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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, 2022

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

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

4 Science Park, New Haven, CT

06511

(Address of principal executive offices)

(Zip Code)

(203) 787-7888

(Registrant’s telephone number, including area code)

a

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

PRPO

The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes        No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No   

As of May 6, 2022, the number of shares of common stock outstanding was 22,708,708.

Table of Contents

PRECIPIO, INC. AND SUBSIDIARIES

INDEX

    

Page No.

PART I.

Financial Information

3

Item 1.

Condensed Consolidated Financial Statements

3

Condensed Consolidated Balance Sheets at March 31, 2022 (unaudited) and December 31, 2021

3

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 (unaudited)

4

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)

5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited)

6

Notes to the Unaudited Condensed Consolidated Financial Statements

8

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

PART II.

Other Information

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

35

Signatures

36

2

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

March 31, 2022

    

(unaudited)

    

December 31, 2021

ASSETS

CURRENT ASSETS:

Cash

$

9,261

$

11,668

Accounts receivable, net

 

1,154

697

Inventories

 

522

564

Other current assets

 

450

549

Total current assets

 

11,387

13,478

PROPERTY AND EQUIPMENT, NET

 

788

836

OTHER ASSETS:

Finance lease right-of-use assets, net

337

371

Operating lease right-of-use assets, net

812

858

Intangibles, net

 

14,480

14,717

Other assets

 

167

179

Total assets

$

27,971

$

30,439

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt, less debt issuance costs

$

26

$

26

Current maturities of finance lease liabilities

 

195

222

Current maturities of operating lease liabilities

 

162

166

Accounts payable

 

2,318

1,863

Accrued expenses

 

1,673

1,918

Deferred revenue

 

21

18

Total current liabilities

 

4,395

4,213

LONG TERM LIABILITIES:

Long-term debt, less current maturities and debt issuance costs

 

154

160

Finance lease liabilities, less current maturities

 

130

159

Operating lease liabilities, less current maturities

 

656

697

Common stock warrant liabilities

 

384

606

Total liabilities

 

5,719

5,835

COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS’ EQUITY:

Preferred stock - $0.01 par value, 15,000,000 shares authorized at March 31, 2022 and December 31, 2021, 47 shares issued and outstanding at March 31, 2022 and December 31, 2021, liquidation preference of $159 at March 31, 2022

 

Common stock, $0.01 par value, 150,000,000 shares authorized at March 31, 2022 and December 31, 2021, 22,708,708 and 22,708,442 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

 

227

227

Additional paid-in capital

 

106,663

104,431

Accumulated deficit

 

(84,684)

(80,094)

Total Precipio, Inc. stockholders’ equity

 

22,206

24,564

Noncontrolling interest in joint venture

46

40

Total stockholders’ equity

22,252

24,604

Total liabilities and stockholders’ equity

$

27,971

$

30,439

See notes to unaudited condensed consolidated financial statements.

3

Table of Contents

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(unaudited)

Three Months Ended March 31, 

    

2022

    

2021

SALES:

 

  

 

  

Service revenue, net

$

2,005

$

1,944

Other revenue

 

522

 

167

Revenue, net of contractual allowances and adjustments

 

2,527

 

2,111

Adjustment for allowance for doubtful accounts

 

(80)

 

(287)

Net sales

 

2,447

 

1,824

COST OF SALES:

 

  

 

  

Cost of service revenue

 

1,536

 

1,300

Cost of other revenue

 

208

 

56

Total cost of sales

 

1,744

 

1,356

Gross profit

 

703

 

468

OPERATING EXPENSES:

 

  

 

  

Operating expenses

 

5,512

 

2,605

OPERATING LOSS

 

(4,809)

 

(2,137)

OTHER INCOME (EXPENSE):

 

  

 

  

Interest income (expense), net

 

2

 

(7)

Warrant revaluation

 

222

 

(118)

Gain on settlement of liability

 

1

 

17

Gain on forgiveness of Paycheck Protection Program loan

794

Total other income

 

225

 

686

LOSS BEFORE INCOME TAXES

 

(4,584)

 

(1,451)

INCOME TAX EXPENSE

 

 

NET LOSS

 

(4,584)

 

(1,451)

Less: Net income attributable to noncontrolling interest in joint venture

(6)

(1)

NET LOSS ATTRIBUTABLE TO PRECIPIO, INC. COMMON STOCKHOLDERS

$

(4,590)

$

(1,452)

BASIC AND DILUTED LOSS PER COMMON SHARE

$

(0.20)

$

(0.08)

BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING

 

22,708,587

 

17,864,342

See notes to unaudited condensed consolidated financial statements.

