INTERPACE BIOSCIENCES, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the Risk Factors sections of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See Forward-Looking Statement Information at the beginning of this Form 10-K. Company Overview We are a fully integrated commercial company that provides molecular diagnostics, bioinformatics and pathology services for evaluation of risk of cancer by leveraging the latest technology in personalized medicine for improved patient diagnosis and management. We develop and commercialize genomic tests and related first line assays principally focused on early detection of patients with indeterminate biopsies and at high risk of cancer using the latest technology. Strategic Disposition of Pharma Business On August 31, 2022, the Company and Interpace Pharma Solutions, Inc. (the “Subsidiary”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Flagship Biosciences, Inc. (the “Purchaser”) pursuant to which the Purchaser agreed to (i) acquire substantially all of the assets of the Subsidiary used in Subsidiary’s business of complex molecular analysis for the early diagnosis and treatment of cancer and supporting the development of targeted therapeutics (the “Business”) and (ii) assume and pay certain liabilities related to the purchased assets as set forth in the Purchase Agreement (collectively, the “Transaction”). The Transaction closed on August 31, 2022. As consideration for the Transaction, under the Purchase Agreement, the Company received a total purchase price of approximately $6.2 million after working capital and other adjustments ($0.5 million of which was deposited into escrow), subject to the assumption by the Purchaser of certain specified liabilities. In addition, subject to the terms and conditions set forth in the Purchase Agreement, Purchaser was obligated to pay the Company an earnout of up to $2.0 million based on revenue for the period beginning September 1, 2021 and ending August 31, 2022. The Company received an earnout payment of approximately $1.0 million in September 2022 which is the fully settled amount and there will be no further earnout payments in the future. In the third quarter of 2023, the $0.5 million funds in escrow were released to the Company. The Purchase Agreement includes a one-year commitment of the Company not to compete with the Business, recruit or hire any former employees of the Subsidiary who accept employment with the Purchaser in connection with the Transaction, or divert or attempt to divert from Purchaser any business to be performed from any of the contracts or agreements with customers as set forth in the Purchase Agreement. The Purchase Agreement also contains customary representations and warranties, post-closing covenants and mutual indemnification obligations for, among other things, any inaccuracy or breach of any representation or warranty and any breach or non-fulfillment of any covenant. In connection with the Transaction, on August 31, 2022, the Company, the Subsidiary and the Purchaser entered into a Shared Services Agreement (the “Shared Services Agreement”) pursuant to which the Company agreed to provide, or cause its affiliates to provide, to the Purchaser certain services set forth in the Shared Services Agreement on a transitional basis and subject to the terms and conditions set forth in the Shared Services Agreement (the “Services”). As consideration for the Services provided by the Company, the Purchaser is paying the Company the amounts specified for each Service as set forth in the Shared Services Agreement. The Company’s obligations to provide the Services will terminate with respect to each Service as set forth in the Shared Services Agreement. The Purchaser is identified as a related party of the Company and is as an affiliate of both Ampersand, a private equity investor in the Company, and BroadOak, a secured lender to the Company. Ampersand and BroadOak have each provided equity financing to the Purchaser, collectively own a majority of the Purchaser’s outstanding equity securities and are represented on its Board of Directors. 61 The Company is using the remaining net proceeds of the Transaction to fund its future business activities and for general working capital purposes. As a result of the sale, the gain on sale and all operations from the Subsidiary have been classified as discontinued operations for all periods presented. Impact of Our Reliance on CMS and Novitas In January 2022, CMS stated they would no longer reimburse for the use of the Company’s ThyGeNEXT ® and ThyraMIR ® tests when billed together by the same provider/supplier for the same beneficiary on the same date of service. However, on February 28, 2022, the Company announced that the National Correct Coding Initiative (NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT ® (0245U) and ThyraMIR ® (0018U) tests has been retroactively reversed to January 1, 2022. In May 2022, the Company was notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 would be completed beginning July 1, 2022. However, on June 9, 2022, the Company was notified that Novitas re-priced ThyGeNEXT ® (0245U) from $2,919 to $806.59 retroactively effective to January 1, 2022. On July 20, 2022, the Clinical Diagnostic Laboratory Tests (CDLT) Advisory Panel affirmed a gapfill