Precipio, Inc 10-K for FY2022
Precipio, Inc. (PRPO)
About this 10-K
Precipio, Inc filed this 10-K on March 30, 2023, covering the fiscal year ended December 31, 2022 (FY2022).
Headline figures
Fiscal year ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $9.41M
- up 6.4% from $8.85M a year earlier
- Net loss
- $12.18M
- compared with a net loss of $8.52M a year earlier
- Diluted EPS
- -$0.54
- compared with -$0.40 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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Securities registered pursuant to Section 12(b) of the Act: | | |
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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 ◻
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported closing price per share of Common Stock as reported on the Nasdaq Capital Market on the last business day of the registrant’s most recently completed second quarter was approximately $
As of March 28, 2023, the number of shares of common stock outstanding was
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders (the “2023 Proxy Statement”) is incorporated by reference in Part III of this Form 10-K to the extent stated herein. The 2023 Proxy Statement, or an amendment to this Form 10-K, will be filed with the SEC within 120 days after December 31, 2022. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.
PRECIPIO, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2022
INDEX
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PART I.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”), including the sections entitled “Risk Factors” “Management’s Discussion & Analysis of Financial Condition and Results of Operations” and “Our Business” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. 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: the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic which is highly uncertain and will depend on future developments, 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 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, expected financial and other benefits from our organizational restructuring activities, 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. Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among other, the following:
| ● | the progress, timing and amount of expenses associated with our development and commercialization activities; |
| ● | our plans and ability to develop and commercialize new products and services, and make improvements to our existing products and services; |
| ● | our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; |
| ● | our ability or the amount of time it will take to achieve successful reimbursement of our existing and future products and services from third-party payors, such as commercial insurance companies and health maintenance organizations, and government insurance programs, such as Medicare and Medicaid; |
| ● | the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products; |
| ● | the success of any nonclinical studies or clinical trials that we may conduct, and any other studies or trials we may conduct; |
| ● | our intention to seek, and our ability to establish, strategic collaborations or partnerships for the development or sale of our products and the effectiveness of such collaborations or partnerships; |
| ● | our expectations as to future financial performance, expense levels and liquidity sources; |
| ● | our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing, as well as our ability to obtain such additional financing on reasonable terms; |
| ● | our ability to compete with other companies that are or may be developing or selling products that are competitive with our products; |
| ● | our ability to build a sales force to market our products and services, and anticipated increases in our sales and marketing costs due to an expansion in our sales force and marketing activities; |
| ● | federal and state regulatory requirements, including potential United States Food and Drug Administration regulation of our products or future products; |
| ● | anticipated trends and challenges in our potential markets; |
| ● | our ability to attract and retain key personnel; |
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| ● | risks associated with the COVID-19 pandemic, which may adversely impact our workforce, global supply chain, business, preclinical studies, clinical trials and financial results; |
| ● | our expectations related to the use of our cash reserves; |
| ● | the impact of new laws and regulations or amendments to existing laws and regulations; |
| ● | developments and projections relating to our competitors and our industry; and |
| ● | our estimates and expectations regarding cash and expense levels, future revenue, capital requirements and needs for additional financing, including our expected use of proceeds from our public offerings, and liquidity sources. |
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 these forward-looking statements for a number of reasons, including those described in Item 1A, “Risk Factors,” and other factors identified by cautionary language used elsewhere in this Annual Report.
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 financial statements and related notes contained in this Annual Report. Results for the year ended December 31, 2022 are not necessarily indicative of results that may be attained in the future.
Solely for convenience, trademarks and tradenames referred to in this Annual Report on Form 10-K appear (after the first usage) without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trademarks and tradenames.
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Item 1. Our Business
Business Description
Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a healthcare biotechnology company focused on cancer diagnostics. Our 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 are caused by numerous factors, among them outdated diagnostic 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. We focus on blood related cancers which represent some of the most complex cancers to diagnose, and are prone to some of the highest rates of misdiagnosis; industry studies estimate 1 in 5 blood-cancer patients are misdiagnosed. As cancer diagnostic testing has evolved from a cellular to a molecular/genetic-based approach, 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 develop and sell diagnostic products, reagents and services that improve the accuracy and efficiency of diagnostics, and lead to fewer misdiagnoses. We believe that our products and services impact patient outcomes by providing more accurate diagnostic results than current industry accepted practices that better inform the selection of appropriate therapeutic options. Furthermore, we believe that better patient outcomes have a positive impact on healthcare expenses as a result of fewer misdiagnoses. We believe our platform delivers better diagnostic accuracy than industry peers because of the technologies, workflow processes and experience we have developed. We market our technologies to other laboratories; additionally, we also operate our own laboratory, focused on delivering specialized diagnostic services to physicians and their patients to better ensure they receive accurate results leading to fewer misdiagnoses and promoting cost savings. 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. In our laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska, our development teams work to develop, test, and ultimately run new products and services in a clinical setting. We operate CLIA (Clinical Laboratory Improvement Amendments), laboratories in both the New Haven, Connecticut and Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide.
Industry
We believe there is a significant problem of misdiagnosis across numerous disease states (particularly in blood-related cancers) due to an inefficient and commoditized industry. We believe that the diagnostic industry focuses primarily on competitive pricing and test turnaround times, (“TAT”), at the expense of quality and accuracy. Increasingly complex disease states are met with eroding specialization rather than increased subspecialized expertise. According to a study conducted by the National Coalition of Health, this results in blood cancer misdiagnosis rates as high as 28%, failing to meet the needs of physicians, patients and the healthcare system as a whole. New technologies offer improved accuracy; however, many are either inaccessible or are not economically practical for clinical use. Despite much publicity of the industry transitioning from fee-per-service to value-based payments, this transition has not yet occurred in diagnostics. When a patient is misdiagnosed, physicians often end up administering incorrect treatments, creating adverse effects rather than improving outcomes. We believe that Insurance Providers, Medicare and Medicaid waste valuable dollars on the application of incorrect treatments and can incur substantial downstream costs. According to a report by Pinnacle Health, the estimated cost of misdiagnosis within the healthcare system is $750 billion annually. Most importantly however, patients pay the ultimate price of misdiagnosis with increased morbidity and mortality. Developing diagnostic products that increase accuracy, while also providing improved workflow and economic outcomes to laboratories is key to addressing this problem and delivering better diagnostic care.
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Market
Our market is the United States domestic oncology market where we participate as a commercial diagnostic laboratory and market our products. The oncology total available market, (“TAM”), is estimated to exceed $20 billion in 2023, with an estimated compound annual growth rate exceeding 5%. We also provide new technologies to the oncology diagnostic laboratory market in the form of HemeScreen and IV-Cell product offerings. The diagnostics product market is estimated to have annual revenues exceeding $14 billion by 2025. The annual growth rate of each market segment is estimated at 5%. Successful deployment within the United States will be closely followed by international marketing where the same product opportunities exist for our products.
From our New Haven, Connecticut commercial lab, we currently provide diagnostic blood cancer testing services to oncology practices in over 20 states. Building on our commercial laboratory expertise, we have developed several impactful diagnostic technologies that are more cost effective than current industry alternatives, which reduces the diagnostic testing time and improves efficiencies to perform such tests. We anticipate gaining a share of the oncology diagnostic product market as commercial diagnostic laboratories and oncology practices adopt these new cost effective technologies.
Our Technologies
Our strategy is to develop, manufacture and sell multiple technologies that we expect to be adopted by laboratories. Since we operate a clinical laboratory, we have access to patient samples that can, in parallel to the clinical work we conduct, be utilized to develop these new technologies. Since its inception, our R&D team has developed two products that are offered in the market, and we continue to develop a robust pipeline of products we expect to launch in the future. The following is a description of the two products currently on the market:
| 1. | HemeScreenTM |
The ongoing introduction of new, genetic-based targeted therapies have made molecular testing a mainstream and essential component of the diagnostic process. WHO (World Health Organization) and NCCN (The National Comprehensive Cancer Network®) guidelines have delineated the testing requirements of several specific genetic markers that are required during the diagnostic workup based on the patient's disease state.
The current products on the market offer two solutions for genetic testing. One of those solutions is single-gene testing products via various testing modalities; the other solution is broad, NGS (Next Generation Sequencing) panels that typically range from 50 to >500 genes in one panel. There are benefits and drawbacks to both current product options. While the single-gene products are focused, a lab requires multiple different products to address the clinical testing needs; using multiple products requires the purchase of multiple products and multiple testing machines, requiring the lab to spend substantial capital expenditures; a complex lab workflow; the splitting of a sample; all resulting in poor economics. Poor economics of an assay require the laboratory to batch samples, resulting in lengthy turnaround time to provide results to patients, and impacting patient care. Conversely, NGS, although providing broad gene coverage, is cumbersome and expensive to operate, thus resulting in lengthy TAT; and is costly to the payors who are reluctant to pay for the testing of 50 genes, when only 5 are defined as medically necessary.
A small panel targeted approach that operates on a single, low-cost, and easy-to-operate platform should be considered an attractive solution that provides the clinician with the answers they need while maintaining a simple, cost-effective workflow and economic model within the laboratory. HemeScreen utilizes an inexpensive RT-PCR (reverse transcription polymerase chain reaction). HemeScreen is a set of disease-specific reagents that provide a simple workflow, is easy to use, and create attractive economics to the lab, resulting in their ability to reduce batches and provide faster TAT. Our customers that utilize HemeScreen have demonstrated a reduction in TAT of 2 weeks to 2 days, and have also improved their financial outcome through this cost-effective technology.
The first panel developed using HemeScreen technology was our Myeloproliferative Neoplasms (MPN) panel. We have since added Acute Myeloid Leukemia (AML), Chronic Lymphocytic Leukemia (CLL), Cytopenia, and BCR-
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ABL panels, evolving HemeScreen into a “suite” of robust genetic diagnostic panels, and we expect the release of additional diagnostic panels during 2023.
We own a provisional patent application on our proprietary panels. Our technology enables testing to be completed in one rapid scanning process. The HemeScreen panels test for the presence of various mutations. In developing HemeScreen, we focused on improving the economics of providing blood cancer diagnostic tests and reducing laboratory technician time consumed in the testing process. By using our HemeScreen media, laboratories can:
| 1. | Avoid the cost of multiple platforms and test all the genes on one single platform; |
| 2. | Reduce the threshold of expertise required to perform these tests; |
| 3. | Reduce the batch requirements for the test and to subsequently significantly reduce the turnaround time for patient results; |
| 4. | Provide improved clinical service to physicians; and |
| 5. | Yield significant revenue to the laboratory. |
| 2. | IV-CellTM |
The cytogenetics laboratory workflow of bone marrow and peripheral blood samples suffers from an inherent flaw. The flaw stems from the requirement of the oncologist to provide their clinical suspicion, which determines the pathway of diagnosis, and guides the laboratory in the testing to be conducted, intended to confirm/rule out the oncologist’s clinical suspicion.
When a laboratory receives a sample, the cytogenetics laboratory must immediately set up the sample for cell culturing. Faced with four different options of cell lineages for culturing – myeloid, B-cell, T-cell, and Plasma, current products limit the laboratory to select only one cell lineage to culture. This selection is typically based solely on the clinical suspicion provided; hence, if the clinical suspicion is incorrect, the laboratory will have cultured the wrong cell lineage, potentially arriving at a false negative result. Our data shows this occurs in approximately 40% of patient cases, creating a substantial driver of misdiagnoses.
IV-Cell is a proprietary cell culture media that addresses the problem of diagnostic mistakes through the process of selective culturing. IV-Cell is a universal media that enables simultaneous culturing of all four hematopoietic cell lineages. Developed by Precipio, the culturing technology ensures that the laboratory is able to obtain sufficient information through other test modalities, thereby not relying solely on clinical suspicion, in order to ultimately select the correct cell lineage for culturing and evaluation.
IV-Cell was validated in our laboratory in parallel with existing commercially available reagents and has successfully demonstrated superior results compared to MarrowMax. Subsequently, IV-Cell has been used at our laboratory for the past few years on more than 1,000 clinical specimens, producing superior diagnostic results.
We are marketing this technology by providing major laboratories with access to the media. The IV-Cell technology and media can be purchased via a direct supply contract, whereby we are contracted with a manufacturer (under license and non-disclosure) to produce the media.
Competition
Our principal competition in clinical pathology services comes largely from two groups. The first group consists of companies that specialize in oncology and offer directly competing services to our diagnostic services. These companies provide a high level of service focused on oncology and offer their services to oncologists and pathology departments within hospitals. Competitors in this group include NeoGenomics Laboratories, Inc., also known as NeoGenomics or Neo, GenPath Diagnostics and Inform Diagnostics. The second group consists of large commercial companies that offer a wide variety of laboratory tests ranging from simple chemistry tests to complex genetic testing. Competitors in this group include LabCorp (NYSE: LH) and Quest Diagnostics (NYSE: DGX). Within the liquid biopsy market, our competitors include Foundation Medicine and Guardant Health.
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For the Products division, our competitors include various reagent manufacturers who produce various products that compete with our products.
Single gene vs. NGS (Next Generation Sequencing) concept
Molecular tests have become part of standard of care for the diagnostic of cancer biopsies. Genes are interrogated in search of mutations that can help explain the cause of cancer; indicate the severity of the cancer (prognosis); and provide guidance as to which targeted therapies may be applicable and therefore more effective for a specific patient.
The NCCN and WHO outline various genes that are required in the workup of various disease entities (typically 5-10 tests per disease entity), and as a result of that, companies have developed testing reagents for those specific genes. For example, for the evaluation of MPN (one of Precipio’s HemeScreen panels), the gene JAK2 is required to be tested. There are numerous competitors such as Qiagen, BioRad, Ipsogen, Cepheid, Asuragen, Abbott, Entrogen and others that have developed a testing assay for the mutation analysis of the JAK2 gene. These are called single-gene testing assays. If a lab wishes to test the required genes, they will typically need to purchase multiple machines (a substantial capital investment that can exceed $1 million), purchase multiple single-gene assays from different manufacturers, and set up multiple work flows, etc. This creates a complex and inefficient workflow.
On the other end of the spectrum are companies that have developed NGS panels for molecular analysis. NGS is a robust, broad ranging technology that enables a lab to test for tens, hundreds, and even thousands of genes in one test. Companies such as Life Technologies, Illumina, Roche, Natera, PerkinElmer, BioRad, Qiagen and many others have developed machines and assays that can test hundreds of genes simultaneously. While this technology is extremely robust, there are a few challenges to NGS.
| 1. | Operability – this is a complex technology that requires a high level of lab competency and an advanced level of staff sophistication and training. |
| 2. | Cost – running NGS testing is expensive; the machines can cost millions of dollars; reagents are expensive, and the staff to run these tests are highly paid. |
| 3. | Reimbursement – Conversely, given that the clinical requirements for genetic testing typically range from 5-10 genes, and these panels can run 50 – 500 genes, payers are reluctant to pay the high cost of these panels given that the vast majority of the information provided may not have clinical relevance. |
Precipio’s HemeScreen panels were designed to meet the clinical requirements outlined in the guidelines, while creating a low cost, easy to operate testing technology that results in a simplified workflow. Our panels:
Typically range from 4-7 genes (matching the clinical requirements);
Are all run on one, inexpensive machine (a RT-PCR, which costs between $30-75k);
Require very basic laboratory training and can be run by any lab tech with limited training; and,
Have attractive economics that provide attractive margins to laboratories who decide to use the RUO assays as an LDT.
IV-Cell competition
As described in the section above, the cytogenetics workup requires the selection and evaluation of a cell lineage within 4 potential cell lineages. All other competitors have a set of products that include a “base media” that is used for culturing, plus a set of various mitogens that are “cocktailed” into the base media in order to stimulate the specific cell lineage in question. Competitors include Gibco, Irvine Scientific, Capricorn Scientific, Sigma-Aldrich, Euroclone and others.
Precipio’s IV-Cell is the only media that has an all-in-one product that includes a base media plus all necessary mitogens, enabling the simultaneous culturing of all 4 cell lineages.
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Competitive Advantage
Our competitive advantage is derived from our ability to identify real-world clinical challenges in the laboratory; develop technology-based solutions to those challenges; test them within our lab on real clinical samples; and then commercialize the technology and bring it to market. Our model gives us a unique capability to ensure that the product is relevant, reliable, and workable within the laboratory workflow. Furthermore, given the hands-on experience we have as first-users of our own products, we have unparalleled experience and expertise required to support our customers and help them maximize the value of our technologies that they use.
As cancer diagnostic testing continues to evolve, laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation. Our organizational structure enables Management and R&D resources to efficiently focus on laboratory economics (time and material); the delivery of complex results (technical processing); and proprietary analysis (gather data, considerations, determination and information presentation) for the physician - all ultimately leading to minimizing misdiagnoses and better patient care. Embedding R&D personnel into a collaborative workflow within our clinical laboratory operations results in a very cost effective development environment enabling identification of issues, the isolation of causes and the creation of proprietary product solutions to mitigate misdiagnoses.
Government Regulation
The healthcare industry is subject to extensive regulation by a number of governmental entities at the federal, state and local level. Laws and regulations in the healthcare industry are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. For example, the U.S. federal transparency requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, (“PPACA”), including the provision commonly referred to as the Physician Payments Sunshine Act, and its implementing regulations, which requires applicable manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to CMS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members. Effective January 1, 2022, these reporting obligations extend to include transfers of value made to certain non-physician providers (physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists and anesthesiologist assistants, and certified-nurse midwives).
Our business is impacted not only by those laws and regulations that are directly applicable to us but also by certain laws and regulations that are applicable to our payers, vendors and referral sources. While our management believes we are in compliance with all of the existing laws and regulations applicable to us, such laws and regulations are subject to rapid change and often are uncertain in their application and enforcement. Further, to the extent we engage in new business initiatives, we must continue to evaluate whether new laws and regulations are applicable to us. There can be no assurance that we will not be subject to scrutiny or challenge under one or more of these laws or that any enforcement actions would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon our business and consolidated financial statements.
Our current active laboratory certifications can be found on http://www.precipiodx.com/accreditations.html. The laboratory operations are governed by Standard Operating Procedure manuals, (“SOPs”), which detail each aspect of the laboratory environment including the work flow, quality control, maintenance, and safety. These SOPs are reviewed and approved annually and signed off by the laboratory manager and medical director.
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Among the various federal and state laws and regulations that may govern or impact our current and planned operations are the following:
Reimbursement
This section is relevant to our clinical pathology services; our products are sold and invoiced directly (or via distributors) to customers who pay for the products, so there are no reimbursement issues. For our laboratory services, as blood-related cancers are more likely to be developed later in life, the largest insurance provider is Medicare, which constitutes approximately 40% of our patients’ cases. Non-Medicare patients are typically insured by private insurance companies who provide patient coverage and pay for patients’ health-related costs. These private insurance companies will often adjust their rates according to the insurance rates annually published by the Center for Medicare and Medicaid Services, (“CMS”). We, and other providers, typically bill according to the codes relevant to the tests we conduct.
Medicare and Medicaid Reimbursement
Many of the services that we provide are reimbursed by Medicare and state Medicaid programs and are therefore subject to extensive government regulation.
Medicare is a federally funded program that provides health insurance coverage for qualified persons age 65 or older, some disabled persons, and persons with end-stage renal disease and persons with Lou Gehrig’s disease. Medicaid programs are jointly funded by the federal and state governments and are administered by states under approved plans.
Medicaid provides medical benefits to eligible people with limited income and resources and people with disabilities, among others. Although the federal government establishes general guidelines for the Medicaid program, each state sets its own guidelines regarding eligibility and covered services. Some individuals, known as “dual eligibles”, may be eligible for benefits under both Medicare and a state Medicaid program. Reimbursement under the Medicare and Medicaid programs is contingent on the satisfaction of numerous rules and regulations, including those requiring certification and/or licensure. Congress often enacts legislation that affects the reimbursement rates under government healthcare programs.
Approximately 40% of our revenue for the year ended December 31, 2022 was derived directly from Medicare, Medicaid or other government-sponsored healthcare programs. Also, we indirectly provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs through managed care entities. Should there be material changes to federal or state reimbursement methodologies, regulations or policies, our direct reimbursements from government-sponsored healthcare programs, as well as service fees that relate indirectly to such reimbursements, could be adversely affected.
Healthcare Reform
In recent years, federal and state governments have considered and enacted policy changes designed to reform the healthcare industry. The most prominent of these healthcare reform efforts, the PPACA, has resulted in sweeping changes to the U.S. system for the delivery and financing of health care. As currently structured, the PPACA increases the number of persons covered under government programs and private insurance; furnishes economic incentives for measurable improvements in health care quality outcomes; promotes a more integrated health care delivery system and the creation of new health care delivery. It is unclear how other healthcare reform measures of the Biden administration or other efforts, if any, to challenge, repeal or replace the PPACA will impact our business.
U.S. Food and Drug Administration Regulation
We offer our products as research use only (RUO) products. An RUO product is one that is not intended for clinical diagnostic use and must be labeled “For Research Use Only. Not for use in diagnostic procedures.” Products that are intended for research use only and are properly labeled as RUO are exempt from compliance with the requirements of the U.S. Food and Drug Administration (FDA) applicable to medical devices. A product labeled RUO but intended to be used diagnostically may be viewed by the FDA as adulterated or misbranded and is subject to FDA enforcement activities.
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The FDA may consider the totality of the circumstances surrounding distribution and use of an RUO product, including how the product is marketed, when determining its intended use. In November 2013, the FDA issued a guidance document entitled “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (RUO Guidance), which highlights the FDA’s interpretation that distribution of RUO products with any labeling, advertising or promotion that suggests that clinical laboratories can validate the test through their own procedures and subsequently offer it for clinical diagnostic use as a laboratory developed test is in conflict with RUO status. The RUO Guidance further articulates the FDA’s position that any assistance offered in performing clinical validation or verification, or similar specialized technical support, to clinical laboratories, conflicts with RUO status.
Additionally, our CLIA laboratories offer testing utilizing our laboratory developed tests (LDTs). LDTs are defined by the FDA to be tests that are designed, developed, and used within a single laboratory. The FDA takes the position that it has authority to regulate LDTs as medical devices, and historically, it has exercised enforcement discretion with respect to most LDTs and has not required laboratories that offer LDTs to comply with the FDA’s requirements for medical devices. However, the FDA has stated it intends to end its policy of enforcement discretion and to actively regulate LDTs. For example, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Regulatory Oversight of Laboratory Developed Tests (LDTs)”, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The draft guidance documents have not been finalized. In January 2017, the FDA issued a “Discussion Paper on Laboratory Developed Tests (LDTs),” which includes a possible approach to LDT oversight that is intended to advance public discussion on the topic. Additionally, legislative proposals continue to be discussed. Such proposals would implement differing approaches to the regulation of LDTs, including in certain instances to require marketing authorization from the FDA. In early 2023, the FDA has also indicated that the agency was looking at rulemaking for diagnostics reform.
Medical devices are subject to extensive regulation by the FDA. The FDA regulates, among other things, the research, design, development, preclinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, marketing authorization, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that a manufacturer has failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, including the following:
| ● | issuance of warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties; |
| ● | requesting or requiring recalls, withdrawals, or administrative detention or seizure of products; |
| ● | imposing operating restrictions or partial suspension or total shutdown of production; |
| ● | refusing or delaying requests for marketing authorization or new products or modified products; or criminal prosecution. |
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European Union Regulation
Our products are regulated as in-vitro diagnostic devices in the European Union (EU) and will therefore be subject to the requirements of the In-Vitro Diagnostic Devices Regulation (EU) 2017/746, (“IVDR”). The IVDR became fully applicable in all EU Member States on May 26, 2022 (therefore not including the UK). The IVDR introduced more stringent requirements than the previous EU In Vitro Diagnostics Directive 98/79/EC, (“IVDD”). For an in-vitro diagnostic device to be placed on the market in the EU, a CE mark demonstrating conformance with the applicable regulations is required. The CE mark confirms that the device meets the general safety and performance requirements under the IVDR (or, previously, the essential requirements under the IVDD). For the lowest risk class devices, the manufacturer can conduct a self-assessment of its device against the requirements and issue a declaration of conformity confirming that the device is compliant. For all other devices, a conformity assessment procedure must be undertaken by an independent notified body to assess the compliance of the device with the applicable requirements.
In accordance with the transitional provisions in the IVDR, devices placed on the EU market prior to 26 May 2022 in accordance with the IVDD (except for Class A, non-sterile devices which must conform with the IVDR requirements since May 26, 2022) may continue to be supplied until a certain date (ranging from May 2025 to May 2027) which will depend on the risk class of the device, provided that manufacturers comply with the IVDR requirements relating to post-market surveillance, market surveillance, vigilance and registration of economic operators and devices. After the applicable date, all devices must be certified under the IVDR in order to be marketed in the EU.
Research and Development Expenses
For the years ended December 31, 2022 and 2021, we recorded $1.7 million and $1.3 million, respectively, of research and development expenses. More information regarding our research and development activities can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Annual Report.
Human Capital
Employees.
As of March 15, 2023, Precipio employed fifty-five (53) employees on a full-time basis and three (3) employees as part-time. Of the total, eleven (11) were in Finance, General and Administration, twenty-one (21) were in laboratory and production, fifteen (15) were in Sales and Marketing, four (4) were in Customer Service and Support and five (5) were in Research & Development.
All of our employees are based in the U.S. and a majority are based in Connecticut. None of our employees are represented by a labor union or covered by a collective bargaining agreement, and we believe our relationship with our employees is good.
Career Development and Growth.
We emphasize employee development and training. We invest in our employees by providing development opportunities, and the necessary resources to support their success, including coaching, management and leadership training, presentation workshops and paid conference attendance. The diversity of our employees and their skillsets also offer a unique opportunity for us to learn from each other’s experiences.
Compensation and Benefits.
Our human capital strategies, initiatives, and outcomes are reviewed on a regular basis with our Board’s Governance Committee as well as Compensation Committee to help align with our overall business strategies. Our competitive compensation programs are designed to align the compensation of our employees with our performance and to provide the proper incentives to attract, retain and motivate employees. The aim is to structure our compensation programs to balance incentive earnings for both short-term and long-term performance.
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We are committed to providing comprehensive benefits and some examples of the benefits we offer are: medical insurance including prescription drug benefits, dental insurance, vision insurance, accident insurance, life insurance, disability insurance, health savings accounts, flexible spending accounts and access to mental health support. We also enable our employees to take unlimited personal time off and have put in place enhanced parental leave abilities.
Employee Engagement.
We conduct confidential employee engagement surveys to obtain feedback on a variety of topics, including culture, values, diversity and inclusion, career development, employee satisfaction and tenure, and execution of our company strategy. These survey results are reviewed by our executive team so that we can continue to increase employee satisfaction and improve the well-being of our employees. We are also committed to communication and transparency, using multiple forums and channels to allow for the sharing of appropriate, timely information to all employees. We focus our employee communications on continual engagement, providing updates on our business, technology, and workforce, including learning opportunities. We believe our management team has the experience necessary to effectively execute our strategy and advance our product and technology leadership.
Diversity & Inclusion (“D&I”).
We strive to create a culture in which all employees feel heard, respected, and valued. We are committed to creating and maintaining a diverse, inclusive and safe work environment. As we grow and mature, we look forward to establishing programs that infuse D&I within the business, identify barriers that impact recruitment, development and retention of underrepresented employees, identify educational content, communicate the value and impact of D&I on goals and objectives, all while continuing to focus on hiring diverse talent at all levels of the Company. Our ability to innovate and meet people’s needs is strongest when all voices are heard and valued.
Code of Business Conduct and Ethics.
We are committed to conducting business in accordance with the highest ethical standards and applicable laws. We maintain, and all of our employees are expected to adhere to our Code of Business Conduct and Ethics, (the “Code of Conduct”), which serves as the foundation of our core values that drive our culture. All of our employees complete training and education on a range of important topics related to our Code of Conduct, and they must certify they understand and comply with the expectations contained in the Code of Conduct. We also maintain an anonymous hotline for employees to report concerns regarding violations of the Code of Conduct.
The full text of our Code of Business Conduct and Ethics is posted on the investor relations page of our website at https://www.precipiodx.com/investors/corporate-governance/.
We intend to satisfy any disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by posting such information on our website, at the Internet address and location specified above.
Executive Officers of the Registrant
Our executive officers, their ages as of March 15, 2023 and their respective positions are as follows:
Ilan Danieli, Chief Executive Officer, age 51
Mr. Danieli was the founder of Precipio Diagnostics LLC and was the Chief Executive Officer of Precipio Diagnostics LLC since 2011. Mr. Danieli assumed the role of Chief Executive Officer of Precipio, Inc. at the time of a June 2017 merger transaction with Transgenomic, Inc. (the “Merger”). With over 20 years managing small and medium-size companies, some of his previous experiences include COO of Osiris, a publicly-traded company based in New York City with operations in the US, Canada, Europe and Asia; VP of Operations for Laurus Capital Management, a multi-billion dollar hedge fund; and in various other entrepreneurial ventures. Ilan holds an MBA from the Darden School at the University of Virginia, and a BA in Economics from Bar-Ilan University in Israel.
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Matthew Gage, Interim Chief Financial Officer, age 56
Mr. Gage was appointed Interim Chief Financial Officer of Precipio, Inc. effective March 21, 2022. Mr. Gage served as Director of Financial Reporting and Analysis of Precipio, Inc. since joining the Company in June 2017 following its acquisition of Transgenomic Inc., where he was Director of Financial Reporting and Analysis since 2014. Mr. Gage has over 30 years of experience in company finance, 25 years of which being with publicly traded companies. Mr. Gage holds a Bachelor of Science Degree in Business Administration from Bryant University.
Environmental, Social, and Governance
As our business continues to grow and develop, we recognize the importance of making responsible business decisions for the benefit of all of our stakeholders, including our stockholders, customers, employees, partners, the communities in which we work and live, as well as the planet. To that end, we published our ESG Report in February 2023, which is available on our website, and expect to continue reporting on our progress to our various stakeholders.
Climate Change
We are committed to operating our business in an environmentally sustainable manner, meaning developing and producing products in a resource efficient way while limiting our environmental impact in the most material areas of greenhouse gas emissions, energy use, waste, and water.
For more information about how climate change impacts our business, see “Risk factors – Global climate change could negatively affect our business” in Item 1A of this Annual Report.
Compliance with Environmental Laws
We believe we are in compliance with current environmental protection requirements that apply to us or our business. Costs attributable to environmental compliance are not currently material.
Intellectual Property
The Company has filed provisional patent applications for its proprietary HemeScreen technology.
Corporate History
Precipio, Inc. was incorporated in Delaware on March 6, 1997. Our principal office is located at 4 Science Park, New Haven, Connecticut 06511.
Our internet address is www.precipiodx.com. Information found on our website is not incorporated by reference into this report and should not be considered as part of this report. We make available free of charge through our website our Securities and Exchange Commission, (“SEC”), filings, including exhibits, furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You can review our electronically filed reports and other information that we file with the SEC on the SEC’s web site at http://www.sec.gov.
