Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis and set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis .
Overview
We are a healthcare biotechnology company focused on improving cancer diagnostics. The Company’s objective is to enhance diagnostic accuracy and accessibility while building a sustainable business model that supports ongoing innovation . The Company can achieve this through a combination of clinical laboratory services and proprietary diagnostic product development. By integrating diagnostic services with product development, the Company’s service business doubles as a self-funded research and development (R&D) unit, enabling the Company to achieve rapid and cost-efficient innovation, rather than being a major cost center of the Company.
This unique integrated operating structure is the foundation of the Company’s approach to research, development, and product commercialization. Unlike companies that rely primarily on stand-alone research facilities or external clinical validation programs, the Company’s clinical laboratory operations enables its R&D team to evaluate, refine, and validate
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diagnostic products in the course of routine clinical testing activities, and at minimal incremental cost. Through these activities, the Company generates clinical data, operational experience, and specimen access that support ongoing assay development and product improvement. While these activities are initially conducted to provide diagnostic services to patients and their healthcare providers, they also contribute to product development and validation processes.
Precipio has a single operating segment but operates two business divisions that are complementary to each other. The Company’s pathology services division provides specialized cancer diagnostic testing services to physicians, hospitals, and laboratories. This division generates revenue and supports the development of the Company’s expertise in oncology diagnostics. The pathology services division delivers specialized diagnostic testing focused primarily on hematologic cancers and operates a full laboratory that includes all the equipment, personnel, and work processes required to receive patient samples daily, and deliver clinical results to the physicians under the proper compliance umbrella, while also generating profitable revenue to the company. While reimbursement levels and testing volumes may vary, the Company views this division as an important foundation for both current operations and future product development.
The Company’s product division develops and commercializes proprietary diagnostic assay kits designed for use by clinical laboratories. These products allow the Company to expand its reach by enabling other laboratories to benefit from the diagnostic products developed by the Company, while building scalable diagnostic solutions. The Company believes this dual structure provides a unique model for R&D development of clinically applicable products, while delivering operational stability and supporting innovation and future growth. Furthermore, it provides the Company with substantial competitive advantages in terms of the economics of product development, and time to market. The products division focuses on developing proprietary diagnostic assays and kits intended for use by other clinical laboratories. These products are designed to improve testing accessibility and laboratory workflow efficiency while enabling broader market reach without requiring Precipio to perform all testing internally. Product revenues may offer greater scalability than traditional laboratory services, although adoption depends on regulatory, reimbursement, and market factors.
To deliver our strategy, we have structured our organization to develop diagnostic products, including our laboratory and research and development (“R&D”) facilities located in New Haven, Connecticut and Omaha, Nebraska, respectively, which house teams that collaborate on the development of new products and services. We operate clinical laboratory improvement amendment (“CLIA”) laboratories in both New Haven, Connecticut and Omaha, Nebraska where we provide essential blood cancer diagnostics to office-based oncologists in many states nationwide. To deliver on our strategy of mitigating misdiagnoses we rely heavily on our CLIA laboratories 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 our robust pipeline of innovative solutions designed to address the root causes of misdiagnoses .
Going Concern
The 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 we will realize our assets and discharge our liabilities in the ordinary course of business. We have incurred substantial operating losses and have typically used cash in our operating activities for the past several years. For the year ended December 31, 2025, we had an operating loss of $1.2 million and net cash provided by operating activities of $0.7 million. As of December 31, 2025, we had an accumulated deficit of $102.8 million and working capital of $2.3 million. Our ability to continue as a going concern over the next twelve months from the date the consolidated financial statements were issued is dependent upon a combination of achieving our business plan, including generating additional revenue and avoiding potential business disruption due to the macroeconomic environment and geopolitical instability, and raising additional financing, if needed, to meet our debt obligations and paying liabilities arising from normal business operations when they come due.
There remains substantial doubt about our ability to continue as a going concern for the next twelve months from the date the consolidated financial statements were available to be issued. There can be no assurance that we will be able to successfully achieve our initiatives summarized above in order to continue as a going concern. The accompanying financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments
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that might result should we be unable to continue as a going concern as a result of the outcome of this uncertainty. See “Risk Factors – There is substantial doubt about our ability to continue as a going concern”.
