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 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.
Our products and services aim to deliver higher accuracy, improved laboratory workflow, and ultimately better patient outcomes, which reduce healthcare expenses. We develop innovative technologies in our laboratory where we design, test, validate, and use these products clinically. We believe these technologies improve diagnostic outcomes across various diseases within the hematologic field. We then commercialize these technologies as proprietary products that serve the global laboratory community in furtherance of our mission to eliminate or greatly reduce the prevalence of misdiagnoses. 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,
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respectively, which house teams that collaborate on the development of new products and services. We operate Clinical Laboratory Improvement Amendments (“CLIA”) compliant laboratories in both New Haven, Connecticut and Omaha, Nebraska, from which we provide essential blood cancer diagnostics to oncologists 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.
The development of laboratory products involves a qualified facility; highly skilled laboratory staff; and access to viable patient specimens to conduct development and testing. Our CLIA laboratory in New Haven, which is operated by our pathology services division, encapsulates these components, and also generates revenue for us which covers costs associated with operating this laboratory. This structure of utilizing our clinical lab to obtain samples and utilize the equipment and staffing to develop, test and validate our products, significantly reduces the development costs and timeline for our products. This also enables us to accelerate the time to market of new product development and launch.
Furthermore, as a clinical laboratory, we are always the first user of every product we develop, which allows us to optimize important laboratory functions such as workflow, inventory management, regulatory and billing issues. As a vendor, this enables us to serve as a reputable user of our own products, and we believe this provides us with significant credibility with existing and prospective customers. Furthermore, because we use our products as part of our day-to-day operations, we can deliver a high level of hands-on, expert support to customers, improving their experience with our products.
Our Products Division commercial team generates direct sales and works with our key distributors. Global healthcare distributors, such as ThermoFisher, McKesson, Medline 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.
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 has used cash in its operating activities for the past several years. For the year ended December 31, 2024, we had a net loss of $4.3 million and net cash provided by operating activities of $0.4 million. As of December 31, 2024, we had an accumulated deficit of $102.4 million and a working capital deficit of $0.8 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 its 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 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 , 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”). 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. On April 8, 2024, we filed a prospectus supplement to our prospectus dated April 25, 2023 registering the offer and sale of up to $1,061,478 of shares of our common stock (the “April 2024 Prospectus Supplement”). As of the date the consolidated financial statements were issued, the Company has approximately $3.7 million
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available for future sales pursuant to the 2023 Registration Statement, which includes approximately $1.0 million of remaining availability pursuant to the April 2024 Prospectus Supplement.
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, 2024 and 2023
Net Sales. Net sales were as follows:
Dollars in Thousands
Year Ended
December 31,
Change
2024
2023
$
%
Service revenue, net, less allowance for credit loss
$
15,921
$
12,178
$
3,743
31
%
Product revenue
2,611
3,019
(408)
(14)
%
Net Sales
$
18,532
$
15,197
$
3,335
22
%
Net sales for the year ended December 31, 2024 were $18.5 million, an increase of $3.3 million, as compared to the same period in 2023. During the year ended December 31, 2024, patient diagnostic service revenue increased $3.7 million as compared to the same period in 2023. This increase was due to a greater number of cases processed in the current year period. We processed 11,894 cases during the year ended December 31, 2024 as compared to 6,765 cases during the same period in 2023, or a 76% increase in cases. The benefit of the increase in cases billed during the full year ended December 31, 2024 as compared to the full year ended December 31, 2023 was partially offset by a lower average price per case during the current year as a result of a different product mix. Product revenue decreased by $0.4 million for the year ended December 31, 2024 as compared to the same period in 2023.
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 $1.8 million for the year ended December 31, 2024 as compared to the same period in 2023. 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,
Margin %
2024
2023
2024
2023
Gross Profit
$
7,559
$
6,018
41
%
40
%
Gross margin was 41% and 40% of total net sales, for the years ended December 31, 2024 and 2023, respectively, and the gross profit was approximately $7.6 million and $6.0 million during the years ended December 31, 2024 and 2023, respectively. The gross profit increased during the year ended December 31, 2024, as compared to the prior year period, as a result of increases in case volume and revenue. We operate a fully staffed CLIA and 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
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$1.9 million to $11.8 million for the year ended December 31, 2024 as compared to $13.6 million for the year ended December 31, 2023. The decrease included decreases from: (1) a decrease of $1.5 million in sales and marketing expenses due mainly to a decrease in personnel costs of $1.2 million as a result of a lower headcount and a decrease of $0.3 million in other costs, (2) a decrease of $0.4 million in research and development expenses mainly related to a decrease of $0.1 million in operating supplies, a decrease of $0.1 million in personnel costs and a decrease of $0.2 million in other costs, and (3) a decrease of $0.1 million in stock-based compensation expenses. General and administrative expenses for the year ended December 31, 2024 increased by $0.1 million as compared to the year ended December 31, 2023.