Item 1A. Risk Factors
The following risks and uncertainties, together with all other information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes, should be considered carefully. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations, and could cause the market price of our common stock to fluctuate or decline.
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Summary of Risk Factors
| ● | There is substantial doubt about our ability to continue as a going concern. |
| ● | We may require significant additional financing to sustain our operations and without it we will not be able to continue operations. |
| ● | 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. |
| ● | 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 are subject to concentrations of revenue risk and concentrations of credit risk in accounts receivable. |
| ● | We have been, and may continue to be, subject to costly litigation. |
| ● | The commercial success of our products, including those we are developing, will depend upon the degree of market acceptance of these products among physicians, patients, health care payers and the medical community and on our ability to successfully market our products. |
| ● | If we cannot compete successfully with our competitors, including new entrants in the market, we may be unable to increase or sustain our revenue or achieve and sustain profitability. |
| ● | We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements, which could have a material adverse effect on our business and operating results. |
| ● | We face risks related to health pandemics and other widespread outbreaks of contagious disease, including the novel coronavirus, COVID-19, which could significantly disrupt our operations and impact our financial results. |
| ● | International expansion of our business could expose us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States. |
| ● | Unfavorable U.S. or global economic conditions could adversely affect our business, financial condition or results of operations. |
| ● | Global climate change could negatively affect our business. |
| ● | We depend upon a limited number of key personnel, and if we are not able to retain them or recruit additional qualified personnel, the execution of our strategy, management of our business and commercialization of our product candidates could be delayed or negatively impacted. |
| ● | We will need to increase the size of our organization, and we may experience difficulties in managing growth. |
| ● | We currently have limited experience in marketing products. If we are unable to establish marketing and sales capabilities and retain the proper talent to execute on our sales and marketing strategy, we may not be able to generate product revenue. |
| ● | Cybersecurity risks could compromise our information and expose us to liability, which may harm our ability to operate effectively and may cause our business and reputation to suffer. |
| ● | Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal tax purposes is subject to limitation and risk that could further limit our ability to utilize our net operating losses. |
| ● | The testing, manufacturing and marketing of diagnostics entails an inherent risk of product liability and personal injury claims. |
| ● | All of our diagnostic technology development and our clinical services are performed at two laboratories, and in the event either or both of these facilities were to be affected by a termination of the lease or a man-made or natural disaster, our operations could be severely impaired. |
| ● | An impairment in the carrying value of our intangible assets could negatively affect our results of operations. |
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| ● | Governmental payers and health care plans have taken steps to control costs. |
| ● | Changes in payer mix could have a material adverse impact on our net sales and profitability. |
| ● | Our laboratories require ongoing CLIA certification and we cannot guarantee that our laboratories will pass all future certification inspections. |
| ● | Our products that we sell as research use only products and/or that we offer as laboratory developed tests could become subject to government regulations requiring marketing authorization, and the marketing authorization and maintenance process for such products may be expensive, time-consuming and uncertain in both timing and outcome. |
| ● | Failure to comply with HIPAA could be costly. |
| ● | Our failure to comply with any applicable government laws and regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations. |
| ● | 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. |
| ● | We cannot be certain that measures taken to protect our intellectual property will be effective. |
| ● | The price of our common stock may fluctuate significantly, which could negatively affect us and holders of our common stock. |
| ● | The price of our stock may be vulnerable to manipulation. |
| ● | If we cannot continue to satisfy Nasdaq listing maintenance requirements and other rules, our securities may be delisted, which could negatively impact the price of our securities. |
| ● | Increased costs associated with corporate governance compliance may significantly impact our results of operations. |
| ● | We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock. |
| ● | If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline. |
| ● | The sale or issuance of our common stock to Alliance Global Partners may cause significant dilution and the sale of the shares of common stock acquired by Alliance Global Partners, or the perception that such sales may occur, could cause the price of our common stock to fall. |
| ● | The issuance of our common stock to creditors or litigants may cause significant dilution to our stockholders and cause the price of our common stock to fall. |
Risks Related to Our Business and Strategy
There is substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm has issued an opinion on our consolidated financial statements included in this Annual Report on Form 10-K that states that the consolidated financial statements were prepared assuming we will continue as a going concern. Our consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assume that we will realize our assets and discharge our liabilities in the ordinary course of business. We have incurred substantial operating losses and have used cash in our operating activities for the past few years. For the year ended December 31, 2022, the Company had a net loss of $12.2 million and net cash used in operating activities of $7.7 million. As of December 31, 2022, the Company had an accumulated deficit of $92.3 million and working capital of $1.3 million. Our consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. We also cannot be certain that additional financing, if needed, will be available on
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acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. There remains substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date the consolidated financial statements were issued.
To date, 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 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.
Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.
We may require significant additional financing to sustain our operations and without it we will not be able to continue operations.
At December 31, 2022, we had working capital of $1.3 million. For the year ended December 31, 2022, we had an operating cash flow deficit of $7.7 million and a net loss of $12.2 million. We do not currently have sufficient financial resources to fund our operations or those of our subsidiaries. Therefore, we need additional funds to continue these operations.
Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations, funding pursuant to a sales agreement with A.G.P./Alliance Global Partners (“AGP”) and possible sales of certain receivables under our receivable factoring agreement.
To facilitate ongoing operations and product development, on April 2, 2021, the Company entered into a sales agreement with AGP, pursuant to which we may offer and sell our common stock, par value $0.01 per share (the “Common Stock”) (the “Shares”), having aggregate sales proceeds of up to $22.0 million, to or through AGP, as sales agent (the “AGP Sales Agreement”), from time to time, in an “at the market offering” (as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended) of the Shares (the “ATM Offering”). We are limited in the number of shares we can sell in the ATM Offering due to the offering limitations currently applicable to us under General Instruction I.B.6. of Form S-3 and our 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 Sales Agreement.
The extent we rely on AGP 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. If obtaining sufficient funding from AGP were to prove unavailable or prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working capital needs. Even if we sell all $22.0 million under the AGP Sales Agreement, we may still need additional capital to fully implement our business, operating and development plans. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects. From April 2, 2021 through the date the consolidated financial statements were issued, we received approximately $16.0 million in gross proceeds through the AGP Sales Agreement from the sale of 5,119,656 shares of common stock, leaving us with an additional $6.0 million available for future sales pursuant to the AGP Sales Agreement.
On March 27, 2023, we entered into receivables factoring agreement with Culain Capital Funding LLC (“Culain”). Under the terms of this agreement, we may offer for sale, and Culain in its sole discretion may purchase eligible
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receivables of the Company (the “Purchased Accounts”). Upon purchase, Culain becomes the absolute owner of the Purchased Accounts, which are payable directly to Culain, subject to certain repurchase obligations of the Company. The willingness of Culain to make advances to us by purchasing eligible accounts receivable is subject to customary conditions for financings of this nature. If we are unable to satisfy those conditions, Culain could refrain from providing financing to us, and we might not have sufficient cash on hand to fund our ongoing operations.
We may have to raise significant additional capital or obtain additional credit to fund our operations in the future. The failure to raise significant capital, or obtain credit when needed, on acceptable terms, could have a material adverse effect on our business, prospects, financial condition and results of operations, and we may not be able to continue our business as currently contemplated or may be required to seek protection under United States federal bankruptcy law.
Substantially all of our consolidated assets are subject to a security interest in favor of Culain under our Factoring Agreement.
Our obligations under certain accounts receivable financing arrangements are secured by a lien on substantially all our consolidated tangible and intangible assets, including receivables from the operations of our business and outstanding ownership interests in each of our direct and indirect subsidiaries. Pursuant to the Factoring Agreement with Culain, we are advanced funds against future accounts receivable. We remain responsible for collecting the accounts receivable. If we are unable to meet our payment obligations under this arrangement, including as the result of failure to collect accounts receivable, Culain would have the right to liquidate our assets to pay off the amounts owed. If any of our assets were to be liquidated, our business could be materially and adversely affected. As of the date of issuance of this Annual Report on Form 10-K, we did not have any receivables outstanding under these arrangements.
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 December 31, 2022, we had cash of $3.4 million and our working capital was $1.3 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 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 December 31, 2022, we had working capital of $1.3 million. For the year ended December 31, 2022, we had an operating cash flow deficit of $7.7 million and a net loss of $12.2 million. For the year ended December 31, 2022, 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.
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We are subject to concentrations of revenue risk and concentrations of credit risk in accounts receivable.
We have had several customers who, from time to time, have individually represented 10% or more of our total revenue, or whose accounts receivable balances individually represented 10% or more of our total accounts receivable.
For the years ended December 31, 2022 and 2021, no customer individually represented 10% or more of our total revenue. We expect to maintain ongoing relationships with our customers, however, the loss of, or significant decrease in demand from, any of our top customers could have a material adverse effect on our business, results of operations and financial condition.
At December 31, 2022, one customer accounted for approximately 12% of our total accounts receivable and at December 31, 2021, two customers accounted for approximately 33% of our total accounts receivable. The business risks associated with this concentration, including increased credit risks for these and other customers and the possibility of related bad debt write-offs, could negatively affect our margins and profits. Additionally, the loss of any of our top customers, whether through competition or consolidation, or a disruption in sales to such a customer, could result in a decrease of the Company’s future sales, earnings and cash flows. Generally, we do not require collateral or other securities to support our accounts receivable and while we are directly affected by the financial condition of our customers, management does not believe significant credit risks exist at December 31, 2022.
We have been, and may continue to be, subject to costly litigation.
We have been, and may continue to be, subject to legal proceedings. Due to the nature of our business and our history of insufficient capital resources to pay our obligations on a timely basis, we may be subject to a variety of regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of our business. The results of these legal proceedings cannot be predicted with certainty due to the uncertainty inherent in litigation, including the effects of discovery of new evidence or advancement of new legal theories, the difficulty of predicting decisions of judges and juries and the possibility that decisions may be reversed on appeal. Such litigation has been, and in the future, could be, costly, time-consuming and distracting to management, result in a diversion of resources and could materially adversely affect our business, financial condition and operating results.
In addition, we may settle some litigation through the issuance of equity securities which may result in significant dilution to our stockholders.
For more information related to this risk factor, see Legal Proceedings under Item 3 in this Annual Report.
The commercial success of our diagnostic products, including those we are developing, will depend upon the degree of market acceptance of these products among physicians, patients, health care payers and the medical community and on our ability to successfully market our products.
Our products may never gain significant acceptance in the marketplace and, therefore, may never generate substantial revenue or profits for us. Our ability to achieve commercial market acceptance for our existing and future products will depend on several factors, including:
| ● | our ability to convince the medical community of the clinical utility of our products and their potential advantages over existing diagnostics technology; |
| ● | the willingness of physicians and patients to utilize our products; and |
| ● | the agreement by commercial third-party payers and government payers to reimburse our products, the scope and amount of which will affect patients’ willingness or ability to pay for our products and will likely heavily influence physicians’ decisions to recommend our products. |
In addition, physicians may rely on guidelines issued by industry groups, such as the NCCN, medical societies, such as the College of American Pathologists, (“CAP”), or other key oncology-related organizations before utilizing any diagnostic test.
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We believe that publications of scientific and medical results in peer-reviewed journals and presentations at leading conferences are critical to the broad adoption of our products. Publication in leading medical journals is subject to a peer-review process, and peer reviewers may not consider the results of studies involving our products sufficiently novel or worthy of publication. The failure to be listed in physician guidelines or to be published in peer-reviewed journals could limit the adoption of our products. Failure to achieve widespread market acceptance of our products would materially harm our business, financial condition, and results of operations.
If we cannot compete successfully with our competitors, including new entrants in the market, we may be unable to increase or sustain our revenue or achieve and sustain profitability.
The medical diagnostic industry is intensely competitive and characterized by rapid technological progress. We face significant competition from competitors ranging in size from diversified global companies with significant research and development resources to small, specialized firms whose narrower product lines may allow them to be more effective in deploying related PCR technology in the genetic diagnostic industry. Our closest competitors fall largely into two groups, consisting of companies that specialize in oncology and offer directly competing services to our diagnostic services, offering their services to oncologists and pathology departments within hospitals, as well as large commercial companies that offer a wide variety of laboratory tests that range from simple chemistry tests to complex genetic testing. The technologies associated with the molecular diagnostics industry are evolving rapidly and there is intense competition within such industry. Certain molecular diagnostics companies have established technologies that may be competitive to our product candidates and any future tests that we develop. Some of these tests may use different approaches or means to obtain diagnostic results, which could be more effective or less expensive than our tests for similar indications. Moreover, these and other future competitors have or may have considerably greater resources than we do in terms of technology, sales, marketing, commercialization and capital resources. These competitors may have substantial advantages over us in terms of research and development expertise, experience in clinical studies, experience in regulatory issues, brand name exposure and expertise in sales and marketing as well as in operating central laboratory services. Many of these organizations have financial, marketing and human resources greater than ours; therefore, there can be no assurance that we can successfully compete with present or potential competitors or that such competition will not have a materially adverse effect on our business, financial position or results of operations.
We believe that many of our competitors spend significantly more on research and development-related activities than we do. Our competitors may discover new diagnostic tools or develop existing technologies to compete with our diagnostic technology. Our commercial opportunities will be reduced or eliminated if these competing products are more effective, are more convenient or are less expensive than our product candidates.
We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements, which could have a material adverse effect on our business and operating results.
Our success depends on our ability to develop new products and applications for our diagnostic technology in existing and new markets, while improving the performance and cost-effectiveness of our systems. New technologies, techniques or products could emerge that might offer better combinations of price and performance than our current or future products and systems. Existing or future markets for our products, as well as potential markets for our diagnostic product candidates, are characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. At the same time, however, we must carefully manage the introduction of new products. If customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete inventory of older products as we transition to new products and our experience in managing product transitions is very limited. If we do not successfully innovate and introduce new technology into our product lines or effectively manage the transitions to new product offerings, our revenues and results of operations will be adversely impacted.
Competitors may respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or customer requirements. We anticipate that we will face increased competition in the future as
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existing companies and competitors develop new or improved products and as new companies enter the market with new technologies.
We face risks related to health pandemics and other widespread outbreaks of contagious disease, including the novel coronavirus, COVID-19, which could significantly disrupt our operations and impact our financial results.
The COVID-19 pandemic continues to evolve. Despite recent progress in the administration of vaccines, COVID-19 had an adverse impact on the global economy and to some extent on our business. The COVID-19 pandemic continues to have a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services may be slow to return to pre-pandemic levels, if they return to pre-pandemic levels. Our laboratory operations resumed to near-normal capacity, but we may continue to experience challenges in procuring materials and supplies in a consistently timely manner due to COVID-19-related supply chain issues. The demand for COVID-19 vaccines and potential for manufacturing facilities and materials to be commandeered under the Defense Production Act of 1950, or equivalent foreign legislation, during a public health emergency may make it more difficult to obtain materials or manufacturing. If any of our third-party manufacturers is adversely impacted by the COVID-19 pandemic or if they divert resources or manufacturing capacity to accommodate the development or manufacture of COVID-19 coronavirus vaccines, our supply chain may be disrupted, limiting our ability to produce our diagnostic tests.
We have been and will continue to be prudent in managing through this economic crisis. Digital connectivity is now fundamental to the continuity of our business operations. The extent to which the COVID-19 pandemic continues to impact our results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and longevity of COVID-19 and its variants, the resurgence of COVID-19 in regions that have begun to recover from the initial impact of the pandemic, the impact of COVID-19 on economic activity, and the actions to contain its impact on public health and the global economy.
International expansion of our business could expose us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
When cleared, authorized or approved, we and our collaborators may market, sell, and distribute our products and services outside of the United States, and our business would be subject to risks associated with doing business outside of the United States, including an increase in our expenses and diversion of our management’s attention from the development of future products and services. Accordingly, our business and financial results in the future could be adversely affected due to a variety of factors, including:
| ● | multiple, conflicting and changing laws and regulations such as privacy, security and data use regulations, tax laws, export and import restrictions, economic sanctions and embargoes, employment laws, anticorruption laws, regulatory requirements, reimbursement or payer regimes and other governmental; |
| ● | approvals, permits and licenses; |
| ● | failure by us, our collaborators or our distributors to obtain regulatory clearance, authorization or approval for the use of our products and services in various countries; |
| ● | additional potentially relevant third-party patent rights; |
| ● | complexities and difficulties in obtaining intellectual property protection and enforcing our intellectual property; |
| ● | difficulties in staffing and managing foreign operations, including repatriating foreign earned profits; |
| ● | complexities associated with managing multiple payer reimbursement regimes, government payers or patient self-pay systems; |
| ● | difficulties in negotiating favorable reimbursement negotiations with governmental authorities; |
| ● | logistics and regulations associated with shipping samples, including infrastructure conditions and transportation delays; |
| ● | limits in our ability to penetrate international markets if we are not able to conduct our clinical diagnostic services locally; |
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| ● | financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products and services and exposure to foreign currency exchange rate fluctuations; |
| ● | international regulations and license requirements that may restrict foreign investment in and operation of the internet, IT infrastructure, data centers and other sectors, and international transfers of data; |
| ● | natural disasters, political and economic instability, including wars, terrorism and political unrest, and outbreak of disease; |
| ● | boycotts, curtailment of trade and other business restrictions; |
| ● | regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the Foreign Corrupt Practices Act of 1977, or FCPA, its books and records provisions, or its anti-bribery provisions or laws similar to the FCPA in other jurisdictions in which we may in the future operate, such as the United Kingdom’s, (“UK”), Bribery Act of 2010 and anti-bribery requirements of member states in the European Union, (“EU”); and |
| ● | our products (including HemeScreen® reagents which are authorized under the previous EU Directive on In-Vitro Diagnostic Devices (98/79/EC)) may not be compliant with the new regulatory framework brought in by the In-Vitro Diagnostic Devices Regulation ((EU) 2017/746), and approvals of our products under the new regulatory regime may be delayed and consequently our ability to continue to commercialize them in the EU may be impacted. |
Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.
The sales of our products in the EU and the UK are regulated through a process that either requires self-certification or certification by a notified body in order to affix a CE mark. Such processes are uncertain, particularly in light of changes to the regulatory framework in the EU and UK. There may be a risk of delay in placing such products on the market and, once on the market, a risk of review and challenges to certain certified statuses.
On May 24, 2022, we received CE-IVD approval for the sale of HemeScreen® reagents in the UK and the EU in accordance with the requirements of the EU IVDD. However, the new EU In-Vitro Diagnostic Devices Regulation ((EU) 2017/746), came into effect on May 26, 2022 and repealed the IVDD. The transitional provisions under the IVDR allow for devices with a notified body certificate issued under the IVDD and which are placed on the EU market prior to May 26, 2022 to continue to be placed on the market in the EU until May 26, 2025. Our device will need to be re-certified under the IVDR by such date in order to remain on the EU market, which will include evaluation by an EU notified body to confirm whether our device meets the general safety and performance requirements under the IVDR. There is no guarantee that our device will be determined to be compliant with such requirements. It should also be appreciated that there currently is a severe shortage of capacity of the EU notified bodies to assess all devices that will require notified body certification under the IVDR. There can be no assurance that our ability to market HemeScreen® reagents in the EU in the future will not be interrupted and this could, in turn, have a negative impact on our business and operating results.
The regulatory framework for medical devices in the UK is likely to evolve now that the UK is no longer part of the EU. Changes to the UK regulations may require additional review of our devices and there is a risk our devices may not be compliant with any revised UK regulations.
Now that the UK has left the EU, the new UKCA mark will replace the EU CE mark in Great Britain, (“GB”). The EU legal framework remains applicable in Northern Ireland (indeed any products placed on the market in Northern Ireland must be compliant with EU law). EU CE marks will continue to be recognized in GB for in-vitro diagnostic devices for the time being, however, from July 2024, transitional arrangements will apply for CE and UKCA marked devices placed on the GB market. These transitional arrangements have not yet been brought into force through the UK medical devices regulations, but the UK Government intends to introduce legislation by Spring 2023 that will bring these into force. In addition, all devices must now be registered with the MHRA in order to be placed on the GB market. These new requirements under the UK medical devices legislation and any other changes that are brought into force could result in delays in our ability to obtain a UKCA mark and to continue to market our product in the UK. The UK’s departure from the EU has also impacted customs regulations as well as timing and ease of shipments into the EU from UK.
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Unfavorable U.S. or global economic conditions could adversely affect our business, financial condition or results of operations.
Over the twelve months ended June 2022, the US Bureau of Labor and Statistics reported that inflation increased 9.1 percent as against prices from June 2021. This represents the largest 12-month advance since 1981.
Our results of operations could be adversely affected by general conditions in the global economy and financial markets. A severe or prolonged economic downturn or increase in inflation rates could result in a variety of risks to our business, including weakened demand for our products and services and our ability to raise additional capital when needed on favorable terms, if at all. A weak declining or inflationary economy could strain our collaborators and suppliers, possibly resulting in supply disruption, or cause delays in their payments to us.
In addition, the Company’s operations and access to capital may be impacted by disruptions to the banking system and financial market volatility resulting from bank failures, particularly in light of the recent events that have occurred with respect to Silicon Valley Bank and other financial institutions.
Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect the Company’s current and projected business operations and its financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although a statement by the Department of the Treasury, the Federal Reserve and the FDIC indicated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts, borrowers under credit agreements, letters of credit and certain other financial instruments with SVB, Signature Bank or any other financial institution that is placed into receivership by the FDIC may be unable to access undrawn amounts thereunder. If any of our suppliers or other parties with whom we conduct business are unable to access funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. In this regard, counterparties to SVB credit agreements and arrangements, and third parties such as beneficiaries of letters of credit (among others), may experience direct impacts from the closure of SVB and uncertainty remains over liquidity concerns in the broader financial services industry. Similar impacts have occurred in the past, such as during the 2008-2010 financial crisis.
Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the U.S. Department of Treasury, FDIC and Federal Reserve Board have announced a program to provide up to $25 billion of loans to financial institutions secured by certain of such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediately liquidity may exceed the capacity of such program. Additionally, there is no guarantee that the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion.
Although we assess our banking relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect the Company, the financial institutions with
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which we have or may enter into credit agreements or arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions with which we have or may enter into financial or business relationships, but could also include factors involving financial markets or the financial services industry generally.
The results of events or concerns that involve one or more of these factors could include a variety of material and adverse impacts on our current and projected business operations and our financial condition and results of operations. These could include, but may not be limited to, the following:
| ● | Delayed access to deposits or other financial assets or the uninsured loss of deposits or other financial assets; |
| ● | Delayed or lost access to other working capital sources and/or delays, inability or reductions in our ability to enter into new credit facilities or access other working capital resources; |
| ● | Potential or actual breach of contractual obligations that require us to maintain letters of credit or other credit support arrangements; |
| ● | Potential or actual breach of financial covenants in any credit agreements or credit arrangements; or |
| ● | Potential or actual cross-defaults in other credit agreements, credit arrangements or operating or financing agreements. |
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations, result in breaches of our financial and/or contractual obligations or result in violations of federal or state wage and hour laws and otherwise have a material adverse impact on our business.
Global climate change could negatively affect our business.
Increased public awareness and concern regarding global climate change will likely result in more regional and/or national requirements to reduce or mitigate the effects of greenhouse gas emissions. In addition, our stockholders and customers also expect us to reduce our greenhouse gas emissions. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. Any future regulations aimed at mitigating climate change may negatively impact the prices of raw materials and energy as well as the demand for certain of our customer’s products which could in turn impact demand for our products and impact our results of operations. The costs of compliance and any changes to our operations mandated by new or amended laws, may be significant. We may also face unexpected delays in obtaining permits and approvals required by such laws in connection with our manufacturing facilities, which would hinder our operation of these facilities. Furthermore, any violations of these laws may result in substantial fines and penalties, remediation costs, third party damages, or a suspension or cessation of our operations.
We also face physical and transition risks from climate change. The manifestations of climate change, such as extreme weather conditions or more frequent extreme weather events, including wildfires, flooding, water stress and extreme heat, could disrupt our operations, damage our facilities, disrupt our supply chain, impact the availability and cost of materials needed for manufacturing or increase insurance and other operating costs. As a result, severe weather events or natural disasters could result in a prolonged disruption to our operations or operations of our customers or suppliers, which could have a material adverse effect on our operating results, cash flows or financial condition
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We depend upon a limited number of key personnel, and if we are not able to retain them or recruit additional qualified personnel, the execution of our strategy, management of our business and commercialization of our product candidates could be delayed or negatively impacted.
Our success is largely dependent upon the continued contributions of our officers and employees. Our success also depends in part on our ability to attract and retain highly qualified scientific, commercial and administrative personnel. In order to pursue our test development and commercialization strategies, we will need to attract and hire additional personnel with specialized experience in a number of disciplines, including assay development, laboratory and clinical operations, sales and marketing, billing and reimbursement. There is intense competition for personnel in the fields in which we operate. If we are unable to attract new employees and retain existing employees, the development and commercialization of our product candidates and any future tests could be delayed or negatively impacted. If any of them becomes unable or unwilling to continue in their respective positions, and we are unable to find suitable replacements, our business and financial results could be materially negatively affected.
We will need to increase the size of our organization, and we may experience difficulties in managing growth.
We are a small company with 53 full-time employees and 3 part-time employees as of March 15, 2023. Future growth will impose significant added responsibilities on members of management, including the need to identify, attract, retain, motivate and integrate highly skilled personnel. We may increase the number of employees in the future depending on the progress of our development of diagnostic technology. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:
| ● | integrate additional management, administrative, manufacturing and regulatory personnel; |
| ● | maintain sufficient administrative, accounting and management information systems and controls; and |
| ● | hire and train additional qualified personnel. |
Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. The expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of our current or future product candidates. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our current or future diagnostic products and product candidates, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our company.
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results.
We currently have limited experience in marketing products. If we are unable to establish marketing and sales capabilities and retain the proper talent to execute on our sales and marketing strategy, we may not be able to generate product revenue.
We have limited experience in marketing our products and services. We intend to continue to develop our in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other companies to recruit, hire, train and retain marketing and sales personnel.
If we are unable to further grow our internal sales, marketing and distribution capabilities, we may pursue collaborative arrangements regarding the sales and marketing of our product candidates or future products. However, we may not be able to establish or maintain such collaborative arrangements, or if we are able to do so, they may not have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from
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product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.
Cybersecurity risks could compromise our information and expose us to liability, which may harm our ability to operate effectively and may cause our business and reputation to suffer.
Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We rely on our information systems to provide security for processing, transmission and storage of confidential information about our patients, customers and personnel, such as names, addresses and other individually identifiable information protected by the Health Insurance Portability and Accountability Act, (“HIPAA”), other privacy laws. We rely on our third-party providers to implement effective security measures and identify and correct for any such failures, deficiencies or breaches. We also rely on our employees and consultants to safeguard their security credentials and follow our policies and procedures regarding use and access of computers and other devices that may contain our sensitive information. If we or our third-party providers fail to maintain or protect our information technology systems and data integrity effectively or fail to anticipate, plan for or manage significant disruptions to our information technology systems, we or our third-party providers could have difficulty preventing, detecting and controlling such cyber-attacks and any such attacks could result in losses described above, as well as disputes with physicians, patients and our partners, regulatory sanctions or penalties, increases in operating expenses, expenses or lost revenues or other adverse consequences, any of which could have a material adverse effect on our business, results of operations, financial condition, prospects and cash flows. Any failure by such third parties to prevent or mitigate security breaches or improper access to or disclosure of such information could have similarly adverse consequences for us. If we are unable to prevent or mitigate the impact of such security or data privacy breaches, we could be exposed to litigation and governmental investigations, which could lead to a potential disruption to our business
Cyberattacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyberattacks could include wrongful conduct by hostile foreign governments, industrial espionage, wire fraud and other forms of cyber fraud, the deployment of harmful malware, denial-of-service, social engineering fraud or other means to threaten data security, confidentiality, integrity and availability. A successful cyberattack could cause serious negative consequences for us, including, without limitation, the disruption of operations, the misappropriation of confidential business information, including financial information, trade secrets, financial loss and the disclosure of corporate strategic plans. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and changing requirements. Compliance with changes in privacy and information security laws and with rapidly evolving industry standards may result in our incurring significant expense due to increased investment in technology and the development of new operational processes.
We have not experienced any known attacks on our information technology systems that compromised any confidential information. We maintain our information technology systems with safeguard protection against cyber-attacks including passive intrusion protection, firewalls and virus detection software. However, these safeguards do not ensure that a significant cyber-attack could not occur. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or damage or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks.
Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches can create system disruptions or shutdowns or the unauthorized disclosure of confidential information. If personal information or protected health information is improperly accessed, tampered with or disclosed as a result of a security breach, we may incur significant costs to notify and mitigate potential harm to the affected individuals, and we may be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under HIPAA or other similar federal or state laws protecting confidential personal information. In addition, a security breach of our information systems could damage our reputation, subject us to liability claims or regulatory penalties for compromised personal information and could have a material adverse effect on our business, financial condition and results of operations.
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Changes in tax law could adversely affect our business and financial condition.
The rules dealing with U.S. federal, state, and local and non-U.S. taxation are constantly under review by persons involved in the legislative process, the Internal Revenue Service, the U.S. Treasury Department and other taxing authorities. Changes to tax laws or tax rulings, or changes in interpretations of existing laws (which changes may have retroactive application), could adversely affect us or holders of our common stock. These changes could subject us to additional income-based taxes and non-income taxes (such as payroll, sales, use, value-added, digital tax, net worth, property, and goods and services taxes), which in turn could materially affect our financial position and results of operations. Additionally, new, changed, modified, or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our products. In recent years, many such changes have been made, and changes are likely to continue to occur in the future. As we expand the scale of our business activities, any changes in the U.S. and non-U.S. taxation of such activities may increase our effective tax rate and harm our business, financial condition, and results of operations.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal tax purposes is subject to limitation and risk that could further limit our ability to utilize our net operating losses.
As of December 31, 2022, we had approximately $74 million of federal net operating losses, (“NOLs”). Approximately $28 million of the federal NOLs will expire at various dates beginning in 2036 through 2037 if not utilized, while the remaining amount will have an indefinite life. As of December 31, 2022, we had approximately $2.4 million of state NOLs. For state NOLs expiration dates, it varies from 2022 to unlimited. Under current law, federal NOLs generated in taxable years ending after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal NOLs may be limited to 80% of our taxable income annually for tax years beginning after December 31, 2020. NOLs generated prior to December 31, 2017, however, have a 20-year carryforward period, but are not subject to the 80% limitation.
Under U.S. federal income tax law, a corporation’s ability to utilize its NOLs to offset future taxable income may be significantly limited if it experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code, as amended. In general, an ownership change will occur if there is a cumulative change in a corporation’s ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change NOLs equal to the value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to similar limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs by federal or state taxing authorities or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our operating results and financial condition.
