10-Q 1 prpo-20200930x10q.htm 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 September 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 November 11, 2020, the number of shares of common stock outstanding was 17,226,916.


PRECIPIO, INC. AND SUBSIDIARIES

INDEX

    

Page No.

PART I.

Financial Information

3

Item 1.

Condensed Consolidated Financial Statements

3

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

3

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)

4

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

5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)

7

Notes to the Unaudited Condensed Consolidated Financial Statements

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

2


PART 1. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

September 30, 2020

    

(unaudited)

    

December 31, 2019

ASSETS

CURRENT ASSETS:

Cash

$

2,158

$

848

Accounts receivable, net

 

1,086

574

Inventories

 

280

184

Other current assets

 

444

272

Total current assets

 

3,968

1,878

PROPERTY AND EQUIPMENT, NET

 

460

431

OTHER ASSETS:

Operating lease right-of-use assets

358

519

Intangibles, net

 

15,904

16,658

Other assets

 

27

25

Total assets

$

20,717

$

19,511

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt, less debt issuance costs

$

530

$

321

Current maturities of convertible notes, less debt discounts and debt issuance costs

 

142

Current maturities of finance lease liabilities

 

37

52

Current maturities of operating lease liabilities

 

219

209

Accounts payable

 

1,829

1,936

Accrued expenses

 

1,804

1,639

Deferred revenue

 

48

35

Total current liabilities

 

4,467

4,334

LONG TERM LIABILITIES:

Long-term debt, less current maturities and debt issuance costs

 

500

198

Finance lease liabilities, less current maturities

 

108

119

Operating lease liabilities, less current maturities

 

150

317

Common stock warrant liabilities

 

1,631

1,338

Total liabilities

 

6,856

6,306

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS’ EQUITY:

Preferred stock - $0.01 par value, 15,000,000 shares authorized at September 30, 2020 and December 31, 2019, 47 shares issued and outstanding at September 30, 2020 and December 31, 2019, liquidation preference of $288 at September 30, 2020

 

Common stock, $0.01 par value, 150,000,000 shares authorized at September 30, 2020 and December 31, 2019, 16,676,916 and 7,898,117 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

167

79

Additional paid-in capital

 

83,362

74,065

Accumulated deficit

 

(69,695)

(60,939)

Total Precipio, Inc. stockholders’ equity

 

13,834

13,205

Noncontrolling interest in joint venture

27

Total stockholders’ equity

13,861

13,205

Total liabilities and stockholders’ equity

$

20,717

$

19,511

See notes to unaudited condensed consolidated financial statements.

3


PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

SALES:

 

  

 

  

  

 

  

Service revenue, net

$

1,998

$

1,020

$

5,072

$

3,125

Other

 

51

 

26

 

104

 

37

Revenue, net of contractual allowances and adjustments

 

2,049

 

1,046

 

5,176

 

3,162

less allowance for doubtful accounts

 

(422)

 

(262)

 

(1,025)

 

(723)

Net sales

 

1,627

 

784

 

4,151

 

2,439

COST OF SALES:

 

  

 

  

 

  

 

  

Cost of service revenue

 

1,244

 

756

 

3,472

 

2,201

Other

 

6

 

 

6

 

Total cost of sales

 

1,250

 

756

 

3,478

 

2,201

Gross profit

 

377

 

28

 

673

 

238

OPERATING EXPENSES:

 

  

 

  

 

  

 

  

Operating expenses

 

2,809

 

2,391

 

7,567

 

6,955

OPERATING LOSS

 

(2,432)

 

(2,363)

 

(6,894)

 

(6,717)

OTHER (EXPENSE) INCOME:

 

  

 

  

 

  

 

  

Interest expense, net

 

(3)

 

(97)

 

(470)

 

(298)

Warrant revaluation

 

(857)

 

563

 

(293)

 

(19)

Loss on modification of warrants

(1,128)

Derivative revaluation

(415)

Gain on settlement of liability, net

 

 

 

 

1,251

Loss on extinguishment of debt

(1,225)

Loss on litigation

 

 

 

(266)

Loss on issuance of convertible notes

(1,870)

Other income

 

 

 

153

 

Total other (expense) income

 

(860)

 

466

 

(1,835)

 

(2,745)

LOSS BEFORE INCOME TAXES

 

(3,292)

 

(1,897)

 

(8,729)

 

(9,462)

INCOME TAX BENEFIT

 

 

 

 

NET LOSS

 

(3,292)

 

(1,897)

 

(8,729)

 

(9,462)

Less: Net income attributable to noncontrolling interest in joint venture

(10)

(27)

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

$

(3,302)

$

(1,897)

$

(12,100)

$

(9,462)

BASIC AND DILUTED LOSS PER COMMON SHARE

$

(0.21)

$

(0.31)

$

(1.01)

$

(1.85)

BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING

 

16,007,025

 

6,186,119

 

11,925,642

 

5,104,397

See notes to unaudited condensed consolidated financial statements.