price of $806.59. As a result of the ThyGeNEXT ® pricing change, the Company reduced its NRV rates for ThyGeNEXT ® Medicare billing to reflect the $806.59 pricing for tests performed during the second quarter of 2022. In addition, in order to reflect the retroactive pricing change to January 1, 2022, the Company recorded an NRV adjustment of $0.7 million during the second quarter of 2022 to reduce revenue recorded during the first quarter of 2022. During July 2022, the Company began implementing cost-savings initiatives including a reduction in headcount and incidental expenses and a freeze on all non-essential travel and hiring. In August 2022, the Company sold its Pharma Solutions business. Effective January 1, 2023, the gapfill price for ThyGeNEXT ® was set at $1,266.07. Further, along with many laboratories, we may be affected by the Proposed LCD DL39365, which is currently under consideration by our local Medicare Administrative Contractor, Novitas. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of our molecular tests, PancraGEN ® . On June 5, 2023 we announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which, if finalized, would have established non-coverage for the Company’s widely used PancraGEN ® test effective July 17, 2023. On July 6, 2023, Novitas announced that it would not be implementing the final Genetic Testing for Oncology LCD (L39365) as scheduled on July 17, 2023. Novitas then issued a new virtually identical proposed LCD affecting the same companies and tests and reaching the same conclusions as noted in the previously rescinded LCD on July 27, 2023. In response, the Company participated in a public meeting presentation and submitted detailed written comments supporting the use of PancraGEN ® . The timing and content of any final implemented LCD is uncertain at this time; the process could potentially take a year or longer from issuance of the updated proposed LCD to reach a conclusion. As a result, we are able to continue offering PancraGEN ® and the related Point2 ® fluid chemistry tests for amylase, CEA, and glucose. In the event Novitas ultimately restricts coverage for the PancraGEN ® test, the Company’s liquidity could be negatively impacted. Impact of the ongoing military conflict between Russia and Ukraine and the war between Israel and Hamas. In February 2022, Russian military forces invaded Ukraine, and although the length, impact, and outcome of the ongoing war in Ukraine is highly unpredictable, this war has led, and could continue to lead, to significant market and other disruptions, including instability in financial markets, supply chain interruptions, political and social instability, and increases in cyberattacks, intellectual property theft, and espionage. We are actively monitoring the situation in Ukraine and assessing its impact on our business. We have no way to predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia, or Belarus as the war, and any resulting government reactions, are rapidly developing and beyond our control. Further, on October 7, 2023, Hamas, a U.S. designated Foreign Terrorist Organization, launched terrorist attacks against Israel. Israel then declared war on Hamas and there is currently an armed conflict in Israel and the Gaza Strip and elsewhere in the Middle East. The extent and duration of the wars in Ukraine and Israel/Gaza expanding geopolitical tensions and any resulting market disruptions could be significant and could potentially have a substantial impact on the global economy and our business for an unknown period of time. Any of the above-mentioned factors could materially adversely affect our business, financial condition, and results of operations. 62 We are also monitoring other macro-economic and geopolitical developments such as inflation and cybersecurity risks so that the Company can be prepared to react to new developments as they arise. Clinical services Our clinical services business commercializes clinically useful molecular diagnostic tests and molecular pathology services. We commercialize genomic tests and related first-line assays principally focused on risk-stratification of cancer using the latest technology to help personalize medicine and improve patient diagnosis and management. Our tests and services provide mutational analysis of genomic material contained in suspicious cysts, nodules, and lesions with the goal of better informing surgery or surveillance treatment decisions in patients suspected of thyroid, pancreatic, and other cancers. The molecular diagnostic tests we offer enable healthcare providers to stratify cancer risk, helping to avoid unnecessary surgical treatment in patients at low risk, while also helping to identify patients that would benefit from increased surveillance or surgical intervention. Our mission is to assist healthcare providers in the diagnosis, triage, and treatment of patients through advanced diagnostics. Our laboratory is licensed pursuant to federal law under Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) and are accredited by College of American Pathologists (“CAP”) and our products are approved by New York State. We are leveraging our laboratory to refine and commercialize our assays and products. We aim to provide physicians and patients with diagnostic options for detecting genomic and