Basis of Presentation

Hooper Holmes, Inc. and its subsidiaries (“Hooper Holmes” or the "Company”) provide on-site screening services and flu shots, laboratory testing, health risk assessment, and sample collection services to individuals as part of comprehensive health and wellbeing programs offered through organizations sponsoring such programs including corporate and government employers, health plans, hospital systems, health care management companies, wellbeing companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations and academic institutions. Through the Company's comprehensive health and wellbeing services, the Company also provides health coaching to support positive health risk migration, access to a wellbeing platform with individual and team challenges and rewards management, interoperability with third party digital health providers, 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. In addition, the Company leverages our national network of health professionals to support the delivery of other similar products and services. The Company’s Food and Drug Administration ("FDA") and International Organization for Standardization ("ISO") certified medical-kit facility provides services to global pharmaceutical companies and supports the delivery of our products and services in a high-quality, secure manner. In 2017, the Company merged with Provant Health Solutions LLC ("PHS"), which offered a similar set of services as Hooper Holmes. The combined company provides a personalized, one-stop programming experience for customers, with proven outcomes powered by sophisticated data collection and management. This uniquely positions the Company to transform and capitalize on the large and growing health and wellbeing market. On January 23, 2018, the Company announced that it has re-branded to Hooper Holmes, Inc. d/b/a Provant Health.

The Company operates under one reporting segment. The Company’s biometric screening services are subject to seasonality, with the third and fourth quarters typically being its strongest quarters due to increased demand for screening services from mid-August through late-November related to annual benefit renewal cycles as well as the seasonal delivery of flu shots. Engagement in the Company’s health and wellbeing 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 the Company’s screening and health and wellbeing services, the Company generates ancillary revenue through the assembly of medical kits for sale to third parties.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Hooper Holmes and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2017 Annual Report on Form 10-K, filed with the SEC on April 17, 2018, as amended by Amendment No. 1 on Form 10-K/A, which was filed with the SEC on May 1, 2018.

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 Quarterly Report on Form 10-Q.

On May 11, 2017, the Company closed the transactions (the “Merger”) contemplated by the Agreement and Plan of Merger dated March 7, 2017 (the "Merger Agreement") by and among the Company, Piper Merger Corp., PHS, and Wellness Holdings, LLC. PHS was the surviving entity in the Merger, as a result of which it became a wholly-owned subsidiary of the Company. See Note 3 to the condensed consolidated financial statements for further discussion.

Immaterial out-of-period corrections to prior period amounts

During the period ended June 30, 2018, the Company identified an immaterial error in its previously issued consolidated financial statements for the year ended December 31, 2017, which has been corrected out-of-period in the accompanying condensed consolidated financial statement as of June 30, 2018. Subsequent to determining that the measurement period was finalized, the company recorded a $0.1 million adjustment to increase goodwill and income tax benefit related to a tax adjustment of the acquired valuation allowance of PHS.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions about future events. The financial information included herein is unaudited; however, such information reflects all adjustments that are, in the opinion of the Company's management, necessary for a fair statement of results for the interim periods presented. 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 and legal 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 condensed consolidated financial statements in future periods.

The results of operations for the three and six months ended June 30, 2018 and 2017, are not necessarily indicative of the results to be expected for any other interim period or the full year. See “Management's Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

Adoption of new accounting standard

Accounting Standards Update (“ASU”) 2014-09, “Revenue - Revenue from Contracts with Customers (Topic 606)” (“ASU-2014-09”), which with amendments is collectively known as ASC 606. On January 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method. As a policy election, the new revenue standard was applied only to contracts that were not substantially completed as of the date of adoption. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the January 1, 2018 opening balance of accumulated deficit. The prior period condensed consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.

As a result of the adoption of ASU 2014-09, the Company has changes to its revenue recognition policy for revenue recognition. Revenue is recognized when control of the services or goods, through the performance obligation of the Company is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for the performance obligations. The Company accounts for revenue contracts with customers based on the following steps:


•	Identification of the contract, or contracts with a customer


•	Identification of the performance obligations in the contract


•	Determination of the transaction price


•	Allocation of the transaction price to the performance obligations in the contract


•	Recognition of revenue when, or as, the Company satisfies a performance obligation

Revenue is recognized for screening services when the screening is completed based on the either the actual number of participants screened or an estimated minimum depending on the terms of the contract. 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 or ratable over the delivery period. The ratable recognition is the result of a stand ready obligation under which we expect the customer to receive and consume the benefits throughout the period. This is a faithful depiction of the satisfaction of the performance obligation because we cannot reasonably estimate when they will request performance and therefore have determined that the straight-line method is the most appropriate measure of performance. Revenue for kit assembly is recorded upon completion of the kit as the Company only assembles components on behalf of the customer and does not take control of the raw materials or finished goods. For contracts with multiple performance obligations, the transaction price is allocated to each individual performance obligation based on the standalone selling price of that performance obligation. We use standalone transactions when available to value each performance obligation. If standalone transactions are not available, we will estimate the standalone selling price through a cost plus a reasonable margin analysis. Any discounts from standalone selling price are spread proportionally to each performance obligation.

