Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - HOOPER HOLMES INCexhibit321201510-k.htm
EX-10.45 - EXHIBIT 10.45 - HOOPER HOLMES INCexhibit1045201510-k.htm
EX-21 - EXHIBIT 21 - HOOPER HOLMES INCexhibit21201510-k.htm
EX-23 - EXHIBIT 23 - HOOPER HOLMES INCexhibit23201510-k.htm
EX-31.1 - EXHIBIT 31.1 - HOOPER HOLMES INCexhibit311201510-k.htm
EX-32.2 - EXHIBIT 32.2 - HOOPER HOLMES INCexhibit322201510-k.htm
EX-31.2 - EXHIBIT 31.2 - HOOPER HOLMES INCexhibit312201510-k.htm
EX-10.43 - EXHIBIT 10.43 - HOOPER HOLMES INCexhibit1043201510-k.htm
EX-10.44 - EXHIBIT 10.44 - HOOPER HOLMES INCexhibit1044201510-k.htm
EX-10.13 - EXHIBIT 10.13 - HOOPER HOLMES INCexhibit1013201510-k.htm
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, 2015

Commission file number: 001-09972

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

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

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

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

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

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   (Check one):
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No x
The aggregate market value of the shares of common stock held by non-affiliates of the Registrant (72,100,000), based on the closing price of these shares on June 30, 2015, (the last business day of the registrant’s most recently completed second fiscal quarter) on the NYSE MKT, was $13,700,000.

The number of shares outstanding of the Registrant’s common stock as of February 29, 2016, was 117,043,442.

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 8, 2016, to be filed with the Securities and Exchange Commission within 120 days of the Registrant's fiscal year ended December 31, 2015.



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





FORM 10K
PART 1

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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



1


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, recently expanding into wellness and health improvement services with the acquisition of Accountable Health Solutions, Inc ("AHS"). This expansion uniquely positions Hooper Holmes to transform and capitalize on the large and growing health and wellness market as one of the only publicly traded, end-to-end health & wellness companies.

We provide on-site 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 as well as to clinical research organizations.  Through our subsidiary AHS, we expanded our capabilities to also include telephonic health coaching, wellness portals, and data analytics and reporting services. We are engaged by the organizations sponsoring such programs, including corporate and government employers, health plans, hospital systems, health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations and academic institutions.  We provide these services through a national network of health professionals, trained and certified to deliver quality service.
The majority of large employers that offer health benefits today also offer at least some wellness programs in an effort to promote employee health and productivity and reduce health related costs.  Through screenings, plan sponsors help employees learn of existing and/or potential health risks. Through corporate wellness, they provide education and health improvement tools and gain the ability to systematically reward employees for good, healthy behaviors and for actual health enhancement metrics, frequently awarded as a reduction in annual medical premiums or contributions to an employee’s Health Savings Account (HSA). By combining both aspects under a single organization, Hooper Holmes creates a seamless, end-to-end experience for members and drives improved engagement and outcomes for our clients.
Today, we service more than 200 direct clients representing nearly 3,000 employers and up to 1,000,000 participants. In the past year, we delivered over 500,000 screenings and are on track to continue year-over-year growth through a combination of our direct, channel partner, and clinical research organization partners as well as through the addition of new customers.
    
Our screening 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 screenings from mid-August through November related to annual benefit renewal cycles. Our wellness services business is more constant, though there are some variations due to the timing of the health coaching programs which are billed per participant, typically starting soon after the conclusion of onsite screening events. In addition to our Screening and Health and Wellness Service operations, we generate ancillary revenue through the assembly of medical kits for sale to third parties.

We believe that the overall market for our health and wellness services is growing and we expect it will continue to grow with the increased nationwide focus on healthcare, cost-containment, and well-being/productivity initiatives. Under the wellness rules for the Affordable Care Act (ACA) that took effect in January 2014, companies are permitted to offer a reward of up to 30 percent of the cost of health coverage costs for employees who complete participatory (health-contingent) wellness programs including risk assessments or biometric tests such as Body Mass Index and waist measurements.

The latest 2015 survey on wellness programs from Fidelity Investments and the National Business Group on Health (NBGH) reveals that employers are continuing to expand their corporate health improvement and wellness programs to improve employee health and create a more positive workplace culture. Almost 80 percent of employers are offering wellness and health improvement programs, spending on average a record $693 per worker. According to the survey, the three most popular incentive-based health improvement programs for 2015 are biometric screenings (72% of employers plan to offer this program), health risk assessments (70%), and physical activity programs (54%).

Recent Events

Acquisition

On April 17, 2015, we entered into and consummated an Asset Purchase Agreement (the "Purchase Agreement") among us and certain of our subsidiaries, Accountable Health Solutions, Inc. (the "Seller" or "AHS") and Accountable Health, Inc.

2


("Shareholder"). Pursuant to the Purchase Agreement, we acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately $7.0 million - $4.0 million in cash and 6,500,000 shares of our common stock, $0.04 par value, with a value of $3.0 million, which was subject to a working capital adjustment as described in the Purchase Agreement (the "Acquisition"). Refer to Note 3 for additional discussion regarding the Acquisition.    

In connection with the Acquisition, we entered into and consummated a Consent and Third Amendment to the Loan and Security Agreement (the "Third Amendment") to the Loan and Security Agreement (as amended, the "2013 Loan and Security Agreement") with ACF FinCo I LP ("ACF" or the "Senior Lender"), the assignee of Keltic Financial Partners II, LP ("Ares"). The 2013 Loan and Security Agreement provides a revolving credit facility which is secured and repaid as set forth therein. The Senior Lender consented to the Acquisition, the maximum borrowing capacity under the 2013 Loan and Security Agreement was reduced from $10 million to $7 million (subject to increase to up to $12 million in certain circumstances, subject to the Senior Lender’s consent, as provided in the 2013 Loan and Security Agreement) and the expiration was extended through February 28, 2019. We paid an amendment fee of $0.1 million in connection with the Third Amendment.

In order to fund the Acquisition, we entered into and consummated a Credit Agreement (the "Credit Agreement") with SWK Funding LLC as the agent ("Agent") on April 17, 2015, and the lenders (including SWK Funding LLC) party thereto from time to time (the "Lenders"). The Credit Agreement provides us with a $5.0 million term loan (the "Term Loan") (refer to Note 3 and Note 10).

Rights Offering

On January 25, 2016, we completed a rights offering to current shareholders, in which we raised $3.5 million that is being used to fund working capital. Refer to Note 17 for additional discussion regarding the rights offering.

Additional Equity Contributions

On March 28, 2016, we received $1,200,000 in additional equity by issuing 10,000,000 shares of our common stock, $0.04 par value, to 200 NNH, LLC, (the "Investor") a new private investor, which will be used to fund working capital. Pursuant to the Stock Purchase Agreement, there is a lock-up period of 18 months, during which time the Investor cannot sell the shares acquired. The Investor also has the right to send a representative to meetings of our Board of Directors as a non-voting observer for so long as the Investor owns at least 5% of our outstanding shares. The foregoing description of the Stock Purchase Agreement is qualified in its entirety by reference to the full text of the Stock Purchase Agreement, attached hereto as Exhibit 10.43 and incorporated herein by reference.
 
Liquidity

The accompanying financial statements have been prepared assuming that we will continue as a going concern. The uncertainty regarding our ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about our ability to continue as a going concern (which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future). These financial statements do not include any adjustments that might result from the outcome of this uncertainty. We expect to continue to monitor our liquidity carefully, work to reduce this uncertainty, and address our cash needs by raising additional equity, as noted above, renegotiating our financial covenants (refer to Note 2), reducing costs, and increasing revenues.

Description of Services

We formed our dedicated 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.

Through our channel partners or direct to customers, we provide on-site 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 as well as to clinical research organizations.  We also offer telephonic health coaching, wellness portals, and data analytics and reporting services, typically to our direct customers.

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, designing and managing wellness portals, compiling data and analytics for risk assessment services and reporting, sourcing and training health professionals, and providing onsite and telephonic wellness and health improvement coaching. Our services are performed for organizations

3


sponsoring such programs, including corporate and government employers, health plans, hospital systems, health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations, and academic institutions.  

Our screening services are performed primarily at employee work locations, typically referred to as onsite screenings, for groups of all sizes, or for individual employees at remote work locations or residences. We provide many options for screening 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.

Our Screening services include:

end-to-end biometric screening management;
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;
ScreeningProTM tablet technology that streamlines the screening experience for participants eliminating the need to fill out paper forms;
performing screenings (e.g., height, weight, body mass index, the taking of a person’s hip, waist and neck measurements, as well as his or her pulse and blood pressure) and blood draws via venipuncture or fingerstick, all of which are performed by our health professionals;
coordination of lab testing of blood specimens and other fluids;
providing onsite participant wellness coaching;
expanded onsite health consultation services via Wellness Support NowSM program with ability to promote other wellness program initiatives during those meaningful face-to-face teachable moments;
data processing and transmission; and
analytics to identify critical values of lab tests and notification services to individuals and customers to better manage risk.

Our Comprehensive Health and Wellness services include:
Biometric screening services;
wellness portals;
wellness assessments;
incentive management services;
year-round education, seminars and activity challenges;
telephonic health coaching for lifestyle and health risk improvement;
data analytics and reporting services;
communication and engagement services; and
wellness program advisory services.

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

Market Conditions and Strategic Initiatives

4



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

The PWC 2015 Health and Wellbeing Touchstone survey indicates that 73% of employers offer a Wellness program which has stabilized for employers with >1,000 employees but continues to grow with employers with fewer than 1,000 employees. Of these employers, 44% offer their wellness program through an external vendor, 28% through their medical vendor, and 28% through in-house services. In the past year there has been significant movement from medical vendors to an external wellness vendor. Almost 50% of individuals consider biometric screening to be the most valuable wellness program they offer followed by the Health Risk Assessment and physical activity programs.

Further, 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.

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

Sales and Marketing

Our Health and Wellness operations focus on mobilizing a nationwide network of health professionals to provide screenings in support of our customers’ wellness programs to help companies identify and stratify their populations’ health risks. We also offer comprehensive health and wellness services to help those companies educate and motivate their employees and spouses to take charge and improve their overall health and well-being. We provide the ability to benchmark the health and wellness of their employee/spouse 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 offer a fully integrated, end-to-end health and wellness solution that we believe gives us several competitive advantages in the market including our ability to:

perform screening services for any group size, in any zip code, with consistently high service quality, regardless of location, and tailoring our service deliverables to meet our customer’s needs;
manage the end-to-end screening event process including planning, scheduling, recruitment, training, and reporting through our proprietary Event Management SystemSM platform, creating a turnkey solution for our customers;
leverage the screening events to educate and promote other wellness services to participants;
build highly flexible, customizable wellness portals for clients that desire the ability to build their programs and incentive designs “made to order”;
deliver an engaging, personalized wellness portal experience for participants (branded and tailored for each client); and
deliver effective health coaching for participants via our in-house health coaches, all who have a minimum four year degree in a health-related field and are experts in inspiring and driving behavior change.


5


With our exit out of the life insurance industry through the sale of the discontinued Portamedic (in 2013), Heritage Labs (in 2014), and Hooper Holmes Services (in 2014) businesses, our leadership team has focused its attention on developing our strategic plan to grow the Health and Wellness operations. We reengineered our operations and service teams in Olathe, Kansas and expanded our offerings with the addition of AHS’s comprehensive health and wellness services. We introduced a new claims billing process to assist Health and Wellness customers and employers in reporting screenings to health plans. We introduced several new offerings including our expanded health and wellness services; our new ScreeningPro tablet technology that streamlines the screening experience for participants; and Wellness Support Now which offers optional expanded onsite health consultation services with ability to promote other wellness program initiatives during those meaningful face-to-face teachable moments.

