 million per quarter. On August 15, 2016, the Company entered into the Third Amendment to Credit Agreement and Limited Waiver and Forbearance (the “Third Amendment”) which, among other things, waived the August 2016 revenue-based principal payment. On November 15, 2016, the Company entered into the Fourth Amendment to Credit Agreement (the "Fourth Amendment") which revised the November 2016 payment such that the maximum principal portion of the aggregate revenue-based payment is capped at $0.4 million and revised the debt covenants (see below for further information on the covenants). The Company evaluated the application of ASC 470-50 and ASC 470-60 for both the Third and Fourth Amendments and concluded that the revised terms did not constitute troubled debt restructurings, and the amendments were accounted for as debt modifications rather than debt extinguishments. During the year ended December 31, 2016, the Company made principal payments to SWK of $1.3 million, and paid approximately $0.5 million of interest.

The outstanding principal balance under the 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 fourteen percent (14.0%) and is due and payable quarterly, in arrears, commencing on August 14, 2015. Upon the earlier of (a) the maturity date on April 17, 2018, 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 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.

The 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 SCM when due or if SCM 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.

As security for payment and other obligations under the 2016 Credit and Security Agreement, SCM holds a security interest in all of the Company's, and its subsidiary guarantors', existing and after-acquired property, including receivables (which are subject to a lockbox account arrangement), inventory, and equipment. Additionally, SWK holds a security interest for final and indefeasible payment. The security interest held by SWK is in substantially all of the Company's assets and the Company's subsidiaries.

In connection with the execution of the Credit Agreement, 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, the Company

42


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 consolidated balance sheet. The SWK Warrant #1 is exercisable after October 17, 2015, and up to and including April 17, 2022. The SWK Warrant #1 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 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 (the “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, the 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 is being amortized through interest expense over the term of the Credit Agreement using the effective interest method. The Company valued both warrants using the Black-Scholes pricing model, which utilizes Level 3 Inputs. For the 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 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 SCM, which is discussed further above. Accordingly, during the year ended December 31, 2016, the Company recorded $0.9 million in other income in the consolidated statement of operations related to the write-off of the derivative liability associated with the SWK Warrant #2.

On March 28, 2016, the Company entered into the Second Amendment to the Credit Agreement (the "Second Amendment") which required the Company to issue shares of its common stock, $0.04 par value, with a value of $0.1 million to SWK, which the Company issued during the first quarter of 2016 and recorded as debt issuance costs as a direct deduction to short-term debt on the consolidated balance sheet as of December 31, 2016.     

The Fourth Amendment cured the default reported in the Company’s Form 10-Q for the quarter ended September 30, 2016, by providing a waiver of the Company's noncompliance with the minimum adjusted EBITDA covenant in the Credit Agreement. In addition, the Fourth Amendment revised the minimum adjusted EBITDA and aggregate revenue covenants going forward. Noncompliance with these covenants constitutes an event of default. Minimum aggregate revenue must not be less than $34.0 million for the twelve months ending December 31, 2016, $41.0 million for the twelve months ending March 31, 2017, and $42.0 million for the twelve months ending each fiscal quarter thereafter. Adjusted EBITDA must not be less than negative $3.5 million for the twelve months ending December 31, 2016, $0.5 million for the twelve months ending March 31, 2017, $0.9 million for the twelve months ending June 30, 2017, and $2.5 million for the twelve months ending each fiscal quarter thereafter. In addition, consolidated unencumbered liquid assets must not be less than $0.5 million on the last day of the fiscal quarter ending December 31, 2016, and $0.75 million on the last day of any fiscal quarter thereafter. The Company was in compliance with the covenants under the Fourth Amendment as of December 31, 2016. If the Company is unable to comply with financial covenants in the future and in the event that the Company was unable to modify the covenants, find new or additional lenders, or raise additional equity, it would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business.

Note 10 — Commitments and Contingencies

Lease obligations

The Company leases its corporate headquarters in Olathe, Kansas under an operating lease which expires in 2018. As of December 31, 2016, the Company was in default on two leased properties assigned to the Company through the Acquisition in Des Moines, IA and Indianapolis, IN under operating leases which also expire in 2018. The Company determined that neither lease were necessary for its operations, so the Company is working with the Des Moines and Indianapolis landlords to terminate both leases on mutually acceptable terms. The Company also leases vehicles, copiers, and other miscellaneous office equipment. These leases expire at various times through 2019.

