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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, 2014

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 S

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 S

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 S 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 S 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.   S

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 S
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No S
The aggregate market value of the shares of common stock held by non-affiliates of the Registrant (66,600,000), based on the closing price of these shares on June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) on the NYSE MKT, was $50,000,000.

The number of shares outstanding of the Registrant’s common stock as of February 28, 2015 was 70,866,603.

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 10, 2015 to be filed with the Securities and Exchange Commission within 120 days of the Registrant's fiscal year ended December 31, 2014.



Table of Contents
 
 
 
PART I
 
 
 
 
 





Mine Safety Disclosures

 
 
 
PART II
 
 
 








 
 
 
PART III
 
 
 





 
 
 
PART IV
 
 
 

 
62

 






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, 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, operating and net profits and losses, and changes in certain segment offerings.

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 concerns about our financial health, our liquidity and ability to comply with financial covenants in our 2013 Loan and Security Agreement, declines in our business, our competition, and our ability to successfully expand our Health and Wellness business and its related impact on revenue, along with other cost reduction initiatives, 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 any forward-looking statements to reflect subsequent events or circumstances.


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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.  Our corporate headquarters are located in Olathe, Kansas, where our Health and Wellness operating center is located. Over the last 40 years, our business focus has been on providing health risk assessment services.  

We provide on-site health screenings, laboratory testing, risk assessment and sample collection services to individuals as part of comprehensive health and wellness programs offered through corporate and government employers.  We are engaged by the organizations sponsoring such programs, including health and care management companies, broker and wellness companies, disease management organizations, reward administrators, third party administrators, clinical research organizations and health plans.  We provide these services through a national network of health professionals.
    
As a provider of services to the health and insurance industries our business is subject to some seasonality, with the second quarter sales typically dropping below other quarters and the third and fourth quarter sales typically the strongest quarters due to increased demand for biometric screenings from mid-August through November related to annual benefit renewal cycles.
    
We believe that the overall market for our wellness services is growing and we expect it will continue to grow with the increased nationwide focus on healthcare initiatives. We support health and care management companies including health plans, disease management organizations, reward administrators, third party administrators, benefit brokers and wellness companies, all of whom generally focus on employers as their customers in providing total population health management services.

    Under the wellness rules for the Affordable Care Act that took effect in January 2014, companies are permitted to offer a reward of up to 30 percent of health costs for employees who complete participatory programs including risk assessments or biometric tests such as Body Mass Index and waist measurements. The 2013 RAND Workplace Wellness Program Study also indicates that approximately half of all employers with 50 or more employees offer wellness programs, and almost half of employers with a wellness program conduct biometric screenings such as those provided by us. According to the 2013 Towers Watson-National Business Group on Health Employer Survey, more employers are considering offering financial rewards to encourage participation by employees and spouses in health management programs.

Recent Events

On August 31, 2014, we completed the sale of certain assets comprising the Heritage Labs and Hooper Holmes Services business units (the "Business") to Clinical Reference Laboratory, Inc. ("CRL") pursuant to the terms of the Strategic Alliance Agreement (as amended, the "Alliance Agreement"). The purchase price, after inventory-related price adjustments, was $3.5 million, of which $0.25 million was deposited into an escrow account in accordance with the Alliance Agreement. The Alliance Agreement provided that certain lab assets were retained by us and were sold to CRL at a separate closing on October 31, 2014, at which time the remaining purchase price held in escrow was released to us. The net book value of assets sold was approximately $1.0 million, consisting primarily of inventory and certain property, plant and equipment. After incurring $0.8 million in transaction costs associated with the sale to CRL, we recorded a gain on sale of $1.7 million during the year ended December 31, 2014, which is recorded as a component of discontinued operations.

We also entered into a Limited Laboratory and Administrative Services Agreement (the "LLASA") with CRL pursuant to which, among other things, CRL is our exclusive provider, subject to certain exceptions, of laboratory testing and reporting services and provides administrative services in support of our Health and Wellness operations. We are a member of CRL’s preferred provider network for wellness programs during the term of the LLASA. The LLASA was effective as of August 31, 2014 upon the closing of the transaction contemplated by the Alliance Agreement, and will continue for five years from such date and auto-renew for an additional five year renewal period unless sooner terminated by either party in accordance with the LLASA. CRL will be providing services to the Health and Wellness operations based on an arms' length pricing structure, and we will have not have the ability to exercise influence over the operations of either the Heritage Labs or the Hooper Holmes Services businesses.

We previously reported our financial results in three segments: Health and Wellness, Heritage Labs and Hooper Holmes Services. Pursuant to the Alliance Agreement with CRL, among other things, we sold certain assets comprising the Heritage Labs and Hooper Holmes Services business units, which represent the Heritage Labs and Hooper Holmes Services reportable segments. As the Heritage Labs and Hooper Holmes Services reportable segments have been reported as discontinued

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operations, segment information is no longer provided for Heritage Labs and Hooper Holmes Services. Subsequent to the closing of the Alliance Agreement with CRL on August 31, 2014, we have one segment, consisting of the Health and Wellness operations. In addition, on September 30, 2013, we completed the sale of certain assets comprising our Portamedic service line. The Portamedic service line is also accounted for as a discontinued operation in this Report.

On May 13, 2014, we entered into a Purchase and Sale Agreement (the "Purchase and Sale Agreement") for the sale to McElroy Deutsch Mulvaney & Carpenter, LLP ("MDMC") of the buildings, land, certain personal property and other interests comprising our Basking Ridge, New Jersey property for an aggregate purchase price of $3.0 million. On July 18, 2014, we entered into an amendment to the Purchase and Sale Agreement that provided for us to deposit into an escrow account at closing an aggregate of $0.3 million of the purchase price, all of which was used to satisfy amounts paid by MDMC in connection with certain repairs and other expenses identified in the course of the property inspection. The sale closed on August 7, 2014 resulting in cash proceeds to us of $2.5 million, which is net of customary closing costs and broker fees of $0.2 million. We recorded a gain on sale of real estate of $1.8 million as a component of operating income (loss) from continuing operations in connection with the transaction.

The table below provides a summary of our revenues from continuing operations for each of the three most recently completed fiscal years. 
    

 
For the Years Ended December 31,
(dollars in thousands)
 
2014
 
% Increase
 
2013
 
% Increase
 
2012
Consolidated Revenue
 
$
28,524

 
18.0
%
 
$
24,171

 
9.2
%
 
$
22,136


Description of Services

We formed our Health and Wellness segment in 2007 in order to expand the use of our existing assets and services in the growing health and disease management market.  For additional information see the discussion under the caption “Market Conditions and Strategic Initiatives” below.

Our Health and Wellness operations performs health risk assessment and risk management services by organizing health and wellness events, performing biometric screenings, administering health risk assessments, compiling data and analytics for risk assessment services, sourcing and training health professionals and providing onsite wellness coaching. Our services are performed for health care management companies, including wellness companies, disease management organizations, clinical research organizations and health plans focused on managing the health care costs of corporate and government employees.   Our services are performed primarily at employee work locations, typically referred to as onsite screenings, for groups of two or more employees, or for individual employees at remote work locations or residences. We provide many options for screening workers 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. We have a nationwide network of health professionals that are utilized to provide seamless coverage across the entire United States.

Our Health and Wellness services include:

scheduling of individual and group screenings and organizing health and wellness events;

provision and fulfillment of needed supplies (e.g., examination kits, blood pressure cuffs, stadiometers, scales, centrifuges) at screening events;

end-to-end biometric screening management;

performing biometric 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, all of which are performed by our wellness-certified health professionals;

coordination of lab testing of blood specimens and other fluids;


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providing onsite participant wellness coaching;

data processing and transmission; and

analytics to identify critical values of lab tests and notification services to individuals and customers to better manage risk.

We also provide patient results on an expedited basis including a web portal that enables participants to access test results within 48 hours of the biometric screening. In addition to our Health and Wellness operations, we generate ancillary revenue through the assembly of medical kits for sale to third parties. 

Market Conditions and Strategic Initiatives

Our operating results for the past several 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. Our Health and Wellness operations support health and care management companies including health and care management companies, broker and wellness companies, disease management organizations, reward administrators, third party administrators, clinical research organizations and health plans.

The RAND Corporation study published in the January 2014 issue of the Journal of Health Affairs concludes that workplace wellness programs may reduce health risks, delay or avoid the onset of chronic disease, and lower healthcare costs for employees already suffering from chronic conditions. A critical component of an effective workplace wellness program is biometric screenings, to establish a baseline and determine the overall health of a population and each participant within, and to identify health risk factors.

According to the Aon Hewitt 2013 Health Care Survey, the top employer concerns remain workforce performance, wellness, prevention and health risks. The primary desired outcome for employers is to increase participation in wellness, health improvement and disease management programs. The survey also indicates that employer priorities in the next three to five years are to offer incentives or disincentives to motivate sustained healthcare behavior change. Our Health and Wellness operations are positioned to provide independently collected data required to fuel the adoption of incentive programs.

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, tailor and personalize interventions, promote positive lifestyle behavior changes, and measure and reward risk reduction.

Sales and Marketing

Our Health and Wellness operations focus on mobilizing a nationwide network of health professionals to provide biometric screenings in support of our customers’ wellness programs. We provide the ability to benchmark the health and wellness of their employee population and then monitor it over time as they implement incentives and guidance to the employee base to improve the overall wellness of their group. By doing this, a typical customer achieves a return on these investments with lower medical insurance and benefit costs as well as in the form of improved productivity of their employee base.

We believe our competitive advantage in the market is our ability to perform the services nationwide with consistently high service quality, regardless of location, and tailoring our service deliverables to meet our customer’s needs. For most customers, we manage these screening events end-to-end from event scheduling, provision and fulfillment of all supplies (e.g., examination kits, blood pressure cuffs, stadiometers, scales, centrifuges, lab coats, bandages, etc.) through lab processing of any specimens collected and information feedback to customers. A typical event consists of the review of a health risk assessment provided by the participant followed by taking various biometric measurements such as height, weight, body mass index, hip, waist, neck, pulse, blood pressure and a blood draw via either venipuncture or finger stick. Post event, we will provide feedback on an individual basis to the participant and in aggregate to the customer (on an anonymous basis) for use in the wellness program initiatives.

With our exit out of the life insurance industry through the sale of the discontinued Portamedic, Heritage Labs and Hooper Holmes Services businesses, our leadership team has focused its attention on developing our strategic plan to grow the Health

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and Wellness operations. We reengineered our operations and service teams in Olathe, Kansas. We introduced a new claims billing process to assist Health and Wellness customers and employers in reporting biometric screenings to health plans. Our strategic alliance with CRL gives us additional access to an expanded panel of laboratory testing and product offerings. We also enhanced participant and invoice 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.

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 Health and Wellness IT system, and our network of certified health professionals.  However, the success of our 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 biometric screening results. 

We build our customer base through typical sales management processes, with referrals being the largest source of new business. After we qualify new potential customers, we market our wellness solutions to “power and focus” their wellness programs. This may take many forms, from a basic biometric screening to identify 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 biometric screenings drive participants into.  Our onsite coaching and engagement services, post screening, answer many basic health questions and helped thousands of participants “engage” in the appropriate programs offered by our sponsors to improve their health.

Information Technology

Information technology systems are used extensively in virtually all aspects of our business.  We must continue to enhance our IT systems as the need for service, product and technology requirements advances. We believe information technology can be a competitive differentiator for us. Our Health and Wellness operations utilize a proprietary customer order, tracking and scheduling system that is central to our operations. We continually invest in improving our IT operating system in order to meet the needs of our customers.

During 2014, we consolidated legacy data centers to a single outsourced third-party data center. We engaged a third party to provide a state of the art underground autonomous data center that includes biometric door security, camera monitoring and a centralized uninterrupted power supply with redundant generator backing. We also adopted a private cloud operating environment leveraging converged storage and networking technologies that provide an increased level of agility as well as segmentation for multi-tenancy. In addition, firewalls will be utilized to provide robust security measures that extend into all layers of our information technology environment.

Major Customers

For the years ended December 31, 2014 and 2013, there were three Health and Wellness customers that exceeded 10% of revenue from continuing operations and represented more than 50% of the consolidated revenue. For the year ended December 31, 2012, there were two Health and Wellness customers that exceeded 10% of revenue from continuing operations and represented more than 50% of the consolidated revenue. We have agreements with each of our Health and Wellness customers, although these agreements do not provide for specific minimum level of purchase.

Competition

Our competition is largely fragmented and consists primarily of private companies who provide biometric screenings in certain geographies in the United States. There are a small number of competitors who claim to have the ability to service customers nationally.

We market mostly to health and care management companies, which in turn serve large employers. We have also expanded our direct sales efforts to large employers and governmental agencies through new and existing channels including brokers. We believe this focus will allow us to tap new business not considered by many of our competitors. We believe our additional competitive advantages include our:

ability to deliver every phase of the wellness screening process, including dedicated lab capabilities;

ability to screen large and small groups;

ability to conduct screenings via venipuncture, fingerstick or self-collection blood draws;


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ability to conduct screenings nationwide in the United States;

fulfillment capability based on our access to collection kits and event management supplies assembled internally; and

a national footprint of health professionals as well as our wellness health professionals certification process, an online training program.

