Precipio(PRPO) - 2020 Q3 - Quarterly Report

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 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 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 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 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][159] - 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][104] Condensed Consolidated Statements of Cash Flows 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] - 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] Notes to the Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. BUSINESS DESCRIPTION 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] - 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][24] - 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][29][30] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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][33][43][44] - 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][35] - 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][37] 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 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] - 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][55] 4. CONVERTIBLE NOTES 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][71] - 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] - 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][81][86] 5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES. 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] 6. COMMITMENTS AND CONTINGENCIES 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] - 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] - 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][93] 7. LEASES 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] 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] 8. STOCKHOLDERS' EQUITY 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][118] - 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][118] - 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][159] 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 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] - 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][165][166][167] 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][170][171][172] 10. EQUITY INCENTIVE PLAN 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] 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] 11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE 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] 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][202] 12. SUBSEQUENT EVENTS 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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][208] 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][212] - 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] Recent Developments 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] - 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] - 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] Going Concern 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] - 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 $50 million in securities[219] Outlook - COVID-19 related This section discusses the significant operational and financial impacts of the COVID-19 pandemic on the company's business - The COVID-19 pandemic has caused significant business disruption, with impacts on operational and financial performance depending on the outbreak's duration and spread, and its effects on customers, employees, and vendors[220] - The Company has experienced business interruptions ranging from 30% to 85% in certain urban markets and anticipates continued restrictions through the end of 2020 and possibly beyond[272] Results of Operations for the Three Months Ended September 30, 2020 and 2019 This section analyzes the company's financial performance for the three-month period, focusing on net sales, gross profit, and operating expenses Net Sales (Dollars in Thousands) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change ($) | 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] 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] - 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 $0.5 million in the prior year period[227][228] Results of Operations for the Nine Months Ended September 30, 2020 and 2019 This section analyzes the company's financial performance for the nine-month period, detailing changes in net sales, gross profit, and operating expenses Net Sales (Dollars in Thousands) | Item | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change ($) | 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] 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][234] - 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 $0.2 million other income (including HHS funds)[235] Liquidity and Capital Resources This section discusses the company's working capital, cash flow activities, and strategies for managing its financial resources Working Capital (Dollars in Thousands) | Item | September 30, 2020 | December 31, 2019 | Change ($) | | :------------------------------------------------ | :----------------- | :------------------ | :--------- | | 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] - 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][242] - 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] Off-Balance Sheet Arrangements 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] Contractual Obligations and Commitments 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] Critical Accounting Policies and Estimates 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] Recently Issued Accounting Pronouncements 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] Impact of Inflation 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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][251] - 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] PART II. Other Information This section provides additional non-financial information, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings 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] - 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] - 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][257] Item 1A. Risk Factors 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] - 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] - 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][266][267] - 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][272][273] - 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][277] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities Precipio, Inc. reported no defaults upon senior securities for the period - Not applicable[279] Item 4. Mine Safety Disclosures Precipio, Inc. reported no mine safety disclosures for the period - Not applicable[280] Item 5. Other Information Precipio, Inc. reported no other information for the period - None[281] Item 6. Exhibits 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] - 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]