Precipio, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Precipio is a cancer diagnostics company operating a diagnostic laboratory and an R&D facility; its business also includes biomarker testing and related services. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales, after doubtful-account allowance | $0.784 | $0.650 | $2.439 | $2.179 |
| Gross profit (loss) | $0.028 | $(0.011) | $0.238 | $0.188 |
| Gross margin | 4% | (2)% | 10% | 9% |
| Operating expenses | $2.391 | $4.106 | $6.955 | $8.936 |
| Operating loss | $(2.363) | $(4.117) | $(6.717) | $(8.748) |
| Net loss | $(1.897) | $(3.849) | $(9.462) | $(9.119) |
| Basic and diluted loss per share | $(0.31) | $(2.49) | $(1.85) | $(10.30) |
- Q3 service revenue before doubtful-account allowances was $1.020 million, versus $0.808 million a year earlier; the allowance was $0.262 million versus $0.173 million. Nine-month service revenue before allowances was $3.125 million versus $2.498 million, with allowances of $0.723 million versus $0.399 million.
- Operating cash used was $7.001 million in the first nine months, versus $4.801 million in 2018. Investing cash use was $0.049 million; financing provided $8.352 million. Cash rose $1.302 million to $1.683 million.
- At September 30, cash was $1.683 million, current assets $2.956 million and current liabilities $4.640 million, resulting in negative working capital of $1.684 million. Accounts receivable, net, was $0.693 million; gross receivables were $3.125 million, offset by a $2.432 million allowance.
- Long-term debt, net of issuance costs, was $0.661 million, of which $0.454 million was current. Convertible notes were $0.034 million net of $2.054 million in discounts and issuance costs, all classified current. Lease liabilities totaled $0.771 million. Warrant liabilities were $1.773 million.
Changes versus the prior comparable period
- Net sales increased 21% in Q3 and 12% for the first nine months. Management attributed growth primarily to patient diagnostic testing: cases processed rose 2% in Q3 (445 versus 436) and 30% year to date (1,250 versus 959), associated with increased sales personnel.
- For the first nine months, patient diagnostic revenue increased about $0.8 million, partly offset by a $0.5 million decline in contract diagnostic revenue and a $0.1 million decline in clinical research grants. Grant revenue was zero in 2019 compared with $0.075 million in 2018.
- Operating expenses declined $1.7 million in Q3 and $2.0 million year to date, mainly due to lower goodwill impairment and legal/professional costs. The 2018 comparison included goodwill impairment of $1.275 million for Q3 and $1.569 million year to date; there was none in 2019. Higher personnel costs partly offset the reductions.
- Despite lower operating losses, nine-month net loss increased $0.343 million. Other expense was $2.745 million, including $1.870 million in losses on convertible-note issuance and $1.128 million in warrant modifications; gains on liability settlements of $1.251 million partly offset these items. Q3 included a $0.563 million warrant revaluation gain.
- Common shares outstanding rose from 2.299 million at December 31, 2018 to 7.136 million at September 30, 2019, reflecting financing and conversions of debt, among other activity. A 1-for-15 reverse split took effect in April 2019; share and per-share amounts are presented on a split-adjusted basis.
Outlook, risks and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern for the twelve months following issuance. The company reported a $9.5 million nine-month net loss, negative working capital of $1.7 million and $7.0 million of operating cash use. Continued operations depend on executing its plan, generating revenue and obtaining financing; there is no assurance those efforts will be sufficient.
- Financing and dilution: The Lincoln Park purchase agreement allows up to $10.0 million of common-stock purchases subject to limitations. As of the report’s issuance, the company said it had received $7.2 million cumulatively, including $0.6 million from sales after September 30, leaving $2.8 million available under the agreement. Availability depends in part on market price and other funding sources. The company also issued convertible bridge notes and warrants; conversions and equity sales increased the share count materially.
- Profitability and commercial risks: The company expects continued losses and says it may need substantial additional capital. It cautions that it may not achieve profitability or successfully commercialize its diagnostic technology. Customer concentration, payer reimbursement estimates, collections and potential bad-debt losses are risks; two customers represented about 29% of Q3 2019 net sales.
- Litigation: A proposed class-action settlement totals $1.95 million, primarily funded by insurance. The company’s estimated share was approximately $0.3 million beyond legal fees already applied to its deductible. The parties deposited funds into escrow; final court approval was pending, with a fairness hearing scheduled for November 2019.
- Other notable items: Vendor settlements generated $1.251 million in net gains during the first nine months, including a gain of about $0.9 million from settling a $1.5 million service-provider obligation for about $0.6 million. The company recorded a $0.266 million litigation loss. New lease accounting resulted in recognition of about $0.7 million of lease assets and liabilities at adoption.
- No numerical revenue, earnings or cash-flow guidance is provided. Management’s commentary emphasizes growing diagnostic case volume and the need for additional revenue and financing. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the company can sustain funding and meet obligations, including the terms and practical availability of remaining Lincoln Park financing.
- Cash burn, operating cash flow and working-capital trends in subsequent filings, and whether the stated financing plan addresses the disclosed going-concern uncertainty.
- Whether diagnostic volume growth translates into improved net sales, gross margins and collections, given rising allowances and the decline in contract diagnostics and grants.
- Further dilution from equity sales, warrant exercises and convertible securities; verify the reported share count and post-quarter changes.
- Final court approval and cash distribution for the $1.95 million settlement, and any further litigation or regulatory developments.
- Key non-cash and unusual earnings items, particularly warrant valuations, note issuance costs, liability-settlement gains and litigation charges, when assessing recurring performance.