The testing, manufacturing and marketing of diagnostics entails an inherent risk of product liability and personal injury claims.
To date, we have experienced no product liability or personal injury claims, but any such claims arising in the future could have a material adverse effect on our business, financial condition and results of operations. Potential product liability or personal injury claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of our policy or limited by other claims under our umbrella insurance policy. Additionally, our existing insurance may not be renewed by us at a cost and level of coverage comparable to that presently in effect, if at all. In the event that we are held liable for a claim against which we are not insured or for damages exceeding the limits of our insurance coverage, such claim could have a material adverse effect on our cash flow and thus potentially a materially adverse effect on our business, financial condition and results of operations.
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All of our diagnostic technology development and our clinical services are performed at two laboratories, and in the event either or both of these facilities were to be affected by a termination of the lease or a man-made or natural disaster, our operations could be severely impaired.
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. Despite precautions taken by us, any future natural or man-made disaster at these laboratories, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment and testing samples or cause us to incur additional expenses.
In addition, we are leasing the facilities where our laboratories operate. We are currently in compliance with all and any lease obligations, but should the leases terminate for any reason, or if at any time either of the laboratories is moved due to conditions outside our control, it could cause substantial delay in our diagnostics operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In the event of an extended shutdown of either laboratory, we may be unable to perform our services in a timely manner or at all and therefore would be unable to operate in a commercially competitive manner. This could harm our operating results and financial condition.
Further, if we have to use a substitute laboratory while our facilities were shut down, we could only use another facility with established state licensure and accreditation under CLIA. We may not be able to find another CLIA-certified facility and comply with applicable procedures, or find any such laboratory that would be willing to perform the tests for us on commercially reasonable terms. Additionally, any new laboratory opened by us would be subject to certification under CLIA and licensure by various states, which would take a significant amount of time and result in delays in our ability to continue our operations.
An impairment in the carrying value of our intangible assets could negatively affect our results of operations.
A significant portion of our assets are intangible assets which are reviewed at least annually for impairment. If we do not realize our business plan, our intangible assets may become impaired resulting in an impairment loss in our results of operations.
Reimbursement and Regulatory Risks Relating to Our Business
Governmental payers and health care plans have taken steps to control costs, which could negatively affect our business.
Third-party payers, including private insurers and governmental entities, have implemented and will continue to implement measures to control the cost, utilization, and delivery of healthcare services, including products and services we offer. These changes have adversely affected and may in the future adversely affect coverage for our services. We also believe that healthcare professionals may not use our services if third-party payers do not provide adequate coverage and reimbursement for them. These changes in federal, state, local, and third-party payer regulations or policies may decrease our revenues and adversely affect our results of operations and our financial condition. Occasionally, legislative pauses and changes impact our products that are reimbursed under the Medicare Physician Fee Schedule (“MPFS”), or the Clinical Laboratory Fee Schedule (“CLFS”). Further, CMS and state Medicaid agencies may adopt regulations and policies that change, limit or exclude coverage for our products and services.
We expect that efforts to contain costs will continue and that coverage and reimbursement for our products and services may be impacted. These efforts, including changes in law or regulations that may occur in the future, may each individually or collectively have a material adverse impact on our business, results of operations, financial condition, and prospects.
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Changes in payer mix could have a material adverse impact on our net sales and profitability.
Testing services are billed to physicians, patients, government payers such as Medicare, and insurance companies. Tests may be billed to different payers depending on a particular patient’s medical insurance coverage. Government payers have increased their efforts to control the cost, utilization and delivery of health care services as well as reimbursement for laboratory testing services. Further reductions of reimbursement for Medicare and Medicaid services or changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time. Reimbursement for the laboratory services component of our business is also subject to statutory and regulatory reduction. Reductions in the reimbursement rates and changes in payment policies of other third party payers may occur as well. Such changes in the past have resulted in reduced payments as well as added costs and have decreased test utilization for the clinical laboratory industry by adding more complex new regulatory and administrative requirements. As a result, increases in the percentage of services billed to government payers could have an adverse impact on our net sales.
Our laboratories require ongoing CLIA certification, and we cannot guarantee that our laboratories will pass all future certification inspections.
The Clinical Laboratory Improvement Amendments of 1988, (“CLIA”), extended federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. The CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories must also undergo proficiency testing and are subject to inspections.
The sanctions for failure to comply with the CLIA requirements include suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could have a material adverse effect on us.
We believe that we are in compliance with all applicable laboratory requirements, but no assurances can be given that our laboratories will pass all future certification inspections.
Our products that we sell as research use only products and/or that we offer as laboratory developed tests could become subject to government regulations requiring marketing authorization, and the marketing authorization and maintenance process for such products may be expensive, time-consuming and uncertain in both timing and outcome.
A number of our products are currently, and in the future will be, labeled and sold as research use only (RUO) products. Even though our products are labeled and sold as RUO products, the United States Food and Drug Administration (FDA) could question whether our products are intended for research use only. For example, in August 2021, we were contacted by the FDA regarding HemeScreen, and we have subsequently revised the labeling for HemeScreen. Should the FDA disagree with our conclusion that our products are intended for research use only or deem our sales, marketing and promotional efforts as being inconsistent with RUO products, our products could be subject to government regulation as diagnostic products. Diagnostic products are regulated as medical devices by the FDA and may require marketing authorization through clearance following the 510(k) premarket notification process, authorization following a request for de novo classification or premarket approval from the FDA, in each case prior to marketing. Obtaining the requisite marketing authorizations can be expensive and may involve considerable delay. Moreover, if the FDA believed we inappropriately labeled our products as RUO products, it could allege that we had misbranded or adulterated our RUO products.
Additionally, our CLIA laboratory offers testing utilizing our laboratory developed tests (LDTs). Historically, the FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories that offer LDTs to comply with the FDA’s requirements for medical devices, such as the FDA’s requirements pertaining to marketing authorization, establishment registration, device listing, the Quality System Regulation, and other post-market controls. However, the FDA has stated it intends to end its policy of enforcement discretion and to actively regulate LDTs. For example, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory
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Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Regulatory Oversight of Laboratory Developed Tests (LDTs)”, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The timing of when, if at all, the draft guidance documents will be finalized is unclear. In January 2017, the FDA issued a “Discussion Paper on Laboratory Developed Tests (LDTs),” which includes a possible approach to LDT oversight that is intended to advance public discussion on the topic. Additionally, legislative proposals have been introduced in Congress or have been publicly circulated. Such proposals would implement differing approaches to the regulation of LDTs, including in certain instances to require marketing authorization from the FDA. We cannot predict whether any of these legislative proposals will be enacted into law or the impact such new legal requirements would have on our business.
If the FDA asserts that our RUO products and/or LDTs are subject to marketing authorization, or that our RUO products and/or LDTs are adulterated or misbranded, our business, financial condition or results of operations could be adversely affected.
Failure to comply with HIPAA could be costly.
HIPAA and associated regulations protect the privacy and security of certain patient health information and establish standards for electronic health care transactions in the United States. These privacy regulations establish federal standards regarding the uses and disclosures of protected health information. Our laboratories are subject to HIPAA and its associated regulations. If we fail to comply with these laws and regulations we could suffer civil and criminal penalties, fines, exclusion from participation in governmental health care programs and the loss of various licenses, certificates and authorizations necessary to operate our patient testing business. We could also incur liabilities from third party claims.
Our failure to comply with any applicable government laws and regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations.
Our research and development and commercial activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state, local and international laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot be certain that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.
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.
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Anti-Kickback Statute
A federal law commonly referred to as the “Anti-Kickback Statute” prohibits the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. The PPACA amended the intent requirement of the Anti-Kickback Statute such that a person or entity can be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate the statute. Further, the PPACA now provides that claims submitted in violation of the Anti-Kickback Statute constitute false or fraudulent claims for purposes of the federal False Claims Act (“FCA”), including the failure to timely return an overpayment. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to influence the purchase, lease or ordering of healthcare items and services reimbursed by a governmental health program or state Medicaid program. Some of these state prohibitions apply to remuneration for referrals of healthcare items or services reimbursed by any third-party payer, including commercial payers and self-pay patients.
Stark Law
Section 1877 of the Social Security Act, or the Stark Law, prohibits a physician from referring a patient to an entity for certain “designated health services” reimbursable by Medicare if the physician (or close family members) has a financial relationship with that entity, including an ownership or investment interest, a loan or debt relationship or a compensation relationship, unless an exception to the Stark Law is fully satisfied. The designated health services covered by the law include, among others, laboratory and imaging services. Some states have self-referral laws similar to the Stark Law for Medicaid claims and commercial claims.
Violation of the Stark Law may result in prohibition of payment for services rendered, a refund of any Medicare payments for services that resulted from an unlawful referral, civil monetary penalties for specified infractions, criminal penalties, and potential exclusion from participation in government healthcare programs, and potential false claims liability. The repayment provisions in the Stark Law are not dependent on the parties having an improper intent; rather, the Stark Law is a strict liability statute and any violation is subject to repayment of all amounts arising out of tainted referrals. If physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant sanctions and loss of revenues, or we could have to change our arrangements and operations in a way that could have a material adverse effect on our business, prospects, damage to our reputation, results of operations and financial condition.
False Claims Act
The FCA prohibits providers from, among other things, (1) knowingly presenting or causing to be presented, claims for payments from the Medicare, Medicaid or other federal healthcare programs that are false or fraudulent; (2) knowingly making, using or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the federal government; or (3) knowingly making, using or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government. The “qui tam” or “whistleblower” provisions of the FCA allow private individuals to bring actions under the FCA on behalf of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of “whistleblower” lawsuits that have been filed against providers has increased significantly in recent years. Defendants found to be liable under the FCA may be required to pay three times the actual damages sustained by the government, plus civil penalties for each separate false claim.
There are many potential bases for liability under the FCA. The government has used the FCA to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services not provided, and providing care that is not medically necessary or that is substandard in quality. The PPACA also provides that claims submitted in connection with patient referrals that result from violations of the Anti-Kickback Statute constitute false claims for the purpose of the FCA, and some courts have held that a violation of the Stark law can result in FCA liability, as well. In addition, a number of states have adopted their own false claims and whistleblower provisions whereby a private
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party may file a civil lawsuit in state court. We are required to provide information to our employees and certain contractors about state and federal false claims laws and whistleblower provisions and protections.
Civil Monetary Penalties Law
The Civil Monetary Penalties Law prohibits, among other things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person or entity knows or should know is likely to influence the beneficiary’s selection of a particular provider or supplier of items or services reimbursable by a federal or state healthcare program. This broad provision applies to many kinds of inducements or benefits provided to patients, including complimentary items, services or transportation that are of more than a nominal value. This law could affect how we have to structure our operations and activities.
Intellectual Property Risks Related to Our Business
We cannot be certain that measures taken to protect our intellectual property will be effective.
We rely upon patents, trade secrets, copyrights and trademarks, as well as non-disclosure agreements and other contractual confidentiality provisions to protect our confidential and proprietary information for which we are not seeking patent protection for various reasons. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If such measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced. Our intellectual property portfolio with respect to certain aspects of our technology and product candidates is at an early stage. We have one company-owned, pending patent application directed to our HemeScreen test. This provisional patent application is not eligible to become an issued patent until, among other things, we file a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Any failure to file a non-provisional patent application within this timeline could cause us to lose the ability to obtain patent protection for the inventions disclosed in the associated provisional patent applications.
If any of our owned patent applications do not issue as patents in any jurisdiction, we may not be able to compete effectively.
Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our owned patents. We cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.
The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patents and patent applications at a reasonable cost or in a timely manner. Disruptions at the United States Patent and Trademark Office (USPTO) or other government agencies may also slow the time necessary for patent applications to be reviewed by the USPTO, which could adversely affect our patent portfolio. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection.
In addition, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our inventions and the prior art allow our inventions to be patentable over the prior art. Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in any of our owned or pending patent applications, or that we were the first to file for patent protection of such inventions
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We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling some of our products.
On September 1, 2022, we terminated the license agreement with Dana-Farber pursuant to which we previously licensed our ICP technology. For more information regarding this license agreement termination, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments”. In the future, we may enter into other license agreements with third parties for certain licensed technologies that are, or may become, relevant to the products we market, or plan to market. In addition, we may elect to license third party intellectual property to further our business objectives and/or as needed for freedom to operate for our products. We do not and will not own the patents, patent applications or other intellectual property rights that are the subject of the Dana-Farber license or these other future licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents, patent applications and other intellectual property rights are or will be subject to the continuation of and compliance with the terms of those licenses.
We might not be able to obtain licenses to technology or other intellectual property rights that we require. Even if such licenses are obtainable, they may not be available at a reasonable cost or multiple licenses may be needed for the same product (e.g., stacked royalties). We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Further, we could encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products.
In some cases, we do not or may not control the prosecution, maintenance, or filing of the patents or patent applications to which we hold licenses, or the enforcement of these patents against third parties. As a result, we cannot be certain that drafting or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.
In addition to the protection afforded by patents, we rely upon trade secret protection, know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our contractors, collaborators, scientific advisors, employees and consultants and invention assignment agreements with our consultants and employees. However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms. The assignment of intellectual property rights under these agreements may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. In addition, we may not be able to prevent the unauthorized disclosure or use of our technical know-how or other trade secrets by the parties to these agreements despite the existence of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures is difficult and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of the contractors, collaborators, scientific advisors, employees and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, we may not have adequate remedies for any such breach or violation. As a result, we could lose our trade secrets. Enforcing a claim against a third party that illegally obtained and is using our trade secrets, like patent litigation, is expensive and time-consuming and the outcome is unpredictable.
Moreover, our trade secrets could otherwise become known or be independently discovered by our competitors or other third parties. Competitors and other third parties could purchase our product candidates and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If our trade secrets are not adequately protected or sufficient to provide an advantage over our competitors, our competitive position could be adversely affected, as could our business.
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Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating our trade secrets.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. If we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, results of operations and prospects.
Third-party claims of intellectual property infringement, misappropriation or other violations may prevent or delay our product discovery and development efforts and have a material adverse effect on our business.
Our commercial success depends in part on our avoiding infringement, misappropriation and other violations of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patents and other intellectual property rights in the diagnostic industries, as well as administrative proceedings for challenging patents, including interference and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. Recently, under U.S. patent reform, new procedures including inter partes review and post grant review have been implemented. As stated above, this reform will bring uncertainty to the possibility of challenge to our patents in the future. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our product candidates. As the diagnostic industry expands and more patents are issued, the risk increases that our product candidates may give rise to claims of infringement of the patent rights of others.
Third parties may assert that we are employing their proprietary technology without authorization. Patents issued in the U.S. by law enjoy a presumption of validity that can be rebutted only with evidence that is “clear and convincing,” a heightened standard of proof. There may be third-party patents of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our products or product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of our product candidates, constructs or molecules used in or formed during the manufacturing process, or any final product itself, the holders of any such patents may be able to block our ability to commercialize the product candidate unless we obtained a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the product candidate unless we obtained a license or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all. Even if we obtained such a license, it may only be non-exclusive, which would permit third parties to use the same intellectual property and compete with us. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, we may be unable
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to commercialize our product candidates or such efforts may be impaired or delayed, which could in turn significantly harm our business.
Parties making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our products or product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. We may not have sufficient resources to bring these actions to a successful conclusion. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock.
In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize our product candidates, which could harm our business significantly. Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations and prospects.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market earlier than would otherwise have been the case, which would have a material adverse effect on our business.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have
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asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.
Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings. Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations and prospects.
Changes to the patent law in the U.S. and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
As is the case with other diagnostic companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the diagnostic industry involve both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the U.S. has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. For example, in the case, Assoc. for Molecular Pathology v. Myriad Genetics, Inc., the U.S. Supreme Court held that certain claims to DNA molecules are not patentable. In addition, the case Amgen Inc. v. Sanofi affects the way antibody claims are examined and litigated. We cannot predict how future decisions by the courts, the Congress or the USPTO may impact the value of our patents.
In addition, a European Unified Patent Court (UPC) is scheduled to come into force during 2023. The UPC will be a common patent court to hear patent infringement and revocation proceedings effective for member states of the European Union. This could enable third parties to seek revocation of a European patent in a single proceeding at the UPC rather than through multiple proceedings in each of the jurisdictions in which the European patent is validated. Although we do not currently own any European patents or applications, if we obtain such patents and applications in the future, any such revocation and loss of patent protection could have a material adverse impact on our business and our ability to commercialize or license our technology and products. Moreover, the controlling laws and regulations of the UPC will develop over time, and may adversely affect our ability to enforce or defend the validity of any European patents we may obtain. We may decide to opt out from the UPC any future European patent applications that we may file and any patents we may obtain. If certain formalities and requirements are not met, however, such European patents and patent applications could be challenged for non-compliance and brought under the jurisdiction of the UPC. We cannot be certain that future European patents and patent applications will avoid falling under the jurisdiction of the UPC, if we decide to opt out of the UPC.
Third parties may assert ownership or commercial rights to inventions we develop.
Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. For example, third parties that have been introduced to or have benefited from our inventions may attempt to replicate or reverse engineer our products and circumvent ownership of our inventions. In addition, we may face claims that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial
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value of such inventions. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property, or may lose our exclusive rights in that intellectual property. Either outcome could have an adverse impact on our business.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.
Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:
•others may be able to make products that are similar to our product candidates or utilize similar technology but that are not covered by the claims of the patents that we hold rights to;
•we, or our licensors or collaborators, might not have been the first to invent or the first to file patent applications covering certain of our or their inventions;
•others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our owned intellectual property rights;
•it is possible that our current or future pending owned patent applications will not lead to issued patents;
•issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties;
•our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in the US;
•we may not develop additional proprietary technologies that are patentable;
•the patents of others may harm our business; and
•we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.
Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of operations and prospects
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Risks Related to Our Common Stock
The price of our common stock may fluctuate significantly, which could negatively affect us and holders of our common stock.
There has been, and continues to be, a limited public market for our common stock, and an active trading market for our common stock has not and may never develop or, if developed, be sustained. The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control.
These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of our common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
The price of our stock may be vulnerable to manipulation.
We believe our common stock has been the subject of significant short selling by certain market participants. Short sales are transactions in which a market participant sells a security that it does not own. To complete the transaction, the market participant must borrow the security to make delivery to the buyer. The market participant is then obligated to replace the security borrowed by purchasing the security at the market price at the time of required replacement. If the price at the time of replacement is lower than the price at which the security was originally sold by the market participant, then the market participant will realize a gain on the transaction. Thus, it is in the market participant’s interest for the market price of the underlying security to decline as much as possible during the period prior to the time of replacement.
Because our unrestricted public float has been small relative to other issuers, previous short selling efforts have impacted, and may in the future continue to impact, the value of our stock in an extreme and volatile manner to our detriment and the detriment of our stockholders. Efforts by certain market participants to manipulate the price of our common stock for their personal financial gain may cause our stockholders to lose a portion of their investment, may make it more difficult for us to raise equity capital when needed without significantly diluting existing stockholders, and may reduce demand from new investors to purchase shares of our stock.
If we cannot continue to satisfy Nasdaq listing maintenance requirements and other rules, our securities may be delisted, which could negatively impact the price of our securities.
Although our common stock is listed on The Nasdaq Capital Market (“Nasdaq”), we may be unable to continue to satisfy the listing maintenance requirements and rules. If we are unable to satisfy Nasdaq’s criteria for maintaining our listing, our securities could be subject to delisting.
On October 28, 2022, we received a letter from The Nasdaq Stock Market LLC, notifying us that the closing bid price per share of our common stock was below the $1.00 minimum bid price requirement for continued listing on Nasdaq, as required by Nasdaq Listing Rule 5550(a)(2) (“Bid Price Rule”). As a result, Nasdaq notified us that we are not in compliance with the Bid Price Rule. Nasdaq has provided us with 180 calendar days, or until April 26, 2023, to regain compliance with the Bid Price Rule. This notification has no immediate effect on our listing on Nasdaq or on the trading of the our common stock.
To regain compliance with the Bid Price Rule, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during the 180-calendar day grace period. If our common stock does not regain compliance with the Bid Price Rule during this grace period, we may be eligible for an additional grace period of 180 calendar days provided that we satisfy Nasdaq’s continued listing requirement for market value of
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publicly held shares and all other initial listing standards for listing on Nasdaq, other than the minimum bid price requirement, and provide written notice to Nasdaq of our intention to cure the delinquency during the second grace period, by effecting a reverse stock split, if necessary. If we meet these requirements, Nasdaq will grant us an additional 180 calendar days. However, if it appears to Nasdaq that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice that our securities will be subject to delisting.
If Nasdaq were to delist 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; |
| ● | activity in the secondary trading market for our common stock; |
| ● | limited amount of news and analyst coverage; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
In addition, we would no longer be subject to Nasdaq rules, including rules requiring us to have a certain number of independent directors and to meet other corporate governance standards.
We intend to monitor the closing bid price of our common stock and may, if appropriate, evaluate various courses of action to regain compliance with the Bid Price rule. However, there can be no assurance that we will be able to regain compliance with the Bid Price Rule.
Increased costs associated with corporate governance compliance may significantly impact our results of operations.
As a public company, we incur significant legal, accounting, and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC, and NASDAQ. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations, and as a result of the new corporate governance and executive compensation related rules, regulations, and guidelines prompted by the Dodd-Frank Act, and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.
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
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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.
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.
We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock.
No cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates. Investors in our common stock should not rely on an investment in our company if they require dividend income.
We may be at an increased risk of securities class action litigation.
Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology stocks have experienced significant stock price volatility in recent years. If we were to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if they issue other unfavorable commentary or cease publishing reports about us or our business.
The sale or issuance of our common stock to, or through, AGP may cause significant dilution and the sale of the shares of common stock acquired by AGP, or the perception that such sales may occur, could cause the price of our common stock to fall.
On April 2, 2021, 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 $22.0 million, to or through AGP, from time to time, in the ATM Offering. We are limited in the number of shares it can sell in the 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 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
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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 2, 2021 through the date the consolidated financial statements were issued, we received approximately $16.0 million in gross proceeds through the AGP Sales Agreement from the sale of 5,119,656 shares of Common Stock, leaving us with an additional $6.0 million available for future sales pursuant to the AGP Sales Agreement.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our diagnostic technologies or current or future development programs.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of private and public equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that materially adversely affect your rights as a common stockholder. Debt financing, if available, would increase our fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise funds through additional collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or current or future product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, scale back or discontinue the development and commercialization of one or more of our product candidates, delay our pursuit of potential in-licenses or acquisitions or grant rights to develop and market current or future product candidates that we would otherwise prefer to develop and market ourselves.
The issuance of our common stock to creditors or litigants may cause significant dilution to our stockholders and cause the price of our common stock to fall
We may seek to settle outstanding obligations to vendors, debtholders or litigants in any litigation through the issuance of our common stock or other security to such persons. Such issuances may cause significant dilution to our stockholders and cause the price of our common stock to fall.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.
As widely reported, global credit and financial markets have experienced extreme volatility and disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability, including most recently in connection with the ongoing COVID-19 pandemic, current macroeconomic conditions, currency exchange rates, and volatile financial markets. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.
Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. In addition, there is a risk that one or more of our current service providers, manufacturers and
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other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.
Our amended and restated bylaws, as amended, designate specific courts in as the exclusive forum for certain litigation that may be initiated by the Company’s stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant to our amended and restated bylaws, as amended (the “bylaws”), unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for state law claims for (1) any derivative action or proceeding brought on our behalf; (2) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any current or former director, officer or other employee or agent of ours to us or our stockholders or debtholders, (3) any action asserting a claim against us or any director or officer or other employee of ours arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or the bylaws (in each case, as they may be amended from time to time), (4) any action asserting a claim against us or any current or former director or officer or other employee or agent of ours governed by the internal affairs doctrine or (5) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the General Corporation Law of the State of Delaware (the “Delaware Forum Provision”); provided, however, that the Delaware Forum Provision will not apply to any causes of action arising under the Securities Act or the Exchange Act. Our amended and restated bylaws further provide that unless we consent in writing to the selection of an alternative forum, that in the event that the Court of Chancery of the State of Delaware lacks jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another state or federal court located within the State of Delaware; provided, however, that stockholders cannot and will not be deemed to have waived our compliance with the U.S. federal securities laws and the rules and regulations thereunder.
The Delaware Forum Provision and the Federal Forum Provision in our bylaws may impose additional litigation costs on stockholders in pursuing any such claims. Additionally, these forum selection clauses may limit our stockholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers or employees, which may discourage the filing of lawsuits against us and our directors, officers and employees, even though an action, if successful, might benefit our stockholders. In addition, while the Delaware Supreme Court and other states courts have upheld the validity of federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court, there is uncertainty as to whether other courts will enforce our forum provision. If our forum provision is found to be unenforceable, we may incur additional costs associated with resolving such matters. Forum provision may also impose additional litigation costs on stockholders who assert that the provision is not enforceable or invalid. The Court of Chancery of the State of Delaware and the federal district courts of the United States may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be
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located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.
Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control, which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.
Our amended and restated certificate of incorporation and our bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:
| ● | a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time; |
| ● | a requirement that special meetings of stockholders be called only by the chairman of the board, board of directors acting pursuant to a resolution approved by the affirmative vote of a majority of the directors then in office, or our chief executive officer; |
| ● | advance notice requirements for stockholder proposals and nominations for election to our board of directors; |
| ● | a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than a majority he shares then entitled to vote generally for the election of directors; and |
| ● | the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and which preferred stock may include rights superior to the rights of the holders of common stock. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law (“DGCL”), which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These antitakeover provisions and other provisions in our fourth amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.
We are a ‘smaller reporting company,” and the reduced disclosure requirements applicable to smaller reporting companies may make our common stock less attractive to investors.
We are a smaller reporting company under Rule 12b-2 of the Exchange Act. For so long as we remain a smaller reporting company, we are permitted and plan to rely on exemptions from certain disclosure requirements, including reduced disclosure obligations regarding executive compensation. These exemptions and reduced disclosures in our SEC filings due to our status as a smaller reporting company also mean our auditors are not required to audit our internal control over financial reporting and may make it harder for investors to analyze our results of operations and financial prospects. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common
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stock and our common stock prices may be more volatile. We will remain a smaller reporting company until our public float exceeds $250 million or our annual revenues exceed $100 million with a public float greater than $700 million.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently lease approximately 7,630 square feet of laboratory and office space in New Haven, Connecticut, which we occupy under a lease expiring in December 2026 with annual rental payments of $0.2 million. We also lease approximately 5,300 square feet of laboratory space in Omaha, Nebraska, which we occupy under a lease expiring in May 2025 with annual rental payments of less than $0.1 million. We believe that these facilities are adequate to meet our current and planned needs. We believe that if additional space is needed in the future, we could find alternate space at competitive market rates as needed.
Item 3. Legal Proceedings
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.
The outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our financial statements for such reporting period could be materially adversely affected. In general, the resolution of a legal matter could prevent us from offering our services or products to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.
The Company is involved in legal proceedings related to matters, which are incidental to its business and 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.
CPA Global provides us with certain patent management services. As previously reported, 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 consolidated balance sheets at December 31, 2022 and 2021.
Item 4. Mine Safety Disclosures
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. Since June 30, 2017, our common stock has traded on the NASDAQ Capital Market under the symbol “PRPO.”
Performance Graph. We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information required under this item.
Holders. At March 28, 2023, there were 23,353,893 shares of our common stock outstanding and approximately 38 holders of record.
Dividends. No cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates. Investors in our common stock should not rely on an investment in our company if they require dividend income and should not purchase our common stock with the expectation of receiving cash dividends.
Issuer Purchases of Equity Securities. We made no purchases of our common stock during the year ended December 31, 2022. Therefore, tabular disclosure is not presented.
Recent Sales of Unregistered Securities. None.
Item 6. [Reserved]
Not Applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis and set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a healthcare solutions company focused on cancer diagnostics. Our business mission is to address the pervasive problem of cancer misdiagnoses by developing solutions 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
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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.
Going Concern
The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that 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 year ended December 31, 2022, the Company had a net loss of $12.2 million and net cash used in operating activities of $7.7 million. As of December 31, 2022, the Company had an accumulated deficit of $92.3 million and working capital of $1.3 million. We believe the existing cash, cash equivalents and marketable securities on hand will enable us to fund our operating expenses and capital expenditure requirements through the first half of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.” The Company’s ability to continue as a going concern over the next twelve months from the date the consolidated financial statements were issued is dependent upon a combination of achieving its business plan, including generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.
To meet our current and future obligations we have taken the following steps to capitalize the business and successfully achieve our business plan:
| ● | On April 2, 2021, we entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which we may offer and sell our common stock, par value $0.01 per share (the “Common Stock”) (the “Shares”), having aggregate sales proceeds of up to $22.0 million, to or through AGP, as sales agent (the “AGP Sales Agreement”). From April 2, 2021 through the date the consolidated financial statements were issued, we have already received approximately $16.0 million in gross proceeds through the AGP Sales Agreement from the sale of 5,119,656 shares of common stock, leaving us an additional $6.0 million available for future sales pursuant to the AGP Sales Agreement. |
Notwithstanding the aforementioned circumstances, there remains substantial doubt about our ability to continue as a going concern for the next twelve months from the date the consolidated financial statements were available to be
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issued. There can be no assurance that we will be able to successfully achieve our initiatives summarized above in order to continue as a going concern. The accompanying financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might result should we be unable to continue as a going concern as a result of the outcome of this uncertainty.
Outlook - COVID-19 related
The COVID-19 outbreak, which spread worldwide in the first quarter of 2020, has caused significant business disruption. The extent of the impact of the ongoing COVID-19 pandemic on the Company’s operational and financial performance will depend on future developments. While our laboratory operations resumed to near-normal capacity, we may continue to experience challenges in procuring materials and supplies in a consistently timely manner due to COVID-19-related supply chain issues. In addition, delays in the development of COVID-19 vaccines or the deployment of vaccines which are approved or otherwise authorized for emergency use, a recurrence or “subsequent waves” of COVID-19 cases, or the discovery of vaccine-resistant COVID-19 variants, the emergence of subvariants, or the discovery of vaccine-resistant COVID-19 variants could cause other widespread or more severe impacts. We have been actively monitoring the COVID-19 pandemic and its impact on the global economy and the Company. As the global pandemic evolves, we will continue to monitor the extent to which COVID-19 impacts our revenues, expenses and liquidity.