4


PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(unaudited)

For the Three Months Ended September 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, July 1, 2020

 

47

$

 

14,616,916

$

146

$

78,857

$

(66,393)

$

12,610

$

17

$

12,627

Net (loss) income

(3,302)

(3,302)

10

(3,292)

Issuance of common stock in connection with purchase agreements

2,060,000

21

4,293

4,314

4,314

Stock-based compensation

 

 

 

 

212

 

 

212

 

 

212

Balance, September 30, 2020

47

$

16,676,916

$

167

$

83,362

$

(69,695)

$

13,834

$

27

$

13,861

For the Nine Months Ended September 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

 

 

 

 

 

 

(8,756)

 

(8,756)

 

27

 

(8,729)

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

4,870,654

49

6,872

6,921

6,921

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

 

 

 

 

 

541

 

 

541

 

 

541

Balance, September 30, 2020

 

47

$

16,676,916

$

167

$

83,362

$

(69,695)

$

13,834

$

27

$

13,861

5


PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED

(Dollars in thousands)

(unaudited)

For the Three Months Ended September 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, July 1, 2019

47

$

5,993,369

$

60

$

69,428

$

(55,261)

$

14,227

$

$

14,227

Net loss

 

 

 

 

 

 

(1,897)

 

(1,897)

 

 

(1,897)

Conversion of convertible notes into common stock

52,748

118

118

118

Issuance of common stock in connection with purchase agreements

1,090,000

11

2,750

2,761

2,761

Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions

(63)

(63)

(63)

Stock-based compensation

 

 

 

 

 

148

 

 

148

 

 

148

Balance, September 30, 2019

 

47

$

 

7,136,117

$

71

$

72,381

$

(57,158)

$

15,294

$

$

15,294

For the Nine Months Ended September 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

 

 

 

 

 

 

(9,462)

 

(9,462)

 

 

(9,462)

Conversion of convertible notes into common stock

 

 

 

2,439,173

 

24

 

7,366

 

 

7,390

 

 

7,390

Issuance of common stock in connection with purchase agreements

2,088,077

21

5,150

5,171

5,171

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

(590)

(590)

(590)

Write-off debt derivative liability in conjunction with convertible note conversions

477

477

477

Stock-based compensation

 

 

 

 

 

455

 

 

455

 

 

455

Payment of fractional common shares in conjunction with reverse stock split

(71)

(1)

(1)

(1)

Balance, September 30, 2019

 

47

$

 

7,136,117

$

71

$

72,381

$

(57,158)

$

15,294

$

$

15,294

See notes to unaudited condensed consolidated financial statements

6


PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

Nine Months Ended September 30, 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$

(8,729)

$

(9,462)

Adjustments to reconcile net loss to net cash flows used in operating activities:

 

  

 

  

Depreciation and amortization

 

829

 

838

Amortization of operating lease right-of-use asset

161

176

Amortization of finance lease right-of-use asset

38

46

Amortization (accretion) of deferred financing costs, debt discounts and debt premiums

 

319

 

(8)

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

 

541

 

455

Provision for losses on doubtful accounts

 

1,025

 

724

Warrant revaluation

 

293

 

19

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

 

(1,537)

 

(727)

Inventories

 

(96)

 

15

Other assets

 

(151)

 

302

Accounts payable

 

(107)

 

(1,624)

Operating lease liabilities

(157)

(170)

Accrued expenses and other liabilities

 

418

 

(13)

Net cash used in operating activities

 

(5,983)

 

(7,001)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

 

(121)

 

(49)

Proceeds from sale of fixed asset

 

55

 

Net cash used in investing activities

 

(66)

 

(49)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Principal payments on finance lease obligations

 

(47)

 

(44)

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

6,921

5,171

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

 

(302)

 

(329)

Net cash flows provided by financing activities

 

7,359

 

8,352

NET CHANGE IN CASH

 

1,310

 

1,302

CASH AT BEGINNING OF PERIOD

 

848

 

381

CASH AT END OF PERIOD

$

2,158

$

1,683

See notes to unaudited condensed consolidated financial statements.