Governmental Regulation

We are subject to federal and state regulation.  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.  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.  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, 2014, we employed approximately 145 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 Health and Wellness operations.

General Information
 
Hooper Holmes, Inc. is a New York corporation.  As of December 31, 2014, 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 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.


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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.
 
Reduction in cash flow from operations in 2015 may limit our ability to make the desired level of investment in our businesses and may lead to liquidity issues.
 
While we do not believe we are facing any immediate or near-term liquidity issues in light of our current cash position and projected borrowing capacity under our 2013 Loan and Security Agreement, we have experienced negative cash flows from operations in recent years. We have taken steps to address and correct the primary causes of the decline through the sale of the discontinued Portamedic, Heritage Labs and Hooper Holmes Services businesses. We used approximately $3.4 million of cash in operations in 2014.  If the revenue growth in our Health and Wellness operations does not continue as expected, our cost reduction measures are not successful, or we are unable to maintain our current collection results, it could become difficult to adequately make needed investments in our businesses or to comply with our debt covenants and have sufficient eligible receivables to maintain borrowing capacity under our 2013 Loan and Security Agreement.
 
Our liquidity may be adversely affected by the terms of our 2013 Loan and Security Agreement.

 If we need to borrow in the future under our 2013 Loan and Security Agreement, the amount available for borrowing may be less than the $10 million limit 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 our lender's discretion of 85% of "Eligible Receivables" (as defined in the 2013 Loan and Security Agreement) up to $10 million under this facility.   Eligible Receivables do not include certain receivables deemed ineligible by our lender. As of December 31, 2014, our lender applied a discretionary reserve of $0.5 million. Available borrowing capacity, net of this discretionary reserve, was $2.6 million based on Eligible Receivables as of December 31, 2014.

    The 2013 Loan and Security Agreement contains various covenants, including financial covenants which require us to achieve a minimum EBITDA amount (earnings before interest expense, income taxes, depreciation and amortization). The lender recently waived the minimum EBITDA covenant for the twelve months ending March 31, 2015 and replaced it with minimum EBITDA covenants of negative $2.5 million for the six months ending June 30, 2015, negative $2.25 million for the nine months ended September 30, 2015 and negative $2.0 million for the twelve months ending December 31, 2015. The discretionary reserve applied by our lender was also increased to $2.0 million. We continue to have limitations on the maximum amount of permitted capital expenditures for each fiscal year. Our failure to comply with or amend these financial covenants may limit or eliminate our borrowing capability under the terms of our 2013 Loan and Security Agreement, which could negatively impact our financial condition. There can be no guarantee that we will continue to comply with the covenants in the 2013 Loan and Security agreement.

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.

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

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find compliance violations, which could subject us to significant liability and/or damage our relationship with our customers.

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 business.
  
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.

    On January 28, 2015, we entered into a Settlement Agreement and Release, by and among our Company, Farmers New World Life Insurance Company and Portamedic, Inc., relating to a claim made by Farmers against each of Portamedic and our Company challenging the validity of charges for services billed to Farmers by certain examiners engaged by Portamedic and our Company dating back to 2010. Under the terms of the 2013 Asset Purchase Agreement between our Company and Piston Acquisition, Inc. (now known as Portamedic), a subsidiary of American Para Professional Systems, Inc., (“Piston”), we agreed to indemnify Piston in connection with the subject matter of the claim. We agreed to deduct a total of $400,000 from the remaining funds held back by Piston as security for our indemnification obligations in exchange for a full release of obligation in connection with the matter and have reduced the remaining Holdback Amounts for the settlement of this claim. In addition, we have reduced the receivable related to the remaining Holdback Amounts to the amount we believe will be collected. There cannot be any assurance that any remaining Holdback Amounts will be collected by us. We anticipate finalization of the remaining Holdback Amount in the first half of 2015.
   
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 Health and Wellness business is derived through our relationships with our channel partners.  Our three largest channel partners, combined, account for more than 50% of our consolidated revenue and accounts receivable balances. 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.

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 the Company’s Health and Wellness offerings.  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

8


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.
 
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 at 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 connection with their insurance underwriting, interventional programs, patient treatment and other decisions.  As a result, we face exposure to claims that may arise or result from the decisions of our customers based on allegedly inaccurate data or faulty analysis of such data.  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 classification of most of our health professionals in many states as independent contractors, rather than employees, exposes us to possible litigation and legal liability.
 
Some state agencies have claimed that we improperly classified our health professionals as independent contractors for purposes of state unemployment and/or workers compensation tax laws and that we were therefore liable for taxes in arrears, or for penalties for failure to comply with such state agencies’ interpretations of the laws.  In some states, our classification of health professionals has been upheld and in others it has not.  However, there are no assurances that we will not be subject to similar claims in other states in the future, nor are there any assurances that those states which have previously upheld our position concerning the classification of our contractors will continue to do so in the future.

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 Health and Wellness operations.
If we do not maintain effective internal controls over financial reporting, we could fail to accurately report our financial results, which may materially adversely affect our business and financial condition.

As previously reported, during management’s assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2013, management determined that there was a material weakness in our controls as a result of turnover of personnel and the associated loss of institutional knowledge associated with the sale of the Portamedic business and strategic relocation and transition of the corporate headquarters from New Jersey to Olathe, Kansas.  These factors 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, as well as its timely identification of certain transactions subject to reporting.  As a result of this material weakness, management concluded that, as of December 31, 2013, our internal control over financial reporting was not effective. As of December 31, 2014, management concluded that the 2013 material weakness had been remediated.

9



It is possible that other material weaknesses and/or control deficiencies could be identified by our management in the future, or may occur without being identified. The existence of any material weakness or significant deficiency could require management to devote significant time and incur significant expense to remediate such weakness or deficiency and management may not be able to remediate the same in a timely manner. Any such weakness or deficiency, even if remediated quickly, could result in regulatory scrutiny, cause investors to lose confidence in our reported financial condition, reduce the market value of our common stock and otherwise materially adversely affect our business and financial condition.

ITEM 1B
Unresolved Staff Comments

Not applicable.

ITEM 2
Properties

We lease our corporate headquarters in Olathe, Kansas, which includes the Health and Wellness operations center, and discontinued Hooper Holmes Services operations centers in Lenexa, Kansas. We still are the primary lessee for 6 Portamedic branch offices, which we sublease to the acquirer of our former Portamedic business. The acquirer pays 100% of the rent and other executory costs for these offices in the form of a contractual obligation for the remaining term of the lease. If we are unable to assign these leases to the acquirer of the former Portamedic business, we will let the leases expire with no intent of renewal. In addition, we are still the primary lessee under 7 operating leases related to offices not utilized for continuing operations and as such related costs are recorded in our reporting for discontinued operations. We have a branch closure obligation of $1.1 million as of December 31, 2014 in the consolidated balance sheet related to these leases.

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

On May 24, 2012, a complaint was filed against the Company in the United States District Court for the District of New Jersey alleging, among other things, that the Company failed to pay overtime compensation to a purported class of certain independent contractor examiners who, the complaint alleges, should be treated as employees for purposes of federal law. The complaint seeks an award of an unspecified amount of allegedly unpaid overtime wages to certain examiners. The Company filed an answer denying the substantive allegations therein. As of the date of this filing, the Magistrate Judge is considering the Company’s Motion to Reconsider an earlier Report and Recommendation conditionally certifying the class of all contract examiners from August 16, 2010 to the present. If the Magistrate's decision stands, notice will be sent to contractors who performed work for the Company within this time period. The claim is not covered by insurance, and the Company is incurring legal costs to defend the litigation which are recorded in continuing operations. This matter relates to the former Portamedic service line for which the Company retained liability.

On July 30, 2013, a complaint was filed against the Company in the California Superior Court, San Bernadino County, on behalf of a putative class of employees alleging, among other things, that the Company failed to pay wages and other compensation as required by state law. The complaint seeks award of an unspecified amount of damages and penalties. The Company has denied all of the allegations in the case and believes them to be without merit. The Company settled the individual claim with the named plaintiff in July 2014 with prejudice.  As a part of the settlement, the named plaintiff agreed to dismiss the class claims, without prejudice.

The Company is a party to a number of other legal actions arising in the ordinary course of its business. In the opinion of management, the Company has substantial legal defenses and/or insurance coverage with respect to all of its pending legal actions. Accordingly, none of these actions is expected to have a material adverse effect on the Company’s liquidity, its consolidated results of operations or its consolidated financial position.

ITEM 4
 
 
 
Mine Safety Disclosures

10


Not applicable
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):

 
 
2014
 
2013
Quarter
 
High
 
Low
 
High
 
Low
First
 
$0.70
 
$0.50
 
$0.54
 
$0.40
Second
 
$0.75
 
$0.58
 
$0.45
 
$0.36
Third
 
$0.80
 
$0.56
 
$0.48
 
$0.32
Fourth
 
$0.63
 
$0.49
 
$0.72
 
$0.45

Holders

According to the records of our transfer agent, Registrar and Transfer Company, Cranford, New Jersey, as of February 28, 2015 there were 932 holders of record of our common stock.

Dividends

No dividends were paid in 2014 or 2013.

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 2013 Loan and Security Agreement with with ACF FinCo I LP, the assignee of Keltic Financial Partners II, LP, which was effective as of February 28, 2013 (Refer to Note 9 to our consolidated financial statements).

Recent Sales of Unregistered Securities

There were no unregistered sales of equity securities during the fiscal year ended December 31, 2014.    

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, 2014.


11


ITEM 6
Selected Financial Data

The following table of selected financial data should be read in conjunction with our consolidated financial statements and related notes, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and other financial information appearing elsewhere in this Report. The statement of operations data set forth below for each of the years in the three year period ended December 31, 2014, and the balance sheet data as of December 31, 2014 and 2013 have been derived from, and are qualified by reference to, our consolidated financial statements appearing elsewhere in this Report. The statement of operations data for the years ended December 31, 2011 and 2010, and the balance sheet data as of December 31, 2012, 2011 and 2010, are derived from the Company’s consolidated financial statements that are not included in this Report.

The operating results of Portamedic, Heritage Labs and Hooper Holmes Services have been segregated and reported as discontinued operations in the statement of operations data set forth below. The allocation of revenue and expenses between current operations and discontinued operations involves management judgments and estimates. The assets and liabilities of the discontinued Portamedic, Heritage Labs and Hooper Holmes Services operations are reflected in the consolidated balance sheet data set forth below for years ended December 31, 2012, 2011 and 2010.

(in thousands except for share data and footnotes)
2014
 
2013
 
2012
 
2011
 
2010
 
Statement of operations data:
 
 
 
 
 
 
(Unaudited)
 
(Unaudited)
 
Revenues
$
28,524

 
$
24,171

 
$
22,136

 
$
19,220

 
$
14,957

 
Operating loss from continuing operations
(5,651
)
(a) 
(12,181
)
(b) 
(9,734
)
(c) 
(10,500
)
  
(11,604
)
(e) 
Interest expense
(1
)
 
(86
)
 
(10
)
 
(18
)
 
(12
)
 
Loss from continuing operations
(5,913
)
 
(12,680
)
 
(9,774
)
  
(10,531
)
  
(11,547
)
(f) 
(Loss) income from discontinued operations
(2,562
)
 
1,405

 
(7,824
)
  
7,007

(d 
13,023

(f) 
Net (loss) income
(8,475
)
 
(11,275
)
 
(17,598
)
 
(3,524
)
 
1,476

  
Basic and diluted (loss) income per share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.18
)
 
$
(0.14
)
 
$
(0.15
)
 
$
(0.17
)
 
Discontinued operations
(0.04
)
 
0.02

 
(0.11
)
 
0.10

 
0.19

 
Net (loss) income
$
(0.12
)
 
$
(0.16
)
 
$
(0.25
)
 
$
(0.05
)
 
$
0.02

 
Cash dividends per share
$

 
$

 
$

 
$

 
$

 
Weighted average shares:
 
 
 
 
 
 
 

 
 

 
Basic
70,684,452

 
69,965,814

 
69,743,897

 
69,628,135

 
69,437,710

 
Diluted
70,684,452

 
69,965,814

 
69,743,897

 
69,628,135

 
69,896,969

 
Balance sheet data (as of December 31):
 
 
 
 
 
 
(Unaudited)
 
(Unaudited)
 
Working capital
$
2,887

 
$
9,387

(g) 
$
19,205

(h) 
$
28,323

(h) 
$
32,321

(h) 
Total assets
$
13,139

 
$
21,646

 
$
36,418

 
$
53,281

 
$
57,479

 
Stockholders’ equity
$
5,357

 
$
13,300

 
$
23,861

 
$
40,749

 
$
43,626

 

(a) Includes restructuring charges of $0.1 million and gain on sale of real estate of $1.8 million.
(b)
Includes impairment charges of $0.2 million and restructuring charges of $0.8 million.
(c)
Includes restructuring charges of $0.5 million.
(d)
Includes a reduction of cost of operations totaling $0.5 million relating to a refund received from a supplier pertaining to improperly charged sales tax on purchased materials.
(e)
Includes impairment charges of $0.1 million and restructuring charges of $0.2 million.
(f)
Includes reversal of $1.6 million relating to previously accrued interest and penalties associated with a state unclaimed property matter for which the audit period has lapsed. The reversal was allocated between continuing operations of $0.4 million and discontinued operations of $1.2 million based on revenues.
(g)
Includes assets held for sale of $2.3 million as of December 31, 2013.
(h)
Includes assets and liabilities of the discontinued Portamedic, Heritage Labs and Hooper Holmes Services operations.


