Precipio, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Precipio is a cancer diagnostics company operating a laboratory in New Haven, Connecticut, and a research and development facility in Omaha, Nebraska. This unaudited quarterly report covers the three and six months ended June 30, 2020; financial amounts below are in U.S. dollars, generally in millions unless stated otherwise. In April, Precipio formed an oncology services joint venture with Poplar Healthcare, holding a 49% ownership interest. Precipio consolidates the venture as the primary beneficiary of a variable interest entity.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1.308 | $0.942 | $2.524 | $1.655 |
| Gross profit | $0.171 | $0.172 | $0.296 | $0.210 |
| Gross margin | 13% | 18% | 12% | 13% |
| Operating loss | $(2.259) | $(2.295) | $(4.462) | $(4.354) |
| Net loss | $(2.232) | $(5.913) | $(5.437) | $(7.565) |
Q2 net loss attributable to common stockholders was $2.249 million, or $0.20 per share. For the first half, that measure was $8.798 million, or $0.89 per share; it included a $3.344 million deemed dividend associated with down-round provisions. Service revenue before the doubtful-account allowance was $1.616 million in Q2 and $3.074 million in the first half. The filing reports net sales after that allowance.
- Cash was $0.353 million at June 30, down from $0.848 million at December 31, 2019. Current assets were $2.015 million and current liabilities $4.680 million, resulting in negative working capital of $2.665 million.
- First-half operating cash use was $3.562 million, compared with $4.887 million in 2019. Investing cash use was $0.010 million; financing provided $3.077 million. Cash declined by $0.495 million.
- Total debt, net of issuance costs and including the PPP loan, was approximately $1.022 million; convertible notes were zero at June 30. The balance sheet also reported $0.774 million of warrant liabilities and $0.578 million of lease liabilities.
- Gross accounts receivable was $4.634 million, offset by a $3.280 million allowance for doubtful accounts, leaving net receivables of $1.354 million.
Material changes versus the comparable period
- Net sales rose 39% in Q2 and 53% in the first half year over year. Management attributed growth primarily to increased patient diagnostic testing volume: 785 cases in Q2 versus 445, and 1,440 cases in the first half versus 805. It linked the volume increase to added sales personnel.
- Higher patient-testing revenue was partly offset by lower contract diagnostics revenue. Gross profit was essentially unchanged in Q2 and increased in the first half, but gross margin narrowed to 13% and 12%, respectively, as cost of sales increased.
- Operating expenses were down slightly in Q2 but up $0.2 million for the first half, including increased sales and marketing costs partly offset by lower general and administrative professional fees.
- First-half net loss improved year over year, partly because 2019 included sizable warrant and derivative revaluation costs, convertible-note issuance losses, litigation costs, and gains on liability settlements. The 2020 period included a $1.225 million loss on extinguishment of convertible notes.
- Common shares issued and outstanding rose to 14.617 million at June 30 from 7.898 million at December 31, 2019. The filing reports 16.427 million shares outstanding as of August 12, 2020.
Outlook, risks, contingencies and unusual items
- Going concern: Management stated that substantial doubt remained about Precipio’s ability to continue as a going concern for the twelve months following issuance. The company cited recurring losses, negative working capital, operating cash use, the need to generate revenue and obtain financing, and potential COVID-19 disruption.
- Funding and dilution: The Lincoln Park 2020 purchase agreement permits up to $10 million of stock sales, subject to conditions. By the report’s issuance, Precipio had received $4.9 million under it, with $5.1 million remaining available. A separate effective shelf registration permits offerings of up to $50 million, but no prospectus supplement had been filed as of issuance. Continued reliance on equity financing may dilute shareholders.
- PPP loan: Precipio borrowed $787,200 at 1% interest, with a two-year term and initial payment deferral. The company intended to apply for forgiveness and said it had incurred qualifying expenses, but forgiveness was not assured; any unforgiven balance would require repayment.
- COVID-19: The filing describes uncertain effects on customers, employees, vendors, revenues and liquidity, and reports business interruptions in certain urban markets ranging from 30% to 85%. On July 30, 2020, after quarter-end, Precipio announced an agreement to distribute an FDA-authorized COVID-19 antibody test. The filing described planned CLIA-laboratory launch and later physician-office and retail channels, subject to further authorization where applicable; commercial results were not established in this report.
- Receivables and reimbursement: Management noted uncertainty in Medicare and Medicaid reimbursement estimates. The substantial doubtful-account allowance and customer concentration warrant attention.
- Other developments: Nasdaq confirmed on June 29 that the company had regained compliance with the $1.00 minimum bid-price requirement. The Campbell litigation settlement was approved and the matter closed in June 2020. The filing also notes delinquent vendor payables and possible collection actions; a CPA Global claim of approximately $0.2 million remained disputed, with a liability of less than $0.1 million recorded.
Important facts for investors to verify
- Whether operating cash use, collections and the allowance for doubtful accounts improve, and how much of gross receivables is ultimately collected.
- Actual cash runway and financing available after June 30, including Lincoln Park draw conditions, subsequent share issuance and potential dilution.
- Whether PPP loan forgiveness is obtained and the repayment impact if any portion is not forgiven.
- Whether COVID-19 disruptions persist and whether the antibody-test distribution plan receives required authorizations and generates material revenue.
- Whether patient-testing growth can translate into stronger gross margins and sustainable operating performance.
- Progress on going-concern plans, vendor obligations, healthcare reimbursement estimates and continued Nasdaq listing compliance.