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PRPO Precipio

Participants
Ilan Danieli CEO
Carl Iberger CFO
Call transcript
Operator

Welcome to the Precipio Incorporated Second Quarter 2019 Corporate Update Call for shareholders. [Operator Instructions]. Please note that the conference is being recorded. 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, 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-10K 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.

Ilan Danieli

Okay, thank you very much.

So good afternoon, everyone. Thank you for joining today's call.

As always, thanks to those who send questions in advance, we'll do our best to address them. On our call today I'll provide an update on the business, Carl, Precipio's CFO will give a financial perspective and then I'll close with a few final remarks.

Before I begin, I'd like to recognize Carl and his team for the company's successful filing a week in advance of the deadline of our recent 10Q. In the past, the combination of complicated transactions and subsequent complex financial statements, together with a relatively lean and small finance team, tasked with a company accomplishing a tonne of work resulted in us frequently filing for extensions as we came up to our two year mark since the merger Carl and his team set as a goal to file before the deadline and I was delighted to see the team meet that goal with flying colors. Two things led to this first, despite the team remaining lean we continuously got better and together with Marcum, our auditors we put in place processes to streamline the preparation and review of our financial statements by our auditors.

Second, simply put, our financial statements got simpler call. Carl will discuss this in further detail in a few moments but if you look at our balance sheet for example, it tells a very different and far cleaner story than it did two years ago.

So kudos to Carl and his team, job well done.

Now onto the business performance, I'll cover both sides of our business, the product side and the pathology services side.

Let me start with our technology services.

As you saw from the recent financial results, as well as the news update we provided last week on Q2 metrics, we continue to head in the right direction with our metrics showing growth.

We continue to reinvest in adding further headcount to build our sales team and this investment continues to show positive results in the growth of our revenue.

Our customer base is not only growing, but it's also changing as we evolved from working with smaller practices to adding larger groups and hospitals. This will of course impact our average revenue per customer in addition to other growth metrics, such as case volume.

I'd also like to comment on the recurring customer metrics because this is somewhat unique to our industry. Many in our industry often complain about a revolving door of customers with new customers trying their services, switching to another lab and jumping around from lab to lab. This is indicative of the nature of our business which is diagnostics is perceived for the most part as a commodity. In contrast, not only have we been able -- have we had an extraordinarily high conversion rate from prospects to trial, from trial to repeat customer as reflected in our metrics.

We also have a low attrition rate. I attribute this to two things.

The first is the outstanding delivery of our message by our hard working sales team, who care deeply about our customers, their patients, and are here to ensure that our vision is carried out and the problem of this diagnosis is indeed eradicated.

The second is the outstanding work done by our laboratory team and world class pathologists in our network who truly provide exceptional value that is recognized by our customers. This creates what we call in sales stickiness, which is the ability to not only to win a customer, but to keep a customer creating the critical recurring revenue model that helps us grow.

Moving on to our product side of the business, I know that everyone is on the edge of their seat waiting for that big contract with [indiscernible] to be announced and believe me, there's nobody who wants you to happen faster than myself and my team. I'm here to assure you today that this process is proceeding.

We are dealing with large organizations and they have their own process and that process takes time.

However, at this point, we have not seen any reason that the process will not result in a successful outcome. We recently received the first shipment from Novamed, our IV-cell manufacturer and have successfully completed its internal testing, showing excellent results. I've never been more confident in our products and I've no doubt that our customers will benefit substantially from clinical as well as operational advantages of IV-cell over current product in the market.

As I communicate with several of you by email, to those who don't have the stomach or patience to wait it out, you will find this process very challenging.

For those who stuck with us with us through the ups and down, I am confident that confident that your patients will be rewarded and I believe that the bulk of the weight is soon to be behind us.

As anyone in sales knows, the first is always the toughest sale. HemeScreen is also progressing and we're working on some large accounts that are in the process of validating and onboarding the essay into their laboratories. Both these products should become strong top line revenue as well as bottom line cash contributors to the company and will help us move towards cash flow positive.

Regarding ICE-COLD PCR, we continue to work on some of the partnerships previously mentioned. And most of them have expressed an interest in continuing to work with us on further development. Those will be announced as we make progress.

Lastly, I'd like to comment on our international effort led by Ori. We've made incredible inroads into some of the largest healthcare institutions worldwide.

Just this morning, I returned from Brazil, where I met with some of the premier healthcare laboratories, and we will be commencing trials with them to implement our products in their lab. This is one of the multiple efforts as we expand our products to Asia, South America, Europe and the Middle East. This will be yet another revenue and cash contributor with the advantages of diversification away from relying solely on the U.S. market.

Now let me turn it over the call for the session on the Company's financial. Carl?

Carl Iberger

Thank you, Ilan for the introduction. Good afternoon.