Results of Operations for the Years Ended December 31, 2022 and 2021
Net Sales. Net sales were as follows:
| | Dollars in Thousands |
| |||||||||
| | Year Ended | | | | |||||||
| | December 31, | | Change |
| |||||||
|
| 2022 |
| 2021 |
| $ |
| % |
| |||
Service revenue, net, less allowance for doubtful accounts | | $ | 8,010 | | $ | 7,935 | | $ | 75 | | 1 | % |
Other | |
| 1,402 | |
| 914 | | | 488 | | 53 | % |
Net Sales | | $ | 9,412 | | $ | 8,849 | | $ | 563 | | 6 | % |
Net sales for the year ended December 31, 2022 were $9.4 million, an increase of $0.6 million, as compared to the same period in 2021. During the year ended December 31, 2022, despite the fact that we had a decrease in cases processed, patient diagnostic service revenue increased $0.1 million as compared to the same period in 2021 due to better reimbursement rates achieved for the tests billed in the current year. We billed 4,109 cases during the year ended December 31, 2022 as compared to 4,345 cases during the same period in 2021, or a 5% decrease in cases. Patient diagnostic service revenue accounted for 85% and 89% our total net sales for the years ended December 31, 2022 and 2021, respectively. The increase in patient diagnostic service revenue was partially offset by a decrease of less than $0.1 million in service revenue from contract diagnostics for the year ended December 31, 2022 as compared to the same period in 2021. Other revenues increased by $0.5 million for the year ended December 31, 2022 as compared to the same period in 2021. The increase is the result of a $0.6 million increase in revenues related to our HemeScreen Reagent Rental (“HSRR”) program, partially offset by a $0.1 million decrease in other miscellaneous revenues.
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 $0.4 million for the year ended December 31, 2022 as compared to the same period in 2021. The increase is in line with the changes in related revenues discussed above.
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Gross Profit. Gross profit and gross margins were as follows:
|
| Dollars in Thousands |
| ||||||||
| | Year Ended | | | | ||||||
| | December 31, | | Margin % |
| ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||
Gross Profit | | $ | 2,510 | | $ | 2,392 |
| 27 | % | 27 | % |
Gross margin was 27% of total net sales, for the years ended December 31, 2022 and 2021, respectively, and the gross profit was approximately $2.5 million and $2.4 million during the years ended December 31, 2022 and 2021, respectively. 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 would enable our laboratory to yield economies of scale and to leverage fixed expenses. We anticipate case volume to increase in the future and for our costs per case to improve as additional economies of scale are possible.
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 $3.3 million to $15.3 million for the year ended December 31, 2022 as compared to $12.0 million for the year ended December 31, 2021. The increase included the following: an increase of $1.2 million in sales and marketing expenses resulting from increased personnel costs largely due to increased headcount in our product sales force; an increase of $0.4 million in research and development expenses due to a $0.1 million increase in personnel costs and a $0.3 million increase in operating supplies; and, an increase of $1.9 million in stock based compensation expenses for the year ended December 31, 2022 as compared to the prior year. These increases were partially offset by a decrease of $0.2 million in general and administrative expenses due to a $0.3 million decrease in legal and professional fees and a decrease of $0.2 million in personnel costs partially offset by a $0.3 million increase in franchise and other tax expenses.
Other Income (Expense). We recorded net other income of $0.6 million and $1.1 million for the years ended December 31, 2022 and 2021, respectively. The current year period other income of $0.6 million is attributable to non-cash income recorded on warrant revaluations. The other income for the year ended December 31, 2021 includes $0.8 million of a gain on forgiveness of debt related to the forgiveness of our Paycheck Protection Program Loan and $0.3 of non-cash income recorded on warrant revaluations.
Liquidity and Capital Resources
Our working capital positions at December 31, 2022 and 2021 were as follows (in thousands):
|
| December 31, 2022 |
| December 31, 2021 |
| Change | |||
Current assets (including cash of $3,445 and $11,668 respectively) | | $ | 5,710 | | $ | 13,478 | | $ | (7,768) |
Current liabilities | |
| 4,361 | |
| 4,213 | |
| 148 |
Working capital | | $ | 1,349 | | $ | 9,265 | | $ | (7,916) |
To date, we have incurred significant net losses and have funded our operations primarily through cash generated from operations, the issuance of convertible debt and the issuance of shares of our common stock.
During the year ended December 31, 2022 we received net proceeds of $0.1 million from sale of 85,023 shares of our common stock and less than $0.1 million from the issuance of 26,795 shares of our common stock in connection with the exercise of 26,795 warrants.
47
Analysis of Cash Flows - Years Ended December 31, 2022 and 2021
The following table summarizes our net cash flow activity (in thousands):
|
| Year Ended December 31, | |||||||
|
| 2022 |
| 2021 |
| Change | |||
Net cash used in operating activities | | $ | (7,721) | | $ | (6,577) | | $ | (1,144) |
Net cash used in investing activities | | | (277) | | | (682) | | | 405 |
Net cash (used in) provided by financing | |
| (225) | |
| 16,271 | |
| (16,496) |
Net change in cash | | $ | (8,223) | | $ | 9,012 | | $ | (17,235) |
Net Change in Cash. Cash decreased by $8.2 million and increased by $9.0 million during the years ended December 31, 2022 and 2021, respectively.
Cash Flows Used in Operating Activities. The cash flows used in operating activities of $7.7 million during the year ended December 31, 2022 included a net loss of $12.2 million, an increase in accounts receivables of $0.7 million, a decrease accrued expenses of $0.3 million, an increase in inventories of $0.1 million and a decrease in operating lease liabilities of $0.2 million. These were partially offset by a decrease in other assets of $0.5 million, an increase in accounts payable of $0.1 million, an increase in deferred revenue of $0.1 million and non-cash adjustments of $5.1 million. The non-cash adjustments included $0.4 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 $4.7 million include, among other things, depreciation and amortization, warrant revaluations and stock-based compensation. The cash flows used in operating activities in the year ended December 31, 2021 included the net loss of $8.5 million, an increase in inventories and other assets of $0.6 million and a decrease in accrued expenses and operating lease liabilities of $0.3 million. These were partially offset by a decrease in in accounts receivable of $0.3 million, an increase in accounts payable of $0.1 million and non-cash adjustments of approximately $2.4 million.
Cash Flows Used In Investing Activities. Cash flows used in investing activities were $0.3 million and $0.7 million for the years ended December 31, 2022 and 2021, respectively, resulting from purchases of property and equipment.
Cash Flows Provided by Financing Activities. Cash flows used in financing activities totaled $0.2 million for the year ended December 31, 2022, which included payments on our long-term debt and finance lease obligations of $0.3 million partially offset by $0.1 million of proceeds from the issuance of common stock. Cash flows provided by financing activities totaled $16.3 million for the year ended December 31, 2021, which included proceeds of $16.2 million from the issuance of common stock and $0.4 million from warrant exercises. These were partially offset by payments on our long-term debt and finance lease obligations of $0.2 million and payments on common stock warrant liabilities of $0.1 million.
At each of December 31, 2022 and December 31, 2021, other than certain purchase commitments, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. The purchase commitments are mostly for laboratory reagents used in our normal operating business. See Note 8 – Commitments and Contingencies to our consolidated financial statements appearing elsewhere in this report for further discussion.
48
Contractual Obligations and Commitments
At December 31, 2022, our contractual obligations and other commitments were as follows:
|
| Payments Due By Period | |||||||||||||
(in thousands) | | Total |
| Less Than 1 Year |
| 1-3 Years |
| 3-5 Years |
| More than 5 Years | |||||
Long term debt(1) | | $ | 426 | | $ | 268 | | $ | 70 | | $ | 71 | | $ | 17 |
Finance lease obligations(2) | |
| 272 | |
| 101 | |
| 145 | |
| 26 | |
| — |
Operating lease obligations(2) | |
| 891 | |
| 252 | |
| 444 | |
| 195 | |
| — |
Purchase obligations(3) | |
| 1,333 | |
| 1,113 | |
| 220 | |
| — | |
| — |
| | $ | 2,922 | | $ | 1,734 | | $ | 879 | | $ | 292 | | $ | 17 |
| (1) | Total payments include $404,000 in principal and $22,000 in interest. See Note 5 - "Long-Term Debt" to our accompanying consolidated financial statements included with this Annual Report on Form 10-K. |
| (2) | See Note 7 - "Leases" to our accompanying consolidated financial statements included with this Annual Report on Form 10-K. |
| (3) | These amounts represent purchase commitments, including all open purchase orders See Note 8 – “Commitments and Contingencies” to our accompanying consolidated financial statements included with this Annual Report on Form 10-K. |
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company’s significant accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements included with this Annual Report on Form 10-K. Certain accounting estimates are particularly important to the understanding of the Company’s financial position and results of operations and require the application of significant judgment by the Company’s management and can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management. The Company’s management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on historical operations, future business plans and projected financial results, the terms of existing contracts, the observance of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The following discusses the Company’s critical accounting policies and estimates:
Revenue Recognition
The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and molecular testing; clinical research from bio-pharma customers, state and federal grant programs; biomarker testing from bio-pharma customers and, from; diagnostic product sales.
Service revenues are comprised of patient diagnostic services for cancer as well as contract diagnostic services for pharmacogenomics trials. Service revenue is recognized upon completion of the testing process and when the diagnostic result is delivered to the ordering physician and/or customer. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payers. Revenue under third-party payer agreements is subject to audit and retroactive adjustment. Provisions for third-party payer settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined.
Revenue from clinical research grant is recognized over time as the service is being performed using a proportional performance method. The Company uses an "efforts based" method of assessing performance. If the
49
arrangement requires the performance of a specified number of similar acts (i.e. test), then revenue is recognized in equal amounts as each act is completed.
Other revenues are comprised of the Company’s sales to bio-pharma customers, clinical research, and HemeScreen and other product sales.
For the year ended December 31, 2022, service revenue represented 85% of our consolidated revenues and other revenues represented 15%. For the year ended December 31, 2021, service revenue represented 90% of our consolidated revenues and other revenues represented 10%.
Allowance for Contractual Discounts
We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers. Accordingly, the total revenue and receivables reported in our financial statements are recorded at the amounts expected to be received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on estimates of losses related to receivable balances. The risk of collection varies based upon the service, the payer (commercial health insurance and government) and the patient’s ability to pay the amounts not reimbursed by the payer. We estimate the allowance for doubtful accounts based upon several factors including the age of the outstanding receivables, the historical experience of collections, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for the ability to pay. Collection agencies are employed and legal action is taken when we determine that taking collection actions is reasonable relative to the probability of receiving payment on amounts owed. Management judgment is used to assess the collectability of accounts and the ability of our customers to pay. Judgment is also used to assess trends in collections and the effects of systems and business process changes on our expected collection rates. We review the estimation process quarterly and make changes to the estimates as necessary. When it is determined that a customer account is uncollectible, that balance is written off against the existing allowance.
Accounts Receivable
Accounts Receivable results from diagnostic services provided to self-pay and insured patients, project based testing services, clinical research and miscellaneous product sales. The services provided by the Company are generally due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue to estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients, including patients with insurance and a deductible and copayment, the Company records an allowance for doubtful accounts in the period of services on the basis of past experience of patients unable or unwilling to pay for service fee for which they are financially responsible. For receivables associated with services provided to patients with third-party coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged against the allowance for doubtful accounts.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the grantee’s requisite vesting period. For the purpose of valuing stock options granted to
50
our employees, directors and officers, we use the Black-Scholes option pricing model. To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of the grant with a term consistent with the expected term of our awards. The expected term of the options granted is in accordance with Staff Accounting Bulletins 107 and 110, and is based on the average between vesting terms and contractual terms. The expected dividend yield reflects our current and expected future policy for dividends on our common stock. The expected stock price volatility for our stock options was calculated by examining the trading history for our common stock. We will continue to analyze the expected stock price volatility and expected term assumptions and will adjust our Black-Scholes option pricing assumptions as appropriate.
Impairment of Long-Lived Assets
We assess the recoverability of our long-lived assets, which include property and equipment and definite-lived intangible assets, whenever significant events or changes in circumstances indicate impairment may have occurred. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to our carrying amount to determine whether the asset’s value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results.
Recently Adopted Accounting Pronouncements
In July 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-05, Lease (Topic 842), “Lessors - Certain Leases with Variable Lease Payments”. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. The Company adopted this guidance on January 1, 2022. The adoption of this standard was not material to our consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity. The Company adopted this guidance on January 1, 2022. The adoption of this standard was not material to our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this Update also require additional disclosures for equity securities subject to contractual sale restrictions. The provisions in this Update are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company does not expect to early adopt this ASU. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial 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
51
accounts receivable and certain debt securities, with a current expected credit loss model. This ASU, as amended, is 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 consolidated financial statements.
Impact of Inflation
Inflation generally affects us with increased cost of labor and operating supplies. We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.
52
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Precipio, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Precipio, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
53
Assessment of the estimation for collections over diagnostic testing for which revenue is recognized.
Description of Matter
As described in Note 2 to the financial statements, the Company records its service revenues from diagnostic testing net of contractual and collection allowances that are estimated based on historical trends and anticipated reimbursement from third party payers. As of December 31, 2022, the Company recognized gross revenue of approximately $20.3 million along with contractual allowances of approximately $10.5 million. The net revenue figure of approximately $9.8 million is recorded as net sales on the consolidated statements of operations.
The principal considerations for our determination that performing procedures over revenue recognition relating to the service revenue is a critical audit matter is based on the significant judgments by management in estimating the amount to be recognized as revenue as well as the effort and complexity in assessing audit evidence in performing procedures to evaluate the amount recognized. The calculation involves estimating adjustments to gross revenue based upon sales mix and third-party contractual terms, such as Medicare rates or variations of Medicare rates.
How We Addressed the Matter
We obtained an understanding of the design of controls in place over the Company’s process to calculate the various allowances. Our audit procedures included the evaluation of significant inputs through the evaluation of the Company's retrospective analysis of allowances as compared to actual payments received, evaluation of estimates based on historical collections by payer, and performance of analytical procedures and sensitivity analyses over the Company’s significant inputs to assess the Company’s ability to accurately estimate the allowances. We also tested the underlying data used in management’s calculations for accuracy and completeness, which included detail testing of the service revenue.
/s/ Marcum LLP
We have served as the Company’s auditor since 2016.
March 30, 2023
54
PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2022 and 2021
(Dollars in thousands, except share data)
|
| 2022 |
| 2021 | ||
ASSETS | | | | | | |
CURRENT ASSETS: | | | | | | |
Cash | | $ | | | $ | |
Accounts receivable, net | |
| | | | |
Inventories | |
| | | | |
Other current assets | |
| | | | |
Total current assets | |
| | | | |
| | | | | | |
PROPERTY AND EQUIPMENT, NET | |
| | | | |
| | | | | | |
OTHER ASSETS: | | | | | | |
Finance lease right-of-use assets, net | | | | | | |
Operating lease right-of-use assets, net | | | | | | |
Intangibles, net | |
| | | | |
Other assets | |
| | | | |
Total assets | | $ | | | $ | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | |
Current maturities of long-term debt, less debt issuance costs | | $ | | | $ | |
Current maturities of finance lease liabilities | |
| | | | |
Current maturities of operating lease liabilities | |
| | | | |
Accounts payable | |
| | | | |
Accrued expenses | |
| | | | |
Deferred revenue | |
| | | | |
Total current liabilities | |
| | | | |
LONG TERM LIABILITIES: | | | | | | |
Long-term debt, less current maturities and debt issuance costs | |
| | | | |
Finance lease liabilities, less current maturities | |
| | | | |
Operating lease liabilities, less current maturities | |
| | | | |
Common stock warrant liabilities | |
| — | | | |
Total liabilities | |
| | | | |
COMMITMENTS AND CONTINGENCIES (Note 8) | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | |
Preferred stock - $ | |
| | | ||
Common stock, $ | |
| | | | |
Additional paid-in capital | |
| | | | |
Accumulated deficit | |
| ( | | | ( |
Total Precipio, Inc. stockholders’ equity | |
| | | | |
Noncontrolling interest in joint venture | | | | | | |
Total stockholders’ equity | | | | | | |
Total liabilities and stockholders’ equity | | $ | | | $ | |
See notes to consolidated financial statements.
55
PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2022 and 2021
(Dollars in thousands, except per share data)
| | Year Ended December 31, | ||||
| | 2022 |
| 2021 | ||
SALES: | | |
|
| |
|
Service revenue, net | | $ | | | $ | |
Other revenue | |
| | |
| |
Revenue, net of contractual allowances and adjustments | |
| | |
| |
Adjustment for allowance for doubtful accounts | |
| ( | |
| |
Net sales | |
| | |
| |
COST OF SALES: | |
|
| |
|
|
Cost of service revenue | |
| | |
| |
Cost of other revenue | |
| | |
| |
Total cost of sales | |
| | |
| |
Gross profit | |
| | |
| |
OPERATING EXPENSES: | |
|
| |
|
|
Operating expenses | |
| | |
| |
OPERATING LOSS | |
| ( | |
| ( |
OTHER INCOME (EXPENSE): | |
|
| |
|
|
Interest expense, net | |
| ( | |
| ( |
Warrant revaluation | |
| | |
| |
Gain on settlement of liability | |
| | |
| |
Gain on forgiveness of Paycheck Protection Program loan | | | — | | | |
Total other income | |
| | |
| |
LOSS BEFORE INCOME TAXES | |
| ( | |
| ( |
INCOME TAX EXPENSE | |
| | |
| |
NET LOSS | |
| ( | |
| ( |
| | | | | | |
Less: Net income attributable to noncontrolling interest in joint venture | | | ( | | | ( |
NET LOSS ATTRIBUTABLE TO PRECIPIO, INC. COMMON STOCKHOLDERS | | $ | ( | | $ | ( |
| | | | | | |
BASIC AND DILUTED LOSS PER COMMON SHARE | | ( | | ( | ||
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING | |
| | |
| |
See notes to consolidated financial statements.
56
PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2022 and 2021
(Dollars in thousands)
| | 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, 2021 |
| | | $ | — |
| | | $ | | | $ | | | $ | ( | | $ | | | $ | | | $ | |
Net loss |
| — | |
| — |
| — | |
| — | |
| — | |
| ( | | | ( | | | | |
| ( |
Issuance of common stock in connection with purchase agreements | | — | | | — | | | | | | | | | | | — | | | | | | — | | | |
Issuance of common stock in connection with at the market offering, net of issuance costs | | — | | | — | | | | | | | | | | | — | | | | | | — | | | |
Proceeds upon issuance of common stock from exercise of warrants | | — | | | — | | | | | | | | | | | — | | | | | | — | | | |
Proceeds upon issuance of common stock from exercise of stock options | | — | | | — | | | | | — | | | | | | — | | | | | | — | | | |
Write-off warrant liability in conjunction with warrant exercises | | — | | | — | | — | | | — | | | | | | — | | | | | | — | | | |
Issuance of common stock for consulting services | | — | |
| — |
| | |
| — | |
| | |
| — | | | | | | — | |
| |
Non-cash stock-based compensation |
| — | |
| — |
| — | |
| — | |
| | |
| — | | | | | | — | |
| |
Balance, December 31, 2021 |
| | | $ | — |
| | | $ | | | $ | | | $ | ( | | $ | | | $ | | | $ | |
Net loss |
| — | |
| — |
| — | |
| — | |
| — | |
| ( | | | ( | | | | |
| ( |
Issuance of common stock in connection with at the market offering, net of issuance costs | | — | | | — | | | | | | | | | | | — | | | | | | — | | | |
Proceeds upon issuance of common stock from exercise of warrants | | — | | | — | | | | | — | | | | | | — | | | | | | — | | | |
Non-cash stock-based compensation |
| — | |
| — |
| — | |
| — | |
| | |
| — | | | | | | — | |
| |
Balance, December 31, 2022 |
| | | $ | — |
| | | $ | | | $ | | | $ | ( | | $ | | | $ | | | $ | |
See notes to consolidated financial statements.
57
PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2022 and 2021
(Dollars in thousands)
Year Ended December 31, | ||||||
|
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net loss | | $ | ( | | $ | ( |
| | | | | | |
Adjustments to reconcile net loss to net cash flows used in operating activities: | |
|
| |
|
|
Depreciation and amortization | |
| | |
| |
Amortization of operating lease right-of-use asset | | | | | | |
Amortization of finance lease right-of-use asset | | | | | | |
Amortization of deferred financing costs, debt discounts and debt premiums | |
| | |
| |
Gain on forgiveness of debt | |
| — | |
| ( |
Gain on settlement of liability | |
| ( | |
| ( |
Stock-based compensation | |
| | |
| |
Value of stock issued in payment of services | |
| — | |
| |
Provision for losses on doubtful accounts | |
| | |
| ( |
Warrant revaluation | |
| ( | |
| ( |
Derecognition of finance lease right-of-use asset | | | — | | | |
Changes in operating assets and liabilities: | |
|
| |
|
|
Accounts receivable | |
| ( | |
| |
Inventories | |
| ( | |
| ( |
Other assets | |
| | |
| ( |
Accounts payable | |
| | |
| |
Operating lease liabilities | | | ( | | | ( |
Deferred revenue | | | | | | |
Accrued expenses | |
| ( | |
| ( |
Net cash used in operating activities | |
| ( | |
| ( |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
|
| |
| |
Purchase of property and equipment | |
| ( | |
| ( |
Net cash used in investing activities | |
| ( | |
| ( |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
|
| |
|
|
Principal payments on finance lease obligations | |
| ( | |
| ( |
Deposits on finance lease right-of-use assets | | | — | | | ( |
Issuance of common stock, net of issuance costs | | | | | | |
Proceeds from exercise of warrants | |
| | |
| |
Proceeds from exercise of stock options | | | — | | | |
Principal payments on long-term debt | |
| ( | |
| ( |
Payments on common stock warrant liabilities | | | — | | | ( |
Net cash flows (used in) provided by financing activities | |
| ( | |
| |
NET CHANGE IN CASH | |
| ( | |
| |
CASH AT BEGINNING OF PERIOD | |
| | |
| |
CASH AT END OF PERIOD | | $ | | | $ | |
| | | | | | |
See notes to consolidated financial statements.
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PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the Years Ended December 31, 2022 and 2021
(Dollars in thousands)
| | Year Ended December 31, | ||||
| | 2022 |
| 2021 | ||
SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | |
Cash paid during the period for interest | | $ | | | $ | |
| | | | | | |
SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY | |
|
| |
|
|
Purchases of equipment financed through accounts payable | | | | | | |
Prepaid insurance financed with loan | | | | | | — |
Operating lease right-of-use assets obtained in exchange for operating lease obligations | | | | | | |
Finance lease right-of-use assets obtained in exchange for finance lease obligations | | | | | | |
Write-off warrant liability in conjunction with warrant exercises | | | — | | | |
See notes to consolidated financial statements.
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PRECIPIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2022 and 2021
1. BUSINESS DESCRIPTION
Business Description.
Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a healthcare solutions company focused on cancer diagnostics. The Company’s 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. Precipio sees 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 its strategy, the Company has structured its 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.
Our operating structure promotes the harnessing of our proprietary technology and genetic diagnostic expertise to bring to market the Company’s robust pipeline of innovative solutions designed to address the root causes of misdiagnoses.
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. 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
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(“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 which were executed in conjunction with the formation of the Joint Venture. Poplar receives a similar fee for the billing services that it provides.
The Company is working with Poplar to dissolve the Joint Venture with an effective date of December 31, 2022.
Going Concern.
The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that 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 year ended December 31, 2022, the Company had a net loss of $
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 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock having aggregate sales proceeds of up to $ |
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 consolidated financial statements were available to be 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 Annual Report Form 10-K. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern as a result of the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The consolidated financial statements include the accounts of Precipio, Inc. and our wholly owned subsidiaries, and the Joint Venture which is a VIE in which we are the primary beneficiary. Refer to the section titled
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“Consolidation of Variable Interest Entities” for further information related to our accounting for the Joint Venture. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The most significant estimates and assumptions with regard to these consolidated financial statements relate to the allowance for doubtful accounts, assumptions used within the fair value of debt and equity transactions and contractual allowances. These assumptions require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The risks and uncertainties may be heightened by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. The more significant of those risks are presented below and throughout the notes to the consolidated financial statements.
The Company operates in the healthcare industry which is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, 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.
Fair Value.
Unless otherwise specified, book value approximates fair value. The common stock warrant liabilities are recorded at fair value. See Note 11 - Fair Value for additional information.
Other Current Assets.
Other current assets of $
Concentrations of Risk.
From time to time, we may maintain a cash position with financial institutions in amounts that exceed Federal Deposit Insurance Corporation insured limits of up to $250,000 per depositor per financial institution. We have not experienced any losses on such accounts as of December 31, 2022.
Service companies in the health care industry typically grant credit without collateral to patients. The majority of these patients are insured under third-party insurance agreements. The services provided by the Company are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers for Medicare and
62
Medicaid Services and third-party payers. The Company utilizes CPT codes for Pathology and Laboratory Services contained within codes 80000-89398.
Inventories.
Inventories consist of laboratory supplies and are valued at cost (determined on an average cost basis, which approximates the first-in, first-out method) or net realizable value, whichever is lower. We evaluate inventory for items that are slow moving or obsolete and record an appropriate reserve for obsolescence if needed. We have an allowance for slow moving or obsolete inventory of
Property and Equipment, net.
Property and equipment are carried at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the related assets as follows:
Furniture and fixtures |
| years | |
Laboratory equipment |
| years | |
Computer equipment and software |
| years |
For assets sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts, and any related gain or loss is reflected in operations for the period. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized.
Intangible Assets.
We review our amortizable long-lived assets for impairment annually or whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair value of the asset to the carrying amount of the asset (group). There were
Debt Issuance Costs
Debt issuance costs are being amortized over the lives of the related financings on a basis that approximates the effective interest method. Costs are presented as a reduction of the related debt in the accompanying balance sheets. The amortization expense recorded was less than $
Stock-Based Compensation.
All stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have
Net Sales Recognition.
Revenue recognition occurs when a customer obtains control of the promised goods and service. Revenue assigned to the goods and services reflects the consideration which the Company expects to receive in exchange for those goods and services.
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The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and molecular testing; clinical research from bio-pharma customers, state and federal grant programs; biomarker testing from bio-pharma customers and from other product sales including revenues from equipment leases and reagent sales associated with our HSRR program. All sources of revenue are recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns. Due to differences in the substance of these revenue types, the transactions require, and the Company utilizes, different revenue recognition policies for each. See more detailed information on revenue in Note 13 – Sales Service Revenue, Net And Accounts Receivable.
The Company recognizes revenue utilizing the five-step framework of ASC 606. Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for diagnostic testing at a point in time based on the delivery method (web-portal access or fax) for a patient’s laboratory report. Diagnostic testing service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payers. Provisions for third-party payer settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined. For clinical research and biomarker services, the Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results per the contract. Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. When we receive payment in advance, we initially defer the revenue and recognize it when we deliver the service.
Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the statements of operations.
Accounts Receivable
Accounts Receivable result from diagnostic services provided to self-pay and insured patients, project based testing services and clinical research. The payment for services provided by the Company are generally due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue to estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients, including patients with insurance and a deductible and copayment, the Company records an allowance for doubtful accounts in the period of services on the basis of past experience of patients unable or unwilling to pay for service fee for which they are financially responsible. For receivables associated with services provided to patients with third-party coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged against the allowance for doubtful accounts.
Presentation of Insurance Claims and Related Insurance Recoveries.
The Company accounts for its insurance claims and related insurance recoveries at their gross values as standards for health care entities do not allow the Company to net insurance recoveries against the related claim liabilities. There were
Advertising Costs.
Advertising costs are expensed as incurred and are included in operating expenses on the consolidated statements of operations. Advertising costs charged to operations totaled approximately $
Research and Development Costs.
All costs associated with internal research and development are expensed as incurred. These costs include salaries and employee related expenses, operating supplies and facility-related expenses. Research and development costs charged to operations totaled $
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Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period when the change in tax rates is enacted.
A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance has been applied against the Company’s net deferred tax assets as of December 31, 2022 and 2021, due to projected losses and because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets.
Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of, or changes in tax laws, regulations and interpretations thereof as well as other factors. The Company’s policy is to record interest and penalties directly related to income taxes as income tax expense in the accompanying consolidated statements of operations, of which there was
Common Stock Warrants.
The Company classifies the issuance of common stock warrants as equity any contracts that (i) require physical settlement or net-stock settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own stocks (physical settlement or net-stock settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside of the Company’s control), or (ii) gives the counterparty a choice of net-cash settlement or settlement in stock (physical settlement or net-stock settlement).
Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity and accordingly, are recorded as a liability (“Common Stock Warrant Liability”). We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings.
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 consolidated balance sheets. Intercompany balances are eliminated in consolidation and not reflected in the following table.
(dollars in thousands) |
| December 31, 2022 |
| December 31, 2021 | ||
Assets: | | | | | | |
Accounts receivable, net | | $ | | | $ | |
Total assets | | $ | | | $ | |
Liabilities: | | | | | | |
Accrued expenses | | $ | | | $ | |
Total liabilities | | $ | | | $ | |
Noncontrolling interest in Joint Venture | | $ | | | $ | |
Total stockholders' equity | | $ | | | $ | |
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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
The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:
| | December 31, | ||
|
| 2022 |
| 2021 |
Stock options |
| |
| |
Warrants |
| |
| |
Preferred stock |
| |
| |
Total |
| |
| |
Recently Adopted Accounting Pronouncements.
In July 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-05, Lease (Topic 842), “Lessors - Certain Leases with Variable Lease Payments”. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. The Company adopted this guidance on January 1, 2022. The adoption of this standard was not material to our consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity. The Company adopted this guidance on January 1, 2022. The adoption of this standard was not material to our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this Update also require additional disclosures for equity securities subject to contractual sale restrictions. The provisions in this Update are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company does not expect to early adopt this ASU. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements.
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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 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 consolidated financial statements.
Reclassification.
Certain reclassifications were made to the statements of cash flows related to splitting accruals and deferred revenue to separate lines in order to conform to the 2022 presentation. These reclassifications had no effect on previously reported retained earnings, net income, total assets or liabilities, or cash flows used in operating activities.
3. PROPERTY AND EQUIPMENT, NET
A summary of property and equipment at December 31, 2022 and 2021 is as follows:
|
| 2022 |
| 2021 | ||
Furniture and fixtures and leasehold improvements | | $ | | | $ | |
Laboratory equipment | |
| | |
| |
Computer equipment and laboratory software | |
| | |
| |
Construction in process | |
| | |
| |
| |
| | |
| |
Less—accumulated depreciation and amortization | |
| ( | |
| ( |
Total | | $ | | | $ | |
Depreciation expense was approximately $
4. INTANGIBLES
Intangible assets consist of the following:
| | Dollars in Thousands | |||||||
| | December 31, 2022 | |||||||
|
| | |
| Accumulated |
| Net Book | ||
| | Cost | | Amortization | | Value | |||
Technology | | $ | | | $ | | | $ | |
| | Dollars in Thousands | |||||||
| | December 31, 2021 | |||||||
|
| | |
| Accumulated |
| Net Book | ||
| | Cost | | Amortization | | Value | |||
Technology | | $ | | | $ | | | $ | |
|
| Estimated Useful Life | |
Technology |
| years |
Amortization expense for intangible assets was $
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5. LONG-TERM DEBT
Long-term debt consists of the following:
| | Dollars in Thousands | ||||
|
| December 31, 2022 |
| December 31, 2021 | ||
Connecticut Department of Economic and Community Development (DECD) | | $ | | | $ | |
DECD debt issuance costs | |
| ( | |
| ( |
Financed insurance loan | |
| | |
| |
Total long-term debt | |
| | |
| |
Current portion of long-term debt | |
| ( | |
| ( |
Long-term debt, net of current maturities | | $ | | | $ | |
Department of Economic and Community Development
On January 8, 2018, the Company entered into an agreement with DECD by which the Company received a loan of $
Debt issuance costs associated with the DECD 2018 Loan were approximately $
Financed Insurance Loan.
