Quarterly Report (10-q)

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 June 30, 2020

	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 Stock Market LLC

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 X 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 X 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 August 12, 2020, the number of shares of common stock outstanding was 16,426,916.

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PRECIPIO, INC. AND SUBSIDIARIES

INDEX

		Page No.

PART I.	Financial Information	3

Item 1.	Condensed Consolidated Financial Statements	3

	Condensed Consolidated Balance Sheets at June 30, 2020 (unaudited) and December 31, 2019	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (unaudited)	7

	Notes to the Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

PART II.	Other Information	48

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5.	Other Information	51

Item 6.	Exhibits	51

Signatures		52

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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)


	June 30, 2020
	(unaudited)		December 31, 2019
ASSETS
CURRENT ASSETS:
Cash	$	353	$	848
Accounts receivable, net		1,354		574
Inventories		233		184
Other current assets		75		272
Total current assets		2,015		1,878

PROPERTY AND EQUIPMENT, NET		441		431

OTHER ASSETS:
Operating lease right-of-use assets		409		519
Intangibles, net		16,142		16,658
Other assets		27		25
Total assets	$	19,034	$	19,511
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, less debt issuance costs	$	391	$	321
Current maturities of convertible notes, less debt discounts and debt issuance costs		—		142
Current maturities of finance lease liabilities		43		52
Current maturities of operating lease liabilities		213		209
Accounts payable		2,083		1,936
Accrued expenses		1,950		1,639
Deferred revenue		—		35
Total current liabilities		4,680		4,334
LONG TERM LIABILITIES:
Long-term debt, less current maturities and debt issuance costs		631		198
Finance lease liabilities, less current maturities		115		119
Operating lease liabilities, less current maturities		207		317
Common stock warrant liabilities		774		1,338
Total liabilities		6,407		6,306
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 15,000,000 shares authorized at June 30, 2020 and December 31, 2019, 47 shares issued and outstanding at June 30, 2020 and December 31, 2019, liquidation preference of $167 at June 30, 2020		—		—
Common stock, $0.01 par value, 150,000,000 shares authorized at June 30, 2020 and December 31, 2019, 14,616,916 and 7,898,117 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		146		79
Additional paid-in capital		78,857		74,065
Accumulated deficit		(66,393)		(60,939)
Total Precipio, Inc. stockholders’ equity		12,610		13,205
Noncontrolling interest in joint venture		17		—
Total stockholders’ equity		12,627		13,205
Total liabilities and stockholders’ equity	$	19,034	$	19,511

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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
SALES:
Service revenue, net	$	1,616	$	1,195	$	3,074	$	2,105
Other		29		4		53		11
Revenue, net of contractual allowances and adjustments		1,645		1,199		3,127		2,116
less allowance for doubtful accounts		(337)		(257)		(603)		(461)
Net sales		1,308		942		2,524		1,655
COST OF SALES:
Cost of service revenue		1,137		770		2,228		1,445
Gross profit		171		172		296		210
OPERATING EXPENSES:
Operating expenses		2,430		2,467		4,758		4,564
OPERATING LOSS		(2,259)		(2,295)		(4,462)		(4,354)
OTHER INCOME (EXPENSE):
Interest income (expense), net		246		(178)		(467)		(201)
Warrant revaluation		(372)		(822)		564		(582)
Loss on modification of warrants		–		(1,128)		–		(1,128)
Derivative revaluation		–		(438)		–		(415)
Gain on settlement of liability, net		–		1,084		–		1,251
Loss on extinguishment of debt		–		–		(1,225)		–
Loss on litigation		–		(266)		–		(266)
Loss on issuance of convertible notes		–		(1,870)		–		(1,870)
Other income		153		–		153		–
Total other expenses		27		(3,618)		(975)		(3,211)
LOSS BEFORE INCOME TAXES		(2,232)		(5,913)		(5,437)		(7,565)
INCOME TAX BENEFIT		–		–		–		–
NET LOSS		(2,232)		(5,913)		(5,437)		(7,565)

