Discontinued Operations

Sale of Assets - Heritage Labs and Hooper Holmes Services

On August 31, 2014, the Company completed the sale of certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units (the "Business") to CRL pursuant to the terms of the Alliance Agreement as amended. The purchase price, after inventory-related price adjustments, was $3.5 million, of which $0.25 million was deposited into an escrow account in accordance with the Alliance Agreement. The Alliance Agreement provided that certain lab assets were retained by the Company and were sold to CRL at a separate closing on October 31, 2014, at which time the remaining purchase price held in escrow was released to the Company. The lab assets of $0.2 million, consisting of fixed assets that were retained by the Company and subsequently sold to CRL on October 31, 2014, are recorded in assets held for sale as of September 30, 2014.

The net book value of assets sold on August 31, 2014 was approximately $0.8 million, consisting primarily of inventory and certain property, plant and equipment. The lab assets retained by the Company are recorded in assets held for sale as of September 30, 2014. After incurring $0.8 million in transaction costs associated with the sale to CRL, the Company recorded a gain on sale of $1.7 million during the three month period ended September 30, 2014, which is recorded as a component of discontinued operations.

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

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

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 nine month periods ended September 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. The following table also reconciles the activity in discontinued operations for the three and nine month periods ended September 30, 2014 and 2013 to the related line in the consolidated statements of operations.



	Three Months Ended						Nine Months Ended
	September 30						September 30
(in thousands)	2014			2013			2014			2013
Revenues
Heritage Labs	$	405		$	2,339		$	4,122		$	7,865
Hooper Holmes Services	$	1,694		$	3,427		$	7,289		$	11,374
Total revenue	$	2,099		$	5,766		$	11,411		$	19,239
Cost of Sales
Heritage Labs	$	529		$	1,747		$	3,511		$	5,497
Hooper Holmes Services	$	1,367		$	3,001		$	6,245		$	9,830
Total cost of sales	$	1,896		$	4,748		$	9,756		$	15,327
Selling, General & Administrative Expenses
Heritage Labs	$	179		$	137		$	462		$	499
Hooper Holmes Services	$	975		$	511		$	2,657		$	1,669
Tail coverage insurance expense	$	1,390		$	—		$	1,390		$	—
Total selling, general & administrative expenses	$	2,544		$	648		$	4,509		$	2,168
(Loss) income from Discontinued Operations
Heritage Labs	$	(302	)	$	455		$	150		$	1,869
Hooper Holmes Services	$	(649	)	$	(85	)	$	(1,614	)	$	(125	)
Tail coverage insurance expense	$	(1,390	)	$	—		$	(1,390	)	$	—
Total (loss) income from discontinued operations	$	(2,341	)	$	370		$	(2,854	)	$	1,744

Reconciliation to statement of operations:
Portamedic discontinued operations and other (see below)	$	(398	)	$	(1,833	)	$	(467	)	$	(4,265	)
Gain on sale of subsidiaries, net of adjustments	$	1,354		$	3,682		$	1,204		$	3,757
(Loss) income from discontinued operations	$	(1,385	)	$	2,219		$	(2,117	)	$	1,236

The assets of the discontinued Heritage Labs and Hooper Holmes Services operations sold to CRL as of August 31, 2014 included inventory of $0.3 million and property, plant and equipment of $0.5 million. The assets sold to CRL recorded in assets held for sale as of December 31, 2013 included inventory of $0.8 million and property, plant and equipment of $0.8 million. The lab assets retained by the Company and subsequently sold to CRL on October 31, 2014 of $0.2 million are recorded in assets held for sale as of September 30, 2014.

Operating cash flow from discontinued operations during the nine month period ended September 30, 2014 was $0.5 million. Changes in working capital from discontinued operations during the nine month period ended September 30, 2014 was $0.6 million. The Company recorded non-cash operating charges for depreciation and bad debt expense of $0.3 million and a non-cash operating charge of $1.0 million for the remaining operating lease payments associated with the discontinued Hooper Holmes Services operations (refer to Note 10). Other than the sale of the discontinued Heritage Labs and Hooper Holmes Services operations to CRL, there were no significant investing or financing activities from discontinued operations during the nine month period ended September 30, 2014. The determination of operating cash flow from discontinued operations for the nine month period ended September 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 for the nine month period ended September 30, 2013.

Included in discontinued operations for the three and nine month periods ended September 30, 2014 is expense of $1.4 million related to retroactive tail coverage insurance policies for the discontinued operations of Portamedic, Heritage Labs and Hooper Holmes Services. The tail coverage represents retroactive insurance policies for claims associated with these businesses incurred prior to the sale of the discontinued operations and were purchased by the Company during the three month period ended September 30, 2014.

The Company also leases a facility used for the discontinued Hooper Holmes Services operations center through 2018. During the nine month period ended September 30, 2014, the Company recorded a liability of $1.0 million representing the fair value of the remaining contractual obligations under the lease reduced by an estimate of sublease income.

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 was released in the first quarter of 2014 when final closing adjustments for inventory and other current assets were determined and paid (the "Closeout Date"). 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 as payment for the first Holdback Amount, after certain adjustments. As a result, the amount remaining related to the first Holdback Amount was written off during the nine month period ended September 30, 2014 as a charge to the adjustment to gain on sale 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 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 nine month periods ended September 30, 2013. During the three and nine month periods ended September 30, 2014, the Company recorded $0.8 million and $1.0 million to discontinued operations for Portamedic related to outstanding legal matters and amounts remaining on the Holdback Amounts.



	September 30, 2013
(in thousands)	Three Months Ended			Nine Months Ended
Revenues	$	19,914		$	65,419
Loss from discontinued operations	$	(1,833	)	$	(4,265	)
Gain on sale of subsidiary, net of adjustments	$	3,682		$	3,757