12


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

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.  This discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes included in Item 8 of this Report.

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.  Our corporate headquarters are located in Olathe, Kansas, where our Health and Wellness operating center is located. Over the last 40 years, our business focus has been on providing health risk assessment services.  

We provide on-site health screenings, laboratory testing, risk assessment and sample collection services to individuals as part of comprehensive health and wellness programs offered through corporate and government employers.  We are engaged by the organizations sponsoring such programs, including health and care management companies, broker and wellness companies, disease management organizations, reward administrators, third party administrators, clinical research organizations and health plans.  We provide these services through a national network of health professionals.
    
As a provider of services to the health and insurance industries our business is subject to some seasonality, with the second quarter sales typically dropping below other quarters and the third and fourth quarter sales typically the strongest quarters due to increased demand for biometric screenings from mid-August through November related to annual benefit renewal cycles.
    
We believe that the overall market for our wellness services is growing and we expect it will continue to grow with the increased nationwide focus on healthcare initiatives. We support health and care management companies including health plans, disease management organizations, reward administrators, third party administrators, benefit brokers and wellness companies, all of whom generally focus on employers as their customers in providing total population health management services.

Recent Events

On August 31, 2014, we completed the sale of certain assets comprising the Heritage Labs and Hooper Holmes Services business units (the "Business") to Clinical Reference Laboratory, Inc. ("CRL") pursuant to the terms of the Strategic Alliance Agreement (as amended, the "Alliance Agreement"). The purchase price, after inventory-related price adjustments, was $3.5 million, of which $0.25 million was deposited into an escrow account in accordance with the Alliance Agreement. The Alliance Agreement provided that certain lab assets were retained by us and were sold to CRL at a separate closing on October 31, 2014, at which time the remaining purchase price held in escrow was released to us. The net book value of assets sold was approximately $1.0 million, consisting primarily of inventory and certain property, plant and equipment. After incurring $0.8 million in transaction costs associated with the sale to CRL, we recorded a gain on sale of $1.7 million during the year ended December 31, 2014, which is recorded as a component of discontinued operations.

We also entered into a Limited Laboratory and Administrative Services Agreement (the "LLASA") with CRL pursuant to which, among other things, CRL is our exclusive provider, subject to certain exceptions, of laboratory testing and reporting services and provides administrative services in support of our Health and Wellness operations. We are a member of CRL’s preferred provider network for wellness programs during the term of the LLASA. The LLASA was effective as of August 31, 2014 upon the closing of the transaction contemplated by the Alliance Agreement, and will continue for five years from such date and auto-renew for an additional five year renewal period unless sooner terminated by either party in accordance with the LLASA. CRL will be providing services to the Health and Wellness operations based on an arms' length pricing structure, and we will have not have the ability to exercise influence over the operations of either the Heritage Labs or the Hooper Holmes Services businesses.

We previously reported our financial results in three segments: Health and Wellness, Heritage Labs and Hooper Holmes Services. Pursuant to the Alliance Agreement with CRL, among other things, we sold certain assets comprising the Heritage Labs and Hooper Holmes Services business units, which represent the Heritage Labs and Hooper Holmes Services reportable segments. As the Heritage Labs and Hooper Holmes Services reportable segments have been reported as discontinued operations, segment information is no longer provided for Heritage Labs and Hooper Holmes Services. Subsequent to the closing of the Alliance Agreement with CRL on August 31, 2014, we have one segment, consisting of the Health and Wellness operations. In addition, on September 30, 2013, we completed the sale of certain assets comprising our Portamedic service line. The Portamedic service line is also accounted for as a discontinued operation in this Report.

On May 13, 2014, we entered into a Purchase and Sale Agreement (the "Purchase and Sale Agreement") for the sale to McElroy Deutsch Mulvaney & Carpenter, LLP ("MDMC") of the buildings, land, certain personal property and other interests comprising

13


our Basking Ridge, New Jersey property for an aggregate purchase price of $3.0 million. On July 18, 2014, we entered into an amendment to the Purchase and Sale Agreement that provided for us to deposit into an escrow account at closing an aggregate of $0.3 million of the purchase price, all of which was used to satisfy amounts paid by MDMC in connection with certain repairs and other expenses identified in the course of the property inspection. The sale closed on August 7, 2014 resulting in cash proceeds to us of $2.5 million, which is net of customary closing costs and broker fees of $0.2 million. We recorded a gain on sale of real estate of $1.8 million.
    
2014 Highlights and Business Outlook for 2015

Consolidated Financial Performance for 2014

The following table summarizes the consolidated results of operations for the years ended December 31, 2014, 2013 and 2012:
 
 
 
 
 
 
(in thousands)
2014
 
2013
 
2012
Revenues
$
28,524

 
$
24,171

 
$
22,136

Cost of operations
21,737

 
17,767

 
15,200

Gross profit
$
6,787

 
$
6,404

 
$
6,936

Selling, general and administrative expense
14,138

 
17,571

 
16,083

Gain on sale of real estate
(1,846
)
 

 

Impairment and restructuring
146

 
1,014

 
587

Other, net
(239
)
 
(480
)
 
(17
)
Income tax expense
23

 
19

 
23

Loss from continuing operations
$
(5,913
)
 
$
(12,680
)
 
$
(9,774
)
Loss from discontinued operations, net of tax
(3,301
)
 
(2,025
)
 
(7,889
)
Gain on sale of subsidiaries, net of adjustments
739

 
3,430

 
65

Net loss
$
(8,475
)
 
$
(11,275
)
 
$
(17,598
)

For the year ended December 31, 2014, consolidated revenues were $28.5 million, representing an increase of approximately 18.0% from the prior year of $24.2 million. The increase corresponds to more screenings during 2014 as well as additional revenue from a long-term clinical study contract. For the year ended December 31, 2014, we performed approximately 474,000 health screenings, compared to approximately 416,000 health screenings for the year ended December 31, 2013, which represents an increase of 13.9% in the number of screenings performed. Consolidated revenues for the years ended December 31, 2014 and 2013 also include third party kit revenue of $0.8 million and $1.0 million, respectively.

Gross profit increased by $0.4 million to $6.8 million in 2014 compared to $6.4 million in 2013. Our gross profit percentage from continuing operations was 23.8% for the year ended December 31, 2014 representing a decline from 26.5% for the year ended December 31, 2013. The decrease in gross profit is primarily due to increases in event and field management labor and travel costs for field specialists and health professionals.

Selling, general and administrative expense ("SG&A") decreased to $14.1 million in 2014 compared to $17.6 million in 2013, representing a decrease of 19.5%, which is a result of efficiencies achieved in connection with the relocation of our corporate headquarters from Basking Ridge, New Jersey to Olathe, Kansas. SG&A also includes $1.9 million of transition costs incurred during the year ended December 31, 2014 associated with maintaining the Basking Ridge, New Jersey real estate prior to its sale as well as transition of information technology infrastructure. SG&A excluding transition costs for the year ended December 31, 2014 was $12.3 million, representing a decrease of approximately 30.3% compared to 2013.

We also recorded a gain on sale of real estate of $1.8 million in connection with the sale of the property in Basking Ridge, New Jersey.

Business Outlook for 2015

We believe there are significant growth opportunities for our Health and Wellness operations. Health and Wellness services include event scheduling, provision and fulfillment of all supplies (e.g., examination kits, blood pressure cuffs, stadiometers,

14


scales, centrifuges, lab coats, bandages, etc.) at screening events, event management, biometric screenings (e.g., height, weight, body mass index, hip, waist, neck, pulse, blood pressure), blood draws via venipuncture or finger stick, procuring lab testing, participant and aggregate reporting, data processing and data transmission.

The United States spends more on healthcare than any other country, with more than 75% 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 biometric screening and other related services given our unique set of assets, including our proprietary Health and Wellness technology platform and our national network of certified health professionals. However, the success of Health and Wellness will also depend in part upon the success of our channel partners and sponsors and their health and care management initiatives to employers.

We believe we can grow our business by offering expanded testing and broader wellness programs based on our biometric screening, risk assessment and support services. Participation rates for wellness programs are generally no more than 50% of eligible participants. Through outreach programs with existing channel partners, we believe we can increase participation rates among our existing customer base as well as help attract new customers in the large and mid-size employer population.

A key strength of ours is our nationwide network of health professionals. We have signed national agreements with retail clinics and local lab offices, giving our customers more options for remote screenings. Due to our national network of health professionals, we have a presence in locations across the United States, with supply chain capabilities that allow us to stock, calibrate, pack and ship the materials our health professionals need to collect accurate health information.

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 continue to focus our attention on our long-term strategy and believe we have the necessary assets to make the most of our immediate opportunities while positioning the Company for long-term growth. In connection with the Alliance Agreement with CRL, we have transitioned out of the life insurance industry to focus on the Health and Wellness business. As a part of the transition, we have reduced our corporate fixed cost structure by evaluating head count, professional fees and other expenses. We have ongoing initiatives to increase the flexibility of our variable cost structure to improve our scalability with changes in screening volumes. We will also continue to evaluate strategic partnerships, ventures and opportunities that will allow us to better leverage our capabilities while maintaining a smaller corporate footprint. Additionally, we continue to work with our investment banking advisor to find strategic growth opportunities.

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 businesses, 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.

We monitored the following metrics for our continuing business operations in 2014:

the number of health screenings completed by Health and Wellness;
the quality scores of our Health Professionals;
the aggregate of travel expenditures incurred by our Health Professionals; and
budget to actual performance for the Health and Wellness operations.

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

Results of Operations

Comparative Discussion and Analysis of Results of Operations in 2014, 2013 and 2012

The table below sets forth our consolidated revenue and number of screenings for the periods indicated. 

15


 
 
For the years ended December 31,
 
Increase
(in thousands)
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
Revenue
 
$
28,524

 
$
24,171

 
$
22,136

 
18.0
%
 
9.2
%
 
 
 
 
 
 
 
 
 
 
 
Number of Screenings
 
474,000

 
416,000

 
411,000

 
13.9
%
 
1.2
%


Revenues

Consolidated revenues for the year ended December 31, 2014 were $28.5 million, an increase of $4.4 million or 18.0% from 2013. Our revenue increase for the year ended December 31, 2014, as compared to the prior year periods, is primarily due to an increased number of screenings. Our Health and Wellness operations performed 13.9% more health screenings in 2014 compared to 2013. Revenue increases for 2014 were also driven by annual contractual price adjustments related to one of our long-term clinical study contracts. Consolidated revenues for the years ended December 31, 2014 and 2013 also include third party kit revenue of $0.8 million and $1.0 million, respectively.

Consolidated revenues for the year ended December 31, 2013 were $24.2 million, an increase of $2.0 million or 9.2% from 2012. Our Health and Wellness operations performed 1.2% more health screenings in 2013 compared to 2012. While revenue from one large customer decreased approximately $3.0 million, or 40%, from 2012, revenue increased in our remaining Health and Wellness customers by approximately 35%. Consolidated revenues for the years ended December 31, 2013 and 2012 also include third party kit revenue of $1.0 million and $0.8 million, respectively.

We have conducted screening events in every state in the U.S. as well as The District of Columbia, Puerto Rico and Guam.   Currently, we have a network of over 10,000 health professionals, of which approximately 4,000 have completed our training program and as such are "wellness certified".

Cost of Operations

The table below sets forth our cost of continuing operations for the periods indicated.

 
 
For the Years Ended December 31,
(in thousands)
 
2014
 
% of Revenue
 
2013
 
% of Revenue
 
2012
 
% of Revenue
Cost of Operations
 
$
21,737

 
76.2
%
 
$
17,767

 
73.5
%
 
$
15,200

 
68.7
%

Cost of operations, as a percentage of revenue, was 76.2% for the year ended December 31, 2014 as compared to 73.5% for the year ended December 31, 2013. The increase in cost of operations is primarily due to higher event and field management labor as well as travel costs for field specialists and health professionals compared to the prior year. We consider these costs effectively as investments in our operations in an effort to drive higher customer service satisfaction levels, while continuing to conduct events in all parts of the United States. We will continue to invest in improving customer service levels as appropriate.

Cost of operations, as a percentage of revenue, was 73.5% for the year ended December 31, 2013 as compared to 68.7% for the year ended December 31, 2012. Cost of operations increased due to increased material costs resulting from higher volume of finger stick screenings, increased spending on travel for field specialists and health professionals as well as additional staffing to improve service quality.

Selling, General and Administrative Expenses (SG&A)

 
 
For the years ended December 31,
 
Decrease (Increase)
(in thousands)
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
Total
 
$
14,138

 
$
17,571

 
$
16,083

 
$
3,433

 
$
(1,488
)

2014 compared to 2013

16



SG&A decreased to $14.1 million in 2014 compared to $17.6 million in 2013, representing a decrease of 19.5%, which is a result of efficiencies achieved in connection with the relocation of our corporate headquarters from Basking Ridge, New Jersey to Olathe, Kansas as well as lower consulting and legal fees. SG&A also includes $1.9 million of transition costs incurred during the year ended December 31, 2014 associated with maintaining the Basking Ridge, New Jersey real estate prior to its sale as well as transition of information technology infrastructure. SG&A excluding transition costs for the year ended December 31, 2014 was $12.3 million, representing a decrease of approximately 30.3% compared to 2013.

