Precipio Inc

Previous wording

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, the effects of the recent Change Healthcare cyberattack on us or our operations, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest and inflation costs, future economic circumstances, business strategy, industry conditions and key trends, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, our ability to comply with the listing requirements of the Nasdaq Capital Market, expected financial and other benefits from our organizational restructuring activities, geopolitical uncertainties including the ongoing Russia and Ukraine conflict and the Israel-Hamas war, actions of governments and regulatory factors affecting our business, projections of future earnings, revenues, synergies, accretion or other financial items, any statements of the plans, strategies and objectives of management for future operations, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission (the “SEC”). In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative of such terms and other similar expressions.

Current wording

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, the effects of the recent Change Healthcare cyberattack on us or our operations, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest and inflation costs, future economic circumstances, business strategy, industry conditions and key trends, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, our ability to comply with the listing requirements of the Nasdaq Capital Market, expected financial and other benefits from our organizational restructuring activities, geopolitical uncertainties including the ongoing Russia and Ukraine conflict and the Israel-Hamas war, actions of governments and regulatory factors affecting our business, projections of future earnings, revenues, synergies, accretion or other financial items, any statements of the plans, strategies and objectives of management for future operations, retaining key employees and other risks as described in our reports filed with the SEC. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative of such terms and other similar expressions.

Previous wording

The following discussion should be read together with our condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q and with the financial statements, related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which we filed with the Securities and Exchange Commission on March 29, 2024. Results for the three months ended March 31, 2024 are not necessarily indicative of results that may be attained in the future.

Current wording

The following discussion should be read together with our condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q and with the financial statements, related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which we filed with the Securities and Exchange Commission on March 29, 2024. Results for the three and six months ended June 30, 2024 are not necessarily indicative of results that may be attained in the future.

Previous wording

various diseases within the hematologic field. We then commercialize these technologies as proprietary products that serve the global laboratory community in furtherance of our mission to eliminate or greatly reduce the prevalence of misdiagnosis. To deliver our strategy, we have structured our organization to develop diagnostic products, including our laboratory and research and development (“R&D”) facilities located in New Haven, Connecticut and Omaha, Nebraska, respectively, which house teams that collaborate on the development of new products and services. We operate CLIA laboratories in both New Haven, Connecticut and Omaha, Nebraska where we provide 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.

Current wording

respectively, which house teams that collaborate on the development of new products and services. We operate CLIA laboratories in both New Haven, Connecticut and Omaha, Nebraska where we provide 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.

Previous wording

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. For the three months ended March 31, 2024, the Company had a net loss of $2.1 million and net cash used in operating activities of $0.7 million. As of March 31, 2024, the Company had an accumulated deficit of $100.2 million and a working capital deficit of $0.7 million. The Company’s ability to continue as a going concern over the next twelve months from the date the condensed consolidated financial statements were issued is dependent upon a combination of achieving its business plan, including generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.

Current wording

might result should the Company be unable to continue as a going concern. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. For the six months ended June 30, 2024, the Company had a net loss of $3.3 million and net cash used in operating activities of $0.2 million. As of June 30, 2024, the Company had an accumulated deficit of $101.4 million and a working capital deficit of $1.2 million. The Company’s ability to continue as a going concern over the next twelve months from the date the condensed consolidated financial statements were issued is dependent upon a combination of achieving its business plan, including generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.

Previous wording

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern over the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q. 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. 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.

Current wording

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern over the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q. 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.

Previous wording

Net sales for the three months ended March 31, 2024 were approximately $3.4 million, an increase of $0.6 million as compared to the same period in 2023. During the three months ended March 31, 2024, patient diagnostic service revenue increased $0.7 million as compared to the same period in 2023. This increase was due to a greater number of cases processed in the current year period. We processed 2,062 cases during the three months ended March 31, 2024 as compared to 1,196 cases during the same period in 2023, or a 72% increase in cases. The benefit of the increase in cases billed during the first quarter of 2024 as compared to the same period in 2023 was partially offset by a lower average price per case during the current year as a result of a different product mix. Other revenue decreased by $0.1 million for the three months ended March 31, 2024 as compared to the same period in 2023.

Current wording

Net sales for the three months ended June 30, 2024 were approximately $4.4 million, an increase of $0.9 million as compared to the same period in 2023. During the three months ended June 30, 2024, patient diagnostic service revenue increased $1.2 million as compared to the same period in 2023. This increase was due to a greater number of cases processed in the current year period. We processed 3,099 cases during the three months ended June 30, 2024 as compared to 1,614 cases during the same period in 2023, or a 92% increase in cases. The benefit of the increase in cases billed during the second quarter of 2024 as compared to the same period in 2023 was partially offset by a lower average price per case during the current year as a result of a different product mix. Product revenue decreased by $0.3 million for the three months ended June 30, 2024 as compared to the same period in 2023.