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

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

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 also launched the ScreeningProTM tablet technology during 2015, which allows for easier and more accurate data collection at the point of care and faster data transmission to drive meaningful behavior change. In addition, our Wellness Solutions team leverages a proprietary portal platform that can be easily customized to serve the diverse needs of our client base. We continually invest in improving our IT operating system in order to meet the needs of our customers.

During 2015, in order to further increase our security measures, we moved the AHS data center to our 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 continued to utilize our secure cloud operating environment leveraging converged storage and networking technologies that provide an increased level of agility. In addition, firewalls are utilized to provide robust security measures that extend into all layers of our information technology environment. As we look ahead to 2016, we will continue to look for ways to integrate systems to drive efficiencies and advance our technological footprint in the Health and Wellness market.

Major Customers

Net sales to our two largest customers in 2015, American Healthways Services, Inc. ("Healthways") and IncentiSoft Solutions, LLC ("Incentisoft"), were 33% of consolidated revenue. Net sales to our three largest customers in 2014, Healthways, Incentisoft, and Westat, Inc., were 58% of consolidated revenue. Net sales to our three largest customers in 2013, Healthways, Incentisoft, and HealthCheck 360, were 57% of our consolidated revenue. No other customers

6


accounted for more than 10% of consolidated revenue in any of these fiscal years. We have agreements with each of our Health and Wellness customers, although these agreements do not provide for specific minimum levels of purchase.

Competition

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

In addition to direct screening and health and wellness sales (i.e., direct contracts with corporate and government employers, health plans, hospital systems, etc.), we provide screening services for many health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, and third party administrators (our “channel partner” customers). Several of the health and care management companies and wellness companies, in turn, serve their own suite of large employer groups, allowing us to tap into new business through these indirect sub-contractor relationships. We also provide specialized screening and data collection services for clinical research organizations and academic institutions across the country.
Given our additional capabilities and our diversified revenue base across three markets - Direct business, Channel partners, Clinical Research Organizations (CROs) - we have identified additional areas to leverage our assets to further expand into targeted adjacent markets with substantial opportunity and a favorable competitive landscape.
Leaders within the wellness market win on technology, engagement, and outcomes. We believe the combination of the Hooper Holmes infrastructure, screening capabilities, and national network of experienced Health Professionals with AHS’s scalable technology and engagement platform, health coaches, and analytics tools positions us to quickly become a leader in a growing health and wellness market.

Governmental Regulation

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

Employees

As of December 31, 2015, we employed approximately 200 full time employees in our Company to perform activities other than direct health screenings. We also utilize part-time employees and independent third parties to fulfill our Health and Wellness operations.

General Information
 
Hooper Holmes, Inc. is a New York corporation.  As of December 31, 2015, 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

7


executive officers, and all amendments to these reports and filings, as soon as reasonably practicable after such material is electronically filed with the SEC.


8


ITEM 1A
Risk Factors

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

Our recurring losses from operations, negative operating cash flows and need to obtain cash flow from operations or adequate funding to fund our comprehensive recovery plan raise doubt as to our ability to continue as a going concern.

In their report dated March 30, 2016, which is also included in this Form 10-K, our independent registered public accounting firm stated that our consolidated financial statements were prepared assuming we would continue as a going concern; however, our recurring losses from operations, negative cash flows from operations, and liquidity raise substantial doubt about our ability to continue as a going concern. Our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern (which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future). These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Reduction in cash flow from operations in 2016 may limit our ability to make the desired level of investment in our businesses and may lead to liquidity issues.
 
We have taken steps to address and correct the primary causes of recurring losses from operations, negative cash flows from operations, and liquidity concerns through the sale of the discontinued Portamedic, Heritage Labs, and Hooper Holmes Services businesses, the acquisition of AHS, and raising additional equity. We used approximately $6.3 million of cash in operations in 2015.  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 receivable collection results, we may be unable to 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 and 2015 Credit Agreement.

 If we need to borrow in the future under our 2013 Loan and Security Agreement, as amended on March 28, 2013, July 9, 2014, April 17, 2015, August 10, 2015, November 10, 2015, and March 28, 2016, the amount available for borrowing may be less than the $7 million under this facility at any given time due to the manner in which the maximum available amount is calculated.  We have an available borrowing base subject to reserves established at the lender's discretion of 85% of Eligible Receivables up to $7 million under this facility.  As discussed in Note 2, the maximum borrowing capacity on the 2013 Loan and Security Agreement was reduced from $10 million to $7 million pursuant to the Third Amendment to the Loan and Security Agreement (the "Third Amendment") on April 17, 2015, (subject to increase to up to $12 million in certain circumstances, subject to the Senior Lender’s consent, as provided in the Loan and Security Agreement) and the expiration was extended through February 28, 2019. Eligible Receivables do not include certain receivables deemed ineligible by the Senior Lender pursuant to the Second Amendment to the Loan and Security Agreement ("the Second Amendment"). On August 10, 2015, we entered into and consummated a Fourth Amendment to the Loan and Security Agreement (the "Fourth Amendment") which added the AHS receivables to the borrowing base. As of December 31, 2015, there were $3.3 million borrowings outstanding under the 2013 Loan and Security Agreement with available borrowing capacity of $0.4 million. Average available borrowing capacity for the month of March 2016 was $0.4 million, and we had $2.4 million of cash and cash equivalents as of March 28, 2016.

The 2013 Loan and Security Agreement and the Third Amendment contain various covenants, including financial covenants which require us to achieve a minimum EBITDA amount (earnings before interest expense, income taxes, depreciation, and amortization). As of December 31, 2015, we had not met the minimum EBITDA covenant of $0.8 million and have obtained a Waiver and Sixth Amendment to the Loan and Security Agreement (the "Sixth Amendment") related to the minimum EBITDA measurement period ended December 31, 2015. The Sixth Amendment also modified the covenants going forward. Refer to Note 2 for the modified covenant requirements. There can be no assurance that cash flows from operations, combined with any additional borrowings available to us, will be obtainable in an amount sufficient to enable us to repay our indebtedness, or to fund other liquidity needs.  Obtaining a waiver and modifying the financial covenants depends on matters that are outside of management’s control and there can be no assurance that management will be successful in these regards. If we are unable to comply with financial covenants in 2016 and in the

9


event that we were unable to modify the covenants, find new or additional lenders, or raise additional equity, we would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on our business.

On February 25, 2016, the Company entered into a First Amendment to Credit Agreement (“First Amendment”) with SWK Funding LLC ("SWK"). The First Amendment modifies the Credit Agreement dated April 17, 2015, to extend the date the Company has to issue the additional warrant to SWK to purchase common stock valued at $1.25 million from February 28, 2016, to April 30, 2016, if the 2013 Loan and Security Agreement is not repaid in full and terminated and all liens securing the 2013 Loan and Security Agreement are not released. The issuance of such additional warrant would cause additional dilution to our stockholders and may adversely impact our stock price.

We incurred additional indebtedness in connection with our acquisition of AHS, and such increased indebtedness could adversely affect our business, cash flows and results of operations and did result in additional dilution to our stockholders.
We entered into and consummated the Credit Agreement and used the proceeds of the $5.0 million Term Loan to partially fund the purchase of AHS and pay certain fees and expenses related to the Acquisition. As a result, we have indebtedness that is substantially greater than our indebtedness prior to the Acquisition of AHS. This higher level of indebtedness may:
require us to dedicate a greater percentage of our cash flow from operations to payments on our debt, thereby reducing the availability of cash flow to fund capital expenditures, pursue other investments, and use for general corporate purposes;
increase our vulnerability to adverse economic and industry conditions, including increases in interest rates on our borrowings that bear interest at variable rates or when such indebtedness is being refinanced;
limit our ability to obtain additional financing; and
limit our flexibility in planning for, or reacting to, changes in or challenges related to our business and industry, creating competitive disadvantages compared to other competitors with lower debt levels and borrowing costs.

We cannot assure you that cash flows from operations, combined with any additional borrowings available to us, will be obtainable in an amount sufficient to enable us to repay our indebtedness, or to fund our other liquidity needs. The Credit Agreement contains numerous covenants, including financial covenants. As of December 31, 2015, we had not met the minimum aggregate revenue amount of $34 million and have obtained a Second Amendment to the Credit Agreement (the "Second Amendment") related to the aggregate revenue measurement period ended December 31, 2015. The Second Amendment removed the minimum aggregate revenue covenant for December 31, 2015, and modified the covenants going forward. Refer to Note 2 for the modified covenant requirements. If we are not able to comply with these revised covenants or obtain additional amendments to the Credit Agreement, the debt may be called by the lender.
We may be unable to successfully integrate AHS into our operations, which could adversely affect our business, financial condition and results of operations.
     On April 17, 2015, we completed the Acquisition of AHS. The integration process is subject to a number of uncertainties and no assurance can be given that the anticipated benefits of any acquisition will be realized, or if realized, the timing of realization. The cost of integrating acquired businesses, or our failure to integrate them successfully into our existing businesses, could result in the incurrence of unanticipated expenses and losses. Some risks associated with integrating acquired businesses include:
diversion of management attention from operations;
ability to retain the clients of the acquired business;
the lingering effects of poor client relations or service performance by the acquired business, which also may taint our existing businesses;
the inability to retain the desirable management, key personnel and other employees of the acquired business;
ability to fully realize the desired synergies, efficiencies and economies of scale;
ability to establish, implement or police the acquired business's adherence to our existing standards, controls, procedures and policies;
exposure to client, employee and other legal claims for activities of the acquired business prior to acquisition;
difficulty in managing geographically separated organizations, systems and facilities;
accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and

10


unforeseen obstacles and costs in the integration process.

In addition, any acquired business could perform significantly worse than expected. Any difficulties encountered in integrating AHS could have a material adverse effect on our business, financial condition and results of operations. 

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 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.
   
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 two largest channel partners, combined, account for more than 30% 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.


11


Competition could negatively impact our business.

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

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

Under the terms of the Limited Laboratory and Administrative Services Agreement ("LLASA") between the Company and CRL, which became effective August 31, 2014, CRL is the Company’s exclusive provider, with certain limited exceptions, of laboratory testing and reporting services in support of 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 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 substantial cost, as the need for service, product and technology requirements advances.  In addition, computer malware, viruses, hacking and phishing attacks, and spamming could harm our business and results of operations.
 
Allegations of negligent or improper actions by our health professionals or other personnel could result in claims against us and/or our incurring expenses to indemnify our clients.
 
Allegations of negligent or improper actions by our health or other medical professionals could result in claims against us, require us to indemnify our clients for any harm they may suffer, or damage our reputation and relationships with important clients.  Our clients rely on the accuracy of the medical data we gather on their behalf in aggregated form to manage their wellness program. We maintain professional liability insurance and such other coverage as we believe appropriate, but such insurance may prove insufficient.  Regardless of insurance, any such claims could damage our reputation and relationships with important clients.
 
Our 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

12


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. In addition to these state actions, we could be subject to federal tax liability if our classification of workers were determined, for federal employment tax purposes, to be incorrect.

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.

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

On April 17, 2015, we completed the acquisition of Accountable Health Solutions, Inc. In connection with this acquisition, we have identified certain deficiencies in our internal control over financial reporting that we deemed to be a material weakness. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We determined that the complexities of the accounting for this non-routine transaction adversely affected management’s review of the accounting for non-routine, complex technical accounting matters to ensure proper application of generally accepted accounting principles in a timely manner.

