Precipio Inc

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 and six months ended June 30, 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 nine months ended September 30, 2024 are not necessarily indicative of results that may be attained in the future.

Previous wording

Change Healthcare (“CHC”), a subsidiary of UnitedHealth Group, suffered a cybersecurity breach in February 2024 which resulted in the temporary shut-down of some of its systems. Precipio uses CHC to process its billings for pathology services. Thus, when CHC shut down its business operations our pathology billings were halted. Our ability to process billings, accept payer remittances, process medical and billing benefit notices, bill secondary insurers, as well as patients, and communicate with commercial payers was severely impacted. Starting shortly after the breach, we redirected a significant amount of our internal resources to manually manufacture the billing services that CHC was no longer delivering. This resulted in billing and cash reimbursement delays during the six months ended June 30, 2024.

Current wording

Change Healthcare (“CHC”), a subsidiary of UnitedHealth Group, suffered a cybersecurity breach in February 2024 which resulted in the temporary shut-down of some of its systems. Precipio uses CHC to process its billings for pathology services. Thus, when CHC shut down its business operations our pathology billings were halted. Our ability to process billings, accept payer remittances, process medical and billing benefit notices, bill secondary insurers, as well as patients, and communicate with commercial payers was severely impacted. Starting shortly after the breach, we redirected a significant amount of our internal resources to manually manufacture the billing services that CHC was no longer delivering. This resulted in billing and cash reimbursement delays during the nine months ended September 30, 2024.

Previous wording

We incurred approximately $0.1 million of expense during the six months ended June 30, 2024, as we used alternative methods for claims processing. Also, we estimate that approximately $0.4 million of our accounts receivable as of June 30, 2024 would have been collected during the three months ended June 30, 2024 if not for the delays mentioned above. CHC established a Temporary Funding Assistance Program to help bridge the gap in short-term cash flow needs for its customers affected by the disruption of its services due to the cyberattack. During the six months ended June 30, 2024, we received approximately $1.1 million from CHC through this program. See Note 4 Accrued Expenses for further discussion.

Current wording

Along with the delays in billing and cash reimbursements, we incurred approximately $0.2 million of expense during the nine months ended September 30, 2024, as we used alternative methods for claims processing. CHC established a Temporary Funding Assistance Program to help bridge the gap in short-term cash flow needs for its customers affected by the disruption of its services due to the cyberattack. During the nine months ended September 30, 2024, we received approximately $1.1 million from CHC through this program. See Note 4 Accrued Expenses for further discussion. As a result of the manual claims processing methods that we put in place following the CHC shutdown, our billing and cash reimbursement processes are nearly rectified as of September 30, 2024.

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 and do not include any adjustments that

Current 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 and do not include any adjustments that 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 nine months ended September 30, 2024, the Company had a net loss of $3.9 million and net cash used in operating activities of $0.1 million.

Previous 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.

Current wording

As of September 30, 2024, the Company had an accumulated deficit of $102.1 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

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.

Current wording

Net sales for the three months ended September 30, 2024 were approximately $5.2 million, an increase of $0.7 million as compared to the same period in 2023. During the three months ended September 30, 2024, patient diagnostic service revenue increased $0.8 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 3,584 cases during the three months ended September 30, 2024 as compared to 2,105 cases during the same period in 2023, or a 70% increase in cases. The benefit of the increase in cases billed during the third 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 $0.1 million for the three months ended September 30, 2024 as compared to the same period in 2023.

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 $1.0 millionfor the six months ended June 30, 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 $0.3 millionfor the three months ended September 30, 2024 as compared to the same period in 2023.

Previous 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.

Current wording

Gross margin was 44% and 42% of total net sales for the three months ended September 30, 2024 and 2023, respectively. Gross profit was approximately $2.3 million and $1.9 million during the three months ended September 30, 2024 and 2023, respectively. The gross profit increased during the three months ended September 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 $0.7 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.

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 $0.5 million to $2.9 million for the three months ended September 30, 2024 as compared to the same period in 2023. The decrease was attributable to: (1) an increase of less than 0.1 million in stock-based compensation expense, (2) an increase of less than $0.1 million in general and administrative expenses due mainly to an increase of $0.1 million legal and professional fees and franchise taxes, partially offset by a decrease of less than $0.1 million in personnel costs (3) a decrease of $0.4 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, and (4) a decrease of $0.1 million in research and development expenses mainly related to decreases in operating supply costs and personnel costs.

Previous 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.

Current wording

Other (Expense) Income. We recorded net other expense of $29 thousand and $7 thousand for the three months ended September 30, 2024 and 2023, respectively, which was related to net interest expense.

Previous wording

Results of Operations for the Six Months Ended June 30, 2024 and 2023

Current wording

Results of Operations for the Nine Months Ended September 30, 2024 and 2023

Previous wording

Net sales for the six months ended June 30, 2024 were approximately $7.9 million, an increase of $1.5 million as compared to the same period in 2023. During the six months ended June 30, 2024, patient diagnostic service revenue increased $1.9 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 5,161 cases during the six months ended June 30, 2024 as compared to 2,810 cases during the same period in 2023, or an 84% 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 $0.4 million for the six months ended June 30, 2024 as compared to the same period in 2023.

