Precipio Q1 2025 Earnings Call Transcript

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May 15, 2025

There are 1 speakers on the call.

Operator

Welcome to the Precipio First Quarter twenty twenty five 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.

Operator

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 ks for the year ended 12/31/2024, 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.

Operator

Now let me hand the call over to Ilan Daniele, Precipio's CEO. Please go ahead. Good afternoon, and thank you all for joining us today to review Precipio's financial and operational results for the first quarter of twenty twenty five. I'm pleased to report a strong start to the year in terms of year over year growth, improved margins, and favorable regulatory developments. This is despite expected seasonal pressures in the first quarter, which impacted our quarter over quarter results.

Operator

Let's start with a breakdown of our q one financial performance. As you may have seen in our recent 10 Q filing as well as the press release, revenues for q one twenty twenty five were 4,900,000.0, up 43% year over year, reflecting sustained demand and continued growth in our pathology services. However, this also represents a 9.5% decrease from q four twenty twenty four, which we'll explain in more detail shortly. We continue to make significant progress in the following metrics year over year. Adjusted EBITDA improved by 92%, coming in at a hundred and 8,000 loss this quarter compared to 1,400,000.0 loss in q one of last year.

Operator

Cash used in operations improved by 93% with a $44,000 cash reduction in q one twenty twenty five, down from $667,000 cash reduction in q one of last year. Net cash used for the quarter was 372,000, a 49% improvement year over year. These results underscore the ongoing operational discipline and scalability we've built into our business. The sequential q quarter over quarter decline in revenue from q four twenty twenty four doesn't concern us since this is a typical seasonal pattern we see across the health care industry, especially in diagnostics. As many of you know, insurance plans reset on January 1, meaning deductibles are back to zero, and patients often post postpone nonurgent testing until those out of pocket costs are absorbed.

Operator

This behavior impacts desk volumes and selection, which in turn creates a temporary dip in both revenue and cash flow. We anticipated this, and our results reflect a well managed quarter in light of these dynamics. More importantly, we're already seeing a rebound in q two, and we expect to return to positive cash flow in either q two or q three of this year. On the product side, last year's FDA ruling on laboratory developed tests, which was eventually overturned in March of this year, caused a number of our prospective customers to delay their plans to bring in our technology in house until this was resolved. We'll discuss that shortly as well.

Operator

Now let's review each of our two divisions in a bit more detail. We'll begin with our pathology services division and then turn to our products division. Our pathology division continues to perform strongly. Test volume increased 46% and revenue grew 53% year over year. 11 new physicians began utilizing our services this quarter, a continued sign of physician engagement and growing market trust.

Operator

On the sales side, division growth has largely been accomplished by the same existing sales team that successfully tells the story of our mission to battle cancer misdiagnosis, present our value proposition to customers, and then allows our lab to deliver strong results. This means the company accomplished approximately 50% growth with no substantial increase in sales team headcount and related costs. Now I'd like to talk briefly about margins and operating expenses where we're proud to report continued operational improvement. Pathology gross margin increased from 24 to 42% year over year. This is due to the increased volume of cases, which translates into further scale efficiencies in the lab.

Operator

Let me give one example from the lab which will demonstrate that impact. Most laboratory tests are performed in batches, meaning multiple patient samples are tested together in the same run. Each batch has a certain number of elements that create a fixed cost for that batch regardless of how many samples are run-in that batch. One of those elements is called a positive control, which is a known positive sample used to verify that the text test correctly identifies the positive result. This control sample cost money to produce, but, of course, it doesn't generate revenue, and therefore, it adds to the cost of the batch.

Operator

The cost of that positive control is spread over all actual patient samples run-in that batch. If, for example, the cost of the control is $200 and we run five samples in a batch, then $40 is added to the cost of each sample in the batch. However, if we run 20 samples per batch, then the initial cost per sample drops to $10, which in turn improves gross margins. Now this makes the question, why not always run 20 batches of 20 samples. Right?

Operator

Well, depending on the number of samples the lab receives up for that test every day, that decision will impact the turnaround time the lab wants to provide to its customers. If a lab receives on average two samples per day, then it will take 10 samples ten ten days to fill the box. That might be longer than the service level that the lab is talking to its customers. Conversely, when the lab volume increases, then it inherently takes less time to fill a batch, and the lab can maintain the same level of service while running larger batches. This is one factor that contributes to our increased margins.

Operator

These improvements are driven by a combination of operational efficiency, improved cost management, and scale. Going forward, we expect topology division margins to stabilize in the mid 40% range. We also saw meaningful improvement in operational efficiency. Operating expenses as a percent of revenue dropped 87 to 61%, a 30% improvement year over year. This was achieved by keeping operating expenses flat at approximately $3,000,000 per quarter while growing revenue by 43% year over year.

