Notes to Unaudited Consolidated Financial Statements
June 30, 2014
(unaudited)
Note 1: Basis of Presentation
Hooper Holmes, Inc. (“Hooper Holmes” or the "Company”) provides on-site health screenings, laboratory testing, risk assessment and sample collection services to individual employees through health and care management companies, including broker and wellness companies, disease management organizations, reward administrators, third party administrators, clinical research organizations and, health plans as part of comprehensive health and wellness programs offered through corporate and government employers. Hooper Holmes provides these services through a national network of health professionals.
As a provider of services within the health and health insurance industries, the Company's business is subject to seasonality, with the second quarter sales typically dropping below the other quarters due to a decline in activity during the summer months and fourth quarter sales typically the strongest quarter due to annual benefit renewal cycles.
The unaudited interim consolidated financial statements of the Company have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2013 Annual Report on Form 10-K, filed with the SEC on March 31, 2014.
Financial statements prepared in accordance with U.S. GAAP require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and other disclosures. The financial information included herein is unaudited; however, such information reflects all adjustments that are, in the opinion of the Company's management, necessary for a fair statement of results for the interim periods presented.
The results of operations for the
three and six month periods
ended
June 30, 2014
and
2013
are not necessarily indicative of the results to be expected for any other interim period or the full year. See “Management's Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
On September 30, 2013, the Company completed the sale of certain assets comprising its Portamedic service line. The Portamedic service line is accounted for as a discontinued operation in this Report. Accordingly, the operating results of Portamedic are segregated and reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented. For further discussion, refer to Note 6.
Sale of Assets - Heritage Labs and Hooper Holmes Services
On April 16, 2014, the Company entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with Clinical Reference Laboratory, Inc. (“CRL”) pursuant to which, among other things, the Company has agreed to sell certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units (the “Business”) to CRL. Under the terms of the Alliance Agreement, CRL has agreed to pay
$3.7 million
in cash for certain assets of the Business, which such assets exclude, among others, all accounts receivable, and to assume specified liabilities related to the Business. The net book value of assets to be sold was approximately
$1.1 million
as of
June 30, 2014
, consisting primarily of inventory and property, plant and equipment. The transaction is expected to close in the third quarter of 2014.
The assets to be sold to CRL qualified as assets held for sale in April 2014, and the sale of the Business to CRL is accounted for as discontinued operations in this Report. The sale of Heritage Labs and Hooper Holmes Services to CRL represents a strategic shift in the Company's ongoing operations. Accordingly, the operating results of Heritage Labs and Hooper Holmes Services are segregated and reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented. For further discussion, refer to Note 6.
Prior to this Report, but subsequent to the sale of Portamedic on September 30, 2013, the Company has previously reported its financial results in
three
segments: Health and Wellness, Heritage Labs and Hooper Holmes Services. Pursuant to the Alliance Agreement with CRL, among other things, the Company has agreed to sell certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units, which represent the Heritage Labs and Hooper Holmes Services reportable
segments. As the Heritage Labs and Hooper Holmes Services reportable segments have been reported as discontinued operations in this Report, segment information is no longer provided for Heritage Labs and Hooper Holmes Services. The Company has also reassessed its segment reporting following the Alliance Agreement with CRL to align with the information that is regularly reviewed. Subsequent to the closing of the Alliance Agreement with CRL, the Company expects to have
one
segment, consisting of the Health and Wellness operations.
Sale of Basking Ridge Real Estate
On May 13, 2014, the Company entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) for the sale to McElroy Deutsch Mulvaney & Carpenter, LLP (the “MDMC”) of the buildings, land, certain personal property and other interests comprising the Company’s Basking Ridge, New Jersey property for an aggregate purchase price of
$3.05 million
. On July 18, 2014, the Company and MDMC entered into an amendment to the Purchase and Sale Agreement that provides for the Company to deposit into an escrow account at closing an aggregate of
$0.3 million
of the purchase price to satisfy amounts paid by MDMC in connection with certain repairs and other expenses identified in the course of the property inspection. The sale closed on August 7, 2014 resulting in cash proceeds of
$2.54 million
, which is net of customary closing costs and broker fees. The Basking Ridge real estate was classified as assets held for sale as of
June 30, 2014
.
Subsequent Event - Amendment to the 2013 Loan and Security Agreement
On July 9, 2014, the Company entered into the Second Amendment to the 2013 Loan and Security Agreement (the "Second Amendment") with ACF FinCo I LP ("ACF"), the assignee of Keltic Financial Partners II, LP ("Keltic Financial"). The Second Amendment amends the terms and conditions of the 2013 Loan and Security Agreement dated as of February 28, 2013, and as amended on March 28, 2013 (as amended, the "2013 Loan and Security Agreement"). The following summarizes certain terms of the Second Amendment:
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•
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The negative covenant regarding the Company's EBITDA has been amended and restated in its entirety to provide that the Company agrees that EBITDA, as of and for each twelve consecutive calendar month period ending on the last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2015, shall not be less than
$100,000
.
