Axe Compute Inc. (AGPU) Q2 2022 Earnings Report, Transcript and Summary

Good day. Thank you for standing by. Welcome to Predictive Oncology's Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Theresa Ferguson, Senior Director of Marketing for Predictive Oncology. Please go ahead.

Thank you. Good morning, and thank you to everyone dialing in. We are pleased to be here today. Joining us for the call will be: Mel Engle, CEO; then we'll hear from Bob Myers, CFO; and Dr. Pamela Bush, SVP of Strategic Sales and Business Development. Following our prepared remarks, we will open it up for discussion with questions and answers. [Operator Instructions]. Note that this call will be recorded and includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations, estimates and projections about our industry, our management's beliefs and certain assumptions made by our management. Words such as expects, plans, intends, anticipates, believes, estimates, seeks, variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties including the risks described in public filings with the U.S. Securities and Exchange Commission. The company's actual results may differ materially from the anticipated results reflected in these forward-looking statements. We'll begin with Predictive Oncology's CEO, Mel Engle.

Thank you, Theresa, and welcome and thank you for joining us for our second quarter shareholder earnings call. Today, we will share the latest developments at Predictive Oncology, then we'll give you an overview of last quarter's earnings and end with an update on our commercialization efforts. The first move we made to further strengthen Predictive Oncology scientific and product strategies is with the appointment of Dr. Julia Kirshner as Chief Scientific Officer. Dr. Kirshner was elevated from a role as Senior Vice President of Predictive Oncology and President of zPREDICTA, the company she founded and the company that Predictive Oncology acquired in the fourth quarter of last year. Dr. Kirshner will focus on the integration of Predictive Oncology's product lines and direct future development of our scientific programs. She will also be working closely with Dr. Bush to identify and meet customer needs as well as provide expanded solutions, leveraging artificial intelligence and drug development. Dr. Kirshner is highly respected for her academic and start-up experience. Most notably, at zPREDICTA, she is responsible for creating the tumor-specific in vitro 3D models that reconstruct tissue microenvironment and mimic drug response, which is part of our key product line offerings in drug development. Her innovative approach to science and strong background and research make her an ideal fit to lead the long-term vision for Predictive Oncology's product development strategy with Dr. Bush, drive adoption of current Predictive Oncology assets and guide product iteration. We look forward to bringing more synergy between our businesses and finding opportunities to provide greater value to our customers. Scientific leaders within the company will be reporting into Dr. Kirshner as she will be working closely with the Board of Directors to establish a new scientific advisory board. As we move forward, Dr. Kirshner will continue to oversee zPREDICTA and will transition site leadership in the next 3 to 6 months. Our second move is Predictive Oncology's decision to streamline the company's research and development operations, which Dr. Kirshner will oversee. Predictive Oncology will consolidate its TumorGenesis division by moving this business from Massachusetts to our flagship location in Pittsburgh, Pennsylvania. By doing this, Predictive Oncology can better focus on growth opportunities with our artificial intelligence technology and lab functions while reducing overhead and centralizing scientific operations. This creates better efficiencies and provides the potential to bring in greater revenue levels as we explore more expanded offerings for clients in the pharmaceutical and biotech industries who are looking to bring more effective cancer treatments to the market. Dr. Bush will share more about the business development and marketing efforts underway. But first, Bob Myers will share about the quarterly earnings. Bob?

