Precipio, Inc. — Q3 2021 Form 10-Q
Business context and period: Precipio is a cancer diagnostics and reagent technology company operating clinical laboratories and developing products including HemeScreen. This unaudited filing covers the three and nine months ended September 30, 2021; amounts below are USD unless stated otherwise.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2.246m | $1.627m | $6.414m | $4.151m |
| Gross profit / margin | $0.528m / 24% | $0.377m / 23% | $1.747m / 27% | $0.673m / 16% |
| Operating expenses | $2.967m | $2.809m | $8.455m | $7.567m |
| Operating loss | $(2.439)m | $(2.432)m | $(6.708)m | $(6.894)m |
| Net loss | $(1.854)m | $(3.292)m | $(6.315)m | $(8.729)m |
| Loss per common share | $(0.08) | $(0.21) | $(0.31) | $(1.01) |
- Cash flow: For the nine months, operating cash use was $5.177m, investing cash use was $0.624m, and financing cash provided was $16.368m. Cash increased $10.567m to $13.223m.
- Liquidity: At September 30, cash was $13.223m, current assets $15.090m, current liabilities $3.648m, and working capital $11.442m, compared with a $0.452m working-capital deficit at December 31, 2020.
- Debt and obligations: Long-term debt, net of issuance costs, was $0.193m, down from $1.010m at year-end, following forgiveness of the $0.787m PPP loan. Finance and operating lease liabilities totaled $0.581m; common stock warrant liabilities were $1.629m.
- Equity financing: The company reported $16.2m net proceeds from common stock issuance during the nine months, including $14.9m through its ATM offering, and $0.4m from warrant exercises. Common shares outstanding rose from 17.58m at year-end to 22.71m at September 30.
Changes versus prior comparable periods
- Nine-month net sales increased 55%. Management attributed higher patient diagnostic service revenue to 30% more cases processed (3,354 versus 2,575) and a lower doubtful-account allowance; other revenue also grew, mainly from HemeScreen. Contract diagnostic service revenue declined by about $0.4m.
- Q3 net sales increased 38%, although reported service revenue before the doubtful-account adjustment was unchanged at $1.998m. The improvement in reported Q3 sales principally reflects the allowance adjustment, which added $0.107m in 2021 versus reducing sales by $0.422m in 2020. Q3 cases processed fell 3% to 1,103.
- Nine-month gross margin improved to 27% from 16%, which management linked to case-volume growth and better absorption of fixed laboratory costs. Q3 margin increased to 24% from 23%.
- Nine-month net loss narrowed, partly reflecting a $0.794m PPP-loan forgiveness gain and lower interest expense; warrant revaluation remained a noncash expense of $0.434m for the period. Q3 included a $0.578m warrant revaluation gain, contributing to the lower net loss versus 2020.
Outlook, risks, and unusual items
- Going concern: Management stated that substantial doubt remains about the company’s ability to continue as a going concern for the twelve months following issuance. It cited recurring losses, operating cash use, the need to execute its business plan and generate revenue, and the need for financing to meet obligations. The statements do not include adjustments that might result if the company cannot continue as a going concern.
- Funding capacity: Under its ATM agreement, the company had received approximately $15.4m gross proceeds through issuance of 4.501m shares and reported approximately $6.6m remaining available under the agreement, subject to offering limits and other conditions. The filing says no ATM shares were sold from October 1 through the filing date.
- Management outlook: The company expected case volume and HemeScreen Reagent Rental (HSRR) revenue to increase, with potential improvement in costs per case as volume generates economies of scale. No quantified financial guidance was provided.
- Business risks: COVID-19 impacts remained uncertain; management cited interruptions in certain urban markets ranging from 30% to 85%. Other disclosed risks include continued losses, dependence on additional capital, payer reimbursement and collection estimates, healthcare regulation, and competition.
- Other matters: The company reported delinquent vendor payables and threatened or potential collection actions. A patent-services vendor had alleged approximately $0.2m was owed; less than $0.1m was accrued. Management reported no material regulatory inquiries and said disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether cash burn, operating performance, and available ATM proceeds are sufficient to address the stated going-concern uncertainty.
- How much reported revenue growth reflects higher test volumes and recurring HSRR sales versus allowance changes, and whether HSRR customers and revenue continue to expand.
- Future payer collections, doubtful-account estimates, reimbursement levels, and customer concentration; one customer represented 22% of accounts receivable at September 30.
- The potential dilution from equity issuance and outstanding options, warrants, and preferred stock; the filing excluded 3.60m potentially dilutive securities from diluted loss per share as anti-dilutive.
- Whether COVID-19 disruption, vendor payment issues, and healthcare regulatory or reimbursement risks materially affect operations or liquidity.