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•
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The Borrowing Base (as defined in the 2013 Loan and Security Agreement) has been amended to include an amount of Unbilled Eligible Receivables (as defined in the 2013 Loan and Security Agreement) not to exceed the least of (i)
fifty percent
of the aggregate amount of Unbilled Eligible Receivables; (ii)
$2,500,000
; and (iii)
fifty percent
of the Borrowing Base as most recently previously calculated. Inclusion of Unbilled Eligible Receivables is expected to increase the Company's borrowing capacity.
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•
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The definition of EBITDA has been amended and will (i) be calculated as net income before interest expense, taxes, depreciation and amortization, and (ii) include any gains or losses resulting from the sale of any owned real estate or from the sale of all or substantially all of the assets constituting the Company's Heritage Labs and Hooper Holmes Services businesses.
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New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014- 08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" to change the criteria for reporting discontinued operations. Under the new guidance, only disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations should be reported as discontinued operations in the financial statements. Additionally, the new guidance removes the condition that an entity may not have any significant continuing involvement in the operations of the component after the disposal transaction. The new guidance requires expanded disclosures for discontinued operations, as well as disclosures about the financial effects of significant disposals that do not qualify for discontinued operations. The Company early adopted the guidance as of January 1, 2014 and has applied the guidance in ASU 2014-08 to the accounting for the sale of Heritage Labs and Hooper Holmes Services to CRL and presentation of discontinued operations.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This new guidance is effective for the Company in the first quarter of 2017, with no early adoption permitted. The Company is currently evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures.
Note 2: Liquidity
The Company's primary sources of liquidity are cash and cash equivalents and the 2013 Loan and Security Agreement. At
June 30, 2014
, the Company had
$3.1 million
in cash and cash equivalents,
$6.0 million
of working capital and no outstanding debt.
For the
three and six month periods
ended
June 30, 2014
, the Company incurred losses from continuing operations of
$1.9 million
and
$4.8 million
, respectively. The Company’s net cash used in operating activities for the
six month period ended
June 30, 2014
was
$1.2 million
. The Company has managed its liquidity through a series of cost reduction and accounts receivable collection initiatives along with access to the 2013 Loan and Security Agreement.
Transition Initiatives
During the
three and six month periods
ended
June 30, 2014
, the Company incurred
$0.4 million
and
$1.5 million
, respectively, of costs, which are recorded in selling, general and administrative expenses in the consolidated statement of operations, in connection with the relocation of its corporate headquarters to Olathe, Kansas, and contributed to the loss from continuing operations during the 2014 periods presented. The Company relocated its headquarters to Olathe, Kansas during the first quarter of 2014, where the Health and Wellness facilities are located. Costs incurred during the second quarter of 2014 relate to expenses associated with maintaining the Basking Ridge, New Jersey real estate and ongoing transition of information technology infrastructure.
On April 16, 2014, under the Alliance Agreement (refer to Note 1), CRL has agreed to pay
$3.7 million
in cash for certain assets of Heritage Labs and Hooper Holmes Services, which such assets exclude, among others, all accounts receivable, and to assume specified liabilities related to the Business. The Company will retain certain aspects of its sample kit assembly operations relating to the Health and Wellness segment and all other supply chain fulfillment capabilities, which continue to support Health and Wellness operations and other customers.
As of
June 30, 2014
, the Basking Ridge, New Jersey real estate continued to be classified as assets held for sale. On May 13, 2014, the Company entered into an agreement for the sale of the Basking Ridge, New Jersey property for an aggregate purchase price of
$3.05 million
. On July 18, 2014, the Company and MDMC entered into an amendment to the Purchase and Sale Agreement that provides for the Company to deposit into an escrow account at closing an aggregate of
$0.3 million
of the purchase price to satisfy amounts paid by MDMC in connection with certain repairs and other expenses identified in the course of the property inspection. The sale closed on August 7, 2014 resulting in cash proceeds of
$2.54 million
, which is net of customary closing costs and broker fees (refer to Note 1).
These initiatives and transactions will provide the Company with additional capital to invest as it focuses on growth supporting Health and Wellness operations.
Holdback Related to the Sale of Portamedic
On September 30, 2013, the Company completed the sale of Portamedic. Approximately
$2.0 million
(“Holdback Amount”) of the purchase price was held back by the acquirer as security for the Company’s obligations under the agreements between the Company and the acquirer. (Refer to Note 6). The Holdback Amount includes
two
components of
$1.0 million
each. During the first quarter of 2014, the Company received
$0.7 million
of the first Holdback Amount. The Company currently anticipates finalization and collection on the second Holdback Amount in the first quarter of 2015. The Company has recorded the remaining receivable related to the second Holdback Amount at the amount it believes will be collected, however there cannot be any assurance that the remaining Holdback Amounts will be collected by the Company.
2013 Loan and Security Agreement
The Company maintains the 2013 Loan and Security Agreement with ACF, the assignee of Keltic Financial (refer to Note 9). Borrowings under the 2013 Loan and Security Agreement are to be used for working capital purposes and capital expenditures. The amount available for borrowing may be less than the
$10 million
under this facility at any given time due to the manner in which the maximum available amount is calculated. The Company has an available borrowing base subject to reserves established at the lender's discretion of
85%
of Eligible Receivables (as defined in the 2013 Loan and Security Agreement) up to
$10 million
under this facility. Eligible Receivables do not include Heritage Labs receivables, certain Hooper Holmes Services receivables, and other receivables deemed ineligible by the lender. As of
June 30, 2014
, the lender applied a discretionary reserve of
$0.5 million
. Available borrowing capacity, net of this discretionary reserve was
$2.8 million
based on Eligible Receivables as of
June 30, 2014
. As of
June 30, 2014
, there were
no
borrowings outstanding under the 2013 Loan and Security Agreement.
