Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2021 OR ☐ 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: 001-36439 PRECIPIO, INC. (Exact name of registrant as specified in its charter) Delaware 91-17893 ...

Financial Data and Key Metrics Changes - Revenue from pathology services increased by 55% year-over-year and 29% from Q1 to Q2 of 2021 [7] - Collection rate improved from the 70% range to approaching 90% billable revenue, positively impacting cash flow [8] Business Line Data and Key Metrics Changes - Pathology services continue to be the primary revenue driver, with significant growth attributed to new customer acquisition and improved collections [7] - HemeScreen is expected to contribute significantly to growth, with operations and revenues anticipated to commence in Q4 2021 [12] Market Data and Key Metrics Changes - The U.S. HemeScreen market is projected to approach several hundred million dollars per year, indicating substantial market potential [14] Company Strategy and Development Direction - The company plans to maintain high-quality clinical diagnostic services, focus on quality production fulfillment, and leverage R&D expertise to broaden offerings [23][24] - HemeScreen is identified as a key focal point for future growth, providing financial stability and enhancing patient care [19] Management's Comments on Operating Environment and Future Outlook - Management acknowledges challenges in the sales environment due to market restrictions but believes the entire industry is facing similar issues, which could lead to collective growth [9][10] - The company is optimistic about reaching a $10 million run rate by the end of the year, marking a significant milestone [11] Other Important Information - A new production facility for HemeScreen is planned to ensure quality and consistency in product delivery [18] - The company celebrated its 10th anniversary, highlighting its commitment to impactful patient care through accurate diagnostics [28][30] Summary of Q&A Session - The conference call concluded without a formal Q&A session, as indicated by the operator's closing remarks [32]

[PART I. Financial Information](index=4&type=section&id=PART%20I.%20Financial%20Information) This section provides an overview of Precipio, Inc.'s unaudited condensed consolidated financial statements and related explanatory notes for the periods presented [Item 1. Condensed Consolidated Financial Statements](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) This section details Precipio, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, cash flows, and comprehensive notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows a significant increase in total assets and stockholders' equity from December 31, 2020, to June 30, 2021, primarily driven by a substantial rise in cash and additional paid-in capital Condensed Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | June 30, 2021 (unaudited) | December 31, 2020 | | :-------------------------------- | :------------------------ | :------------------ | | Cash | $15,701 | $2,656 | | Total current assets | $16,980 | $4,204 | | Total assets | $33,540 | $20,713 | | Total current liabilities | $3,638 | $4,656 | | Total liabilities | $6,282 | $6,551 | | Total stockholders' equity | $27,258 | $14,162 | - Cash increased significantly from **$2,656 thousand** at December 31, 2020, to **$15,701 thousand** at June 30, 2021[10](index=10&type=chunk) - Total assets grew by approximately **62%** from **$20,713 thousand** to **$33,540 thousand**[10](index=10&type=chunk) - Total stockholders' equity nearly doubled, increasing from **$14,162 thousand** to **$27,258 thousand**[10](index=10&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported increased net sales and gross profit for both the three and six months ended June 30, 2021, compared to the prior year, but continued to incur net losses, primarily due to operating expenses and warrant revaluation losses Condensed Consolidated Statements of Operations Highlights (Dollars in thousands, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $2,344 | $1,308 | $4,168 | $2,524 | | Gross profit | $751 | $171 | $1,219 | $296 | | Operating loss | $(2,132) | $(2,259) | $(4,269) | $(4,462) | | Net loss | $(3,010) | $(2,232) | $(4,461) | $(5,437) | | Net loss attributable to Precipio, Inc. common stockholders | $(3,013) | $(2,249) | $(4,465) | $(8,798) | | Basic and diluted loss per common share | $(0.14) | $(0.20) | $(0.23) | $(0.89) | - Net sales increased by **79%** for the three months ended June 30, 2021, and by **65%** for the six months ended June 30, 2021, compared to the respective prior year periods[11](index=11&type=chunk) - Gross profit significantly improved, increasing from **$171 thousand** to **$751 thousand** for the three-month period and from **$296 thousand** to **$1,219 thousand** for the six-month period[11](index=11&type=chunk) - Basic and diluted loss per common share improved from **$(0.20)** to **$(0.14)** for the three-month period and from **$(0.89)** to **$(0.23)** for the six-month period[11](index=11&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity saw a substantial increase during the six months ended June 30, 2021, primarily driven by the issuance of common stock through at-the-market offerings and warrant exercises, despite ongoing net losses Changes in Stockholders' Equity (Dollars in thousands) | Metric | Balance, January 1, 2021 | Net (loss) income | Issuance of common stock (ATM offering) | Proceeds from warrant exercise | Stock-based compensation | Balance, June 30, 2021 | | :-------------------------------- | :----------------------- | :---------------- | :-------------------------------------- | :----------------------------- | :----------------------- | :--------------------- | | Total Precipio, Inc. stockholders' equity | $14,135 | $(4,465) | $14,947 | $400 | $800 | $27,227 | - Total stockholders' equity increased from **$14,162 thousand** at January 1, 2021, to **$27,258 thousand** at June 30, 2021[12](index=12&type=chunk) - Issuance of common stock in connection with at-the-market offering contributed **$14,947 thousand** to additional paid-in capital during the six months ended June 30, 2021[12](index=12&type=chunk) - Proceeds from the exercise of warrants added **$400 thousand** to stockholders' equity[12](index=12&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash flows from financing activities significantly increased in the first half of 2021 due to common stock issuances and warrant exercises, leading to a substantial net increase in cash, despite continued cash usage in operating and investing activities Condensed Consolidated Statements of Cash Flows Highlights (Dollars in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(3,048) | $(3,562) | | Net cash used in investing activities | $(321) | $(10) | | Net cash flows provided by financing activities | $16,414 | $3,077 | | Net change in cash | $13,045 | $(495) | | Cash at end of period | $15,701 | $353 | - Net cash provided by financing activities increased over five-fold from **$3,077 thousand** in H1 2020 to **$16,414 thousand** in H1 2021[17](index=17&type=chunk) - The company experienced a net increase in cash of **$13,045 thousand** in H1 2021, a significant improvement from a net decrease of **$495 thousand** in H1 2020[17](index=17&type=chunk) - Cash at the end of the period surged from **$353 thousand** in H1 2020 to **$15,701 thousand** in H1 2021[17](index=17&type=chunk) [Notes to the Unaudited Condensed Consolidated Financial Statements](index=14&type=section&id=Notes%20to%20the%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations and disclosures for the unaudited condensed consolidated financial statements, covering business operations, significant accounting policies, debt, equity, fair value measurements, and revenue recognition, offering crucial context for the financial performance and position [1. BUSINESS DESCRIPTION](index=14&type=section&id=1.%20BUSINESS%20DESCRIPTION) Precipio, Inc. is a cancer diagnostics and reagent technology company focused on eradicating misdiagnosis through proprietary technologies like IV-Cell and HemeScreen, and strategic partnerships. The company also distributes an FDA-authorized COVID-19 antibody test and operates a joint venture with Poplar Healthcare, while facing ongoing going concern challenges despite recent financing efforts - Precipio is a cancer diagnostics and reagent technology company aiming to solve cancer misdiagnosis through its platform and proprietary products like IV-Cell and HemeScreen[21](index=21&type=chunk)[22](index=22&type=chunk)[23](index=23&type=chunk) - The HemeScreen Reagent Rental (HSRR) program, launched in Q3 2020, offers diagnostic reagent sets at lower costs, reducing test reporting time from 7-10 days to 1 day, and began recognizing recurring revenues in H1 2021[24](index=24&type=chunk) - The company entered an agreement in Q4 2020 to market and distribute an FDA-authorized COVID-19 serology antibody test in the U.S. and worldwide[25](index=25&type=chunk) - Precipio formed a joint venture with Poplar Healthcare PLLC in April 2020, holding a **49%** ownership interest but consolidating it as a Variable Interest Entity (VIE) where Precipio is the primary beneficiary[27](index=27&type=chunk)[29](index=29&type=chunk) - The company has incurred substantial operating losses and used cash in operations, leading to substantial doubt about its ability to continue as a going concern, despite raising **$8.8 million** from Lincoln Park and **$15.4 million** from an ATM offering, and receiving PPP loan forgiveness[31](index=31&type=chunk)[32](index=32&type=chunk)[34](index=34&type=chunk) [2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=18&type=section&id=2.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section outlines the company's accounting policies, including GAAP conformity, consolidation of subsidiaries and the Joint Venture as a VIE, reclassifications, and the impact of recently adopted and not yet adopted accounting pronouncements. It also details the calculation of loss per share and the treatment of anti-dilutive securities - The condensed consolidated financial statements are presented in conformity with GAAP and include the accounts of Precipio, its wholly-owned subsidiaries, and the Joint Venture (a VIE where Precipio is the primary beneficiary)[35](index=35&type=chunk)[36](index=36&type=chunk) - The company adopted ASU 2019-12, 'Income Taxes,' on January 1, 2021, with no material impact, and is evaluating ASU 2021-04 ('Equity-Classified Written Call Options') and ASU 2020-06 ('Convertible Instruments') for future impact[39](index=39&type=chunk)[40](index=40&type=chunk)[41](index=41&type=chunk) - Options, warrants, and preferred stock totaling **2,311,399 shares** at June 30, 2021, and **1,815,502 shares** at June 30, 2020, were excluded from diluted loss per share calculation due to their anti-dilutive effect[43](index=43&type=chunk)[44](index=44&type=chunk) Joint Venture Assets and Liabilities (Dollars in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :------------------------ | :------------ | :---------------- | | Accounts receivable, net | $240 | $538 | | Total assets | $240 | $538 | | Accrued expenses | $7 | $27 | | Total liabilities | $7 | $27 | | Noncontrolling interest | $31 | $27 | | Total stockholders' equity | $61 | $53 | [3. LONG-TERM DEBT](index=22&type=section&id=3.%20LONG-TERM%20DEBT) The company's long-term debt primarily consists of a DECD loan, with the Paycheck Protection Program (PPP) loan of $0.8 million being fully forgiven in March 2021, significantly reducing total long-term debt Long-Term Debt (Dollars in thousands) | Debt Type | June 30, 2021 | December 31, 2020 | | :------------------------------------------------ | :------------ | :---------------- | | Department of Economic and Community Development (DECD) | $219 | $233 | | Financed insurance loan | — | $12 | | Paycheck Protection Program | — | $787 | | Total long-term debt | $199 | $1,010 | | Long-term debt, net of current maturities | $174 | $362 | - The **$787,200** Paycheck Protection Program (PPP) loan, received in April 2020, was fully forgiven effective March 24, 2021, resulting in a **$0.8 million** gain on forgiveness of debt[55](index=55&type=chunk)[58](index=58&type=chunk) - The DECD 2018 Loan maturity date was extended to May 31, 2028, due to COVID-19 financial relief, with no material impact on cash flows[51](index=51&type=chunk) [4. CONVERTIBLE NOTES](index=24&type=section&id=4.