The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2022, the Company financed $
Paycheck Protection Program.
On April 23, 2020, the Company entered into a promissory note (the “Promissory Note”) evidencing an unsecured $
On February 11, 2021, the Company filed an application for loan forgiveness with Webster Bank and was subsequently notified by Webster Bank that effective March 24, 2021 the PPP Loan, plus accrued interest, was considered fully forgiven. As a result, the Company recorded a gain on forgiveness of debt of $
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The aggregate future maturities required on gross long-term debt at December 31, 2022 are as follows:
|
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 and thereafter |
| Total | |||||||
DECD loan | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
Financed insurance loan | | | | | | — | | | — | | | — | | | — | | | — | | | |
| | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses at December 31, 2022 and 2021 are as follows:
(dollars in thousands) |
| 2022 |
| 2021 | ||
Accrued expenses | | $ | | | $ | |
Accrued compensation | |
| | |
| |
Accrued franchise, property and sales and use taxes | | | | | | |
Accrued interest | |
| | |
| |
| | $ | | | $ | |
The Company recorded certain settlement reductions in accrued expenses and accounts payable as gains which are included in gain on settlement of liability, net in the consolidated statements of operations. During each of the years ended December 31, 2022 and 2021, approximately $
7. LEASES
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
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. On November 29, 2021, we extended the lease term for our office facility in New Haven, Connecticut by modifying the expiration date from December 31, 2021 to December 31, 2026. As a result of this lease extension agreement, on the lease extension date, we recognized an additional operating lease ROU asset and corresponding operating lease of $
The Company also recognizes ROU assets from finance leases in connection with its HSRR program. For certain customers in the HSRR program, the Company leases diagnostic testing equipment and then subleases the equipment to
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the customer. Finance lease ROU assets and finance lease liabilities are recognized at the lease commencement date, and at the sublease commencement date the finance lease ROU asset is derecognized and is recorded as cost of sales in the consolidated statements of operations. Derecognized finance lease ROU assets for the years ended December 31, 2022 and 2021 were
The balance sheet presentation of our operating and finance leases is as follows:
(dollars in thousands) | | | | | | |
Classification on the Consolidated Balance Sheet | | December 31, 2022 | | December 31, 2021 | ||
Assets: | | | | | | |
Operating lease right-of-use assets, net | | $ | | | $ | |
Finance lease right-of-use assets, net (1) | | | | | | |
Total lease assets | | $ | | | $ | |
| | | | | | |
Liabilities: | | | | | | |
Current: | | | | | | |
Current maturities of operating lease liabilities | | $ | | | $ | |
Current maturities of finance lease liabilities | | | | | | |
Noncurrent: | | | | | | |
Operating lease liabilities, less current maturities | | | | | | |
Finance lease liabilities, less current maturities | | | | | | |
Total lease liabilities | | $ | | | $ | |
As of December 31, 2022, the estimated future minimum lease payments, excluding non-lease components, are as follows:
(dollars in thousands) |
| Operating Leases | | Finance Leases | | Total | |||
2023 | | $ | | | $ | | | $ | |
2024 | |
| | |
| | |
| |
2025 | |
| | |
| | |
| |
2026 | |
| | | | | |
| |
Total lease obligations | |
| | |
| | |
| |
Less: Amount representing interest | |
| ( | |
| ( | |
| ( |
Present value of net minimum lease obligations | |
| | |
| | |
| |
Less, current portion | |
| ( | |
| ( | |
| ( |
Long term portion | | $ | | | $ | | | $ | |
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Other information as of December 31, 2022 and 2021:
| December 31, | | December 31, |
| 2022 | | 2021 |
Weighted-average remaining lease term (years): | | | |
Operating leases | | ||
Finance leases | | ||
Weighted-average discount rate: | | | |
Operating leases | | ||
Finance leases | |
During the years ended December 31, 2022 and 2021, operating cash flows from operating leases was $
Operating Lease Costs
Operating lease costs were $
Finance Lease Costs
Finance lease amortization and interest expenses are included in the consolidated statements of operations for the years ended December 31, 2022 and 2021. The balances within these accounts are approximately $
8. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into purchase commitments for reagents from suppliers. These agreements started in 2011 and run through 2025. The Company and the suppliers will true up the amounts on an annual basis. The future minimum purchase commitments under these and other purchase agreements are as follows:
Years ending December 31, |
| | (dollars in thousands) |
2023 | | $ | |
2024 | |
| |
2025 | |
| |
| | $ | |
LITIGATIONS
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.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $
71
against us in connection with this allegation. A liability of less than $
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.
9. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s net deferred tax assets relate primarily to its net operating loss carryforwards, allowance for doubtful accounts and stock-based compensation, partially offset by property and equipment and intangible assets. The Company has recorded a full valuation allowance to offset the net deferred tax assets, as it is more likely than not that the Company will not realize future benefits associated with these net deferred tax assets at December 31, 2022 and 2021.
At December 31, 2022 and 2021, the Company had net deferred tax assets of $
| | Dollars in Thousands | ||||
|
| 2022 |
| 2021 | ||
Deferred tax assets: |
| |
|
| |
|
Net operating loss and credit carryforwards | | $ | | | $ | |
Allowance for doubtful accounts | | | | | | |
Stock-based compensation | |
| | |
| |
Other | |
| | |
| |
Gross deferred tax assets | |
| | |
| |
Deferred tax liabilities: | |
|
| |
|
|
Property and equipment | |
| ( | |
| ( |
Intangible assets | |
| ( | |
| ( |
Other | |
| ( | |
| ( |
Gross deferred tax liabilities | |
| ( | |
| ( |
Net deferred tax assets | |
| | |
| |
Less valuation allowance | |
| ( | |
| ( |
Net deferred liability | | $ | | | $ | |
72
The Company’s provision for income taxes for the years ended December 31, 2022 and December 31, 2021 relates to income taxes in states and other jurisdictions and differs from the amounts determined by applying the statutory federal income tax rate to the loss before income taxes for the following reasons:
| | | | | | |
| | Dollars in Thousands | ||||
| | 2022 | | 2021 | ||
Benefit at federal rate | | $ | ( | | $ | ( |
Increase (decrease) resulting from: | |
|
| |
|
|
State income taxes—net of federal benefit | |
| ( | |
| ( |
Miscellaneous permanent differences | |
| | |
| |
Warrant liability revaluation | |
| ( | |
| ( |
Meals and entertainment | | | | | | |
PPP Loan forgiven | | | — | | | ( |
Income taxed to owners on Non-Controlling Interest (NCI) | | | ( | | | ( |
Change in valuation allowance | |
| | |
| |
Total income tax benefit | | $ | — | | $ | — |
The income tax expense consists of the following for the years ended December 31, 2022 and 2021.
| | | | | | |
| | Dollars in Thousands | ||||
|
| 2022 |
| 2021 | ||
Federal: |
| |
|
| |
|
Current | | $ | — | | $ | — |
Deferred | |
| — | |
| — |
Total Federal | | $ | — | | $ | — |
State: | |
|
| |
|
|
Current | | $ | — | | $ | — |
Deferred | |
| — | |
| — |
Total State | | $ | — | | $ | — |
Foreign: | |
|
| |
|
|
Current | | $ | — | | $ | — |
Deferred | |
| — | |
| — |
Total Foreign | | $ | — | | $ | — |
Total Tax Provision | | $ | — | | $ | — |
The Company had available gross federal net operating loss (“NOL”) carryforwards of approximately $
73
At December 31, 2022, and as a result of the limitations under Section 382 of the Internal Revenue Code, the Company had a total of unused federal tax net operating loss carryforwards with expiration dates as follows:
| | Dollars in | |
| | Thousands | |
|
| 2022 | |
2036 | | $ | |
2037 | | | |
Unlimited life | |
| |
Total Federal | | $ | |
The Company has adopted guidance on accounting for uncertainty in income taxes which clarified the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements as well as guidance on de-recognition, measurement, classification and disclosure of tax positions. There are no material uncertain tax positions that would require recognition in the financial statements. The Company is obligated to file income tax returns in the U.S. federal jurisdiction and various U.S. states. Since the Company had losses in the past, all prior years that generated NOLs are open and subject to audit examination in relation to the NOL generated from those years. During the year ended December 31, 2022, the IRS completed an exam of the Company’s 2019 tax year, which resulted in a change to the NOL carryforward. Our evaluation of uncertain tax positions was performed for the tax years open to examination.
10. STOCKHOLDERS’ EQUITY
Common Stock
Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have
During the years ended December 31, 2022 and 2021, the Company issued
During the year ended December 31, 2021, the Company issued
During the year ended December 31 2021, the Company issued
LP 2020 Purchase Agreement
On March 26, 2020, the Company entered into a purchase agreement (the “LP 2020 Purchase Agreement”) with Lincoln Park pursuant to which Lincoln Park agreed to purchase from us, from time to time, up to $
During the year ended December 31, 2021, we received approximately $
74
At The Market Offering Agreement
On April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock, par value $
The sale of our shares of Common Stock to or through AGP, will be made pursuant to the registration statement (the “Registration Statement”) on Form S-3 (File No. 333-237445), which was declared effective by the Securities and Exchange Commission (the “SEC”) on April 13, 2020, for an aggregate offering price of up to $
Under the AGP Sales Agreement, Shares may be sold by any method permitted by law deemed to be an “at the market offering.” AGP will also be able to sell shares of Common Stock by any other method permitted by law, including in negotiated transactions with the Company’s prior written consent. Upon delivery of a placement notice and subject to the terms and conditions of the AGP Sales Agreement, AGP is required to use its commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of The Nasdaq Capital Market to sell the Shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. AGP is not under any obligation to purchase any of the Shares on a principal basis pursuant to the AGP Sales Agreement, except as otherwise agreed by AGP and the Company in writing and expressly set forth in a placement notice. AGP’s obligations to sell the Shares under the AGP Sales Agreement are subject to satisfaction of certain conditions, including customary closing conditions. The Company is not obligated to make any sales of Shares under the AGP Sales Agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs.
The Company has agreed to pay AGP a cash fee of
During the years ended December 31, 2022 and 2021, we received net proceeds of approximately $
As of the date of issuance of this Annual Report on Form 10-K, we have received an aggregate of $
Preferred Stock
The Company’s Board of Directors is authorized to issue up to
75
provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. We have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
Series B Preferred Stock
The Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware, which designates
The conversion price of the Series B Preferred Stock contains a down round feature. The Company will recognize the effect of the down round feature when it is triggered. At that time, the effect would be treated as a deemed dividend and as a reduction of income available to common shareholders in our basic earnings per share calculation.
There were
Liquidation Preferences
The following is the liquidation preferences for the Company’s preferred stock;
Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders shall be entitled to receive out of the assets of the Corporation an amount equal to the par value, plus any accrued and unpaid dividends thereon, for each share of Preferred Stock before any distribution or payment shall be made to the holders of the Common Stock, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders in accordance with the respective amounts that would be payable on such shares. If all amounts were paid in full; and thereafter, the holders shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount that a holder of Common Stock would receive if the Preferred Stock were fully converted to Common Stock which amount shall be paid pari passu with all holders of Common Stock.
76
Common Stock Warrants
The following represents a summary of the warrants outstanding as of December 31, 2022:
|
| |
| |
| Underlying |
| Exercise | |
| | Issue Year | | Expiration | | Shares | | Price | |
Warrants | | | | | | | | | |
(1) | | 2018 | | April 2023 | | | | $ | |
(2) | | 2018 | | July 2023 | | | | $ | |
(3) | | 2018 | | August 2023 | | | | $ | |
(4) | | 2018 | | September 2023 | | | | $ | |
(5) | | 2018 | | November 2023 | | | | $ | |
(6) | | 2018 | | December 2023 | | | | $ | |
(7) | | 2019 | | April 2024 | | | | $ | |
(8) | | 2019 | | May 2024 | | | | $ | |
|
|
|
|
|
| |
| |
|
(1) - (7) These warrants were issued in connection with a 2018 securities purchase agreement, as amended.
(8) These warrants were issued in connection with convertible notes issued in May 2019.
During the years ended December 31, 2022 and 2021,
During the year ended December 31, 2021,
During the years ended December 31, 2022 and 2021, there were
Deemed Dividends
Certain of our preferred stock and warrant issuances contain down round provisions which require us to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share.
Some warrants that expired or were exercised during the years ended December 31, 2022 and 2021 contained down round provisions but such provisions had no impact on the respective expiration or exercise dates.
There were
11. FAIR VALUE
FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
77
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Common Stock Warrant Liabilities.
Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our consolidated statement of operations.
2016 Warrant Liability
The Company has a warrant liability related to warrants issued in January 2016 (the “2016 Warrant Liability”) and it represents the fair value of such warrants, of which,
Bridge Note Warrant Liabilities
During 2019 and 2018, the Company issued warrants in connection with the issuance of convertible notes. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”).
The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of December 31, 2022, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of
During the year ended December 31, 2021, the Company wrote-off $
During the years ended December 31, 2022 and 2021, the change in the fair value of the warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:
Dollars in Thousands | | | |||||||
| | | | | | | | Year Ended December 31, 2022 | |
| | | | | | | Bridge Note | ||
|
| | |
| |
| Warrant Liabilities | ||
Beginning balance at January 1 | | | | | | | | $ | |
Total losses: | | | | | | | |
|
|
Revaluation recognized in earnings | | | | | | | | | ( |
Balance at December 31 | | | | | | | | $ | – |
| | | | | | | | | |
| | Year Ended December 31, 2021 | |||||||
| | 2016 Warrant | | Bridge Note | | Total Warrant | |||
|
| Liability |
| Warrant Liabilities |
| Liabilities | |||
Beginning balance at January 1 | | $ | | | $ | | | $ | |
Total losses: | |
|
| |
|
| |
|
|
Revaluation recognized in earnings | | | – | | | ( | | | ( |
Deductions – warrant exercises and write-offs | | | – | | | ( | | | ( |
Deductions – warrant liability settlement | | | ( | | | – | | | ( |
Balance at December 31 | | $ | – | | $ | | | $ | |
78
12. EQUITY INCENTIVE PLAN
The Company currently issues stock awards under its 2017 Stock Option and Incentive Plan, as amended (the "2017 Plan") which will expire on June 5, 2027. The shares authorized for issuance under the 2017 Plan were
The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”), which has the authority to set the number, exercise price, term and vesting provisions of the awards granted under the Plan, subject to the terms thereof. Either incentive or non-qualified stock options may be granted to employees of the Company, but only non-qualified stock options may be granted to non-employee directors and advisors. However, in either case, the Plan requires that stock options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Options issued under the plan vest over periods as determined by the Committee and expire
Stock Options.
The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value at the date of grant and expenses the benefit in operating expense in the consolidated statements of operations over the service period of the awards. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.
During the year ended December 31, 2022, the Company granted stock options to purchase up to
The following table summarizes stock option activity under our plans during the year ended December 31, 2022:
|
| Number of |
| Weighted-Average | |
| | Options | | Exercise Price | |
Outstanding at January 1, 2022 |
| | | $ | |
Granted |
| | |
| |
Forfeited |
| ( | |
| |
Outstanding at December 31, 2022 |
| | | $ | |
Exercisable at December 31, 2022 |
| | | $ | |
As of December 31, 2022, there were
During the year ended December 31, 2021, there were
79
During the years ended December 31, 2022 and 2021, we recorded compensation expense for all stock awards of $
13 SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE
ASC Topic 606, “Revenue from contracts with customers”
The Company follows the guidance of ASC 606 for the recognition of revenue from contracts with customers to transfer goods and services. The Company performed a comprehensive review of its existing revenue arrangements following the five-step model:
Step 1: Identification of the contract with the customer. Sub-steps include determining the customer in a contract, initial contract identification and determining if multiple contracts should be combined and accounted for as a single transaction.
Step 2: Identify the performance obligation in the contract. Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct.
Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable to a customer.
Step 4: Allocate transaction price. Sub-steps include assessing the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the customer.
Step 5: Satisfaction of performance obligations. Sub-steps include ascertaining the point in time when an asset is transferred to the customer and when the customer obtains control of the asset upon which time the Company recognizes revenue.
Nature of Contracts and Customers
The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers starts upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research. Payment terms for the services provided are 30 days, unless separately negotiated.
Diagnostic testing
Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract.
Clinical research grants
Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation.
Biomarker testing and clinical project services
Control of the biomarker testing and clinical project services are transferred to the customer over time. The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results.
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The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs.
Reagents and other diagnostic products
Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. These revenues include revenues from reagent sets for our HSRR program, COVID-19 antibody tests and other product sales and are included in other revenue in our consolidated statements of operations.
Equipment leasing
The Company accounts for sales-type leases within the scope of ASC 842, Leases, as ASC 606 specifically excludes leases from its guidance. The sales-type leases result in the derecognition of the underlying asset, the recognition of profit or loss on the sale, and the recognition of an investment in leased asset. Revenue from sales-type leases is recognized upfront on the commencement date of the lease, and is included in other revenue in our consolidated statements of operations. During the year ended December 31, 2022 and 2021, revenue from sales-type leases was
Disaggregation of Revenues by Transaction Type
We operate in
| | For the Year Ended December 31, | ||||||||||||||||
(dollars in thousands) | | Diagnostic Testing | | Biomarker Testing | | Total | ||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Medicaid | | $ | | | $ | | | $ | — | | $ | — | | $ | | | $ | |
Medicare | |
| | |
| | |
| — | |
| — | |
| | |
| |
Self-pay | |
| | |
| | |
| — | |
| — | |
| | |
| |
Third party payers | |
| | |
| | |
| — | |
| — | |
| | |
| |
Contract diagnostics | |
| — | |
| — | |
| — | |
| | |
| — | |
| |
Service revenue, net | | $ | | | $ | | | $ | — | | $ | | | $ | | | $ | |
Revenue from the Medicare and Medicaid programs account for a portion of the Company’s patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from the following types of transactions: diagnostic testing (“Diagnostic”), revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics (collectively “Biomarker”), revenues from clinical research grants from state and federal research programs and diagnostic product sales, including revenues from equipment leases and reagent sales associated with our HSRR program.
81
Deferred revenue
Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of revenue from deferred revenue. As of December 31, 2022 and 2021, the deferred revenue was $
Contractual Allowances and Adjustments
We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers. Accordingly, the total revenue and receivables reported in our consolidated financial statements are recorded at the amounts expected to be received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payer class during the years ended December 31, 2022 and 2021.
| | For the Year Ended December 31, | ||||||||||||||||
(dollars in thousands) | | | | Contractual Allowances and | | Revenues, net of Contractual | ||||||||||||
| | Gross Revenues | | adjustments | | Allowances and adjustments | ||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Medicaid | | $ | | | $ | | | $ | — | | $ | — | | $ | | | $ | |
Medicare | |
| | |
| | |
| — | |
| — | |
| | |
| |
Self-pay | |
| | |
| | |
| — | |
| — | |
| | |
| |
Third party payers | |
| | |
| | |
| ( | |
| ( | |
| | |
| |
Contract diagnostics | |
| – | |
| | |
| — | |
| — | |
| — | |
| |
| |
| | |
| | |
| ( | |
| ( | |
| | |
| |
Other | |
| | |
| | |
| — | |
| — | |
| | |
| |
| | $ | | | $ | | | $ | ( | | $ | ( | | $ | | | $ | |
82
Allowance for Doubtful Accounts
The Company provides for a general allowance for collectability of services when recording net sales. The Company has adopted the policy of recognizing net sales to the extent it expects to collect that amount. Reference FASB 954-605-45-5 and ASU 2011-07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the years ended December 31, 2022 and 2021.
| | For the Year Ended December 31, | ||||||||||||||||
| | Revenues, net of | | | |
| ||||||||||||
(dollars in thousands) | | Contractual Allowances | | Allowances for doubtful | |
| ||||||||||||
| | and adjustments | | accounts | | Total | ||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Medicaid | | $ | | | $ | | | $ | ( | | $ | ( | | $ | | | $ | |
Medicare | |
| | |
| | |
| ( | |
| ( | |
| | |
| |
Self-pay | |
| | |
| | |
| ( | |
| — | |
| | |
| |
Third party payers | |
| | |
| | |
| ( | |
| | |
| | |
| |
Contract diagnostics | |
| — | |
| | |
| — | |
| — | |
| — | |
| |
| |
| | |
| | |
| ( | |
| | |
| | |
| |
Other | |
| | |
| | |
| — | |
| — | |
| | |
| |
| | $ | | | $ | | | $ | ( | | $ | | | $ | | | $ | |
Costs to Obtain or Fulfill a Customer Contract
Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in operating expenses in the consolidated statements of operations.
Shipping and handling costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the consolidated statements of operations.
Accounts Receivable
The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements.
The following summarizes the mix of receivables as of December 31, 2022 and 2021:
| | | | | | |
(dollars in thousands) |
| December 31, 2022 |
| December 31, 2021 | ||
Medicaid | | $ | | | $ | |
Medicare | |
| | |
| |
Self-pay | |
| | |
| |
Third party payers | |
| | |
| |
Contract diagnostic services and other | |
| | |
| |
| | $ | | | $ | |
Less allowance for doubtful accounts | |
| ( | |
| ( |
Accounts receivable, net | | $ | | | $ | |
83
The following table presents the roll-forward of the allowance for doubtful accounts for the year ended December 31, 2022:
|
| | |
| Allowance for | |
| | | | | Doubtful | |
(dollars in thousands) | | | | | Accounts | |
Balance, January 1, 2022 |
| |
| | $ | ( |
Collection Allowance: |
| |
| |
|
|
Medicaid | | $ | ( | |
|
|
Medicare | |
| ( | |
|
|
Self-pay | | | ( | | | |
Third party payers | |
| ( | |
|
|
| |
| ( | |
|
|
Bad debt expense | | $ | | |
|
|
Total charges | |
|
| |
| ( |
Other | | | | | | |
Balance, December 31, 2022 | |
|
| | $ | ( |
Customer Revenue and Accounts Receivable Concentration
Customer revenue and accounts receivable concentration amounted to the following for the identified periods.
| | Net sales | | | Accounts receivable, as of | | ||||
| | Years Ended | | | | | ||||
| | December 31, | | | December 31, | | December 31, | | ||
| | 2022 | | 2021 | | | 2022 | | 2021 | |
| | | | | | | | | | |
Customer A | | * | | * | | | * | | % | |
Customer B | | * | | * | | | * | | % | |
Customer C | | * | | * | | | % | * | | |
| | | | | | | | | | |
* represents less than 10% | | | | | | | | | | |
14. SUBSEQUENT EVENTS
The Company has evaluated events and transactions subsequent to December 31, 2022 through the date the consolidated financial statements were issued. Outside of the items noted below, there are no other events to report other than what has been disclosed in the consolidated financial statements.
Factoring and Security Agreement
Effective March 27, 2023, we entered into a Factoring and Security Agreement (the “Factoring Agreement”) with Culain Capital Funding, LLC (“Culain”) for the purpose of factoring certain of our accounts receivable. Under the terms of the Factoring Agreement, we may offer for sale, and Culain may purchase in its sole discretion, certain accounts receivable of ours (the “Purchased Receivables”), which are payable directly by Culain, subject to certain repurchase obligations we have. The Factoring Agreement provides for a maximum of $
Culain’s fee for each Purchased Receivable is based on an initial discount rate of one and twenty-five hundredths percent (
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Receivable, as applicable, used to determine the initial payment with respect to such Purchased Receivable for a period of
Our obligations under the Factoring Agreement are secured by a continuing security interest in all of our assets, properties, and rights, wherever located, whether owned as of the date of the Factoring Agreement or subsequent thereto including but not limited to our present and future accounts receivable and all chattel paper, instruments, general intangibles, securities, contract rights, insurance, proceeds, property rights and interests associated therewith, as well as all equipment, inventory and deposit accounts as more fully described in the Factoring Agreement, in order to secure our payment and performance obligations to Culain under the Factoring Agreement.
The Factoring Agreement has an initial term of
The Factoring Agreement contains covenants that are customary for accounts receivable-based factoring agreements and also contains provisions relating to events of default that are customary for agreements of this type.
The foregoing summary of the Factoring Agreement is qualified in its entirety by reference to the Factoring Agreement, a copy of which is filed as Exhibit 10.15 to this Annual Report on Form 10-K for the year ended December 31, 2022.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to ensure 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 Commission’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Interim Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Interim Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) (“Disclosure Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls will be modified as systems change and conditions warrant.
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this Report. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer. Based on this evaluation, we concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2022.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, our management, with the participation of our principal executive officer and principal financial officer has conducted an assessment, including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. This assessment included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation.
Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2022.
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(c) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As a smaller reporting company, the Company is not required to include in this Annual Report a report on the effectiveness of internal control over financial reporting by the Company’s independent registered public accounting firm.
Item 9B. Other Information
Effective March 27, 2023, we entered into a Factoring and Security Agreement (the “Factoring Agreement”) with Culain Capital Funding, LLC (“Culain”) for the purpose of factoring certain of our accounts receivable. Under the terms of the Factoring Agreement, we may offer for sale, and Culain may purchase in its sole discretion, certain accounts receivable of ours (the “Purchased Receivables”), which are payable directly by Culain, subject to certain repurchase obligations we have. The Factoring Agreement provides for a maximum of $2,000,000 in Purchased Receivables. Upon purchase of a Purchased Receivable, Culain will pay us 85% of the amount of the Purchased Receivable and the balance (less fees) is paid to us upon collection of the Purchased Account by Culain.
Culain’s fee for each Purchased Receivable is based on an initial discount rate of one and twenty-five hundredths percent (1.25%) of the Gross Amount or Net Amount (as such term is defined in the Factoring Agreement) of a Purchased Receivable, as applicable, used to determine the initial payment with respect to such Purchased Receivable for a period of 30 days (the “Fixed Discount Period “) followed by variable fees calculated as a daily percentage rate equal to forty-two thousandths percent (0.042%), commencing on the first (1st) calendar day after the end of the Fixed Discount Period with respect to such Purchased Receivable and other miscellaneous fees. We may also be required to repurchase uncollectible Purchased Receivables or upon default for an amount equal to the then-unpaid face amount due on any such accounts.
Our obligations under the Factoring Agreement are secured by a continuing security interest in all of our assets, properties, and rights, wherever located, whether owned as of the date of the Factoring Agreement or subsequent thereto including but not limited to our present and future accounts receivable and all chattel paper, instruments, general intangibles, securities, contract rights, insurance, proceeds, property rights and interests associated therewith, as well as all equipment, inventory and deposit accounts as more fully described in the Factoring Agreement, in order to secure our payment and performance obligations to Culain under the Factoring Agreement.
The Factoring Agreement has an initial term of 12 months and automatically renews for successive 12-month renewal periods unless terminated pursuant to the terms of the Factoring Agreement. We may terminate the Factoring Agreement at the end of the initial term upon 60 days’ notice and payment of an early termination fee, which is equal to the Purchased Receivable Limit of $2.0 million multiplied by one and twenty-five hundredths percent (1.25%).
The Factoring Agreement contains covenants that are customary for accounts receivable-based factoring agreements and also contains provisions relating to events of default that are customary for agreements of this type.
The foregoing summary of the Factoring Agreement is qualified in its entirety by reference to the Factoring Agreement, a copy of which is filed as Exhibit 10.15 to this Annual Report on Form 10-K for the year ended December 31, 2022.
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On March 28, 2023, Ilan Danieli, Chief Executive Officer and director of the Company, terminated the stock trading plan which he entered into on September 16, 2022 in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and the Company’s insider trading policy (the “Plan”). The details of the Plan were included in the Company's Form 8-K filed on September 19, 2022.
Item 9C. Foreign Jurisdictions that Prevent Inspections
Not applicable.
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Part III
Item 10. Directors, Executive Officers and Corporate Governance
We intend to file with the Securities and Exchange Commission a definitive Proxy Statement, which we refer to herein as the 2023 Proxy Statement, not later than 120 days after the close of the fiscal year ended December 31, 2022. The information required by this item is incorporated herein by reference to the 2023 Proxy Statement. The information required by this item related to the executive officers can be found in the section captioned “Executive Officers of the Registrant” under Part I, “Item 1. Our Business” of this Annual Report on Form 10-K, and is also incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 2023 Proxy Statement to be filed with the SEC within 120 days after the year ended December 31, 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the 2023 Proxy Statement to be filed with the SEC within 120 days after the year ended December 31, 2022.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the 2023 Proxy Statement to be filed with the SEC within 120 days after the year ended December 31, 2022.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the 2023 Proxy Statement to be filed with the SEC within 120 days after the year ended December 31, 2022.
Our independent public accounting firm is Marcum LLP, New Haven, CT, PCAOB Auditor ID 688.
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Part IV
Item 15. Exhibits, Financial Statement Schedules
| (a) | The following documents are filed as part of this report: |
1 Financial Statements. The following financial statements of the Registrant are included in response to Item 8 of this report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets of the Registrant and Subsidiary as of December 31, 2022 and 2021.
Consolidated Statements of Operations of the Registrant and Subsidiary for the years ended December 31, 2022 and 2021.
Consolidated Statements of Stockholders’ Equity of the Registrant and Subsidiary for the years ended December 31, 2022 and 2021.
Consolidated Statements of Cash Flows of the Registrant and Subsidiary for the years ended December 31, 2022 and 2021.
Notes to Consolidated Financial Statements of the Registrant and Subsidiary.
2 Financial Statement Schedules.
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
3 Exhibits. The following exhibits are filed as required by Item 15(a)(3) of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:
2.1 | |
2.2 | |
2.3 | |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
3.5 | |
3.6 |
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4.1 | |
4.2 | |
10.1† | |
10.2† | |
10.3† | |
10.4† | |
10.5# | |
10.6 | |
10.7 | |
10.8 | |
10.9 | |
10.10 | |
10.11† | |
10.12† | |
10.13† | |
10.14† | |
10.15 | |
21.1 | |
23.1 | |
31.1 | |
31.2 | |
32.1* | |
32.2* | |
101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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* This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.
# Confidential treatment has been requested or granted for certain information contained in this exhibit. Such information has been omitted and filed separately with the Securities and Exchange Commission.
† Indicates a management contract or any compensatory plan, contract or arrangement.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 30th day of March 2023.
