Precipio, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Precipio provides cancer diagnostic testing and related services. Financial amounts below are in U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net sales | $713,000 | $712,000 |
| Gross profit and margin | $38,000; 5% | $24,000; 3% |
| Operating loss | $2.059 million | $2.448 million |
| Net loss | $1.652 million | $2.439 million |
| Net cash used in operations | $1.879 million | $1.145 million |
- Patient diagnostic revenue increased about $0.3 million, while contract diagnostic revenue fell about $0.3 million. Cases processed rose 157%, from 140 to 360; management attributed the increase to added sales personnel.
- Net sales were essentially flat. A $204,000 allowance for doubtful accounts reduced reported revenue, versus $84,000 in Q1 2018. Cost of sales was $675,000, compared with $688,000.
- Operating expenses were $2.097 million, including no goodwill impairment, versus $2.472 million in Q1 2018, which included a $294,000 goodwill impairment. Other income included $240,000 from warrant revaluation and $167,000 from liability settlements; these are not ordinary operating revenue.
- Cash was $302,000 at March 31, down from $381,000 at year-end. Financing activities provided $1.803 million, principally from $1.726 million of stock issuance and $250,000 of convertible-note proceeds; operating activities used $1.879 million.
- Working capital was negative $8.518 million, improved from negative $11.972 million at December 31, 2018. Current assets were $1.433 million and current liabilities $9.951 million.
- Balance-sheet debt included $3.129 million of current convertible notes and $399,000 of long-term debt, net of issuance costs and current maturities. Finance lease liabilities were $198,000; warrant liabilities were $892,000. Accounts payable totaled $4.696 million.
Material changes and financing
- Common shares outstanding increased to 4,304,929 at March 31 from 2,298,738 at December 31, reflecting note conversions and stock sales. The share figures and per-share data reflect a subsequent 1-for-15 reverse split effective April 26, 2019. The company reported 5,919,681 shares outstanding on May 14, 2019.
- During Q1, $1.7 million of stock was sold under the Lincoln Park equity purchase agreement, and convertible notes were converted into common stock. Subsequent to quarter-end, the company reported further conversions of approximately $3.7 million of notes outstanding at March 31.
- After quarter-end, Precipio received approximately $900,000 gross from April 2019 notes and $1.0 million proceeds from a May 2019 secured convertible-note transaction. The May notes bear 8% interest, have a 9% original issue discount, and include warrants. These financings add liquidity but carry repayment, conversion and potential dilution terms.
Outlook, risks and unusual items
- Going concern: Management stated substantial doubt about the company’s ability to continue as a going concern for the next 12 months. It cited recurring losses, negative working capital, low cash and dependence on revenue growth and additional financing to meet obligations. There is no assurance the financing and business initiatives will be sufficient.
- No specific revenue or earnings guidance was provided. Management said Q1 results are not necessarily indicative of full-year results and expects continued losses; profitability depends on market acceptance, commercialization, sales penetration and margins.
- Nasdaq notified the company in March that it failed the minimum bid-price requirement. Following the reverse split, Nasdaq notified the company on May 15 that it was compliant and closed the matter.
- Patient service revenue is exposed to payer reimbursement and collection estimates. Management noted Medicare and Medicaid rules are complex and estimates could change materially; the allowance for doubtful accounts rose to $1.912 million from $1.708 million at year-end.
- Contingencies include a shareholder lawsuit remanded to the district court, vendor-related disputes and healthcare regulatory compliance risk. XIFIN and Bio-Rad balances were settled or paid after quarter-end. A separate service-provider settlement requires about $0.6 million plus interest through September 2019; approximately $0.9 million of debt forgiveness and a gain are conditional on full payment and compliance.
Important facts for investors to verify
- Whether cash generation, equity-line availability and subsequent debt financings can cover near-term obligations, given the stated substantial doubt about going concern.
- Convertible-note balances, conversion prices, repayment terms, collateral and potential dilution, including post-quarter conversions and new note issuances.
- Collection experience and the adequacy of revenue, contractual allowance and doubtful-account estimates as diagnostic volume increases.
- Whether the company completes the service-provider settlement payment schedule and recognizes the conditional debt-forgiveness gain.
- Progress in turning higher patient-testing volume into sustainable revenue and improved gross margins, while monitoring legal and reimbursement risks.