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EX-31.2 - EXHIBIT 31.2 - HOOPER HOLMES INCexhibit312201610-ka3.htm
EX-31.1 - EXHIBIT 31.1 - HOOPER HOLMES INCexhibit311201610-ka3.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
(Amendment No. 3)

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

Commission file number: 001-09972

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

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

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

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

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

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

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

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

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company.  See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”,
and "emerging growth company" in Rule 12b-2 of the Exchange Act.  
 
Large accelerated filer o
Accelerated filer o
Smaller reporting company x
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x

The aggregate market value of the shares of common stock held by non-affiliates of the Registrant (7,800,000), based on the closing
price of these shares on June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) on the NYSE
MKT, was $9,400,000.

The number of shares outstanding of the Registrant’s common stock as of June 15, 2017, was 25,838,698.




Documents Incorporated by Reference

None.








EXPLANATORY NOTE

Hooper Holmes Inc., referred to as “Hooper Holmes,” “Company,” “we,” “us” and “our”, is filing this Amendment No. 3 on Form 10-K/A, referred to as this Amendment No. 3, to amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the U.S. Securities and Exchange Commission, referred to as the SEC, on March 9, 2017, as amended by Amendment No. 1 on Form 10-K/A, which was filed with the SEC on May 1, 2017, and as amended by Amendment No. 2 on Form 10-K/A, which was filed with the SEC on May 25, 2017, (collectively, the “Original Form 10-K”) and in conjunction with this Amendment No. 3 referred to as the 2016 Annual Report on Form 10-K (this "Report").  Except as otherwise specifically defined herein, all defined terms used in the Original Form 10-K shall have the same meanings in this Amendment No. 3.

In response to a comment letter from the Securities and Exchange Commission, dated June 1, 2017, the Company is filing this Amendment No. 3 to revise the disclosures in Part I, Item 1 and Part II, Item 7.

Except as described above, this Amendment No. 3 does not revise or alter the Company’s financial statements and any forward-looking statements or amend, modify or otherwise update any other information in the Original Form 10-K.  Except as reflected herein, this Amendment No. 3 speaks as of the original filing date of the Original Form 10-K.  Accordingly, this Amendment No. 3 should be read in conjunction with the Original Form 10-K and with our filings with the SEC subsequent to the filing of the Original Form 10-K.


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Part I

ITEM 1
Business

Overview

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

We provide on-site screenings and flu shots, laboratory testing, risk assessment, and sample collection services to individuals as part of comprehensive health and wellness programs offered through organizations sponsoring such programs including corporate and government employers, health plans, hospital systems, health care management companies, wellness companies, brokers and consultants, disease management organizations, reward administrators, third party administrators, clinical research organizations and academic institutions. Through our comprehensive health and wellness services, we also provide telephonic health coaching, access to a wellness portal with individual and team challenges, data analytics, and reporting services. We contract with health professionals to deliver these services nationwide, all of whom are trained and certified to deliver quality service. We leverage our national network of health professionals to support the delivery of other similar products and services.
The majority of large employers that offer health benefits today also offer at least some wellness programs in an effort to promote employee health and productivity as well as to reduce health related costs.  Through screenings, plan sponsors help employees learn of existing and/or potential health risks. Through corporate wellness, they provide education and health improvement tools and personalized challenges. Program sponsors also gain the ability to systematically reward employees for good, healthy behaviors and for actual health enhancement metrics. Some common examples of these rewards include reductions in annual medical premiums, contributions to an employee’s Health Savings Account (HSA), and credits that are redeemable through an online merchandise mall. By combining both the screening and corporate wellness services under a single organization, we create a seamless, end-to-end experience for members and drives improved engagement and outcomes for our clients.
Today, we service approximately 200 direct clients representing nearly 3,000 employers and up to 1,000,000 participants. In 2016, we delivered nearly 500,000 screenings and are on track to continue year-over-year revenue growth through a combination of our direct, channel partner, and clinical research organization partners as well as through the addition of new customers.

