Precipio, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 13, 2023. Unless noted, financial amounts are in millions of dollars. Precipio develops and provides cancer diagnostic testing, products, reagents and related services.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $4.518 | $2.215 | $10.868 | $7.021 |
| Gross profit | $1.885 | $0.436 | $4.005 | $1.912 |
| Gross margin | 42% | 20% | 37% | 27% |
| Operating expenses | $3.333 | $3.665 | $10.771 | $12.383 |
| Operating loss | $(1.448) | $(3.229) | $(6.766) | $(10.471) |
| Net loss | $(1.455) | $(3.173) | $(6.778) | $(9.895) |
| Basic and diluted loss per share | $(1.04) | $(2.79) | $(5.39) | $(8.72) |
Revenue growth reflected higher diagnostic case volumes and HemeScreen reagent sales. The company processed 2,105 cases in Q3 versus 1,031 a year earlier, and 4,915 cases in the first nine months versus 3,037. Q3 net sales rose 104%; nine-month sales rose 55%. Gross margin improved as higher volume increased revenue and helped absorb fixed laboratory costs. Operating expenses declined, including lower stock-based compensation, although sales and marketing costs increased.
Cash flow and liquidity: Nine-month operating cash use was $3.673, improved from $6.221 in 2022. Investing cash use was $0.077; financing provided $1.867, including $2.245 net proceeds from common-stock issuance. Cash fell $1.883 from year-end to $1.562. At September 30, current assets were $4.309 and current liabilities $5.454, leaving negative working capital of $1.145, compared with positive working capital of $1.349 at December 31, 2022.
Debt and leases: Long-term debt, including current maturities and net of issuance costs, totaled $0.447, of which $0.334 was current. Debt includes a 9.99% financed-insurance loan. Lease liabilities totaled $0.849 ($0.365 current). Accounts payable were $2.513 and accrued expenses $2.213.
Material changes and notable items
- Q3 net sales increased $2.303 year over year; nine-month sales increased $3.847. Service revenue growth was driven by more cases, while other revenue growth was primarily attributed to HemeScreen reagent sales.
- Nine-month net loss narrowed by $3.117 year over year. The comparison also reflects non-cash warrant-revaluation income of $0.578 in 2022, versus none in 2023.
- In June 2023, Precipio raised approximately $2.0 million gross, or approximately $1.8 million net, in a registered direct offering, issuing 206,250 common shares, pre-funded warrants for 15,972 shares and warrants for 444,444 shares. The latter warrants have a $12.60 exercise price. The filing reports 1,380,555 common shares outstanding at September 30 and 1,420,125 as of November 9.
- A one-for-20 reverse stock split took effect September 21, 2023. Nasdaq notified the company on October 6 that it had regained compliance with the minimum bid-price rule.
- The joint venture was dissolved on November 1, 2023, with an effective date of December 31, 2022.
Outlook, risks and contingencies
- Going concern: Management states that substantial doubt remains about Precipio’s ability to continue as a going concern for the 12 months following issuance of the financial statements. Continued operations depend on executing its business plan, generating additional revenue and raising financing to meet obligations. The company reported a $6.8 million nine-month net loss, $3.7 million operating cash use, a $99.1 million accumulated deficit and negative working capital.
- The company had approximately $3.8 million available under its 2023 at-the-market equity sales agreement, but had raised less than $1,000 under that agreement by the financial-statement issuance date. Further equity financing may dilute existing shareholders; the filing notes substantial potential dilution from outstanding warrants and options.
- Management expects losses to continue at least through 2023 and anticipates higher selling, general and administrative costs as it develops markets and expands product support. The filing provides no quantified revenue, earnings or cash-flow guidance.
- Precipio reports that certain vendor and supplier payables are delinquent and that vendors have taken or threatened legal action to collect. It also discloses a longstanding CPA Global claim of approximately $0.2 million; less than $0.1 million is recorded as a liability, and no claim has been filed.
- Medicare and Medicaid reimbursement rules are complex, and management says recorded estimates could change materially. The company also faces healthcare regulatory and fraud-and-abuse compliance risks, payer and collection risk, financing and Nasdaq-listing risks, and broader macroeconomic and geopolitical uncertainties.
- Management concluded disclosure controls were effective at a reasonable assurance level as of September 30, 2023, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether cash generation, case growth and product sales can improve enough to address the going-concern warning and negative working capital.
- Availability, timing and dilution impact of additional financing, including actual use of the remaining at-the-market capacity and potential warrant or option exercises.
- Collection of receivables and sustainability of reimbursement assumptions, including the impact of payer mix and large customer concentrations.
- Status and resolution of delinquent vendor balances, threatened collection actions and other legal or regulatory contingencies.
- Post-quarter share count, continued Nasdaq listing compliance and the operating or financial effects of the joint venture’s dissolution.