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 solutions company focused on cancer diagnostics. Our business mission is to address the pervasive problem of cancer misdiagnoses by developing solutions in the form of diagnostic products and services. Misdiagnoses originate from outdated commercial diagnostic cancer testing technologies, lack of subspecialized expertise, and sub-optimal laboratory processes that are needed in today’s diagnostic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 one in five 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
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physician for patient treatment. We believe cancer diagnostics requires a holistic approach to improve the quality of diagnostic data and achieve more accurate interpretations of the patient situation, 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 our strategy, we have structured our organization to develop diagnostic products. Laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on the development of new products and services. We operate 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 Products Division commercial team generates direct sales as well as works with our key distributors. Global healthcare distributors, such as ThermoFisher, McKesson and Cardinal Health, have partnered with us to form the backbone of our go-to-market strategy and enable us to access laboratories around the country that can benefit from using our diagnostic products.
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 . The Joint Venture was dissolved on November 1, 2023 with an effective date of December 31, 2022.
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. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. For the year ended December 31, 2023, the Company had a net loss of $5.8 million and net cash used in operating activities of $3.6 million. As of December 31, 2023, the Company had an accumulated deficit of $98.2 million and 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 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 our current and future obligations we have taken the following steps to capitalize the business and successfully achieve our business plan:
● On April 14, 2023 , we entered into a sales agreement with AGP, pursuant to which we may offer and sell our common stock having aggregate sales proceeds of up to $5.8 million, to or through AGP, as sales agent (the “AGP 2023 Sales Agreement”). The sale of our shares of common stock to or through AGP, pursuant to the AGP 2023 Sales Agreement, will be made pursuant to the registration statement (the “2023 Registration Statement”) on Form S-3 (File No. 333-271277), filed by the Company with the SEC on April 14, 2023, as amended by Amendment No. 1 filed by the Company with the SEC on April 25, 2023, and declared effective on April 27, 2023. As of the date the consolidated financial statements were issued, we have received $0.1 million in gross proceeds through the AGP 2023 Sales Agreement from the sale of 10,192 shares of common stock. The Company has approximately $3.7
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million available for future sales pursuant to the AGP 2023 Sales Agreement. On January 19, 2024, we filed a prospectus supplement to our prospectus dated April 25, 2023 registering the offer and sales of up to $865,889 of shares of our common stock. We have approximately $0.8 million of remaining availability pursuant to this prospectus supplement.
● On June 8, 2023, we entered into a securities purchase agreement pursuant to which we received $2.0 million in gross proceeds through the sale of 206,250 shares of common stock and warrants to purchase shares of our common stock. Issuance costs were approximately $0.2 million and we intend to use the net proceeds for working capital and general corporate purposes.
Notwithstanding the aforementioned circumstances, 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 that might result should we be unable to continue as a going concern as a result of the outcome of this uncertainty.
Results of Operations for the Years Ended December 31, 2023 and 2022
Net Sales. Net sales were as follows:
Dollars in Thousands
Year Ended
December 31,
Change
2023
2022
$
%
Service revenue, net, less allowance for credit loss
$
12,178
$
8,010
$
4,168
52
%
Other
3,019
1,402
1,617
115
%
Net Sales
$
15,197
$
9,412
$
5,785
61
%
Net sales for the year ended December 31, 2023 were $15.2 million, an increase of $5.8 million, as compared to the same period in 2022. During the year ended December 31, 2023, patient diagnostic service revenue increased $4.2 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 6,765 cases during the year ended December 31, 2023 as compared to 4,109 cases during the same period in 2022, or a 65% increase in cases. Other revenue increased by $1.6 million for the year ended December 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 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 $2.3 million for the year ended December 31, 2023 as compared to the same period in 2022. The increase is in line with the changes in related revenues discussed above.
Gross Profit. Gross profit and gross margins were as follows:
Dollars in Thousands
Year Ended
December 31,
Margin %
2023
2022
2023
2022
Gross Profit
$
6,018
$
2,510
40
%
27
%
Gross margin was 40% and 27% of total net sales, for the years ended December 31, 2023 and 2022, respectively, and the gross profit was approximately $6.0 million and $2.5 million during the years ended December 31, 2023 and 2022, respectively. The gross profit increased during the year ended December 31, 2023, 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
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laboratory processing and reporting to ordering physicians. An increase in case volume enables our laboratory to yield economies of scale and to leverage fixed expenses, as we saw during 2023 with the increases in case volume and gross margin mentioned above.
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 $1.7 million to $13.6 million for the year ended December 31, 2023 as compared to $15.3 million for the year ended December 31, 2022. The decrease included decreases from: (1) a decrease of less than $0.1 million in general and administrative expenses, which was due to a decrease of $0.2 million in legal and professional fee expenses partially offset by a $0.1 million increase in state franchise taxes; and (2), a decrease of $2.2 million in stock-based compensation expenses for the year ended December 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 .