Results of Operations for the Years Ended December 31, 2025 and 2024
Net Sales. Net sales were as follows:
Dollars in Thousands
Year Ended
December 31,
Change
2025
2024
$
%
Service revenue, net, less allowance for credit loss
$
21,309
$
15,921
$
5,388
34
%
Product revenue
2,740
2,611
129
5
%
Net Sales
$
24,049
$
18,532
$
5,517
30
%
Net sales for the year ended December 31, 2025 were $24.0 million, an increase of $5.5 million, as compared to the same period in 2024. During the year ended December 31, 2025, patient diagnostic service revenue increased $5.4 million as compared to the same period in 2024. This increase was due to a greater number of cases processed in the current year period. We processed 15,470 cases during the year ended December 31, 2025 as compared to 11,894 cases during the same period in 2024, or a 30% increase in cases. Product revenue increased by $0.1 million for the year ended December 31, 2025 as compared to the same period in 2024.
Cost of Sales. Cost of sales includes material and supply costs, including shipping, for the patient tests performed, costs related to 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 $2.4 million for the year ended December 31, 2025 as compared to the same period in 2024. The majority of the increase related to increases in reagents, operating supplies, personnel costs and pathologist interpretation costs all due to the increase in the number of cases processed, as discussed above.
Gross Profit. Gross profit and gross margins were as follows:
Dollars in Thousands
Year Ended
December 31,
Change
2025
2024
$
%
Gross Profit
$
10,706
$
7,559
3,147
42
Gross Margin
45%
41%
Gross margin was 45% and 41% of total net sales, for the years ended December 31, 2025 and 2024, respectively, and the gross profit was approximately $10.7 million and $7.6 million during the years ended December 31, 2025 and 2024, respectively. G ross profit increased during the year ended December 31, 2025, as compared to the prior year period, as a result of increases in case volume and revenue. We operate a fully staffed CLIA and CAP certified clinical 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 increased by $0.1 million to $11.9 million for the year ended December 31, 2025 as compared to $11.8 million for the year ended December 31, 2024. For the year ended December 31, 2025: (1) general and administrative expenses remained flat which included an increase of $0.1 million in personnel costs offset by a decrease of $0.1 million in legal and professional fees, (2) sales and marketing expenses increased by $0.1 million due to an increase in professional fees, (3) research and development expenses increased by $0.3 million due to an increase in personnel costs and operating supplies, and (4) stock-based compensation decreased by $0.3 million .
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Other (Expense) Income. We recorded net other income of $0.8 million for the year ended December 31, 2025 which included income of $0.1 million from the gain on settlement of liabilities, income of $0.8 million from the receipt of Employee Retention Credits (as defined below), and net interest expense of $0.1 million. During the year ended December 31, 2024, w e recorded net other expense of $0.1 million which was related to net interest expense .
Liquidity and Capital Resources
Our working capital positions at December 31, 2025 and 2024 were as follows (in thousands):
December 31, 2025
December 31, 2024
Change
Current assets (including cash of $2,651 and $1,389 respectively)
$
6,039
$
3,451
$
2,588
Current liabilities
3,752
4,271
(519)
Working capital
$
2,287
$
(820)
$
3,107
During the year ended December 31, 2025, we received net cash proceeds of approximately $1.3 million from the exercise of 444,444 warrants, which resulted in the issuance of 242,562 shares of common stock of the Company .
Also, during the year ended December 31, 2025, we received $0.8 million related to refundable Employee Retention Credits that it had applied for.
Analysis of Cash Flows - Years Ended December 31, 2025 and 2024
The following table summarizes our net cash flow activity (in thousands):
Dollars in Thousands
Year Ended December 31,
2025
2024
Change
Net cash provided by operating activities
$
685
$
439
$
246
Net cash used in investing activities
(326)
(223)
(103)
Net cash provided by (used in) financing activities
903
(329)
1,232
Net change in cash
$
1,262
$
(113)
$
1,375
Net Change in Cash. Cash increased by $1.3 million during the year ended December 31, 2025 and decreased by $0.1 million during the year ended December 31, 2024.
Cash Flows Provided by (Used in) Operating Activities. The cash flows provided by operating activities of $0.7 million during the year ended December 31, 2025 included an increase in accounts payable of $0.5 million, an increase in deferred revenues of $0.1 million, and non-cash adjustments of $3.2 million. These were partially offset by a net loss of $0.4 million, an increase in accounts receivables of $1.4 million, an increase in inventories of $0.2 million, a decrease in operating lease liabilities of $0.2 million and a decrease in accrued expenses of $0.9 million. The non-cash adjustments included $0.2 million for the change in provision for credit losses. We routinely provide a reserve for credit losses as a result of having limited in-network payer contracts. The other non-cash adjustments to net loss of approximately $3.0 million include, among other things, depreciation and amortization, and stock-based compensation. The cash flows provided by operating activities of approximately $0.4 million during the year ended December 31, 2024 included a decrease in accounts receivables of $0.4 million, a decrease in other assets of $0.3 million, an increase in accrued expenses of $1.0 million, an increase in deferred revenue of $0.1 million and non-cash adjustments of $3.4 million . These were partially offset by a net loss of $4.3 million, an increase in inventories of $0.3 million, and a decrease in operating lease liabilities of $0.2 million.