other molecular alterations that are associated with gastrointestinal, endocrine, and other cancers. Our customers consist primarily of physicians, hospitals, and clinics. We currently have five commercialized molecular diagnostic tests in the marketplace: PancraGEN ® , a pancreatic cyst and pancreaticobiliary solid lesion genomic test that helps physicians better risk-stratify pancreaticobiliary cancers using our proprietary PathFinderTG ® platform and full integration of clinical factors; PanDNA ® , an alternate reporting option of the PathFinderTG platform, which provides physicians the “molecular only” information provided within PancraGEN; ThyGeNEXT ® , an expanded oncogenic mutation panel that helps “rule-in” and “rule-out” malignancy in thyroid nodules; ThyraMIR ® v2, used in combination with ThyGeNEXT ® , which further stratifies thyroid nodules for malignancy risk utilizing a proprietary microRNA gene expression classifier; and RespriDx ® a genomic test that also utilizes our PathFinderTG ® platform, to help physicians differentiate metastatic or recurrent lung cancer from the presence of newly formed primary lung cancer. The global esoteric molecular diagnostics market is estimated to be $25.9 billion (USD) in 2023 and is expected to grow to $54.9 billion (USD) by 2030 with a Compound Annual Growth rate or CAGR of 11.3% between 2023 and 2030, according to Coherent Market Insights (Report Code: CMI6261, published November 2023). We believe that the molecular diagnostics market offers significant growth and strong patient value given the substantial opportunity it affords to lower healthcare costs by helping to reduce unnecessary surgeries and ensuring the appropriate frequency of monitoring. We are keenly focused on growing our test volumes, securing additional insurance coverage and reimbursement, maintaining and growing our current reimbursement and supporting revenue growth for our molecular diagnostic tests, introducing related first line product and service extensions, as well as expanding our business by developing and promoting synergistic products in our markets. OTCQX On February 24, 2021, the Company was approved to have its common stock quoted on the OTCQX ® Best Market tier of the OTC Markets Group Inc. (the “OTCQX”), an electronic quotation service operated by OTC Markets Group Inc. The trading of the Company’s common stock commenced on OTCQX at the open of business on February 25, 2021 under the trading symbol IDXG. 63 On December 28, 2023, we received notice from the OTCQX indicating that the Company’s market capitalization has stayed below the required $5 million for 30 consecutive calendar days preceding the date of such notice, and that the Company no longer meets the standards for continued qualification for the OTCQX U.S. tier under the OTCQX Rules for U.S. Companies section 3.2.b.2. On March 20, 2024 we received notice from the OTCQX indicating that the Company’s market capitalization has stayed above the required $5 million for ten consecutive trading days preceding the date of such notice, and that the Company currently satisfies the standards for continued qualification for the OTCQX U.S. tier under the OTCQX Rules for U.S. Companies. DESCRIPTION OF REPORTING SEGMENTS We operate under one segment which is the business of developing and selling diagnostic clinical services. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, or (“GAAP”). The preparation of financial statements and related disclosures in conformity with GAAP requires management to make judgments, estimates and assumptions at a specific point in time that affect the amounts reported in our consolidated financial statements and disclosed in the accompanying notes. These assumptions and estimates are inherently uncertain. Outlined below are accounting policies, which are important to our financial position and results of operations and require our management to make significant judgments in their application. Some of those judgments can be subjective and complex. Management’s estimates are based on historical experience, information from third-party professionals, facts and circumstances available at the time and various other assumptions that are believed to be reasonable. Actual results could differ from those estimates. Additionally, changes in estimates could have a material impact on our consolidated results of operations in any one period. For a summary of all of our significant accounting policies, including the accounting policies discussed below, see Note 1, Nature of Business and Significant Accounting Policies , to our consolidated financial statements included in this Annual Report on Form 10-K. Revenue and Cost of Revenue The Company’s revenue is primarily generated from the performance of its proprietary molecular diagnostic tests for its clinical customers. Prior to the disposition of our Pharma business in August 2022, we also generated revenue from DNA-based testing services in support of clinical trials for its pharma services customers. The Company’s performance obligation is fulfilled upon completion, review and release of test results and subsequent billing to the third-party payer, hospital or service provider. Revenue Recognition ASC 606 Revenue Recognition Clinical services derive their revenues from the performance