Other Income (Expense). We recorded net other income of $1.8 million for the year ended December 31, 2023 which was related to $1.7 million of income from the write-off of certain liabilities and $0.1 million of income related to a gain on the dissolution of joint venture. These were partially offset by less than $0.1 million of interest expense. During the year ended December 31, 2022, we recorded net other income of $0.6 million which was primarily attributable to non-cash income recorded on warrant revaluations .
Liquidity and Capital Resources
Our working capital positions at December 31, 2023 and 2022 were as follows (in thousands):
December 31, 2023
December 31, 2022
Change
Current assets (including cash of $1,502 and $3,445 respectively)
$
3,682
$
5,710
$
(2,028)
Current liabilities
3,141
4,361
(1,220)
Working capital
$
541
$
1,349
$
(808)
To date, we have incurred significant net losses and have funded our operations primarily through cash generated from operations, the issuance of convertible debt and the issuance of shares of our common stock.
During the year ended December 31, 2023 we received net proceeds of $2.2 million from sale of 237,102 shares of our common stock through purchase agreements and at the market offerings. We have approximately $3.7 million available for future sales pursuant to the AGP 2023 Sales Agreement . On January 19, 2024, we filed a prospectus supplement to our prospectus dated April 25, 2023 registering the offer and sales of up to $865,889 of shares of our common stock. We have approximately $0.8 million of remaining availability pursuant to this prospectus supplement.
Analysis of Cash Flows - Years Ended December 31, 2023 and 2022
The following table summarizes our net cash flow activity (in thousands):
Year Ended December 31,
2023
2022
Change
Net cash used in operating activities
$
(3,559)
$
(7,721)
$
4,162
Net cash used in investing activities
(126)
(277)
151
Net cash provided by (used in) financing
1,742
(225)
1,967
Net change in cash
$
(1,943)
$
(8,223)
$
6,280
Net Change in Cash. Cash decreased by $1.9 million and $8.2 million during the years ended December 31, 2023 and 2022, respectively.
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Cash Flows Used in Operating Activities. The cash flows used in operating activities of $3.6 million during the year ended December 31, 2023 included a net loss of $5.8 million, an increase in accounts receivables of $0.5 million, a decrease in accounts payable of $0.2 million and a decrease in operating lease liabilities of $0.2 million. These were partially offset by a decrease in inventories of $0.3 million, a decrease in other assets of $0.4 million, an increase in accrued expenses of $0.7 million and non-cash adjustments of $1.7 million. The non-cash adjustments included $0.2 million for the change in provision for credit losses. We routinely provide a reserve for credit losses accounts as a result of having limited in-network payer contracts. The other non-cash adjustments to net loss of approximately $3.2 million include, among other things, depreciation and amortization, the value of stock issued in payment of services, gain on write-off of liabilities and stock-based compensation . The cash flows used in operating activities in the year ended December 31, 2022 included the net loss of $12.2 million, an increase in accounts receivables of $0.7 million, a decrease accrued expenses of $0.3 million, an increase in inventories of $0.1 million and a decrease in operating lease liabilities of $0.2 million. These were partially offset by a decrease in other assets of $0.5 million, an increase in accounts payable of $0.1 million, an increase in deferred revenue of $0.1 million and non-cash adjustments of $5.1 million .
Cash Flows Used In Investing Activities. Cash flows used in investing activities were $0.1 million and $0.3 million for the years ended December 31, 2023 and 2022, respectively, resulting from purchases of property and equipment.
Cash Flows Provided by (used in) Financing Activities. Cash flows provided by financing activities totaled $1.7 million for the year ended December 31, 2023, which included $2.2 million of proceeds from the issuance of common stock partially offset by payments on our long-term debt and finance lease obligations of $0.5 million . Cash flows used in financing activities totaled $0.2 million for the year ended December 31, 2022, which included payments on our long-term debt and finance lease obligations of $0.3 million partially offset by $0.1 million of proceeds from the issuance of common stock .
At each of December 31, 2023 and December 31, 2022, 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, 2023, 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
Long term debt (1)
$
370
$
248
$
70
$
52
Finance lease obligations (2)
171
79
92
—
Operating lease obligations (2)
696
258
438
—
Purchase obligations (3)
1,884
1,834
50
—
$
3,121
$
2,419
$
650
$
52
(1) Total payments include $353,000 in principal and $17,000 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.
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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:
● 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 and New Accounting Standards,” in Part II, Item 8, of this Annual Report on Form 10-K.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
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. Early adoption is permitted. ASU 2023-09 is effective for the Company beginning January 1, 2025. Adoption of ASU 2023-09 is expected to enhance the usefulness of income tax disclosures and is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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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 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 consolidated financial statement.
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 .
Item 7A. Quantitative and Qualitative Disclosure 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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