7


PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- CONTINUED

(Dollars in thousands)

(unaudited)

Nine Months Ended September 30, 

2020

    

2019

SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the period for interest

$

25

$

27

SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY

 

  

 

  

Purchases of equipment financed through accounts payable

4

Equipment financed through finance lease obligations

 

21

 

23

Discount of 9% on issuance of convertible bridge notes

188

Conversion of convertible debt, plus interest, into common stock

 

2,176

 

7,390

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

Prepaid insurance financed with loan

23

434

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)

590

Write-off of derivative liability in conjunction with convertible note conversions

477

See notes to unaudited condensed consolidated financial statements.

8


PRECIPIO, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 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.

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 Company has determined that it holds a variable interest in the Joint Venture and is the primary beneficiary of the variable interest entity (“VIE”). See Note 2 - Summary of Significant Accounting Policies for further discussion regarding consolidation of variable interest entities.

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

9


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 September 30, 2020, the Company had a net loss of $8.7 million, negative working capital of $0.5 million and net cash used in operating activities of $6.0 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 $6.7 million from the LP 2020 Purchase Agreement from the sale of 4,130,000 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 $3.3 million to draw subsequent to the filing of this Quarterly Report. See Note 8 Stockholders’ Equity for further discussion on Lincoln Park agreements; 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.

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.

10


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

The accompanying condensed consolidated financial statements are presented in conformity with GAAP and, as of September 30, 2020 and for the nine months ended September 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 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 August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the potential impact that the adoption of this ASU will have on its condensed consolidated financial statements.

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, is

11


effective for the Company for reporting periods beginning after December 15, 2022. The Company is currently assessing the potential impact that the adoption of this ASU will have on its 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 1,832,514 and 1,725,719 shares of our common stock have been excluded from the computation of diluted loss per share at September 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:

September 30, 

    

2020

    

2019

Stock options

 

808,245

 

493,908

Warrants

 

906,769

 

909,189

Preferred stock

 

117,500

 

20,888

Convertible notes

 

 

301,734

Total

 

1,832,514

 

1,725,719

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)

    

September 30, 2020

Assets:

Accounts receivable, net

$

569

Total assets

$

569

Liabilities:

Accrued expenses

$

7

Total liabilities

$

7

Noncontrolling interest in Joint Venture

$

27

The Company entered into the Joint Venture during 2020 and, as such, there are no assets or liabilities of the Joint Venture as of December 31, 2019.

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3. LONG-TERM DEBT

Long-term debt consists of the following:

Dollars in Thousands

    

September 30, 2020

    

December 31, 2019

Department of Economic and Community Development (DECD)

$

240

$

249

DECD debt issuance costs

 

(22)

 

(24)

Financed insurance loan

 

19

 

260

September 2018 Settlement

6

34

Paycheck Protection Program

787

Total long-term debt

 

1,030

 

519

Current portion of long-term debt

 

(530)

 

(321)

Long-term debt, net of current maturities

$

500

$

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 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 nine months ended September 30, 2020.

Debt issuance costs associated with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance costs were less than $1,000 for the three months ended September 30, 2020 and 2019, respectively, and $2,000 for the nine months ended September 30, 2020 and 2019, respectively. Net debt issuance costs were approximately $22,000 and $24,000 at September 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 made monthly payments through May of 2020.  In July 2020, the Company financed less than $0.1 million with a 5.0% interest rate and will make monthly payments through May 2021. As of September 30, 2020 and December 31, 2019, the Financed Insurance Loan’s outstanding balance of less than $0.1 million 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 balance of

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less than $0.1 million was included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet as of September 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, the Company has incurred approximately $0.8 million in payroll, payroll related costs and other anticipated 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 September 30, 2020, $0.5 million the PPP Loan’s outstanding balance was included in current maturities of long-term debt and $0.3 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

    

September 30, 2020

    

December 31, 2019

Convertible bridge notes

$

$

1,938

Convertible bridge notes discount and debt issuance costs

 

 

(1,796)

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.

14


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 nine months ended September 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 nine months ended September 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.

15


 

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 nine months ended September 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 nine months ended September 30, 2020.

During the three months ended September 30, 2020, there were no bridge note conversions. During the three months ended September 30, 2019, $0.1 million of bridge notes, plus interest, were converted into 52,748 shares of common stock of the Company. During the nine months ended September 30, 2020 and 2019, $2.2 million and $4.6 million, respectively, of bridge notes, plus interest, were converted into 3,908,145 and 1,828,766 shares of common stock of the Company, respectively.

As a result of the bridge note conversions, the Company wrote off approximately $0.5 million of derivative liability, with an offset to additional paid-in capital, during the nine months ended September 30, 2019.

