UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2015~~2016

¨☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 333-176790

AURORA DIAGNOSTICS HOLDINGS, LLC

(Exact Name of Registrant as Specified in Its Charter)

Delaware		20-4918072
(State or other Jurisdiction ofIncorporation or Organization)		(I.R.S. EmployerIdentification No.)
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

11025 RCA Center Drive, Suite 300, Palm Beach Gardens, Florida 33410

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: 866-420-5512

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨☐ No x☒. (Note: The registrant is a voluntary filer and for the preceding 12 months has filed all reports pursuant to the Securities Exchange Act of 1934 asthat ~~applicable~~would ~~for~~have ~~the~~been ~~preceding~~required 12to ~~months~~have been filed by it had it been subject to such sections.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐.

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨☐ Accelerated filer ¨☐ Non-Accelerated filer x☒ Smaller reporting company ¨☐

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act).

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	1416
Item 1B.	Unresolved Staff Comments	3133
Item 2.	Properties	3134
Item 3.	Legal Proceedings	3134
Item 4.	Mine Safety Disclosures	3134
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3235
Item 6.	Selected Financial Data	3236
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3640
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	5759
Item 8.	Financial Statements and Supplementary Data	5861
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	95101
Item 9A.	Controls and Procedures	95101
Item 9B.	Other Information	96102
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	97103
Item 11.	Executive Compensation	~~100~~106
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~105~~111
Item 13.	Certain Relationships and Related Transactions and Director Independence	~~107~~112
Item 14.	Principal Accountant Fees and Services	~~110~~116
PART IV
Item 15.	Exhibits and Financial Statement Schedules	~~111~~117
Signatures		112
Item 16.	Form 10-K Summary	117
Signatures		118

PART I

Item 1.

Business.

The information provided in this Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016, including the consolidated financial statements and notes thereto, is that of Aurora Diagnostics Holdings, LLC and its subsidiaries and affiliates. The terms “we,” “us,” “our,” “Aurora Diagnostics,” “Aurora Holdings,” and the “Company” typically refer to Aurora Diagnostics Holdings, LLC and its subsidiaries, as well as the professional associations and professional corporations, which are separate legal entities that it controls through contractual arrangements.

Corporate History

We were organized in the State of Delaware as a limited liability company on June 2, 2006 to develop and operate as a diagnostic services company. We have grown our business significantly since our founding, driven largely by the acquisition of local and regional pathology ~~laboratories~~practices across the United States ~~within these acquired operations~~. Since our formation, we have completed 2831 acquisitions of diagnostic services companies and currently operate 2426 primary ~~laboratory~~ locations across the United States. We have achieved a national footprint and a leading presence in our local markets, upon which we are building a more integrated and larger-scale diagnostics company which processed over 2.1 million accessions for the year ended December 31, 2016.

Overview

We are a ~~specialized~~leading independent pathology services and cancer diagnostics company. ~~providing~~We provide integrated diagnostic consultations, information services ~~that~~and ~~play~~personalized amedicine ~~key~~services ~~role~~tailored into the ~~diagnosis~~patients of ~~cancer~~our referring physicians, hospitals and hospital systems. We also provide research services to pharmaceutical companies and other ~~diseases~~research entities. Our ~~experienced~~highly-trained, subspecialized pathologists deliver comprehensive diagnostic ~~reports~~opinions of a patient’s condition and ~~consult~~work ~~frequently~~collaboratively with referring physicians to ~~help~~ determine ~~the~~ appropriate ~~treatment~~treatments. ~~Our~~We ~~diagnostic~~have ~~reports~~established ~~often~~long-standing ~~enable~~relationships ~~the~~with ~~early~~our ~~detection~~referring physicians as a result of ~~disease,~~our ~~allowing~~locally ~~referring~~provided ~~physicians~~diagnostic toservices, ~~make~~frequent ~~informed~~diagnostic consultations and ~~timely~~flexible ~~treatment~~information ~~decisions~~technology (“IT”) solutions that ~~improve~~are ~~their~~customizable ~~patients’~~to ~~health~~our inclients’ aneeds. ~~cost~~Our client-~~effective~~centered ~~manner~~approach to providing diagnostic services is driven by our belief that the practice of medicine and the delivery of healthcare are both personal and best delivered locally.

WeThrough ~~are~~organic growth and a ~~leading~~series ~~specialized~~of ~~diagnostics~~strategic ~~company~~acquisitions, ~~focused~~we onhave ~~the~~achieved ~~anatomic~~a ~~pathology~~large ~~market.~~geographic Wefootprint ~~are~~and ~~well-positioned~~a leading presence in ~~the~~our ~~higher-growth~~local ~~subspecialties~~markets. As of ~~anatomic~~December ~~pathology~~31, ~~with~~2016, awe ~~leading~~operated ~~market~~26 ~~position~~community-based inpathology ~~dermatopathology~~practices ~~and~~with inover ~~the~~160 ~~women’s~~board-certified ~~health~~pathologists ~~pathology~~on ~~subspecialty~~staff, and aour ~~growing~~clients ~~market~~included ~~position~~over in13,000 ~~hematopathology~~referring physicians and ~~hospital~~101 ~~pathology~~hospitals ~~services~~across 45 states. Our ~~strengths~~referring inphysicians ~~anatomic~~include ~~pathology~~dermatologists, ~~are~~obstetricians ~~complemented~~and bygynecologists, ~~our~~family ~~specialized~~practitioners, ~~clinical~~gastroenterologists, urologists, general surgeons and ~~molecular~~oncologists. ~~diagnostics~~We ~~offerings,~~also ~~which~~serve ~~enable~~as uslaboratory tomedical ~~provide~~director afor ~~broad~~312 ~~selection~~laboratory ofsites ~~diagnostic~~across ~~services~~the tocountry, including our ~~referring~~101 ~~physicians~~hospital clients.

~~Substantially~~According ~~all~~to ofvarious ~~our~~industry ~~consolidated net revenue for each of the years ended December 31~~sources, ~~2013, 2014 and 2015 resulted from providing~~ diagnostic ~~related~~ services torepresent ~~our~~an ~~clients.~~estimated ~~The~~2% ~~majority~~to 3% of ~~our~~total ~~revenue~~U.S. inhealthcare ~~2015~~spending, ~~was~~but ~~derived~~according ~~from~~to ~~providing~~the ~~diagnostic~~American ~~related~~Clinical ~~services~~Laboratory inAssociation, ~~the~~influence ~~non-hospital~~a ~~outpatient~~disproportionate ~~channel~~70% of ~~the~~all ~~anatomic~~medical ~~pathology~~decisions ~~market.~~made Weby ~~also~~healthcare ~~have~~providers. ~~contracts~~Our ~~with~~pathologists 81direct ~~hospitals~~the ~~under~~diagnostic ~~which~~process wethrough ~~provide~~an ~~inpatient~~integrated and ~~outpatient~~comprehensive ~~professional~~review ~~anatomic pathology services. For some~~ of ~~our~~individual ~~hospital~~patient ~~contracts,~~conditions weand ~~also~~serve ~~provide~~as ~~medical~~the ~~director~~primary ~~services~~integrator ~~and~~of ~~technical~~diagnostic ~~slide preparation services~~information.

~~Our~~We ~~business~~believe ~~model~~we ~~builds~~are ~~upon~~well-positioned in the ~~expertise~~higher-growth subspecialties of ~~our~~anatomic ~~experienced~~pathology, ~~pathologists~~with towhat ~~provide~~we ~~seamless,~~believe ~~reliable~~are leading market positions in dermatopathology and ~~comprehensive~~women’s ~~pathology~~health and ~~molecular~~growing ~~diagnostics~~market ~~offerings~~positions toin ~~referring~~hematopathology ~~physicians~~and hospital pathology services. WeOur ~~typically~~strengths ~~have~~in ~~established~~anatomic ~~long-standing~~pathology ~~relationships~~are ~~with~~complemented by our ~~referring~~specialized ~~physicians~~molecular asdiagnostics aofferings, ~~result~~which ofenable ~~focused~~us ~~localized~~to ~~delivery~~provide a broad selection of ~~diagnostic~~consultative services, ~~personalized~~to ~~responses~~our ~~and~~referring ~~frequent consultations~~physicians, and ~~flexible~~assist ~~information~~in ~~technology,~~the ordevelopment ~~IT,~~of ~~solutions~~personalized ~~that~~medicine. ~~are~~We ~~customizable~~operate tofour ~~our~~highly ~~clients’~~specialized ~~needs.~~laboratories ~~Our~~focusing ITon ~~and~~molecular ~~communications~~techniques ~~platform~~that ~~enables~~greatly usenhance tothe ~~deliver~~ability ~~routine~~of ~~diagnostic~~our ~~reports~~pathologists to ~~our~~subcategorize ~~clients~~a ~~generally~~patient’s ~~within~~disease, ~~24 hours~~including the identification of ~~specimen~~the ~~receipt~~genetic structure, ~~helping~~cell tomarkers ~~improve~~and ~~patient~~receptors ~~care~~on a tumor. InThis ~~addition,~~subcategorization ~~our~~enables IToncologists ~~platform~~to ~~enables~~select usthe most appropriate treatment to ~~track~~yield ~~and~~the ~~monitor~~best ~~volume~~outcome ~~trends~~for ~~from~~a ~~referring~~patient’s ~~physicians~~specific condition.

Through a series of strategic acquisitions, we have achieved a national footprint and a leading presence in our local markets, upon which we are building a more integrated and larger-scale diagnostics company. Currently, with 24 primary laboratories across the United States, we have reached a scale that has enabled us to process approximately 2.1 million accessions for the year ended December 31, 2015.

Our pathologists who work with our hospital clients typically provide most of the diagnostic services required for hospital inpatient accessions and, in many cases, hospital outpatient accessions. An accession may include one or more specimens received by our pathology practices originated from a single patient visit to a referring physician concerning a particular condition. Typically, we provide these services to hospitals under exclusive and long-term contractual arrangements. Our pathologists also provide hospital laboratory medical director services to our hospital clients. The position of hospital laboratory medical director is mandated by federal and state law. A laboratory medical director is critical to the operation of the hospital laboratory and responsible for the technical quality and diagnostic accuracy of a hospital’s laboratory testing. In the laboratory medical director role, our pathologists are active members of a hospital’s medical staff and participate on medical staff committees overseeing patient care quality, standards of clinical care and professional peer review. The laboratory medical director services we provide result in incremental revenue for us.

Substantially all of our consolidated net revenue for each of the years ended December 31, 2014, 2015 and 2016 resulted from providing diagnostic related services to our clients. For the year ended December 31, 2016, we processed approximately 2.1 million accessions, and generated net revenue of $284.0 million.

Our Services

Anatomic pathology typically requires a pathologist to make a specific diagnosis. Anatomic pathologists are medical doctors who specialize in the study of disease. Anatomic pathologists do not treat patients, but rather assist other physicians in determining the correct diagnosis of their patient’s ailments. A pathologist’s diagnosis represents a critical factor in determining a patient’s future care. In addition, anatomic pathologists may consult with attending physicians regarding treatment plans. In these capacities, the anatomic pathologist often serves as the “physician’s physician,” thereby creating long-term relationships.

~~Anatomic~~Our pathologists ~~perform~~have ~~their~~clinical ~~duties~~expertise in ~~laboratories,~~11 ~~including~~subspecialties: ~~independent~~dermatopathology, ~~free-standing~~cytologic ~~local laboratories~~pathology, ~~hospital~~gastrointestinal ~~laboratories~~pathology, ~~regional~~genitourinary ~~and~~pathology, ~~national~~breast ~~laboratories~~pathology, inhematopathology, ~~ambulatory~~pediatric ~~surgery~~pathology, ~~centers~~head and inneck ~~a variety of other settings. Referring physicians take specimens from patients~~pathology, ~~and~~transfusion ~~those specimens are transported to a laboratory by courier or an overnight delivery service. Once received at the laboratory~~medicine, aclinical ~~specimen~~pathology ~~is processed~~ and ~~mounted~~gynecologic ~~onto a slide by laboratory technologists for examination by a pathologist~~pathology. ~~Once~~The ~~the~~alignment ~~pathologist examines a specimen, the pathologist typically records the results~~ of ~~testing~~our ~~performed~~pathologists’ insubspecialties ~~the~~with ~~form~~those of ~~a report to be transmitted to the~~ referring ~~physician.~~physicians ~~Since~~greatly ~~specimens~~enhances ~~are~~our ~~transportable~~ability ~~and technology facilitates communication, samples can be diagnosed by a pathologist from a remote location. Therefore, pathologists are generally not needed “on-site”~~ to ~~make~~retain aexisting ~~diagnosis.~~clients ~~This enhances utilization of available capacity in outpatient~~ and ~~inpatient~~attract ~~laboratories~~new ~~and~~clients ~~allows~~while ~~the~~optimizing ~~practice~~care ~~to service a wider geographic area~~quality.

AnWe ~~anatomic~~offer ~~pathologist~~an ~~must~~array ~~have~~of anmolecular ~~understanding~~testing ofservices awhich ~~broad~~span ~~range~~across all of ~~medicine~~our various subspecialties. AnIn ~~anatomic~~November ~~pathologist~~of ~~may~~2016, ~~perform~~we ~~diagnostic~~hired ~~testing~~a ~~services~~PhD ~~for~~with a15 ~~number~~years of ~~subspecialty~~experience ~~testing~~in ~~markets~~the ~~such~~field to serve as ~~dermatopathology,~~our ~~urologic~~Director ~~pathology,~~of ~~women’s~~Molecular ~~health~~and ~~pathology,~~Next ~~gastrointestinal~~Generation ~~pathology,~~Sequencing ~~hematopathology~~Development. orMolecular ~~surgical~~and ~~pathology.~~Next ~~While~~Generation ~~physical~~Sequencing ~~examination~~(“NGS”) oris ~~radiology~~a ~~procedures~~growing ~~may~~field ~~suggest~~that aincludes ~~diagnosis~~tests ~~for~~which ~~many~~generate ~~diseases~~higher revenue per accession than other testing services we provide. During 2016, ~~the~~we ~~definitive~~expanded ~~diagnosis~~our isresources ~~generally~~and ~~established~~testing bycapabilities ~~the~~in ~~anatomic~~molecular ~~pathologist.~~and NGS to now internally process and bill for tests that we previously outsourced to other third party reference labs.

AsWe aare ~~result~~dedicated ofto ~~recent~~providing ~~emphasis~~high onquality ~~personalized~~dermatopathology ~~medicine~~services ~~and~~to ~~the~~patients, ~~resultant~~dermatologists ~~successes~~and ofother ~~targeted~~physicians ~~therapies,~~specializing ~~human biospecimens are~~ in ~~high~~skin ~~demand~~disease, ~~and~~with ~~now~~approximately ~~required~~41% ~~for most phases~~ of ~~the~~our ~~drug~~revenue ~~and~~attributable ~~diagnostic~~to ~~development~~this ~~process~~subspecialty –in ~~from~~2016. We ~~preclinical~~employ ~~discovery~~more ~~experiments~~than ~~through~~40 ~~late-stage~~renowned ~~clinical~~dermatopathologists, ~~validation~~including ~~studies.~~some ~~Launched in April~~ of ~~2013,~~ the ~~Aurora~~most ~~Research~~prominent ~~Institute~~experts ~~(ARI)~~in ~~leverages~~the ~~Aurora’s nationwide network of 155 pathologists~~field, 24through ~~specialty~~eight ~~laboratories,~~practices ~~and~~devoted 81solely ~~hospital affiliates~~ to ~~further~~dermatopathology ~~therapeutic~~ and ~~diagnostic~~three ~~research~~multi-specialty ~~and~~practices ~~development~~with ~~efforts~~dermatopathology ~~in markets across the United States~~expertise. ~~ARI~~ ~~specializes~~Our indermatopathologists ~~providing~~are ~~contract~~dedicated ~~research services and bio specimens~~ to ~~pharmaceutical~~furthering ~~and~~the ~~diagnostic~~field ~~companies~~of ~~conducting~~dermatology, ~~research~~as ~~studies. This~~evidenced ~~access~~by ~~along~~the ~~with~~continuing ~~expert~~education ~~pathologist~~and ~~consultations~~the incomprehensive ~~all~~training ~~subspecialties~~we ofprovide ~~pathology is a valuable resource~~ to ~~pharmaceutical,~~dermatology ~~biotech~~residents, ~~and~~physician ~~medical~~assistants ~~device~~and ~~companies~~nurse ~~engaged~~practitioners inthroughout ~~research~~our orlocations ~~product~~across ~~validation~~the ~~studies~~country. ~~ARI has grown since its launch in 2013, completing more than 200 projects during 2015.~~

~~Sales~~In 2013, drawing on our significant scale across pathology practices and ~~Marketing;~~hospitals ~~Client~~nationwide, ~~Service~~we established the Aurora Research Institute (“ARI”) in response to the growing need for cancer-related biospecimens for research in personalized medicine. ARI leverages the expertise of our pathologists, laboratory resources and sizeable library of biospecimens to provide contract research services and bio specimens used in the development of therapeutics and companion diagnostics by leading global pharmaceutical and biotechnology companies. ARI has grown since its launch in 2013 and, we believe, enhances our positioning in cancer diagnostics. For the year ended December 31, 2016, ARI completed more than 200 projects and contributed net revenue of $3.9 million, or approximately 1.3% of our total net revenue.

The selection of a pathologist to perform diagnostic testing services is primarily made by individual referring physicians. We maintain a sales and marketing team of 85 professionals who are highly-trained and organized by subspecialty to better meet the needs of our referring physicians. We have designed our compensation structure to incentivize our sales representatives to not only secure new physician clients, but also to maintain and enhance relationships with existing physician clients. As a result, our sales and marketing team has enabled us to expand nationally and leverage our extensive offering of diagnostic services across our markets.

We currently focus our marketing and sales efforts primarily on dermatologists, urologists and gynecologists, as well as gastroenterologists, hematologists and oncologists. The physicians on which our marketing and sales efforts are focused include both non-hospital-based and hospital-based physicians. Our sales representatives concentrate on a geographic area based on the number of existing clients and client prospects, which we identify using several national physician databases that provide physician address information, patient demographic information and other data.

AtSales ~~the beginning of a new client relationship, one of our sales representatives visits a prospective physician client~~ and ~~describes~~Marketing; inClient ~~detail~~Service our differentiated service offerings, focusing on our experienced pathologists, local presence, rapid turn-around times, comprehensive diagnostic reports, client service and IT solutions. Our sales representatives focus on the specialties offered by their respective divisions, which allows them not only to discuss our specialized diagnostic services, but also to describe diagnostic developments and new products and technologies in their practice areas.

The selection of a pathologist to perform diagnostic testing services is primarily made by individual referring physicians. Our pathology practices are heavily focused on client service. We ~~also~~currently maintain a sales, marketing and client service team of 46over 120 professionals. ~~who~~This ~~are~~team ~~highly-~~is trained and organized by subspecialty. ~~Our~~to ~~dedicated~~better ~~client~~meet ~~service~~the ~~team~~needs ~~provides~~of ~~ongoing~~our ~~support~~referring tophysicians ~~our~~and ~~clients~~their ~~and,~~patients in ~~particular,~~each region. Our pathologists are also engaged in the ~~office~~sales ~~staff~~process ofand ~~our~~often ~~referring~~join ~~physicians~~sales representatives in visits to clients. Our ~~client~~sales ~~service~~representatives ~~team~~are ~~enables~~incentivized usto not only secure new referring physicians, but also to ~~augment~~maintain ~~the~~a ~~long-standing~~high ~~relationships~~level ~~between~~of ~~our~~service ~~pathologists~~quality and ~~their~~enhance ~~clients~~relationships towith ~~maintain~~existing aphysician ~~more~~clients. ~~stable~~Other ~~base~~elements of ~~referrals.~~our ~~These~~focus on customer service ~~teams~~include ~~provide~~customized ~~our~~diagnostic ~~clients~~and ~~with~~flexible areporting ~~personal~~solutions (including diagnostic reports that integrate clinical data, ~~knowledgeable~~patient history and ~~consistent~~imaging), ~~point~~24 ofto ~~contact~~48 ~~within~~hour ~~our~~turnaround ~~company.~~time ~~Client~~for ~~service~~delivery ~~team~~of ~~members~~diagnosis ~~coordinate~~from ~~the~~specimen ~~provision~~receipt ofand ~~services,~~local ~~ensure~~couriers ~~testing~~for ~~supplies~~rapid ~~are~~delivery ~~replenished,~~of ~~answer~~specimens. ~~administrative~~Our ~~and~~relationships ~~billing~~with ~~questions,~~leading pharmaceutical and ~~resolve~~diagnostic ~~service~~companies ~~issues.~~through WeARI ~~believe~~also ~~these~~provide ~~additional~~our ~~client~~referring ~~contacts~~physicians ~~greatly~~and ~~enhance~~their ~~client~~patients ~~satisfaction~~with access to cutting-edge research and ~~strengthen~~companion ~~overall~~diagnostics ~~client~~as ~~relationships~~well as opportunities to participate in clinical trials.

We offer a comprehensive test menu so each physician specialist can order the best test available to make an accurate diagnosis and appropriate treatment decisions. We currently focus our marketing and sales efforts to hospitals and to our clients by subspecialty. Our product offerings have been developed to meet the unique needs of each subspecialty. Our representatives are extensively trained in the specific subspecialty they service and are knowledgeable about our test offerings and new diagnostic technologies available in the market by subspecialty. This provides additional value to our physician clients and their staff, as our representatives become a resource to our client’s practice.

~~Dermatopathology~~To ~~accounted~~maintain ~~for~~high ~~approximately~~quality ~~43 percent~~services ofacross our ~~revenue~~practices inand ~~2015~~specialties, ~~and~~we have established the ~~remaining~~Pathology 57Executive ~~percent~~Council (“PEC”), which is comprised of the physicians who are the managing directors of each of our ~~revenue~~practices. The ~~primarily~~PEC ~~consisted~~is responsible for establishing our medical and technical standards and assuring the compliance of ~~other~~our ~~subspecialties~~practices to defined standards of care. A series of advisory councils report to the PEC detailing best practices for their specific subspecialty areas, including ~~urology~~dermatopathology, ~~gastroenterology~~hematopathology, breast ~~hematology~~and ~~oncology~~gynecological, ~~women’s~~pulmonary, ~~health~~gastrointestinal, ~~pathology~~pediatric, as well as molecular and NGS. In addition, laboratory Medicine is represented by Councils that define the best practices for our hospital ~~pathology~~based ~~services~~groups.These ~~Our~~councils ~~operational,~~actively ~~marketing~~engage ~~and~~over ~~sales~~80 ~~efforts~~of ~~are,~~our pathologists in ~~general~~the defining, ~~organized~~implementing, and ~~focused~~reviewing onof ~~subspecialties.~~our medical and technical practices.

Hospital Contracts, Relationships with Referring Physicians and Third-Party Payors

Substantially all of our revenue consists of payments or reimbursements for specialized diagnostic services rendered toon the order of referring physicians or under our hospital contracts. Our contracted hospitals and referring physicians, whom we refer to as our clients, are our primary customers. No single hospital contract or group of our clients accounted for a number of referrals in ~~2015~~2016 that was material to us. Accordingly, we are not dependent on any single contract or small group of our clients for referrals, revenue or otherwise. We receive referrals at the discretion of our clients, and our clients are under no obligation to make referrals to us. Furthermore, we generally have no contractual or other formalized legal arrangements with our ~~clients~~referring physicians.

We receive most of our revenue in the form of reimbursement from third-party payors. While third-party payors are not our clients or customers, our contractual arrangements with third-party payors, along with the customer relationships and the specific services we provide, enable the generation of our revenue. Accordingly, such arrangements are, in the aggregate, material to us.

For the year ended December 31, ~~2015~~2016, based on cash collections, we derived approximately 58 ~~percent~~% of our revenue from private insurance, including managed care organizations and other healthcare insurance providers. For the year ended December 31, ~~2015~~2016, none of these sources individually accounted for more than 10 ~~percent~~% of our revenue. While our reimbursements from private insurance sources are material to our business in the aggregate, we do not consider any individual private insurance source to be material to us.

We generally receive reimbursements from private third-party payors on a laboratory-by-laboratory basis. Our laboratories typically enter contracts with third-party payors that provide for us to be reimbursed at agreed-upon rates based on the services we perform. Our laboratories’ contracts with private insurers are typically subject to termination by the insurers for cause, including, among other things, upon our laboratories’ exclusion from government payor programs, and, in some cases, without cause. The insurers under such contracts typically have a right to change the applicable reimbursement rates we receive under the contract. In cases where our laboratories do not have contracts with particular private third-party payors, we receive reimbursements for services we perform at rates and on terms applicable to such payors’ out-of-network providers.

~~For~~We ~~the~~generally ~~year~~receive ~~ended~~reimbursements ~~December 31,~~from ~~2015,~~private third-party payors on a practice-by-practice basis. Our practices typically enter contracts with third-party payors that provide for us to be reimbursed at agreed-upon rates based on ~~cash~~the ~~collections,~~services we ~~derived~~perform. ~~approximately~~Our ~~24 percent~~practices’ ofcontracts ~~our~~with ~~revenue~~private ~~from~~insurers ~~government~~are ~~payor~~typically ~~programs~~subject to termination by the insurers for cause, including, ~~Medicare~~among ~~and~~other ~~Medicaid. Accordingly~~things, ~~reimbursements~~upon our practices’ exclusion from government payor programs, ~~are~~and, ~~material~~in tosome ~~our~~cases, ~~business~~without cause. ~~This~~The ~~makes~~insurers ~~our~~under ~~business~~such ~~dependent~~contracts ontypically ~~our~~have ~~ability~~a right to ~~participate~~change in the ~~government~~applicable ~~programs~~reimbursement ~~and~~rates onwe receive under the ~~reimbursement~~contract. ~~rates~~In cases where our practices do not have contracts with particular private third-party payors, we receive ~~under~~reimbursements for services we perform at rates and on terms applicable to such ~~programs~~payors’ out-of-network providers.

WeFor ~~generally~~the ~~receive~~year ~~reimbursements~~ended ~~from~~December 31, ~~government~~2016, ~~third-party~~based ~~payors~~ on acash ~~laboratory-by-laboratory~~collections, ~~basis.~~we ~~Our~~derived ~~laboratories~~approximately ~~typically~~24% ~~participate~~of ~~with~~our ~~government~~revenue ~~third-party~~from ~~payors~~government ~~that~~payor ~~provide~~programs, ~~for~~including usMedicare toand beMedicaid. ~~reimbursed~~Accordingly, atreimbursements ~~applicable~~from ~~rates~~government ~~based~~payor onprograms ~~the~~are ~~services~~material weto ~~perform~~our ~~and other factors~~business. ~~Our~~This ~~laboratories’~~makes ~~participation~~our ~~with~~business ~~governmental~~dependent ~~payors~~on ~~are~~our ~~typically~~ability ~~subject~~ to ~~termination~~participate byin the government ~~for~~programs ~~cause,~~ and ~~our~~on ~~governmental payors have a right to change~~ the ~~applicable~~ reimbursement rates we receive under such programs.

We generally receive reimbursements from government third-party payors on a practice-by-practice basis. Our practices typically participate with government third-party payors that provide for us to be reimbursed at applicable rates based on the services we perform and other factors. Our practices’ participation with governmental payors are typically subject to termination by the government for cause, and our governmental payors have a right to change the applicable reimbursement rates we receive under such programs.

Competition

The anatomic pathology market is highly competitive. Competition in our industry is based on several factors, including price, clinical expertise, quality of service, third party payor contracts, client relationships, breadth of testing menu, speed of turnaround of test results, reporting and IT systems, reputation in the medical community and ability to employ qualified personnel. Our competitors include local and regional pathology groups, national laboratories, hospital-based pathology groups and specialty physician groups.

●• Local and Regional Pathology Groups. Local and regional pathology groups typically provide a relatively narrow menu of test services to community physicians and, in certain cases, to hospital-based pathologists.

●• National Laboratory Companies. National laboratories typically offer a full suite of tests for a variety of medical professionals, including general practitioners, hospitals and pathologists. National laboratories have identified anatomic pathology as a focus area for future growth and will continue to be a competitive challenge going forward.

●• Hospital Pathologists. Pathologists working in hospitals typically provide most of the diagnostic services required for hospital inpatients and, sometimes, hospital outpatients. Hospital pathologists act as medical directors for the hospital’s clinical and histology laboratories. Typically, hospital pathologists provide these services to hospitals under exclusive and long-term contractual arrangements.

●• Specialty Physician Groups. In recent years a number of specialty physician groups (dermatologists, urologists and gastroenterologists in particular) have built their own laboratories and in-sourced pathology services. This has been a significant source of competition in prior years and may continue to impact the anatomic pathology landscape in the future. However, decreases in reimbursement rates in recent years seem to have diminished this trend.

There is an evolving trend among pathologists to form larger practices to provide a broader range of outpatient and inpatient services and enhance the utilization of the practices’ pathologists. We believe this trend can be attributed to several factors, including cost containment pressures by governmental and other third-party payors, increased competition, managed care and the increased costs and complexities associated with operating a medical practice. Moreover, given the current trends of increasing outpatient services, outsourcing and the consolidation of hospitals, pathologists are seeking to align themselves with larger practices that can assist providers in the evolving health care environment. Larger practices can offer pathologists certain advantages, such as obtaining and negotiating contracts with hospitals and other providers, managed care providers and national clinical laboratories; marketing and selling of professional services; providing continuing education and career advancement opportunities; making available a broad range of specialists with whom to consult; providing access to capital and business and management experience; establishing and implementing more efficient and cost effective billing and collection procedures; and expanding the practice’s geographic coverage area. Each of these factors supports the pathologists in the efficient management of the complex and time-consuming non-medical aspects of their practice. As a result, we believe that there are substantial consolidation opportunities in the anatomic pathology market as smaller pathology providers seek access to the resources of diagnostics companies with a more comprehensive selection of services for referring physicians.

There is an evolving trend among pathologists to form larger practices to provide a broader range of outpatient and inpatient services and enhance the utilization of the practices’ pathologists. We believe this trend can be attributed to several factors, including cost containment pressures by governmental and other third-party payors, increased competition, managed care and the increased costs and complexities associated with operating a medical practice. Moreover, given the current trends of increasing outpatient services, outsourcing and the consolidation of hospitals, pathologists are seeking to align themselves with larger practices that can assist providers in the evolving health care environment. Larger practices can offer pathologists certain advantages, such as the ability to obtain and negotiate more favorable terms in contracts with hospitals and other providers, managed care providers and national clinical laboratories; enhanced marketing and sale of professional services; superior continuing education and career advancement opportunities; a broader range of specialists with whom to consult; access to capital and business and management experience; more efficient and cost effective billing and collection procedures; and expanded geographic coverage area. Each of these factors supports the pathologists in the efficient management of the complex and time-consuming non-medical aspects of their practice. As a result, we believe that there are substantial consolidation opportunities in the anatomic pathology market as smaller pathology providers seek access to the resources of diagnostics companies with a more comprehensive selection of services for referring physicians.

Seasonality

Our business is affected by seasonal trends and generally declines during summer and winter months, the year-end holiday period and other major holidays. Adverse weather conditions can also influence our business.

Information Systems and Technology Solutions

ITWe ~~provides~~believe ~~systems~~ that ~~streamline~~efficient, ~~internal~~accurate ~~operations~~ and ~~provide~~regulatory ~~customized~~compliant ITdelivery ~~solutions to meet the needs~~ of ~~our~~clinical ~~clients.~~information Weis ~~offer~~essential ITto ~~solutions primarily through~~ our ~~proprietary~~business ~~system,~~and ~~ConnectDx.~~a ~~ConnectDx~~critical isaspect aof ~~customizable~~the ~~application~~differentiated ~~platform~~service that ~~provides~~we aprovide ~~gateway~~to ~~for~~our ~~delivering patient reports~~clients. We ~~offer~~have ~~multiple~~internally ~~electronic~~developed ~~delivery~~a ~~channels~~suite ~~that~~of ~~include~~IT ~~electronic~~solutions ~~interfaces,~~called ~~client~~ConnectDX ~~EMR~~that ~~interfacing and web portal capabilities. ConnectDx~~ is ~~the~~compatible ~~core~~with ~~hub~~most ~~that~~electronic ~~connects~~medical ~~diagnosis~~record ~~outcomes for all Aurora Diagnostic customers. We support approximately 600 live client interfaces through 106~~ (“EMR”) ~~vendors. We~~systems ~~also~~and ~~provide~~allows ~~traditional~~our ~~methods~~systems ofto ~~patient~~interface ~~report~~with ~~delivery~~a ~~which~~referring ~~include~~physician’s ~~local~~systems ~~printed~~through ~~reports~~electronic ~~and~~data ~~faxing~~interchange ~~services.~~(“EDI”) technology.

~~Most~~We ofoffer ~~our~~multiple ITelectronic ~~solutions~~delivery ~~are~~channels ~~implemented~~that oninclude aelectronic ~~laboratory~~interfaces, byclient ~~laboratory~~EMR ~~basis~~interfacing and web portal capabilities. ConnectDx ~~After~~is anthe ~~acquisition~~core hub that connects diagnosis outcomes for all Aurora Diagnostic customers. Each month, we ~~generally~~execute ~~transition~~approximately ~~our~~20 ~~acquired~~new ~~laboratories~~EMR toconnections aand ~~common~~we ~~accounting~~supported ~~system~~over ~~and~~1,500 ~~software~~live ~~package~~client ~~for~~interfaces ~~financial~~in ~~processing~~2016 ~~and~~through ~~reporting~~approximately ~~within~~100 ~~60 days~~EMR vendors. We also provide traditional methods of ~~closing.~~patient ~~Generally,~~report ~~the~~delivery ~~LIS~~which include local printed reports and ~~billing~~faxing ~~platforms~~services. Our technology solutions are customizable to meet the diagnostic reporting requirements of our ~~acquired~~clients. ~~laboratories,~~We asbelieve ~~well~~our astechnology ~~all~~solutions ~~their~~create ~~day-to-day~~a ~~laboratory~~competitive ~~operations,~~advantage ~~continue~~and toreinforce ~~operate~~our asrelationships ~~they~~with ~~did~~referring ~~pre-acquisition~~physicians, hospitals and hospital systems. We ~~bill~~believe ~~for~~that ~~our~~we ~~services~~have ~~using~~gained ~~the~~referring ~~existing~~physician ~~billing~~clients ~~systems~~because of ~~the~~our ~~acquired~~competitors’ ~~laboratories~~inability ~~or,~~to ininterface ~~some~~with ~~locations,~~client weIT ~~use~~systems anor ~~outsourced~~create ~~vendor~~the tocustomized ~~provide~~reporting ~~billing~~required ~~services~~by clients.

~~Corporate~~Most ~~Structure~~of our IT solutions are implemented on a practice by practice basis. After an acquisition, we generally transition our acquired practices to a common accounting system and software package for financial processing and reporting within 60 days of closing. Generally, the laboratory information system (“LIS”) and billing information system (“BIS”) platforms of our acquired practices, as well as all their day-to-day laboratory operations, continue to operate as they did pre-acquisition. We bill for our services using the existing billing systems of the acquired practices or, in some locations, we use an outsourced vendor to provide billing services.

We derive substantially all of our revenue from our laboratory practices, which we own either directly through our wholly owned subsidiaries or through contractual arrangements with our affiliated practices. The manner in which we acquire and operate a particular practice is determined primarily by the corporate practice of medicine restrictions of the state in which the practice is located and other applicable regulations. We exercise diligence and care in structuring our practices and arrangements with providers in an effort to comply with applicable federal and state laws and regulations, and we believe that our current practices and arrangements comply in all material respects with applicable laws and regulations. However, due to uncertainties in the law, there can be no assurance that our practices and arrangements would be deemed to be in compliance with applicable laws and regulations, and any noncompliance could result in a material adverse effect on us.

In 2015, we derived approximately 43 percent of our revenue from our affiliated practices. Through our contractual arrangements described below, our Board of Managers and management formulate strategies and policies which are implemented locally on a day-to-day basis by each of our affiliated practices. The following descriptions of our contractual arrangements with our affiliated practices are only summaries, which do not contain all of the information that may be important to you. For additional information, you should refer to the forms of our management, nominee, non-alienation and services agreements, copies of which have been filed as exhibits to our Registration Statement on Form S-4 filed with the SEC on September 12, 2011.

We have entered into long-term management agreements with each of our eleven affiliated practices, which are located in Massachusetts, Michigan, Minnesota, Nevada, Texas, North Carolina, South Carolina and Florida. Pursuant to these management agreements, we manage and control the non-medical functions of our affiliated practices, including:

● recruiting, training, employing and managing the technical and support staff;

● developing and equipping laboratory facilities;

● establishing and maintaining courier services to transport specimens;

● negotiating and maintaining contracts with hospitals, managed care organizations and other payors;

●Corporate ~~providing~~Structure financial reporting and administration, clerical, purchasing, payroll, billing and collection, information systems, sales and marketing, risk management, employee benefits, legal, tax and accounting services; and

●We ~~monitoring~~derive substantially all of our revenue from our pathology practices, which we own either directly through our wholly owned subsidiaries or through contractual arrangements with our affiliated practices. The manner in which we acquire and operate a particular practice is determined primarily by the corporate practice of medicine restrictions of the state in which the practice is located and other applicable regulations. We exercise diligence and care in structuring our practices and arrangements with providers in an effort to comply with applicable federal and state laws and regulations, and we believe that our current practices and arrangements comply in all material respects with applicable laws and regulations. However, due to uncertainties in the law, there can be no assurance that our practices and arrangements would be deemed to be in compliance with applicable laws and regulations, and any noncompliance could result in a material adverse effect on us.

In 2016, we derived approximately 47% of our revenue from our affiliated practices. Through contractual arrangements with our affiliated practices, our Board of Managers and management formulate strategies and policies which are implemented locally on a day-to-day basis by each of our affiliated practices. The following descriptions of our contractual arrangements with our affiliated practices are only summaries, which do not contain all of the information that may be important to you. For additional information, you should refer to the forms of our management, nominee, non-alienation and services agreements, copies of which have been incorporated as exhibits hereto.

We have entered into long-term management agreements with each of our eleven affiliated practices, which are located in Michigan, Minnesota, Nevada, Texas, North Carolina, Oregon, South Carolina and Florida. Pursuant to these management agreements, we manage and control the non-medical functions of our affiliated practices, including:

•

recruiting, training, employing and managing the technical and support staff;

•

developing and equipping laboratory facilities;

•

establishing and maintaining courier services to transport specimens;

•

negotiating and maintaining contracts with hospitals, managed care organizations and other payors;

•

providing financial reporting and administration, clerical, purchasing, payroll, billing and collection, information systems, sales and marketing, risk management, employee benefits, legal, tax and accounting services; and

•

monitoring compliance with applicable laws and regulations.

Accordingly, our management agreements effectively give us total control over the operations of our affiliated practices, except with respect to decisions involving the medical judgment of our affiliated practices’ physicians. We do not control the medical diagnoses, medical treatments or other activities involving the exercise of medical judgment by our affiliated practices’ physicians.

From an operational standpoint, we typically prepare an annual operating plan for each of our affiliated practices pursuant to which the practice’s capital and operating budgets, scope and pricing of services, staffing and compensation of employees, support services, billing and collection procedures, patient acceptance policies and procedures, quality assurance and utilization assessment programs, compliance policies and risk management programs, and financial and strategic growth planning are established.

The scope of services for each affiliated practice is established in connection with the preparation of the practice’s annual operating plan, which we establish in consultation with and with the assistance of the practice’s laboratory director, who implements the practice’s operating plan and performs such other duties or requirements assigned by us.

The compensation of each affiliated practice’s licensed medical professionals is a component of the respective practice’s annual operating plan, which we prepare with the practice’s laboratory director as set forth above. The practice’s policies with respect to the retention of employees are also established by us and the practice’s laboratory director, provided that additional affiliated practice professionals may only be retained with our consent.

Each of our management agreements are long term contractual arrangements and cannot be terminated by our affiliated practice without cause. We receive a management fee from each of our affiliated practices for the services we provide pursuant to the management agreements. For nine of our affiliated practices, our management fee is equal to the practice’s net revenue less its expenses, which include physician salaries and other professional expenses. For the remaining two affiliated practices, our management fee is determined annually based on our estimate of each practice’s demand for management services during the upcoming year. For these practices, we may adjust the fee in the event that the services we provided were greater or less than the services that were anticipated. Subject to the requirements of applicable law, the adjustment of our management fees is entirely at our discretion.

We bear the economic risk associated with our affiliated practices. Under the provisions of our management agreements, we are generally obligated to pay all expenses of our affiliated practices, including any management fees, a portion of corporate overhead or other costs. We must absorb all losses of our affiliated practice entities. We are not entitled to recover, from the affiliated practices’ nominee owners, physicians or other parties, any losses incurred by our affiliated practices.

In addition, we have entered into contractual arrangements with the licensed physicians that own our affiliated practices. These contractual arrangements, which consist of nominee agreements and non-alienation agreements, govern the ownership of our affiliated practices by our physicians. These physicians may not vote or transfer their ownership interests in our affiliated practices or distribute or encumber the assets of our affiliated practices without our prior authorization. In addition, we have the irrevocable and unconditional right to cause the physicians to transfer their ownership interests in our affiliated practices to our designee for nominal consideration. Through these contractual arrangements, we maintain controlling voting and financial interests in our affiliated practices. Each of our affiliated practices is owned by physicians pursuant to these agreements with the exception of our ~~laboratories~~practices in Nevada, where each of our affiliated practices is owned by a trust of which one of our wholly owned subsidiaries is the sole beneficiary.

8We have acquired practices in Michigan, Massachusetts, Oregon and Texas, where the corporate practice of medicine is restricted by state law. In each case, we entered into a nominee agreement with one of the selling physicians, pursuant to which such physician holds the practice’s equity interest as our designated nominee on our behalf. We also, either directly or through one of our wholly owned subsidiaries, entered into a long-term management agreement with each of the affiliated practices on the terms described above, pursuant to which we manage and control the non-medical functions of the practices.

We have acquired practices in Michigan, Massachusetts and in Texas, where the corporate practice of medicine is restricted by state law. In each case, we entered into a nominee agreement with one of the selling physicians, pursuant to which such physician holds the practice’s equity interest as our designated nominee on our behalf. We also, either directly or through one of our wholly owned subsidiaries, entered into a long-term management agreement with each of the affiliated practices on the terms described above, pursuant to which we manage and control the non-medical functions of the practices.

In Florida, which does not prohibit the corporate practice of medicine, we, through one of our wholly owned subsidiaries, directly purchased substantially all of the assets of a practice, including the fixed assets, customer lists, contract rights and goodwill and other intangibles of the practice. After consummation of the acquisition, we determined to enter into a non-alienation agreement with the shareholders of the professional entity from which we previously purchased assets, pursuant to which we acquired controlling voting and financial interests in the professional entity on terms substantially the same as our nominee agreements in Michigan and Texas. We also, through one of our wholly owned subsidiaries, entered into a long-term management agreement with the affiliated practice on terms substantially the same as our management agreements in Michigan and Texas.

We have practices in North Carolina, South Carolina and Minnesota, each of which restricts the corporate practice of medicine. In each case, we, through a wholly owned subsidiary, directly acquired the ~~laboratory~~practice. Because we cannot directly employ physicians in these states, in each case the selling physicians formed a de novo physician group that employs our pathologists. Similar to our contractual arrangements with our affiliated practices in Michigan and Texas, we entered into nominee agreements with the physicians who hold the equity interests in the physician groups on our behalf, and we entered into long-term management agreements with the physician groups. In addition, each ~~laboratory~~practice that we acquired entered into a long-term services agreement with the physician group, pursuant to which the physician group provides professional pathology services to our ~~laboratory~~practice on an exclusive basis. Each of our services agreements has an initial term of 50 years and cannot be terminated by the physician group without cause. Under these services agreements, we pay each physician group a service fee approximately equal to the compensation and professional expenses attributable to our pathologists employed by the group.

In Nevada, where the corporate practice of medicine is restricted, we acquired all of the common stock of our affiliated practices through trusts. We, through one of our wholly owned subsidiaries, are the sole beneficiary of the trusts and receive all income from the trusts. We generally have the right, at our sole discretion, to replace the trustees, withdraw assets from the trusts, modify the terms of the trust agreements, or terminate the trusts and direct the trustees to distribute the income and any assets from the trusts. No assets of the trusts can be sold or otherwise disposed of without our consent. In addition, we entered into a long-term management agreement with each of our affiliated practices that are owned directly by the trusts. These agreements are substantially the same as our management agreements in other states.

In addition to the foregoing affiliated practices, in Alabama, which does not prohibit the corporate practice of medicine, we, through a wholly owned subsidiary, directly acquired a laboratory. Although we can directly employ physicians in Alabama, we contract with an unaffiliated de novo entity formed by the selling physicians that employs our pathologists. Similar to our practices in North Carolina, South Carolina and Minnesota, our laboratory entered into a long-term services agreement with the unaffiliated physician group, pursuant to which the physician group provides professional pathology services to our laboratory on an exclusive basis. In contrast to our practices in North Carolina, South Carolina and Minnesota, however, we did not enter into a nominee or management agreement with the physician group. While we do not have a controlling voting or financial interest in the physician group, we have the right to consult with the physician group regarding business decisions and to approve or disapprove the retention or discharge of all employees by the physician group. The services agreement has an initial term of 25 years and cannot be terminated by the physician group without cause. We currently pay the physician group a service fee based upon a percentage of revenue, subject to a minimum, as defined in the agreement.

Our affiliated practice entities are included in our consolidated financial statements, which can be found in Part II, Item 8 of this Annual Report.

In addition to the foregoing affiliated practices, in Alabama, which does not prohibit the corporate practice of medicine, we, through a wholly owned subsidiary, directly acquired a practice. Although we can directly employ physicians in Alabama, we contract with an unaffiliated de novo entity formed by the selling physicians that employs our pathologists. Similar to our practices in North Carolina, South Carolina and Minnesota, our practice entered into a long-term services agreement with the unaffiliated physician group, pursuant to which the physician group provides professional pathology services to our practice on an exclusive basis. In contrast to our practices in North Carolina, South Carolina and Minnesota, however, we did not enter into a nominee or management agreement with the physician group. While we do not have a controlling voting or financial interest in the physician group, we have the right to consult with the physician group regarding business decisions and to approve or disapprove the retention or discharge of all employees by the physician group. The services agreement has an initial term of 25 years and cannot be terminated by the physician group without cause. We currently pay the physician group a service fee based upon a percentage of revenue, subject to a minimum, as defined in the agreement.

The results of our affiliated practice entities are included in our consolidated financial statements, which can be found in Part II, Item 8 of this Annual Report.

Contracts and Relationships with Providers

We employ our pathologists, control the practice entities that employ our pathologists or contract with pathologists on an independent contractor basis to provide diagnostic services in our ~~laboratories~~pathology practices. While we exercise legal control over our practices, we do not exercise control over, or otherwise influence, the medical judgment or professional decisions of any pathologist associated with our practices.

Our pathologist employment agreements typically have terms of between 3three and 5 five years and generally can be terminated by either party without cause upon between 90 and 180 days’ notice. Our pathologists generally receive base compensation, health and welfare benefits generally available to our employees and, in some cases, annual performance bonuses. Our pathologists are required to hold a valid license to practice medicine in the jurisdiction in which they practice. We are responsible for billing patients, physicians and payors for services rendered by our pathologists. Most of our pathologist employment agreements contain restrictive covenants, including non-competition, non-solicitation and confidentiality covenants.

Our business is dependent on the recruitment and retention of pathologists, particularly those with subspecialties like dermatopathology. While we have generally been able to recruit and retain pathologists in the past, no assurance can be given that we will be able to continue to do so successfully or on terms similar to our current arrangements. The relationship between our pathologists and their respective local medical communities is important to the operation and continued profitability of our practices. In the event that a significant number of pathologists terminate their relationships with us or become unable or unwilling to continue their employment, our business could be materially harmed.