2013 compared to 2012

SG&A was $17.6 million for the year ended December 31, 2013, representing an increase of 9.3% from the year ended December 31, 2012 of $16.1 million. The increase in SG&A for 2013 compared to 2012 was primarily due to increases of professional and consulting services and financial advisory fees; outside legal fees and Board of Director fees driven largely by the Portamedic transaction and transition costs associated with the relocation initiatives. These increases were partially offset by decreases in incentive and general bonuses.

Gain on Sale of Real Estate

We recorded a gain on sale of real estate of $1.8 million in connection with the sale of the property in Basking Ridge, New Jersey during the year ended December 31, 2014. There were no such gains recorded during the years ended December 31, 2013 and 2012.

Restructuring Charges

For the years ended December 31, 2014, 2013 and 2012, we recorded restructuring charges of $0.1 million, $0.8 million and $0.5 million, respectively, in continuing operations consisting of employee severance.
    
Operating Loss from Continuing Operations

Our consolidated operating loss from continuing operations for the year ended December 31, 2014 was $5.7 million, compared to a loss of $12.2 million in 2013. The improvement is due primarily to SG&A efficiencies achieved with the relocation of our corporate headquarters as well as the gain on real estate recorded in connection with the sale of the Basking Ridge, New Jersey property.

Our consolidated operating loss from continuing operations for the year ended December 31, 2013 was $12.2 million, compared to $9.7 million in 2012.  The change is due to lower gross profit and increases in SG&A as well as restructuring charges compared to the prior year. 

Other expense/income

Other expense (income) in 2014, 2013 and 2012 was an expense of $0.2 million, $0.5 million and $0.02 million, respectively. Other expense, net, for all periods consisted primarily of bank credit facility fees and amortization of deferred financing costs as well as an offset for rental income.

Discontinued Operations
   
Discontinued operations represent the results of operations during the periods presented for the Portamedic service line that was sold to Piston on September 30, 2013 as well as the results of operations for Heritage Labs and Hooper Holmes Services sold to CRL in connection with the Alliance Agreement on August 31, 2014.

Discontinued operations, net, was a loss of $2.6 million for the year ended December 31, 2014, income of $1.4 million for the year ended December 31, 2013 and loss of $7.8 million for the year ended December 31, 2012.

Included in discontinued operations for the year ended December 31, 2014 is expense of $1.4 million related to retroactive tail coverage insurance policies for the discontinued operations of Portamedic, Heritage Labs and Hooper Holmes Services. We also recorded charges of $1.0 million representing the fair value of the remaining contractual obligations for a facility used for the discontinued Hooper Holmes Services operations center during 2014.


17


We recorded a gain on sale of $1.7 million related to the sale of Heritage Labs and Hooper Holmes Services to CRL during the year ended December 31, 2014. We recorded a gain on sale of $3.4 million during the year ended December 31, 2013 related to the sale of Portamedic.

Net Loss

Net loss for the year ended December 31, 2014 was $8.5 million, or $0.12 per share on both a basic and diluted basis, compared to a net loss of $11.3 million, or $0.16 per share on both a basic and diluted basis, reported for the year ended December 31, 2013.  For the year ended December 31, 2012, we reported net loss of $17.6 million, or $0.25 on both a basic and diluted basis.

Liquidity and Financial Resources

Our primary sources of liquidity are our cash and cash equivalents as well as availability under our 2013 Loan and Security Agreement (as amended, the "2013 Loan and Security Agreement"). At December 31, 2014, we had $5.2 million in cash and cash equivalents and no outstanding debt.    

We incurred a loss from continuing operations of $5.9 million for the year ended December 31, 2014. The net cash used in operating activities during the year ended December 31, 2014 was $3.4 million. We have managed our liquidity through sales of the Portamedic, Heritage Labs and Hooper Holmes Services business units, the sale of the Basking Ridge, New Jersey property, a series of cost reduction and accounts receivable collection initiatives and availability under the 2013 Loan and Security Agreement.

We have historically used availability under the 2013 Loan and Security Agreement to fund operations. We did not borrow under the 2013 Loan and Security Agreement during the year ended December 31, 2014. We used the proceeds from the sale of Heritage Labs and Hooper Holmes Services as well as the proceeds from the sale of the Basking Ridge real estate to fund capital expenditures and operating expenses associated with the increased screening volume experienced in the second half of the year. We experience a timing difference between the operating expense and cash collection of the associated revenue as Health and Wellness customers generally have longer payment terms.

We present our cash flows inclusive of the Portamedic, Heritage Labs and Hooper Holmes Services service lines, which is the way our cash flows have been presented historically. Given the nature of our business, we have not historically separated much of our working capital by service line and thus we are not able to reliably distinguish between continuing and discontinued operations in our consolidated statements of cash flows for the years ended December 31, 2014, 2013 and 2012. As such, changes in accounts payable, accounts receivable, inventory and other financial line items associated with the Portamedic, Heritage Labs and Hooper Holmes Services service lines may impact future cash flow statement presentation. We provide information about the impact of Portamedic, Heritage Labs and Hooper Holmes Services on our cash flows below in the discussion of our cash flows from operating, investing and financing activities. Significant uses affecting our cash flows for the year ended December 31, 2014 include:

a net loss of $8.5 million, which includes a gain on sale of subsidiaries of $0.7 million and a gain on sale of real estate of $1.8 million and was offset by non-cash charges of $1.6 million in depreciation and amortization expense and $0.5 million in share-based compensation expense;

an increase in inventory and accounts payable and accrued expenses of $0.8 million due to increased purchasing requirements to support higher screening volumes during the year; and

capital expenditures of $1.4 million.

These uses of cash were offset by:

proceeds from the sale of Heritage Labs and Hooper Holmes Services to CRL of $3.5 million, offset by transaction fees of $0.8 million;

net proceeds from the sale of the real estate in Basking Ridge, New Jersey of $2.5 million;

receipt of $0.7 million for payment of the first Holdback Amount; and

a decrease in accounts receivable of $5.1 million, primarily due to the collection of accounts receivable from the discontinued Heritage Labs and Hooper Holmes services customers partially offset by higher current year Health and Wellness screening volumes and related revenue during the year.

18


Our consolidated days sales outstanding ("DSO"), measured on a rolling 90-day basis, was 35.9 days at December 31, 2014, compared to 52.7 days at December 31, 2013 with the change on year over year basis due to timing of large customer receipts. Our Health and Wellness customers generally have had longer payment terms. Historically, our accounts receivable balances and our DSO are near their highest point in September and their lowest point in December as many of our customers utilize the remainder of their operating budgets before their year-end budget close-out.

2013 Loan and Security Agreement

We maintain the 2013 Loan and Security Agreement with ACF FinCo I LP ("ACF"), the assignee of Keltic Financial Partners II, LP ("Keltic Financial"). Borrowings under the 2013 Loan and Security Agreement are to be used for working capital purposes and capital expenditures. The amount available for borrowing may be less than the $10 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 (as defined in the 2013 Loan and Security Agreement) up to $10 million under this facility.   Eligible Receivables do not include certain other receivables deemed ineligible by the lender. As of December 31, 2014, the lender applied a discretionary reserve of $0.5 million. Available borrowing capacity, net of this discretionary reserve was $2.6 million based on Eligible Receivables as of December 31, 2014. As of December 31, 2014, there were no borrowings outstanding under the 2013 Loan and Security Agreement.

We entered into an amendment to the 2013 Loan and Security Agreement with ACF on July 9, 2014 to modify the definition of Eligible Receivables to include up to fifty percent of Unbilled Eligible Receivables (as defined in the 2013 Loan and Security Agreement), which results in an increase in our borrowing capacity.

The 2013 Loan and Security Agreement contains various covenants, including financial covenants which require us to achieve a minimum EBITDA amount (earnings before interest expense, income taxes, depreciation and amortization). On March 27, 2015, the lender modified the covenants to waive the minimum EBITDA covenant for the twelve months ending March 31, 2015 and replaced it with minimum EBITDA covenants of negative $2.5 million for the six months ending June 30, 2015, negative $2.25 million for the nine months ended September 30, 2015 and negative $2.0 million for the twelve months ending December 31, 2015. The discretionary reserve applied by our lender was also increased to $2.0 million.

We continue to have limitations on the maximum amount of unfunded capital expenditures for each fiscal year. We are in compliance with the covenants under the 2013 Loan and Security Agreement as of December 31, 2014. Given the seasonal nature of the our operations, management expects to use the revolver at certain points in the year and believes we have sufficient borrowing capacity to do so. We also believe we will meet our covenants during 2015.

Sale of Assets - Heritage Labs and Hooper Holmes Services

On August 31, 2014, we completed the sale of certain assets comprising the Heritage Labs and Hooper Holmes Services business units to CRL pursuant to the terms of the Alliance Agreement. The purchase price, after inventory-related price adjustments, was $3.5 million, of which $0.25 million was deposited into an escrow account in accordance with the Alliance Agreement. The Alliance Agreement provided that certain lab assets were retained by us and were sold to CRL at a separate closing on October 31, 2014, at which time the remaining purchase price held in escrow was released to us. The net book value of assets sold was approximately $1.0 million, consisting primarily of inventory and certain property, plant and equipment. After incurring $0.8 million in transaction costs associated with the sale to CRL, we recorded a gain on sale of $1.7 million during the year ended December 31, 2014, which is recorded as a component of discontinued operations.
    
Sale of Basking Ridge Real Estate

On May 13, 2014, we entered into a Purchase and Sale Agreement for the sale to MDMC of the buildings, land, certain personal property and other interests comprising our Basking Ridge, New Jersey property for an aggregate purchase price of $3.0 million. On July 18, 2014, we entered into an amendment to the Purchase and Sale Agreement that provided for us to deposit into an escrow account at closing an aggregate of $0.3 million of the purchase price, all of which was used to satisfy amounts paid by MDMC in connection with certain repairs and other expenses identified in the course of the property inspection. The sale closed on August 7, 2014 resulting in cash proceeds to us of $2.5 million, which is net of customary closing costs and broker fees of $0.2 million. We recorded a gain on sale of real estate of $1.8 million.

Liquidity Considerations


19


The Health and Wellness business principally sells through wellness, disease management, benefit brokers and insurance companies (referred to as channel partners) who ultimately have the relationship with the end customer. The current services are often aggregated with other offerings from our channel partners to provide a total solution to the end-user. As such, our success is largely dependent on that of our partners.

Our ability to generate cash flow in the future is dependent on realizing the benefits from the consolidation of our operations in Kansas and growing the Health and Wellness business as it seeks to streamline operations and improve efficiency through increased revenue and cost reduction initiatives. These and other factors could adversely affect liquidity if not achieved.
    
Now that we have completed the sale of the Basking Ridge, New Jersey property and Portamedic, Heritage Labs and Hooper Holmes Services business units, we are poised for continued growth of the Health and Wellness operations. The capital raised from these transactions provided us with additional capital to invest as we focus on growth supporting Health and Wellness operations.

While we received an aggregated of $5.3 million in net proceeds during the year ended December 31, 2014 from the sale of the Basking Ridge, New Jersey property and sale of Heritage Labs and Hooper Holmes Services business units, we also had cash outflows of $1.9 million during the year ended December 31, 2014 in connection with transition costs.

In 2014, we also invested $1.4 million in capital expenditures, primarily on information technology enhancements and to prepare for increased screening volumes. The remaining change in cash for the year ended December 31, 2014 is due to the remaining higher fixed cost structure as discussed below and fulfillment and execution of screening events in advance of cash receipts from customers. To conduct successful screenings we must expend cash to deliver equipment and supplies required for the screenings as well as pay our health professionals and site management, which is in advance of the customer invoicing process and ultimate cash receipts for services performed.

We continue to focus our attention on our long-term strategy and believe we have the necessary assets to make the most of our immediate opportunities while positioning for long-term growth. In connection with the Alliance Agreement with CRL, we have transitioned out of the life insurance industry to focus on the Health and Wellness business. As a part of the transition, we have reduced our corporate fixed cost structure by evaluating head count, professional fees and other expenses. We have ongoing initiatives to increase the flexibility of our variable cost structure to improve scalability with changes in screening volumes. Management will also continue to evaluate strategic partnerships, ventures and opportunities that will allow us to better leverage our capabilities while maintaining a smaller corporate footprint.

Based on our anticipated level of future revenues and gross profits, anticipated cost reduction initiatives and existing cash and cash equivalents and borrowing capacity, we believe we have sufficient funds to meet our cash needs to fund operation expenses and capital expenditures for the twelve months following December 31, 2014.

