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, 2023
	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 8, 2023, the number of shares of common stock outstanding was 23,437,298.

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, 2023 (unaudited) and December 31, 2022	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022 (unaudited)	4
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (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	31
Item 4.	Controls and Procedures	31
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	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
Signatures		35

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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, 2023
	(unaudited)		December 31, 2022
ASSETS
CURRENT ASSETS:
Cash	$	2,141	$	3,445
Accounts receivable, net		858		1,036
Inventories		546		708
Other current assets		450		521
Total current assets		3,995		5,710
PROPERTY AND EQUIPMENT, NET		834		877
OTHER ASSETS:
Finance lease right-of-use assets, net		234		257
Operating lease right-of-use assets, net		714		763
Intangibles, net		13,530		13,768
Other assets		116		129
Total assets	$	19,423	$	21,504
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, less debt issuance costs	$	142	$	255
Current maturities of finance lease liabilities		155		162
Current maturities of operating lease liabilities		205		199
Accounts payable		2,190		2,042
Accrued expenses		1,685		1,584
Deferred revenue		124		119
Total current liabilities		4,501		4,361
LONG TERM LIABILITIES:
Long-term debt, less current maturities and debt issuance costs		127		134
Finance lease liabilities, less current maturities		50		68
Operating lease liabilities, less current maturities		520		574
Total liabilities		5,198		5,137
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 15,000,000 shares authorized at March 31, 2023 and December 31, 2022, 47 shares issued and outstanding at March 31, 2023 and December 31, 2022, liquidation preference of $78 at March 31, 2023		—		—
Common stock, $0.01 par value, 150,000,000 shares authorized at March 31, 2023 and December 31, 2022, 23,364,086 and 22,820,260 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		233		228
Additional paid-in capital		109,254		108,371
Accumulated deficit		(95,327)		(92,297)
Total Precipio, Inc. stockholders’ equity		14,160		16,302
Noncontrolling interest in joint venture		65		65
Total stockholders’ equity		14,225		16,367
Total liabilities and stockholders’ equity	$	19,423	$	21,504

See notes to unaudited condensed consolidated financial statements.

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PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(unaudited)

	Three Months Ended March 31,
	2023		2022
SALES:
Service revenue, net	$	2,068	$	2,005
Other revenue		761		522
Revenue, net of contractual allowances and adjustments		2,829		2,527
Adjustment for allowance for doubtful accounts		(12)		(80)
Net sales		2,817		2,447
COST OF SALES:
Cost of service revenue		1,769		1,536
Cost of other revenue		299		208
Total cost of sales		2,068		1,744
Gross profit		749		703
OPERATING EXPENSES:
Operating expenses		3,775		5,512
OPERATING LOSS		(3,026)		(4,809)
OTHER (EXPENSE) INCOME:
Interest expense, net		(4)		2
Warrant revaluation		—		222
Gain on settlement of liability		—		1
Total other (expense) income		(4)		225
LOSS BEFORE INCOME TAXES		(3,030)		(4,584)
INCOME TAX EXPENSE		—		—
NET LOSS		(3,030)		(4,584)
Less: Net income attributable to noncontrolling interest in joint venture		—		(6)
NET LOSS ATTRIBUTABLE TO PRECIPIO, INC. COMMON STOCKHOLDERS	$	(3,030)	$	(4,590)
BASIC AND DILUTED LOSS PER COMMON SHARE	$	(0.13)	$	(0.20)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING		23,211,838		22,708,587

See notes to unaudited condensed consolidated financial statements.

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PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(unaudited)

	For the Three Months Ended March 31, 2023
	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, 2023	47	$	—	22,820,260	$	228	$	108,371	$	(92,297)	$	16,302	$	65	$	16,367
Net (loss) income	—		—	—		—		—		(3,030)		(3,030)		—		(3,030)
Issuance of common stock in connection with at the market offering, net of issuance costs	—		—	543,826		5		433		—		438		—		438
Stock-based compensation	—		—	—		—		450		—		450		—		450
Balance, March 31, 2023	47	$	—	23,364,086	$	233	$	109,254	$	(95,327)	$	14,160	$	65	$	14,225

	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

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,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,030)	$	(4,584)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		310		302
Amortization of operating lease right-of-use asset		49		46
Amortization of finance lease right-of-use asset		23		34
Amortization of deferred financing costs, debt discounts and debt premiums		—		1
Gain on settlement of liability		—		(1)
Stock-based compensation		450		2,232
Provision for losses on doubtful accounts		12		78
Warrant revaluation		—		(222)
Changes in operating assets and liabilities:
Accounts receivable		166		(535)
Inventories		162		42
Other assets		84		111
Accounts payable		141		448
Operating lease liabilities		(48)		(45)
Deferred revenue		5		3
Accrued expenses		101		(244)
Net cash used in operating activities		(1,575)		(2,334)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(22)		(10)
Net cash used in investing activities		(22)		(10)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on finance lease obligations		(25)		(56)
Issuance of common stock, net of issuance costs		438		—
Principal payments on long-term debt		(120)		(7)
Net cash flows provided by (used in) financing activities		293		(63)
NET CHANGE IN CASH		(1,304)		(2,407)
CASH AT BEGINNING OF PERIOD		3,445		11,668
CASH AT END OF PERIOD	$	2,141	$	9,261

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,
	2023		2022
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest	$	10	$	9
SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY
Purchases of equipment financed through accounts payable		7		7

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, 2023 and 2022

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.