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

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

Rights Offering

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

Additional Equity Contributions

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


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

Reverse Stock Split

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

Merger Agreement

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

Liquidity

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

Description of Services

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

Our screening services include:

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

Our comprehensive health and wellness services include:

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

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

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

Market Conditions and Strategic Initiatives

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

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

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

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

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

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





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Sales and Marketing

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

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

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

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

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

Information Technology

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

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can be easily customized to service the diverse needs of our client base. We are investing in improving our IT operating systems and expertise to enable innovation that meets or exceeds the needs of our customers.

During 2016, we continued the use of a state-of-the-art underground autonomous data center that employs three-factor biometric entrance security, 24x7 camera monitoring, and a highly resilient power grid solution that includes a centralized uninterrupted power supply with redundant generator backing. We also continued to utilize our highly available and secure private cloud operating environment leveraging converged infrastructure that has maintained a core uptime of 100% for three years running. In addition, next generation security technologies provide robust security measures that extend into all layers of our IT systems and products. As we look ahead to 2017, efforts will continue around innovation to drive efficiencies and advance our technological capabilities in the health and wellness market.

Major Customers

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

Competition

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

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

Governmental Regulation

We are subject to federal and state regulations relating to the collection, testing, transportation, handling, and disposal of the various specimens obtained in the course of a wellness screening, such as Clinical Laboratory Improvement Amendments (“CLIA”). 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, such as the Occupational Safety and Health Act (“OSHA”). 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”), other federal and state laws relating to the privacy of health and other personal information, and state and federal laws designed to guard against healthcare fraud and abuse.

CLIA

The Centers for Medicare & Medicaid Services (CMS) regulates all laboratory testing (except research) performed on humans in the U.S. through the Clinical Laboratory Improvement Amendments (CLIA). The Division of Laboratory Services, within the Survey and Certification Group, under the Center for Clinical Standards and Quality (CCSQ) has the responsibility for implementing the CLIA Program. The objective of the CLIA program is to ensure the quality of laboratory testing. All clinical laboratories must be properly certified to receive Medicare or Medicaid payments.



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OSHA

The federal, OSHA Bloodborne pathogens standard, as amended pursuant to the Needlestick Safety and Prevention Act of 2000, prescribes safeguards to protect workers against the health hazards caused by bloodborne pathogens. Its requirements address items such as exposure control plans, universal precautions, engineering and work practice controls, personal protective equipment, housekeeping, laboratories, hepatitis B vaccination, post-exposure follow-up, hazard communication and training, and recordkeeping. The standard places requirements on employers whose workers can be reasonably anticipated to contact blood or other potentially infectious materials. Some states operate their own OSHA-approved state program, which state programs are required to adopt a bloodborne pathogens standard that is at least as effective as the Federal OSHA standard.

HIPAA, Privacy Laws, and Data Security

Federal Privacy Laws

The HIPAA Privacy Standards and Security Standards under establish a set of national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and healthcare providers (referred to as “covered entities”) and their “business associates,” which are persons or entities that perform certain services for or on behalf of a covered entity (or another business associate) that involve the use or disclosure of protected health information. As a “business associate”, we are subject to HIPAA with regard to certain aspects of our business, such as managing employee or plan member health information for employers or health plans. With respect to our services platform and related services, HITECH creates obligations for us to report any unauthorized use or disclosure of protected health information, known as a breach, to our covered entity customers. Violations of HIPAA may result in civil and criminal penalties.

As part of the payment-related aspects of our business, we may also undertake security-related obligations arising out of the USA Patriot Act, Gramm-Leach-Bliley Act and the Payment Card Industry guidelines applicable to card systems. These requirements generally require safeguards for the protection of personal and other payment related information.

State Privacy Laws

In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations, or state privacy laws, that govern the use and disclosure of a person’s medical information or records and, in some cases, are more stringent than those issued under HIPAA. These state privacy laws include regulation of health insurance providers and agents, regulation of organizations that perform certain administrative functions such as utilization review or third-party administration, issuance of notices regarding privacy practices, and reporting and providing access to law enforcement authorities. These laws may require us to modify our operations and procedures to comply with these more stringent state privacy laws or be subject to applicable sanctions.