The Company and ACF entered into an amendment to the 2013 Loan and Security Agreement on July 9, 2014 (refer to Note 1) to modify the financial covenants in an effort to better align such covenants with the Company's operations and strategy going forward. In addition, Eligible Receivables was amended to include up to
fifty percent
of Unbilled Eligible Receivables (as defined in the 2013 Loan and Security Agreement), which results in an increase in the Company's borrowing capacity. The 2013 Loan and Security Agreement contains various covenants, including financial covenants which require the Company to achieve a minimum EBITDA amount (earnings before interest expense, income taxes, depreciation and amortization) beginning with the twelve months ending March 31, 2015 as the first measurement date. The Company continues to have limitations on the maximum amount of unfunded capital expenditures for each fiscal year.
Other Considerations
The Company's Health and Wellness business principally sells through wellness, disease management and insurance companies (referred to as channel partners) who ultimately have the relationship with the end customer. The Company's current services are aggregated with other offerings from its channel partners to provide a total solution to the end-user. As such, the Company's success is largely dependent on that of its partners.
The Company's ability to generate cash flow in the future is dependent on realizing the benefits from the consolidation in Kansas and growing the Health and Wellness business as it seeks to streamline operations and improve efficiency through increased revenue and cost reduction initiatives. These and other factors could adversely affect liquidity.
Based on the Company's anticipated level of future revenues and gross profits, anticipated cost reduction initiatives, cash proceeds in connection with the Alliance Agreement, the sale of the Basking Ridge, New Jersey real estate, and existing cash and cash equivalents and borrowing capacity, the Company believes it has sufficient funds to meet its cash needs to fund operation expenses and capital expenditures for the twelve months following
June 30, 2014
.
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Note 3:
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(
Loss) Earnings Per Share
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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 because the inclusion of dilutive common stock equivalents would have been anti-dilutive for all periods presented.
Note 4: Impairment of Long-lived Assets
The Company evaluates the recovery of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of assets may not be recoverable. The Company evaluated the long-lived assets associated with Heritage Labs and Hooper Holmes Services in connection with the anticipated sale of certain assets under the Alliance Agreement with CRL (refer to Note 1). The Company concluded these long-lived assets were not impaired. There were
no
impairment charges recorded for these assets or any other assets in continuing operations during the
three and six month periods
ended
June 30, 2014
.
During the
three and six month periods
ended
June 30, 2013
, the Company recorded an impairment charge of
$0.2 million
relating to the write-off of certain financial system software which was no longer expected to be utilized. The
$0.2 million
impairment charge is included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the
three and six month periods
ended
June 30, 2013
.
Note 5: Share-Based Compensation
Employee
Share-Based Compensation Plans
- On May 29, 2008, the Company's shareholders approved the 2008 Omnibus Employee Incentive Plan (the “2008 Plan”) providing for the grant of stock options, stock appreciation rights, non-vested stock and performance shares. The 2008 Plan provides for the issuance of an aggregate of
5,000,000
shares. For the
three and six month periods
ended
June 30, 2014
, the Company granted
181,100
and
343,700
options to purchase shares under the 2008 Plan. For the
three and six month periods
ended
June 30, 2013
, there were
no
options for the purchase of shares granted under the 2008 Plan. As of
June 30, 2014
, approximately
3,127,900
shares remain available for grant under the 2008 Plan.
On May 24, 2011, the Company's shareholders approved the 2011 Omnibus Employee Incentive Plan, as subsequently amended and restated, (the "2011 Plan") providing for the grant of stock options and non-vested stock awards. The 2011 Plan provides for the issuance of an aggregate of
3,500,000
shares. On June 11, 2014, the Company's shareholders approved an amendment and restatement of the 2011 Plan to rename the 2011 Plan as the Hooper Holmes, Inc. 2011 Omnibus Incentive Plan and also to include
non-employee directors and consultants as eligible participants. The 2011 Plan is to remain in effect until the earlier of (i) the 10th anniversary of the plan's original effective date of May 24, 2011, or (ii) the date all shares of stock available for issuance have been issued. There were
no
options for the purchase of shares granted under the 2011 Plan during the
three month period
ended
June 30, 2014
. During the
six month period ended
June 30, 2014
, the Company granted
300,000
options to purchase shares under the 2011 Plan. During the
six month period ended
June 30, 2014
, the Company also granted a total of
400,000
stock awards to non-employee members of the Board of Directors that immediately vested. There were
no
options for the purchase of shares or stock awards granted under the 2011 Plan during the
six month period ended
June 30, 2013
. As of
June 30, 2014
, approximately
1,217,000
shares remain available for grant under the 2011 Plan as amended.
