Precipio, Inc. annual report, FY2019

Precipio, Inc. — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; comparisons are with FY 2018. This annual filing does not provide standalone fourth-quarter results.

Business context

Precipio is a cancer diagnostics company operating laboratories in New Haven, Connecticut, and Omaha, Nebraska. It provides diagnostic services and is developing or commercializing IV-Cell, HemeScreen and licensed ICE-COLD-PCR (ICP) technologies, with a strategy centered on academic pathology expertise.

Key financial metrics

MetricFY 2019FY 2018
Net sales$3.127 million$2.864 million
Gross profit / margin$0.219 million / 7%$0.225 million / 8%
Operating loss$10.994 million$13.912 million
Net loss$13.243 million$15.694 million
Net loss per common share$2.33$13.82
Cash used in operations$9.141 million$6.754 million
Cash at year-end$0.848 million$0.381 million

Operating expenses fell to $11.213 million from $14.137 million, mainly reflecting lower impairment charges and legal and professional fees. FY 2019 included a $1.590 million impairment of in-process research and development; FY 2018 included $4.685 million of goodwill and intangible impairment. Other expense was $2.319 million, including a $1.870 million loss on convertible-note issuance and a $1.128 million warrant-modification loss, partially offset by a $1.437 million gain on liability settlements and $0.416 million of warrant revaluation income.

At December 31, 2019, current assets were $1.878 million and current liabilities $4.334 million, yielding negative working capital of $2.456 million. Balance-sheet carrying amounts included $0.519 million of long-term debt and $0.142 million of current convertible notes, net of discounts and costs. Contractual obligations totaled $4.688 million, including $2.676 million of debt and convertible notes, $0.783 million of lease obligations and $1.229 million of purchase commitments. The debt-obligation schedule lists $2.431 million due in less than one year; carrying values and contractual amounts differ because of discounts and other accounting adjustments.

Changes versus FY 2018

  • Net sales increased 9%. Patient diagnostic case volume rose 24%, to 1,672 from 1,345, while contract diagnostic revenue and grant revenue declined.
  • Gross profit was roughly flat, but gross margin declined one percentage point to 7%.
  • Operating loss and net loss improved, principally due to lower operating expenses and impairment charges. Cash used in operations nevertheless increased by $2.387 million.
  • Common shares outstanding increased to 7.898 million from 2.299 million, reflecting equity sales, warrant exercises and conversion of notes. A 1-for-15 reverse stock split took effect in April 2019.

Outlook, risks and unusual items

  • Going concern: The auditor’s report and management disclosure state that substantial doubt exists about the Company’s ability to continue as a going concern for the next 12 months. Precipio reported recurring losses, negative working capital, $9.141 million of operating cash use and delinquent payments to some lenders and vendors. Additional financing and revenue growth are essential; there is no assurance funding will be available.
  • Financing and dilution: The $10 million Lincoln Park equity facility had provided approximately $9.3 million through the financial-statement issuance date, leaving about $0.7 million available under that agreement. A March 2020 agreement for a further $10 million facility was disclosed subsequent to year-end, subject to conditions, including an effective resale registration statement.
  • Debt amendments: In March 2020, the Company extended the maturity of certain 2019 bridge notes from April 16 to July 16, 2020, lowered the conversion floor from $2.25 to $0.40 and extended guaranteed interest from 12 to 18 months.
  • Commercial development: A March 2020 non-cash partnership with Poplar Healthcare included acquiring the OncoMetrix customer base and associated revenues, which management expected to improve laboratory scale. Realized revenue and operating benefits were not yet reported.
  • Other risks: COVID-19 could disrupt sample processing and operations. Revenue and receivables are concentrated: two customers represented about 30% of FY 2019 net sales, and two customers about 29% of year-end receivables. Approximately 45% of revenue was disclosed as directly derived from government-sponsored healthcare programs, exposing the business to reimbursement changes. Clinical adoption, competition, dependence on a single academic pathology partner, regulatory compliance and access to capital are also material risks.
  • Contingencies: A proposed $1.95 million settlement of a shareholder lawsuit, primarily funded by insurance, remained subject to final court approval as of the filing. The Company also disclosed delinquent vendor obligations and a pending vendor claim.

Management reported effective disclosure controls and internal control over financial reporting as of year-end. The independent auditor issued an unmodified opinion on the financial statements, with a separate explanatory paragraph regarding going concern.

Investor verification priorities

  1. Verify available liquidity, financing conditions and dilution from equity facilities, note conversions and warrants, including post-year-end activity.
  2. Review near-term debt maturities, lender and vendor payment status, and the effect of the March 2020 note amendments.
  3. Assess the quality and collectability of diagnostic revenue, the large doubtful-account allowance, customer concentration and reimbursement exposure.
  4. Track whether the Poplar/OncoMetrix partnership produces the expected customer retention, revenue and cost-scale benefits.
  5. Confirm final court approval and payment status of the shareholder settlement, and monitor COVID-19 effects on operations and testing volumes.