Precipio, Inc. (PRPO) Q3 2019 Earnings Report, Transcript and Summary

Welcome to the Precipio Third Quarter 2019 Commercial Update Call. All participants will be listen-only mode. [Operator Instructions] Please note that the conference is being recorded. Now, let me hand the call over to Miri Radomski, Precipio’s In-House Counsel. Please go ahead.

Thank you, Ben. Good afternoon. Statements made during this call contain forward-looking statements about our business. You should not place undue reliance on forward-looking statements as these statements are based upon our current expectations, forecasts and assumptions and are subject to significant risks and uncertainties. These statements may be identified by words such as may, will, should, could, expect, intend, plan, anticipate, believe, estimate, predict, potential, forecast, continue or the negative of these terms or other words or terms of similar meaning. Risks and uncertainties that could cause our actual results to differ materially from those set forth in any forward-looking statements include that are not limited to the matters listed under risk factors in our annual report on Form 10-K for the year ended December 31, 2018, which is on file with the Securities and Exchange Commission as well as other risks detailed in our subsequent filings with the Securities and Exchange Commission. These reports are available at www.sec.gov. Statements and information including forward-looking statements speak only to the date they are provided unless an earlier date is indicated. And we do not undertake any obligation to publicly update any statements or information, including forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. Now let me hand the conference over to Ilan, Precipio's CEO.

Thank you, Miri, and good afternoon everyone and thank you for taking the time to connect today. As you probably saw, we just filed our 10-Q and released our third quarter results. I know most of you probably haven't had the time to go through the full report yet, so I wanted to take this opportunity to discuss the company’s result all at a high level and address some of the points coming out of the Q. Carl Iberger, our CFO, is here with us and he'll share a few thoughts as well. The first point to discuss is our revenues, which are lower than the prior quarter. Let me start by saying we are not happy with this result. I want to share with you a few of the reasons why our revenues this quarter are lower. My goal is to get everyone comfortable with the fact that this is only a temporary drop and not a trend. Let me begin by discussing our revenue comp position. To refresh your memory, our revenue has historically been comprised of two main components. The first is our pathology services revenue generated from patient’s specimens sent to us by oncologists for diagnosis. The business has been growing consistently, driven by the continuous onboarding each month of new customers, who send us their business. The revenue can go up and down from month to month for individual customers, but as the company develops a large customer base, revenue growth are typically consistent because each customer that continues to use us becomes a recurring revenue generating customer. And so, our growth is achieved by adding new customers while keeping the existing one. That's pretty straightforward. The second source of revenue is pharma, which is based on various pharma projects that the company has hired to conduct. The revenue from these pharma projects is less predictable because they're based on various intervals of the project whether it would be a clinical trial or some other studies that the pharmaceutical company is conducting. Most of these projects come to phases so often there is a start stop element to them. A pharma company will send us a batch of samples. We run the samples in our lab and return results. The company will analyze the results and then proceed to the next phase. This can require patient recruitment or other acquisition of samples from repositories or archives. At any rate, it's a far less predictable part of the business. In Q3, while our pathology business continued to grow, we had virtually no pharma revenues because the project we were working on happened to be in a phase during Q3 when they didn't generate much business to us. Coming into Q4, we already see a bounce back in pharma revenues and so we expect those will come back and make up for some of the lost revenue in Q3. The second reason was the summer slow down. For whatever reason, this summer and particularly in August, we saw a sharp decline in our pathology volume. Although our existing customer base remains unchanged and we also continue to grow our base with new customers, for many of our customers the volume declined with some of the customers on vacation for a substantial part of the summer. And therefore, we saw sharp declines in certain customer revenues. In Q4, however, we've already seen a bounce back in our pathology volume and our October case volume has increased by almost 20% above Q3 average. Lastly, management was focused on advancing our technology projects – products: IV-cell and HemeScreen. As I said in the past, one of the strategic goals of the company is to diversify its revenue to add a third revenue line item from products and services. Unlike the pathology and pharma revenues, product sales or B2B revenue that's not susceptible to reimbursement or collections or long lead time and DSO. And once you get a customer, it's very, very predictable. Furthermore, as the lab to lab product usage is relatively consistent and so purchases are predictable with a relatively high degree of accuracy. So as we aim to build as much of a pipeline as possible, the company took an All Hands On Deck approach and everyone rolled up their sleeves to get these products in front of as many customers as possible. As in any sales process, it begins with a funnel of prospects, target customers, meetings and presentations that converted into trials and those convert into customers. We've shared some of the results of our work with completing the validation. And I want to assure you that we are all still moving forward towards onboarding major labs to use our products both domestically and internationally as we work with labs in Asia and South America to introduce our products. And yes, in Q4, we will have our products generating revenue for the company for the first time. We've now thoroughly tested and incorporated the IV-cell media product produced by Novamed and both in our labs as well as in other labs trialing it. The results are spectacular. Novamed is ready to scale up with us and we have ensured adequate capacity for substantial customer orders. We continue to believe that this is going to be a substantial growth driver for the company going forward. Having said that, we're not pleased with the results for the quarter and members of the team, including myself, have conducted a thorough analysis to identify the causes, so that this doesn't happen again. We are a growth company with a lot to offer and our numbers, not our words, must continue to demonstrate that. I have no doubt that the seeds planted this year and in particular in Q3 will show their fruits very soon and these fruits will be long lasting. Now, let me hand it over to Carl for some additional comments and I'll come back for some closing thoughts. Carl?