%20CONVERTIBLE%20NOTES) The company's convertible bridge notes, issued in 2018 and 2019, were subject to amendments in March 2020 that led to their extinguishment and conversion into common stock, resulting in a $1.2 million loss on extinguishment in H1 2020, with no convertible notes outstanding by June 30, 2021 - Amendments to convertible bridge notes in March 2020 were treated as an extinguishment, resulting in a **$1.2 million** loss on extinguishment of convertible notes in H1 2020[63](index=63&type=chunk) - During H1 2020, **$2.2 million** of bridge notes, plus interest, were converted into **3,908,145 shares** of common stock[64](index=64&type=chunk) - There were no convertible notes outstanding at June 30, 2021, and December 31, 2020[64](index=64&type=chunk) [5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.](index=27&type=section&id=5.%20ACCRUED%20EXPENSES%20OTHER%20CURRENT%20LIABILITIES.) Accrued expenses decreased from $2,036 thousand at December 31, 2020, to $1,343 thousand at June 30, 2021, with a small gain on settlement of liability recorded in H1 2021 Accrued Expenses (Dollars in thousands) | Category | June 30, 2021 | December 31, 2020 | | :------------------------------------ | :------------ | :---------------- | | Accrued expenses | $676 | $906 | | Accrued compensation | $251 | $685 | | Accrued franchise, property and sales and use taxes | $397 | $426 | | Accrued interest | $19 | $19 | | Total Accrued Expenses | $1,343 | $2,036 | - A gain on settlement of liability of less than **$0.1 million** was recorded during the three and six months ended June 30, 2021[65](index=65&type=chunk) [6. COMMITMENTS AND CONTINGENCIES](index=27&type=section&id=6.%20COMMITMENTS%20AND%20CONTINGENCIES) The company is involved in legal proceedings, including a patent management service claim, and operates within a complex and highly regulated healthcare industry, which could expose it to significant fines or penalties for non-compliance, though management believes it is currently in compliance - A liability of less than **$0.1 million** is recorded for a patent management service claim from CPA Global[67](index=67&type=chunk) - The healthcare industry is subject to numerous federal, state, and local laws and regulations, including those related to licensure, accreditation, and fraud and abuse, with potential for significant fines or program expulsion for violations[68](index=68&type=chunk)[69](index=69&type=chunk) [7. LEASES](index=27&type=section&id=7.%20LEASES) The company leases administrative facilities and laboratory equipment through operating and finance lease agreements, recognizing ROU assets and lease liabilities on the balance sheet. Finance lease ROU assets are also recognized for equipment subleased to HSRR customers, with sales-type leases for direct customer equipment leases Lease Assets and Liabilities (Dollars in thousands) | Classification | June 30, 2021 | December 31, 2020 | | :------------------------------------ | :------------ | :---------------- | | Operating lease right-of-use assets, net | $199 | $306 | | Finance lease right-of-use assets, net | $508 | $204 | | Total lease assets | $707 | $510 | | Current maturities of operating lease liabilities | $143 | $225 | | Current maturities of finance lease liabilities | $248 | $48 | | Operating lease liabilities, less current maturities | $64 | $92 | | Finance lease liabilities, less current maturities | $199 | $116 | | Total lease liabilities | $654 | $481 | - Finance lease right-of-use assets related to the HSRR program increased from **$29 thousand** at December 31, 2020, to **$155 thousand** at June 30, 2021[75](index=75&type=chunk) - The weighted-average discount rate for finance leases increased significantly from **8.28%** at December 31, 2020, to **18.87%** at June 30, 2021[77](index=77&type=chunk) [8. STOCKHOLDERS' EQUITY](index=31&type=section&id=8.%20STOCKHOLDERS'%20EQUITY) Stockholders' equity increased significantly due to common stock issuances from warrant exercises and an at-the-market (ATM) offering, which raised $14.9 million net proceeds in H1 2021. The company also details various common stock warrants and the Series B Preferred Stock, which experienced a down round adjustment in March 2020, resulting in deemed dividends - During H1 2021, the company issued **74,000 shares** of common stock from warrant exercises, generating **$0.4 million** in net cash proceeds[81](index=81&type=chunk) - The company received net proceeds of approximately **$14.9 million** from the sale of **4,501,000 shares** of common stock through an At The Market (ATM) offering with AGP during H1 2021[92](index=92&type=chunk) - The LP 2020 Purchase Agreement with Lincoln Park was terminated effective June 14, 2021, after receiving **$8.8 million** from common stock sales[87](index=87&type=chunk) - The March 2020 Amendment triggered a down round feature for Series B Preferred Stock and certain warrants, adjusting their conversion/exercise prices and resulting in **$3.344 million** in deemed dividends in H1 2020[97](index=97&type=chunk)[107](index=107&type=chunk)[109](index=109&type=chunk)[111](index=111&type=chunk)[122](index=122&type=chunk) Common Stock Warrants Outstanding (June 30, 2021) | Issue Year | Expiration | Underlying Shares | Exercise Price | | :--------- | :--------- | :---------------- | :------------- | | 2017 | June 2022 | 2,540 | $41.25 | | 2017 | June 2022 | 500 | $7.50 | | 2017 | June 2022 | 6,095 | $105.00 | | 2017 | August 2022 | 25,201 | $0.40 | | 2017 | August 2022 | 4,000 | $46.88 | | 2017 | August 2022 | 47,995 | $150.00 | | 2017 | August 2022 | 9,101 | $7.50 | | 2017 | August 2022 | 16,664 | $0.40 | | 2017 | August 2022 | 7,335 | $0.40 | | 2017 | October 2022 | 666 | $0.40 | | 2018 | October 2022 | 7,207 | $112.50 | | 2018 | April 2023 | 69,964 | $5.40 | | 2018 | April 2023 | 78,414 | $5.40 | | 2018 | October 2022 | 15,466 | $11.25 | | 2018 | July 2023 | 14,671 | $5.40 | | 2018 | July 2023 | 14,672 | $5.40 | | 2018 | August 2023 | 20,903 | $5.40 | | 2018 | August 2023 | 20,903 | $5.40 | | 2018 | September 2023 | 19,816 | $5.40 | | 2018 | September 2023 | 20,903 | $5.40 | | 2018 | November 2023 | 75,788 | $5.40 | | 2018 | December 2023 | 51,282 | $5.40 | | 2019 | April 2024 | 147,472 | $5.40 | | 2019 | May 2024 | 154,343 | $9.56 | | **Total** | | **831,901** | | [9. FAIR VALUE](index=40&type=section&id=9.%20FAIR%20VALUE) The company classifies certain common stock warrants as Level 3 liabilities, measured at fair value using the Black-Scholes model. Revaluation of these warrant liabilities resulted in a $1.012 million expense in H1 2021, compared to a $0.564 million gain in H1 2020 - Common stock warrant liabilities are classified as **Level 3** financial instruments and valued using the Black-Scholes model[125](index=125&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk)[129](index=129&type=chunk) Change in Fair Value of Warrant Liabilities (Dollars in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Beginning balance at January 1 | $1,325 | $1,338 | | Revaluation recognized in earnings | $1,012 (loss) | $(564) (gain) | | Deductions – warrant exercises | $(130) | — | | Balance at June 30 | $2,207 | $774 | - The 2016 Warrant Liability was settled for cash of approximately **$0.1 million** in January 2021, with a zero balance at June 30, 2021[105](index=105&type=chunk)[126](index=126&type=chunk)[131](index=131&type=chunk) [10. EQUITY INCENTIVE PLAN](index=42&type=section&id=10.%20EQUITY%20INCENTIVE%20PLAN) The company operates under its 2017 Stock Option and Incentive Plan, with 1,355,514 shares available for future grant at June 30, 2021. Stock-based compensation expense increased significantly in H1 2021, reflecting new grants and a weighted-average exercise price of $2.17 for options granted - As of June 30, 2021, **1,355,514 shares** were available for future grant under the 2017 Stock Option and Incentive Plan[132](index=132&type=chunk) Stock Option Activity (Six Months Ended June 30, 2021) | Metric | Number of Options | Weighted-Average Exercise Price | | :-------------------------- | :---------------- | :------------------------------ | | Outstanding at January 1, 2021 | 822,992 | $4.46 | | Granted | 597,347 | $2.17 | | Forfeited | (58,341) | $3.02 | | Outstanding at June 30, 2021 | 1,361,998 | $3.52 | | Exercisable at June 30, 2021 | 541,544 | $5.19 | - Stock-based compensation expense increased from **$0.3 million** in H1 2020 to **$0.8 million** in H1 2021[138](index=138&type=chunk) [11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE](index=44&type=section&id=11.%20SALES%20SERVICE%20REVENUE%2C%20NET%20AND%20ACCOUNTS%20RECEIVABLE) The company recognizes revenue under ASC Topic 606 from diagnostic testing, biomarker testing, clinical research grants, and product sales (including HSRR and COVID-19 tests). Revenue disaggregation shows significant growth in Medicare and Third-Party Payer diagnostic testing, while contractual allowances and the allowance for doubtful accounts are managed based on historical trends and payer contracts - Revenue is recognized when a customer obtains control of promised goods or services, using the expected value method for variable consideration[153](index=153&type=chunk) - Revenue sources include diagnostic testing, biomarker testing, clinical research grants, and sales of reagents and other diagnostic products (e.g., HSRR program, COVID-19 antibody tests)[147](index=147&type=chunk)[148](index=148&type=chunk) Service Revenue, Net by Payer (Dollars in thousands) | Payer Category | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Medicaid | $18 | $16 | $31 | $25 | | Medicare | $1,009 | $643 | $1,993 | $1,168 | | Self-pay | $69 | $86 | $116 | $136 | | Third party payers | $921 | $847 | $1,821 | $1,363 | | Contract diagnostics | $21 | $24 | $21 | $382 | | **Total Service Revenue, net** | **$2,038** | **$1,616** | **$3,982** | **$3,074** | Accounts Receivable, Net (Dollars in thousands) | Payer Category | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Medicaid | $27 | $131 | | Medicare | $435 | $1,054 | | Self-pay | $64 | $276 | | Third party payers | $1,193 | $3,373 | | Contract diagnostic services and other | $133 | $53 | | **Gross Accounts Receivable** | **$1,852** | **$4,887** | | Less allowance for doubtful accounts | $(1,409) | $(4,013) | | **Accounts receivable, net** | **$443** | **$874** | - Accounts receivable, net, decreased from **$874 thousand** at December 31, 2020, to **$443 thousand** at June 30, 2021, largely due to a reduction in the allowance for doubtful accounts[164](index=164&type=chunk) [12. SUBSEQUENT EVENTS](index=52&type=section&id=12.%20SUBSEQUENT%20EVENTS) The company reported no other material subsequent events or transactions from June 30, 2021, through the date of issuance of the condensed consolidated financial statements - No other material subsequent events occurred between June 30, 2021, and the financial statement issuance date[168](index=168&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=54&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operational results, highlighting significant revenue growth driven by increased case volume and new programs, while also addressing ongoing challenges related to profitability, liquidity, and the impact of the COVID-19 pandemic [Forward-Looking Information](index=54&type=section&id=Forward-Looking%20Information) This subsection serves as a cautionary statement regarding forward-looking statements, emphasizing that actual results may differ materially due to various factors, including the uncertain impact of COVID-19, and disclaims any obligation to update these statements - The report contains forward-looking statements based on management's current views, subject to uncertainty and changes in circumstances[169](index=169&type=chunk) - Factors that could cause actual results to vary include the impact of COVID-19, revenue, expenses, funding, market conditions, and regulatory factors[169](index=169&type=chunk) - The company expressly disclaims any obligation to update or revise forward-looking statements, except as required by law[171](index=171&type=chunk) [Overview](index=54&type=section&id=Overview) Precipio, Inc. is a cancer diagnostics and reagent technology company dedicated to eliminating misdiagnosis through its New Haven laboratory and Omaha R&D facility, which develops proprietary products like IV-Cell and HemeScreen. The company also leverages exclusive licenses to technologies like ICE-COLD-PCR and has a consolidated joint venture with Poplar Healthcare to expand oncology services - Precipio is a cancer diagnostics and reagent technology company focused on eradicating misdiagnosis by providing diagnostic products, reagents, and services to the oncology market[173](index=173&type=chunk) - The company operates a cancer diagnostic laboratory in New Haven, CT, and an R&D facility in Omaha, NE, which develops proprietary products like IV-Cell and HemeScreen[173](index=173&type=chunk) - Precipio holds an exclusive license to patented ICE-COLD-PCR (ICP) technology from Dana-Farber Cancer Institute[174](index=174&type=chunk) - A joint venture with Poplar