Thank you, Mel. The financial results from our second quarter ended June 30, 2022, show a strong balance sheet with a solid cash balance, commensurate equity and no debt. Cash and cash equivalents grew from $25 million on March 31, 2021, to $28 million at quarter end 2022, which represents a positive change of 12%. Predictive Oncology's recognized net sales revenue of $0.4 million for the quarter was an increase of 6% from the comparative 3-month period in 2021. The company's gross profit margin grew from 59% in 2021 -- June 2021 to 64% for the comparable quarter of 2022. Net cash used in operating activities was $6.4 million and $5.5 million for the 6 months ended June 30, 2022 and June 30, 2021, respectively. Primarily because of the increase in operating costs and the launch of our PeDAL commercial strategy. General and administrative expenses increased from $2.1 million in the quarter ended June 30, 2021, to $2.4 million for the corresponding quarter in 2022. Operating expense -- operations expenses increased from $0.6 million in the quarter ended June 30, 2021, to $49 million in the quarter ended June 30, 2022, primarily due to higher staffing and EBITDA. This was partially offset by the timing of research and development expenses and lower consulting fees. Quarterly sales and marketing expenses as the company increased by $0.1 million for the quarter ended June 30, 2022, to $0.3 million as compared to the corresponding period in 2021 due to staff-related expenses and the implementation of advertising and marketing initiatives. I'd like to discuss the goodwill expense in the current quarter. Current marketing conditions -- market conditions, I'm sorry, coupled with Predictive Oncology's lower quantitative valuation of zPREDICTA resulted in $7.2 million of a noncash goodwill impairment. This was required due to GAAP standards related to the price we originally paid for zPREDICTA, Predictive Oncology's quarter ending stock price and our value differential between our cash position and market cap. While we cannot yet report on the potential contracts we have, predictive Oncology is anticipating stronger business growth in the second half of the year with current and potential customers of its validated 3D tour model for: multiple myeloma, which is an existing model; breast cancer, an existing new model; and pancreatic cancer, also an existing new model as well as the testing of immuno-oncology therapies. Also, now that we validated our PeDAL platform at a statistically significant 92% drug response accuracy rate, have begun commercialization efforts and are implementing highly targeted marketing initiatives, we expect to begin seeing results of those efforts in the next 2 quarters. On a final note, we are looking forward to attending the Investor Summit in New York this November. I will now pass the conversation along to Dr. Bush, who will share about our progress in sales and marketing. Pamela?

Thank you, Bob. This has been a busy quarter for our sales and marketing team at Predictive Oncology. We kicked off our commercialization efforts for PeDAL at BIO International in San Diego. One of the largest industry conferences attended by pharmaceutical and biotech companies looking for solutions to advance the drug development initiatives. Our team participated in more than 50 one-on-one partnership meetings and initiated conversations through other networking opportunities at the conference. Predictive Oncology is in conversation with numerous potential customers and are building our pipeline with additional marketing efforts to be implemented this quarter. We have created and activated a strategic marketing plan targeting key decision makers with respective customers. We also completed a comprehensive landscape market analysis to better understand specifically how our AI technology fits into the drug development marketplace, and we are leveraging that information as we pursue business development opportunities. We intend on closing deals before the end of the year. We are expanding our offerings with a 3D tumor cell model capable of maintaining cell viability for over 30 days. Our sales team is in conversation with current and prospective customers. In addition to our existing solutions with multiple myeloma models, we have added validated models for breast and [ necrotic ] cancer and are extending the use of our tumor-specific models to offer testing of immuno-oncology therapy. Immuno-oncology is a promising area of oncology, but the technologies to evaluate the efficiency and potency of immuno-oncology compounds and extending interactions between cancer cells and the immune system are currently very limited. Predictive Oncology's 3D tumor model system will enable drug developers to make these evaluations. This will expand our customer footprint and will drive the development of new cancer treatments. We are excited to share that the completion date of our GMP facility in late August. This means we will have expanded our in-house ability to support formulation solutions and end the toxin removal in the drug development process through clinical trials. We anticipate strong growth with this product line. In addition to the team's presence at BIO International in San Diego, we will have representation at BIO Europe this October. As we move forward, our goal is to demonstrate our strength as One Predictive Oncology company with a suite of solutions along the drug development continuum from early discovery up to clinical trials. We are excited about the next 2 quarters and look forward to sharing updates as we move into the second half of the year. Now I will pass the call back to Mel.

Thank you, Dr. Bush, and thank you for your effort and hard work you have been putting into our business development initiatives, especially with the current discussions underway. At Predictive Oncology, we look forward to the launching of our products and the positive impact of having a Chief Scientific Officer in place, a Scientific Advisory Board and the consolidation of our research and development operations. Next, we will open up the conference call for Q&A. [Operator Instructions]

[Operator Instructions] And our first question comes from Chris Birch with Wolfe Advisory Board.

I'd like for you to elaborate to the goodwill write-off. Would it be a fair assumption to say that if it weren't for that goodwill write-off, and the warrants that exercised that the earnings report would look completely different? What are your thoughts on that?

Well, the goodwill, I mean, obviously, goodwill is a onetime expense. We've decided to -- we could have spread it out a little bit and argued valuation but it was appropriate to take it now. Many, many companies across the board are involved in the same thing. And that is a direct result of the market on such a downswing. So yes, of course, it affects our yearly and quarterly reporting as an additional expense, but we consider it extraordinary. And if you remove that, that puts us kind of ahead of last year. In terms of warrant exercises, we haven't had any warrant exercises during the course of this year. Our price being down where it is. But we are hopeful that, that will pick up because that's a natural method of cash that comes to us without over-dilution. I think that the market price is down because the market is in a horrible swing right now, everything is down. The chances for us to increase our market price are in the future as we record deals, as we start showing revenue and as we verified all the things that we have now talked about. So we're very confident in that. But I don't -- it hasn't really changed very much, if you'll notice over the past month or 2.

