Precipio, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Precipio operates a cancer diagnostics laboratory and develops diagnostic technologies, including ICE-COLD-PCR. Financial amounts below are in U.S. dollars; unless indicated otherwise, amounts are in millions.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales, after doubtful-account allowance | $0.942 | $0.817 | $1.655 | $1.529 |
| Gross profit | $0.172 | $0.175 | $0.210 | $0.199 |
| Gross margin | 18% | 21% | 13% | 13% |
| Operating expenses | $2.467 | $2.358 | $4.564 | $4.830 |
| Operating loss | $(2.295) | $(2.183) | $(4.354) | $(4.631) |
| Net loss | $(5.913) | $(2.831) | $(7.565) | $(5.270) |
| Loss per common share | $(1.05) | $(2.29) | $(1.66) | $(8.20) |
Net sales growth reflected higher patient diagnostic volume, partly offset by lower contract diagnostic revenue and the absence of clinical research grant revenue. Patient cases rose 16% in Q2 (445 vs. 383) and 54% in the first half (805 vs. 523), which management attributed to increased sales personnel. Q2 service revenue increased, but the doubtful-account allowance also rose to $257,000 from $142,000 a year earlier. Six-month allowance was $461,000 versus $226,000.
- Cash flow: First-half operating cash use was $4.887 million, compared with $3.611 million in 2018; investing cash use was $30,000; financing cash inflow was $5.705 million. Cash increased by $788,000 to $1.169 million.
- Liquidity: At June 30, current assets were $2.331 million and current liabilities $4.750 million, for negative working capital of $2.419 million. Accounts receivable, net, was $883,000 against a gross balance of $3.054 million and an allowance of $2.171 million.
- Debt and leases: Long-term debt, net of issuance costs, was $326,000; convertible notes, net, were $39,000, all current. Operating and finance lease liabilities totaled $817,000. Common-stock warrant liabilities were $2.336 million.
- Balance sheet: Total assets were $22.205 million, total liabilities $7.978 million, and stockholders’ equity $14.227 million. Common shares outstanding were 5,993,369 at June 30; the filing reports 6,093,369 outstanding as of August 6.
Material changes versus the prior period
First-half net sales rose 8%, while operating loss narrowed to $4.354 million from $4.631 million. Net loss increased to $7.565 million from $5.270 million, driven substantially by other expenses, including warrant and derivative remeasurement, warrant modifications, and losses on convertible-note issuance. Q2 net loss also increased year over year. These financing-related expenses include significant noncash fair-value items.
Operating expenses for the first half fell $266,000, chiefly due to lower goodwill impairment and professional fees, partly offset by higher selling, general and administrative personnel costs. Financing and equity transactions materially changed the balance sheet: the company converted approximately $7.3 million of convertible debt and interest into 2,386,425 shares during the first half, and received $2.4 million from common-stock sales and $1.6 million from warrant exercises. A 1-for-15 reverse stock split took effect April 26, 2019; presented share and per-share figures reflect the split.
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 next 12 months. Continued operations depend on executing the business plan, generating revenue, and obtaining additional financing to meet obligations. The company had $1.169 million cash, negative working capital, and $4.887 million of first-half operating cash use.
- Potential funding and dilution: The Lincoln Park equity purchase agreement allows purchases of up to $10 million, subject to limitations. As of the filing’s issuance, Precipio reported $4.1 million received and approximately $5.9 million remaining available. Availability depends on market price and other conditions; there is no assurance the funding will be sufficient or accessible on acceptable terms.
- Convertible financing and unusual charges: First-half results included a $1.870 million loss on issuance of convertible notes, a $1.128 million loss on warrant modification, warrant revaluation expense of $582,000, and derivative revaluation expense of $415,000. These items are substantially valuation/accounting-driven; gains on liability settlements of $1.251 million partly offset expenses. The notes include conversion-price reset provisions and warrants, creating potential dilution and earnings volatility.
- Legal matter: A proposed $1.95 million settlement of the Campbell litigation was preliminarily approved by the court after quarter-end and remained subject to final approval. The filing estimated approximately $300,000 payable by Precipio after insurance, and recorded that amount as a liability. XIFIN and Bio-Rad matters were settled or paid; a CPA Global claim remained disclosed.
- Business risks: Revenue and receivables are concentrated among a small number of customers; one customer accounted for 26% of first-half 2019 sales and 28% of receivables at June 30. Medicare/Medicaid reimbursement estimates and healthcare regulatory requirements pose additional risks. Nasdaq notified the company of a bid-price deficiency; following the reverse split, Nasdaq confirmed compliance on May 15, 2019.
- Guidance: The filing provides no quantified financial guidance. Management described plans to increase revenue and secure financing but cautioned that results and funding are uncertain.
Important facts for investors to verify
- Whether the company can obtain enough financing and manage cash burn to address the disclosed going-concern uncertainty, including actual availability of the remaining Lincoln Park equity line.
- Whether diagnostic case growth translates into stronger net sales, improved gross margins, and better collections; review the large allowance for doubtful accounts and payer reimbursement estimates.
- The remaining convertible-note terms, warrant liabilities, potential share issuance, and any further financing-related fair-value charges or dilution.
- Final court approval and ultimate insurance coverage and company cost for the Campbell settlement.
- Customer concentration, Nasdaq listing compliance, and progress in commercializing the company’s diagnostic technologies.