# Precipio, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Precipio, Inc.](/companies/prpo.md) (CIK 1043961)
- Form: 10-Q
- Filed: 2023-08-11
- Accepted by EDGAR: Aug 11, 2023, 16:31 ET
- Period: 2023-06-30
- Accession: 0001558370-23-014655
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1043961/000155837023014655/prpo-20230630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1043961/000155837023014655/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $3.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $6.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $2.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $4.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $1.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $2.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | −$2.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | −$5.3m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | −$2.3m | us-gaap:ProfitLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$5.3m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.22 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.09 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 24,362,785 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 23,790,491 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$2.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $54.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-06-30 | $2.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $4.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $19.5m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $4.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $5.4m | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $120.0k | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-06-30 | $27.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-06-30 | $14.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 24,923 characters.

### Forward-Looking Information

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest and inflation costs, future economic circumstances, business strategy, industry conditions and key trends, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, our ability to comply with the listing requirements of the Nasdaq Capital Market, expected financial and other benefits from our organizational restructuring activities, geopolitical uncertainties with the ongoing Russia and Ukraine conflict, actions of governments and regulatory factors affecting our business, projections of future earnings, revenues, synergies, accretion or other financial items, any statements of the plans, strategies and objectives of management for future operations, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission (the “SEC”). In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative of such terms and other similar expressions.

You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons, including those described in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q and our prior filings with the Securities and Exchange Commission.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The following discussion should be read together with our condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q and with the financial statements, related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which we filed with the Securities and Exchange Commission on March 30, 2023. Results for the three and six months ended June 30, 2023 are not necessarily indicative of results that may be attained in the future.

### 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 to mitigate the root causes of this problem in the form of diagnostic products, reagents and services. Misdiagnoses originate from aged 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 1 in 5 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 physician for patient treatment. We view cancer diagnostics as requiring a holistic approach to improve diagnostic data for improved interpretations 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 in order to drive development of diagnostic products. Laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on new products and services. The Company operates 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.

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. We are working with Poplar to dissolve the Joint Venture with an effective date of December 31, 2022. This is expected to be completed in Q4 2023.

### 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. For the six months ended June 30, 2023, the Company had a net loss of $5.3 million and net cash used in operating activities of $2.8 million. As of June 30, 2023, the Company had an accumulated deficit of $97.6 million and negative working capital of $0.4 million. The Company’s ability to continue as a going concern over the next twelve months from the date the condensed 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 its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its 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. As of the date the condensed consolidated financial statements were issued, we have received less than $1 thousand in gross proceeds through the AGP 2023 Sales Agreement from the sale of 500 shares of common stock. The Company approximately $3.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.
- On June 8, 2023, the Company entered into a securities purchase agreement pursuant to which it received $2.0 million in gross proceeds through the sale of 4,125,000 shares of common stock and warrants to purchase shares of our common stock. Issuance costs were approximately $0.2 million and the Company intends to use the net proceeds for working capital and general corporate purposes.

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern over the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q. 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. 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.

### Results of Operations for the Three Months Ended June 30, 2023 and 2022

*Net Sales.* Net sales were as follows:

*Dollars in Thousands*

| ​ ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ Three Months Ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ ​ | ​ ​ ​ Change $% | ​ | ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Service revenue, net, less allowance for doubtful accounts | ​ | $2,656 | ​ | $2,139 | ​ | $517 | ​ | 24% |
| Other | ​ | 877 | ​ | 220 | ​ | ​ 657 | ​ | 299% |
| Net Sales | ​ | $3,533 | ​ | $2,359 | ​ | $1,174 | ​ | 50% |

Net sales for the three months ended June 30, 2023 were approximately $3.5 million, an increase of $1.2 million as compared to the same period in 2022. During the three months ended June 30, 2023, patient diagnostic service revenue increased $0.5 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 1,614 cases during the three months ended June 30, 2023 as compared to 1,009 cases during the same period in 2022, or a 60% increase in cases. The increase in revenue due to increased cases processed was partially offset by a decrease in the Company’s revenue per case in the current year period. Other revenue increased by $0.7 million for the three months ended June 30, 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 HSRR 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 $0.6 million for the three months ended June 30, 2023 as compared to the same period in 2022.

