Good morning, and welcome to the Precipio Earnings Conference Call for the Third Quarter ended September 30, 2017. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being recorded for playback purposes. An audio replay of the call will be available on Precipio’s website in the Investor Relations section approximately one day after the end of the call. I would now like to turn the conference over to Mr. Scott Gordon, President of CORE IR, the Company’s Investor Relations firm. Please go ahead, sir.
Thank you, Philip. Thank you all for joining today’s conference call to discuss Precipio’s corporate developments and financial results for the third quarter ended September 30, 2017. With us today are Ilan Danieli, Precipio’s CEO; and Carl Iberger, Precipio’s CFO. Yesterday, Precipio, Inc. released financial results for the third quarter ended September 30, 2017.
If you have not received Precipio’s earnings release, please visit the investor's page at www.precipiodx.com.
Before we begin with management’s prepared remarks, I would like to remind everyone that certain statements in this conference call constitute forward-looking statements within the meaning of Federal Securities Laws including statements relating to plans and prospects for Precipio and other statements containing the words anticipate, intend, may, plan, predict, will, would, could, should and similar expressions constitute forward-looking statements within the meaning of the Private Securities Litigation reform Act of 1995. The Company's actual results could differ materially from those anticipated in these forward-looking statements, as a result of various factors. Factors that could cause future results to materially differ from the recent results or those projected in forward-looking statements include the known risks, uncertainties, and other factors described in the Company's quarterly report on Form 10-Q filed on November 20, 2017 and the Company's prior filings from time-to-time and in the Company’s subsequent filings with Securities and Exchange Commission. Any change in such factors, risks, and uncertainties may cause actual results, events, and performance to differ materially from those in such statements. All information in this conference call is as of today, November 21, 2017. The Company does not undertake any duty to update this information including any forward-looking statements unless required by law. It is now my pleasure to introduce the Ilan Danieli, CEO of Precipio. Ilan please go ahead.
Thank you, Scott. Good morning everyone, and thank you for joining us to discuss the results of Q3 2017, our first full post merger quarter. A little over 4.5 months ago, we just completed the merger one day before the start of this quarter. On day one, our Company required financing, it faced a massive AP liability on it’s balance sheet.
Our CLIA Laboratory operation in Omaha was planned to be relocated to New Haven, and we had a product that needed significant revamping before it could be re-launched into the market. Overcoming these challenges was the first step towards determining the Company's long-term viability and positioning the Company for success. This morning, I'm pleased to share with you that we've made significant progress overcoming these challenges. In August, the Company completed its first capital raise of $6 million out of a targeted $8 million, and we recently completed a subsequent top-up raise of approximately $2.5 million. We've reduced our AP by over 50% and restructured a significant portion into long-term debt, shoring up our balance sheet and positioning Precipio for a recovery towards financial viability.
Our lab staff have successfully completed on schedule the transfer of the 30,000 square foot laboratory facility in Omaha into our New Haven facility.
We’re up and running, and as announced in early October, we won a new $750,000 pharma project. We launched our first revamped lung cancer ICE-COLD PCR kit also on schedule, and most importantly we now have new ICP customers’ orders and revenue. In the time since the merger, we've achieved with ICP what has been previously attempted for the past six years, and we are now bringing the promise of ICE-COLD PCR to the liquid biopsy market. I'd like to share with you a recent experience with one of our new ICP customers Methodist Healthcare to frame our market development and customer experience. When we approached the folks at Methodist, they were in the final stages of evaluating five other competitors to select a liquid biopsy solution for their in-house laboratory. The outcome as you know was that Precipio’s ICP was selected as their liquid biopsy platform. They chose us because ICP is more flexible, it's more robust in terms of its adaptability to other platforms, and because it enables them to make money using our technology. Two weeks ago, we sent one of our lab techs to help setup ICP in their laboratory and assist in the onboarding of their technology. At the same time, in my discussions with one of our R&D team members, she voiced her concern that it wasn't going to work. When I asked why she felt that way, she gave me a very simple honest answer which was because it's never worked before. When our lab tech returned from the onboarding, she reported the successful implementation and how excited the customer was to begin using ICP. This is a tremendous validation of all the hard work we have done, leading up to the merger. We spend a lot of time doing our diligence, we knew the potential of the technology we were acquiring, and we knew that if executed properly, it could yield this positive outcome.
However, there's nothing like seeing the success of a product launch and the excitement it created around the team who was able to produce a product that customers actually want. That was extremely rewarding.
Now having said that, there are still many challenges ahead of us in growing the company.
However, we believe we've demonstrated we have a product that works and is valuable to customers. Like in any business, the first customer is always the toughest sell and we've won our first several customers. This could not have been accomplished without the hard work and dedication of our fantastic team. And I'd like to take a moment to recognize them. From our investors to our experienced and engaged board of directors to every single member of our team who played a critical role in making this happen, this is your success. I'm so proud to see the close collaboration between our commercial and R&D teams in designing, developing, and bringing to market a product that customers truly need. To all those shareholders who've been waiting for the promise of ICE-COLD PCR, this is the beginning.
We have a lot of work ahead of us to convert the pipeline we have into a growing customer base and that's what we're determined to do. I want to take a few moments to discuss why we decided to enter into the second capital raise which I know caught many by surprise.
Our original plan and budget call for $8 million as we announced back in August. We raised $6 million in gross proceeds, which on the surface results in 75% of our expected capital need.
