Precipio, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed April 16, 2019. This is an annual report, not a standalone fourth-quarter report. It does not provide a clear set of Q4-only financial results. Comparative figures are for FY 2017.
Business context
Precipio is a cancer diagnostics company operating a clinical laboratory in New Haven, Connecticut, and an R&D facility in Omaha, Nebraska. It provides diagnostic services and is developing or commercializing ICE-COLD-PCR (ICP), IV-Cell culture media and the HemeScreen mutation panel. Its clinical model relies on academic pathologists, including an exclusive pathology-services relationship with Yale.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $2.864 million | $1.723 million |
| Gross profit / margin | $0.225 million / 8% | $0.292 million / 17% |
| Operating loss | $13.912 million | $15.511 million |
| Net loss | $15.694 million | $20.694 million |
| Net loss available to common stockholders | $19.916 million | $33.209 million |
| Net cash used in operating activities | $6.754 million | $6.690 million |
| Cash at year-end | $0.381 million | $0.421 million |
| Working capital | $(11.972) million | $(8.294) million |
| Total assets / total liabilities | $21.605 million / $15.482 million | $27.260 million / $14.235 million |
- Service revenue, net of doubtful-account allowances, was $2.751 million, up 98%; clinical research grants were $0.100 million, down 64%. Total net sales increased 66%. Diagnostic case volume rose 71%, to 1,345 from 788. Contract diagnostic revenue benefited from FY 2017 including only half a year after the merger.
- Cost of sales rose to $2.639 million from $1.431 million, exceeding the increase in net sales and reducing gross margin to 8% from 17%.
- Operating expenses were $14.137 million, down from $15.803 million, mainly reflecting lower goodwill impairment ($4.685 million versus $9.315 million). Excluding impairment, operating expenses increased. R&D expense rose to $1.1 million from $0.5 million.
- Cash used in investing was $0.097 million; financing provided $6.811 million. Financing included $3.850 million of convertible-note proceeds, $2.008 million from common-stock issuance and $1.271 million from warrant exercises.
- At year-end, current liabilities were $13.765 million, including $4.377 million of current convertible notes and $5.169 million of accounts payable. Long-term debt was $0.516 million, and capital lease liabilities totaled $0.212 million. Contractual obligations were reported at $10.165 million, including $5.515 million of long-term debt and convertible notes.
Material changes, outlook and risks
- Revenue growth reflected higher diagnostic volume and contract work, but margin weakened as laboratory and medical processing costs increased. Government-sponsored healthcare programs directly accounted for approximately 54% of FY 2018 revenue, exposing the business to reimbursement changes.
- The company reported substantial doubt about its ability to continue as a going concern for the 12 months following issuance. It had a $15.7 million net loss, a $12.0 million working-capital deficit, $0.381 million cash and was delinquent on payments to some lenders and vendors. The auditor’s opinion was unmodified but included a going-concern explanatory paragraph; the statements contain no adjustments for a possible failure to continue as a going concern.
- Precipio had a $10 million Lincoln Park equity purchase facility, subject to conditions and market limits. As of April 14, 2019, it had received about $1.4 million from 2018 sales and $2.4 million from 2019 sales under the facility. Further reliance could be dilutive, and the filing states the company may need substantial additional financing.
- Convertible financing included senior secured bridge notes with variable conversion-price provisions, warrants and substantial accounting discounts and fair-value adjustments. At December 31, 2018, 37.8 million potentially dilutive securities were excluded from diluted loss per share as anti-dilutive. Common shares outstanding increased from 10.2 million at year-end 2017 to 34.5 million at year-end 2018; 74.1 million were outstanding as of April 11, 2019.
- Unusual FY 2018 items included $4.685 million of goodwill impairment, a $2.903 million loss on extinguishment of convertible notes, $1.328 million loss on issuance of convertible notes, and gains from warrant and derivative revaluation. The net loss improved year over year, but remained substantial; deemed dividends of $4.222 million increased the loss attributable to common stockholders.
- Nasdaq notified the company in March 2019 that it failed the $1 minimum-bid-price requirement and was subject to delisting. Precipio requested a hearing and said it was considering a reverse split; continued listing was not assured.
- Management described product development and commercialization plans but provided no quantified revenue, earnings or cash-flow guidance. Commercial adoption, reimbursement, regulatory compliance, competition, dependence on Yale pathologists, financing availability, litigation and dilution are material risks.
- Subsequent events: in January 2019, Crede and Leviston obligations were settled through convertible notes ($1.45 million and $0.7 million, respectively), and a $1.47 million service-provider obligation was settled for $0.55 million, payable under an agreed schedule. In April 2019, the company obtained about $0.8 million gross proceeds from an additional convertible-note closing.
- Management reported disclosure controls and internal control over financial reporting effective at year-end. A valuation-methodology material weakness identified during 2018 was reported as remediated with assistance from third-party valuation experts. The auditor was not engaged to audit internal controls.
Investor verification priorities
- Verify near-term liquidity, creditor payment status, cash burn and the financing needed to address the going-concern uncertainty.
- Review the terms, conversion prices, maturities, security interests and dilution effects of outstanding and subsequent convertible notes, warrants and equity-line issuances.
- Assess whether diagnostic revenue growth can translate into improved gross margins and collections, including the impact of doubtful-account allowances and payer reimbursement.
- Confirm Nasdaq hearing and listing status, any reverse split, and the effect of the share-count increase on existing holders.
- Check the status and potential exposure of the remanded Campbell lawsuit and other vendor claims, and track whether the stated settlements are paid as agreed.
- Validate commercial progress and independent evidence supporting adoption and performance claims for ICP, IV-Cell, HemeScreen and the academic-pathology model.