4

Table of Contents

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(unaudited)

For the Three Months Ended March 31, 2022

Preferred Stock

Common Stock

Additional

Noncontrolling

Outstanding

Par

    

Outstanding

    

Par

Paid-in

Accumulated

Total

Interest in

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Deficit

    

Precipio, Inc.

    

Joint Venture

    

Total

Balance, January 1, 2022

 

47

$

 

22,708,442

$

227

$

104,431

$

(80,094)

$

24,564

$

40

$

24,604

Net loss

(4,590)

(4,590)

6

(4,584)

Proceeds upon issuance of common stock from exercise of warrants

266

Stock-based compensation

 

 

 

 

2,232

 

 

2,232

 

 

2,232

Balance, March 31, 2022

47

$

22,708,708

$

227

$

106,663

$

(84,684)

$

22,206

$

46

$

22,252

For the Three Months Ended March 31, 2021

Preferred Stock

Common Stock

Additional

Noncontrolling

Outstanding

Par

    

Outstanding

    

Par

Paid-in

Accumulated

Total

Interest in

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Deficit

    

Precipio, Inc.

    

Joint Venture

    

Total

Balance, January 1, 2021

47

$

17,576,916

$

176

$

85,523

$

(71,564)

$

14,135

$

27

$

14,162

Net loss

 

 

 

 

 

 

(1,452)

 

(1,452)

 

1

 

(1,451)

Issuance of common stock in connection with purchase agreements

500,000

5

1,255

1,260

1,260

Issuance of common stock for consulting services

55,147

150

150

150

Stock-based compensation

 

 

 

 

 

437

 

 

437

 

 

437

Balance, March 31, 2021

 

47

$

 

18,132,063

$

181

$

87,365

$

(73,016)

$

14,530

$

28

$

14,558

See notes to unaudited condensed consolidated financial statements

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PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

Three Months Ended March 31, 

    

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$

(4,584)

$

(1,451)

Adjustments to reconcile net loss to net cash flows used in operating activities:

 

  

 

  

Depreciation and amortization

 

302

 

268

Amortization of operating lease right-of-use asset

46

53

Amortization of finance lease right-of-use asset

34

11

Amortization of deferred financing costs, debt discounts and debt premiums

 

1

 

2

Gain on forgiveness of debt

 

 

(794)

Gain on settlement of liability

 

(1)

 

(17)

Stock-based compensation

 

2,232

 

437

Value of stock issued in payment of services

 

 

150

Provision for losses on doubtful accounts

 

78

 

288

Warrant revaluation

 

(222)

 

118

Derecognition of finance lease right-of-use asset

29

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

(535)

 

(39)

Inventories

 

42

 

(122)

Other assets

 

111

 

(177)

Accounts payable

 

448

 

194

Operating lease liabilities

(45)

(54)

Accrued expenses and other liabilities

 

(241)

 

(156)

Net cash used in operating activities

 

(2,334)

 

(1,260)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

 

(10)

 

(185)

Net cash used in investing activities

 

(10)

 

(185)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Principal payments on finance lease obligations

 

(56)

 

(12)

Deposits on finance lease right-of-use assets

(29)

Issuance of common stock, net of issuance costs

1,260

Principal payments on long-term debt

 

(7)

 

(14)

Payments on common stock warrant liabilities

(130)

Net cash flows (used in) provided by financing activities

 

(63)

 

1,075

NET CHANGE IN CASH

 

(2,407)

 

(370)

CASH AT BEGINNING OF PERIOD

 

11,668

 

2,656

CASH AT END OF PERIOD

$

9,261

$

2,286

See notes to unaudited condensed consolidated financial statements.

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PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- CONTINUED

(Dollars in thousands)

(unaudited)

Three Months Ended March 31, 

2022

    

2021

SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the period for interest

$

9

$

5

SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY

 

  

 

  

Purchases of equipment financed through accounts payable

7

82

Finance lease right-of-use assets obtained in exchange for finance lease obligations

96

See notes to unaudited condensed consolidated financial statements.