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

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

The NYSE MKT notified us on December 9, 2015, that we have fallen out of compliance with Section 1003(a)(ii) of the NYSE MKT Company Guide because we reported shareholders’ equity of less than $4.0 million in our Form 10-Q for the quarter ended September 30, 2015, and we have had net losses in our four most recent fiscal years. As a result, we were required to submit a plan to regain compliance prior to May 8, 2017. The NYSE MKT accepted the plan. If we fail to fulfill it in the allotted time, our shares may be delisted from the Exchange. In addition, as we reported a net loss for the year ending December 31, 2015, we have had net losses for five consecutive years, which increases our shareholders’ equity requirement to $6.0 million. We believe the successful completion of the rights offering and additional private equity obtained (refer to Note 17) supports our efforts to satisfy this higher shareholders’ equity requirement, but if we fail to raise sufficient shareholders’ equity by May 8, 2017, our shares could be delisted.
A continued low trading price on the NYSE MKT could lead the Exchange to take actions toward delisting our stock.
The NYSE MKT notified us on February 4, 2016, that we have fallen out of compliance with Section 1003(f)(v) of the NYSE MKT Company Guide because our common stock has been trading at levels viewed as abnormally low for a substantial period of time. Our stock has traded at prices less than $0.20 for much of the past several months. In addition, the NYSE MKT has advised us that its policy is to suspend trading in shares of, and commence delisting procedures with respect to, a listed company if the market price of its shares falls below $0.06 per share. The notice required the Company to remedy its low trading price no later than August 4, 2016. Our compliance plan mentioned above, submitted to and accepted by the NYSE MKT, addresses this issue as well, but if we are not able to remedy our low trading price no later than August 4, 2016, our shares could be delisted.

ITEM 1B
Unresolved Staff Comments

Not applicable.


13


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 eight Portamedic branch offices, which we sublease to the acquirer of our former Portamedic business. We have a branch closure obligation of $0.7 million as of December 31, 2015, 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

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

On 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 award of an unspecified amount of allegedly unpaid overtime wages to certain examiners. The Company filed an answer denying the substantive allegations therein. On August 1, 2014, the Magistrate Judge issued a Report and Recommendation to conditionally certify the class of all contract examiners from August 16, 2010, to the present. On August 29, 2014, the Company submitted its objections to the Report and Recommendation of the Magistrate Judge. The Magistrate has suspended ruling concerning those objections while the parties pursue the possibility of a settlement If the case is not settled, and if the Magistrate's decision stands, notice will be sent to contractors who performed work for the Company within the requisite time period noted above. The claim is not covered by insurance, and the Company is incurring legal costs to defend the litigation which are recorded in discontinued operations. This matter relates to the former Portamedic service line for which the Company retained liability.

ITEM 4
 
 
 
Mine Safety Disclosures
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):


14


 
 
2015
 
2014
Quarter
 
High
 
Low
 
High
 
Low
First
 
$0.63
 
$0.44
 
$0.70
 
$0.50
Second
 
$0.52
 
$0.19
 
$0.75
 
$0.58
Third
 
$0.28
 
$0.11
 
$0.80
 
$0.56
Fourth
 
$0.23
 
$0.06
 
$0.63
 
$0.49

Holders

According to the records of our transfer agent, American Stock Transfer & Trust Company, Brooklyn, New York, as of February 29, 2016, there were 907 holders of record of our common stock.

Dividends

No dividends were paid in 2015 or 2014.

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 and our Credit Agreement (Refer to Note 10 to our consolidated financial statements).

Recent Sales of Unregistered Securities

As previously reported in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015, filed on May 14, 2015, we entered into and consummated the Purchase Agreement on April 17, 2015, among the Company and certain of its subsidiaries, AHS, and Shareholder. Pursuant to the Purchase Agreement, we acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately $7 million - $4 million in cash and up to 6,500,000 shares of our common stock, $0.04 par value, with a value of $3.0 million, subject to a working capital adjustment as described in the Purchase Agreement. At the closing of the Purchase Agreement, we issued and delivered 5,576,087 shares of Common Stock to the Shareholder at closing and issued and held back 326,087 shares of Common Stock for the working capital adjustment, which were subsequently released on October 9, 2015, and 597,826 shares of Common Stock for indemnification purposes. No additional shares will be issued under the terms of the Purchase Agreement. The shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, which provides an exemption for private offerings of securities.

On February 29, 2016, we issued 454,545 shares of our common stock, $0.04 par value, with a value of $50,000 to SWK Funding LLC pursuant to the First Amendment to Credit Agreement dated as of February 25, 2016. The securities have not been registered under the Securities Act of 1933, and are “restricted securities” as that term is defined in Rule 144 under the Securities Act.

On March 28, 2016, we issued 10,000,000 shares of our common stock, $0.04 par value, with a value of $1,200,000 to 200 NNH, LLC. The securities have not been registered under the Securities Act of 1933, and are “restricted securities” as that term is defined in Rule 144 under the Securities Act.

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, 2015.


15


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, 2015, and the balance sheet data as of December 31, 2015 and 2014 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, 2012 and 2011, and the balance sheet data as of December 31, 2013, 2012 and 2011, 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 and 2011.

(in thousands except for share data and footnotes)
2015
 
2014
 
2013
 
2012
 
2011
 
Statement of operations data:
 
 
 
 
 
 
 
 
(Unaudited)
 
Revenues
$
32,115

 
$
28,524

 
$
24,171

 
$
22,136

 
$
19,220

 
Operating loss from continuing operations
(8,539
)
(a) 
(5,651
)
(b) 
(12,181
)
(c) 
(9,734
)
(d) 
(10,500
)
 
Interest expense, net
(1,796
)
 

 
(81
)
 
16

 
44

 
Loss from continuing operations
(10,354
)
 
(5,913
)
 
(12,680
)
  
(9,774
)
  
(10,531
)
 
(Loss) income from discontinued operations
(520
)
 
(2,562
)
 
1,405

  
(7,824
)
 
7,007

(e) 
Net loss
(10,874
)
 
(8,475
)
 
(11,275
)
 
(17,598
)
 
(3,524
)
  
Basic and diluted (loss) income per share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.14
)
 
$
(0.08
)
 
$
(0.18
)
 
$
(0.14
)
 
$
(0.15
)
 
Discontinued operations

 
(0.04
)
 
0.02

 
(0.11
)
 
0.10

 
Net loss
$
(0.14
)
 
$
(0.12
)
 
$
(0.16
)
 
$
(0.25
)
 
$
(0.05
)
 
Cash dividends per share
$

 
$

 
$

 
$

 
$

 
Weighted average shares:
 
 
 
 
 
 
 

 
 

 
Basic
76,048,156

 
70,684,452

 
69,965,814

 
69,743,897

 
69,628,135

 
Diluted
76,048,156

 
70,684,452

 
69,965,814

 
69,743,897

 
69,628,135

 
Balance sheet data (as of December 31):
 
 
 
 
 
 
 
 
(Unaudited)
 
Working capital
$
(7,520
)
 
$
2,887

 
$
9,387

(f) 
$
19,205

(g) 
$
28,323

(g) 
Total assets
$
17,846

 
$
13,139

 
$
21,646

 
$
36,418

 
$
53,281

 
Stockholders’ equity
$
217

 
$
5,357

 
$
13,300

 
$
23,861

 
$
40,749

 

(a) Includes transaction costs of $1.0 million
(b)
Includes restructuring charges of $0.1 million and gain on sale of real estate of $1.8 million.
(c)
Includes impairment charges of $0.2 million and restructuring charges of $0.8 million.
(d)
Includes restructuring charges of $0.5 million.
(e)
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.
(f)
Includes assets held for sale of $2.3 million as of December 31, 2013.
(g)
Includes assets and liabilities of the discontinued Portamedic, Heritage Labs and Hooper Holmes Services operations.


16


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, recently expanding into wellness and health improvement services with the acquisition of Accountable Health Solutions, Inc ("AHS"). This expansion uniquely positions Hooper Holmes to transform and capitalize on the large and growing health and wellness market as one of the only publicly traded, end-to-end health & wellness companies.

We provide on-site 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 as well as to clinical research organizations.  Through our subsidiary AHS, we expanded our capabilities to also include telephonic health coaching, wellness portals, and data analytics and reporting services. We are engaged by the organizations sponsoring such programs, including corporate and government employers, health plans, hospital systems, health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations and academic institutions.  We provide these services through a national network of health professionals, trained and certified to deliver quality service.
The majority of large employers that offer health benefits today also offer at least some wellness programs in an effort to promote employee health and productivity and reduce health related costs.  Through screenings, plan sponsors help employees learn of existing and/or potential health risks. Through corporate wellness, they provide education and health improvement tools and gain the ability to systematically reward employees for good, healthy behaviors and for actual health enhancement metrics, frequently awarded as a reduction in annual medical premiums or contributions to an employee’s Health Savings Account (HSA). By combining both aspects under a single organization, Hooper Holmes creates a seamless, end-to-end experience for members and drives improved engagement and outcomes for our clients.
Today, we service more than 200 direct clients representing nearly 3,000 employers and up to 1,000,000 participants. In the past year, we delivered over 500,000 screenings and are on track to continue year-over-year growth through a combination of our direct, channel partner, and clinical research organization partners as well as through the addition of new customers.
    
Our screening 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 screenings from mid-August through November related to annual benefit renewal cycles. Our wellness services business is more constant, though there are some variations due to the timing of the health coaching programs which are billed per participant, typically starting soon after the conclusion of onsite screening events. In addition to our Screening and Health and Wellness Service operations, we generate ancillary revenue through the assembly of medical kits for sale to third parties.

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

Acquisition

On April 17, 2015, we entered into and consummated an Asset Purchase Agreement (the "Purchase Agreement") among us and certain of our subsidiaries, Accountable Health Solutions, Inc. (the "Seller" or "AHS") and Accountable Health, Inc. ("Shareholder"). Pursuant to the Purchase Agreement, we acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately $7.0 million - $4.0 million in cash and 6,500,000 shares of our common stock, $0.04 par value, with a value of $3.0 million, which was subject to a working capital adjustment as described in the Purchase Agreement (the "Acquisition"). Refer to Note 3 for additional discussion regarding the Acquisition.    

In connection with the Acquisition, we entered into and consummated a Consent and Third Amendment to the Loan and Security Agreement (the "Third Amendment") to the Loan and Security Agreement (as amended, the "2013 Loan and Security Agreement") with ACF FinCo I LP ("ACF" or the "Senior Lender"), the assignee of Keltic Financial Partners II, LP ("Ares"). The 2013 Loan and Security Agreement provides a revolving credit facility which is secured and repaid as set forth therein.

17


The Senior Lender consented to the Acquisition, the maximum borrowing capacity under the 2013 Loan and Security Agreement was reduced from $10 million to $7 million (subject to increase to up to $12 million in certain circumstances, subject to the Senior Lender’s consent, as provided in the 2013 Loan and Security Agreement) and the expiration was extended through February 28, 2019. We paid an amendment fee of $0.1 million in connection with the Third Amendment.

In order to fund the Acquisition, we entered into and consummated a Credit Agreement (the "Credit Agreement") with SWK Funding LLC as the agent ("Agent") on April 17, 2015, and the lenders (including SWK Funding LLC) party thereto from time to time (the "Lenders"). The Credit Agreement provides us with a $5.0 million term loan (the "Term Loan") (refer to Note 3 and Note 10).