However, considering the net proceeds from the raise after all the costs associated with the transaction, as well as the debt we retired, we were effectively left with less than 50% of our target raise. This meant that from an operational perspective we would need to operate with our foot on the brakes something that nobody wants. The subsequent top off provided us with additional capital needed to execute on our plan. We believe our company has never been in a better position than it is today.
Lastly, before I hand the call over to Carl for his review of financial highlights. I'd like to point out that the presentation of financial results for the third quarter of 2017, compared to Q3 of 2016 is a comparison of financial metrics of Precipio Inc. the post-merger and now public entity versus last year's financial metrics of Precipio LLC, the private entity pre-merger. This is not really an apples-to-apples comparison and that should be considered in that relative context. Furthermore, much of the financial results of Q3 were negatively impacted in the merger in two ways.
First, there are significant one-time costs that occurred during Q3 which were associated with the merger. They are not part of our ongoing business and will not impact future numbers.
The second impact of the merger was on management attention.
As I mentioned before, during the first half of 2017 leading up to the merger, management attention was consumed with the transaction itself and we were not able to properly focus on the business.
Given management’s significant role and involvement in sales and the development of the business including myself, our business took a hit that impacted Q3 from a revenue and subsequent gross margin and net profit perspective.
Now in Q4, with the majority of the post-merger integration the capital raise and the AP restructuring behind us, management can refocus our attention on growing the business. The results won’t be immediate and as the financials demonstrate the company will at some point still require additional capital to grow that we believe we will be in a very different position at that point. I do feel, however, that we have the right team in place that can get us back to where we were and then continue to grow from there. It's now my pleasure to introduce Carl Iberger, Precipio’s CFO for discussion on our financials. I will return after that with some closing remarks. Carl, over to you.
Thank you, Ilan and good morning. Reviewing operating results for the quarter ending September 30, 2017. Net sales were $270,000, as compared to $365,000 a decrease of $0.1 million or 26% during the three months ended September 30, 2017. The decrease in reported revenues is due to the decrease in cases processed during the three months ended September 30, 2017 as compared to the same period in 2016 resulting from a management focus on the merger as Ilan has just reviewed. Cost of goods increased by $0.1 million or 46% for the three months ended September 30, 2017.
As compared to the same period in 2016, increase is due to additional staffing as the company hired several additional laboratory personnel in New Haven in preparation for the transition of the previous Omaha work to our CLIA facility in Connecticut.
Moving to gross profit, gross profit and gross margins were as follows; gross margin was a negative 29% of total net sales, during the third quarter of 2017, compared to 35% of total net sales during the same quarter in 2016. The gross profit decreased by $0.2 million during the three months ended September 30, 2017 as compared to the same period in 2016 due to the decreased revenues discussed above and associated fixed costs to operate our laboratories. I’d like to point out that the change in gross margin is largely due to the fixed costs associated with operating our lab facility spread over the lower volume. Both our product lines in pathology services and ICP kits have gross margins exceeding 60%. We believe that in near future, we will return and exceed revenue levels that shows strong gross margins.
Moving to operating expenses. The company’s operating expenses increased by $3.1 million to $3.6 million during the three months ended September 30, 2017, as compared to the same period in 2016. The increase in operating expenses reflects the increase in one-time professional fees attributed to legal, audit, and advisory expenses related to the merger of the two organizations and other costs associated with combining the organization’s post-merger.
Additional increases in our general and administrative expenses resulted from increased amortization related to acquired intangibles from the merger and expenses related to operating as a public company. Other expenses for the three months ended September 30, 2017 and 2016 includes interest expense of approximately $1.9 million as compared to $0.2 million in 2016. The increase is interest expense is due to $1.8 million of debt discounts and debt issuance costs that were amortized to interest expense during the third quarter of 2017 as a result of the payment and conversion of all of our convertible bridge notes during that quarter. Net loss for the quarter ended September 30, 2017, was $6.3 million, compared to Q3 2016 of $0.5 million. Merger and recapitalization expenses represent approximately $5 million of the $5.8 million increase in net loss, and are mostly one-time, non-recurring expenses. In summary, our Q3 initiatives to recapitalize the company, restructure our debt, to manage cash flow, and relocating lab operations has provided the company the ability to accelerate R&D development, transfer those developments into production tests, and to build our sales force for market expansion.
Now I’d like to turn the call back over to our CEO, Ilan Danieli for some final remarks. Ilan?
Thank you, Carl. In summary, if you look at the discussion from our previous investor call and the milestones we laid out as our goals, you’ll see that we’ve delivered on what we said we were going to do. From a financial perspective, we believe our company is adequately financed to the near-term, although it will require further financing next year to continue to facilitate our plant growth. From an operational standpoint, we’ve successfully executed on our main goals of relocating and reopening the lab and restarting both of our existing businesses, as well as winning new contract.
Lastly, from a commercial standpoint, we’ve revamped and launched the first of the successful new line of ICE-COLD PCR products and have obtained customers, orders, and revenue both domestically and internationally. Q3 was the cleanup quarter, where we repositioned the company for return to growth. I feel we have the ingredients we need, a strong product offering, and a solid team, and coupled with hard work will continue towards recovery and turning the corner. I’d like to thank everyone again for joining us today.
We’re excited about the future and our focus on achieving the promise that Precipio represents and to delivering lasting shareholder value to you, our loyal shareholders. Thank you again for your time and continued support. And we look forward to continuing to report on our achievements in the coming months.
We also intend to participate in a number of investor conferences and events in the coming months, the details of which we will be announcing accordingly. We look forward to engaging you - with you as we proceed. Thank you.
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.