The Company is working with Poplar Healthcare PLLC (“Poplar”) to dissolve the Joint Venture with an effective date of December 31, 2022.

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. For the three months ended March 31, 2023, the Company had a net loss of $3.0 million and net cash used in operating activities of $1.6 million. As of March 31, 2023, the Company had an accumulated deficit of $95.3 million and a negative working capital of $0.5 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

8

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.

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 received approximately $16.1 million in gross proceeds through the AGP Sales Agreement from the sale of 5,202,561 shares of common stock. The AGP Sales Agreement expired on April 13, 2023 in connection with the expiration of a registration statement on Form S-3 (File No. 333-237445).

● On April 14, 2023, the Company entered into a sales agreement with AGP, pursuant to which the Company may offer and sell its common stock having aggregate sales proceeds of up to $5.8 million, to or through AGP, as sales agent (the “AGP 2023 Sales Agreement”). As of the date the condensed consolidated financial statements were issued, we have received less than $1,000 in gross proceeds through the AGP 2023 Sales Agreement from the sale of 500 shares of common stock, leaving the Company approximately $5.8 million available for future sales pursuant to the AGP 2023 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, 2023 and for the three months ended March 31, 2023 and 2022, 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, 2022 contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2023.

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.

9

Reclassification.

Certain reclassifications were made to the statements of cash flows related to splitting accruals and deferred revenue to separate lines in order to conform to the 2023 presentation. These reclassifications had no effect on previously reported retained earnings, net income, total assets or liabilities, or cash flows used in operating activities.

Recently Adopted Accounting Pronouncements.

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. The Company adopted this guidance on January 1, 2023. The adoption of this standard was not material to our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this Update also require additional disclosures for equity securities subject to contractual sale restrictions. The provisions in this Update are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company does not expect to early adopt this ASU. The Company is currently assessing the potential impact that the adoption of this ASU will have on its condensed consolidated financial statements.

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.

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 5,571,536 and 4,584,622 shares of our common stock have been excluded from the computation of diluted loss per share at March 31, 2023 and 2022, 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,
	2023	2022
Stock options	4,764,905	3,635,487
Warrants	689,131	831,635
Preferred stock	117,500	117,500
Total	5,571,536	4,584,622

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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.

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, 2023		December 31, 2022
Assets:
Accounts receivable, net	$	256	$	335
Total assets	$	256	$	335
Liabilities:
Accrued expenses	$	17	$	50
Total liabilities	$	17	$	50
Noncontrolling interest in Joint Venture	$	65	$	65
Total stockholders' equity	$	129	$	127

3. LONG-TERM DEBT

Long-term debt consists of the following:

	Dollars in Thousands
	March 31, 2023		December 31, 2022
Connecticut Department of Economic and Community Development (DECD)	$	169	$	176
DECD debt issuance costs		(15)		(15)
Financed insurance loan		115		228
Total long-term debt		269		389
Current portion of long-term debt		(142)		(255)
Long-term debt, net of current maturities	$	127	$	134

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 less than $1,000 for the three months ended March 31, 2023 and 2022, respectively.

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Financed Insurance Loan.

The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2022, the Company financed $0.4 million with a 5.99% interest rate and is obligated to make payments on a monthly basis through June 2023. As of March 31, 2023 and December 31, 2022, the Financed Insurance Loan’s outstanding balance of $0.1 million and $0.2 million, respectively, was included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet. A corresponding prepaid asset was included in other current assets.

4. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

Accrued expenses at March 31, 2023 and December 31, 2022 are as follows:

(dollars in thousands)	March 31, 2023		December 31, 2022
Accrued expenses	$	968	$	983
Accrued compensation		561		491
Accrued franchise, property and sales and use taxes		137		91
Accrued interest		19		19
	$	1,685	$	1,584

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, 2023 and 2022, zero and $1,000, respectively, were recorded as a gain on settlement of liability.

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.

PURCHASE COMMITMENTS

The Company has entered into purchase commitments for reagents from suppliers. These agreements started in 2011 and run through 2025. The Company and the suppliers will true up the amounts on an annual basis. The future minimum purchase commitments under these and other purchase agreements are approximately $1.2 million and $1.3 million at March 31, 2023 and December 31, 2022, respectively.