Options awarded under the 2008 Plan and 2011 Plan are granted at fair value on the date of grant, are exercisable in accordance with a vesting schedule specified in the grant agreement, and have contractual lives of
10
years from the date of grant. Options to purchase an aggregate of
100,000
shares of the Company's stock are outstanding, which were granted to certain executives of the Company in December 2010 and which vested
50%
on each of the first and second anniversaries of the grant. Options to purchase an aggregate of
1,228,900
shares of the Company's stock granted to certain employees of the Company vest
one-third
on each of the first, second and third anniversaries of the grant. Options to purchase
2,000,000
shares of the Company's stock granted to the Chief Executive Officer of the Company in September 2013, vest
25%
upon receipt of the grant and 25% on the first, second and third anniversary of the grant. Other options granted by the Company vest
25%
on each of the second through fifth anniversaries of the grant.
The fair value of the stock options granted during the
three and six month periods
ended
June 30, 2014
was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2014
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2014
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Expected life (years)
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5.26
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5.25
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Expected volatility
|
78.5%
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83.1%
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Expected dividend yield
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—%
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—%
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Risk-free interest rate
|
1.8%
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1.8%
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Weighted average fair value of options granted during the period
|
$0.40
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$0.39
|
The following table summarizes stock option activity for the
six month period ended
June 30, 2014
:
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Number of Shares
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Weighted Average Exercise Price Per Share
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Weighted Average remaining Contractual Life (years)
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Aggregate Intrinsic Value (in thousands)
|
Outstanding balance at December 31, 2013
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4,150,550
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$
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0.75
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Granted
|
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643,700
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0.58
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Exercised
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(54,000
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)
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0.51
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Expired
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(536,300
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)
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1.19
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Forfeited
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(173,950
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)
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0.37
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Outstanding balance at June 30, 2014
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4,030,000
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0.67
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|
8.34
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$809
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Options exercisable at June 30, 2014
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1,341,450
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$
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0.99
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6.58
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$174
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The aggregate intrinsic value disclosed in the table above represents the difference between the Company's closing stock price on the last trading day of the quarter ended
June 30, 2014
and the exercise price, multiplied by the number of in-the-money stock options.
During the
three and six month periods
ended
June 30, 2014
, an aggregate of
16,500
and
54,000
stock options valued with a weighted average exercise price of
$0.65
and
$0.51
, respectively, were exercised.
No
stock options were exercised during the
six month period ended
June 30, 2013
. Options for the purchase of an aggregate of
24,400
shares of common stock vested during the
six month period ended
June 30, 2014
, and the aggregate fair value at grant date of these options was
$0.01 million
. As of
June 30, 2014
, there was approximately
$0.7 million
of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of
2.3
years.
In
July 2009
, an aggregate of
500,000
shares of non-vested stock were granted under the
2008 Plan
. The fair value of these non-vested stock awards was based on the grant date fair value of
$0.45
per share. The shares vest as follows:
25%
after two years and
25%
on each of the next three anniversary dates thereafter. As of
June 30, 2014
, an aggregate of
350,000
shares of such non-vested stock were forfeited and
150,000
were vested. In July 2011, an aggregate of
305,000
shares of non-vested stock were granted under the 2008 Plan. The fair value of these non-vested stock awards was based on the grant date fair value of
$1.06
per share. As of
June 30, 2014
, an aggregate of
149,900
shares of such non-vested stock were forfeited and
155,100
were vested. The shares vest as follows:
33%
on each of the first and second anniversary dates and
34%
on the third anniversary. As of
June 30, 2014
, there was no unrecognized compensation cost related to non-vested stock awards.
Employee Stock Purchase Plan
- The Company's 2004 Employee Stock Purchase Plan (the "2004 Plan") provides for the granting of purchase rights for up to
2,000,000
shares of the Company's stock to eligible employees of the Company. Under the 2004 Plan, purchase rights for approximately
233,000
shares were granted in the February 2013 offering period with an aggregate fair value of
$0.03 million
, based on the Black-Scholes option pricing model. The
February 2013
offering period concluded in
March 2014
and, in accordance with the 2004 Plan's automatic termination provision, there were
36,154
shares issued. The Company is no longer granting purchase rights under the 2004 Plan.
Other Stock Awards
- On May 30, 2007, the Company's shareholders approved the Hooper Holmes, Inc. 2007 Non-Employee Director Restricted Stock Plan (the “2007 Plan”), which provided for the automatic grant, on an annual basis for
10
years, of shares of the Company's stock to the Company's non-employee directors. The total number of shares that may be awarded under the 2007 Plan is
600,000
. As of
June 30, 2014
, there remain available for grant approximately
360,000
shares under the 2007 Plan. Each non-employee member of the Board of Directors other than the non-executive chair previously received
5,000
shares annually and the non-executive chair received
10,000
shares annually of the Company's stock, with such shares vesting immediately upon issuance. During the
six month period ended
June 30, 2014
,
no
shares were awarded under the 2007 Plan. During the
six month period ended
June 30, 2013
, a total of
30,000
shares were awarded under the 2007 Plan.
The Company recorded
$0.3 million
and
$0.4 million
of share-based compensation expense in selling, general and administrative expenses for the
three and six month periods
ended
June 30, 2014
. The Company recorded
$(0.02) million
and
$0.2 million
, respectively, of share-based compensation expense in selling, general and administrative expenses for the
three and six month periods
ended
June 30, 2013
. In connection with the resignation of its former Chief Executive Officer, the Company reversed previously recorded share-based compensation expense during the
three month period
ended
June 30, 2013
.
