Earnings Call Transcript - PRPO Q4 2020

Operator, Operator

Welcome to the Precipio Q4 2020 and Yearend Shareholder Update Call. All participants will be in a 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 may 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, 2020, 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 these 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, CEO

Thank you and good afternoon, everyone. I would like to thank you all for joining our post yearend 2020 10K filing shareholder call. During the call, I'll provide a recap of 2020 and an update on the progress our company has made since the start of 2021 and our plans for 2021 and beyond. With me today is Carl Iberger, our CFO who will share his perspective on the business and our finances. I'll close with a few thoughts on where the company is going in 2021 and beyond. As we filed our 10K filing and the subsequent press release we issued yesterday morning, we've doubled our revenues from 2019 to 2020. This has been an impressive accomplishment in a normal year and 2020 was challenging. Our sales team faced limited to no access to customers, operational and other limitations to what is already a complicated workflow, yet with all of that, we were able to double the number of patients for whom we provided what we believe to be the most accurate diagnosis that this industry can provide, backed by academic experts and proprietary technologies. This is an incredible feat and I want to take a moment to recognize our whole team that made this happen. Not only did any of our employees put their personal concerns or need for basic care aside. Instead, while the majority of the counties stayed home, they showed up to work every day to take care of the patients in front of us. As we watched this capital markets disarray, we saw many businesses take immediate action to cut costs through massive layoffs. Our company culture is built on commitment. Instead, management and employees ensured that while our take-or-pay may be temporarily reduced, nobody had to face the prospect of losing their job and not being able to provide for themselves or their families. This is the commitment we as a company have to each other and to the heart of who we are. I am proud of the team for all they have accomplished in 2020. On the product side, 2020 was the year we formulated and solidified our strategy as we took our proprietary technologies and converted them into products. We have the technology in a working format; after all, we were the first customers to use both IV-Cell and our technology in our lab. In order to create a proper business unit for these technologies, we needed a sales channel and a go-to-market strategy. Let's start with IV-Cell. IV-Cell is a sophisticated product used in the study in the laboratory, which is not only a highly critical part of the lab but also one that is typically adverse to change. So we needed a strategy that would both get us in the door with decision-makers as well as establish trustworthy relationships with these decision-makers to convince them to try something new. In August, we signed a sales and distribution agreement with ADS Biotec, one of the most established and respectable players in the industry with products sold directly into these generic labs. With our partnership with ADS, we aim to gain access to these laboratories and their decision-makers, and through ADS's credibility, we can win customers. The first step in our strategy with ADS was to conduct a dataset. ADS would identify several sites in the U.S. and Europe that would be open to new innovation. We will present in the cloud program and work with the customer to show them the impact and results of using IV-Cell compared to the current media they use. The results should be sufficiently compelling for them to transition to using the IV-Cell and becoming our customer. With a few successful trial customers in our pockets and everyone feeling comfortable with the value proposition, we could then move to broader market penetration. Regarding the timeline to complete the file date, the strategy is on track. We see many labs crippled by regulations they need to adapt to in order to meet social requirements as well as safety precautions that include shift arrangements and quarantine. With labs typically understaffed and already struggling to meet their volume capacity, a study like this will often take a backseat to clinical work. As it should, after all, there is a patient in front of them, and providing care comes first. During the second part of the year, we had to meet the pace of our customers and accept the fact we saw it would take longer than expected. Thus far, the initial results in the trials we conducted have been positive, and I feel we are moving in the right direction, and I am confident we will get there. IV-Cell is a promising technology that offers both clinical accuracy and operational and economic advantages. In a market that's been using the same product for over 50 years, laboratories are ripe for change, and I think our product with our distribution partner is in a strong position to capture the market. Moving on to HemeScreen, our proprietary family of reagents for rapid molecular diagnostic methods. After using these in our labs for several years, last year we identified the opportunity to migrate the technology into the Physician Office Laboratory and sell these reagents to run as diagnostic tests in their labs. Similar to IV-Cell, we needed to prepare this technology with a solid sales partner and a successful go-to-market strategy. In December 2020, we entered into an agreement with a subsidiary of AmerisourceBergen and a GPO in the oncology market. This subsidiary supplies oncology products to community oncologists, which is precisely our target customer. Furthermore, at the hardware division, its health and community oncology practices provide better care to the patient, aligning perfectly with our vision. Our sales force is deeply entrenched with their customers, and their ability to open doors and put us in front of the right decision-makers has been nothing short of impressive. Since the launch of the partnership in mid-January, we have presented to more than 50 customers, and a majority of them have expressed interest in bringing HemeScreen on board. We already have active customers generating revenue and with a solid and rapidly growing pipeline of customers in the various sales and onboarding stages. Our goal is to build a strong base of oncology practices as our customers, leveraging HemeScreen as we continue to sell these and other products. I truly believe that HemeScreen is going to be one of the strongest growth drivers for our company, and I am excited about the progress we've made and what lies ahead of us. Lastly, let's discuss our COVID plan. I would first like to reemphasize that COVID is not our core business and, contrary to some other companies in the industry, at no time could we abandon our core business and our focus on it. However, we took the opportunity to explore, using limited resources, the ability to take a technology developed by our partner and bring it to market. Given the highly regulated nature of this asset, which requires stringent approvals from the FDA, we had to change courses a couple of times throughout the process. We're delighted to have partnered with a U.S.-based company that received an EUA for their COVID antibody testing. We're working closely with them to explore various distribution channels available to the market; more to come on that. In terms of what our COVID testing may mean to the company, we view it as a potential bonus providing additional revenue and cash, but whether that happens and the magnitude is very difficult to control or predict. We prefer to look at it as a nice bonus that may or may not happen, and which we will celebrate if it does, but it does not need to be that way. As we continue to make progress, we'll update our shareholders accordingly. Now, let me hand it over to Carl, our CFO, to share some thoughts on the business and our financial performance, and then I'll end with a few comments on where we see 2021.