Rights Offering

On January 25, 2016, we completed a rights offering to current shareholders, in which we raised $3.5 million that is being used to fund working capital. Refer to Note 17 for additional discussion regarding the rights offering.

Additional Equity Contributions

On March 28, 2016, we received $1,200,000 in additional equity by issuing 10,000,000 shares of our common stock, $0.04 par value, to 200 NNH, LLC, (the "Investor") a new private investor, which will be used to fund working capital. Pursuant to the Stock Purchase Agreement, there is a lock-up period of 18 months, during which time the Investor cannot sell the shares acquired. The Investor also has the right to send a representative to meetings of our Board of Directors as a non-voting observer for so long as the Investor owns at least 5% of our outstanding shares.

Liquidity

The accompanying financial statements have been prepared assuming that we will continue as a going concern. The uncertainty regarding our ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about our ability to continue as a going concern (which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future). These financial statements do not include any adjustments that might result from the outcome of this uncertainty. We expect to continue to monitor our liquidity carefully, work to reduce this uncertainty, and address our cash needs by raising additional equity, as noted above, renegotiating our financial covenants (refer to Note 2), reducing costs, and increasing revenues.

2015 Highlights and Business Outlook for 2016

Consolidated Financial Performance for 2015

The following table summarizes the consolidated results of operations for the years ended December 31, 2015, 2014 and 2013:

18








(in thousands)
2015

2014

2013
Revenues
$
32,115


$
28,524


$
24,171

Cost of operations
25,590


21,737


17,767

Gross profit
$
6,525


$
6,787


$
6,404

Selling, general and administrative expense
14,037


14,138


17,571

Transaction costs
1,027





(Gain) on sale of real estate


(1,846
)


Impairment and restructuring


146


1,014

Interest expense, net
1,796




81

Other expense, net


239


399

Income tax expense
19


23


19

Loss from continuing operations
$
(10,354
)

$
(5,913
)

$
(12,680
)
Loss from discontinued operations, net of tax
(520
)

(3,301
)

(2,025
)
Gain on sale of subsidiaries, net of adjustments


739


3,430

Net loss
$
(10,874
)

$
(8,475
)

$
(11,275
)

For the year ended December 31, 2015, consolidated revenues were $32.1 million, representing an increase of approximately 12.6% from the prior year of $28.5 million. The increase is primarily due to the addition of AHS revenue of $9.6 million offset by reduced screening volume associated with a long-term clinical study contract per its planned research program. For the year ended December 31, 2015, we performed approximately 515,000 health screenings, compared to approximately 474,000 health screenings for the year ended December 31, 2014, which represents an increase of 8.6% in the number of screenings performed. Consolidated revenues for the years ended December 31, 2015 and 2014, also include third party kit revenue of $1.2 million and $0.8 million, respectively.

Gross profit decreased by $0.3 million to $6.5 million in 2015 compared to $6.8 million in 2014. Our gross profit percentage from continuing operations was 20.3% for the year ended December 31, 2015, a decline from 23.8% for the year ended December 31, 2014. The decrease in gross profit is primarily due to the absence of a long-term clinical study contract per its planned research program that had higher than average margins in 2014, in addition to increases in event and field management labor and travel costs for field specialists and health professionals.

SG&A, excluding transaction costs related to the acquisition of AHS and the rights offering in 2015 of $1.0 million, gain on sale of real estate in connection with the sale of property in Basking Ridge, New Jersey in 2014 of $1.8 million, and restructuring charges in 2014 of $0.1 million, decreased slightly from $14.1 million in 2014 to $14.0 million in 2015. SG&A includes $0.7 million of transition costs incurred during the year ended December 31, 2015, due to costs incurred to transition services purchased with the Acquisition, and $1.9 million of transition costs associated with maintaining the Basking Ridge property as well as transition of information technology infrastructure incurred during the year ended December 31, 2014. Excluding these transition costs in both 2015 and 2014, SG&A increased 8.8% due to the addition of AHS expenses.

The following table sets forth our reconciliation of Adjusted EBITDA for the years ended December 31, 2015, 2014 and 2013:

19


 
 
 
 
 
 
(in thousands)
2015
 
2014
 
2013
Net loss
$
(10,874
)
 
$
(8,475
)
 
$
(11,275
)
Plus:
 
 
 
 
 
   Interest expense, net
623

 

 
81

   Amortization of deferred financing fees
385

 
343

 
298

   Accretion of debt discount on warrants
780

 

 

   Accretion of termination fees
88

 

 

   Mark to market of the additional warrant feature
(80
)
 

 

   Income tax expense
19

 
23

 
19

   Depreciation and amortization
2,211

 
1,220

 
2,200

EBITDA
(6,848
)
 
(6,889
)
 
(8,677
)
   Share-based compensation expense
440

 
503

 
643

   Transaction costs
1,027

 

 

   Impairment

 

 
212

   Gain on sale of real estate

 
(1,846
)
 

   Restructuring charges

 
146

 
802

   Transition costs
701

 
1,885

 

   Gain on sale of subsidiaries, net of adjustments

 
(889
)
 
(3,430
)
   Close-out cost of 2013 Portamedic sale
168

 
150

 

Adjusted EBITDA
(4,512
)

(6,940
)

(10,450
)

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

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

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

Business Outlook for 2016


20


With the acquisition of AHS on April 17, 2015 (the "Acquisition"), 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, 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. We have expanded our capabilities allowing us to deliver telephonic health coaching, wellness portals and data analytics, and reporting services.

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

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

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

Already in 2016, we have gained several new customers, both direct and through our channel partners, including a large multi-year clinical research study extension, have raised $3.5 million in equity through our rights offering, and raised $1.2 million in additional equity through a private investor (refer to Note 17). We believe that being one of only a few pure-play publicly traded health and wellness companies that offers a fully-integrated end-to-end solution to our customers has positioned us to capitalize on market need in 2016 and beyond. There are, however, events as noted in Item 1A Risk Factors above that could negatively affect our financial condition, results of operations, and cash flows.

Key Financial and Other Metrics Monitored by Management

In our periodic reports filed with the SEC, we provide certain financial information and metrics about our 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 monitor the following key metrics related to our core Health and Wellness operations:

the number of health screenings completed;
the number of enrollments in health coaching services;
the number of subscribers to the wellness portal services;
the quality scores of our Health Professionals;
the aggregate of travel expenditures incurred by our Health Professionals; 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 2015, 2014 and 2013


21


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


For the years ended December 31,

Increase
(in thousands)

2015

2014

2013

2015 vs. 2014

2014 vs. 2013
Revenue

$
32,115


$
28,524


$
24,171


12.6
%

18.0
%

Revenues

Consolidated revenues for the year ended December 31, 2015, were $32.1 million, an increase of $3.6 million or 12.6% from 2014. Our revenue increase for the year ended December 31, 2015, was due primarily to the addition of AHS revenue of $9.6 million and sales growth from new screening customers, but was offset by reduced screening volume associated with a long-term clinical study contract per its planned research program and one large customer that decided not to screen in 2015. These last two factors led to a reduction of $5.1 million in screening revenue for the year ended December 31, 2015.

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, 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, 2015, 2014 and 2013, also include third party kit revenue of $1.2 million, $0.8 million, and $1.0 million, respectively.

Screening Units

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

 
 
For the years ended December 31,
 
Increase
 
 
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Number of Screenings
 
515,000

 
474,000

 
416,000

 
8.6
%
 
13.9
%

We completed 515,000 screenings during the year ended December 31, 2015, for an increase of 8.6% from 2014. The increase was due to the addition of AHS screening units of 90,000 and sales growth from new customers, but was offset by reduced screening volume associated with a long-term clinical study contract per its planned research program and one large customer that decided not to screen in 2015. These last two factors led to a reduction of approximately 47,000 screenings for the year ended December 31, 2015.

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)
 
2015
 
% of Revenue
 
2014
 
% of Revenue
 
2013
 
% of Revenue
Cost of Operations
 
$
25,590

 
79.7
%
 
$
21,737

 
76.2
%
 
$
17,767

 
73.5
%

Cost of operations, as a percentage of revenue, was 79.7% for the year ended December 31, 2015, as compared to 76.2% for the year ended December 31, 2014. The increase in cost of operations is primarily due to the absence of a long-term clinical study contract per its planned research program that had higher than average margins in 2014, in addition to increases in event and field management labor and travel costs for field specialists and health professionals compared to the prior year. Additionally, our cost of sales has a certain element of fixed costs that are required to maintain customer service levels and cannot easily be reduced in periods of lower screening volume.


22


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.

Selling, General and Administrative Expenses (SG&A)

 
 
For the years ended December 31,
 
Decrease (Increase)
(in thousands)
 
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Total
 
$
14,037

 
$
14,138

 
$
17,571

 
$
101

 
$
3,433


SG&A, excluding transaction costs related to the acquisition of AHS and the rights offering in 2015 of $1.0 million, gain on sale of real estate in connection with the sale of property in Basking Ridge, New Jersey in 2014 of $1.8 million, and restructuring charges in 2014 of $0.1 million, decreased slightly from $14.1 million in 2014 to $14.0 million in 2015. SG&A includes $0.7 million of transition costs incurred during the year ended December 31, 2015, due to costs incurred to transition services purchased with the Acquisition, and $1.9 million of transition costs associated with maintaining the Basking Ridge property as well as transition of information technology infrastructure incurred during the year ended December 31, 2014. Excluding these transition costs in both 2015 and 2014, SG&A increased 8.8% due to the addition of AHS expenses.

SG&A, excluding gain on sale of real estate in connection with the sale of property in Basking Ridge, New Jersey in 2014 of $1.8 million and impairment and restructuring charges in 2014 and 2013 of $0.1 million and $1.0 million, respectively, decreased to $14.1 million in 2014 compared to $17.6 million in 2013, 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 includes $1.9 million of transition costs incurred during the year ended December 31, 2014, associated with maintaining the Basking Ridge property as well as transition of information technology infrastructure. Excluding these transition costs for the year ended December 31, 2014, SG&A decreased 30.3% compared to 2013.

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, 2015 and 2013.

Transaction Costs

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

Restructuring Charges

For the years ended December 31, 2014 and 2013, we recorded restructuring charges of $0.1 million and $0.8 million, respectively, in continuing operations consisting of employee severance. There were no such charges recorded during the year ended December 31, 2015.
    
Operating Loss from Continuing Operations

Our consolidated operating loss from continuing operations for the year ended December 31, 2015, was $8.5 million, compared to a loss of $5.7 million in 2014. The decrease is primarily due to the $1.0 million of transaction costs incurred in connection with the Acquisition and rights offering in 2015 and the gain on the sale of real estate of $1.8 million recorded in 2014.

Our consolidated operating loss from continuing operations for the year ended December 31, 2014, was $5.7 million, compared to $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.

Other Expense/Income

Other (expense) income in 2015, 2014 and 2013 was an expense of $1.8 million, $0.2 million and $0.5 million, respectively. Other expense, net, for 2015 is due to the financing obtained for the Acquisition, including interest on the Term Loan and accretion

23


of the termination fees and debt discount. 2014 and 2013 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, net, was a loss of $0.5 million for the year ended December 31, 2015, loss of $2.6 million for the year ended December 31, 2014, and income of $1.4 million for the year ended December 31, 2013. Discontinued operations for the year ended December 31, 2015, included expenses of $0.3 million for a contingent liability related to the Portamedic service line.

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.