Less: Net income attributable to noncontrolling interest in joint venture		(17)				(17)
Deemed dividends related to beneficial conversion feature of preferred stock and fair value of warrant down round features		–		–		(3,344)		–
NET LOSS ATTRIBUTABLE TO PRECIPIO, INC. COMMON STOCKHOLDERS	$	(2,249)	$	(5,913)	$	(8,798)	$	(7,565)

BASIC AND DILUTED LOSS PER COMMON SHARE	$	(0.20)	$	(1.05)	$	(0.89)	$	(1.66)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING		11,353,093		5,655,022		9,862,525		4,554,571

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 June 30, 2020
	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, April 1, 2020	47	$	—	9,506,126	$	95	$	75,334	$	(64,144)	$	11,285	$	—	$	11,285
Net (loss) income	—		—	—		—		—		(2,249)		(2,249)		17		(2,232)
Conversion of convertible notes into common stock	—		—	3,480,148		35		1,788		—		1,823		—		1,823
Issuance of common stock in connection with purchase agreements	—		—	1,630,642		16		1,241		—		1,257		—		1,257
Write-off debt premiums in conjunction with convertible note conversions	—		—	—		—		333		—		333		—		333
Stock-based compensation	—		—	—		—		161		—		161		—		161
Balance, June 30, 2020	47	$	—	14,616,916	$	146	$	78,857	$	(66,393)	$	12,610	$	17	$	12,627

	For the Six Months Ended June 30, 2020
	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, 2020	47	$	—	7,898,117	$	79	$	74,065	$	(60,939)	$	13,205	$	—	$	13,205
Net (loss) income	—		—	—		—		—		(5,454)		(5,454)		17		(5,437)
Conversion of convertible notes into common stock	—		—	3,908,145		39		2,137		—		2,176		—		2,176
Issuance of common stock in connection with purchase agreements	—		—	2,810,654		28		2,579		—		2,607		—		2,607
Write-off debt premiums (net of debt discounts) in conjunction with convertible note conversions	—		—	—		—		270		—		270		—		270
Write-off beneficial conversion feature in conjunction with convertible note extinguishment	—		—	—		—		(523)		—		(523)		—		(523)
Stock-based compensation	—		—	—		—		329		—		329		—		329
Balance, June 30, 2020	47	$	—	14,616,916	$	146	$	78,857	$	(66,393)	$	12,610	$	17	$	12,627

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	For the Three Months Ended June 30, 2019
	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, April 1, 2019	47	$	—	4,304,929	$	43	$	59,138	$	(49,348)	$	9,833	$	—	$	9,833
Net loss	—		—	—		—		—		(5,913)		(5,913)		—		(5,913)
Conversion of convertible notes into common stock	—		—	1,138,310		12		4,134		—		4,146		—		4,146
Issuance of common stock in connection with purchase agreements	—		—	240,000		2		682		—		684		—		684
Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions	—		—	—		—		(842)		—		(842)		—		(842)
Write-off debt derivative liability in conjunction with convertible note conversions	—		—	—		—		438		—		438		—		438
Issuance of common stock upon exercise of warrants	—		—	310,200		3		1,572		—		1,575		—		1,575
Write-off warrant liability in conjunction with warrant exercises	—		—	—		—		2,364		—		2,364		—		2,364
Beneficial conversion feature on issuance of convertible notes	—		—	—		—		1,792		—		1,792		—		1,792
Stock-based compensation	—		—	—		—		151		—		151		—		151
Payment of fractional common shares in conjunction with reverse stock split	—		—	(71)		—		(1)		—		(1)		—		(1)
Balance, June 30, 2019	47	$	—	5,993,368	$	60	$	69,428	$	(55,261)	$	14,227	$	—	$	14,227