We manage and control all of the non-medical functions of our practices. We are not licensed to practice medicine. The practice of medicine is conducted solely by the physicians in our practices.

Billing and Reimbursement

Billing

Billing for diagnostic services is generally highly complex. ~~Laboratories~~Pathology practices must bill various payors, such as private insurance companies, managed care companies, governmental payors such as Medicare and Medicaid, physicians, hospitals and employer groups, each of which may have different billing requirements. Additionally, the audit requirements we must meet to ensure compliance with applicable laws and regulations, as well as our internal compliance policies and procedures, add further complexity to the billing process, resulting in additional costs to us.

Reimbursement

Depending on the billing arrangement and applicable law, the party that reimburses us for our services may be:

●• a third party who provides coverage to the patient, such as an insurance company, managed care organization or a governmental payor program;

●• the physician or other authorized party (such as a hospital or another laboratory) who ordered the testing service or otherwise referred the services to us; or

●• the patient.

For the year ended December 31, ~~2015~~2016, we derived approximately 58 ~~percent~~% of our revenue from private insurance, including managed care organizations and other healthcare insurance providers, 24 ~~percent~~% from governmental payor programs, including Medicare and Medicaid, and 18 ~~percent~~% from other sources.

10In 2016, approximately 22% of our annual revenue was derived from the Medicare program, which is overseen by the Centers for Medicare & Medicaid Services (“CMS”). Because a large percentage of our revenue is derived from the Medicare program, the Medicare coverage and reimbursement rules are significant to our operations. Reimbursement under the Medicare program for the diagnostic services that we offer is subject to either the national Medicare clinical laboratory fee schedule (“CLFS”) or the national Medicare physician fee schedule (“PFS”), each of which is subject to geographic adjustments and is updated annually. The PFS is designed to set compensation rates for those medical services provided to Medicare beneficiaries that require a degree of physician supervision. The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) will implement changes to the reimbursement for these services beginning in 2019, based on physicians’ performance in 2017 on a number of metrics. Clinical diagnostic laboratory tests furnished to non-hospital patients are paid according to the CLFS.

InMost ~~2015,~~of ~~approximately~~the 22services ~~percent~~that ofwe ~~our~~provide ~~annual~~are ~~revenue~~anatomic ~~was~~pathology ~~derived~~services, ~~from~~which ~~the~~are ~~Medicare~~reimbursed ~~program~~separately under the PFS, ~~which~~and beneficiaries are responsible for applicable coinsurance and deductible amounts. The PFS is ~~overseen~~based byon ~~the~~assigned ~~Centers~~relative value units for ~~Medicare &~~each ~~Medicaid~~procedure ~~Services~~or service, orand ~~CMS~~an annually determined conversion factor is applied to the relative value units to calculate the reimbursement. ~~Because~~Prior ato ~~large~~MACRA, ~~percentage~~the ofSustainable ~~our~~Growth ~~revenue~~Rate is(“SGR”) ~~derived~~formula ~~from~~used to calculate the ~~Medicare~~fee ~~program~~schedule conversion factor usually would result in a decrease in PFS payments, unless Congress acts to prevent such reductions. For example, the ~~Medicare~~SGR ~~coverage~~formula was used to calculate the 2012 and 2013 PFS resulting in scheduled reimbursement ~~rules~~cuts ~~are~~of ~~significant~~27%. However, in both years Congress took action to ~~our~~delay ~~operations~~the implementation of these reductions. ~~Reimbursement~~Congress ~~under~~passed legislation that prevented the ~~Medicare~~implementation ~~program~~of ~~for~~these scheduled reductions and continued the ~~diagnostic~~existing ~~services~~payment ~~that~~levels wethrough ~~offer~~December is31, ~~subject~~2013. toFor ~~either~~2014, CMS had projected the ~~national~~reimbursement ~~Medicare~~cut ~~clinical~~resulting ~~laboratory~~from ~~fee~~the ~~schedule~~SGR formula would be approximately 20%, ~~which~~unless weCongress ~~refer~~acted to asprevent the ~~CLFS~~reduction. On December 18, or2013, Congress passed legislation that enacted a 0.5% increase in the ~~national~~conversion factor, effective until March 31, 2014. On April 1, 2014, President Obama signed the Protecting Access to Medicare ~~physician~~Act ~~fee~~of ~~schedule~~2014 (“PAMA”), which, weamong ~~refer~~other tothings, aschanges the ~~PFS~~way that rates on the Medicare CLFS are set. Beginning in 2017 and every three years thereafter, ~~each~~certain laboratories will report private payor rates and associated volumes for clinical laboratory tests furnished during a portion of the prior year. CMS will calculate the weighted medians of the private payor rates, which iswill ~~subject~~become tothe ~~geographic~~new ~~adjustments~~CLFS ~~and~~rates isfor ~~updated~~a ~~annually.~~period ~~The~~of ~~PFS~~three years, starting in 2018. While it is ~~designed~~too soon to ~~set~~know ~~compensation~~the ~~rates~~impact ~~for~~of ~~those~~PAMA ~~medical~~on ~~services~~CLFS ~~provided~~rates, the rates are expected to ~~Medicare~~decline. Any ~~beneficiaries~~rate ~~that~~reductions ~~require~~will be phased in over a ~~degree~~number of ~~physician supervision~~years. ~~Clinical~~PAMA ~~diagnostic~~extended ~~laboratory~~the ~~tests~~0.5% ~~furnished~~increase tothrough ~~non-hospital~~March 31, ~~patients~~2015 ~~are~~and ~~paid~~made ~~according~~other changes to ~~the~~laboratory ~~CLFS~~reimbursement discussed below. Section 216 of PAMA will significantly change how clinical laboratory services are reimbursed.

Most of the services that we provide are anatomic pathology services, which are reimbursed separately under the PFS, and beneficiaries are responsible for applicable coinsurance and deductible amounts. The PFS is based on assigned relative value units for each procedure or service, and an annually determined conversion factor is applied to the relative value units to calculate the reimbursement. The Sustainable Growth Rate (SGR) formula used to calculate the fee schedule conversion factor usually would result in a decrease in PFS payments, unless Congress acts to prevent such reductions. For example, the SGR formula was used to calculate the 2012 and 2013 PFS resulting in scheduled reimbursement cuts of 27 percent. However, in both years Congress took action to delay the implementation of these reductions. Congress passed legislation that prevented the implementation of these scheduled reductions and continued the existing payment levels through December 31, 2013. For 2014, CMS had projected the reimbursement cut resulting from the SGR formula would be approximately 20 percent, unless Congress acted to prevent the reduction. On December 18, 2013, Congress passed legislation that enacted a 0.5 percent increase in the conversion factor, effective until March 31, 2014. On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014, or PAMA. PAMA extended the 0.5 percent increase through March 31, 2015 and made other changes to laboratory reimbursement discussed below.

On April 16, 2015 President Obama signed the Medicare and CHIP Reauthorization Act (MACRA). The MACRA repealed the provisions related to the Medicare SGR formula and implements a new physician payment system that is designed to reward the quality of care. In addition, it extended the then-current Medicare Physician Fee Schedule rates through June 2015 and increased them by 0.5 percent for the remainder of 2015. Beginning in January 1, 2016, the rates are to be increased annually by 0.5 percent, through 2019. For 2020 through 2025 rates will be frozen, although payment will be adjusted to account for performance on certain quality metrics under the Merit-Based Incentive Payment Systems (MIPS) or to reflect physician participation in alternative payment models (APMs). For 2026 and subsequent years, qualified APM participants receive an annual 0.75% increase on Medicare physician payment rates, while those not participating receive a 0.25% annual payment increase, plus any applicable MIPS-based payment adjustments. At this time, it is too early to determine how these changes may impact our business this year and thereafter.

Finally, the Budget Control Act of 2011 created a Joint Select Committee on Deficit Reduction, which was tasked with recommending proposals to reduce spending. Under the law, the Joint Committee’s failure to achieve a targeted deficit reduction, or Congress’ failure to pass the Committee’s recommendations without amendment by December 23, 2011, would result in automatic across-the-board cuts to most discretionary programs. Automatic cuts also would be made to Medicare and would result in aggregate reductions in Medicare payments to providers of up to two percent per fiscal year, starting in 2013 and continuing through 2021. Because the Joint Committee was not able to agree on a set of deficit reduction recommendations on which Congress could vote, cuts went into effect in April 2013. This reduction was extended by PAMA through 2024. We have estimated the impact of sequestration has been approximately $1.1 million in our annual Medicare revenue.

Our reimbursement is also affected by policies that are enacted by CMS. In 2013, CMS announced its process for pricing over 100 new CPT codes for molecular diagnostics, which the American Medical Association had adopted in 2012. CMS stated it would pay for the new molecular codes based on the CLFS, rather than the PFS as some stakeholders had urged. CMS also required that the Medicare Administrative Contractors “gapfill” the new codes and set an appropriate price for them. That “gapfilling” process took place during 2013 and CMS announced the new prices for these codes in September 2013. The median of the prices set by the contractors became the new prices for these codes, effective January 1, 2014.

InOn ~~early~~April ~~2014~~16, ~~CMS~~2015, ~~also~~President ~~made~~Obama ~~two~~signed ~~proposals~~the ~~that~~MACRA, ~~could~~which ~~affect~~repealed the ~~reimbursement~~provisions ~~for~~related ~~our~~to ~~laboratory~~the ~~services. First,~~Medicare ~~CMS~~SGR ~~proposed~~formula and implements a ~~change~~new inphysician ~~how~~payment system that is designed to reward the quality of care. In addition, it ~~calculated~~extended the ~~Relative~~then-current ~~Value~~Medicare ~~Units~~PFS ~~(RVUs)~~rates ~~used~~through toJune ~~calculate~~2015 ~~payments~~and ~~under~~increased them by 0.5% for the ~~PFS~~remainder of 2015. ~~Under~~ ~~this~~Beginning ~~proposal~~in January 1, ~~where~~2016, athe ~~service~~rates ~~was~~were ~~paid~~increased atby a0.5% ~~lower~~and ~~rate~~will incontinue ~~the~~to ~~hospital~~be ~~based~~increased onannually ~~the~~by ~~hospital~~0.5% ~~Outpatient~~through ~~Prospective~~2019. ~~Payment~~For ~~System~~2020 ~~than~~through it2025 ~~was~~rates ~~under~~will ~~the~~be ~~PFS~~frozen, ~~CMS~~although ~~proposed~~beginning in 2019, payment will be adjusted to ~~reduce~~account for performance on certain quality metrics under the ~~RVUs~~Merit-based ~~for~~Incentive ~~that~~Payment ~~service~~System in(“MIPS”) ~~order~~or to ~~equalize~~reflect ~~the~~physician ~~payment~~participation ~~between~~in ~~the~~Alternative ~~two~~Payment ~~systems~~Models (“APMs”). ~~This~~ ~~change~~MIPS includes four performance categories for physicians: quality, ifcost ~~implemented~~clinical practice improvement activities, ~~would~~and ~~have~~advancing ~~resulted~~care ininformation. Eligible anclinicians ~~approximate~~who ~~cut~~report ofsuccessfully 25on ~~percent~~all four performance categories will avoid negative payment adjustments and may earn positive payment adjustments; those participating in ~~aggregate~~APMs ~~payments~~are toexcluded ~~independent~~from ~~laboratories~~MIPS reporting. InFor ~~the~~2026 ~~Final~~and ~~Physician~~subsequent ~~Rule~~years, ~~for~~qualified ~~2014,~~APM ~~however,~~participants ~~CMS~~receive ~~chose~~an ~~not~~annual to0.75% ~~implement~~increase ~~this~~on ~~proposal,~~Medicare ~~although~~physician itpayment ~~stated~~rates, ~~that~~while itthose ~~would~~not ~~develop~~participating receive a ~~revised~~0.25% ~~proposal~~annual ~~that~~payment itincrease, ~~would~~plus ~~propose~~any inapplicable ~~the~~MIPS-based ~~future~~payment adjustments.

In ~~the~~November ~~2014 Proposed Rule~~2016, CMS ~~also~~issued ~~explained~~a ~~that~~final itrule ~~was~~to ~~concerned~~implement ~~that payments for many codes paid under~~ the ~~CLFS~~requirements ~~had~~of ~~not~~MACRA. ~~been~~In ~~revised to reflect technological advances that have occurred since~~ the ~~CLFS~~Final ~~was first implemented in 1984. As a result~~Rule, CMS ~~proposed~~made aclear ~~procedure~~that ~~under~~pathologists ~~which~~practicing itin ~~would~~independent ~~adjust~~laboratories ~~the~~are ~~amount~~considered ~~paid~~“eligible ~~for~~clinicians” ~~various~~and ~~laboratory~~will ~~services~~be tosubject ~~reflect technological changes. CMS stated it expected it would take about five years~~ to ~~review all codes on~~ the ~~CLFS. CMS~~MIPS ~~adopted~~payment adjustment; this ~~proposal~~is in ~~the~~contrast ~~Final~~to ~~2014 Physician Fee Schedule Rule. However, in PAMA, Congress eliminated~~ CMS’s ~~authority~~position towith ~~adjust~~respect ~~prices~~to ~~based~~the onPhysician ~~technological~~Quality ~~changes;~~Reporting ~~therefore~~System (“PQRS”), ~~CMS~~which ~~has~~MIPS ~~stated that it will not implement this adjustment procedure~~replaced. ~~PAMA~~CMS ~~also~~did ~~required~~create ~~that~~some ~~clinical~~flexibility ~~laboratory~~for ~~reimbursement~~non-patient-facing beclinicians ~~changed~~(those towho ~~better~~have ~~reflect~~fewer ~~current~~than ~~market~~100 ~~rates~~patient-facing ~~and~~encounters ~~established~~during a ~~process~~reporting ~~for~~period); ~~making~~ these ~~changes,~~clinicians ~~which~~are ~~requires~~expected ~~laboratories~~ to ~~report~~participate ~~the~~in ~~rates~~some, ~~paid~~but bynot ~~third-party~~all, ~~payors. The~~aspects ~~requirements~~ of ~~PAMA~~MIPS ~~are~~reporting. ~~discussed~~At ~~below~~this ~~under the heading “Recent Developments~~time, ~~Health~~it ~~Care~~is ~~Regulatory~~too ~~and~~early ~~Reimbursement~~to ~~Changes”~~determine inhow ~~Part~~these ~~II,~~changes ~~Item 7~~may ofimpact ~~this~~our ~~Annual Report~~business.

~~In addition~~Finally, ~~CMS~~the ~~made~~Budget ~~several~~Control ~~other~~Act ~~changes~~of in2011 ~~2014~~created ~~Physician~~a ~~Fee~~Joint ~~Schedule~~Select ~~Rule~~Committee ~~that~~on ~~impacted~~Deficit ~~our business. First~~Reduction, ~~CMS~~which ~~implemented~~was atasked ~~policy~~with ~~that~~recommending ~~will~~proposals ~~set~~to ~~the~~reduce ~~payment~~spending. ~~for~~Under the ~~examination~~law, ofthe 10Joint orCommittee’s ~~more~~failure ~~prostate~~to ~~biopsies~~achieve ~~into~~ a ~~single~~targeted ~~“bundled”~~deficit ~~payment amount~~reduction, ~~rather~~or ~~than~~Congress’ ~~paying~~failure ~~separately~~to ~~for~~pass ~~each~~the ~~individual~~Committee’s ~~procedure~~recommendations aswithout ~~had~~amendment ~~been~~by ~~done~~December ~~previously. This~~23, ~~resulted~~2011, would result in aautomatic ~~significant~~across-the-board ~~reduction~~cuts into ~~reimbursement~~most ondiscretionary ~~each~~programs. ofAutomatic ~~these~~cuts ~~procedures. In~~also ~~addition,~~would asbe amade to Medicare and would result ofin ~~recent~~aggregate ~~changes~~reductions in ~~the~~Medicare ~~descriptions~~payments ~~for~~to ~~certain~~providers ~~CPT~~of ~~codes~~up ~~that~~to we2% ~~commonly~~per ~~bill~~fiscal ~~for~~year, ~~CMS~~starting ~~developed~~in ~~new~~2013 ~~prices~~and ~~for~~continuing ~~Immunohistochemistry~~through ~~procedures,~~2021. ~~which~~Because ~~are~~the Joint Committee was not able to agree on a ~~common~~set ~~staining~~of ~~procedure~~deficit ~~used~~reduction inrecommendations ~~pathology~~on ~~and~~which ~~for~~Congress ~~FISH~~could ~~(Fluorescent~~vote, Incuts ~~Situ~~went ~~Hybridization)~~into ~~testing~~effect in April 2013. ~~Each~~ ofThis ~~these~~reduction ~~changes~~was ~~resulted~~extended inby ~~reductions~~PAMA inthrough 2024 and by the ~~reimbursement~~Bipartisan ~~received~~Budget ~~for~~Act ~~these~~of ~~procedures~~2015 through 2025.

~~Also,~~Our ~~beginning~~reimbursement inis ~~2015~~also affected by policies that are enacted by CMS. In 2013, CMS ~~stopped~~announced ~~paying~~its ~~separately~~process for ~~the~~pricing ~~technical~~over ~~component~~100 ofnew ~~many~~CPT ~~pathology~~codes ~~services~~for ~~furnished~~molecular ~~to outpatients. Instead~~diagnostics, which the ~~technical~~American ~~component~~Medical ~~payments~~Association ~~were~~had ~~included~~adopted in 2012. CMS stated it would pay for the ~~total~~new ~~amount~~molecular ~~paid~~codes based on the ~~hospital~~CLFS, rather than the PFS as some stakeholders had urged. ~~This~~ ~~change~~CMS ~~could~~also ~~have~~required anthat ~~impact~~the onMedicare ~~our~~Administrative ~~arrangements~~Contractors ~~with~~“gapfill” ~~those~~the ~~hospitals~~new ~~with~~codes ~~whom~~and weset doan ~~business,~~appropriate price for them. That “gapfilling” process took place during 2013 and ~~could~~CMS ~~increase~~announced ~~pressure~~the new prices for ~~more~~these ~~favorable~~codes ~~payment~~in ~~terms~~September 2013. The median of the prices set by the contractors became the new prices for these codes, effective January 1, 2014.

~~Emerging~~In ~~Growth~~2014, ~~Company~~CMS also made two proposals that could affect the reimbursement for our laboratory services. First, CMS proposed a change in how it calculated the Relative Value Units used to calculate payments under the PFS. Under this proposal, where a service was paid at a lower rate in the hospital based on the hospital Outpatient Prospective Payment System than it was under the PFS, CMS proposed to reduce the RVUs for that service in order to equalize the payment between the two systems. This change, if implemented, would have resulted in an approximate cut of 25% in aggregate payments to independent laboratories. In the Final Physician Rule for 2014, however, CMS chose not to implement this proposal, although it stated that it could develop a revised proposal in the future.

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). As an emerging growth company, we are subject to reduced reporting and other obligations generally applicable to public companies, including reduced disclosure about our executive compensation arrangements and exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. In addition, we may take advantage of an extended transition period for complying with new or revised accounting standards under the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

The information that we provide may be different than what is available with respect to other public companies due to these reduced reporting burdens.

In the 2014 PFS Final Rule, CMS made several changes in 2014 Physician Fee Schedule Rule that impacted our business. First, CMS implemented a policy that set the payment for the examination of 10 or more prostate biopsies into a single “bundled” payment amount, rather than paying separately for each individual procedure as had been done previously. This resulted in a significant reduction in reimbursement on each of these procedures. In addition, as a result of recent changes in the descriptions for certain CPT codes that we commonly bill for, CMS developed new prices for Immunohistochemistry procedures, which are a common staining procedure used in pathology and for FISH (Fluorescent In Situ Hybridization) testing. Each of these changes resulted in reductions in the reimbursement received for these procedures. Additional changes to these codes or other codes that we bill could be implemented in the future.

Also, beginning in 2015, CMS stopped paying separately for the technical component of many pathology services furnished to outpatients. Instead, the technical component payments were included in the total amount paid to the hospital. This change did not have a material impact on our financial results since becoming effective.

Congress and President Trump have also proposed a number of legislative initiatives, including possible repeal and replacement of the ACA, although to date such measures have not been passed.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and reduced disclosure obligations regarding executive compensation in this annual report.

If certain events occur, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt securities in any three-year period, we will cease to be an emerging growth company.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act. As a result, our financial statements may not be comparable to those of companies that comply with such new or revised accounting standards.

Government Regulation and Compliance Infrastructure

The services that we provide are heavily regulated by both federal and state governmental authorities. Failure to comply with the applicable regulations can subject us to significant civil and criminal penalties, loss of license, or the requirement that we repay amounts previously paid to us. The significant areas of regulation include the following:

●• the federal Anti-Kickback Statute, which prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any goods or service for which payment may be made under governmental payor programs such as Medicare and Medicaid;

●• the federal False Claims Act (“FCA”), which prohibits individuals or entities from knowingly presenting to, or causing to be presented to, the federal government, claims for payment that are false or fraudulent;

●• the Health Insurance Portability and Accountability Act, or (“HIPAA”), which established comprehensive federal standards with respect to the use and disclosure of protected health information;

● the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, which was passed as part of the American Recovery and Reinvestment Act and which strengthens many of the requirements applicable to privacy and security, among other things;

● the Stark Law, which prohibits a physician from making a referral to an entity for certain designated health services reimbursed by Medicare or Medicaid if the physician (or a member of the physician’s family) has a financial relationship with the entity and which also prohibits the submission of any claim for reimbursement for designated health services furnished pursuant to a prohibited referral;

● the federal Civil Monetary Penalty Law, which prohibits the offering of remuneration or other inducements to beneficiaries of federal health care programs to influence the beneficiaries’ decisions to seek specific governmentally reimbursable items or services or to choose particular providers;

● the Clinical Laboratory Improvement Amendments, which requires that laboratories be certified by the federal government or by a federally-approved accreditation agency;

● the anti-markup rule, which prohibits a physician or supplier billing the Medicare program from marking up the price of a purchased diagnostic service performed by another physician or supplier who does not “share a practice” with the billing physician or supplier;

● state law equivalents of the above, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers;

● state laws that prohibit the corporate practice of medicine and the splitting or sharing of fees between physicians and non-physicians;

● state laws that govern the manner in which licensed physicians can be organized to perform and bill for medical services;

● the reassignment rules, which preclude Medicare payment for covered services to anyone other than the patient, physician, or other person who provided the service, with limited exceptions; and

● state laws that prohibit other specified practices, such as billing an entity that does not have ultimate financial responsibility for the service, waiving coinsurance or deductibles, billing Medicaid a higher charge than the lowest charge offered to another payor, and placing professionals who draw blood, or phlebotomists, in the offices of referring physicians.

~~Compliance~~• ~~with~~the ~~government~~Health ~~rules~~Information ~~and~~Technology ~~regulations~~for isEconomic ~~a significant concern throughout our industry, in part due to evolving interpretations of these rules~~ and ~~regulations.~~Clinical WeHealth ~~seek~~Act to(“HITECH ~~conduct our business in compliance with all statutes and regulations applicable to our operations. To this end~~Act”), wewhich ~~have~~was ~~created~~passed aas ~~Compliance~~part ~~Committee and have designated a Compliance Officer to assist with reviews~~ of ~~regulatory~~the ~~compliance~~American ~~procedures~~Recovery and ~~policies~~Reinvestment ~~throughout~~Act ~~our business. Our executive management team is responsible for the oversight~~ and ~~operation~~which ofstrengthens ~~our~~many ~~compliance efforts. The Compliance Officer is responsible for administering and monitoring compliance with our Standards~~ of ~~Conduct. We provide periodic training programs to our personnel to promote~~ the ~~observance~~requirements ofapplicable ~~our policies, which are designed~~ to ~~ensure~~privacy ~~compliance with the statutes~~ and ~~regulations~~security, ~~applicable~~among toother ~~us.~~ things;

•

the Physician Self-Referral Law (“Stark Law”), which prohibits a physician from making a referral to an entity for certain designated health services reimbursed by Medicare or Medicaid if the physician (or a member of the physician’s family) has a financial relationship with the entity and which also prohibits the submission of any claim for reimbursement for designated health services furnished pursuant to a prohibited referral;

•

the federal Civil Monetary Penalty Law, which prohibits the offering of remuneration or other inducements to beneficiaries of federal health care programs to influence the beneficiaries’ decisions to seek specific governmentally reimbursable items or services or to choose particular providers;

•

the Clinical Laboratory Improvement Amendments, which requires that laboratories be certified by the federal government or by a federally-approved accreditation agency;

•

the anti-markup rule, which prohibits a physician or supplier billing the Medicare program from marking up the price of a purchased diagnostic service performed by another physician or supplier who does not “share a practice” with the billing physician or supplier;

•

state law equivalents of the above, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers;

•

state laws that prohibit the corporate practice of medicine and the splitting or sharing of fees between physicians and non-physicians;

•

state laws that govern the manner in which licensed physicians can be organized to perform and bill for medical services;

•

the reassignment rules, which preclude Medicare payment for covered services to anyone other than the patient, physician, or other person who provided the service, with limited exceptions; and

•

state laws that prohibit other specified practices, such as billing an entity that does not have ultimate financial responsibility for the service, waiving coinsurance or deductibles, billing Medicaid a higher charge than the lowest charge offered to another payor, and placing professionals who draw blood, or phlebotomists, in the offices of referring physicians.

Compliance with government rules and regulations is a significant concern throughout our industry, in part due to evolving interpretations of these rules and regulations. We seek to conduct our business in compliance with all statutes and regulations applicable to our operations. To this end, we consult with outside experts as necessary and have created a Compliance Committee and have designated a Compliance Officer to assist with reviews of regulatory compliance procedures and policies throughout our business. Our executive management team is responsible for the oversight and operation of our compliance efforts. The Compliance Officer is responsible for administering and monitoring compliance with our Standards of Conduct. We provide periodic training programs to our personnel to promote the observance of our policies, which are designed to ensure compliance with the statutes and regulations applicable to us.

HIPAA and HITECH

Under the administrative simplification provisions of HIPAA, the U.S. Department of Health and Human Services issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the privacy and security of protected health information (“PHI”) used or disclosed by most healthcare providers and other covered entities and their business associates, including the business associates’ subcontractors. Four principal regulations with which we are required to comply have been issued in final form under HIPAA and HITECH: privacy regulations, security regulations, the breach notification rule, and standards for electronic transactions, which establish standards for common healthcare transactions.

The privacy regulations cover the use and disclosure of protected health information by covered entities as well as business associates, which are defined to include subcontractors that create, receive, maintain, or transmit protected health information on behalf of a business associate. They also set forth certain rights that an individual has with respect to his or her PHI maintained by a covered entity, including the right to access or amend certain records containing PHI, or to request restrictions on the use or disclosure of protected health information. The security regulations establish requirements for safeguarding the confidentiality, integrity, and availability of PHI that is electronically transmitted or electronically stored. HITECH, among other things, established certain health information security breach notification requirements. A covered entity must notify any individual whose PHI is breached according to the specifications set forth in the breach notification rule. The HIPAA privacy and security regulations do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing protected health information or insofar as such state laws apply to personal information that is broader in scope than PHI as defined under HIPAA.

CLIA and State Laboratory Testing

As a pathology practice that operates laboratories, we are required to hold certain federal and state licenses, certifications and permits to conduct our business. As to federal certifications, in 1988, Congress enacted CLIA, establishing quality standards for all laboratories that perform testing on human specimens for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA requires such laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure the accuracy, reliability and timeliness of patient test results. CLIA certification is also a prerequisite to be eligible to bill state and federal healthcare programs, as well as many commercial third-party payors, for laboratory testing services. CLIA requires that a laboratory hold a certificate applicable to the type of work it performs, such as high complexity, and comply with certain standards. In addition, CLIA requires each certified laboratory to enroll in an approved proficiency testing program if it performs testing in any category. Certain states also require laboratories located in or conducting testing on specimens originating from those states to hold state-specific licenses or permits: New York is one notable example that has an extensive permitting and laboratory evaluation program.

Intellectual Property

Our intellectual property consists primarily of trademarks and trade secrets. The marks AURORA DIAGNOSTICS and CONNECTDX ~~THE~~the ~~INFORMATION~~Information ~~GATEWAY &~~Gateway ~~Design~~ are our most recognizable trademarks. Those trademarks are registered with the U.S. Patent and Trademark Office ~~along with the marks DERMDX, GASTRODX, HEMADX, TREATMENTDX, URODX and WOMEN’SDX~~. Also, the names of our individual ~~labs~~practices are registered in their respective states. We institute legal action where necessary to prevent others from using or registering confusingly similar trademarks. Our intellectual property also includes the copyright in and to our Tiger TCPC software, which is registered with the U.S. Copyright Office.

Segment Reporting and Geographic Areas

Our operations consist of one reportable segment. All of the Company’s revenue is attributable to customers located in the United States, and all of the Company’s long-lived assets are located in the United States.

Employees

As of December 31, ~~2015~~2016, we had 1,~~105~~136 employees, which consisted of ~~139~~147 pathologists, ~~776~~764 laboratory technicians and staff, 59 87 corporate office personnel and ~~131~~122 sales, marketing and client service personnel. In addition to our ~~139~~147 employed pathologists, we have contractual arrangements with a physician practice that, as of December 31, ~~2015~~2016, employed 16 pathologists, each of which exclusively provides pathology services to our Alabama ~~laboratory~~practice. None of our employees are subject to collective bargaining agreements. We consider our relationships with our employees to be good.

Item 1A.

Risk Factors.

The statements under this heading describe the most significant risks to the Company’s business identified by management and should be considered carefully in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” included in Part II, Item 7 and Part II, Item 8, respectively, of this Annual Report on Form 10-K.

The following is a discussion of risks and uncertainties that the Company believes could, individually or in the aggregate, cause its actual results to differ materially from expected and past results. However, predicting or identifying all such risks and uncertainties is not possible. As a result, the following factors should not be considered to be a complete discussion of the Company’s risks and uncertainties.

14Risks Relating to Our Liquidity and Indebtedness

~~Risks~~Our ~~Relating~~senior secured credit facility is subject to ~~Our~~an ~~Business~~accelerated maturity date of October 14, 2017 and our Senior Notes mature in January 15, 2018. We may not be able to refinance this indebtedness before its maturity.

~~Changes~~As inof ~~medical~~December 31, ~~treatment~~2016, ~~reimbursement~~our ~~rates~~total indebtedness was $397.1 million, including $200.0 million outstanding under our 10.750% senior notes due 2018 (the “Senior Notes”) and ~~other~~$197.0 ~~market~~million ~~conditions~~outstanding inunder our senior secured credit facility, consisting of $162.0 million outstanding under the ~~dermatopathology~~term ~~market~~loan ~~could~~and ~~adversely~~$35.0 million ~~affect~~outstanding under the delayed draw term loans. In addition, as of December 31, 2016, we were obligated to pay contingent consideration in connection with our ~~business~~acquisitions up to $17.7 million. Our amended senior secured credit facility is scheduled to mature on July 14, 2019, but is subject to an accelerated maturity date of October 14, 2017, and will require repayment in full on such date, if our Senior Notes are not refinanced or their maturity is not extended prior to October 14, 2017. Our Senior Notes are scheduled to mature in January 15, 2018.

WeOur ~~derive~~ability ato ~~significant~~meet ~~portion~~our obligations as they become due in the ordinary course of ~~our~~business ~~revenue~~for ~~from~~the next 12 months will depend on our ~~dermatopathology~~ability ~~subspecialty,~~to ~~which~~refinance ~~makes~~our usSenior ~~particularly~~Notes ~~sensitive~~or our ability to ~~changes~~otherwise inrefinance ~~medical~~or ~~treatment,~~extend ~~reimbursement~~the ~~rates~~maturity of our senior secured credit facility and ~~other~~our ~~market~~ability ~~conditions~~to ingenerate ~~the~~cash ~~dermatopathology~~from ~~market~~our operations. Our ~~revenue~~plans isto ~~particularly~~conduct ~~sensitive~~an exchange offer to ~~changes~~refinance ~~that~~the ~~affect~~Senior Notes to avoid the ~~number~~accelerated maturity date of orthe ~~reimbursement~~senior ~~for~~secured ~~dermatopathology-related~~credit ~~services.~~facility Inare ~~2015~~explained under “Management’s Discussion and Analysis of Results of Operations—Liquidity and Capital Resources” and Note 1 to our consolidated financial statements, wewhich ~~derived~~can ~~approximately~~be 43found in Part II, Item ~~percent~~8 of this Annual Report. There is no assurance that we will be able to conduct the exchange offer to refinance our ~~revenue~~Senior ~~from~~Notes or that we will otherwise be able to refinance the Senior Notes or our ~~dermatopathology~~senior ~~subspecialty~~secured ~~services,~~credit ~~primarily~~facility ~~from~~prior ~~biopsies~~to the acceleration of the ~~skin~~maturity date thereof. If ~~there~~we isare aunable ~~significant~~to ~~development~~refinance inour Senior Notes or our senior secured credit facility or otherwise extend the ~~prevention~~maturity of ~~skin~~our ~~cancer~~senior secured credit facility, orwe anwill ~~adverse~~be ~~development~~required into ~~the~~repay ~~reimbursement~~all ~~rate~~outstanding ~~for~~amounts ~~skin~~under ~~biopsies~~our senior secured credit facility by October 14, it2017 ~~could~~and then repay our Senior Notes on January 15, 2018, and we may not have sufficient liquidity to do so. A default under our senior secured credit facility could cause a default under other of our obligations that are subject to cross-default and cross-acceleration provisions, including our Senior Notes. If we are unable to meet these obligations upon maturity or acceleration, we may be forced to sell material ~~adverse~~assets ~~effect~~or onoperations, seek additional capital from other sources or take other actions to satisfy our ~~business~~indebtedness. We may not be able to take any of these actions, and these actions may not be successful or permit us to meet our debt service obligations. Furthermore, these actions may not be permitted under the terms of existing or future debt agreements. In such case, we could be forced into insolvency or liquidation.

Changes in governmental reimbursement policies may adversely affect reimbursement for diagnostic services and could have a material adverse impact on our business.

Reimbursement levels for health care services are subject to continuous and often unexpected changes in policies, and we face a variety of efforts by government payors to reduce utilization and reimbursement for diagnostic testing services. Changes in governmental reimbursement may result from statutory and regulatory changes, retroactive rate adjustments, administrative rulings, competitive bidding initiatives, and other policy changes.

The U.S. Congress has considered, at least yearly in conjunction with budgetary legislation, changes to one or both of the Medicare fee schedules under which we receive reimbursement, which include the PFS and CLFS. For example, currently there is no copayment or coinsurance required for clinical laboratory services, although there is for our physician services. However, Congress has periodically considered imposing a 20 percent coinsurance on clinical laboratory services. If enacted, this would require us to attempt to collect this amount from patients, although in many cases the costs of collection would exceed the amount actually received.

In 2010, the U.S. Congress passed legislation relating to health care reform, referred to as the Patient Protection and Affordable Care Act, or the ACA, which provided for two separate reductions in the reimbursement rates for our clinical laboratory services, each of which reduce the annual Consumer Price Index-based update that would otherwise determine our reimbursement for clinical laboratory services. CMS has stated that the combined reduction resulting from these provisions was 0.25 percent for 2015 and has recently announced the update would actually increase slightly, by 0.10 percent for 2016. In addition, in the Middle Class Tax Relief and Job Creation Act of 2012, Congress mandated an additional change in the reimbursement for clinical laboratory services. That legislation required CMS to rebase the CLFS to effect an additional two percent reduction in clinical laboratory fees.

Reimbursement for our anatomic pathology services is governed by the physician fee schedule. On April 16, 2015, President Obama signed the MACRA that will replace the old SGR formula with a new system that is designed to reward the quality of care. At this time, it is not known how these changes may affect our business beyond 2016.

A substantial portion of our anatomic pathology services are billed under a few codes (CPT 88305, 88305TC and 88305-26) and our revenue and business may be adversely affected if the reimbursement rates associated with these codes are reduced. For example, in the 2012 Final Rule, CMS requested that the American Medical Association’s RVS Update Committee (RUC) reexamine the relative value units (RVUs) for certain common pathology codes, including these codes. The 2013 Final Rule included a reduction of approximately 33 percent in the global billing code for 88305 and a 52 percent reduction in the technical component of that code.

Under the headings “Billing and Reimbursement” in Part I, Item 1 of this Annual Report and “Recent Developments, Health Care Regulatory and Reimbursement Changes” in Part II, Item 7 of this Annual Report, we have summarized a number of recent and potential changes in government reimbursement policies that may adversely affect reimbursement for diagnostic services, including without limitation:

● changes to the PFS and CLFS;

● cuts in reimbursement arising as a result of The Budget Control Act of 2011;

● the adoption of pricing for new CPT codes and the “gapfilling” process;

● proposals to reduce RVUs used to calculate payments under the PFS to lower hospital based rates;

● potential adjustments to payments under the CLFS to reflect technological advances;

● proposals to bundle prostate biopsies;

● new pricing for immunohistochemistry procedures and FISH testing; and

● bundling of technical component services furnished to hospital outpatients.

These and other changes to government reimbursement policies could have a material adverse impact on our business. Even when reimbursement rates are not reduced, policy changes add to our costs by increasing the complexity and volume of administrative requirements. Medicaid reimbursement, which varies by state, is also subject to administrative and billing requirements and budget pressures. Recently, state budget pressures have caused states to consider several policy changes that may impact our financial condition and results of operations, such as delaying payments, reducing reimbursement, restricting coverage eligibility and service coverage, and imposing taxes on our services.

Non-governmental third-party payors have taken steps to control the utilization and reimbursement of diagnostic services.

We also face efforts by non-governmental third-party payors, including health plans, to reduce utilization of diagnostic testing services and reimbursement for diagnostic services. For instance, third-party payors often use the payment amounts under the Medicare fee schedules as a reference in negotiating their payment amounts. In some cases, our fee schedules with third-party payors are linked to the current Medicare fee schedules, and therefore reductions in the Medicare fee schedules could lead to reductions in reimbursement from some of our third-party payors. As described above, CMS’ 2013 Final Rule included a reduction in the Medicare fee schedules of approximately 33 percent in the global billing code for 88305 and a 52 percent reduction in the technical component of that code, which resulted in a significant reduction in our reimbursement from Medicare. CMS made significant further reductions in reimbursement for certain codes we bill under the 2014 and 2015 Medicare fee schedules. We have experienced isolated reductions in reimbursement from non-governmental third-party payors tied to the Medicare reductions. However, the recent reduction in Medicare reimbursement rates, and future reductions in Medicare reimbursement rates, could result in a reduction in the reimbursements we receive from such third-party payors and have a material adverse impact on our business.

In addition, changes in test coverage policies of and reimbursement from other third-party payors may also occur independently from changes in Medicare. Such reimbursement and coverage changes in the past have resulted in reduced prices, added costs and reduced accession volume and have added more complex and new regulatory and administrative requirements.

The health care industry has also experienced a trend of consolidation among health insurance plans, resulting in fewer, larger health plans with significant bargaining power to negotiate fee arrangements with health care providers like us. Some of these health plans, as well as independent physician associations, have demanded that laboratories accept discounted fee structures or assume a portion or all of the financial risk associated with providing diagnostic testing services to their members through capitated payment arrangements. In addition, some health plans have limited the preferred provider organization or point-of-service laboratory network to only a single national laboratory to obtain improved fee-for-service pricing. The increased consolidation among health plans also has increased the potential adverse impact of ceasing to be a contracted provider with any such insurer.

WeOur ~~expect~~substantial ~~that~~indebtedness ~~efforts~~could toadversely ~~reduce~~affect ~~reimbursements,~~our ~~impose~~ability ~~more~~to ~~stringent~~operate ~~cost controls and reduce utilization of diagnostic testing services will continue. These efforts may have a material adverse effect on~~ our business ~~and results of operations~~.

~~Increased~~In ~~internalization~~addition ofto ~~diagnostic~~the ~~testing~~risk byrelating ~~our~~to ~~clients~~the oraccelerated ~~patients,~~maturity ~~including~~date ~~the use~~ of ~~new~~our ~~testing~~senior ~~technologies~~secured bycredit facility, our ~~clients~~substantial orindebtedness ~~patients,~~may ~~could~~ adversely ~~affect~~impact our business., results of operations and financial condition, by:

~~Our~~• ~~clients,~~increasing such as referring physicians and hospitals, may internalize diagnostic testing or technologies that have historically been performed by diagnostic laboratory companies like us. Our industry has experienced a recent market trend in which physicians and hospitals perform the technical and/or professional components of their laboratory testing needs in their own offices. If this trend continues or becomes more pronounced and our ~~clients~~vulnerability ~~internalize diagnostic testing functions or technologies that we currently perform or use, and we do not develop new or alternative functions or technologies that are attractive~~ to ~~our~~general ~~clients,~~adverse iteconomic ~~may reduce the demand for our diagnostic testing services~~ and ~~adversely~~industry ~~affect our business.~~ conditions;

In• ~~addition,~~subjecting ~~advances~~us ~~in technology may lead~~ to ~~the~~covenants ~~development of more cost-effective tests~~ that ~~can~~limit beour ~~performed~~ability ~~outside~~to offund afuture ~~commercial~~working ~~laboratory~~capital, ~~such~~capital asexpenditures, ~~point-of-care~~research ~~tests~~and ~~that~~development ~~can~~costs beand ~~performed~~other bygeneral ~~physicians~~corporate ~~in their offices~~requirements; tests that can be performed by hospitals in their own laboratories; or home testing that can be performed by patients in their homes. Any advance in technology could reduce demand for our services or render them obsolete.

~~Compliance~~• ~~costs~~requiring ~~associated~~us ~~with~~to ~~the~~devote ~~Clinical~~a ~~Laboratory~~substantial ~~Improvement~~portion ~~Amendments~~ of ~~1988,~~our orcash ~~CLIA,~~flow ~~make~~from itoperations ~~cost-prohibitive for many physicians~~ to ~~operate~~payments ~~clinical~~on ~~laboratories~~our ~~in their offices. However~~indebtedness, ~~diagnostic~~thereby ~~tests~~reducing ~~approved or cleared by~~ the ~~U.S.~~availability ~~Food~~of ~~and Drug Administration, or FDA, for home use are automatically deemed to be “waived” tests under CLIA and may be performed by~~ our ~~referring~~cash ~~physicians~~flow ~~and their patients with minimal regulatory oversight under CLIA. Test kit manufacturers could seek~~ to ~~increase~~fund ~~sales~~working tocapital, ~~both~~capital ~~our~~expenditures, ~~referring~~research ~~physicians~~ and ~~their~~development ~~patients~~efforts ~~of test kits approved by the FDA for point-of-care testing or home use. Development of such technology~~ and ~~its~~other ~~use~~general bycorporate ~~our clients could decrease our revenue and have a material adverse effect on our business.~~purposes;

~~Failure~~• tolimiting ~~timely or accurately bill for~~ our ~~services~~ability orto ~~collect~~fund ~~outstanding~~future ~~payments could have a material adverse effect on our business.~~acquisitions;

~~Billing~~• ~~for~~limiting ~~diagnostic~~our ~~services~~flexibility isin ~~complex.~~planning ~~We bill numerous payors~~for, ~~including~~or ~~physicians,~~reacting ~~patients~~to, ~~insurance~~changes ~~companies,~~in ~~Medicare,~~our ~~and~~business ~~Medicaid, according to applicable law, billing requirements~~ and, ~~as applicable, contractual arrangements. This complexity is further compounded by~~ the ~~fact~~industry that we currently generate bills using multiple billing systems and are subject to rapidly changing requirements for auditing, external compliance, and internal compliance policies and procedures. Furthermore, in ~~the~~which ~~future,~~ we ~~may convert the legacy billing systems of businesses we have acquired to one or more common platforms.~~ operate;

~~Most~~• ofimpeding our ~~provision~~ability ~~for~~to ~~doubtful~~obtain ~~accounts in 2015, which totaled 6.3 percent of revenue, resulted from~~ the ~~failure~~necessary ofapprovals ~~patients~~ to ~~pay~~operate ~~their bills, including copayments and deductibles. Failure to timely or correctly bill could lead to lack of reimbursement for services or an increase in the aging of~~ our ~~accounts~~business ~~receivable, which could adversely affect our results of operations. Increases~~ in ~~write-offs~~compliance of doubtful accounts, delays in receiving payments, potential retroactive adjustments, and penalties resulting from audits by payors would also adversely affect our financial condition. Failure to comply with applicable laws relating to billing governmental health care programs could also lead to various penalties, including exclusion from participation in Medicare or Medicaid programs, asset forfeitures, civil and criminal fines and penalties, and the ~~loss~~numerous oflaws ~~various licenses, certificates,~~ and ~~authorizations~~regulations ~~necessary~~ to ~~operate our business, any of~~ which ~~could~~we ~~have~~are asubject; ~~material adverse effect on our business.~~ and/or

~~Our~~• ~~use~~placing ofus ~~multiple~~at ~~billing~~a ~~systems~~competitive ~~and~~disadvantage ~~the~~relative ~~potential~~to ~~conversion~~our ofcompetitors ~~legacy~~that ~~systems of businesses we~~ have ~~acquired~~greater ~~may~~financial ~~result in inconsistent data, slower collections, exposure to billing compliance violations~~ and ~~unexpected~~other ~~down~~resources ~~times~~than ~~for~~we ~~releasing bills for payment~~do.

Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt.

We may be able to incur substantially more indebtedness in the future, including $30.0 million of additional borrowings under our senior secured credit facility, and we may be able to incur further borrowings in connection with a refinancing or extension of that facility. Although the terms of our debt agreements contain covenants limiting indebtedness, these covenants are subject to a number of significant exceptions and qualifications, and if we incur additional debt, secure existing or future debt, or recapitalize our debt, we might further exacerbate the risks associated with our substantial indebtedness.

Our failure to comply with the financial tests and ratios contained in the agreements governing our senior secured credit facility could result in an acceleration of our indebtedness.

We currently expect to meet the financial tests and ratios contained in the agreement governing our amended senior secured credit facility at least through the end of 2017. Nonetheless, we may not achieve all of our business goals and objectives and events beyond our control could affect our ability to meet these financial tests and ratios. Any failure by us to meet all applicable financial tests and ratios could result in an event of default with respect to our amended senior secured facility. An event of default under our senior secured credit facility could lead to the acceleration of the maturity of our outstanding loans or Senior Notes and the termination of the commitments to make further extensions of credit under our senior secured credit facility.

The computation of amounts owed under the contingent notes could lead to disputes that could disrupt our operations and damage our relationships with our pathologists.

In connection with some of our acquisitions, we agreed to pay additional consideration in future periods based upon the attainment of stipulated levels of operating results of the acquired entities. The computation of the annual operating results and the amount owed under such agreements is subject to review and approval by sellers prior to payment. This computation could lead to a dispute with the sellers who are often our pathologists. For example, as described in Note 10 of our Consolidated Financial Statements in this Annual Report, certain sellers have claimed that we owed additional amounts in connection with contingent notes. These types of disputes could disrupt our operations, damage our relationships with our pathologists and have a material adverse effect on our business.

~~Changes~~The inagreements ~~payor~~governing ~~mix~~our ~~may~~senior ~~adversely~~secured ~~affect~~credit ~~reimbursement~~facility ~~for~~and ~~diagnostic~~Senior ~~services~~Notes contain, and ~~could~~future ~~have~~debt aagreements ~~material~~may ~~adverse~~contain, ~~impact~~various oncovenants that limit our discretion in the operation of our business.