Let me extend a welcome to everyone on this shareholder call. I'm Carl Iberger, Precipio's Chief Financial Officer. On today's call, I will be bringing you up to date on significant transactions completed in 2019.

Our operating performance and our balance sheet and what we need to accomplish to obtain breakeven operations.

Let me start my discussion with addressing several material and significant items the company has concluded during Q2. When considering these items taken either individually or collectively, they have been a negative financial and resource drain on the company to-date. Getting these behind us will benefit our future.

All of these items have been reported on in our 10-Q.

First, as Precipio entered 2019 the company had two significant legal claims facing it. Both were holdovers from the 2017 merger. By the end of this past quarter, the company settled both investor related Transgenomic pre-merger matters.

The first matter is Crede Capital claim on Transgenomic.

As of May 2019, this matter has been settled and fully paid with its origin dating back to July 2015 settling and concluding the inherited liability obligations of Transgenomic to Crede Capital is a material financial weight lifted off the company.

The second matter is a legal action stemming from Transgenomic activities pre-merger. Campbell et al. Transgenomic is a lawsuit. In June, negotiations were completed. All parties have agreed on a settlement. Final documents will be completed during Q3. All impact of the settlement have been accounted for in our second quarter financials.

A third item non-legal but more contractual dealing with post-merger agreement was also settled, signed and completed in May of this year. This item has to do with Leviston Resources LLC. At the conclusion of Q2, Precipio has satisfied all outstanding obligations and claims with Leviston and counterclaims by Precipio and has a fully executed release settlement. The fourth item, also during June, was completed settlements with three remaining major merger related legacy accounts payable vendors.

With these settlements, the company can finally turn the page on the legacy payables.

During the last two years, we worked off an excess of 15 million and legacy debt through negotiations, settlement claims and minimizing cash outlays of approximately $8 million. Also in Q2 the company executed a reverse stock split in order to remain on the NASDAQ stock exchange. In previous press releases, and the shareholder call in May, Ilan addressed this action. The financial information provided in the Q has been adjusted to incorporate the 15 for 1 reverse split on April 26. The company has 5.9 million shares, possibly outstanding as of June 30, 2019.

Moving to our operating performance, I'd like to address our business activities. The company filed it's 10Q on August 9, reporting our financials, footnotes disclosure, legal exhibits and management discussion analysis.

During this reporting period covering the three and six month period, ending June 30th. Total reported revenues grew 32% quarter over quarter and 8% for the six month period of year over year.

Based on our projections for additional growth in the second half, we believe our annualized growth rate will continue to increase, exceeding the current annualized rate of 15%. Stepping back and taking a look at our services as of this reporting period, diagnostic testing account for almost all of the reported revenue. Of this amount pathology services represent approximately 75% of all revenues. Pharma services from pharma contracts provides the remaining 25%.

Our New Haven, Connecticut [indiscernible] license pathology lab recently received its cap approval in August.

In recent conversations with our sales team led by Steve Miller, we believe that securing the cap certificate will translate into additional diagnostic sales from key oncology practices. Growth in pathology is directly related to expanding our sales force.

During the first half 2019, we have steadily increased our sales force and with this expansion, we now cover 18 states. Breaking down the account profiles, a majority of revenues generated from pathology diagnostic testing comes from office based oncologists and multi-oncologist physician groups. Medical centers and hospitals comprise the balance. Paramount for success is physician relationships built through the direct to the doc sales force and our in house quality team assigned to customer patient cases. The remaining revenue is comprised of pharma projects. These projects make up approximately 25% of reported revenue. These services generate revenues from contract clinical research companies, pharmaceutical contracts and/or testing developers.

Our pharma services are provided by the company's Omaha, Nebraska research facility.

As Ilan touched upon, we have developed two new laboratory processes HemeScreen launching late 2018 and IV-cell launched in Q1, 2019. When orders are placed, these products and their volume requirements will not only expand revenues, but will help leverage overall lab expenses, affording us economies of scale. Currently, lab technical staff has the capacity to take on increased volume. Both HemeScreen and IV-cell are currently being marketed to cytogenetic molecular reference laboratories and hospitals throughout the U.S., Asia and most recently, as noted previously, Brazil. The management team is extremely confident about the technology and its application. Internally for our own testing needs, we have demonstrated the ability for the media to supplant existing lab processes, providing improved clinical results, saving significant time and reducing costs.

These new lab processes have allowed our New Haven, Connecticut pathology lab to expand it's services and to offer markedly improved clinical outcomes as well as improved turnaround time.

However, with all that said, we are disappointed in the length of time it has taken external labs to complete validation testing. We remain very encouraged but we're not satisfied.

We are confident we're doing all we can edge closer to completion and external valuation.