Cash Flows from Operating, Investing and Financing Activities

We discuss below the cash flows from operating, investing and financing activities for the years ended December 31, 2014, 2013 and 2012, inclusive of discontinued operations. Future cash flows from operating, investing and financing activities may change as a result of our relocation to Kansas and from our re-positioning solely as a health and wellness company. Since we historically have not tracked accounts receivable, accounts payable and other accounts by service line, our continuing operations and the Portamedic, Heritage Labs and Hooper Holmes Services service lines had customers and suppliers in common, and our continuing and discontinued operations shared certain selling, general and administrative services, we do not have reliable information for the historical impact of Portamedic, Heritage Labs and Hooper Holmes Services on our cash flows.

We believe that without the discontinued Portamedic, Heritage Labs and Hooper Holmes Services operations and with planned selling, general and administrative cost reductions, cash flow from operations will improve. We have reduced our corporate fixed cost structure in 2014 and plan to continue to evaluate professional fees and other expenses in 2015. We have ongoing initiatives to increase the flexibility of our variable cost structure to improve our scalability with changes in screening volumes. We will also continue to evaluate strategic partnerships, ventures and opportunities that will allow us to better leverage our capabilities while maintaining a smaller corporate footprint.

Cash Flows from Operating Activities

For the year ended December 31, 2014, net cash used in continuing and discontinued operating activities was $3.4 million. Our net cash used in continuing and discontinued operating activities for the year ended December 31, 2013 was $7.0 million. Our net cash used in continuing and discontinued operating activities for the year ended December 31, 2012 was $4.2 million.

20



Our consolidated days sales outstanding ("DSO"), measured on a rolling 90-day basis, was 35.9 days at December 31, 2014, compared to 52.7 days at December 31, 2013 with the change on year over year basis due to timing of large customer receipts. Our Health and Wellness customers generally have had longer payment terms. Historically, our accounts receivable balances and our DSO are near their highest point in September and their lowest point in December as many of our customers utilize the remainder of their operating budgets before their year-end budget close-out.

The net cash used in operating activities for 2013 of $7.0 million includes a net loss of $11.3 million, which was reduced by the gain on sale of Portamedic of $3.4 million, and non-cash charges related to depreciation and amortization expense of $2.5 million of depreciation and amortization and $0.6 million of share-based compensation expense. Changes in working capital items included:

a decrease in accounts receivable of $9.0 million, primarily due to reduced revenues during the fourth quarter of 2013 compared to the fourth quarter of 2012 following the sale of Portamedic; and

a combined net increase in accounts payable, accrued expenses and other long-term liabilities of $4.3 million.

The net cash used in operating activities for 2012 of $4.2 million includes a net loss of $17.6 million, non-cash charges of $4.3 million of depreciation and amortization, impairment of long-lived assets totaling $5.3 million and $0.7 million share-based compensation expense. Changes in working capital items included:

a decrease in accounts receivable of $1.2 million, primarily due to reduced revenues during the fourth quarter of 2012 compared to the fourth quarter of 2011.

a decrease in other assets of $1.3 million and

a combined net decrease in accounts payable, accrued expenses and other long-term liabilities of $0.4 million

Cash Flows used in Investing Activities

For the year ended December 31, 2014, we had a net cash inflow from investing activities of $4.6 million. During the year ended December 31, 2014, we received proceeds from the sale of Heritage Labs and Hooper Holmes Services to CRL of $3.5 million off set by transaction fees of $0.8 million. We also received net proceeds from the sale of the real estate in Basking Ridge, New Jersey of $2.5 million during the year ended December 31, 2014. We received $0.7 million for payment of the first Holdback Amount from the sale of Portamedic during the year ended December 31, 2014. Capital expenditures for the year ended December 31, 2014 were $1.4 million primarily on information technology enhancements and to prepare for increased screening volumes.

For the year ended December 31, 2013, we had net cash inflow from investing activities of $3.7 million due to cash proceeds for the sale of Portamedic of $6.1 million, partially offset by disposal costs of $0.8 million and capital expenditures of $1.6 million. Capital expenditures during the year ended December 31, 2013 included $0.8 million related to the development of Partnerlink, which was the Portamedic ordering system as well as approximately $0.5 million related to improvements to the Health and Wellness operating system.

For the year ended December 31, 2012, we used $4.1 million in net cash for investing activities for capital expenditures primarily related to the ongoing development of Partnerlink, the Portamedic web portal and the iParamed technology platform for Portamedic. Capital expenditures of our continuing operations were $2.1 million and related to improvements in the Health and Wellness operating system, information systems equipment and medical equipment. Capital expenditures for Heritage Labs included the improvements to the warehouse and inventory management systems.

Cash Flows used in Financing Activities

For the year ended December 31, 2014, net cash provided by financing activities was $0.02 million related to proceeds from stock option excercises.

For the year ended December 31, 2013, net cash used in financing activities was $1.0 million and represents costs associated with our 2013 Loan and Security Agreement and a reduction in our capital lease obligations.


21


For the year ended December 31, 2012, net cash used in financing activities was $0.4 million and was due to a reduction in our capital lease obligations and costs associated with our 2009 Loan and Security Agreement with TD Bank.

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 2014, 2013 and 2012

Dividends

No dividends were paid in 2014, 2013 and 2012. 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 2013 Loan and Security Agreement with Keltic Financial (Refer to Note 9 to our consolidated financial statements).
 
Contractual Obligations

The following table sets forth our schedule of contractual obligations at December 31, 2014, including future minimum lease payments under non-cancelable operating and capital leases, and employment contract payments.

 
 
Payments Due by Period
(In thousands)
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Operating Lease Obligations
 
$
5,587

 
$
1,651

 
$
3,936

 
$

 
$

Employment Contracts
 
775

 
775

 

 

 

Total
 
$
6,362

 
$
2,426

 
$
3,936

 
$

 
$


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 included elsewhere in this Report.

Revenue Recognition

Revenue is recognized for Health and Wellness services when the wellness screening is completed and the results are delivered to our customers. Revenue for kit assembly is recorded upon shipment to the customers. In all cases, there must be evidence of

22


an agreement with the customer, the sales price must be fixed or determinable, delivery of services must occur and the ability to collect must be reasonably assured.

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, our ability to collect on accounts receivable could be negatively impacted, in which case additional allowances may be required. We must make significant management judgments and estimates in determining allowances for doubtful accounts in any accounting period.  One significant 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.

Discontinued Operations Presentation

On August 31, 2014, we completed the sale of certain assets comprising our Heritage Labs and Hooper Holmes Services business units to CRL. On September 30, 2013, we also completed the sale of certain assets comprising our Portamedic service line. The Heritage Labs, Hooper Holmes Services and Portamedic operations are accounted for as discontinued operations in this Report. Accordingly, the operating results of the these discontinued operations are segregated and reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented. The allocation of revenue and expenses between current operations and discontinued operations involves management judgments and estimates. Certain costs presented within continuing operations in the financial statements, notably selling, general and administrative costs, may not be indicative of costs going forward because those costs have historically been shared among service lines and the continuing operations have been restructured. There is no guarantee that costs allocated to Heritage Labs, Hooper Holmes Services and Portamedic and included in discontinued operations will be eliminated in future periods.

In connection with the sale of Portamedic, we agreed to deduct a total of $400,000 from the remaining funds held back by Piston as security for our indemnification obligations in exchange for a full release of obligation in connection with the settlement of the claim by Farmers, and have reduced the remaining Holdback Amounts for the settlement of this claim. In addition, we have reduced the receivable related to the remaining Holdback Amounts to the amount we believe will be collected. There cannot be any assurance that any remaining Holdback Amounts will be collected by us. We anticipate finalization on the remaining Holdback Amount in the first half of 2015. There are no holdback amounts related to the sale of Heritage Labs and Hooper Holmes Services to CRL.
  
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.

ITEM 7A
Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk primarily through our borrowing activities, which are described in Note 9 to the consolidated financial statements included in this Report.  Our credit facility is based on variable rates and is therefore subject to interest rate fluctuations.  Accordingly, our interest expense will vary as a result of interest rate changes and the level of any outstanding borrowings.  As of December 31, 2014 there were no borrowings outstanding.

As of December 31, 2014, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date.


23


ITEM 8
Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Consolidated Financial Statements:
 
 
 
Report of Independent Registered Public Accounting Firm
39

Consolidated Balance Sheets – December 31, 2014 and 2013
40

Consolidated Statements of Operations – Years ended December 31, 2014, 2013 and 2012
41

Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2014, 2013 and 2012
42

Consolidated Statements of Cash Flows – Years ended December 31, 2014, 2013 and 2012
43

Notes to Consolidated Financial Statements
44-58

Quarterly Financial Data (Unaudited)
59


24





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited the accompanying consolidated balance sheets of Hooper Holmes, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014.  In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule, Schedule II – Valuation and Qualifying Accounts.  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.  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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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 taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 and Note 5 to the consolidated financial statements, the Company changed its method of accounting for discontinued operations during the year ended December 31, 2014 due to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
 

 
/s/ KPMG LLP
 

Kansas City, Missouri
March 31, 2015


25


Hooper Holmes, Inc.
Consolidated Balance Sheets
 (In thousands, except share and per share data)

 
 
December 31, 2014
 
December 31, 2013
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
5,201

 
$
3,970

Accounts receivable, net of allowance for doubtful accounts of $87 and $153 at December 31, 2014 and 2013, respectively
 
3,178

 
8,398

Inventories
 
897

 
596

Other current assets
 
202

 
1,597

Assets held for sale
 

 
2,302

Total current assets
 
9,478

 
16,863

Property, plant and equipment, net
 
3,054

 
2,953

Other assets
 
607

 
1,830

               Total assets
 
$
13,139

 
$
21,646

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 

Current liabilities:
 
 
 
 

Accounts payable
 
$
2,508

 
$
3,440

Accrued expenses
 
4,083

 
4,036

Total current liabilities
 
6,591

 
7,476

Other long-term liabilities
 
1,191

 
870

Commitments and contingencies (Note 10)
 


 


Stockholders’ Equity:
 
 
 
 

Common stock, par value $.04 per share; Authorized 240,000,000 shares; Issued: 70,875,998 shares and 70,382,544 shares at December 31, 2014 and 2013, respectively. Outstanding: 70,866,603 shares and 70,373,149 shares at December 31, 2014 and 2013, respectively
 
2,835

 
2,815

Additional paid-in capital
 
150,747

 
150,235

Accumulated deficit
 
(148,154
)
 
(139,679
)
 
 
5,428

 
13,371

Less: Treasury stock, at cost; 9,395 shares as of December 31, 2014 and 2013
 
(71
)
 
(71
)
Total stockholders' equity
 
5,357

 
13,300

Total liabilities and stockholders' equity
 
$
13,139

 
$
21,646

See accompanying notes to consolidated financial statements.


26


      Hooper Holmes Inc.
Consolidated Statements of Operations
 (In thousands, except share and per share data)
 
 
Years ended December 31,
 
 
2014
 
2013
 
2012
Revenues
 
$
28,524

 
$
24,171

 
$
22,136

Cost of operations
 
21,737

 
17,767

 
15,200

Gross profit
 
6,787

 
6,404

 
6,936

Selling, general and administrative expenses
 
14,138

 
17,571

 
16,083

Gain on sale of real estate
 
(1,846
)
 

 

Impairment
 

 
212

 
41

Restructuring charges
 
146

 
802

 
546

Operating loss from continuing operations
 
(5,651
)
 
(12,181
)
 
(9,734
)
Other (expense) income:
 
 

 
 

 
 

Interest expense
 
(1
)
 
(86
)
 
(10
)
Interest income
 
1

 
5

 
26

Other (expense) income, net
 
(239
)
 
(399
)
 
(33
)
 
 
(239
)
 
(480
)
 
(17
)
Loss from continuing operations before income taxes
 
(5,890
)
 
(12,661
)
 
(9,751
)
Income tax expense
 
23

 
19

 
23

Loss from continuing operations
 
(5,913
)
 
(12,680
)
 
(9,774
)
Discontinued operations:
 
 

 
 

 
 

Loss from discontinued operations, net of tax
 
(3,301
)
 
(2,025
)
 
(7,889
)
Gain on sale of subsidiaries, net of adjustments
 
739

 
3,430

 
65

(Loss) income from discontinued operations
 
$
(2,562
)
 
$
1,405

 
$
(7,824
)
Net loss
 
$
(8,475
)
 
$
(11,275
)
 
$
(17,598
)
Basic and diluted (loss) earnings per share:
 
 

 
 

 
 

Continuing operations
 
 

 
 

 
 

Basic
 
$
(0.08
)
 
$
(0.18
)
 
$
(0.14
)
Diluted
 
$
(0.08
)
 
$
(0.18
)
 
$
(0.14
)
Discontinued operations
 
 
 
 
 
 
Basic
 
$
(0.04
)
 
$
0.02

 
$
(0.11
)
Diluted
 
$
(0.04
)
 
$
0.02

 
$
(0.11
)
Net loss
 
 
 
 
 
 
Basic
 
$
(0.12
)
 
$
(0.16
)
 
$
(0.25
)
Diluted
 
$
(0.12
)
 
$
(0.16
)
 
$
(0.25
)
Weighted average number of shares:
 
 

 
 

 
 

Basic
 
70,684,452

 
69,965,814

 
69,743,897

Diluted
 
70,684,452

 
69,965,814

 
69,743,897


See accompanying notes to consolidated financial statements.