~~Most~~Our ofagreements ~~our~~and ~~services~~the ~~are~~related ~~billed~~instruments togoverning aborrowings ~~party~~under ~~other~~our ~~than~~senior ~~the~~secured ~~physician~~credit ~~that~~facility ~~ordered~~and ~~the~~Senior ~~test.~~Notes ~~In 2013~~contain, ~~2014~~ and ~~2015,~~the ~~based~~agreements ~~on cash collections, we estimate that we received 23 percent, 22 percent~~ and 24instruments ~~percent,~~governing ~~respectively,~~any of our ~~revenue~~future ~~from~~debt ~~Medicare~~agreements ~~and~~may ~~Medicaid. In 2015~~contain, ~~based~~various onrestrictive ~~cash~~covenants ~~collections~~that, weamong ~~estimate~~other ~~that 58 percent of our revenue was paid by non-governmental third-party payors~~things, ~~including~~require ~~health~~us ~~plans. If we bill a higher percentage of our services~~ to ~~payors~~comply ~~who~~with ~~reimburse~~or atmaintain ~~rates~~certain ~~lower~~financial ~~than~~tests ~~our~~and ~~current~~ratios ~~payors, our results of operations~~ and ~~financial~~restrict ~~condition~~our ~~would~~ability ~~suffer.~~to:

~~Changes~~• inincur ~~the~~more ~~mix of diagnostic testing services that we provide have and could continue to negatively impact our net revenue per accession and our profitability.~~ debt;

We• ~~typically~~redeem provide global pathology services in which we provide both the technical component and the professional component of services with respect to our accessions. In recent years, increasing numbers of referring physicians have converted to arrangements in which we perform only the technical component or ~~the~~repurchase ~~professional component of services with respect to our accessions~~stock, aspay ~~opposed~~dividends to global pathology services. In these cases, our net revenue per accession has declined due to the fact that we no longer receive the entire global fee for the service, but instead receive fees for only the technical component or ~~the~~make ~~professional~~other component of each accession. If the volume or percentage of accessions for which we perform global pathology services decreases, it could continue to decrease our average net revenue per accession and gross profit percentage. distributions;

~~Diagnostic~~• ~~testing~~make ~~services that we perform in~~ certain subspecialties involving clinical lab services, such as women’s health pathology, have lower average net revenue per accession and gross profit percentage than those in other subspecialties. A change in our service mix that results in an increase in the percentage of services we perform in women’s health pathology could result in a decrease in our average net revenue per accession and gross profit percentage. The average revenue per accession of our organic business may decline in the future as a result of changes in service mix, including growth in women’s health pathology services. In addition, our growth rates and average revenue per accession may be positively or negatively impacted by the reimbursement market, service mix and average revenue per accession of acquisitions completed in the future. investments;

~~Our~~• ~~financial~~create and billing systems limit our ability to monitor and precisely report historical revenue by subspecialty. This inability, which could continue into future periods, may make it difficult or impossible for us to accurately assess changes in our service mix or the impact of such changes. liens;

~~Integration~~• ofenter ~~our~~into ~~operations~~transactions with ~~newly acquired businesses may be difficult and costly.~~ affiliates;

~~Since~~• ~~our~~make ~~inception, we have acquired 28 existing diagnostic services businesses, including four~~ acquisitions in 2014 and two in 2015. We expect to evaluate potential strategic acquisitions of diagnostic services and other businesses that might augment our existing specialized diagnostic testing services. These acquisitions have involved and could continue to involve the integration of a separate company that previously operated independently and had different systems, processes and cultures. As such, many of our systems, such as our laboratory information systems and billing systems, are not standardized and some aspects of the day-to-day operations of our laboratories continue to be conducted on a decentralized basis. ;

~~The~~• ~~process~~merge ~~of integrating businesses we acquire may substantially disrupt both our existing businesses and the businesses we acquire. This disruption may divert management from the operation of our business~~ or may cause us to lose key employees or clients. Additionally, we may have difficulty consolidating facilities and infrastructure, standardizing information and other systems and coordinating geographically-separated facilities and workforces, resulting in a decline in the quality of services. consolidate;

~~Any~~• ~~past~~transfer or ~~future~~sell ~~acquisitions,~~assets; and the related integration efforts, may be difficult, costly or unsuccessful. In each case, our existing business and the businesses we acquire may be adversely affected. Even if we are able to successfully integrate businesses we have acquired, we may not be able to realize the benefits that we expect from them.

•

make fundamental changes in our corporate existence and principal business.

Any failure by us to comply with all applicable covenants could result in an event of default with respect to our senior secured facility, our Senior Notes or future debt agreements. This could lead to the acceleration of the maturity of our outstanding loans or notes and the termination of the commitments to make further extensions of credit. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business at our sole discretion could harm our business by, among other things, limiting our ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.

Risks Relating to Our Business

Changes in governmental reimbursement policies may adversely affect reimbursement for diagnostic services and could have a material adverse impact on our business.

Reimbursement levels for health care services are subject to continual and often unexpected changes in policies, and we face a variety of efforts by government payors to reduce reimbursement for diagnostic testing services. Changes in governmental reimbursement or changes in policy regarding coverage of anatomic pathology services and clinical laboratory services may result from statutory and regulatory changes, retroactive rate adjustments, administrative rulings, competitive bidding initiatives, and other policy changes.

The U.S. Congress has considered, at least yearly in conjunction with budgetary legislation, changes to one or both of the Medicare fee schedules under which we receive reimbursement, which are the PFS and, to a far lesser extent, the CLFS. With respect to the PFS, on April 16, 2015, President Obama signed MACRA, which replaces the old SGR formula with a new system that is designed to reward the quality of care. At this time, it is not known how these changes may affect our business. With respect to the CLFS, currently there is no copayment or coinsurance required for clinical laboratory services, although there is for our physician services. However, Congress has periodically considered imposing a 20% coinsurance on clinical laboratory services. If enacted, this would require us to attempt to collect this amount from patients, although in many cases the costs of collection would exceed the amount actually received.

~~Businesses~~A wesubstantial ~~acquire~~portion orof ~~have~~our ~~acquired~~anatomic pathology services are billed under a few codes (CPT 88305 (a global code), 88305TC (for the technical component) and 88305-26 (for the professional component)) and our revenue and business may ~~have~~be ~~significant~~adversely ~~unknown~~affected orif ~~contingent~~the ~~liabilities~~reimbursement rates associated with these codes are reduced. For example, in the 2012 PFS Final Rule, CMS requested that ~~could~~the ~~adversely~~American ~~impact~~Medical ~~our~~Association’s ~~operating~~RVS ~~results~~Update Committee (the “RUC”) reexamine the relative value units (“RVUs”) for certain common pathology codes, including these codes. The 2013 PFS Final Rule included a reduction of approximately 33% in the global billing code for 88305 and a 52% reduction in the technical component code 88305TC.

~~Businesses~~In we2010, ~~acquire~~the orU.S. ~~have~~Congress ~~acquired~~passed ~~may~~the ~~have~~Patient ~~unknown~~Protection orand ~~contingent~~Affordable ~~liabilities~~Care orAct, ~~liabilities~~which ~~that~~provided ~~are~~for intwo ~~excess~~separate ofreductions in the ~~amounts~~reimbursement ~~that~~rates wefor ~~originally~~our ~~estimated.~~clinical ~~Although~~laboratory weservices, ~~generally~~each ~~seek~~of ~~indemnification~~which ~~from~~reduce the ~~sellers~~annual ofConsumer ~~businesses~~Price weIndex-based ~~acquire~~update ~~for matters~~ that ~~are~~would ~~not~~otherwise ~~properly~~determine ~~disclosed~~our toreimbursement ~~us,~~for weclinical ~~may~~laboratory ~~not successfully obtain indemnification~~services. ~~Even~~CMS inhas ~~cases~~stated ~~where~~that wethe ~~are~~combined ~~able~~reduction toresulting ~~obtain~~from ~~indemnification,~~these weprovisions ~~may~~was be0.25% ~~subject~~for to2015 ~~liabilities~~and ~~greater~~by ~~than~~0.10% ~~the~~for ~~contractual~~2016. ~~limits~~In ofaddition, ~~our~~in ~~indemnification or~~ the ~~financial~~Middle ~~resources~~Class ofTax ~~the~~Relief ~~indemnifying~~and ~~party.~~Job InCreation ~~the~~Act ~~event~~of ~~that~~2012, weCongress ~~are~~mandated ~~responsible~~an ~~for~~additional ~~liabilities~~change ~~substantially~~ in ~~excess~~the ofreimbursement ~~any~~for ~~amounts~~clinical ~~recovered~~laboratory ~~through~~services, ~~rights~~which toresulted ~~indemnification,~~in ~~this~~an ~~could~~additional ~~adversely~~2% ~~impact~~reduction ~~our~~in ~~operating~~clinical ~~results.~~laboratory fees.

WeIn ~~have~~2014, ~~recorded~~the U.S. Congress passed PAMA which, among other things, changes the way that rates on the Medicare CLFS are set. Beginning in 2017 and every three years thereafter, certain laboratories will report private payor rates and associated volumes for clinical laboratory tests furnished during a ~~significant~~portion ~~amount~~of the prior year. CMS will calculate the weighted medians of ~~intangible~~the ~~assets~~private payor rates, which ~~may~~will ~~never~~become ~~generate~~the new CLFS rates for a period of three years, starting in 2018. While it is too soon to know the ~~returns~~impact weof ~~expect~~PAMA on CLFS rates, the rates are expected to decline. Any rate reductions will be phased in over a number of years.

~~Our~~On ~~acquisitions~~November ~~have resulted in significant increases in net identifiable intangible assets and goodwill. Net identifiable intangible assets~~2, ~~which include customer relationships~~2016, ~~healthcare~~CMS ~~facility~~issued ~~agreements~~its ~~and~~2017 ~~non-compete agreements acquired in acquisitions~~PFS, ~~were~~which ~~approximately~~effectuated ~~$65.7 million~~reductions atto ~~December 31,~~CPT ~~2015,~~Code ~~representing~~88305 ~~25 percent~~ of ~~our~~approximately ~~total assets~~7%. ~~Goodwill,~~Reimbursement ~~which~~rates ~~relates~~for toflow ~~the~~cytometry ~~excess~~codes ofwere ~~cost~~also ~~over~~reduced ~~the~~by ~~fair value of the net assets of the businesses acquired, was $125.2 million at December 31, 2015, representing~~ approximately ~~48 percent of our total assets~~19%. ~~Goodwill~~ Based ~~and net identifiable intangible assets are recorded at fair value~~ on ~~the~~our ~~date~~current level of ~~acquisition~~reimbursement ~~and, under Financial Accounting Standards Board Statement (FASB) Accounting Standards Codification 350, are reviewed at least annually for impairment. Impairment may result~~ from, ~~among other things~~Medicare, ~~deterioration~~we inestimate ~~performance of~~ the ~~acquired~~changes ~~company,~~to ~~adverse~~reimbursement ~~market~~rates ~~conditions,~~included ~~adverse changes~~ in ~~applicable laws or regulations, including changes that restrict~~ the ~~activities~~CY of2017 ~~the~~PFS ~~acquired~~will ~~business,~~result ~~and~~in a ~~variety~~reduction of ~~other circumstances. The amount of any impairment must be written off. We evaluated~~ our ~~recorded~~annualized ~~goodwill~~Medicare ~~and~~revenue ~~identifiable intangible assets as~~ of ~~November 30,~~approximately ~~2013, November 30, 2014, June 30, 2015 and November 30, 2015, which resulted in our recording impairment charges of~~ $532.9 ~~million,~~ ~~$27.5~~ million~~, $39~~.~~6 million~~ and $17.1 million, respectively. We may never realize the full value of our intangible assets. Any future determination requiring the write-off of a significant portion of intangible assets would have an adverse effect on our financial condition and results of operations.

~~Failure~~We ofhave ~~our~~summarized ITa ornumber ~~communication systems, or the failure~~ of ~~these~~recent ~~systems~~and topotential ~~keep~~changes ~~pace~~in ~~with~~government ~~technological~~reimbursement ~~advances~~policies orthat ~~changes~~may inadversely ~~regulation~~affect ~~and~~reimbursement ~~policies~~for ~~related~~diagnostic toservices ~~our~~under ITthe orheadings ~~communication~~“Business—Billing ~~systems,~~and ~~could~~Reimbursement.” ~~adversely~~These ~~impact~~changes ~~our~~include: ~~business.~~

~~Our~~• ~~laboratory~~changes ~~operations~~to ~~depend significantly on~~ the ~~uninterrupted~~PFS ~~performance of our IT~~ and communication systems. Sustained system failures or interruption of our systems in one or more of our laboratories could disrupt our ability to process laboratory requisitions, handle client service, perform testing, provide our reports or test results in a timely manner, or bill the appropriate party for our services. CLFS;

~~Our~~• ~~efforts~~cuts ~~to invest~~ in ~~new~~reimbursement orarising ~~improved~~as ~~IT systems and billing systems may be costly and require time and resources for implementation. While we have begun implementing~~ a ~~plan~~result toof ~~standardize~~The ~~and~~Budget ~~improve~~Control ~~our~~Act ~~laboratory~~of information systems and billing systems, we expect that it will take several years to complete full implementation. Our efforts to invest in new or improved IT systems and billing systems may not ultimately be successful, and our failure to properly implement our plan to standardize and improve our laboratory information systems and billing systems could adversely impact our business. 2011;

~~Public~~• ~~and~~changes ~~private~~in ~~initiatives~~reimbursement tounder ~~create electronic medical record standards and to mandate standardized coding systems for~~ the ~~electronic~~CLFS ~~exchange~~as ofa information, including test orders and test results, could require costly modifications to our existing IT systems. We expect that any standards that might be adopted or implemented would allow us adequate time to comply with such standards. However, any failure or delay in implementing standards may result ~~in a loss~~ of ~~clients~~the ~~and business opportunities, which could adversely impact our business.~~ PAMA;

•

the adoption of pricing for new CPT codes and the “gapfilling” process;

•

proposals to bundle prostate biopsies;

•

new pricing for immunohistochemistry procedures and FISH testing; and

•

bundling of technical component services furnished to hospital outpatients.

~~Failure~~These and other changes to ~~adequately~~government ~~safeguard~~reimbursement ~~data~~policies or coverage policies could have a material adverse impact on our business. Even when reimbursement rates are not reduced, ~~including~~policy ~~patient~~changes ~~data~~add ~~that~~to our costs by increasing the complexity and volume of administrative requirements. Medicaid reimbursement, which varies by state, is also subject to ~~regulations~~administrative ~~related~~and tobilling ~~patient~~requirements ~~privacy~~and budget pressures. Recently, ~~could~~state ~~adversely~~budget pressures have caused states to consider several policy changes that may impact our ~~business~~financial condition and results of operations, such as delaying payments, reducing reimbursement, restricting coverage eligibility and service coverage, and imposing taxes on our services.

~~The~~Non-governmental ~~success~~third-party ofpayors our business depends on our ability to obtain, process, analyze, maintain and manage data, including sensitive information such as patient data. If we do not adequately safeguard that information and it were to become available to persons or entities that should not have ~~access~~taken tosteps ~~it, our business could be impaired, our reputation could suffer and we could be subject~~ to ~~fines,~~control ~~penalties~~spending ~~and~~on ~~litigation.~~reimbursement Although we have implemented security measures, our infrastructure is vulnerable to computer viruses, break-ins and similar disruptive problems caused by our clients or others that could result in interruption, delay or cessation of ~~service.~~diagnostic ~~Break-ins,~~services ~~whether electronic or physical, could potentially jeopardize the security of confidential client~~ and ~~supplier~~are ~~information~~likely ~~stored physically at our locations or electronically in our computer systems. Such an event could damage our reputation, cause us~~ to ~~lose~~continue ~~existing clients and deter potential clients. It could also expose us~~ to ~~liability~~do toso ~~parties~~in ~~whose security or privacy has been infringed, to regulatory actions by CMS or~~ the ~~U.S. Department of Health and Human Services (HHS)~~future, orwhich ~~to civil or criminal sanctions. The occurrence of any of the foregoing events~~ could adversely ~~impact~~affect our business.

~~The~~We ~~American~~also ~~Recovery~~face ~~and~~efforts ~~Reinvestment~~by ~~Act~~non-governmental ofthird-party ~~2009~~payors, ~~imposed~~including ~~additional~~health ~~obligations~~plans, onto ~~health~~reduce ~~care~~reimbursement ~~entities~~for ~~with~~diagnostic ~~respect~~services. toFor ~~data~~instance, ~~privacy~~third-party ~~and~~payors ~~security,~~often ~~including~~use ~~new~~the ~~notifications~~payment inamounts ~~case~~under ofthe Medicare fee schedules as a ~~breach~~reference ofin ~~privacy~~negotiating ~~and~~their ~~security~~payment ~~standards~~amounts. WeIn some cases, our fee schedules with third-party payors are ~~unable~~linked to ~~predict~~the current Medicare fee schedules, and therefore reductions in the ~~extent~~Medicare fee schedules could lead to ~~which~~reductions ~~these~~in ~~new~~reimbursement ~~obligations~~from ~~may~~some ~~prove~~of ~~technically~~our ~~difficult~~third-party payors. As described above, ~~time~~the 2013 through 2017 Medicare fee schedules included significant reductions in reimbursement for certain codes we bill. We have experienced isolated reductions in reimbursement from non-~~consuming~~governmental orthird-party ~~expensive~~payors tied to ~~implement~~the Medicare reductions. However, reductions in Medicare reimbursement rates could result in a reduction in the reimbursements we receive from such third-party payors and have a material adverse impact on our business.

~~Failure~~In addition, changes in test coverage policies of and reimbursement from other third-party payors may also occur independently from changes in Medicare. Our ability to ~~attract~~qualify for or obtain reimbursement from third-party payors is dependent on factors that may include, among other things, our compliance with the terms of applicable agreements with such third-party payors, our compliance with applicable laws, our participation in government payor programs and ~~retain~~our ~~experienced~~satisfaction of necessary billing standards. Reimbursement and ~~qualified~~coverage ~~personnel~~changes in the past have resulted in reduced prices, added costs and reduced accession volume and have added more complex and new regulatory and administrative requirements and are likely to continue to do so in the future. Our failure to qualify for or obtain reimbursement from third-party payors could ~~adversely~~undermine ~~affect~~our ability to generate revenue and have a material adverse effect on our business.

~~Our~~We ~~success~~expect ~~depends~~that onefforts ~~our ability~~ to ~~attract,~~reduce ~~retain~~reimbursement and ~~motivate~~impose ~~experienced~~more ~~anatomic~~stringent ~~pathologists,~~cost ~~histotechnologists,~~controls ~~cytotechnologists,~~for ~~skilled~~diagnostic ~~laboratory~~testing ~~and~~services ITwill ~~staff, experienced sales representatives and other personnel~~continue. ~~Competition~~These ~~for~~efforts ~~these~~may ~~employees is strong, and if we are not able to attract and retain qualified personnel it could~~ have a material adverse effect on our business and results of operations.

WeInternalization ~~are dependent on the expertise~~ of ~~our~~diagnostic ~~local~~testing ~~medical~~by ~~directors and~~ our ~~executive~~clients ~~officers. The loss of these individuals~~ could ~~have~~adversely aaffect ~~material adverse effect on~~ our business.

Our ~~sales~~clients, ~~representatives~~such ~~have~~as ~~developed~~referring physicians and ~~maintain~~hospitals, ~~close~~may ~~relationships~~internalize ~~with~~diagnostic atesting ~~number~~that ofhas ~~health~~historically ~~care~~been ~~professionals~~performed by pathology diagnostics companies like us. In certain medical specialties, ~~and~~such ~~our~~as ~~specialized~~dermatology, ~~approach~~there is an ongoing trend to ~~marketing~~consolidate ~~our~~smaller ~~services~~practices ~~positions~~into ~~our~~larger ~~sales~~practices ~~representatives~~by toroll-up ~~have~~acquisitions. aAs ~~deep~~practices ~~knowledge~~grow oflarger, they may perform the ~~needs~~technical and/or professional components of ~~the~~their ~~referring~~laboratory ~~physicians~~testing ~~they~~needs ~~serve~~in their own facilities. ~~Given~~Similarly, ~~the~~although ~~nature~~in ofsmaller ~~the~~degree, ~~relationships~~practices wein ~~seek~~certain specialties, such as obstetrics and gynecology, have been and may continue to ~~develop~~be ~~with~~acquired by hospitals and start using the hospital’s own laboratories for their laboratory testing needs. If these trends become more pronounced and our clients internalize diagnostic testing functions, ~~losses~~the ofdemand ~~sales~~for ~~representatives~~our diagnostic testing services may ~~cause~~be usreduced toand ~~lose~~our ~~clients~~business may be adversely affected.

~~Failure~~Competition toin ~~adequately scale~~ our ~~infrastructure~~industry toand ~~meet demand for~~ our ~~diagnostic~~failure ~~services or~~ to ~~support~~obtain ~~our growth could create capacity constraints~~ and ~~divert~~retain ~~resources,~~clients ~~resulting~~could inhave a material adverse ~~effect~~impact on our business.

~~Increases~~The inanatomic ~~demand~~pathology ~~for~~market ~~our~~is ~~diagnostic~~highly ~~services,~~competitive. ~~including~~Competition ~~unforeseen or significant increases~~ in ~~demand due to client or accession volume, could strain the capacity of~~ our ~~personnel~~industry ~~and~~is ~~infrastructure.~~based ~~Any strain~~ on ~~our~~several ~~personnel~~factors, orincluding ~~infrastructure~~price, ~~could~~clinical ~~lead~~expertise, toquality ~~inaccurate~~of ~~test results~~service, ~~unacceptable~~third ~~turn-around~~party ~~times~~payor orcontracts, client ~~service failures. Furthermore~~relationships, ~~although~~breadth weof ~~are~~testing ~~not~~menu, ~~currently~~speed ~~subject~~of toturnaround ~~these~~of ~~capacity~~test ~~constraints~~results, ifreporting ~~demand~~and ~~increases~~IT ~~for~~systems, ~~our~~reputation ~~diagnostic~~in ~~services,~~the wemedical ~~may~~community ~~not~~and beability ~~able~~ to ~~scale~~employ ~~our~~qualified personnel ~~or infrastructure accordingly~~. ~~Any~~Our ~~failure~~competitors toinclude ~~handle~~local ~~increases~~and inregional ~~demand~~pathology groups, ~~including~~national ~~increases due to client or accession volumes~~laboratories, ~~could~~hospital-based ~~lead~~pathology togroups ~~the loss of established clients~~ and ~~have~~specialty aphysician ~~material adverse effect on our business.~~ groups

WeOur ~~may~~success ~~expand~~depends byon ~~establishing laboratories in additional geographic markets. In addition to acquisition or development costs, this will require us to spend considerable time and money to expand~~ our ~~infrastructure~~ability ~~and~~ to ~~hire~~obtain and retain ~~experienced~~clients ~~anatomic pathologists, histotechnologists, cytotechnologists, skilled laboratory~~ and ITmaintain ~~staff,~~accession ~~experienced~~volume. ~~sales~~A ~~representatives,~~reduction ~~client~~in ~~service~~the ~~associates~~number ~~and~~of ~~other personnel for~~ our ~~additional laboratories. We will also need federal~~clients, ~~state~~specimens ~~and~~submitted ~~local~~by ~~certifications,~~our asclients ~~well~~or astests ~~supporting~~ordered ~~operational,~~by ~~logistical~~our ~~and administrative infrastructure. Even after new laboratories are operational~~clients, itwithout ~~may~~offsetting ~~take~~increases ~~time~~or ~~for us to derive the same economies of scale we have in our existing laboratories. Moreover~~growth, wecould ~~may~~impact ~~suffer reduced economies of scale in~~ our ~~existing~~ability ~~laboratories as we seek~~ to ~~balance~~maintain ~~the~~or ~~amount~~grow ofour ~~work~~business ~~allocated to each facility~~ and ~~expand those laboratories. An expansion of our laboratories or systems~~ could ~~divert~~have ~~resources,~~a ~~including~~material ~~the~~adverse ~~focus~~effect ofon our ~~management, away from our current~~ business.

~~Failure~~While there has been significant consolidation in recent years in the diagnostic testing industry, the industry remains fragmented and highly competitive both in terms of price and service. We primarily compete with local and regional pathology groups, national laboratories, hospital-based pathology groups and specialty physician groups. This competition is based primarily on clinical expertise, quality of service, client relationships, price, breadth of testing menu, speed of turnaround of test results, reporting and IT systems, reputation in the medical community and ability to ~~effectively~~employ ~~continue~~qualified orpersonnel. ~~manage~~Some of our ~~strategic~~competitors have greater technical, financial and ~~organic~~other ~~growth~~resources ~~could~~than ~~have~~we ando. ~~adverse~~Our ~~impact~~failure to successfully compete on any of these factors could result in a loss of clients and adversely affect our ~~business~~ability to grow.

~~Our~~Replication ~~business~~of ~~strategy~~our ~~may~~business ~~include~~model ~~continuing~~by tocompetitors ~~selectively~~may ~~acquire~~adversely ~~existing~~affect ~~diagnostic~~growth ~~services~~and ~~businesses~~profitability. ~~Since~~Barriers ~~our~~to ~~inception,~~entry wein ~~have~~anatomic ~~acquired~~pathology 28markets ~~existing~~include ~~diagnostic~~the ~~services~~need ~~businesses.~~to Toform ~~continue~~strong ~~this~~relationships ~~strategic~~with ~~growth~~referring physicians, wehire ~~will~~experienced ~~need~~pathologists, tomake ~~continue~~capital toinvestments ~~identify~~and ~~appropriate businesses to~~ acquire ~~and~~IT. ~~successfully~~These ~~undertake~~barriers ~~the~~may ~~acquisition~~not ofbe ~~these~~sufficient ~~businesses~~to onprevent ~~reasonable~~or ~~terms.~~deter ~~Consolidation~~new ~~and~~entrants ~~competition~~to ~~within~~ our ~~industry~~market, ~~among~~and ~~other~~competitors ~~factors,~~could ~~may~~replicate ~~make~~or itimprove ~~difficult~~some or ~~impossible~~all toaspects ~~identify~~of ~~businesses~~our tobusiness ~~acquire~~model onand aeither ~~timely~~cause ~~basis,~~us orto atlose ~~all.~~market ~~Our~~share ~~inability~~in tothe ~~acquire~~areas ~~additional~~where ~~independent~~we ~~labs~~compete ~~could~~or ~~hinder~~inhibit our growth, ~~and~~which could have a material adverse effect on our business.

WeFailure ~~may also seek organic growth through the expansion~~ of our ~~sales~~IT ~~force,~~or ~~the~~communication ~~development of de novo laboratories~~systems, or ~~strategic~~the ~~extension~~failure of ~~our~~these ~~operations~~systems ~~into~~to ~~markets~~keep ~~such~~pace aswith ~~the~~technological ~~inclusion~~advances ofor ~~new~~changes ~~tests~~ in ~~our~~applicable ~~testing~~regulation ~~menu. Because of limitations in available capital~~ and ~~competition within our industry~~policies, ~~among other factors, we may not be able to implement any or all of these organic growth strategies on a reasonable schedule, or at all. Our failure to achieve organic growth~~ could ~~have~~adversely aimpact ~~material adverse effect on~~ our business.

Our ~~net~~operations ~~revenue~~depend ~~has~~significantly ~~grown~~on ~~from~~the ~~$3.5 million~~uninterrupted inperformance ~~2006~~of ~~to $263.7 million in 2015. To manage~~ our ~~growth,~~IT ~~we must continue to implement~~ and ~~improve~~communication ~~our operational and financial~~ systems. ~~and~~Sustained tosystem ~~expand,~~failures ~~train,~~or ~~manage~~interruption ~~and~~of ~~motivate~~ our ~~employees.~~systems Wecould ~~may~~disrupt ~~not~~our beability ~~able~~ to ~~effectively~~process ~~manage~~requisitions, ~~the~~handle ~~expansion~~client ofservice, ~~our~~perform ~~operations~~testing, ~~and~~provide our ~~systems,~~reports ~~procedures~~ or ~~controls~~test ~~may~~results ~~not~~in bea ~~adequate~~timely tomanner, ~~support~~or ~~our~~bill ~~operations. Our management may not be able to rapidly scale~~ the ~~infrastructure~~appropriate ~~necessary~~party ~~to exploit the market opportunity~~ for our services. ~~Our inability to manage growth could have a material adverse effect on our business.~~

~~Failure~~Our efforts to ~~participate~~invest asin anew ~~provider~~or ~~with~~improved ~~payors~~IT systems and billing systems may be costly and require time and resources for implementation. While we continue to standardize and improve our LIS and BIS, we expect that it will take several years to complete full standardization. Our efforts to invest in new or ~~operating~~improved asIT asystems ~~non-contracted~~and ~~provider~~billing ~~could~~systems ~~have~~may anot ~~material~~ultimately ~~adverse~~be ~~effect~~successful, onand our failure to standardize and improve our LIS and BIS could adversely impact our business.

~~The~~Public ~~health~~and ~~care~~private ~~industry~~initiatives ~~has~~to ~~experienced~~create aelectronic ~~trend~~medical ofrecord ~~consolidation~~standards ~~among~~and ~~health~~to ~~care~~mandate ~~insurers,~~standardized ~~resulting~~coding insystems ~~fewer,~~for ~~larger~~the ~~insurers~~electronic ~~with~~exchange ~~significant~~of ~~bargaining~~information, ~~power~~including intest ~~negotiating~~orders ~~fee~~and ~~arrangements~~test ~~with~~results, ~~health~~could ~~care~~require ~~providers~~costly ~~like~~modifications ~~us.~~to ~~Managed~~our ~~care~~existing ~~providers~~IT ~~often~~systems. ~~restrict~~We ~~their~~expect ~~contracts~~that toany astandards ~~small number of laboratories~~ that ~~may~~might be ~~used~~adopted ~~for~~or ~~tests~~implemented ~~ordered~~would byallow ~~physicians~~us inadequate ~~the~~time ~~managed~~to ~~care~~comply ~~provider’s~~with ~~network~~such standards. IfHowever, weany dofailure ~~not~~or ~~have~~delay ain ~~contract~~implementing ~~with~~standards ~~a managed care provider, we~~ may beresult ~~unable~~in toa ~~gain~~loss ~~those~~of ~~physicians as~~ clients, and itbusiness opportunities, which could adversely ~~affect~~impact our business.

InNew ~~cases~~diagnostic intechnologies ~~which~~or weproducts docould ~~contract~~decrease ~~with~~demand afor ~~specified~~our ~~insurance~~services ~~company as a participating provider, we are considered “in-network,”~~ and ~~the~~have ~~reimbursement~~an ofadverse ~~third-party~~effect ~~payments~~on isour ~~governed by contractual relationships~~business.

InThe ~~cases~~diagnostic inindustry ~~which~~is wecharacterized doby ~~not~~rapid ~~have~~changes ain ~~contractual~~technology, ~~relationship~~frequent ~~with~~introductions anof ~~insurance~~new ~~company~~products orand weevolving ~~are~~industry ~~not~~standards anand ~~approved~~client ~~provider~~demands for anew ~~government~~diagnostic ~~program,~~technologies. weAdvances ~~have~~in notechnology ~~contractual~~may ~~right~~result toin ~~collect~~the ~~for~~creation ~~our~~of ~~services~~enhanced ~~and~~diagnostic ~~such~~tools ~~payors~~that ~~may~~enable ~~refuse~~other tolaboratories, ~~reimburse~~hospitals, usphysicians, ~~for~~patients ~~our~~or ~~services.~~third ~~This~~parties ~~could lead~~ to aprovide ~~decrease~~or inperform ~~accession~~specialized ~~volume~~diagnostic ~~and~~services athat ~~corresponding decrease in our revenue. In instances where we~~ are anmore ~~out~~patient-~~of-network provider~~friendly, ~~reductions~~efficient inor ~~reimbursement rates for non~~cost-~~participating providers could also adversely affect us~~effective. ~~Third-party~~For ~~payors~~example, ~~with~~the ~~whom~~dermatology weindustry dohas ~~not~~been ~~participate~~working asfor a ~~contracted~~number ~~provider~~of ~~may~~years ~~also~~in ~~require~~developing ~~that~~digitized wephotographic ~~enter~~imaging ~~into~~for ~~contracts,~~the ~~which~~diagnosis ~~may~~of ~~have~~skin ~~pricing~~cancer. ~~and~~These ~~other~~developments ~~terms~~may ~~that~~result ~~are~~in ~~materially~~a ~~less~~decrease ~~favorable~~in ~~to us than~~ the ~~terms~~demand ~~under~~for ~~which~~our weservices ~~currently~~or ~~operate.~~cause ~~While~~us ~~accession~~to ~~volume~~reduce ~~may~~the ~~increase~~prices asfor ~~a result of these contracts,~~ our ~~revenue per accession may decrease~~services.

~~Use~~In ofaddition, ~~our~~advances ~~diagnostic services as a non-participating provider also typically results~~ in ~~greater~~technology ~~copayments~~may ~~for~~lead to the ~~patient~~development ~~unless~~of wecost-effective ~~elect~~tests tothat ~~treat~~can ~~them~~be asperformed ifoutside weof ~~were~~ a ~~participating~~commercial ~~provider~~laboratory, ~~in accordance with applicable law. Treating~~ such ~~patients~~ as ifpoint-of-care wetests ~~were~~that acan ~~participating~~be ~~provider~~performed ~~may~~by ~~adversely~~physicians ~~impact~~in ~~results~~their ofoffices; ~~operations~~tests ~~because~~that wecan ~~may~~ be ~~unable~~performed toby ~~collect~~hospitals ~~patient~~in ~~copayments~~their ~~and~~own ~~deductibles.~~laboratories; Inor ~~some~~home ~~states,~~testing ~~applicable~~that ~~law~~can ~~prohibits~~be usperformed ~~from~~by ~~treating these~~ patients asin iftheir ~~we were a participating provider~~homes. AsAny aadvance ~~result,~~in ~~referring~~technology ~~physicians~~could ~~may~~reduce ~~avoid~~demand ~~use~~for of our services, ~~which~~or ~~could~~render ~~result~~them ~~in a decrease in accession volume and adversely affect revenue~~obsolete.

~~Our~~Finally, ~~revenues~~compliance costs associated with CLIA make it cost prohibitive for many independent or small physician practices to operate clinical laboratories in their offices. However, diagnostic tests approved or cleared by the U.S. Food and Drug Administration (the “FDA”) for home use are ~~dependent~~automatically ondeemed usto ~~receiving~~be ~~reimbursements~~“waived” ~~from~~tests ~~third-party~~under ~~payors~~CLIA and may be performed by our ~~failure~~referring tophysicians ~~qualify~~and ~~for~~their patients with minimal regulatory oversight. If test kit manufacturers expand or ~~obtain~~improve ~~reimbursements~~their ~~from~~home ~~third~~use offerings, our referring physicians could increasingly use these kits for point-~~party~~of-care ~~payors~~testing. Development of such technology and its use by our clients could decrease our revenue and have a material adverse effect on our business.

~~Our~~Failure ~~ability~~ to ~~qualify~~acquire ~~for~~rights orto ~~obtain~~new ~~reimbursement from third-party payors is dependent on factors that may include~~technologies, ~~among~~products ~~other~~or ~~things~~tests, ~~our~~or ~~compliance~~discontinuations ~~with~~or ~~the~~recalls ~~terms~~ of ~~applicable~~existing ~~agreements with such third-party payors~~technologies, ~~our~~products ~~compliance~~or ~~with applicable laws~~tests, ~~our~~could ~~participation~~negatively inimpact ~~government payor programs and~~ our ~~satisfaction~~testing ofvolume ~~necessary billing standards. Our failure to qualify for or obtain reimbursements from third-party payors could undermine our ability to generate revenue~~ and ~~have~~net ~~a material adverse effect on our business~~revenue.

~~Failure~~The successful operation of our business is dependent upon certain technologies, products and tests which are commonly used in the diagnostic testing industry. Other companies or individuals, including our competitors, may obtain patents or other intellectual property rights that could prevent, limit or interfere with our ability to ~~raise~~develop, ~~additional~~perform ~~capital~~or sell our tests or ~~generate~~operate ~~the~~our ~~significant~~business ~~capital~~or ~~necessary~~increase our costs. We may be unable to ~~continue~~develop or introduce new technologies or tests on our ~~growth~~own, ~~could~~which ~~reduce~~means that our success may depend, in part, on our ability to ~~compete~~license new and ~~could~~improved ~~harm~~technologies on favorable terms. We may be unable to continue to negotiate acceptable licensing arrangements, and arrangements that we do conclude may not yield commercially successful diagnostic tests. If we are unable to acquire rights to these testing methods at competitive rates, our research and development costs may increase as a result. In addition, if we are unable to develop and introduce, or acquire rights to new tests, technology and services to expand our testing business, our testing methods may become outdated when compared with our competition and our testing volume and revenue may be materially and adversely affected.

WeIf ~~currently~~manufacturers ~~expect~~discontinue ~~that~~or ~~our~~recall ~~existing cash and cash equivalents~~reagents, ~~together~~test ~~with~~kits ~~the~~or ~~availability~~instruments ~~under our senior secured credit facility, will be sufficient to meet our anticipated cash needs through 2016. After that,~~ we ~~may~~use ~~need~~ to ~~raise~~perform ~~additional~~diagnostic ~~funds~~services, ~~and~~such wediscontinuations ~~may not be able to obtain additional debt~~ or ~~equity~~recalls ~~financing~~could onadversely ~~favorable~~affect ~~terms~~our costs, iftesting atvolume ~~all. If we need additional capital~~ and ~~cannot~~revenues. ~~raise it on acceptable terms, we may not, among other things, be able to:~~

●The ~~continue~~loss toof ~~expand~~one or more members of our ~~sales~~executive management team or our failure to attract and ~~marketing;~~retain other experienced and qualified personnel could adversely affect our business.

●Our ~~develop~~success ordepends, ~~acquire~~in ~~complementary~~part, ~~technologies~~on the continued contributions of our executive management team, including Daniel D. Crowley, our Chief Executive Officer, Bruce C. Walton, our Chief Operating Officer, and F. Michael Walsh, our Chief Medical Officer. Our Chief Executive Officer, Mr. Crowley, is not our employee. He provides services as Chief Executive Officer for our Company pursuant to an agreement we entered into with Dynamic Healthcare Solutions, ~~products~~LLC or(“DHS”), of which he is the founder, sole owner and a principal. Although Mr. Crowley dedicates significant time managing our Company and is highly active in our management, he does not devote his full time and attention to our Company. Mr. Crowley also currently serves as Chairman and Chief Executive Officer of Premier Dental Services, Inc., a dental healthcare provider, and is Chairman and managing owner of J.D. Allman, Inc., d/b/a OmegaComp Human Resources (“OmegaComp”), which provides human resources services for businesses;. In the future, Mr. Crowley may accept other similar positions that may demand his time and attention. If we lose or suffer an extended interruption in the service of one or more of our executive management team members, our financial condition and operating results could be adversely affected.

●Our ~~expand~~success ~~operations~~also ~~both~~depends ~~organically~~on our ability to attract, retain and ~~through~~motivate ~~acquisitions;~~experienced anatomic pathologists, including to serve as laboratory medical directors to our client hospitals, histotechnologists, cytotechnologists, skilled laboratory and IT staff, experienced sales representatives and other personnel. Competition for these employees is strong, and if we are not able to attract and retain qualified personnel, it could have a material adverse effect on our business. Our sales representatives have developed and maintain close relationships with a number of healthcare professionals, and our specialized approach to marketing our services enable our sales representatives to have a deep knowledge of the needs of the referring physicians they serve. Given the nature of the relationships we seek to develop with our clients, losses of sales representatives may cause us to lose clients.

● hire, train and retain employees;

● service our existing debt obligations or continue to comply with compliance covenants thereunder; or

● respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could seriously harm our business, financial condition and results of operations.

We may be unable to obtain, maintain or enforce our intellectual property rights and may be subject to intellectual property litigation that could adversely impact our business.

We may be unable to obtain or maintain adequate proprietary rights for our products and services or to enforce our proprietary rights successfully, and we cannot assure you that our products or methods do not infringe the intellectual property rights of third parties. Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm our reputation. Such claims and proceedings could also distract and divert management and key personnel from other tasks important to the success of our business. In the event of an adverse determination in an intellectual property suit or proceeding, or our failure to license essential technology, our sales could be harmed and/or our costs could increase, which would harm our financial condition.

~~Economic~~Changes ~~conditions~~ in the ~~United~~mix ~~States~~of diagnostic testing services that we provide could ~~adversely~~negatively impact our ~~operating~~net ~~results~~revenue per accession and ~~financial~~our ~~condition~~profitability.

~~Continued~~We ~~uncertain~~typically ~~economic~~provide ~~conditions~~global pathology services in ~~the~~which ~~United~~we ~~States~~provide asboth athe ~~result~~technical ofcomponent ~~declining~~and ~~oil~~the ~~prices~~professional orcomponent ~~other~~of ~~factors~~services ~~could~~with ~~adversely~~respect ~~affect~~to our ~~operating results and financial condition~~accessions. ~~Among~~The ~~other~~technical ~~things,~~component ~~the~~principally ~~potential~~includes ~~decline~~technical inslide ~~federal~~preparation and ~~state~~the ~~revenue~~non-professional ~~that~~items ~~could~~associated ~~result~~with ~~from~~our ~~these~~diagnostic ~~conditions~~services, ~~could~~including ~~create~~equipment, ~~additional~~supplies ~~pressures~~and totechnical ~~contain~~personnel, orand ~~reduce~~the ~~reimbursements~~professional ~~for~~component ~~our~~principally ~~services~~includes ~~from~~review ~~Medicare, Medicaid~~ and ~~other~~diagnosis ~~government~~by ~~sponsored~~a ~~programs~~pathologist. ~~Increased~~In ~~job~~recent ~~losses~~years, ~~and~~increasing ~~elevated~~numbers ~~unemployment~~of ~~rates~~referring inphysicians ~~the~~have ~~United~~converted ~~States~~to ~~could~~arrangements ~~result~~ in awhich ~~smaller~~we ~~percentage~~perform ofonly ~~our~~the ~~patients~~technical ~~being~~component ~~covered~~or bythe ~~commercial~~professional ~~payors~~component ~~and~~of aservices ~~larger~~with ~~percentage~~respect ~~being~~to ~~covered~~our byaccessions, ~~lower-paying~~as ~~Medicaid~~opposed ~~programs.~~to Toglobal ~~the~~pathology ~~extent~~services. ~~that~~In ~~payors~~these ~~are~~cases, ~~adversely~~our ~~affected~~net byrevenue ~~declines~~per inaccession ~~economic~~has ~~conditions,~~declined wedue ~~may~~to ~~experience~~the ~~further~~fact ~~pressure~~that onwe ~~commercial~~no ~~rates,~~longer ~~delays~~receive inthe ~~fee~~entire ~~collections~~global ~~and~~fee afor ~~reduction in~~ the ~~amounts~~service, webut ~~are~~instead ~~able~~receive tofees ~~collect.~~for Inonly ~~addition,~~the ~~increases~~technical incomponent ~~interest~~or ~~rates~~the ~~could~~professional ~~make~~component itof ~~difficult~~each toaccession. ~~obtain~~If ~~credit in~~ the ~~future.~~volume ~~Any~~ or ~~all~~percentage of ~~these~~accessions ~~factors,~~for aswhich ~~well~~we asperform ~~other~~global ~~consequences~~pathology ofservices ~~declining economic conditions~~decreases, ~~could~~our ~~adversely~~average ~~impact~~net ~~our~~revenue ~~operating~~per ~~results~~accession and ~~financial~~gross ~~condition~~profit percentage could decrease.

~~Competition~~An increase in ~~our~~the ~~industry~~percentage ~~from~~of ~~existing~~services orwe ~~new~~perform ~~companies~~for ~~and~~certain ~~failure~~pathology tosubspecialties ~~obtain~~may ~~and~~have ~~retain~~a ~~clients~~negative ~~could~~impact ~~have~~on aour ~~material~~net ~~adverse~~revenue ~~impact~~per onaccession and our ~~business~~profitability.

~~Our~~Diagnostic ~~success~~testing ~~depends~~services onthat ~~our~~we ~~ability~~perform toin ~~obtain~~certain ~~and~~pathology ~~retain~~subspecialties, ~~clients~~such ~~and~~as ~~maintain~~women’s health pathology, have lower average net revenue per accession ~~volume~~and gross profit percentage than those in other subspecialties. AAn ~~reduction~~increase in the ~~number~~percentage of ~~our~~services ~~clients,~~we orperform in ~~the~~women’s ~~tests~~health ~~ordered~~pathology orcompared ~~specimens~~to ~~submitted~~other bysubspecialties that command higher net revenue per accession could result in a decrease in our ~~clients,~~average ~~without~~net ~~offsetting~~revenue ~~increases~~per oraccession ~~growth~~and gross profit percentage. In addition, ~~could~~our ~~impact~~BIS and financial systems limit our ability to ~~maintain~~monitor and precisely report historical revenue by subspecialty. This inability, which we currently expect to continue into future periods, may make it difficult or ~~grow~~impossible ~~our~~for ~~business~~us ~~and~~to ~~could~~accurately assess whether changes in the proportion of the services we perform for certain subspecialties have aoccurred ~~material~~or ~~adverse~~the ~~effect~~impact onof ~~our~~such ~~business~~changes.

~~While~~Integration ~~there has been significant consolidation in recent years in the diagnostic testing industry, the industry remains fragmented and highly-competitive both in terms~~ of ~~price~~our ~~and~~operations ~~service. We primarily compete~~ with ~~various~~newly ~~clinical~~acquired ~~test~~businesses ~~providers,~~may ~~anatomic~~be ~~pathology~~difficult ~~practices, hospital-affiliated laboratories, commercial clinical laboratories~~ and ~~physician-office~~costly ~~laboratories. This competition is based primarily on price, clinical expertise, quality of service, client relationships, breadth of testing menu, speed of turnaround of test results, reporting~~ and ITwe ~~systems,~~may ~~reputation~~not inobtain the ~~medical~~revenues ~~community~~ and ~~ability~~operating tomargins ~~employ~~expected ~~qualified~~from ~~personnel. Some of~~ our ~~competitors may have greater technical, financial and other resources than we do~~acquisitions. ~~Our failure to successfully compete on any of these factors could result in a loss of clients and adversely affect our ability to grow.~~

~~Replication~~Since of our ~~business~~inception, ~~model~~we byhave ~~competitors~~acquired ~~may~~31 ~~adversely~~diagnostic ~~affect~~services ~~growth~~businesses, ~~and~~including ~~profitability.~~four ~~Barriers~~acquisitions ~~to entry~~ in ~~anatomic~~2014, ~~pathology~~three ~~markets~~in ~~include~~2015 ~~the~~and ~~need~~two toin ~~form~~2016. ~~strong~~We ~~relationships~~expect ~~with~~to ~~referring~~evaluate ~~physicians,~~potential ~~hire~~strategic ~~experienced~~acquisitions ~~pathologists,~~of ~~make~~diagnostic ~~capital~~services ~~investments~~ and ~~acquire~~other ~~IT.~~businesses ~~These~~that ~~barriers~~might ~~may~~augment ~~not~~our beexisting ~~sufficient~~specialized todiagnostic ~~prevent~~testing orservices. ~~deter~~These ~~new~~acquisitions ~~entrants~~have toinvolved ~~our market,~~ and ~~competitors~~ could ~~replicate~~continue orto ~~improve~~involve ~~some~~the orintegration ~~all aspects~~ of ~~our~~a ~~business~~separate ~~model~~company ~~and~~that ~~either~~previously ~~cause~~operated usindependently toand ~~lose~~had ~~market~~different ~~share~~systems, incompliance ~~the areas where we compete or inhibit our growth~~programs, ~~which~~processes ~~could~~and ~~have a material adverse effect on our business~~cultures.