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, 2023 and December 31, 2022.

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.

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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 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 HemeScreen Reagent Rental (“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. There were no derecognized finance lease ROU assets for the three months ended March 31, 2023 and 2022, 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 $0.1 million as of March 31, 2023 and December 31, 2022, 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:

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(dollars in thousands)
Classification on the Condensed Consolidated Balance Sheet	March 31, 2023		December 31, 2022
Assets:
Operating lease right-of-use assets, net	$	714	$	763
Finance lease right-of-use assets, net (1)		234		257
Total lease assets	$	948	$	1,020
Liabilities:
Current:
Current maturities of operating lease liabilities	$	205	$	199
Current maturities of finance lease liabilities		155		162
Noncurrent:
Operating lease liabilities, less current maturities		520		574
Finance lease liabilities, less current maturities		50		68
Total lease liabilities	$	930	$	1,003

(1) As of March 31, 2023 and December 31, 2022, finance lease right-of-use assets included $7,000 and $13,000, respectively, of assets related to finance leases associated with the HSRR program.

As of March 31, 2023 and December 31, 2022, the estimated future minimum lease payments, excluding non-lease components, are as follows:

(dollars in thousands)	Operating Leases		Finance Leases		Total
		March 31,		March 31,		March 31,
		2023		2023		2023
2023 (remaining)	$	189	$	69	$	258
2024		239		80		319
2025		205		65		270
2026		195		26		221
Total lease obligations		828		240		1,068
Less: Amount representing interest		(103)		(35)		(138)
Present value of net minimum lease obligations		725		205		930
Less, current portion		(205)		(155)		(360)
Long term portion	$	520	$	50	$	570

Other information as of March 31, 2023 and December 31, 2022 is as follows:

	March 31,	December 31,
	2023	2022
Weighted-average remaining lease term (years):
Operating leases	3.5	3.7
Finance leases	2.7	2.8
Weighted-average discount rate:
Operating leases	8.00%	8.00%
Finance leases	10.41%	10.31%

During the three months ended March 31, 2023 and 2022, 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.

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Operating Lease Costs

Operating lease costs were approximately $0.1 million during the three months ended March 31, 2023 and 2022, 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, 2023 and 2022, 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, 2023 and 2022. The balances within these accounts are less than $0.1 million, respectively.

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 implemented this increase.

During the three months ended March 31, 2023 and 2022, the Company issued zero and 266 shares of its common stock, respectively, in connection with the exercise of zero and 266 warrants, respectively. The warrant exercises during the three months ended March 31, 2022 resulted in net cash proceeds to the Company of less than $1,000.  

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, 2023, we received net proceeds of $0.4 million from the sale of 543,826 shares of common stock through AGP. There were no sales of common stock through AGP during the three months ended March 31, 2022. As of the date of issuance of this Quarterly Report on Form 10-Q, we have received an aggregate of $15.6 million in net proceeds, after issuance costs of approximately $0.5 million, from the sale of 5,202,561 shares of common stock through AGP, including less than $0.1 million in net proceeds from the sale of 72,712 shares of common stock through AGP from April 1, 2023 through the date of issuance of this quarterly Report on From 10-Q.

The AGP Sales Agreement expired on April 13, 2023 in connection with the expiration of the registration statement on Form S-3 (File No. 333-237445). On April 14, 2023, the Company entered into a sales agreement with AGP, pursuant to which the Company may offer and sell its common stock having aggregate sales proceeds of up to $5.8 million, to or through AGP, as sales agent (the “AGP 2023 Sales Agreement”). See Note 11 – Subsequent Events for further discussion.

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, 2023 and 2022, respectively. At March 31, 2023 and December 31, 2022, 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, 2023 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, 2023:

			Underlying	Exercise
	Issue Year	Expiration	Shares	Price
Warrants
(1)	2018	April 2023	148,378	$	5.40
(2)	2018	July 2023	29,343	$	5.40
(3)	2018	August 2023	41,806	$	5.40
(4)	2018	September 2023	40,719	$	5.40
(5)	2018	November 2023	75,788	$	5.40
(6)	2018	December 2023	51,282	$	5.40
(7)	2019	April 2024	147,472	$	5.40
(8)	2019	May 2024	154,343	$	9.56
			689,131

(1) - (7)These warrants were issued in connection with a 2018 securities purchase agreement, as amended.

(8) These warrants were issued in connection with convertible notes issued in May 2019.

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 recorded during the three months ended March 31, 2023 and 2022.

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.

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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.

Bridge Note Warrant Liabilities

During 2018 and 2019, the Company issued warrants in connection with the issuance of convertible notes. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”).

