Precipio, Inc. (then Transgenomic, Inc.) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is Transgenomic’s annual filing, not a standalone fourth-quarter report or a 2016 financial report for the post-merger Precipio, Inc. The proposed merger with Precipio Diagnostics, LLC was pending when the filing was issued.
Business context
At year-end, Transgenomic’s continuing business was primarily an Omaha-based laboratory-services operation supporting oncology and pharmacogenomics research and clinical trials. Its strategic focus was commercializing its MX-ICP mutation-enrichment technology through products, clinical testing, licensing, and partnerships. The filing describes MX-ICP as intended to improve detection of low-level mutations and support liquid-biopsy testing; these are company claims, not reported financial results.
Former Genetic Assays and Platforms activities and the Patient Testing business were reported as discontinued operations. The company had 19 continuing-operations employees at December 31, 2016, down from 37 a year earlier.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Continuing-operations net sales | $1.557 million | $1.929 million |
| Gross profit (loss) / margin | $(0.205) million / (13)% | $(0.011) million / (1)% |
| Operating expenses | $7.614 million | $8.908 million |
| Operating loss, continuing operations | $(7.819) million | $(8.919) million |
| Net loss, continuing operations | $(8.269) million | $(9.862) million |
| Net income (loss), discontinued operations | $0.653 million | $(23.092) million |
| Consolidated net loss | $(7.616) million | $(32.954) million |
| Loss per common share, continuing operations | $(0.38) | $(0.91) |
| Cash and cash equivalents at year-end | $0.110 million | $0.444 million |
| Cash used in continuing operating activities | $4.955 million | $7.578 million |
| Total debt, classified as current | $7.814 million | $7.596 million |
| Working capital | $(19.329) million | $(13.699) million |
Revenue fell 19%, mainly because fewer contract-laboratory customers had active projects; increased grant revenue partly offset the decline. The negative gross margin in 2016 reflected laboratory revenue insufficient to cover fixed direct costs. Operating expenses declined, including lower stock compensation, research and development, and franchise taxes. R&D expense was $1.422 million, versus $1.853 million.
Other expense was $0.450 million in 2016, including $1.038 million of interest expense, a $0.199 million loss on asset disposals, and a $0.788 million non-cash gain from warrant revaluation. The improved consolidated net loss versus 2015 largely reflects discontinued-operations results: 2015 included substantial impairment charges, while 2016 included asset-sale and accounts-payable-settlement gains.
Cash used in operating activities for the consolidated company was $3.550 million in 2016, compared with $12.378 million in 2015; discontinued operations provided $1.405 million of operating cash in 2016. Financing activities provided $2.210 million in 2016, including net proceeds from preferred securities and warrants, ATM share sales, and borrowing. Year-end current assets were $0.495 million against current liabilities of $19.824 million; total assets were $1.259 million and stockholders’ deficit was $19.350 million.
The $7.814 million of debt consisted of a $3.243 million revolving line, a $4.000 million term loan, and $0.571 million of convertible promissory notes. The company had failed to make required loan interest payments during the second half of 2016 and was in default; the secured lenders held liens on its assets. The filing reports total contractual obligations of $9.813 million, including debt and interest due in 2017 and $1.318 million of operating lease obligations.
Material changes, outlook, and risks
- Merger and proposed financing: Transgenomic expected to merge with Precipio Diagnostics in the second quarter of 2017 and then change its name to Precipio, Inc. Closing depended on approvals, a related preferred-stock financing, and other conditions; the outside termination date was extended to June 30, 2017. The filing described a proposed private placement of up to $7 million and conversion of secured debt into common and preferred securities. These transactions were not completed as of the filing.
- Potential dilution and preferred terms: The filing warned that existing Transgenomic common holders could own approximately 9% of the combined company on a fully diluted basis after the merger and related transactions. Proposed preferred shares carried an 8% cumulative annual payment and a liquidation preference generally equal to 1.5 times original purchase price plus accrued amounts, or the as-converted value, whichever was greater. Merger ownership and exchange-ratio descriptions vary across the filing and amendments; final terms should be checked against definitive documents.
- Going concern: Management and the independent auditor stated that substantial doubt existed about the company’s ability to continue as a going concern. Management cited the merger, revenue growth, improved collections, possible asset sales, and potential additional financing as possible remedies, but gave no assurance these would succeed. The financial statements include no adjustments for the outcome of this uncertainty.
- Listing and funding access: Nasdaq suspended trading in February 2017; the stock began trading on OTCQB under “TBIO.” The company anticipated it might not meet Nasdaq’s initial listing price requirement after the merger without a reverse split. Delisting could impair liquidity and access to capital.
- Operations and commercialization: Management reported launching a breast-cancer liquid-biopsy panel and an EGFR C797S test, signing a VWR distribution arrangement for research kits, and entering a LifeLabs licensing agreement in January 2017. Management expected licensing to become a major longer-term revenue source, but provided no quantified revenue or earnings guidance and acknowledged commercialization and partnership uncertainty.
- Contingencies and payment stress: The company reported approximately $0.6 million of delinquent vendor payables and multiple claims and settlements. A UNMC settlement payment was delinquent as of March 15, 2017; a landlord-related settlement and other vendor obligations were also disclosed. Fox Chase and a stockholder merger-related lawsuit remained unresolved, with potential losses not estimable; XIFIN sought approximately $0.27 million and applied for entry of default.
- Other items: Discontinued operations reported $2.163 million in 2016 sales and $0.653 million net income, including about $1.0 million of proceeds from asset sales and a $0.325 million gain on settlement of accounts payable. The company had $167.9 million of federal net operating loss carryforwards, but noted that a merger-related ownership change could limit their use. It discontinued matching employee 401(k) contributions effective January 1, 2017.
Important facts for investors to verify
- Whether the merger and the related private placement closed, and the final exchange ratio, financing amount, debt conversion, preferred-stock rights, and fully diluted ownership.
- Available cash, near-term cash requirements, debt and vendor-payment status, lender waivers, and the company’s ability to fund operations if the merger or financing does not close.
- Current Nasdaq or other exchange listing status, reverse-split effects, and resulting share liquidity and dilution.
- Actual MX-ICP test and licensing revenue, customer adoption, clinical validation, and the cost and timing of commercialization.
- Developments in the disclosed lawsuits, settlements, delinquent obligations, and any losses beyond recorded accruals.
- Comparability of 2015 and 2016 results, including discontinued-operation classifications and the 2015 revenue reclassification described in the filing.