*Gross Profit.* Gross profit and gross margins were as follows:

*Dollars in Thousands*

| ​ ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Three Months Ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ ​ ​ ​ ​ Margin % 2023 | ​ ​ ​ 2022 |
| --- | --- | ---: | --- | ---: | ---: | ---: |
| Gross Profit | ​ | $1,371 | ​ | $773 | 39% | 33% |

Gross margin was 39% of total net sales, for the three months ended June 30, 2023, as compared to 33% of total net sales for the same period in 2022. Gross profit was approximately $1.4 million and $0.7 million during the three months ended June 30, 2023 and 2022, respectively. The gross profit increased during the three months ended June 30, 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 laboratory processing and reporting to ordering physicians. An increase in case volume will enable our laboratory to yield economies of scale and to leverage fixed expenses.

*Operating Expenses.* Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs, stock-based compensation costs and depreciation and amortization. Our operating expenses increased by $0.5 million to $3.7 million for the three months ended June 30, 2023 as compared to the same period in 2022. The increase included an increase of $0.3 million in general and administrative expenses, which was due to an increase in legal and professional fee expenses, an increase of $0.2 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 and an increase in research and development expenses of $0.1 million. These increases were partially offset by a decrease of $0.1 million in stock-based compensation expenses for the three months ended June 30, 2023.

*Other (Expense) Income.* We recorded net other expense of $1 thousand for the three months ended June 30, 2023 which was related to net interest expense. During the three months ended June 30, 2022, we recorded net other income of $0.3 million which was primarily attributable to non-cash income recorded on warrant revaluations.

### Results of Operations for the Six Months Ended June 30, 2023 and 2022

*Net Sales.* Net sales were as follows:

*Dollars in Thousands*

| ​ ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ Six Months Ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ ​ | ​ ​ ​ Change $% | ​ | ​ ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Service revenue, net, less allowance for doubtful accounts | ​ | $4,712 | ​ | $4,064 | ​ | $648 | ​ | 16% |
| Other | ​ | 1,638 | ​ | 742 | ​ | ​ 896 | ​ | 121% |
| Net Sales | ​ | $6,350 | ​ | $4,806 | ​ | $1,544 | ​ | 32% |

Net sales for the six months ended June 30, 2023 were approximately $6.4 million, an increase of $1.5 million as compared to the same period in 2022. During the six months ended June 30, 2023, patient diagnostic service revenue increased $0.6 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 2,810 cases during the six months ended June 30, 2023 as compared to 2,006 cases during the same period in 2022, or a 40% increase in cases. Other revenue increased by $0.9 million for the six months ended June 30, 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 HSRR 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 $0.9 million for the six months ended June 30, 2023 as compared to the same period in 2022.

*Gross Profit.* Gross profit and gross margins were as follows:

*Dollars in Thousands*

| ​ ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ Six Months Ended June 30, 2023 | ​ | ​ 2022 | ​ ​ ​ ​ | ​ ​ Margin % 2023 | ​ ​ ​ ​ ​ 2022 ​ |
| --- | --- | ---: | --- | --- | ---: | ---: | ---: |
| Gross Profit | **​** | $2,120 | ​ | ​ | 1,476 | 33% | 31% |

Gross margin was 33% of total net sales, for the six months ended June 30, 2023, as compared to 31% of total net sales for the same period in 2022. Gross profit was approximately $2.1 million and $1.5 million during the six months ended June 30, 2023 and 2022, respectively. The gross profit increased during the six months ended June 30, 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 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

$1.3 million to $7.4 million for the six months ended June 30, 2023 as compared to the same period in 2022. The decrease included a decrease of $0.3 million in general and administrative expenses, which was due to a decreases of $0.1 million in personnel costs, $0.1 million in legal and professional fee expenses and $0.1 million in other expenses, and a decrease of $1.9 million in stock-based compensation expenses for the six months ended June 30, 2023. These decreases were partially offset by a $0.8 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 and an increase in research and development expenses of $0.1 million.

