Precipio(PRPO) - 2021 Q2 - Quarterly Report

PART I. Financial Information 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 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 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] - Total assets grew by approximately 62% from $20,713 thousand to $33,540 thousand[10] - Total stockholders' equity nearly doubled, increasing from $14,162 thousand to $27,258 thousand[10] Condensed Consolidated Statements of Operations 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] - 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] - 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] Condensed Consolidated Statements of Stockholders' Equity 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] - 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] - Proceeds from the exercise of warrants added $400 thousand to stockholders' equity[12] Condensed Consolidated Statements of Cash Flows 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] - 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] - Cash at the end of the period surged from $353 thousand in H1 2020 to $15,701 thousand in H1 2021[17] Notes to the Unaudited Condensed Consolidated Financial Statements 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 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][22][23] - 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] - 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] - 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][29] - 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][32][34] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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][36] - 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][40][41] - 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][44] 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 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][58] - 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] 4. CONVERTIBLE NOTES 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] - During H1 2020, $2.2 million of bridge notes, plus interest, were converted into 3,908,145 shares of common stock[64] - There were no convertible notes outstanding at June 30, 2021, and December 31, 2020[64] 5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES. 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] 6. COMMITMENTS AND CONTINGENCIES 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] - 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][69] 7. LEASES 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] - 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] 8. STOCKHOLDERS' EQUITY 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] - 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] - The LP 2020 Purchase Agreement with Lincoln Park was terminated effective June 14, 2021, after receiving $8.8 million from common stock sales[87] - 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][107][109][111][122] 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 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][127][128][129] 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][126][131] 10. EQUITY INCENTIVE PLAN 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] 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] 11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE 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] - 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][148] 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] 12. SUBSEQUENT EVENTS 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - Factors that could cause actual results to vary include the impact of COVID-19, revenue, expenses, funding, market conditions, and regulatory factors[169] - The company expressly disclaims any obligation to update or revise forward-looking statements, except as required by law[171] 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] - 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] - Precipio holds an exclusive license to patented ICE-COLD-PCR (ICP) technology from Dana-Farber Cancer Institute[174] - 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] Recent Developments 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 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] - The HSRR program provides a turn-key test offering with an option to lease-to-own diagnostic testing equipment[177] - The company began recognizing recurring revenues from its first HSRR accounts during the first half of 2021[177] Business Activities – COVID Testing 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] - 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] - Precipio holds exclusive distribution rights for this product on Amazon's platform, and it tests for both IgG & IgM antibodies[178] Going Concern 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] - The company received approximately $8.8 million from the LP 2020 Purchase Agreement with Lincoln Park, which was terminated effective June 14, 2021[182] - The $0.8 million PPP Loan was fully forgiven effective March 24, 2021[184] - 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] Outlook - COVID-19 related 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] - Business interruptions in certain urban markets have ranged from 30% to 85%[230] - 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] Results of Operations for the Three Months Ended June 30, 2021 and 2020 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 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] - Other revenue increased by $0.2 million, primarily from the HSRR program[187] Cost of Sales 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] - The increase was driven by higher patient diagnostic costs and HSRR revenue-related costs, partially offset by lower contract diagnostic costs[188] Gross Profit 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] Operating Expenses 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] - 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] Other (Expense) Income 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] - 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] Results of Operations for the Six Months Ended June 30, 2021 and 2020 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 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] - Other revenue increased by $0.3 million, mostly from the HSRR program[194] Cost of Sales 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] - The increase was driven by higher patient diagnostic costs and HSRR revenue-related costs, partially offset by lower contract diagnostic costs[195] Gross Profit 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] Operating Expenses 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][199] - 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] Other (Expense) Income 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] - 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] - 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] Liquidity and Capital Resources 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] - Net proceeds of $16.2 million were received from the sale of 5,001,000 shares of common stock during H1 2021[202] - Proceeds of $0.4 million were received from the exercise of 74,000 warrants during H1 2021[202] Analysis of Cash Flows – Six Months Ended June 30, 2021 and 2020 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 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] - Cash at the end of the period was $15.7 million in H1 2021, up from $0.353 million in H1 2020[17] Cash Flows Used in Operating Activities 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] - Non-cash adjustments in H1 2021 included an $0.8 million gain on forgiveness of the PPP Loan[204] Cash Flows Used In Investing Activities 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] - The increase was primarily due to purchases of property and equipment[205] Cash Flows Provided by Financing Activities 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] - H1 2021 financing cash flows included $16.2 million from common stock issuance and $0.4 million from warrant exercises[207] - H1 2020 financing cash flows included $2.6 million from common stock issuance and $0.8 million from the PPP Loan[207] Off-Balance Sheet Arrangements 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] Contractual Obligations and Commitments 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] Critical Accounting Policies and Estimates 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] Recently Issued Accounting Pronouncements 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] Impact of Inflation 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] 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 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] Item 4. Controls and Procedures 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 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][216] Changes in Internal Control over Financial Reporting 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] PART II. Other Information This section provides additional disclosures, including legal proceedings, risk factors, equity security sales, and other required information Item 1. Legal Proceedings 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] - 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][221] Item 1A. Risk Factors 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] - The company has incurred losses since inception and expects to continue incurring losses, with no certainty of achieving or sustaining profitability[223] - Substantial additional capital is needed to commercialize diagnostic technology, and failure to obtain funding could delay or cease product development and operations[227] - 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][230] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - This item is not applicable[234] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is not applicable[235] Item 5. Other Information The company reported no other information for the period - No other information was reported[236] 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 various XBRL documents - Exhibits include certifications (31.1, 31.2, 32.1, 32.2) from the Principal Executive Officer and Principal Financial Officer[238] - XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, Presentation Linkbase, and Cover Page Interactive Data File are included[238] 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]