Healthcare, formed in April 2020, is consolidated by Precipio, which holds a **49%** ownership but is deemed the primary beneficiary[176](index=176&type=chunk) [Recent Developments](index=56&type=section&id=Recent%20Developments) Recent developments include the successful launch of the HemeScreen Reagent Program (HSRR), which began generating recurring revenues in the first half of 2021 by offering cost-effective diagnostic reagent sets and equipment. Additionally, the company expanded access to its FDA-authorized COVID-19 rapid antibody test by listing it on Amazon.com's healthcare platform [Business Activities – HemeScreen](index=56&type=section&id=Business%20Activities%20%E2%80%93%20HemeScreen) The HemeScreen Reagent Program (HSRR) was launched to provide oncology practices and hospitals with diagnostic reagent sets and lease-to-own equipment, significantly reducing costs and test reporting times. This program began generating recurring revenues in the first half of 2021 - The HemeScreen Reagent Program (HSRR) offers diagnostic reagent sets of patent-pending HemeScreen technology at lower costs, reducing test reporting time from **7-10 days** to **1 day**[177](index=177&type=chunk) - The HSRR program provides a turn-key test offering with an option to lease-to-own diagnostic testing equipment[177](index=177&type=chunk) - The company began recognizing recurring revenues from its first HSRR accounts during the first half of 2021[177](index=177&type=chunk) [Business Activities – COVID Testing](index=56&type=section&id=Business%20Activities%20%E2%80%93%20COVID%20Testing) Precipio expanded access to its FDA-authorized COVID-19 rapid antibody test by listing it on Amazon.com's healthcare website platform. This test, manufactured by Nirmidas Biotech, is the first US-based test to receive EUA for point-of-care and detects both IgG & IgM antibodies - On May 3, 2021, the company expanded access to its COVID-19 rapid antibody test by listing it on Amazon.com's healthcare website platform[178](index=178&type=chunk) - The antibody test, manufactured by Nirmidas Biotech, was the first US-based test to receive Emergency Use Authorization (EUA) by the FDA for point-of-care (POC)[178](index=178&type=chunk) - Precipio holds exclusive distribution rights for this product on Amazon's platform, and it tests for both IgG & IgM antibodies[178](index=178&type=chunk) [Going Concern](index=56&type=section&id=Going%20Concern) The company's ability to continue as a going concern remains in substantial doubt due to recurring operating losses and cash usage. Despite significant financing efforts, including $8.8 million from Lincoln Park, $0.8 million from PPP loan forgiveness, and $15.4 million from an ATM offering, there is no assurance these initiatives will fully resolve the uncertainty - As of June 30, 2021, the company had a net loss of **$4.4 million**, working capital of **$13.3 million**, and net cash used in operating activities of **$3.0 million**, raising substantial doubt about its ability to continue as a going concern[179](index=179&type=chunk) - The company received approximately **$8.8 million** from the LP 2020 Purchase Agreement with Lincoln Park, which was terminated effective June 14, 2021[182](index=182&type=chunk) - The **$0.8 million** PPP Loan was fully forgiven effective March 24, 2021[184](index=184&type=chunk) - Approximately **$15.4 million** in gross proceeds were received through an At The Market (ATM) Offering with AGP from April 2, 2021, through the issuance date[184](index=184&type=chunk) [Outlook - COVID-19 related](index=58&type=section&id=Outlook%20-%20COVID-19%20related) The COVID-19 pandemic has caused significant business disruption, with operational impacts ranging from 30% to 85% in certain urban markets. The extent of its ongoing effect on the company's financial performance remains highly uncertain, and management anticipates continued challenges through 2021 and potentially beyond - The COVID-19 outbreak has caused significant business disruption, with its impact on operational and financial performance remaining highly uncertain[184](index=184&type=chunk) - Business interruptions in certain urban markets have ranged from **30%** to **85%**[230](index=230&type=chunk) - The company anticipates that quarantine and shelter-in-place orders will continue through 2021 and possibly beyond, making it difficult to project the full impact[230](index=230&type=chunk) [Results of Operations for the Three Months Ended June 30, 2021 and 2020](index=59&type=section&id=Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20June%2030%2C%202021%20and%202020) For the three months ended June 30, 2021, net sales increased significantly by 79% due to higher patient diagnostic service revenue and growth in the HSRR program. Gross profit improved substantially, with gross margin rising to 32%, reflecting economies of scale from increased case volume. However, operating expenses and warrant revaluation losses led to a net other expense [Net Sales](index=59&type=section&id=Net%20Sales) Net sales for the three months ended June 30, 2021, increased by $1.0 million (79%) compared to the same period in 2020, driven by a 49% increase in patient diagnostic cases processed and higher revenue from the HSRR program Net Sales (Three Months Ended June 30, Dollars in thousands) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------------------ | :--- | :--- | :--------- | :--------- | | Service revenue, net, less allowance for doubtful accounts | $2,138 | $1,279 | $859 | 67 % | | Other revenue | $206 | $29 | $177 | 610 % | | **Net Sales** | **$2,344** | **$1,308** | **$1,036** | **79 %** | - Patient diagnostic service revenue increased by **$0.9 million** due to a **49%** increase in cases processed (**1,168 cases** in Q2 2021 vs. **785** in Q2 2020)[187](index=187&type=chunk) - Other revenue increased by **$0.2 million**, primarily from the HSRR program[187](index=187&type=chunk) [Cost of Sales](index=59&type=section&id=Cost%20of%20Sales) Cost of sales increased by $0.5 million for the three months ended June 30, 2021, aligning with the rise in patient diagnostic and HSRR revenues, partially offset by a decrease in contract diagnostic costs - Cost of sales increased by **$0.5 million** for the three months ended June 30, 2021, compared to the same period in 2020[188](index=188&type=chunk) - The increase was driven by higher patient diagnostic costs and HSRR revenue-related costs, partially offset by lower contract diagnostic costs[188](index=188&type=chunk) [Gross Profit](index=59&type=section&id=Gross%20Profit) Gross profit for the three months ended June 30, 2021, increased to $0.8 million, with gross margin improving to 32% from 13% in the prior year. This improvement was attributed to increased case volume and the resulting economies of scale Gross Profit and Margin (Three Months Ended June 30, Dollars in thousands) | Metric | 2021 | 2020 | Margin % 2021 | Margin % 2020 | | :----------- | :--- | :--- | :------------ | :------------ | | Gross Profit | $751 | $171 | 32 % | 13 % | - Gross margin increased from **13%** to **32%** due to higher case volume, enabling economies of scale and leveraging fixed expenses[189](index=189&type=chunk) [Operating Expenses](index=59&type=section&id=Operating%20Expenses) Operating expenses increased by $0.4 million to $2.9 million for the three months ended June 30, 2021, primarily due to higher general and administrative expenses and stock-based compensation - Operating expenses increased by **$0.4 million** to **$2.9 million** for the three months ended June 30, 2021[190](index=190&type=chunk) - The increase was driven by a **$0.2 million** rise in general and administrative expenses and a **$0.2 million** increase in stock-based compensation expenses[190](index=190&type=chunk) [Other (Expense) Income](index=59&type=section&id=Other%20%28Expense%29%20Income) The company recorded a net other expense of $0.9 million for the three months ended June 30, 2021, primarily due to warrant revaluations. This contrasts with a net other income of less than $0.1 million in the prior year, which included interest income and HHS funds, partially offset by warrant revaluations and interest expense - Net other expense was **$0.9 million** for the three months ended June 30, 2021, primarily attributable to warrant revaluations[191](index=191&type=chunk) - In Q2 2020, net other income of less than **$0.1 million** included **$0.3 million** in interest income and **$0.1 million** from HHS funds, offset by **$0.4 million** in warrant revaluations and **$0.1 million** in interest expense[193](index=193&type=chunk) [Results of Operations for the Six Months Ended June 30, 2021 and 2020](index=61&type=section&id=Results%20of%20Operations%20for%20the%20Six%20Months%20Ended%20June%2030%2C%202021%20and%202020) For the six months ended June 30, 2021, net sales increased by 65% due to a significant rise in patient diagnostic service revenue and HSRR program growth. Gross profit and margin improved substantially, reaching 29%. Operating expenses increased, but net other expense decreased due to a gain on PPP loan forgiveness, partially offset by warrant revaluations [Net Sales](index=61&type=section&id=Net%20Sales) Net sales for the six months ended June 30, 2021, increased by $1.6 million (65%) compared to the prior year, driven by a 56% increase in patient diagnostic cases processed and higher HSRR program revenue, partially offset by a decrease in contract diagnostics Net Sales (Six Months Ended June 30, Dollars in thousands) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------------------ | :--- | :--- | :--------- | :--------- | | Service revenue, net, less allowance for doubtful accounts | $3,795 | $2,471 | $1,324 | 54 % | | Other revenue | $373 | $53 | $320 | 604 % | | **Net Sales** | **$4,168** | **$2,524** | **$1,644** | **65 %** | - Patient diagnostic service revenue increased by **$1.7 million** due to a **56%** increase in cases processed (**2,251 cases** in H1 2021 vs. **1,440** in H1 2020)[194](index=194&type=chunk) - Other revenue increased by **$0.3 million**, mostly from the HSRR program[194](index=194&type=chunk) [Cost of Sales](index=61&type=section&id=Cost%20of%20Sales) Cost of sales increased by $0.7 million for the six months ended June 30, 2021, reflecting higher patient diagnostic and HSRR revenues, partially offset by reduced contract diagnostic costs - Cost of sales increased by **$0.7 million** for the six months ended June 30, 2021, compared to the same period in 2020[195](index=195&type=chunk) - The increase was driven by higher patient diagnostic costs and HSRR revenue-related costs, partially offset by lower contract diagnostic costs[195](index=195&type=chunk) [Gross Profit](index=61&type=section&id=Gross%20Profit) Gross profit for the six months ended June 30, 2021, increased to $1.2 million, with gross margin improving to 29% from 12% in the prior year. This was primarily due to increased case volume and the resulting economies of scale Gross Profit and Margin (Six Months Ended June 30, Dollars in thousands) | Metric | 2021 | 2020 | Margin % 2021 | Margin % 2020 | | :----------- | :--- | :--- | :------------ | :------------ | | Gross Profit | $1,219 | $296 | 29 % | 12 % | - Gross margin increased from **12%** to **29%** due to higher case volume, enabling economies of scale and leveraging fixed expenses[196](index=196&type=chunk) [Operating Expenses](index=61&type=section&id=Operating%20Expenses) Operating expenses increased by $0.7 million to $5.5 million for the six months ended June 30, 2021, driven by higher general and administrative expenses and stock-based compensation, partially offset by reduced sales and marketing costs - Operating expenses increased by **$0.7 million** to **$5.5 million** for the six months ended June 30, 2021[197](index=197&type=chunk)[199](index=199&type=chunk) - The increase included a **$0.4 million** rise in general and administrative expenses and a **$0.5 million** increase in stock-based compensation expenses, partially offset by a **$0.2 million** decrease in sales and marketing expenses[199](index=199&type=chunk) [Other (Expense) Income](index=63&type=section&id=Other%20%28Expense%29%20Income) Net other expense decreased from $1.0 million in H1 2020 to $0.2 million in H1 2021. This improvement was primarily due to an $0.8 million gain on PPP loan forgiveness, partially offset by $1.0 million in warrant revaluation expense. The prior year included a $1.2 million loss on extinguishment of convertible notes - Net other expense decreased from **$1.0 million** in H1 2020 to **$0.2 million** in H1 2021[200](index=200&type=chunk) - The current year's other expense includes **$1.0 million** from warrant revaluations, partially offset by an **$0.8 million** gain on PPP loan forgiveness[200](index=200&type=chunk) - H1 