Gross margins, we've seen the proven and a gross margins but significant improvement can only be generated by continuing to build or sales volume. We project gross margin to markedly improved as volume increases.

Moving to operating expenses and SG&A.

Our expenses required to operate sales and G&A are essentially level year over year while the size of our business has grown by 8% to 10%. What is not obvious is the progress we have made in reducing certain material G&A expense. These savings have been reinvested in our sales force. Key expenses in G&A that we are focused on are public reporting expenses, auditing expenses and legal. Legal expenses have been significantly curtailed, as have the cost for IT support. Legal reductions are a direct result of finalizing the previously discussed settlements. We shall see material changes in the second half.

Going forward, we need to continue to reduce expenses.

As noted, specifically public reporting expenses related to our business. Stepping back from that for the size of Precipio today, public reporting expenses comprised of single largest expense item and they're driven by our audit expenses, valuation analysis on our financial instruments, technical accounting services for accounting guidance and incorporating accounting for our financial instruments. Multiple public reporting fees and associated franchise taxes as well from NASDAQ, from Delaware and through corporate reporting to the states that we provide business in.

Taken as a whole, public reporting costs are excessive for our company.

While we are making progress on G&A expenses throughout the remainder 2019, we will invest or repurpose all expense reductions into expanding the sales force and building customer reporting tools to grow the business.

Looking forward, I believe the proof of these efforts will find their way to second half financials as sales force expansion, funded by the G&A reductions drives volume.

Moving along to other income and expenses during the quarter it was material activity related to our financial instruments and price modifications that resulted in warrant and derivative evaluation expenses and the last and initial sub-convertible notes.

As identified in the 10-Q other expenses net was 3.4 million and 0.6 million for the three months ended June 30, 2019 and 2018 and included expense from warrant and derivative of revaluations of 2.4 million and income from warrant and derivative revaluation of 0.3 billion for the same period -- six months ended as well as a loss of issuance of convertible notes of 1.9 million and 0.9 million, especially.

During three months ended June 30, 2019 the other expense items will partially offset by gains and settlement of liabilities of 1.1 million

Moving to our balance sheet and cash flow activities, looking at our assets, cash reserves at June 30, 2019 were 1.2 million, as compared 0.4 million at year-end 12/31/18. Accounts receivable reflected proportionate increase in revenues, and DSO as of June 30, 2019, was 84 favorable to year in 12/31 DSO of 92. No liabilities for the company to fund the operations and clear the previously discussed settlements.

During the quarter ending June 30th the company issued 2.1 million in new debt, and also received proceeds of 1.6 million from the exercise of warrants.

As of June 30, 2019, cumulative accounts payable and accrued liabilities for 4.3 million as compared to a year ending 12/31 amounts of 7.7 million or a decrease of 3.4 million. Changes in liability reflected recently concluded statements making a gain of approximately 1.1 million in negotiated AP [ph] and the use of proceeds for payment of expenses related to our operations.

Recently, the company filed an F1 on August 9th, estimated proceeds are 4.9 million. The company believes existing cash reserves, combined with the equity line proceeds should provide sufficient runway for the company to successfully market IV-cell and HemeScreen and reach cash flow breakeven and profitability.

Now, let me turn it back to Ilan for some final comments.

Ilan Danieli

Thank you, Carl, for that detailed analysis.

So a few final thoughts.

Our team and I continue to work hard at building the company and achieving the goals we set out, and that we've promised to deliver on to you the shareholder. I know that many of you, myself included, are disappointed at the decline of the stock price where it was a few months ago post reverse split.

Our stock has previously suffered from aggressive shorting but from examining the recent short positions around the stock, you can actually see a relatively low percentage of short interest and reduced short pressure, which is very positive. The volatility in our share price is probably a reflection of the perception and uncertainty in the eyes of fund in the market around the company's capabilities. In our view, this is not an indication of the company's performance, because from a revenue perspective and financial perspective, we've demonstrated relatively stable growth. We believe we have great prospects for our products, which are undergoing validation by institutions and these processes, as I mentioned, about to take some time but once they're completed, we believe that the results will have a dramatic impact on the company's finances as well as its overall position in the market as a global leader in providing impactful and valuable products that we've created.

And with that, I believe that the stock volatility will stabilize and it will reach a price that reflects the value we deliver. We're all entirely dedicated to achieving this goal and with each day that goes by, with each meeting that takes place, we grow more and more confident in our value proposition, the clinical benefit to our customers and their patients and the subsequent direct financial value to our stockholders.

Never has there been a more exciting and more important time to be where we are today. Cancer touches everyone and with the tools we've created no cancer patient should ever suffer the consequences of being misdiagnosed.

I want to thank you all for your continued interest and the support of the company. And I look forward to speaking with you on our next call. Wishing everyone a nice evening. Thank you

Operator

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

You may now disconnect.