The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of March 31, 2023, Bridge Note Warrant Liabilities outstanding were the result of convertible note issuances on eight different dates in 2018 and 2019. The assumptions used in the valuation of the Bridge Note Warrant Liabilities include the following ranges: remaining life to maturity of 0.1 to 1.1 years; volatility rate of 56% to 79%; and risk-free rate of 4.63% to 4.97%. As of December 31, 2022, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 0.3 to 1.4 years; volatility rate of 69% to 77%; and risk free rate of 4.42 to 4.76%.

During the three months ended March 31, 2023 and 2022, the change in the fair value of the warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:

Dollars in Thousands
	Three Months Ended March 31, 2023
	Bridge Note
	Warrant Liabilities
Beginning balance at January 1	$	–	*
Total gains:
Revaluation recognized in earnings		–	*
Balance at March 31	$	–	*
* Represents amount less than one thousand dollars
	Three Months Ended March 31, 2022
	Bridge Note
	Warrant Liabilities
Beginning balance at January 1	$	606
Total gains:
Revaluation recognized in earnings		(222)
Balance at March 31	$	384

9. EQUITY INCENTIVE PLAN

The Company currently issues stock awards under its 2017 Stock Option and Incentive Plan, as amended (the “2017 Plan”) which will expire on June 5, 2027. The shares authorized for issuance under the 2017 Plan were 4,993,866 at March 31, 2023, of which 227,662 were available for future grant. The shares authorized under the 2017 Plan are subject to annual increases on January 1 by 5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or such lessor number of shares determined by the Company’s Board of Directors or Compensation Committee. During the three months ended March 31, 2023, the shares authorized for issuance increased by 1,141,013 shares.

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Stock Options.

The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value at the date of grant and expenses the benefit in operating expense in the condensed consolidated statements of operations over the service period of the awards. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.

During the three months ended March 31, 2023, the Company granted stock options to purchase up to 1,100,600 shares of common stock at a weighted average exercise price of $0.62 per share. These awards have vesting periods of up to four years and had a weighted average grant date fair value of $0.59. The fair value calculation of options granted during the three months ended March 31, 2023 used the following assumptions: risk free interest rate of 3.66%, based on the U.S. Treasury yield in effect at the time of grant; expected life of six years; and volatility of 162% based on historical volatility of the Company’s common stock over a time that is consistent with the expected life of the option.

The following table summarizes stock option activity under our plans during the three months ended March 31, 2023:

	Number of	Weighted-Average
	Options	Exercise Price
Outstanding at January 1, 2023	3,681,336	$	2.84
Granted	1,100,600		0.62
Forfeited	(17,031)		1.80
Outstanding at March 31, 2023	4,764,905	$	2.33
Exercisable at March 31, 2023	2,482,475	$	3.05

As of March 31, 2023, there were 4,054,451 options that were vested or expected to vest with aggregate intrinsic value of less than $0.1 million and a remaining weighted average contractual life of 8.3 years.

During the three months ended March 31, 2022, there were 1,004,000 options granted with a weighted average exercise price of $1.54 per share and 3,800 options forfeited with a weighted average exercise price of $4.95 per share.

For the three months ended March 31, 2023 and 2022, we recorded non-cash stock-based compensation expense for all stock awards of $0.5 million and $2.2 million, respectively, within operating expense in the accompanying statements of operations. As of March 31, 2023, the unrecognized compensation expense related to unvested stock awards was $3.3 million, which is expected to be recognized over a weighted-average period of 2.5 years.

10. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE

ASC Topic 606, “Revenue from contracts with customers”

The Company follows the guidance of ASC 606 for the recognition of revenue from contracts with customers to transfer goods and services. The Company performed a comprehensive review of its existing revenue arrangements following the five-step model:

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Step 1: Identification of the contract with the customer.  Sub-steps include determining the customer in a contract, initial contract identification and determining if multiple contracts should be combined and accounted for as a single transaction.  

Step 2: Identify the performance obligation in the contract.  Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct.

Step 3: Determine the transaction price.  Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable to a customer.

Step 4: Allocate transaction price.  Sub-steps include assessing the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the customer.

Step 5: Satisfaction of performance obligations.  Sub-steps include ascertaining the point in time when an asset is transferred to the customer and when the customer obtains control of the asset upon which time the Company recognizes revenue.

Nature of Contracts and Customers

The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers starts upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research.  Payment terms for the services provided are 30 days, unless separately negotiated.

Diagnostic testing

Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract.

Clinical research grants

Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation.

Biomarker testing and clinical project services

Control of the biomarker testing and clinical project services are transferred to the customer over time.  The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results.

The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs.

Reagents and other diagnostic products

Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. These revenues include revenues from reagent sets for our HSRR program and other product sales and are included in other revenue in our condensed consolidated statements of operations.

