Earnings Call Transcript - PRPO Q3 2023

Operator, Operator

Welcome to the Precipio Third Quarter 2023 Shareholder Update Conference Call. All participants will be in listen-only mode. 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 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 CEO. Please go ahead.

Ilan Danieli, CEO

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 six weeks left until the end of the year, to frame this within the context of 2023. Following that, since our next shareholder call will be in April of next year, I'd like to share some thoughts about what we have lined up for 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, this puts us 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 outstanding accomplishment for our company, and it's important to emphasize that this was not a cost-cutting exercise. Those who know me and our company know that we've always been a very lean and frugal enterprise. This cash burn reduction was accomplished by a combination of restructuring operational initiatives that saved a lot of money, and of course, in addition to our revenue growth, we generated positive cash margins. 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 goal for the company to reach cash flow breakeven and achieve financial independence. Breaking this down, this would be achieved by leading three targets. The first is that the Pathology division reaches breakeven at a run rate of $14 million. The second is the Product division reaching a run rate of $8 million. And the third is significant reductions in our expenses. The combination of these three targets gets our business to cash flow breakeven. As of Q3, we have achieved two of those three targets. Our Pathology division has reached that target and is now a cash-neutral 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 that 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 service. Depending on the revenue level and case mix, this billing and collections initiative and subsequent reduction in billing expenses yields savings of about $50,000 to $75,000 in cash every month. This is just one initiative of many, which in combination have enabled us to significantly reduce our cash burden. 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 two other targets has effectively reduced the company breakeven threshold for the 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, whether it takes one or two more quarters to get there; we have the cash in the bank to reach our goal of financial independence. Reaching financial independence and beginning to generate cash will be an exciting milestone from my perspective, 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, reaching the exciting milestone of breakeven doesn't mean we change our mindset from the frugal way in which we operate our business. One of the things I am proud of is that management and indeed the entire team treats every dollar as if it is coming out of their own pockets. That mindset has enabled us to examine our operations closely and find ways to operate in a more cash-efficient manner, generating the same, and even better, results while spending less cash. Now, let's discuss 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 enhance laboratory performance. In our industry, developing a product for laboratories typically means an expensive process involving coming up with a product, finding a fully operational lab that has all the equipment and staffing to test it, which is itself quite costly. Perhaps the most challenging and expensive element is finding patient samples upon which the company can test their product. If you look at our competitors, you will find R&D costs in the tens of millions of dollars to develop their products. 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 for our product development needs. Essentially, we have devised a business model where our cost to develop a product is almost negligible. In August, we announced the release of our new breakthrough BCR-ABL assay. The development cost for this assay was less than $100,000. To the best of our knowledge, there is no other company that has developed such a model. The implications of this are significant, as we can develop future products at a relatively low budget and with tremendous flexibility without the significant need for capital. Consider what this does for the potential ROI of a business where we can launch such a product like BCR-ABL with revenue potential as high as $40 million a year and with an incremental product development cost of less than $100,000. We value that business model highly. This also allows us to make small investments in sales and marketing for our products. Right now, we've relied on a combination of direct sales efforts 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. Up until now, we've been very limited in our spending to enable us to reach this milestone of cash flow breakeven. Yet another impact is our ability to invest in our product production line. We currently control the entire supply chain and manufacturing process to ensure product availability and quality. By gradually purchasing various pieces of equipment, we can reduce our manufacturing costs and increase margins, 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 alters the decision-making process regarding such purchases and subsequently improves our business economics. These are just a few of the impacts we will witness once the company reaches cash flow breakeven. This is, of course, very exciting for our company, especially to reach this point at such low revenue levels. 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 how our business looks when we capture 10% of the market. Now, let's turn to a few things we have planned for 2024. First and foremost, financial stability. We are establishing the infrastructure so that when we reach cash flow positives, we stay there. We've always maintained clear visibility and transparency within the entire organization regarding cash management, and we intend to keep it that way to ensure that the numbers continue to trend in the right direction. Second, product growth. We're working on several strategies and partnerships that will significantly accelerate the growth of our product revenues. These will include various business development and collaboration initiatives that will get us directly in front of large and right customers. More on that to come in the future. Third, R&D development. In 2023, our R&D team's marching orders were to remain fully focused on HemeScreen, leaving the other products on the back burner. This was done in order to concentrate on the full development of the HemeScreen product line and to provide the proper support to our customers. Moving into 2024, we genuinely plan 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 one-product company, but rather to build out a suite of products we can sell to the same customers. Next year, we will see the execution of that component of our vision beginning to unfold. Lastly, I believe that next year we will be able to share our story with the public markets. The questions about our company's ability to execute, reach cash flow positive, and grow the product business will have largely been addressed. However, the public markets do not really know us, and it is time they did. Therefore, I intend to spend significantly more time attending conferences and engaging with investors to share our story. We also plan to develop social media and digital marketing campaigns to disseminate our message. These require relatively minimal resources, and with the correct messaging and targeting, I believe we can reach many more people and get more eyes on our stock. I believe that the combination of our story of ongoing financial success and growth, along with the expansion of the audience that hears our story, will create a multiplying impact for our shareholders. I am genuinely excited to see and share the year-end results with you, especially 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 joyful holiday season as we close the year. I look forward to connecting with you again in 2024. Thank you, and have a pleasant evening.

Operator, Operator

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