Precipio, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed April 13, 2018. This is an annual report, not a standalone fourth-quarter report. The June 2017 reverse merger with Precipio Diagnostics changed the company’s business and reporting basis, so comparisons with 2016 are not fully like-for-like.
Business context
Precipio provides oncology diagnostic services through a New Haven laboratory and a Yale pathology partnership, and is developing and commercializing ICE-COLD-PCR (ICP), a licensed technology intended to improve mutation detection in liquid biopsies. Its business also includes a platform connecting patients, physicians, and academic experts. The company reported that Medicare, Medicaid, and other government-sponsored programs directly accounted for approximately 36% of 2017 revenue.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1.723 million | $1.723 million |
| Gross profit / margin | $0.292 million / 17% | $0.753 million / 44% |
| Operating loss | $15.511 million | $1.712 million |
| Net loss | $20.694 million | $2.227 million |
| Net loss available to common shareholders | $33.209 million | $4.082 million |
| Net cash used in operations | $6.690 million | $0.959 million |
| Cash at year-end | $0.421 million | $0.051 million |
| Working capital | $(8.294) million | $(2.460) million |
Operating expenses were $15.803 million, including a $9.315 million goodwill impairment charge. Other notable 2017 expenses included $2.676 million in merger advisory fees, $2.324 million in net interest expense, and $1.391 million for debt extinguishment and induced conversion. Gains from liability settlements and troubled-debt restructuring partly offset expenses. No income tax expense was recorded.
At year-end, total assets were $27.260 million and total liabilities were $14.235 million. Recorded long-term debt, including current maturities, was $3.416 million; current liabilities were $10.036 million. The company reported that it was delinquent in payments to certain lenders and vendors. Contractual obligations for debt, interest, leases, and purchases totaled $5.081 million, excluding some subsequently disclosed commitments.
Changes versus prior period
- Net sales were reported as flat, but patient diagnostic cases fell 35%, to 788 from 1,221; management attributed the decline to turnover of key sales personnel.
- Gross profit declined $0.461 million and gross margin fell from 44% to 17%, reflecting higher direct service costs and merger-related operations.
- Net loss and operating cash use increased substantially. The goodwill impairment, merger costs, and financing-related charges were significant contributors.
- The merger added goodwill and acquired intangible assets; year-end goodwill was $4.685 million after impairment, and net intangibles were $20.458 million.
- Financing and restructuring activity included an August public offering, a November preferred-stock offering, conversions of debt and preferred securities, and vendor debt settlements. These transactions substantially increased shares and potential dilution.
Revenue disclosure note: The audited statements report net sales of $1.723 million, while related MD&A and note disclosures show different service-revenue figures (including $1.392 million in one MD&A table and $1.702 million in the revenue note). The filing text does not provide a clear reconciliation of these figures.
Outlook, risks, contingencies, and unusual items
Management provided no quantified revenue, earnings, or cash-flow guidance. Its stated priorities were growing diagnostic services, expanding academic partnerships, and commercializing ICP products. The filing describes substantial uncertainty about achieving revenue growth, market acceptance, reimbursement, and profitability.
- 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, citing recurring losses, negative working capital, low cash, overdue obligations, and reliance on additional financing. The financial statements contain no adjustments for a possible failure to continue as a going concern.
- Subsequent financing and obligations: After year-end, the company reported a $0.4 million DECD grant and loan, an equity purchase agreement for up to $8 million with an initial share sale producing approximately $0.7 million net, and approximately $0.2 million of net proceeds from preferred-stock and warrant conversions/exercises. It settled with Crede for $1.925 million payable over 16 months. These measures did not eliminate the disclosed going-concern doubt. The filing gives differing figures for the initial equity-sale proceeds in different sections.
- Listing risk: Nasdaq notified the company on March 26, 2018 that its bid price was below $1.00. The stated initial cure deadline was September 24, 2018; delisting remained possible if compliance was not regained.
- Legal and vendor matters: Multiple vendor-related claims and settlements are described. A shareholder merger-related lawsuit remained unresolved, with the company unable to estimate a loss range. The Crede matter was settled after year-end; Bio-Rad also filed a claim in March 2018.
- Business and regulatory risks: The company depends on its Yale pathology relationship, faces reimbursement and laboratory-certification risks, and competes with larger diagnostic firms. Commercial adoption and clinical evidence for its offerings were not assured.
- Clinical commentary: The filing reports preliminary first-quarter 2018 study results with Yale suggesting a four-fold advantage in diagnostic accuracy versus outside pathology laboratories; these were preliminary company-reported results, not a completed or independently validated outcome.
Important facts for investors to verify
- Reconcile the conflicting service-revenue disclosures and confirm the case-volume decline and its effect on recurring revenue.
- Assess available cash, operating burn, overdue payables, debt-payment schedules, and whether post-year-end financing is sufficient to fund operations.
- Review dilution from common-stock sales, preferred conversions, warrants, and the expanded equity incentive plan.
- Evaluate the goodwill impairment, acquired intangible-asset values, and the assumptions behind any expected commercialization benefits.
- Check the status and estimated exposure of the unresolved litigation and vendor claims, and confirm Nasdaq listing compliance.
- Validate the preliminary Yale study claims and assess reimbursement, customer adoption, and the company’s dependence on its academic partner.