Precipio, Inc. | |||
| | ||
By: | | /s/ ILAN DANIELI | |
| | Ilan Danieli, Chief Executive Officer (Principal Executive Officer) | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|
|
| | |
/s/ Ilan Danieli |
| Director and Chief Executive Officer | | March 30, 2023 |
Ilan Danieli |
| (Principal Executive Officer) | | |
|
|
| | |
/s/ Matthew Gage |
| Interim Chief Financial Officer | | March 30, 2023 |
Matthew Gage |
| (Principal Financial and Accounting Officer) | | |
|
|
| | |
/s/ Richard Sandberg |
| Chairman of the Board of Directors | | March 30, 2023 |
Richard Sandberg |
|
| | |
| | | | |
/s/ Kathleen LaPorte |
| Director | | March 30, 2023 |
Kathleen LaPorte | | | | |
|
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| | |
/s/ Ronald Andrews |
| Director | | March 30, 2023 |
Ronald Andrews |
|
| | |
|
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| | |
/s/ Douglas Fisher, M.D. |
| Director | | March 30, 2023 |
Douglas Fisher, M.D. |
|
| | |
|
|
| | |
/s/ Jeffrey Cossman, M.D. |
| Director | | March 30, 2023 |
Jeffrey Cossman, M.D. |
|
| | |
|
|
| | |
/s/ David Cohen |
| Director | | March 30, 2023 |
David Cohen |
|
| | |
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Exhibit 10.15
EXECUTION COPY
FACTORING AGREEMENT
BETWEEN
CULAIN CAPITAL FUNDING LLC
(“BUYER”)
AND
PRECIPIO, INC.
(“SELLER”)
DATED MARCH 27, 2023
TABLE OF CONTENTS
1. DEFINITIONS | 1 |
2. ASSIGNMENT OF RECEIVABLES; OFFER FOR SALE OF ELIGIBLE RECEIVABLES BY SELLER; PURCHASE OF ELIGIBLE RECEIVABLES BY BUYER | 1 |
2.1. Offer of Receivables for Purchase | 1 |
2.2. Funding Requests; Deliveries | 1 |
2.3. Sales of Receivables | 1 |
2.4. Purchase of Eligible Receivables by Buyer | 1 |
2.5. Effect of Purchase of Receivables by Buyer | 1 |
3. MAXIMUM FACILITY AMOUNT; OVERADVANCES | 1 |
4. RECEIVABLES PURCHASE PRICE | 2 |
4.1. Purchase Price for Purchased Receivables | 2 |
4.2. Calculation of the Initial Payment | 2 |
4.3. Calculation of Residual Payment | 2 |
4.4. Purchase Price Defined Terms | 2 |
4.5. Fees, Costs and Expenses | 2 |
4.6. Manner of Payments to Seller | 3 |
5. REPURCHASE OR REPLACEMENT OF PURCHASED RECEIVABLES; RESERVE ACCOUNT | 3 |
5.1. Repurchase or Replacement | 3 |
5.2. Buyer’s Acceptance of Credit Risk | 3 |
5.3. No Reassignment | 3 |
5.4. Reserve Account | 3 |
6. ADMINISTRATION AND SERVICING OF ACCOUNTS | 3 |
6.1. Lockbox; Collection Account | 3 |
6.2. Payments in Trust | 3 |
6.3. Crediting of Collections | 4 |
6.4. Servicing Agent for Receivables That are Not Purchased Receivables | 4 |
6.5. Authorization of Buyer | 4 |
6.6. Field Examinations and Inspections | 4 |
7. COLLATERAL AND SECURITY INTEREST | 4 |
7.1. Grant of Security Interest in Collateral | 4 |
7.2. Security Agreement | 5 |
7.3. Security Acknowledgment | 5 |
8. REPRESENTATIONS, WARRANTIES AND COVENANTS BY SELLER | 5 |
8.1. Seller Representations, Warranties and Covenants | 5 |
8.2. Seller Notification; Disputed Receivables | 6 |
8.3. Financial Statements; Tax Returns | 6 |
8.4. Deposit Accounts; Buyer Access | 6 |
8.5. Customer Portal Access | 6 |
8.6. Indemnification of Buyer | 6 |
8.7. Survival of Representations, Warranties and Covenants | 6 |
9. EVENTS OF DEFAULT; REMEDIES | 6 |
9.1. Events of Default | 6 |
9.2. Rights and Remedies Upon Event of Default | 7 |
9.3. No Notice or Waiver | 7 |
10. TERM TERMINATION; RELEASE OF LIENS | 7 |
10.1. Initial Term; Renewal Terms | 7 |
10.2. No Lien Termination without Release | 7 |
11. GENERAL PROVISIONS | 7 |
11.1. Governing Law; Jurisdiction; No Jury Trial | 7 |
11.2. Rights and Remedies Cumulative | 8 |
11.3. Reinstatement | 8 |
11.4. Successors and Assigns | 8 |
11.5. Headings | 8 |
11.6. Severability | 8 |
11.7. Notice | 8 |
11.8. Strict Performance | 8 |
11.9. Construction of Agreement. | 9 |
11.10. Buyer’s Performance | 9 |
11.11. Entire Agreement; Amendments; Buyer’s Consent | 9 |
11.12. Execution in Counterparts | 9 |
SCHEDULE OF ADDITIONAL TERMS | 11 |
DEFINITIONS SCHEDULE | 14 |
EXHIBIT A FORM OF PURCHASE OFFER | 17 |
EXHIBIT B FORM OF ASSIGNMENT AGREEMENT | 18 |
EXHIBIT C FORM OF SCHEDULE OF ASSIGNED ACCOUNTS | 19 |
01 Culain - Precipio Factoring Agreement Execution Copy.docx | Table of Contents Page i of i |
THIS FACTORING AGREEMENT (this “Agreement”) is made as of March 27, 2023 Between PRECIPIO, INC., a corporation organized under the laws of the State of Delaware (“Seller”), and CULAIN CAPITAL FUNDING LLC, a limited liability company organized under the laws of the State of Delaware (“Buyer”).
RECITALS:
Seller wishes to obtain financing by factoring, selling and assigning to Buyer certain accounts receivable, at a discount below face value, in accordance with and subject to the terms and conditions of this Agreement. Buyer is willing to purchase accounts receivable from Seller from time to time, upon the terms and subject to the conditions set forth in this Agreement.
AGREEMENT:
1.Definitions. Unless defined in the Recitals, above, in the body of this Agreement, or in the Exhibits or other Schedules hereto, capitalized terms have the meanings given to such terms in the Definitions Schedule. The Definitions Schedule and the Schedule of Additional Terms also provide meanings for certain other phrases used in this Agreement (whether or not capitalized). Each term defined in the singular shall be interpreted in a collective manner when used in the plural, and each term defined in the plural shall be interpreted in an individual manner when used in the singular.
2.Assignment of Receivables; Offer for Sale of Eligible Receivables by Seller; Purchase of Eligible Receivables by Buyer.
2.1.Offer of Receivables for Purchase. During the Term of this Agreement, Seller agrees to assign to Buyer all of Seller’s Receivables, and to offer for sale to Buyer all of Seller’s Eligible Receivables, and to sell to Buyer on the terms set forth in this Agreement such of the offered Eligible Receivables as Buyer may accept for purchase in Buyer’s reasonable discretion. Buyer shall have the right in Buyer’s reasonable discretion to reject any or all offered Receivables, whether or not an Eligible Receivable, and whether or not Buyer has previously purchased from Seller any Eligible Receivable of the same Account Debtor.
2.2.Funding Requests; Deliveries. In connection with each offer of Eligible Receivables to Buyer, Seller agrees to deliver to Buyer (a) a completed Purchase Offer in the form of Exhibit A attached hereto, (b) a completed Assignment Agreement in the form of Exhibit B attached hereto, and if delivered in electronic or other digital format (such as .pdf) a Schedule of Assigned Accounts in the form of Exhibit C attached hereto and attached to such Assignment Agreement describing the Eligible Receivables covered by such Purchase Offer and Assignment Agreement, validity executed by Seller and submitted to Buyer in connection with Seller’s offer of Eligible Accounts to Buyer for purchase pursuant to the terms hereof, (c) a copy of all purchase orders or other similar agreements and requests for the provision of goods or services relating to the Eligible Receivables described therein, a copy of Seller’s invoices relating to the Eligible Receivables described therein, and evidence of Seller’s delivery of the related goods or performance of the related services described in each such invoice, all in a form satisfactory to Buyer, (d) a detailed report of Seller’s agings of all of Seller’s Receivables , and (e) such other information described in Item 5 of the Schedule of Additional Terms (each related Purchase Offer, Assignment Agreement, Schedule of Assigned Accounts, copies of associated purchase orders and invoices, and such other required information shall be referred to as a “Funding Request”). Seller shall deliver each Funding Request and related invoices and other documentation to Buyer either (i) through the client portal provided to Seller through Buyer’s FactorSoft system (“Client Portal”), or (ii) by forwarding to Buyer by electronic mail (i.e., email) such Funding Request and all related information in digital or other electronic format (including by attachment of .pdf versions of documents). If Seller uses the Client Portal to submit a Funding Request to Buyer, Seller acknowledges
and agrees that all Purchased Receivables and invoices included in such Funding Request shall be included in, and may be attached by Buyer as, the Schedule of Accounts to the Assignment Agreement relating to such Funding Request and presented by Buyer to third parties, including Account Debtors, as Seller’s duly executed Assignment of Accounts and Schedule of Accounts relating thereto.
2.3.Sales of Receivables. Seller hereby acknowledges and agrees that Seller’s inclusion of any Eligible Receivable in a Funding Request shall evidence Seller’s offer to sell, transfer, assign and otherwise convey to Buyer (as a sale by Seller and a purchase by Buyer, and not as security for any indebtedness or other obligation of Seller to Buyer) all right, title and interest of Seller in and to all Eligible Receivables included in such Funding Request, together with all related rights (but not obligations) of Seller with respect thereto, including all contract rights, guarantees, letters of credit, liens in favor of Seller, insurance and other agreements and arrangements of whatever character from time to time supporting or securing payment of such Receivables and all right, title and interest of Seller in any related goods, including Seller’s rights and remedies under Article 2, Part 7 of the UCC.
2.4.Purchase of Eligible Receivables by Buyer. Buyer’s acceptance for purchase of any offered Eligible Receivable shall be evidenced by Buyer’s tender of the “Initial Payment” (as defined in Section 4.2) to Seller or otherwise delivering or making available to Seller through the Client Portal a schedule or report of Eligible Receivables accepted for purchase by Buyer. Seller’s offer of sale, assignment and transfer of offered Eligible Receivables shall not be effective as to any Receivables not accepted for purchase by Buyer. Each Receivable purchased by Buyer pursuant to the terms hereof shall be referred to as a “Purchased Receivable”.
2.5. | Effect of Purchase of Receivables by Buyer. |
2.5(a) The sale, transfer, assignment and conveyance of any Purchased Receivable to Buyer does not constitute and is not intended to result in an assumption by Buyer of any obligation of Seller or any other Person in connection with the Purchased Receivable or related rights or under any agreement or instrument relating thereto.
2.5(b) Seller agrees to execute and deliver such bills of sale, assignments, letters of credit, notices of assignment, financing statements (including continuation statements) under the UCC and other documents, and make such entries and markings in its books and records, and to take all such other actions (including the negotiation, assignment or transfer of negotiable documents, letters of credit or other instruments) as Buyer may request to further evidence or protect the sales and assignments of Purchased Receivables and related rights to Buyer hereunder.
2.5(c) After a Purchased Receivable has been purchased by Buyer, Seller shall not have the right to (i) vary, modify, alter or otherwise change the terms of sale set forth in the invoice relating to such Purchased Receivable, or (ii) offer or accept any compromise, discount or substitution with respect to such invoice or Purchased Receivable, or (iii) vary, modify, alter or otherwise change any other aspect of such invoice or Purchased Receivable, without the prior written consent of Buyer, which consent may be granted or withheld in Buyer’s sole discretion.
3.Maximum Facility Amount; Overadvances. The parties agree that, without the prior consent of Buyer (y) the maximum amount of uncollected Purchased Receivables outstanding as of any time will not exceed the Purchased Receivable Limit, and (z) the maximum amount of uncollected Purchased Receivables owing from an Account Debtor will not exceed such Account Debtor’s Credit Limit. If (a) the aggregate amount of uncollected Purchased Receivables at any time exceeds the Purchased Receivable Limit for any reason, or (b) the aggregate amount of uncollected Purchased Receivables from an Account Debtor exceeds such Account Debtor’s Credit Limit (the amount of any such excess to be referred to as an “Overadvance”), then (i) such Overadvance will constitute an overpayment by Buyer of
01 Culain - Precipio Factoring Agreement Execution Copy.docx | Page 1 |
the Purchase Price for Seller’s Purchased Receivables for purposes of this Agreement, (ii) payment of such Overadvance will be secured by the Collateral, (iii) Seller shall immediately repay the amount of such Overadvance without notice or demand by Buyer, (iv) Buyer may charge the amount of such Overadvance to the Reserve Account and deduct the amount therefrom, (v) Buyer may deduct the amount of such Overadvance from all proceeds of all Receivables then in the possession of Buyer or received by Buyer after the creation of such Overadvance (whether or not the proceeds of any such Receivables derives from Purchased Receivables) until Buyer has been repaid the amount of such Overadvance in full, and (vi) Buyer may in Buyer’s sole discretion refrain from purchasing any additional Eligible Receivables until the Overadvance has been repaid to Buyer in full. Any Overadvance not paid or otherwise collected in full by Buyer pursuant to the foregoing within two (2) Business Days of the date of the creation of such Overadvance shall be charged the Overadvance Fee until the amount of such Overadvance has been paid in cash to Buyer in full.
4.Receivables Purchase Price.
4.1.Purchase Price for Purchased Receivables. The purchase price for each Eligible Receivable purchased hereunder shall consist of and be paid by Buyer’s payment to Seller of the “Initial Payment” (as defined in Section 4.2) and the “Residual Payment” (as defined in Section 4.3) with respect to such Purchased Receivable. The Initial Payment shall be payable by Buyer to Seller (a) on the same day of Buyer’s receipt of a Funding Request including such Purchased Receivable from Seller if the Funding Request was received by Buyer on or before the “Funding Request Deadline” (as defined in Item 6 of the Schedule of Additional Terms) on a Business Day, or (ii) on the Business Day immediately following Buyer’s receipt of the Funding Request including such Purchased Receivable if the Funding Request was received by Buyer after the Funding Request Deadline on a Business Day, or Buyer receives the Funding Request including such Purchased Receivable on any day that is not a Business Day. The Residual Payment with respect to a Purchased Receivable shall be payable by Buyer to Seller on the Wednesday, if a Business Day, or otherwise on the immediately following Business Day, following the week in which Buyer receives from the Collection Account Collections consisting of the proceeds of collection for the subject Purchased Receivable in an amount equal to the “Gross Amount” or “Net Amount” (as such terms are defined in Section 4.4) of such Purchased Receivable used to determine the Initial Payment, as applicable, subject to Buyer’s right to withhold, offset and charge against each Residual Payment for funding of the Reserve Account as described in Section 5.4), for the repayment of any Overadvance as described in Section 3, for fees, costs and expenses payable to Buyer in accordance with the terms of this Agreement, and as otherwise permitted pursuant to the terms of this Agreement.
4.2.Calculation of the Initial Payment. The “Initial Payment” with respect to a Purchased Receivable means the lesser of the “Gross Amount” or “Net Amount” (as defined below) of such Purchased Receivable, multiplied by the “Initial Payment Rate” as defined in Item 7 of the Schedule of Additional Terms.
4.3.Calculation of Residual Payment. The “Residual Payment” with respect to a Purchased Receivable means the aggregate amount of Collections received by Buyer and credited to Seller’s account pursuant to the terms of this Agreement with respect to such Purchased Receivable in an amount equal to the lesser of the “Gross Amount” or “Net Amount” of such Purchased Receivable used to determine the Initial Payment, as applicable, less the sum of (a) the Initial Payment with respect to such Purchased Receivable, plus (b) the “Fixed Discount” and the “Variable Discount” (as such terms are defined in Section 4.4), plus (c) the amount of such Purchased Receivable credited to the “Reserve Account” (as defined in Section 5.4), plus (d) all fees, costs and expenses payable by Seller to Buyer pursuant to the terms of this Agreement (including but not limited to
any and all attorneys’ fees and other costs of collection) relating to such Purchased Receivable. The Fixed Discount will be paid by Seller or charged to Seller’s account at the time of Buyer’s purchase of a Purchased Receivable. The Variable Discount will be paid by Seller or charged to Seller’s account monthly at the end of each month.
4.4.Purchase Price Defined Terms. For purposes of this Agreement (a) the “Gross Amount” means, with respect to a Purchased Receivable, the gross face amount payable in United States Dollars pursuant to the invoice relating to such Purchased Receivable, (b) the “Net Amount” of a Purchased Receivable means the Gross Amount of such Purchased Receivable less all permitted discounts, deductions and allowances stated in the invoice relating to such Purchased Receivable, (c) “Fixed Discount” means a discount of the Gross Amount or Net Amount of a Purchased Receivable used to determine the Initial Payment, as applicable, with respect to such Purchased Receivable equal to such amount and for such term, as defined in Item 8 of the Schedule of Additional Terms, (d) “Variable Discount” means a discount computed on the Gross Amount or Net Amount of a Purchased Receivable used to determine the Initial Payment, as applicable, with respect to such Purchased Receivable, at the rate and for such period as described in Item 10 of the Schedule of Additional Terms.
4.5.Fees, Costs and Expenses. In addition to the Fixed Discounts, Variable Discounts, other discounts, fees and other charges payable to Buyer hereunder:
4.5(a) Misdirected Payment Fee. Seller shall pay to Buyer any Misdirected Payment Fee immediately upon its accrual, and Buyer may (a) charge to and withdraw from the Reserve Account such Misdirected Payment Fee, and/or (b) deduct such Misdirected Payment Fee from all proceeds of all Receivables then in the possession of Buyer or received by Buyer in the future. Notwithstanding the foregoing, the Misdirected Payment Fee shall not be chargeable on payments which are directed to the account of the Seller rather than the Lockbox or Collection Account during the Misdirected Payment Waiver Period as described in Item 18 of the Schedule of Additional Terms.
4.5(b) Reimbursable Expenses. Seller shall reimburse Buyer for all fees, costs and expenses directly incurred by Buyer if Buyer employs counsel for advice or other representation, reasonably incurs legal fees or expenses, consulting fees or expenses, fees, costs or expenses of external professionals engaged by Buyer, or reasonably incurs other out-of-pocket costs or expenses in connection with: (a) the exercise of any right or remedy of Buyer described in this Agreement or any other Factoring Document; (b) any amendment, modification or restatement of this Agreement; (c) periodic field exams or audits and appraisals performed by Buyer following the occurrence of an Event of Default; (d) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Buyer, Seller or any other person) in any way relating to the Accounts, the Collateral, this Agreement or Seller’s business or affairs; (e) the establishment, attachment, perfection or protection of any Security Interest or lien on the Collateral; (f) any attempt to enforce any right or remedy of Buyer against Seller or any other Person who may be obligated to Buyer by virtue of this Agreement or any other Factoring Document, including, without limitation, Account Debtors, Persons providing any guaranty of the Obligations or any Secondary Obligor; or (g) any attempt to inspect, verify, protect, preserve, restore, collect, sell, lease, license, liquidate or otherwise dispose of or realize upon the Collateral; then, in any such event, all reasonable attorneys’ fees arising from such services and all expenses, costs and charges of such counsel, all fees, costs, expenses and charges of consultants and professionals engaged by Buyer, and all other costs and out-of-pocket expenses of Buyer relating to any of the events or actions described above shall be payable by Seller to Buyer, and shall be additional Obligations under this Agreement secured by the Collateral. With respect to any amount paid by Buyer and required to be reimbursed by Seller pursuant to the provisions of this Section 4.5(b), Seller agrees that
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Buyer may (i) charge to and withdraw from the Reserve Account such unpaid amount until Buyer has been paid the unpaid amount in full, and/or (b) deduct such unpaid amount from all proceeds of all Receivables then in the possession of Buyer or received by Buyer in the future until Buyer has been paid the unpaid amount in full, and/or (c) require Seller to reimburse Buyer immediately in cash.
4.5(c) Additional Fees and Expenses. Seller shall pay for and/or reimburse Buyer for such additional fees and expenses described in Item 19 of the Schedule of Additional Terms.
4.6.Manner of Payments to Seller. All payments by Buyer to Seller, and all payments from Seller to Buyer, will be effected by ACH transfer or by wire transfer. In order to accommodate ACH transfers, Seller hereby authorizes Buyer to initiate electronic debit or credit entries through the ACH system to Seller’s Account or any other deposit account maintained by Seller wherever located. Seller shall execute all agreements, documents and instruments required by Seller’s bank to implement ACH transfers by Buyer. Seller may only terminate this authorization by giving Buyer the sooner to occur of (i) thirty (30) days prior written notice of termination, or (ii) payment in cash and full satisfaction of all Obligations.
5.Repurchase or Replacement of Purchased Receivables; Reserve Account.
5.1.Repurchase or Replacement. Buyer will have immediate recourse against Seller, and may, at Buyer’s option and in Buyer’s reasonable discretion (i) require that Seller repurchase a Purchased Receivable from Buyer in an amount equal to the amount of the Initial Payment and the then-due Variable Discount applicable to such Purchased Receivable, on demand, (ii) require that Seller replace a Purchased Receivable with an Eligible Receivable in a Gross Amount no less than the Gross Amount of such Purchased Receivable, or (iii) charge to and withdraw from the Reserve Account the amount of the Initial Payment and the then-due Variable Discount applicable to such Purchased Receivable until Buyer has been repaid the amount of the Initial Payment and such Variable Discount in full, or (iv) deduct the amount of the Initial Payment and the then-due Variable Discount applicable to such Purchased Receivable from all proceeds of all Receivables then in the possession of Buyer or received by Buyer in the future until Buyer has been repaid the amount of the Initial Payment and the Variable Discount applicable to such Purchased Receivable in full, if:
5.1(a) such Purchased Receivable (or any portion thereof) is a Disputed Receivable when tendered to Buyer for sale, or becomes a Disputed Receivable prior to Buyer’s receipt of payment in full thereof (specifically including any Purchased Receivable that is not paid in full prior to the Presumed Dispute Date); or
5.1(b) (i) it is discovered that such Purchased Receivable was not an Eligible Receivable, or was an Ineligible Receivable, when tendered to Buyer for sale, or (ii) such Purchased Receivable becomes an Ineligible Receivable prior to Buyer’s receipt of payment in full thereof; or
5.1(c) any goods relating to a Purchased Receivable are returned to or repossessed by Seller; or
5.1(d) (i) Seller has breached any of its representations, warranties or covenants with respect to such Purchased Receivable, or (ii), or (iii) there is any material deficiency, error or inaccuracy in connection with a Purchased Receivable; or
5.1(e) upon the occurrence of an Event of Default, or upon the effective date of termination of this Agreement, in which case Buyer may demand that Seller repurchase all Purchased Receivables; or
5.1(f) if any of the conditions described in Item 14 of the Schedule of Additional Terms have occurred.
5.2.Buyer’s Acceptance of Credit Risk. For purposes of clarity and confirmation, Buyer accepts all risks of non-payment with respect to a Purchased Receivable, in whole or in part, if such non-payment is
solely the result of an Insolvency Claim with respect to the Account Debtor relating to such Purchased Receivable.
5.3.No Reassignment. The repurchase of a Purchased Receivable shall not constitute a reassignment thereof; Buyer shall retain its Security Interest in such repurchased Purchased Receivable; and in addition to the amounts payable by Seller to Buyer described in Section 5.1, Seller shall be liable to pay and shall immediately pay to Buyer an amount equal to all fees, costs and expenses owing to Buyer in connection therewith, until all such amounts are paid to Buyer in full. In the case of Seller’s replacement of a Purchased Receivable with an Eligible Receivable pursuant to the terms of this Section 5, Buyer shall not be required to make any Initial Payment with respect to such replacement Eligible Receivable and Buyer shall assign to Seller the subject Purchased Receivable being replaced.
5.4.Reserve Account. Buyer may, in Buyer’s sole discretion, establish an account (the “Reserve Account”) in such amount as Buyer shall determine from time to time in Buyer’s reasonable discretion to fund any actual or projected shortfall with respect to Variable Discounts, to pay to and reimburse Buyer for any Overadvance pursuant to Section 3, to reserve against Buyer’s additional risks relating to an Account Debtor’s Purchased Receivables exceeding the Concentration Limit, to fund any repurchase of a Purchased Receivable pursuant to Section 5.1, to pay for any proceeds of Receivables credited to the account of Seller that are not paid to or credited to Buyer pursuant to Section 6.3, to pay to and reimburse Buyer for any Disputed Receivable pursuant to Section 8.2, to repurchase Purchased Receivables and pay the Obligations in full following an Event of Default as provided in Paragraphs 9.2(a) and 9.2(b), for the payment of fees, costs and expenses payable to Buyer pursuant to the terms of this Agreement, such other purposes as described in this Agreement. The Reserve Account shall be funded from the proceeds of Purchased Receivables received by Buyer, and may, in Buyer’s sole discretion, be applied against and withheld from one or more Initial Payments and/or one or more Residual Payments with respect to Purchased Receivables until the Reserve Account has been fully funded. Any withdrawal from the Reserve Account by Buyer pursuant to the terms of this Agreement may, in Buyer’s sole discretion, be re-funded by applying against and withholding from one or more Initial Payments and/or one or more Residual Payments with respect to Purchased Receivables until the Reserve Account has been fully funded.
6.Administration and Servicing of Accounts.
6.1.Lockbox; Collection Account. Buyer has established a lockbox for the processing of checks and other tangible Collections (as further described in Item 15 of the Schedule of Additional Terms; the “Lockbox”) and an account for the collection of Collections whether from the Lockbox or directly from Account Debtors (as further described in Item 16 of the Schedule of Additional Terms; the “Collection Account”). Seller shall instruct all of its Account Debtors that may generate Eligible Receivables on Seller’s invoices to forward all checks and other tangible Collections to the Lockbox, and all ACH, wire transfers, and other electronic Collections to the Collection Account, without setoff or other deduction. Buyer may change the Lockbox and/or Collection Account at any time upon written notice to Seller. Seller shall require each of its Account Debtors making a payment of a Purchased Receivable by check or other instrument to make such check or instrument payable to the order of (a) Seller, or (b) Buyer, or (c) Seller and Buyer jointly. Collected funds in the Lockbox shall be deposited into the Collection Account, and funds in the Collection Account will be deposited into Buyer’s Account, at such times and in such amounts as directed by the operating procedures of the financial institution with which the Lockbox and Collection Account have been established.
6.2.Payments in Trust. If Seller receives Collections or other Proceeds of Purchased Receivables, such Collections and Proceeds (a) shall be received by Seller and held by Seller in trust for Buyer, (b)
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will not be commingled with any funds of Seller, and (c) will be delivered by Seller to Buyer, in precisely the form received (except for the endorsement or assignment of Seller where necessary), by the close of business on the next Business Day following receipt by Seller. Seller shall cause all Persons processing or collecting any credit card payments or proceeds of Purchased Receivables on behalf of Seller to deliver such payments or proceeds to the Collection Account promptly, but not less frequently than once every week.
6.3.Crediting of Collections. All funds credited to Seller’s account are conditional upon final payment to Buyer in cash or solvent credits of the items giving rise to such funds. If any Collections or other item credited to the payment of any Purchased Receivable, or to Seller’s account for any other Receivable which has been paid by Buyer to Seller, is not paid to Buyer, the amount of any credit given for such item shall be charged to Seller’s account whether or not the item is returned, and Buyer may (a) charge to and withdraw from the Reserve Account the amount of such unpaid amount until Buyer has been paid the unpaid amount in full, and/or (b) deduct such unpaid amount from all proceeds of all Receivables then in the possession of Buyer or received by Buyer in the future until Buyer has been paid the unpaid amount in full. For the purpose of crediting funds to Seller’s account, Buyer shall credit funds on the date such funds are deposited in and received by the Settlement Account.
6.4.Servicing Agent for Receivables That are Not Purchased Receivables. Seller hereby appoints Buyer as servicing agent for Receivables that are not Purchased Receivables and for which the Collections relating to such Receivables are directed to the Lockbox or the Collection Account. Buyer shall process such Receivables and all Collections relating thereto in a commercially reasonable manner, and shall remit all Collections received by Buyer with respect to non- Purchased Receivables weekly, on the Wednesday, if a Business Day, or otherwise on the immediately following Business Day, following the week in which Buyer receives from the Collection Account the Collections consisting of the proceeds of non-Purchased Receivables.
6.5.Authorization of Buyer. Seller hereby acknowledges that Buyer, at any time and from time to time, may in Buyer’s sole discretion (a) forward directly to Account Debtors statements or invoices on Purchased Receivables, (b) deliver to Account Debtors notice of the assignment of Seller’s Receivables to Buyer (each, a “Notice of Assignment”), (c) request payment of Receivables to the Lockbox, the Collection Account, or to such address or to such bank account as may be designated by Buyer in Buyer’s sole discretion, (d) at any time and without notice to or the consent of Seller, to communicate directly with Seller’s Customers and Account Debtors by whatever means. Buyer shall promptly provide Seller with a copy of any such communication with the Seller’s Customers or Account Debtors; provided, however, under no circumstance shall (i) Buyer’s communication with a Customer or Account Debtor require prior notice to, the consent of, or other action by Seller, and (ii) the delivery or receipt of any such copy of communication with a Customer or Account Debtor constitute a condition to Buyer’s communication therewith. Buyer shall elect for the purpose of verifying Purchased Receivables and information supplied by Seller to Buyer pursuant to this Agreement, (e) to execute in the name of Seller and file any Internal Revenue Service (“IRS”) forms 8821 or other forms which Buyer may deem necessary in order for Buyer to remain informed on Seller’s status with the Internal Revenue Service, (f) pay any sum necessary to discharge any lien, Security Interest or other Encumbrance which is senior to Buyer’s Security Interest in the Collateral, which sums shall be included as Obligations hereunder, (g) extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all Purchased Receivables and other Collateral which included a monetary obligation, and discharge or release any Account Debtor or other Obligor with respect to any Purchased Receivable (including filing of any public record releasing any lien, Security Interest or other
Encumbrance granted to Seller by such Account Debtor or other Obligor), without affecting any of the Obligations. Seller further acknowledges that Buyer shall have the sole right to collect, sue for and give releases in the name of Seller or Buyer in Buyer’s sole discretion, for all amounts due on all Purchased Receivables. Seller specifically authorizes Buyer to endorse, in the name of Seller, all checks, drafts, trade acceptances or other forms of payment tendered by Account Debtors in payment of Purchased Receivables deposited in the Lockbox or Collection Account or received by Seller and made payable to Buyer. Buyer shall have no liability to Seller for any mistake in the application of any payment received with respect to any Purchased Receivable other than any such mistake due to Buyer’s gross negligence or willful misconduct, IT BEING THE SPECIFIC INTENT OF THE PARTIES HERETO THAT BUYER SHALL HAVE NO LIABILITY HEREUNDER FOR ITS OWN NEGLIGENCE EXCEPT FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Seller hereby waives notice of nonpayment of any Purchased Receivable as well as any and all other notices with respect to such Purchased Receivables, demands or presentations for payment, and agrees that Buyer may extend or renew from time to time the payment of, or vary or reduce the amount payable under or compromise any of the terms of, any Purchased Receivable, in each case without notice to or the consent of Seller. After the occurrence and during the continuation of an Event of Default (i) Seller further authorizes Buyer (or its designee) to open and remove the contents of any post office box of Seller or Buyer (or its designee) which Buyer believes contains mail relating to Purchased Receivables, and in connection therewith or otherwise, to receive, open and dispose of mail addressed to Seller which Buyer believes may relate to Purchased Receivables, and (ii) Seller hereby irrevocably appoints Buyer (and any employee, agent or other person designated by Buyer, any of whom may act without joinder of the others) as Seller’s attorneys-in-fact and agents, in Seller’s name, place and stead, to take all actions, execute and deliver all notices, negotiate such instruments and other documents, as may be necessary or advisable to permit Buyer (or its designee), to take any and all of the actions described in this Section 6.5 or as a Secured Party as permitted by the terms of this Agreement or the UCC with respect to the Purchased Receivables and other Collateral, or to carry out the purpose and intent hereof, as fully and for all intents and purposes as Seller could itself do, and hereby ratifies and consigns all that said attorneys-in- fact and agents may do or cause to be done by virtue hereof. This power of attorney is irrevocable and deemed coupled with an interest.
