Earnings Call Transcript - PRPO Q3 2021

Operator, Operator

Welcome to the Precipio Third Quarter 2021 Shareholder Update Conference Call. All participants will be in listen-only mode, and please note that the conference is being recorded. During this call, we may discuss forward-looking statements about our business. It is important not to place undue reliance on these statements, as they are based on our current expectations, forecasts, and assumptions and are subject to significant risks and uncertainties. These statements may be identified by terms such as may, will, should, could, expect, intend, plan, anticipate, believe, estimate, predict, potential, forecast, continue, or similar words. The risks and uncertainties that could lead to actual results differing materially from those expressed in any forward-looking statements include, but are not limited to, the matters outlined under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2020, which can be found with the Securities and Exchange Commission, along with other risks detailed in our subsequent filings. These reports are available at www.sec.gov. Please note that statements and information, including forward-looking statements, reflect the circumstances at the time they are provided unless an earlier date is indicated, and we do not have any obligation to update any statements or information, including forward-looking statements, unless required by law. Now, I will hand over the call to Ilan Danieli, Precipio's CEO.

Ilan Danieli, CEO

Thank you, Grant. Good afternoon, everyone. And thank you for joining our Q3 2021 shareholder call. My goal on this call is to give you an insight as to how we experienced the recent quarter. We are what you read in our financial statements that were filed last week. And to give you some insight into how we see the future. Let me start by saying we had a rough quarter; we experienced several challenges, we dealt with them and we've overcome them. With these challenges, we start seeing the passion, dedication, and commitment to our cause and to the business. I believe we're coming out of this quarter stronger, and with more determination to succeed. Let me begin by providing insight into each of our business segments, and then share with you some of the exciting outlook for our company going forward. Let's start with our clinical pathology services. This quarter was the first quarter where we didn't experience the growth we saw in prior quarters. For the nine months ending September 30, 2021, year-over-year, audited revenues of $6.4 million have increased to $2.3 million or 55% from 2020. That's a great accomplishment. And in Q3, our case volume and revenues were relatively flat; not great. As in any complex situation, there is rarely one single cause that could be identified as the sole driver of a problem. Like many companies around the globe, we too have to deal with supply chain issues, unreliable courier services on which we depend, and internal lab operational issues, which ultimately translated into service issues for our customers. The challenges resulted in us losing several customers. Fortunately, none of them were large enough for our revenue to decline, but nonetheless, it resulted in us not achieving the growth we've demonstrated previously. And nobody likes losing a customer. Certainly not us. So our team stepped up. And we worked hard to resolve the issues with our mission in mind, which is first and foremost providing the most accurate diagnosis to ensure proper patient care, alongside our goal of providing our customers with the service they've come to expect. With that in mind, we worked hard to address those issues. Today, in Q4, I'm pleased to report that the operational issues have been resolved. In addition, we've revamped our sales process and these combined steps are starting to produce greater results. I was proud to watch our team step up, embrace the problems head-on and work hard to fix them. I believe that a company's management teams are measured not when everything is going smoothly, but rather when challenges arise and the way in which these challenges are addressed. Our team performed outstandingly; this just proves once again what we already knew—that there is nothing that as a team we cannot overcome. On the product side of the business, this quarter was a successful quarter for Speedy Trial. As previously announced in August, we signed an agreement with AON, a large oncology practice to onboard. This account was introduced to us by our strategic partner AON Solutions. We did a great job at bringing this customer to the table and helping to close the deal. Today, AON is the largest customer we onboarded and our team made sure the onboarding was successful. We conducted outside training for the lab team and worked with them to ensure a smooth and successful launch. I'm pleased to announce that as of last week, AON went live with HemeScreen. Now, like in any process when onboarding new products, there could be bumps along the way. I'd like to share with you a small example of our team's dedication to our customers' success. Our shipment of reagents to AON is worth hundreds of thousands of dollars. They are shipped on dry ice so that they can remain frozen until the reagents arrive at the customer site and are safely placed in the customer's freezer. Given several mishaps with FedEx on the pathology services side, we weren't going to take the risk with our very first shipment to our largest customer. Driving the reagent by car wasn't enough to ensure a safe distance. So one of our managers graciously volunteered to fly down with the reagent in his luggage and personally deliver them to the customer. Now this may not sound like a big deal, but this is not typical in our industry. Our laboratory is well experienced in receiving reagents from other vendors that are either expired or out of temperature range; not with Precipio. Without hesitation, our team members rose to the occasion and got the job done. This is a major customer with significant expected revenue and gross margins that will impact our business. Once fully operational, AON alone is expected to reduce our cash burn by approximately 25%. AON is also a very good, visible customer, and we're actively working to onboard numerous other sizable customers to grow this part of our business with continued impact on revenue and profitability. Now I know we haven't discussed IV-Cell for a while, and until today, the reality is there hasn't been a record. Unlike our pathology services, we're limited in access to allow this kind of business or with HemeScreen where we're still able to present the concept and onboard customers. With IV-Cell, the onboarding process really requires hands-on in-person work together at the client site. Given the ongoing disarray of laboratories due to COVID, this really wasn't possible. Having said that, we've not given up and in fact, I'm pleased to say that we are making progress with several accounts, and I hope to have some good news early next year. We still believe that IV-Cell is a