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Equipment leasing

The Company accounts for sales-type leases within the scope of ASC 842, Leases, as ASC 606 specifically excludes leases from its guidance. The sales-type leases result in the derecognition of the underlying asset, the recognition of profit or loss on the sale, and the recognition of an investment in leased asset.  Revenue from sales-type leases is recognized upfront on the commencement date of the lease and is included in other revenue in our condensed consolidated statements of operations. For the three months ended March 31, 2023 and 2022, revenue from sales-type leases was zero, respectively.

Disaggregation of Revenues by Transaction Type

We operate in one business segment and, therefore, the results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Service revenue, net for the three months ended March 31, 2023 and 2022 was as follows:

	For the Three Months Ended March 31,
(dollars in thousands)	Diagnostic Testing
	2023		2022
Medicaid	$	8	$	15
Medicare		880		974
Self-pay		80		49
Third party payers		1,100		967
Service revenue, net	$	2,068	$	2,005

Revenue from the Medicare and Medicaid programs account for a portion of the Company’s patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from the following types of transactions: diagnostic testing (“Diagnostic”), revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics (collectively “Biomarker”), revenues from clinical research grants from state and federal research programs and diagnostic product sales, including revenues from equipment leases and reagent sales associated with our HSRR program.

Deferred revenue

Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of revenue from deferred revenue. For the period ended March 31, 2023 and December 31, 2022, the deferred revenue was $0.1 million, respectively.

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Contractual Allowances and Adjustments

We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers. Accordingly, the total revenue and receivables reported in our condensed consolidated financial statements are recorded at the amounts expected to be received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payer class during the three months ended March 31, 2023 and 2022.

	For the Three Months Ended March 31,
(dollars in thousands)					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2023		2022		2023		2022		2023		2022
Medicaid	$	8	$	15	$	—	$	—	$	8	$	15
Medicare		880		974		—		—		880		974
Self-pay		80		49		—		—		80		49
Third party payers		3,835		3,385		(2,735)		(2,418)		1,100		967
		4,803		4,423		(2,735)		(2,418)		2,068		2,005
Other		761		522		—		—		761		522
	$	5,564	$	4,945	$	(2,735)	$	(2,418)	$	2,829	$	2,527

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Allowance for Doubtful Accounts

The Company provides for a general allowance for collectability of services when recording net sales. The Company has adopted the policy of recognizing net sales to the extent it expects to collect that amount. Reference is made to FASB 954-605-45-5 and ASU 2011-07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the three months ended March 31, 2023 and 2022.

	For the Three Months Ended March 31,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2023		2022		2023		2022		2023		2022
Medicaid	$	8	$	15	$	(4)	$	(7)	$	4	$	8
Medicare		880		974		—		(24)		880		950
Self-pay		80		49		(8)		—		72		49
Third party payers		1,100		967		—		(49)		1,100		918
		2,068		2,005		(12)		(80)		2,056		1,925
Other		761		522		—		—		761		522
	$	2,829	$	2,527	$	(12)	$	(80)	$	2,817	$	2,447

Costs to Obtain or Fulfill a Customer Contract

Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in operating expenses in the condensed consolidated statements of operations.

Shipping and handling costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the condensed consolidated statements of operations.

Accounts Receivable

The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements.

The following summarizes the mix of receivables outstanding related to payer categories:

(dollars in thousands)	March 31, 2023		December 31, 2022
Medicaid	$	31	$	34
Medicare		1,080		1,124
Self-pay		252		291
Third party payers		1,446		1,888
Contract diagnostic services and other		415		53
	$	3,224	$	3,390
Less allowance for doubtful accounts		(2,366)		(2,354)
Accounts receivable, net	$	858	$	1,036

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The following table presents the roll-forward of the allowance for doubtful accounts for the three months ended March 31, 2023.

			Allowance for
			Doubtful
(dollars in thousands)			Accounts
Balance, January 1, 2023			$	(2,354)
Collection Allowance:
Medicaid	$	(4)
Medicare		—
Self-pay		(8)
Third party payers		—
		(12)
Bad debt expense	$	—
Total charges				(12)
Balance, March 31, 2023			$	(2,366)

Customer Revenue and Accounts Receivable Concentration

Our customers are oncologists, hospitals, reference laboratories, physician-office laboratories, and pharma and biotech companies. Customers that accounted for 10% or greater of our net sales or accounts receivable for the identified periods is as follows:

	Net sales				Accounts receivable, as of
	Three Months Ended
	March 31,				March 31,		December 31,
	2023		2022		2023		2022
Customer A	18	%	*		31	%	*
Customer B	*		10	%	*		*
Customer C	*		*		*		12	%
Customer D	*		*		12	%	*
* represents less than 10%

11. SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to March 31, 2023 through the date of this Quarterly Report on Form 10-Q, and any material subsequent events are reported below.