The process of acquiring and integrating businesses we acquire may substantially disrupt both our existing business and the businesses we acquire. This disruption may divert management from the operation of our business or may cause us to lose key employees or clients. Additionally, we may have difficulty consolidating facilities and infrastructure, standardizing information and other systems and coordinating geographically-separated facilities and workforces, resulting in a decline in the quality of services. Any past or future acquisitions, and the related integration efforts, may be difficult, costly or unsuccessful. In each case, our existing business and the businesses we acquire may be adversely affected. Even if we are able to successfully integrate businesses we have acquired, we may not be able to operate them profitably or otherwise realize the benefits that we expect from them.

Finally, many of the businesses we have acquired in the past, and those we may acquire in the future, have not performed independent external audit procedures on their financial statements and have presented us, and may present us, with unaudited financial statements that have been prepared by the management of such businesses. There is no guarantee that such unaudited financial statements would not be materially different if they were audited. If such unaudited financial statements do not accurately represent the financial condition of the businesses we acquire, we may not obtain the revenues and operating margins expected at the time of acquisition and we may even suffer losses.

~~Failure~~Businesses towe acquire ~~rights~~or tohave ~~new~~acquired ~~technologies,~~may ~~products~~have orsignificant ~~tests,~~unknown or ~~discontinuations~~contingent orliabilities ~~recalls~~that ~~of existing technologies, products or tests,~~ could ~~negatively~~adversely impact our ~~testing~~operating ~~volume and net revenues~~results.

~~The~~Businesses ~~diagnostic~~we ~~testing~~acquire industry is characterized by rapid changes in technology, frequent introductions of new products and diagnostics tests and evolving industry standards and client demands for new diagnostic technologies. Other companies or ~~individuals,~~have ~~including~~acquired ~~our competitors,~~ may ~~obtain~~have ~~patents~~unknown or ~~other~~contingent ~~intellectual~~liabilities ~~property~~or ~~rights~~liabilities that ~~could~~are ~~prevent,~~in ~~limit~~excess orof ~~interfere~~the ~~with~~amounts ~~our~~that ~~ability~~we tooriginally ~~develop, perform or sell our tests or operate our business or increase our costs~~estimated. ~~Advances~~Although inwe ~~technology~~generally ~~may~~seek ~~result~~indemnification infrom the ~~creation~~sellers of ~~enhanced~~businesses ~~diagnostic~~we ~~tools~~acquire ~~that~~for ~~enable~~matters ~~other laboratories, hospitals, physicians, patients or third parties to provide specialized diagnostic services~~ that are ~~superior~~not toproperly ~~ours~~disclosed orto ~~more patient-friendly~~us, ~~efficient~~we ~~or cost-effective. These developments~~ may ~~result~~not insuccessfully aobtain ~~decrease in the demand for our tests or cause us to reduce the prices for our tests~~indemnification. WeEven ~~may be unable to develop or introduce new tests on our own, which means that our success may depend,~~ in ~~part,~~cases onwhere ~~our~~we ~~ability~~are toable ~~license new and improved technologies on favorable terms. We may be unable~~ to ~~continue~~obtain ~~to negotiate acceptable licensing arrangements~~indemnification, ~~and arrangements that~~ we ~~do conclude~~ may ~~not~~be ~~yield~~subject ~~commercially successful diagnostic tests. If we are unable~~ to ~~acquire~~liabilities ~~rights~~greater tothan ~~these~~the ~~testing~~contractual ~~methods~~limits atof ~~competitive rates,~~ our ~~research~~indemnification ~~and~~or ~~development~~the ~~costs~~financial ~~may~~resources ~~increase~~of asthe aindemnifying ~~result~~party. In ~~addition,~~the ifevent that we are ~~unable~~responsible tofor ~~develop~~liabilities ~~and~~substantially ~~introduce,~~in orexcess ~~acquire~~of ~~rights~~any ~~to,~~amounts ~~new~~recovered ~~tests,~~through ~~technology~~rights ~~and services~~ to ~~expand our testing business~~indemnification, ~~our~~this ~~testing~~could ~~methods~~adversely ~~may~~impact ~~become outdated when compared with~~ our ~~competition~~operating ~~and our testing volume and revenues may be materially and adversely affected~~results.

IfFailure ~~manufacturers~~to ~~discontinue~~continue or ~~recall~~manage ~~reagents,~~our ~~test~~strategic ~~kits~~and ororganic ~~instruments~~growth weeffectively ~~use~~could tohave ~~perform~~an ~~diagnostic~~adverse ~~services,~~impact ~~such~~on ~~discontinuations or recalls could adversely affect~~ our ~~costs, testing volume and revenues~~business.

Our ~~Principal~~ability ~~Equityholders~~to continue to grow depends in part on our ability to continue to selectively acquire existing diagnostic services businesses. Since our inception, we have acquired 31 diagnostic services businesses. To continue this growth, we will need to continue to identify appropriate businesses to acquire and successfully undertake the acquisition of these businesses on reasonable terms. Consolidation and competition within our industry, among other factors, may make it difficult or impossible to identify businesses to acquire or to undertake an acquisition. We also need to access capital in order to finance these acquisitions, which we may not be able to obtain on favorable conditions, or at all. Our inability to acquire additional pathology practices could hinder our growth and have ~~interests~~a ~~that~~material ~~differ~~adverse ~~from~~effect ~~your~~on ~~interests~~our business.

~~Circumstances~~We may ~~occur~~also inseek ~~which~~organic ~~the~~growth ~~interests~~by ofdeveloping ~~our~~new ~~equityholders~~referral ~~could~~networks, beexpanding inour ~~conflict~~menu ~~with those~~ of ~~our~~services ~~noteholders.~~and ~~For~~utilizing ~~example,~~current ~~our equityholders~~resources, ~~including~~such ~~KRG~~as ~~Capital~~stored ~~Partners~~biospecimens, ~~and~~to ~~Summit~~produce ~~Partners,~~new ~~may~~revenue. ~~have~~Because anof ~~interest~~limitations in ~~pursuing~~available ~~acquisitions,~~capital ~~divestitures,~~and ~~financing~~competition orwithin ~~other~~our ~~transactions that~~industry, inamong ~~their~~other ~~judgment~~factors, ~~could~~we ~~enhance~~may ~~their~~not ~~equity~~be ~~investments,~~able ~~even though such transactions might involve risks~~ to ~~our~~implement ~~noteholders.~~any ~~Additionally,~~or ~~certain~~all of ~~our~~these ~~equityholders,~~organic ~~including~~growth ~~KRG~~strategies ~~Capital~~on ~~Partners~~a ~~and~~reasonable ~~Summit Partners~~schedule, ~~have~~or ~~significant~~at ~~knowledge~~all. ofOur ~~our~~failure ~~business~~to ~~operations~~achieve ~~and~~organic ~~strategy~~growth ~~and~~could ~~are~~have ~~not~~a ~~prohibited~~material ~~from~~adverse ~~making~~effect ~~investments~~on ~~in any of~~ our ~~competitors~~business.

~~Regulatory~~Our ~~Risks~~net revenue has grown from $3.5 million in 2006 to $284.0 million in 2016. To manage our growth, we must continue to implement and improve our operational and financial systems and to expand, train, manage and motivate our employees. We may not be able to effectively manage the expansion of our operations, and our systems, procedures or controls may not be adequate to support our operations. Our management may not be able to rapidly scale the infrastructure necessary to exploit the market opportunity for our services. Our inability to manage growth could have a material adverse effect on our business.

~~New~~Failure ~~and~~to ~~proposed~~participate ~~federal~~as a provider with payors or ~~state~~operating ~~health~~as ~~care~~a ~~reform~~non-contracted ~~measures~~provider could ~~adversely~~have ~~affect~~a ~~our~~material ~~operating~~adverse ~~results~~effect ~~and~~on ~~financial~~our ~~condition~~business.

~~The~~Managed ~~U.S. Congress and state legislatures continue to focus on health~~ care ~~reform.~~providers ~~The~~often ~~Accountable~~restrict ~~Care~~their ~~Act,~~contracts ~~referred~~ to ~~as the ACA, which was enacted in 2010, represented~~ a ~~broad~~small ~~health~~number ~~care~~of ~~reform~~pathology ~~initiative,~~or ~~which~~laboratory ~~was~~providers ~~not~~that ~~fully~~may ~~implemented~~be ~~until~~used ~~2014. Many~~for ~~states~~tests ~~are~~ordered ~~still~~by ~~determining~~physicians ~~whether,~~in ~~and~~the ~~how,~~managed tocare ~~adopt~~provider’s ~~various requirements applicable to them~~network. In ~~2012,~~If ~~the~~we ~~Supreme~~do ~~Court~~not ~~upheld~~have ~~the~~or ~~constitutionality~~if ofwe ~~the~~lose ~~health~~a ~~care~~contract ~~reform law,~~ with ~~the~~a ~~exception~~managed ofcare ~~certain provisions dealing with the expansion of Medicaid coverage under the law. In 2015~~provider, ~~the~~we ~~Court~~may ~~upheld~~be ~~the~~unable ~~ability of the federal government~~ to ~~pay~~gain ~~subsidies~~or toretain ~~individuals~~those ~~enrolled~~physicians ~~in federal,~~ as ~~opposed to state~~clients, ~~health~~and ~~insurance~~it ~~exchanges.~~could ~~Congress~~adversely ~~has~~affect ~~also~~our ~~proposed a number of legislative initiatives, including possible repeal of the health reform law~~business.

WeIn ~~cannot~~cases ~~predict~~in ~~whether~~which ~~any~~we ofdo ~~the~~contract ~~possible~~with ~~changes~~a tospecified ~~the~~insurance ~~federal~~company ~~and~~as ~~state~~a ~~health~~participating ~~care~~provider, ~~reform~~we ~~legislation,~~are ifconsidered ~~implemented~~“in-network,” ~~will~~and ~~have~~the areimbursement ~~material~~of ~~impact~~third-party onpayments usis governed by contractual relationships. ~~Further,~~In cases in which we ~~cannot~~do ~~predict~~not ~~whether~~have ~~federal~~a contractual relationship with an insurance company or ~~state~~we ~~governments~~are ~~will~~not ~~enact~~an ~~any~~approved ~~additional~~provider ~~laws~~for a government program, we have no contractual right to ~~effect~~collect ~~health~~for ~~care~~our ~~reform~~services and, ifsuch ~~any~~payors ~~such~~may ~~new~~refuse ~~laws~~to ~~were~~reimburse ~~enacted,~~us ~~what~~for ~~their~~our ~~terms~~services. ~~would~~This becould lead to a decrease in reimbursements and ~~whether~~a orcorresponding decrease in ~~what~~our ~~ways~~revenue. ~~any~~In ~~new~~instances ~~laws~~where ~~would~~we are an out-of-network provider, reductions in reimbursement rates for non-participating providers could also adversely affect us. ~~However,~~Third-party itpayors iswith ~~possible~~whom ~~that~~we ~~new~~do ~~laws~~not ~~could~~participate ~~increase~~as ~~our~~a ~~costs,~~contracted ~~decrease~~provider ~~our~~may ~~revenue~~also require that we enter into contracts, ~~expose~~which usmay tohave ~~expanded~~pricing ~~liability~~and orother ~~require~~terms usthat are materially less favorable to ~~revise~~us than the ~~ways~~terms inunder which we ~~conduct~~currently ~~our~~operate. ~~business,~~While ~~any~~accession ofvolume ~~which~~may ~~could~~increase ~~adversely~~as ~~affect~~a result of these contracts, our ~~operating~~revenue ~~results~~per ~~and~~accession ~~financial~~may ~~condition~~decrease.

Use of our diagnostic services as a non-participating provider also typically results in greater copayments for the patient unless we elect to treat them as if we were a participating provider. Treating such patients as if we were a non-participating provider may adversely impact results of operations because we may be unable to collect the greater patient copayments and deductibles. There has been a trend of states enacting what are commonly referred to as “Surprise Bill” laws which could limit the amounts we collect from patients with insurance under which we are not a participating provider to the in-network amount. Also, in some states, applicable law prohibits us from treating these patients as if we were a participating provider. As a result, referring physicians may avoid use of our services, which could result in a decrease in accession volume and adversely affect revenue. Some payors have also challenged the practice of reducing patient cost-sharing amounts by treating patients as if we were a participating provider. If a third-party payor with whom we do not participate as a contracted provider reduces our reimbursement or refuses to reimburse us for our services, our accession volume and revenue could be adversely affected. In addition, if we were to lose our status as a participating provider in certain states, we may also lose business from referring physicians in those states even if we have a presence in other states where we would be a participating provider.

Consolidation among health insurance plans may impact our reimbursement rates.

The health care industry has experienced a trend of consolidation among health insurance plans, resulting in fewer, larger health plans with significant bargaining power to negotiate fee arrangements with health care providers like us. Some of these health plans, as well as independent physician associations, have demanded that pathology and laboratory providers accept discounted fee structures or assume a portion or all of the financial risk associated with providing diagnostic services to their members through capitated payment arrangements. We expect consolidation among health insurance plans to continue, which could have a material adverse effect on our reimbursement rates.

Failure to timely or accurately bill for our services or collect outstanding payments could have a material adverse effect on our business.

Billing for diagnostic services is complex. We bill numerous payors, including physicians, patients, insurance companies, Medicare and Medicaid, according to applicable law, billing requirements and, as applicable, contractual arrangements. This complexity is further compounded by the fact that we currently generate bills using multiple billing systems and are subject to rapidly changing requirements for auditing, external compliance and internal compliance policies and procedures. Failure to timely or correctly bill could lead to lack of reimbursement for services or an increase in the aging of our accounts receivable, which could adversely affect our results of operations. Increases in write-offs of doubtful accounts, delays in receiving payments, potential retroactive adjustments, and penalties resulting from audits by payors would also adversely affect our financial condition.

Changes in medical treatment, reimbursement rates and other conditions in the dermatopathology market could adversely affect our business.

We derive a significant portion of our revenue from our dermatopathology subspecialty, which makes us particularly sensitive to changes in medical treatment, reimbursement rates and other conditions in the dermatopathology market. In 2016, we derived approximately 41% of our revenue from our dermatopathology subspecialty services, primarily from biopsies of the skin. If there is a significant development in the prevention of skin cancer, or an adverse development in the reimbursement rate for skin biopsies, it could have a material adverse effect on our business.

Changes in clinical protocols for diagnostic testing could adversely affect our business

Clinical protocols for the detection and treatment of diseases are continuously evolving. Professional organizations that issue clinical protocols regarding the recommended frequency of diagnostic testing have from time to time recommended less frequent testing with respect to certain conditions. For example, the American College of Obstetricians and Gynecologists recently modified its clinical protocols to recommend that women only undergo cervical cancer screening once every three years rather than annually. Changes such as these, which we may not be able to influence or control, could adversely affect our business by reducing demand for our diagnostic services.

Changes in payor mix may adversely affect reimbursement for diagnostic services and could have a material adverse impact on our business.

Most of our services are billed to a party other than the physician that ordered a diagnosis. In 2016, based on cash collections, we estimate that we received 22% of our revenue from Medicare, 2% of our revenue from Medicaid and 58% of our revenue from non-governmental third-party payors, including health plans. If we bill a higher percentage of our services to payors who reimburse at rates lower than our current payors, our results of operations and financial condition would suffer.

Increasing health insurance co-payments or high deductible health plans could reduce the demand for our services and make it more difficult for us to collect outstanding payments.

Health insurance plans with higher co-payments or higher deductibles are becoming increasingly prevalent in the private insurance market. These plans generally require the patient to bear a higher percentage of the cost of medical services, including diagnostic services. As a result, some patients may choose to delay or forgo procedures they would have received if health insurance covered a larger portion of the payment. If patients choose to delay or forgo procedures, our accession volume could decrease.

In addition, an increase in patient cost-sharing could make it more difficult for us to timely collect our bills. Most of our provision for doubtful accounts in 2016, which totaled 5.6% of revenue, resulted from the failure of patients to pay their bills, including copayments and deductibles. If patients are required to pay a higher share of our bills, our write-offs of doubtful accounts may increase. Either a decrease in accession volume or increased write-offs would have an adverse effect on our financial condition.

We have recorded a significant amount of intangible assets, which may never generate the returns we expect.

Our acquisitions have resulted in significant increases in net identifiable intangible assets and goodwill. Net identifiable intangible assets, which include customer relationships, healthcare facility agreements and non-compete agreements acquired in acquisitions, were approximately $51.9 million at December 31, 2016, representing 22% of our total assets. Goodwill, which relates to the excess of cost over the fair value of the net assets of the businesses acquired, was $120.8 million at December 31, 2016, representing approximately 50% of our total assets. Goodwill and net identifiable intangible assets are recorded at fair value on the date of acquisition and, under Financial Accounting Standards Board Statement (“FASB”) Accounting Standards Codification 350, are reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in performance of the acquired company, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. The amount of any impairment must be written off. We evaluated our recorded goodwill and identifiable intangible assets as of November 30, 2014, June 30, 2015, November 30, 2015 and November 30, 2016, which resulted in our recording impairment charges of $27.5 million, $39.6 million, $17.1 million and $6.7 million, respectively. As of December 31, 2016, we had accumulated impairment charges related to goodwill of $311.3 million. We may never realize the full value of our intangible assets. Any future determination requiring the write-off of a significant portion of intangible assets could have an adverse effect on our financial condition and results of operations.

We have incurred significant net losses in the past, and we may not be able to achieve or sustain profitability.

For the years ended December 31, 2014, 2015 and 2016, we had net losses of $55.5 million, $83.4 million and $29.1 million, respectively. As a result of these losses we had an accumulated deficit of $219.8 million as of December 31, 2016. We may have net losses in the future, and we cannot assure you that we will achieve profitability in future periods. If we do not achieve profitability, it will be more difficult for us to finance our business and accomplish our strategic objectives.

Failure to scale our infrastructure adequately to meet demand for our diagnostic services could create capacity constraints and divert resources, resulting in a material adverse effect on our business.

Increases in demand for our diagnostic services, including unforeseen or significant increases in demand due to client or accession volume, could strain the capacity of our personnel and infrastructure. Any strain on our personnel or infrastructure could lead to inaccurate diagnoses, unacceptable turnaround times or client service failures. Furthermore, if demand increases for our diagnostic services, we may not be able to scale our personnel or infrastructure accordingly. Any failure to handle increases in demand, including increases due to client or accession volumes, could lead to the loss of established clients and have a material adverse effect on our business.

Regulatory or economic conditions in the United States, particularly in states where we operate a large number of pathology practices, could adversely impact our operating results and financial condition.

Uncertain economic conditions in the United States or changes in regulatory conditions could adversely affect our operating results and financial condition. Among other things, the potential decline in federal and state revenue that could result from these conditions could create additional pressures to contain or reduce reimbursements for our services from Medicare, Medicaid and other government sponsored programs. Our business may be particularly sensitive to regulatory or economic conditions in certain states in which the revenue from our pathology practices is concentrated, such as Florida, Nevada and Texas. Increased job losses and elevated unemployment rates in the United States could result in a smaller percentage of our patients being covered by commercial payors and a larger percentage being covered by lower-paying Medicaid programs. To the extent that payors are adversely affected by declines in economic conditions, we may experience further pressure on commercial rates, delays in fee collections and a reduction in the amounts we are able to collect. In addition, increases in interest rates could make it difficult to obtain credit in the future. Any or all of these factors, as well as other consequences of declining economic conditions or changes in regulatory conditions, could adversely impact our operating results and financial condition.

We may be subject to liability claims for damages and other expenses not covered by insurance that could adversely impact our operating results.

The provision of diagnostic testing services to patients may subject us to litigation and liability for damages based on an allegation of malpractice, professional negligence in the performance of our treatment and related services, the acts or omissions of our employees, or other matters. Our exposure to this litigation and liability for damages increases with growth in the number of our pathology practices and accession volume. Potential judgments, settlements or costs relating to potential future claims, complaints or lawsuits could result in substantial damages and could subject us to the incurrence of significant fees and costs. Our insurance may not be sufficient or available to cover these damages, costs or expenses. Our business, profitability and growth prospects could suffer if we face negative publicity or if we pay damages or defense costs in connection with a claim that is outside the scope of any applicable insurance coverage, including claims related to contractual disputes and professional and general liability claims.

Our insurance costs may increase over the next several years, and our coverage may not be sufficient to cover claims and losses.

We maintain a program of insurance coverage against a broad range of risks in our business. In particular, we maintain professional liability insurance, subject to deductibles. The premiums and deductibles under our insurance may increase over the next several years as a result of general business rate increases, coupled with our continued growth. We are unable to predict whether such increases in premiums and deductibles will occur and the amount of any such increases, but such increases could adversely impact our earnings. The liability exposure of operations in the health care services industry has increased, resulting not only in increased premiums, but also in limited liability on behalf of the insurance carriers. Our ability to obtain the necessary and sufficient insurance coverage for our operations upon expiration of our insurance policies may be limited, and sufficient insurance may not be available on favorable terms, if at all. We could be materially and adversely affected by any of the following: our inability to obtain sufficient insurance for our operations; the collapse or insolvency of one or more of our insurance carriers; further increases in premiums and deductibles; and an inability to obtain one or more types of insurance on acceptable terms.

Our business may be adversely impacted by the loss of specimens or by damage to our facilities from natural disasters, terrorism and other factors beyond our control.

Our pathologists provide diagnostic reports of specimens taken from patients at the offices of our referring physicians or at hospitals. Obtaining these specimens many times involves complicated surgical procedures. Once obtained, these specimens are transported to our pathology laboratories by courier or an overnight delivery service for processing. If our pathologists were to lose, misplace or mislabel a significant number of specimens or the couriers or overnight delivery services we use to transport specimens were to lose or misdeliver them, we could lose business from our clients and our reputation and our business could suffer.

In addition, our facilities may be negatively impacted by natural disasters, acts of terrorism, criminal activities or other factors beyond our control. These natural disasters or other factors could disrupt our ability to provide diagnostics services and force certain of our facilities to close temporarily or for an extended period of time. Any extended closures or damages not covered by insurance could have an adverse effect on our business.

Risks Relating to Regulatory Matters

New and proposed federal or state health care reform measures could adversely affect our operating results and financial condition.

Since the passage of the ACA in 2010, the U.S. Congress and some state legislatures have focused on health care reforms. The ACA represented a broad health care reform initiative, which was not fully implemented until 2014. States had to determine whether, and how, to adopt various requirements applicable to them. In 2012, the Supreme Court upheld the constitutionality of the ACA, with the exception of certain provisions dealing with the expansion of Medicaid coverage under the law. In 2015, the Supreme Court also upheld the ability of the federal government to pay subsidies to individuals enrolled in federal, as opposed to state, health insurance exchanges. Congress and President Trump have also proposed a number of legislative initiatives, including possible repeal and replacement of the ACA, although to date such measures have not been passed.

We cannot predict whether any possible changes to the federal and state health care reform legislation would, if enacted, have a material impact on us. Further, we cannot predict whether federal or state governments will enact any additional laws to effect health care reform and, if any such new laws were enacted, what their terms would be and whether or in what ways any new laws would affect us. However, it is possible that new laws could increase our costs, decrease our revenue, expose us to expanded liability or require us to revise the ways in which we conduct our business, any of which could adversely affect our operating results and financial condition.

If we fail to comply with the complex federal, state and local government laws and regulations that apply to our business, we could suffer severe consequences that could adversely affect our operating results and financial condition.

Our operations are subject to extensive federal, state and local government regulations, all of which are subject to change, including those relating to billing practices, healthcare fraud and abuse, and financial relationships with physicians, hospitals and other healthcare professionals and entities. These government laws and regulations currently include, among others, ~~those~~the ~~described~~federal ~~under~~Anti-Kickback Statute, the ~~heading~~Stark ~~“Government~~Law, ~~Regulation~~the ~~and~~FCA, ~~Compliance~~the ~~Infrastructure”~~Anti-Markup inRule, ~~section~~HIPAA, ~~Part~~HITECH, ICLIA, ~~Item 1.~~the ~~Business,~~Civil inMonetary ~~this~~Penalties ~~Annual~~Law ~~Report~~and similar state laws.

We believe that we operate in material compliance with these laws and regulations. However, these laws and regulations are complex and, among other things, practices that are permissible under federal law may not be permissible in all states. In addition, these laws and regulations are subject to interpretation by courts and ~~enforcement~~regulatory agencies. Our failure to comply with such laws could lead to civil and criminal penalties, exclusion from participation in Medicare and Medicaid, and possible prohibitions or restrictions on our ~~laboratories’~~ ability to provide diagnostic services, and any such penalties, exclusions, prohibitions or restrictions could have a material adverse effect on our arrangements with managed care organizations, ~~and~~ private payors and other third parties.

If we fail to comply with state corporate practice of medicine laws, we could suffer severe consequences.

The laws of many states prohibit ~~business~~non-physician ~~corporations~~owned entities, including us and our subsidiaries, from owning corporations that employ physicians, ordeliver ~~from~~medical ~~exercising~~services or exercise control over the medical judgments or decisions of physicians. These laws and their interpretations vary from state to state and are enforced by both the courts and regulatory authorities, each with broad discretion. The manner in which we operate each practice is determined primarily by the corporate practice of medicine restrictions of the state in which the practice is located, other applicable regulations and commercial considerations.

We believe that we are currently in material compliance with the corporate practice of medicine laws in each of the states in which we operate. Nevertheless, it is possible that regulatory authorities or other parties may assert that we are engaged in the unauthorized corporate practice of medicine. If such a claim were successfully asserted in any jurisdiction, we could be subject to civil and criminal penalties, which could exclude us from participating in Medicare, Medicaid and other governmental health care programs, or we could be required to restructure our contractual and other arrangements.

Failure to comply with complex federal and state laws and regulations related to submission of claims for our services could result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs.

Our failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or result in attempts by third-party payors, such as Medicare and Medicaid, to recover payments from us that have already been made. Submission of claims in violation of certain statutory or regulatory requirements can result in both criminal and civil penalties, including civil monetary penalties of up to $10 50,000 for each item or service billed to Medicare in violation of the legal requirement, assessment of up to three times the amount claimed or received, and exclusion from participation in Medicare and Medicaid. The amount of such penalties will be adjusted in the future to reflect inflation. Government authorities may also assert that violations of laws and regulations related to submission, or causing the submission, of claims violate the ~~federal~~FCA ~~False Claims Act~~ or other laws related to fraud and abuse, including those described under the heading “Business—Regulatory Affairs,” such as submission of claims for services that were not medically necessary. In addition, based on regulations implemented in 2016, we could also be liable for a false claim if we are aware of, or act in reckless disregard of, an overpayment and fail to return it within 60 days of identifying it. We could be adversely affected if it was determined that the services we provided were not medically necessary and not reimbursable, particularly if it were asserted that we contributed to the physician’s referrals of unnecessary services to us. It is also possible that the government could attempt to hold us liable under fraud and abuse laws for improper claims submitted by an entity for services that we performed if we were found to have knowingly participated in the arrangement that resulted in submission of the improper claims.

2529

Our business could be harmed by the loss or suspension of a license or imposition of a fine or penalties under, or future changes in, ~~the law~~ or ~~regulations~~interpretations of, the ~~Clinical~~law ~~Laboratory~~or ~~Improvement~~regulations ~~Amendments~~of CLIA or those of Medicare, Medicaid or other federal, state or local agencies.

The diagnostic testing industry is subject to extensive regulation at the federal and state level, and many of these statutes and regulations have not been interpreted by the courts. CLIA requires that laboratories and pathology providers be certified by the federal government or by a federally- approved accreditation agency every two years. CLIA mandates specific standards in the areas of personnel qualifications, administration, proficiency testing, patient test management, quality control, quality assurance and inspections. CLIA regulations include special rules applicable to cytology testing, such as pap smears, including workload limits, specialized proficiency testing requirements that apply not just to the laboratory or pathology provider, but also to the individuals performing the tests, specialized personnel standards and quality control procedures. A laboratory may be sanctioned based on its failure to participate in an acceptable proficiency testing program, unsatisfactory performance in proficiency testing or for prohibited activities related to proficiency testing, such as failing to test the proficiency testing samples in the same manner as patient specimens or communicating with other laboratories regarding proficiency testing results. The sanction for failure to comply with CLIA requirements, including proficiency testing violations, may be suspension, revocation or limitation of a ~~laboratory~~provider’s CLIA certificate, as well as the imposition of significant fines and criminal penalties. While imposition of certain CLIA sanctions may be subject to appeal, few, if any, such appeals have been successful. A CLIA certificate is necessary to conduct business. As a result, any CLIA sanction or our failure to renew a CLIA certificate could have a material adverse effect on our business. Although each laboratory facility is separately certified by CLIA, if the CLIA certificate of any our laboratories is revoked, CMS could seek revocation of our other laboratories’ CLIA certificates based on their common ownership or operation with the laboratory facility whose certificate was revoked. Some states have enacted analogous state laws that are stricter than CLIA. Potential sanctions for violation of these statutes and regulations include fines and the suspension or loss of various licenses, certificates and authorizations, which could have a material adverse effect on our business.

Changes in laws and regulations that address billing arrangements for our services could have a material adverse effect on our revenue.

While we do not bill referring physicians for our services when those services are covered under a government program, in some cases, we do, where permissible, bill referring physicians for services that are not covered under a government program. Laws and regulations in several states currently preclude us from billing referring physicians, either by requiring us to bill directly the third-party payor or other person ultimately responsible for payment for the service, or by prohibiting or limiting the referring physician’s or other purchaser’s ability to bill a greater amount than the amount paid for the service. An increase in the number of states whose laws prevent such arrangements could adversely affect us by encouraging physicians to furnish such services directly. Currently, Medicare does not require beneficiaries to pay coinsurance for clinical laboratory testing or subject such tests to a deductible, although coinsurance and deductibles do apply to services paid for under the PFS. From time to time, legislation has been proposed that would subject diagnostic services to coinsurance and deductibles. Such legislation could be enacted in the future. Legislation subjecting clinical diagnostic services to coinsurance or deductibles could adversely affect our revenue given the anticipated difficulty in collecting such amounts from Medicare beneficiaries. In addition, we could be subject to potential fraud and abuse violations if adequate procedures to bill and collect copayments were not established and followed.

2630

WeGovernment ~~are increasingly subject to~~ initiatives to recover improper payments and overpayments ~~and such initiatives~~ could result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs.

Government payors have ~~increased~~implemented initiatives to recover improper payments and overpayments. For example, in March 2005, CMS initiated a demonstration project using Recovery Audit Contractors, or (“RACs”), who are paid a contingent fee to detect and correct improper Medicare payments. As part of their duties, RACs collect overpayments from Medicare providers, including those providers who were paid for services that were not medically necessary or were incorrectly coded. As of January 1, 2010, the RAC program began to operate throughout the United States on a permanent basis, and they were granted the authority to pursue improper payments made on or after October 1, 2007. In addition, state Medicaid Programs will now also be required to have their own RAC programs. Furthermore, in 2011, CMS finalized a rule that ~~will~~implemented ~~implement~~ significant anti-fraud provisions included in the health care reform legislation, which ~~will~~, among other things, ~~strengthen~~strengthens ~~current~~ limits on who can enroll as a provider under Medicare, ~~allow~~allows Medicare to suspend payments where a credible allegation of fraud exists, and ~~permit~~permits Medicare and Medicaid to implement a temporary moratorium on new providers when necessary to prevent fraud and abuse. In August 2015, we settled claims by the Veterans Health Administration of overpayments based on one ~~laboratory~~pathology provider’s decision to bill for the professional component of clinical pathology services, which, ~~claims~~ the Veterans Health Administration, isclaimed was not allowed under its reimbursement rules. Although the Company believes its billing practices were not inappropriate, it agreed to a final settlement with the Veterans Health Administration for this claim in the amount of $1.2 million, which iswas ~~being~~ paid in monthly installments of $100,000 through August 2016.

Governmental investigations to which we may become subject could have a material adverse effect on our business.

Governmental investigations of laboratories and pathology practices have been ongoing for a number of years and are expected to continue, including actions brought pursuant to the FCA’s whistleblower or qui tam provisions. In fact, a substantial increase in funding of Medicare and Medicaid program integrity and anti-fraud efforts has been ~~proposed~~implemented. Investigations ~~of our laboratories~~, regardless of their outcome, could damage our reputation and adversely affect important business relationships that we have with third parties, as well as have a material adverse effect on our business.

If we fail to comply with current or future laws or regulations governing the collection, processing, storage, access, use, security and privacy of personally identifiable, protected health or other sensitive or confidential information, our business, reputation and profitability could suffer.

The privacy and security of personally identifiable, protected health and other sensitive or confidential information that is created, collected, stored, maintained, received or transmitted in any form or media is a major issue in the healthcare industry. Along with our own confidential data and information, we collect, process, use and store a large amount of such hard-copy and electronic data and information from our patients and employees. As a healthcare provider, we must comply with numerous federal and state laws and regulations governing the collection, processing, sharing, access, use, security and privacy of personally identifiable information, including protected health information (“PHI”). Such laws and regulations include but are not limited to HIPAA, and similar state laws that protect the privacy and security of health information. If we fail to comply with applicable privacy and security laws, regulations and standards, properly protect the integrity and security of our facilities and systems and the data located within them, protect our proprietary rights to our systems, or defend against cybersecurity attacks, or if our third-party service providers fail to do any of the foregoing with respect to data and information accessed, used or collected on our behalf, our business, reputation, results of operations and cash flows could be materially and adversely affected.

Interpretation and regulations relating to privacy laws and security, including those that specifically cover PHI, are changing rapidly. New interpretation and regulations, could have a significant effect on the manner in which we handle healthcare-related data, and the cost of monitoring and complying with such laws, regulations and standards could be significant. Privacy and security regulations require us to provide notification of breaches of PHI and provide for significant fines and other penalties for wrongful use or disclosure of PHI, including civil and criminal fines and penalties. We are subject to HIPAA as a covered entity and business associate, and we believe we are generally in compliance with the privacy regulations. However, the documentation and process requirements of the privacy regulations are complex and subject to interpretation and our efforts in this respect are ongoing. Our failure to comply with the privacy regulations could subject us to sanctions or penalties. HIPAA authorizes state attorneys general to file suit on behalf of their residents for violations. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we could also incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private information. Additionally, HIPAA’s standards have been used as the basis for the duty of care owed in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. HIPAA also mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates, such as us, for compliance with the HIPAA privacy and security standards.

We address our information and data security needs by relying on applicable members of our staff and third parties, including auditors and third-party service providers. We have implemented administrative, physical and technical safeguards for the security of personally identifiable, protected health and other sensitive or confidential information that we collect, process, store, access or use, and we take commercially reasonable actions to require that our third-party service providers are taking appropriate security measures to protect the data and information they access, use or collect on our behalf. However, we cannot assure you that these measures will provide absolute security. Despite these efforts, our facilities and systems and those of our third-party service providers, as well as the data that they hold, may be vulnerable to security attacks and breaches caused by acts of vandalism, fraud or theft, computer viruses, criminal activity, coordinated attacks by activist entities, programming and/or human errors, including errors or misdeeds by our own employees or those of our third-party service providers, or other similar events. Because the techniques used to obtain unauthorized access, disable services or sabotage systems change frequently, may originate from less regulated and remote areas around the world and generally are not recognized until launched against us, we may be unable to proactively address these techniques or to implement adequate preventative measures. Emerging and advanced security threats, including coordinated attacks, require additional layers of security which may disrupt or impact efficiency of operations.

Any security breach involving the misappropriation, loss, corruption or other unauthorized disclosure or use of personally identifiable, PHI or other sensitive or confidential information, including financial data, competitively sensitive information or other proprietary data, whether suffered by us or one of our third-party service providers, could have a material adverse effect on our business, reputation, financial condition, cash flows or results of operations. The occurrence of any of the foregoing events to us or a third-party service provider could result in business interruptions and delays, cessations in the availability of systems and our ability to provide services, potential liability and regulatory action, harm or loss to our reputation and relationships with our patients and vendors, investigations, monetary fines, civil or criminal suits, civil penalties or criminal sanctions, as well as significant costs, including as they relate to legal requirements to disclose the breach publicly, repairing any system damage, credit monitoring and similar services offered to patients or others to maintain business relationships after a breach, and the implementation of measures to prevent future breaches. Any of the foregoing may result in a material adverse effect on our results of operations, financial position, and cash flows or our business reputation. In addition, concerns about our practices with regard to the collection, use, disclosure or security of personally identifiable, protected health and other sensitive or confidential information, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.

Changes in regulations or failure to follow regulations requiring the use of “standard transactions” for health care services issued under HIPAA could adversely affect our profitability and cash flows.

Pursuant to HIPAA, the Secretary of Health and Human Services has issued final regulations designed to facilitate the electronic exchange of information in certain financial and administrative transactions. HIPAA transaction standards are complex and subject to differences in interpretation by payors. For instance, some payors may interpret the standards to require us to provide certain types of information, including demographic information not usually provided to us by physicians. As a result of inconsistent application of transaction standards by payors or our inability to obtain certain billing information not usually provided to us by physicians, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and revenues. Any future requirements for additional standard transactions, such as claims attachments or use of a national provider identifier, could prove technically difficult, time-consuming or expensive to implement.

Failure to comply with environmental, health and safety laws and regulations could adversely affect our ability to operate and result in fines, litigation or other consequences.

We are subject to licensing and regulation under numerous federal, state and local laws and regulations relating to the protection of the environment and human health and safety. Our use, generation, manufacture, handling, transportation, storage and disposal of chemicals and medical specimens, such as human tissue, infectious and hazardous waste, and radioactive materials, as well as the health and safety of our ~~laboratory~~ employees, are covered under these laws and regulations.

In particular, the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, including certain laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These requirements, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and the transmission of, bloodborne pathogens. In addition, the Needlestick Safety and Prevention Act requires, among other things, that we include in our safety programs the evaluation and use of engineering controls such as safety needles if found to be effective at reducing the risk of needlestick injuries in the workplace.

We cannot entirely eliminate the risk of accidental injury, contamination or sabotage from working with hazardous materials or wastes. Our general liability insurance or workers’ compensation insurance policies may not cover damages and fines arising from biological or hazardous waste exposure or contamination. In the event of contamination or injury, we could be held liable for damages or subject to fines in an amount exceeding our resources, and our operations could be suspended or otherwise adversely affected.

27Additionally, because we use various chemicals for processing specimens in our laboratory operations, we are subject to federal hazardous waste and non-hazardous waste disposal laws and regulations. These laws and regulations address the proper handling, storage and disposal of these chemicals. A violation of such laws, or the future enactment of more stringent laws or regulations, could subject us to liability, or require us to incur costs that could have a material adverse effect on us.

Failure to comply with federal, state and local laws and regulations could subject us to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions which would have a material adverse effect on our business. In addition, the current environmental, health and safety requirements applicable to our business, facilities and employees could be revised to become more stringent, and new laws and requirements could be adopted in the future. Thus, compliance with applicable environmental, health and safety laws and regulations could become both more costly and more difficult in the future.

Failure to comply with the Health Insurance Portability and Accountability Act security and privacy regulations may increase our costs.

HIPAA and related regulations establish comprehensive federal standards with respect to the use and disclosure of protected health information by health plans, health care providers and health care clearinghouses. Additionally, HIPAA establishes standards to protect the confidentiality, integrity and availability of protected health information.

Federal privacy regulations restrict our ability to use or disclose patient identifiable laboratory data, without patient authorization for purposes other than payment, treatment or health care operations, as defined by HIPAA. In February 2014, HIPAA was amended to require that laboratories make available to patients or the patient’s representative, upon request, copies of completed test reports that the laboratory can identify as belonging to the patient. These privacy and security regulations provide for significant fines and other penalties for wrongful use or disclosure of protected health information, including civil and criminal fines and penalties. We believe we are in substantial compliance with the privacy regulations. However, the documentation and process requirements of the privacy regulations are complex and subject to interpretation and our efforts in this respect are ongoing. Our failure to comply with the privacy regulations could subject us to sanctions or penalties. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we could also incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private information. We have policies and procedures to comply with the HIPAA regulations and state laws. In addition, we must also comply with non-U.S. laws governing the transfer of health care data relating to citizens of other countries.

Changes in regulations or failure to follow regulations requiring the use of “standard transactions” for health care services issued under the Health Insurance Portability and Accountability Act could adversely affect our profitability and cash flows.

Pursuant to HIPAA, the Secretary of HHS has issued final regulations designed to facilitate the electronic exchange of information in certain financial and administrative transactions. HIPAA transaction standards are complex and subject to differences in interpretation by payors. For instance, some payors may interpret the standards to require us to provide certain types of information, including demographic information not usually provided to us by physicians. As a result of inconsistent application of transaction standards by payors or our inability to obtain certain billing information not usually provided to us by physicians, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and revenues. Any future requirements for additional standard transactions, such as claims attachments or use of a national provider identifier, could prove technically difficult, time-consuming or expensive to implement.

We may be subject to liability claims for damages and other expenses not covered by insurance that could adversely impact our operating results.

The provision of diagnostic testing services to patients may subject us to litigation and liability for damages based on an allegation of malpractice, professional negligence in the performance of our treatment and related services, the acts or omissions of our employees, or other matters. Our exposure to this litigation and liability for damages increases with growth in the number of our laboratories and tests performed. Potential judgments, settlements or costs relating to potential future claims, complaints or lawsuits could result in substantial damages and could subject us to the incurrence of significant fees and costs. Our insurance may not be sufficient or available to cover these damages, costs or expenses. Our business, profitability and growth prospects could suffer if we face negative publicity or if we pay damages or defense costs in connection with a claim that is outside the scope of any applicable insurance coverage, including claims related to contractual disputes and professional and general liability claims.

Our insurance costs may increase over the next several years, and our coverage may not be sufficient to cover claims and losses.

Risks Relating to Our Indebtedness

Our failure to comply with the financial tests and ratios contained in the agreements governing our senior secured credit facility and senior notes could result in an acceleration of our indebtedness.

We currently expect to meet the financial tests and ratios contained in the agreements governing our amended senior secured credit facility and senior notes at least through the end of 2016. Nonetheless, we may not achieve all of our business goals and objectives and events beyond our control could affect our ability to meet these financial tests and ratios. Any failure by us to meet all applicable financial tests and ratios could result in an event of default with respect to our amended senior secured facility or our senior notes. This could lead to the acceleration of the maturity of our outstanding loans or notes and the termination of the commitments to make further extensions of credit. Each of these would have a material adverse effect on our business. Furthermore, our amended senior secured credit facility, which is scheduled to mature on July 31, 2019, is subject to an accelerated maturity date of October 14, 2017 and would require repayment in 2017 if our senior notes are not refinanced or their maturity is not extended prior to October 14, 2017.

We are highly leveraged, and our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry, and prevent us from meeting our debt obligations, including our obligations under our senior secured credit facility, our senior notes and our contingent notes issued in acquisitions.

As of December 31, 2015, our total indebtedness was $389.3 million, including $200.0 million outstanding under our senior notes, $189.0 million outstanding under our senior secured credit facility, consisting of $164.0 million outstanding under the term loan and $25.0 million outstanding under the delayed draw term loan. In addition, as of December 31, 2015, the fair value of contingent consideration issued in our acquisitions was $13.1 million and we had $30.0 million available to be borrowed under our revolving credit facility and $40.0 million available through April 10, 2016 to be borrowed for acquisitions under our delayed draw term loan B. Our indebtedness could have important consequences, which could adversely impact our business, results of operations and financial condition, including:

● increase our vulnerability to general adverse economic and industry positions;

● subject us to covenants that limit our ability to fund future working capital, capital expenditures, research and development costs and other general corporate requirements;

● require us to devote a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

● limit our ability to obtain additional financing to fund future acquisitions;

● limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

● impede our ability to obtain the necessary approvals to operate our business in compliance with the numerous laws and regulations to which we are subject;

● place us at a competitive disadvantage relative to our competitors that have less debt outstanding; and

● limit our ability to borrow additional funds for operational or strategic purposes (including to fund future acquisitions), among other things, under the financial and other restrictive covenants in our indebtedness.

Our credit facility bears interest at variable rates that are linked to changing market interest rates. As a result, an increase in market interest rates above the specified floor would increase our interest expense and our debt service obligations.

Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt.

We and our subsidiaries may be able to incur substantially more additional indebtedness in the future, including our access to approximately $70.0 million additional borrowing capacity under our senior secured revolving credit facility, inclusive of $40.0 million which is available through April 10, 2016 to pay consideration for acquisitions under the delayed draw term loan B facility, which was entered into on April 10, 2015. Although the terms of our debt agreements contain covenants limiting indebtedness, these covenants are subject to a number of significant exceptions and qualifications, and if we incur additional debt, secure existing or future debt, or recapitalize our debt, we might further exacerbate the risks associated with our substantial indebtedness.

The computation of amounts owed under the contingent notes could lead to disputes that could disrupt our operations and damage our relationships with our pathologists.

In connection with our acquisitions, we agreed to pay additional consideration in future periods based upon the attainment of stipulated levels of operating results of the acquired entities. The computation of the annual operating results and the amount owed under such agreements is subject to review and approval by sellers prior to payment. This computation could lead to a dispute with the sellers who are often our pathologists. For example, as further described in Note 10 of our Consolidated Financial Statements in this Annual Report, certain sellers have claimed that we owed additional amounts in connection with contingent notes. These types of disputes could disrupt our operations, damage our relationships with our pathologists and have a material adverse effect on our business.

The agreements governing our senior secured credit facility and senior notes contains, and future debt agreements may contain, various covenants that limit our discretion in the operation of our business.

Our agreements and the related instruments governing borrowings under our senior secured credit facility and senior notes contain, and the agreements and instruments governing any future debt agreements of ours may contain, various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to:

● incur more debt;

● redeem or repurchase stock, pay dividends or make other distributions;

● make certain investments;

● create liens;

● enter into transactions with affiliates;

● make acquisitions;

● merge or consolidate;

● transfer or sell assets; and

● make fundamental changes in our corporate existence and principal business.

Any failure by us to comply with all applicable covenants could result in an event of default with respect to our senior secured facility, our senior notes or future debt agreements. This could lead to the acceleration of the maturity of our outstanding loans or notes and the termination of the commitments to make further extensions of credit. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business at our sole discretion could harm our business by, among other things, limiting our ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.

Item 1B.

Unresolved Staff Comments.

Not applicable.

Item 2.

Properties.

We lease our corporate headquarters at 11025 RCA Center Drive, Suite 300, Palm Beach Gardens, FL 33410 (approximately 16,200 square feet), and we lease 2930 other facilities: four in Florida, six in Alabama, one in Arizona, one in ~~Georgia, one in~~ Massachusetts, three in Michigan, one in Minnesota, two in Nevada, one in New Hampshire, one in New Jersey, one in New York, two in North Carolina, one in Ohio, three in Oregon, one in South Carolina, one in Texas and ~~two~~one in Virginia. These facilities are used for laboratory and pathology operations, administrative, billing and collections operations and storage space. The 3031 facilities have lease terms expiring from ~~2016~~2017 to 2026.

Item 3.

Legal Proceedings.

As further described in Note 10 to our consolidated financial statements contained herein, we have been and are currently a party to certain legal proceedings. In the normal course of our business, we may be named in various claims, disputes, legal actions and other proceedings involving malpractice, employment and other matters from time to time. A negative outcome in certain of the ongoing litigation could harm our business, financial condition, liquidity or results of operations. Further, prolonged litigation, regardless of which party prevails, could be costly, divert management’s attention or result in increased costs of doing business.

Item 4.

Mine Safety Disclosures.

None.

3134

PART II

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

We are a privately held company and do not currently have any securities listed on any securities exchange. As of March 2130, ~~2016~~2017, we have 14 holders of record of our common membership units. We are permitted to make distributions to our members in accordance with the LLC Agreement, but we have not made any distributions during the past three years.