groundbreaking technology, and we see the impact on patient care in our laboratory every day. With persistence, I anticipate that we will win customers and ultimately, other laboratories worldwide will benefit from this technology. From an organizational perspective, we're in the process of re-organizing our company. Starting next year, we will have two divisions. The first is our clinical diagnostic services division, which includes our pathology sales team and our lab operations. This division has two purposes. The first and foremost is to deliver on our mission to tackle the problems with diagnosis. From our proprietary processes and technologies to our expert academic pathologists, we continue to demonstrate an unparalleled level of quality and accuracy that impacts patient care. This is the core of who we are as a company, and this will always remain the heart of our business. The second purpose of this division is to provide a breeding ground for new technology. Both HemeScreen and IV-Cell were developed out of the identification of operational and clinical deficiencies in the way laboratories operate and our desire to improve these efficiencies to provide better patient care. Therefore, our laboratory serves a dual purpose. One is to provide clinical results to our customers. And the second is to support our R&D team to continually identify, examine, and develop technologies for laboratories. The second division is our diagnostics product division. This division will include our R&D team, and the product's commercial arm that will bring these technologies, such as HemeScreen and IV-Cell, and others to the market. We believe that this division will be the primary growth engine and profitability contributor for the company going forward due to several factors. First, this is a B2B business that does not require the customer to repeatedly make decisions to use our product. Once the lab is onboarded and validates our product, it's difficult to unseat the incumbent, especially when our technology is superior to competing products on the market. From the company's perspective, this means our recurring revenue stream requires relatively minimal sales and technical support effort. Second, this is a higher margin business due to the economics of the product. Lastly, this is a highly scalable business. Spending less than $50,000, we’ve recently set up full production facilities that can scale up to produce 25 times the volume of products we currently produce. All these factors have a direct impact on the company's revenues, as well as gross margins and profitability. It is our intention to continue to invest more in R&D and build our pipeline of products. With a methodical and disciplined process to evaluate new technologies against market needs, I can already visualize doubling our product portfolio next year, and bring to market new, exciting, and clinically impactful technologies with the knowledge to provide better economic and operational benefits to our customers, but also support our core mission of eradicating misdiagnosis, and providing the diagnostic tools to ensure the highest level of accuracy for patients. I want to take a few moments to discuss our IR strategy. I know many of you have been disappointed by the decline of the share price over the last quarter, and the lack of news. So hopefully you can see that neither of these mirror the actual activity going on in the company and that we've made tremendous progress. As insiders, we have the benefit of seeing how our company is advancing and making huge strides toward success. But sometimes, you just need to hunker down, keep your head in the game and focus. And that can result in less communication to the outside world as we focus on our work and let the results speak for themselves. In the past, we've seen press releases result in stock moves that quickly return to their previous position. This volatility is not good for the company or its existing shareholders. It is not beneficial for our institutional investors either. As our company grows, our goal is to transition from a micro-cap company to a more mature company that can attract and earn the support of long-term, large institutional investors. That, in addition, of course, to the ongoing performance, which ensures stability, continuous long-term growth of the share price, and reduced volatility for both the share price and our shareholders. I would argue that if previously, the share price was not a reflection of the company value and our accomplishments, with the results that we've shared today, you can see that this is even more true. Let me give you a few anecdotal financial points to support that. For the nine months ended September 30, 2021, our audited revenues of $6.4 million increased by 55% or $2.3 million for the same period last year. The company also reported increased gross profit of $1.1 million and reported gross margins of $0.27, both representing a 60% to 80% improvement compared to the same period in 2020. There are other financial measures that are just as important. Allowance for doubtful accounts has dropped from around 25% to below 10%, as well as significant improvements in DSO (days sales outstanding) from above 100 days to below 30 days. All these have a significant cash impact on the company and demonstrate substantial, continuous improvements in the right direction for us. These are some of the financial metrics that institutional investors look for that demonstrate that a company is on its way to becoming high-performing. In summary, we had a challenging quarter which we overcame. We are stronger; our team is more resilient, and our business will benefit from the lessons we've learned as we faced these challenges. I'm proud to be part of this team and support them as they translate their dedication and commitment into ongoing improvements for the business. Our goal is to ensure financial stability and shareholder value for you, our shareholders. We have a unique business model that combines the values of the clinical lab with technological capabilities developed into real-world solutions to true clinical challenges. I have no doubt that supporting our diagnostic services division while allocating resources to our diagnostics products division, and building a strong team to execute on these technologies and those in the pipeline will result in real enterprise value for our company and for you, our shareholders. We have some amazing concepts we're working on that I'm eagerly awaiting the moment when I could share those with you and enable you to be a part of the community. With that, I want to wish our shareholders and their families a happy holiday season. I wish you that while you remain our shareholders, you and your loved ones will never require our services, and to those who rely on us to provide quality and accuracy and deliver on our mission, know that we're, as always, committed to that goal. Thank you all for your support and have a great evening. We'll see you next year.

Operator, Operator

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