Carl Iberger, CFO

Thank you, Ilan. Good afternoon. I am Carl Iberger, Precipio's Chief Financial Officer. Yesterday, Precipio issued a press release that provided a synopsis of our 2020 topline results. This press release followed the filing of our 10K on Monday, March 29. In his opening remarks, Ilan covered a number of items. I'd like to take this opportunity to add some additional comments regarding our sales growth in pathology services, the progress we are making in developing a distribution market for IV-Cell, and finally, the impressive reception HemeScreen is receiving with office-based oncologists and larger oncology commercial labs. First, regarding pathology diagnostic services, just prior to the interruption in business shutdown from COVID, we reorganized our sales force at the tail end of February and into early March 2020. This action by the company proved to be extremely timely. Our initiatives enabled Precipio to address the many disruptions of normal business operations resulting from the economic shutdown. First on the list of issues was basic access to physician accounts by our sales reps. During Q2 2020, as the COVID shutdown ramped up, we seamlessly executed the onboarding of accounts from the non-cash, non-equity acquisition of our Poplar Healthcare's OncoMetrix business. As we moved through Q3 and Q4 of 2020, the decisions and preparations we made in February and early March regarding our sales organization, lab operations, and lab logistics allowed the sales force to grow account volumes and add new business as our customers experienced minimal changes from normal business routines. Stepping back and reviewing 2020, case volume grew throughout the year. In our 10K, we reported a year-over-year volume growth of billable cases of 120%. While we are just completing Q1 2021, our initial unaudited results are impressive. Given the impact of the variety of storms in the southeast and midwest, we project revenues to approximate Q4 of 2020. Second, regarding IV-Cell, as Ilan stated, IV-Cell is a sophisticated, highly complex cytogenetic product being introduced in the commercial lab setting. Our path to building market revenues has been elongated, reflecting the complexity and change this advanced technology has and will have on the cytogenetic lab process. So where are we today? The bottom line on IV-Cell is that it delivers what is clinically advertised: simultaneous cultures and speed in processing. Additionally, the financial value proposition to the customer is very real and meaningful. Therefore, we are extremely confident in the product and our ability to sell through our partnership with ADS and its international customers. Third, regarding HemeScreen, having a product that offers a turnkey solution, including diagnostic equipment and reagents, a product that offers extremely low entry costs for the customer, and a product that enables oncology practices to generate new revenues while eliminating the need to reference out tests that are expensive and have a long lead time of 10 days to two weeks, reducing that to one day—this defines HemeScreen. We project that HemeScreen will produce very meaningful revenues for Precipio in 2021 and will be a material driver for the company. When we combine the growth from HemeScreen and pathology services, we anticipate accelerating the company's timeline for cash flow breakeven. Now moving to our financial results. Our 10K provides extensive information on the financial performance of our operations. The press release highlights our 2020 results. Diving into the financial performance, let me address sales and gross profit, operating expenses, and our balance sheet. Sales and gross profit both rose in 2020. Sales for 2020 of $6.1 million increased by 95% over 2019, driven by pathology services. Our increases in pathology services enabled our lab operations to leverage text expenses to maximize batch processing and to a large extent consolidate purchase expenses, ultimately reducing our costs. Our gross profit for 2020 of $1.2 million increased by fourfold in comparison to 2019. For 2020, the gross margin increased to 19% from 7%. Looking at Q4 of 2020, our margin increased to 24%, and on an incremental revenue basis, our gross profit also grew significantly. We anticipate that continual case volume increases in pathology will show significant improvements in gross profit and gross margin percentage in 2021. Continuing our discussion of gross profit, we're very encouraged about the impact HemeScreen will have on our 2021 future gross profits. As HemeScreen revenues build and our upfront investment costs are behind us, we see HemeScreen being a material factor in accelerating total reported revenues, gross profit, and the timeline to cash flow breakeven. Moving toward operating expenses, in 2020, our operating expenses were $9.8 million, an increase of less than $0.2 million, or less than 2% when compared to 2019, while revenues during that same period almost doubled. During 2020, we focused on reducing G&A expenses, taking those savings and reinvesting them into selling and R&D initiatives. Within R&D in 2021, we actively worked on developing a suite of HemeScreen panels, and as we build HemeScreen accounts, we look to expand the offerings to those oncology practices. Moving on to the balance sheet, our growth has provided the company with more financial flexibility. With growth, we've been able to shore up our balance sheet, reduce cash burn, increase cash on hand, and stabilize our total liabilities, including accounts payable and accrued expenses. Ending December 31, 2020, accounts receivable was $0.9 million, an increase of only $0.3 million on a sales increase of $3.0 million. Our days sales outstanding at the end of 2020 was 52 days, a decrease of 15 days from 2019. As the majority of our revenue comes from patient billing, I'm very pleased with the results turned in by the company's reimbursement team. Accounts payable and accrued expenses remained essentially level year-over-year on a much larger book of business. The improvement in our revenue collection and accelerating collections have positively impacted the company's cash needs and operations. Moving on to CapEx, in Q4 of 2020, seeing the monthly case volume continually increase in pathology services, we reassessed the company's CapEx needs for the future. The assessment led to initiatives by lab operations and renegotiating contracts with major equipment and reagent suppliers, along with revisiting equipment rental programs and upgrading lab diagnostic competencies, which expanded our molecular testing capabilities. This change allows Precipio to bring in-house previously outsourced expensive testing that had lengthy reporting times. We are encouraged that growth in volume will be supported by our ongoing emphasis on diagnostic quality, which will provide lower case costs. In 2020, we utilized our equity line to fuel the company's growth in operations. Entering 2021, with anticipated revenue on the rise, we project a reduction in our cash burn rate every quarter. Key to this will be building HemeScreen revenues. Regarding COVID, while we are actively moving forward, our endeavor in COVID antibody testing and the resulting revenue performance is still uncertain. Therefore, we do not include material COVID revenue in our projections. As we move forward, the company will provide additional shareholder information on this product as material data becomes available. In summary, 2020 was a unique and challenging year for the company. Looking ahead, we are truly excited about 2021 and our growth opportunities. Operationally, we anticipate continuous improvement through increased volumes in pathology services and as HemeScreen revenues build. Financially, we are gaining strength but remain focused on leveraging our assets and driving the company to breakeven. At this time, I am done with my portion of the presentation and I will hand the meeting back over to Ilan.