	For the Six Months Ended June 30, 2019
	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, 2019	47	$	—	2,298,738	$	23	$	53,796	$	(47,696)	$	6,123	$	—	$	6,123
Net loss	—		—	—		—		—		(7,565)		(7,565)		—		(7,565)
Conversion of convertible notes into common stock	—		—	2,386,425		24		7,248		—		7,272		—		7,272
Issuance of common stock in connection with purchase agreements	—		—	998,076		10		2,400		—		2,410		—		2,410
Issuance of common stock upon exercise of warrants	—		—	310,200		3		1,572		—		1,575		—		1,575
Write-off warrant liability in conjunction with warrant exercises	—		—	—		—		2,364		—		2,364		—		2,364
Beneficial conversion feature on issuance of convertible notes	—		—	—		—		1,792		—		1,792		—		1,792
Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions	—		—	—		—		(527)		—		(527)		—		(527)
Write-off debt derivative liability in conjunction with convertible note conversions	—		—	—		—		477		—		477		—		477
Stock-based compensation	—		—	—		—		307		—		307		—		307
Payment of fractional common shares in conjunction with reverse stock split	—		—	(71)		—		(1)		—		(1)		—		(1)
Balance, June 30, 2019	47	$	—	5,993,368	$	60	$	69,428	$	(55,261)	$	14,227	$	—	$	14,227

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)


	Six Months Ended June 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,437)	$	(7,565)

Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		564		560
Amortization of operating lease right-of-use asset		110		123
Amortization of finance lease right-of-use asset		27		30
Amortization (accretion) of deferred financing costs, debt discounts and debt premiums		317		(50)
Gain on settlement of liability, net		—		(1,251)
Loss on litigation		—		266
Loss on issuance of convertible notes		—		1,870
Loss on extinguishment of convertible notes		1,225		—
Stock-based compensation		329		307
Provision for losses on doubtful accounts		606		463
Warrant revaluation		(564)		582
Loss on modification of warrants		—		1,128
Derivative revaluation		—		415
Gain from sale of fixed asset		(55)		—
Changes in operating assets and liabilities:
Accounts receivable		(1,386)		(656)
Inventories		(49)		8
Other assets		195		177
Accounts payable		147		(1,316)
Operating lease liabilities		(106)		(117)
Accrued expenses and other liabilities		515		139
Net cash used in operating activities		(3,562)		(4,887)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(65)		(30)
Proceeds from sale of fixed asset		55		—
Net cash used in investing activities		(10)		(30)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on finance lease obligations		(33)		(28)
Payment of deferred financing costs		—		(120)
Payment of fractional common shares in conjunction with reverse stock split		—		(1)
Issuance of common stock, net of issuance costs		2,607		2,410
Proceeds from exercise of warrants		—		1,575
Proceeds from long-term debt		787		—
Proceeds from convertible notes		—		2,150
Principal payments on convertible notes		—		(50)
Principal payments on long-term debt		(284)		(231)
Net cash flows provided by financing activities		3,077		5,705
NET CHANGE IN CASH		(495)		788
CASH AT BEGINNING OF PERIOD		848		381
CASH AT END OF PERIOD	$	353	$	1,169

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)


	Six Months Ended June 30,
	2020		2019
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest	$	20	$	18

SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY
Equipment financed through finance lease obligations		21		—
Discount of 9% on issuance of convertible bridge notes		—		188
Conversion of convertible debt into common stock		1,938		7,272
Conversion of interest on convertible debt into common stock		238		—
Beneficial conversion feature on issuance of convertible notes		—		1,792
Initial valuation of derivative liability recorded in conjunction with issuance of convertible notes		—		1,858
Liabilities exchanged for convertible notes		—		2,150
Write-off of beneficial conversion feature in conjunction with convertible note extinguishment		523		—
Right-of-use assets obtained in exchange for lease obligations		—		750
Write-off warrant liability in conjunction with warrant exercises		—		2,364
Write-off of debt discounts (net debt premiums) in conjunction with convertible note conversions		(270)		527
Write-off of derivative liability in conjunction with convertible note conversions		—		477

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 and Six Months Ended June 30, 2020 and 2019

1. BUSINESS DESCRIPTION

Business Description.

Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing diagnostic products and services to the oncology market. We have built and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technologies developed within academic institutions, and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with various academic institutions to capture the expertise, experience and technologies developed within academia to provide a better standard of cancer diagnostics and aim to solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which focuses on development of various technologies, among them IV-Cell, HemeScreen and ICE-COLD-PCR, or ICP, the patented technology described further below, which we exclusively licensed from Dana-Farber Cancer Institute, Inc., or Dana-Farber, at Harvard University. The research and development center focuses on the development of these technologies, which we believe will enable us to commercialize these and other technologies developed with our current and future academic partners. The facility in Omaha was also recently certified as a CLIA and CAP facility, and we have begun bringing in house several molecular tests that the Company had previously referred out to other laboratories. Our platform also connects patients, physicians and diagnostic experts residing within academic institutions.