Operator

How have we driven this market growth? We achieved margin improvements with strategic investments in two key areas, equipment and people. With respect to equipment, we've always insisted on investing in state of the art equipment in our lab, which ensures the highest quality directly impacting patient outcomes. If the cost of each piece of equipment is divided by the number of samples run during the life of the machine to get a cost per sample, which is then burdened on each patient sample. As our volume increases, this disc cost is spread over more samples and reduces the cost per sample, thereby improving gross margins.

Operator

Equally improvement is our investment in talent. We invest heavily in the training of our staff to ensure they have both the highest quality and skill set and are able to conduct their work accurately and efficiently. This translates into many factors. I'll give two examples. First of all, a better trained lab employee is able to handle more samples per batch, which drives and improves efficiencies in batching as we discussed before.

Operator

Second, our team is constantly handling very expensive reagents, which require delicate and accurate work. Sometimes, a mere two drops of one of our reagents can cost a thousand dollars, and those drops need to be pipetted accurately into the right tube. If they're not, with one small pipette push, we just wasted a thousand bucks. As our business and volumes grow, the value of the excellent skill sets of our lab tech directly impact the financial performance of our business. These are just a few examples that reflect our continued commitment to sustainable, disciplined operational and financial management.

Operator

Next, I'd like to address a major Medicare reimbursement development that will increase our cash receipts from existing testing. In q one of this year, we received Molvek approval for our next generation sequencing or NGS testing, a major regulatory milestone for Pacifiol. For those unfamiliar, MoDx is the Medicare program that governs molecular diagnostic test reimbursement in various states across The US. Securing approval for MolDX is a rigorous and highly selective process requiring laboratories to submit an application with robust data to support clinical validity, utility, accuracy, and reproducibility. Without MolDX approval, when a laboratory receives Medicare patient samples for NGS testing from MolDX government state, the lab does not get paid.

Operator

Up until now, when we received patient cases from a state governed by MolDX and NGS was part of the test order for that sample, we ran the NGS NGS component of the order and ate the cost, knowing we could not bill for NGS for sample from this MolDX state. This meant that each month, we have dozens of tests where we incurred the cost of running it, but received no revenue. Now with this approval, going forward, we'll still be running the same test, but we will be able to bill and collect cash for them. This will impact the revenue recognized as well as cash received. Based on our internal estimates, this would equal this could equal approximately a quarter million dollars per quarter in increased revenue and cash from our current case volume that is before any growth.

Operator

Overall, the pathology services division is growing at a healthy pace and is a positive revenue cash contributor to the overall business. With continued volume increases, we expect to see gross margins and contributions improve. Moreover, as we've discussed before, this division is critical for the computer development of our product division. With over 12,000 samples received in 2024, this enables us to continuously test, develop, and launch new products for our product division. We've essentially built a self financed r and d operation to rapidly and at a very low cost develop our next generation of products.

Operator

Now let's turn to the product division in a bit more granularity. In q one, we onboarded one new customer and launched two new diagnostic panels, and two customers began the validation for four additional panels collectively. With that pipeline, we expect order volumes to increase steadily in q two and beyond. We also saw a positive trend in customer meetings driven by distributors, an early signal that our investment in these sales channels is gaining traction. One of the factors that slowed down our growth was the uncertainty around the FDA ruling on laboratory tests or LDPs as they're called, which was finally cleared up in March of this year when that ruling was overturned.

Operator

Our products such as team screen fall under the LVP category. And last year, the FDA came out with a ruling that essentially began the gradual elimination of LVPs and conversion of all laboratory testing to FDA approved kits. This would have placed an enormous cost burden both on manufacturers such as ourselves to create and submit such kits for approval and on laboratories who would have to comply with these rules. It also plays an insurmountable insurmountable burden on the FDA itself, which you would have to review and approve all these submissions. In March of this year, the FDA ruling was overturned, and the industry breathed a spy of relief.

Operator

Many of our own customers have told us that their situation of our products was on hold until the FDA situation cleared up. And indeed, once the reversal of that ruling came out, some of our prospective customers reached back out to us saying they are now ready to proceed. With our pipeline of prospective customers that are now at various stages of validation and are expected to go live commercially in q two and beyond, we're expecting to begin to see consistent growth in the product revenues in q two and further in the year. Now let's turn to product operations. Gross margin for the product division improved from 37 to 51% year over year.

