Precipio, Inc. — Q1 2020 Form 10-Q
Business context and period: Precipio is a cancer diagnostics company operating a diagnostic laboratory in New Haven, Connecticut, and a research and development facility in Omaha, Nebraska. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Financial figures below are in U.S. dollars; amounts are in thousands unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $1,216 | $713; up 71% |
| Gross profit / margin | $125 / 10% | $38 / 5% |
| Operating expenses | $2,328 | $2,097 |
| Operating loss | $(2,203) | $(2,059) |
| Net loss | $(3,205) | $(1,652) |
| Net loss available to common stockholders | $(6,549); $(0.78) per share | $(1,652); $(0.48) per share |
| Cash used in operating activities | $(1,589) | $(1,879) |
| Cash at period end | $417 | $302 |
- Service revenue, net of the allowance for doubtful accounts, was $1,192, up 69% from $706. The company processed 683 cases versus 360, an increase of 90%; management attributed higher volume to increased sales personnel. Contract diagnostics revenue also increased.
- Cost of sales rose to $1,091 from $675. Gross margin improved to 10% from 5%, but remained low.
- Other expense was $1,002, versus other income of $407 in Q1 2019. Q1 2020 included a $1,225 loss on extinguishment of convertible notes and $713 of net interest expense, partly offset by a $936 noncash gain from warrant revaluation.
- At March 31, cash was $417; current assets were $1,692 and current liabilities $6,739, resulting in negative working capital of $5,047, compared with negative $2,456 at December 31, 2019. Accounts receivable, net, was $883; the doubtful-account allowance was $2,942.
- Current convertible notes, net of discounts and issuance costs, were $2,292. Other current debt maturities were $180. Total liabilities were $7,710. The March 2020 note amendment caused the convertible notes’ maturity to move to July 16, 2020.
- Common shares outstanding increased from 7,898,117 at December 31, 2019 to 9,506,126 at March 31, 2020; 11,134,520 shares were outstanding as of May 13, 2020.
Material changes, outlook and risks
- Financing and dilution: During Q1 the company received $1.35 million from common-stock issuance and converted $0.4 million of convertible notes and interest into 427,997 shares. A March 2020 agreement with Lincoln Park permits up to $10 million of additional stock purchases, subject to limitations; the company reported receiving $0.3 million from it after quarter-end through the report’s issuance. An effective shelf registration permits offerings of up to $50 million, but no offering prospectus supplements had been filed as of issuance.
- Debt amendment: The March 2020 amendment extended the relevant bridge notes’ maturity by three months, lowered their conversion-price floor from $2.25 to $0.40, and extended guaranteed interest from 12 to 18 months. The change was accounted for as an extinguishment and generated the $1.225 million loss. It also triggered a $3.344 million deemed dividend, primarily from the preferred stock conversion-price adjustment; this increased loss attributable to common stockholders but was not an operating expense.
- Going concern: Management stated that substantial doubt remains about the company’s ability to continue as a going concern for the twelve months following issuance. The company cited recurring losses, negative working capital, cash needs to meet obligations, and dependence on additional revenue and financing. The Lincoln Park facility and shelf registration do not assure that sufficient funding will be available.
- COVID-19: Management said the pandemic’s full impact was uncertain and could materially affect operations and liquidity. The company reported business interruptions in certain urban markets ranging from 30% to 85% and anticipated restrictions could continue through Q2 2020 or longer.
- Subsequent events: On April 23, 2020, the company obtained a $787,200 unsecured Paycheck Protection Program loan at 1% interest, with payments deferred for six months and a two-year term. Forgiveness is not assured. In April, Precipio also formed a joint venture in which its subsidiary owns 49% and Poplar Healthcare owns 51%.
- Nasdaq listing: On April 29, 2020, the company received notice that its stock had failed the $1.00 minimum bid-price requirement. The stated deadline to regain compliance was December 28, 2020, subject to possible additional time if eligibility requirements were met. Delisting remained a risk.
- Contingencies: A proposed $1.95 million settlement of a shareholder lawsuit remained subject to final court approval; company and insurer payments had been placed in escrow. A vendor had asserted a claim of approximately $0.2 million for patent-management services, with less than $0.1 million recorded as a liability.
- Guidance: The filing provides no specific revenue, earnings, or cash-flow guidance. Management said results would depend on execution of its business plan, revenue growth, access to capital, and the evolving COVID-19 impact.
Key facts for investors to verify
- Whether the company can raise adequate capital, meet near-term obligations, and address the substantial doubt about its ability to continue as a going concern.
- Convertible-note terms, maturity and conversion exposure following the reduced $0.40 floor, and the resulting potential dilution.
- Cash runway and liquidity after the quarter, including actual Lincoln Park funding, any shelf offerings, and PPP loan forgiveness or repayment.
- Whether COVID-19 interruptions affected later-period case volumes, reimbursement collections, and customer activity; also monitor receivable collectability and the large doubtful-account allowance.
- Progress toward Nasdaq bid-price compliance, final court approval of the shareholder settlement, and performance and financial effects of the new joint venture.