27


 Hooper Holmes, Inc.
Consolidated Statements of Stockholders’ 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
Balance, December 31, 2011
 
69,678,982

 
$
2,787

 
$
148,839

 
$
(110,806
)
 
(9,395
)
 
$
(71
)
 
$
40,749

Net loss
 
 

 
 

 
 

 
(17,598
)
 
 

 
 

 
(17,598
)
Share-based compensation
 
165,800

 
7

 
703

 
 

 
 

 
 

 
710

Balance, December 31, 2012
 
69,844,782

 
2,794

 
149,542

 
(128,404
)
 
(9,395
)
 
(71
)
 
23,861

Net loss
 
 

 
 

 
 

 
(11,275
)
 
 

 
 

 
(11,275
)
Exercise of share-based awards
 
182,930

 
7

 
64

 
 
 
 
 
 
 
71

Share-based compensation
 
354,832

 
14

 
629

 
 

 
 

 
 

 
643

Balance, December 31, 2013
 
70,382,544

 
2,815

 
150,235

 
(139,679
)
 
(9,395
)
 
(71
)
 
13,300

Net loss
 
 
 
 
 
 
 
(8,475
)
 
 
 
 
 
(8,475
)
Exercise of share-based awards
 
57,300

 
2

 
27

 
 
 
 
 
 
 
29

Share-based compensation
 
436,154

 
18

 
485

 
 
 
 
 
 
 
503

Balance, December 31, 2014
 
70,875,998

 
$
2,835

 
$
150,747

 
$
(148,154
)
 
(9,395
)
 
(71
)
 
$
5,357



See accompanying notes to consolidated financial statements.


28


Hooper Holmes, Inc.
Consolidated Statements of Cash Flows
 (In thousands)
 
Years ended December 31,
 
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(8,475
)
 
$
(11,275
)
 
$
(17,598
)
 

 


 


Adjustments to reconcile net loss to net cash (used in) provided by
 
 
 
 
 

operating activities:
 
 
 
 
 

    Gain on sale of real estate, net
(1,846
)
 

 

    Gain on sale of subsidiaries, net of adjustments
(739
)
 
(3,430
)
 
(65
)
    Depreciation and amortization
1,220

 
2,200

 
4,191

    Amortization of deferred financing fees
343

 
298

 
136

    Provision for bad debt expense
85

 
(380
)
 
207

    Share-based compensation expense
503

 
643

 
710

         Impairment of long-lived assets, loss on disposal of fixed assets and other
181

 
416

 
5,310

         Change in assets and liabilities:
 
 
 
 
 

          Accounts receivable
5,135

 
9,000

 
1,161

          Inventories
(300
)
 
(62
)
 
(5
)
          Other assets
1,005

 
(184
)
 
1,334

          Accounts payable, accrued expenses and other liabilities
(542
)
 
(4,255
)
 
442

Net cash used in operating activities
(3,430
)
 
(7,029
)
 
(4,177
)
Cash flows from investing activities:
 
 
 
 
 

Capital expenditures
(1,409
)
 
(1,550
)
 
(4,103
)
Proceeds from sale of real estate, net of closing costs
2,544

 

 

Proceeds from the sale of Heritage Labs and Hooper Holmes Services
3,539

 

 

Cost paid to sell Heritage Labs and Hooper Holmes Services
(777
)
 

 

Proceeds from the sale of Portamedic
743

 
6,053

 

Costs paid to sell Portamedic

 
(781
)
 

Proceeds from sale of fixed assets

 

 
51

Net cash provided by (used in) investing activities
4,640

 
3,722

 
(4,052
)
Cash flows from financing activities:
 
 
 
 
 
Borrowings under credit facility

 
50,827

 

Payments under credit facility

 
(50,827
)
 

Debt financing fees

 
(999
)
 
(101
)
Proceeds related to the exercise of stock options
29

 
71

 

Payments on capital lease obligations
(8
)
 
(114
)
 
(268
)
Net cash used in financing activities
21

 
(1,042
)
 
(369
)
Net decrease in cash and cash equivalents
1,231

 
(4,349
)
 
(8,598
)
Cash and cash equivalents at beginning of year
3,970

 
8,319

 
16,917

Cash and cash equivalents at end of year
$
5,201

 
$
3,970

 
$
8,319

 
 
 
 
 
 
Supplemental disclosure of non-cash investing activities:
 
 
 
 
 

Fixed assets vouchered but not paid
$
163

 
$
153

 
$
154

Fixed assets acquired by capital leases
$

 
$

 
$
64

       Proceeds from sale of Portamedic not received, net of costs not paid
$

 
$
1,525

 
$

Supplemental disclosure of cash flow information:
 
 
 
 
 

Cash paid during the period for:
 
 
 
 
 

Income taxes
$
53

 
$
62

 
$
50

See accompanying notes to consolidated financial statements

29


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

Note 1 — Summary of Significant Accounting Policies

(a)
Description of the Business

Hooper Holmes, Inc. and its subsidiaries (“Hooper Holmes” or the "Company”) provides on-site health screenings, laboratory testing, risk assessment and sample collection services to individuals as part of comprehensive health and wellness programs offered through corporate and government employers.  Hooper Holmes is engaged by the organizations sponsoring such programs, including health and care management companies, broker and wellness companies, disease management organizations, reward administrators, third party administrators, clinical research organizations and health plans.  Hooper Holmes provides these services through a national network of health professionals.

As a provider of services within the health and health insurance industries, the Company's business is subject to some seasonality, with the second quarter sales typically dropping below the other quarters and the third and fourth quarter sales typically the strongest quarters due to increased demand for biometric screenings from mid-August through November related to annual benefit renewal cycles.

On September 30, 2013, the Company completed the sale of certain assets comprising its Portamedic service line. The Portamedic service line is accounted for as a discontinued operation in this Report. Accordingly, the operating results of Portamedic are segregated and reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented.

Sale of Assets - Heritage Labs and Hooper Holmes Services

On August 31, 2014, the Company completed the sale of certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units (the "Business") to Clinical Reference Laboratory, Inc. ("CRL") pursuant to the terms of a Strategic Alliance Agreement (as amended, the "Alliance Agreement") entered into in April 2014. The purchase price, after inventory-related price adjustments, was $3.5 million, of which $0.25 million was deposited into an escrow account in accordance with the Alliance Agreement. The Alliance Agreement provided that certain lab assets were sold to CRL at a separate closing on October 31, 2014, at which time the remaining purchase price held in escrow was released to the Company. The net book value of assets sold was approximately $1.0 million, consisting primarily of inventory and certain property, plant and equipment. After incurring $0.8 million in transaction costs associated with the sale to CRL, the Company recorded a gain on sale of $1.7 million during the year ended December 31, 2014, which is recorded as a component of discontinued operations.

The assets sold to CRL qualified as assets held for sale in April 2014, and the businesses are accounted for as discontinued operations in this Report. The sale of the Heritage Labs and Hooper Holmes Services businesses to CRL represents a strategic shift in the Company's ongoing operations. Accordingly, the operating results of the Heritage Labs and Hooper Holmes Services businesses are segregated and reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented. For further discussion, refer to Note 5.

Following the sale of Portamedic on September 30, 2013 but prior to the second quarter of 2014, the Company previously reported its financial results in three segments: Health and Wellness, Heritage Labs and Hooper Holmes Services. Pursuant to the Alliance Agreement with CRL, among other things, the Company sold certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units, which represent the Heritage Labs and Hooper Holmes Services reportable segments. As the Heritage Labs and Hooper Holmes Services reportable segments have been reported as discontinued operations in this Report, segment information is no longer provided for Heritage Labs and Hooper Holmes Services. The Company also reassessed its segment reporting following the Alliance Agreement with CRL to align with the information that is regularly reviewed. Subsequent to the closing of the Alliance Agreement with CRL on August 31, 2014, the Company has one segment, consisting of the Health and Wellness operations.
 
Sale of Basking Ridge Real Estate

On May 13, 2014, the Company entered into a Purchase and Sale Agreement (the "Purchase and Sale Agreement") for the sale to McElroy Deutsch Mulvaney & Carpenter, LLP (the "MDMC") of the buildings, land, certain personal property and other interests comprising the Company’s Basking Ridge, New Jersey property for an aggregate purchase price of $3.0 million. On July 18, 2014, the Company and MDMC entered into an amendment to the Purchase and Sale Agreement that provided for

30


the Company to deposit into an escrow account at closing an aggregate of $0.3 million of the purchase price, all of which was used to satisfy amounts paid by MDMC in connection with certain repairs and other expenses identified in the course of the property inspection. The sale closed on August 7, 2014 resulting in cash proceeds to the Company of $2.5 million, which is net of customary closing costs and broker fees of $0.2 million. The Company recorded a gain on sale of real estate of $1.8 million in connection with the transaction. The gain is recorded as a component of operating income (loss) from continuing operations as the Basking Ridge, New Jersey property was Company's former corporate headquarters.
    
(b)
Principles of Consolidation

The 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.

(c)
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.

(d)
Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. 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 accounts receivable historical losses and 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.

(e)
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, 2014 and 2013 are $0.7 million and $0.3 million, respectively, of finished goods and $0.2 million and $0.3 million, respectively, of components.

(f)
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 operations 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.

(g)
Long-Lived Assets

Long-lived assets, including intangible assets with determinable useful lives, are reviewed for impairment whenever events or changes in 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 assets to the future undiscounted net cash flows expected to be generated by the asset.  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 and is charged to earnings.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell.  Intangible assets with determinable useful lives were amortized on a straight line basis over their respective estimated useful lives and were fully amortized as of December 31, 2012. Amortization expense from continuing operations of $0.2 million was recorded for the year ended December 31, 2012.

(h)
Deferred Rent


31


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, 2014 and 2013, the Company has recorded $0.2 million and $0.3 million, respectively, related to deferred rent in the consolidated balance sheet.

(i)
Advertising

Costs related to space in publications are expensed as incurred. Advertising expense included in continuing operations was approximately $0.02 million, $0.1 million and $0.2 million in 2014, 2013 and 2012, respectively.

(j)
Revenue Recognition

Revenue is recognized for Health and Wellness services when the wellness screening is completed and the results are delivered to customers. Revenue for kit assembly is recorded upon shipment to the customers. 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 occur and the ability to collect must be reasonably assured. 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.

(k)
Share-Based Compensation
 
The Company recognizes share-based compensation cost on a straight-line basis over the vesting period, for awards expected to vest. Compensation cost is measured at the grant date based on the fair value of the award.

(l)
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.

(m)
(Loss) Earnings per Common Share

Basic (loss) earnings per share equals net (loss) income divided by the weighted average common shares outstanding during the period.  Diluted (loss) earnings per share equals net (loss) income divided by the sum of the weighted average common shares outstanding during the period plus dilutive common stock equivalents. The calculation of (loss) earnings per common share on a basic and diluted basis was the same for the three years ended December 31, 2014 because the inclusion of dilutive common stock equivalents would have been anti-dilutive for all periods presented.

(n)
Use of Estimates

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, 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

32


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.

(o)
Concentration of Credit Risk

The Company’s accounts receivable are due primarily from healthcare management and wellness companies.  As of December 31, 2014, there were two customer balances that each accounted for more than 10% of the total consolidated accounts receivable. The accounts receivable balance for these two customers represented approximately 39% of total consolidated accounts receivable as of December 31, 2014. As of December 31, 2013, there were three customer balances that each accounted for more than 10% of the total consolidated accounts receivable and represented approximately 42% of total consolidated accounts receivable.

For the years ended December 31, 2014 and 2013, there were three Health and Wellness customers that exceeded 10% of revenue from continuing operations and represented more than 50% of the consolidated revenue. For the year ended December 31, 2012, there were two Health and Wellness customers that exceeded 10% of revenue from continuing operations and represented more than 50% of the consolidated revenue. The Company has agreements with each of its Health and Wellness customers, although these agreements do not provide for specific minimum level of purchase.

(p)
New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014- 08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" to change the criteria for reporting discontinued operations. Under the new guidance, only disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations should be reported as discontinued operations in the financial statements. Additionally, the new guidance removes the condition that an entity may not have any significant continuing involvement in the operations of the component after the disposal transaction. The new guidance requires expanded disclosures for discontinued operations, as well as disclosures about the financial effects of significant disposals that do not qualify for discontinued operations. The Company early adopted the guidance as of January 1, 2014 and has applied the guidance in ASU 2014-08 to the accounting for the sale of Heritage Labs and Hooper Holmes Services to CRL and presentation of discontinued operations.

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 2017, with no early adoption permitted. The Company is currently evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures.

Note 2 - Liquidity

The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the 2013 Loan and Security Agreement (refer to Note 9). At December 31, 2014, the Company had $5.2 million cash and cash equivalents and no outstanding debt.    

The Company incurred a loss from continuing operations of $5.9 million for the year ended December 31, 2014. The Company's net cash used in operating activities during the year ended December 31, 2014 was $3.4 million. The Company has managed its liquidity through sales of the Portamedic, Heritage Labs and Hooper Holmes Services business units, the sale of the Basking Ridge, New Jersey property, a series of cost reduction and accounts receivable collection initiatives and availability under the 2013 Loan and Security Agreement.