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PRECIPIO, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 and 2021

1. BUSINESS DESCRIPTION

Business Description.

Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a healthcare solutions company focused on cancer diagnostics.  The Company’s business mission is to address the pervasive problem of cancer misdiagnoses by developing solutions to mitigate the root causes of this problem in the form of diagnostic products, reagents and services.  Misdiagnoses originate from aged commercial diagnostic cancer testing technologies, lack of subspecialized expertise, and sub-optimal laboratory processes that are needed in today’s diagnostic cancer testing in order to provide accurate, rapid, and resource-effective results to treat patients.  Industry studies estimate 1 in 5 blood-cancer patients are misdiagnosed. As cancer diagnostic testing has evolved from cellular to molecular (genes and exons), laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation of the abundance of genetic data to effectively gather, consider, analyze and present information for the physician for patient treatment.  Precipio sees cancer diagnostics as requiring a holistic approach to improve diagnostic data for improved interpretations with the intent to reduce misdiagnoses. By delivering diagnostic products, reagents and services that improve the accuracy and efficiency of diagnostics, leading to fewer misdiagnoses, we believe patient outcomes can be improved through the selection of appropriate therapeutic options.  Furthermore, we believe that better patient outcomes will have a positive impact on healthcare expenses as misdiagnoses are reduced.  Better Diagnostic Results – Better Patient Outcome – Lower Healthcare Expenditures.

To deliver its strategy, the Company has structured its organization in order to drive development of diagnostic products.  Laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on new products and services.  The Company operates CLIA laboratories in both the New Haven, Connecticut and Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide.  To deliver on our strategy of mitigating misdiagnoses we rely heavily on our CLIA laboratory to support R&D beta-testing of the products we develop, in a clinical environment.

Our operating structure promotes the harnessing of our proprietary technology and genetic diagnostic expertise to bring to market the Company’s robust pipeline of innovative solutions designed to address the root causes of misdiagnoses.

Joint Venture.

The Company has determined that it holds a variable interest in a joint venture formed in April 2020 (the “Joint Venture”) and is the primary beneficiary of the variable interest entity (“VIE”). See Note 2 - Summary of Significant Accounting Policies for further discussion regarding consolidation of variable interest entities.

Going Concern.

The condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. As of March 31, 2022, the Company had a net loss of $4.6 million, an accumulated deficit of $84.7 million, working capital of $7.0 million and net cash used in operating activities of $2.3 million. The Company’s ability to continue as a going concern over the next twelve months from the date of issuance of these condensed consolidated financial statements in this Quarterly Report on Form 10-Q is dependent upon a combination of achieving its business plan, including generating additional revenue and avoiding potential business disruption due to the novel coronavirus (“COVID-19”) pandemic, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.

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To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan:

On April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock having aggregate sales proceeds of up to $22.0 million, to or through AGP, as sales agent (the “AGP Sales Agreement”). From April 2, 2021 through the date the condensed consolidated financial statements were issued, we have already received approximately $15.4 million in gross proceeds through the AGP Sales Agreement from the sale of 4,501,000 shares of common stock, leaving the Company an additional $6.6 million available for future sales pursuant to the AGP Sales Agreement.

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date these condensed consolidated financial statements were issued. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern over the next twelve months from the date of issuance of this Quarterly Report Form 10-Q. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern as a result of the outcome of this uncertainty.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

The accompanying condensed consolidated financial statements are presented in conformity with GAAP and, as of March 31, 2022 and for the three  months ended March 31, 2022 and 2021, are unaudited and reflect all adjustments (consisting of only normal recurring adjustments) that are necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2021 contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2022. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2022.

The condensed consolidated financial statements include the accounts of Precipio and its wholly owned subsidiaries, and the Joint Venture which is a VIE in which we are the primary beneficiary. Refer to the section titled “Consolidation of Variable Interest Entities” for further information related to our accounting for the Joint Venture. All intercompany balances have been eliminated in consolidation.

Recently Adopted Accounting Pronouncements.

In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842), “Lessors - Certain Leases with Variable Lease Payments”. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. The amendments are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company adopted this guidance on January 1, 2022. The adoption of this standard was not material to our condensed consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, “Issuers Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity.  This ASU becomes effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and should be applied prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted this

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guidance on January 1, 2022. The adoption of this standard was not material to our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted.