Note 6: Discontinued Operations
Sale of Assets - Heritage Labs and Hooper Holmes Services
On April 16, 2014, the Company entered into an Alliance Agreement with CRL pursuant to which, among other things, the Company has agreed to sell certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units (the “Business”) to CRL. Under the terms of the Alliance Agreement, CRL has agreed to pay
$3.7 million
in cash for certain assets of the Business, which such assets exclude, among others, all accounts receivable, and to assume specified liabilities related to the Business. The net book value of assets to be sold was approximately
$1.1 million
as of
June 30, 2014
, consisting primarily of inventory and property, plant and equipment. The transaction is expected to close in the third quarter of 2014. The Company will retain certain aspects of its sample kit assembly operations relating to the Health and Wellness segment and all other supply chain fulfillment capabilities, which continue to support Health and Wellness operations and other customers. The Company decided to sell the Business as the transaction will provide the Company with additional capital to invest to focus on growth in the Health and Wellness operations.
The assets to be sold to CRL qualified as assets held for sale in April 2014, and the sale of the Business to CRL is accounted for as discontinued operations in this Report. The sale of Heritage Labs and Hooper Holmes Services to CRL represents a strategic shift in the Company's ongoing operations. Accordingly, the operating results of Heritage Labs and Hooper Holmes Services are segregated and reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented. The assets and liabilities to be sold to CRL have been reclassified and reported as assets held for sale in the consolidated balance sheet as of
June 30, 2014
.
The Company also entered into the Limited Laboratory and Administrative Services Agreement (the “LLASA”) with CRL pursuant to which, among other things, CRL will become the Company’s exclusive provider, subject to certain exceptions, of laboratory testing and reporting services and will also provide administrative services in support of the Company’s Health and
Wellness operations. The Company will become a member of CRL’s preferred provider network for wellness programs during the term of the LLASA. The LLASA will become effective upon the closing of the transaction contemplated by the Alliance Agreement and will continue for
five years
from such date and auto-renew for an additional
five
year renewal period unless sooner terminated by either party in accordance with the LLASA. CRL will be providing services to the Health and Wellness operations based on an arms' length pricing structure, and the Company will have not have the ability to exercise influence over the operations of either the Heritage Labs or the Hooper Holmes Services businesses.
The following table summarizes the major classes of line items constituting the pretax results of operations of Heritage Labs and Hooper Holmes Services for the
three and six month periods
ended
June 30, 2014
and
2013
, which are reported as a component of discontinued operations in the consolidated statement of operations. There was no income tax recorded in discontinued operations for Heritage Labs and Hooper Holmes Services for any period presented.
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Three Months Ended
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Six Months Ended
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June 30
|
June 30
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(in thousands)
|
2014
|
2013
|
2014
|
2013
|
Revenues
|
|
|
|
|
Heritage Labs
|
$
|
1,405
|
|
2,615
|
|
$
|
3,717
|
|
$
|
5,526
|
|
Hooper Holmes Services
|
$
|
2,607
|
|
$
|
3,883
|
|
$
|
5,595
|
|
$
|
7,947
|
|
Total revenue
|
$
|
4,012
|
|
$
|
6,498
|
|
$
|
9,312
|
|
$
|
13,473
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|
Cost of Sales
|
|
|
|
|
Heritage Labs
|
$
|
1,222
|
|
$
|
1,811
|
|
$
|
2,982
|
|
$
|
3,750
|
|
Hooper Holmes Services
|
$
|
2,296
|
|
$
|
3,342
|
|
$
|
4,878
|
|
$
|
6,829
|
|
Total cost of sales
|
$
|
3,518
|
|
$
|
5,153
|
|
$
|
7,860
|
|
$
|
10,579
|
|
Selling, General & Administrative Expenses
|
|
|
|
|
Heritage Labs
|
50
|
|
$
|
167
|
|
$
|
251
|
|
$
|
362
|
|
Hooper Holmes Services
|
$
|
1,215
|
|
$
|
592
|
|
$
|
1,682
|
|
$
|
1,158
|
|
Total selling, general & administrative expenses
|
$
|
1,265
|
|
$
|
759
|
|
$
|
1,933
|
|
$
|
1,520
|
|
(Loss) income from Discontinued Operations
|
|
|
|
|
Heritage Labs
|
$
|
133
|
|
$
|
637
|
|
$
|
484
|
|
$
|
1,414
|
|
Hooper Holmes Services
|
$
|
(904
|
)
|
$
|
(51
|
)
|
$
|
(965
|
)
|
$
|
(40
|
)
|
Total (loss) income from discontinued operations
|
$
|
(771
|
)
|
$
|
586
|
|
$
|
(481
|
)
|
$
|
1,374
|
|
The assets of the discontinued Heritage Labs and Hooper Holmes Services operations to be sold to CRL are recorded in assets held for sale in the consolidated balance sheet as of
June 30, 2014
and include inventory of
$0.4 million
and property, plant and equipment of
$0.7 million
. The assets to be sold to CRL recorded in assets held for sale as of
December 31, 2013
include inventory of
$0.8 million
and property, plant and equipment of
$0.8 million
.
