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 CNH Finance ("CNH"), as amended. If the Company needs to borrow in the future under its 2016 Credit and Security Agreement, as amended, which is solely at the lender's discretion, the amount available for borrowing may be less than the $15.0 million under this facility at any given time due to the manner in which the maximum available amount is calculated. The Company has an available borrowing base subject to reserves established at the lender's discretion of 85% of Eligible Receivables up to $15.0 million under this facility. At December 31, 2017, the Company had $10.0 million of outstanding borrowings under the 2016 Credit and Security Agreement, with unused borrowing capacity of $1.8 million. In addition, the Company entered into the Amended and Restated Credit Agreement dated as of May 11, 2017 (the “A&R Credit Agreement”), with SWK Funding, LLC (“SWK”), as amended provides both a term loan of $8.5 million (the “Term Loan”) and a $2.0 million revolving credit facility (the “Seasonal Facility”) that the Company can use between June 1 and November 30, for both 2017 and 2018. In 2017, the A&R Credit Agreement with SWK, as amended, increased the principal balance under the existing former Term Loan to $6.5 million and provided for an additional $2.0 million term loan (the “August 2017 Term Loan”). The debt agreements with CNH and SWK described above contain certain financial covenants, including various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements, which the Company was not in compliance with as of December 31, 2017. On February 2, 2018, the Company entered into a Third Amendment to the A&R Credit Agreement which extended the August 2017 Term Loan’s maturity date to April 30, 2018. The Company has repaid $250,000 of the principal balance thereon as part of this Third Amendment. Under this Third Amendment, there was a second payment of $250,000 due in March 2018, which was not repaid in accordance with the amendment and as a result, the Company is currently in default.

The Company has 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 screening services, the Company must expend cash to deliver the equipment and supplies required for the screening services. The Company must also expend cash to pay the health professionals and site management conducting the screening services. 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, management expects to continue using a revolving credit facility in 2018 and beyond.

Going Concern

In accordance with ASC 205-40, the following information reflects the results of management’s assessment of its 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:

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The Company had a working capital deficit of $27.1 million with $0.9 million of cash and cash equivalents at December 31, 2017. The Company had $11.7 million of payables at December 31, 2017, that were in past due date terms. The Company continues to work with its vendors to facilitate revised payment terms; however, the Company has had certain vendors who have terminated services, threatened to terminate services, filed legal action or threatened to file legal action due to aged outstanding payables and in order to accelerate invoice payments. At December 31, 2017, over 35% of our outstanding payables were more than 90 days past due. If certain services were terminated and the Company was not able to find alternative sources of supply, it could have a material adverse impact on our business.


•	The Company’s net cash used in operating activities during the year ended December 31, 2017, was $12.0 million. The Company’s current forecast does not indicate positive cash flow in 2018, and our history of losses requires us to be cautious in our forecasting. We continue reviewing restructuring within our organization for additional cost savings.


•	The Company incurred a loss from continuing operations of $16.1 million for the year ended December 31, 2017; however, this includes $3.2 million of one-time transaction and transition expenses related to the Merger.

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The Company had $10.0 million of outstanding borrowings under the 2016 Credit and Security Agreement with CNH, with unused borrowing capacity of $1.8 million, at December 31, 2017. As of March 30, 2018, the Company had $4.9 million of outstanding borrowings with unused borrowing capacity of $0.2 million. Any borrowings on the unused borrowing capacity are at the discretion of CNH. The Company is presently in default under the 2016 Credit and Security Agreement as a result of a cross-default provision triggered by our March 2018 payment default under the Term Loan with SWK, described below.


•	The Company owed $8.5 million at December 31, 2017 under the Term Loan with SWK, which was used to fund the Merger and working capital. In addition, the Company owed $1.9 million to Century (as defined in Note 9 to the consolidated financial statements) for the Subordinated Promissory Note issued in connection with the Merger.

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The maturity date of the August 2017 Term Loan, which comprised $2.0 million of the $8.5 million balance owed under the Term Loan with SWK, has been extended to April 30, 2018. As required by the Third Amendment, which provided for the April 30, 2018 extension, and on February 1, 2018, we repaid $250,000 of the principal balance on the August 2017 Term Loan. The extension also required a second payment of $250,000 in March that was not repaid. As a result of missing this March payment, the Company is currently in default of that agreement.