In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the potential impact that the adoption of this ASU will have on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU, as amended, is effective for the Company for reporting periods beginning after December 15, 2022. The Company is currently assessing the potential impact that the adoption of this ASU will have on its condensed consolidated financial statements.

Loss Per Share.

Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 4,584,622 and 2,381,497 shares of our common stock have been excluded from the computation of diluted loss per share at March 31, 2022 and 2021, respectively, because the effect is anti-dilutive due to the net loss.

The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:

March 31, 

    

2022

    

2021

Stock options

 

3,635,487

 

1,358,096

Warrants

 

831,635

 

905,901

Preferred stock

 

117,500

 

117,500

Total

 

4,584,622

 

2,381,497

Consolidation of Variable Interest Entities.

We evaluate any entity in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. We consolidate VIEs that are subject to assessment when we are deemed to be the primary beneficiary of the VIE. The process for determining whether we are the primary beneficiary of the VIE is to conclude whether we are a party to the VIE holding a variable interest that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

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We have determined that we hold a variable interest in the Joint Venture, have the power to make significant operational decisions on behalf of the VIE and also have the obligation to absorb the majority of the losses from the VIE.  As such we have also determined that we are the primary beneficiary of the VIE. The following table presents information about the carrying value of the assets and liabilities of the Joint Venture which we consolidate and which are included on our condensed consolidated balance sheets. Intercompany balances are eliminated in consolidation and not reflected in the following table.

(dollars in thousands)

    

March 31, 2022

    

December 31, 2021

Assets:

Accounts receivable, net

$

239

$

180

Total assets

$

239

$

180

Liabilities:

Accrued expenses

$

33

$

36

Total liabilities

$

33

$

36

Noncontrolling interest in Joint Venture

$

46

$

40

Total stockholders' equity

$

91

$

79

3. LONG-TERM DEBT

Long-term debt consists of the following:

Dollars in Thousands

    

March 31, 2022

    

December 31, 2021

Department of Economic and Community Development (DECD)

$

198

$

205

DECD debt issuance costs

 

(18)

 

(19)

Total long-term debt

 

180

 

186

Current portion of long-term debt

 

(26)

 

(26)

Long-term debt, net of current maturities

$

154

$

160

Department of Economic and Community Development.

On January 8, 2018, the Company entered into an agreement with the Connecticut Department of Economic and Community Development (“DECD”) by which the Company received a loan of $300,000 secured by substantially all of the Company’s assets (the “DECD 2018 Loan”). The DECD 2018 Loan is a ten-year loan due on December 31, 2027 and includes interest paid monthly at 3.25%. The maturity date of the DECD 2018 Loan was extended to May 31, 2028 and the modification did not have a material impact on the Company’s cash flows.

Amortization of the debt issuance costs were $1,000 for the three months ended March 31, 2022 and 2021, respectively.

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4. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

Accrued expenses at March 31, 2022 and December 31, 2021 are as follows:

(dollars in thousands)

    

2022

    

2021

Accrued expenses

$

995

$

1,033

Accrued compensation

 

565

 

718

Accrued franchise, property and sales and use taxes

94

148

Accrued interest

 

19

 

19

$

1,673

$

1,918

The Company recorded certain settled reductions in accrued expenses and accounts payable as gains which are included in gain on settlement of liability, net in the condensed consolidated statements of operations. During the three months ended March 31, 2022 and 2021 less than $0.1 million, respectively, was recorded as a gain.

5. COMMITMENTS AND CONTINGENCIES

The Company is involved in legal proceedings related to matters, which are incidental to its business. Also, the Company is delinquent on the payment of outstanding accounts payable for certain vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts. See below for a discussion on these matters.

LITIGATIONS

CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owed approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance sheets at March 31, 2022 and December 31, 2021.

LEGAL AND REGULATORY ENVIRONMENT

The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.

Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

6. LEASES

The Company leases administrative facilities and laboratory equipment through operating lease agreements. In addition we rent various equipment used in our diagnostic lab and in our administrative offices through finance lease arrangements.  Our operating leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew, from 1 to 5 years or more. The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our right-of-use (“ROU”) assets and lease liabilities as they are not reasonably certain of exercise.  We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the

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renewal period in our lease term.  As our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The primary leases we enter into with initial terms of 12 months or less are for equipment.