Net Loss

Net loss for the year ended December 31, 2015, was $10.9 million, or $0.14 per share on both a basic and diluted basis, compared to a net loss of $8.5 million, or $0.12 per share on both a basic and diluted basis, reported for the year ended December 31, 2014.  For the year ended December 31, 2013, we reported net loss of $11.3 million, or $0.16 on both a basic and diluted basis.

Liquidity and Financial Resources

The accompanying financial statements have been prepared assuming that we will continue as a going concern. The uncertainty regarding our ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about our ability to continue as a going concern (which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future). These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

On January 25, 2016, we completed a rights offering to current shareholders, in which we raised $3.5 million that is being used to fund working capital. Refer to Note 17 to the consolidated financial statements for additional discussion regarding the rights offering;

On March 28, 2016, we received $1,200,000 in additional equity by issuing 10,000,000 shares of our common stock, $0.04 par value, to 200 NNH, LLC, which will be used to fund working capital. Refer to Note 17 to the consolidated financial statements for additional discussion regarding the additional equity raised;

On March 28, 2016, we renegotiated our financial covenants in the 2013 Loan and Security Agreement and the Credit Agreement to requirements based on our forecast models;

We will continue to implement further cost actions and efficiency improvements;

We will continue to aggressively seek new and return business from our existing customers and expand our presence in the Health and Wellness marketplace;

We may sell additional equity or pursue other capital market transactions; and

We expect to continue to carefully manage receipts and disbursements, including amounts and timing, focusing on reducing days receivables outstanding and managing days payables outstanding.

Our primary sources of liquidity are cash and cash equivalents as well as availability under the 2013 Loan and Security Agreement (refer to Note 10). At December 31, 2015, we had $2.0 million of cash and cash equivalents and had $3.3 million outstanding under the 2013 Loan and Security Agreement with available borrowing capacity of $0.4 million. As discussed in Note 3, we entered into the Credit Agreement on April 17, 2015, for a $5.0 million Term Loan, which provided funding for the cash component of the Acquisition. After the $4.0 million payment for the Acquisition, the origination fee and related legal costs, we received approximately $0.8 million in net proceeds from the Term Loan.


24


We have historically used availability under the 2013 Loan and Security Agreement to fund operations. We experience a timing difference between the operating expense and cash collection of the associated revenue based on Health and Wellness customer payment terms. 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 present our cash flows inclusive of the Portamedic, Heritage Lab, 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 and 2013. Activities negatively affecting our cash flows for the year ended December 31, 2015 include:

a net loss of $10.9 million, offset by non-cash charges of $3.4 million in depreciation and amortization expense, amortization of debt discount, and amortization of deferred financing fees; and $0.4 million in share-based compensation expense;

capital expenditures of $0.8 million; and

an increase in accounts receivable of $1.5 million.

We received net proceeds from financing activities of $7.9 million which were used to fund the Acquisition and working capital.

2013 Loan and Security Agreement
    
We maintain the 2013 Loan and Security Agreement, as amended on March 28, 2013, July 9, 2014, April 17, 2015, August 10, 2015, November 10, 2015, and March 28, 2016, with the Senior Lender. 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 $7 million under this facility at any given time due to the manner in which the maximum available amount is calculated.  We have an available borrowing base subject to reserves established at the lender's discretion of 85% of Eligible Receivables up to $7 million under this facility.  Eligible Receivables do not include certain receivables deemed ineligible by the Senior Lender pursuant to the Second Amendment to the Loan and Security Agreement ("the Second Amendment"). On August 10, 2015, we entered into and consummated a Fourth Amendment to the Loan and Security Agreement (the "Fourth Amendment") which added the AHS receivables to the borrowing base. As of December 31, 2015, there were $3.3 million borrowings outstanding under the 2013 Loan and Security Agreement with available borrowing capacity of $0.4 million. Average available borrowing capacity for the month of March 2016 was $0.4 million, and we had $2.4 million of cash and cash equivalents as of March 28, 2016.

The 2013 Loan and Security Agreement and the Third Amendment contain various covenants, including financial covenants which require us to achieve a minimum EBITDA amount (earnings before interest expense, income taxes, depreciation, and amortization). The Third Amendment contained minimum EBITDA covenants of positive $0.8 million for the twelve month period ended December 31, 2015, which we did not comply with. On March 28, 2016, we obtained a Waiver and Sixth Amendment to the Loan and Security Agreement (the "Sixth Amendment") in which the lender modified the covenants to waive the minimum EBITDA covenant for the twelve months ended December 31, 2015, and replaced it with minimum EBITDA covenants of negative $1.6 million for the three months ending March 31, 2016, negative $2.0 million for the six months ending June 30, 2016, negative $1.1 million for the nine months ending September 30, 2016, and $0.8 million for the twelve months ending December 31, 2016, and each twelve consecutive calendar month period ending on the last day of each fiscal quarter thereafter. In addition, we must obtain new equity contributions in an aggregate amount of not less than $4.0 million between November 10, 2015, and June 30, 2016, which condition has been satisfied by our completion of the rights offering earlier this year and the private offering to the investor described above. If we are unable to comply with financial covenants in 2016 and in the event that we were unable to modify the covenants, find new or additional lenders, or raise additional equity, we would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on our business. Additionally, we continue to have limitations on the maximum amount of capital expenditures for each fiscal year.

2015 Credit Agreement

In order to fund the Acquisition, we entered into and consummated a Credit Agreement on April 17, 2015, with SWK Funding LLC. The Credit Agreement provided us with a $5.0 million Term Loan. The proceeds of the Term Loan were used to pay certain fees and expenses related to the negotiation and consummation of the Purchase Agreement for the Acquisition described in Note

25


3 and general corporate purposes. The Term Loan is due and payable on April 17, 2018. We are also required to make quarterly revenue-based payments in an amount equal to eight and one-half percent (8.5%) of yearly aggregate revenue up to and including $20 million, seven percent (7%) of yearly aggregate revenue greater than $20 million up to and including $30 million, and five percent (5%) of yearly aggregate revenue greater than $30 million. The revenue-based payment will be applied to fees and interest and any excess to the principal of the Term Loan. Revenue-based payments commence in February 2016, and the maximum aggregate revenue-based principal payment is capped at $600,000 per quarter. We made the first principal payment of $0.5 million, on February 16, 2016, in addition to $0.2 million of interest expense, for a total payment of $0.7 million.
    
The outstanding principal balance under the Credit Agreement bears interest at an adjustable rate per annum equal to the LIBOR Rate (subject to a minimum amount of one percent (1.0%)) plus fourteen percent (14.0%) and is due and payable quarterly, commencing on August 14, 2015. Upon the earlier of (a) the maturity date of April 17, 2018, or (b) full repayment of the Term Loan, whether by acceleration or otherwise, we are required to pay an exit fee equal to eight percent (8%) of the aggregate principal amount of all term loans advanced under the Credit Agreement. We are recognizing the exit fee over the term of the Term Loan through an accretion accrual to interest expense using the effective interest method.

On February 25, 2016, we entered into a First Amendment to Credit Agreement (“First Amendment”) with SWK. The First Amendment modifies the Credit Agreement dated April 17, 2015, to extend the date we have to issue the additional warrant to SWK to purchase common stock valued at $1.25 million from February 28, 2016, to April 30, 2016, if the 2013 Loan and Security Agreement is not repaid in full and terminated and all liens securing the 2013 Loan and Security Agreement are not released. The First Amendment also modifies the exercise price of the warrant from one cent over the closing price on February 28, 2016, and replaced it with the closing price of our stock on April 30, 2016. Refer to Note 3 for additional discussion regarding the warrants. The First Amendment also required us to issue 454,545 shares of our common stock, $0.04 par value, with a value of $50,000 to SWK effective February 29, 2016.

The Credit Agreement also contains certain financial covenants including minimum aggregate revenue, EBITDA, and consolidated unencumbered liquid assets requirements. The Credit Agreement contains a minimum aggregate revenue covenant of $34 million for the twelve month period ended December 31, 2015, which we did not comply with. On March 28, 2016, we obtained a Second Amendment to the Credit Agreement (the "Second Amendment") in which the lender removed the minimum aggregate revenue requirement for the twelve months ended December 31, 2015, and replaced it with minimum aggregate revenue covenants of $33.0 million for the twelve months ending March 31, 2016, $34.0 million for the twelve months ending June 30, 2016, $37.0 million for the twelve months ending September 30, 2016, $40.0 million for the twelve months ending December 31, 2016, and $45.0 million for the twelve months ending each fiscal quarter thereafter. The Second Amendment also modified the minimum EBITDA covenants for 2016 and replaced them with minimum EBITDA covenants of negative $1.6 million for the three months ending March 31, 2016, negative $2.0 million for the six months ending June 30, 2016, negative $1.1 million for the nine months ending September 30, 2016, $0.8 million for the twelve months ending December 31, 2016, $0.5 million for the twelve months ending March 31, 2017, $0.9 million for the twelve months ending June 30, 2017, and $2.5 million for the twelve months ending September 30, 2017. In addition, we must obtain new equity contributions in an aggregate amount of not less than $0.5 million between March 23, 2016 and June 30, 2016, which requirement we have satisfied through the private offering to the investor described above. The Second Amendment also required us to issue shares of our common stock, $0.04 par value, with a value of $100,000 to SWK within five business days of the transaction. If we are unable to comply with financial covenants in 2016 and in the event that we were unable to modify the covenants, find new or additional lenders, or raise additional equity, we would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on our business.

The Credit Agreement contains a cross-default provision that can be triggered if we have more than $0.25 million in debt outstanding under the 2013 Loan and Security Agreement and we fail to make payments to the Senior Lender when due or if the Senior Lender is entitled to accelerate the maturity of debt in response to a default situation under the 2013 Loan and Security Agreement, which may include violation of any financial covenants.

Other Considerations

The Health and Wellness business sells services directly to end customers and also through wellness, disease management, benefit brokers, and insurance companies (referred to as channel partners) who ultimately have the relationship with the end customer. Sales to direct customers offer the full suite of products and services while our screenings are often aggregated with other offerings from its channel partners to provide a total solution to the end-user. As such, our success is largely dependent on that of our partners.


26


The Acquisition of AHS required us to enter into the Credit Agreement with the Lenders. In association with the Acquisition, we also incurred transaction expenses and legal and professional fees. During the year ended December 31, 2015, we incurred $0.8 million in legal and professional fees associated with the Acquisition.

Additionally, the Acquisition provides new offerings including the wellness portal and telephonic coaching, along with new staff, new systems, and new customers. During the year ended December 31, 2015, we incurred $0.7 million of costs in connection with integrating the Acquisition, which are recorded in selling, general and administrative expenses. Costs incurred during 2015 primarily relate to transition services purchased from the Seller and the ongoing transition of information technology infrastructure. The integration of AHS will continue into early 2016, and we will continue to incur certain transition costs associated with integrating the two companies, which could adversely affect liquidity.

In addition, as noted in the Contractual Obligations table below, we have contractual obligations related to operating leases and employment contracts which could adversely affect liquidity.

Our ability to satisfy our liquidity needs and meet future covenants is dependent on growing revenues, improving profitability, and raising additional equity as noted above. These profitability improvements primarily include the successful integration of AHS and expansion of our presence in the Health and Wellness marketplace. We must increase screening, telephonic health coaching, and wellness portal volumes in order to cover our fixed cost structure and improve gross profits. These improvements may be outside of management’s control. The integration of AHS and marketplace expansion may require additional costs to grow and operate the newly integrated entity, which we must recover through expanded revenues. If we are unable to increase volumes or control integration or operating costs, liquidity may adversely be affected.