At The Market Offering Agreement

On April 14, 2023, the Company entered into a Sales Agreement with AGP, pursuant to which the Company may offer and sell from time to time shares (the “Shares”) of its common stock, par value $0.01 per share (the “Common Stock”) to or through AGP, as sales agent (the “AGP 2023 Sales Agreement”), 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”).  AGP will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of Shares pursuant to the AGP 2023 Sales Agreement. The Company has filed a prospectus to its registration statement on Form S-3 (File No. 333-271277), as amended, offering shares of common stock having an aggregate gross sales price of up to $5,800,000 pursuant to the AGP 2023 Sales Agreement. 

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As of the date the condensed consolidated financial statements were issued, we have received less than $1,000 in gross proceeds through the AGP 2023 Sales Agreement from the sale of 500 shares of common stock, leaving the Company approximately $5.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.

Nasdaq Delisting Notice

As previously reported, on October 28, 2022, the Company received a letter from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that the closing bid price for its common stock had been below $1.00 for the previous 30 consecutive business days, and that it was therefore not in compliance with the minimum bid price requirement for continued inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the "Bid Price Rule"). The notice indicated that it would have 180 calendar days, or until April 26, 2023, to regain compliance with the Bid Price Rule.  

On April 27, 2023, Nasdaq notified the Company that it is eligible for an extension to comply with the Bid Price Rule until October 23 2023, by which date the Company must evidence compliance for at least ten consecutive business days. If compliance cannot be demonstrated by October 23, 2023, Nasdaq will provide written notification that the Company’s common stock will be delisted. In the event of such a notification, the Company may appeal Nasdaq’s determination, but there can be no assurance Nasdaq would grant any such request for continued listing.

 The Company intends to monitor the closing bid price of its common stock and may, if appropriate, evaluate various courses of action to regain compliance with the Bid Price Rule. However, there can be no assurance that the Company will be able to regain compliance with the Bid Price Rule.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements. 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: the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic which is uncertain and will depend on future developments, our expected revenue, income (loss), receivables, operating expenses, 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 with the ongoing Russia and Ukraine conflict, 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.

You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons, including those described in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q and our prior filings with the Securities and Exchange Commission.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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, 2022, which we filed with the Securities and Exchange Commission on March 30, 2023. Results for the three months ended March 31, 2023 are not necessarily indicative of results that may be attained in the future.

Overview

We are a healthcare solutions company focused on cancer diagnostics.  Our 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.  We view 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

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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 our strategy, we have structured our 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.

In April 2020, we formed a Joint Venture with Poplar. Poplar provides specialized laboratory testing services to a nationwide client base of gastroenterologists, dermatologists, oncologists, urologists, gynecologists and their patients. The business purpose of the Joint Venture is to facilitate and capitalize on the combined capabilities, resources and healthcare industry relationships of its members by partnering, promoting and providing oncology services to office based physicians, hospitals and medical centers. Under the terms of the Joint Venture, Precipio SPV has a 49% ownership interest in the Joint Venture, with Poplar having a 51 % ownership. We have determined that we hold a variable interest in the Joint Venture and that we are the primary beneficiary of the Joint Venture. Due to this determination, we consolidate the Joint Venture. See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements appearing elsewhere in this report for further discussion. We are working with Poplar to dissolve the Joint Venture with an effective date of December 31, 2022.

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. For the three months ended March 31, 2023, the Company had a net loss of $3.0 million and net cash used in operating activities of $1.6 million. As of March 31, 2023, the Company had an accumulated deficit of $95.3 million and negative working capital of $0.5 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.

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 received approximately $16.1 million in gross proceeds through the AGP Sales Agreement from the sale of 5,202,561 shares of common stock. The AGP Sales Agreement expired on April 13, 2023 in connection with the expiration of a registration statement on Form S-3 (File No. 333-237445).

● On April 14, 2023, the Company entered into a sales agreement with AGP, pursuant to which the Company may offer and sell its common stock having aggregate sales proceeds of up to $5.8 million, to or through AGP, as sales agent (the “AGP 2023 Sales Agreement”). As of the date the condensed consolidated financial statements were issued, we have received less than $1,000 in gross proceeds through the AGP 2023 Sales Agreement from the sale of 500 shares of common stock, leaving the Company approximately $5.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.

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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.