*Other (Expense) Income.* We recorded net other expense $5,000 for the six months ended June 30, 2023 which was related to net interest expense. During the six months ended June 30, 2022, we recorded net other income of $0.5 million which was primarily attributable to non-cash income recorded on warrant revaluations.

### Liquidity and Capital Resources

Our working capital positions were as follows:

| ​ ​ | ​ | ​ ​ June 30, 2023 | ​ | ​ ​ December 31, 2022 | ​ | ​ ​ Change |
| --- | --- | ---: | --- | ---: | --- | ---: |
| Current assets (including cash of $2,573 and $3,445 respectively) | ​ | $4,348 | ​ | $5,710 | ​ | $(1,362) |
| Current liabilities | ​ | 4,721 | ​ | 4,361 | ​ | 360 |
| Working capital | ​ | $(373) | ​ | $1,349 | ​ | $(1,722) |

During the six months ended June 30, 2023 we received net proceeds of $2.2 million from sale of 4,742,038 shares of our common stock through purchase agreements and at the market offerings. The Company has approximately $3.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.

### Analysis of Cash Flows – Six Months Ended June 30, 2023 and 2022

| ​ ​ ​ | ​ | ​ ​ Six Months Ended June 30, 2023 | ​ | ​ ​ 2022 | ​ | ​ ​ Change |
| --- | --- | ---: | --- | ---: | --- | ---: |
| Net cash used in operating activities | ​ | $(2,777) | ​ | $(3,980) | ​ | $1,203 |
| Net cash used in investing activities | ​ | ​ (54) | ​ | ​ (106) | ​ | ​ 52 |
| Net cash provided by (used in) financing | ​ | 1,959 | ​ | (109) | ​ | 2,068 |
| Net change in cash | ​ | $(872) | ​ | $(4,195) | ​ | $3,323 |

*Cash Flows Used in Operating Activities.* The cash flows used in operating activities of approximately $2.8 million during the six months ended June 30, 2023 included a net loss of $5.3 million and a decrease in operating lease liabilities and deferred revenue of $0.2 million. These were partially offset by a decrease in inventories of $0.2 million, a decrease in other assets of $0.2 million, an increase in accounts payable of $0.3 million, an increase accrued expenses of $0.3 million, and non-cash adjustments of $1.7 million. The non-cash adjustments included $0.1 million for the change in provision for losses on doubtful accounts. We routinely provide a reserve for doubtful accounts as a result of having limited in-network payer contracts. The other non-cash adjustments to net loss of approximately $1.6 million include, among other things, depreciation and amortization, warrant revaluations and stock-based compensation. The cash flows used in operating activities of approximately $4.0 million during the six months ended June 30, 2022 included a net loss of $6.7 million, an increase in accounts receivables of $0.6 million, a decrease accrued expenses and other liabilities of $0.5 million, an increase in inventories of $0.1 million and a decrease in operating lease liabilities of $0.1 million. These were partially offset by a decrease in other assets of $0.2 million, an increase in accounts payable of $0.7 million and non-cash adjustments of $3.1 million.

*Cash Flows Used In Investing Activities.* Cash flows used in investing activities were $0.1 million for the six months ended June 30, 2023 and 2022, respectively, resulting from purchases of property and equipment.

*Cash Flows Used in or Provided by Financing Activities.* Cash flows provided by financing activities totaled $2.0 million for the six months ended June 30, 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 $0.2 million. Cash flows used by financing activities totaled $0.1 million for the six months ended June 30, 2022, which included payments on our long-term debt and finance lease obligations of $0.1 million.

For further information regarding the Company’s future funding requirements, see the Going Concern disclosure in Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included with this Quarterly Report on Form 10-Q.

### Off-Balance Sheet Arrangements

At each of June 30, 2023 and December 31, 2022, other than certain purchase commitments of approximately $0.8 million and $1.3 million, respectively, 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.

### Contractual Obligations and Commitments

No significant changes to contractual obligations and commitments occurred during the six months ended June 30, 2023, as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on March 30, 2023.

### Critical Accounting Policies and Estimates

Accounting policies used in the preparation of our financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on March 30, 2023.