The Company has historically used availability under the 2013 Loan and Security Agreement to fund operations. The Company did not borrow under the 2013 Loan and Security Agreement during the year ended December 31, 2014. The Company used the proceeds from the sale of Heritage Labs and Hooper Holmes Services as well as the proceeds from the sale of the Basking Ridge real estate to fund capital expenditures and operating expenses associated with the increased screening volume experienced in the second half of the year. The Company experiences a timing difference between the operating expense and cash collection of the associated revenue as Health and Wellness customers generally have longer payment terms.

Transition Initiatives


33


During the year ended December 31, 2014, the Company incurred $1.9 million of costs, which are recorded in selling, general and administrative expenses in the consolidated statement of operations, in connection with the relocation of its corporate headquarters to Olathe, Kansas, and contributed to the year-to-date loss from continuing operations during 2014. The Company relocated its headquarters to Olathe, Kansas during the first quarter of 2014, where its Health and Wellness operations facilities are located. Costs incurred during 2014 relate to expenses associated with maintaining the Basking Ridge, New Jersey real estate through the date of sale and the transition of information technology infrastructure.

Under the Alliance Agreement with CRL (refer to Note 1), the Company completed the sale of certain assets of Heritage Labs and Hooper Holmes Services as of August 31, 2014 with a purchase price, after inventory-related price adjustments, of $3.5 million.

On May 13, 2014, the Company entered into an agreement for the sale of the Basking Ridge, New Jersey property for an aggregate purchase price of $3.0 million. The sale closed on August 7, 2014 resulting in cash proceeds to the Company of $2.5 million, which is net of customary closing costs and broker fees (refer to Note 1).

2013 Loan and Security Agreement
    
The Company maintains the 2013 Loan and Security Agreement with ACF FinCo I LP ("ACF"), the assignee of Keltic Financial Partners II, LP ("Keltic Financial") (refer to Note 9). Borrowings under the 2013 Loan and Security Agreement are to be used for working capital purposes and capital expenditures. The amount available for borrowing may be less than the $10 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 (as defined in the 2013 Loan and Security Agreement) up to $10 million under this facility.  Eligible Receivables do not include certain receivables deemed ineligible by the lender. As of December 31, 2014, the lender applied a discretionary reserve of $0.5 million. Available borrowing capacity, net of this discretionary reserve was $2.6 million based on Eligible Receivables as of December 31, 2014. As of December 31, 2014, there were no borrowings outstanding under the 2013 Loan and Security Agreement.

The Company and ACF entered into an amendment to the 2013 Loan and Security Agreement on July 9, 2014 (refer to Note 9) to modify the definition of Eligible Receivables was amended to include up to fifty percent of Unbilled Eligible Receivables (as defined in the 2013 Loan and Security Agreement), which results in an increase in the Company's borrowing capacity.

The 2013 Loan and Security Agreement contains various covenants, including financial covenants which require the Company to achieve a minimum EBITDA amount (earnings before interest expense, income taxes, depreciation and amortization). On March 27, 2015, the lender modified the covenants to waive the minimum EBITDA covenant for the twelve months ending March 31, 2015 and replaced it with minimum EBITDA covenants of negative $2.5 million for the six months ending June 30, 2015, negative $2.25 million for the nine months ended September 30, 2015 and negative $2.0 million for the twelve months ending December 31, 2015. The discretionary reserve applied by the lender was also increased to $2.0 million.

The Company continues to have limitations on the maximum amount of capital expenditures for each fiscal year. The Company is in compliance with the covenants under the 2013 Loan and Security Agreement as of December 31, 2014. Given the seasonal nature of the Company's operations, management expects to use the revolver at certain points in the year and believes the Company has sufficient borrowing capacity to do so. The Company also believes it will meet its covenants during 2015.

Other Considerations

The Company's Health and Wellness business principally sells through wellness, disease management, benefit brokers and insurance companies (referred to as channel partners) who ultimately have the relationship with the end customer. The Company's current services are often aggregated with other offerings from its channel partners to provide a total solution to the end-user. As such, the Company's success is largely dependent on that of its partners.

The Company's ability to generate cash flow in the future is dependent on realizing the benefits from the consolidation of its operations in Kansas and growing the Health and Wellness business as it seeks to streamline operations and improve efficiency through increased revenue and cost reduction initiatives. These and other factors could adversely affect liquidity if not achieved.

The Company has completed the sale of the Basking Ridge, New Jersey property and Portamedic, Heritage Labs and Hooper Holmes Services business units. The capital raised from these transactions provided the Company with additional capital to invest as it focuses on growth supporting Health and Wellness operations.


34


While the Company received an aggregate of $5.3 million in net proceeds during the year ended December 31, 2014 from the sale of the Basking Ridge, New Jersey property and sale of Heritage Labs and Hooper Holmes Services business units, the Company had cash outflows of $1.9 million during the year ended December 31, 2014 in connection with transition costs.

In 2014, the Company also invested $1.4 million in capital expenditures, primarily for information technology enhancements and to prepare for increased screening volumes. The remaining change in cash for the year ended December 31, 2014 is due to the remaining higher fixed cost structure as discussed below and fulfillment and execution of screening events in advance of cash receipts from the Company's customers. To conduct successful screenings the Company must expend cash to deliver equipment and supplies required for the screenings as well as pay its health professionals and site management, which is in advance of the customer invoicing process and ultimate cash receipts for services performed.

The Company continues to focus its attention on the long-term strategy and believe it has the necessary assets to make the most of its immediate opportunities while positioning the Company for long-term growth. In connection with the Alliance Agreement with CRL, he Company has transitioned out of the life insurance industry to focus on the Health and Wellness business. As a part of the transition, the Company reduced corporate fixed cost structure by evaluating head count, professional fees and other expenses.

Based on the Company's anticipated level of future revenues and gross profits, continued cost reduction initiatives and existing cash and cash equivalents and borrowing capacity, the Company believes it has sufficient funds to meet its cash needs to fund operation expenses and capital expenditures for the twelve months following December 31, 2014.

Note 3 - Impairment of Long-lived Assets

The Company evaluates the recovery of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of assets may not be recoverable. The Company evaluated the long-lived assets associated with Heritage Labs and Hooper Holmes Services in connection with the sale of certain assets under the Alliance Agreement with CRL (refer to Note 1). The Company concluded these long-lived assets were not impaired. There were no impairment charges recorded for these assets or any other assets in continuing operations during the year ended December 31, 2014.

During the years ended December 31, 2013 and 2012, the Company recorded impairment charges in continuing operations of $0.2 million and $0.04 million, which are included in impairment in the accompanying consolidated statement of operations. The charges relate to the write-off of software which was no longer expected to be utilized.

The Company recorded an impairment charge of long-lived assets related to discontinued operations in the consolidated statements of operations of $0.04 million, $0.1 million and $5.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. These impairment charges are included in (loss) income from discontinued operations in the consolidated statements of operations.

Note 4 — Share-Based Compensation

Employee Stock-Based Compensation Plan — 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 5,000,000 shares. During the three years ended December 31, 2014, options for the purchase of 359,700, 325,000 and 900,000 shares were granted under the 2008 Plan. During the year ended December 31, 2014, no shares of restricted stock were granted. During the year ended December 31, 2013, 205,532 shares of restricted stock were granted, which vest immediately but cannot be sold for one year from date of grant, to the Company's Chief Executive Officer as settlement for a discretionary bonus of $0.1 million. As of December 31, 2014, approximately 3,493,200 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 3,500,000 shares. On June 11, 2014, the Company's shareholders approved an amendment and restatement of the 2011 Plan to rename the 2011 Plan as the Hooper Holmes, Inc. 2011 Omnibus Incentive Plan and also to include non-employee directors and consultants as eligible participants. The 2011 Plan is to remain in effect until the earlier of (i) the 10th anniversary of the plan's original effective date of May 24, 2011, or (ii) the date all shares of stock available for issuance have been issued. During the year ended December 31, 2014, the Company granted a total of 400,000 stock awards to non-employee members of the Board of Directors that immediately vested. During the three years ended December 31, 2014, 2013 and 2012, options for the purchase of 300,000, 2,000,000 and 1,225,000 shares, respectively, were granted under the 2011 Plan.

35


As of December 31, 2014, the Company is authorized to grant share-based awards of approximately 1,217,000 shares under the 2011 Plan.

Options under the 2008 and 2011 Plans are granted at fair value on the date of grant, are exercisable in accordance with a vesting schedule specified in the grant agreement, and have contractual lives of 10 years from the date of grant. Options to purchase 100,000 shares of the Company's stock granted to certain executives of the Company in December 2010 vested 50% on each of the first and second anniversaries of the grant. Options to purchase an aggregate of 1,066,600 shares of the Company's stock granted to certain employees of the Company vest one-third on each of the first, second and third anniversaries of the grant. Options to purchase 2,000,000 shares of the Company's stock granted to the Chief Executive Officer of the Company in September 2013, vest 25% upon receipt of the grant and 25% on the first, second, and third anniversaries of the grant. All other options granted by the Company vest 25% on each of the second through fifth anniversaries of the 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:
 
 
2014
 
2013
 
2012
Expected life (years)
 
5.3

 
5.4

 
5.5

Expected volatility
 
82.9
%
 
89.6
%
 
92.4
%
Expected dividend yield
 

 

 

Risk-free interest rate
 
1.8
%
 
1.5
%
 
0.7
%
Weighted average fair value of options granted during the year
 
$0.39
 
$0.34
 
$0.47

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.
 
The following table summarizes stock option activity for the year ended December 31, 2014:
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Weighted Average
 
Average Remaining
 
Aggregate Intrinsic
 
 
 Number of Shares
 
Exercise Price Per Share
 
Contractual Life (years)
 
 Value (in thousands)
Outstanding at December 31, 2013
 
4,150,550

 
$0.75
 
 
 
 
Granted
 
659,700

 
$0.58
 
 
 
 
Exercised
 
(57,300
)
 
0.52

 
 
 
 
Expired
 
(615,300
)
 
$1.19
 
 
 
 
Forfeited
 
(485,450
)
 
$0.53
 
 
 
 
Outstanding at December 31, 2014
 
3,652,200

 
$0.67
 
7.8
 
$117
Exercisable at December 31, 2014
 
2,005,350

 
$0.80
 
7.1
 
$58
 
The aggregate intrinsic value disclosed in the table above represents the difference between the Company’s closing stock price on the last trading day of 2014 (December 31, 2014) and the exercise price, multiplied by the number of in-the-money stock options for each category.
 
For the year ended December 31, 2014, 57,300 stock options valued with a weighted average exercise price of $0.52 were exercised under the 2008 Plan. No stock options were exercised during the year end December 31, 2014 under the 2011 Plan. For the year ended December 31, 2013, 173,050 and 9,880 stock options valued with a weighted average exercise price of $0.38 and $0.65, respectively, were exercised under the 2008 Plan and 2011 Plan, respectively. No stock options were exercised during the year ended December 31, 2012.

Options for the purchase of 770,600, 1,498,850 and 1,176,150 shares of common stock vested during the years ended December 31, 2014, 2013 and 2012, respectively, and the aggregate fair value at grant date of these options was $0.3 million, $0.7 million

36


and $0.7 million, respectively. As of December 31, 2014, there was approximately $0.4 million of unrecognized compensation cost related to stock options which is expected to be recognized over a weighted average period of 1.8 years.  

The Company’s initial accruals for share-based compensation expense are based on the estimated number of instruments for which the requisite service is expected to be rendered.  Therefore, the Company is required to incorporate the probability of pre-vesting forfeitures in determining the number of options and restricted stock that are estimated to vest. The forfeiture rate is based on historical forfeiture experience.  The Company monitors employee termination patterns to estimate forfeiture rates.

Employee Stock Purchase Plan - The Company's 2004 Employee Stock Purchase Plan (the "2004 Plan") provides for the granting of purchase rights for up to 2,000,000 shares of the Company's stock to eligible employees of the Company. Under the 2004 Plan, purchase rights for approximately 233,000 shares were granted in the February 2013 offering period with an aggregate fair value of $0.03 million, based on the Black-Scholes option pricing model. The February 2013 offering period concluded in March 2014 and, in accordance with the 2004 Plan's automatic termination provision, there were 36,154 shares issued. The February 2012 offering period concluded in March 2013 and, in accordance with the 2004 Plan's automatic termination provision, no shares were issued. The February 2011 offering period concluded in March 2012 and in accordance with the 2004 Plan's automatic termination provision, no shares were issued. The Company is no longer granting purchase rights under the 2004 Plan.
Other Stock Awards — On May 30, 2007, the Company’s shareholders approved the Hooper Holmes, Inc. 2007 Non-Employee Director Restricted Stock Plan (the “2007 Plan”), which provides for the automatic grant, on an annual basis for 10 years, of shares of the Company’s stock to the Company's non-employee directors.  The total number of shares that may be awarded under the 2007 Plan is 600,000.  There were no shares awarded under the 2007 Plan for the year ended December 31, 2014. For the years ended December 31, 2013 and 2012, shares awarded under the 2007 Plan totaled 30,000 each year.  The fair value of these stock awards was based on the grant date market value and totaled $0.02 million each year.