Cash Flows Used In Investing Activities. Cash flows used in investing activities were $0.3 million and $0.2 million for the years ended December 31, 2025 and 2024, respectively, resulting from purchases of property and equipment.
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Cash Flows Provided by (Used in) Financing Activities. Cash flows provided by financing activities totaled $0.9 million for the year ended December 31, 2025, which included $1.3 million in proceeds from the exercise of warrants and $0.1 million in proceeds from the exercise of stock options. These were partially offset by $0.5 million in payments on our long-term debt and finance lease obligations. Cash flows used in financing activities totaled $0.3 million for the year ended December 31, 2024, which included $0.7 million in payments on our long-term debt and finance lease obligations. These were partially offset by $0.3 million of proceeds from debt and $0.1 million of proceeds from the issuance of common stock .
At each of December 31, 2025 and December 31, 2024, other than certain purchase commitments, 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. See Note 8 – “Commitments and Contingencies” to our consolidated financial statements appearing elsewhere in this report for further discussion.
Contractual Obligations and Commitments
At December 31, 2025, our contractual obligations and other commitments were as follows:
Payments Due By Period
(in thousands)
Total
Less Than 1 Year
1-3 Years
3-5 Years
More than 5 Years
Long term debt (1)
$
87
$
35
$
52
$
—
$
—
Finance lease obligations (2)
1,201
300
507
315
79
Operating lease obligations (2)
3,273
648
1,446
1,086
93
Purchase obligations (3)
3,080
2,290
316
316
158
$
7,641
$
3,273
$
2,321
$
1,717
$
330
(1) Total payments include $83,000 in principal and $4,000 in interest. See Note 5 - "Long-Term Debt" to our accompanying consolidated financial statements included with this Annual Report on Form 10-K.
(2) See Note 7 - "Leases" to our accompanying consolidated financial statements included with this Annual Report on Form 10-K.
(3) These amounts represent purchase commitments, including all open purchase orders See Note 8 – “Commitments and Contingencies” to our accompanying consolidated financial statements included with this Annual Report on Form 10-K.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events.
We believe that the following critical accounting estimates are particularly subject to management’s judgment and could materially affect our financial condition and results of operations:
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● Assumptions used in the Black-Scholes pricing model for valuation of stock option awards, such as expected volatility, risk-free interest rate, expected term and expected dividends.
● Assumptions used in the recording of allowances for credit losses and contractual allowances, including customer creditworthiness, market conditions, and trends in healthcare and insurance practices.
Management also regularly makes estimates related to the recoverability of long-lived assets; the fair values and useful lives of intangible assets acquired in business combinations; and income taxes. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable, the results of which form the basis for the amounts recorded in the consolidated financial statements. As appropriate, the Company obtains reports from third-party valuation experts to inform and support estimates related to fair value measurements.
For additional information on critical accounting estimates, see Note 2 to the consolidated Financial Statements, “Summary of Significant Accounting Policies,” in Part II, Item 8, of this Annual Report on Form 10-K.
Recently Adopted Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09—Income Taxes (Topic 740)—Improvements to Income Tax Disclosures (“ASU 2023-09”) which amends the Codification to enhance the transparency and decision usefulness of income tax disclosures. ASU 2023-09 requires additional disaggregation of the reconciliation between the statutory and effective tax rate for an entity and of income taxes paid, both of which are disclosures required by current GAAP. The amendments improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. The amendments in ASU 2023-09 apply to all entities that are subject to Topic 740, Income Taxes. For public business entities, the amendments in ASU 2023-09 are effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company has adopted this standard with retrospective application in the 2025 annual financial statements and have included the additional disclosures in Note 9 - Income Taxes.
