Precipio, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited financial statements; amounts below are in U.S. dollars unless noted. Precipio is a cancer diagnostics company operating a diagnostic laboratory and developing its ICE-COLD-PCR (ICP) technology.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $817,000 | $260,000 | $1.529 million | $508,000 |
| Gross profit (margin) | $175,000 (21%) | $(24,000) (-9%) | $199,000 (13%) | $42,000 (8%) |
| Operating loss | $(2.183) million | $(801,000) | $(4.631) million | $(1.398) million |
| Net loss | $(2.831) million | $(3.680) million | $(5.270) million | $(4.439) million |
| Net loss available to common stockholders | $(3.165) million | $(8.928) million | $(9.118) million | $(9.687) million |
| Basic and diluted loss per share | $(0.15) | $(15.35) | $(0.55) | $(18.77) |
- For the first half, operating cash use was $3.611 million, investing cash use was $44,000, and financing provided $3.305 million. Cash fell by $350,000, from $421,000 at year-end 2017 to $71,000 at June 30.
- At June 30, current assets were $1.158 million and current liabilities were $9.282 million, resulting in negative working capital of $8.124 million. Accounts payable were $5.020 million.
- Reported long-term debt, including current maturities and net of discounts, was $3.490 million. April bridge notes had $1.824 million principal but only $9,000 net carrying value after discounts and issuance costs. The company also reported $1.006 million of warrant liabilities and a $143,000 derivative liability.
- Total assets were $25.889 million, total liabilities $13.690 million, and stockholders’ equity $12.199 million.
Changes and comparability
- Net sales rose 214% in Q2 and 201% in the first half. Management attributed growth to acquired contract diagnostic revenue following the June 2017 merger, more patient testing, and clinical research grant revenue. Patient cases increased 67% in Q2 and 22% for the first half year over year.
- The comparisons are affected by the reverse merger: the 2017 reported periods do not include Transgenomic’s results before June 29, 2017. The filing’s unaudited pro forma 2017 net sales, assuming the merger occurred January 1, were $565,000 for Q2 and $1.472 million for the first half.
- Operating expenses increased to $2.358 million in Q2 and $4.830 million in the first half, reflecting higher headcount, public-company and professional costs, acquired-intangible amortization, and other costs. First-half results also include a $294,000 goodwill impairment.
- First-half net loss increased year over year, while loss available to common shareholders improved partly because 2017 included $5.248 million of deemed dividends; 2018 included $3.848 million. Q2 2018 also included a $928,000 loss on issuance of convertible notes. Warrant revaluation gains were $584,000 for the first half, a non-cash item.
- The company issued 12.36 million common shares during the first half, with common shares outstanding increasing from 10.20 million at December 31, 2017 to 22.56 million at June 30, 2018. Per-share comparisons are affected by this substantial share-count change.
Outlook, risks, and unusual items
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern over the twelve months following issuance. Continued operations depend on executing its business plan, generating revenue, and obtaining financing to meet debt and operating obligations. No assurance was given that these efforts will succeed.
- Financing and dilution: In April, the company raised $1.660 million net of original issue discount through 8% secured convertible bridge notes with $1.824 million principal. The notes mature on the earlier of one year after initial closing or a qualifying $7 million financing; conversion terms may reset based on market prices, subject to a $0.30 floor. The company issued 3.65 million related warrants. In July, after quarter-end, it received a further $348,099 for notes with $382,526 principal and issued 765,052 warrants. Further drawdowns were contemplated under the agreement.
- ICP development: Management reported eight ICP trials underway in June 2018 and agreements for twelve additional kit trials in Q3 2018. These are development and trial updates, not revenue or financial guidance.
- Nasdaq listing: The company received a March 2018 notice for failure to meet the $1.00 minimum bid-price requirement and had until September 24, 2018 to regain compliance.
- Equity purchase agreement: The company reported a $460,000 current liability related to investor price-protection provisions and said it was negotiating a settlement. On August 10, it sought to withdraw its S-1 registration statement while renegotiating the agreement following an SEC letter; withdrawal approval was pending at filing issuance.
- Claims and obligations: The company disclosed delinquent vendor payables and threatened or existing collection actions. A settlement with Crede requires $1.925 million in cash or, at the company’s option, stock, with final payment due May 2019; the company had paid about $300,000 by June 30. The filing also describes other vendor disputes and healthcare reimbursement and regulatory risks.
- Management reported effective disclosure controls as of June 30 and no material changes in internal control over financial reporting. No explicit financial forecast or profitability timetable was provided.
Important facts for investors to verify
- Available cash, cash burn, and the timing and terms of any additional financing; the company’s ability to meet near-term liabilities and debt repayments.
- Bridge-note conversion and warrant terms, subsequent funding drawdowns, and the resulting potential dilution.
- Resolution of the Leviston price-protection liability and SEC-related registration statement matters, plus compliance with Nasdaq’s bid-price requirement.
- Whether ICP trials convert into commercial contracts and recurring revenue, and whether diagnostic volume growth can improve margins.
- Collection of receivables and the adequacy of allowances, given the $1.351 million allowance for doubtful accounts against $2.103 million gross receivables.