The Company also recognizes ROU assets from finance leases in connection with its HSRR program. For certain customers in the HSRR program, the Company leases diagnostic testing equipment and then subleases the equipment to the customer.  Finance lease ROU assets and finance lease liabilities are recognized at the lease commencement date, and at the sublease commencement date the finance lease ROU asset is derecognized and is recorded as cost of sales in the condensed consolidated statements of operations. Derecognized finance lease ROU assets for the three months ended March 31, 2022 and 2021 were zero and $0.1 million, respectively. Where Precipio is the lessor, customers lease diagnostic testing equipment from the Company with the transfer of ownership to the customer at the end of the lease term at no additional cost.  For these contracts, the Company accounts for the arrangements as sales-type leases. The lease asset for sales-type leases is the net investment in leased asset, which is recorded once the finance lease ROU asset is derecognized and a related gain or loss is noted. The net investment in leased assets was $0.2 million as of March 31, 2022 and December 31, 2021, respectively, and is included in other current assets and other assets in our condensed consolidated balance sheets.

The balance sheet presentation of our operating and finance leases is as follows:

(dollars in thousands)

Classification on the Condensed Consolidated Balance Sheet

March 31, 2022

December 31, 2021

Assets:

Operating lease right-of-use assets, net

$

812

$

858

Finance lease right-of-use assets, net (1)

337

371

Total lease assets

$

1,149

$

1,229

Liabilities:

Current:

Current maturities of operating lease liabilities

$

162

$

166

Current maturities of finance lease liabilities

195

222

Noncurrent:

Operating lease liabilities, less current maturities

656

697

Finance lease liabilities, less current maturities

130

159

Total lease liabilities

$

1,143

$

1,244

(1)As of March 31, 2022 and December 31, 2021, finance lease right-of-use assets included $48 and $61, respectively, of assets related to finance leases associated with the HSRR program.

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As of March 31, 2022 and December 31, 2021, the estimated future minimum lease payments, excluding non-lease components, are as follows:

(dollars in thousands)

    

Operating Leases

Finance Leases

Total

March 31,

December 31,

March 31,

December 31,

March 31,

December 31,

2022

2021

2022

2021

2022

2021

2022

$

165

$

227

$

116

$

176

$

281

$

403

2023

 

218

218

 

101

101

 

319

 

319

2024

 

205

204

 

80

80

 

285

 

284

2025

 

191

191

 

65

65

 

256

 

256

2026

194

195

26

26

220

221

Thereafter

 

 

 

 

Total lease obligations

 

973

1,035

 

388

448

 

1,361

 

1,483

Less: Amount representing interest

 

(155)

(172)

 

(63)

(67)

 

(218)

 

(239)

Present value of net minimum lease obligations

 

818

863

 

325

381

 

1,143

 

1,244

Less, current portion

 

(162)

(166)

 

(195)

(222)

 

(357)

 

(388)

Long term portion

$

656

$

697

$

130

$

159

$

786

$

856

Other information as of March 31, 2022 and December 31, 2021:

March 31,

December 31,

2022

2021

Weighted-average remaining lease term (years):

Operating leases

4.5

4.7

Finance leases

3.4

3.1

Weighted-average discount rate:

Operating leases

8.00%

8.00%

Finance leases

10.10%

10.03%

During the three months ended March 31, 2022 and 2021, operating cash flows from operating leases was $0.1 million, respectively, and operating lease ROU assets obtained in exchange for operating lease liabilities was zero, respectively.

Operating Lease Costs

Operating lease costs were approximately $0.1 million during the three months ended March 31, 2022 and 2021, respectively. These costs are primarily related to long-term operating leases for the Company’s facilities and laboratory equipment. Short-term and variable lease costs were less than $0.1 million for the three months ended March 31, 2022 and 2021, respectively.

Finance Lease Costs

Finance lease amortization and interest expenses are included in the condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021. The balances within these accounts are less than $0.1 million, respectively.

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7. STOCKHOLDERS’ EQUITY

Common Stock.

Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have 150,000,000 shares of common stock authorized for issuance. On December 20, 2018, the Company’s shareholders approved the proposal to authorize the Company’s Board of Directors to, in its discretion, amend the Company’s Third Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock from 150,000,000 shares to 250,000,000 shares. The Company has not yet effected this increase.