The Company is obligated, and in default as of December 31, 2016, under a lease related to the discontinued Hooper Holmes Services operations center through 2018 and has ceased use of this facility. The Company has recorded a facility closure obligation of $0.4 million as of December 31, 2016, related to this lease, which is recorded in other current and long-term liabilities in the consolidated balance sheet. The Company has subleased out part of this space and is also working with this landlord to terminate the lease on mutually acceptable terms.

43



The table below presents future minimum lease payments for operating leases (with initial or remaining terms in excess of one year) as of December 31, 2016, and includes leases from both continuing and discontinued operations, as described above. This table does not reflect any changes related to the lease negotiations noted above.

(in thousands)
 
 
Year ending December 31,

Operating
Leases
2017

$
1,743

2018

1,278

2019

4

2020


2021


Thereafter


Total minimum lease payments

$
3,025

Estimated sublease payments (not included in minimum lease payments)

(633
)


$
2,392


Rental expense under operating leases of continuing operations totaled $1.2 million and $1.1 million in 2016 and 2015, respectively.

Employment obligations

The Company has employment agreements with certain executive employees that provide for payment of base salary for a one year period in the event their employment with the Company is terminated in certain circumstances, including following a change in control, as further defined in the agreements.

The Company incurred certain severance and other costs related to its ongoing initiatives to increase the flexibility of its cost structure that were recorded in selling, general, and administrative expenses, and at December 31, 2016, the Company recorded a $0.3 million liability related to these initiatives in other current liabilities in the accompanying consolidated balance sheet.

Legal contingencies and obligations

The Company, in the normal course of business, is a party to various claims and other legal proceedings. In the opinion of management, the Company has legal defenses and/or insurance coverage (subject to deductibles) with respect to all of its pending legal actions. If management believes that a material loss not covered by insurance arising from these actions is probable and can reasonably be estimated, the Company may record the amount of the estimated loss or, if a loss cannot be estimated but the minimum liability may be estimated using a range and no point is more probable than another, the Company may record the minimum estimated liability. As additional information becomes available, any potential liability related to these actions is assessed and the estimates are revised, if necessary. Management believes that the ultimate outcome of all pending legal actions, individually and in the aggregate, will not have a material adverse effect on the Company's financial position that is inconsistent with its loss reserves or on its overall trends in results of operations. However, litigation and claims are subject to inherent uncertainties and unfavorable outcomes can occur that exceed any amounts reserved for such losses. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the outcome occurs or in future periods.

On August 5, 2016, the Company agreed to a settlement of $0.45 million related to a lawsuit involving the former Portamedic service line for which the Company retained liability. Accordingly, as of December 31, 2016 and 2015, the Company has recorded a liability of $0.45 million and $0.3 million, respectively, related to this matter.  The litigation accrual for all periods was included in the other current liabilities line item on the accompanying consolidated balance sheet.  The additional expense of $0.15 million recorded during the year ended December 31, 2016, was included in the discontinued operations line item on the consolidated statements of operations. The claim is not covered by insurance, and the Company incurred legal costs to defend the litigation which are also recorded in discontinued operations.



44


Note 11 — Income Taxes

The components of the income tax provision are as follows:

(in thousands)
 
2016
 
2015
Federal - current
 
$

 
$

State and local - current
 
16

 
12

Federal - deferred
 
8

 
6

State and local - deferred
 
1

 
1

Total income tax expense
 
$
25

 
$
19


The following reconciles the “statutory” federal income tax rate to the effective income tax rate:

 
 
2016

2015
Computed "expected" income tax benefit
 
(35
)%
 
(35
)%
Reduction (increase) in income tax benefit and increase (reduction) in income tax expense resulting from:
 
 
 
 
State tax, net of federal benefit
 

 

Change in federal valuation allowance
 
35

 
35

Other
 

 

Effective income tax rate
 
 %
 
 %

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:

(in thousands)
 
2016
 
2015
Deferred income tax assets:
 
 
 
 
Receivable allowance
 
$
17

 
$
43

Accumulated depreciation
 
371

 
214

Restructuring accrual
 
454

 
376

Intangible assets
 
813

 
484

Compensation expense
 
634

 
417

Federal net operating loss carryforward
 
61,688

 
58,532

State net operating loss carryforward
 
5,736

 
6,040

Accrued expenses
 
160

 
344

Deferred rent
 
57

 
102

Deferred revenue
 
83

 
343

Interest
 
180

 

