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LEASES

3 Months Ended

Mar. 31, 2024

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, 2024 and 2023, 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, 2024 and December 31, 2023, respectively, and is included in other current assets and other assets in our condensed consolidated balance sheets.

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


(dollars in thousands)
Classification on the Condensed Consolidated Balance Sheet	March 31, 2024		December 31, 2023
Assets:
Operating lease right-of-use assets, net	$	556	$	612
Finance lease right-of-use assets, net (1)		156		174
Total lease assets	$	712	$	786

Liabilities:
Current:
Current maturities of operating lease liabilities	$	215	$	218
Current maturities of finance lease liabilities		62		132
Noncurrent:
Operating lease liabilities, less current maturities		353		407
Finance lease liabilities, less current maturities		71		18
Total lease liabilities	$	701	$	775

(1)

As of March 31, 2024 and December 31, 2023, finance lease right-of-use assets included zero, respectively, of assets related to finance leases associated with the HSRR program.

As of March 31, 2024, 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,
		2024		2024		2024
2024 (remaining)	$	189	$	59	$	248
2025		224		65		289
2026		214		26		240
Total lease obligations		627		150		777
Less: Amount representing interest		(59)		(17)		(76)
Present value of net minimum lease obligations		568		133		701
Less, current portion		(215)		(62)		(277)
Long term portion	$	353	$	71	$	424

Other information as of March 31, 2024 and December 31, 2023 is as follows:


	March 31,	December 31,
	2024	2023
Weighted-average remaining lease term (years):
Operating leases	2.6	2.8
Finance leases	1.8	2.0
Weighted-average discount rate:
Operating leases	8.00%	8.00%
Finance leases	10.70%	10.63%

During the three months ended March 31, 2024 and 2023, operating cash flows from operating leases was $0.1 million, respectively, and operating lease ROU assets obtained in exchange for operating lease liabilities was zero, respectively.

Operating Lease Costs

Operating lease costs were approximately $0.1 million during the three months ended March 31, 2024 and 2023, 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, 2024 and 2023, 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, 2024 and 2023. The balances within these accounts are less than $0.1 million, respectively.