Joint Venture.

In April 2020, the Company formed a joint venture with Poplar Healthcare PLLC (“Poplar”), which we refer to as the “Joint Venture”. The Joint Venture was formed by the Limited Liability Company Agreement of Precipio Oncometrix LLC, a Delaware limited liability company (“POC”), which was entered into as of April 11, 2020 (the “Effective Date”), by and among POC, Poplar, and Precipio SPV Inc. (“Precipio SPV”), a newly formed subsidiary of the Company, together with such other persons who from time to time become party to the Limited Liability Company Agreement by executing a counterpart signature page in accordance with the terms hereof. POC was formed as a limited liability company on April 2, 2020 in accordance with the statutes and laws of the State of Delaware relating to limited liability companies, including, without limitation, the Delaware Act, by the filing of a Certificate of Formation with the office of the Secretary of State of the State of Delaware. Precipio SPV was incorporated in the State of Delaware on March 10, 2020 for the sole purpose of being a party to the Joint Venture.

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Under the terms of the Joint Venture, Precipio SPV has a 49% ownership interest in the Joint Venture, with Poplar having a 51 % ownership. Pursuant to the Limited Liability Company Agreement, Poplar, at any time, has the right to require Precipio SPV to purchase all, but not less than all, of Poplar’s shares in the Joint Venture (the “Poplar Put Right”). The purchase price for Poplar’s shares shall be $1.00 per share, or fifty-one dollars, and Precipio SPV would, therefore, become the sole 100% owner of the Joint Venture at the time the Poplar Put Right became effective.

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. Operational services of the Joint Venture are performed entirely by its members and employees of its members. Precipio SPV’s responsibilities include product and account management services, selling & marketing, laboratory diagnostic services and general & administrative services. Precipio SPV is entitled to a management fee for the services it provides. This management fee is established through service agreements which were executed in conjunction with the formation of the Joint Venture. Poplar receives a similar fee for the billing services that it provides.

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. As of June 30, 2020, the Company had a net loss of $5.4 million, negative working capital of $2.7 million and net cash used in operating activities of $3.6 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 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 March 26, 2020, the Company entered into a second purchase agreement (the “LP 2020 Purchase Agreement”) with Lincoln Park Capital Fund LLC (“Lincoln Park”), pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10.0 million of common stock of the Company (subject to certain limitations) from time to time over the term of the LP 2020 Purchase Agreement. The extent we rely on Lincoln Park as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. As of the date of issuance of this Quarterly Report on Form 10-Q, we have already received $4.9 million from the LP 2020 Purchase Agreement from the sale of 3,330,000 shares of common stock to Lincoln Park from April 1, 2020 through the date of issuance of this Form 10-Q, leaving the Company an additional $5.1 million to draw upon in the coming year; and

●

The Company filed with the SEC a registration statement on Form S-3 on March 27, 2020, as amended on April 9, 2020, to register an indeterminate number of shares of common stock and preferred stock, such indeterminate principal amount of debt securities and such indeterminate number of warrants to purchase common stock, preferred stock or debt securities as shall have an aggregate initial offering price not to exceed $50 million. This registration statement was declared effective by the SEC on April 13, 2020 and allows the Company, from time to time, to offer up to $50 million of any combination of the securities described in the Form S-3 in one or more offerings. In order for the Company to utilize the effective S-3, it will have to file subsequent prospectus supplement(s) with regard to the securities it will offer, as applicable from time to time. As of the date of issuance of this Form 10-Q, no subsequent prospectus supplements to this effect have been filed by the Company.

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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 June 30, 2020 and for the six months ended June 30, 2020 and 2019, 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, 2019 contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2020, and as amended on April 7, 2020. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2020.

The condensed consolidated financial statements include the accounts of Precipio and its wholly owned subsidiaries, and the Joint Venture which is a variable interest entity (“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.