of their proprietary assays or tests. The Company’s performance obligation is fulfilled upon completion, review and release of test results to the customer. The Company subsequently bills third-party payers or direct-bill payers for the tests performed. Revenue is recognized based on the estimated transaction price or net realizable value (“NRV”), which is determined based on historical collection rates by each payer category for each proprietary test offered by the Company. To the extent the transaction price includes variable consideration, for all third party and direct-bill payers and proprietary tests, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience. For our clinical services, we regularly review the ultimate amounts received from the third-party and direct-bill payers and related estimated reimbursement rates and adjust the NRV’s and related contractual allowances accordingly. If actual collections and related NRV’s vary significantly from our estimates, we adjust the estimates of contractual allowances, which would affect net revenue in the period such variances become known. 64 Leases The Company determines if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term while lease liabilities represent our obligation to make lease payments arising from the lease. All leases with terms greater than twelve months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. Unless a lease provides all of the information required to determine the implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments. We use the implicit interest rate in the lease when readily determinable. Our lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that we will exercise that option. Leases with terms of twelve months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of an asset or liability. See Note 8, Leases . Income Taxes Income taxes are based on income for financial reporting purposes calculated using our expected annual effective rate and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return and expected annual changes in deferred taxes. We account for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of our assets and liabilities based on enacted tax laws and rates. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability. A valuation allowance is established, when necessary, to reduce the deferred income tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We operate in multiple tax jurisdictions and provide taxes in each jurisdiction where we conduct business and are subject to taxation. The breadth of our operations and the complexity of the various tax laws require assessments of uncertainties and judgments in estimating the ultimate taxes we will pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of proposed assessments arising from federal and state audits. We have established estimated liabilities for uncertain federal and state income tax positions. Uncertain tax positions are recognized in the financial statements when it is more likely than not (for example, a likelihood of more than fifty percent) that a position taken or expected to be taken in a tax return would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured as the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement. We adjust our accruals for unrecognized tax benefits as facts and circumstances change, such as the progress of a tax audit. We believe that any potential audit adjustments will not have a material adverse effect on our financial condition or liquidity. However, any adjustments made may be material to our consolidated results of operations or cash flows for a reporting period. Penalties and interest, if incurred, would be recorded as a component of current income tax expense. Significant judgment is also required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. We currently have significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences. The realization of these assets is dependent on generating future taxable income. We perform an analysis quarterly to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. Our recent operating results and projections of future income weighed heavily in our overall assessment. The existing and forecasted levels of pretax earnings for financial reporting purposes are not sufficient to generate future taxable income and realize our deferred tax assets and, as a result, we established a full federal and state valuation allowance for the net deferred tax assets at December 31, 2023 and 2022, as we determined that it was more likely than not that these assets would not be realized. 