Precipio Inc

NASDAQ:PRPO

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Precipio Third Quarter 2023 Shareholder Update Conference Call. [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 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, but are not limited to, the matters listed under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, 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 call over to Ilan Danieli, Precipio's CEO. Please go ahead.

[Ilan Danieli, executive]

Thank you, and good evening, and thank you for joining our Q3 2023 shareholder update call. As this will be the last shareholder call for the year, I'd like to take a few moments to recap the recent quarter's results, and even though we still have 6 weeks left to the end of the year, to frame this within the context of 2023. Following that, since our next shareholder call would be in April of next year, I'd like to share some thoughts about what we have lined up to 2024 and what you can expect to see.

Let's begin with our Q3 results. As you saw in our filings, we grew revenues by almost 30% from the previous quarter and doubled year-over-year from Q3 of last year. This is a very meaningful jump for us in business volume and was driven both by our pathology business as well as our product business. At $4.5 million per quarter, we expect this on an annualized run rate of $18 million, which begins to approach our breakeven point.

Additionally, our cash burn dropped to around $1 million in the quarter, down to approximately 40% of the $2.5 million, which was our cash burn in the same quarter of last year. This is an astounding -- outstanding accomplishment for our company, and it's important to emphasize that this is not a fat-cutting exercise.

Those who know me and our company, you know that we've always been a very lean and frugal company. This cash burn reduction was accomplished by a combination of restructuring operational initiatives that saves a lot of money. And of course, in addition to our revenue growth, we generated positive cash margin -- generating positive margins and cash. So overall, we had a good quarter, and we are continuing to head in the right direction.

Now let me put this within the context of 2023. At the start of 2023, we set a very clear role for the company to reach cash flow breakeven and a few financial independence. Breaking this down, this will be achieved by meeting 3 targets.

First is the pathology division reaches breakeven at a run rate of $14 million. The second is that the product division reaching a run rate of $8 million. And the third is significant reductions in our expenses. The combination of these 3 targets gets our business to cash flow breakeven.

As of Q3, we have achieved 2 of those 3 targets. Our pathology division has reached that target and is now a cash-needful division. This has significant implications for our future business, and I'll come back to that in a few minutes. But the important part is the most expensive part of our business, our pathology services operation is no longer a cash drain on the company.

The second target we achieved is a significant reduction in our expenses through the execution of various operational efficiencies as we've discussed. One example we've mentioned in the past is bringing our billing function in-house versus using an outside billing service. Depending on the revenue level on case mix, this billing and collections initiatives and subsequent reduction in billing expenses yield savings of about -- between $50,000 to $75,000 in cash every month.

This is just 1 initiative of many, which, in combination, have enabled us to significantly slash our cash burn. Since many of these are tied to revenues, the impact will continue to improve as we grow our business. While our product division has not yet reached its targets as of Q3, the combination of achieving the 2 other targets has effectively reduced the company breakeven threshold of our product division from $8 million to $6 million or $1.5 million per quarter.

With our current pipeline, we are well on our way to reaching that target. Perhaps the most important part of the equation is that we believe we have enough cash to get us to the target, and whether it takes 1 or 2 more quarters to get there, we have the gas in the tank to reach our goal of financial independence. Reaching financial independence and beginning to generate cash will be an exciting milestone from my vantage point, but we are well within reach of achieving that target.

So what does that mean for the company? Let's review a few things. First of all, by reaching the exciting milestone of breakeven, it doesn't mean we changed our mindset from the way in which we operate our business. One of the things I'm proud of -- proud about is that management, and indeed the entire team, treats every dollar as if it's coming out of their own pocket. That mindset has enabled us to look at our operations closely and find ways to operate in a more cash-efficient manner, generating the same or even better results while spending less cash.

Now let's talk about a few other impacts. First of all, having a pathology division that is breakeven essentially means we have achieved a significant component of our business model, which is to create a cost-free R&D center. As you know, the company's strategy is to develop and sell diagnostic products that makes labs better.