Previous wording

Gross margin was 27% of total net sales, for the three months ended March 31, 2024 and 2023, respectively. Gross profit was approximately $0.9 million and $0.7 million during the three months ended March 31, 2024 and 2023, respectively. The gross profit increased during the three months ended March 31, 2024, as compared to the prior year period, as a result of increases in case volume and revenue. We operate a fully staffed CLIA and CAP certified clinical

Current wording

Gross margin was 39% of total net sales, for the three months ended June 30, 2024 and 2023, respectively. Gross profit was approximately $1.7 million and $1.4 million during the three months ended June 30, 2024 and 2023, respectively. The gross profit increased during the three months ended June 30, 2024, as compared to the prior year period, as a result of increases in case volume and revenue. We operate a fully staffed CLIA and College of American Pathologists (“CAP”) certified clinical pathology and molecular laboratory. As such, it is necessary to maintain appropriate staffing levels to provide industry standard laboratory processing and reporting to ordering physicians. An increase in case volume will enable our laboratory to yield economies of scale and to leverage fixed expenses.

Previous wording

Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs, stock-based compensation costs and depreciation and amortization. Our operating expenses decreased by $0.8 million to $3.0 million for the three months ended March 31, 2024 as compared to the same period in 2023. The decrease was attributable to: (1) a decrease of $0.1 million in stock-based compensation expense, (2) a decrease of $0.6 million in sales and marketing expenses due mainly to decreases in personnel costs as a result of a lower headcount, and (3) a decrease of $0.1 million in research and development expenses.

Current wording

Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs, stock-based compensation costs and depreciation and amortization. Our operating expenses decreased by $0.7 million to $2.9 million for the three months ended June 30, 2024 as compared to the same period in 2023. The decrease was attributable to: (1) a decrease of $0.1 million in stock-based compensation expense, (2) a decrease of $0.1 million in general and administrative expenses due mainly to a decrease in legal and professional fees (3) a decrease of $0.3 million in sales and marketing expenses due mainly to a decrease in personnel costs of $0.4 million as a result of a lower headcount, partially offset by a $0.1 million increase in marketing costs and (4) a decrease of $0.2 million in research and development expenses mainly related to a decrease in operating supply costs.

Previous wording

Other (Expense) Income. We recorded net other expense $5 thousand and $4 thousand for the three months ended March 31, 2024 and 2023, respectively, which was related to net interest expense.

Current wording

Other (Expense) Income. We recorded net other expense of $11 thousand and $1 thousand for the three months ended June 30, 2024 and 2023, respectively, which was related to net interest expense.

Previous wording

Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed, costs related to HSRR products and other direct costs (primarily personnel costs, pathologist interpretation costs and rent) associated with the operations of our laboratory. Cost of sales increased by $0.4 millionfor the three months ended March 31, 2024 as compared to the same period in 2023.

Current wording

Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed, costs related to HSRR products and other direct costs (primarily personnel costs, pathologist interpretation costs and rent) associated with the operations of our laboratory. Cost of sales increased by $1.0 millionfor the six months ended June 30, 2024 as compared to the same period in 2023.

Previous wording

pathology and molecular laboratory. As such, it is necessary to maintain appropriate staffing levels to provide industry standard laboratory processing and reporting to ordering physicians. An increase in case volume will enable our laboratory to yield economies of scale and to leverage fixed expenses.

Current wording

Gross margin was 33% of total net sales, for the six months ended June 30, 2024 and 2023, respectively. Gross profit was approximately $2.6 million and $2.1 million during the six months ended June 30, 2024 and 2023, respectively. The increase in gross profit during the six months ended June 30, 2024, as compared to the prior year period, was a result of increases in case volume and revenue. We operate a fully staffed CLIA and CAP certified clinical pathology and molecular laboratory. As such, it is necessary to maintain appropriate staffing levels to provide industry standard laboratory processing and reporting to ordering physicians. An increase in case volume will enable our laboratory to yield economies of scale and to leverage fixed expenses.

Previous wording

During the three months ended March 31, 2024 we received net proceeds of $0.1 million from sale of 10,167 shares of our common stock through at the market offerings. The Company has approximately $3.7 million available for future sales pursuant to the AGP 2023 Sales Agreement.

Current wording

During the six months ended June 30, 2024 we received $0.3 million in proceeds from debt issuance and net proceeds of $0.1 million from sale of 11,822 shares of our common stock through at the market offerings. The Company has approximately $3.7 million available for future sales pursuant to the AGP 2023 Sales Agreement.