Item 6.

Selected Financial Data.

The following selected historical consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included in this Annual Report. The selected historical consolidated financial data included in this section are not intended to replace the consolidated financial statements and the related notes included in this Annual Report.

32The consolidated statements of operations data for the fiscal years 2014, 2015 and 2016, and consolidated balance sheet data as of fiscal year end 2015 and 2016, were derived from Aurora Holdings’ audited consolidated financial statements that are included elsewhere in this Annual Report. The consolidated statements of operations data for the fiscal years ended December 31, 2012 and 2013 and consolidated balance sheet data as of December 31, 2012, 2013 and 2014, were derived from Aurora Holdings’ audited consolidated financial statements not included in this Annual Report. As indicated in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and disclosed in the audited consolidated financial statements included in this Annual Report, we have made a number of acquisitions. The selected historical consolidated financial data includes the results of operations of those acquisitions subsequent to the acquisition date. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

The consolidated statements of operations data for the fiscal years 2013, 2014 and 2015, and consolidated balance sheet data as of fiscal year end 2014 and 2015, were derived from Aurora Holdings’ audited consolidated financial statements that are included elsewhere in this Annual Report. The consolidated statements of operations data for the fiscal years ended December 31, 2011 and 2012 and consolidated balance sheet data as of December 31, 2011, 2012 and 2013, were derived from Aurora Holdings’ audited consolidated financial statements not included in this Annual Report. As indicated in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and disclosed in the audited consolidated financial statements included in this Annual Report, we have made a number of acquisitions. The selected historical consolidated financial data includes the results of operations of those acquisitions subsequent to the acquisition date. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

	Year Ended December 31,
	2012			2013			2014			2015			2016
	(in thousands)
Net revenue	$	277,886		$	248,169		$	242,561		$	263,744		$	284,039
Operating costs and expenses:
Cost of services		134,877			134,112			132,265			142,663			151,472
Selling, general and administrative expenses(1)		64,230			64,949			61,820			66,890			70,314
Provision for doubtful accounts		18,343			16,945			16,600			16,597			15,789
Intangible asset amortization expense		22,270			18,584			18,092			19,047			19,700
Management fees, related parties		2,875			2,530			2,459			2,614			2,840
Impairment of goodwill and other intangible assets(2)		168,498			53,876			27,516			56,725			6,718
Write-off of financing transaction costs (3)		-			-			-			-			1,494
Gain on sale of leased facility (5)		-			-			(957)			-			-
Change in fair value of contingent consideration		(4,193	)		1,149			4,936			1,656			1,866
Merger and acquisition transaction costs		418			169			1,046			889			1,454
Total operating costs and expenses		407,318			292,314			263,777			307,081			271,647
Income (loss) from continuing operations		(129,432	)		(44,145	)		(21,216	)		(43,337	)		12,392
Other income (expense):
Interest expense		(32,531	)		(32,760	)		(35,997	)		(40,980	)		(41,945	)
Write-off of deferred debt issue costs(4)		(848	)		-			(1,639	)		-			-
Loss on extinguishment of debt(4)		-			-			(805	)		-			-
Other income (expense), net		17			17			15			4			-
Total other expense, net		(33,362	)		(32,743	)		(38,426	)		(40,976	)		(41,945	)
Loss from continuing operations before income taxes		(162,794	)		(76,888	)		(59,642	)		(84,313	)		(29,553	)
Benefit for income taxes (6)		(5,109	)		(3,874	)		(4,094	)		(878	)		(410	)
Net loss from continuing operations		(157,685	)		(73,014	)		(55,548	)		(83,435	)		(29,143	)
Discontinued operations:
Loss from operations		(2,189	)		-			-			-			-
Loss on sale		(980	)		-			-			-			-
Loss from discontinued operations		(3,169	)		-			-			-			-
Net loss	$	(160,854	)	$	(73,014	)	$	(55,548	)	$	(83,435	)	$	(29,143	)

	Year Ended December 31,
	2011			2012			2013			2014			2015
	(in thousands)
Net revenue	$	268,695		$	277,886		$	248,169		$	242,561		$	263,744
Operating costs and expenses:
Cost of services		119,938			134,877			134,112			132,265			142,663
Selling, general and administrative expenses(1)		63,346			64,230			64,949			61,820			66,890
Provision for doubtful accounts		18,147			18,343			16,945			16,600			16,597
Intangible asset amortization expense		22,798			22,270			18,584			18,092			19,047
Management fees		2,846			2,875			2,530			2,459			2,614
Impairment of goodwill and other intangible assets(2)		14,168			168,498			53,876			27,516			56,725
Write-off of public offering costs (3)		4,445			-			-			-			-
Gain on sale of leased facility (5)		-			-			-			(957)			-
Change in fair value of contingent consideration		12,535			(4,193	)		1,149			4,936			1,656
Acquisition and business development costs		878			418			169			1,046			889
Total operating costs and expenses		259,101			407,318			292,314			263,777			307,081
Income (loss) from continuing operations		9,594			(129,432	)		(44,145	)		(21,216	)		(43,337	)
Other income (expense):
Interest expense		(32,545	)		(32,531	)		(32,760	)		(35,997	)		(40,980	)
Write-off of deferred debt issue costs(4)		-			(848	)		-			(1,639	)		-
Loss on extinguishment of debt(4)		-			-			-			(805	)		-
Other income (expense), net		(35	)		17			17			15			4
Total other expense, net		(32,580	)		(33,362	)		(32,743	)		(38,426	)		(40,976	)
Loss from continuing operations before income taxes		(22,986	)		(162,794	)		(76,888	)		(59,642	)		(84,348	)
Benefit for income taxes (6)		(740	)		(5,109	)		(3,874	)		(4,094	)		(878	)
Net loss from continuing operations		(22,246	)		(157,685	)		(73,014	)		(55,548	)		(83,435	)
Discontinued operations:
Loss from operations		(10,620	)		(2,189	)		-			-			-
Loss on sale		-			(980	)		-			-			-
Loss from discontinued operations		(10,620	)		(3,169	)		-			-			-
Net loss	$	(32,866	)	$	(160,854	)	$	(73,014	)	$	(55,548	)	$	(83,435	)
	As of December 31,
	2011			2012			2013			2014			2015
		(in thousands)
Cash and equivalents	$	16,262		$	10,842		$	1,407		$	26,422		$	19,085
Total assets		606,963			409,105			328,885			325,780			262,630
Working capital		(3,132	)		(4,126	)		(1,770	)		18,505			11,368
Long term debt, including current portion		316,262			315,965			325,431			370,847			385,385
Fair value of contingent consideration, including current portion		51,720			26,256			7,600			9,050			13,140
Members’ equity		179,890			20,227			(52,494	)		(107,574	)		(190,783	)

	As of December 31,
	2012			2013			2014			2015			2016
		(in thousands)
Cash and equivalents	$	10,842		$	1,407		$	26,422		$	19,085		$	18,571
Total assets		409,105			328,885			325,780			257,009			239,799
Working capital		(4,126	)		(1,770	)		18,505			11,368			(177,275	)
Long term debt, including current portion		315,965			325,431			370,847			379,764			390,722
Fair value of contingent consideration, including current portion		26,256			7,600			9,050			13,140			10,734
Members’ equity		20,227			(52,494	)		(107,574	)		(190,783	)		(219,786	)

(1) In July 2011, we adopted the Aurora Diagnostics Holdings, LLC 2011 Equity Incentive Plan, which we refer to as the 2011 Plan. The 2011 Plan provides for the grant of options to purchase units of Aurora Holdings to eligible participants. Through December 31, ~~2015~~2016, we have granted a total of 3,632,619 options to employees under the 2011 Plan, of which 2,~~087~~145,~~619~~119 have been forfeited ~~since the grant date~~. For the years ended December 31, ~~2013~~2014, ~~2014~~2015 and ~~2015~~2016, selling general and administration expenses included compensation costs of $0.35 million, $0.52 million and $0.21 million, respectively, for these awards.

(2) We test goodwill for impairment annually, or more frequently if circumstances indicate our goodwill may have been impaired. As a result of our testing we recorded non-cash impairment charges to write-down our recorded goodwill by $~~19.2 million, $~~0.9 million, $93.0 million, $46.0 million, $52.9 million, $27.3 million, $39.6 million, ~~and~~ $17.1 million asand of$6.7 ~~September 30~~million, ~~2011,~~as of June 30, 2012, September 30, 2012, November 30, 2012, November 30, 2013, November 30, 2014, June 30, 2015, ~~and~~ November 30, 2015, ~~respectively.~~and ~~During~~November ~~the year ended December 31~~30, ~~2011~~2016, ~~the non-cash impairment charges included $10~~respectively.3 ~~million related to our discontinued operation.~~We also test for impairment of our other intangible assets whenever events occur indicating the recorded balances of our other intangible assets may not be recoverable. As a result of our testing we recorded non-cash impairment charges to write-down our other intangible assets by $~~5.3 million, $~~0.2 million, $21.6 million, $7.9 million, $1.0 million and $0.2 million as of ~~September 30, 2011,~~ June 30, 2012 September 30, 2012, November 30, 2012, November 30, 2013 and November 30, 2014, respectively.

(3) During the year ended December 31, ~~2011~~2016, we ~~decided to delay the completion of our initial public offering. As a result, we~~ recognized a non-cash charge of $41.45 million to write off ~~the~~costs ~~previously~~in ~~deferred~~connection ~~offering~~with ~~costs~~a financing transaction that was abandoned in December 2016.

(4) During 2012, we entered into a second amendment to our credit facility. In connection with the second amendment, we repaid approximately $11.9 million of $114.4 million then outstanding under our term loan credit facility and elected to reduce the maximum amount available under the revolving credit facility from $110 million to $60 million. As a result, we recorded a non-cash write-off of the pro rata portion of unamortized original issue discount and debt issue costs of approximately $0.8 million. In July 2014, we again refinanced our senior secured credit facility and recorded a ~~non-cash~~ charge to write off $1.6 million of unamortized deferred debt issue costs and $0.8 million of original issue discount.

(5)	In 2014, we sold our leased clinical lab facility and other assets and recorded a gain of approximately $1.0 million.

(6)

Aurora Holdings is a Delaware limited liability company taxed as a partnership for federal and state income tax purposes in accordance with the applicable provisions of the Internal Revenue Code. Accordingly, Aurora Holdings was not generally subject to income taxes. The income attributable to Aurora Holdings was allocated to the members of Aurora Holdings in accordance with the terms of the existing Aurora Holdings limited liability company agreement, which we refer to as the LLC Agreement. However, certain of our subsidiaries are corporations, file separate returns and are subject to federal and state income taxes. The provision for income taxes for these subsidiaries is reflected in our consolidated financial statements and includes federal and state taxes currently payable and changes in deferred tax assets and liabilities, excluding the establishment of deferred tax assets and liabilities related to the acquisitions.

Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization (EBITDA), further adjusted to exclude unusual items and other cash or non-cash adjustments. We believe that disclosing Adjusted EBITDA provides additional information to investors, enhancing their understanding of our financial performance and providing them an important financial metric used to evaluate performance in the health care industry. Our senior secured credit facility contains financial covenants measured against Adjusted EBITDA. Our definition and calculation of Adjusted EBITDA in this Annual Report is consistent with the definition and calculation contained in our senior secured credit facility and the indenture governing our Senior Notes. 37

~~Adjusted~~We define EBITDA ~~does~~as ~~not~~earnings ~~represent~~before ~~net~~interest, ~~income~~taxes, ordepreciation ~~cash~~and ~~flow~~amortization and ~~from~~Adjusted ~~operations~~EBITDA as ~~those~~EBITDA ~~terms~~further ~~are~~adjusted ~~defined~~for byimpairment ~~GAAP~~of goodwill, management fees, equity-based compensation, changes in fair value of contingent consideration, abandoned facility costs, merger and ~~does~~acquisition ~~not~~transaction ~~necessarily~~costs, ~~indicate~~write-off ~~whether~~of ~~cash~~financing ~~flows~~transaction ~~will~~costs, bewrite-off ~~sufficient~~of todeferred ~~fund~~debt ~~cash~~issue ~~needs.~~costs Asand aloss ~~result~~on extinguishment of debt, ~~the~~cost ~~measure~~savings ~~can~~for bereductions ~~disproportionately~~in ~~affected~~force, byimplementation of a ~~particularly~~laboratory ~~strong~~systems orupgrade, ~~weak~~pro ~~quarter.~~forma ~~Further~~acquired EBITDA, itand ~~may~~certain ~~not~~other becharges. ~~comparable~~We believe that disclosing EBITDA and Adjusted EBITDA provides additional information to ~~the~~investors, ~~measure~~enhancing ~~for~~their ~~any~~understanding ~~subsequent~~of ~~four-quarter~~our ~~period~~financial orperformance ~~any~~and ~~complete~~providing ~~fiscal~~them ~~year~~important financial metrics used to evaluate performance in the health care industry.

34EBITDA and Adjusted EBITDA do not represent net income or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, they may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

EBITDA and Adjusted EBITDA isare not a recognized ~~measurement~~measurements under GAAP and should not be considered as a substitute for measures of our financial performance as determined in accordance with GAAP, such as net income and operating income. Because other companies may calculate EBITDA and Adjusted EBITDA differently than we do, EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. EBITDA and Adjusted EBITDA ~~has~~have other limitations as an analytical ~~tool~~tools when compared to the use of net income, which we believe is the most directly comparable GAAP financial measure, including:

●• EBITDA and Adjusted EBITDA ~~does~~do not reflect the provision of income tax expense in our various jurisdictions;

●• EBITDA and Adjusted EBITDA ~~does~~do not reflect the interest expense we incur;

●• EBITDA and Adjusted EBITDA ~~does~~do not reflect any attribution of costs to our operations related to our investments and capital expenditures through depreciation and amortization charges; and

●• Adjusted EBITDA does not reflect the cost of compensation we provide to our employees in the form of stock option awards~~; and~~.

~~● Adjusted EBITDA excludes expenses that we believe are unusual or non-recurring, but which others may believe are normal expenses for the operation of a business.~~38

The following is a reconciliation of net income to EBITDA and Adjusted EBITDA (in thousands):

	2011 (G)			2012 (G)			2013 (G)			2014 (G)			2015 (G)
	2014 (G)			2015 (G)			2016 (G)
Net loss	$	(3255,~~866~~548	)	$	(~~160~~83,~~854~~435	)	$	(7329,~~014~~143	)	$	~~(55,548~~	)	$	~~(83,435~~	)
Interest expense		3235,~~545~~997			3240,~~531~~980			3241,~~760~~945			~~35,997~~			~~40,980~~
Income taxes		(~~740~~4,094	)		(~~5,109~~878	)		(~~3,874~~410	)		~~(4,094~~	)		~~(878~~	)
Depreciation and amortization		2722,~~243~~587			2623,~~938~~274			23,~~127~~472			~~22,587~~			~~23,274~~
EBITDA		26(1,~~182~~058	)		(~~106~~20,~~494~~059	)		~~(21~~35,~~001~~864	)		~~(1,058~~	)		~~(20,059~~	)
Management fees (A)		2,846			2,875			2,530			2,459			2,614
Impairment of goodwill and other intangible assets		27,516			56,725			6,718
Equity-based compensation		1,413			1,148			293			468			226
Management fees, related parties (A)		2,459			2,614			2,840
Change in fair value of contingent consideration (B)		12,535			(4,193	)		1,149			4,936			1,656
Equity-based compensation		468			226			140
Other charges (C)(D)(E)		29,794			170,855			54,045			31,006			57,614
Change in fair value of contingent consideration (B)		4,936			1,656			1,866
Discontinued operation (F)		(180	)		1,878			-			-			-
Sale or abandoned of leased facility (C)		(957	)		0			1,171
Other		35			(17	)		(17	)		(972	)		(4	)
Merger and acquisition transaction costs (D)		1,046			889			1,454
Adjusted EBITDA	$	72,625		$	66,052		$	36,999		$	36,839		$	42,047
Write-off of public offering costs (E)		0			0			1,494
Write-off of deferred debt issue costs and loss on extinguishment of debt (F)		2,444			0			0
Cost savings for reductions in force (G)		578			2,604			1,147
Implementation of laboratory systems upgrade (H)		863			1,082			870
Pro forma acquired EBITDA (I)		0			0			501
Discontinued operation (H)		-			-			-
Other charges (J)		1,076			826			252
Adjusted EBITDA	$	39,371		$	46,563		$	54,317

(A) InFees ~~accordance~~for ~~with~~management ~~our~~services ~~New~~provided ~~Credit~~by ~~Facility~~Summit Partners and ~~our~~KRG ~~prior~~Capital ~~senior~~Partners ~~secured~~pursuant ~~credit~~to ~~facility~~a ~~and~~management ~~the~~services ~~indenture~~agreement. ~~governing~~Since ~~our~~April ~~Senior Notes~~2013, we have accrued but not paid management fees ~~payable~~ to ~~affiliates~~comply ~~are~~with ~~excluded~~the ~~from~~terms ~~Adjusted~~of ~~EBITDA~~the senior secured credit facility.

(B) For the years ended December 31, 2011, 2013, 2014 and 2015, we recorded charges of $12.5 million, $1.1 million, $4.9 million and $1.7 million, respectively, and for the year ended December 31, 2012 we recorded a gain of $4.2 million related to nonNon-cash changes in the ~~estimated~~ fair value of contingent consideration ~~issued~~payable by us in connection with our acquisitions ~~completed after January 1, 2009~~. ~~These~~The changes inrelated ~~the estimate of the fair value relate~~ to numerous variables, ~~such~~including ~~as the~~ discount rate, remaining pay out period and the projected performance for each acquisition.

(C) ~~During~~For the ~~years~~year ended December 31, ~~2011, 2012, 2013,~~ 2014 ~~and 2015~~, werepresents ~~recorded~~a ~~non~~one-~~cash~~time ~~impairment~~gain ~~charges~~ of $24(1.50) million, ~~$169.6~~relating ~~million,~~to ~~$53.9~~the ~~million,~~sale ~~$27.5~~of ~~million~~a ~~and~~clinical ~~$56.7~~leased ~~million, respectively, related to goodwill and other intangible assets~~facility. ~~During~~For the ~~years~~year ended December 31, ~~2011 and 2012~~2016, ~~the~~represents ~~non-cash impairment charges included~~ $~~10.3 million and $~~1.1 million, ~~respectively,~~of ~~related~~non-cash charges to ~~our~~accrue ~~discontinued operation. During~~ the ~~year~~present ~~ended~~value ~~December~~of ~~31,~~contractual ~~2011,~~rent weand ~~decided~~ to ~~delay~~write ~~the~~off ~~completion~~equipment ofin ~~our~~connection ~~initial~~with ~~public~~the ~~offering.~~Company’s Asdecision ato ~~result,~~vacate wea ~~recognized~~facilities ain ~~non-cash~~Las ~~charge~~Vegas, ofNevada ~~$4.4~~in ~~million~~January to2016 ~~write~~and ~~off~~in ~~the~~Tampa, ~~previously~~Florida ~~deferred~~in ~~offering~~March ~~costs~~2016.

(D) ~~Other~~Amounts ~~charges~~represent ~~also~~merger ~~includes~~and ~~an add-back for~~ acquisition ~~and~~transaction ~~business development~~ costs, asincluding ~~reported~~legal ~~in our consolidated statements of operations~~fees.

35(E) During the quarter ended December 31, 2016, the Company delayed a planned financing transaction and recognized a charge to write-off previously deferred financing transaction costs.

(EF) ~~For~~Consists of the ~~year~~non-cash ~~ended~~write-off ~~December~~of ~~31, 2012, net loss included~~ $01.86 million ~~for write-offs~~ of deferred ~~debt~~financing ~~issue~~ costs. ~~For~~in ~~the~~connection ~~year~~with ~~ended~~the ~~December~~refinancing ~~31,~~of ~~2014,~~the weprior ~~again refinanced our~~ credit facility and ~~recorded~~ a non-cash ~~charge~~loss toof ~~write off~~ $10.68 million ofrelating ~~unamortized~~to ~~deferred~~the ~~debt~~extinguishment ~~issue~~of ~~costs~~debt ~~and~~in ~~$0.8~~the ~~million~~year ofended ~~original~~December ~~issue~~31, ~~discount~~2014.

(FG) ~~Amount~~Represents ~~represents~~payments ~~EBITDA~~made ofto ~~our~~employees ~~discontinued~~whose ~~operation,~~positions ~~which~~were ~~was~~permanently ~~sold~~eliminated onin ~~August~~the ~~31,~~respective ~~2012.~~period ~~The~~to ~~year~~improve ~~ended~~profitability ~~December~~and ~~31,~~margin ~~2012~~in ~~includes~~response ~~$1.0~~to ~~million~~rate ~~for~~pressure specific to those periods, in each case assuming the ~~loss~~employees onhad been terminated at the ~~sale~~beginning of the ~~discontinued~~relevant ~~operation~~period.

(GH) ~~The~~Represents ~~Adjusted~~one-time ~~EBITDA~~expenses ~~for~~relating ~~the year ended December 31, 2011 excludes the results of operations of acquisitions completed in 2011 prior~~ to ~~their~~a ~~acquisition~~company-wide ~~date.~~initiative For purposes of calculating compliance ratios for our prior senior secured credit facility, the Adjusted EBITDA for the year ended December 31, 2011 would include approximately $4.6 million of additional Adjusted EBITDA related to ~~operations~~standardize of our ~~2011~~laboratory ~~acquisitions~~procedures ~~as if they were acquired on January 1, 2011. The Adjusted EBITDA for the year ended December 31, 2011 does not reflect any adjustments to add back $1.6 million of severance~~ and ~~other~~implement ~~charges~~a ascommon ~~prescribed~~LIS bysystem ~~our~~in ~~prior senior secured credit facility and the indenture governing~~ our ~~Senior~~existing ~~Notes~~laboratories. ~~The~~As ~~Adjusted~~of ~~EBITDA for the year ended~~ December 31, 2012 does not reflect any adjustments to add back $2.5 million of severance and other charges as prescribed by our prior senior secured credit facility and the indenture governing our Senior Notes. The Adjusted EBITDA for the year ended December 312016, ~~2013~~we ~~does~~had ~~not~~standardized ~~reflect~~approximately ~~any~~40% ~~adjustments to add back $8.7 million~~ of ~~other amounts as prescribed by our prior senior secured credit facility and~~ the ~~indenture~~laboratories ~~governing~~included ~~our~~in ~~Senior~~this ~~Notes, including approximately $4~~initiative.8 ~~million~~We ~~for~~are ~~pro forma adjustments related to reduction~~ in ~~force initiatives. The Adjusted EBITDA for~~ the ~~year~~process ~~ended December 31, 2014 does not reflect adjustments to add back $6.1 million~~ of ~~other~~standardizing ~~amounts~~the asremaining ~~prescribed~~laboratories ~~by our New Credit Facility~~ and ~~the~~we ~~indenture~~do ~~governing~~not ~~our~~expect ~~Senior~~these ~~Notes,~~expenses ~~including approximately $2.9 million for pro forma adjustments related~~ to ~~our~~recur ~~acquisitions~~once inall ~~2014.The Adjusted EBITDA for the year ended December 31, 2015 does not reflect adjustments to add back approximately $9.0 million of other amounts as prescribed by~~ our ~~New~~existing ~~Credit~~laboratories ~~Facility~~have ~~and~~been ~~the indenture governing our Senior Notes, including approximately $3~~standardized.~~8 million for pro forma adjustments related to our acquisitions in 2015.~~

(I)

Represents the incremental Adjusted EBITDA of approximately $0.5 million for the pathology practice we acquired in Oregon on March 31, 2016 and $51,000 for the pathology practice we acquired in Florida on April 8, 2016, that we estimate would have been contributed had we acquired the practices on January 1, 2016. Our estimates of incremental Adjusted EBITDA are based on due diligence quality of earnings reports prepared for us in connection with the applicable acquisitions.

(J)

Represents (i) costs and expenses paid to Dynamic Healthcare Solutions, LLC (“DHS”) of $0.9 million in 2014, $0.5 million in 2015, and $0.2 million for 2016, respectively, for project-specific support services that in future periods will be performed by company employees with no incremental cost to the Company; and (ii) separation costs of $0.2 million in 2014, $0.2 million in 2015, and $25,000 for 2016, respectively, paid to a former chief executive officer following his retirement in 2011 pursuant to a consulting agreement that terminated on March 1, 2016.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Some of the statements made in this Annual Report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial position, or that describe our plans, goals, intentions, objectives, strategies, expectations, beliefs and assumptions, are forward-looking statements. The words “believe,” “may,” “might,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “project,” “plan,” “objective,” “could,” “would,” “should” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. We caution that the forward-looking statements in this Annual Report are subject to a number of known and unknown risks, uncertainties and assumptions that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things:

●• ~~changes~~our inability ~~medical~~to ~~treatment~~successfully orconduct ~~reimbursement~~an ~~rates~~exchange offer to refinance our Senior Notes or ~~utilization~~otherwise ~~for~~refinance our ~~anatomic~~Senior ~~and~~Notes ~~clinical~~or ~~pathology~~extend ~~markets~~the maturity of our senior secured credit facility;

●• changes in ~~payor~~governmental ~~regulations,~~and ~~policies~~non-governmental orreimbursement ~~payor~~rates ~~mix~~for our diagnostic services;

●• ~~changes~~internalization inof ~~regulation~~testing orfunctions ~~regulatory~~and ~~policies~~technologies by our clients;

●• competition ~~for~~in our ~~diagnostic~~industry ~~services,~~from ~~including~~existing ~~the~~or ~~internalization~~new ~~of testing functions and technologies by our clients~~companies;

36• disruptions or failures of our IT solutions or infrastructure;

●• the ~~failure~~introduction toof ~~successfully~~new ~~collect~~diagnostic technologies or products which could reduce demand for our services;

●• ~~payor~~our ~~efforts~~inability to ~~reduce~~acquire ~~utilization~~rights to new technologies and ~~reimbursement~~products, ~~rates~~or recalls or discontinuations of existing technologies or products;

●• ~~changes~~loss inof ~~product~~key ~~mix~~executives, pathologists or technical personnel;

●• ~~failure~~changes toin ~~successfully integrate or fully realize~~ the ~~anticipated~~mix ~~benefits~~of ~~from~~diagnostic ~~our~~testing ~~acquisitions~~services ~~within~~we ~~the expected time frames~~perform;

●• changes in the ~~discovery~~percentage of ~~unknown~~services orwe ~~contingent~~perform ~~liabilities~~for ~~from~~certain ~~acquired businesses~~subspecialties;

●• ~~the~~ failure ofto ~~our~~successfully ~~acquired~~integrate ~~assets~~or tofully ~~generate~~realize the ~~level~~anticipated ofbenefits ~~expected~~from ~~returns~~our acquisitions;

●• ~~disruptions~~the ordiscovery ~~failures~~ of ~~our~~unknown ITor ~~solutions~~contingent orliabilities ~~infrastructure~~from acquired businesses;

●• ~~the~~ failure to ~~adequately~~manage ~~safeguard~~our ~~data~~growth effectively;

●• ~~loss~~changes ofin ~~key~~reimbursement ~~executives,~~rates ~~pathologists~~due ~~and~~to ~~technical~~consolidation ~~personnel~~in the health insurance industry;

●• ~~growth~~the inloss ~~demand~~of ~~for~~in-network ~~our~~status ~~services~~with, ~~that~~or ~~exceeds~~ our ~~ability~~the inability to ~~adequately~~collect ~~scale~~from, ~~our~~health ~~infrastructure~~care insurers;

~~● a decline in our rate of strategic or organic growth;~~40

●• the ~~loss~~failure ofto ~~in-network~~successfully ~~status~~collect ~~with~~for or our ~~the inability to collect from health care insurers~~services;

●• ~~the~~changes ~~availability~~in ofthe ~~additional~~dermatopathology ~~capital resources~~market;

●• ~~increased~~changes ~~competition~~ in ~~our~~clinical ~~industry~~protocols orthat ~~the~~reduce ~~failure~~demand tofor ~~maintain~~diagnostic ~~relationships~~testing ~~with clients, including referring physicians and hospitals, and with payors~~services;

●• ~~the~~changes ~~protection~~in of our ~~intellectual~~payor ~~property~~mix;

●• ~~general~~the ~~economic,~~impact ~~business~~of orhigh ~~regulatory~~deductible ~~conditions~~health ~~affecting~~plans ~~the~~on ~~health~~demand ~~care~~for our services and ~~diagnostic~~our ~~testing~~ability ~~services~~to ~~industries~~collect for our services;

●• the ~~introduction~~availability of ~~new~~additional orcapital ~~failure of old technologies, products or tests~~resources;

●• ~~federal~~the orfailure ~~state~~of ~~health~~our ~~care~~acquired ~~reform~~assets ~~initiatives~~to generate the level of expected returns;

●• ~~violation~~growth ~~of, failure to comply with, or changes~~ in ~~federal~~demand ~~and state laws and regulations related to, submission of claims~~ for our services, ~~fraud~~that ~~and~~exceeds ~~abuse,~~our ~~patient~~ability ~~privacy,~~to ~~corporate~~adequately ~~practice~~scale ~~of medicine, billing arrangements for~~ our ~~services and environmental, health and safety~~infrastructure;

●• ~~attainment~~general ofeconomic, ~~licenses~~business ~~required~~or toregulatory ~~test~~conditions ~~patient~~affecting ~~specimens~~the ~~from~~health ~~certain~~care ~~states~~and ordiagnostic ~~the~~testing ~~loss~~services ~~or suspension of licenses~~industries;

●• ~~our~~violation ~~inability~~of, failure to ~~obtain~~comply ~~liability~~with, ~~insurance~~or ~~coverage~~changes orin federal and state laws and regulations related to, submission of claims for ~~damages~~our inservices, ~~excess~~fraud and abuse, patient privacy, corporate practice of medicine, billing arrangements for our ~~coverage~~services and environmental, health and safety;

●• ~~future~~our ~~increases~~substantial inlevel ~~liability~~of ~~insurance coverage~~indebtedness; and

●• ~~our~~the ~~substantial~~other ~~level~~risks and uncertainties discussed under the heading “Risk Factors” in Part I, Item 1A of ~~indebtedness~~this ~~and~~Annual ~~ability~~Report toand ~~incur~~elsewhere ~~substantially~~in ~~more~~this ~~debt;~~Annual Report.

● covenants in our debt agreements; and

● the other risks and uncertainties discussed under the heading “Risk Factors” in Part I, Item 1A of this Annual Report and elsewhere in this Annual Report.

Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time-to-time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report to conform these statements to actual results or changes in our expectations, unless otherwise required by law.

General

We are a ~~specialized~~leading independent pathology services and cancer diagnostics company. ~~providing~~We provide integrated diagnostic consultations, information services ~~that~~and ~~play~~personalized amedicine ~~key~~services ~~role~~tailored into the ~~diagnosis~~patients of ~~cancer~~our referring physicians, hospitals and hospital systems. We also provide research services to pharmaceutical companies and other ~~diseases~~research entities. Our ~~experienced~~highly-trained, subspecialized pathologists deliver comprehensive diagnostic ~~reports~~opinions of a patient’s condition and ~~consult~~work ~~frequently~~collaboratively with referring physicians to ~~help~~ determine ~~the~~ appropriate ~~treatment~~treatments. ~~Our~~We ~~diagnostic~~have ~~reports~~established ~~often~~long-standing ~~enable~~relationships ~~the~~with ~~early~~our ~~detection~~referring physicians as a result of ~~disease,~~our ~~allowing~~locally ~~referring~~provided ~~physicians~~diagnostic toservices, ~~make~~frequent ~~informed~~diagnostic consultations and ~~timely~~flexible ~~treatment~~IT ~~decisions~~solutions that ~~improve~~are ~~their~~customizable ~~patients’~~to ~~health~~our inclients’ ~~a cost-effective manner~~needs. ~~Through~~Our ~~our pathologist~~client-~~operated~~centered ~~laboratory~~approach ~~practices,~~to weproviding ~~provide~~diagnostic ~~physician-based~~services ~~general~~is ~~anatomic~~driven ~~and~~by ~~clinical~~our ~~pathology,~~belief ~~dermatopathology,~~that ~~molecular~~the ~~diagnostic~~practice ~~services~~of medicine and ~~other~~the ~~esoteric~~delivery ~~testing~~of ~~services~~healthcare toare ~~physicians,~~both ~~hospitals,~~personal ~~clinical laboratories~~ and ~~surgery~~best ~~centers~~delivered locally. Our operations consist of one reportable segment.

Key Factors Affecting Our Results of Operations

Services Mix

An important factor affecting our financial performance is the impact of changes in our services mix, including the conversion of global fee arrangements to technical component or professional component arrangements and changes in the accession volume across our various subspecialties. Under a global fee arrangement, we provide both technical and professional services. The technical component represents the cost of preparing a specimen for interpretation, while the professional component represents the cost of supervision and interpretation by our pathologists. We generally prefer global fee arrangements in which we provide both the professional and technical services components, as opposed to arrangements where we only perform either technical or professional services, because global arrangements result in higher revenue per accession. Additionally, changes in test volume across our various subspecialties can impact our revenue. For example, molecular testing, hematopathology, dermatopathology, gastrointestinal and genitourinary all have higher revenue per accession than women’s health pathology services and clinical tests. Women’s health services and clinical tests generally have lower revenue per accession. Therefore, increases in the percentage of accessions related to women’s health pathology services relative to the percentages of accessions generated by other subspecialities would generally decrease our average revenue per accession. Conversely, a higher volume of molecular testing would generally increase our average revenue per accession.

Payor Mix

Changes in our payor mix, as well as changes in the payors used by our referring physicians, can affect our revenue per accession and impact our financial results. We generally provide services on an in-network basis, where we perform services for patients within the networks of payors with which we have contracts. Services performed on an out-of-network basis comprised approximately 10% of our 2016 revenue. Our payors include governmental payors, such as Medicare and Medicaid; private insurance, including managed care organizations and commercial payors; and private payors, such as physicians and individual patients. Because we are generally obligated to bill for our services in the specific manner prescribed by each payor, who may each have different billing requirements, these differences can impact our financial results. Therefore, if more of our referring physicians use governmental payors who have historically had lower reimbursement rates as opposed to commercial payors who have historically had higher reimbursement rates, our revenue per accession may decrease. For the year ended December 31, 2016, based on cash collections, we estimate approximately 58% of our revenue was paid by private insurance, including managed care organizations and commercial payors; approximately 22% of our revenue was paid by Medicare; approximately 2% of our revenue was paid by Medicaid; and approximately 18% was paid by physicians and individual patients.

Reimbursement Rates

Changes to the reimbursement rates paid by our payors impact our net revenue per accession. When we bill our services to third party payors and uninsured patients, we use a company-generated fee schedule that is generally set at billing rates that are higher than our anticipated reimbursement rates. Our billings for services to third party payors are then reimbursed in accordance with the set or negotiated reimbursement rates of the applicable payor. On the other hand, when we bill our services to physicians, which are not reimbursed by third party payors, we use a negotiated fee schedule, and when we bill Medicare for specialized diagnostic services, we are subject to a Medicare physician fee schedule and, to a lesser degree, a clinical laboratory fee schedule, both of which are updated annually. Our revenue is recorded net of the estimated differences between the amount billed in accordance with the prescribed fee schedule and the estimated payment to be received from third party payors, including Medicare. As a result, any changes to the reimbursements rates for our services or the fee schedules at which we bill our services will impact our financial results. We have historically faced, and expect to continue to face, pressure on reimbursement rates as government payors and private insurers take steps to control the cost, use and delivery of health care services, including diagnostic testing services. Government regulations can impact our reimbursement rates and financial results.

On November 2, 2016, CMS issued its 2017 Fee Schedule. In the 2017 Fee Schedule, CMS effectuated reductions to CPT Code 88305, which is the CPT Code we bill most frequently, of approximately 6.8%. Reimbursement rates for flow cytometry codes were also reduced by approximately 19%. Based on our current level of reimbursement from Medicare, we estimate the changes to the 2017 Fee Schedule would result in a reduction of our annualized Medicare revenue of approximately $2.9 million.

From time to time we must renegotiate our reimbursements from commercial payors. We recently renegotiated two contracts which became effective in January and February of 2017, that allow us to retain our in-network status and become a preferred provider in their network. We anticipate these new contracts could generate increased volume, but at lower rates that are more in-line with current market reimbursement rates. We do not anticipate that the increased volume will fully offset the impact of lower reimbursement on our 2017 revenue. Based on 2016 volume, we estimate the reimbursement rates reflected in these two new contracts could result in a reduction of approximately $2.3 million in our net revenue for 2017.

Acquisitions

Since our formation in 2006, we have acquired 31 diagnostic services companies throughout the United States. As a result of the significant number and size of our acquisitions, many of the changes in our consolidated results of operations and financial position discussed from period to period reflect revenue generated by the businesses we have acquired and costs related to these acquisitions. For additional information relating acquisitions in 2014, 2015 and 2016, see “—Recent Acquisitions.”

Seasonality

Our results are also affected by seasonal trends and generally decline during the summer, winter and holiday periods. Furthermore, our results are subject to declines due to weather conditions, such as severe snow storms and flooding or excessively hot or cold spells, as well as general economic conditions, which can deter patients from visiting hospitals and our referring physicians. Seasonal fluctuations tend to vary by region, and, for example, we experience a greater decrease in our accession volume during the winter months in the northeast as compared to the southeast. In addition, we tend to experience a decrease in our accession volume at the beginning of each year as a result of the annual reset of health plan deductibles.

Statement of Operations Overview

Net Revenue

Substantially all of our revenue consists of payments or reimbursements for specialized diagnostic services rendered to patients of our referring physicians, and these revenue are affected primarily by changes in case volume, which we refer to as accession volume, payor mix and reimbursement rates. Accessions are measured as the number of patient cases, and each accession may include multiple specimens. Net revenue per accession is impacted mainly by changes in reimbursement rates and test and payor mix. Accession volume varies from period to period based on the referral patterns of our referring physicians and the frequency of their ordering, the relative mix of the referring physicians’ anatomic pathology specialties, and the type and number of tests ordered. Accession volume is also affected by seasonal trends and generally declines during the summer. winter and holiday periods. Furthermore, accession volume is also subject to declines due to weather conditions, such as severe snow storms and flooding or excessively hot or cold spells, as well as general economic conditions, which can deter patients from visiting our referring physicians.

Our billings for services reimbursed by third-party payors, including Medicare, and patients are based on a company-generated fee schedule that is generally set at higher rates than our anticipated reimbursement rates. Our billings to physicians, which are not reimbursed by third-party payors, represent less than 10 percent of net revenue and are billed based on negotiated fee schedules that set forth what we charge for our services. Reimbursement under Medicare for specialized diagnostic services is subject to a Medicare physician fee schedule and, to a lesser degree, a clinical laboratory fee schedule, both of which are updated annually. Our billings to insured patients include co-insurance and deductibles as dictated by the patient’s insurance coverage. Billings for services provided to uninsured patients are based on our company-generated fee schedule. Our revenue is recorded net of the estimated differences between the amount billed and the estimated payment to be received from third party payors, including Medicare. We do not have any capitated payment arrangements, which are arrangements under which we are paid a contracted per person rate regardless of the services we provide. We generally provide services on an in-network basis, where we perform services for persons within the networks of payors with which we have contracts. Services performed on an out-of-network basis, where we perform services for persons outside of the networks of payors with which we have contracts, comprised less than 15 percent of our 2015 revenue. We may face continuing pressure on reimbursement rates as government payors and private insurers have taken steps and may continue to take steps to control the cost, use, and delivery of health care services, including diagnostic testing services. Changes in payor mix could lead to corresponding changes in revenue based on the differences in reimbursement rates.

Compliance with applicable laws and regulations, as well as internal policies and procedures, adds further complexity and costs to our operations. Furthermore, we are generally obligated to bill in the specific manner prescribed by each governmental payor and private insurer, who may each have different billing requirements. Reimbursements for anatomic pathology services are received from governmental payors, such as Medicare and Medicaid; private insurance, including managed care organizations and commercial payors; and private payors, such as physicians and individual patients. For the year ended December 31, 2015, based on cash collections, we estimate approximately 58 percent of our revenue were paid by private insurance, including managed care organizations and commercial payors; approximately 24 percent of our revenue were paid by Medicare and Medicaid; and approximately 18 percent were paid by physicians and individual patients. For the year ended December 31, 2014, we estimate approximately 60 percent of our revenue were paid by private insurance, 22 percent of our revenue were paid by Medicare and Medicaid; and approximately 18 percent were paid by physicians and individual patients.

In most cases, we provide a global testing service which includes both the technical slide preparation and professional diagnosis. We also fulfill requests from physicians for only the technical component of our services, or TC, which principally includes technical slide preparation and the non-professional items associated with our diagnostic services, including equipment, supplies and technical personnel, or the professional component of our services, or PC, which principally includes review and diagnosis by a pathologist. If a physician requires only the TC services such as slide preparation, we prepare the slide and then return it to the referring physician for assessment and diagnosis.

Cost of Services

Cost of services consists primarily of physician costs, including compensation, benefits and medical malpractice insurance and other physician related costs. InFor ~~addition,~~the ~~cost~~year ofended ~~services~~December ~~includes~~31, ~~costs~~2016, ~~related~~physician tocosts ~~the~~represented ~~technical~~approximately ~~preparation~~42% of ~~specimens~~our ~~and~~total ~~transcription~~cost of ~~reports,~~services. ~~depreciation,~~In ~~courier~~the ~~and~~future, ~~distribution~~we ~~costs,~~may ~~and~~experience ~~all~~increases ~~other~~in physician costs ~~required~~ to ~~fulfill~~retain ~~the~~existing ~~diagnostic~~physicians, ~~service~~to ~~requirements~~replace ofdeparting ~~our~~physicians ~~referring~~or to hire new physicians ~~and~~to ~~their~~support ~~patients~~accession growth.

~~Cost~~In ~~of services generally increases with accession volume and reflects the additional staffing~~addition, ~~equipment, supplies and systems needed to process the increased volume and maintain client service levels. A major component of~~ cost of services isincludes ~~physician~~ costs ~~which,~~related ~~for~~to the ~~year~~technical ~~ended~~preparation ~~December 31,~~of ~~2015,~~specimens ~~represented~~and ~~approximately~~transcription ~~43 percent~~ of ~~our~~reports, ~~total~~depreciation, ~~cost~~courier ofand ~~services.~~distribution ~~In the future~~costs, weand ~~may~~all ~~experience~~other ~~increases~~costs inrequired ~~physician~~to ~~costs~~fulfill tothe ~~retain~~diagnostic ~~existing~~service ~~physicians,~~requirements toof ~~replace~~our ~~departing~~referring physicians orand totheir ~~hire~~patients. ~~new~~These ~~physicians~~costs toincrease ~~support~~with accession ~~growth.~~volume Aand ~~significant~~reflect ~~portion~~the ofadditional ~~our~~staffing, ~~cost~~equipment, ofsupplies ~~services~~and issystems ~~fixed.~~needed Ato ~~lesser~~process ~~portion~~the isincreased ~~variable,~~volume ~~which~~and ~~will~~maintain ~~fluctuate~~client inservice ~~relation to our revenue~~levels.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of general lab and corporate overhead, billing, information technology, accounting, human resources, and sales and marketing expenses. We ~~continue~~also to incur costs to maintain and update our information systems technology at our existing and acquired ~~labs~~pathology practices. We expect sales and marketing and IT expenses to increase faster than revenue as we hire additional personnel and invest in ~~lab~~LIS and ~~billing~~BIS ~~information systems~~ to support our efforts to achieve revenue growth and retain existing customer relationships. As we grow, either through acquisition or organic growth and we expand in size, we expect selling, general and administrative expenses as a percent of revenue to reduce over time.

Provision for Doubtful Accounts

The provision for doubtful accounts and the related allowance are adjusted periodically, based upon an evaluation of historical collection experience with specific payors for particular services, anticipated collection levels with specific payors for new services, industry reimbursement trends, accounts receivable aging and other relevant factors. The majority of our provision for doubtful accounts relates to our estimate of uncollectible amounts from patients who are uninsured or fail to pay their coinsurance or deductible obligations. Changes in these factors in future periods could result in increases or decreases in our provision for doubtful accounts and impact our results of operations, financial position and cash flows.

In an effort to maximize our collections of accounts receivable, we take a number of steps to collect amounts, including coinsurance and deductibles, owed by third party payors, government payors, referring physicians and patients. The process generally includes:

●• verification of complete insurance information and patient demographics,

●• active management and follow up on denials,

●• delivery of scheduled statements to patients, and/or

●• forwarding significant past due accounts to outside collection agencies.

Due to the fact that we operate on multiple billing platforms, we evaluate collectability and the related adequacy of our allowance for doubtful accounts using information from multiple sources. Not all of our systems produce the same level of information by payor or by aging classification and, therefore, we are unable to provide consolidated accounts receivable agings by payor class. However, we believe that sufficient information exists in each respective billing system to make reasonable estimates of our provision for doubtful accounts. In the future, we may convert legacy billing systems from businesses we have acquired to one or more common billing platforms. This could allow for the consolidation of billing data and information on a consistent basis.

Recent ~~Developments~~Acquisitions

~~Health~~Through ~~Care~~December 31, ~~Regulatory~~2016, we have acquired 31 diagnostic services companies throughout the United States, with our most recent acquisition completed on April 8, 2016. The following summarizes the acquisitions we completed in 2014, 2015 and ~~Reimbursement~~2016. ~~Changes~~

In the 2014 Final Physician Fee Schedule Rule CMS calculated the 2014 conversion factor using the Sustainable Growth Rate method, or SGR. The new conversion factor for 2014 represented a 20.1 percent reduction from the 2013 conversion factor. On December 18, 2013, Congress passed legislation that enacted a 0.5 percent increase in the conversion factor, which was effective through March 31, 2014. On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014, or PAMA. PAMA extended the 0.5 percent increase through March 31, 2015 and made other changes to laboratory reimbursement discussed below.

On April 16, 2015 President Obama signed the Medicare and CHIP Reauthorization Act (MACRA). MACRA repealed the provisions related to the Medicare SGR formula and implemented a new physician payment system that is designed to reward the quality of care. In addition, it extended the then-current Medicare Physician Fee Schedule rates through June, 2015, and then increased them by 0.5 percent for the remainder of 2015. Furthermore, the rates are to be increased annually by 0.5 percent, beginning January 1, 2016, through 2019. For 2020 through 2025, the rates will be frozen, although payments will be adjusted to account for performance on certain quality metrics under the Merit-Based Incentive Payment Systems (MIPS) or to reflect physician participation in alternative payment models (APMs). For 2026 and subsequent years, qualified APM participants receive an annual 0.75% increase on Medicare physician payment rates, while those not participating receive a 0.25% annual payment increase, plus any applicable MIPS-based payment adjustments. At this time, it is too early to determine how these changes may impact our business.

In the 2014 Physician Fee Schedule Rule, CMS also changed CPT codes for certain stains we commonly use and reduced the RVUs related to those codes. These changes, as well as other limits on other commonly-used CPT codes, resulted in decreased Medicare reimbursement for some of our services. We estimated the changes to the 2014 Physician Fee Schedule resulted in a reduction of our annualized Medicare revenue of approximately $3 million. We have experienced isolated reductions in reimbursement from non-governmental third-party payors tied to the Medicare reductions. However, at this time we are unable to predict the extent to which non-governmental third-party payors will seek to reduce our reimbursement rates as a result of reductions in Medicare’s Physician Fee Schedule.