And last, could you speak to a little bit more detail on the completion of the lab at the end of the month?

Sure. Mel, do you want me to take that?

Sure. Go ahead, Bob. You're on a roll.

Okay. Chris, yes, this is absolutely great news. And we've got so many customers lined up, and we have just been chopping at the bit to get this done. We have actually received our city permit. Everything is done there. The age back is completing. So in the next week, 2 weeks, we will have a completed GMP. We already, as I said, have customers that are discussing work with us to go through the GMP process and we'll have a pretty good announcement, not necessarily on the customers, but on another exciting aspect of that lab coming up shortly. So everything is ready to go.

[Operator Instructions] And the next question comes from Michael Broadman with Bedrock Group Inc.

My question is really about the share price. And I was hopeful for a positive EPS on this quarter's earnings, but with the miss and where the share price is right now after the sell-off, it feels like we're headed toward a reverse split, and compliance seems out of reach at this point for the company outside of looking at the year performance for the company from start of the year to current. With LabCorp announcements and zPREDICTA inclusion in revenue, only $100,000 for the quarter, and I'm not sure what to expect for that company's additions to the revenue for next quarter as well. How does the company expect to regain compliance for NASDAQ listing requirements and reward the reverse split? I as a shareholder honestly, I feel like I would be voting against it. And I'd say I have a larger position than a lot of the institutions that have invested in POAI. And I think most retail investors who have been holding this for 1 to 2 years who are pretty beat up on the stock price as well would bode similarly to myself. Can you provide specifics what the company's direction and plan is to avoid a fight with shareholders over a reverse split in the next 6 months?

Mel, I'm going to grab that again, if you don't mind.

Sure, go ahead.

Michael, good to speak to you again. First and foremost, the company Predictive Oncology and please hear this well, is not thinking of a reverse stock split anytime soon. Now we have until November to reach compliance. That is a difficult chore. You know it. You said it. You made good background as to why it's a difficult situation in a market where everybody is down. However, we've been in this spot before, and we know how to deal with it, and we know how to get compliance. And most importantly, we have a 6-month extension that we can take in November, to get us through to the next May of 2023. In that 6-month extension, which virtually everybody receives it, it's a given, rarely, rarely this NASDAQ not allow that extension to occur. And in that, we will formulate a plan to NASDAQ as to why we will succeed in compliance, how we will get there. And yes, one of the things that would be included would be a Board-approved reverse split, but that does not mean that we have to do the reverse, but it does not mean that we will do the reverse split. That would be an absolute last ditch effort. It is our belief with the revenue that we will book through the course of the next couple of quarters and more importantly, the beginning of next year and the amount of deals that we will make, especially through PeDAL will overcome some of the market situations and bring our compliance up. Additionally, we have hired a firm, a marketing firm. It's a full-fledged public relations integrated marketing firm is called Health Mavens. They are not only helping us in public relations, and they are not only helping us in media work and how to brand the company. They are actively working with Pamela Bush, Dr. Bush, on increasing our sales and planning and actually already in effect with a marketing plan to those customers. We have a large list of people that we're talking to -- I should say companies forgive me, that we're talking to. These companies are interested and Health Mavens is a company that knows how to get the word to the right people in those companies as well as the contacts we have and to the right people and companies similar to those. So that's going to be a huge addition. So let's first look at reverse split for a half second, Michael. Again, this is not on our minds, and we have no intention to go in there. And I believe that we will bring this market price into compliance well before the May deadline. But let's just say for argument's sake that we had absolutely no choice but to do a reverse split. And you say that you would adamantly vote against it. I want you to really think about that and I'd be more than welcome to speak to you or anybody else directly about that. If we ever get into that position, you are talking about maintaining our company's compliance and NASDAQ and all the investments that have been put through so far over these years, and to vote no would, in effect, be removing us from NASDAQ and [indiscernible] to use an old saying your own nose off your face. Now I hope never to get there. I don't believe we're going to get there. But let's suspend that thought for a number of months, and we will continue to work on bringing our price up as quickly as possible.

I appreciate that. If I can, based on your response, I may ask two more follow-up questions?

Of course.