During the three months ended March 31, 2022, the Company issued 266 shares of its common stock in connection with the exercise of 266 warrants. The warrant exercise resulted in net cash proceeds to the Company of less than $1,000 during the three months ended March 31, 2022.  There were no warrant exercises during the three months ended March 31, 2021.

During the three months ended March 31, 2021, the Company issued 55,147 shares of its common stock in connection with consulting services of approximately $0.2 million.

LP 2020 Purchase Agreement

On March 26, 2020, the Company entered into a purchase agreement (the “LP 2020 Purchase Agreement”) with Lincoln Park pursuant to which Lincoln Park has agreed to purchase from us, from time to time, up to $10,000,000 of our common stock, subject to certain limitations, during the 24 month term of the LP 2020 Purchase Agreement.

During the three months ended March 31, 2021, we received approximately $1.3 million from the sale of 500,000 shares of common stock to Lincoln Park under the LP 2020 Purchase Agreement. The Company terminated the LP 2020 Purchase Agreement effective June 14, 2021.

At The Market Offering Agreement

On April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock, par value $0.01 per share (the “Common Stock”) (the “Shares”), having aggregate sales proceeds of up to $22.0 million. Shares can be sold either directly to or through AGP as a sales agent (the “AGP Sales Agreement”), from time to time, in an “at the market offering” (as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended) of the Shares (the “ATM Offering”). The Company is limited in the number of shares it can sell in the ATM Offering due to the offering limitations currently applicable to the Company under General Instruction I.B.6. of Form S-3 and the Company’s public float as of the applicable date of such sales, as well as the number of authorized and unissued shares available for issuance, in accordance with the terms of the AGP Sales Agreement.

The sale of our shares of Common Stock to or through AGP, will be made pursuant to the registration statement (the “Registration Statement”) on Form S-3 (File No. 333-237445), which was declared effective by the Securities and Exchange Commission (the “SEC”) on April 13, 2020, for an aggregate offering price of up to $50.0 million.

 

Under the AGP Sales Agreement, Shares may be sold by any method permitted by law deemed to be an “at the market offering.” AGP will also be able to sell shares of Common Stock by any other method permitted by law, including in negotiated transactions with the Company’s prior written consent. Upon delivery of a placement notice and subject to the terms and conditions of the AGP Sales Agreement, AGP is required to use its commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of The Nasdaq Capital Market to sell the Shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. AGP is not under any obligation to purchase any of the Shares on a principal basis pursuant to the AGP Sales Agreement, except as otherwise agreed by AGP and the Company in writing and expressly set forth in a placement notice. AGP’s obligations to sell the Shares under the AGP Sales Agreement are subject to satisfaction of certain conditions, including customary closing conditions. The Company is not obligated to

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make any sales of Shares under the AGP Sales Agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs.

 

The Company has agreed to pay AGP a cash fee of 3.0% of the aggregate gross proceeds from the sale of the Shares on the Company’s behalf pursuant to the AGP Sales Agreement. The AGP Sales Agreement contains representations, warranties and covenants that are customary for transactions of this type. In addition, the Company has provided AGP with customary indemnification and contribution rights. The Company has also agreed to reimburse AGP for certain specified expenses, including the expenses of counsel to AGP. The offering of the Shares pursuant to the AGP Sales Agreement will terminate upon the termination of the AGP Sales Agreement by AGP or the Company, as permitted therein.

During the three months ended March 31, 2022 and 2021, there were zero sales of shares of common stock through AGP, respectively. As of the date of issuance of this Quarterly Report on Form 10-Q, we have received an aggregate of $14.9 million in net proceeds from the sale of common stock through the AGP Sales Agreement.

Preferred Stock.

The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors.

Series B Preferred Stock.

The Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware, which designates 6,900 shares of our preferred stock as Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share. The Series B Preferred Stock includes a beneficial ownership blocker but has no dividend rights (except to the extent dividends are also paid on the common stock). On August 28, 2017, the Company completed an underwritten public offering consisting of the Company’s Series B Preferred Stock and warrants.

The conversion price of the Series B Preferred Stock contains a down round feature. The Company will recognize the effect of the down round feature when it is triggered. At that time, the effect would be treated as a deemed dividend and as a reduction of income available to common shareholders in our basic earnings per share calculation.