Operating cash flow from discontinued operations during the
six month period ended
June 30, 2014
was
$0.9 million
. Changes in working capital from discontinued operations during the
six month period ended
June 30, 2014
was
$0.6 million
. The Company recorded non-cash operating charges for depreciation and bad debt expense of
$0.2 million
and a non-cash operating charge of
$0.6 million
for the remaining operating lease payments associated with the discontinued Hooper Holmes Services operations (refer to Note 10). There were no significant investing or financing activities from discontinued operations during the
six month period ended
June 30, 2014
. The determination of operating cash flow from discontinued operations for the
six month period ended
June 30, 2014
includes a degree of management judgment and estimates. The Company has not allocated any general corporate overhead to discontinued operations.
The Company has not historically tracked accounts receivable, accounts payable and other balance sheet accounts by service line. The continuing operations and the Portamedic, Heritage Labs and Hooper Holmes Services discontinued service lines had customers and suppliers in common. The continuing and discontinued operations also shared certain selling, general and administrative services. As a result, the Company does not have reliable information for the historical impact of Portamedic, Heritage Labs and Hooper Holmes Services on our cash flows
six month period ended
June 30, 2013
.
Sale of Portamedic
On September 30, 2013, the Company completed the sale of certain assets comprising the Portamedic service line to Piston Acquisition, Inc., a subsidiary of American Para Professional Systems, Inc. (“Piston”). Pursuant to the terms of the Asset Purchase Agreement, the Company sold assets associated with the Portamedic service line to Piston, including, among other things, fixed assets, inventory and intellectual property, and Piston assumed certain specified liabilities. The adjusted purchase price was approximately
$8.1 million
in cash, adjusted from
$8.4 million
at announcement due to changes in working capital. Piston held back
$2.0 million
of the purchase price as security for the obligations under the Asset Purchase Agreement and certain other agreements between the Company and Piston.
The Holdback Amount includes
two
components. The first holdback is
$1.0 million
, subject to adjustments, and is released in total as follows: within
three
business days after the date on which final closing adjustments for inventory and other current assets are determined and paid (the “Closeout Date”). The remaining
$1.0 million
of the Holdback Amount, less any deductions or adjustments with respect to fixed assets, indemnification claims and any amounts in respect of any indemnification claims then in dispute, will be paid on the first anniversary of the Closeout Date. During the first quarter of 2014, the Company received
$0.7 million
of the first Holdback Amount. As a result, the amount remaining related to the first Holdback Amount was written off during the
six month period ended
June 30, 2014
as a charge to the adjustment to gain on sale of Portamedic and subsidiary in the statement of operations. The Company has recorded the receivable related to the second Holdback Amount at the amount it believes will be collected, however there cannot be any assurance that the remaining the Holdback Amounts will be collected by the Company. The Company currently anticipates finalization and collection on the second Holdback Amount in the first quarter of 2015.
The table below summarizes the operating results of Portamedic which are reported as a component of discontinued operations in the accompanying consolidated statement of operations. Income taxes relating to the operations of Portamedic were less than
$0.1 million
for the
three and six month periods
ended
June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
June 30
|
June 30
|
(in thousands)
|
2014
|
2013
|
2014
|
2013
|
Revenues
|
$
|
—
|
|
$
|
21,857
|
|
$
|
—
|
|
$
|
45,505
|
|
Loss from discontinued operations
|
$
|
(99
|
)
|
$
|
(1,900
|
)
|
$
|
(69
|
)
|
$
|
(2,433
|
)
|
Adjustment to gain on sale of Portamedic and subsidiary
|
$
|
—
|
|
$
|
75
|
|
$
|
(150
|
)
|
$
|
75
|
|
Sale of Basking Ridge Real Estate
As of
June 30, 2014
, the Basking Ridge, New Jersey real estate continued to be classified as assets held for sale as the Board authorized the sale of the real estate during the fourth quarter of 2013. The land and building owned in Basking Ridge, New Jersey of
$0.7 million
are recorded as assets held for sale at
June 30, 2014
and
December 31, 2013
. On May 13, 2014, the Company entered into an agreement for the sale of the Basking Ridge, New Jersey property to MDMC for a purchase price of
$3.05 million
. On July 18, 2014, the Company and MDMC entered into an amendment to the Purchase and Sale Agreement that provides for the Company to deposit into an escrow account at closing an aggregate of
$0.3 million
of the purchase price to satisfy amounts paid by MDMC in connection with certain repairs and other expenses identified in the course of the property inspection. The sale closed on August 7, 2014 resulting in cash proceeds of
$2.54 million
, which is net of customary closing costs and broker fees.
Note 7: Inventories
Included in inventories at
June 30, 2014
and
December 31, 2013
are
$0.3 million
and
$0.3 million
, respectively, of finished goods and
$0.3 million
and
$0.3 million
, respectively, of components.
Note 8: Restructuring Charges
During the
six month period ended
June 30, 2014
, the Company recorded restructuring charges in continuing operations totaling
$0.09 million
and restructuring charges in discontinued operations totaling
$0.08 million
, consisting of employee severance.