Recently Adopted Accounting Pronouncements.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 “Fair Value Measurement (Topic 820)”, which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. The Company adopted this guidance on January 1, 2020. The adoption of this guidance was not material to our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40)”, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. The Company adopted this guidance on January 1, 2020. The adoption of this guidance was not material to our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted.

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. This standard is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of adoption of this ASU and does not expect the adoption of this new standard to have a material impact on its condensed consolidated financial statements.

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. This ASU, as amended,

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is effective for the Company for reporting periods beginning after December 15, 2022. We are currently assessing the potential impact that the adoption of this ASU will have on our 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 1,815,502 and 1,760,336 shares of our common stock have been excluded from the computation of diluted loss per share at June 30, 2020 and 2019, 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:


	June 30,
	2020	2019
Stock options	791,233	501,242
Warrants	906,769	909,189
Preferred stock	117,500	20,888
Convertible notes	—	329,017
Total	1,815,502	1,760,336

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)		June 30, 2020
Assets:
Accounts receivable, net	(1)	$	578
Total assets		$	578
Liabilities:
Accrued expenses		$	46
Total liabilities		$	46
Noncontrolling interest in Joint Venture		$	17

(1)

As of June 30, 2020, approximately $0.1 million of the Joint Venture gross accounts receivable balance is due from Poplar, with the remainder due from diagnostic testing customers.

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3. LONG-TERM DEBT

Long-term debt consists of the following:


	Dollars in Thousands
	June 30, 2020		December 31, 2019
Department of Economic and Community Development (DECD)	$	242	$	249
DECD debt issuance costs		(23)		(24)
Financed insurance loan		—		260
September 2018 Settlement		16		34
Paycheck Protection Program		787		—
Total long-term debt		1,022		519
Current portion of long-term debt		(391)		(321)
Long-term debt, net of current maturities	$	631	$	198

Department of Economic and Community Development.

On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an agreement with the Department of Economic and Community Development (“DECD”) by which the Company received a grant of $100,000 and 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%.

Due to the economic impact of COVID-19, DECD offered financial relief to all businesses with certain loans, including the Company’s DECD 2018 Loan. The relief includes the option to defer all payments from April 1, 2020 to August 1, 2020 and no interest will accrue on the deferred payments between those dates. The deferred payments will be added to the end of the loan. The Company chose to defer its payments and the maturity date of the DECD 2018 Loan was extended to May 31, 2028. The payment deferral modification did not have a material impact on the Company’s cash flows for the six months ended June 30, 2020.

Debt issuance costs associated with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance cost was less than $1,000 for the three months ended June 30, 2020 and 2019, respectively, and less than $2,000 for the six months ended June 30, 2020 and 2019, respectively. Net debt issuance costs were approximately $23,000 and $24,000 at June 30, 2020 and December 31, 2019, respectively, and are presented as a reduction of the related debt in the accompanying condensed consolidated balance sheets. Amortization for each of the next five years is expected to be approximately $3,000.

Financed Insurance Loan.

The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2018, the Company financed $0.4 million with a 4.89% interest rate and fully paid off such loan as of July 2019. In July 2019, the Company financed $0.4 million with a 5.0% interest rate and will make monthly payments through May of 2020. As of June 30, 2020 and December 31, 2019, the Financed Insurance Loan’s outstanding balance of zero and $0.3 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.

Settlement Agreement.

On September 21, 2018, the Company entered into a settlement and forbearance agreement with a creditor (the “September 2018 Settlement”) pursuant to which, the Company agreed to make monthly principal and interest payments to the creditor over a two year period, from November 1, 2018 to November 1, 2020, in full and final settlement of $0.1 million of indebtedness that was owed to the creditor on the date of the September 2018 Settlement. The settlement amount accrues interest at the rate of 10% per annum until paid in full. The September 2018 Settlement outstanding

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balance of less than $0.1 million was included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet as of June 30, 2020 and December 31, 2019, respectively.

Paycheck Protection Program.

On April 23, 2020, the Company entered into a promissory note (the “Promissory Note”) evidencing an unsecured $787,200 loan under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (or “PPP”) was established under the recently congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The PPP Loan to the Company was made through Webster Bank, N.A.