In PAMA, Congress instituted a new process for the review of rates paid for clinical laboratory services, which will replace CMS’s plan to adjust payments based on technological advances. This process only applies to services paid based on the CLFS and would not affect the Medicare reimbursement for those of our services that are paid for under the Physician Fee Schedule. Beginning in 2016, laboratories will be required to report to CMS the prices that they receive from third-party payors and the volumes of the tests paid at each payment level. Payments reported must include any discounts, rebates, coupons or other price concessions, and any changes in prices paid during the applicable time period must also be reported. Reporting must reflect payments from private payors, Medicare Advantage plans and Medicaid managed plans. This reporting process will be repeated every three years, except for tests that are considered Advanced Diagnostic Laboratory Tests, or ADLTs, for which prices must be reported annually. ADLTs are tests performed by a single laboratory and which consist of an analysis of multiple biomarkers of DNA, RNA or proteins combined with a unique algorithm; tests cleared or approved by FDA; or other tests defined by the Secretary of Health and Human Services. PAMA required CMS to issue a Final Rule by June 30, 2015 establishing the data collection requirements. CMS did not meet that deadline and issued a Proposed Rule on October 1, 2015. As a result, CMS may be unable to meet some of the remaining deadlines in the law.

Beginning in 2017, laboratory tests will be paid at the weighted median of all the reported prices; however, the reductions will be phased in over time. From 2017 through 2019, reductions cannot be more that 10 percent of the amount paid in the prior year. From 2020 through 2022, reductions cannot be more than 15 percent of the amount paid in the prior year. When new tests are introduced, they will either be paid based on gapfilling or crosswalking unless they are ADLTs. ADLTs will be paid at their list price for their first three quarters and then will be paid at the new weighted median of the market price. If the initial list price is more than 130% of the new price, then CMS may recoup the difference. In addition, PAMA requires numerous other changes that will affect the coding and coverage for new tests and calls for the establishment of a new technical advisory panel to make recommendations to CMS on payment and coverage issues. Based on our volume of clinical tests, we do not expect the changes to the CLFS to have a material impact on our revenue.

In the 2015 Physician Fee Rule, CMS enacted additional payment changes. Although it had indicated previously that it considered flow cytometry, a test that we commonly bill, to be potentially misvalued and therefore, overpaid, CMS did not change the payment for that code in the Final Rule. CMS did, however, change how it pays for prostate biopsy codes, which is also a test that we bill relatively often, and stated that it did consider that code to be potentially misvalued. In addition, it made substantial reductions in certain other codes, including the codes applicable to FISH (fluorescent in situ hybridization), which we also bill; however, those cuts were offset by the increases in other codes, including CPT 88305, which is the most common code that we bill. CMS also stated that it does not intend to implement the policy that it proposed in the 2014 Proposed Fee Schedule Rule that would have limited certain physician payments to the amounts paid in the hospital setting. Finally, CMS announced that it is withdrawing its authority to amend laboratory rates to reflect technological changes as mandated by PAMA.

On October 30, 2015, CMS issued its Final Physician Fee Schedule Rule for 2016, which adopted new policies that will go into effect in January 2016. Our review of the Final Rule suggests that the impact of the changes could be an increase of approximately $2.0 million in our annualized Medicare revenue, inclusive of acquisitions completed in 2014 and 2015. However, our product mix, payor mix and volume may change and the actual impact of the changes to the 2016 Physician Fee Rule may vary significantly from our estimates. This does not reflect any potential change that Congress might make in the future with regard to the conversion factor.

The Budget Control Act of 2011 created a Joint Select Committee on Deficit Reduction, which was tasked with recommending proposals to reduce spending. Under the law, the Joint Committee’s failure to achieve a targeted deficit reduction, or Congress’ failure to pass the Committee’s recommendations without amendment by December 23, 2011, would result in automatic across-the-board cuts to most discretionary programs. Automatic cuts also would be made to Medicare and would result in aggregate reductions in Medicare payments to providers of up to two percent per fiscal year, starting in 2013 and continuing through 2021. Because the Joint Committee was not able to agree on a set of deficit reduction recommendations on which Congress could vote, cuts went into effect in April 2013. This reduction was extended by PAMA through 2024. We have estimated the impact of sequestration, has been approximately $1.1 million to our annual Medicare revenue.

Acquisitions

Through December 31, 2015, we have acquired 28 diagnostic services companies throughout the United States, with our most recent acquisition completed on October 29, 2015. The following summarizes the acquisitions we completed in 2014 and 2015.

2014 Acquisitions

We acquired 100% ~~percent~~ of the equity of two separate pathology practices on June 30, 2014, a third pathology practice on September 30, 2014, and a fourth pathology practice on October 31, 2014 for an aggregate cash purchase price of $16.0 million. In three of the transactions, we issued additional consideration payable over three years. The additional consideration for two of these acquisitions is based on the future performance of the acquired practice. The total acquisition date fair value of the additional consideration issued for the 2014 acquisitions was $1.4 million, representing the present value of estimated future payments of $2.0 million. We funded the cash portion of the June 30, 2014 acquisitions using funds drawn under our previous revolving credit facility. We funded the cash portion of the September 30, 2014 acquisition using $9.7 million drawn on our new delayed draw term loan and the October 31, 2014 acquisition with cash on hand.

2015 Acquisitions

On July 31, 2015, we acquired the assets of two pathology practices and a billing service, all located in Texas. On October 29, 2015, we acquired 100% ~~percent~~ of the equity of a pathology practice in Ohio. We paid $15.4 million of cash in aggregate at closing and issued contingent notes to the sellers payable over ~~from~~ three to six years from the applicable date of closing. Payments under the contingent notes will be paid annually, up to a maximum of $11.9 million over the term of the notes, subject to the retention of certain key facility contracts, financial results and the cash received under specified client contracts. We primarily used the funds available under our $25.0 million delayed draw term loan to pay the $15.4 million cash portion of the purchase price for the acquisitions.

As a result of the significant number and size of the acquisitions, many of the changes in our consolidated results of operations and financial position in 2015, compared to 2014, and in 2014, compared to 2013, discussed below relate to the acquisitions completed in 2014 and 2015. 44

422016 Acquisitions

On March 31, 2016, we acquired 100% of the equity of a hospital-based pathology practice located in Oregon. We paid a total of $7.0 million at closing and issued contingent notes payable over three years. Payments under the contingent notes will be paid annually, up to a maximum of $1.5 million, subject to the future financial performance of the acquired practice and the retention of a key facility contract. We used the available cash under our $40.0 million delayed draw term loan B to pay the $7.0 million cash portion of the purchase price for the acquisition. On April 8, 2016, we acquired a hospital-based pathology practice in Florida, for a purchase price of approximately $0.9 million. The acquisition was funded with available cash.

As a result of the significant number and size of the acquisitions, many of the changes in our consolidated results of operations and financial position in 2016, compared to 2015, and in 2015, compared to 2014, discussed below relate to the acquisitions completed in 2014, 2015 and 2016.

Results of Operations

The following table outlines, for the periods presented, our results of operations as a percentage of net revenue.

	Year Ended December 31,
	2013			~~2014~~2015			~~2015~~2016
Net Revenue		100.0	%		100.0	%		100.0	%
Operating costs and expenses:
Cost of services		54.05	%		54.51	%		5453.13	%
Selling, general and administrative expenses		2625.25	%		25.54	%		2524.48	%
Provision for doubtful accounts		6.8	%		6.83	%		65.36	%
Intangible asset amortization expense		7.5	%		7.52	%		76.29	%
Management fees		1.0	%		1.0	%		1.0	%
Management fees, related parties		1.0	%		1.0	%		1.0	%
Impairment of goodwill and other intangible assets		2111.73	%		1121.35	%		212.54	%
Gain on sale of leased facility		0.0	%		-0.4	%		0.0	%
Write-off of financing transaction costs		0.0	%		0.0	%		0.5	%
Acquisition and business development costs		0.1	%		0.4	%		0.3	%
Gain on sale of leased facility		-0.4	%		0.0	%		0.0	%
Change in fair value of contingent consideration		0.5	%		2.0	%		0.6	%
Merger and acquisition transaction costs		0.4	%		0.3	%		0.5	%
Total operating costs and expenses		117.8	%		108.7	%		116.4	%
Change in fair value of contingent consideration		2.0	%		0.6	%		0.7	%
Income (loss) from continuing operations		-17.8	%		-8.7	%		-16.4	%
Total operating costs and expenses		108.7	%		116.4	%		95.6	%
Income (loss) from continuing operations		-8.7	%		-16.4	%		4.4	%
Other income (expense):
Interest expense		-1314.28	%		-1415.85	%		-1514.58	%
Write-off of deferred debt issue costs		-0.07	%		-0.70	%		0.0	%
Loss on extinguishment of debt		-0.03	%		-0.30	%		0.0	%
Other income (expense)		0.0	%		0.0	%		0.0	%
Total other expense, net		-1315.28	%		-15.85	%		-1514.58	%
Loss from continuing operations before income taxes		-3124.06	%		-2432.60	%		-3210.04	%
Benefit for income taxes		-1.67	%		-10.73	%		-0.31	%
Net loss		-2922.49	%		-2231.96	%		-3110.63	%

Our historical consolidated operating results do not reflect the results of operations of our 2014, 2015 and ~~2015~~2016 acquisitions prior to the effective date of those acquisitions. As a result, our historical consolidated operating results may not be indicative of what our results of operations will be for future periods. Also, effective January, 1, 2015, we adjusted the way we count our accession volume to better reflect our revenue per accession. Accession counts for all prior periods have been revised to reflect our current methodology.

~~Comparison of the Year Ended December 31, 2015 and 2014~~ 45

Comparison of the Year Ended December 31, 2016 and 2015

Net Revenue

Net revenue increased approximately $2120.1 3 million, or 87.7 ~~percent~~%, to $~~263~~284.7 0 million for the year ended December 31, ~~2015~~2016, from $~~242~~263.6 7 million for the year ended December 31, ~~2014~~2015. Revenue from ~~labs~~pathology practices that we operated for the full years ~~2014~~2015 and ~~2015~~2016, which we refer to herein as our existing ~~labs~~pathology practices, increased approximately $51.3 6 million, or 20.~~2 percent~~6%, while the acquisitions contributed approximately $426.80 million and $207.63 million to net revenue in the years ended December 31, ~~2014~~2016 and 2015, respectively, which is a net increase of $1518.87 million.

43Total accessions increased by 45,000 to 2,121,000 for the year ended December 31, 2016, compared to 2,076,000 for the year ended December 31, 2015. Accessions at existing pathology practices decreased by 71,000 for the year ended December 31, 2016, compared to the year ended December 31, 2015, while pathology practices acquired in 2015 and 2016 contributed 146,000 and 30,000 accessions for the years ended December 31, 2016 and 2015, respectively, which is a net increase of 116,000 accessions. The average revenue per accession at our existing pathology practices increased to approximately $130 for the year ended December 31, 2016, from $125 for the year ended December 31, 2015. The increase in existing practice revenue was primarily related to changes in service mix, higher Medicare reimbursement under the 2016 PFS, and higher revenue from ARI, partially offset by lower volume from certain continuing clients as well as client attrition.

Total accessions increased by 109,000 to 2,076,000 for the year ended December 31, 2015, compared to 1,967,000 for the year ended December 31, 2014. Existing lab accessions increased by 6,000 for the year ended December 31, 2015, compared to the year ended December 31, 2014, while labs acquired in 2014 and 2015 contributed 141,000 and 38,000 accessions for the years ended December 31, 2015 and 2014, respectively, which is a net increase of 103,000 accessions. The average revenue per accession at our existing labs increased to approximately $125 for the year ended December 31, 2015, from $123 for the year ended December 31, 2014. The increase in net revenue at our existing labs was due primarily to changes in testing mix, higher revenue from the Aurora Research Institute, or ARI, and higher reimbursement from Medicare.

On October 30, 2015, CMS issued its Final Physician Fee Schedule Rule for 2016, which adopted new policies that will go into effect in January 2016. Our initial review of the Final Rule suggests that the impact of the changes could be an increase of approximately $2.0 million in our annualized Medicare revenue, inclusive of acquisitions completed in 2014 and 2015.

We expect the average revenue per accession of our existing business to fluctuate primarily as the result of changes in service mix, including women’s health services and clinical tests, which generally have lower revenue per accession, molecular tests which generally have higher revenue per accession and the conversion of global fee arrangements to technical component (TC) or professional component (PC) arrangements. In addition, our growth rates and average revenue per accession may be positively or negatively impacted by the reimbursement market and the average revenue per accession of acquisitions completed in the future.

Cost of Services

Cost of services increased approximately $108.4 8 million, or 76.~~9 percent~~2%, to $~~142~~151.7 5 million for the year ended December 31, ~~2015~~2016 from $~~132~~142.3 7 million for the year ended December 31, ~~2014~~2015. Cost of services at ~~labs~~pathology practices acquired in ~~2014~~2015 and ~~2015~~2016 was $1013.4 million and $23.54 million for the years ended December 31, ~~2015~~2016 and ~~2014~~2015, respectively. Cost of services for our existing ~~labs~~pathology ~~increased~~practices decreased approximately $21.5 2 million, or 10.9 ~~percent~~%, to $~~132~~138.2 0 million for the year ended December 31, ~~2015~~2016, compared to $~~129~~139.7 2 million for the year ended December 31, ~~2014~~2015. The ~~increase~~decrease in costs of services at our existing ~~labs~~pathology practices, inclusive of ARI, was primarily ~~related~~as toa ~~higher~~result ~~personnel~~of ~~related~~lower ~~expenses,~~laboratory supplies and technical processing costs, ~~and~~which ~~physician~~correlate ~~consulting~~to ~~fees~~lower volume, ~~partially~~and ~~offset~~lower bypersonnel ~~reductions~~related ~~in lab supplies~~ costs, ~~associated~~partially ~~with~~offset ~~improved~~by ~~supplies~~higher ~~contracts~~consulting costs.

As a ~~percentage~~result of ~~net~~the ~~revenue~~preceding factors, cost of services was 5453.~~1 percent~~3% ~~and~~of ~~54.5 percent~~net revenue for the ~~years~~year ended December 31, ~~2015~~2016, ~~and~~compared ~~2014~~to 54.1% for the year ended December 31, ~~respectively~~2015, and our gross margins were 4546.~~9 percent~~7% and 45.~~5 percent~~9% for the years ended December 31, ~~2015~~2016 and ~~2014~~2015, respectively. Our gross margin may be negatively impacted by lower average revenue per accession and increases in pathologist compensation and replacement costs. Cost of services and our related gross profit percentages may be positively or negatively impacted by market conditions and our service mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased approximately $53.1 4 million, or 85.~~2 percent~~1%, to $6670.9 3 million for the year ended December 31, ~~2015~~2016 from $6166.8 9 million for the year ended December 31, ~~2014~~2015. Selling, general and administrative expenses for ~~labs~~pathology practices acquired in ~~2014~~2015 and ~~2015~~2016 were $2.5 4 million and $0.5 million for the years ended December 31, ~~2015~~2016 and ~~2014~~2015, respectively. Selling, general and administrative expenses at corporate increased by approximately $4.0.1 million ~~while~~due to higher personnel related costs. Selling, general and administrative expenses at our existing ~~labs~~pathology ~~decreased~~practices increased by approximately $01.9 4 million for the year ended December 31, ~~2015~~2016 compared to ~~2014. Corporate~~2015 ~~selling, general and administrative costs increased~~ primarily ~~due~~from ~~higher~~non-cash ~~personnel~~charges related costs, including increased temporary personnel and travel costs, as well as increased legal and consulting fees. Selling, general and administrative expense decreased at our existing labs primarily attributable to ~~the~~ ~~$1.2~~two ~~million~~leased ~~for~~locations avacated ~~legal~~in ~~settlement with~~ the ~~U.S.~~year ~~Veterans~~ended ~~Administration~~December ~~recognized~~31, ~~in 2014~~2016, ~~partially~~as ~~offset~~well byas higher personnel ~~related costs~~ and ~~billing~~collections ~~fees in 2015~~costs.

As a percentage of net revenue, selling, general and administrative expenses were 2524.~~4 percent~~8% and 25.~~5 percent~~4% for the years ended December 31, ~~2015~~2016 and ~~2014~~2015, respectively.

4446

Provision for Doubtful Accounts

Our provision for doubtful accounts ~~was~~decreased by approximately $160.6 8 million, ~~for~~to ~~each~~$15.8 ofmillion for the ~~years~~year ended December 31, ~~2015~~2016, ~~and~~compared ~~2014~~to $16.6 million for the year ended December 31, 2015. As a percentage of net revenue, the provision for doubtful accounts was 65.~~3 percent~~6% for the year ended December 31, ~~2015~~2016, compared to 6.83% ~~percent~~ for the year ended December 31, ~~2014~~2015. The decrease in the provision for doubtful accounts as a percentage of net revenue primarily related to changes in our collections processes which have improved our collections results. The Company’s provision for doubtful accounts could be positively or negatively impacted by changes in payor mix.

Intangible Asset Amortization Expense (Amortization)

Amortization expense increased by approximately $0.97 million, to $19.07 million for the year ended December 31, ~~2015~~2016, from $1819.1 0 million for the year ended December 31, ~~2014~~2015 as a result of ~~intangible~~amortization ~~assets~~of ~~acquired~~finite inlived ~~2014~~intangible ~~and~~assets ~~2015,~~recorded ~~partially~~for ~~offset~~practices byacquired ~~certain~~in ~~intangible~~2015 ~~assets~~and ~~becoming fully amortized~~2016. We amortize our intangible assets over weighted average lives ranging from 3 to 15 years.

Management Fees, ~~related~~Related ~~parties~~Parties

Management fees increased by approximately $0.12 million, to $2.68 million for the year ended December 31, ~~2015~~2016, from $2.5 6 million for the year ended December 31, ~~2014~~2015 as a result of higher net revenue. Management fees are based on 1.0 ~~percent~~% of net revenue plus expenses. Since April 2013, the Company has accrued but not paid management fees in accordance with the terms of its credit agreements. For each of the years ended December 31, ~~2015~~2016 and ~~2014~~2015, we paid expenses of less than $0.1 million, but paid no management fees, and the Company expects to pay no management fees through December 31, ~~2016~~2017. As of December 31, ~~2015~~2016, $811.65 million of these management fees are reflected in long-term liabilities in the accompanying consolidated balance sheet.

Impairment of Goodwill and Other Intangible Assets

At November 30, 2016, we tested goodwill for potential impairment and determined the carrying value at one of our reporting units exceeded the estimated fair value. As a result, we recorded a non-cash impairment charge of $6.7 million to write down the carrying value of goodwill at this reporting unit. The expected loss of the reporting unit’s largest client resulted in a reduction in the fair value of the reporting unit below its carrying value.

At June 30, 2015, we identified indications of impairment at two of our reporting units. One of the reporting units exhibited lower margins and both of the reporting units experienced lower volume as a result of competition to such an extent as to indicate potential impairment. We believe the reduction in volume due to attrition in the client base resulted in reductions in the fair values of the reporting units below their carrying values. We tested goodwill for impairment at these two reporting units as of June 30, 2015 and recorded non-cash impairment charges of $39.6 million to write down the carrying value of goodwill.

At November 30, 2015, we tested goodwill for potential impairment and determined three of our reporting units had carrying values in excess of their estimated fair values. As a result, we recorded non-cash impairment charges of $17.1 million to write down the carrying value of goodwill at these three reporting units. Regarding these reporting units, we believe various factors, including the expected loss of a significant client, higher projected costs and reductions in projected private insurance reimbursement rates resulted in a reduction in the fair value of the reporting units below their carrying value.

AtAs ~~November 30~~of December 31, ~~2014~~2016, we ~~tested~~had goodwill and net intangible assets ~~for potential impairment and recorded non-cash impairment charges~~ of $27172.56 million ~~resulting from a write-down of $27~~.3 million in the carrying value of goodwill and a write-down of $0.2 million in the carrying value of intangible assets. The write-down of the goodwill and intangible assets related to five of our reporting units. The impairments at these reporting units were primarily the result of client attrition, as well as the cumulative effect of reductions in reimbursement from governmental payors in 2013 and 2014.

AsWrite-off of ~~December 31,~~Financing ~~2015,~~Transaction we had goodwill and net intangible assets of $190.9 million. Many factors, including competition, general economic conditions, health care reform, third party payment patterns and industry consolidation, could have a negative impact on one or more of our reporting units. Therefore, we may experience additional impairment charges in future periods. Costs

45During the quarter ended December 31, 2016, we delayed the completion of a financing transaction. As a result, we recognized a charge of $1.5 million to write off the previously deferred financing transaction costs.

~~Gain on Sale of Leased Facility~~47

On December 31, 2014, we sold certain assets, including equipment and other assets, pertaining to our sole clinical laboratory facility for approximately $0.9 million. This leased facility was our only location that exclusively performed clinical laboratory testing. We also entered into a laboratory services agreement with the purchaser of the clinical laboratory facility effective January 1, 2015, under which we are outsourcing clinical laboratory testing to the purchaser. As a result of the facility sale, we recorded a gain on sale of facility of approximately $1.0 million for the year ended December 31, 2014.

Change in Fair Value of Contingent Consideration

For the year ended December 31, ~~2015~~2016, we recorded net non-cash charges of $1.7 9 million, compared to ~~non-cash charges of~~ $41.97 million for the year ended December 31, ~~2014~~2015, to recognize changes in the estimated fair values of contingent consideration issued in connection with our acquisitions ~~completed after January 1, 2009~~. These charges relate to changes in the estimated fair value, including numerous variables such as the discount rate, remaining pay out period and the projected performance for each acquisition.

InMerger ~~April~~and ~~2015,~~Acquisition weTransaction ~~finalized~~Costs a settlement agreement with the sellers in one of our acquisitions. As a result of the settlement we recorded a charge of approximately $5.4 million in the change in fair value of contingent consideration in the year ended December 31, 2014.

~~Acquisition~~Costs associated with our merger and ~~Business~~acquisition ~~Development~~transactions ~~Costs~~increased to $1.5 million for the year ended December 31, 2016, compared to $0.9 million for the year ended December 31, 2015, as a result of increased merger and acquisition transactions activity during 2016.

Transaction costs associated with our acquisitions and business development costs decreased to $0.9 million for the year ended December 31, 2015, compared to $1.0 million for the year ended December 31, 2014, as a result of a decline in acquisition activity during 2015.

Interest Expense

Interest expense for the year ended December 31, ~~2015~~2016 was $41.09 million, compared to $3641.0 million for the year ended December 31, ~~2014~~2015. The higher interest expense related to higher average balances outstanding under our credit facility term loans. Additionally, interest rates under our current credit facility entered into on July 31, 2014 are higher, currently at 8.375 percent, than our prior credit facility, which was paid off on July 31, 2014 with a portion of the proceeds from the current credit facility.

Write-off of Deferred Debt Issue Costs and Loss on Extinguishment of Debt

As noted in the preceding paragraph, on July 31, 2014 we entered into a new credit facility and used a portion of the proceeds to repay all amounts outstanding under our prior credit facility. In connection with the retirement of our previous credit facility, we recorded a non-cash charge of $1.6 million to write off the unamortized balance of deferred issuance costs and a non-cash loss on extinguishment of debt of $0.8 million for the related original issue discount.

Benefit for Income Taxes

We are a Delaware limited liability company taxed as a partnership for federal and state income tax purposes, in accordance with the applicable provisions of the Internal Revenue Code. Accordingly, we generally have not been subject to income taxes, and the income attributable to us has been allocated to the members of Aurora Holdings in accordance with the terms of the LLC Agreement. However, certain of our subsidiaries are structured as corporations and therefore are subject to federal and state income taxes. The benefit for federal and state income taxes ~~for these subsidiaries~~, as reflected in our consolidated financial statements, amounted to a benefit of $0.94 million and $40.19 million for the years ended December 31, ~~2015~~2016 and ~~2014~~2015, respectively.

46Comparison of the Year Ended December 31, 2015 and 2014

Comparison of the Year Ended December 31, 2014 and 2013

Net Revenue

Net revenue ~~decreased~~increased approximately $521.6 1 million, or 28.~~3 percent~~7%, to $~~242~~263.6 7 million for the year ended December 31, ~~2014~~2015, from $~~248~~242.2 6 million for the year ended December 31, ~~2013~~2014. Revenue from ~~labs~~pathology practices that we operated for the full years ~~2013~~2014 and ~~2014~~2015, ~~decreased~~which we refer to herein as our existing pathology practices, increased approximately $105.4 3 million, or 42.2 ~~percent~~%, while the acquisitions ~~in 2014~~ contributed approximately $4.8 million and $20.6 million to net revenue in the years ended December 31, 2014 and 2015, respectively, which is a net increase of $15.8 million.

Total accessions ~~declined~~increased by 37109,000 to 12,~~967~~076,000 for the year ended December 31, ~~2014~~2015, compared to 21,~~004~~967,000 for the year ended December 31, ~~2013~~2014. Accessions at existing ~~labs~~pathology ~~declined~~practices increased by 756,000 for the year ended December 31, ~~2014~~2015, compared to the year ended December 31, ~~2013~~2014, while ~~labs~~pathology practices acquired in 2014 and 2015 contributed 141,000 and 38,000 accessions for the ~~year~~years ended December 31, 2015 and 2014, respectively, which is a net increase of 103,000 accessions. The average revenue per accession at our existing ~~labs~~pathology ~~decreased~~practices increased to approximately $~~123~~125 for the year ended December 31, ~~2014~~2015, from $~~124~~123 for the year ended December 31, ~~2013~~2014. The ~~decrease~~increase in net revenue at our existing ~~labs~~pathology practices was due primarily to ~~client~~changes ~~attrition~~in ~~and~~testing ~~lower volume from continuing clients~~mix, ~~which~~higher ~~offset~~ revenue from ~~new~~ARI ~~clients~~ and ~~hospital~~higher ~~contracts, as well as lower~~ reimbursement, ~~chiefly~~ from Medicare ~~reductions, including changes to the 2014 Fee Schedule and sequestration, which became effective in April 2013~~. ~~These decreases in revenue were partially offset by $1.8 million higher revenue from the Aurora Research Institute, or ARI.~~

Cost of Services

Cost of services ~~decreased~~increased approximately $110.8 4 million, or 17.~~4 percent~~9%, to $~~132~~142.3 7 million for the year ended December 31, ~~2014~~2015 from $~~134~~132.1 3 million for the year ended December 31, ~~2013~~2014. Cost of services at ~~labs~~pathology practices acquired in 2014 and 2015 was $10.4 million and $2.5 million for the ~~year~~years ended December 31, 2015 and 2014, respectively. Cost of services for our existing ~~labs~~pathology ~~decreased~~practices increased approximately $42.3 5 million, or 31.~~3 percent~~9%, to $132.2 million for the year ended December 31, 2015, compared to $129.8 7 million for the year ended December 31, 2014. The ~~decrease~~increase in costs of services at our existing ~~labs~~pathology practices, inclusive of ARI, primarily related to ~~lower~~higher personnel related ~~costs~~expenses, ~~from~~technical ~~reductions~~processing incosts ~~headcount,~~and ~~lower~~physician ~~medical~~consulting ~~liability insurance~~fees, ~~and~~partially offset by reductions in lab supplies costs associated with ~~lower~~improved ~~volume,~~supplies ~~partially offset by higher costs for the expansion of ARI~~contracts.

As a percentage of net revenue, cost of services was 54.~~5 percent~~1% and 54.~~0 percent~~5% for the years ended December 31, ~~2014~~2015 and ~~2013~~2014, respectively, and our gross margins were 45.~~5 percent~~9% and 4645.~~0 percent~~5% for the years ended December 31, ~~2014~~2015 and ~~2013~~2014, respectively. Our gross margin may be negatively impacted by lower average revenue per accession and increases in pathologist compensation and replacement costs. Cost of services and our related gross profit percentages may be positively or negatively impacted by market conditions and our service mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ~~decreased~~increased approximately $35.1 million, or 4.8 ~~percent~~.2%, to $6166.8 9 million for the year ended December 31, ~~2014~~2015 from $6461.9 8 million for the year ended December 31, ~~2013~~2014. Selling, general and administrative expenses for ~~labs~~pathology practices acquired in 2014 and 2015 were $2.5 million and $0.5 million for the ~~year~~years ended December 31, 2015 and 2014, respectively. Selling, general and administrative expenses at corporate increased by approximately $14.10 million while expenses at our existing ~~labs~~pathology practices decreased by approximately $40.7 9 million for the year ended December 31, ~~2014~~2015 compared to ~~2013~~2014. ~~Selling~~ Corporate selling, general and administrative ~~expense~~costs ~~reductions~~increased atprimarily ~~our~~due ~~existing labs were attributable~~ to ~~lower~~ higher personnel related costs, asincluding aincreased ~~result~~temporary ofpersonnel ~~reductions~~and intravel ~~headcount~~costs, ~~lower~~as ~~costs~~well ~~for~~as ~~electronic~~increased ~~medical~~legal ~~records~~and ~~systems~~consulting ~~donations~~fees. ~~which~~Selling, ~~were~~general ~~ceased~~and inadministrative ~~the~~expense ~~first~~decreased ~~quarter~~at ofour ~~2014~~existing ~~and~~pathology ~~lower~~practices ~~billing fees~~ primarily attributable to the ~~decrease in revenue, partially offset by a charge of~~ $1.2 million for a ~~proposed~~ legal settlement with the U.S. Veterans Health Administration~~. Corporate~~ ~~selling,~~recognized ~~general~~in ~~and~~2014, ~~administrative~~partially ~~costs~~offset ~~reflected~~by higher ~~compensation~~personnel related costs, ~~including~~and ~~share~~billing ~~based~~fees ~~compensation,~~in ~~partially offset by lower legal costs~~2015.

As a percentage of net revenue, selling, general and administrative expenses were 25.~~5 percent~~4% and 2625.~~2 percent~~5% for the years ended December 31, ~~2014~~2015 and ~~2013~~2014, respectively.

Provision for Doubtful Accounts

Our provision for doubtful accounts ~~decreased~~was $~~0.3 million, or 2.0 percent, to $~~16.6 million for each of the ~~year~~years ended December 31, ~~2014,~~2015 ~~from~~and ~~$16~~2014.9 ~~million~~As ~~for~~a ~~the~~percentage ~~year~~of ~~ended~~net ~~December 31~~revenue, ~~2013. The decrease in~~ the provision for doubtful accounts ~~primarily~~was ~~related~~6.3% tofor ~~changes~~the inyear ~~our~~ended ~~payor~~December ~~mix~~31, ~~and lower net revenue. As a percentage of net revenue~~2015, ~~the~~compared ~~provision~~to ~~for doubtful accounts was~~ 6.8 ~~percent~~% for ~~each of~~ the ~~years~~year ended December 31, 2014 ~~and 2013~~. The ~~Company’s~~decrease in the provision for doubtful accounts ~~could~~as bea ~~positively~~percentage orof ~~negatively~~net ~~impacted~~revenue byprimarily related to changes in ~~payor~~our ~~mix~~collections processes which have improved our collections results.

Intangible Asset Amortization Expense (Amortization)

Amortization expense ~~decreased~~increased by approximately $0.59 million, to $1819.10 million for the year ended December 31, ~~2014~~2015, from $18.6 1 million for the year ended December 31, ~~2013~~2014 as a result of ~~certain~~ intangible assets ~~becoming~~acquired ~~fully amortized, as well as $1.0 million and $0.2 million of impairments of finite lived intangible assets recorded~~ in ~~November~~2014 ~~2013~~ and ~~November 2014~~2015, ~~respectively. The decreases were~~ partially offset by ~~approximately~~certain ~~$0.4 million of amortization related to the 2014 acquisitions. We amortize our~~ intangible assets ~~over~~becoming ~~weighted~~fully ~~average lives ranging from 3 to 15 years~~amortized.

Management Fees, related parties

Management fees ~~were~~increased ~~comparable~~by approximately $0.1 million, to $2.6 million for the ~~years~~year ended December 31, ~~2014 and 2013~~2015, atfrom ~~approximately~~ $2.5 million for the year ended December 31, 2014 as a result of higher net revenue. Management fees are based on 1.0 ~~percent~~% of net revenue plus expenses. Since April 2013, the Company has accrued but not paid management fees in accordance with the terms of its credit agreements. For each of the years ended December 31, ~~2014~~2015 and ~~2013~~2014, we paid expenses of less than $0.1 million, but paid no management fees, and the Company expects to pay no management fees through December 31, 2016.

Impairment of Goodwill and Other Intangible Assets

At November 30, 2014, we tested goodwill and intangible assets for potential impairment and recorded non-cash impairment charges of $27.5 million resulting from a write-down of $27.3 million in the carrying value of goodwill and a write-down of $0.2 million in the carrying value of intangible assets. The write-down of the goodwill and intangible assets related to five of our reporting units. The impairments at these reporting units were primarily the result of client attrition, as well as the cumulative effect of reductions in reimbursement from governmental payors in 2013 and 2014.

At November 30, 2013, we tested goodwill and intangible assets for potential impairment and recorded non-cash impairment charges of $53.9 million resulting from a write-down of $52.9 million in the carrying value of goodwill and a write-down of $1.0 million in the carrying value of intangible assets. The write-down of the goodwill and intangible assets related to seven of our reporting units. The impairments at these reporting units were primarily the result of the reduction in Medicare reimbursement rates effective for 2014.

Gain on Sale of Leased Facility

Change in Fair Value of Contingent Consideration

For the year ended December 31, ~~2014~~2015, we recorded net non-cash charges of $41.9 7 million, compared to non-cash charges of $14.19 million for the year ended December 31, ~~2013~~2014, to recognize changes in the estimated fair values of contingent consideration issued in connection with our acquisitions completed after January 1, 2009. ~~The~~These ~~gain~~charges ~~and charge~~ relate to changes in the estimated fair value, including numerous variables such as the discount rate, remaining pay out period and the projected performance for each acquisition.

~~Acquisition~~Merger and ~~Business~~Acquisition ~~Development~~Transaction Costs

~~Transaction~~Costs ~~costs~~ associated with our ~~acquisitions~~merger and ~~business~~acquisition ~~development~~transactions ~~costs~~decreased ~~increased~~ to $1.0.9 million for the year ended December 31, ~~2014~~2015, compared to ~~approximately~~ $01.20 million for the year ended December 31, ~~2013~~2014, as a result of a ~~higher~~decline ~~level~~in of acquisition activity during ~~2014~~2015.

Interest Expense

Interest expense for the year ended December 31, ~~2014~~2015 was $3641.0 million, compared to $3236.80 million for the year ended December 31, ~~2013~~2014. The higher interest expense related to higher average balances outstanding under our credit facility term loans. Additionally, interest rates under our ~~current~~senior secured credit facility entered into on July 31, 2014 ~~were~~are higher than the rates under our prior credit facility, which was paid off on July 31, 2014 with a portion of the proceeds from the current credit facility.

Write-off of Deferred Debt Issue Costs and Loss on Extinguishment of Debt

OnAs noted in the preceding paragraph, on July 31, 2014 we entered into a new credit facility and used a portion of the proceeds to repay all amounts outstanding under our prior credit facility. In connection with the retirement of our previous credit facility, we recorded a non-cash charge of $1.6 million to write off the unamortized balance of deferred issuance costs and a non-cash loss on extinguishment of debt of $0.8 million for the related original issue discount.

Benefit for Income Taxes

We are a Delaware limited liability company taxed as a partnership for federal and state income tax purposes, in accordance with the applicable provisions of the Internal Revenue Code. Accordingly, we generally have not been subject to income taxes, and the income attributable to us has been allocated to the members of Aurora Holdings in accordance with the terms of the LLC Agreement. However, certain of our subsidiaries are structured as corporations and therefore are subject to federal and state income taxes. The benefit for federal and state income taxes ~~for these subsidiaries~~, as reflected in our consolidated financial statements, amounted to a benefit of $40.19 million and $34.91 million for the years ended December 31, ~~2014~~2015 and ~~2013~~2014, respectively.

Liquidity and Capital Resources

Since inception, we have primarily financed operations through capital contributions from our equityholders, long -term debt financing and cash flow from operations.

On December 20, 2010, we issued $200.0 million in unsecured ~~Senior~~senior ~~Notes~~notes that mature on January 15, 2018, which we refer to as our Senior Notes. The Senior Notes bear interest at an annual rate of 10.75 ~~percent~~%, which is payable each January 15th and July 15th. In accordance with the indenture governing our Senior Notes, we are subject to certain limitations on issuing additional debt and are ~~required~~subject to ~~submit~~other ~~quarterly~~customary affirmative and ~~annual~~negative ~~financial reports~~covenants. The Senior Notes are currently redeemable at our option at ~~102.688 percent of~~ par, plus accrued interest. The ~~redemption price decreases to 100 percent of par on January 15, 2017. The~~ Senior Notes rank equally in right of repayment with all of our other senior indebtedness, but are subordinated to our secured indebtedness to the extent of the value of the assets securing that indebtedness.

49On July 31, 2014, we entered into a $220.0 million credit facility with Cerberus Business Finance, LLC, which facility, as subsequently amended, we refer to as our senior secured credit facility. Our senior secured credit facility initially consisted of a $165.0 million initial term loan, $30.0 million revolving credit line and $25.0 million delayed draw term loan. The delayed draw term loan facility was available through October 31, 2015 to pay for acquisitions, including acquisition related fees and expenses. Each of the term loan, revolving credit line and delayed draw term loan under the senior secured credit facility mature on July 14, 2019, but are subject to an accelerated maturity date of October 14, 2017, and would require repayment in full on such date, if our Senior Notes are not refinanced prior to October 14, 2017. We expect to conduct an exchange offer to refinance our Senior Notes to avoid the acceleration of the maturity of our senior secured credit facility, however we can give no assurance that we will be able to conduct or close the exchange offer or otherwise refinance the Senior Notes or the senior secured credit facility.

On July 31, 2014 we entered into a new $220.0 million credit facility with Cerberus Business Finance, LLC, which we refer to as the New Credit Facility. The New Credit Facility consists of a $165.0 million initial term loan, $30.0 million revolving credit line and $25.0 million delayed draw term loan. The delayed draw term loan facility, as amended, was available through October 31, 2015 to pay the consideration for acquisitions, as permitted under the New Credit Facility, including acquisition related fees and expenses. Each of the term loan, revolving credit line and delayed draw term loan under the New Credit Facility has a maturity of five years but is subject to a maturity date of October 14, 2017 if our Senior Notes are not refinanced or their maturity is not extended prior to such date. Under the outstanding term loans, quarterly principal repayments of $0.5 million ~~became~~were ~~due~~required ~~commencing~~and onpaid from September 30, 2015 through December 31, 2016. Quarterly principal repayments increase to $0.9 million on March 31, 2017 through June 30, 2018 and to $1.3 million on September 30, 2018 and each quarter end thereafter, with the balance due at maturity. Prior to the second amendment on April 10, 2015, at our option, interest under the ~~New~~credit ~~Credit~~facility ~~Facility~~ was either LIBOR, with a 1.25% floor, plus 7%, or at a base rate, with a 2.25% floor, plus 6%. The New Credit Facility is secured by essentially all of our assets and unconditionally guaranteed by us and certain of the Company’s existing and subsequently acquired or organized domestic subsidiaries and is subject to certain financial covenants.

We used $145.6 million of the $165.0 million proceeds to retire our previous revolving credit facility due May 2015 and term loan facility due May 2016, including accrued interest and fees. The proceeds under the New Credit Facility were reduced by discounts of $5.1 million. Additionally, we used $3.9 million of the proceeds to pay issuance costs in connection with the New Credit Facility. In connection with the retirement of our previous credit facility, we recorded a non-cash charge of $1.6 million to write off the unamortized balance of deferred issuance costs and a non-cash loss on extinguishment of debt of $0.8 million for the related original issue discount.

On April 10, 2015 we entered into a second amendment to the New Credit Facility. The second amendment to the New Credit Facility added a $40 million delayed draw term loan B facility which is available through April 10, 2016 to pay consideration for acquisitions, as permitted under the New Credit Facility, including acquisition related fees and expenses. The second amendment also increased the interest rate under the New Credit Facility to LIBOR, with a 1.25% floor, plus 7.125%, or to the base rate, with a 2.25% floor, plus 6.125%. The New Senior Secured Credit Facility is subject to a 2.25% per annum fee on the undrawn amount thereof, payable quarterly in arrears.

The Company borrowed $9.7 million under the delayed draw term loan during 2014. The Company entered into third and fourth amendments to its New Credit Facility that extended the period that the Company was able to use the remaining availability under the $25.0 million delayed draw term loan from July 31, 2015, to October 31, 2015. In connection with the acquisitions consummated by the Company on July 15, 2015 and October 29, 2015, the Company borrowed the remaining $15.3 million available under the delayed draw term loan.

As of December 31, 2015, the balance outstanding under our term loan facility was $164.0 million and the balance outstanding under the delayed draw term loan facility was $25.0 million. As of December 31, 2015 we were in compliance with our loan covenants. As of December 31, 2015, no amounts were outstanding and we had $30.0 million available under our revolving credit facility and $40 million available for acquisitions under our delayed draw term loan B facility.

Generally, we are permitted to make voluntary prepayments under the New Credit Facility and to reduce the existing revolving loan commitments at any time. However, subject to certain exceptions, prepayments and commitment reductions are subject to a premium equal to 3.0% of the term loans prepaid and revolving credit commitments reduced through July 31, 2016. The premium is reduced to 2.0% effective August 1, 2016, further reduced to 1.0% effective August 1, 2017 and eliminated entirely after July 31, 2018.

Subject to certain exceptions, we are required to prepay borrowings under the New Credit Facility as follows: (i) with 100% of the net cash proceeds we receive from the incurrence of debt obligations other than debt obligations otherwise permitted under the financing agreement, (ii) with 100% of the net cash proceeds in excess of $1 million in the aggregate in any fiscal year we receive from specified non-ordinary course asset sales or as a result of casualty or condemnation events, subject to reinvestment provisions, (iii) with 50% of our excess cash flows for each fiscal year commencing with the fiscal year ending December 31, 2015 and (iv) 100% of the net cash proceeds from the exercise of any “equity cure” with respect to the financial covenants contained in the financing agreement.

The New Credit Facility requires us to maintain a maximum leverage ratio (based upon the ratio of total funded debt to consolidated EBITDA, net of agreed cash amounts) and a minimum interest coverage ratio (based upon the ratio of consolidated EBITDA to net cash interest expense), each quarter based on the last four fiscal quarters. The maximum leverage ratio as of December 31, 2015 was 10.20:1.00 and becomes more restrictive each quarter through maturity. The interest coverage ratio was 1.00:1.00 as of December 31, 2015 and increases to 1.05:1.00 on December 31, 2017. In addition, we are required to maintain liquidity (defined as availability under the revolving credit facility plus amounts in bank accounts that are subject to the agent’s perfected first priority liens) of at least $5.0 million at any time and $10.0 million on the last business day of each month. Our compliance with the maximum leverage ratio and the minimum interest coverage ratio is subject to customary “equity cure” rights.

The New Credit Facility specifies maximum limits for our consolidated capital expenditures on an annual basis and includes negative covenants restricting or limiting our ability to, among other things, incur, assume or permit to exist additional indebtedness or guarantees; incur liens and engage in sale leaseback transactions; make loans and investments; declare dividends, make payments or redeem or repurchase capital stock; engage in mergers, acquisitions and other business combinations; prepay, redeem or purchase certain indebtedness; amend or otherwise alter terms of our indebtedness; sell assets; enter into transactions with affiliates and alter our business without prior approval of the lenders. The New Credit Facility also contains customary default provisions that include material adverse events, as defined therein. We have determined that the risk of subjective acceleration under the material adverse events clause is remote and therefore have classified the outstanding principal in long-term debt based on scheduled repayments.

In connection with the final settlement of one of our contingent notes, effective June 26, 2013, we agreed to pay $2.0 million in 24 equal monthly installments, plus 8 percent interest on the unpaid balance, through June 2015. As of December 31, 2015, this subordinated note was fully repaid.

Long-term debt consists of the following as of December 31, 2015 (in thousands):

Senior Notes	$	200,000
Term Loan		164,000
Delayed Draw Term Loan		25,000
Note payable		133
Capital lease obligations		129
Total:		389,262
Less:
Original issue discount, net		(3,877	)
Current portion		(2,147	)
Long-term debt, net of current portion	$	383,238

As of December 31, 2015, future maturities of long-term debt are as follows (in thousands):

Years ending December 31,
2016	$	2,147
2017		3,610
2018		204,255
2019*		179,250
	$	389,262

* The estimated future debt principal payments in 2019 reflect the maturity of the Company’s New Credit Facility which is subject to a maturity date of October 14, 2017 and would be repaid in 2017 if the Company’s Senior Notes are not refinanced or their maturity is not extended prior to October 14, 2017.

On April 10, 2015 we entered into a second amendment to our senior secured credit facility. This amendment added a $40.0 million delayed draw term loan B facility that was available through April 10, 2016 to pay for acquisitions, including acquisition related fees and expenses. The second amendment also increased the interest rate under the credit facility to LIBOR, with a 1.25% floor, plus 7.125%, or to the base rate, with a 2.25% floor, plus 6.125%. The senior secured credit facility is subject to a 2.25% per annum fee on the undrawn amount thereof, payable quarterly in arrears.

In connection with the acquisitions we consummated on July 15, 2015, we borrowed the remaining $15.3 million available under the delayed draw term loan. The amount we borrowed exceeded the total we paid for eligible acquisitions, inclusive of related expenses, by $5.4 million. Subsequent amendments extended the remaining $5.4 million availability under the $25.0 million delayed draw term loan from July 31, 2015 to October 31, 2015. We used the remaining $5.4 million for an acquisition completed on October 29, 2015.

As of December 31, 2016, we owed $162.0 million under the term loan, $25.0 million under the delayed draw term loan and $10.0 million under the delayed draw term loan B facility. As of December 31, 2016, no amounts were outstanding and we had $30.0 million available under our revolving credit facility.

The senior secured credit facility is secured by essentially all of our assets and unconditionally guaranteed by us and certain of the Company’s subsequently acquired or organized domestic subsidiaries and is subject to certain financial covenants. The senior secured credit facility requires us to maintain a maximum leverage ratio (based upon the ratio of total funded debt to consolidated EBITDA, net of agreed cash amounts) and a minimum interest coverage ratio (based upon the ratio of consolidated EBITDA to net cash interest expense), each quarter based on the last four fiscal quarters. The maximum leverage ratio as of December 31, 2016 was 9.80:1.00 and becomes more restrictive each quarter through maturity. The minimum interest coverage ratio was 1.00:1.00 as of December 31, 2016 and increases to 1.05:1.00 on December 31, 2017. In addition, we are required to maintain liquidity (defined as availability under the revolving credit facility plus amounts in bank accounts that are subject to the agent’s perfected first priority liens) of at least $5.0 million at any time and $10.0 million on the last business day of each month. We are also subject to other restrictive covenants set forth in our senior secured credit facility. Generally, we are permitted to make voluntary prepayments under our senior secured credit facility and to reduce the revolving loan commitments at any time. However, subject to certain exceptions, prepayments and commitment reductions are currently subject to a premium equal to 2.0%, which will be reduced to 1.0% effective August 1, 2017 and eliminated entirely after July 31, 2018.

Subject to certain exceptions, we are required to prepay borrowings under the credit facility as follows: (i) with 100% of the net cash proceeds we receive from the incurrence of debt obligations other than debt obligations otherwise permitted under the financing agreement, (ii) with 100% of the net cash proceeds in excess of $1 million in the aggregate in any fiscal year we receive from specified non-ordinary course asset sales or as a result of casualty or condemnation events, subject to reinvestment provisions, (iii) with 50% of our excess cash flows for each fiscal year, which commenced with the fiscal year ending December 31, 2015, and (iv) 100% of the net cash proceeds from the exercise of any “equity cure” with respect to the financial covenants contained in the financing agreement.