At
June 30, 2014
, there was a total of
$0.3 million
related to restructuring charges, including employee severance and branch closure costs, recorded in accrued expenses in the accompanying consolidated balance sheet. The following table provides a summary of the activity in the restructure accrual for the
six month period ended
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
As of
|
(In thousands)
|
December 31, 2013
|
|
Charges
|
|
Payments
|
|
June 30, 2014
|
Severance
|
$
|
531
|
|
|
$
|
170
|
|
|
$
|
(562
|
)
|
|
$
|
139
|
|
Branch closure obligation
|
415
|
|
|
1
|
|
|
(251
|
)
|
|
165
|
|
Total
|
$
|
946
|
|
|
$
|
171
|
|
|
$
|
(813
|
)
|
|
$
|
304
|
|
Note 9: Loan and Security Agreement
The Company maintains the 2013 Loan and Security Agreement, as amended, with ACF, the assignee of Keltic Financial. Borrowings under the 2013 Loan and Security Agreement are to be used for working capital purposes and capital expenditures. The amount available for borrowing may be less than the
$10 million
under this facility at any given time due to the manner in which the maximum available amount is calculated. The Company has an available borrowing base subject to reserves established at the lender's discretion of
85%
of Eligible Receivables up to
$10 million
under this facility. Eligible Receivables do not include Heritage Labs receivables, certain Hooper Holmes Services receivables, and other receivables deemed ineligible by Keltic Financial. As of
June 30, 2014
, the lender applied a discretionary reserve of
$0.5 million
. Available borrowing capacity, net of this discretionary reserve was
$2.8 million
based on Eligible Receivables as of
June 30, 2014
. As of
June 30, 2014
, there were
no
borrowings outstanding under the 2013 Loan and Security Agreement.
On July 9, 2014, the Company and ACF entered into the Second Amendment to the 2013 Loan and Security Agreement. The Second Amendment amends the terms and conditions of the 2013 Loan and Security Agreement dated as of February 28, 2013, and as amended on March 28, 2013. The following summarizes certain terms of the Second Amendment:
|
|
•
|
The negative covenant regarding the Company's EBITDA has been amended and restated in its entirety to provide that the Company agrees that EBITDA, as of and for each twelve consecutive calendar month period ending on the last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2015, shall not be less than
$100,000
.
|
|
|
•
|
The Borrowing Base (as defined in the 2013 Loan and Security Agreement) has been amended to include an amount of Unbilled Eligible Receivables (as defined in the 2013 Loan and Security Agreement) not to exceed the least of (i)
fifty percent
of the aggregate amount of Unbilled Eligible Receivables; (ii)
$2,500,000
; and (iii)
fifty percent
of the Borrowing Base as most recently previously calculated. Inclusion of Unbilled Eligible Receivables is expected to increase the Company's borrowing capacity.
|
|
|
•
|
The definition of EBITDA has been amended and will (i) be calculated as net income before interest expense, taxes, depreciation and amortization, and (ii) include any gains or losses resulting from the sale of any owned real estate or from the sale of all or substantially all of the assets constituting the Company's Heritage Labs and Hooper Holmes Services businesses.
|
Interest on revolving credit loans is calculated based on the greatest of (i) the annualized prime rate plus
2.75%
, (ii) the
90
day
LIBOR
rate plus
5.25%
, and (iii)
6%
per annum. The interest rate on the 2013 Loan and Security Agreement was
6.00%
as of
June 30, 2014
. The Company is obligated to pay, on a monthly basis in arrears, an annual facility fee equal to
1%
of the revolving credit limit of
$10 million
. During the
three and six month periods
ended
June 30, 2014
, in connection with the 2013 Loan and Security Agreement, the Company incurred
$0.05 million
and
$0.09 million
, respectively, in facility fees. During the
three and six month periods
ended
June 30, 2013
, the Company incurred facility fees of
$0.04 million
and
$0.05 million
, respectively. There were no additional financing fees deferred during the
three and six month periods
June 30, 2014
in connection with the Second Amendment to the 2013 Loan and Security Agreement.
The revolving credit loans are payable in full, together with all accrued interest and fees, on February 28, 2016. The 2013 Loan and Security Agreement provides for the prepayment of the entire outstanding balance of the revolving credit loans. The Company would be required to pay an early termination fee equal to
3%
of the revolving credit limit if the termination occurs prior to February 28, 2015, and
2%
if the termination occurs after February 28, 2015 but prior to February 28, 2016.
As security for payment and other obligations under the 2013 Loan and Security Agreement, the Company granted Keltic Financial a security interest in all of its', and its subsidiary guarantors, existing and after-acquired property, including receivables (which are subject to a lockbox account arrangement), inventory and equipment. The aforementioned security interest is collectively referred to herein as the “collateral”. The 2013 Loan and Security Agreement contains various covenants, including financial covenants which require the Company to achieve a minimum EBITDA amount (earnings before interest expense, income taxes, depreciation and amortization) beginning with the twelve months ending March 31, 2015 as the first measurement date.
The Company continues to have limitations on the maximum amount of unfunded capital expenditures for each fiscal year. The Company is in compliance with the covenants under the 2013 Loan and Security Agreement as of
June 30, 2014
.
Note 10: Commitments and Contingencies
The Company leases its corporate headquarters in Olathe, Kansas, which includes the Health and Wellness operations center, under an operating lease which expires in 2018. The Company also leases copiers and other miscellaneous equipment. These leases expire in various years through 2017.
