Precipio, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Precipio Diagnostics’ financial statements are the historical statements following the June 29 reverse merger with Transgenomic, Inc. The merger, name change, reverse stock split, and differing business mix limit direct comparability with prior periods.
Business context and results
Precipio provides cancer diagnostic laboratory services and is developing a platform connecting patients, physicians, and academic experts. Its development pipeline includes ICE-COLD-PCR technology for detecting mutations in liquid biopsies. Management described laboratory consolidation, platform development, and expanded academic and distribution relationships as strategic priorities.
| Metric ($ millions, except per-share data) | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | 0.260 | 0.504 | 0.508 | 1.042 |
| Gross profit (loss) | (0.024) | 0.263 | 0.042 | 0.563 |
| Gross margin | (10)% | 52% | 8% | 54% |
| Operating expenses | 0.777 | 0.548 | 1.440 | 1.076 |
| Net loss | (3.680) | (0.444) | (4.439) | (0.752) |
| Net loss available to common stockholders | (8.928) | (0.444) | (9.687) | (2.607) |
| Basic and diluted loss per common share | (15.35) | (1.03) | (18.77) | (6.10) |
Revenue declined 48% in Q2 and 51% for the first half year over year. Management attributed the decrease to lower case volume following turnover among key sales personnel: 230 versus 338 cases in Q2, and 429 versus 727 cases in the first half. In Q2, lower revenue and laboratory fixed costs drove a gross loss. The first-half net loss included $2.603 million of merger advisory fees; common-stockholder loss also included $5.248 million of deemed preferred dividends, a non-operating equity-related charge.
Cash, liquidity, debt, and balance sheet
- At June 30, cash was $0.967 million, up from $0.051 million at year-end. First-half operating cash use was $0.897 million; investing cash provided was $0.101 million, representing cash acquired in the merger; financing cash provided was $1.712 million.
- Current assets were $1.798 million and current liabilities $16.314 million, yielding negative working capital of $14.516 million. Accounts payable were $10.328 million and accrued expenses $3.521 million. Total assets were $37.010 million, including merger-related goodwill of $13.832 million and intangibles of $21.100 million.
- Reported current maturities of long-term debt were $0.513 million. Convertible bridge notes were reported at $0.166 million net of discounts and issuance costs; the notes disclose $2.0 million outstanding before those discounts and costs. Capital lease liabilities totaled $0.186 million.
- Senior and junior notes were converted into preferred and common stock at the merger; Webster Bank debt was paid at closing. Connecticut Innovations and DECD balances were paid in July 2017. The balance sheet also reflects a $0.618 million common-stock warrant liability.
Merger, outlook, risks, and unusual items
- The June 29 reverse merger changed the company’s name from Transgenomic to Precipio and included a 1-for-30 reverse stock split. The merger added substantial goodwill and intangible assets and brought legacy Transgenomic liabilities and litigation into the combined company.
- Management stated that recurring losses, operating cash use, negative working capital, and the need to raise capital create substantial doubt about the company’s ability to continue as a going concern. No quantified revenue, earnings, or cash-flow guidance was provided.
- On August 1, the company announced plans for an underwritten public offering of common stock and warrants. Completion, size, and terms were uncertain, and management said additional funding would still be needed even if the offering were completed.
- A $125,000 unsecured convertible note, plus accrued interest, had an extended payment date of August 16, 2017. The filing states that, as of August 21, payment had not been made; the company was seeking a resolution, with no assurance of agreement. Failure to pay within the specified period could constitute an event of default.
- Material recorded or disclosed claims include settlements involving UNMC, Fox Chase/IDT, Mount Sinai, a former landlord, XIFIN, Science Park Development, CPA Global, and EdgeBio. The company also disclosed an unresolved shareholder lawsuit for which it could not estimate a loss range; vendor payment delinquencies and threatened collection actions were noted.
- Management identified material weaknesses in accounting for complex debt and equity instruments and in revenue recognition, including payor-contract and estimation controls. The company said it added review steps and accounting personnel, but remediation was ongoing.
- Key business risks include continued losses and financing dependence; uncertain reimbursement and market acceptance; sales-force execution; integration and realization of merger synergies; reliance on academic pathology services; and healthcare, laboratory, privacy, and intellectual-property regulation. Management reported no income-tax expense, with a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether the planned offering was completed, its proceeds and dilution, and the company’s subsequent cash runway.
- Resolution and payment status of the August 16 note, other debt maturities, and delinquent vendor and settlement obligations.
- Whether case volumes and revenue stabilized after sales-team turnover, and whether the announced Asian distribution agreement generated business.
- Progress in remediating material weaknesses and the reliability of revenue, allowance, and complex-instrument accounting estimates.
- Merger-related integration costs and liabilities, litigation outcomes, and whether the company’s going-concern position improved.