Thank you, Ilan. Good afternoon and to our shareholders thank you for joining our call today. I am Carl Iberger, Precipio’s Chief Financial Officer. On today's call, I'll cover our 10-Q filing, operating performance and cash requirements. First, as Ilan noted, we have completed and filed our 10-Q with the SEC today. Consistent with prior reporting, the company is filing a clean quarterly review and audit from Marcum LLP. Moving on to operating performance and on the revenue front, in his remarks, Ilan discussed our Q3 revenue. While Q3 revenue was lower from the prior quarter Q2 of 2019, our reported revenues on a year-to-date basis were $2.4 million for the nine months and more favorable to the nine months ending 2018 by 12%. While reporting a 12% year-over-year increase and to Ilan's point, our expectations were higher. We projected a 15% increase and we were attracting to that forecast through August. However, we fell short in the month of September. Our testing revenue decreased as a result of a decrease in patient referrals from several key farmer accounts and certain other ordering accounts. While disappointed with September, ordering patterns have rebounded in Q4. Moving on to lab operating costs. At present, it is difficult to show improvement in gross profit because our testing volumes did not allow us to realize economies of scale. Both fixed and variable expenses are required at their current level to appropriately operate a functioning CLIA and CAP certified diagnostic lab. Simply put, we are staffed at an appropriate level of effort to manage the lab and provide industry standard turnaround. But taken as a whole, lab operating costs have remained constant over the last 18 months. As testing volumes grow, our margins will improve. That just stands today we do have excess capacity. Estimates are that we could absorb a volume increase approaching 20% before adding to our variable costs. Each incremental revenue dollar heals 55% to 60% margins. Moving onto our operating expenses. The company's operating expenses consists of sales, marketing, R&D, public reporting expenses, legal, IT, general business operating expenses and management. By cost category, our operating expenses consist of salary, professional fees, facility costs, travel, depreciation and amortization. In the G&A section of operating expenses, we continually make strides with cost reductions and efficiencies through outsourcing and external systems. These initiatives yield both recurring and non-recurring reductions in our operating business. Key process changes have been in legal, public reporting, state and federal tax filings and business fees. Once we've locked on a reduction and demonstrate the savings, we in turn look to invest in sales, expanding our business development activities and R&D. During Q2 and Q3, our investments have been expanding our sales team and upgrading our business development activities. Currently our sales force covers 17 States. Early results of our sales analytics show that we are seeing an increase in both new ordering accounts and a general across the Board increase and orders per account. On the R&D front and I believe Ilan touched upon this. We've commercialized IV-cell and HemeScreen. Well there have been some starts and stops in the clinical evaluation process and these have elongated our initial estimation regarding completion of clinical trials. Expectations remain for significant revenue contributions in 2020, operating losses. For the three months ending September 30, 2019 the company reported a net loss of $2.4 million as compared to a net of $4.1 million for the equivalent period in 2018. Off the $1.7 million change, $1.6 million was the write offs associated with Goodwill. The remaining $0.1 million is the net impact of securing expense reductions in legal and public reporting and then turning around and investing in sales, business development and R&D. So stepping back and viewing the company's operating expenses as a whole. During 2019 we have successfully reduced spending in certain G&A areas and public reporting. We estimate that between 350 to 0.5 million in annual reductions have enabled the company to focus on its growth initiatives. Moving forward we believe additional reductions or overall public reporting expenses will be evident in future quarters. Turning to our cash and cash requirements, to grow the business, develop new products and expand sales. The company has relied on cash generated from its revenues and investor financing. We are a consumer of cash today. Cash on hand as of September 30th was $1.7 million. This is an increase of 1.3 million from the year-end December 2018. Going forward, management believes that current cash balances, continued growth in diagnostic testing revenue, generating additional cash, newly inked clinical research contracts and new product revenues in the form of IV-cell and HemeScreen combined with managing expenses will be sufficient to reach cash flow breakeven during 2020. And now I'll turn the call back over to Ilan for some closing remarks. Okay.