In our industry, developing a product for laboratories typically means an extensive process of coming up with a product, finding a fully operational lab, which has all the equipment and staffing to test it, which, in itself, is quite expensive. Perhaps the most challenging and most expensive element is to find patient samples upon which the company can test their products.

If you look at our competitors, you will find R&D costs in the tens of millions of dollars to develop their product. Our incremental cost is minimal because we have a revenue-generating, now cash-neutral laboratory with all the equipment, staffing and patient samples coming in every day, which, once we're done with the clinical work, we can utilize to our product development needs.

Essentially, we've developed a business model where our cost development product is almost negligible. In August, we announced the release of our new breakthrough BCR-ABL assay. The development cost of this assay was less than $100,000. For the best of our knowledge, there is no other company that has developed this kind of model.

And what it means is that in a relatively low budget and with tremendous flexibility, we can develop future products without a significant need of capital. Thinking of what this does for the potential ROI of the business, where we can launch such a product like BCR-ABL, with revenue potential as high as $40 million a year and was an incremental product development cost of less than $100,000, we like that business model.

Second, this allows us to make small investments in sales and marketing of our products. Right now, we've relied on a combination of a direct sales effort in addition to the distributors we work with, Thermo Fisher and McKesson. We believe that with minor marketing efforts costing less than $100,000 for the entire year, we can significantly boost product awareness and generate additional product sales for our product. Up until now, we've been very limited in spending to enable us to reach this milestone of cash flow breakeven.

Yet another impact is the ability to invest in our product production line. We currently control the entire supply chain and manufacturing process to ensure product availability and its quality. By purchasing various pieces of equipment over time, we can reduce our manufacturing costs and increasing margin, generating a positive ROI from those equipment purchases within less than 12 months. Having the volume to do that and the financial stability of the cash-generating business changes the decision-making process for such purchases and subsequently improves our business economics.

These are just a few of the impacts we will see once the company reaches cash flow breakeven. This is, of course, very exciting for our company, in particular, to reach this point at such a low -- at such low revenue numbers. With a total available market potential for some of our products, for example, HemeScreen, at approximately $400 million a year, there is tremendous growth potential. Just imagine what this business looks like when we capture 10% of the market.

Now let's turn to a few things we have planned for 2024. Number one, financial stability. First and foremost, we are setting in place the infrastructure so that when we reach cash flow positive, we stay there. We've always maintained clear visibility and transparency within the entire organization as it relates to cash management, and we intend to keep it that way to ensure that the numbers continue to trend in the right direction.

Number two, product growth. We're working on several strategies and partnerships that will significantly accelerate the growth of our product revenues. Those will include various business development and collaboration issues that will get us directly in front of the right and large customers. More on that to come in the future.

Number three, R&D development. In 2023, our R&D teams' marching orders were to remain fully focused on HemeScreen and leave the other products on the back burner. This was done in order to focus on the full development of the HemeScreen product line as well as to provide the proper support to our customers.

Going into 2024, we're going to unleash our R&D team to begin developing some of the new products that have been parked while we got HemeScreen up and running. Keep in mind, our vision was never to be a 1-product company, but rather to build out a suite of products we can sell to the same customers. Next year, we will see the start of executing of that component of our vision.

And lastly, I think, next year, we get to tell the story to the public market. The questions about our company's ability to execute, reach cash flow positive and grow the product business will have largely been addressed. But the public markets don't really know us and it's time they get it. So I, myself, am going to be spending significantly more time attending conferences and meeting with investors to share our story.

We also plan to develop social media and big digital marketing campaigns to get the story out. These are things that require relatively minimal resources. And with the right messaging, getting to the right audience, I think we can get many more ears to hear the story and many more eyes on the stock.

I believe that the combination of our story of continued financial success and growth and the expansion of the audience that hears the story will create a multiplying impact for our shareholders. I'm really excited to see and share with you the results of the year-end and especially for next year as we turn the corner on delivering on Precipio's vision.

I want to thank you for attending the call today, and I wish you and your families a Happy Thanksgiving and a happy holiday season at the year-end, and look forward to connecting with you again in 2024. Thank you, and have a nice week.

[Operator]

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