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The debt agreements with CNH and SWK described above contain certain financial covenants, including various affirmative and negative covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements, which the Company did not comply with as of December 31, 2017. On February 2, 2018, we entered into a Third Amendment to the A&R Credit Agreement which provided a waiver for the measurement period ended December 31, 2017, in the event the Company is able to pay $250,000 on March 15, 2018, and the remaining balance of the August 2017 Term Loan in full, prior to April 30, 2018. The Company was not able to make its March 15, 2018, payment; therefore, the Company defaulted on its loan with SWK and, due to the cross-default clause with CNH, was also in default on its 2016 Credit and Security Agreement. Even though the Company is in default, the lenders have not yet elected to exercise their rights under the agreements to declare the obligations immediately due and payable. If the Company is unable to remediate the existing default, comply with financial covenants in the future and cannot modify the covenants, find new or additional lenders, or raise additional equity, CNH reserves the right to terminate access to the unused borrowing capacity under the 2016 Credit and Security Agreement. CNH and SWK have reserved their 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 the debt agreements with CNH and SWK prohibit the Company from incurring additional debt of any kind without prior approval from the lenders. In addition, CNH has reserved the right to terminate access to the unused borrowing capacity under the 2016 Credit and Security Agreement. For additional information regarding the 2016 Credit and Security Agreement, the A&R Credit Agreement, and the related covenants, refer to Note 9 to the consolidated financial statements. If the Company is unable to negotiate forbearance agreements or waivers of the existing covenant and payment defaults with SWK and CNH, raise sufficient capital to repay the facilities, or replace the facilities with new debt facilities, the defaults could have a material adverse impact on the Company's business.


•	The Company has contractual obligations related to operating leases for our two major locations in Olathe, KS and East Greenwich, RI, capital leases obtained in the Merger and employment contracts which could adversely affect liquidity. Refer to Note 10 to the consolidated financial statements.

Management's plans

The Company expects 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:

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As disclosed on our Form 8-K filed with the SEC on March 30, 2018, the Company appointed a Chief Restructuring Officer ("CRO"). The CRO’s principal duties in the immediate term are to establish a working capital plan, with the broader mandate to include developing and implementing plans to restructure the Company’s balance sheet, operating expense structure and overall strategies in an effort to resolve this going concern assessment. The plan, when finalized, may involve significant changes to the Company’s business model, including any or all of the following: divestitures of lines of business, reductions in staffing, changes to the type and pricing of the Company’s service offerings, and changes in the Company’s marketing and sales strategies and client mix. During the CRO’s tenure, our executive officers will report to the CRO.


•	Under the restructuring plan being developed by the CRO, the Company will consider all available options for strengthening our balance sheet through acquisitions and divestitures, capital-raising activities, and restructuring existing obligations.


•	The Company will continue to seek additional equity investments. During the year ended December 31, 2017, the Company was able to raise $3.4 million of additional equity through the issuance of common stock and warrants, net of issuance costs.

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The Company will seek a source of debt or equity sufficient to repay the principal balance of the August 2017 Term Loan prior to its maturity date of April 30, 2018, or as an alternative, may seek an agreement with SWK to modify the repayment obligation. The Company continues to work with SWK through the restructuring process, and will share with SWK the restructuring plan described above, once finalized. The result of this restructuring plan may impact SWK’s decision regarding the repayment terms of this loan.


•	The Company will seek forbearance agreements or waivers of the existing covenant and payment defaults with SWK and CNH.

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On August 31, 2017, the Company entered into a purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”) (the "LPC Equity Line"), pursuant to which the Company has the right to sell to LPC up to $10.0 million in shares of our common stock, $0.04 par value. Based on the market price of the Company’s stock at the time of this filing, the Company would be limited to selling LPC a dollar value of shares totaling approximately $8,250 per day. Subject to these limitations and satisfaction of the conditions set forth in the Registration Rights Agreement, we will have the right to require LPC to purchase shares to provide equity financing for our operations over a 36-month period.


•	As discussed in Note 10 to the consolidated financial statements, the Company reached settlement agreements for the remaining lease obligations owed under three operating leases for spaces the Company no longer utilizes. The terms of the three lease settlements reduced our obligation by approximately $0.7 million compared to the original stated lease terms.


•	The Company has been able to obtain more favorable payment terms with some of its vendors and will continue to pursue revised terms, based on the new consolidated company model after the Merger. Hooper Holmes and PHS had several of the same vendors and have been able to work with them collectively to come up with more favorable terms for us going forward which should improve liquidity.


•	The Company will continue to aggressively seek new and return business from our existing customers and expand our presence in the health and wellness marketplace. The Company will also evaluate the overall profitability of our existing customer contracts and attempt to address underperforming business through price increases, cost savings or termination of services.


•	The Company will continue to analyze and implement further cost reduction initiatives and efficiency improvements (see Note 10 to the consolidated financial statements). In March 2018, we reorganized several departments which resulted in headcount reductions and additional savings.

Management's assessment and conclusion

Considering the Company's recent history of liquidity challenges, the Company has evaluated its plans described above to determine the likelihood that they will be effectively implemented and, if so, the likelihood that they will alleviate or mitigate the conditions and events that raise substantial doubt about the Company's ability to continue as a going concern. Successful implementation of these plans involves both the Company's efforts and factors that are outside its control, such as its ability to attract and retain new and existing customers and to negotiate suitable terms with vendors and financing sources. As a result, the Company can give no assurance that its plans will be effectively implemented in such a way that they will sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company's ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

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.