The term of the PPP Loan is two years. The interest rate on the PPP Loan is 1.00% and payments are deferred for the first six months of the term of the loan. Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. The Company will use the eight-week forgiveness period and will apply for forgiveness of the PPP Loan in accordance with the terms of the PPP, but no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The Company believes it used all of the PPP Loan amount for qualifying expenses. As of the date of issuance of this Report on Form 10-Q, using the eight-week forgiveness period, we have incurred approximately $0.8 million in payroll, payroll related costs and other qualifying expenses.

The Promissory Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the Promissory Note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company.

As of June 30, 2020, $0.4 million the PPP Loan’s outstanding balance was included in current maturities of long-term debt and $0.4 million was included in long-term debt in the Company’s condensed consolidated balance sheet.

4. CONVERTIBLE NOTES

Convertible notes consist of the following:


	Dollars in Thousands
	June 30, 2020		December 31, 2019
Convertible bridge notes	$	—	$	1,938
Convertible bridge notes discount and debt issuance costs		—		(1,796)
Convertible bridge notes premiums		—		—
Total convertible notes		—		142
Current portion of convertible notes		—		(142)
Convertible notes, net of current maturities	$	—	$	—

Convertible Bridge Notes.

On April 20, 2018, the Company entered into a securities purchase agreement (the “2018 Note Agreement”) with certain investors (the “April 2018 Investors”), as amended on November 29, 2018 (the “Amendment Agreement”) and amended on April 16, 2019 (“Amendment No.2 Agreement”). During 2018, pursuant to the 2018 Note Agreement, the Company issued approximately $4.5 million in Senior Secured Convertible Promissory Notes (the “Bridge Notes”) along with warrants.

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On April 16, 2019, the Company entered into the Amendment No.2 Agreement which provided the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of $989,011 (the “April 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The 9% discount associated with the April 2019 Bridge Notes was approximately $89,000 and was recorded as a debt discount. In connection with the April 2019 Bridge Note issuances, the Company issued to the investors 147,472 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $5.40 (the “April 2019 Warrants”). The April 2019 Warrants had an initial value of approximately $1.0 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 9 – Fair Value for further discussion. The April 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement.

The conversion price of the April 2019 Bridge Notes shall be equal to the greater of $3.75 or $0.75 above the closing bid price of our common stock on the date prior to the original issue date. In the event the notes are not paid in full prior to 180 days after the original issue date, the conversion price shall be equal to 80% of the lowest volume weighted average price (“VWAP”) in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.

The Company reviewed the conversion option of the April 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with an offset to additional paid in capital at the time of the Amendment No.2 Agreement. The Company also reviewed the redemption features of the April 2019 Bridge Notes and determined that there is a redemption feature (the “Bridge Notes Redemption Feature”) that qualifies as an embedded derivative. The Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of the conversion feature and a limited upside from the redemption premium.

Debt discounts and debt issuance costs related to the April 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.0 million face amount of the debt at issuance, the Company recorded $1.0 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $1.0 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations during the three and six months ended June 30, 2019.

Pursuant to the Amendment No.2 Agreement, previously issued warrants were amended such that the exercise price of such warrants was amended from $7.50 to $5.40 and any warrant that had a one-year term was amended to have a five-year term. The Company reviewed the amendments to the warrants and determined that they will be treated as a modification of an outstanding equity instrument at the time of the Amendment No.2 Agreement. Management calculated the change in fair value due to the modifications to be an expense of approximately $1.1 million which is included in loss on modification of warrants in the condensed consolidated statements of operations during the three and six months ended June 30, 2019.

On May 14, 2019, the Company entered into a securities purchase agreement pursuant to which, the Company was provided with $1,000,000 of gross proceeds for the issuance of notes with an aggregate principal of $1,098,901 (the “May 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The 9% discount associated with the May 2019 Bridge Notes was approximately $99,000 and was recorded as a debt discount. In connection with the May 2019 Bridge Note issuances, the Company issued to the investors 154,343 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $9.56 (the “May 2019 Warrants”). The May 2019 Warrants had an initial value of approximately $0.9 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 9 – Fair Value for further discussion. The May 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement.