Operator

I'd like to describe an ex as an example, one of the factors that contributed to this improvement. One factor that drives these cost improvements is called shelf life quality control. Each time we produce a batch of product, which has a committed shelf life, we set aside a number of plates for internal testing to ensure quality control. For instance, to ensure our product maintains a six six month shelf life, we test a couple of plates in the same production batch each month. So let's say we produced a hundred plates, we would reserve 12 plates of them for this shelf life testing, testing two plates each month over a period of six months for a total of 12 plates.

Operator

That equals 12% of the of the manufactured batch, which we don't sell, but rather use internally for quality control. But now if we produce 200 plates in a production one, we still only need 12 plates for shelf life testing. Now that quality control testing has utilized only 6% of the batch instead of 12%, and we just gained a 6% margin drop. As productive scale, cost of quality control for unit drop, and that helps drive up our gross margin. This is just one example that shows how growing demand and higher output leads to better efficiency and profitability.

Operator

For the entire combined business, gross margins rose from 27 to 43% year over year. This is a weighted average calculation of our gross margins of both divisions together. And since the product side is operationally simpler than the pathology services side, and it has a lot more room to grow in terms of margin. As the product side of the business begins to grow faster than the services side, we will see the overall company mark gross margins continue to increase. We're making a big push to grow our product customer base, channel use, and subsequent revenue.

Operator

So q four twenty twenty four to q one twenty twenty five, our revenues were flat. One of the key factors that has been largely out of our control is the timeline it takes our customers to complete the validation and go live with our products, which means they then begin to consistently place recurring orders. As an example, we are currently in the process of onboarding a major laboratory that has decided to replace their current testing and have selected five out of our six panels that we offer. In q two of this year, q '2 of this year, they began validation for the first panel, and we hope they will be able to complete and go live with the second panel by the beginning of q three. We anticipate that this customer could reach full operating capacity by the end of the year, representing a potential 7 figure annualized revenue.

Operator

There are more stories like this in our pipeline, but unfortunately, oftentimes, as a manufacturer, we have limited ability to influence these timelines as much as we'd like to. Therefore, in order to shorten that timeline, we've created several structured plans to support and encourage a more efficient and rapid onboarding process. These programs improve the commercial terms for customers who complete validation on a timely basis and transition to routine use. In most cases, we find that these discounts are earned back within one quarter and accelerate customer activation and revenue realization. We will continue to track the impact of these initiatives and look forward to sharing progress in in future updates.

Operator

Now I'd like to update you on two items that have a positive yet nonrecurring impact on both cash and profits during 2025. First, Change Healthcare, the billing platform we rely on for processing a substantial portion of our patient claims and whom in early twenty twenty four experienced a cyber attack that temporarily shut down key systems for providers nationwide. Like most health care providers, we too were affected. The disruption caused delays in billing, reimbursement, and impacted our collection during the first half of twenty twenty four. To help bridge the gap, we received approximately 1,100,000.0 through Change Healthcare's temporary funding assistance program.

Operator

These funds were interest free, offering important short term relief while Change Healthcare works to restore its system, which they confirmed as fully operational in late October twenty twenty four. Following the system restoration, we entered a discussion with Change Healthcare about settling up. First, we negotiated the write off of a hundred and $30,000 to offset costs during incurred as a result of their problem. Second, we negotiated the one year repayment of the funds they've had. Since the beginning of the year, we've repaid approximately 200,000, change scale written off the hundred and 30,000, and the remaining obligations just under 800,000 will be paid out over the year.

Operator

The second positive nonrecurring impact on both cash and profit was our recent receipt of over 400,000 of COVID relief funds from the treasury. As you may recall, part of the federal government's response to COVID nineteen was the CARES Act, which included an employee retention credit to help companies like our like ours offset payroll tax expenses during the pandemic. Based on the eligibility criteria back in November 22, we submitted a claim for approximately $1,400,000. Last month, we received the first installment of that credit of around $400,000. To be honest, we didn't expect to reduce money at all, at least not without significant delays or complications.

Operator

We're still pursuing the remaining 1,000,000 and are taking all appropriate steps to ensure that we receive those funds. Together, these two items result in a non recurring income of over half a million dollars, which will be recorded in our second quarter results and make our remaining obligation to Chase Healthcare much easier to fulfill. Looking ahead to the remainder of 2025, we expect revenue growth to continue in q two and accelerate in the second half of the year, particularly on the product side as we continue to add new customers and recurring revenue and expand existing customer purchases of new panels. We also anticipate returning to positive operating cash flow in q two or q driven by higher pathology volumes, increased product sales, and the NGS Medicare reimbursement previously discussed. In closing, we sit here today with a strong pathology business, great profit for our product pipeline, and a strong balance sheet.

Operator

We appreciate the continued support of our shareholders and look forward to a strong Q2 and continued momentum throughout the year. Thank you, and have a nice evening. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Precipio Q1 2025
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