The Company has agreements with third parties for the procurement of rewards and gift cards for some customers who subsequently distribute these rewards and gift cards to their employees for engaging in certain health and wellness activities. The Company does not control the rewards and gift cards before they are transferred to the customer, the pricing is controlled by the third party and the Company does not generate any profit or loss for these activities as the service is only a “pass-though” cost, and therefore the Company has been classified as an agent with regards to these subcontracted services. These pass-through costs are not included in the transaction price and the Company will record the reimburse of these costs net of the amount it pays the third party.

The Company recognizes contract assets, or unbilled receivables, related to the rights to consideration for services completed but not billed at the reporting date. Unbilled receivables are classified as receivables when the Company has the right to invoice the customer. Unbilled receivables were $1.9 million at June 30, 2018. The unbilled receivables of $2.7 million outstanding at December 31, 2017 were subsequently billed prior to March 31, 2018.

The Company records contract liabilities when cash payments are received for due in advance of performance to deferred revenue. Deferred revenue primarily relates to the advance consideration received from the customer. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as long-term deferred revenue. Deferred revenue during the three and six months ended June 30, 2018 decreased by $0.4 million and $0.7 million, respectively, resulting from $0.7 million and $1.5 million of additional invoicing and was offset by revenue recognized of $1.0 million and $2.2 million during the same periods, of which $0.3 million and $1.0 million were included in deferred revenue at the beginning of the respective periods. As of June 30, 2018, there is $1.6 million in total deferred revenue of which $0.03 million is long-term and will be recognized over a period exceeding 12 months. The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an expected length of one year of less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.

The recognition of our revenues remains substantially unchanged under ASC 606 with the exception of upfront fees charged to our customers which had a material impact. Depending on the terms of the contract, the period over which the upfront fees will be recognized may differ from the current treatment. In addition to the revenue change for up-front fees, the Company expects a change to the direct and incremental costs to obtain contract with customers, such as sales commissions, as these costs will be deferred and recognized over the period of benefit rather than expensing them as incurred in the period that the commissions are earned by our employees. The change in deferred commission expense as a result of deferring incremental costs of obtaining a contract and the related offset of amortization were both immaterial during the three and six months ended June 30, 2018.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard was as follows:



(in thousands)	Balance at December 31, 2017			Adjustments due to ASC 606			Balance at January 1, 2018
ASSETS
Other current assets	$	998		$	70		$	1,068
Other assets	397			359			756
LIABILITIES AND STOCKHOLDERS' DEFICIT
Other current liabilities	5,529			(42		)	5,487
Other long-term liabilities	268			(53		)	215
Accumulated deficit	(185,324		)	(334		)	(184,990		)

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Operations was as follows:



	June 30, 2018
(in thousands)	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)
BALANCE SHEET
ASSETS
Other current assets	$	794		$	740		$	54
Other assets	982			623			359
LIABILITIES AND STOCKHOLDERS' DEFICIT
Other current liabilities	4,220			4,184			36
Other long-term liabilities	149			96			53
Accumulated deficit	(195,296		)	(194,962		)	334



	Three months ended									Six months ended
	June 30, 2018									June 30, 2018
(in thousands)	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)			As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)
STATEMENT OF OPERATIONS
Revenues	$	10,275		$	10,183		$	92		$	21,610		$	21,604		$	6
Selling, general and administrative expenses	6,433			6,451			(18		)	13,284			13,300			(16		)
Net loss	(5,077		)	(5,151		)	74			(10,306		)	(10,296		)	(10		)

The following table disaggregates our revenue by major product line:



	Three months ended		Six months ended
(in thousands)	June 30, 2018		June 30, 2018
Screening revenues	$	6,726	$	14,071
Portal revenues	2,685		5,715
Coaching revenues	485		1,074
Other revenues	379		750
Total revenues	$	10,275	$	21,610

New Accounting Pronouncements

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 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 adopted the guidance during the fourth fiscal quarter of 2017, prior to our annual testing of goodwill impairment. See Note 7 to the consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting", which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award's fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its consolidated financial position, results of operations or cash flows.