The conversion price of the May 2019 Bridge Notes is $7.12, provided that a) in the event the notes are not paid in full prior to 180 days after the original issue date or b) upon a registration statement (as defined in the purchase agreement) being declared effective, whichever occurs earlier, the conversion price shall be equal to 80% of the lowest VWAP in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.

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The Company reviewed the conversion option of the May 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with an offset to additional paid in capital at the time of issuance of the May 2019 Bridge Notes. The May 2019 Bridge Notes also contain the Bridge Notes Redemption Feature and the Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of the conversion feature and a limited upside from the redemption premium.

Debt discounts and debt issuance costs related to the May 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.1 million face amount of the debt, the Company recorded $1.1 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations during the three and six months ended June 30, 2019.

On March 26, 2020, the Company entered into an amendment agreement (the “March 2020 Amendment”) amending the terms of that certain Amendment No. 2 Agreement dated April 16, 2019 and the securities purchase agreement dated May 14, 2019. As a result of the March 2020 Amendment, (i) the maturity date of the April 2019 Bridge Notes and the May 2019 Bridge Notes was extended three months from April 16, 2020 to July 16, 2020, (ii) the floor price at which conversions may occur under the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from $2.25 to $0.40, and (iii) guaranteed interest on the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from twelve months to eighteen months.

The Company reviewed the modifications and concluded that the March 2020 Amendment will be treated as an extinguishment of the related April 2019 Bridge Notes and May 2019 Bridge Notes. The difference between the carrying value of the notes just prior to modification (the “Pre-modification Debt”) and the fair value of the notes just after modification (the “Post-modification Debt”) would be recorded as a gain or loss on extinguishment in the condensed consolidated statements of operations. The Company removed the carrying value of the Pre-modification Debt which included $1.0 million of unamortized debt discounts and beneficial conversion features of $0.5 million. The Company calculated the fair value of the Post-modification Debt to be $2.6 million. The Company reviewed whether or not a beneficial conversion feature existed on the Post-modification Debt but the calculation resulted in zero intrinsic value so no new beneficial conversion feature was recorded. Management also reviewed the Bridge Notes Redemption Feature of the post-modification notes but their fair value was zero so no derivative liability was recorded at the time of modification, however this will be reassessed at the end of each reporting period. As a result, the Company recorded a debt premium on the Post-modification Debt of $0.8 million and a loss on extinguishment of convertible notes of $1.2 million in the condensed consolidated statements of operations during the six months ended June 30, 2020.

During the three months ended June 30, 2020 and 2019, $1.8 million and $2.1 million, respectively, of bridge notes, plus interest, were converted into 3,480,148 and 756,588 shares of common stock of the Company, respectively. During the six months ended June 30, 2020 and 2019, $2.2 million and $4.2 million, respectively, of bridge notes, plus interest, were converted into 3,908,145 and 1,776,018 shares of common stock of the Company, respectively.

As a result of the bridge note conversions, the Company wrote off approximately $0.4 million of derivative liability, with an offset to additional paid-in capital, during the three and six months ended June 30, 2019.

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During the three and six months ended June 30, 2020 and 2019, the change in Bridge Note debt discounts and debt premiums was as follows:


(Dollars in thousands)	For the Three Months Ended June 30,
	2020				2019
		Debt Discounts		Debt Premiums		Debt Discounts		Debt Premiums
Beginning balance at April 1	$	—	$	679	$	(1,053)	$	91
Additions:		—		—		(2,086)		—
Deductions:
Amortization (accretion) (1)		—		(346)		55		(7)
Write-off related to note conversions (2)		—		(333)		926		(84)
Balance at June 30	$	—	$	—	$	(2,158)	$	—


	For the Six Months Ended June 30,
	2020				2019
		Debt Discounts		Debt Premiums		Debt Discounts		Debt Premiums
Beginning balance at January 1	$	(1,796)	$	—	$	(1,111)	$	647
Additions:		—		793		(2,086)		—
Deductions:
Amortization (accretion) (1)		703		(385)		113		(167)
Write-off related to note conversions (2)		138		(408)		926		(480)
Write-off related to note extinguishment (3)		955		—		—		—
Balance at June 30	$	—	$	—	$	(2,158)	$	—

(1)

Amortization/accretion is recognized as interest expense/income within the condensed consolidated statements of operations based on the effective interest method.