Healthcare Fraud Statutes

Federal statute identifies a class of federal crimes known as the “federal healthcare offenses,” including healthcare fraud and false statements relating to healthcare matters. The Federal Anti-Kickback Statute prohibits payment of remuneration to induce referrals of federal or state healthcare program beneficiaries. The Federal Healthcare Fraud statute prohibits, among other things, executing a scheme or artifice to defraud any healthcare benefit program, and the Federal Health Care Benefit Program False Statements Statute prohibits, among other things, concealing a material fact or making a materially false statement in connection with the payment for healthcare benefits, items or services. Violation of these statutes is punishable by fines and/or imprisonment. Most states have similar statutes relating to state (and sometimes private) healthcare benefit plans.

False Claims Act

The Federal Civil False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The “qui tam” or “whistleblower” provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. There are also state law corollaries to the Federal False Claims Act.

Regulation of Wellness Incentive Programs

The HIPAA Nondiscrimination Provisions generally prohibit group health plans from charging similarly situated individuals different premiums or contributions or imposing different deductible, co-payment, or other cost-sharing requirements based on a

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“health factor.” Such differentials are, however, acceptable under the HIPAA Nondiscrimination Provisions if the differentials are applied through “wellness programs.” The Department of Labor, in coordination with the Departments of the Treasury and HHS, has issued regulations (finalized in 2013) that define “wellness programs” for purposes of the HIPAA nondiscrimination provisions, establishing specific requirements for wellness programs that reward participants who satisfy a standard related to a health factor (referred to as “health-contingent wellness programs”) and for other types of wellness programs. Programs that do not meet these requirements may be subject to enforcement actions.

Consumer Protection Laws

Federal and state consumer protection laws are being increasingly enforced by the United States Federal Trade Commission (“FTC”), the Federal Communications Commission (“FCC”), and the various state’s attorneys general to regulate the collection, use, storage and disclosure of personal or patient information, though websites or otherwise, to regulate the presentation of website content, and to regulate direct marketing, including telemarketing and telephonic communication. Courts may also adopt the standards for fair information practices promulgated by the FTC, concerning consumer notice, choice, security and access.

Americans with Disabilities Act

The Americans with Disabilities Act (ADA) prohibits discrimination on the basis of an employee’s disability or perceived disability. Among other things, it limits employers from inquiring about the disabilities of employees unless the questions are job-related and consistent with business necessity. The ADA also limits the circumstances in which an employer may require physical examinations or answers to medical inquiries. However, the ADA allows employers to conduct voluntary medical examinations and activities, including voluntary medical histories, as part of a voluntary wellness program. A wellness program is “voluntary” if the employer neither requires participation nor penalizes employees who do not participate. Records acquired as part of a wellness program must be kept confidential and may not be used for a discriminatory purpose. Many states and localities provide similar protections to employees.

GINA

The Genetic Information Nondiscrimination Act restricts the collection or use of genetic information for underwriting purposes, and treats the offering of incentives or disincentives for completing an HRA or participating in a wellness program as underwriting.

Employees

As of December 31, 2016, we employed 319 employees, including 178 full-time employees.  For the full year 2016, we also engaged 1,524 independent contractors, primarily as health professionals to provide our screening services.

General Information

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

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC").  You may read and copy any document that we file with the SEC at the SEC's Public Reference Room located at 100 F Street, NE, Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330.  The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding companies that file electronically with the SEC.  The SEC’s website is www.sec.gov.  We also make available free of charge, through our website, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statements, the Form 3, 4 and 5 filings of our directors and executive officers, and all amendments to these reports and filings, as soon as reasonably practicable after such material is electronically filed with the SEC.
 
Part II

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

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


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Executive Summary

Overview

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

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

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

Key Risks, Trends and Uncertainties in Our Business

We believe that the key risks, trends and uncertainties in our business are as follows:

Our recurring losses from operations, negative cash flows from operations, and liquidity issues raise substantial doubt about our ability to continue as a going concern within one year after issuance of our financial statements. Please refer to “Liquidity and Capital Resources - Going Concern” in Item 7 of this Report for further discussion.