Other (Expense) Income. We recorded net other expense of $0.1 million for the year ended December 31, 2024 which was related to net interest expense. F or the year ended December 31, 2023, we recorded net other income of $1.8 million 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.
Liquidity and Capital Resources
Our working capital positions at December 31, 2024 and 2023 were as follows (in thousands):
December 31, 2024
December 31, 2023
Change
Current assets (including cash of $1,389 and $1,502 respectively)
$
3,451
$
3,682
$
(231)
Current liabilities
4,271
3,141
1,130
Working capital
$
(820)
$
541
$
(1,361)
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, 2024 we received $0.3 million in proceeds from debt issuance and net proceeds of $0.1 million from sale of 11,822 shares of our common stock through at the market offerings. The Company has approximately $3.7 million available for future sales pursuant to the AGP 2023 Sales Agreement which includes approximately $1.0 million of remaining availability pursuant to the April 2024 Prospectus Supplement.
Analysis of Cash Flows - Years Ended December 31, 2024 and 2023
The following table summarizes our net cash flow activity (in thousands):
Year Ended December 31,
2024
2023
Change
Net cash provided by (used in) operating activities
$
439
$
(3,559)
$
3,998
Net cash used in investing activities
(223)
(126)
(97)
Net cash (used in) provided by financing activities
(329)
1,742
(2,071)
Net change in cash
$
(113)
$
(1,943)
$
1,830
Net Change in Cash. Cash decreased by $0.1 million and $1.9 million during the years ended December 31, 2024 and 2023, respectively.
Cash Flows Provided by (Used in) Operating Activities. The cash flows provided by operating activities of $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. The non-cash adjustments included $0.1 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 $3.3 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. 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. The cash flows used in operating activities of $3.6 million
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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.
Cash Flows Used In Investing Activities. Cash flows used in investing activities were $0.2 million and $0.1 million for the years ended December 31, 2024 and 2023, respectively, resulting from purchases of property and equipment.
Cash Flows (Used in) Provided by Financing Activities. Cash flows used in financing activities totaled $0.3 million for the year ended December 31, 2024, which included payments on our long-term debt and finance lease obligations of $0.6 million partially offset by $0.2 million of proceeds from debt and $0.1 million of proceeds from the issuance of common stock. 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 .
At each of December 31, 2024 and December 31, 2023, 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, 2024, 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)
$
413
$
326
$
70
$
17
$
—
Finance lease obligations (2)
589
172
240
104
73
Operating lease obligations (2)
438
224
214
—
—
Purchase obligations (3)
3,116
2,168
316
316
316
$
4,556
$
2,890
$
840
$
437
$
389
(1) Total payments include $383,000 in principal and $30,000 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.
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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 2022, the Financial Accounting Standards Board (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 Company adopted this guidance on January 1, 2024. The adoption of this standard was not material to our 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 earnings per share (“EPS”) guidance for both Subtopics. The Company adopted this guidance on January 1, 2024. The adoption of this standard was not material to our consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis, primarily through enhanced disclosures of significant segment expenses. Under the new guidance an entity is required to disclose the title and position of the chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The ASU also requires that an entity that has a single reportable segment provide all the disclosures required by this ASU and all existing segment disclosures in Topic 280. The ASU does not change how operating segments are identified or, when applicable, aggregated. The Company adopted this standard for fiscal year 2024 and such adoption did not have a material impact on our consolidated financial statements.
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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.
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.
Other Developments
Change Healthcare
Change Healthcare (“CHC”), a subsidiary of UnitedHealth Group, suffered a cybersecurity breach in February 2024 which resulted in the temporary shut-down of some of its systems. Precipio uses CHC to process its billings for pathology services. Thus, when CHC shut down its business operations our pathology billings were halted. Our ability to process billings, accept payer remittances, process medical and billing benefit notices, bill secondary insurers, as well as patients, and communicate with commercial payers was severely impacted. Starting shortly after the breach, we redirected a significant amount of our internal resources to 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 expense 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, the Company 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. See Note 6 – “Accrued Expenses and Other Current Liabilities” for further discussion.
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 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, 2024 and 2023. 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.
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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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