2020 net other expense included a **$1.2 million** loss on extinguishment of convertible notes and **$0.5 million** income from warrant revaluations[201](index=201&type=chunk) [Liquidity and Capital Resources](index=63&type=section&id=Liquidity%20and%20Capital%20Resources) The company's working capital significantly improved from a deficit of $0.5 million at December 31, 2020, to a surplus of $13.3 million at June 30, 2021, primarily driven by $16.2 million in net proceeds from common stock issuance and $0.4 million from warrant exercises Working Capital (Dollars in thousands) | Metric | June 30, 2021 | December 31, 2020 | Change | | :-------------------------------------------------------------------------------- | :------------ | :---------------- | :----- | | Current assets (including cash of $15,701 and $2,656 respectively) | $16,980 | $4,204 | $12,776 | | Current liabilities | $3,638 | $4,656 | $(1,018) | | **Working capital** | **$13,342** | **$(452)** | **$13,794** | - Working capital increased by **$13.8 million**, moving from a deficit of **$452 thousand** to a surplus of **$13,342 thousand**[202](index=202&type=chunk) - Net proceeds of **$16.2 million** were received from the sale of **5,001,000 shares** of common stock during H1 2021[202](index=202&type=chunk) - Proceeds of **$0.4 million** were received from the exercise of **74,000 warrants** during H1 2021[202](index=202&type=chunk) [Analysis of Cash Flows – Six Months Ended June 30, 2021 and 2020](index=63&type=section&id=Analysis%20of%20Cash%20Flows%20%E2%80%93%20Six%20Months%20Ended%20June%2030%2C%202021%20and%202020) Cash flows for the six months ended June 30, 2021, showed a significant net increase in cash, primarily driven by substantial financing activities from common stock issuances and warrant exercises. Operating cash outflows decreased, while investing cash outflows increased due to property and equipment purchases [Net Change in Cash](index=63&type=section&id=Net%20Change%20in%20Cash) Cash increased by $13.0 million during the six months ended June 30, 2021, a significant improvement compared to a $0.5 million decrease in the same period of 2020 - Net change in cash was an increase of **$13.0 million** in H1 2021, compared to a decrease of **$0.5 million** in H1 2020[203](index=203&type=chunk) - Cash at the end of the period was **$15.7 million** in H1 2021, up from **$0.353 million** in H1 2020[17](index=17&type=chunk) [Cash Flows Used in Operating Activities](index=63&type=section&id=Cash%20Flows%20Used%20in%20Operating%20Activities) Net cash used in operating activities decreased to $3.0 million in H1 2021 from $3.6 million in H1 2020. This was influenced by the net loss, changes in working capital, and non-cash adjustments, notably an $0.8 million gain on PPP loan forgiveness - Net cash used in operating activities decreased from **$3.6 million** in H1 2020 to **$3.0 million** in H1 2021[204](index=204&type=chunk) - Non-cash adjustments in H1 2021 included an **$0.8 million** gain on forgiveness of the PPP Loan[204](index=204&type=chunk) [Cash Flows Used In Investing Activities](index=63&type=section&id=Cash%20Flows%20Used%20In%20Investing%20Activities) Cash flows used in investing activities increased to $0.3 million in H1 2021 from less than $0.1 million in H1 2020, primarily due to higher purchases of property and equipment - Net cash used in investing activities increased from less than **$0.1 million** in H1 2020 to **$0.3 million** in H1 2021[205](index=205&type=chunk) - The increase was primarily due to purchases of property and equipment[205](index=205&type=chunk) [Cash Flows Provided by Financing Activities](index=65&type=section&id=Cash%20Flows%20Provided%20by%20Financing%20Activities) Cash flows provided by financing activities significantly increased to $16.4 million in H1 2021 from $3.1 million in H1 2020, driven by $16.2 million from common stock issuances and $0.4 million from warrant exercises - Net cash provided by financing activities increased from **$3.1 million** in H1 2020 to **$16.4 million** in H1 2021[207](index=207&type=chunk) - H1 2021 financing cash flows included **$16.2 million** from common stock issuance and **$0.4 million** from warrant exercises[207](index=207&type=chunk) - H1 2020 financing cash flows included **$2.6 million** from common stock issuance and **$0.8 million** from the PPP Loan[207](index=207&type=chunk) [Off-Balance Sheet Arrangements](index=65&type=section&id=Off-Balance%20Sheet%20Arrangements) The company reported no off-balance sheet arrangements that had or are reasonably likely to have a material effect on its financial condition or results of operations as of June 30, 2021, and December 31, 2020 - No off-balance sheet arrangements were reported as of June 30, 2021, and December 31, 2020[208](index=208&type=chunk) [Contractual Obligations and Commitments](index=65&type=section&id=Contractual%20Obligations%20and%20Commitments) No significant changes to contractual obligations and commitments occurred during the six months ended June 30, 2021, compared to those disclosed in the Annual Report on Form 10-K for fiscal year 2020 - No significant changes to contractual obligations and commitments occurred during the six months ended June 30, 2021[209](index=209&type=chunk) [Critical Accounting Policies and Estimates](index=65&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company refers to its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, for a detailed discussion of its critical accounting policies and estimates - Critical accounting policies and estimates are discussed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020[210](index=210&type=chunk) [Recently Issued Accounting Pronouncements](index=65&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) Additional information regarding recently issued accounting pronouncements can be found in Note 2 – 'Summary of Significant Accounting Policies' within the unaudited condensed consolidated financial statements - Information on recently issued accounting pronouncements is provided in Note 2 to the unaudited condensed consolidated financial statements[211](index=211&type=chunk) [Impact of Inflation](index=65&type=section&id=Impact%20of%20Inflation) The company does not believe that price inflation or deflation had a material adverse effect on its financial condition or results of operations during the periods presented - Price inflation or deflation did not have a material adverse effect on financial condition or results of operations during the periods presented[212](index=212&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=65&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Precipio, Inc. is exempt from providing quantitative and qualitative disclosures about market risk under Rule 12b-2 of the Securities Exchange Act of 1934 - Precipio, Inc. is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[213](index=213&type=chunk) [Item 4. Controls and Procedures](index=65&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2021, and reported no material changes in internal control over financial reporting during the quarter [Evaluation of Disclosure Controls and Procedures](index=65&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of June 30, 2021 - Disclosure controls and procedures were evaluated by management, with CEO and CFO participation, and concluded to be effective at a reasonable assurance level as of June 30, 2021[214](index=214&type=chunk)[216](index=216&type=chunk) [Changes in Internal Control over Financial Reporting](index=67&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) There were no changes in internal control over financial reporting during the three months ended June 30, 2021, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2021[217](index=217&type=chunk) [PART II. Other Information](index=68&type=section&id=PART%20II.%20Other%20Information) This section provides additional disclosures, including legal proceedings, risk factors, equity security sales, and other required information [Item 1. Legal Proceedings](index=68&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in legal proceedings, including a patent management service claim from CPA Global for approximately $0.2 million, for which a liability of less than $0.1 million has been recorded. It also operates within a complex and highly regulated healthcare environment, with management believing it is in compliance with fraud and abuse regulations - CPA Global claims the company owes approximately **$0.2 million** for patent maintenance services, with a liability of less than **$0.1 million** recorded[219](index=219&type=chunk) - The healthcare industry is subject to numerous federal, state, and local laws and regulations, including those related to fraud and abuse, with potential for significant fines or program expulsion for violations[220](index=220&type=chunk)[221](index=221&type=chunk) [Item 1A. Risk Factors](index=68&type=section&id=Item%201A.%20Risk%20Factors) This section updates and refers to the Annual Report on Form 10-K for a comprehensive list of risks. Key risks highlighted include the company's history of losses, the need for substantial additional capital to commercialize diagnostic technology, and the significant operational and financial disruptions caused by the COVID-19 pandemic - The company refers to its Annual Report on Form 10-K for a comprehensive discussion of risk factors[222](index=222&type=chunk) - The company has incurred losses since inception and expects to continue incurring losses, with no certainty of achieving or sustaining profitability[223](index=223&type=chunk) - Substantial additional capital is needed to commercialize diagnostic technology, and failure to obtain funding could delay or cease product development and operations[227](index=227&type=chunk) - The COVID-19 pandemic has caused significant business disruption, with uncertain and potentially material adverse effects on operations and financial results, including **30%** to **85%** business interruptions in certain urban markets[228](index=228&type=chunk)[230](index=230&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=72&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities or use of proceeds were reported[233](index=233&type=chunk) [Item 3. Defaults Upon Senior Securities](index=72&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company for the reporting period - This item is not applicable[234](index=234&type=chunk) [Item 4. Mine Safety Disclosures](index=72&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company for the reporting period - This item is not applicable[235](index=235&type=chunk) [Item 5. Other Information](index=72&type=section&id=Item%205.%20Other%20Information) The company reported no other information for the period - No other information was reported[236](index=236&type=chunk) [Item 6. Exhibits](index=72&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, as well as various XBRL documents - Exhibits include certifications (**31.1, 31.2, 32.1, 32.2**) from the Principal Executive Officer and Principal Financial Officer[238](index=238&type=chunk) - XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, Presentation Linkbase, and Cover Page Interactive Data File are included[238](index=238&type=chunk) [Signatures](index=73&type=section&id=Signatures) The report is duly signed on August 12, 2021, by Ilan Danieli, Chief Executive Officer, and Carl Iberger, Chief Financial Officer, in accordance with the requirements of the Securities Exchange Act of 1934 - The report was signed on **August 12, 2021**, by Ilan Danieli, Chief Executive Officer, and Carl Iberger, Chief Financial Officer[242](index=242&type=chunk)

Precipio, Inc. (NASDAQ:PRPO) Q1 2021 Earnings Conference Call May 20, 2021 5:00 PM ET Company Participants Ilan Danieli - Chief Executive Officer Conference Call Participants Operator Good day and welcome to the Precipio’s Shareholder First Quarter 2021 Shareholder Update Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that the conference is being recorded. Statements made during this call contain forward-looking statements about our business. You should ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 OR ◻ 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: 001-36439 PRECIPIO, INC. (Exact name of registrant as specified in its charter) Delaware 91-1789357 ( ...

Precipio, Inc. (NASDAQ:PRPO) Q4 2020 Earnings Conference Call March 31, 2021 5:00 PM ET Company Participants Ilan Danieli - CEO Carl Iberger - CFO Conference Call Participants Operator Welcome to the Precipio Q4 2020 and Yearend Shareholder Update Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that the conference is being recorded. Statements made during this call contain forward-looking statements about our business. You should not place undue reliance on forward- ...