16


During the three and nine months ended September 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 September 30,

2020

2019

Debt Discounts

Debt Premiums

Debt Discounts

Debt Premiums

Beginning balance at July 1

$

$

$

(2,158)

$

Deductions:

Amortization (1)

41

Write-off related to note conversions (2)

63

Balance at September 30

$

$

$

(2,054)

$

For the Nine Months Ended September 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)

154

(167)

Write-off related to note conversions (2)

138

(408)

989

(480)

Write-off related to note extinguishment (3)

955

Balance at September 30

$

$

$

(2,054)

$

(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 nine months ended September 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 September 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 September 30, 2019. During the nine months ended September 30, 2019, the change in Exchange Note debt discounts was as follows:

(Dollars in thousands)

For the Nine Months Ended September 30, 2019

Beginning balance at January 1

$

(83)

Deductions:

Amortization (1)

2

Write-off related to note conversions (2)

81

Balance at September 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 nine months ended September 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 nine months ended September 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 September 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.

18


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

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

5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

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

(dollars in thousands)

    

September 30, 2020

    

December 31, 2019

Accrued expenses

$

1,247

$

1,268

Accrued compensation

 

536

 

247

Accrued interest

 

21

 

124

$

1,804

$

1,639

During the three and nine months ended September 30, 2019, the Company recorded gain on settlement of liability, net of zero and $1.3 million, respectively, from the settlement of obligations with certain vendors. There were no gains on settlement of liability recorded during the three and nine months ended September 30, 2020.

6. COMMITMENTS AND CONTINGENCIES

The Company is involved in legal proceedings related to matters, which are incidental to its business. Also, the Company is delinquent on the payment of outstanding accounts payable for certain vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts. See below for a discussion on these matters.

LITIGATIONS

CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owed approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance sheets at September 30, 2020 and December 31, 2019.

On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the District Court for the District of Nebraska alleging we had a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers.  On June 21, 2019, the parties filed a stipulation of settlement, in which defendants are released from all claims and expressly deny that that they have committed any act or omission giving rise to any liability.  The stipulation includes a settlement payment of $1.95 million.  On July 10, 2019, the Court entered an order preliminarily approving the settlement. During the third quarter of 2019, both the Company and its insurance company paid their respective amounts of $0.27 million and $1.68 million, respectively, to an escrow account where the funds were held until they were approved for distribution. On June 3, 2020, the Court approved the settlement and entered an order of dismissal. As of the date the condensed consolidated financial statements were issued, the escrow funds have been released and this matter is closed.

19


LEGAL AND REGULATORY ENVIRONMENT

The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.

Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

7. LEASES

On January 1, 2019, the Company recorded initial ROU assets and corresponding operating lease liabilities of approximately $750,000 and a reversal of deferred rent and prepaid expenses of approximately $6,000 resulting in no cumulative effect adjustment upon adoption of Topic 842. The Company leases administrative facilities and laboratory equipment through operating lease agreements. In addition we rent various equipment used in our diagnostic lab and in our administrative offices through finance lease arrangements. Our operating leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew, from 1 to 5 years or more. The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.  As our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The primary leases we enter into with initial terms of 12 months or less are for equipment.

Upon the adoption of Topic 842, our accounting for finance leases, previously referred to as capital leases, remains substantially unchanged from prior guidance.

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The balance sheet presentation of our operating and finance leases is as follows:

(dollars in thousands)

Classification on the Condensed Consolidated Balance Sheet

September 30, 2020

December 31, 2019

Assets:

Operating lease assets

Operating lease right-of-use assets, net

$

358

$

519

Finance lease assets

Property and equipment, net

187

184

Total lease assets

$

545

$

703

Liabilities:

Current:

Operating lease obligations

Current maturities of operating lease liabilities

$

219

$

209

Finance lease obligations

Current maturities of finance lease liabilities

37

52

Noncurrent:

Operating lease obligations

Operating lease liabilities, less current maturities

150

317

Finance lease obligations

Finance lease liabilities, less current maturities

108

119

Total lease liabilities

$

514

$

697

As of September 30, 2020 and December 31, 2019, the estimated future minimum lease payments, excluding non-lease components, are as follows:

(dollars in thousands)

    

Operating Leases

Finance Leases

September 30,

December 31,

September 30,

December 31,

2020

2019

2020

2019

2020

$

59

$

242

$

13

$

62

2021

 

241

241

 

50

38

2022

 

48

48

 

38

32

2023

 

35

35

 

28

28

2024

17

17

27

27

Thereafter