Without giving effect to the Merger discussed in Note 15 to the consolidated financial statements, our current projections indicate that we will have continued negative cash flow and recurring losses for the foreseeable future. Please refer to “Liquidity and Capital Resources - Going Concern” in Item 7 of this Report for further discussion.

While we were able to comply with the covenants in our debt agreements as of December 31, 2016, we were unable to meet our debt covenants for both the six month period ended June 30, 2016, and the nine month period ended September 30, 2016. We may be unable to comply with the revised covenants in our debt agreements following the Merger. Please refer to “Liquidity and Capital Resources - Going Concern” in Item 7 of this Report for further discussion.

Our screening operations are seasonal in nature and largely depend on volumes during the third and fourth quarters. Please refer to “Liquidity and Capital Resources” in Item 7 of this Report for further discussion.

Our ability to generate positive cash flows and net income is dependent upon closing the Merger and achieving the cost reductions and new and return business discussed below under the heading “Liquidity and Capital Resources-Going Concern-Management’s Plans” in Item 7 of this Report with respect to the post-Merger company on a combined basis.

Please refer to “Risk Factors” in Item 1A included in this Report for additional information about risks and uncertainties facing our Business.

Capital Activities

Rights Offering


9


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

Additional Equity Contributions

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

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

Reverse Stock Split

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

Merger Agreement

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

Liquidity

The accompanying financial statements have been prepared assuming that we will continue as a going concern (which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future). The uncertainty regarding our ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about our ability to continue as a going concern within one year after issuance date of the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 2 to the consolidated financial statements and within the Liquidity and Capital Resources below for further discussion.

Business Outlook for 2017

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

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

A key corporate strength is our extensive network of health professionals, providing coverage in every zip code nationwide and allowing us to offer screenings for smaller sites. We also have national agreements with retail clinics and local lab offices,

10


and offer physician form and at-home-kit services, providing our customers more robust, convenient options to maximize member participation with annual screenings. We also have logistical expertise in staffing and supply chain capabilities that allow us to stock, calibrate, pack, and ship the materials our health professionals need to collect accurate health information. This centralized fulfillment model allows us to deliver a reliable, consistent experience for our customers nationwide, regardless of location, as well as consistent and reliable equipment to provide a strong degree of accuracy and quality.

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

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

Key Financial and Other Metrics Monitored by Management

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

We monitor the following key metrics related to our operations:

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

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

Adjusted EBITDA

The following table sets forth our reconciliation of Adjusted EBITDA for the years ended December 31, 2016 and 2015:

11


 
 
 
 
(in thousands)
2016
 
2015
Net loss
$
(10,324
)
 
$
(10,874
)
Plus:
 
 
 
   Interest expense
1,017

 
623

Other debt related costs included in interest expense
2,553

 
1,173

Income tax expense
25

 
19

Depreciation and amortization
2,633

 
2,211

Share-based compensation expense
579

 
440

Severance costs
444

 

Stock payments in connection with debt amendments
50

 

Transaction costs
559

 
1,027

Transition costs
56

 
701

Write-off of SWK Warrant #2
(887
)
 

Impairment of property, plant and equipment, net
88

 

Portamedic contingent liability
150

 
300

   Close-out cost of 2013 Portamedic sale

 
168

Adjusted EBITDA
$
(3,057
)
 
$
(4,212
)

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

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

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

Results of Operations

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

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


12


 
 
For the years ended December 31,
 
%
(dollars in thousands)
 
2016
 
2015
 
Change
Revenue
 
$
34,271

 
$
32,115

 
6.7
%

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

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

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

 
77.1
%
 
$
25,590

 
79.7
%

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

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

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

 
$
14,037

 
3.5
%

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

Transaction Costs

Transaction costs represent legal and professional fees incurred for non-recurring transactions. For the year ended December 31, 2016, we incurred $0.6 million of transaction costs primarily in connection with the termination of the 2013 Loan and Security Agreement and other transactional legal fees. For the year ended December 31, 2015, we incurred $1.0 million of transaction costs in connection with the Acquisition and the rights offering.