Part I [Business](index=5&type=section&id=Item%201.%20Business) Precipio, Inc. is a cancer diagnostics company focused on mitigating misdiagnosis through a platform combining academic expertise with proprietary technologies - The company operates as a cancer diagnostics and reagent technology provider, aiming to reduce cancer misdiagnosis by leveraging academic expertise and proprietary technologies[15](index=15&type=chunk) - Precipio's key proprietary products include IV-Cell™ (a universal cell culture media), HemeScreen™ (genetic diagnostic panels for blood cancers), and the exclusively licensed ICE-COLD-PCR™ (a liquid biopsy specimen enrichment technology)[24](index=24&type=chunk)[31](index=31&type=chunk)[41](index=41&type=chunk) - The company targets the US domestic oncology market (over **$20 billion** annually) and the oncology reagent market (over **$14 billion** annually)[21](index=21&type=chunk) - In April 2020, Precipio formed a joint venture with Poplar Healthcare to provide oncology services to office-based physicians and medical centers[17](index=17&type=chunk) Employee Distribution as of March 25, 2021 | Department | Number of Employees | | :--- | :--- | | **Full-time** | **54** | | Finance, General & Administration | 12 | | Laboratory Operations | 21 | | Sales and Marketing | 10 | | Customer Service and Support | 5 | | Research & Development | 9 | | **Part-time** | **3** | [Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks, including substantial doubt about its ability to continue as a going concern, requiring additional financing, and intense competition - There is substantial doubt about the company's ability to continue as a going concern, having incurred a net loss of **$10.6 million** and negative working capital of **$0.5 million** for the year ended December 31, 2020[80](index=80&type=chunk) - The company requires significant additional financing to sustain operations, with a purchase agreement with Lincoln Park for up to **$10 million** in common stock to fund working capital needs[83](index=83&type=chunk)[84](index=84&type=chunk) - The COVID-19 pandemic has caused business interruptions ranging from **30% to 85%** in certain markets, and the ongoing impact remains uncertain[108](index=108&type=chunk)[110](index=110&type=chunk) - The company faces intense competition from specialized oncology service providers like Neogenomics and large commercial labs like LabCorp and Quest Diagnostics[51](index=51&type=chunk)[102](index=102&type=chunk) - The company's laboratories require ongoing CLIA certification, and failure to comply could result in suspension of operations and loss of Medicare/Medicaid reimbursement[130](index=130&type=chunk)[131](index=131&type=chunk) - The company received a PPP loan of **$787,200**, and if forgiveness is not granted by the SBA, the loan will need to be repaid, which could adversely affect cash flows[124](index=124&type=chunk)[125](index=125&type=chunk) [Unresolved Staff Comments](index=55&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - None[187](index=187&type=chunk) [Properties](index=55&type=section&id=Item%202.%20Properties) Precipio leases approximately 7,630 sq. ft. of lab and office space in New Haven, CT, and 5,300 sq. ft. in Omaha, NE, which are deemed adequate for current needs - Leases office and laboratory space in New Haven, Connecticut (**7,630 sq. ft**, lease expires Dec 2021) and Omaha, Nebraska (**5,300 sq. ft**, lease expires May 2022)[188](index=188&type=chunk) [Legal Proceedings](index=55&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in incidental legal proceedings, including an unresolved claim from CPA Global and a settled lawsuit with Jesse Campbell - CPA Global claims approximately **$0.2 million** for patent maintenance services; the company has recorded a liability of less than **$0.1 million**[193](index=193&type=chunk) - The Jesse Campbell lawsuit from 2017 was settled for **$1.95 million**, with the company paying **$0.27 million** and its insurance covering the rest, closing the matter in June 2020[194](index=194&type=chunk)[196](index=196&type=chunk) [Mine Safety Disclosures](index=57&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[197](index=197&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=58&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the NASDAQ Capital Market under "PRPO", with 18,132,063 shares outstanding as of March 25, 2021, and no cash dividends paid or anticipated - Common stock trades on the NASDAQ Capital Market under the symbol "**PRPO**"[200](index=200&type=chunk) - As of March 25, 2021, there were **18,132,063** shares of common stock outstanding[201](index=201&type=chunk) - The company has never paid cash dividends and does not anticipate paying them in the foreseeable future[202](index=202&type=chunk) Quarterly Stock Price (2020) | Quarter Ended | High | Low | | :--- | :--- | :--- | | March 31, 2020 | $2.30 | $0.68 | | June 30, 2020 | $1.51 | $0.58 | | September 30, 2020 | $7.00 | $1.16 | | December 31, 2020 | $2.64 | $1.94 | [Selected Consolidated Financial Data](index=58&type=section&id=Item%206.%20Selected%20Consolidated%20Financial%20Data) As a smaller reporting company, Precipio is not required to provide the information for this item - The company is a smaller reporting company and is not required to provide this information[205](index=205&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=60&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In fiscal year 2020, Precipio's net sales increased by 95% to $6.1 million, driven by a 120% increase in patient diagnostic cases, despite reporting a net loss of $10.6 million and a working capital deficit of $0.5 million Results of Operations (2020 vs. 2019) | Metric (in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $6,092 | $3,127 | $2,965 | 95% | | Gross Profit | $1,150 | $219 | $931 | 425% | | Gross Margin | 19% | 7% | - | - | | Operating Loss | ($9,146) | ($10,994) | $1,848 | (17%) | | Net Loss | ($10,598) | ($13,243) | $2,645 | (20%) | - The **95% increase in net sales** was primarily due to a **120% increase** in patient diagnostic cases processed, from **1,672 in 2019 to 3,677 in 2020**[227](index=227&type=chunk) - The company's financial condition raises substantial doubt about its ability to continue as a going concern, with a net loss of **$10.6 million**, negative working capital of **$0.5 million**, and **$7.4 million** cash used in operations as of December 31, 2020[221](index=221&type=chunk)[222](index=222&type=chunk) - To address liquidity, the company relies on an equity purchase agreement with Lincoln Park (of which **$8.8 million** has been drawn), a **$0.8 million** PPP loan, and an effective S-3 registration to offer up to **$50 million** in securities[225](index=225&type=chunk) Working Capital (in thousands) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Current Assets | $4,204 | $1,878 | | Current Liabilities | $4,656 | $4,334 | | **Working Capital** | **($452)** | **($2,456)** | [Quantitative and Qualitative Disclosures About Market Risk](index=76&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Price) As a smaller reporting company, Precipio is not required to provide the information for this item - The company is a smaller reporting company and is not required to provide this information[262](index=262&type=chunk) [Financial Statements and Supplementary Data](index=77&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) The consolidated financial statements for 2020 and 2019 are presented, with the auditor's report highlighting substantial doubt about the company's going concern ability and identifying critical audit matters - The independent auditor's report includes an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern due to significant working capital deficiency and recurring losses[266](index=266&type=chunk) - Critical Audit Matters identified by the auditor include: 1) Assessment of the estimation for collections over diagnostic testing revenue, and 2) Evaluation of changes in convertible debt to determine proper accounting treatment (extinguishment)[273](index=273&type=chunk)[276](index=276&type=chunk) Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $4,204 | $1,878 | | **Total Assets** | **$20,713** | **$19,511** | | Total Current Liabilities | $4,656 | $4,334 | | **Total Liabilities** | **$6,551** | **$6,306** | | **Total Stockholders' Equity** | **$14,162** | **$13,205** | Consolidated Statement of Operations Summary (in thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | Net Sales | $6,092 | $3,127 | | Gross Profit | $1,150 | $219 | | Operating Loss | ($9,146) | ($10,994) | | **Net Loss** | **($10,598)** | **($13,243)** | | **Basic and Diluted Loss Per Share** | **($0.85)** | **($2.33)** | Consolidated Cash Flow Summary (in thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($7,434) | ($9,141) | | Net cash used in investing activities | ($96) | ($55) | | Net cash provided by financing activities | $9,338 | $9,663 | | **Net Change in Cash** | **$1,808** | **$467** | | **Cash at End of Period** | **$2,656** | **$848** | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosures](index=151&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[512](index=512&type=chunk) [Controls and Procedures](index=151&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes during the fourth quarter - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020[515](index=515&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2020[517](index=517&type=chunk) - No material changes were made to internal control over financial reporting during the quarter ended December 31, 2020[519](index=519&type=chunk) [Other Information](index=153&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[521](index=521&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=154&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information for this item will be included in the company's definitive 2021 Proxy Statement, incorporated by reference - Information is incorporated by reference from the forthcoming 2021 Proxy Statement[524](index=524&type=chunk) [Executive Compensation](index=154&type=section&id=Item%2011.%20Executive%20Compensation) Information for this item will be included in the company's definitive 2021 Proxy Statement, incorporated by reference - Information is incorporated by reference from the forthcoming 2021 Proxy Statement[525](index=525&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=154&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information for this item will be included in the company's definitive 2021 Proxy Statement, incorporated by reference - Information is incorporated by reference from the forthcoming 2021 Proxy Statement[526](index=526&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=154&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information for this item will be included in the company's definitive 2021 Proxy Statement, incorporated by reference - Information is incorporated by reference from the forthcoming 2021 Proxy Statement[527](index=527&type=chunk) [Principal Accountant Fees and Services](index=154&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information for this item will be included in the company's definitive 2021 Proxy Statement, incorporated by reference - Information is incorporated by reference from the forthcoming 2021 Proxy Statement[528](index=528&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=155&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the documents filed as part of the report, including financial statements and a list of 30 exhibits such as material contracts and officer certifications - The financial statements listed under Item 8 are filed as part of this report[531](index=531&type=chunk) - All financial statement schedules are omitted as they are inapplicable or the information is included in the notes to the financial statements[534](index=534&type=chunk) - A list of **30 exhibits** is provided, including material contracts, corporate charters, and officer certifications[535](index=535&type=chunk)[536](index=536&type=chunk)[537](index=537&type=chunk) [Form 10-K Summary](index=159&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports no Form 10-K summary - None[539](index=539&type=chunk)

Precipio, Inc. (NASDAQ:PRPO) Q3 2020 Results Conference Call November 19, 2020 5:00 PM ET Company Participants Ilan Danieli - CEO Conference Call Participants Operator Good day, and welcome to the Precipio Quarterly Shareholder Update Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that the conference is being recorded. Statements made during this call contain forward-looking statements about our business. You should not place undue reliance on forward-looking state ...

