Precipio, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Precipio is a cancer diagnostics company operating CLIA laboratories and developing diagnostic products, reagents, and services. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are to the corresponding 2021 periods. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2.215 million | $2.246 million | $7.021 million | $6.414 million |
| Gross profit | $0.436 million | $0.528 million | $1.912 million | $1.747 million |
| Gross margin | 20% | 24% | 27% | 27% |
| Operating loss | $3.229 million | $2.439 million | $10.471 million | $6.708 million |
| Net loss | $3.173 million | $1.854 million | $9.895 million | $6.315 million |
| Net loss attributable to common stockholders | $3.179 million | $1.860 million | $9.913 million | $6.325 million |
| Loss per common share, basic and diluted | $0.14 | $0.08 | $0.44 | $0.31 |
- Cash flow: Operating activities used $6.221 million in the first nine months of 2022, versus $5.136 million in 2021. Investing activities used $0.225 million; financing activities used $0.078 million. Cash declined $6.524 million to $5.144 million from $11.668 million at December 31, 2021.
- Liquidity: Working capital was $3.008 million, down from $9.265 million at year-end 2021. Current assets were $7.418 million and current liabilities $4.410 million.
- Debt and leases: Reported debt was $0.508 million, including $0.367 million current and $0.141 million long-term. Lease liabilities totaled $1.076 million, of which $0.362 million was current.
- Balance sheet: Total assets were $23.547 million; accumulated deficit was $90.007 million. Common shares outstanding were 22,820,260 at September 30, 2022.
Material changes versus prior comparable periods
- Q3 net sales fell 1% year over year; nine-month net sales rose 9%. For the nine months, service revenue after collection allowances increased 2%, while other revenue—primarily related to the HSRR program—increased 90% to $0.977 million.
- Diagnostic case volume fell 6% in Q3 and 9% for the nine months, but management attributed higher patient service revenue for the nine-month period to improved reimbursement rates. Q3 patient diagnostic service revenue declined, in part because of higher doubtful-account allowances.
- Q3 gross margin fell to 20% from 24%; nine-month gross margin remained 27%. Operating expenses rose $0.7 million in Q3 and $3.9 million for the nine months, including higher sales and marketing, R&D, and stock-based compensation.
- Nine-month stock-based compensation was $3.405 million, versus $1.310 million in 2021. It included $1.1 million for accelerated vesting upon a former employee’s retirement and $0.5 million related to an option modification.
- Net income comparisons include noncash warrant revaluation effects: a $0.578 million gain in nine-month 2022 versus a $0.434 million loss in 2021. The prior-year period also included a $0.794 million gain from forgiveness of a Paycheck Protection Program loan.
Outlook, risks, contingencies, and unusual items
- Going concern: Management reported substantial doubt about the Company’s ability to continue as a going concern for the 12 months following issuance. Continued operations depend on executing the business plan, generating additional revenue, and obtaining financing to meet obligations. The filing reports recurring losses and operating cash outflows.
- Potential financing: The ATM agreement permits up to $22 million in aggregate sales. The Company reported approximately $15.1 million of net proceeds received through the agreement as of the filing, with $6.4 million available for future sales; further equity issuance could dilute shareholders. Nine-month 2022 ATM proceeds were $0.129 million net.
- Commercial outlook: Precipio signed distribution agreements with two major U.S. healthcare distributors to market HemeScreen products beginning in Q4 2022. Management expects sales and marketing expense to rise in coming quarters as it builds sales and support capacity; it cited anticipated product-revenue growth in 2023 but gave no quantified guidance.
- Nasdaq listing: On October 28, 2022, Nasdaq notified the Company it was below the $1.00 minimum bid-price requirement. It had until April 26, 2023 to regain compliance, with no assurance it would do so. Failure could lead to delisting and impair access to capital.
- Other risks and contingencies: The filing cites COVID-19-related supply-chain risks, reimbursement and collection uncertainty, rising operating costs, and dependence on additional capital. Certain vendor and supplier payables were delinquent, and some vendors had taken or threatened legal action. A patent-services provider asserted a claim of approximately $0.2 million; less than $0.1 million was recorded as a liability. Management said no material regulatory inquiries had been made, while noting possible future review.
- Technology change: The Company terminated its Dana-Farber license for ICE COLD PCR technology on September 1, 2022. Management did not expect a material business impact.
- Management stated disclosure controls were effective at a reasonable assurance level as of September 30, 2022; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Cash burn, available liquidity, timing of obligations, and the financing assumptions underlying management’s going-concern assessment.
- Progress in regaining Nasdaq’s minimum bid-price compliance and any consequences for capital raising.
- Whether distributor launches translate into HemeScreen sales, and how revenue, case volume, reimbursement rates, and gross margins develop.
- The size and collectability of receivables, changes in doubtful-account allowances, and status of delinquent vendor obligations or legal claims.
- Future stock-based compensation expense and potential dilution from the ATM, options, warrants, and preferred stock.