Current wording

Net sales for the nine months ended September 30, 2024 were approximately $13.1 million, an increase of $2.2 million as compared to the same period in 2023. During the nine months ended September 30, 2024, patient diagnostic service revenue increased $2.7 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 8,745 cases during the nine months ended September 30, 2024 as compared to 4,915 cases during the same period in 2023, or a 78% increase in cases. The benefit of the increase in cases billed during the third 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 $0.5 million for the nine months ended September 30, 2024 as compared to the same period in 2023.

Previous wording

the operations of our laboratory. Cost of sales increased by $0.6 millionfor the three months ended June 30, 2024 as compared to the same period in 2023.

Current wording

the operations of our laboratory. Cost of sales increased by $1.3 millionfor the nine months ended September 30, 2024 as compared to the same period in 2023.

Previous 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.

Current wording

Gross margin was 38% of total net sales, for the nine months ended September 30, 2024 and 37% for the nine months ended September 30, 2023. Gross profit was approximately $4.9 million and $4.0 million during the nine months ended September 30, 2024 and 2023, respectively. The increase in gross profit during the nine months ended September 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

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 $1.5 million to $5.9 million for the six months ended June 30, 2024 as compared to the same period in 2023. The decrease was attributable to: (1) a decrease of $0.2 million in stock-based compensation expense, (2) a decrease of $0.1 million in general and administrative expenses due a decrease in legal and professional fees of $0.2 million, partially offset by an increase of less than $0.1 million in franchise tax costs, (3) a decrease of $0.9 million in sales and marketing expenses due mainly to a decrease in personnel costs of $1.0 million as a result of a lower headcount, partially offset by a $0.1 million increase in marketing costs and (4) a decrease of $0.3 million in research and development expenses mainly related to a decrease of $0.2 million in operating supplies and a decrease of $0.1 million in personnel and other costs.

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 $2.0 million to $8.8 million for the nine months ended September 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 a decrease in legal and professional fees of $0.3 million, partially offset by an increase of $0.1 million in franchise tax costs and an increase of $0.1 million in other costs, (3) a decrease of $1.3 million in sales and marketing expenses due mainly to a decrease in personnel costs of $1.2 million as a result of a lower headcount and a decrease of $0.1 million other costs and (4) a decrease of $0.4 million in research and development expenses mainly related to a decrease of $0.1 million in operating supplies, a decrease of $0.1 million in personnel costs and a decrease of $0.2 million in other costs.

Previous wording

Other (Expense) Income. We recorded net other expense of $16 thousand and $5 thousand for the six months ended June 30, 2024 and 2023, respectively, which was related to net interest expense.

Current wording

Other (Expense) Income. We recorded net other expense of $45 thousand and $12 thousand for the nine months ended September 30, 2024 and 2023, respectively, which was related to net interest expense.

Previous 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.

Current wording

During the nine months ended September 30, 2024 we received $0.6 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 – Six Months Ended June 30, 2024 and 2023

Current wording

Analysis of Cash Flows – Nine Months Ended September 30, 2024 and 2023

Previous 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.

Current wording

Cash Flows Used in Operating Activities. The cash flows used in operating activities of approximately $0.1 million during the nine months ended September 30, 2024 included a net loss of $3.9 million, an increase in inventories of $0.2 million and a decrease in operating lease liabilities of $0.2 million. These were partially offset by a decrease in accounts receivables of $0.1 million, a decrease in other assets of $0.1 million, an increase in accounts payable of $0.1 million, an increase in deferred revenues of $0.2 million, an increase in accrued expenses of $0.9 million and non-cash adjustments of $2.7 million. The non-cash adjustments included $0.2 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 $2.5 million include, among other things, depreciation and amortization, and stock-based compensation. The cash flows used in operating activities of approximately $3.7 million during the nine months ended September 30, 2023 included a net loss of $6.8 million, an increase in accounts receivables of $0.6 million and a decrease in operating lease liabilities and deferred revenue of $0.3 million. These were partially offset by a decrease in inventories of $0.1 million, a decrease in other assets of $0.3 million, an increase in accounts payable of $0.5 million, an increase in accrued expenses of $0.6 million, and non-cash adjustments of $2.5 million.

Previous 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.

Current wording

Cash Flows Used In Investing Activities. Cash flows used in investing activities were $0.2 million and $0.1 million for the nine months ended September 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 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.

Current wording

Cash Flows Used in or Provided by Financing Activities. Cash flows provided by financing activities totaled $0.2 million for the nine months ended September 30, 2024, which included $0.2 million of proceeds from debt and $0.1 million of proceeds from the issuance of common stock. These were partially offset by $0.4 million in payments on our long-term debt and finance lease obligations. Cash flows provided by financing activities totaled $1.9 million for the nine months ended September 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 $0.3 million.

Previous 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.

Current wording

At each of September 30, 2024 and December 31, 2023, other than certain purchase commitments of approximately $2.3 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 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.

Current wording

No significant changes to contractual obligations and commitments occurred during the nine months ended September 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.