PART I. Financial Information This section provides a comprehensive overview of the company's financial performance, position, and cash flows, along with detailed notes and management's analysis [Item 1. Condensed Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Precipio, Inc. and its subsidiaries, including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, debt, equity, and revenue recognition [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (Dollars in thousands) | Item | September 30, 2020 (unaudited) | December 31, 2019 | | :--------------------------------- | :----------------------------- | :------------------ | | **ASSETS** | | | | Cash | $2,158 | $848 | | Accounts receivable, net | $1,086 | $574 | | Inventories | $280 | $184 | | Other current assets | $444 | $272 | | Total current assets | $3,968 | $1,878 | | Property and equipment, net | $460 | $431 | | Operating lease right-of-use assets | $358 | $519 | | Intangibles, net | $15,904 | $16,658 | | Other assets | $27 | $25 | | **Total assets** | **$20,717** | **$19,511** | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Current maturities of long-term debt | $530 | $321 | | Current maturities of convertible notes | $— | $142 | | Current maturities of finance lease liabilities | $37 | $52 | | Current maturities of operating lease liabilities | $219 | $209 | | Accounts payable | $1,829 | $1,936 | | Accrued expenses | $1,804 | $1,639 | | Deferred revenue | $48 | $35 | | Total current liabilities | $4,467 | $4,334 | | Long-term debt, net of current maturities | $500 | $198 | | Finance lease liabilities, net of current maturities | $108 | $119 | | Operating lease liabilities, net of current maturities | $150 | $317 | | Common stock warrant liabilities | $1,631 | $1,338 | | **Total liabilities** | **$6,856** | **$6,306** | | Total Precipio, Inc. stockholders' equity | $13,834 | $13,205 | | Noncontrolling interest in joint venture | $27 | $— | | **Total stockholders' equity** | **$13,861** | **$13,205** | | **Total liabilities and stockholders' equity** | **$20,717** | **$19,511** | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's revenues, costs, and expenses, culminating in net loss and loss per share for the reporting periods Condensed Consolidated Statements of Operations (Dollars in thousands, except per share data) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Service revenue, net | $1,998 | $1,020 | $5,072 | $3,125 | | Other revenue | $51 | $26 | $104 | $37 | | Revenue, net of contractual allowances and adjustments | $2,049 | $1,046 | $5,176 | $3,162 | | Less allowance for doubtful accounts | $(422) | $(262) | $(1,025) | $(723) | | **Net sales** | **$1,627** | **$784** | **$4,151** | **$2,439** | | Total cost of sales | $1,250 | $756 | $3,478 | $2,201 | | **Gross profit** | **$377** | **$28** | **$673** | **$238** | | Operating expenses | $2,809 | $2,391 | $7,567 | $6,955 | | **Operating loss** | **$(2,432)** | **$(2,363)** | **$(6,894)** | **$(6,717)** | | Total other (expense) income | $(860) | $466 | $(1,835) | $(2,745) | | **Loss before income taxes** | **$(3,292)** | **$(1,897)** | **$(8,729)** | **$(9,462)** | | Net loss | $(3,292) | $(1,897) | $(8,729) | $(9,462) | | Net loss attributable to Precipio, Inc. common stockholders | $(3,302) | $(1,897) | $(12,100) | $(9,462) | | Basic and diluted loss per common share | $(0.21) | $(0.31) | $(1.01) | $(1.85) | | Basic and diluted weighted-average shares of common stock outstanding | 16,007,025 | 6,186,119 | 11,925,642 | 5,104,397 | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This section outlines changes in the company's equity, including net loss, stock issuances, and conversions of convertible notes - For the nine months ended September 30, 2020, total stockholders' equity increased from **$13,205 thousand** to **$13,861 thousand** primarily driven by the issuance of common stock in connection with purchase agreements (**$6,921 thousand**) and conversion of convertible notes (**$2,176 thousand**), partially offset by a net loss of **$(8,729) thousand** and deemed dividends related to beneficial conversion features (**$3,344 thousand**)[12](index=12&type=chunk)[159](index=159&type=chunk) - For the nine months ended September 30, 2019, total stockholders' equity increased from **$6,123 thousand** to **$15,294 thousand**, with key drivers including the conversion of convertible notes (**$7,390 thousand**), issuance of common stock in connection with purchase agreements (**$5,171 thousand**), and proceeds from warrant exercises (**$1,575 thousand**), despite a net loss of **$(9,462) thousand**[14](index=14&type=chunk)[104](index=104&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Dollars in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(5,983) | $(7,001) | | Net cash used in investing activities | $(66) | $(49) | | Net cash flows provided by financing activities | $7,359 | $8,352 | | **NET CHANGE IN CASH** | **$1,310** | **$1,302** | | Cash at beginning of period | $848 | $381 | | **CASH AT END OF PERIOD** | **$2,158** | **$1,683** | - Supplemental non-cash activities for the nine months ended September 30, 2020, included **$2,176 thousand** from the conversion of convertible debt into common stock and a **$523 thousand** write-off of beneficial conversion feature in conjunction with convertible note extinguishment[20](index=20&type=chunk) - Supplemental non-cash activities for the nine months ended September 30, 2019, included **$7,390 thousand** from the conversion of convertible debt into common stock, **$1,792 thousand** for beneficial conversion feature on issuance of convertible notes, and **$1,858 thousand** for initial valuation of derivative liability[20](index=20&type=chunk) [Notes to the Unaudited Condensed Consolidated Financial Statements](index=14&type=section&id=Notes%20to%20the%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements [1. BUSINESS DESCRIPTION](index=14&type=section&id=1.%20BUSINESS%20DESCRIPTION) Precipio, Inc. is a cancer diagnostics company focused on eradicating misdiagnosis through a platform leveraging academic expertise and technologies. The company operates a diagnostic laboratory in New Haven, CT, and an R&D facility in Omaha, NE, which recently received CLIA and CAP certification. In April 2020, Precipio formed a joint venture with Poplar Healthcare PLLC, holding a 49% ownership interest but consolidating it as a Variable Interest Entity (VIE) due to being the primary beneficiary. The company faces substantial doubt about its ability to continue as a going concern due to operating losses and negative working capital, but has taken steps to raise capital through equity agreements and a registration statement - Precipio, Inc. is a cancer diagnostics company providing diagnostic products and services to the oncology market, aiming to eradicate misdiagnosis through academic partnerships and proprietary technologies like IV-Cell, HemeScreen, and ICE-COLD-PCR (ICP)[22](index=22&type=chunk) - In April 2020, the Company formed a joint venture, Precipio Oncometrix LLC (POC), with Poplar Healthcare PLLC, where Precipio SPV holds a **49%** ownership interest but consolidates POC as a Variable Interest Entity (VIE) due to being the primary beneficiary[23](index=23&type=chunk)[24](index=24&type=chunk) - The Company has incurred substantial operating losses and negative working capital, leading to substantial doubt about its ability to continue as a going concern; mitigation efforts include a **$10.0 million** common stock purchase agreement with Lincoln Park Capital Fund LLC (of which **$6.7 million** has been received) and an effective S-3 registration statement for up to **$50 million** in securities[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk) [2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=18&type=section&id=2.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section outlines the basis of presentation for the condensed consolidated financial statements, which conform to GAAP and include all necessary adjustments for fair presentation. It details the consolidation of the Joint Venture as a Variable Interest Entity (VIE) where Precipio is the primary beneficiary. The company also adopted new FASB ASUs related to fair value measurement and internal use software capitalization, neither of which had a material impact, and is assessing the impact of upcoming ASUs on convertible instruments and income taxes - The condensed consolidated financial statements are prepared in conformity with GAAP and include the accounts of Precipio, its wholly-owned subsidiaries, and the Joint Venture, which is consolidated as a Variable Interest Entity (VIE) where Precipio is the primary beneficiary[32](index=32&type=chunk)[33](index=33&type=chunk)[43](index=43&type=chunk)[44](index=44&type=chunk) - The Company adopted ASU 2018-13 (Fair Value Measurement) and ASU 2018-15 (Intangibles—Goodwill and Other—Internal Use Software) on January 1, 2020, with no material impact on its financial statements[34](index=34&type=chunk)[35](index=35&type=chunk) - Precipio is currently assessing the potential impact of ASU 2020-06 (Accounting for Convertible Instruments and Contracts in an Entity's Own Equity) and ASU 2019-12 (Simplifying the Accounting for Income Taxes), with no material impact expected from the latter[36](index=36&type=chunk)[37](index=37&type=chunk) Outstanding Securities Excluded from Diluted Net Loss Per Share (in shares) | Security Type | September 30, 2020 | September 30, 2019 | | :------------ | :----------------- | :----------------- | | Stock options | 808,245 | 493,908 | | Warrants | 906,769 | 909,189 | | Preferred stock | 117,500 | 20,888 | | Convertible notes | — | 301,734 | | **Total** | **1,832,514** | **1,725,719** | [3. LONG-TERM DEBT](index=22&type=section&id=3.%20LONG-TERM%20DEBT) Precipio's long-term debt increased to $1,030 thousand as of September 30, 2020, from $519 thousand at December 31, 2019, primarily due to a new $787 thousand Paycheck Protection Program (PPP) Loan. The company also has a DECD loan, a financed insurance loan, and a settlement agreement, with the DECD loan's maturity extended due to COVID-19 relief Long-Term Debt (Dollars in Thousands) | Item | September 30, 2020 | December 31, 2019 | | :------------------------------------------------ | :----------------- | :----------------- | | Department of Economic and Community Development (DECD) | $240 | $249 | | DECD debt issuance costs | $(22) | $(24) | | Financed insurance loan | $19 | $260 | | September 2018 Settlement | $6 | $34 | | Paycheck Protection Program | $787 | $— | | **Total long-term debt** | **$1,030** | **$519** | | Current portion of long-term debt | $(530) | $(321) | | **Long-term debt, net of current maturities** | **$500** | **$198** | - The DECD 2018 Loan's maturity date was extended to **May 31, 2028**, due to COVID-19 payment deferral options, with no material impact on cash flows for the nine months ended September 30, 2020[48](index=48&type=chunk) - The Company secured an unsecured **$787,200** PPP Loan in April 2020, with a **1.00%** interest rate and deferred payments for six months; the Company intends to apply for forgiveness, believing it used the funds for qualifying expenses, but no assurance of forgiveness is provided[54](index=54&type=chunk)[55](index=55&type=chunk) [4. CONVERTIBLE NOTES](index=24&type=section&id=4.%20CONVERTIBLE%20NOTES) As of September 30, 2020, Precipio had no outstanding convertible notes, a significant change from December 31, 2019, when $142 thousand in convertible bridge notes were outstanding. This reduction is primarily due to the extinguishment and conversion of bridge notes, including the April 2019 and May 2019 Bridge Notes, which were amended in March 2020 to extend maturity and adjust floor prices, resulting in a $1.2 million loss on extinguishment. Various other convertible notes (Exchange, Crede, Leviston) were also fully converted or paid off by September 30, 2020 Convertible Notes (Dollars in Thousands) | Item | September 30, 2020 | December 31, 2019 | | :------------------------------------------------ | :----------------- | :----------------- | | Convertible bridge notes | $— | $1,938 | | Convertible bridge notes discount and debt issuance costs | $— | $(1,796) | | **Total convertible notes** | **$—** | **$142** | | Current portion of convertible notes | $— | $(142) | | **Convertible notes, net of current maturities** | **$—** | **$—** | - The March 2020 Amendment to the April 2019 and May 2019 Bridge Notes, which extended maturity and adjusted the conversion floor price, was treated as an extinguishment, resulting in a **$1.2 million** loss on extinguishment of convertible notes for the nine months ended September 30, 2020[70](index=70&type=chunk)[71](index=71&type=chunk) - During the nine months ended September 30, 2020, **$2.2 million** of bridge notes, plus interest, were converted into **3,908,145** shares of common stock; for the same period in 2019, **$4.6 million** of bridge notes were converted into **1,828,766** shares[72](index=72&type=chunk) - All previously issued Exchange Notes, Crede Note, and Leviston Note were fully converted or paid off by September 30, 2020, with zero outstanding balance[76](index=76&type=chunk)[81](index=81&type=chunk)[86](index=86&type=chunk) [5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.](index=31&type=section&id=5.%20ACCRUED%20EXPENSES%20OTHER%20CURRENT%20LIABILITIES.) Accrued expenses increased to $1,804 thousand at September 30, 2020, from $1,639 thousand at December 31, 2019, primarily due to a rise in accrued compensation. No gains on settlement of liability were recorded in 2020, compared to $1.3 million in 2019 Accrued Expenses (Dollars in Thousands) | Item | September 30, 2020 | December 31, 2019 | | :------------------ | :----------------- | :----------------- | | Accrued expenses | $1,247 | $1,268 | | Accrued compensation | $536 | $247 | | Accrued interest | $21 | $124 | | **Total** | **$1,804** | **$1,639** | - No gains on settlement of liability were recorded during the three and nine months ended September 30, 2020, compared to **$1.3 million** recorded during the nine months ended September 30, 2019[87](index=87&type=chunk) [6. COMMITMENTS AND CONTINGENCIES](index=31&type=section&id=6.%20COMMITMENTS%20AND%20CONTINGENCIES) Precipio is involved in legal proceedings, including a claim from CPA Global for patent management services and a class-action lawsuit filed by Jesse Campbell. The Campbell lawsuit was settled for $1.95 million, with the Company and its insurer paying their respective amounts, and the matter was closed in June 2020. The company also operates within a highly regulated healthcare industry, subject to various federal, state, and local laws, and believes it is in compliance, though future government review and interpretation are possible - CPA Global claims Precipio owes approximately **$0.2 million** for patent maintenance services, with less than **$0.1 million** recorded as a liability[89](index=89&type=chunk) - The Jesse Campbell class-action lawsuit, alleging misleading proxy statements, was settled for **$1.95 million**; the Company paid **$0.27 million** and its insurer paid **$1.68 million**, with the settlement approved and the matter closed in June 2020[90](index=90&type=chunk) - The healthcare industry is subject to complex federal, state, and local laws and regulations, including those related to licensure, accreditation, government healthcare program participation, reimbursement, and fraud and abuse; management believes the Company is in compliance, but future review and interpretation are possible[92](index=92&type=chunk)[93](index=93&type=chunk) [7. LEASES](index=33&type=section&id=7.%20LEASES) Precipio adopted ASC Topic 842 on January 1, 2019, recognizing ROU assets and lease liabilities for operating leases, while accounting for finance leases remains largely unchanged. As of September 30, 2020, total lease assets were $545 thousand and total lease liabilities were $514 thousand. Operating lease costs were approximately $0.1 million for the three months and $0.2 million for the nine months ended September 30, 2020 - Upon adoption of Topic 842 on January 1, 2019, the Company recorded initial ROU assets and corresponding operating lease liabilities of approximately **$750,000**[94](index=94&type=chunk) Lease Assets and Liabilities (Dollars in Thousands) | Item | September 30, 2020 | December 31, 2019 | | :------------------------------------------ | :----------------- | :----------------- | | Operating lease right-of-use assets, net | $358 | $519 | | Finance lease assets (Property and equipment, net) | $187 | $184 | | **Total lease assets** | **$545** | **$703** | | Current maturities of operating lease liabilities | $219 | $209 | | Current maturities of finance lease liabilities | $37 | $52 | | Operating lease liabilities, less current maturities | $150 | $317 | | Finance lease liabilities, less current maturities | $108 | $119 | | **Total lease liabilities** | **$514** | **$697** | - Operating lease costs were approximately **$0.1 million** for the three months ended September 30, 2020, and **$0.2 million** for the nine months ended September 30, 2020[100](index=100&type=chunk) [8. STOCKHOLDERS' EQUITY](index=35&type=section&id=8.