6.6.Field Examinations and Inspections. Seller shall permit Buyer and any authorized representatives designated by Buyer, upon reasonable notice to Seller and during Seller’s normal business hours, to visit and inspect any of the properties of Seller, including its financial and accounting records, and to make copies and take extracts therefrom, and to discuss its affairs, finances, and business with its officers at such times during normal business hours and as often as Buyer requests. Buyer may, at any time after the occurrence of an Event of Default, review, inspect and copy all records, files and books relating to Purchased Receivables and the other Collateral located at Seller’s premises or otherwise under the control of Seller.
7.Collateral and Security Interest.
7.1.Grant of Security Interest in Collateral. As security for the final and indefeasible payment to Buyer in cash and performance of Seller’s obligations (including but not limited to the repurchase of Purchased Receivables pursuant to the terms hereof), liabilities, indemnification obligations and duties to Buyer under the terms of this Agreement (collectively, the “Obligations”) in full, Seller hereby pledges to Buyer, and grants to Buyer a continuing general lien upon and Security Interest in and to the Collateral. The pledge, lien and Security Interest granted to Buyer pursuant to this Agreement shall continue in full force and effect until (a) all Purchased Receivables have been paid in cash to Buyer in full pursuant to the terms hereof, (b) all Obligations have been finally and indefeasibly paid to Buyer in
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cash and performed in full, and (c) Seller has provided to Buyer a fully executed Termination Release, notwithstanding the termination of any other Factoring Document (in whole or in part), the termination of Buyer’s offer to purchase Receivables under this Agreement or any other agreement, document or instrument by or between Seller and Buyer, or the repurchase of any Receivable by Seller. Any balances to the credit of Seller in the possession of Buyer, and any other property or assets of Seller in the possession of Buyer, shall be held by Buyer as Collateral, and applied in whole or partial satisfaction of the Obligations when due, subject to the terms of this Agreement. Notwithstanding the foregoing, Seller and Buyer acknowledge and agree that all Purchased Receivables shall become the property of Buyer upon the date of purchase thereof by Buyer. Seller will execute and deliver to Buyer security agreements, assignments (including, without limitation, assignments of specific Accounts), and other documents and instruments as Buyer may at any time reasonably request to establish, evidence, attach, perfect, or protect any security interest, pledge, lien, charge, mortgage or other encumbrance granted to Buyer pursuant to this Agreement or any other document between Buyer and Seller or instrument delivered to Buyer in connection therewith. Seller authorizes Buyer to file all financing statements, and all continuations or amendments thereof, and deliver, with or without Seller’s execution thereof, any Notice of Assignment to Seller’s Customers and Account Debtors as Buyer determines in Buyer’s sole discretion, to establish, evidence attach, perfect or protect any security interest, pledge, lien, charge, mortgage or other encumbrance granted to Buyer in the Collateral, and specifically acknowledges is authorization of Buyer to have filed any such financing statements prior to the date of this Agreement. Seller agrees that subject to Seller’s rights under Section 9-509(d)(2) of the UCC, Seller is not and shall not be authorized to file any financing statement or amendment, termination or corrective statement with respect to any financing statement filed by Buyer, or with respect to any continuation or amendment thereof, without the prior written consent of Buyer, which may be granted or withheld in Buyer’s sole discretion. Seller will perform any and all actions requested by Buyer in Buyer’s sole discretion to establish, attach, perfect or protect any security interest, pledge, lien, charge, mortgage or other encumbrance of Buyer in Inventory, including without limitation, placing and maintaining signs, appointing custodians, maintaining stock Records and transferring Inventory to warehouses. In addition to all other rights and remedies granted to Buyer pursuant to the terms of this Agreement, Buyer shall possess all rights and remedies of a “Secured Party” (as such term is defined in the UCC) under and pursuant to the terms and provisions of the UCC.
7.2.Security Agreement. Seller acknowledges and agrees that this Agreement shall constitute a “Security Agreement” for purposes of the UCC.
7.3.Security Acknowledgment. Notwithstanding the creation and grant of the above Security Interest in favor of Buyer hereunder, the relationship of the Buyer and Seller shall be that of a purchaser and seller of Receivables and Accounts, and not that of a lender and borrower.
8.Representations, Warranties and Covenants by Seller.
8.1.Seller Representations, Warranties and Covenants. As an inducement for Buyer to enter into this Agreement, Seller represents and warrants that the following statements are true and correct, and that the same will remain true and correct, and will comply with each covenant and other agreement of Seller below, for so long as any of the Obligations or any other amount remains owing to Buyer hereunder (whether by Seller or an Account Debtor):
8.1(a) Receivables Representations and Warranties. As of the date of assignment of an Eligible Receivable to Buyer: to the best of Seller’s information and knowledge such Customer’s or Account Debtor’s business is solvent; Seller is, at the time of purchase by Buyer, Seller is the lawful owner of and has good and undisputed title
to each Eligible Receivable; at the time of purchase by Buyer no Customer has or shall have any right of set-off, abatement or reduction whatsoever in respect of any Purchased Receivable unless Buyer has been provided written notice by Seller of any such set-off, abatement or reduction prior to delivery of the Initial Payment with respect to such Purchased Receivable to Seller; each Purchased Receivable is an accurate statement of indebtedness by the respective Customer or Account Debtor to Seller for a certain sum which is due and payable as provided in Seller’s invoice relating to such Purchased Receivable; each Purchased Receivable is an accurate statement of a bona fide sale, delivery and acceptance of merchandise or performance of service by Seller to the respective Customer or Account Debtor, or other good and valid liability of the Customer or Account Debtor in question to the Seller; each Purchased Receivable is current and not past due as of the date of purchase by Buyer, has not been paid by or on behalf of the Customer or Account Debtor in whole or in part, and, to Seller’s knowledge is not, and will not be, subject to any dispute, rescission, set-off, recoupment, defense or claim by the respective Customer or Account Debtor, whether relating to price, quality, quantity, workmanship, delay in delivery, set off, counterclaim or otherwise; to Seller’s knowledge the Customer or Account Debtor with respect to a Purchased Receivable has not and will not claim any defense of any kind or character (other than in connection with an Insolvency Claim arising after the date of sale of such Receivable to Buyer hereunder) against payment of such Purchased Receivable, and; Seller does not own, control or exercise dominion over, in any way whatsoever, the business of any Customer or Account Debtor in respect of a Purchased Receivable; and
8.1(b) Covenants of Seller. Seller will not, under any circumstances or in any manner whatsoever, interfere with any of Buyer’s rights under this Agreement; Seller will not request, notify or direct any Customer or Account Debtor to remit payments for Purchased Receivables to any address or account other than the Lockbox or Collection Account or otherwise interfere with Buyer’s payment directions as provided in the Notice of Assignment executed by Buyer; Seller will place on each invoice to each customer of Seller to be assigned to Buyer pursuant to this Agreement only payment instructions to the Lockbox and the Collection Account; Seller will not offer any Receivable to Buyer for purchase that is not an Eligible Receivable, and by offering any Receivable to Buyer, Seller shall be deemed to have represented and warranted that such Receivable is an Eligible Receivable; Seller will discharge all taxes, levies or assessments imposed upon it or incurred by it in the operation of its business as and when same become due; Seller will not change or modify the terms of the original invoice issued in connection with a Purchased Receivable with a Customer or Account Debtor unless Buyer first consents to such change in writing in Buyer’s sole discretion; Seller will not permit any lien, Security Interest or Encumbrance to be created upon its Accounts or other Collateral except for such liens, Security Interests or other Encumbrances to which Buyer consents in writing in advance in its sole discretion; provided, however, Seller shall be permitted to sell to and to factor with any a third party of Seller’s choosing any Receivable not purchased by Buyer, and Buyer will use commercially reasonable efforts to negotiate and consummate an intercreditor agreement in form and content acceptable to Buyer in Buyer’s reasonable discretion with each such third party relating to Buyer’s and such third party’s Security Interests, liens, Encumbrances and rights in and to Receivables, Purchased Receivables and Receivables purchased by such third party; Seller will maintain such insurance covering Seller’s business and/or Seller’s property as is customary for businesses similar to the business of Seller and, at the request of Buyer, name Buyer as a loss payee of such insurance; Seller shall immediately notify Buyer of any dispute between a Customer or an Account Debtor and Seller; Seller shall give prompt notice to Buyer if goods relating to a Purchased Receivable are returned to or repossessed by Seller;
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Seller will notify Buyer in writing prior to any change in Seller’s place of business, or if Seller has or acquires more than one place of business, or prior to any change in Seller’s chief executive office, the office or offices where Seller’s books and records concerning Accounts or accounts receivable are kept; and Seller will notify Buyer at least sixty (60) calendar days in advance of any proposed change of Seller’s name, identity, legal entity or corporate structure.
8.2.Seller Notification; Disputed Receivables. Seller agrees to notify Buyer immediately of any breach by Seller of any representation, warranty or covenant of Seller contained herein or should any representation, warranty or agreement made herein become untrue or false at any time. Seller further agrees to notify Buyer immediately of the existence of any Disputed Receivable, the assertion by any Customer or Account Debtor of any dispute or other claim (including any defense or offset asserted by any Customer or Account Debtor) with respect to any Purchased Receivable, or with respect to any related goods or services. Upon Buyer’s request, Seller agrees to settle, at its own expense and for the benefit of Buyer, any Disputed Receivable; provided, that any such settlement shall be made only with the prior written consent of Buyer. As to any Disputed Receivable, Buyer shall have the right, in its sole discretion, (a) to settle at the expense of Seller (including all attorneys’ fees and expenses of Buyer) and for the benefit of Buyer any such dispute or claim upon such terms as Buyer may in its sole discretion deem advisable, or (b) to assign the related Purchased Receivable to Seller, without recourse to Buyer, and charge to and withdraw from Reserve Account the unpaid portion of the Initial Payment and the Variable Discount applicable to such Disputed Receivable until Buyer has been repaid the unpaid portion of the Initial Payment and the Variable Discount applicable to such Disputed Receivable in full, or (iv) deduct the unpaid portion of the Initial Payment and the Variable Discount applicable to such Disputed Receivable from all proceeds of all Receivables then in the possession of Buyer or received by Buyer in the future (whether or not Purchased Receivables) until Buyer has been repaid the unpaid portion of the Initial Payment and the Variable Discount applicable to such Disputed Receivable in full. Seller agrees that, in lieu of Buyer charging the unpaid portion of the Initial Payment and the Variable Discount applicable to a Disputed Receivable against the Reserve Account, or against such other funds, Buyer may require Seller to pay (and Seller hereby agrees to pay) to Buyer on demand the unpaid portion of the Initial Payment and the Variable Discount applicable to a Disputed Receivable. A Purchased Receivable with respect to which the Account Debtor has asserted an Insolvency Claim shall not be a Disputed Receivable under the terms of this Agreement.
8.3.Financial Statements; Tax Returns. Seller shall provide to Buyer such financial information of Seller, financial statements of Seller and tax returns of Seller as and at such times as Seller is required to provide such information, statements and returns to the Securities Exchange Commission, and state equivalent thereof, and any federal or state taxing authority. All financial statements delivered to Buyer shall fairly present Seller’s financial condition and results of operations as of the dates and for the periods covered, and shall not contain any material misstatements.
8.4.Deposit Accounts; Buyer Access. Seller will provide Buyer not less than sixty (60) calendar days’ prior written notice prior to opening any Deposit Account or other account at any bank, brokerage firm, Securities Intermediary, Commodities Intermediary, or other financial institution, if such account is to be used by Seller for the receipt of payments of the purchase price for Purchased Receivables hereunder and/or proceeds of Receivables (each, a “Receivables Account”). Seller shall execute and deliver, or cause to be executed and delivered, to Buyer such agreements, documents, and instruments as Buyer deems necessary or desirable in Buyer’s sole discretion, including but not limited to, providing Buyer with all passwords and other information for all of such Receivables Accounts, in order to enable Buyer to have online, view-only access to such Receivables
Accounts, and Seller will not change any such password or directly or indirectly interfere with Buyer’s view-only access to any such Receivables Account during the Term of this Agreement.
8.5.Customer Portal Access. Seller will notify Buyer of each web- based, on-line, virtually hosted and other remotely-accessed platform, portal, account and other site maintained by an Account Debtor for Seller that include information regarding Seller’s delivery of products and/or services to such Account Debtor, such account Debtor’s purchase orders delivered to Seller, Seller’s invoices delivered to such Account Debtor, and/or Seller’s Receivables from such Account Debtor (each, a “Customer Portal”). Seller shall provide Buyer with all passwords, login information and credentials issued to Seller to access each such Customer Portal in order to enable Buyer to have online, view-only access to each such Customer Portal, and Seller will not change any such password, login information or credentials or directly or indirectly interfere with Buyer’s view-only access to any such Customer Portal during the Term of this Agreement.
8.6.Indemnification of Buyer. Seller agrees to indemnify and hold all “Indemnified Persons” (as hereinafter defined) harmless against any breach by Seller of any representation, warranty or covenant of Seller contained in this Agreement, and against any claims or damages arising out of the manufacture, sale, possession or use of, or otherwise relating to, goods, or the performance of services, associated with or relating to Receivables, Accounts or related rights purchased (or with respect to which a Security Interest is granted to Buyer) hereunder. The term “Indemnified Persons” shall mean Buyer and its officers, directors, members, managers, shareholders, employees, attorneys, representatives, agents, Affiliates, successors and assigns. To the extent that Seller’s undertaking to indemnify, pay and hold harmless Buyer as set forth in this Section 8.6 may be unenforceable because it violates any law or public policy, Seller shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all matters referred to under this Section 8.6.
8.7.Survival of Representations, Warranties and Covenants. All representations and warranties and covenants of Seller contained in this Agreement shall be true, accurate and complete at the time of Seller’s execution of this Agreement, shall be true, accurate and complete on each date that Seller offers a Receivable for purchase to Buyer, and shall be true, accurate and complete on the date each Receivable is purchased by Buyer hereunder. Seller shall comply with all covenants of Seller contained in this Agreement until (a) all Purchased Receivables have been paid in cash to Buyer in full pursuant to the terms hereof, (b) all Obligations have been finally and indefeasibly paid to Buyer in cash and performed in full, and (c) Seller has provided to Buyer a fully executed Termination Release. Buyer’s right to bring an action for breach of any such representation, warranty or covenant or to exercise any right or remedy under this Agreement based upon the breach of any such representation, warranty or covenant shall survive the execution, delivery and acceptance of this Agreement until the Obligations are finally and indefeasibly paid to Buyer in cash and performed in full.
9.Events of Default; Remedies.
9.1.Events of Default. The occurrence of any of the following acts or events will constitute an “Event of Default” under this Agreement: (a) if Seller fails to make payment of any of the Obligations when due; (b) if Seller commits any breach of any of the terms, representations, warranties, covenants, conditions or provisions of this Agreement, or of any present or future amendment, restatement, extension, supplement or other modification hereof or of any other agreement between Buyer and Seller; (c) if Seller becomes insolvent or unable to meet Seller’s debts as they mature; (d) if Seller fails to pay when due any material obligations or liabilities owing by Seller to any Person (including without limitation, any United States and state taxes); (e) if Seller calls, or has called by a third party, a meeting of creditors; (f) if any bankruptcy proceeding, insolvency arrangement, receivership or
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similar proceeding is commenced by or against Seller under any federal, state or other applicable law; (g) if Seller suspends or discontinues doing business for any reason; (h) if a receiver or trustee of any kind is appointed for Seller or any of Seller’s property; (i) if there shall be a change in the beneficial ownership and control, directly or indirectly of the majority of the outstanding voting securities or other interests entitled (without regard to the occurrence of any contingency) to elect or appoint members of the board of directors or other managing body of Seller; or (j) if Seller grants to any Person other than Buyer any lien, Security Interest or other Encumbrance on or to any Collateral; (k) if a notice of lien, money judgment, levy, assessment, seizure or writ, or warrant of attachment is entered or filed against Seller or with respect to the Accounts or any other Collateral in which Seller has granted Buyer a Security Interest; or (l) if Seller sells, leases, transfers or otherwise disposes of all or substantially all of Seller’s property or assets, or consolidates with or merges into or with any corporation or entity.
9.2.Rights and Remedies Upon Event of Default.
9.2(a) Termination of Purchase Obligations; Repurchase of Purchased Receivables. In addition to all other rights and remedies granted to Buyer pursuant to the terms of this Agreement, upon the occurrence and during the continuation of an Event of Default other than as described in Paragraphs (f) or (h) of Section 9.1, Buyer will have the right to (i) require Seller to repurchase all Purchased Receivables then unpaid and outstanding at a price for each such Purchased Receivable equal to the unpaid portion of the Initial Payment made by Buyer thereon and the Variable Discount then owing thereon, and (ii) pay to Buyer all outstanding Obligations and all fees (including the Early Termination Fee, if applicable), costs and expenses due and payable to Buyer, and (iii) terminate all obligations to purchase Receivables pursuant to this Agreement and all other arrangements existing between Buyer and Seller, and (iv) set-off or apply (A) the Reserve Account and any and all proceeds of Receivables and other Collateral then in Buyer’s possession, and/or (B) any indebtedness or other liability or obligation at any time owing by Buyer to or for the credit or the account of Seller, to Buyer’s obligation to repurchase Purchased Receivables and to Seller’s payment of the Obligations then owing by Seller to Buyer hereunder, and (v) to withhold any further payments to Seller until Seller has paid to Buyer all amounts due with respect to Purchased Receivables required to be repurchased by Seller and all Obligations have been to paid in cash to Buyer in full, and (vi) take all other and further actions and avail itself of any and all rights, powers, remedies and privileges available to Buyer under this Agreement, any other agreement between Buyer and Seller or between Buyer and any other Person, and available under law or in equity.
9.2(b) Immediate Repurchase of Purchased Receivables; Obligations Immediately Due. Notwithstanding the provisions of Paragraph 9.2(a) above, upon the occurrence and during the continuance of an Event of Default described in Paragraphs (f) or (h) of Section 9.1, without notice, demand or other action by Buyer (i) Seller shall immediately repurchase all Purchased Receivables then unpaid and outstanding at a price for each such Purchased Receivable equal to the unpaid portion of Initial Payment made by Buyer thereon and Variable Discount then owing thereon, and (ii) all of Seller’s outstanding Obligations to Buyer all fees (including the Early Termination Fee, if applicable), costs and expenses due and payable to Buyer shall immediately become due and payable whether or not payable on demand prior to such Event of Default, and (iii) all of Buyer’s obligations to purchase Receivables pursuant to this Agreement and all other arrangements existing between Buyer and Seller shall immediately terminate, and (iv) Buyer shall set-off or apply (A) the Reserve Account and any and all proceeds of Receivables and other Collateral then in Buyer’s possession, and/or (B) any indebtedness or other liability or obligation at any time owing by Buyer to or for the credit or the account of Seller, to Buyer’s obligation to repurchase Purchased Receivables and to Seller’s payment of the
Obligations then owing by Seller to Buyer hereunder, and (v) to withhold any further payments to Seller until Seller has paid to Buyer all amounts due with respect to Purchased Receivables required to be repurchased by Seller and all Obligations have been to paid in cash to Buyer in full, and (vi) take all other and further actions and avail itself of any and all rights, powers, remedies and privileges available to Buyer under this Agreement, under any Factoring Document, under any other agreement between Buyer and Seller or between Buyer and any other Person, as a Secured Party pursuant to the UCC, and available under law or in equity
9.3.No Notice or Waiver. SELLER WAIVES ANY REQUIREMENT THAT BUYER INFORM SELLER BY AFFIRMATIVE ACT OR OTHERWISE OF ANY ACCELERATION OF SELLER’S OBLIGATIONS HEREUNDER IN CONNECTION WITH ANY EVENT OF DEFAULT. FURTHER, BUYER’S FAILURE TO CHARGE OR ACCRUE FEES OR DISCOUNTS AT ANY “DEFAULT” OR “PAST DUE” RATE SHALL NOT BE DEEMED A WAIVER BY BUYER OF ITS CLAIM THERETO.
10.Term Termination; Release of Liens.
10.1.Initial Term; Renewal Terms. This Agreement shall be effective on execution hereof by the parties hereto, and unless earlier terminated pursuant to the terms hereof shall have an initial term equal to the “Initial Term” described in Item 20 of the Schedule of Additional Terms, and shall be automatically extended for a period equal to the “Renewal Term” described in Item 21 of the Schedule of Additional Terms (each such period of extension, a “Renewal Term”) unless Seller or Buyer provides written notice to the other party at least sixty (60) calendar days prior to the end of the Initial Term or a Renewal Term, as applicable, of its intention to terminate this Agreement on the end of the Initial Term or a Renewal Term (a “Notice of Scheduled Termination”). The period commencing on the date of this Agreement and continuing until the earlier of (a) the end of the Initial Term, as extended by and together with any Renewal Periods, (b) the earlier termination of this Agreement pursuant to the terms hereof, and (c) an Early Termination Date, shall be referred to as the “Term” of this Agreement. Following the end of the Term of this Agreement (i) all obligations of the parties with respect to any Purchased Receivables previously sold, assigned or transferred to Buyer under this Agreement shall remain in full force and effect until the same have been fully paid to Buyer in cash, together with the full payment in cash to Buyer of all Obligations, fees, costs and expenses payable by Seller to Buyer under this Agreement, and (ii) Buyer shall have no obligation to purchase any Receivables from Seller.
10.2.No Lien Termination without Release. Notwithstanding the termination of this Agreement, the repurchase of all outstanding Purchased Receivables by Seller, or the payment of all Obligations payable by Seller to Buyer pursuant to the terms hereof, Buyer shall not be required to release or discharge, or record or file any financing statement termination or evidence of a discharge or satisfaction of its liens, Security Interest or Encumbrances on the Collateral unless and until Seller and each guarantor of Seller’s Obligations deliver to Seller a fully executed and enforceable general release of claims against Buyer and the Indemnified Parties in form and content acceptable to Buyer in Buyer’s reasonable discretion (the “Termination Release”).
11.General Provisions.
11.1.Governing Law; Jurisdiction; No Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdiction other than the State of New York. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN ERIE COUNTY, NEW YORK FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY
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TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTIONS CONTEMPLATED HEREBY.
11.2.Rights and Remedies Cumulative. Buyer’s rights, remedies benefits and privileges under this Agreement shall be cumulative and not alternative or exclusive, irrespective of any other rights, remedies benefits and privileges that may be available to Buyer under any other agreement, document or instrument by or between Seller and Buyer, or between Buyer and any other Person, by operation of law or otherwise, and may be exercised by Buyer at such time or times and in such order as Buyer in Buyer’s sole discretion may determine, and are for the sole benefit of Buyer. Buyer’s failure to exercise or delay in exercising any right or remedy shall not (a) preclude Buyer from exercising such right or remedy thereafter, (b) preclude Buyer from exercising any other right or remedy of Buyer, or (c) result in liability to Buyer or Buyer’s affiliates or their respective members, managers, shareholders, directors, officers, partners, employees, consultants or agents.
11.3.Reinstatement.
11.3(a) Buyer’s rights, powers, remedies, benefits and privileges under this Agreement, and the agreements, covenants, liabilities and obligations of the Seller set forth in this Agreement (including, but not limited to, the final and indefeasible payment of an amount equal to the repurchase of the outstanding Purchased Receivables by Buyer and the Obligations of Seller to Buyer in cash and performance of the Obligations in full, and all Security Interests, liens, charges and other Encumbrances granted to Buyer under this Agreement and each other agreement, document or instrument delivered by Seller or any other Person to Buyer), shall continue to be effective, or be reinstated, as the case may be, if at any time any payment in respect of the repurchase of Purchased Receivables by Buyer or payment of the Obligations of Seller to Buyer hereunder or proceeds of any collection action or other enforcement action by Buyer is subsequently invalidated, rescinded, declared to be fraudulent or preferential, set aside, recovered from, or disgorged by Buyer, or is or are required to be returned, refunded, repaid or otherwise restored to Seller, a trustee, receiver or any other Person by reason of any bankruptcy, reorganization, arrangement, composition or similar proceeding, or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, Seller or any other Person, or for or with respect to any property of Seller or any other Person, under any law (including, without limitation, any bankruptcy law, foreign, state or federal law, common law or equitable cause of action), or otherwise, all as though such payment had not been made.
11.3(b) Furthermore to the extent that Seller or any other Person makes a payment or payments to Buyer with respect to the repurchase of Purchased Receivables or the Obligations payable to Buyer hereunder, or Buyer enforces or forecloses on (as the case may be) any right, power, remedy, benefit, privilege, Security Interest, lien, charge or other Encumbrance, or exercises any right of setoff, granted
to Buyer under this Agreement or any other agreement, document or instrument delivered to Buyer in connection herewith, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, rescinded, declared to be fraudulent or preferential, set aside, recovered from, or disgorged by Buyer, or is or are required to be returned, refunded, repaid or otherwise restored to Seller, a trustee, receiver or any other Person by reason of any bankruptcy, reorganization, arrangement, composition or similar proceeding, or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, Seller or any other Person, or for or with respect to any property of Seller or any other Person, under any law (including, without limitation, any bankruptcy law, foreign, state or federal law, common law or equitable cause of action), then, to the extent of such recovery, repurchase of Purchased Receivables and/or the Obligations or part thereof originally intended to be satisfied, or remaining unpaid, as applicable, and all rights, powers, remedies, benefits, privileges, Security Interests, liens, charges and other Encumbrances, granted to Buyer under this Agreement, under any other agreement, document or instrument delivered to Buyer in connection herewith, and under any applicable law, shall be revived and continued in full force and effect (x) as if such payment or payments had not been made or such enforcement or setoff had not occurred, and/or (y) until such payment or payments have been paid to Buyer in cash in full..
11.4.Successors and Assigns. This Agreement is entered into for the benefit of the parties hereto and their successors and assigns and shall be binding upon the parties, their successors and assigns. Buyer shall have the right, without the necessity of any consent, authorization or other action by Seller, to sell, assign, securitize or grant participations in all or a portion of Buyer’s interest in the Purchased Receivables and the transactions described herein to other financing parties and/or financial institutions of Buyer’s choice and on such terms as are acceptable to Buyer in Buyer’s sole discretion. Seller shall not assign, exchange or otherwise hypothecate any rights, liabilities or obligations under this Agreement, in whole or in part, without the prior written consent of Buyer, which consent may be granted or withheld in Buyer’s sole discretion, and any attempted assignment, exchange or hypothecation without Buyer’s written consent shall be void and be of no effect.
11.5.Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.
11.6.Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.
11.7.Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided, confirmation of transmission is mechanically or electronically generated and kept on file by the sending party) or e- mail (provided, confirmation of receipt is verified by return email from the receiver or by other written means); or (iii) one Business Day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. All notices shall be delivered to a party’s address as identified in Item 22 of the Schedule of Additional Terms.
11.8.Strict Performance. The failure or delay by Buyer at any time to require Seller’s strict compliance with or performance of any provision of this Agreement shall not waive, affect, impair or diminish any right of Buyer thereafter to demand Seller’s strict compliance with and performance of such provision. Any suspension or waiver by Buyer of any Event of Default shall not suspend, waive or affect any other Event of Default, whether the same is prior or subsequent to such
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suspension or waiver and whether of the same or a different type. No failure or delay on the part of Buyer in the exercise of any right, power, remedy, benefit or privilege of Buyer hereunder or under any of the other agreements, documents or instruments delivered to Buyer in connection herewith shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power, remedy, benefit or privilege preclude other or further exercise thereof or of any other right, power, remedy, benefit or privilege.
11.9.Construction of Agreement. The parties hereto agree that the terms, provisions and language of this Agreement were the result of negotiations between the parties, and, as a result, there shall be no presumption that any ambiguities in this Agreement shall be resolved against either party. Any controversy over the construction of this Agreement shall be decided without regard to events of authorship or negotiation.
11.10.Buyer’s Performance. Buyer shall not be responsible for any failure of any Initial Payment, Residual Payment or payment of any other amount by Buyer to Seller pursuant to the terms of this Agreement to be credited to any account of Seller (i) if such failure is caused by conditions beyond Buyer’s control including, but not limited to Acts of God, restrictions of Governmental Units (including the denial or cancellation of any necessary license, registration or permit), wars, insurrections, or interruptions of telephone service or internet access caused by a service provider or resulting from the failure of a service provider’s equipment, software or personnel, and (ii) if such failure is not caused by or due to an event, occurrence or condition described in clause (i) immediately above, unless such failure is caused by or due to Buyer’s gross negligence or willful misconduct.
11.11.Entire Agreement; Amendments; Buyer’s Consent. This Agreement (including the Schedules and Exhibits hereto) constitutes the entire agreement between Buyer and Seller with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements or conditions between Buyer and Seller, whether express or implied, oral or written, with respect to the subject matter hereof. The Schedules and Exhibits identified in this Agreement are incorporated herein by reference and made a part hereof. No amendment or waiver of any provision of this Agreement, nor consent to any departure by Seller therefrom, shall in any event be effective unless the same shall be Authenticated by Buyer in a Record, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
11.12.Execution in Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to each other party; provided that a facsimile or .pdf signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile or .pdf signature.
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IN WITNESS WHEREOF, each party has caused its signature to this Agreement to be duly executed as of the date first written above.