(2)

Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion.

(3)

Write-offs associated with note extinguishment are recognized as a loss and included in loss on extinguishment of convertible notes in the condensed consolidated statements of operations.

Convertible Promissory Notes – Exchange Notes.

During the three and six months ended June 30, 2019, zero and $0.6 million, respectively, of previously issued convertible promissory notes (the “Exchange Notes”) were converted into zero and 155,351 shares of common stock of the Company, respectively.

As of June 30, 2020 and December 31, 2019, the outstanding balance of the Exchange Notes, net of discounts, was zero, respectively.

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There was no Exchange Note activity during the three months ended June 30, 2019. During the six months ended June 30, 2019, the change in Exchange Note debt discounts was as follows:


(Dollars in thousands)
	For the Six Months Ended June 30, 2019
Beginning balance at January 1	$	(83)
Deductions:
Amortization (1)		2
Write-off related to note conversions (2)		81
Balance at June 30	$	—

(1)

Amortization is recognized as interest expense within the condensed consolidated statements of operations based on the effective interest method.

(2)

Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion.

As a result of Exchange Note conversions, during the three and six months ended June 30, 2019, the Company wrote off zero and less than $0.1 million, respectively, of derivative liability with an offset to additional paid-in capital.

Convertible Promissory Notes – Crede Note.

On January 15, 2019, the Company and Crede Capital Group LLC (“Crede”) entered into an amendment and restatement agreement (the “Crede Amendment Agreement”) in order to enable the Company to provide Crede with an alternative means of payment of a previous settlement amount, by issuing to Crede a convertible note in the amount of $1.45 million (the “Crede Note”). The conversion price of the Crede Note shall equal 90% of the closing bid price of the Company’s common stock on the date prior to each conversion date. The Crede Note is payable by the Company on the earlier of (i) January 15, 2021 or (ii) upon the closing of a qualified offering in which the Company receives gross proceeds of at least $4.0 million. The Crede Note may not be converted if, after giving effect to the conversion, Crede together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock. The Company, at its option, may redeem some or all of the then outstanding principal amount of the Crede Note for cash.

In accordance with the terms of the Crede Amendment Agreement, during the period commencing on the date of issuance of the Crede Note and ending on the date Crede no longer beneficially owns any portion of the Crede Note, Crede shall not sell, on any given trading day, more than the greater of (i) $10,000 of common stock (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) and (ii) 10% of the daily average composite trading volume of the Company’s common stock as reported by Bloomberg, LP (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) for such trading day.

During the three and six months ended June 30, 2019, the Company made no payments on the Crede Note. On April 16, 2019, the entire outstanding amount of $1.45 million was converted into 270,699 shares of common stock of the Company and as of June 30, 2020 and December 31, 2019, the remaining amount due on the Crede note was zero.

Convertible Promissory Notes – Leviston Note

On February 8, 2018, the Company entered into an equity purchase agreement (the “2018 Purchase Agreement”) with Leviston Resources LLC (“Leviston”). On January 29, 2019, the Company entered into a settlement agreement (the “Leviston Settlement”) with Leviston pursuant to which the Company issued to Leviston a convertible note in the amount of $0.7 million (the “Leviston Note”) in full satisfaction of certain obligations to Leviston.

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In addition to the Leviston Settlement and the Leviston Note, the Company and Leviston have each executed a release pursuant to which each of the Company and Leviston agreed to release the other party from their respective obligations arising from or concerning the Obligations.

During the three and six months ended June 30, 2019, the Company made cash payments of zero and less than $0.1 million, respectively, on the Leviston Note. During the three and six months ended June 30, 2019, $0.5 million and $0.7 million, respectively, of the Leviston Note was converted into 111,023 and 184,357 shares of common stock of the Company, respectively.

The remaining amount due on the Leviston Note was zero as of June 30, 2020 and December 31, 2019, respectively.

5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

Accrued expenses at June 30, 2020 and December 31, 2019 are as follows:


(dollars in thousands)	June 30, 2020		December 31, 2019
Accrued expenses	$	1,497	$	1,268
Accrued compensation		430

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