%20STOCKHOLDERS'%20EQUITY) Precipio's common stock outstanding increased significantly due to conversions of convertible notes and issuances under purchase agreements with Lincoln Park. The company has two active purchase agreements with Lincoln Park (LP Purchase Agreement and LP 2020 Purchase Agreement), through which it has raised substantial capital by selling common stock. Series B Preferred Stock includes a down round feature, which was triggered in March 2020, adjusting the conversion price and resulting in a $3.3 million deemed dividend. Various common stock warrants are outstanding, with some also having down round provisions that triggered deemed dividends in March 2020 - During the nine months ended September 30, 2020, Precipio issued **3,908,145** shares of common stock from convertible note conversions (**$2.2 million**) and **4,870,654** shares from purchase agreements (**$6.9 million**)[103](index=103&type=chunk)[118](index=118&type=chunk) - Under the LP 2020 Purchase Agreement, the Company has received **$6.7 million** from the sale of **4,130,000** shares of common stock to Lincoln Park from April 1, 2020, through the date of issuance of this Form 10-Q, with an additional **$3.3 million** available to draw[30](index=30&type=chunk)[118](index=118&type=chunk) - The March 2020 Amendment triggered the down round feature of the Series B Preferred Stock, adjusting its conversion price from **$2.25** to **$0.40** per share and resulting in a **$3.3 million** deemed dividend[122](index=122&type=chunk)[159](index=159&type=chunk) Summary of Warrants Outstanding as of September 30, 2020 | Issue Year | Expiration | Underlying Shares | Exercise Price | | :--------- | :--------- | :---------------- | :------------- | | 2015 | Dec 2020 | 272 | $747.00 | | 2016 | Jan 2021 | 596 | $544.50 | | 2017 | Jun 2022 | 2,540 | $41.25 | | 2017 | Jun 2022 | 500 | $7.50 | | 2017 | Jun 2022 | 6,095 | $105.00 | | 2017 | Aug 2022 | 25,201 | $0.40 | | 2017 | Aug 2022 | 4,000 | $46.88 | | 2017 | Aug 2022 | 47,995 | $150.00 | | 2017 | Aug 2022 | 9,101 | $7.50 | | 2017 | Aug 2022 | 16,664 | $0.40 | | 2017 | Aug 2022 | 7,335 | $0.40 | | 2017 | Oct 2022 | 666 | $0.40 | | 2018 | Oct 2022 | 7,207 | $112.50 | | 2018 | Apr 2023 | 69,964 | $5.40 | | 2018 | Apr 2023 | 121,552 | $5.40 | | 2018 | Oct 2022 | 15,466 | $11.25 | | 2018 | Jul 2023 | 14,671 | $5.40 | | 2018 | Jul 2023 | 14,672 | $5.40 | | 2018 | Aug 2023 | 36,334 | $5.40 | | 2018 | Aug 2023 | 36,334 | $5.40 | | 2018 | Sep 2023 | 19,816 | $5.40 | | 2018 | Sep 2023 | 20,903 | $5.40 | | 2018 | Nov 2023 | 75,788 | $5.40 | | 2018 | Dec 2023 | 51,282 | $5.40 | | 2019 | Apr 2024 | 147,472 | $5.40 | | 2019 | May 2024 | 154,343 | $9.56 | | **Total** | | **906,769** | | [9. FAIR VALUE](index=48&type=section&id=9.%20FAIR%20VALUE) Precipio measures certain financial assets and liabilities at fair value using a three-level hierarchy. Common stock warrant liabilities, specifically the 2016 Warrant Liability and Bridge Note Warrant Liabilities, are recorded as liabilities and revalued at each reporting date, with changes recognized in earnings. These are considered Level 3 financial instruments, valued using Monte Carlo or Black-Scholes models. Derivative liabilities related to convertible notes, such as redemption features and conversion options, are also bifurcated and re-measured at fair value, with changes recognized in earnings - The Company uses a three-level fair value hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs other than Level 1; Level 3: unobservable inputs) to measure financial assets and liabilities[161](index=161&type=chunk) - Common stock warrant liabilities (2016 Warrant Liability and Bridge Note Warrant Liabilities) are recorded at fair value as Level 3 financial instruments, with revaluation gains/losses recognized in earnings; the 2016 Warrant Liability was valued using Monte Carlo, and Bridge Note Warrant Liabilities using Black-Scholes[162](index=162&type=chunk)[165](index=165&type=chunk)[166](index=166&type=chunk)[167](index=167&type=chunk) Change in Fair Value of Warrant Liabilities (Dollars in Thousands) | Item | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | | :------------------------------------ | :------------------------------ | :----------------------------- | | Beginning balance | $774 | $1,338 | | Revaluation recognized in earnings | $857 | $293 | | **Balance at September 30** | **$1,631** | **$1,631** | | Item | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :------------------------------------ | :------------------------------ | :----------------------------- | | Beginning balance | $2,336 | $1,132 | | Additions | $— | $1,858 | | Revaluation recognized in earnings | $(563) | $19 | | Modification recognized in earnings | $— | $1,128 | | Deductions – warrant liability settlement | $— | $(2,364) | | **Balance at September 30** | **$1,773** | **$1,773** | - Derivative liabilities related to Bridge Note redemption features and conversion options are bifurcated from debt and re-measured at fair value; for the nine months ended September 30, 2019, total derivative liabilities decreased from **$62 thousand** to zero, primarily due to write-offs in conjunction with convertible note conversions[169](index=169&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk)[172](index=172&type=chunk) [10. EQUITY INCENTIVE PLAN](index=53&type=section&id=10.%20EQUITY%20INCENTIVE%20PLAN) Precipio operates its 2017 Stock Option and Incentive Plan, with 913,586 shares authorized for issuance as of September 30, 2020, and 105,433 remaining available for future grants. During the nine months ended September 30, 2020, 393,050 stock options were granted at a weighted average exercise price of $1.99. Total stock-based compensation expense for the nine months ended September 30, 2020, was $0.5 million, with $1.7 million in unrecognized expense remaining - As of September 30, 2020, **913,586** shares were authorized for issuance under the 2017 Stock Option and Incentive Plan, with **105,433** shares remaining available for future grants[173](index=173&type=chunk) Stock Option Activity (Nine Months Ended September 30, 2020) | Item | Number of Options | Weighted-Average Exercise Price | | :-------------------------- | :---------------- | :------------------------------ | | Outstanding at January 1, 2020 | 490,330 | $8.30 | | Granted | 393,050 | $1.99 | | Forfeited | (75,135) | $13.86 | | **Outstanding at September 30, 2020** | **808,245** | **$4.72** | | Exercisable at September 30, 2020 | 335,493 | $7.03 | - For the nine months ended September 30, 2020, compensation expense for stock awards was **$0.5 million**; unrecognized compensation expense related to unvested awards was **$1.7 million**, expected to be recognized over a weighted-average period of **1.8 years**[177](index=177&type=chunk) [11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE](index=55&type=section&id=11.%20SALES%20SERVICE%20REVENUE,%20NET%20AND%20ACCOUNTS%20RECEIVABLE) Precipio recognizes revenue from diagnostic testing, biomarker testing, and clinical research grants based on ASC Topic 606. Service revenue, net, for the three months ended September 30, 2020, was $1,998 thousand, and for the nine months, it was $5,072 thousand, with Medicare and Third-Party Payers being the largest contributors. The company records contractual allowances and an allowance for doubtful accounts, which increased significantly in 2020 due to higher patient service revenues. Accounts receivable, net, increased to $1,086 thousand at September 30, 2020, from $574 thousand at December 31, 2019 - Revenue is recognized when a customer obtains control of promised goods or services, with variable consideration estimated using the expected value method based on historical experience[189](index=189&type=chunk) Service Revenue, Net by Transaction Type (Dollars in Thousands) | Payer Type | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Medicaid | $15 | $10 | $40 | $22 | | Medicare | $811 | $373 | $1,979 | $1,217 | | Self-pay | $196 | $5 | $332 | $20 | | Third party payers | $950 | $490 | $2,313 | $1,297 | | Contract diagnostics | $26 | $142 | $408 | $569 | | **Service revenue, net** | **$1,998** | **$1,020** | **$5,072** | **$3,125** | Accounts Receivable, Net (Dollars in Thousands) | Payer Type | September 30, 2020 | December 31, 2019 | | :-------------------------- | :----------------- | :----------------- | | Medicaid | $132 | $107 | | Medicare | $1,002 | $814 | | Self-pay | $403 | $88 | | Third party payers | $3,211 | $2,203 | | Contract diagnostic services | $37 | $36 | | **Total gross receivables** | **$4,785** | **$3,248** | | Less allowance for doubtful accounts | $(3,699) | $(2,674) | | **Accounts receivable, net** | **$1,086** | **$574** | - The allowance for doubtful accounts increased from **$(2,674) thousand** at January 1, 2020, to **$(3,699) thousand** at September 30, 2020, reflecting an increase in patient service revenues[195](index=195&type=chunk)[202](index=202&type=chunk) [12. SUBSEQUENT EVENTS](index=63&type=section&id=12.%20SUBSEQUENT%20EVENTS) The Company has evaluated events and transactions subsequent to September 30, 2020, and reported no additional material events beyond those already disclosed in the condensed consolidated financial statements - No other events to report subsequent to September 30, 2020, through the date of issuance of the condensed consolidated financial statements, beyond what has been disclosed[204](index=204&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=64&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Precipio's financial condition and operational results for the three and nine months ended September 30, 2020, compared to 2019. It covers business overview, recent developments including new product launches and COVID-19 antibody tests, and reiterates the going concern warning. The discussion details significant increases in net sales and gross profit driven by higher case volumes, alongside changes in operating expenses and other income/expense. It also analyzes liquidity, capital resources, and cash flow activities, highlighting the reliance on equity financing [Forward-Looking Information](index=64&type=section&id=Forward-Looking%20Information) This section provides cautionary statements regarding forward-looking information, emphasizing inherent uncertainties and risks - The report contains forward-looking statements based on management's current views and assumptions, which are subject to uncertainty and changes in circumstances, and are not guarantees of future performance[206](index=206&type=chunk) - Readers are cautioned not to place undue reliance on forward-looking statements, as actual results may differ materially due to various factors, including those described in 'Risk Factors'; the Company disclaims any obligation to update these statements unless required by law[207](index=207&type=chunk)[208](index=208&type=chunk) [Overview](index=64&type=section&id=Overview) This section provides a high-level summary of Precipio's business as a cancer diagnostics company and its joint venture activities - Precipio is a cancer diagnostics company focused on eliminating misdiagnosis by leveraging academic expertise and technologies, operating a diagnostic laboratory in New Haven, CT, and an R&D facility in Omaha, NE[210](index=210&type=chunk)[212](index=212&type=chunk) - In April 2020, the Company formed a Joint Venture with Poplar Healthcare PLLC to provide oncology services, consolidating it as a Variable Interest Entity (VIE) due to Precipio being the primary beneficiary[213](index=213&type=chunk) [Recent Developments](index=66&type=section&id=Recent%20Developments) This section highlights recent business activities, including new product launches and strategic partnerships - During Q2 2020, Precipio launched its HemeScreen Reagent Rental (HSRR) program, enabling oncologists to perform in-house diagnostic tests, with installations and validations beginning in Q3 2020 and revenues expected in Q4 2020[214](index=214&type=chunk) - On July 30, 2020, the Company announced an agreement with ADS Biotec to distribute FDA-authorized COVID-19 serology antibody tests, which began rolling out as CLIA tests in Q3 2020, with plans for point-of-care and direct-to-consumer distribution pending further FDA authorization[215](index=215&type=chunk) - Antibody testing is highlighted as crucial for identifying individuals with immune responses to SARS-CoV-2, aiding in the return to normal societal functionality[216](index=216&type=chunk) [Going Concern](index=66&type=section&id=Going%20Concern) This section addresses the company's ability to continue operations, citing financial challenges and mitigation strategies - The Company's ability to continue as a going concern is in substantial doubt due to a net loss of **$8.7 million**, negative working capital of **$0.5 million**, and **$6.0 million** net cash used in operating activities as of September 30, 2020[217](index=217&type=chunk) - To address going concern issues, Precipio entered into a **$10.0 million** common stock purchase agreement with Lincoln Park (receiving **$6.7 million** to date) and has an effective S-3 registration statement for up to **$50 million** in securities[219](index=219&type=chunk) [Outlook - COVID-19 related](index=68&type=section&id=Outlook%20-%20COVID-19%20related) This section discusses the significant operational and financial impacts of the COVID-19 pandemic on the company's business - The COVID-19 pandemic has caused significant business disruption, with impacts on operational and financial performance depending on the outbreak's duration and spread, and its effects on customers, employees, and vendors[220](index=220&type=chunk) - The Company has experienced business interruptions ranging from **30%** to **85%** in certain urban markets and anticipates continued restrictions through the end of 2020 and possibly beyond[272](index=272&type=chunk) [Results of Operations for the Three Months Ended September 30, 2020 and 2019](index=69&type=section&id=Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20September%2030,%202020%20and%202019) This section analyzes the company's financial performance for the three-month period, focusing on net sales, gross profit, and operating expenses Net Sales (Dollars in Thousands) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change ($) | Change (%) | | :------------------------------------------ | :------------------------------ | :------------------------------ | :--------- | :--------- | | Service revenue, net, less allowance for doubtful accounts | $1,576 | $758 | $818 | 108% | | Other | $51 | $26 | $25 | 96% | | **Net Sales** | **$1,627** | **$784** | **$843** | **108%** | - Net sales increased by **$0.8 million** (**108%**) for the three months ended September 30, 2020, primarily due to a **155%** increase in patient diagnostic service cases processed (**1,135** cases in 2020 vs. **445** in 2019)[223](index=223&type=chunk) Gross Profit and Margin (Dollars in Thousands) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Margin % 2020 | Margin % 2019 | | :--------- | :------------------------------ | :------------------------------ | :------------ | :------------ | | Gross Profit | $377 | $28 | 23% | 4% | - Operating expenses increased by **$0.4 million** to **$2.8 million**, driven by a **$0.3 million** increase in sales and marketing personnel costs and a **$0.1 million** increase in stock-based compensation[226](index=226&type=chunk) - Other expense, net, was **$0.9 million** for the three months ended September 30, 2020, primarily due to warrant revaluations, compared to other income, net, of **$0.5 million** in the prior year period[227](index=227&type=chunk)[228](index=228&type=chunk) [Results of Operations for the Nine Months Ended September 30, 2020 and 2019](index=71&type=section&id=Results%20of%20Operations%20for%20the%20Nine%20Months%20Ended%20September%2030,%202020%20and%202019) This section analyzes the company's financial performance for the nine-month period, detailing changes in net sales, gross profit, and operating expenses Net Sales (Dollars in Thousands) | Item | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change ($) | Change (%) | | :------------------------------------------ | :----------------------------- | :----------------------------- | :--------- | :--------- | | Service revenue, net, less allowance for doubtful accounts | $4,047 | $2,402 | $1,645 | 68% | | Other | $104 | $37 | $67 | 181% | | **Net Sales** | **$4,151** | **$2,439** | **$1,712** | **70%** | - Net sales increased by **$1.7 million** (**70%**) for the nine months ended September 30, 2020, driven by a **106%** increase in patient diagnostic service cases processed (**2,575** cases in 2020 vs. **1,250** in 2019)[229](index=229&type=chunk) Gross Profit and Margin (Dollars in Thousands) | Item | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Margin % 2020 | Margin % 2019 | | :--------- | :----------------------------- | :----------------------------- | :------------ | :------------ | | Gross Profit | $673 | $238 | 16% | 10% | - Operating expenses increased by **$0.6 million** to **$7.6 million**, primarily due to a **$0.8 million** increase in sales and marketing personnel costs and a **$0.1 million** increase in stock-based compensation[232](index=232&type=chunk)[234](index=234&type=chunk) - Other expense, net, was **$1.8 million** for the nine months ended September 30, 2020, including **$1.2 million** loss on extinguishment of convertible notes and **$0.3 million** warrant revaluations, partially offset by **$0.2 million** other income (including HHS funds)[235](index=235&type=chunk) [Liquidity and Capital Resources](index=73&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's working capital, cash flow activities, and strategies for managing its financial resources Working Capital (Dollars in Thousands) | Item | September 30, 2020 | December 31, 2019 | Change ($) | | :------------------------------------------------ | :----------------- | :------------------ | :--------- | | Current assets (including cash) | $3,968 | $1,878 | $2,090 | | Current liabilities | $4,467 | $4,334 | $133 | | **Working capital** | **$(499)** | **$(2,456)** | **$1,957** | - During the nine months ended September 30, 2020, the Company received **$6.9 million** from common stock sales and converted **$2.2 million** of convertible notes into common stock[237](index=237&type=chunk) - Cash flows provided by financing activities totaled **$7.4 million** for the nine months ended September 30, 2020, including **$6.9 million** from common stock issuance and **$0.8 million** from the PPP Loan[241](index=241&type=chunk)[242](index=242&type=chunk) - Net cash used in operating activities was approximately **$6.0 million** for the nine months ended September 30, 2020, primarily due to a net loss of **$8.7 million** and increases in accounts receivable and inventories[239](index=239&type=chunk) [Off-Balance Sheet Arrangements](index=75&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of any material off-balance sheet arrangements impacting the company's financial condition - As of September 30, 2020, and December 31, 2019, the Company did not have any off-balance sheet arrangements that would materially affect its financial condition or results of operations[243](index=243&type=chunk) [Contractual Obligations and Commitments](index=75&type=section&id=Contractual%20Obligations%20and%20Commitments) This section notes no significant changes to the company's contractual obligations and commitments since the prior fiscal year - No significant changes to contractual obligations and commitments occurred during the nine months ended September 30, 2020, compared to those disclosed in the Annual Report on Form 10-K for fiscal year 2019[244](index=244&type=chunk) [Critical Accounting Policies and Estimates](index=75&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section refers to the company's annual report for details on significant accounting policies and management judgments - Critical accounting policies and estimates, which involve significant management judgments, are discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019[245](index=245&type=chunk) [Recently Issued Accounting Pronouncements](index=75&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) This section directs readers to the notes to financial statements for information on new accounting standards - Additional information regarding recently issued accounting pronouncements can be found in Note 2 – 'Summary of Significant Accounting Policies' of the unaudited condensed consolidated financial statements[246](index=246&type=chunk) [Impact of Inflation](index=75&type=section&id=Impact%20of%20Inflation) This section states that inflation has not had a material adverse effect on the company's financial performance - The Company does not believe that price inflation or deflation had a material adverse effect on its financial condition or results of operations during the periods presented[247](index=247&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=75&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Precipio, Inc. is exempt from providing quantitative and qualitative disclosures about market risk - Precipio, Inc. is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[248](index=248&type=chunk) [Item 4. Controls and Procedures](index=75&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, with the participation of the CEO and CFO, evaluated the effectiveness of Precipio's disclosure controls and procedures as of September 30, 2020, concluding they were effective at a reasonable assurance level. No material changes in internal control over financial reporting occurred during the three months ended September 30, 2020 - As of September 30, 2020, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level[249](index=249&type=chunk)[251](index=251&type=chunk) - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the three months ended September 30, 2020[252](index=252&type=chunk) PART II. Other Information This section provides additional non-financial information, including legal proceedings, risk factors, and exhibits [Item 1. Legal Proceedings](index=78&type=section&id=Item%201.%20Legal%20Proceedings) Precipio is involved in legal proceedings, including a claim from CPA Global for patent management services and a class-action lawsuit filed by Jesse Campbell. The Campbell lawsuit was settled for $1.95 million, with the Company and its insurer paying their respective amounts, and the matter was closed in June 2020. The company also operates within a highly regulated healthcare industry, subject to various federal, state, and local laws, and believes it is in compliance, though future government review and interpretation are possible - CPA Global claims Precipio owes approximately **$0.2 million** for patent management services, with less than **$0.1 million** recorded as a liability[254](index=254&type=chunk) - The Jesse Campbell class-action lawsuit, alleging misleading proxy statements, was settled for **$1.95 million**; the Company paid **$0.27 million** and its insurer paid **$1.68 million**, with the settlement approved and the matter closed in June 2020[255](index=255&type=chunk) - The healthcare industry is subject to complex federal, state, and local laws and regulations, including those related to licensure, accreditation, government healthcare program participation, reimbursement, and fraud and abuse; management believes the Company is in compliance, but future review and interpretation are possible[256](index=256&type=chunk)[257](index=257&type=chunk) [Item 1A. Risk Factors](index=78&type=section&id=Item%201A.%20Risk%20Factors) Precipio faces significant risks, including a history of losses and expected future losses, requiring substantial additional capital for commercialization. The company's ability to obtain funding on favorable terms is uncertain, which could force delays or cessation of operations. There's also a risk of delisting from Nasdaq if listing maintenance requirements are not met, despite regaining compliance with the minimum bid price rule. Furthermore, the COVID-19 pandemic poses ongoing disruption and financial impact, and the Paycheck Protection Program (PPP) loan carries the risk of repayment if forgiveness is not granted - Precipio has incurred losses since inception and expects to continue incurring losses, with a net loss of **$8.7 million**, negative working capital of **$0.5 million**, and **$6.0 million** net cash used in operating activities as of September 30, 2020[259](index=259&type=chunk) - The Company will need to raise substantial additional capital to commercialize its diagnostic technology, and failure to obtain funding on acceptable terms could force delays, reductions, or cessation of product development and operations[263](index=263&type=chunk) - While currently in compliance with Nasdaq listing requirements, the Company faces the risk of delisting if it cannot continue to satisfy maintenance requirements, which could negatively impact its stock price and liquidity[264](index=264&type=chunk)[266](index=266&type=chunk)[267](index=267&type=chunk) - The COVID-19 pandemic has significantly disrupted business operations, with ongoing uncertainty regarding its impact on revenues, expenses, and liquidity, and the Company anticipates continued challenges[270](index=270&type=chunk)[272](index=272&type=chunk)[273](index=273&type=chunk) - The Paycheck Protection Program (PPP) loan carries the risk that if forgiveness is not granted, the loan will need to be repaid, which could adversely affect the Company's future cash flows and financial position[276](index=276&type=chunk)[277](index=277&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=84&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Precipio, Inc. reported no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities and use of proceeds to report[278](index=278&type=chunk) [Item 3. Defaults Upon Senior Securities](index=84&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) Precipio, Inc. reported no defaults upon senior securities for the period - Not applicable[279](index=279&type=chunk) [Item 4. Mine Safety Disclosures](index=84&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Precipio, Inc. reported no mine safety disclosures for the period - Not applicable[280](index=280&type=chunk) [Item 5. Other Information](index=84&type=section&id=Item%205.%20Other%20Information) Precipio, Inc. reported no other information for the period - None[281](index=281&type=chunk) [Item 6. Exhibits](index=84&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, as well as XBRL instance and taxonomy documents - Exhibits include certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 from the Principal Executive Officer and Principal Financial Officer[283](index=283&type=chunk) - XBRL (eXtensible Business Reporting Language) documents, such as the Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase Documents, are also filed as exhibits[283](index=283&type=chunk)

Financial Data and Key Metrics Changes - The company reported significant progress in Q2 2020 despite the challenges posed by the COVID-19 pandemic, indicating a focus on growth and adaptation [5][31]. - The diagnostic services side of the business is expected to improve margins as volume increases, driving cash flow towards profitability [11][18]. Business Line Data and Key Metrics Changes - The pathology services segment has seen growth due to the successful integration of Oncometrix customers and the addition of new clients [10]. - The product side of the business, including technologies like IV-Cell and HemeScreen, is being commercialized, with expectations of substantial revenue shifts between diagnostic services and product sales in the next 12 months [18]. Market Data and Key Metrics Changes - The company is actively engaging in the COVID-19 testing market, having partnered with ADS Biotec to distribute FDA authorized serology tests, indicating a strategic pivot to meet market demands [24][30]. - The company is currently capable of producing 1 million tests per day, positioning itself to meet potential future demand as the FDA expands EUA for point-of-care and self-use tests [30]. Company Strategy and Development Direction - The company aims to leverage its COVID-19 testing initiatives as a means to generate shareholder value while maintaining focus on its core business [31]. - Strategic partnerships are being explored to enhance the market introduction of products like IV-Cell and HemeScreen, aiming for rapid adoption and distribution [15][18]. Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate the challenges posed by the pandemic while capitalizing on new opportunities in the testing market [32][33]. - The company believes that the next steps in reopening the economy will involve expanded testing capabilities, which aligns with its strategic goals [26][29]. Other Important Information - The company has developed a strong pipeline for HemeScreen, targeting physician office laboratories, which have been seeking to improve service quality and efficiency during the pandemic [17]. - The management emphasized the importance of adhering to FDA guidelines and processes in the development and marketing of their COVID-19 tests [28]. Q&A Session Summary Question: What is the company's strategy regarding COVID-19 testing? - The company has partnered with ADS Biotec to distribute FDA authorized COVID-19 serology tests and is focusing on leveraging its existing customer base for initial rollout [24]. Question: How does the company plan to handle the production and distribution of tests? - The company is currently capable of producing 1 million tests per day and is preparing distribution channels for potential expanded use of the tests [30].