Other
 
10

 
43

Gross deferred income tax assets
 
$
70,203

 
$
66,938

Valuation allowance
 
(70,203
)
 
(66,929
)
 
 
$

 
$
9

Deferred income tax liabilities:
 
 

 
 

Interest
 
$

 
$
(9
)
Goodwill
 
(16
)
 
(7
)
Gross deferred income tax liabilities
 
(16
)
 
(16
)
Net deferred income tax assets
 
$
(16
)
 
$
(7
)

45



The Company has significant deferred tax assets attributable to tax deductible intangibles and federal and state net operating loss carryforwards, which may reduce taxable income in future periods.  Based on the cumulative tax and operating losses, the lack of taxes in the carryback period, and the uncertainty surrounding the extent or timing of future taxable income, the Company believes it is not more likely than not that it will realize the tax benefits of its deferred tax assets.  Accordingly, the Company continues to record a full valuation allowance on its net deferred tax assets as of December 31, 2016 and 2015, with the exception of deferred income tax on the liabilities of certain indefinite-lived intangibles.

There was no current federal tax expense recorded in the years ended December 31, 2016 and 2015. The current state tax expense recorded for the years ended December 31, 2016 and 2015 reflects a state tax liability to one state. Deferred tax expense is recorded as of December 31, 2016 and 2015.

The tax years 2013 through 2016 may be subject to federal examination and assessment.  Tax years from 2008 through 2012 remain open solely for purposes of federal and certain state examination of net operating loss and credit carryforwards.  State income tax returns may be subject to examination for tax years 2012 through 2016, depending on state tax statute of limitations.
  
As of December 31, 2016, the Company had U.S. federal and state net operating loss carryforwards of approximately $176.2 million and $143.0 million, respectively.   The net operating loss carryforwards, if not utilized, will expire in the years 2017 through 2036. No tax benefit has been reported since a full valuation allowance offsets these tax attributes. However, limitations could apply upon the release of the valuation allowance.

Since the Company had changes in ownership during 2015 and continuing into 2016, additional limitations under IRC Section 382 of the Internal Revenue Code of 1986 may apply to the future utilization of certain tax attributes including net operating loss (“NOL”) carryforwards, other tax carryforwards, and certain built-in losses.  Limitations on future net operating losses apply when a greater than 50% ownership change occurs under the rules of IRC Section 382. The Company has not had a formal study completed with respect to IRC Section 382, but the Company did complete its own analysis and determined that there has not been a greater than 50% change in ownership as of December 31, 2016. However, if the merger discussed in Note 15 to the consolidated financial statements is approved, the Company has determined that it is more likely than not that a greater than 50% change in ownership may occur by May 2017. If confirmed, the allowance of future net operating losses will be limited to the market capitalization value multiplied by the “long-term tax-exempt rate” for the month in which the ownership change takes place. It is estimated that the Company would be limited to approximately $0.2 million of NOL per year, and due to expiring net operating loss provisions, the Company has estimated it would be unable to utilize approximately $172.7 million and $140.0 million of remaining federal and state net operating losses, respectively, in the future.

Note 12 — Common Stock

The 2016 Credit and Security Agreement prohibits the Company from repurchasing or retiring shares of its common stock and paying dividends (see Note 9 to the consolidated financial statements). The Company did not repurchase any shares of its common stock in 2016 and 2015. The Company did retire its treasury stock in the amount of $0.1 million in connection with the reverse stock split discussed in Note 1 to the consolidated financial statements. Refer to Note 2 to the consolidated financials for discussion of issuance of common stock and warrants during the year ended December 31, 2016.

Note 13 — 401(k) Savings and Retirement Plan

The Company’s 401(k) Savings and Retirement Plan (the “401(k) Plan”) is available to all employees with at least one year of employment service, who have worked at least 1,000 hours in a service year and who are at least 21 years of age. There were no Company contributions related to the 401(k) Plan during the years ended December 31, 2016 and 2015. The Company’s common stock is not an investment option to employees participating in the 401(k) Plan.

Note 14 — Fair Value Measurements

The Company determines the fair value measurements used in our consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

46



Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3 - Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company estimated the fair value of the Term Loan and the derivative liability using Level 3 valuation techniques. The estimated fair value of the Term Loan was determined by discounting future projected cash flows using a discount rate commensurate with the risks involved and by using the Black-Scholes valuation model, while the estimated fair value of the derivative liability was determined using the Black-Scholes valuation model.