The Company recorded $0.5 million, $0.6 million and $0.7 million of share-based compensation expense in selling, general and administrative expenses for each of the years ended December 31, 2014, 2013 and 2012, respectively, related to stock options, non-vested stock, restricted stock awards and the 2004 Plan.  In connection with the resignation of former executive officers, the Company reclassified previously recorded share-based compensation expense totaling $0.2 million during the year ended December 31, 2013.  The reclassifications were recorded in restructuring charges (See Note 6). There were no reclassifications during 2014 or 2012.

Note 5 — Discontinued Operations

Sale of Assets - Heritage Labs and Hooper Holmes Services

On August 31, 2014, the Company completed the sale of certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units (the "Business") to CRL pursuant to the terms of the Alliance Agreement. The purchase price, after inventory-related price adjustments, was $3.5 million, of which $0.25 million was deposited into an escrow account in accordance with the Alliance Agreement. The Alliance Agreement provided that certain lab assets were sold to CRL at a separate closing on October 31, 2014, at which time the remaining purchase price held in escrow was released to the Company.

The net book value of assets sold was approximately $1.0 million, consisting primarily of inventory of $0.3 million and certain property, plant and equipment of $0.7 million. After incurring $0.8 million in transaction costs associated with the sale to CRL, the Company recorded a gain on sale of $1.7 million during the year ended December 31, 2014, which is recorded as a component of discontinued operations. The assets sold to CRL are recorded in assets held for sale in the consolidated balance sheet as of December 31, 2013 and included inventory of $0.8 million and property, plant and equipment of $0.8 million.

The Company has retained certain aspects of its sample kit assembly operations (relating to the Health and Wellness segment) as well as certain other third party kit assembly and all other supply chain fulfillment capabilities, which continue to support Health and Wellness operations and other customers. The Company decided to sell the Business as the transaction provided the Company with additional capital to invest in the growing Health and Wellness operation.

The assets sold to CRL qualified as assets held for sale in April 2014. The sale of Heritage Labs and Hooper Holmes Services to CRL represents a strategic shift in the Company's ongoing operations. Accordingly, the operating results of Heritage Labs and Hooper Holmes Services are segregated and reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented.

The Company also entered into the Limited Laboratory and Administrative Services Agreement (the "LLASA"), as amended, with CRL pursuant to which, among other things, CRL is the Company’s exclusive provider, subject to certain exceptions, of

37


laboratory testing and reporting services and provides administrative services in support of the Company’s Health and Wellness operations. The Company is a member of CRL’s preferred provider network for wellness programs during the term of the LLASA. The LLASA was effective as of August 31, 2014 upon the closing of the transaction contemplated by the Alliance Agreement and will continue for five years from such date and auto-renew for an additional five year renewal period unless sooner terminated by either party in accordance with the LLASA. CRL will be providing services to the Health and Wellness operations based on an arms' length pricing structure, and the Company will have not have the ability to exercise influence over the operations of either the Heritage Labs or the Hooper Holmes Services businesses.

Sale of Portamedic

The Company decided to sell its under-performing Portamedic service line and shift its focus towards the growth of its remaining health care segments. On September 30, 2013, the Company completed the sale of certain assets comprising the Portamedic service line to Piston Acquisition, Inc., a subsidiary of American Para Professional Systems, Inc. (“Piston”). Pursuant to the terms of the Asset Purchase Agreement, the Company sold assets associated with the Portamedic service line to Piston, including, among other things, fixed assets, inventory and intellectual property, and Piston assumed certain specified liabilities. The adjusted purchase price (the "Purchase Price") was approximately $8.1 million in cash, adjusted from $8.4 million at announcement due to changes in working capital. Approximately $2.0 million of the Purchase Price was held back (the "Holdback Amount") by Piston as security for the obligations under the Asset Purchase Agreement and certain other agreements between the Company and Piston. During the year ended December 31, 2013, the Company received $6.1 million of cash proceeds and incurred $1.0 million of financial advisory, legal and accounting fees in connection with the sale.

The Holdback Amount includes two components. The first holdback was $1.0 million, subject to adjustments, and was released in the first quarter of 2014 when final closing adjustments for inventory and other current assets were determined and paid (the "Closeout Date"). During the year ended December 31, 2014, the Company received $0.7 million as payment for the first Holdback Amount, after the closing adjustments. As a result, the amount remaining related to the first Holdback Amount was written off during the year ended December 31, 2014 as a charge to gain on sale of subsidiary in the consolidated statement of operations.

On January 28, 2015, the Company entered into a Settlement Agreement and Release, by and among the Company, Farmers New World Life Insurance Company and Portamedic, Inc., relating to a claim made by Farmers against each of Portamedic and the Company challenging the validity of charges for services billed to Farmers by certain examiners engaged by Portamedic and the Company dating back to 2010. Under the terms of the Asset Purchase Agreement, the Company agreed to indemnify Piston in connection with the subject matter of the claim. The Company agreed to deduct a total of $400,000 from the second Holdback Amount in exchange for a full release of obligation in connection with the matter and has reduced the remaining Holdback Amounts for the settlement of this claim. In addition, the Company has reduced the receivable related to the remaining Holdback Amounts to the amount it believes will be collected. There cannot be any assurance that any remaining Holdback Amounts will be collected by the Company, including the possibility that no further amounts may be collected. The Company anticipates finalization on the second Holdback Amount in the first half of 2015.

Prior to the fourth quarter of 2013, the Company has not historically tracked accounts receivable, accounts payable and other balance sheet accounts by segment. Following the sale of the Portamedic service line on September 30, 2013, the Company reassessed its segment reporting. Beginning in the fourth quarter of 2013, the Company began reporting financial results in three segments: Health and Wellness (health risk assessments including biometirc screenings), Heritage Labs (laboratory testing) and Hooper Holmes Services (health information services). Following the sale of Heritage Labs and Hooper Holmes Services in the third quarter of 2014, the Company reverted to one reporting segment, Health and Wellness. The continuing operations and the Portamedic, Heritage Labs and Hooper Holmes Services discontinued segments had customers and suppliers in common. The continuing and discontinued operations also shared certain selling, general and administrative services. As a result, the Company does not have reliable information for the historical impact of Portamedic, Heritage Labs and Hooper Holmes Services on our cash flows for the years ended December 31, 2013 and 2012 as well as certain statement of operations information for the Portamedic segment for the years ended December 31, 2013 and 2012.

The operating results of Portamedic, which are reported as a component of discontinued operations in the consolidated statements of operations, include revenue of $66.5 million and $100.4 million for the years ended December 31, 2013 and 2012, respectively. Income taxes relating to the operations of Portamedic were less than $0.1 million for the years ended December 31, 2013 and 2012. The following table summarizes the major classes of line items constituting the pretax results of operations of Heritage Labs and Hooper Holmes Services for the years ended December 31, 2014, 2013 and 2012, which are reported as a component of discontinued operations in the consolidated statement of operations. There was no income tax recorded in discontinued operations for Heritage Labs and Hooper Holmes Services for any period presented.


38


 
 
 
(in thousands)
2014
2013
2012
Revenues
 
 
 
     Heritage Labs
$
4,393

$
10,367

$
12,367

     Hooper Holmes Services
$
7,289

$
14,622

$
16,474

     Total revenue
$
11,682

$
24,989

$
28,841

Cost of Sales
 
 
 
     Heritage Labs
$
3,576

$
7,221

$
8,130

     Hooper Holmes Services
$
6,254

$
12,629

$
14,349

     Total cost of sales
$
9,830

$
19,850

$
22,479

Selling, General & Administrative Expenses
 
 
 
     Heritage Labs
$
379

$
604

$
1,147

     Hooper Holmes Services
$
1,625

$
2,110

$
2,518

     Tail coverage insurance expense
$
1,390

$

$

     Total selling, general & administrative expenses
$
3,394

$
2,714

$
3,665

(Loss) income from Discontinued Operations
 
 
 
     Heritage Labs
$
438

$
2,542

$
3,090

     Hooper Holmes Services
$
(590
)
$
(117
)
$
(393
)
     Tail coverage insurance expense
$
(1,390
)
$

$

     Total (loss) income from discontinued operations
$
(1,542
)
$
2,425

$
2,697

 
 
 
 
Reconciliation to statement of operations:
 
 
 
Portamedic discontinued operations and other (see below)
$
(1,759
)
$
(4,450
)
$
(10,586
)
Gain on sale of subsidiaries, net of adjustments
$
739

$
3,430

$
65

(Loss) income from discontinued operations
$
(2,562
)
$
1,405

$
(7,824
)
 
 
 
 

Operating cash flow from discontinued operations for the Heritage Labs and Hooper Holmes Services segments for the year ended December 31, 2014 was approximately $1.3 million. Changes in working capital for the Heritage Labs and Hooper Holmes Services segments for the year ended December 31, 2014 was approximately $1.2 million. The Company recorded non-cash operating charges for depreciation and bad debt expense of $0.2 million and a non-cash operating charge of $1.0 million for the remaining operating lease payments associated with the discontinued Hooper Holmes Services operations (refer to Note 10). Other than the sale of the discontinued Heritage Labs and Hooper Holmes Services operations to CRL, there were no significant investing or financing activities from discontinued operations for the year ended December 31, 2014. The determination of operating cash flow from discontinued operations for the year ended December 31, 2014 includes a degree of management judgment and estimates. The Company has not allocated any general corporate overhead to discontinued operations.
 
Included in discontinued operations for the year ended December 31, 2014 is expense of $1.4 million related to retroactive tail coverage insurance policies for the discontinued operations of Portamedic, Heritage Labs and Hooper Holmes Services. The tail coverage represents retroactive insurance policies for claims associated with these businesses incurred prior to the sale of the discontinued operations and were purchased by the Company during the year ended December 31, 2014. The Company made payments of $0.6 million during the year ended December 31, 2014 for the tail coverage insurance policies and has $0.8 million in the consolidated balance sheet as of December 31, 2014 for the remaining payments scheduled for 2015.

The Company also leases a facility used for the discontinued Hooper Holmes Services operations center through 2018. During the year ended December 31, 2014, the Company recorded charges of $1.0 million representing the fair value of the remaining contractual obligations under the lease reduced by an estimate of sublease income.

In connection with the 2008 sale of the Claims Evaluation Division ("CED"), the Company was released as the primary obligor for certain lease obligations acquired but remains secondarily liable in the event the buyer defaults through the lease term which expires in July 2015. During the years ended December 31, 2014, 2013 and 2012, the Company reduced liabilities related to CED by $0.06 million, $0.08 million and $0.07 million, respectively. The corresponding gains are reported in the consolidated statement of operations in discontinued operations for the years ended December 31, 2014, 2013 and 2012. The Company has no remaining obligation recorded in the consolidated balance sheet related to the leases as of December 31, 2014.

39



Note 6 — Restructuring Charges

At December 31, 2014, there was a total of $1.1 million related to restructuring charges for branch closure costs, recorded in accrued expenses in the accompanying consolidated balance sheet. The following table provides a summary of the activity in the restructure accrual for the year ended December 31, 2014:

 
As of
 
 
 
 
 
As of
(In thousands)
December 31, 2013
 
Charges
 
Payments
 
December 31, 2014
Severance
$
531

 
$
202

 
$
(733
)
 
$

Branch closure obligation
415

 
1,097

 
(438
)
 
1,074

     Total
$
946

 
$
1,299

 
$
(1,171
)
 
$
1,074


Restructuring Charges

During the year ended December 31, 2014, the Company recorded restructuring charges of $1.3 million, of which $0.1 million was recorded in continuing operations and $1.2 million was recorded in discontinued operations. The Company recorded severance charges of $0.1 million in continuing operations during the year ended December 31, 2014 for employee severance associated with the relocation of the corporate headquarters. The Company recorded a charge to discontinued operations of $1.0 million for the remaining operating lease payments associated with the Hooper Holmes Services operations. In addition, branch closure costs of $0.1 million related to the discontinued Portamedic operations as well as employee severance of $0.1 million were recorded to discontinued operations during the year ended December 31, 2014. As of December 31, 2014, there was $0.5 million recorded in accrued expenses and $0.6 million recorded in other long-term liabilities, related to branch closure obligations. The total branch closure obligation as of December 31, 2014 was $1.1 million, of which $1.0 million relates to Hooper Holmes Services and $0.1 million relates to Portamedic.

During the year ended December 31, 2013, the Company recorded restructuring charges of $1.9 million, of which $0.8 million was recorded in continuing operations and $1.1 million was recorded in discontinued operations. Restructuring charges in continuing operations consist of severance related to the resignation of former executives and other employee severance. Restructuring changes in discontinued operations include lease closure costs as well as severance.

During the year ended December 31, 2012, the Company recorded restructuring charges of $2.7 million, of which $0.6 million was recorded in continuing operations and $2.1 million was recorded in discontinued operations. Restructuring charges in continuing operations consist of employee severance. Restructuring charges in discontinued operations consist of $1.2 million related to branch closure costs and $0.9 million for severance. The restructuring charges in 2012 related to the deployment of a new service delivery model for the discontinued Portamedic operations.
    
Note 7 — Property, Plant and Equipment

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

 
 
 
 
Estimated
 
 
December 31,
 
Useful Life
 
 
2014
 
2013
 
In Years
Building and leasehold improvements
 
$
1,386