Outlook - COVID-19 related

The COVID-19 outbreak, which spread worldwide in the first quarter of 2020, has caused significant business disruption. The extent of the impact of the ongoing COVID-19 pandemic on the Company’s operational and financial performance will depend on future developments. While our laboratory operations resumed to near-normal capacity, we may continue to experience challenges in procuring materials and supplies in a consistently timely manner due to COVID-19-related supply chain issues. In addition, delays in the development of COVID-19 vaccines or the deployment of vaccines which are approved or otherwise authorized for emergency use, a recurrence or “subsequent waves” of COVID-19 cases, or the discovery of vaccine-resistant COVID-19 variants, the emergence of subvariants, or the discovery of vaccine-resistant COVID-19 variants could cause other widespread or more severe impacts. We have been actively monitoring the COVID-19 pandemic and its impact on the global economy and the Company. As the global pandemic evolves, we will continue to monitor the extent to which COVID-19 impacts our revenues, expenses and liquidity.

Results of Operations for the Three Months Ended March 31, 2023 and 2022

Net Sales. Net sales were as follows:

	Dollars in Thousands
	Three Months Ended
	March 31,				Change
	2023		2022		$		%
Service revenue, net, less allowance for doubtful accounts	$	2,056	$	1,925	$	131	7	%
Other		761		522		239	46	%
Net Sales	$	2,817	$	2,447	$	370	15	%

Net sales for the three months ended March 31, 2023 were approximately $2.8 million, an increase of $0.4 million as compared to the same period in 2022. During the three months ended March 31, 2023, patient diagnostic service revenue increased $0.1 million as compared to the same period in 2022. This increase was due to a greater number of cases processed in the current year period. We processed 1,196 cases during the three months ended March 31, 2023 as compared to 997 cases during the same period in 2022, or a 20% increase in cases.  Other revenue increased by $0.2 million for the three months ended March 31, 2023 as compared to the same period in 2022. The other revenues were primarily related to increased sales of our HemeScreen product as a result of a greater number of customers purchasing reagents during the current year period.

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 million for the three months ended March 31, 2023 as compared to the same period in 2022.

Gross Profit. Gross profit and gross margins were as follows:

	Dollars in Thousands
	Three Months Ended
	March 31,				Margin %
	2023		2022		2023		2022
Gross Profit	$	749	$	703	27	%	29	%

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Gross margin was 27% of total net sales, for the three months ended March 31, 2023, as compared to 29% of total net sales for the same period in 2022. Gross profit was approximately $0.7 million during the three months ended March 31, 2023 and 2022, respectively. 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.

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 $1.8 million to $3.8 million for the three months ended March 31, 2023 as compared to the same period in 2022. The decrease included a decrease of $0.6 million in general and administrative expenses, which was due to a decrease of $0.2 million in personnel costs and a decrease of $0.4 million in legal expenses, and a decrease of $1.8 million in stock-based compensation expenses for the three months ended March 31, 2023. These decreases were partially offset by a $0.6 million increase in sales and marketing expenses due mainly to increased personnel costs as we expanded our product sales force starting in the second half of 2022 and an increase in research and development expenses of less than $0.1 million.

Other (Expense) Income. We recorded net other expense $4,000 for the three months ended March 31 2023 which was related to net interest expense. During the three months ended March 31, 2022, we recorded net other income of $0.2 million which was primarily attributable to non-cash income recorded on warrant revaluations.

Liquidity and Capital Resources

Our working capital positions were as follows:

	March 31, 2023		December 31, 2022		Change
Current assets (including cash of $2,141 and $3,445 respectively)	$	3,995	$	5,710	$	(1,715)
Current liabilities		4,501		4,361		140
Working capital	$	(506)	$	1,349	$	(1,855)

During the three months ended March 31, 2023 we received net proceeds of $0.4 million from sale of 543,826 shares of our common stock.

Analysis of Cash Flows – Three Months Ended March 31, 2023 and 2022

	Three Months Ended March 31,
	2023		2022		Change
Net cash used in operating activities	$	(1,575)	$	(2,334)	$	759
Net cash used in investing activities		(22)		(10)		(12)
Net cash (used in) provided by financing		293		(63)		356
Net change in cash	$	(1,304)	$	(2,407)	$	1,103

Cash Flows Used in Operating Activities. 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 accrued expenses of $0.1 million, and non-cash adjustments of $0.8 million. The non-cash adjustments included $12,000 for the change in provision for losses on doubtful accounts. We routinely provide a reserve for doubtful accounts as a result of having limited in-network payer contracts. The other non-cash adjustments to net loss of approximately $0.8 million include, among other things, depreciation and amortization, warrant revaluations and stock-

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based compensation. The cash flows used in operating activities of approximately $2.3 million during the three months ended March 31, 2022 included a net loss of $4.6 million, an increase in accounts receivables of $0.5 million, a decrease accrued expenses and other liabilities of $0.2 million and a decrease in operating lease liabilities of $0.1 million. These were partially offset by a decrease in inventories and other assets of $0.1 million, an increase in accounts payable of $0.4 million and non-cash adjustments of $2.5 million.

Cash Flows Used In Investing Activities. Cash flows used in investing activities were less than $0.1 million for the three months ended March 31, 2023 and 2022, respectively, resulting from purchases of property and equipment.