With SEC compliance and FINRA compliance as well, obviously, you can't give me an exact number. But you mentioned that there's a lot in the works in the upcoming future. Can you provide a forward-looking projection of where you see EPS and bottom line revenues in the next 3 months, 6 months and a year? Will we see a significant increase over the annual $2.5 million to $4 million gross revenue, bottom line net negative EPS? When will we see -- where will we see a positive EPS and revenue growth.

Okay. So a very good question. And I can be reasonably clear on that. First and foremost, and I'm going to come back to zPREDICTA. And you'll see as we go along over the coming months and next year that we'll be talking more and more only about Predictive Oncology that these divisions will be more integrated through product line and we'll stand as One Predictive Oncology. zPREDICTA, the reason that you have not seen the kind of revenue growth that we prognosticated at the acquisition is predominantly due to 2 things. One is revenue recognition. zPREDICTA back in the days of being private, recognized revenue as projects were being complete -- being issued. We can't do that. We cannot recognize the revenue under today's rules, until completion of the project based on the types of projects we're doing. So we are sitting with revenue that we definitely will have over the next 2 quarters and going into the early quarters of next year. We also have a number of customer jobs that are completed but not approved yet and the completion takes a bit of testing and time. So those 2 will occur, and then we will be able to recognize that revenue. I will definitely tell you, I cannot tell you amounts, but I would definitely tell you that there is revenue to be recognized from the zPREDICTA liver and lung cancer models that we have, and that's a first. We never expected to be able to do that during the course of 2022. We anticipated that, that might go to 2023. As far as the revenue for this year, it may not go to the point of beyond the $1.5 million or $2 million because it has taken us quite a bit of time to organize our marketing, to organize our advertising, to hire the right firm and Health Mavens, or Dr. Bush to put together her connections to hire Theresa Ferguson and the wonderful job she too has done for us. And this is all in place now, but it's not like an Apple phone where people are waiting online to just buy us up, we have to go out and we have to meet with these firms. Some of them we've talked to with last year and just show them what our product can do for them and where we have succeeded. So you will see that increase in the first couple of quarters next year, and you will see a much improved revenue line at the end of 2023, which obviously will follow with a more positive earnings per share. I hope that helps anyway.

Yes. And there's no way for the company to provide an actual forward guidance like other listed companies would expect revenue growth of 20%, 30%, 130%. We'd love to see an EPS of $3 one day.

Michael, you and I both. We can't do that. And the reason is, and you have to understand, we are turning from an R&D-based company to a commercialized company. And we're doing it with a product that most people do not have. A product that works with a database that people do not. Companies do not have and the AI Core program that has succeeded in a way that others haven't. And therefore, there is no way to tell that once we begin our sales process when we've begun it. But we start succeeding in our sales process, how quickly this thing will move. I know that we have had positive answers. We've had people asking us what else can we do with it? What's our next step with it? And we're already working on that. So we're not in a position to talk of percentages, but I certainly hope so as we develop a history.

Last comment, I'll make myself, let somebody else speak. Last call, we had, which we were appreciative of as well, you mentioned there were deals on the table for the Pet Dow technology. And I asked the same question of whether the internal validation or external validation was in place. Has there been any pushback on the internal elevation? And what's the response from potential partners for the PeDAL? And when do you expect the first contract to be signed?

Pamela, do you want to handle that?

Absolutely. So thank you, Michael, for that. So there have been questions about the validation, of course, and we have shared those. The response has been positive. As we talk to the different aspects of the sales cycle, we're talking with business individuals, we're talking to scientists. We're sharing the data with them once we have an NDA in place. And there is absolute comfort in the information that we are providing. With respect to having a contract in place, as I said in my prepared remarks, the goal is to have at least 1 contract in place before the end of the year. But we have -- as Bob mentioned, we are talking to multiple companies. We came with a very good group of companies that are interested in the products from BIO, and we are following up with them, starting conversations about specific projects that they're interested in engaging to utilize the PeDAL to utilize it for their oncology pipeline development.

Can you tell me how many NDAs are in place right now?

No. I'm sorry, Michael. I could tell you that we have -- how do I want to say without -- we have a number of them, certainly more than one and..

Lets go on to the next question.

Thank you. At this time, I'm currently showing no further questions. I'd like to hand the conference back over to Mr. Engle for any closing remarks.

Thank you, everyone, for joining us on this call. If we couldn't get to your questions, please feel free to contact either Keith Pinder at Landon Capital or Theresa Ferguson, our Senior Director of Marketing, and they will respond accordingly.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect. Everyone, have a wonderful day.