Precipio, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Precipio is a cancer diagnostics company operating a diagnostic laboratory and developing diagnostic products, including its ICE-COLD-PCR liquid-biopsy technology. Unless stated otherwise, financial amounts below are in thousands of dollars.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $712 | $248 |
| Cost of sales | $688 | $182 |
| Gross profit / margin | $24 / 3% | $66 / 27% |
| Operating expenses | $2,472 | $662 |
| Operating loss | $(2,448) | $(596) |
| Net loss | $(2,439) | $(758) |
| Net loss available to common stockholders | $(5,953) | $(758) |
| Basic and diluted loss per share | $(0.47) | $(1.69) |
| Cash used in operating activities | $(1,145) | $(326) |
- Revenue net of contractual allowances increased 162% to $796; net sales after the doubtful-account allowance rose 187%. The increase primarily reflected $488 of contract diagnostic revenue. Patient diagnostic cases declined 30%, to 140 from 199.
- Cash was $286 at quarter-end, down from $421 at December 31, 2017. Current assets were $1,206 and current liabilities $8,751, resulting in negative working capital of $7,545.
- Long-term debt, including current maturities, totaled $3,570; capital lease liabilities totaled a further $151. Accounts payable were $4,956. The filing reports $1,015 of financing cash inflows, including stock issuance, warrant exercises and debt proceeds.
Changes and notable items
- Reported Q1 2017 results do not include Transgenomic, whose operations entered the consolidated statements after the June 2017 merger. Pro forma Q1 2017 results assuming the merger had occurred January 1, 2017 show net sales of $907 and net loss available to common stockholders of $2,778, versus $712 and $5,953, respectively, in Q1 2018. These pro forma figures are not a substitute for reported results.
- Gross margin fell to 3% from 27%, which management attributed to higher professional medical fees and diagnostic-laboratory supplies. Operating expenses rose by $1.8 million, including higher staffing, public-company, professional-fee and amortization costs, plus a $294 goodwill impairment charge.
- Q1 other income and expense included a $261 warrant revaluation gain and $141 gain on settling a liability, partly offset by a $385 loss on settlement of equity instruments. The $3,514 deemed dividend—related to preferred-stock conversion terms and inducements—reduced earnings available to common stockholders but was not an operating expense.
- Shares issued and outstanding increased to 19,668,572 at March 31, 2018 from 10,196,620 at year-end 2017, largely reflecting preferred-stock conversions and creditor settlements. The company also issued 3.3 million stock options during the quarter.
Outlook, risks and contingencies
- Going concern: Management stated that substantial doubt remained about the company’s ability to continue as a going concern for the next 12 months, citing recurring losses, negative working capital and operating cash use. Continued operations depend on executing the business plan and obtaining additional financing.
- In April 2018, the company filed a Form S-1 related to an equity purchase agreement with Leviston, which provides for up to $8 million of share purchases at the company’s option, subject to agreement terms and registration effectiveness. It also entered into an agreement for up to approximately $3.3 million of 8% senior secured convertible notes; the initial closing generated $1.66 million gross proceeds for notes with $1.809 million principal. The filing gives conflicting warrant-coverage descriptions for this financing: 25% in the subsequent-events note and 100% in MD&A.
- A $3.2 million secured creditor obligation is payable in 48 monthly installments beginning July 2018. Under a Crede settlement, $1.925 million is payable over 16 months, in cash or, at the company’s discretion, stock; the agreement also includes an affidavit of confession of judgment.
- Nasdaq notified the company that it did not meet the $1.00 minimum bid-price requirement. It had until September 24, 2018 to regain compliance; failure could threaten its listing.
- Management described preliminary Yale study results as showing four-fold superiority in diagnostic accuracy versus outside pathology laboratories, and reported new ICP products and international distribution partnerships. These are management-reported developments, not financial guidance; the filing provides no quantified revenue or earnings guidance.
- Other risks include declining patient case volume attributed to sales-personnel turnover, substantial financing needs and dilution, reimbursement and collection uncertainty, healthcare regulatory exposure, and vendor claims. The Campbell lawsuit was dismissed on May 3, 2018; other disclosed claims include vendor litigation and the Bio-Rad payment dispute.
Investor verification priorities
- Confirm the final terms, warrant coverage, proceeds received and repayment or conversion provisions of the April 2018 secured convertible-note financing.
- Assess near-term cash needs against operating cash burn, negative working capital, creditor payments and the company’s financing capacity.
- Reconcile the reported revenue increase with the decline in patient cases, the contribution and repeatability of contract diagnostic revenue, and the deterioration in gross margin.
- Review dilution exposure from the equity purchase agreement, outstanding warrants, convertible securities, stock options and the expanded equity-plan share reserve.
- Monitor Nasdaq bid-price compliance and the status of creditor, vendor and other legal matters.