65 The NOL carry forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL, and tax credit carry forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three year period in excess of 50%, as defined under Sections 382 and 383 of the Code as well as similar state tax provisions. The amount of the annual limitation, if any, will be determined based on the value of our company immediately prior to an ownership change. Subsequent ownership changes may further affect the limitation in future years. Additionally, U.S. tax laws limit the time during which these carry forwards may be applied against future taxes, therefore, we may not be able to take full advantage of these carry forwards for federal income tax purposes. During 2021, the Company completed a 382 assessment of the available NOLs under Section 382 and determined that the Company underwent an ownership change on September 30, 2017 and July 15, 2019, and as a result, NOLs attributable to the pre-ownership change are subject to a substantial annual limitation under Section 382 of the Code due to the multiple ownership changes. The Company has adjusted their NOL carryforwards to address the impact of the 382 ownership change. Stock Compensation Costs The compensation cost associated with the granting of stock-based awards is based on the grant date fair value of the stock award. We recognize the compensation cost, net of estimated forfeitures, over the shorter of the vesting period or the period from the grant date to the date when retirement eligibility is achieved. Forfeitures are initially estimated based on historical information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures. As a result, changes in forfeiture activity can influence the amount of stock compensation cost recognized from period-to-period. We primarily use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards is made on the date of grant and is affected by our stock price as well as assumptions made regarding a number of complex and subjective variables. These assumptions include: our expected stock price volatility over the term of the awards; actual and projected employee stock option exercise behaviors; the risk-free interest rate; and expected dividend yield. Changes in the valuation assumptions could result in a significant change to the cost of an individual award. However, the total cost of an award is also a function of the number of awards granted, and as result, we have the ability to manage the cost and value of our equity awards by adjusting the number of awards granted. 66 CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth the selected statements of operations data ($ in thousands) as a percentage of revenue for the periods indicated. The trends illustrated in this table may not be indicative of future operating results. Years Ended December 31, 2023 2023 2022 2022 % to % to revenue revenue Revenue, net $ 40,214 100.0 % $ 31,838 100.0 % Cost of revenue 16,310 40.6 % 13,607 42.7 % Gross profit 23,904 59.4 % 18,231 57.3 % Operating expenses: Sales and marketing 10,233 25.4 % 9,125 28.7 % Research and development 636 1.6 % 703 2.2 % General and administrative 9,363 23.3 % 10,973 34.5 % Acquisition related amortization expense 861 2.1 % 1,270 4.0 % Change in fair value of contingent consideration 7 0.0 % (223 ) -0.7 % Total operating expenses 21,100 52.5 % 21,848 68.6 % Operating income (loss) 2,804 7.0 % (3,617 ) -11.4 % Interest accretion expense (112 ) -0.3 % (158 ) -0.5 % Note payable interest expense (896 ) -2.2 % (850 ) -2.7 % Other expense, net (667 ) -1.7 % (1,211 ) -3.8 % Income (loss) from continuing operations before tax 1,129 2.8 % (5,836 ) -18.3 % Provision for income taxes 17 0.0 % 29 0.1 % Income (loss) from continuing operations 1,112 2.8 % (5,865 ) -18.4 % Loss from discontinued operations, net of tax (310 ) -0.8 % (16,093 ) -50.5 % Net income (loss) $ 802 2.0 % $ (21,958 ) -69.0 % Revenue, net Consolidated revenue for the year ended December 31, 2023 increased by $8.4 million, or 26%, to $40.2 million, compared to $31.8 million for the year ended December 31, 2022. The increase in net revenue was largely driven by increased test volumes as compared to the prior year as well as improved collections. Cost of revenue Consolidated cost of revenue for the year ended December 31, 2023 increased by $2.7 million, or 20%, to $16.3 million, compared to $13.6 million for the year ended December 31, 2022. This increase was primarily driven by the increased test volumes discussed above. Gross Profit Consolidated gross profit for the year ended December 31, 2023 increased $5.7 million, or 31%, to $23.9 million, compared to $18.2 million for the year ended December 31, 2022. The increase can be attributed to the increase in revenue. Sales and marketing expense Sales and marketing expense was $10.2 million for the year ended December 31, 2023 and $9.1 million for the year ended December 31, 2022. As a percentage of revenue, sales and marketing expense decreased to 25% from 29% in the comparable prior year period due to the higher revenue for the year ended December 31, 2023. 67 Research and development Research and development expense was $0.6 million for the year ended December 31, 2023 and $0.7 million for the year ended December 31, 2022. As a percentage of revenue, research and development expense decreased to 1.6% from 2.2% in the prior year period. General and administrative General and administrative expense for the year ended December 31, 2023 was $9.4 million as compared to $11.0 million for the year ended December 31, 2022. The decrease can be primarily attributed to a decrease in employee compensation costs compared to the prior year. As a percentage of net revenue, general and administrative expense was 23% for the year ended December 31, 2023 as compared to 34% for the year ended December 31, 2022. Acquisition related amortization expense During the years ended December 31, 2023 and December 31, 2022, we recorded amortization expense of approximately $0.9 million and $1.3 