Operating Loss from Continuing Operations

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

Interest Expense, Net

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

Other Income

13



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

Loss from Discontinued Operations

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

Net Loss

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

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents as well as availability under a Credit and Security Agreement (the "2016 Credit and Security Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM"). We have historically used availability under a revolving credit facility to fund operations due to a lag between the payment of certain operating expenses and the subsequent billing and collection of the associated revenue based on customer payment terms. To illustrate, in order to conduct successful screenings, we must expend cash to deliver the equipment and supplies required for the screenings. We must also expend cash to pay the health professionals and site management conducting the screenings. All of these expenditures are incurred in advance of the customer invoicing process and ultimate cash receipts for services performed. Given the seasonal nature of our operations, which are largely dependent on second half volumes, management expects to continue using a revolving credit facility in 2017 and beyond.

Going Concern

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

Principal conditions or events that require management's consideration

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

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

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

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

We had $3.6 million of outstanding borrowings under the 2016 Credit and Security Agreement with SCM, with unused borrowing capacity of $0.1 million at December 31, 2016. As of February 28, 2017, we had $3.1 million of outstanding

14


borrowings with unused borrowing capacity of $0.2 million. Any borrowings on the unused borrowing capacity are at the discretion of SCM.

We owed approximately $3.7 million at December 31, 2016 under an existing term loan (the "Term Loan"), which is governed by the terms of a credit agreement (the "Credit Agreement") with SWK Funding LLC ("SWK") and was used to fund the cash component of the Acquisition.

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

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

Management's plans

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

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

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

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

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

Management's assessment and conclusion

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

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

Cash Flows from Operating, Investing and Financing Activities


15


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

Cash Flows used in Operating Activities

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

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

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

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

Cash Flows used in Investing Activities

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

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

Cash Flows provided by Financing Activities

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

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

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

Off-Balance Sheet Arrangements

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

Share Repurchases

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

Dividends


16


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

Inflation

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

Critical Accounting Policies

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

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

Revenue Recognition

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

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

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

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

17


estimate forfeiture rates within the valuation model.  The estimated fair values of options are based on assumptions, including estimated lives, volatility, dividend yield, and risk-free interest rates.  These estimates also consider the probability that the options will be exercised prior to the end of their contractual lives and the probability of termination or retirement of the holder, which are based on reasonable estimates and historical trends but are subject to change based on a variety of external factors. See Note 4 to the consolidated financial statements for further discussion.

Business Combinations

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

Goodwill and Other Intangible Assets

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

Impairment of Long-Lived Assets

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

Going Concern

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


18


Part IV

ITEM 15
Exhibits and Financial Statement Schedules

(a) The following exhibits are filed as part of this report:                                    

Exhibit
Number
 
Item
31.1

 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended
31.2

 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended



19


                                                                                                                                                                     SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
HOOPER HOLMES, INC.
 
 
(Registrant)
 
 
 
 
 
June 16, 2017
By:
/s/ Henry E. Dubois
 
 
 
Henry E. Dubois
 
 
 
Chief Executive Officer
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature
  
Title
 
Date
 
 
 
/s/ Henry E. Dubois
 
Chief Executive Officer;
 
June 16, 2017
Henry E. Dubois
 
Director
 
 
 
 
 
 
/s/ Ronald V. Aprahamian
 
 
 
June 16, 2017
Ronald V. Aprahamian
 
Director
 
 
 
 
 
/s/ Frank Bazos
 
 
 
June 16, 2017
Frank Bazos
 
Director
 
 
 
 
 
 
 
/s/ Paul Daoust
 
 
 
June 16, 2017
Paul Daoust
 
Director
 
 
 
 
 
 
 
/s/ Larry Ferguson
 
 
 
June 16, 2017
Larry Ferguson
 
Director
 
 
 
 
 
 
 
/s/ Jim Foreman
 
 
 
June 16, 2017
Jim Foreman
 
Director
 
 
 
 
 
 
 
/s/ Thomas A. Watford
 
 
 
June 16, 2017
Thomas A. Watford
 
Director
 
 
 
 
 
 
 
/s/ Steven R. Balthazor
 
Chief Financial and
 
June 16, 2017
Steven R. Balthazor
 
Accounting Officer
 
 
 
 
 
 
 







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