There were no conversions of Series B Preferred Stock during the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022 and December 31, 2021, the Company had 6,900 shares of Series B Preferred Stock designated and issued and 47 shares of Series B Preferred Stock outstanding. Based on the stated value of $1,000 per share and a conversion price of $0.40 per share, the outstanding shares of Series B Preferred Stock at March 31, 2022 were convertible into 117,500 shares of common stock.

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Common Stock Warrants.

The following represents a summary of the warrants outstanding as of March 31, 2022:

    

    

    

Underlying

    

Exercise

Issue Year

Expiration

Shares 

Price

Warrants

(1)

 

2017

 

June 2022

 

2,540

 

$

41.25

(1)

2017

June 2022

500

$

7.50

(2)

 

2017

 

June 2022

 

6,095

 

$

105.00

(3)

 

2017

 

August 2022

 

24,935

 

$

0.40

(4)

 

2017

 

August 2022

 

4,000

 

$

46.88

(5)

 

2017

 

August 2022

 

47,995

 

$

150.00

(5)

2017

August 2022

9,101

$

7.50

(6)

 

2017

 

August 2022

 

16,664

 

$

0.40

(6)

2017

August 2022

7,335

$

0.40

(7)

 

2017

 

October 2022

 

666

 

$

0.40

(8)

2018

October 2022

7,207

$

112.50

(9)

2018

April 2023

69,964

$

5.40

(9)

2018

April 2023

78,414

$

5.40

(10)

2018

October 2022

15,466

$

11.25

(11)

2018

July 2023

14,671

$

5.40

(11)

2018

July 2023

14,672

$

5.40

(11)

2018

August 2023

20,903

$

5.40

(11)

2018

August 2023

20,903

$

5.40

(11)

2018

September 2023

19,816

$

5.40

(11)

2018

September 2023

20,903

$

5.40

(12)

2018

November 2023

75,788

$

5.40

(12)

2018

December 2023

51,282

$

5.40

(13)

2019

April 2024

147,472

$

5.40

(14)

2019

May 2024

154,343

$

9.56

 

  

 

  

 

831,635

 

  

(1)These warrants were issued in connection with a June 2017 merger transaction (the “Merger”).
(2)These warrants were issued in connection with the Merger.
(3)These warrants were issued in August 2017.
(4)These warrants were issued in August 2017.
(5)These warrants were issued in connection with the conversion of our Series A Senior stock.
(6)These warrants were issued in connection with the conversion of convertible bridge notes.
(7)These warrants were issued in connection with the waiver of default the Company received in the fourth quarter of 2017 in connection with the Convertible Promissory Notes.
(8)These warrants were issued in connection with certain debt obligation settlement agreements.
(9)These warrants were issued in connection with a 2018 securities purchase agreement, as amended, (the “2018 Note Agreement”).
(10)These warrants were issued in connection with the 2018 Note Agreement.
(11)These warrants were issued in connection with the 2018 Note Agreement.
(12)These warrants were issued in connection with the 2018 Note Agreement.
(13)These warrants were issued in connection with the 2018 Note Agreement.
(14)These warrants were issued in connection with convertible notes issued in May 2019 (the “May 2019 Bridge Notes”).

During the three months ended March 31, 2022 and 2021, zero and 239 warrants expired, respectively. These warrants had been issued in connection with transactions which were completed in January 2016.

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Table of Contents

During the three months ended March 31, 2021, 357 warrants were settled for cash of approximately $0.1 million. For further discussion, see the 2016 Warrant Liability in Note 8 – Fair Value.

There were 266 warrants exercised during the three months ended March 31, 2022 for proceeds to the Company of less than $1,000. During the three months ended March 31, 2022, the intrinsic value of the warrants exercised was less than $1,000.

Deemed Dividends

Certain of our preferred stock and warrant issuances contain down round provisions which require us to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share.

There were no deemed dividends during the three months ended March 31, 2022 and 2021.

8. FAIR VALUE

FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our condensed consolidated financial statements.

FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and

Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.

Common Stock Warrant Liabilities.

Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated statements of operations.

2016 Warrant Liability

The Company has a warrant liability related to warrants issued in January 2016 (the “2016 Warrant Liability”) and it represents the fair value of such warrants, of which,