We had $3.3 million borrowings outstanding under the 2013 Loan and Security Agreement as of December 31, 2015. Given the seasonal nature of our operations, which are largely dependent on second half volumes, management expects to continue using the 2013 Loan and Security Agreement in 2016 and beyond.

Given our performance during 2015, we reported EBITDA and aggregate revenue for the year ended December 31, 2015, that was below the current covenants outlined in the 2013 Loan and Security Agreement and the Credit Agreement. As noted above, the lenders recently waived and removed the minimum EBITDA and aggregate revenue covenants for December 31, 2015, and reduced the covenants for 2016 and 2017. There can be no assurance that cash flows from operations, combined with any additional borrowings available to us, will be obtainable in an amount sufficient to enable us to repay our indebtedness, or to fund other liquidity needs. Obtaining a waiver and modifying the financial covenants depends on matters that are outside of management’s control and there can be no assurance that management will be successful in these regards. If we are unable to comply with financial covenants in 2016 and in the event that we were unable to modify the covenants, find new or additional lenders, or raise additional equity, we would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on our business.

Forward-Looking Statements in “Liquidity”

Our beliefs regarding liquidity sufficiency are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934, as amended.  Forward-looking statements are indicated by words such as “expected”, “will” and other similar words.

Cash Flows from Operating, Investing and Financing Activities

We believe that as a result of the addition of the offerings acquired in the Acquisition of AHS, cash flow from operations will improve. We have reduced our corporate fixed cost structure and plan to continue to evaluate professional fees and other expenses in 2016. We have ongoing initiatives to increase the flexibility of our variable cost structure to improve our scalability with changes in screening volumes. We also believe that the Acquisition 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, 2015, net cash used in operating activities was $6.3 million. Our net cash used in operating activities for the year ended December 31, 2014 was $3.4 million, while our net cash used in operating activities for the year ended December 31, 2013 was $7.0 million.


27


Our consolidated days sales outstanding ("DSO"), measured on a rolling 90-day basis, was 46.0 days at December 31, 2015, compared to 35.9 days at December 31, 2014. The increase in DSO in 2015 was primarily due to timing of large customer receipts in December 2015. We experience a timing difference between the operating expense and cash collection of the associated revenue based on Health and Wellness customer payment terms. Historically, our accounts receivable balances and our DSO are near their highest point in September and their lowest point in December.

The net cash used in operating activities for 2014 of $3.4 million includes 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 of depreciation and amortization and $0.5 million of share-based compensation expense. Changes in working capital items included:

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; and

a decrease in accounts payable, accrued expenses, and other long-term liabilities of $0.5 million.

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 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 decrease in accounts payable, accrued expenses, and other long-term liabilities of $4.3 million.

Cash Flows used in Investing Activities

For the year ended December 31, 2015, we had a net cash outflow from investing activities of $4.8 million. We used $4.0 million for the year ended December 31, 2015, to acquire AHS on April 17, 2015. Capital expenditures for the year ended December 31, 2015, were $0.8 million.

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.

Cash Flows used in Financing Activities

For the year ended December 31, 2015, net cash provided by financing activities was $7.9 million related to the proceeds from the Term Loan of $5.0 million, which was partially offset by $0.4 million incurred for debt financing fees. We also had net borrowings under the credit facility of $3.3 million for the year ended December 31, 2015.

For the year ended December 31, 2014, net cash provided by financing activities was $0.02 million related to proceeds from stock option exercises and a reduction in our capital lease obligations.

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.

Off-Balance Sheet Arrangements

28



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 2015, 2014 and 2013.

Dividends

No dividends were paid in 2015, 2014 and 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 and our Credit Agreement, each as described in Note 10.
 
Contractual Obligations

The following table sets forth our schedule of contractual obligations at December 31, 2015, 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
2013 Loan and Security Agreement
 
$
3,278

 
$
3,278

 
$

 
$

 
$

Term Loan
 
$
5,000

 
$
5,000

 
$

 
$

 
$

Operating Lease Obligations
 
$
4,967

 
$
1,847

 
$
3,120

 
$

 
$

Employment Contracts
 
$
1,171

 
$
1,171

 

 

 

Total
 
$
14,416

 
$
11,296

 
$
3,120

 
$

 
$


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 screening services when the screening is completed and the results are delivered to our customers. Revenue for portal services are recognized on a per eligible member, per month basis, while revenue from coaching services are recognized as services are performed. 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 have

29


occurred, 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.

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 management judgments and estimates in determining allowances for doubtful accounts in any accounting period.  One uncertainty inherent in our analysis is whether our past experience will be indicative of future periods.  Adverse changes in general economic conditions could affect our allowance estimates, collection of accounts receivable, cash flows and results of operations.
  
Share-Based Compensation

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

Business Combinations

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

Goodwill and Other Intangible Assets

Goodwill is accounted for under the provisions of ASC 350, Intangibles - Goodwill and Other.  All goodwill is assigned to one reporting unit, where it is subject to an annual impairment assessment, or more frequently if circumstances indicate that impairment is likely.  Any one event or a combination of events such as change in the business climate, a negative change in relationships with significant customers and changes to strategic decisions, including decisions to expand made in response to economic or competitive conditions could require an interim assessment prior to the next required annual assessment.  We assessed our goodwill for impairment as of December 31, 2015, and as our market capitalization exceeded the book value of net equity, it was determined that goodwill was not impaired.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future sales, and estimated costs. We cannot predict the occurrence of certain future events that might adversely affect the reported value of long-lived assets, which include, but are not limited to, a change in the business climate, government incentives, a negative change in relationships with significant customers, and changes to strategic decisions made in response to economic and competitive conditions. Changes in these facts, circumstances and management’s estimates and judgment could result in an impairment of long-lived assets resulting in a material charge to earnings. Based on the Company's recent financial performance, management determined a review of impairment of long-lived assets was necessary as of December 31, 2015. The analysis indicated no impairment charge for long-lived assets was required at December 31, 2015.


30


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 10 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, 2015, there were $3.3 million borrowings outstanding.

As of December 31, 2015, 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.


31


ITEM 8
Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Consolidated Financial Statements:
 
 
 
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2015 and 2014
Consolidated Statements of Operations – Years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows – Years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)

32





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 (the "Company") as of December 31, 2015 and 2014, 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, 2015.  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, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements and the financial statement schedule taken as a whole, presents fairly, in all material respects, the information set forth therein.

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

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 30, 2016


33


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

 
 
December 31, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
2,035

 
$
5,201

Accounts receivable, net of allowance for doubtful accounts of $112 and $87 at December 31, 2015 and 2014, respectively
 
5,565

 
3,178

Inventories
 
567

 
897

Other current assets
 
331

 
202

Total current assets
 
8,498

 
9,478

Property, plant and equipment, net
 
2,771

 
3,054

Intangible assets
 
5,331

 

Goodwill
 
633

 

Other assets
 
613

 
607

               Total assets
 
$
17,846

 
$
13,139

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 

Current liabilities:
 
 
 
 

Accounts payable
 
$
5,339

 
$
2,508

Accrued expenses
 
5,186

 
4,083

Short-term debt
 
5,493

 

Total current liabilities
 
16,018

 
6,591

Other long-term liabilities
 
1,611

 
1,191

Commitments and contingencies (Note 11)
 


 


Stockholders’ Equity:
 
 
 
 

Common stock, par value $.04 per share; Authorized 240,000,000 shares; Issued: 78,025,998 shares and 70,875,998 shares at December 31, 2015 and 2014, respectively. Outstanding: 78,016,603 shares and 70,866,603 shares at December 31, 2015 and 2014, respectively
 
3,121

 
2,835

Additional paid-in capital
 
156,195

 
150,747

Accumulated deficit
 
(159,028
)
 
(148,154
)
 
 
288

 
5,428

Less: Treasury stock, at cost; 9,395 shares as of December 31, 2015 and 2014
 
(71
)
 
(71
)
Total stockholders' equity
 
217

 
5,357

Total liabilities and stockholders' equity
 
$
17,846

 
$
13,139

See accompanying notes to consolidated financial statements.


34


      Hooper Holmes Inc.
Consolidated Statements of Operations
 (In thousands, except share and per share data)
 
 
Years ended December 31,
 
 
2015
 
2014
 
2013
Revenues
 
$
32,115

 
$
28,524

 
$
24,171

Cost of operations
 
25,590

 
21,737

 
17,767

Gross profit
 
6,525

 
6,787

 
6,404

Selling, general and administrative expenses
 
14,037

 
14,138

 
17,571

Transaction costs
 
1,027

 

 

Gain on sale of real estate
 

 
(1,846
)
 

Impairment
 




212

Restructuring charges
 


146


802

Operating loss from continuing operations
 
(8,539
)
 
(5,651
)
 
(12,181
)
Other (expense) income:
 
 

 
 

 
 

Interest expense, net
 
(1,796
)
 

 
(81
)
Other expense, net
 

 
(239
)
 
(399
)
 
 
(1,796
)
 
(239
)
 
(480
)
Loss from continuing operations before income taxes
 
(10,335
)
 
(5,890
)
 
(12,661
)
Income tax expense
 
19

 
23

 
19

Loss from continuing operations
 
(10,354
)
 
(5,913
)
 
(12,680
)
Discontinued operations:
 
 

 
 

 
 

Loss from discontinued operations, net of tax
 
(520
)
 
(3,301
)
 
(2,025
)
Gain on sale of subsidiaries, net of adjustments
 

 
739

 
3,430

Income (loss) from discontinued operations
 
$
(520
)
 
$
(2,562
)
 
$
1,405

Net loss
 
$
(10,874
)
 
$
(8,475
)
 
$
(11,275
)
Basic and diluted (loss) earnings per share:
 
 

 
 

 
 

Continuing operations
 
 

 
 

 
 

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

 
$
(0.04
)
 
$
0.02

Diluted
 
$

 
$
(0.04
)
 
$
0.02

Net loss
 
 
 
 
 
 
Basic
 
$
(0.14
)
 
$
(0.12
)
 
$
(0.16
)
Diluted
 
$
(0.14
)
 
$
(0.12
)
 
$
(0.16
)
Weighted average number of shares:
 
 

 
 

 
 

Basic
 
76,048,156

 
70,684,452

 
69,965,814

Diluted
 
76,048,156

 
70,684,452

 
69,965,814


See accompanying notes to consolidated financial statements.


35


 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 Stockholders' Equity
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

Net loss
 
 
 
 
 
 
 
(10,874
)
 


 


 
(10,874
)
Exercise of share-based awards
 
50,000

 
2

 
21

 
 
 


 


 
23

Share-based compensation
 
600,000

 
24

 
416

 
 
 


 


 
440

Issuance of common stock
 
6,500,000

 
260

 
2,740

 
 
 


 


 
3,000

Issuance of warrant
 
 
 
 
 
2,656

 
 
 


 

 
2,656

Amortization of deferred financing related to warrant
 
 
 
 
 
(385
)
 
 
 
 
 
 
 
(385
)
Balance, December 31, 2015
 
78,025,998

 
$
3,121

 
$
156,195

 
$
(159,028
)
 
(9,395
)
 
(71
)
 
$
217

See accompanying notes to consolidated financial statements.