### Recently Issued Accounting Pronouncements

See the accompanying unaudited condensed consolidated financial statements and Note 2 - “Summary of Significant Accounting Policies” in the Notes to unaudited condensed consolidated financial statements for additional information regarding recently issued accounting pronouncements.

### 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.

## Market risk

As filed, 186 characters.

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.

## Controls and procedures

As filed, 2,112 characters.

#### Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management including our Chief Executive Officer and our Interim Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023.

#### Changes in Internal Control over Financial Reporting

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended June 30, 2023 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 16,624 characters.

As disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, there are a number of risks and uncertainties that may have a material effect on the operating results of our business and our financial condition. The following information updates, and should be read in conjunction with, the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, and other filings we make with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

***We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.***

We have incurred losses since our inception and expect to incur losses in the future. At June 30, 2023, we had working capital of negative $0.4 million. For the six months ended June 30, 2023, we had an operating cash flow deficit of $2.8 million and a net loss of $5.3 million. For the period ended June 30, 2023, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses through at least 2023 as we further develop and commercialize our diagnostic technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.

***We may need to raise substantial additional capital to commercialize our diagnostic technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts or force us to restrict or cease operations.***

As of June 30, 2023, we had cash of $2.6 million and our working capital was negative $0.4 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we may be required to raise additional capital to complete the development and commercialization of our current product candidates and to pay off our obligations. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings. In future periods, when we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict or cease our operations or obtain funds by entering into agreements on unattractive terms.

***We are not currently in compliance with the minimum bid price rule of the Nasdaq Capital Market, and if we cannot regain and maintain compliance, our securities may be delisted, which could negatively impact the price of our securities and hinder our ability to raise capital.***

On October 28, 2022, we received a letter from the Nasdaq Capital Market (“Nasdaq”) notifying us that for the past 30 consecutive business days, the closing bid price per share of our common stock was below $1.00, the minimum bid price requirement for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). As a result, Nasdaq notified us that we were not in compliance with the Bid Price Rule. The notice from Nasdaq has no immediate effect on the listing of the shares of our common stock. Nasdaq provided us until April 26, 2023 to regain compliance with the Bid Price Rule.

On April 27, 2023, Nasdaq notified us that we are eligible for an extension to comply with the Bid Price Rule until October 23 2023, by which date we must evidence compliance for at least ten consecutive business days along with compliance of other Nasdaq listing rules. If compliance cannot be demonstrated by October 23, 2023, Nasdaq will provide written notification that our common stock will be delisted. In the event of such a notification, we may appeal Nasdaq’s determination, but there can be no assurance Nasdaq would grant any such request for continued listing.

We are presently evaluating various courses of action to regain compliance with the Bid Price Rule but there can be no assurance that we will be able to regain compliance.

If Nasdaq delists our securities, we could face significant consequences, including:

- a limited availability for market quotations for our securities;
- reduced liquidity with respect to our securities;
- a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in reduced trading;
- reduced activity in the secondary trading market for our common stock;
- reduced or limited amount of news and analyst coverage; and
- a decreased ability to issue additional securities or obtain additional financing in the future.

These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock and would substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.

***Our internal control over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur.***

The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate, and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting, which we may be required to include in our periodic reports that we file with the SEC under Section 404 of the Sarbanes-Oxley Act, and could harm our operating results, cause us to fail to meet our reporting obligations, or result in a restatement of our prior period financial statements. If we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results, and the price of our common stock could decline. In addition, in June 2023, our registered public accounting firm agreed to a settlement with the SEC with respect to certain matters relating to systemic quality control failures and violations of audit standards in connection with audit work for hundreds of special purpose acquisition company (SPAC) clients beginning at the latest in 2020 and continuing through 2022. We are actively monitoring the situation but do not currently believe this settlement will affect our financial statements.

We are required to comply with certain of the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. This assessment needs to include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting or if we are unable to complete our evaluation, testing, and any required remediation in a timely fashion, we will be unable to assert that our internal control over financial reporting is effective.

These developments could make it more difficult for us to retain qualified members of our Board of Directors, or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.

