Precipio, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 13, 2020. Precipio is a cancer diagnostics company operating laboratories in Connecticut and Nebraska. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales, after doubtful-account allowance | $1.627 million | $0.784 million | $4.151 million | $2.439 million |
| Gross profit / margin | $0.377 million / 23% | $0.028 million / 4% | $0.673 million / 16% | $0.238 million / 10% |
| Operating loss | $(2.432) million | $(2.363) million | $(6.894) million | $(6.717) million |
| Net loss | $(3.292) million | $(1.897) million | $(8.729) million | $(9.462) million |
| Net loss attributable to common stockholders | $(3.302) million | $(1.897) million | $(12.100) million | $(9.462) million |
| Basic and diluted loss per share | $(0.21) | $(0.31) | $(1.01) | $(1.85) |
- Revenue before the doubtful-account allowance was $2.049 million for Q3 and $5.176 million for the nine months. The allowance was $0.422 million and $1.025 million, respectively.
- Cash was $2.158 million at September 30, versus $0.848 million at year-end 2019. Current assets were $3.968 million and current liabilities $4.467 million, leaving negative working capital of $0.499 million.
- Nine-month operating cash use was $5.983 million, investing cash use $0.066 million, and financing cash provided $7.359 million. Financing included $6.921 million from common-stock issuance and $0.787 million of PPP borrowing.
- Reported long-term debt was $1.030 million, including the $0.787 million PPP loan; $0.530 million was current. Lease liabilities totaled $0.514 million. Separately, common-stock warrant liabilities were $1.631 million.
Changes and operating developments
- Net sales rose 108% in Q3 and 70% for the nine-month period year over year. Management attributed the increase mainly to patient diagnostic testing volume: 1,135 cases in Q3 versus 445, and 2,575 for nine months versus 1,250.
- Higher case volume improved gross margin, which management said helped absorb laboratory capacity and leverage fixed costs. Operating expenses increased to $2.809 million in Q3 and $7.567 million for nine months, mainly from sales and marketing personnel costs.
- Despite higher sales and gross profit, the Q3 net loss widened, primarily reflecting a $0.857 million noncash warrant revaluation expense; the prior-year quarter included a $0.563 million warrant revaluation gain. For nine months, common-stockholder loss also included a $3.344 million deemed dividend related to down-round features.
- Common shares outstanding increased to 16,676,916 at September 30 from 7,898,117 at December 31, 2019, reflecting equity sales and note conversions. The filing reports 17,226,916 shares outstanding as of November 11, 2020.
Outlook, risks and unusual items
- Going concern: Management states substantial doubt remains about the Company’s ability to continue as a going concern for the 12 months following issuance. It cites recurring losses, $6.0 million of operating cash use over nine months, negative working capital, and dependence on revenue growth and additional financing.
- The Company had received $6.7 million under its 2020 Lincoln Park stock purchase agreement by the filing date, with approximately $3.3 million of stated capacity remaining then, subject to agreement terms and market conditions. A separate effective shelf registration permits offerings of up to $50 million, but no related prospectus supplement had been filed by issuance.
- COVID-19 effects remain uncertain. The Company reported business interruptions of 30% to 85% in certain urban markets and said restrictions could continue through year-end 2020 or beyond. No quantified financial forecast was provided.
- Management launched the HemeScreen Reagent Rental program in Q2 and continued installations and customer onboarding in Q3; it expected revenue from these customers to begin in Q4 2020. The Company also began rolling out distributed COVID-19 antibody tests as laboratory CLIA tests and described possible future point-of-care and retail offerings, subject to further FDA authorization where applicable.
- The PPP loan carries 1% interest and may be forgiven subject to program requirements; forgiveness was not assured. At issuance, the Company said it had incurred approximately $0.8 million in anticipated qualifying expenses.
- The March 2020 amendment to convertible notes triggered a reduction in conversion and warrant exercise prices and a $3.344 million deemed dividend. The amendment also resulted in a $1.225 million loss on extinguishment of convertible notes. Convertible notes were fully converted or otherwise no longer outstanding at September 30.
- The Campbell lawsuit settlement was approved and dismissed in June 2020; the matter is closed. A vendor patent-services claim remains disputed, with less than $0.1 million recorded as a liability. Management notes healthcare regulatory compliance may be subject to future review.
- The Company regained Nasdaq minimum-bid-price compliance in June 2020. Management reported disclosure controls were effective at a reasonable assurance level and no material changes to internal control occurred during the quarter.
Important facts for investors to verify
- Whether revenue growth and Q4 HemeScreen customer revenue materialized, and how COVID-19 affected testing volumes and collections after September 30.
- Cash runway, near-term payment needs, and the availability and actual use of remaining Lincoln Park capacity or other financing; assess potential dilution.
- Receivables collectability: gross receivables were $4.785 million and the allowance was $3.699 million at September 30; verify payer mix, collection trends, and reimbursement estimates.
- PPP forgiveness status and any repayment obligation, alongside the Company’s progress toward resolving the disclosed going-concern uncertainty.
- Future warrant-liability revaluations, which are noncash but can materially affect reported earnings, and the impact of outstanding warrants, options, and preferred stock on dilution.