Precipio, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Precipio is a cancer diagnostics company operating a laboratory and developing diagnostic products, including its ICE-COLD-PCR liquid-biopsy technology. Financial figures below are in thousands of dollars unless otherwise stated.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $650 | $270 | $2,179 | $778 |
| Gross profit (loss) | $(11) | $(77) | $188 | $(35) |
| Gross margin | (2)% | (29)% | 9% | (4)% |
| Operating expenses, including goodwill impairment | $4,106 | $3,556 | $8,936 | $4,996 |
| Operating loss | $(4,117) | $(3,633) | $(8,748) | $(5,031) |
| Net loss | $(3,849) | $(6,280) | $(9,119) | $(10,719) |
| Net loss available to common stockholders | $(3,849) | $(10,128) | $(12,967) | $(19,815) |
| Basic and diluted loss per share | $(0.17) | $(1.36) | $(0.69) | $(6.96) |
Revenue rose 141% in Q3 and 180% for the nine-month period. Management attributed growth to higher patient testing volumes, contract diagnostic revenue, and grant revenue. Cases processed increased 111% in Q3 to 436 and 51% for the nine-month period to 959. Comparisons for the nine months are affected by the June 2017 merger, after which Transgenomic’s results were consolidated.
Q3 gross loss narrowed to $11 from $77; nine-month results shifted to gross profit of $188 from a $35 gross loss. Operating expenses rose, reflecting sales and marketing, research and development, public-company costs, acquired-intangible amortization, and goodwill impairment. Goodwill impairment was $1,275 in Q3 and $1,569 for the nine months.
Cash, liquidity and debt
- Cash was $219 at September 30, 2018, down from $421 at December 31, 2017.
- Current assets were $1,466 and current liabilities $10,289, resulting in negative working capital of $8,823.
- Net cash used in operating activities was $4,801 for the nine months; financing activities provided $4,665. Cash declined by $202 overall.
- Long-term debt, net of current maturities, was $1,036; convertible notes, net of current maturities and discounts, were $1,530. The balance sheet also reported $653 of current long-term debt and $256 of current convertible notes.
- The company issued approximately $3.0 million of secured convertible bridge notes during 2018, bearing 8% annual interest and subject to conversion terms that can adjust based on the share price. It also exchanged $2.1 million of secured debt obligations for $1.8 million of convertible notes. In October and November 2018, it exchanged a further $1.1 million of secured obligations for approximately $0.9 million of notes.
- Financing also included $618 of net common-stock proceeds and $1,271 from warrant exercises during the nine months. A Lincoln Park agreement provides for potential future common-stock purchases of up to $10 million, subject to contractual and Nasdaq limits; no shares had been sold under it by September 30.
Outlook, risks and notable items
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern over the twelve months following the filing. Continuity depends on executing its business plan, generating additional revenue, and obtaining financing to meet debt and operating obligations.
- Nasdaq listing: The share price was below the $1.00 minimum bid requirement. Nasdaq granted an additional compliance period through March 25, 2019; the company said it was evaluating options, with no assurance it would regain compliance.
- Products and commercial activity: Precipio announced an ICEme EGFR kit in September, launched HemeScreen in October, announced two additional ICEme assays in October, and announced a commercial collaboration with PerkinElmer in November. The filing provides no quantified revenue outlook or profitability guidance.
- Accounting and unusual items: The company adopted ASC 606 in 2018 with no material change to revenue recognition. Noncash fair-value changes, debt issuance discounts, warrant repricing, and financing-related charges affected reported results. The company recorded a $1.0 million loss on issuance of convertible notes for the nine months.
- Controls: Management concluded disclosure controls were not effective at a reasonable assurance level and identified a material weakness involving valuation methodologies.
- Other risks: The filing describes delinquent vendor payables and legal claims, healthcare reimbursement and regulatory risks, and the possibility of further dilution or difficulty raising capital. Management stated there were no material regulatory inquiries at the time.
Investor verification points
- Review the company’s cash runway, financing needs, and progress toward addressing the stated going-concern uncertainty.
- Confirm the status, terms, and potential dilution from convertible notes, warrants, the Leviston price-protection obligation, and the Lincoln Park facility.
- Track Nasdaq bid-price compliance and any resulting listing actions.
- Assess whether revenue growth and new product collaborations translate into sustainable margins and cash generation.
- Verify remediation of the valuation-methodology material weakness and monitor receivable collectability and legal/vendor obligations.