Our credit facility specifies maximum limits for our consolidated capital expenditures on an annual basis and includes negative covenants restricting or limiting our ability to, among other things, incur, assume or permit to exist additional indebtedness or guarantees; incur liens and engage in sale leaseback transactions; make loans and investments; declare dividends, make payments or redeem or repurchase capital stock; engage in mergers, acquisitions and other business combinations; prepay, redeem or purchase certain indebtedness; amend or otherwise alter terms of our indebtedness; sell assets; enter into transactions with affiliates and alter our business without prior approval of the lenders. The senior secured credit facility also contains customary default provisions that include material adverse events, as defined therein.

Long-term debt consists of the following as of December 31, 2016 (in thousands):

	2015			2016
Senior Notes	$	200,000		$	200,000
Term loans		164,000			162,000
Delayed draw term loans		25,000			35,000
Notes payable		133			67
Capital lease obligations		129			50
		389,262			397,117
Less:
Original issue discount, net		(3,877	)		(2,759	)
Debt issuance costs, net		(5,621	)		(3,636	)
Current portion		(2,147	)		(191,681	)
Long-term debt, net of current portion	$	377,617		$	199,041

As of December 31, 2016, future maturities of long-term debt are as follows (in thousands):

Year Ending December 31,
2017*	$	197,112
2018		200,005
2019*		-
	$	397,117

Our senior secured credit facility matures on July 14, 2019, but is subject to an accelerated maturity date of October 14, 2017 and will become due on such date if our Senior Notes are not refinanced or their maturity is not extended prior to October 14, 2017. As of December 31, 2016, the amounts due under the term loans under the senior secured credit facility are classified as current liabilities and the future debt maturities in 2017 include $194.4 million for the accelerated balance of the term loans under the senior secured credit facility. However, as discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 under the sub-heading “Going Concern Considerations” in our consolidated financial statements included in this Annual Report, we expect to conduct an exchange offer to refinance our Senior Notes and avoid the acceleration of the maturity of our senior secured credit facility.

Contingent Consideration

In connection with the majority of our acquisitions, we have agreed to pay additional consideration annually over future periods of three to six years based upon contract retention and the attainment of stipulated levels of operating results by each of the acquired entities, as defined in their respective agreements. The computation of the annual operating results is subject to review and approval by sellers prior to payment. In the event there is a dispute, the Company will pay the undisputed amount and then take reasonable efforts to resolve the dispute with the sellers. If the sellers are successful in asserting their dispute, the Company could be required to make additional payments in future periods. For the years ended December 31, ~~2013~~2014, ~~2014~~2015 and ~~2015~~2016, we paid consideration under contingent notes of $215.08 million, $54.85 million and $4.5.4 million, respectively. During 2014 we received $1.2 million of repayments of contingent notes.

As of December 31, ~~2015~~2016, the total maximum future payments of contingent consideration issued in acquisitions was $2117.87 million. Lesser amounts will be paid or no payments will be made for earnings below the maximum level of stipulated earnings or if the stipulated contracts are not retained. We utilize a present value of estimated future payments approach to estimate the fair value of the contingent consideration. These estimates involve significant projections regarding future performance of the acquired practices. If actual future results differ significantly from current estimates, the actual payments for contingent consideration will differ correspondingly. ~~Any future payments of contingent consideration will be reflected in the change in the fair value of the contingent consideration.~~ As of December 31, ~~2015~~2016, the fair value of contingent consideration related to acquisitions was $1310.17 million, representing the present value of approximately $1814.72 million in estimated future payments through 2021.

In April 2015, we finalized a settlement agreement with the sellers in one of our acquisitions. As a result of the settlement we recorded a charge of approximately $5.4 million in the change in fair value of contingent consideration in the year ended December 31, 2014. In connection with the settlement, we paid cash of $0.9 million to the sellers within 5 days of settlement and modified the contingent notes to extend payments for an additional two years.

Medical Malpractice Insurance

We are insured on a claims-made basis up to our policy limits through a third party malpractice insurance policy. We establish reserves, on an undiscounted basis, for self-insured deductibles, claims incurred and reported and claims incurred but not reported (IBNR) during the policy period. We had recorded medical malpractice liabilities of $32.2 million and $21.29 million as of December 31, ~~2014~~2015 and ~~2015~~2016, respectively, which were included in accounts payable, accrued expenses and other current liabilities. We also record a receivable from our insurance carrier for expected recoveries. Expected insurance recoveries, which are included in prepaid expenses and other current assets, were $10.13 million and $0.34 million as of December 31, ~~2014~~2015 and ~~2015~~2016, respectively. So long as we maintain third party malpractice insurance policies, the IBNR claims will be covered by such third party policy up to the policy limits.

Cash and Working Capital

We require significant cash flow to service our debt obligations, including contingent notes. In addition to servicing our debt, we use cash to make acquisitions, purchase property and equipment and otherwise fund our operations. Cash used to fund our operations excludes the impact of non-cash items, such as the allowance for doubtful accounts, depreciation, impairments of goodwill and other intangible assets, changes in the fair value of the contingent consideration and non-cash stock-based compensation, and is impacted by the timing of our payments of accounts payable and accrued expenses and collections of accounts receivable.

52As of December 31, 2016, we had cash and cash equivalents of $18.6 million and negative working capital of $177.3 million. We had $30.0 million available under our revolving credit facility. Our senior secured credit facility matures on July 14, 2019, but is subject to an accelerated maturity date of October 14, 2017, and will become due in 2017, if our Senior Notes are not refinanced or their maturity is not extended prior to October 14, 2017. As of December 31, 2016, the amounts due under our term loans are classified as current liabilities and the future debt maturities in 2017 include $197.0 million for the entire outstanding balance of the term loans under our senior secured credit facilities. Our Senior Notes mature on January 15, 2018. We have a total of $200.0 million aggregate principal amount of Senior Notes outstanding.

AsOn ofMarch ~~December 31~~30, ~~2015~~2017, we ~~had~~executed ~~cash~~a ~~and~~non-binding ~~cash~~term ~~equivalents~~sheet with holders of ~~$19.1 million~~over ~~and~~98% ~~working~~of ~~capital~~the Senior Notes setting forth the terms of ~~$11.4~~an ~~million. We~~offer ~~had~~to ~~$30.0 million~~exchange ~~available~~the ~~under~~Senior ~~our~~Notes ~~revolving~~for ~~credit~~a ~~facility~~combination ~~and~~of up to $40200.0 million ~~available~~of ~~under~~new ~~our~~senior ~~delayed~~notes ~~draw~~due ~~term~~January ~~loan~~15, B2020 ~~facility. The~~and ~~delayed~~penny ~~draw~~warrants ~~term~~to ~~loan~~purchase Bup ~~facility~~to is15% ~~available~~of ~~through~~our ~~April~~equity ~~10,~~interests. The ~~2016~~term tosheet ~~pay~~provides ~~the~~that, ~~consideration~~concurrently ~~for~~with ~~acquisitions~~the exchange offer, aswe ~~permitted~~will ~~under~~commence ~~the~~a ~~New~~consent ~~Credit~~solicitation ~~Facility. We~~to ~~believe~~remove ~~our~~substantially ~~current~~all ~~cash~~of ~~and~~the ~~cash~~restrictive ~~equivalents~~covenants ~~together~~and ~~with~~events ~~cash~~of default from ~~operations~~the ~~and~~indenture governing the ~~amount~~Senior ~~available~~Notes. ~~under~~The ~~our~~term ~~revolving~~sheet ~~credit~~also ~~facility~~provides ~~will~~that bethe ~~sufficient~~holders toparties ~~fund~~thereto ~~our~~will ~~working~~enter ~~capital~~into ~~requirements~~a ~~through~~support ~~2016.~~agreement Inpursuant ~~order~~to which, subject to ~~access~~certain ~~the~~conditions ~~amounts~~and ~~available~~exceptions, ~~under~~they ~~our~~will ~~revolving~~agree ~~credit~~to ~~facility,~~tender wetheir ~~must~~Senior ~~meet~~Notes in the ~~financial~~exchange ~~tests~~offer and ~~ratios~~provide ~~contained~~consents in ~~our~~the ~~New~~consent ~~Credit Facility~~solicitation. We ~~currently~~have ~~expect~~agreed to ~~meet~~close ~~these~~the ~~financial~~exchange ~~tests~~offer ~~and~~by ~~ratios~~May at30, ~~least~~2017. ~~through~~To the ~~end~~extent that any of ~~2016. Nonetheless,~~the weholders ~~may~~of ~~not~~the ~~achieve~~remaining ~~all~~2% of ~~our~~Senior ~~business~~Notes ~~goals~~do ~~and~~not ~~objectives~~participate ~~and~~in ~~events~~the ~~beyond~~exchange ~~our~~offer, ~~control~~we could, ~~affect~~with ~~our~~the ~~ability~~consent toof ~~meet~~the ~~these~~administrative ~~financial~~agent ~~tests~~under ~~and~~the ~~ratios~~senior ~~and~~secured ~~limit~~credit ~~our~~facility, ~~ability~~call toany ~~access~~remaining ~~the~~Senior ~~amounts~~Notes ~~otherwise~~for ~~available~~redemption ~~under~~and ~~our~~repay ~~revolving~~them ~~credit~~at ~~facility~~par using cash on hand.

If we are able to conduct and close the exchange offer on the terms contemplated by the term sheet, assuming that all Senior Notes are tendered therein, at the closing thereof we will have extended the maturity of the Senior Notes to January 15, 2020, and therefore, the maturity of the senior secured credit facility should not be accelerated. However we can give no assurance that we will be able to conduct and successfully close the exchange offer because, among other reasons, the term sheet is non-binding on the parties thereto, including us.

In light of the plan to exchange the Senior Notes as described above, our management believes our current cash and cash equivalents, cash from operations and the amount available under our revolving credit facility will be sufficient to fund working capital requirements for the next 12 months. This belief assumes, among other things, that we will be able to conduct and close the exchange offer and therefore avoid acceleration of the maturity date of the senior secured credit facility, will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. There is no assurance we will be able to conduct and close the exchange offer with respect to the Senior Notes or that the Senior Notes or the senior secured credit facility will otherwise be extended, or refinanced in a timely manner or on terms acceptable to us, or at all, or that we will be able to achieve our forecasted cash from operations. If one or more of these factors do not occur as expected, it could cause a default under one or more of the agreements governing our indebtedness. If we are unable to exchange our Senior Notes or otherwise refinance or extend the maturity of the Senior Notes or the senior secured credit facility and if our cash from operations and refinancing sources are insufficient to service our debt or to fund our other liquidity needs, we may be forced to reduce or delay our business activities, sell material assets, seek additional capital or be forced into insolvency or liquidation.

In addition, in order to access the amounts available under our revolving credit facility, we must meet the financial tests and ratios contained in our senior secured credit facility. We currently expect to extend the maturity of our Senior Notes and to meet these financial tests and ratios at least for the next 12 months. Nonetheless, we may not achieve all of our business goals and objectives and events beyond our control could affect our ability to meet these financial tests and ratios and limit our ability to access the amounts otherwise available under our revolving credit facility.

Cash Provided By Operating Activities

Net cash provided by operating activities during the year ended December 31, ~~2015~~2016 was $27.30 million compared to $72.83 million during the year ended December 31, ~~2014~~2015. Net cash provided by operating activities for the year ended December 31, ~~2015~~2016 reflected a net loss of $8329.41 million and certain adjustments for non-cash items, including $566.7 million for a write-~~offs~~off of goodwill ~~and other intangible assets~~, $23.35 million of depreciation and amortization, $3.2 million of amortization of debt issue costs and original issue discount, $0.21 million of equity compensation costs, ~~and~~ a $1.79 million increase in the fair value of contingent consideration, $1.5 million for a write-off of public offering costs, and a $1.2 million non-cash charge for the abandonment of leased facilities, partially offset by a net decrease of $1.9 million of deferred income tax liabilities. Net cash provided by operating activities for the year ended December 31, ~~2015~~2016 also reflected a $2.0 million increase in accounts receivable, $0.51 million decrease in prepaid income taxes and other prepaid expenses, a $0.61 million ~~increase~~decrease in accrued interest, a $12.13 million increase in accounts payable, accrued expenses and other liabilities, and a $0.34 million ~~increase~~decrease in accrued compensation. As of December 31, ~~2015~~2016, our DSO (Days Sales Outstanding) were 4347 days compared to 4443 days as of December 31, ~~2014~~2015. Various factors contributed to the increase in DSOs, including Medicare denials currently under appeal, delays in billing due to conversion of billing systems at four of our locations, longer collection cycles on accounts receivable for acquired hospital-based practices and delays in collections for credentialing issues.

Cash Used In Investing Activities

Net cash used in investing activities during the year ended December 31, ~~2015~~2016 was $2215.10 million compared to $2122.81 million during the year ended December 31, ~~2014~~2015. Net cash used in investing activities during the year ended December 31, ~~2015~~2016 primarily consisted of $157.3 million net cash paid for acquisitions, $4.5.4 million of contingent note payments and $2.34 million of purchases of property and equipment.

Cash Provided By Financing Activities

Net cash provided by financing activities for the year ended December 31, ~~2015~~2016 was $127.56 million compared to $3912.05 million for the year ended December 31, ~~2014~~2015. For the year ended December 31, ~~2015~~2016, we borrowed $1510.0 million under our delayed draw term loan and repaid $2.0 million on our term loan facility, paid $0.93 million of ~~debt~~financing ~~issuance~~transaction costs, and paid $0.61 million of principal under subordinated notes and capital leases ~~and repaid $1~~.0 ~~million on our term loan facility.~~

Contractual Obligations and Commitments

The following table sets forth our long-term contractual obligations and commitments as of December 31, ~~2015~~2016 (in thousands):

	Payments Due by Period
Contractual obligations	~~2016~~2017		~~2017~~2018		~~2018~~2019		~~2019~~2020		~~2020~~2021		Thereafter		Total
Senior notes	$	-	$	-	$	200,000	$	-	$	-	$	-	$	200,000
Senior notes (1)	$	-	$	200,000	$	-	$	-	$	-	$	-	$	200,000
Term loans (1)		2197,000		~~3,500~~-		~~4,250~~-		~~179,250~~-		-		-		~~189~~197,000
Unsecured subordinated notes		67		66-		-		-		-		-		~~133~~67
Estimated interest on senior secured notes		21,500		2110,~~500~~750		~~10,750~~-		-		-		-		5332,~~750~~250
Estimated interest on term loans (2)		1514,~~766~~372		~~15,551~~-		~~15,250~~-		~~8,713~~-		-		-		5514,~~280~~372
Capitalized and operating leases		5,~~083~~472		5,~~096~~179		4,~~411~~581		32,~~967~~983		2,~~591~~187		43,~~852~~570		2623,~~000~~972
Supplies agreements		12,~~702~~134		~~1,646~~829		~~1,496~~790		~~1,314~~788		~~1,314~~97		-		74,~~472~~638
Total	$	46240,~~118~~545	$	47216,~~359~~758	$	~~236~~5,~~157~~371	$	~~193~~3,~~244~~771	$	32,~~905~~284	$	43,~~852~~570	$	~~531~~472,~~635~~299

53(1) Our senior secured credit facility matures on July 14, 2019, but is subject to a maturity date of October 14, 2017, and will become due on such date, if our Senior Notes are not refinanced or their maturity is not extended prior to October 14, 2017. As of December 31, 2016, the amounts due under our senior secured credit facility are classified as current liabilities and the future debt maturities in 2017 include $197.0 million for the entire outstanding balance of the term loans. However, as discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 under the sub-heading “Going Concern Considerations” in our consolidated financial statements included in this Annual Report, we expect to conduct an exchange offer to refinance our Senior Notes and avoid the acceleration of the maturity of our senior secured credit facility.

(12) ~~The~~Estimated ~~estimated~~interest ~~future debt principal~~ payments inon ~~2019~~our ~~reflect~~Term ~~the~~Loans ~~maturity~~calculated ofusing the ~~Company’s~~current ~~New~~effective ~~Credit~~interest ~~Facility~~rates ~~which~~(LIBOR is (subject to a ~~maturity~~floor ~~date~~ of ~~October 14~~1.25%), ~~2017~~plus ~~and~~7.125% ~~would~~per beannum) ~~repaid~~multiplied inby ~~2017 if~~ the ~~Company’s~~outstanding ~~Senior~~balances ~~Notes~~as ~~are~~of ~~not~~December ~~refinanced~~31, or2016, ~~their~~reduced ~~maturity~~by isscheduled ~~not~~principal ~~extended prior to October 14, 2017~~repayments.

(2) Estimated interest payments on our Term Loans calculated using the current effective interest rates (LIBOR (subject to a floor of 1.375 percent), plus 7.00 percent per annum) multiplied by the outstanding balances as of December 31, 2015, reduced by scheduled principal repayments.

Off Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reported periods. We have provided a description of all our significant accounting policies in Note 1 to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. We believe that of these significant accounting policies, the following may involve a higher degree of judgment or complexity.

Net Revenue and Accounts Receivable

Substantially all of our revenue consists of payments or reimbursements for specialized diagnostic services rendered to patients of our referring physicians. Our billings for services reimbursed by third-party payors, including Medicare, and patients are based on a company-generated fee schedule that is generally set at higher rates than our anticipated reimbursement rates. Our billings to physicians are billed based on negotiated fee schedules that set forth what we charge for our services. Reimbursement under Medicare for our services is subject to a Medicare physician fee schedule and, to a lesser degree, a clinical laboratory fee schedule, both of which are updated annually. Our billings to patients include co-insurance and deductibles as dictated by the patient’s insurance coverage. Billings for services provided to uninsured patients are based on our company-generated fee schedule. We do not have any capitated payment arrangements, which are arrangements under which we are paid a contracted per person rate regardless of the services we provide.

Our net revenue is recorded net of contractual allowances, which represent the estimated differences between the amount billed and the estimated payment to be received from third party payors, including Medicare. Adjustments to the estimated contractual allowances, which are based on actual receipts from third-party payors, including Medicare, are recorded upon settlement. Our billing is currently processed through multiple systems. We have an ongoing process to evaluate and record our estimates for contractual allowances based on information obtained from each of these billing systems. This information includes aggregate historical billing and contractual adjustments, billings and contractual adjustments by payor class, accounts receivable by payor class, aging of accounts receivable, historical cash collections and related cash collection percentages by payor and/or aggregate cash collections compared to gross charges. In addition, we may take into account the terms and reimbursement rates of our larger third party payor contracts and allowables under government programs in determining our estimates.

The process for estimating the ultimate collection of accounts receivable associated with our services involves significant assumptions and judgment. The provision for doubtful accounts and the related allowance are adjusted periodically, based upon an evaluation of historical collection experience with specific payors for particular services, anticipated collection levels with specific payors for new services, industry reimbursement trends, accounts receivable aging and other relevant factors. The majority of our provision for doubtful accounts relates to our estimate of uncollectible amounts from patients who are either uninsured and may fail to pay their coinsurance or deductible obligations. Changes in these factors in future periods could result in increases or decreases in our provision for doubtful accounts and impact our results of operations, financial position and cash flows.

The degree of information used in making our estimates varies based on the capabilities and information provided by each of our billing systems. Due to our multiple billing systems and the varying degree of billing information and system capabilities, the following should be noted regarding our estimates of allowances for contractual adjustments and doubtful accounts.

First, our billing systems are unable to quantify amounts pending approval from third parties. However, we generally operate in most markets as an in-network provider, and we estimate that approximately 90% ~~percent~~ of our diagnostic testing services are paid for by locally-focused in-network providers. ~~As of December 31, 2015 our DSO (Days Sales Outstanding) averaged 43 days.~~

We also make our provisions for contractual adjustments based on our aggregate historical contractual write-off experience for a particular ~~laboratory~~practice as recorded and reported in that ~~laboratory~~practice’s billing system. This estimate is not done on a patient-by-patient or payor-by-payor basis. The actual aggregate contractual write-offs are recorded as a reduction in our allowance for contractual adjustments account in the period in which they occur. At the end of each accounting period, we analyze the adequacy of our allowance for contractual adjustments based on the information reported by our individual ~~laboratories~~practice’s respective billing systems.

In addition, our current ~~laboratory~~ billing systems generally do not provide reports on contractual adjustments by date of service. Accordingly, we are unable to directly compare the aggregate estimated provision for contractual adjustments to the actual adjustments recorded in ~~its~~our various laboratory billing systems at the patient level. However, we do analyze the aggregate provision for contractual adjustments as a percentage of gross charges for each laboratory’s billing system compared to the last twelve months’ actual contractual writes-offs as a percentage of gross charges to determine that our estimated percentages are a reasonable basis for recording our periodic provisions for contractual adjustments.

Further, in determining the provision of doubtful accounts, we analyze the historical write-off percentages for each of our ~~laboratories~~practices as recorded in our billing systems. We record an estimated provision for doubtful accounts for each accounting period based on our historical experience ratios. Actual charge-offs reduce our allowance for doubtful accounts in the period in which they occur. At each balance sheet date, we evaluate the adequacy of our allowance for doubtful accounts based on the information provided by the billing system for each of our ~~laboratories~~practices. In conducting this evaluation, we consider, if available, the aging and payor mix of our accounts receivables.

Finally, in order to assess the reasonableness of the periodic estimates for the provision for contractual adjustments and doubtful accounts, we compare our actual historical contractual write-off percentages and our bad debt write-off percentages to the estimates recorded for each of our laboratories. In addition, at the end of each accounting period, we evaluate the adequacy of our contractual and bad debt allowances based on the information reported by the billing system for each of our laboratories to ensure that our reserves are adequate on a consolidated basis. 57

AsFinally, ofin ~~December 31,~~order ~~2015,~~to ~~for~~assess ~~each~~the ~~1.0 percent~~reasonableness ~~change~~of inthe ~~our~~periodic ~~estimate~~estimates for the ~~allowance~~provision for contractual adjustments and doubtful accounts, ~~net~~we ~~revenue~~compare ~~would~~our ~~have~~actual ~~increased~~historical orcontractual ~~decreased~~write-off ~~approximately~~percentages ~~$0.9 million.~~and Asour ofbad ~~December 31,~~debt ~~2015,~~write-off percentages to the estimates recorded for each 1of our practices.~~0 percent~~ ~~change~~In inaddition, at the end of each accounting period, we evaluate the adequacy of our ~~estimate~~contractual ~~for~~and bad debt allowances based on the ~~allowance~~information reported by the billing system for ~~doubtful~~each ~~accounts,~~of our ~~provision~~practices ~~for~~to ~~doubtful~~ensure ~~accounts~~that ~~would~~our ~~have~~reserves ~~increased~~are oradequate ~~decreased~~on bya ~~approximately~~consolidated $0basis.5 ~~million.~~

As of December 31, 2016, for each 1.0% change in our estimate for the allowance for contractual adjustments, net revenue would have increased or decreased approximately $1.0 million. As of December 31, 2016, for each 1.0% change in our estimate for the allowance for doubtful accounts, our provision for doubtful accounts would have increased or decreased by approximately $0.5 million.

Fair Value of Contingent Consideration Issued in Acquisitions

The fair value of contingent consideration is derived using valuation techniques that incorporate unobservable inputs. We utilize a present value of estimated future payments approach to estimate the fair value of the contingent consideration. Estimates for fair value of contingent consideration primarily involve two inputs, which are (i) the projections of the financial performance of the acquired practices that are used to calculate the amount of the contingent payments and (ii) the discount rates used to calculate the present value of future payments.

Projections of future performance of the acquired practices involve significant assumptions and judgment. If future results differ significantly from current projections, future payments for contingent consideration will differ correspondingly. In developing projections, we consider historical results and trends and factors that are likely to impact future results. On a quarterly basis, we review the actual results for the acquired practices in relation to our prior projections and assess whether current projections should be adjusted higher or lower in light of recent results. We also consider any events or changes in circumstances that may have occurred which could affect future performance.

The discount rates used in estimating the fair value of contingent consideration incorporate current market interest rates adjusted for company specific risks at the acquired ~~labs~~practices. At December 31, ~~2015~~2016 the discount rates used ranged from 1514.8% ~~percent~~ to 2018.~~1 percent~~5%.

Annual Impairment Testing of Goodwill and Intangibles

Goodwill is our single largest asset. We evaluate the recoverability and measure the potential impairment of our goodwill annually on November 30^th, or when events or circumstances dictate, more frequently. The annual impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. For purposes of testing goodwill for impairment, each of our acquired practices is considered a separate reporting unit. To estimate the fair value of the reporting units, we utilize a discounted cash flow model as the primary approach to value supported by a market approach guideline public company method, or the GPC Method, which is used as a reasonableness test. We believe that a discounted cash flow analysis is the most appropriate methodology to test the recorded value of long-term assets with a demonstrated long-lived value. The results of the discounted cash flow provide reasonable estimates of the fair value of the reporting units because this approach is based on each respective unit’s actual results and reasonable estimates of future performance, and also takes into consideration a number of other factors deemed relevant by management, including but not limited to, expected future market revenue growth and operating profit margins. We have consistently used these approaches in determining the value of goodwill. We consider the GPC Method as an adequate reasonableness test which utilizes market multiples of industry participants to corroborate the discounted cash flow analysis. We believe this methodology is consistent with the approach that any strategic market participant would utilize if they were to value one of our reporting units.

The first step of the goodwill impairment process screens for potential impairment and the second step measures the amount of the impairment, if any. Our estimate of fair value considers (i) the financial projections and future prospects of our business, including its growth opportunities and likely operational improvements, and (ii) comparable sales prices, if available. As part of the first step to assess potential impairment, we compare our estimate of fair value for the reporting unit to the book value of the reporting unit. If the book value is greater than our estimate of fair value, we would then proceed to the second step to measure the impairment, if any. The second step compares the implied fair value of goodwill with its carrying value. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit’s goodwill is greater than its implied fair value, an impairment loss will be recognized in the amount of the excess.

On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have occurred which could have a material adverse effect on our fair value and the fair value of our goodwill. If such events or changes in circumstances were deemed to have occurred, we would perform an impairment test of goodwill as of the end of the quarter consistent with the annual impairment test and record any noted impairment loss.

We also consider the economic outlook for the healthcare services industry and various other factors during the testing process, including hospital and physician contract changes, local market developments, changes in third-party payor payments, and other publicly available information.

Intangible assets acquired as the result of a business combination are recognized at fair value, as an asset apart from goodwill if the asset arises from contractual or other legal rights, or if it is separable. Intangible assets, principally representing the fair value of customer relationships, health care facility agreements and non-competition agreements acquired, are capitalized and amortized on the straight-line method over their expected useful life, which generally ranges from 3 to 15 years.

We recognize impairment losses for intangible assets when events or changes in circumstances indicate the carrying amount may not be recoverable. We continually assesses whether an impairment in the carrying value of the intangible assets has occurred. If the undiscounted future cash flows over the remaining amortization period of an intangible asset indicate the value assigned to the intangible asset may not be recoverable, we reduce the carrying value of the intangible asset. We would determine the amount of any such impairment by comparing anticipated discounted future cash flows from acquired businesses with the carrying value of the related assets. In performing this analysis, we consider such factors as current results, trends and future prospects, in addition to other relevant factors.

Recent Accounting Pronouncements

New accounting pronouncements that we have recently adopted, as well as those that have been recently issued but not yet adopted by us, are included under the heading “Recent Accounting Standards Updates” in Note 1 to the Financial Statements in this Annual Report.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

We maintain our cash balances at high quality financial institutions. The balances in our accounts may periodically exceed amounts insured by the Federal Deposit Insurance Corporation, which insures deposits of up to $250,000 as of December 31, ~~2015~~2016. We do not believe we are exposed to any significant credit risk and have not experienced any losses.

As of December 31, 2015, we had outstanding balances of $189.0 million under our New Credit Facility maturing July 2019, which accrues interest at a variable rate of LIBOR (subject to a floor of 1.25 percent) plus 7.125 percent per annum. As of December 31, 2015, the short term LIBOR rate used as the base for calculating the interest rates for our New Credit Facility was approximately 0.416 percent. As such, changes in the LIBOR rates would not impact our interest expense until the 1.25 percent floor is exceeded. Based upon the balances outstanding under our revolving credit facility and term loan as of December 31, 2015, for every 100 basis point increase in the LIBOR rates over the 1.25 percent floor, we would incur approximately $1.9 million of additional annual interest expense. 59

57Our senior secured credit facility, which is scheduled to mature on July 31, 2019, is subject to an accelerated maturity date of October 14, 2017, and would require repayment on such date, if our Senior Notes are not refinanced or their maturity is not extended prior to October 14, 2017. We expect to conduct an exchange offer to refinance our Senior Notes and avoid the acceleration of the maturity of our senior secured credit facility, however we can give no assurance our refinancing efforts will be successful.

As of December 31, 2016, we had outstanding balances of $197.0 million under our senior secured credit facility, which accrues interest at a variable rate of LIBOR (subject to a floor of 1.25%) plus 7.125% per annum. As of December 31, 2016, the short term LIBOR rate used as the base for calculating the interest rates for our credit facility was approximately 0.934%. As such, changes in the LIBOR rates would not impact our interest expense until the 1.25% floor is exceeded. Based upon the balances outstanding under our revolving credit facility and term loan as of December 31, 2016, for every 100 basis point increase in the LIBOR rates over the 1.25% floor, we would incur approximately $2.0 million of additional annual interest expense.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

To the Members

Aurora Diagnostics Holdings, LLC

Palm Beach Gardens, Florida

We have audited the accompanying consolidated balance sheets of Aurora Diagnostics Holdings, LLC (the “Company”) as of December 31, ~~2015~~2016 and ~~2014~~2015 and the related consolidated statements of operations, members’ deficit, and cash flows for each of the three years in the period ended December 31, ~~2015~~2016. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in Item 15a for each of the three years in the period ended December 31, ~~2015~~2016. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aurora Diagnostics Holdings, LLC as of December 31, ~~2015~~2016 and ~~2014~~2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2015~~2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for each of the three years in the period ended December 31, ~~2015~~2016, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2016, the Company adopted Accounting Standards Update Number 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Our opinion is not modified with respect to this matter.

/s/ Crowe Horwath LLP

Crowe Horwath LLP

Tampa, Florida

March 2131, ~~2016~~2017

5861

Aurora Diagnostics Holdings, LLC

Consolidated Balance Sheets

(in thousands, except for member units)

	December 31,
	2014			2015
	2015			2016
Assets
Current Assets
Cash and cash equivalents	$	2619,~~422~~085		$	1918,~~085~~571
Accounts receivable, net		2932,~~309~~851			3235,~~851~~680
Prepaid expenses and other assets		34,~~676~~321			4,~~321~~496
Prepaid income taxes		~~1,167~~175			~~175~~-
Deferred tax assets		666			-
Total current assets		56,432			58,747
Total current assets		61,240			56,432
Property and equipment, net		8,646			7,517
Property and equipment, net		9,323			8,646
Other Assets:
Deferred debt issue costs, net		~~7,203~~453			~~6,074~~327
Deposits and other noncurrent assets		~~637~~596			~~596~~599
Goodwill		~~177~~125,~~774~~188			~~125~~120,~~188~~755
Intangible assets, net		6965,~~603~~694			6551,~~694~~854
		255,217			197,552
		191,931			173,535
	$	~~325~~257,~~780~~009		$	~~262~~239,~~630~~799
Liabilities and Members' Deficit
Current Liabilities
Current portion of long-term debt	$	12,~~633~~147		$	2191,~~147~~681
Current portion of fair value of contingent consideration		4,~~284~~820			4,~~820~~834
Accounts payable, accrued expenses and other current liabilities		16,~~674~~839			1618,~~839~~424
Accrued compensation		67,~~518~~030			76,~~030~~914
Accrued interest		1314,~~626~~228			14,~~228~~169
Total current liabilities		4245,~~735~~064			45236,~~064~~022
Long-term debt, net of current portion		~~369~~377,~~214~~617			~~383~~199,~~238~~041
Deferred tax liabilities		96,~~115~~473			64,~~473~~590
Accrued management fees, related parties		68,~~018~~633			811,~~633~~473
Fair value of contingent consideration, net of current portion		48,~~766~~320			85,~~320~~900
Other liabilities		1,~~506~~685			12,~~685~~559
Commitments and Contingencies
Members' Equity Deficit
Common member units, 23,549,812 units issued and outstanding		199,993			199,993
Equity based compensation and transaction costs		(~~339~~113	)		~~(113~~27	)
Retained deficit		(~~307~~390,~~228~~663	)		(~~390~~419,~~663~~806	)
Total Members' Deficit		(~~107~~190,~~574~~783	)		(~~190~~219,~~783~~786	)
	$	~~325~~257,~~780~~009		$	~~262~~239,~~630~~799

See Notes to Consolidated Financial Statements.

5962

Aurora Diagnostics Holdings, LLC

Consolidated Statements of Operations

Years Ended December 31, ~~2013~~2014, ~~2014~~2015 and ~~2015~~ 2016

(in thousands)

	December 31,
	2013			2014			2015
	2014			2015			2016
Net revenue	$	~~248~~242,~~169~~561		$	~~242~~263,~~561~~744		$	~~263~~284,~~744~~039
Operating costs and expenses:
Cost of services		~~134~~132,~~112~~265			~~132~~142,~~265~~663			~~142~~151,~~663~~472
Selling, general and administrative expenses		6461,~~949~~820			6166,~~820~~890			6670,~~890~~314
Provision for doubtful accounts		16,~~945~~600			16,~~600~~597			1615,~~597~~789
Intangible asset amortization expense		18,~~584~~092			1819,~~092~~047			19,~~047~~700
Management fees, related parties		2,~~530~~459			2,~~459~~614			2,~~614~~840
Impairment of goodwill and other intangible assets		5327,~~876~~516			2756,~~516~~725			566,~~725~~718
Gain on sale of leased facility		-			(957	)		-
Write-off of financing transaction costs		-			-			1,494
Acquisition and business development costs		169			1,046			889
Gain on sale of leased facility		(957	)		-			-
Change in fair value of contingent consideration		1,149			4,936			1,656
Merger and acquisition transaction costs		1,046			889			1,454
Total operating costs and expenses		292,314			263,777			307,081
Change in fair value of contingent consideration		4,936			1,656			1,866
Loss from operations		(44,145	)		(21,216	)		(43,337	)
Total operating costs and expenses		263,777			307,081			271,647
Loss from operations		(21,216	)		(43,337	)		12,392
Other income (expense):
Interest expense		(3235,~~760~~997	)		(3540,~~997~~980	)		(4041,~~980~~945	)
Write-off of deferred debt issue costs		-(1,639	)		~~(1,639~~-	)		-
Loss on extinguishment of debt		-(805	)		~~(805~~-	)		-
Other income		1715			154			4-
Total other expense, net		(3238,~~743~~426	)		(3840,~~426~~976	)		(4041,~~976~~945	)
Loss from operations before income taxes		(7659,~~888~~642	)		(5984,~~642~~313	)		(8429,~~313~~553	)
Benefit for income taxes		(34,~~874~~094	)		(~~4,094~~878	)		(~~878~~410	)
Net loss	$	(7355,~~014~~548	)	$	(5583,~~548~~435	)	$	(8329,~~435~~143	)

See Notes to Consolidated Financial Statements.

6063

Aurora Diagnostics Holdings, LLC

Consolidated Statements of Members’ Deficit

Years Ended December 31, ~~2013~~2014, ~~2014~~2015 and ~~2015~~2016

(in thousands, except for member units)

					~~Equity Based~~	Equity Based
			Member		~~Compensation~~	Compensation					~~Total~~			Total
	Member		Contributions		~~and Transaction~~	and Transaction		~~Retained~~		Retained	~~Members'~~			Members'
	Units		(Distributions)		~~Costs~~	Costs		~~Deficit~~		Deficit	~~Deficit~~			Deficit
Balance, January 1, 2013		23,549,812	$	199,993	$	(1,100	)	$	(178,666	)	$	20,227
Balance, January 1, 2014		23,549,812	$	199,993		$	(807	)		$	(251,680	)		$	(52,494	)
Net loss		-		-		-	-		~~(73,014~~	)	(55,548	~~(73,014~~)	)		(55,548	)
Equity based compensation		-		-		~~293~~	468		-		-	~~293~~			468
Balance, December 31, 2013		23,549,812	$	199,993	$	(807	)	$	(251,680	)	$	(52,494	)
Balance, December 31, 2014		23,549,812	$	199,993		$	(339	)		$	(307,228	)		$	(107,574	)
Net loss									~~(55,548~~	)	(83,435	~~(55,548~~)	)		(83,435	)
Equity based compensation		-		-		~~468~~	226		-		-	~~468~~			226
Balance, December 31, 2014		23,549,812	$	199,993	$	(339	)	$	(307,228	)	$	(107,574	)
Balance, December 31, 2015		23,549,812	$	199,993		$	(113	)		$	(390,663	)		$	(190,783	)
Net loss		-		-			-		~~(83,435~~	)	(29,143	~~(83,435~~)	)		(29,143	)
Equity based compensation		-		-		~~226~~	140		-		-	~~226~~			140
Balance, December 31, 2015		23,549,812	$	199,993	$	(113	)	$	(390,663	)	$	(190,783	)
Balance, December 31, 2016		23,549,812	$	199,993		$	27			$	(419,806	)		$	(219,786	)

See Notes to Consolidated Financial Statements.

6164

Aurora Diagnostics Holdings, LLC

Consolidated Statements of Cash Flows

Years Ended December 31, ~~2013~~2014, ~~2014~~2015 and ~~2015~~ 2016

(in thousands)

	2013			2014			2015
	2014			2015			2016
Cash Flows From Operating Activities
Net loss	$	(7355,~~014~~548	)	$	(5583,~~548~~435	)	$	(8329,~~435~~143	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization		2322,~~127~~587			2223,~~587~~274			23,~~274~~472
Amortization of deferred debt issue costs		1,~~921~~932			12,~~932~~071			2,~~071~~111
Amortization of original issue discount on debt		~~383~~699			~~699~~1,100			1,~~100~~119
Deferred income taxes		(23,~~279~~705	)		(31,~~705~~895	)		(1,~~895~~883	)
Equity based compensation		~~293~~468			~~468~~226			~~226~~140
Change in fair value of contingent consideration		14,~~149~~936			41,~~936~~656			1,~~656~~866
Impairment of goodwill and other intangible assets		5327,~~876~~516			2756,~~516~~725			566,~~725~~718
Write-off of deferred debt issue costs		-			1,639			-
Write-off of financing transaction costs		-			-			1,494
Loss on extinguishment of debt		-			805			-
Loss on abandonment of lease		-			-			1,171
(Gain) loss on sale of leased facility and property		(17	)		(972	)		-
Write-off of deferred debt issue costs		1,639			-			-
Loss on extinguishment of debt		805			-			-
(Gain) loss on sale of leased facility and property		(972	)		-			-
Changes in assets and liabilities, net of working capital
acquired in business combinations:
(Increase) decrease in:
Accounts receivable		~~955~~(191	)		(~~191~~4	)		(42,005	)
Prepaid income taxes		~~(1,294~~947	)		~~947~~992			~~992~~175
Prepaid expenses		573,195			~~3,195~~(452	)		(~~452~~110	)
Increase (decrease) in:
Accounts payable, accrued expenses and other current liabilities		2,~~522~~675			21,~~675~~147			12,~~147~~335
Accrued compensation		~~265~~(2,755	)		~~(2,755~~323	)		~~323~~(425	)
Accrued interest		463,606			~~3,606~~602			~~602~~(59	)
Net cash provided by operating activities		7,~~990~~834			72,~~834~~330			26,~~330~~976
Cash Flows From Investing Activities
Purchase of property and equipment		(2,~~810~~746	)		(2,~~746~~279	)		(2,~~279~~417	)
Proceeds from sale of facility		-925			~~925~~-			-
(Increase) decrease in deposits and other noncurrent assets		(~~229~~31	)		(3140	)		(404	)
Payments of contingent notes		(215,~~045~~779	)		(54,~~779~~506	)		(45,~~506~~372	)
Repayments of contingent notes		-1,213			~~1,213~~-			-
Businesses acquired, net of cash acquired		-(15,394	)		(15,~~394~~323	)		(157,~~323~~250	)
Net cash used in investing activities		(2421,~~084~~812	)		(2122,~~812~~148	)		(2215,~~148~~043	)
Cash Flows From Financing Activities
Payments of capital lease obligations		(~~116~~109	)		(~~109~~81	)		(8179	)
Borrowing under new term loan facility		-169,575			~~169~~15,~~575~~070			1510,~~070~~000
Repayments under term loan facility		-(102,500	)		(~~102~~1,~~500~~000	)		(12,000	)
Repayments of subordinated notes payable		(~~500~~1,000	)		(~~1,000~~566	)		(~~566~~67	)
Net borrowings (repayments) under revolver		8(22,200	)		~~(22,200~~-	)		-
Payment of debt issuance costs		(925	)		(4,773	)		(942	)
Payment of financing transaction costs		(4,773	)		(942	)		(301	)
Net cash provided by financing activities		638,~~659~~993			3812,~~993~~481			127,~~481~~553
Net (decrease) increase in cash and cash equivalents		(925,~~435~~015	)		25(7,~~015~~337	)		(~~7,337~~514	)
Cash and cash equivalents, beginning		101,~~842~~407			126,~~407~~422			2619,~~422~~085
Cash and cash equivalents, ending	$	126,~~407~~422		$	2619,~~422~~085		$	1918,~~085~~571

(Continued)

6265

Aurora Diagnostics Holdings, LLC

Consolidated Statements of Cash Flows (Continued)

Years Ended December 31, ~~2013~~2014, ~~2014~~2015 and ~~2015~~2016

(in thousands)

	2013		2014		2015
	2014		2015		2016
Supplemental Disclosures of Cash Flow Information
Cash interest payments	$	3029,~~410~~703	$	2937,~~703~~238	$	3738,~~238~~791
Cash tax payments, including member tax distributions	$	576	$	414	$	1,171
Cash tax payments	$	414	$	1,171	$	518
Supplemental Schedule of Noncash Investing and Financing Activities
Notes and fair value of contingent consideration issued in acquisitions	$	-1,400	$	16,~~400~~940	$	61,~~940~~100
Assets acquired under capital leases and fixed minimum purchase commitments	$	~~890~~673	$	~~673~~1,262	$	~~1,262~~355

See Notes to Consolidated Financial Statements.

6366

Note 1. Nature of Business; ~~Working~~Going ~~Capital~~Concern Considerations; ~~Facility~~ Sale of Leased Facility; Summary of Significant Accounting Policies; and Recent Accounting Standards

Nature of business

Aurora Diagnostics Holdings, LLC and subsidiaries (the “Company”) was organized in the State of Delaware as a limited liability company on June 2, 2006 to operate as a diagnostic services company. The Company’s ~~practices~~provides ~~provide~~integrated ~~physician-based~~diagnostic ~~general~~consultations, ~~anatomic~~information services and ~~clinical~~personalized ~~pathology~~medicine services tailored to the patients of our referring physicians, ~~dermatopathology~~hospitals and ~~molecular~~hospital ~~diagnostic~~systems. ~~services~~The ~~and~~Company ~~other~~also ~~esoteric~~provides ~~testing~~research services to ~~physicians,~~pharmaceutical ~~hospitals,~~companies ~~clinical laboratories~~ and ~~surgery~~other ~~centers~~research entities. The Company’s operations consist of one reportable segment.

The Company operates in a highly regulated industry. The manner in which licensed physicians can organize to perform and bill for medical services is governed by state laws and regulations. Businesses like the Company often are not permitted to employ physicians or to own corporations that employ physicians or to otherwise exercise control over the medical judgments or decisions of physicians.

In states where the Company is not permitted to directly own a medical services provider or for other commercial reasons, it performs only non-medical administrative and support services, does not represent to the public or its clients that it offers medical services and does not exercise influence or control over the practice of medicine. In those states, the Company conducts business through entities that it controls, and it is these affiliated entities that employ the physicians who practice medicine. In such states, the Company generally enters into a contract that restricts the owners of the affiliated entity from transferring their ownership interests in the affiliated entity and otherwise provides the Company or its designee with a controlling voting or financial interest in the affiliated entity and its laboratory operations. This controlling financial interest generally is obtained pursuant to a long-term management services agreement between the Company and the affiliated entity. Under the management services agreement, the Company exclusively manages all aspects of the operation other than the provision of medical services. Generally, the affiliated entity has no operating assets because the Company acquired all of its operating assets at the time it acquired the related laboratory operations. In accordance with the relevant accounting guidance, these affiliated entities are included in the consolidated financial statements of Aurora Diagnostics Holdings, LLC.

~~Working~~Going ~~Capital~~Concern Considerations

These financial statements have been prepared in conformity with generally accepted accounting principles in the United States, which contemplate continuation of the Company as a going concern. The Company requires significant cash flow to service its debt obligations. ~~The~~ However, ~~reductions~~as further described in ~~Medicare~~Note ~~reimbursement~~7, ~~for~~as ~~2013~~of December 31, 2016, the Company had outstanding $200.0 million of senior notes maturing on January 15, 2018 (the “Senior Notes”) and ~~2014~~owed $197.0 million under its senior secured credit facility. The Company’s senior secured credit facility matures on July 14, 2019, but is subject to an accelerated maturity date of October 14, 2017, and will become due on such date, if the ~~corresponding~~Company’s ~~reduction~~Senior inNotes ~~reimbursement~~are ~~from~~not ~~non-governmental~~refinanced ~~payors~~or their maturity is not extended prior to October 14, ~~had~~2017. Although, as discussed below, the Company has devised a ~~significant~~plan ~~negative~~to ~~impact~~refinance onthe Senior Notes to avoid the acceleration of the maturity of its senior secured credit facility, as of December 31, 2016, the amounts due under the Company’s ~~cash~~senior ~~flows~~secured credit facility have been classified as current liabilities.

On ~~July~~March 3130, ~~2014~~2017, asthe ~~further~~Company ~~described~~executed ina ~~Note~~non-binding 7,term ~~the~~sheet ~~Company~~with ~~entered~~holders ~~into~~of aover ~~new~~98% ~~$220.0~~of ~~million~~its ~~credit~~Senior ~~facility~~Notes (setting forth the ~~“New~~terms ~~Credit~~of ~~Facility”)~~an ~~with~~offer ~~Cerberus~~to ~~Business~~exchange ~~Finance,~~the ~~LLC. The~~Senior ~~New~~Notes ~~Credit~~for ~~Facility~~a ~~consists~~combination of aup to $~~165~~200.0 million ~~initial~~of ~~term~~new ~~loan,~~senior ~~$30.0~~notes ~~million~~due ~~revolving~~January ~~credit~~15, ~~line~~2020 and ~~$25.0~~penny ~~million~~warrants ~~delayed~~to ~~draw~~purchase ~~term~~up ~~loan. Each~~to 15% of the Company’s equity interests. The term ~~loan~~sheet provides that, ~~revolving~~concurrently ~~credit~~with ~~line~~the exchange offer, the Company will commence a consent solicitation to remove substantially all of the restrictive covenants and ~~delayed~~events ~~draw~~of default from the indenture governing the Senior Notes. The term ~~loan~~sheet ~~under~~also provides that the ~~New~~holders ~~Credit~~parties ~~Facility~~thereto ~~has~~will aenter ~~maturity~~into ofa ~~five~~support ~~years~~agreement ~~but~~pursuant isto which, subject to ancertain ~~earlier~~conditions ~~maturity~~and ifexceptions, ~~the~~they ~~Company’s~~will ~~existing~~agree ~~Senior~~to ~~Notes~~tender ~~are~~their ~~not~~Senior ~~refinanced~~Notes orin ~~their~~the ~~maturity~~exchange isoffer ~~not~~and ~~extended~~provide ~~prior~~consents toin ~~October~~the ~~14,~~consent ~~2017~~solicitation. The Company ~~used~~has ~~$145.6~~agreed ~~million~~to ofclose the ~~proceeds~~exchange tooffer ~~retire~~by ~~its~~May ~~Barclays~~30, ~~Bank~~2017. ~~PLC~~To ~~revolving~~the ~~credit~~extent ~~facility~~that ~~due~~any ~~May~~of ~~2015~~the ~~and~~holders ~~term~~of ~~loan~~the ~~facility~~remaining ~~due~~2% ~~May~~of ~~2016,~~Senior ~~including~~Notes ~~accrued~~do ~~interest~~not ~~and~~participate ~~fees. Additionally~~in the exchange offer, the Company ~~borrowed~~could, ~~$25.0~~with ~~million~~the consent of the administrative agent under the ~~new~~senior ~~delayed~~secured ~~draw~~credit ~~term~~facility, ~~loan~~call toany ~~fund~~remaining ~~acquisitions~~Senior inNotes ~~2014~~for redemption and ~~2015~~repay them at par using cash on hand.