million, respectively, which is related to intangible assets associated with our acquisitions. Change in fair value of contingent consideration During the year ended December 31, 2023, there was a $7,000 increase in the contingent consideration liability. During the year ended December 31, 2022, there was a $0.2 million decrease in the contingent consideration liability. Operating income (loss) Operating income from continuing operations was $2.8 million for the year ended December 31, 2023 as compared to an operating loss of $3.6 million for the year ended December 31, 2022. The operating income was primarily attributable to the increases in revenue and gross profit discussed above. Other expense, net During the years ended December 31, 2023 and December 31, 2022, there were other expenses, net of approximately $0.7 million and $1.2 million, respectively. The amounts are primarily related to the fair value adjustments recorded on the note payable. Provision for income taxes Income tax expense was approximately $17,000 for the year ended December 31, 2023 and $29,000 for the year ended December 31, 2022. Income tax expense for both periods was primarily driven by Texas Gross Receipts Tax. Loss from discontinued operations, net of tax We had a loss from discontinued operations of $0.3 million for the year ended December 31, 2023 as compared to a loss from discontinued operations of $16.1 million for the year ended December 31, 2022. The loss for the year ended December 31, 2022 was primarily attributed to the impairment of goodwill and intangible assets associated with the disposition of the Pharma business in August 2022 as well as eight months of Pharma operating losses before the disposition. Non-GAAP Financial Measures In addition to the United States generally accepted accounting principles, or GAAP, results provided throughout this document, we have provided certain non-GAAP financial measures to help evaluate the results of our performance. We believe that these non-GAAP financial measures, when presented in conjunction with comparable GAAP financial measures, are useful to both management and investors in analyzing our ongoing business and operating performance. We believe that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view our financial results in the way that management views financial results. 68 In this 10-K, we discuss Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a metric used by management to measure cash flow of the ongoing business. Adjusted EBITDA is defined as income or loss from continuing operations, plus depreciation and amortization, acquisition related expenses, non-cash stock-based compensation, interest and taxes, and other non-cash expenses including asset impairment costs, change in fair value of contingent consideration, change in fair value of notes payable, and warrant liability. The table below includes a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure. Reconciliation of Adjusted EBITDA (Unaudited) ($ in thousands) Years Ended December 31, 2023 2022 Income (loss) from continuing operations (GAAP Basis) $ 1,112 $ (5,865 ) Depreciation and amortization 1,026 1,429 Stock-based compensation 630 1,237 Tax expense 17 29 Interest accretion expense 112 158 Financing interest and related costs 938 850 Interest income (53 ) - Mark to market on warrant liability - (71 ) Change in fair value of note payable 678 1,224 Change in fair value of contingent consideration 7 (223 ) Adjusted EBITDA $ 4,467 $ (1,232 ) LIQUIDITY AND CAPITAL RESOURCES In October 2021, the Company entered into a Loan and Security Agreement with BroadOak, providing for a term loan in the aggregate principal amount of $8,000,000 (the “Term Loan” or “BroadOak Loan Agreement”). Funding of the Term Loan took place on November 1, 2021. The Term Loan was scheduled to mature upon the earlier of (i) October 31, 2024 or (ii) the occurrence of a change in control, and bears interest at the rate of 9% per annum. The Term Loan is secured by a security interest in substantially all of the Company’s and its subsidiaries’ assets and is subordinate to the Company’s $7,500,000 revolving credit facility with Comerica Bank. The Term Loan has an origination fee of 3% of the Term Loan amount, and a terminal payment equal to (i) 15% of the original principal amount of the Term Loan if the change of control occurs on or prior to the first anniversary of the funding of the Term Loan, (ii) 20% of the original principal amount of the Term Loan if the change of control occurs after the first anniversary but on or prior to the second anniversary of the funding of the Term Loan and (iii) 30% of the original principal amount of the Term Loan if the change of control occurs after the second anniversary of the funding of the Term Loan, or if the Term Loan is repaid on its maturity date. Upon receipt of the term loan, the proceeds were used to repay in full at their maturity the notes extended by Ampersand and 1315 Capital discussed above. See Note 13, Notes Payable, for more details. In May 2022, the Company issued a Convertible Note to BroadOak, pursuant to which BroadOak funded a term loan in the aggregate principal amount of $2.0 million. See Note 13, Notes Payable , for more details. On October 24, 2023, the Company entered into a Second Amendment to the Loan and Security Agreement with BroadOak. The primary changes to the original agreement were as follows: ● The Company made a one-time payment in an aggregate amount equal to $2,500,000, on October 30, 2023 and applied the payment in full satisfaction of the $3,000,000 Terminal Payment (as defined in the BroadOak Loan Agreement). See Note 13, Notes Payable , regarding the Terminal Payment. 