Thank you, Carl. I'd like to reiterate some of the commitments we've made to our fellow shareholders. First, we are committed to growth. While this quarter didn't show that in numbers, I know that our lower shareholder base has a long-term commitment, believes in what we're doing and it's going to be there when the company delivers, so that they can reap the rewards of their patients. Every road has it bumps. We have a strong team that knows how to overcome any bumps we face and we are committed to continuing down this path of growth. Second, is our commitment to fiscal responsibility? As I've said before, we continue to manage our cash extremely carefully. As Carl has shared some of the elements of how we manage the finances of the business. We remain committed to not conducting any substantial capital raise that will be diluted to our shareholders. We're driving our company towards profitability, so that if and when we want to raise capital it will hopefully be when we don't necessarily need it and when our share price as a point where the capital raised is relatively small compared to the company's market cap. Lastly, our commitment to patient care. I'm proud to be a part of and inspired by a team who cares so deeply about what we do, and the cause that gets us out of bed every morning. We are privileged to be part of an organization that brings such meaningful clinical value to patients battling the scariest disease in healthcare. And we're privileged to have a shareholder base that is committed to sharing this exciting ride with us as we build a meaningful, growing, valuable and important business. I constantly think about the mission and vision of the company and continuously communicate it to all of our stakeholders: our employees, our customers, and to you our shareholders. This common vision that unites us is the key ingredient to the continued hard work required to achieve success. Over the past quarter I've personally visited over a dozen labs to discuss products such as IV-cell. The response has been almost unanimous in terms of immediate interest. The need for better product is clearly there and goes virtually un-refuted. This tells me that we've developed a product that has a clear market need and can provide substantial clinical impact as well as operational value. As with any product, the first few sales are always the toughest, but I'm confident we're on the right track to major success. As we enter into the year in the holiday season I want to wish you all health and happiness. I spent quite a bit of time in the offices of our customers. And from time-to-time, I see the gut retching image of parents walking out of the treatment room with their teenage daughter wrapped in a blanket with her head covered with a scarf. Those moments remind me of how lucky we are to be able to do what we do, to be contributed to society and to spend another good year – another year in good health. During this upcoming holiday season, I wish you and your families the same. Have a nice evening and thanks for joining the call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.