Cash Flows Used in or Provided by Financing Activities. 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. Cash flows used by financing activities totaled $0.1 million for the three months ended March 31, 2022, which included payments on our long-term debt and finance lease obligations of $0.1 million.

For further information regarding the Company’s future funding requirements, see the Going Concern disclosure in Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included with this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

At each of March 31, 2023 and December 31, 2022, other than certain purchase commitments of approximately $1.2 million and $1.3 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.

Contractual Obligations and Commitments

No significant changes to contractual obligations and commitments occurred during the three months ended March 31, 2023, as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on March 30, 2023.

Critical Accounting Policies and Estimates

Accounting policies used in the preparation of our financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on March 30, 2023.

Recently Issued Accounting Pronouncements

See the accompanying unaudited condensed consolidated financial statements and Note 2 - “Summary of Significant Accounting Policies” in the Notes to unaudited condensed consolidated financial statements for additional information regarding recently issued accounting pronouncements.

Impact of Inflation

Inflation generally affects us with increased cost of labor and operating supplies. We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management including our Chief Executive Officer and our Interim Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2023.

Changes in Internal Control over Financial Reporting

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended March 31, 2023 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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.

The outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our financial statements for such reporting period could be materially adversely affected. In general, the resolution of a legal matter could prevent us from offering our services or products to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.

The Company is involved in legal proceedings related to matters, which are incidental to its business and 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.

CPA Global provides us with certain patent management services. As previously reported, 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, 2023 and December 31, 2022.

Item 1A. Risk Factors

As disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, there are a number of risks and uncertainties that may have a material effect on the operating results of our business and our financial condition. The following information updates, and should be read in conjunction with, the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, and other filings we make with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.

We have incurred losses since our inception and expect to incur losses in the future. At March 31, 2023, we had working capital of negative $0.5 million. For the three months ended March 31, 2023, we had an operating cash flow deficit of $1.6 million and a net loss of $3.0 million. For the period ended March 31, 2023, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses through at least 2023 as we further develop and commercialize our diagnostic technology. We also expect that our selling, general

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and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.

We may need to raise substantial additional capital to commercialize our diagnostic technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts or force us to restrict or cease operations.

As of March 31, 2023, we had cash of $2.1 million and our working capital was negative $0.5 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we may be required to raise additional capital to complete the development and commercialization of our current product candidates and to pay off our obligations. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings. In future periods, when we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict or cease our operations or obtain funds by entering into agreements on unattractive terms.

We are not currently in compliance with the minimum bid price rule of the Nasdaq Capital Market, and if we cannot regain and maintain compliance, our securities may be delisted, which could negatively impact the price of our securities and hinder our ability to raise capital.

On October 28, 2022, we received a letter from the Nasdaq Capital Market (“Nasdaq”) notifying us that for the past 30 consecutive business days, the closing bid price per share of our common stock was below $1.00, the minimum bid price requirement for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). As a result, Nasdaq notified us that we were not in compliance with the Bid Price Rule. The notice from Nasdaq has no immediate effect on the listing of the shares of our common stock. Nasdaq provided us until April 26, 2023 to regain compliance with the Bid Price Rule.

On April 27, 2023, Nasdaq notified us that we are eligible for an extension to comply with the Bid Price Rule until October 23 2023, by which date we must evidence compliance for at least ten consecutive business days along with compliance of other Nasdaq listing rules. If compliance cannot be demonstrated by October 23, 2023, Nasdaq will provide written notification that our common stock will be delisted. In the event of such a notification, we may appeal Nasdaq’s determination, but there can be no assurance Nasdaq would grant any such request for continued listing.

We are presently evaluating various courses of action to regain compliance with the Bid Price Rule but there can be no assurance that we will be able to regain compliance.

If Nasdaq delists our securities, we could face significant consequences, including:

● a limited availability for market quotations for our securities;

● reduced liquidity with respect to our securities;

● a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in reduced trading;

● reduced activity in the secondary trading market for our common stock;

● reduced or limited amount of news and analyst coverage; and

● a decreased ability to issue additional securities or obtain additional financing in the future.

These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock and would substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

10.1	Factoring Agreement, dated March 27, 2023, by and between the Company and Culain Capital Funding LLC (incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 30, 2023).
31.1	Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.
31.2	Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.
32.1*	Certification of Principal Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.
32.2*	Certification of Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.
101.INS	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File – formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.

*     This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PRECIPIO, INC.
Date:   May 12, 2023	By:	/S/ ILAN DANIELI
		Ilan Danieli
		Chief Executive Officer (Principal Executive Officer)
Date:   May 12, 2023	By:	/S/ MATTHEW GAGE
		Matthew Gage
		Interim Chief Financial Officer (Principal Financial and Accounting Officer)

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