69 ● Effective November 1, 2023, the interest rate under the BroadOak Loan Agreement is to be reduced from 9% to 8% through the maturity date of October 31, 2024 or earlier, upon the occurrence of a change in control (“Loan Maturity Date”). ● The Company has the option to request an extension of the Loan Maturity Date in writing no less than sixty days prior to the Loan Maturity Date. If BroadOak agrees to the extension, the Loan Maturity Date would automatically be extended. On March 29, 2024, the Company entered into a Third Amendment to the Loan and Security Agreement with BroadOak, extending the loan maturity date to June 30, 2025. See Note 20, Subsequent Events , for more details. The BroadOak Loan Agreement contains affirmative and negative restrictive covenants, including restrictions on certain mergers, acquisitions, investments and encumbrances which could adversely affect our ability to conduct our business. The BroadOak Loan Agreement also contains customary events of default. In January 2022, the Company’s registration statement for a rights offering filed with the Securities and Exchange Commission (SEC) became effective; however, the rights offering was subsequently terminated later in January 2022 when the Company announced that the Centers for Medicare & Medicaid Services, or CMS, issued a new billing policy whereby CMS will no longer reimburse for the use of the Company’s ThyGeNEXT ® and ThyraMIR ® tests when billed together by the same provider/supplier for the same beneficiary on the same date of service. On February 28, 2022, the Company announced that the National Correct Coding Initiative (NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT ® (0245U) and ThyraMIR ® (0018U) tests has been retroactively reversed to January 1, 2022. In May 2022, the Company was notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 would be completed beginning July 1, 2022. However, on June 9, 2022, the Company was notified that Novitas re-priced ThyGeNEXT ® (0245U) from $2,919 to $806.59 retroactively effective to January 1, 2022. On July 20, 2022, the Clinical Diagnostic Laboratory Tests (CDLT) Advisory Panel affirmed a gapfill price for ThyGeNEXT ® of $806.59. As a result of the ThyGeNEXT ® pricing change, the Company reduced its net realizable value, or NRV rates for ThyGeNEXT ® Medicare billing to reflect the $806.59 pricing for tests performed during the second quarter of 2022. In addition, in order to reflect the retroactive pricing change to January 1, 2022, the Company recorded an NRV adjustment of $0.7 million during the second quarter of 2022 to reduce revenue recorded during the first quarter of 2022. Effective January 1, 2023, the gapfill price for ThyGeNEXT ® was set at $1,266.07. In October 2021, we entered into the Comerica Loan Agreement with Comerica, providing for a revolving credit facility of up to $7,500,000 (the “Credit Facility”). The Company is using the proceeds of the Credit Facility for working capital and other general corporate purposes. The amount that could be borrowed under the Credit Facility was the lower of (i) the revolving limit of $7,500,000 (the “Revolving Line”) and (ii) 80% of the Company’s eligible accounts receivable plus an applicable non-formula amount consisting of $2,000,000 of additional availability at close not based upon the Company’s eligible accounts receivable, with such additional availability reducing by $250,000 per quarter beginning with the quarter ending June 30, 2022. Borrowings on the Credit Facility were limited to $5,000,000 until 80% of the Company’s and its subsidiaries’ customers are paying into a collection account or segregated governmental account with Comerica. The Revolving Line also included, at the Company’s option, credit card services with a sublimit of $300,000. Borrowings on the Revolving Line were subject to an interest rate equal to prime plus 0.50%, with prime being the greater of (x) Comerica’s stated prime rate or (y) the sum of (A) the daily adjusting LIBOR rate plus (B) 2.5% per annum. The Company was also required to pay an unused facility fee quarterly in arrears in an amount equal to 0.25% per annum on the average unused but available portion of the Revolving Line for such quarter. See Note 18, Revolving Line of Credit , for more details. Comerica had a first priority security interest in substantially all of the Company’s and its subsidiaries’ assets. On October 6, 2023, effective September 30, 2023, the Company entered into a Fifth Amendment to its Loan and Security Agreement (the “Fifth Amendment to the Comerica Loan Agreement”) with Comerica Bank providing for a revolving credit facility of up to $5,000,000. This agreement was terminated in February 2024. The Fifth Amendment to the Comerica Loan Agreement contained affirmative and negative restrictive covenants that are applicable whether or not any amounts are outstanding under the Comerica Loan Agreement. These restrictive covenants, which included restrictions on certain mergers, acquisitions, investments, encumbrances, etc. The Comerica Loan Agreement also contained financial covenants requiring specified minimum liquidity and minimum adjusted EBITDA thresholds. As of December 31, 2023 the Company had a zero balance on the line of credit. 