On April 10, 2015, the Company entered into a second amendment to the New Credit Facility. The second amendment to the New Credit Facility added a $40 million delayed draw term loan B facility which is available through April 10, 2016 to pay consideration for acquisitions, as permitted under the New Credit Facility, including acquisition related fees and expenses.67

AsIf ~~of December 31, 2015,~~ the Company ~~had~~is ~~$30.0~~able ~~million~~to ~~available~~conduct ~~under~~and ~~its~~close ~~revolving~~the ~~credit~~exchange ~~facility~~offer ~~and~~on anthe ~~additional~~terms ~~$40.0~~contemplated ~~million~~by ~~available~~the ~~under~~term ~~its~~sheet, ~~delayed~~assuming ~~draw~~that ~~term~~all ~~loan~~Senior BNotes ~~for~~are ~~acquisitions~~tendered ~~through April 10~~therein, ~~2016. In~~at ~~order to access~~ the ~~amounts~~closing ~~available~~thereof ~~under its revolving credit facility,~~ the Company ~~must~~will ~~meet~~have extended the ~~financial~~maturity ~~tests~~of ~~and ratios contained in its senior secured credit facility. If~~ the ~~Company~~Senior ~~fails~~Notes to ~~meet~~January ~~these~~15, ~~financial~~2020, ~~tests~~ and ~~ratios~~therefore, ~~its~~the ~~ability~~maturity toof ~~access~~ the ~~amounts~~senior ~~otherwise~~secured ~~available under its revolving~~ credit facility ~~could~~should not be ~~limited~~accelerated.

64In light of the plan to exchange the Senior Notes as described above, the Company’s management believes its current cash and cash equivalents, cash from operations and the amount available under its revolving credit facility will be sufficient to fund working capital requirements for the next 12 months. This belief assumes, among other things, that the Company will be able to conduct and close the exchange offer and therefore avoid acceleration of the maturity date of the senior secured credit facility, will continue to be successful in implementing its business strategy and that there will be no material adverse developments in its business, liquidity or capital requirements. There is no assurance the Company will be able to conduct and close the exchange offer with respect to the Senior Notes because, among other reasons, the term sheet described above is non-binding on the parties thereto. There is also no assurance that the Senior Notes or the senior secured credit facility will otherwise be extended, or refinanced in a timely manner or on terms acceptable to the Company, or at all, or that the Company will be able to achieve its forecasted cash from operations. If one or more of these factors do not occur as expected, it could cause a default under one or more of the agreements governing the Company’s indebtedness. If the Company is unable to exchange its Senior Notes or otherwise refinance or extend the maturity of the Senior Notes or the senior secured credit facility and if the Company’s cash from operations and refinancing sources are insufficient to service its debt or to fund its other liquidity needs, the Company may be forced to reduce or delay its business activities, sell material assets, seek additional capital or be forced into insolvency or liquidation.

In addition, in order to access the funds available under its revolving credit facility, the Company must meet the financial tests and ratios contained in its senior secured credit facility. If the Company fails to meet these financial tests and ratios, its ability to access the amounts otherwise available under its revolving credit facility could be limited.

Sale of Leased Facility

On December 31, 2014, the Company sold certain assets, including equipment and other assets, pertaining to its sole clinical laboratory facility for $0.9 million. This leased facility was the Company’s only location ~~which~~to exclusively ~~performed~~perform clinical laboratory testing. The Company also entered into a laboratory services agreement with the purchaser of the clinical laboratory facility effective January 1, 2015, under which the Company is outsourcing the clinical laboratory testing to the purchaser. As a result of the facility sale, the Company recorded a gain of approximately $1.0 million for the year ended December 31, 2014.

Summary of Significant Accounting Policies

Principles of consolidation: The accompanying consolidated financial statements of the Company include the accounts of Aurora Diagnostics Holdings, LLC, its wholly-owned subsidiaries, and ~~companies~~affiliated practices in which the Company has a controlling financial interest by means other than the direct record ownership of voting stock. All accounts and transactions between the entities have been eliminated in consolidation.

Accounting estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Due to the inherent uncertainties in this process, actual results could differ from those estimates.

Fair value of financial instruments: As of December 31, ~~2014~~2015 and ~~2015~~2016, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value based on the short maturity of these instruments. Refer to Note 11 for discussion of the fair value of the Company’s contingent consideration issued in acquisitions and long-term debt.

Revenue recognition and accounts receivable: The Company recognizes revenue at the time services are performed. Unbilled receivables are recorded for services rendered during, but billed subsequent to, the reporting period. Revenue is reported at the estimated realizable amounts from patients, third-party payors and others for services rendered. Revenue under certain third-party payor agreements is subject to audit and retroactive adjustments. Provisions for estimated third-party payor settlements and adjustments are estimated in the period the related services are rendered and adjusted in future periods as final settlements are determined. The provision for doubtful accounts and the related allowance are adjusted periodically based upon an evaluation of historical collection experience with specific payors for particular services, anticipated collection levels with specific payors for new services, industry reimbursement trends, and other relevant factors. Changes in these factors in future periods could result in increases or decreases in the Company’s provision for doubtful accounts and impact its results of operations, financial position and cash flows. In 2013, 2014 and 2015, approximately 23 percent, 22 percent and 24 percent, respectively, of the Company’s consolidated net revenues were generated by Medicare and Medicaid programs. 68

~~Segment~~Revenue ~~Reporting~~recognition and accounts receivable: The Company ~~operates~~recognizes ~~throughout~~revenue at the ~~United~~time ~~States~~services inare ~~one~~performed. ~~reportable~~Unbilled ~~segment,~~receivables ~~the~~are ~~medical~~recorded ~~laboratory~~for ~~industry.~~services ~~Medical~~rendered ~~laboratories~~during, ~~offer~~but abilled ~~broad~~subsequent ~~range~~to, ofthe ~~testing~~reporting ~~services~~period. toRevenue is reported at the ~~medical~~estimated ~~profession.~~realizable ~~The~~amounts ~~Company’s~~from ~~testing~~patients, third-party payors and others for services ~~are~~rendered. ~~categorized~~Revenue ~~based~~under ~~upon~~certain ~~the~~third-party ~~nature~~payor ofagreements ~~the~~is ~~test:~~subject ~~general~~to ~~anatomic~~audit ~~pathology,~~and ~~clinical~~retroactive ~~pathology,~~adjustments. ~~dermatopathology,~~Provisions ~~molecular~~for ~~diagnostic~~estimated ~~services~~third-party payor settlements and ~~other~~adjustments ~~esoteric~~are ~~testing~~estimated ~~services~~in tothe ~~physicians,~~period ~~hospitals,~~the ~~clinical~~related ~~laboratories~~services are rendered and ~~surgery~~adjusted ~~centers.~~in ~~The~~future ~~Company’s~~periods ~~revenue~~as ~~consists~~final ofsettlements ~~payments~~are ordetermined. ~~reimbursements~~The provision for ~~these~~doubtful ~~services.~~accounts ~~For~~and the ~~year~~related ~~ended~~allowance ~~December 31,~~are ~~2013,~~adjusted ~~net~~periodically ~~revenue~~based ~~consisted~~upon ofan 60evaluation ~~percent~~of ~~from~~historical ~~private~~collection ~~insurance,~~experience ~~including~~with ~~managed~~specific ~~care~~payors ~~organizations~~for ~~and~~particular ~~commercial payors~~services, 23anticipated ~~percent~~collection ~~from~~levels ~~Medicare~~with ~~and~~specific ~~Medicaid~~payors ~~and~~for 17new ~~percent~~services, ~~from~~industry ~~physicians~~reimbursement trends, and ~~individual~~other ~~patients~~relevant factors. ~~For~~Changes ~~the~~in ~~year~~these ~~ended~~factors ~~December 31,~~in ~~2014,~~future ~~net~~periods ~~revenue~~could ~~consisted~~result ofin 60increases ~~percent~~or ~~from~~decreases ~~private~~in ~~insurance,~~the 22Company’s ~~percent~~provision ~~from~~for ~~Medicare~~doubtful accounts and ~~Medicaid~~impact ~~and~~its 18results ~~percent~~of ~~from~~operations, ~~physicians~~financial position and ~~individual~~cash ~~patients~~flows. ~~For~~In ~~the~~2014, ~~year~~2015 ~~ended~~and ~~December 31~~2016, ~~2015~~approximately 22%, ~~net~~24% ~~revenue~~and ~~consisted~~24%, respectively, of 58the ~~percent~~Company’s ~~from~~consolidated ~~private~~net ~~insurance,~~revenues 24were ~~percent~~generated ~~from~~by Medicare and Medicaid ~~and 18 percent from physicians and individual patients~~programs.

65Segment Reporting: The Company operates throughout the United States in one reportable segment, the medical laboratory industry. Medical laboratories offer a broad range of testing services to the medical profession. The Company’s testing services are categorized based upon the nature of the test: general anatomic pathology, clinical pathology, dermatopathology, molecular diagnostic services and other esoteric testing services to physicians, hospitals, clinical laboratories and surgery centers. The Company’s revenue consists of payments or reimbursements for these services. For the year ended December 31, 2014, net revenue consisted of 60% from private insurance, including managed care organizations and commercial payors, 22% from Medicare and Medicaid and 18% from physicians and individual patients. For each of the years ended December 31, 2015 and 2016, net revenue consisted of approximately 58% from private insurance, 24% from Medicare and Medicaid and 18% from physicians and individual patients.

Cash and cash equivalents: The Company considers deposits and investments that have original maturities of less than three months, when purchased, to be cash equivalents. The Company maintains its cash balances at high quality financial institutions. At December 31, ~~2014~~2015 and ~~2015~~2016, the Company’s balances in its accounts exceeded amounts insured by the Federal Deposit Insurance Corporation, which insures amounts of up to $250,000. The Company does not believe it is exposed to any significant credit risk and has not experienced any losses.

Property and equipment: Property and equipment is stated at cost. Routine maintenance and repairs are charged to expense as incurred, while costs of betterments and renewals are capitalized. Depreciation is calculated on a straight-line basis, over the estimated useful lives of the respective assets, which range from 3 to 10 years. Leasehold improvements are amortized over the shorter of the term of the related lease, or the useful life of the asset.

Goodwill: Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired in business combinations. The Company reviews goodwill for impairment at the reporting unit level annually on November 30^th, or when events or circumstances dictate, more frequently. The impairment review for goodwill consists of a qualitative assessment and then a two-step process of first determining the fair value of the reporting unit and comparing it to the carrying value of the net assets allocated to the reporting unit. If the fair value of the reporting unit exceeds the carrying value, no further analysis or write-down of goodwill is required. If the fair value of the reporting unit is less than the carrying value of the net assets, the implied fair value of the reporting unit is allocated to all the underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value.

As further discussed in Note 5, the Company performed impairment testing of goodwill and intangible assets as of November 30, ~~2013~~2014, ~~2014~~2015 and ~~2015~~2016 and recorded goodwill impairment charges of $5227.93 million, $2717.31 million and $176.17 million, respectively. Additionally, as of June 30, 2015, the Company identified indicators of impairment at two of its reporting units, tested goodwill for impairment at these two reporting units and recorded non-cash impairment charges of $39.6 million to write down the carrying value of goodwill.

Intangible assets: Intangible assets acquired as the result of a business combination are recognized at fair value, as an asset apart from goodwill if the asset arises from contractual or other legal rights, or if it is separable. Intangible assets, principally representing the fair value of customer relationships, health care facility agreements and non-competition agreements acquired, are capitalized and amortized on the straight-line method over their expected useful life, which generally ranges from 3 to 15 years.

The Company reviews its finite lived intangible assets for impairment whenever events indicate the recorded value of the intangible assets may not be recoverable. If the undiscounted cash flows attributable to the intangible asset exceed the carrying value, no further analysis or write-down of the intangible asset is required. If the carrying value of the intangible asset exceeds the undiscounted cash flows attributable to the intangible asset, then the Company recognizes an impairment loss to reduce the recorded value down to, but not below, the estimated fair value of the intangible asset. In connection with its goodwill impairment testing on November 30, ~~2013 and November 30,~~ 2014, the Company identified certain intangible assets that were determined to be impaired and recorded a non-cash impairment ~~charges~~charge of $1.0 ~~Million and $0~~.2 million, ~~respectively,~~ to write down the carrying value of other intangible assets.

Long-lived assets: The Company recognizes impairment losses for long-lived assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

Deferred debt issue costs: The Company recognizes the direct costs of issuing debt financing as deferred debt issue costs. Deferred debt issue costs pertaining to the Senior Notes, ~~which~~term loan and delayed draw term loans are reflected as a reduction in the long-term debt balances in the accompanying consolidated balance sheets. Deferred debt issue costs pertaining to the revolving credit facility are included in other assets in ~~its~~the accompanying consolidated balance sheets. Deferred debt issue costs are amortized to interest expense using the effective interest method over the term of the related debt.

As further discussed in Note 7, on December 20, 2010, the Company issued $200.0 million inof ~~unsecured senior notes, which it refers to as the~~ Senior Notes, and incurred $6.5 million of related costs. These costs are being amortized to interest expense using the effective interest method through the January 15, 2018 maturity date.

66In connection with its $220.0 million credit facility entered into on July 31, 2014, the Company incurred $4.8 million of direct costs, which were deferred and are being amortized to interest expense using the effective interest method over the term of the credit facility, which has a maturity of five years, or earlier under certain circumstances. The Company used a portion of the proceeds from the credit facility to retire its previous credit facility with Barclays and recorded a non-cash charge of $1.6 million to write off the unamortized balance of the deferred issuance costs related to the Barclays credit facility and a non-cash loss on extinguishment of debt of $0.8 million for the related original issue discount.

InAs ~~connection~~further ~~with~~discussed ~~the~~in ~~$220.0~~Note ~~million~~7, ~~New Credit Facility entered into~~ on ~~July~~April 3110, ~~2014~~2015, the Company ~~incurred~~entered ~~$4.8~~into ~~million~~a ofsecond ~~direct~~amendment ~~costs, which were deferred and are being amortized~~ to ~~interest~~its ~~expense using the effective interest method over the term of the new~~ credit facility, which ~~has~~added a ~~maturity~~$40 ofmillion ~~five~~delayed ~~years,~~draw orterm ~~earlier~~loan ~~under~~B ~~certain circumstances~~facility. ~~The~~ ~~Company~~In ~~used~~connection awith ~~portion of~~ the ~~proceeds~~second ~~from~~amendment the ~~new~~Company ~~credit~~incurred ~~facility~~an toadditional ~~retire~~$0.9 ~~its~~million ~~credit~~of ~~facility~~direct ~~with~~costs ~~Barclays~~related ~~and~~to ~~recorded~~the ~~a non-cash charge of~~ $~~1.6~~40 million todelayed ~~write~~draw ~~off~~term ~~the~~loan ~~unamortized~~B ~~balance~~facility, ofwhich ~~the~~were deferred ~~issuance~~and ~~costs~~are ~~related~~being amortized to ~~the~~interest ~~Barclays~~expense ~~credit~~using ~~facility~~the ~~and~~effective ainterest ~~non-cash~~method ~~loss~~over onthe ~~extinguishment~~remaining ofterm ~~debt~~ of ~~$0.8 million for~~ the ~~related~~credit ~~original issue discount~~facility.

AsInterest ~~further~~expense ~~discussed~~from inthe ~~Note~~amortization 7,of ondeferred ~~April~~debt ~~10,~~issue ~~2015,~~costs ~~the~~was ~~Company~~$1.9 ~~entered~~million, ~~into~~$2.1 amillion ~~second~~and ~~amendment~~$2.1 tomillion for the ~~New~~years ~~Credit~~ended ~~Facility~~December 31, ~~which~~2014, ~~added~~2015 aand ~~$40~~2016, ~~million~~respectively. ~~delayed~~The ~~draw~~Company ~~term~~has ~~loan~~$3.7 Bmillion ~~facility.~~in Innet ~~connection~~deferred ~~with~~debt ~~the~~issue ~~second~~costs ~~amendment~~remaining ~~the~~at ~~Company~~December 31, ~~incurred~~2016, anconsisting ~~additional~~of $02.97 million ~~of direct costs~~ related to the credit facility and $401.0 million ~~delayed~~related ~~draw~~to ~~term~~the ~~loan~~Senior BNotes. ~~facility,~~As ~~which~~described ~~were~~in Note 7, deferred ~~and~~debt ~~are~~issue ~~being~~costs ~~amortized~~pertaining to ~~interest~~the ~~expense~~revolving ~~using~~credit ~~the~~facility ~~effective~~as ~~interest~~of ~~method~~December 31, ~~over~~2015 ~~the~~and ~~remaining~~2016 ~~term~~amounted ofto ~~the~~$0.5 ~~New~~million ~~Credit~~and ~~Facility~~$0.3 million, respectively.

Interest expense from the amortization of deferred debt issue costs was $1.9 million, $1.9 million and $2.1 million for the years ended December 31, 2013, 2014 and 2015, respectively. The Company has $6.1 million in net deferred debt issue costs remaining at December 31, 2015, consisting of $4.2 million related to the New Credit Facility and $1.9 million related to the Senior Notes. Deferred debt issue costs as of December 31, 2014 and 2015 consist of the following (in thousands): 70

	2014			2015
Deferred debt issue costs	$	11,240		$	12,182
Less accumulated amortization		(4,037	)		(6,108	)
Deferred debt issue costs, net	$	7,203		$	6,074

Medical malpractice claims insurance: The Company is insured on a claims-made basis up to its policy limits through a third party malpractice insurance policy. The Company establishes reserves, on an undiscounted basis, for self-insured deductibles, claims incurred and reported and claims incurred but not reported (IBNR) during the policy period. The Company had recorded medical claims liabilities of $2.2 million and $1.9 million as of December 31, 2015 and 2016, respectively, which are included in accounts payable, accrued expenses and other current liabilities. The Company also records a receivable from its insurance carrier for expected recoveries. Expected insurance recoveries, which are included in prepaid expenses and other current assets were $0.3 million and $0.4 million, as of December 31, 2015 and 2016, respectively. Medical claims insurance costs were $1.8 million, $1.5 million and $1.1 million for the years ended December 31, 2014, 2015 and 2016, respectively, inclusive of adjustments to the Company’s reserves for medical claims.

~~Medical~~Income ~~malpractice claims insurance~~taxes: The Company is ~~insured~~a onDelaware limited liability company taxed as a ~~claims-made~~partnership ~~basis~~for upfederal toand ~~its~~state ~~policy~~income ~~limits~~tax ~~through~~purposes ain ~~third~~accordance ~~party~~with ~~malpractice~~the ~~insurance~~applicable ~~policy~~provisions of the Internal Revenue Code. ~~The~~Accordingly, the Company ~~establishes~~is ~~reserves,~~generally onnot ansubject ~~undiscounted~~to ~~basis~~income taxes, ~~for~~and ~~self-insured~~the ~~deductibles,~~income ~~claims~~attributable ~~incurred~~to ~~and~~the ~~reported~~limited ~~and~~liability ~~claims~~company ~~incurred~~is ~~but~~allocated ~~not~~to ~~reported~~the ~~(IBNR)~~members ~~during~~in accordance with the ~~policy~~terms ~~period.~~of ~~The~~the Company’s ~~had~~Second ~~recorded~~Amended ~~medical~~and ~~claims~~Restated ~~liabilities~~Limited ofLiability ~~$3.2~~Company ~~million~~Agreement, ~~and~~dated ~~$2.2~~July 6, ~~million~~2011, which it refers to as ofthe ~~December 31,~~LLC ~~2014~~Agreement. ~~and~~In ~~2015~~addition, ~~respectively~~any tax distributions related to the income allocated to each member would be paid out quarterly. However, ~~which~~certain of the Company’s subsidiaries are ~~included~~structured inas ~~accounts~~corporations, ~~payable~~file separate returns, ~~accrued~~and ~~expenses~~therefore are subject to federal and ~~other~~state ~~current~~income ~~liabilities~~taxes. The ~~Company~~provision ~~also~~for ~~records~~income ataxes ~~receivable~~for ~~from~~these ~~its~~subsidiaries ~~insurance~~is ~~carrier~~reflected ~~for~~in ~~expected~~the ~~recoveries.~~Company’s ~~Expected~~consolidated ~~insurance~~financial ~~recoveries,~~statements ~~which~~and ~~are~~includes ~~included~~federal inand ~~prepaid~~state ~~expenses~~taxes currently payable and ~~other~~changes ~~current~~in deferred tax assets ~~were~~and ~~$1.1~~liabilities ~~million~~excluding the establishment of deferred tax assets and $0liabilities related to acquisitions.3 ~~million,~~Deferred income taxes represent the estimated future tax effects resulting from the temporary difference between the carrying values (as ofreflected ~~December 31,~~in ~~2014~~the financial statements) and ~~2015,~~the ~~respectively.~~tax ~~Medical~~reporting ~~claims~~basis ~~insurance~~of ~~costs~~the ~~were~~related $1assets and liabilities.9 ~~million~~The Company does not recognize a tax benefit, ~~$1.8~~unless ~~million~~the ~~and~~Company ~~$1.5~~concludes ~~million~~that ~~for~~it is more likely than not that the ~~years~~benefit ~~ended~~will ~~December~~be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. ~~31,~~If ~~2013,~~the ~~2014~~recognition ~~and~~threshold ~~2015,~~is ~~respectively~~met, ~~inclusive~~the Company recognizes a tax benefit measured at the largest amount of ~~adjustments~~the totax benefit that the Company’s ~~reserves~~believes ~~for~~has ~~medical~~greater ~~claims~~than a 50% likelihood of being realized. The Company records interest and penalties in income tax expense.

~~Income~~Concentration ~~taxes:~~of ~~The~~credit ~~Company~~risk: isFinancial ainstruments ~~Delaware~~that ~~limited~~potentially ~~liability~~subject ~~company taxed as a partnership for federal and state income tax purposes in accordance with~~ the ~~applicable provisions of the Internal Revenue Code. Accordingly, the~~ Company isto ~~generally~~concentrations ~~not~~of ~~subject~~credit torisk ~~income~~are ~~taxes,~~cash and ~~the~~cash ~~income~~equivalents ~~attributable~~and toaccounts ~~the~~receivable. ~~limited~~The ~~liability~~Company’s ~~company~~policy is ~~allocated~~ to ~~the~~place ~~members~~cash in ~~accordance~~highly-rated ~~with~~financial ~~the~~institutions. ~~terms~~Concentration of ~~the~~credit ~~Company’s~~risk ~~Second~~with ~~Amended~~respect ~~and Restated Limited Liability Company Agreement, dated July 6, 2011, which it refers~~ to asaccounts ~~the~~receivable ~~LLC~~is ~~Agreement.~~mitigated Inby ~~addition, any tax distributions related to~~ the ~~income~~diversity ~~allocated to each member would be paid out quarterly. However, certain~~ of the Company’s ~~subsidiaries~~payers ~~are structured as corporations, file separate returns,~~ and ~~therefore~~their ~~are~~dispersion ~~subject~~across tomany ~~federal~~different ~~and~~geographic ~~state income taxes~~regions. ~~The~~While ~~provision for income taxes for these subsidiaries is reflected in~~ the Company’s ~~consolidated~~has ~~financial~~receivables ~~statements~~due ~~and~~from ~~includes~~ federal and state ~~taxes~~governmental ~~currently~~agencies, ~~payable and changes in deferred tax assets and liabilities excluding~~ the ~~establishment~~Company ofdoes ~~deferred~~not ~~tax~~believe ~~assets~~such ~~and~~receivables ~~liabilities related to acquisitions. Deferred income taxes~~ represent ~~the~~a ~~estimated~~credit ~~future~~risk ~~tax~~since ~~effects resulting from~~ the ~~temporary~~related ~~difference~~healthcare ~~between~~programs ~~the~~are ~~carrying~~funded ~~values~~by ~~(as~~federal ~~reflected in the financial statements)~~ and ~~the~~state ~~tax~~governments ~~reporting basis of the related assets~~ and ~~liabilities.~~given ~~The Company does not recognize a tax benefit, unless the Company concludes~~ that itpayment is ~~more~~primarily ~~likely~~dependent ~~than not that the benefit will be sustained~~ on ~~audit by~~ the ~~taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the~~ Company’s ~~recognizes~~submission ~~a tax benefit measured at the largest amount~~ of ~~the~~appropriate ~~tax benefit that the Company believes has greater than a 50 percent likelihood of being realized~~documentation. ~~The Company records interest and penalties in income tax expense.~~

Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable. The Company’s policy is to place cash in highly-rated financial institutions. Concentration of credit risk with respect to accounts receivable is mitigated by the diversity of the Company’s payers and their dispersion across many different geographic regions. While the Company has receivables due from federal and state governmental agencies, the Company does not believe such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments and given that payment is primarily dependent on the Company’s submission of appropriate documentation.

Distributions to members and allocation of profits and losses: Profits and losses are allocated to the members in accordance with certain provisions contained in the LLC Agreement. Distributions are also made in accordance with the terms of the LLC Agreement.

Recent Accounting Standards Updates

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which will replace numerous requirements in U.S. GAAP and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for interim and annual reporting periods beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. WeThe ~~have~~Company ~~not~~expects ~~yet~~to ~~selected~~adopt athe ~~transition~~full retrospective method. Weunder ~~are~~ASU 2014-09 for its first quarter of 2018 and is currently evaluating the ~~potential~~effect ~~changes~~of ~~from~~adoption ~~this~~on ~~ASU~~its tofinancial ~~our~~position, ~~future~~results ~~financial~~of ~~reporting~~operations and ~~disclosures~~cash flows.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of this ASU are effective for annual and interim periods beginning after December 15, 2016. The adoption of ASU 2014-15 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.71

In ~~February~~March ~~2015~~2016, the FASB issued ASU ~~2015~~No. 2016-0208, “~~Consolidation~~Principal versus Agent Considerations (~~Topic~~Reporting ~~810~~Revenue Gross versus Net):.” ~~Amendments~~The amendments in ASU 2016-08 affect ASU 2014-09 and are related to the ~~Consolidation~~principal ~~Analysis~~versus agent considerations implementation guidance in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing.” The amendments in ASU ~~2015~~2016-0210 ~~changes~~clarify the ~~analysis~~following ~~that~~two aaspects ~~reporting~~in ~~entity~~ASU ~~must~~2014-09: ~~perform~~identifying toperformance ~~determine~~obligations ~~whether~~and itthe ~~should~~licensing ~~consolidate~~implementation ~~certain~~guidance, ~~types~~while ofretaining ~~legal~~the ~~entities~~related principles for those areas. ~~This~~In ~~update~~May is2016, ~~effective~~the ~~for~~FASB ~~interim~~issued ASU No. 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and ~~annual~~2014-16 ~~periods~~Pursuant ~~beginning~~to ~~after~~Staff ~~December 15~~Announcements at the March 3, ~~2015~~2016 EITF Meeting. ” The amendments in ASU 2016-11 rescinded certain SEC Staff Observer comments that are codified, effective upon the adoption of ASU ~~2015~~2014-0209. isIn ~~not~~May ~~expected~~2016, tothe ~~have~~FASB aissued ~~material~~ASU ~~effect~~No. on2016-12, “Narrow-Scope Improvements and Practical Expedients.” The amendments in ASU 2016-12 address certain issues identified in ASU 2014-09 in the ~~Company’s~~guidance ~~financial~~on ~~position~~assessing collectability, ~~results~~presentation of ~~operations~~sales ortaxes, non-cash ~~flows~~consideration, and completed contracts and contract modifications at transition. These ASU’s are effective concurrently with the adoption of ASU 2014-09. The Company is evaluating the impact of the adoption of these updates on its consolidated financial statements and related disclosures.

In ~~April~~August ~~2015~~2014, the FASB issued ASU ~~2015~~2014-0315, “~~Interest—Imputation~~Presentation of ~~Interest~~Financial Statements—Going Concern (Subtopic ~~835~~205-3040): ~~Simplifying~~Disclosure ~~the Presentation~~ of ~~Debt~~Uncertainties ~~Issuance~~about ~~Costs.” The~~an ~~amendments~~Entity’s inAbility ~~this~~to ~~update~~Continue ~~require~~as ~~that~~a ~~debt~~Going ~~issuance~~Concern.” Under ~~costs~~the ~~related~~new toguidance, amanagement ~~recognized~~is ~~debt~~required ~~liability~~to beassess ~~presented~~an inentity’s ~~the~~ability ~~balance~~to ~~sheet~~continue as a ~~direct~~going ~~deduction~~concern, ~~from~~and ~~the~~to ~~carrying~~provide ~~amount~~related offootnote ~~that~~disclosures ~~debt~~in ~~liability,~~certain ~~consistent with debt discounts~~circumstances. The ~~recognition~~provisions ~~and~~of ~~measurement~~this ~~guidance~~ASU ~~for debt issuance costs~~ are ~~not affected by the amendments in this standards update. The new guidance is~~ effective for annual ~~reporting~~ periods ~~beginning~~ending after December 15, ~~2015,~~2016 ~~including~~and interim periods ~~within~~beginning ~~that~~after ~~reporting~~December ~~period~~15, 2016. As Ana ~~entity~~result ~~should~~of ~~apply~~adopting ~~the~~this guidance, ~~either retrospectively to each prior reporting period presented or retrospectively with~~ the ~~cumulative adjustment at the date of the initial application. Had the~~ Company ~~adopted~~has ~~ASU~~disclosed ~~2015-03,~~additional ~~the~~information ~~deferred~~related ~~debt~~to ~~issue~~uncertainties ~~costs~~about ~~and~~its ~~long-term~~ability ~~debt~~to ~~would~~continue ~~have been reduced by approximately $6.6 million and $5.6 million~~ as ofa ~~December~~going ~~31,~~concern ~~2014~~in ~~and~~this ~~2015,~~Note ~~respectively~~1.

68In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This update was effective for interim and annual periods beginning after December 15, 2015. The adoption of ASU 2015-02 did not have a material effect on the Company’s financial position, results of operations or cash flows.

In ~~August~~April 2015, the FASB issued ASU 2015-1503, “Interest—Imputation of Interest (Subtopic 835-30): ~~Presentation~~Simplifying ~~and~~the ~~Subsequent~~Presentation ~~Measurement~~ of Debt Issuance Costs.” The ~~Associated~~amendments ~~with~~in ~~Line-of-Credit~~this ~~Arrangements—Amendments~~update torequire ~~SEC~~that ~~Paragraphs~~debt ~~Pursuant~~issuance costs related to ~~Staff~~a ~~Announcement~~recognized atdebt ~~June~~liability ~~18,~~be ~~2015~~presented ~~EITF~~in ~~Meeting (SEC~~the ~~Update),”~~balance ~~clarifying~~sheet ~~the~~as ~~SEC’s~~a ~~views~~direct ondeduction from the ~~presentation~~carrying ~~and~~amount ~~subsequent~~of that debt liability, consistent with debt discounts. The recognition and measurement ofguidance for debt issuance costs ~~related~~are tonot ~~line-of-credit~~affected ~~arrangements~~by the amendments in this standards update. The ~~ASU~~new ~~2015-15~~guidance ~~allows~~was effective for anannual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. An entity should apply the guidance either retrospectively to ~~defer~~each ~~and~~prior ~~present~~reporting ~~debt~~period ~~issuance~~presented ~~costs~~or ~~associated~~retrospectively with ~~line-~~the cumulative adjustment at the date of the initial application. The Company’s adoption of ASU 2015-~~credit~~03 ~~arrangements~~resulted asin anthe ~~asset~~inclusion of approximately $5.6 million and ~~subsequently~~$3.6 ~~amortize~~million ~~the~~of deferred debt ~~issuance~~issue costs ~~ratably~~as ~~over~~a ~~the~~reduction of long-term ofdebt ~~the~~as ~~line-~~of~~-credit~~ ~~arrangement~~December 31, ~~regardless~~2015 ofand ~~whether~~as ~~there~~a ~~are~~reduction ~~any~~of ~~outstanding~~current ~~borrowings~~portion onof ~~the line~~long-~~of-credit~~term ~~arrangements.~~debt ~~This~~as ~~ASU~~of ~~was~~December ~~effective~~31, ~~upon~~2016, ~~issuance~~respectively. The ~~Company~~change ~~adopted~~in ~~ASU~~accounting ~~2015-15,~~principle ~~and~~has ~~the~~been ~~adoption~~applied ~~did~~on ~~not~~a ~~have~~retrospective abasis. Deferred ~~material~~debt ~~effect~~issue oncosts ~~the~~were ~~Company’s~~originally ~~financial~~included ~~position,~~in ~~results~~other ofassets ~~operations~~in orthe ~~cash~~consolidated ~~flows~~balance sheets at December 31, 2015.

In ~~April~~February ~~2015~~2016, the FASB issued ASU ~~2015~~2016-0502, “~~Intangibles—Goodwill~~Leases” ~~and Other-Internal-Use Software~~ (~~Subtopic~~topic ~~350-40~~842):. ~~Customer’s~~The ~~Accounting~~FASB ~~for~~issued ~~Fees~~this ~~Paid~~update into aincrease ~~Cloud~~transparency ~~Computing~~and ~~Arrangement.” ASU~~comparability ~~2015-05~~among isorganizations ~~meant~~by torecognizing ~~help~~lease ~~entities~~assets ~~evaluate~~and ~~the~~lease ~~accounting~~liabilities ~~for~~on ~~fees~~the ~~paid~~balance bysheet aand ~~customer~~disclosing inkey ainformation ~~cloud~~about ~~computing~~leasing ~~arrangement~~arrangements. byThe ~~providing~~updated guidance asis toeffective ~~whether~~for anannual ~~arrangement~~periods ~~includes~~beginning ~~the~~after ~~sale~~December or15, ~~license~~2018, ofincluding ~~software.~~interim ~~This~~periods ~~update~~within isthose ~~effective~~fiscal ~~for~~years. ~~interim~~Early ~~and~~adoption ~~annual~~of ~~periods~~the ~~beginning~~update ~~after~~is ~~December 15, 2015~~permitted. The Company is evaluating the impact of the adoption of this update on ~~our~~its consolidated financial statements and related disclosures.

In ~~May~~March ~~2015~~2016, the FASB issued ASU ~~2015~~2016-0809, “~~Business~~Improvements ~~Combinations~~to ~~(Topic~~Employee ~~805):~~Share-Based ~~Pushdown~~Payment Accounting,” -which ~~Amendments~~amends toAccounting ~~SEC~~Standards ~~Paragraphs~~Codification ~~Pursuant~~Topic to718, ~~Staff~~Compensation ~~Accounting~~– ~~Bulletin~~Stock NoCompensation. ~~115.” The amendments in~~ ASU ~~2015~~2016-0809 ~~amend~~simplifies ~~various~~several ~~SEC~~aspects ~~paragraphs~~of ~~included in~~ the ~~FASB’s~~accounting ~~Accounting~~for ~~Standards~~share-based ~~Codification~~payment ~~(the~~transactions, ~~“Codification”)~~including ~~to reflect~~ the ~~issuance~~income oftax ~~Staff Accounting Bulletin No. 115~~consequences, ~~which~~classification ~~rescinds portions~~ of ~~the~~awards ~~interpretive~~as ~~guidance~~either ~~included~~equity inor ~~the~~liabilities, ~~SEC’s Staff Accounting Bulletins series~~ and ~~brings~~classification ~~existing~~on ~~guidance~~the ~~into~~statement ~~conformity~~of ~~with~~cash ~~ASU No~~flows. ~~2014~~ASU 2016-~~17,~~09 is ~~“Business~~effective ~~Combinations~~for ~~(Topic~~the ~~805):~~Company’s ~~Pushdown~~fiscal ~~Accounting,”~~years ~~which~~beginning ~~provides~~after anDecember ~~acquired~~15, ~~entity~~2016, ~~with~~and aninterim ~~option~~periods towithin ~~apply~~those ~~pushdown~~fiscal ~~accounting~~years inand ~~its~~early ~~separate~~adoption ~~financial~~is ~~statements upon occurrence of an event in which an acquirer obtains control of the acquired entity~~permitted. The ~~amendments~~Company indoes ~~the~~not ~~update~~expect ~~are effective upon issuance, and~~ the ~~Company adopted the amendments in ASU 2015-08, effective May 8, 2015. The~~ adoption of ASU ~~2015~~2016-0809 ~~did~~to ~~not~~ have a material effect on ~~the~~its ~~Company’s~~ financial position, results of operations or cash flows..

In June 2015, the FASB issued ASU 2015-10, “Technical Corrections and Improvements.” ASU 2015-10 covers a wide range of Topics in the Codification. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. Transition guidance varies based on the amendments. The amendments that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments were effective upon issuance. The Company has adopted ASU 2015-10, and the adoption did not have a material effect on the Company’s financial position, results of operations or cash flows.72

In ~~September~~June ~~2015~~2016, the FASB issued ASU ~~2015~~No. 2016-1613, “~~Business~~Financial ~~Combinations~~Instruments—Credit Losses (Topic ~~805~~326): ~~Simplifying~~Measurement ~~the~~of ~~Accounting~~Credit ~~for~~Losses ~~Measurement-Period~~on ~~Adjustments.~~Financial Instruments”. ~~The~~ASU 2016-13 introduces ~~standard~~a ~~requires~~new ~~that~~forward-looking ~~adjustments~~approach, ~~made~~based on expected losses, to ~~provisional~~estimate ~~amounts~~credit ~~recognized~~losses inon acertain ~~business~~types ~~combination~~of befinancial ~~recorded~~instruments, inincluding ~~the~~trade ~~period~~receivables ~~such~~and ~~adjustments~~held-to-maturity ~~are~~debt ~~determined~~securities, ~~rather~~which ~~than~~will ~~retrospectively~~require ~~adjusting~~entities ~~previously~~to ~~reported~~incorporate ~~amounts.~~considerations ~~ASU~~of ~~2015-16~~historical isinformation, ~~effective~~current ~~for~~information ~~fiscal~~and ~~years,~~reasonable and ~~interim~~supportable ~~periods~~forecasts. ~~within~~This ~~those~~ASU ~~years,~~also expands disclosure requirements. ASU 2016-13 is effective for the Company beginning ~~after~~the ~~December~~first ~~15,~~quarter ~~2015,~~of ~~and~~2020 with early adoption is permitted. The ~~Company~~guidance ~~has~~will ~~adopted~~be ~~ASU~~applied ~~2015~~using the modified-~~16,~~retrospective ~~and~~approach. ~~the~~The ~~adoption~~Company ~~did~~is ~~not~~currently ~~have~~evaluating athe ~~material~~impact ~~effect~~of onadoption ~~the~~of ~~Company’s~~ASU ~~financial~~2016-13 ~~position,~~on ~~results~~its ofconsolidated ~~operations~~financial orstatements ~~cash~~and ~~flows~~related disclosures.

In ~~November~~August ~~2015~~2016, the FASB issued ASU ~~2015~~No. 2016-1715, “~~Income~~Statement ~~Taxes~~of Cash Flows (Topic ~~740~~230): ~~Balance Sheet~~ Classification of ~~Deferred~~Certain ~~Taxes.”~~Cash ~~ASU~~Receipts ~~2015-17~~and ~~requires~~Cash ~~that~~Payments,” ~~deferred~~which ~~tax~~clarifies ~~liabilities~~how ~~and~~certain ~~assets~~cash bereceipts ~~classified~~and ascash ~~noncurrent~~payments inare apresented and classified in the statement of ~~financial~~cash ~~position~~flows. ~~The~~ASU ~~Company~~No. ~~has~~2016-15 ~~elected~~is ~~to adopt this standard prospectively~~ effective ~~with~~for the ~~beginning~~Company ofin the first quarter ~~ended~~of ~~December~~2018 ~~31,~~with ~~2015.~~early ~~The~~adoption ~~application~~permitted ofand ~~ASU~~must ~~2015-17~~be applied retrospectively to ~~the~~all ~~Company’s~~periods ~~December~~presented. ~~31,~~The ~~2015~~Company ~~Consolidated~~is ~~Balance~~currently ~~Sheets~~evaluating ~~resulted~~the inimpact aof ~~decrease~~adoption toof ~~current~~ASU ~~deferred~~2016-15 ~~tax~~on ~~assets~~the presentation and ~~non-current~~classification ~~deferred~~of ~~tax~~the ~~liabilities~~Company’s statements of ~~$0.7~~cash ~~million~~flows.

69In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This ASU requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred until the asset is sold to a third party or recovered through use. ASU 2016-16 is effective for the Company for its annual reporting period beginning after December 15, 2017, including interim reporting periods within that annual reporting period. The Company is currently evaluating the impact of adoption of ASU 2016-16 on its consolidated financial statements and related disclosures.

In ~~February~~January ~~2016~~2017, the FASB issued ASU ~~2016~~2017-0201, “~~Leases”~~Business Combinations (~~topic~~Topic ~~842~~805).: ~~The~~Clarifying ~~FASB~~the ~~issued~~Definition ~~this~~of ~~update~~a toBusiness.” ~~increase~~This ~~transparency~~ASU ~~and~~is ~~comparability~~intended ~~among~~to ~~organizations~~clarify bythe ~~recognizing~~definition ~~lease~~of ~~assets~~a business to help companies and ~~lease~~other ~~liabilities~~organizations onevaluate ~~the~~whether ~~balance~~transactions ~~sheet~~should ~~and~~be ~~disclosing~~accounted ~~key~~for ~~information~~as ~~about~~acquisitions ~~leasing~~(or ~~arrangements.~~disposals) ~~The~~of ~~updated~~assets ~~guidance~~or businesses. ASU 2017-01 is effective for public companies for annual and interim periods beginning after December 15, ~~2018~~2017, ~~including~~and ~~interim~~early ~~periods~~adoption ~~within~~is ~~those~~permitted ~~fiscal~~under ~~years~~certain circumstances. ~~Early~~ASU ~~adoption~~2017-01 should be applied prospectively as of the ~~update~~beginning isof ~~permitted~~the period of adoption. The Company is currently evaluating the impact of ~~the~~ adoption of ~~this~~ASU ~~update~~2017-01 on ~~our~~its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” to simplify the subsequent measurement of goodwill. The amendment reduces the cost and complexity of evaluating goodwill for impairment by eliminating the second step in the goodwill impairment test. This update is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of adoption of ASU 2017-04 on its consolidated financial statements and related disclosures.

Note 2.

Acquisitions

The Company has made strategic acquisitions of small local ~~laboratories~~pathology practices to achieve greater economies of scale and expand or augment its geographic presence. In connection with its acquisition ~~and business development~~ related activities during ~~2013~~2014, ~~2014~~2015 and ~~2015~~2016, the Company has expensed $01.20 million, $1.0.9 million and $0.98 million, respectively, of acquisition ~~and business development~~ costs in the accompanying consolidated statements of operations.

2014 Acquisitions

The Company acquired 100% ~~percent~~ of the equity of two separate pathology practices on June 30, 2014, a third pathology practice on September 30, 2014, and a fourth pathology practice on October 31, 2014 for an aggregate cash purchase price of $16.0 million. In three of the transactions, the Company issued additional consideration payable over three years. The additional consideration for two of these acquisitions is based on the future performance of the acquired practice. The total acquisition date fair value of the additional consideration issued for the 2014 acquisitions was $1.4 million representing the present value of estimated future payments of $2.0 million. The Company funded the cash portion of the June 30, 2014 acquisitions using funds drawn under its previous revolving credit facility. The Company funded the cash portion of the September 30, 2014 acquisition using $9.7 million drawn on its delayed draw term loan and the October 31, 2014 acquisition with cash on hand.

2015 Acquisitions

On July 15, 2015, the Company acquired the assets of two pathology practices and a billing service, all located in Texas. On October 29, 2015, the Company acquired 100% ~~percent~~ of the equity of a pathology practice in Ohio. The Company paid a total of $15.4 million of cash in aggregate at closing and issued contingent notes payable over from three to six years. Payments under the contingent notes will be paid annually, up to a maximum of $11.9 million over the term of the notes, subject to the retention of certain key facility contracts, financial results and the cash received under specified client contracts. The Company used the available cash under its $25.0 million delayed draw term loan to pay the $15.4 million cash portion of the purchase price for the acquisitions. The Company’s allocation of the purchase price to the net assets acquired is preliminary, pending final evaluation of the acquired accounts receivable and is expected to be finalized no later than June 30, 2016.

~~Intangible~~2016 assets acquired as the result of a business combination are recognized at fair value as an asset apart from goodwill if the asset arises from contractual or other legal rights or if it is separable. The Company’s intangible assets, which principally consist of the fair value of customer relationships, health care facility agreements and non-competition agreements acquired in connection with the acquisition of diagnostic companies, are capitalized and amortized on the straight-line method over their useful lives, which generally range from 3 to 15 years. The goodwill recorded by the Company in acquisitions relates to intangible assets that do not qualify for separate recognition, such as the assembled workforce and anticipated synergies. The Company recorded $60,000 and $2.3 million of tax deductible goodwill related to the 2014 and 2015 acquisitions, respectively.Acquisitions

70On March 31, 2016, the Company acquired 100% of the equity of a hospital-based pathology practice located in Oregon. On April 8, 2016, the Company acquired 100% of the equity of a second hospital-based pathology practice in Florida. In connection with these 2016 acquisitions, the Company paid total net cash of $7.2 million and issued contingent notes payable over three years. Payments under the contingent notes will be paid annually, up to a maximum of $1.5 million over the term of the notes, subject to the future financial performance of the acquired practice and the retention of a key facility contract. The Company used cash available under its $40.0 million delayed draw term loan B to pay the $7.2 million cash portion of the purchase price for the acquisition.

~~The~~Intangible ~~following~~assets ~~table~~acquired ~~summarizes~~as the ~~estimated~~result ~~aggregate~~of a business combination are recognized at fair value ofas an asset apart from goodwill if the asset arises from contractual or other legal rights or if it is separable. The Company’s intangible assets, ~~acquired~~which principally consist of the fair value of customer relationships, health care facility agreements and ~~liabilities~~non-competition ~~assumed~~agreements acquired in connection with the ~~2015~~acquisition ~~acquisitions~~of (diagnostic companies, are capitalized and amortized on the straight-line method over their useful lives, which generally range from 3 to 15 years. The goodwill recorded by the Company in ~~thousands):~~acquisitions relates to intangible assets that do not qualify for separate recognition, such as the assembled workforce and anticipated synergies. The Company recorded $11.1 million, $2.6 million, and $2.0 million of tax deductible goodwill related to the 2014, 2015 and 2016 acquisitions, respectively.

Cash	$	123
Accounts receivable		3,538
Other assets		193
Property and equipment		9
Intangible assets		15,138
Goodwill		4,139
Assets acquired		23,140
Accounts payable and accrued expenses		565
Accrued compensation		189
Fair value of contingent consideration		6,940
Liabilities assumed		7,694
Net assets acquired	$	15,446
Net assets acquired	$	15,446
Less:
Cash acquired		(123	)
Net cash paid for acquisitions, net of cash acquired	$	15,323

The following table summarizes the estimated aggregate fair value of the assets acquired and liabilities assumed in connection with the 2016 acquisitions (in thous ands):

Cash	$	602
Accounts receivable		849

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