Recent Accounting Pronouncements Not Yet Adopted
In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income (Topic 220): Expense Disaggregation Disclosures (ASU 2024-03”). This update requires entities to disaggregate operating expenses into specific categories, such as purchases of inventory, compensation, depreciation, and amortization, to provide enhanced transparency into the nature and function of expenses. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, with early adoption permitted. ASU 2024-03 may be applied retrospectively or prospectively. The Company is currently evaluating the impact of this standard on its financial statement presentation and disclosures.
In July 2025, the FASB issued ASU 2025-05, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets , which provides a practical expedient related to the estimation of expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, including those assets acquired in a business combination. The practical expedient permits all entities to assume that current conditions as of the balance sheet date do not change for the remaining life of the asset. This ASU is effective for fiscal years beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements and disclosures.
In September 2025, the FASB issued ASU 2025-06, Intangibles — Goodwill and Other — Internal-use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software, which eliminates the previous stage-based model for capitalizing software costs and replaces it with a principles-based framework. This new guidance is designed to be more adaptable to modern, agile software development methods, clarifying when an entity should capitalize software costs based on a “probable-to-complete” threshold. This ASU is effective for fiscal years beginning after December 15, 2027, and interim reporting periods within those annual reporting periods, and may be applied using a prospective, modified, or retrospective transition approach. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements and disclosures.
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Other Developments
Change Healthcare
Change Healthcare (“CHC”), a subsidiary of UnitedHealth Group, experienced a cybersecurity breach in February 2024 which resulted in the temporary shut-down of some of its systems. Precipio uses CHC to process its billings for pathology services. Thus, when CHC shut down its business operations our pathology billings were halted. Our ability to process billings, accept payer remittances, process medical and billing benefit notices, bill secondary insurers, as well as patients, and communicate with commercial payers was severely impacted. Starting shortly after the breach, we redirected a significant amount of our internal resources to internally handle the billing services that CHC was no longer delivering. This resulted in billing and cash reimbursement delays during the year ended December 31, 2024.
Along with the delays in billing and cash reimbursements, we incurred approximately $0.3 million of expenses during the year ended December 31, 2024, as we incurred lost collections and used alternative methods for claims processing. CHC established a Temporary Funding Assistance Program to help bridge the gap in short-term cash flow needs for its customers affected by the disruption of its services due to the cyberattack. On October 28, 2024, we received a notice from CHC stating that they had restored the connectivity of their systems. During the year ended December 31, 2024, we received approximately $1.1 million from CHC through this program.
During the year ended December 31, 2025, we made approximately $0.9 million in repayments to CHC and wrote off another $0.1 million . See Note 6 – “Accrued Expenses and Other Current Liabilities” for further discussion.
Employee Retention Credit (ERC)
On March 27, 2020, the U.S. government enacted the CARES Act. Under the provisions of the CARES Act, and its subsequent extensions, we became eligible to apply for a refundable Employee Retention Credit (the “ERC”), subject to certain criteria, which could be used to offset payroll tax liabilities.
In November 2022, we submitted an ERC claim totaling approximately $1.5 million. During the year ended December 31, 2025, we received payments totaling approximately $0.8 million. We recorded this amount as other income in the condensed consolidated statements of operations.
We retain all rights to pursue and receive the remaining balance of approximately $0.7 million and are actively evaluating the likelihood and timing of any additional disbursements. We have not waived any claims to the unpaid portion of the ERC and are taking reasonable steps to secure the remaining balance. However, there can be no assurance as to the timing, amount, or certainty of receipt of additional funds, and we will continue to assess the collectability of the remaining claim in accordance with applicable accounting standards.
The $0.8 million ERC refund and the $0.1 million CHC write-off discussed above are non-recurring items and, as a result of these non-recurring items, we recorded approximately $0.9 million of other income in the consolidated statements of operations.
One Big Beautiful Bill Act of 2025
On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the United States. The OBBBA includes significant changes to federal tax law and other regulatory provisions that may impact us. We are currently assessing the impact of the OBBBA on our business, outlook, and financial statements.
Impact of Inflation
Inflationary factors, such as increases in our cost of goods, labor, or other operating expenses, may adversely affect our operating results. While it is difficult to accurately measure the impact of inflation due to the imprecise nature
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of the estimates required, we do not believe inflation had a material effect on our financial condition or results of operations during the years ended December 31, 2025 and 2024. We cannot assure you, however, that we will be able to increase the prices of our products or reduce our operating expenses in an amount sufficient to offset the effects future inflationary pressures may have on our gross margin. Accordingly, we cannot assure you that our financial condition and results of operations will not be materially impacted by inflation in the future.
Item 7A. 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.
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