Ilan Danieli, CEO

Yes, sorry, I was on mute. Thank you, Carl. I appreciate the outstanding job you and your team are doing. Let me end with a few closing thoughts on where I see us in 2021 and beyond. Pathology services will always be our core business. Our pathology business starts with our sales team responsible for the growth we describe at the top of this call, and this is supported by our dedicated team in the lab and customer service to ensure that we deliver on our promise every day for every patient the doctor sees. It also facilitates our ability to create, test, and develop new products that drive the product side of our business, and this is where I think the real growth engine exists. The product side of the business offers unique opportunities we have never really contemplated before. First of all, proprietary products create a barrier to entry that competitors cannot easily overcome. Second, these are B2B products with firm revenues from ongoing usage. And lastly, the market that utilizes these products is huge, exceeding $100 million per year. Therefore, going forward, our strategy will be to impact patient care both externally in our labs and by creating products that can be used to achieve the same by outside labs. In 2021, I expect us to continue to grow the pathology business; our value proposition is strong, and our team is well poised to deliver that message as we continue to gain customers. Evidently, the product side of the business is becoming a substantial part of our revenue and our bottom line. With a solid go-to-market strategy and formidable partners for both our lead products, the feedback from our customers is outstanding. In short, the pathology business will continue to serve as our anchor for the business and the foundation for the development of our proprietary product, and those products are what will enable us to achieve rapid market and financial growth. Coming out of 2020, I am more excited than ever; we have the team and the tools we need to execute, and the results are already showing. I want to thank you all for your ongoing support and I look forward to speaking with you soon. Thank you, and have a nice evening.

Operator, Operator

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