70 On August 31, 2022, the Company closed on the sale of its Pharma Solutions business for a total sale price of $6.2 million after a post-closing working capital adjustment. See Note 4, Discontinued Operations . For the year ended December 31, 2023, we had operating income from continuing operations of $2.8 million. As of the year ended December 31, 2023, we had cash and cash equivalents of $3.5 million, total current assets of $10.3 million, net of restricted cash, and current liabilities of $17.5 million. As of March 22, 2024, we had approximately $2.8 million of cash on hand, net of restricted cash. During the year ended December 31, 2023, net cash provided by operating activities was $3.8 million. The main component of cash provided by operating activities was net income of $0.8 million, and non-cash expenses of $2.5 million. During the year ended December 31, 2022, net cash used in operating activities was $7.7 million. The main component of cash used in operating activities was our net loss of $22.0 million, partially offset by depreciation and amortization expense of $2.6 million and non-cash impairment charges of $12.4 million. During the year ended December 31, 2023, there was net cash used in investing activities of $0.1 million. During the year ended December 31, 2022, net cash provided from investing activities was $6.2 million, which primarily pertained to the net proceeds received from the sale of our Pharma Solutions business unit. For the year ended December 31, 2023, cash used in financing activities was $5.0 million, of which $2.5 million was from the repayment on the Revolving Line and $2.5 million was the terminal payment made to BroadOak. See Note 13, Notes Payable, for more details. For the year ended December 31, 2022, cash provided from financing activities was $3.0 million, of which $1.0 million was from the drawdown on the Revolving Line and $2.0 million was the Convertible Debt agreement entered into with BroadOak. See Note 13, Notes Payable, for more details. We generated positive cash flows from operations for the year ending December 31, 2023. We intend to meet our ongoing capital needs by using our available cash as well as through targeted margin improvement; collection of accounts receivable; containment of costs; and the potential use of other financing options and other strategic alternatives. The Company continues to explore various strategic alternatives, dilutive and non-dilutive sources of funding, including equity and debt financings, strategic alliances, business development and other sources in order to provide additional liquidity. With the Company’s delisting of its common stock from Nasdaq in February 2021, our ability to raise additional capital on terms acceptable to the Company has been adversely impacted. There can be no assurance that the Company will be successful in obtaining such funding on terms acceptable to the Company. Further, along with many laboratories, we may be affected by the Proposed LCD DL39365, which is currently under consideration by our local Medicare Administrative Contractor, Novitas. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of our molecular tests, PancraGEN ® . On June 5, 2023 we announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which, if finalized, would have established non-coverage for the Company’s widely used PancraGEN ® test effective July 17, 2023. On July 6, 2023, Novitas announced that it would not be implementing the final Genetic Testing for Oncology LCD (L39365) as scheduled on July 17, 2023. Novitas then issued a new virtually identical proposed LCD affecting the same companies and tests and reaching the same conclusions as noted in the previously rescinded LCD on July 27, 2023. In response, the Company participated in a public meeting presentation and submitted detailed written comments supporting the use of PancraGEN ® . The timing and content of any final implemented LCD is uncertain at this time; the process could potentially take a year or longer from issuance of the updated proposed LCD to reach a conclusion. As a result, we are able to continue offering PancraGEN ® and the related Point2 ® fluid chemistry tests for amylase, CEA, and glucose. In the event Novitas ultimately restricts coverage for the PancraGEN ® test, the Company’s liquidity could be negatively impacted. 71 As of December 31, 2023, contractual obligations with terms exceeding one year and estimated minimum future rental payments required by non-cancelable operating leases with initial or remaining lease terms exceeding one year are as follows: Less than 1 to 3 3 to 5 After Total 1 Year Years Years 5 Years Operating lease obligations $ 2,400 $ 575 $ 1,000 $ 825 $ - Total $ 2,400 $ 575 $ 1,000 $ 825 $ - ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a “smaller reporting company” for purposes of the disclosure requirements of Item 305 of Regulation S-K and, therefore, we are not required to provide this information.