Previous wording

Analysis of Cash Flows – Three Months Ended March 31, 2024 and 2023

Current wording

Analysis of Cash Flows – Six Months Ended June 30, 2024 and 2023

Previous wording

Cash Flows Used in Operating Activities. The cash flows used in operating activities of approximately $0.7 million during the three months ended March 31, 2024 included a net loss of $2.1 million, an increase in inventories of $0.1 million and a decrease in operating lease liabilities and accrued expenses of $0.1 million. These were partially offset by a decrease in accounts receivables of $0.3 million, a decrease in other assets of $0.1 million, an increase in accounts payable of $0.3 million, an increase in deferred revenues of $0.1 million, and non-cash adjustments of $0.8 million. The non-cash adjustments included $0.1 million for the change in provision for credit losses. We routinely provide a reserve for credit losses as a result of having limited in-network payer contracts. The other non-cash adjustments to net loss of approximately $0.7 million include, among other things, depreciation and amortization, and stock-based compensation. The cash flows used in operating activities of approximately $1.6 million during the three months ended March 31, 2023 included a net loss of $3.0 million and a decrease in operating lease liabilities of less than $0.1 million. These were partially offset by a decrease in accounts receivables of $0.2 million, a decrease in inventories of $0.2 million, a decrease in other assets of $0.1 million, an increase in accounts payable of $0.1 million, an increase in accrued expenses of $0.1 million, and non-cash adjustments of $0.8 million.

Current wording

Cash Flows Used in Operating Activities. The cash flows used in operating activities of approximately $0.2 million during the six months ended June 30, 2024 included a net loss of $3.3 million, an increase in inventories of $0.3 million and a decrease in operating lease liabilities of $0.1 million. These were partially offset by a decrease in accounts receivables of $0.1 million, a decrease in other assets of $0.2 million, an increase in accounts payable of $0.2 million, an increase in deferred revenues of $0.1 million, an increase in accrued expenses of $1.1 million and non-cash adjustments of $1.8 million. The non-cash adjustments included $0.1 million for the change in provision for credit losses. We routinely provide a reserve for credit losses as a result of having limited in-network payer contracts. The other non-cash adjustments to net loss of approximately $1.7 million include, among other things, depreciation and amortization, and stock-based compensation. The cash flows used in operating activities of approximately $2.8 million during the six months ended June 30, 2023 included a net loss of $5.3 million and a decrease in operating lease liabilities and deferred revenue of $0.2 million. These were partially offset by a decrease in inventories of $0.2 million, a decrease in other assets of $0.2 million, an increase in accounts payable of $0.3 million, an increase in accrued expenses of $0.3 million, and non-cash adjustments of $1.7 million.

Previous wording

Cash Flows Used In Investing Activities. Cash flows used in investing activities were zero and less than $0.1 million for the three months ended March 31, 2024 and 2023, respectively, resulting from purchases of property and equipment.

Current wording

Cash Flows Used In Investing Activities. Cash flows used in investing activities were $0.1 million for the six months ended June 30, 2024 and 2023, respectively, resulting from purchases of property and equipment.

Previous wording

Cash Flows Used in or Provided by Financing Activities. Cash flows used in financing activities totaled $0.1 million for the three months ended March 31, 2024, which included $0.1 million in payments on our long-term debt and finance lease obligations partially offset by less than $0.1 million of proceeds from the issuance of common stock. Cash flows provided by financing activities totaled $0.3 million for the three months ended March 31, 2023, which included $0.4 million of proceeds from the issuance of common stock partially offset by payments on our long-term debt and finance lease obligations of $0.1 million.

Current wording

Cash Flows Used in or Provided by Financing Activities. Cash flows provided by financing activities totaled less than $0.1 million for the six months ended June 30, 2024, which included $0.3 million of proceeds from debt and $0.1 million of proceeds from the issuance of common stock. These were partially offset by $0.3 million in payments on our long-term debt and finance lease obligations. Cash flows provided by financing activities totaled $2.0 million for the six months ended June 30, 2023, which included $2.2 million of proceeds from the issuance of common stock partially offset by payments on our long-term debt and finance lease obligations of $0.2 million.

Previous wording

At each of March 31, 2024 and December 31, 2023, other than certain purchase commitments of approximately $1.6 million and $1.9 million, respectively, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. The purchase commitments are mostly for laboratory reagents used in our normal operating business.

Current wording

At each of June 30, 2024 and December 31, 2023, other than certain purchase commitments of approximately $0.9 million and $1.9 million, respectively, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. The purchase commitments are mostly for laboratory reagents used in our normal operating business.

Previous wording

No significant changes to contractual obligations and commitments occurred during the three months ended March 31, 2024, as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission on March 29, 2024.

Current wording

No significant changes to contractual obligations and commitments occurred during the six months ended June 30, 2024, as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission on March 29, 2024.