The Company also leases a facility used for the discontinued Hooper Holmes Services operations center through 2018. During the
three month period
ended
June 30, 2014
, the Company recorded a liability of
$0.6 million
representing the fair value of the remaining lease payments under the lease reduced by an estimate of sublease income.
The Company is still the primary lessee under operating leases for
9
Portamedic branch offices with terms extending through September 2016, which are subleased by the acquirer of the former Portamedic business. The acquirer pays
100%
of the rent and other executory costs for these
9
offices in the form of a contractual obligation for the remaining lease term. If the Company is unable to assign these leases to the acquirer of the former Portamedic business, the Company will let the leases expire with no intent of renewal.
In addition, the Company is still the primary lessee under
16
operating leases related to former Portamedic offices not utilized for continuing operations, which are not subleased by the acquirer of the former Portamedic business. The Company has accrued in previous periods approximately
$0.2 million
as branch closure obligations. The accrual is included as a component of the restructure reserve in the consolidated balance sheet as of
June 30, 2014
.
The Company has employment agreements with each of its Chief Executive Officer and Chief Financial Officer that provide for payment of base salary for a
one year
period in the event their employment with the Company is terminated in certain circumstances, including following a change in control, as further defined in the agreements.
In the past, some federal and state agencies have claimed that the Company improperly classified its health professionals as independent contractors for purposes of federal and state unemployment and/or worker's compensation tax laws and that the Company was therefore liable for taxes in arrears, or for penalties for failure to comply with their interpretation of the laws. There are no assurances that the Company will not be subject to similar claims in the future. The Company has determined that losses related to the remaining complaint are not probable or estimable.
Note 11: Litigation
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 complaints seek 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. The Company intends to object to the Report and Recommendation, however, if the Magistrate's decision stands, notice will be sent to contractors who performed work for the Company within this time period. The claim is not covered by insurance, and the Company is incurring legal costs to defend the litigation which are recorded in continuing operations. This matter relates to the former Portamedic service line for which the Company retained liability. The Company has determined that losses related to the remaining complaint are not probable or estimable.
On July 30, 2013, a complaint was filed against the Company in the California Superior Court, San Bernadino County, on behalf of a putative class of employees alleging, among other things, that the Company failed to pay wages and other compensation as required by state law. The complaint seeks award of an unspecified amount of damages and penalties. The Company has denied all of the allegations in the case and believes them to be without merit. The Company settled the individual claim with the named plaintiff in July 2014 with prejudice. As a part of the settlement, the named plaintiff agreed to dismiss the class claims, without prejudice. As a result, the Company has recorded an immaterial accrual as of June 30, 2014 for the settlement amount as a charge to discontinued operations in the accompanying consolidated statement of operations.
The Company is a party to a number of other legal actions arising in the ordinary course of its business. In the opinion of management, the Company has substantial legal defenses and/or insurance coverage with respect to all of its pending legal actions.
Accordingly, none of these actions is expected to have a material adverse effect on the Company’s liquidity, its consolidated results of operations or its consolidated financial position.
Note 12: Income Taxes
The Company recorded tax expense of
$0.01 million
or less in continuing operations for each of
three and six month periods
ended
June 30, 2014
and
2013
reflecting a state tax liability to one state. No amounts were recorded for unrecognized tax benefits or for the payment of interest and penalties during the
three and six month periods
ended
June 30, 2014
and
2013
. No federal or state tax benefits were recorded relating to the current year loss, as the Company continues to believe that a full valuation allowance is required on its net deferred tax assets.
The Company is under examination by the IRS and expects to reach a conclusion with the IRS for tax year 2011 without a material effect. State income tax returns for the year 2009 and forward are subject to examination.
As of
December 31, 2013
, the Company has U.S. federal and state net operating loss carryforwards of
$140.0 million
and
$127.2 million
, respectively. There has been no significant change in these balances as of
June 30, 2014
. The net operating loss carryforwards, if unutilized, will expire in the years
2014
through
2033
.
Note 13: Segments
The Company reassessed its segment report following the sale of the Portamedic service line on September 30, 2013 and again in connection with the Alliance Agreement with CRL. Following the sale of the Portamedic service line, the Company reassessed its segment reporting to align with the information that the Company's chief operating decision maker regularly reviewed subsequent to the sale of Portamedic. Beginning in the fourth quarter of 2013, the Company previously reported financial results in
three
segments: Health and Wellness (health risk assessments including biometric screenings), Heritage Labs (laboratory testing) and Hooper Holmes Services (health information services).
Pursuant to the Alliance Agreement with CRL, among other things, the Company has agreed to sell certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units, which represent the Heritage Labs and Hooper Holmes Services reportable segments. As the reportable segments have been reported as discontinued operations in this Report, segment information is no longer provided for Heritage Labs and Hooper Holmes Services. The Company has also reassessed its segment reporting following the Alliance Agreement with CRL to align with the information that is regularly reviewed. Subsequent to the closing of the Alliance Agreement with CRL, the Company expects to have
one
segment, consisting of the Health and Wellness operations.
As of
June 30, 2014
, substantially all of the Company's services are provided within the United States, and substantially all of the Company's assets are located within the United States.