Precipio, Inc. (PRPO) Earnings Call Transcript & Summary

Welcome to the Precipio Q4 and Year-End 2024 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, 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. Now let me hand the call over to Ilan Danieli, Precipio's CEO. Please go ahead.

Good afternoon, and thank you for joining our 2024 Q4 and year-end shareholder update call. Thank you for those who submitted questions. We'll do our best as always to address them during the call. Before we dive into our review and update, I'd like to take a moment to reflect on the business we're in and the difference we make to everyday people's lives. To illustrate the true meaning of our work, I encourage our listeners to check out online the testimony of Andrew, a patient we helped last year. You can find this testimony on our website at www.precipiodx.com/andrew, and we're going to play it for you at the end of this call. His story, one of many patients we help every day, helps make our impact real and tangible. Our financial results represent much more than revenue and share price. They reflect our impact on real people, and I take immense pride in the role we play in supporting patients and their families in their battle against cancer. Now let's turn to a review of the business performance in 2024. At the start of 2024, we declared our goal of reaching breakeven by year-end. This call reflected our commitment to end the dilutive structured capital raises that we had experienced and bring the company into a new era where we can deliver appreciation and shareholder value. I'm pleased to report that in Q4, we achieved our goals with both positive and adjusted EBITDA and positive cash flow. And with the company's current cash reserves and growth pipeline, we believe we're on track to turn the corner and become a profitable company. I'd like to take a moment to explain how this impacts the way we manage the business. Running a business that is in the ongoing need of capital raises for its survival as opposed to raising capital for growth creates a different and not always produces an ideal set of decision factors for the business. I'd like to think of it as constantly playing defense. Every decision made, every dollar spent is viewed through the lens of whether it shortens or lengthens the runway. And as a licensed pilot myself, the concern of not having a long enough runway is literally a die for death factor, which impacts how you fly the plane. Although this develops strong organizational discipline, frugality and the ability to do more with less, it is not always conducive to maximizing growth. This disciplined approach to financial management, while sometimes limited growth, has also instilled a level of rigor that proves invaluable. Through careful financial modeling, scenario planning and assumptions laid out in spreadsheets, we planned and projected cash flow assessed runway, which guided every spending decision we made. As a long-time entrepreneur, we're bred with a healthy skepticism as to whether the assumptions we made and the models we created in Excel will actually match up with reality in our bank account. The last several quarters have shown us that numbers and spreadsheets can and did become real. Now is the time for our organization to begin to change its mindset. And I don't mean we throw away the discipline and frugality we've developed, but rather, we look at a dollar spent as an investment in the future to be decisions with a longer horizon to grow our business and create value. In other words, it's the time to start playing offense. Looking back to one of the words I used at the end of 2023, conversion. Management's entire focus was on taking our leads, introductions and pipeline of customers and converting them into existing business revenue and cash. During 2024, we began to leverage our structure where our expenses are mostly fixed. And as we grew revenues, we reduced our cash burn substantially. For the Q4 quarter, we delivered revenue growth of nearly 26% compared to the previous year quarter while also improving our profitability. For the full year, we drove revenue growth of close to 22%. And while I'm pleased with these results, I am by no means a content. We can and will do much better. Now let's review each of our divisions' performance in detail. For the second consecutive quarter, our Pathology revenues exceeded the division's breakeven point of $1.3 million per month. Our target for 2025 is to continue growing this division organically with our sales team. And our goal is to reach approximately $25 million run rate by the end of the year, keeping in mind that the goal of the Pathology business was and continues to be to generate positive cash flow for the company while serving as a driving force in developing our next generation of products, which is the future growth engine of this company. I'm confident that with the current team, the division will continue to execute, ensuring that our pathology services division will continue to serve as a positive operational and financial contributor to our broader strategy. Now let's turn to the Products division. Q4 revenues remained the same as Q3 at $700,000, which might give a somewhat misleading impression. So I'd like to take a few moments to provide further insight into our Products division customer base and the onboarding process. Last year, we discussed our progress of adding customers, and we referenced 3 large customers with whom we were working in various stages, whether to onboard our products, complete validations, go live clinically or add new panels to the program. They are all still progressing in various stages. As you can imagine in our business, there are often challenges that we face with those stages, and therefore, we were able to add more customer -- while we were able to add more customers, those challenges often delay the progress of customers going live, translating those delays into orders and subsequent revenues. I'd like to share some of those challenges with you today. There are 3 main categories of challenges we've experienced. The first type of challenge is regulatory. Our field is driven by science and therefore, is ever-changing with new requirements and regulations constantly arising. These require our customers to adapt their tests and our assistance in modifying our products to meet the new regulatory requirements. Let me share one example with you. Recently, one of the