Precipio, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Precipio is a cancer diagnostics company operating a clinical laboratory and developing diagnostic products, including ICE-COLD-PCR (ICP) technology for liquid biopsies. A reverse merger closed June 29, 2017; the historical comparative statements are those of Precipio Diagnostics, while 2017 results include the acquired Transgenomic business only after closing. The periods are therefore not fully comparable.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $270,000 | $365,000 | $778,000 | $1.407 million |
| Gross profit (loss) | $(77,000) | $134,000 | $(35,000) | $697,000 |
| Gross margin | (29)% | 35% | (5)% | 49% |
| Operating loss | $(3.633) million | $(363,000) | $(5.031) million | $(876,000) |
| Net loss | $(6.280) million | $(499,000) | $(10.719) million | $(1.251) million |
| Net loss available to common stockholders | $(10.128) million | $(499,000) | $(19.815) million | $(3.106) million |
| Basic and diluted loss per share | $(1.36) | $(1.15) | $(6.96) | $(7.23) |
- Revenue fell 26% in Q3 and 45% for the nine months. Management attributed the decline to fewer cases processed following turnover among key sales personnel: 207 versus 269 cases in Q3, and 636 versus 996 for the nine-month period.
- Cost of diagnostic services exceeded net sales in both 2017 periods. Management cited lower volume, laboratory fixed costs, relocation and restructuring costs, and professional fees.
- Operating expenses rose to $3.556 million in Q3 and $4.996 million for the nine months. They included a $1.015 million goodwill impairment; merger-related legal and advisory costs, public-company costs, increased compensation, and amortization of acquired intangibles also contributed.
- Interest expense was $1.883 million in Q3 and $2.265 million for the nine months. Much of the increase reflected amortization of bridge-note discounts and issuance costs. Debt extinguishment and induced conversions added losses of $1.338 million in Q3 and $1.391 million for the nine months; a $647,000 vendor-settlement gain partly offset these items.
Cash, liquidity and capital structure
- At September 30, cash was $381,000, compared with $51,000 at December 31, 2016. Nine-month operating cash outflow was $4.481 million; investing activities provided $101,000 and financing activities provided $4.710 million.
- Current assets were $1.112 million and current liabilities were $13.735 million, producing negative working capital of $12.623 million, versus negative $2.460 million at year-end 2016. Accounts payable was $10.034 million.
- Total liabilities were $14.571 million. Long-term debt was zero at September 30; current debt maturities were $42,000, and capital lease obligations totaled $175,000. The company had paid off or converted substantial legacy and bridge debt in connection with the merger and August financing.
- Assets included $12.817 million of goodwill and $20.779 million of net intangible assets recorded in the merger. The company recorded a $1.015 million goodwill impairment during Q3 after a decline in share price and market capitalization.
- The August public offering raised $6.0 million gross and approximately $5.0 million net. It included Series B preferred shares and warrants, and produced significant potential dilution. At September 30, 4.225 million warrants were outstanding. Common shares outstanding were 9.447 million at quarter-end and 10.029 million as of November 9.
Developments, outlook and risks
- Management described continued work to integrate operations and finance functions, relocation of clinical testing from Omaha to New Haven, and efforts to expand ICP-PCR awareness and product development. The company also reported its first multinational distribution agreement, with Clearbridge Health for services in several Asian countries.
- No quantitative revenue or earnings guidance was provided. Management’s stated plan depends on growing revenue, commercializing products and obtaining additional financing.
- Management and the auditor-related disclosures state that substantial doubt remains about the company’s ability to continue as a going concern. The company reported recurring operating losses, negative working capital and reliance on additional financing.
- Subsequent to quarter-end, vendors agreed to reduce approximately $5.0 million of currently due liabilities and restructure approximately $2.5 million as secured obligations payable over 48 months beginning July 2018; warrants were also to be issued. The company’s Series C financing closed November 9, raising $2.748 million gross and approximately $2.4 million net. These actions improve near-term capitalization but do not eliminate the stated going-concern uncertainty.
- Material weaknesses in internal controls remained: insufficient expertise for complex debt and equity accounting and inadequate revenue-recognition controls, including payor-contract and allowance estimates. Management said remediation was underway but not yet complete.
- Contingencies include multiple legacy vendor and contract disputes. The filing identifies a class-action merger-related case for which a loss estimate could not be made; an adverse resolution could materially affect liquidity or results. Healthcare reimbursement and fraud-and-abuse rules also pose regulatory risks.
Important facts for investors to verify
- Whether the vendor settlement and Series C proceeds provide adequate liquidity, and whether further financing is needed to meet obligations and fund operations.
- Whether the company can reverse the case-volume and revenue declines, retain sales personnel, and achieve sustainable gross margins.
- The terms and effects of preferred stock and warrants, including dilution and price adjustments tied to down-round provisions and the Series C offering.
- Progress in remediating the material weaknesses and improving revenue estimates, collections, and complex-instrument accounting.
- The status and potential financial impact of outstanding litigation, vendor claims, and other contingent liabilities.
- The scale and commercial progress of ICP-PCR, the academic partnerships, and the Clearbridge distribution agreement; the filing provides no quantified future revenue contribution.