Precipio, Inc. (then Transgenomic, Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. The filing was made under Transgenomic’s name before its planned merger with Precipio Diagnostics, LLC and subsequent name change to Precipio, Inc. Financial amounts below are in U.S. dollars; unless stated otherwise, dollar figures are in thousands.
Business context
Transgenomic described itself as a biotechnology company focused on molecular technologies and laboratory services, including its MX-ICP mutation-detection technology. Continuing operations centered on its Omaha laboratory, providing oncology analytical and pharmacogenomics research services. The Patient Testing business and Genetic Assays and Platforms activities were reported as discontinued operations. The company highlighted a January 2017 licensing agreement under which LifeLabs selected its ICE COLD-PCR technology for cancer testing in Canada.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Continuing-operations net sales | $658 | $236 | Up $422, or 179%; attributed primarily to a new contract laboratory services contract. |
| Gross profit (loss) | $199 | ($269) | Gross margin improved to 30% from (114%); higher revenue and slightly lower cost of goods sold contributed. |
| SG&A | $1,620 | $1,704 | Lower personnel, professional-fee and stock-compensation costs were partly offset by merger costs and a $0.4 million lease-termination charge. |
| Research and development | $134 | $270 | Lower personnel and laboratory supply costs. |
| Operating loss, continuing operations | ($1,555) | ($2,243) | Improved year over year. |
| Net loss | ($1,762) | ($3,264) | Includes discontinued-operations income of $73 in 2017 versus a $1,173 loss in 2016. |
| Basic and diluted loss per share | ($0.07) | ($0.18) | Weighted-average shares were 26.8 million and 20.3 million, respectively. |
| Cash and cash equivalents | $59 | $110 at Dec. 31, 2016 | Declined $51 during the quarter. |
| Cash flow from operations | ($50) | ($1,924) | Total includes discontinued operations; continuing operations used $130 in 2017. |
| Debt | $7,368 | $7,814 at Dec. 31, 2016 | Entire balance classified current; no long-term portion reported. |
| Working capital | ($20,562) | ($19,329) at Dec. 31, 2016 | Negative working capital worsened by $1,233. |
At March 31, total assets were $1.229 million, total liabilities were $21.872 million, and stockholders’ deficit was $20.643 million. Operating cash use was partly offset by a $1.967 million increase in accounts payable. The filing reported no cash paid for interest during the quarter.
Material changes and outlook
- The company reported a substantial improvement in continuing-operations revenue and gross profit, but remained loss-making and had minimal cash.
- The merger with Precipio Diagnostics was expected to close in Q2 2017, subject to conditions and termination rights. Under the described transaction terms, Precipio common-unit holders were expected to own approximately 52% of New Precipio on a fully diluted basis, with preferred-unit holders expected to own approximately 8%.
- In February 2017, Transgenomic’s shares were delisted from Nasdaq and began trading on OTCQB. The company expected a reverse stock split could be needed to meet Nasdaq’s initial listing requirements after the merger.
- On April 13, 2017, after quarter-end, the company raised $1.15 million in bridge notes, receiving net proceeds of $1.031 million. The notes bear 4% annual interest, mature in 90 days, and may be repaid early at a 20% premium. Warrants to acquire 1.15 million shares at $0.50 were also issued. The company agreed to lend up to $561,500 of the proceeds to Precipio; repayment is subordinated to Precipio’s secured bank debt.
Risks, contingencies and unusual items
- Going concern: Management stated that substantial doubt existed about the company’s ability to continue as a going concern for the following 12 months. The company cited recurring losses, negative working capital of $20.6 million, cash of $59,000 and dependence on completing the merger, improving revenue and collections, selling assets, or obtaining financing. There is no assurance the merger or financing will be completed.
- Debt default and maturity: The company was not in compliance with its loan agreement, including failure to make required monthly interest payments. Default increased applicable interest rates by 5%; all reported debt was current and the revolving line and term loan matured November 1, 2017. Lenders had agreed, subject to merger completion and other conditions, to convert outstanding indebtedness into New Precipio shares.
- Payables and legal claims: Approximately $0.6 million of vendor and supplier payables was delinquent, with collection actions taken or threatened. The company also disclosed settlements or recorded liabilities involving UNMC, Mount Sinai, Todd Smith, XIFIN, SPDC, CPA Global and EdgeBio. XIFIN had obtained entry of default, and an application for default judgment was filed. Potential losses in the Fox Chase and shareholder proxy lawsuits could not be estimated; the filing cautioned that a settlement in the proxy matter could materially affect liquidity.
- Unusual quarterly item: A $0.4 million loss related to the early termination of the Omaha facility lease was included in expense. The lease settlement was entered into after quarter-end and reduced disclosed operating lease obligations from approximately $1.3 million to $0.6 million.
- No formal financial guidance: The filing provided no quantified revenue or earnings guidance. Management’s stated priorities included completing the merger, growing revenue, improving collections and securing resources to meet obligations.
Most important facts for investors to verify
- Whether the Precipio merger closed, on what terms, and whether New Precipio satisfied Nasdaq’s initial listing requirements, including any reverse split.
- The company’s post-quarter cash position and ability to meet near-term obligations, including the November 2017 debt maturity, default-related interest and settlement payments.
- Whether the bridge notes and warrants resulted in additional dilution, and whether the subordinated Precipio Note is collectible.
- Whether delinquent vendor balances, legal proceedings and settlements created additional cash demands or losses beyond amounts recorded.
- Whether the LifeLabs license and new laboratory-services contract produced recurring revenue and improved operating cash flow.