SELLER: | | |||
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PRECIPIO, INC. | | |||
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By: | | | ||
Name: | Ilan Danieli | | ||
Its: | CEO | | ||
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BUYER: | | |||
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CULAIN CAPITAL FUNDING LLC | | |||
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By: | | |||
Name: | Joseph Heim | | ||
Its: | CCO | | ||
[Signature Page to Culain – Precipio Factoring Agreement]
SCHEDULE OF ADDITIONAL TERMS
Item 1. Purchased Receivable Limit. Means, at any time, Two Million and 00/100 Dollars ($2,000,000.00).
Item 2. Overadvance Fee. Means a daily fee equal to the unpaid portion of any Overadvance multiplied by five hundredths of one percent (0.05%) for each calendar day such Overadvance, or any portion thereof, remains unpaid.
Item 3. Additional Ineligible Receivable Criteria. In addition to the criteria for treating any Receivable as an Ineligible Receivable described in the definition of “Ineligible Receivables” contained in the Definitions Schedule, without limiting Buyer’s discretion to purchase or refrain from purchasing any Receivable, Buyer may treat any Receivable as an Ineligible Receivable if:
·Unless otherwise agreed to in writing in advance by Buyer, such Receivable provides for payment terms in excess of (i) net sixty (60) days in the case of Thermo, or (ii) net seventy five (75) days in the case of McKesson.
·The face amount of such Receivable, or Receivables, arising from a sale or sales to a single Customer or Account Debtor, exceed or exceeds, in the aggregate, an amount equal to twenty five percent (25%) of the aggregate unpaid amount of Purchased Receivables from all Account Debtors outstanding at such time; provided, however, with respect to McKesson and Thermo Fisher Scientific Inc, Buyer acknowledges that Receivables from McKesson and/or Thermo shall exceed twenty-five percent (25.0%) and may separately or collectively equal one hundred percent (100%) of the aggregate amount of Purchased Receivables of Seller. Buyer shall periodically review Receivables and Purchased Receivables from McKesson and/or Thermo and shall, in Buyer’s reasonable discretion, place and adjust such limits on the percentage that Purchased Receivables from McKesson and/or Thermo may be in comparison to the aggregate amount of all Purchased Receivables in Buyer’s reasonable discretion from time to time. Buyer will promptly notify Seller of the placement or adjustment of the permitted concentration percentage of McKesson and/or Thermo Receivables promptly after Buyer’s determination of the same; or
·Such Receivable or Receivables are from a Customer or an Account Debtor if more than twenty five percent (25%) percent of such Customer’s or Account Debtor’s outstanding Receivables are sixty (60) or more calendar days past due.
Item 4. Collateral. Means all of Seller’s right, title and interest in and to the following, wherever located and whether owned on the date of this Agreement or thereafter acquired, whether owned or held by Seller or by any other Person in any manner for such Seller’s account (and specifically includes all accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of all of the following): (a) Accessions, Accounts (including without limitation all unearned premiums with respect to insurance policies insuring any of the Collateral and claims against any Person for loss of, damage to, or destruction of any or all of the Collateral), Certificates of Title, Chattel Paper, Commercial Tort Claims (specifically including all Commercial Tort Claims arising from or in connection with the matters described in the attached Disclosure Schedule), Deposit Accounts, Documents, Equipment, Fixtures, General Intangibles, Goods, Health-care-insurance-receivables, Instruments, Inventory, Investment Property, Leases, Letter-of-Credit Rights, Money, Securities Accounts, Software and Supporting Obligations, (b) all books and records pertaining to any of the foregoing (including but not limited all to all tangible books and records, and all recorded data of any kind or nature, regardless of the medium of recording, including, without limitation, writings, plans, specifications, schematics Customer lists, credit files, computer programs, printouts and other computer materials and records of Seller pertaining to any of the items or subject matter described in this Item 4), (c) all Proceeds and products of any of the foregoing, (d) all collateral security and guaranties given by any Person with respect to any of the foregoing, and (e) all property subject to any lien, Security Interest or Encumbrance in favor of Seller.
Item 5. Funding Request Additional Information. N/A
Item 6. Funding Request Deadline. Means 11 a.m. Eastern Time on a Business Day.
Item 7. Initial Payment Rate. Means up to eighty five percent (85.00%) of the lesser of the Gross Amount or Net Amount of a Purchased Receivable.
Item 8. Fixed Discount. Means an amount equal to one and twenty-five hundredths percent (1.25%) of the Gross Amount or Net Amount of a Purchased Receivable, as applicable, used to determine the Initial Payment with respect to such Purchased Receivable, which Fixed Discount shall apply to the Purchased Receivable during the Fixed Discount Period.
Item 9. Fixed Discount Period. Means the thirty (30) calendar day period commencing on the date of the Initial Payment.
Item 10. Variable Discount. Means an amount equal to the Gross Amount or Net Amount of a Purchased Receivable, as applicable, used to determine the Initial Payment with respect to such Purchased Receivable multiplied by a daily percentage rate equal to forty-two thousandths percent (0.042%), commencing on the first (1st) calendar day after the end of the Fixed Discount Period with respect to such Purchased Receivable, and continuing for each calendar day in which a Purchased Receivable remains unpaid, in whole or in part, and ending on the Payment Credit Date with respect to which Buyer receives and deposits the full proceeds of Collections for such Purchased Receivable in an aggregate amount equal to the Gross Amount or Net Amount of a Purchased Receivable, as applicable, used to determine the Initial Payment with respect to such Purchased Receivable in Buyer’s Account; provided, however, with respect to each Purchased Receivable, or portion thereof, that remains unpaid after the Late Payment Date of such Purchased Receivable, the Variable Discount shall be computed at a rate equal to eighty six thousandths percent (0.086%) for each calendar day after the Late Payment Date. The Variable Discount shall continue to be charged on the amount of any Collections credited to the payment of any Purchased Receivable until the Payment Credit Date with respect to such Collections.
Item 11. Late Payment Date. For a Purchased Receivable means ninety (90) calendar days after the date of the invoice relating to such Purchased Receivable.
Item 12. Purchased Receivable Approval Period. Means the five (5) consecutive calendar day period commencing on the date the invoice upon which a Purchased Receivable is based.
Schedule of Additional Terms | Page 11 |
Item 13. Concentration Limit. Twenty five percent (25.00%); provided, however, see the 2nd bullet point under Item 3, “Additional Ineligible Receivable Criteria”, above
Item 14. Additional Repurchase Events. In addition to the events and conditions described in Section 5.1 of this Agreement, upon the occurrence of any of the following conditions the Buyer shall have the right to require Seller to repurchase any Purchased Receivable pursuant to the terms of Section 5.1 of the Agreement: N/A
Item 15. Lockbox Information. Seller shall instruct Account Debtors on Seller’s invoices to forward all checks and other tangible Collections to the following Lockbox:
CULAIN CAPITAL FUNDING LLC
PO BOX 74421
CLEVELAND OH 44194-0002
Re: PRECIPIO, INC.
Item 16. Collection Account Information. Seller shall instruct Account Debtors on Seller’s invoices to forward all ACH, wire transfers, and other electronic Collections to the following Collection Account:
Beneficiary Bank Name: | KEYBANK, NATIONAL ASSOCIATION |
| 4910 TIEDEMAN ROAD |
| BROOKLYN OH 44144 |
Bank ABA: | 021300077 |
Bank SWIFT: | KEYBUS33 |
Beneficiary Name: | CULAIN CAPITAL FUNDING LLC |
Beneficiary Address: | 1780 WEHRLE DRIVE, SUITE 101 |
Beneficiary Account No. | 329681394865 |
Ref: | PRECIPIO, INC. |
Item 17. Misdirected Payment Fee. Means an amount equal to fifteen percent (15%) of the amount of any payment on account of a Purchased Receivable that has been received by Seller and not delivered in kind to Buyer within two (2) Business Day(s) following the date of receipt by Seller.
Item 18. Misdirected Payment Waiver Period. Means the sixty (60) consecutive calendar day period commencing on the date of execution of this Agreement.
Item 19. Additional Fees and Expenses. In addition to all other fees, costs and expenses to be paid by Seller or reimbursed by Seller to Buyer as described in this Agreement, Buyer shall pay the following fees, costs and expenses as follows:
·Early Termination Fee. Means, in the event of an uncured Event of Default resulting in the termination of this Agreement or due to a Seller Early Termination, a fee in an amount to be paid by Seller to the Buyer equal to the Purchased Receivable Limit multiplied by one and twenty-five hundredths percent (1.25%).
·Missing Notation Fee. A fee equal to fifteen percent (15%) of the Gross Amount of any Purchased Receivable if the related invoice is sent by Seller to a Customer or an Account Debtor which does not provide for payment to the Lockbox and/or to the Collection Account.
·Minimum Volume Fee. A fee equal to the amount by which the sum of (i) aggregate Initial Discounts, plus (ii) aggregate Variable Discounts, plus Concentration Fees earned in any month (prorated for partial months) is less than Two Thousand Dollars ($2,000.00), to be paid on the first day of the following month.
·Concentration Fee. A fee payable to Buyer equal to one and twenty-five hundredths percent (1.25%) of the face amount of each invoice representing a Purchased Receivable from an Account Debtor in excess of the Concentration Limit.
·Inspection/Field Examination Expenses. In connection with Buyer’s exercise of its rights under Section 6.6 of this Agreement Seller shall be liable for and promptly reimburse Buyer for all fees, costs and expenses associated with periodic field examinations and inspections of Buyer’s books and records, the Receivables and/or other Collateral performed by Buyer and/or Buyer’s agents, all as deemed necessary by Buyer in its reasonable discretion.
Item 20. Initial Term. The twelve (12) consecutive month period ending on the anniversary date of the date of this Agreement.
Item 21. Renewal Term; Renewal Terms. A period of twelve (12) consecutive months commencing immediately after the end of the Initial Term, or a Renewal Term, as applicable.
Item 22. Notice Address:
If to Buyer:
Culain Capital Funding LLC
1780 Wehrle Drive
Suite 101
Williamsville, NY 14221
Attn: Joseph A. Heim, Chief Credit Officer
Tel: (716) 919-1322
Email: jheim@culaincapital.com
Schedule of Additional Terms | Page 12 |
If to Seller:
Precipio, Inc.
4 Science Park, 3rd Floor
New Haven, CT 06511
Attn: Mr. Ilan Danieli
Tel: 203.787.7888 ex. 536
Email: idanieli@precipiodx.com
Schedule of Additional Terms | Page 13 |
DEFINITIONS SCHEDULE
“Account Debtor’s Credit Limit” means the maximum amount of uncollected Purchased Receivables established by Buyer from time to time in Buyer’s reasonable discretion with respect to an Account Debtor. An Account Debtor’s Credit Limit will be displayed in the Client Portal.
“Business Day” means a day of the week other than a Saturday, Sunday, or a holiday under which banks located in the State of New York are required or permitted to be closed.
“Client Portal” is defined in Section 2.2.
“Collateral” means the property of Seller securing Seller’s Obligations under this Agreement for the payment of fees, costs, expenses and all other amounts payable to Buyer pursuant to the terms of this Agreement, and is further defined in Item 4 of the Schedule of Additional Terms.
“Collections” means: all checks, drafts, notes, acceptances, cashier’s checks, bank checks, payment orders or other tangible forms of payment in payment of a Receivable; all ACH credit entries, wire transfers, other acceptable forms of electronic payment or other forms of cash payment made in payment of a Receivable; all Proceeds of all Letters of Credit securing a Receivable; all insurance claims and all other amounts payable in respect of a Receivable; and, all Proceeds of Collateral received by Buyer in Buyer’s Account.
“Concentration Limit” means for an Account Debtor, if at any time the aggregate outstanding uncollected amount of all Purchased Receivables from such Account Debtor exceeds (i) the Concentration Limit as described in Item 13 of the Schedule of Additional Terms, multiplied by (ii) the aggregate outstanding uncollected amount of all Purchased Receivables at such time.
“Customer” means Seller’s customer to whom Seller provides goods and/or services that serves as the basis for a Receivable.
“Disputed Receivable” means any Receivable that on the date of when tendered to Buyer for sale is, or any Purchased Receivable that becomes, subject to any claim by a Customer or Account Debtor against Seller, of any kind whatsoever, valid or invalid, that may reduce the amount collectible from such Customer or Account Debtor in respect of such Receivable, including any dispute or claim, bona fide or otherwise, as to price, terms, quantity, quality, delivery, or any cause or defense to payment of such Receivable whatsoever, and shall also include any Purchased Receivable that (i) has not been approved by the respective Customer or Account Debtor, or has not been verified or confirmed by Buyer to Buyer’s reasonable satisfaction, by the end of the Purchased Receivable Approval Period, or (ii) that has not paid to Buyer in full by the Presumed Dispute Date. Buyer shall be under no obligation to determine or verify the bona fides or veracity of any claim, dispute or other allegation of a Customer, Account Debtor or Seller with respect to a Disputed Receivable.
“Eligible Receivable” means a Receivable arising out of a sale in the ordinary course of Seller’s business in respect of which all of the representations and warranties set forth in this Agreement with respect to Eligible Receivables are true and accurate, and that is acceptable to Buyer in Buyer’s reasonable discretion.
“Factoring Documents” means, collectively, this Agreement and all other agreements, documents and instruments executed and/or delivered to Buyer in connection with the transactions contemplated by this Agreement, including but not limited to all guarantees, validity agreements, resolutions and other items, as each of the foregoing may be amended, restated, extended, supplemented or otherwise modified from time to time.
“Fixed Discount” means the initial discount payable to Buyer with respect to a Purchased Receivable as described in Section 4.4, as supplemented by Item 8 of the Schedule of Additional Terms.
“Fixed Discount Period” means the period during which the Fixed Discount shall apply while a Purchased Receivable shall remain unpaid, in whole or in part, as described in Item 9 of the Schedule of Additional Terms.
“Ineligible Receivable” means any Receivable which Buyer determines is not an Eligible Receivable in Buyer’s reasonable discretion, including but not limited to:
·Any Receivable with respect to which the Customer or Account Debtor is an Affiliate of Seller or a director, officer, agent, stockholder, or employee of Seller’s or any of Seller’s Affiliates; and
·Any Receivable which on the date of tender to Buyer is, or that any time prior to the full payment thereof becomes, a Disputed Receivables or with respect to which there is any dispute with the respective Customer or Account Debtor;
·Any Receivable with respect to which the Customer or Account Debtor is a person to which Seller is indebted, provided, however, that in Buyer’s sole discretion any such Receivable may be treated as an Ineligible Receivable as to that portion of such Receivable which is less than or equal to the amount owed by Seller to such Person;
·Any Receivable which has been charged back to or repurchased by Seller pursuant to the terms of this Agreement;
·Any Receivable with respect to which the goods or services covered by the invoice relating to such Receivable were shipped to the Customer or Account Debtor or performed for the Customer or Account Debtor, as applicable, prior to or after the date of the invoice giving rise to such Receivable;
·Any Receivable that consists of a sale to a Customer or Account Debtor: on consignment; on any bill and hold basis; on any guaranteed sale, sale or return, sale on approval or other repurchase or return basis; on any billing in advance of shipment or other “pre- billing” basis; or under any payment plan, scheduled installment plan, or other extended payment terms basis;
·Any Receivable that is invoiced in any currency other than United States Dollars;
·If the invoice relating to such Receivable fails to set forth, as the sole authorized address for payment, the address of the “Lockbox” and “Collection Account” as provided in Section 6.1 of this Agreement and as supplemented by Item 15 and Item 16 of the Schedule of Additional Terms, or such other address or account as may be communicated by Buyer to Seller from time to time;
·Receivables related to the permanent placement of a temporary employee without confirmation of employee start date;
·Receivables (or any portion thereof) consisting of amounts owing for finance or service charges;
·Receivables offset by contra accounts (including customer deposits, etc.);
·Receivables issued for future performance (including installations, periodic servicing, etc.);
·Receivables for sales and services under warranty agreements or arrangements to be supplied in the future;
·Receivables for guaranteed sales;
·Receivables from any Customer or Account Debtor that had its check or other payment on a Purchased Receivable returned unpaid;
·Receivables from any Customer or Account Debtor that had a Purchased Receivable submitted for collection;
Definitions Schedule | Page 14 |
·Receivables from any Customer or Account Debtor that had a claim denied for payment of a Purchased Receivable under a credit insurance policy;
·Receivables for which Buyer’s Security Interest has not
been perfected; and
·Any Receivable treated as an Ineligible Receivable pursuant to the additional criteria described in Item 3 of the Schedule of Additional Terms.
“Initial Payment” means the initial amount paid by Buyer for a Purchased Receivable as described in Article 4 of this Agreement as supplemented by Item 7 of the Schedule of Additional Terms.
“Initial Term” means the initial term of this Agreement as provided in Section 10.1 of this Agreement and as further described in Item 20 of the Schedule of Additional Terms.
“Insolvency Claim” means, if Seller has not breached its representations with respect to the solvency, bankruptcy or financial inability to pay of any Customer or Account Debtor contained in Paragraph 8.1(a) as of the date of sale of such Purchased Receivable to Buyer, any defense or other claim by an Account Debtor to payment with respect to a Purchased Receivable sold to Buyer hereunder arising solely out of (a) the commencement of and continuation of any case by or against such Account Debtor under any provision of the United States Bankruptcy Code, or under any federal, state, local or other applicable law including provisions for reorganizations or liquidations, (b) the appointment of and continuing representation by a receiver, trustee or similar officer for such Account Debtor under any provision of the United States Bankruptcy Code, or under any federal, state, local or other applicable law including provisions for reorganizations or liquidations, (c) such Account Debtor making an assignment for the benefit of its creditors, (d) such Account Debtor calling a meeting of its creditors to obtain any general financial accommodation, (e) such Account Debtor’s suspension of its business as demonstrated to the reasonable satisfaction of Buyer, or (e) the Account Debtor’s insolvency or other financial inability pay such Purchased Receivable as demonstrated to the reasonable satisfaction of Buyer.
“Late Payment Date” is defined in Item 11 of the Schedule of Additional Terms.
“McKesson” means, collectively, McKesson Corporation, a Delaware corporation, and its U.S. affiliates.
“Misdirected Payment Fee” means the fee chargeable to Seller’s account in connection with any Collections with respect to a Purchased Receivable received by Seller which is not delivered to Buyer within such time as described in Item 17 of the Schedule of Additional Terms.
“Misdirected Payment Waiver Period” means the period during which the Misdirected Payment Fee shall not apply to any payments on any Purchased Receivables that are not made to the Lockbox or the Collection Account, as provided in Paragraph 4.5(a), as supplemented by Item 18 of the Schedule of Additional Terms.
“Notice of Assignment” is defined in Section 6.5 of this Agreement.
“Obligations” is defined in Section 7.1 if this Agreement.
“Overadvance Fee” is defined in Item 2 of the Schedule of Additional Terms.
“Payment Credit Date” means the date a payment of Collections with respect to a Purchased Receivable is credited to the account of Buyer for purposes of determining the Variable Discount as follows:
(a)If received by wire transfer: the date of deposit into Buyer’s Settlement Account plus one (1) Business Day
(b)If received by ACH or other acceptable form of electronic payment: the date of deposit into Buyer’s Settlement Account plus two (2) Business Days
(c)If received by check or other physical payment instrument: the
date of deposit into Buyer’s Settlement Account plus three (3) Business Days
“Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.
“Presumed Dispute Date” means, with respect to a Purchased Receivable, the date that is the later of (i) sixty (60) calendar days from the date that payment of such Purchased Receivable is due, and (ii) ninety (90) calendar days from the date of the invoice giving rise to such Purchased Receivable. For purposes of clarity, the Presumed Dispute Date is the date upon which such Purchased Receivable is presumed to be subject to a dispute between Seller and the related Customer or Account Debtor.
“Purchased Receivable” is defined in Section 2.4 of this Agreement.
“Purchased Receivable Approval Period” is defined in Item 12 of the Schedule of Additional Terms.
“Purchased Receivable Limit” means, at any time, the maximum aggregate outstanding face value of Eligible Receivables that Buyer is willing to purchase from Seller pursuant to the terms of this Agreement at such time, as indicated in Item 1 of the Schedule of Additional Terms.
“Receivable” means, with respect to Seller, a right to payment of a monetary obligation, whether or not earned by performance, for goods, inventory or other property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, to McKesson or to Thermo. For purposes of clarity, the term “Receivable” as used in this Agreement shall exclude all rights to payment of Seller with respect to Seller’s provision of goods and/or services in connection with Seller’s clinical testing and related operations.
“Renewal Term” means each period of renewal of this Agreement following the Initial Term as provided in Section 11.1 of this Agreement and as supplemented by Item 21 of the Schedule of Additional Terms.
“Reserve Account” means the account established by Buyer for the payment of fees, costs and expenses payable to Buyer pursuant to the terms of this Agreement, for the payment of any Overadvance, and for the crediting of any Purchased Receivable that no longer is an Eligible Receivable pursuant to the terms of this Agreement, as further described in Section 5.4 of this Agreement.
“Residual Payment” means the amount, if any, payable to Seller with respect to a Purchased Receivable after the Initial Payment has been made to Seller as described in Article 4 of this Agreement as supplemented by Item 8 and Item 10 of the Schedule of Additional Terms.
“Seller Early Termination” means a date on which Buyer receives a notice of termination of this Agreement from Seller other than a Notice of Scheduled Termination, or a date, other than the last day of the Initial Term or a Renewal Term, on which Seller repurchases all outstanding Purchased Receivables, pays all Variable Fees thereon, pays all other Obligations and provides a Termination Release to Buyer without notice or on notice other than a Notice of Scheduled Termination.
“Settlement Account” means Buyer’s account at KeyBank N.A., Buffalo, NY 14221, Account Name: Culain Capital Funding Operating Account; Account No. 329681394840, or such other account as Buyer may advise Seller.
Definitions Schedule | Page 15 |
“Term” of this Agreement means the Initial Term together with each Renewal Term as provided in Section 10.1 of this Agreement, as supplemented by Item 20 and Item 21 of the Schedule of Additional Terms.
“Termination Release” is defined in Section 10.2 of this Agreement.
“Thermo” means, collectively, Thermo Fisher Scientific Inc., a Delaware corporation, and its U.S. affiliates.
“UCC” means the New York Uniform Commercial Code as in effect on the date of this Agreement, and as may be amended or modified after the date of this Agreement; provided, however, in the event that, by reason of mandatory provisions of law, the rights of Buyer with respect to the collection of any Receivable or Account, or the perfection, the effect of perfection or nonperfection or priority of Buyer’s Security Interest in any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of New York, then the term “UCC” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for the purposes of the provisions hereof relating to the rights of Buyer with respect to the collection of any Receivable or Account, or perfection, the effect of perfection or nonperfection or priority of Buyer’s Security Interest in such Collateral.
“Variable Discount” means the discount payable to Buyer with respect to a Purchased Receivable relating to the number of calendar days such Purchased Receivable remains unpaid in full, as described in Section 4.4, as supplemented by Item 10 of the Schedule of Additional Terms.
UCC Definitions. When used in this Agreement:
(a)Article 9 Definitions. The following terms have the same definitions as provided in Section 9-102 of Article 9 of the UCC, but for convenience in this Agreement such terms are capitalized: “Accession”; “Account”; “Account Debtor” (and for purposes of this Agreement, to the extent not included in the UCC definition of Account Debtor, the term “Account Debtor” includes all Persons obligated, directly or indirectly, on any account receivable); “As-extracted Collateral”; “Authenticate” (and all derivations thereof); “Certificate of Title”; “Chattel Paper”; “Commercial Tort Claim”; “Commodity Account”; “Commodity Intermediary”; “Consumer Transaction”; “Debtor”; “Deposit Account”; “Document”; “Electronic Chattel Paper”; “Encumbrance”; “Equipment”; “Financing Statement”; “Fixtures” (and the singular “Fixture” may be used in this Agreement”); “General Intangible” (and for purposes of this Agreement, to the extent not included in the UCC definition of General Intangible, the term “General Intangible” includes all patents, patent applications, trademarks, trademark applications, copyrights, copyright applications, proprietary and intellectual property rights, labels, trade secrets, trade names, rights of use of any name, advertising matter, registrations, licenses, software, franchises, Customer lists, tax refund claims, claims against carriers and shippers, guarantee claims, contracts rights, security deposits and rights to indemnification, and any property of a similar nature, all goodwill, and all rights, title and interests in and to all of the foregoing); “Goods”; “Governmental Unit”; “Health-care-insurance Receivable”; “Instrument”; “Inventory”; “Investment Property”; “Jurisdiction Of Organization”; “Letter-of-credit Right”; “Obligor”; “Payment Intangible”; “Person Related To”; “Proceeds” (as specifically defined in Section 9-102(a)(64) of the UCC); “Public Organic Record”; “Record” (and for purposes of this Agreement, to the extent not included in the UCC definition of Record, the term “Record” includes all recorded data of any kind or nature, regardless of the medium of recording, including, without limitation, writings, plans, specifications, schematics Customer lists, credit files, computer programs, printouts and other computer materials and records of a Person, wherever located and whether in the custody of such Person or in the custody another Person for their benefit); “Registered
Organization”; “Secondary Obligor”; “Secured Party”; “Security Agreement”; “Software”; “State”; and “Supporting Obligation”;
(b)Article 8 Definitions. The following terms have the same definitions as provided in Article 8 of the UCC (specifically including Section 8-102 and the provisions and principals of Section 8-103 of the UCC), but for convenience in this Agreement such terms are capitalized: “Financial Asset” (and the plural “Financial Assets” may be used in this Agreement”); “Securities Account”; “Securities Intermediary”; “Security” (and the plural “Securities” may be used in this Agreement”); and “Security Entitlement”;
(c)Control. The term “Control” with respect to property or interests in property (i) has the same definition as “control” provided in Section 7-106 of the UCC when used in connection with an electronic Document of Title (as used in Article 7 of the UCC), (ii) has the same definition as “control” provided in Section 8-106 of the UCC when used in connection with Securities and Security Entitlements (and continue to be subject to the provisions of Article 9 of the UCC, including Sections 9-106 and 9-305 thereof), and (iii) has the same definition as “control” provided in Article 9 of the UCC (including Sections 9-104 through 9-107, inclusive, of the UCC) when used in connection with all other property;
(d)Money. The term “Money” has the same definition as “money” provided in Section 1-201(b)(24) of the UCC; and
(e)Security Interest. The term “Security Interest” has the same definition as “security interest” provided in Section 1-201(b)(35) of the UCC.
(f)Other UCC Definitions. Unless specifically provided for in this Agreement, if any of the capitalized terms contained in paragraphs (a) through (e) immediately above are defined in any other article, division, section or provision of the UCC, the definitions in paragraphs (a) through (e) immediately above shall apply for purposes of this Agreement.
Definitions Schedule | Page 16 |
EXHIBIT A FORM OF PURCHASE OFFER
[Month] [Date], [Year]
Culain Capital Funding LLC
1780 Wehrle Drive
Suite 101
Williamsville, NY 14221
Re: Offer for Purchase of Receivables
The undersigned requests that Culain Capital Funding LLC (“Buyer”) purchase the Eligible Receivables (as defined in that certain Factoring Agreement dated March 27, 2023 between the undersigned, as Seller, and Buyer, as the same may be amended, restated, extended, supplemented or otherwise modified from time to time (the “Factoring Agreement”) described in the attached Sale and Assignment of Account Receivable. Capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Factoring Agreement.
(A) | Gross Amount of Eligible Receivables: | $ | . |
| | | |
(B) | Net Amount of Eligible Receivables: | $ | . |
| | | |
(C) | Initial Payment Rate: | | Eighty Five percent (85.00%). |
| | | |
(D) | Initial Payment Amount | | |
| (Lesser of A and B, multiplied by C): | $ | . |
Please call the undersigned to confirm receipt of this request at ( ) or by emailing confirmation to .
PRECIPIO, INC. | | |||
| | |||
| | |||
By: | | | ||
| | | ||
Name: | | | ||
| | | ||
| | |||
Title: | | | ||
Form of Assignment Agreement | Page 17 |
EXHIBIT B FORM OF ASSIGNMENT AGREEMENT
SALE AND ASSIGNMENT OF ACCOUNTS RECEIVABLE
FOR VALUE RECEIVED, Precipio, Inc. (“Seller”) hereby sells, assigns and transfers all right, title and interest in and to the account(s) receivable as described in the Schedule of Assigned Accounts annexed hereto, to CULAIN CAPITAL FUNDING LLC (“Buyer”).
Seller warrants that the account(s) receivable annexed hereto are valid and due, and that Seller has not received payment for any or any part thereof. Seller further affirms that all representations and warranties contained in that certain Factoring Agreement between Seller and Buyer dated as of March 27, 2023 (the “Factoring Agreement”) with respect to such account(s) receivable are true and accurate as of the date hereof, and that the assignment of such account(s) receivable are subject to the terms and conditions of the Factoring Agreement.
Dated this day of , .
PRECIPIO, INC. | | |||
| | |||
| | |||
By: | | | ||
Name: | | | ||
Its: | | | ||
Form of Assignment Agreement | Page 18 |
EXHIBIT C FORM OF SCHEDULE OF ASSIGNED ACCOUNTS
File format in Microsoft Excel (XLS) is preferable.
Assignment Agreement – Schedule of Accounts | Page 19 |
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
Name | State of Incorporation or Organization |
Precipio Diagnostics, LLC | Delaware |
Precipio SPV, Inc. | Delaware |
Exhibit 23.1
Independent Registered Public Accounting Firm’s Consent
We consent to the incorporation by reference in the Registration Statement of Precipio, Inc. on Form S-8 file nos. 333-222819, 333-41714, 333-69334, 333-13999, 333-71866, 333-196712 and 333-221804, and Form S-3 file nos. 333-200313, 333-201907, 333-205793, 333-209111, 333-209112, 333-229525 and 333-237445, of our report dated March 30, 2023, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of the consolidated financial statements of Precipio, Inc. as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021, which report is included in this Annual Report on Form 10-K of Precipio, Inc. for the year ended December 31, 2022.
/s/ Marcum LLP
Marcum LLP
New Haven, CT
March 30, 2023
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Ilan Danieli, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Precipio, Inc. (the Registrant); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to me by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and |
| 5. | The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. |
Date: March 30, 2023
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Matthew Gage, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Precipio, Inc. (the Registrant); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and |
| 5. | The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. |
Date: March 30, 2023
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2022, I, Ilan Danieli, Chief Executive Officer of Precipio, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
| (1) | Such Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2022, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in such Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2022, fairly presents, in all material respects, the financial condition and results of operations of Precipio, Inc. |
Date: March 30, 2023
A signed original of the certification required by Section 906 has been provided to Precipio, Inc. and will be retained by Precipio, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2022, I, Matthew Gage, Interim Chief Financial Officer of Precipio, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
| (1) | Such Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2022, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in such Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2022, fairly presents, in all material respects, the financial condition and results of operations of Precipio, Inc. |
Date: March 30, 2023
A signed original of the certification required by Section 906 has been provided to Precipio, Inc. and will be retained by Precipio, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.