36


Hooper Holmes, Inc.
Consolidated Statements of Cash Flows
 (In thousands)
 
Years ended December 31,
 
2015
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(10,874
)
 
$
(8,475
)
 
$
(11,275
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 

    Gain on sale of real estate, net

 
(1,846
)
 

    Gain on sale of subsidiaries, net of adjustments

 
(739
)
 
(3,430
)
    Depreciation and amortization
2,211


1,220


2,200

    Amortization of debt discount
780

 

 

    Amortization of deferred financing fees
385

 
343

 
298

    Provision for bad debt expense
61

 
85

 
(380
)
    Share-based compensation expense
440


503


643

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

 
181

 
416

         Change in assets and liabilities:
 
 
 
 
 

          Accounts receivable
(1,530
)
 
5,135

 
9,000

          Inventories
215

 
(300
)
 
(62
)
          Other assets
(459
)
 
1,005

 
(184
)
          Accounts payable, accrued expenses and other liabilities
2,474

 
(542
)
 
(4,255
)
Net cash used in operating activities
(6,297
)
 
(3,430
)
 
(7,029
)
Cash flows from investing activities:
 
 
 
 
 

Capital expenditures
(793
)
 
(1,409
)
 
(1,550
)
Acquisition of Accountable Health Solutions
(4,000
)
 

 

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
)
Net cash (used in) provided by investing activities
(4,793
)
 
4,640

 
3,722

Cash flows from financing activities:
 
 
 
 
 
Borrowings under credit facility
19,190

 

 
50,827

Payments under credit facility
(15,912
)
 

 
(50,827
)
Proceeds from issuance of Term Loan
5,000

 

 

Debt financing fees
(377
)
 

 
(999
)
Proceeds related to the exercise of stock options
23

 
29

 
71

Payments on capital lease obligations

 
(8
)
 
(114
)
Net cash provided by (used in) financing activities
7,924

 
21

 
(1,042
)
Net increase (decrease) in cash and cash equivalents
(3,166
)
 
1,231

 
(4,349
)
Cash and cash equivalents at beginning of year
5,201

 
3,970

 
8,319

Cash and cash equivalents at end of year
$
2,035

 
$
5,201

 
$
3,970

 
 
 
 
 
 
Supplemental disclosure of non-cash investing activities:
 
 
 
 
 

Fixed assets vouchered but not paid
$
97

 
$
163

 
$
153

Debt financing fees vouchered but not paid
$
500

 
$

 
$

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

 
$

 
$
1,525

Supplemental disclosure of non-cash financing activities:
 
 
 
 
 
        Issuance of common stock in connection with the Acquisition
3,000

 

 

Supplemental disclosure of cash flow information:
 
 
 
 
 

Cash paid during the period for:
 
 
 
 
 

Interest
$
516

 
$

 
$
82

Income taxes
$
41

 
$
53

 
$
62

See accompanying notes to consolidated financial statements

37


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 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.  The acquisition of Accountable Health Services, Inc ("AHS") allows Hooper Holmes to also deliver telephonic health coaching, wellness portals, and data analytics and reporting services. 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.
    
The Company's 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 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 Form 10-K. During 2014, the Company sold certain assets comprising the Heritage Labs and Hooper Holmes Services businesses. The operating results of these businesses are also segregated and reported as discontinued operations in this Form 10-K.

Acquisition of Accountable Health Solutions, Inc.

On April 17, 2015, the Company entered into and consummated an Asset Purchase Agreement (the "Purchase Agreement") among the Company and certain of its subsidiaries, Accountable Health Solutions, Inc. (the "Seller" or "AHS") and Accountable Health, Inc. ("Shareholder"). Pursuant to the Purchase Agreement, the Company has acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately $7.0 million - $4.0 million in cash and up to 6,500,000 shares of the Company’s common stock, $0.04 par value, with a value of $3.0 million, which was subject to a working capital adjustment as described in the Purchase Agreement (the "Acquisition"). Refer to Note 3 for additional discussion regarding the Acquisition.

In connection with the Acquisition, the Company entered into and consummated a Consent and Third Amendment to the Loan and Security Agreement (the "Third Amendment") to the Loan and Security Agreement (as amended, the "2013 Loan and Security Agreement") with ACF FinCo I LP ("ACF" or the "Senior Lender"), the assignee of Keltic Financial Partners II, LP ("Ares"). The 2013 Loan and Security Agreement provides a revolving credit facility which is secured and repaid as set forth therein. The Senior Lender consented to the Acquisition, the maximum borrowing capacity under the 2013 Loan and Security Agreement was reduced from $10 million to $7 million (subject to increase to up to$12 million in certain circumstances, subject to the Senior Lender’s consent, as provided in the 2013 Loan and Security Agreement) and the expiration was extended through February 28, 2019. The Company paid an amendment fee of $0.1 million in connection with the Third Amendment.

In order to fund the Acquisition, the Company entered into and consummated a Credit Agreement (the "Credit Agreement") with SWK Funding LLC as the agent ("Agent") on April 17, 2015, and the lenders (including SWK Funding LLC) party thereto from time to time (the "Lenders"). The Credit Agreement provides the Company with a $5.0 million term loan (the "Term Loan") (refer to Note 3 and Note 10).
    
(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.


38


(d)
Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. Customer contracts state that we can charge interest but historically the Company has not. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowances for uncollectible accounts are estimated based on the Company's periodic review of 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, 2015 and 2014 are $0.4 million and $0.7 million, respectively, of finished goods and $0.3 million and $0.2 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 are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future sales, and estimated costs.

Based on the Company's recent financial performance, management determined a review of impairment of long-lived assets was necessary as of December 31, 2015. The analysis indicated no impairment charge for long-lived assets was required at December 31, 2015. There was also no impairment charges recorded in continuing operations during the year ended December 31, 2014. During the year ended December 31, 2013, the Company recorded impairment charges in continuing operations of $0.2 million related 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 of $0.04 million and $0.1 million for the years ended December 2014 and 2013, respectively.

(h)
Goodwill

Goodwill is accounted for under the provisions of ASC 350, Intangibles – Goodwill and Other. All goodwill is assigned to one reporting unit, where it is subject to an annual impairment assessment, or more frequently if circumstances indicate that impairment is likely. Any one event or a combination of events such as change in the business climate, a negative change in relationships with significant customers and changes to strategic decisions, including decisions to expand made in response to economic or competitive conditions could require an interim assessment prior to the next required annual assessment. The Company assessed its goodwill for impairment as of December 31, 2015, and concluded that goodwill was not impaired. The assessment consisted of a quantitative analysis in accordance with Accounting Standards Update ("ASU") 2011-08, Testing for Goodwill Impairment, in which the fair value of our reporting unit exceeded the carrying amount. Goodwill was $0.6 million as of December 31, 2015.

(i)
Deferred Rent


39


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, 2015 and 2014, the Company has recorded $0.2 million and $0.2 million, respectively, related to deferred rent in the consolidated balance sheet.

(j)
Revenue Recognition

Revenue is recognized for screening services when the screening is completed and the results are delivered to our customers. Revenue for portal services are recognized on a per eligible member, per month basis, while revenue from coaching services are recognized as services are performed. 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 have occurred, 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 all share-based compensation to employees, directors, and consultants, including grants of stock options and restricted stock, in the financial statements as compensation cost based on their fair value on the date of grant, in accordance with ASC 718, Compensation-Stock Compensation. This compensation cost is recognized over the vesting period on a straight-line basis for the fair value of awards expected to vest. Refer to Note 4 for a detailed discussion of share-based payments.

(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, 2015, because the inclusion of dilutive common stock equivalents would have been anti-dilutive for all periods presented. Options to purchase 4,398,700, 3,652,200, and 4,150,550 shares of the Company's common stock through employee stock plans were outstanding as of December 31, 2015, 2014 and 2013, respectively, and a warrant to purchase 8,152,174 shares issued to SWK was outstanding as of December 31, 2015, but are anti-dilutive because the Company is in a net loss position.

(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

40


assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which the Company believes to be reasonable under the circumstances.  The Company adjusts such estimates and assumptions when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.  Changes in those estimates will be reflected in the consolidated financial statements in future periods.

(o)
Concentration of Credit Risk

The Company’s accounts receivable are due primarily from healthcare management and wellness companies.  As of December 31, 2015, 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 34% of total consolidated accounts receivable as of December 31, 2015. As of December 31, 2014, there were two customer balances that each accounted for more than 10% of the total consolidated accounts receivable and represented approximately 39% of total consolidated accounts receivable.

For the year ended December 31, 2015, there were two Health and Wellness customers that exceeded 10% of revenue from continuing operations and represented more than 30% of the consolidated revenue. 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. 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 May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This new guidance is effective for the Company in the first quarter of 2018, with early adoption permitted as of the original effective date or first quarter of 2017. The Company is currently evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs", which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The Company has unamortized debt issuance costs of $0.3 million that is included in Other Assets as of December 31, 2015, and will be reclassified as an offset to Debt in the first quarter of 2016. ASU 2015-03 is effective for the Company in the first quarter of 2016, with early adoption permitted, and retrospective application required.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments", which eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. An acquirer now must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments amounts are determined. ASU 2015-16 is effective for the Company in the first quarter of 2016, with early adoption permitted. We elected to early adopt the provisions of this new standard for the year ended December 31, 2015. The adoption of this standard did not have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes", which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. We elected to early adopt the provisions of this new standard for the year ended December 31, 2015, on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial position, results of operations or cash flows.

Note 2 — Liquidity


41


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The uncertainty regarding the Company's ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about its ability to continue as a going concern (which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future). These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

On January 25, 2016, the Company completed a rights offering to current shareholders, in which it raised $3.5 million that is being used to fund working capital. Refer to Note 17 to the consolidated financial statements for additional discussion regarding the rights offering;

On March 28, 2016, the Company received $1,200,000 in additional equity by issuing 10,000,000 shares of its common stock, $0.04 par value, to 200 NNH, LLC, which will be used to fund working capital. Refer to Note 17 to the consolidated financial statements for additional discussion regarding the additional equity raised;

On March 28, 2016, the Company renegotiated its financial covenants in the 2013 Loan and Security Agreement and the Credit Agreement to requirements based on its forecast models;

The Company will continue to implement further cost actions and efficiency improvements;

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

The Company may sell additional equity or pursue other capital market transactions; and

The Company expects to continue to carefully manage receipts and disbursements, including amounts and timing, focusing on reducing days receivables outstanding and managing days payables outstanding.

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 10). At December 31, 2015, the Company had $2.0 million of cash and cash equivalents and had $3.3 million outstanding under the 2013 Loan and Security Agreement with available borrowing capacity of $0.4 million. As discussed in Note 3, the Company entered into the Credit Agreement on April 17, 2015, for a $5.0 million term loan, which provided funding for the cash component of the Acquisition. After the $4.0 million payment for the Acquisition, the origination fee and related legal costs, the Company received approximately $0.8 million in net proceeds from the Term Loan.
    
The Company incurred a loss from continuing operations of $10.4 million for the year ended December 31, 2015. The Company's net cash used in operating activities during the year ended December 31, 2015 was $6.3 million. The Company has managed its liquidity through the addition of the Term Loan and the availability under the 2013 Loan and Security Agreement and a series of cost reduction initiatives.

The Company has historically used availability under the 2013 Loan and Security Agreement to fund operations. The Company experiences a timing difference between the operating expenses and cash collection of the associated revenue based on Health and Wellness customer payment terms. 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.