***The sale or issuance of our common stock to, or through, AGP, or otherwise, may cause significant dilution and the sale of the shares of common stock acquired by AGP or others, or the perception that such sales may occur, could cause the price of our common stock to fall.***

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, from time to time, in an at-the-market offering (the “2023 ATM Offering”). We are limited in the number of shares it can sell in the 2023 ATM Offering due to the offering limitations currently applicable to the Company under General Instruction I.B.6. of Form S-3 and the Company’s public float as of the applicable date of such sales, as well as the number of authorized and unissued shares available for issuance, in accordance with the terms of the AGP 2023 Sales Agreement. Sales to, or through, AGP by us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

From April 14, 2023 through June 30, 2023, we received less than $1 thousand in gross proceeds through the AGP 2023 Sales Agreement from the sale of 500 shares of Common Stock. The Company has an additional $3.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.

***We have issued a substantial number of warrants and equity awards from our equity plans which are exercisable into shares of our common stock which could result in substantial dilution to the ownership interests of our existing stockholders.***

As of June 30, 2023, approximately 9,749,088 shares of our common stock were reserved for issuance upon exercise or conversion of outstanding warrants. Additionally, 4,636,043 shares of our common stock were reserved for issuance upon exercise of outstanding stock options. The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership interests of our existing stockholders. The shares underlying the equity awards from our equity plans are registered on a Form S-8 registration statement. As a result, upon vesting these shares can be freely exercised and sold in the public market upon issuance, subject to volume limitations applicable to affiliates. The exercise of options and the subsequent sale of the underlying common stock could cause a decline in our stock price. As of June 30, 2023, our outstanding warrants included 319,445 shares of our common stock reserved for issuance upon exercise of pre-funded warrants, which are already included in our calculation of our weighted average common shares outstanding.

***Sales of a substantial number of shares of our common stock in the public market after the registered direct offering and concurrent private placement of June 2023 could cause our stock price to fall.***

We sold 4,125,000 shares of common stock, pre-funded warrants to purchase 319,445 shares of common stock and warrants to purchase 8,888,890 shares of common stock in our June 2023 registered direct offering and concurrent private placement. The sales of a substantial number of the shares and/or the exercise and sale of a substantial number of the pre-funded warrants and common warrants in the public market or the perception that these sales might occur could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock. In addition, the sale of substantial amounts of our common stock could adversely impact the price of our common stock. The sale, or the availability for sale, of a large number of shares of our common stock in the public market could cause the price of our common stock to decline.

***We may become subject to the Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law and may be subject to analogous provisions of applicable state laws and could face substantial penalties if we fail to comply with such laws.***

There are several federal laws addressing fraud and abuse that apply to businesses that receive reimbursement from a federal health care program. There are also a number of similar state laws covering fraud and abuse with respect to, for example, private payers, self-pay and insurance. Currently, we receive a substantial percentage of our revenue from private payers and from Medicare. Accordingly, our business is subject to federal fraud and abuse laws, such as the Anti-Kickback Statute, the Stark Law, the False Claims Act, the Civil Monetary Penalties Law and other similar laws. Moreover, we are already subject to similar state laws. We believe we have operated, and intend to continue to operate, our business in compliance with these laws. However, these laws are subject to modification and changes in interpretation, and are enforced by authorities vested with broad discretion. Federal and state enforcement entities have significantly increased their scrutiny of healthcare companies and providers which has led to investigations, prosecutions, convictions and large settlements. We continually monitor developments in this area. If these laws are interpreted in a manner contrary to our interpretation or are reinterpreted or amended, or if new legislation is enacted with respect to healthcare fraud and abuse, illegal remuneration, or similar issues, we may be required to restructure our affected operations to maintain compliance with applicable law. There can be no assurances that any such restructuring will be possible or, if possible, would not have a material adverse effect on our results of operations, financial position, or cash flows.

For more information, see “*Risk Factors – Reimbursement and Regulatory Risk Relating to Our Business – We may become subject to the Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law and may be subject to analogous provisions of applicable state laws and could face substantial penalties if we fail to comply with such laws”* in our Annual Report on Form 10-K for the year ended December 31, 2022.

Filed Aug 11, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-014655. Last ingested by Listed: Oct 29, 2026, 16:01 ET. No prices; not investment advice.