2013 Loan and Security Agreement
    
The Company maintains the 2013 Loan and Security Agreement, as amended on March 28, 2013, July 9, 2014, April 17, 2015, August 10, 2015, November 10, 2015, and March 28, 2016, with the Senior Lender. 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 $7 million under this facility at any given time due to the manner in which the maximum available amount is calculated.  The Company has an available borrowing base subject to reserves established at the lender's discretion of 85% of Eligible Receivables up to $7 million under this facility.  Eligible Receivables do not include certain receivables deemed ineligible by the Senior Lender pursuant to the Second Amendment to the Loan and Security Agreement ("the Second Amendment"). On August 10, 2015, the Company entered into and consummated a Fourth Amendment to the Loan and Security Agreement (the "Fourth Amendment") which added the AHS receivables to the borrowing base. As of December 31, 2015, there were $3.3 million

42


borrowings outstanding under the 2013 Loan and Security Agreement with available borrowing capacity of $0.4 million. Average available borrowing capacity for the month of March 2016 was $0.4 million, and we had $2.4 million of cash and cash equivalents as of March 28, 2016.

The 2013 Loan and Security Agreement and the Third Amendment contain various covenants, including financial covenants which require the Company to achieve a minimum EBITDA amount (earnings before interest expense, income taxes, depreciation, and amortization). The Third Amendment contained minimum EBITDA covenants of positive $0.8 million for the twelve month period ended December 31, 2015, which the Company did not comply with. On March 28, 2016, the Company obtained a Waiver and Sixth Amendment to the Loan and Security Agreement (the "Sixth Amendment") in which the lender modified the covenants to waive the minimum EBITDA covenant for the twelve months ended December 31, 2015, and replaced it with minimum EBITDA covenants of negative $1.6 million for the three months ending March 31, 2016, negative $2.0 million for the six months ending June 30, 2016, negative $1.1 million for the nine months ending September 30, 2016, and $0.8 million for the twelve months ending December 31, 2016, and each twelve consecutive calendar month period ending on the last day of each fiscal quarter thereafter. In addition, the Company must obtain new equity contributions in an aggregate amount of not less than $4.0 million between November 10, 2015, and June 30, 2016, which condition has been satisfied by its completion of the rights offering earlier this year and the private offering to the investor described above. If the Company is unable to comply with financial covenants in 2016 and in the event that the Company was unable to modify the covenants, find new or additional lenders, or raise additional equity, it would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business. Additionally, the Company continues to have limitations on the maximum amount of capital expenditures for each fiscal year.

2015 Credit Agreement

In order to fund the Acquisition, the Company entered into and consummated a Credit Agreement on April 17, 2015, with SWK Funding LLC ("SWK"). The Credit Agreement provides the Company with a $5.0 million Term Loan. The proceeds of the Term Loan were used to pay certain fees and expenses related to the negotiation and consummation of the Purchase Agreement for the Acquisition described in Note 3 and general corporate purposes. The Term Loan is due and payable on April 17, 2018. The Company is also required to make quarterly revenue-based payments in an amount equal to eight and one-half percent (8.5%) of yearly aggregate revenue up to and including $20 million, seven percent (7%) of yearly aggregate revenue greater than $20 million up to and including $30 million, and five percent (5%) of yearly aggregate revenue greater than $30 million. The revenue-based payment will be applied to fees and interest and any excess to the principal of the Term Loan. Revenue-based payments commence in February 2016, and the maximum aggregate revenue-based principal payment is capped at $600,000 per quarter. The Company made its first principal payment of $0.5 million, on February 16, 2016, in addition to $0.2 million of interest expense, for a total payment of $0.7 million.
    
The outstanding principal balance under the Credit Agreement bears interest at an adjustable rate per annum equal to the LIBOR Rate (subject to a minimum amount of one percent (1.0%)) plus fourteen percent (14.0%) and is due and payable quarterly, commencing on August 14, 2015. Upon the earlier of (a) the maturity date of April 17, 2018, or (b) full repayment of the Term Loan, whether by acceleration or otherwise, the Company is required to pay an exit fee equal to eight percent (8%) of the aggregate principal amount of all term loans advanced under the Credit Agreement. The Company is recognizing the exit fee over the term of the Term Loan through an accretion accrual to interest expense using the effective interest method.

On February 25, 2016, the Company entered into a First Amendment to Credit Agreement (“First Amendment”) with SWK. The First Amendment modifies the Credit Agreement dated April 17, 2015, to extend the date the Company has to issue the additional warrant to SWK to purchase common stock valued at $1.25 million from February 28, 2016, to April 30, 2016, if the 2013 Loan and Security Agreement is not repaid in full and terminated and all liens securing the 2013 Loan and Security Agreement are not released. The First Amendment also modifies the exercise price of the warrant from one cent over the closing price on February 28, 2016, and replaced it with the closing price of our stock on April 30, 2016. Refer to Note 3 for additional discussion regarding the warrants. The First Amendment also required the Company to issue 454,545 shares of its common stock, $0.04 par value, with a value of $50,000 to SWK effective February 29, 2016.

The Credit Agreement also contains certain financial covenants including minimum aggregate revenue, EBITDA, and consolidated unencumbered liquid assets requirements. The Credit Agreement contains a minimum aggregate revenue covenant of $34 million for the twelve month period ended December 31, 2015, which the Company did not comply with. On March 28, 2016, the Company obtained a Second Amendment to the Credit Agreement (the "Second Amendment") in which the lender removed the minimum aggregate revenue requirement for the twelve months ended December 31, 2015, and replaced it with minimum aggregate revenue covenants of $33.0 million for the twelve months ending March 31, 2016, $34.0 million for the twelve months ending June 30, 2016, $37.0 million for the twelve months ending September 30, 2016, $40.0 million for the twelve months ending December 31, 2016, and $45.0 million for the twelve months ending each fiscal quarter thereafter. The Second Amendment

43


also modified the minimum EBITDA covenants for 2016 and replaced them with minimum EBITDA covenants of negative $1.6 million for the three months ending March 31, 2016, negative $2.0 million for the six months ending June 30, 2016, negative $1.1 million for the nine months ending September 30, 2016, $0.8 million for the twelve months ending December 31, 2016, $0.5 million for the twelve months ending March 31, 2017, $0.9 million for the twelve months ending June 30, 2017, and $2.5 million for the twelve months ending September 30, 2017. In addition,the Company must obtain new equity contributions in an aggregate amount of not less than $0.5 million between March 23, 2016 and June 30, 2016, which requirement the Company has satisfied through the private offering to the investor described above. The Second Amendment also required the Company to issue shares of its common stock, $0.04 par value, with a value of $100,000 to SWK within five business days of the transaction. If the Company is unable to comply with financial covenants in 2016 and in the event that the Company was unable to modify the covenants, find new or additional lenders, or raise additional equity, it would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business.

The Credit Agreement contains a cross-default provision that can be triggered if the Company has more than $0.25 million in debt outstanding under the 2013 Loan and Security Agreement and the Company fails to make payments to the Senior Lender when due or if the Senior Lender is entitled to accelerate the maturity of debt in response to a default situation under the 2013 Loan and Security Agreement, which may include violation of any financial covenants.

Other Considerations

The Health and Wellness business sells services directly to end customers and also through wellness, disease management, benefit brokers, and insurance companies (referred to as channel partners) who ultimately have the relationship with the end customer. Sales to direct customers offer the full suite of products and services while our screenings 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 Acquisition of AHS required the Company to enter into the Credit Agreement with the Lenders. In association with the Acquisition, we also incurred transaction expenses and legal and professional fees. During the year ended December 31, 2015, we incurred $0.8 million in legal and professional fees associated with the Acquisition.

Additionally, the Acquisition provides new offerings including the wellness portal and telephonic coaching, along with new staff, new systems, and new customers. During the year ended December 31, 2015, the Company incurred $0.7 million of costs in connection with integrating the Acquisition, which are recorded in selling, general and administrative expenses. Costs incurred during 2015 primarily relate to transition services purchased from the Seller and the ongoing transition of information technology infrastructure. The integration of AHS will continue into early 2016, and the Company will continue to incur certain transition costs associated with integrating the two companies, which could adversely affect liquidity.

In addition, we have contractual obligations related to operating leases and employment contracts which could adversely affect liquidity.

The Company’s ability to satisfy its liquidity needs and meet future covenants is dependent on growing revenues, improving profitability, and raising additional equity as noted above. These profitability improvements primarily include the successful integration of AHS and expansion of the Company’s presence in the Health and Wellness marketplace. The Company must increase screening, telephonic health coaching, and wellness portal volumes in order to cover its fixed cost structure and improve gross profits. These improvements may be outside of management’s control. The integration of AHS and marketplace expansion may require additional costs to grow and operate the newly integrated entity, which the Company must recover through expanded revenues. If the Company is unable to increase volumes or control integration or operating costs, liquidity may adversely be affected.

The Company had $3.3 million borrowings outstanding under the 2013 Loan and Security Agreement as of December 31, 2015. Given the seasonal nature of the Company's operations, which are largely dependent on second half volumes, management expects to continue using the 2013 Loan and Security Agreement in 2016 and beyond.

Given the Company's performance during 2015, the Company reported EBITDA and aggregate revenue for the year ended December 31, 2015, that was below the current covenants outlined in the 2013 Loan and Security Agreement and the Credit Agreement. As noted above, the lenders recently waived and removed the minimum EBITDA and aggregate revenue covenants for December 31, 2015, and reduced the covenants for 2016 and 2017. There can be no assurance that cash flows from operations, combined with any additional borrowings available to the Company, will be obtainable in an amount sufficient to enable the Company to repay its indebtedness, or to fund other liquidity needs.  Obtaining a waiver and modifying the financial covenants

44


depends on matters that are outside of management’s control and there can be no assurance that management will be successful in these regards. If the Company is unable to comply with financial covenants in 2016 and in the event that the Company were unable to modify the covenants, find new or additional lenders, or raise additional equity, the Company would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business.

Note 3 — Acquisition

The Company entered into and consummated the Purchase Agreement on April 17, 2015, among the Company and certain of its subsidiaries, Accountable Health Solutions, Inc. (the "Seller" or "AHS") and Accountable Health, Inc. ("Shareholder"). Pursuant to the Purchase Agreement, the Company has acquired the assets and certain liabilities representing the health and wellness business of the Seller for approximately $7.0 million - $4.0 million in cash and up to 6,500,000 shares of the Company’s common stock, $0.04 par value, with a value of $3.0 million, which was subject to a working capital adjustment as described in the Purchase Agreement (the "Acquisition"). At the closing of the Purchase Agreement, the Company issued and delivered 5,576,087 shares of Common Stock to the Shareholder and issued and held back 326,087 shares of Common Stock for the working capital adjustment, which were subsequently released on October 9, 2015, and 597,826 shares of Common Stock for indemnification purposes. No additional shares will be issued under the terms of the Purchase Agreement. The shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, which provides an exemption for private offerings of securities. During the year ended December 31, 2015, the Company recorded transaction costs of $0.8 million in connection with the Acquisition in the consolidated statement of operations.

The acquisition provides significant growth opportunities for the Health and Wellness operations. It has expanded the Company's capabilities allowing us to deliver telephonic health coaching, wellness portals, and data analytics and reporting services. These factors, combined with the synergies and economies of scale expected from combining the operations of the two companies, are the basis for acquisition and comprise the resulting goodwill recorded.

In order to fund the Acquisition, the Company entered into and consummated a Credit Agreement (the "Credit Agreement") with SWK Funding LLC as the agent ("Agent") on April 17, 2015, and the lenders (including SWK Funding LLC) party thereto from time to time (the "Lenders"). The Credit Agreement provides the Company with a $5.0 million term loan (the "Term Loan"). The proceeds of the Loan were used to pay certain fees and expenses related to the negotiation and consummation of the Purchase Agreement and the Acquisition described above and general corporate purposes. The Company paid the Agent an origination fee of $0.1 million. The Loan is due and payable on April 17, 2018.