regulatory agencies changed its standards for evaluating an important factor in the test performance called the limit of detection, often referred to as LOD. The LOD is intended to show the lower limit of how sensitive the test is. In other words, below that level, the test might not be able to provide an accurate answer. Every diagnostic test has this metric. In order to demonstrate the LOD of an assay, a series of tests need to be conducted by the customer in their lab by running a few unique plates, which we provide. The change in the LOD requirement meant we had developed a new set of LOD plates for our customers, something that can take a couple of months. Once we develop the plate and test it in our lab, it's ready for distribution to our customers who then have to run these plates in their lab, record the results and submit them to the regulator for approval. The total time for the process can take anywhere from 3 to 6 months and unfortunately, is entirely unexpected. From a company forecasting perspective, it means that revenues that were expected in January may not happen until April. Now the good news is the requirement is not specific to our company, and so every competitor is faced with the same challenge. Because of our unique model where as a manufacturer, we also operate a clinical lab, we can develop, test and offer these LOD updates much faster than any other competitor. So ultimately, it's not an if, it's a when do we begin to see revenue from these customers that face this challenge -- this type of challenge. A second type of challenge is what we refer to as equipment and lab process challenges. And let me give you an example of a type of these challenges. Our HemeScreen assay detects genetic mutations, which are tested on DNA. A laboratory typically receives a blood sample and has to extract DNA from the blood through a process that's called DNA extraction process. There are numerous methods and kits to use to extract DNA. And although we usually recommend to the customer a certain type of method, this may not be -- always be the method that they are used to. We recently had a situation with a specific customer that tried to adapt their DNA extraction method to our assay. And after about 3 months of testing, they realized it wouldn't work. This is a trial error process, which sometimes is unavoidable. Ultimately, the customer ended up changing to an extraction process we recommended, but it wasn't until they were convinced that their method wouldn't work. As frustrating as it is, we had no choice but to watch as the customer went through those trials and tribulations until they arrived at the ultimate conclusion and made the change. Again, not an if, it's a when, but we experienced a 3-month delay in starting their revenue. One final example is some of our customers encounter personnel challenges. Lab staff come and go. Most labs I know of are always short staffed, and that sometimes means that the lab has to make a choice on which test they need to pause until they rehire adequate staff. One of our largest and earliest customers recently lost 2 of their molecular lab techs who are running our tests and had to stop ordering reagents until they rehired and trained new staff, creating a gap of almost 6 months of revenues from that customer. Thankfully, we have hired 2 techs and are in the process of completing their training, so we expect to see them ordering reagents shortly and for that revenue to bounce back. What's the solution to these challenges? There are a couple of changes we made with the goal of improving and shortening the onboarding process and ensuring consistent revenue from each customer. First, we try to anticipate the regulatory changes as early as possible and be prepared for them. Our scientific advisory team is constantly combing literature and publications to ensure we remain ahead of the curve. We recently updated one of our panels to better distinguish between 2 very similar mutations that began to appear in various publications and which we believe will soon become part of the guidelines. Having that modification already in our product means we will dramatically reduce, in fact, eliminate any downtime and loss of revenue due to any regulatory changes. In terms of customer laboratory workflow, after a few of these situations, such as the one I described with DNA extraction kit, we developed a detailed checklist that we review with each customer as part of the initiation process to ensure we don't fall into those potholes again. We continuously monitor the onboarding process and keep a log of the time line it takes and when we expect to see a significant improvement in the onboarding process as a shortening of the time line to the customers placing an order. There's 2 points I'd like to make following this up. First, that our revenue changes don't always reflect the continuous growth in our customers and that over time, those bumps will smooth out and create a nice increasing growth curve. Second is that we continue -- that we are a continuous learning organization. We debrief every customer experience, good or bad, and see that we can learn from it to improve the next experience, delivering better results to the customer and to us. Finally, on the Products division, we're excited to announce that Steve Miller, our former Chief Commercial Officer, will be rejoining the team in the same role, focused on accelerating growth in the Products division. Steve was Precipio's Chief Commercial Officer for 2017 to 2020. At the time, our Products division didn't yet exist and our Pathology division as well as our company was facing various struggles. However, with the successful launch and growth of the Products division, we are thrilled to welcome him back in such an exciting time. Steve's return now with a strong suite of products that we have and the distribution partnerships that we've built is perfect timing for him to lead the division and accelerate growth, both through direct sales as well as enhanced collaboration with our distribution partner. With Steve's extensive background in the diagnostics field and years of executive leadership experience, he is uniquely positioned to drive our growth initiatives. We're confident that Steve's leadership will play a critical role in driving sustainable rapid growth for the company, and I'm personally excited to have Steve in our corner. Now looking into 2025 for our Products division. Historically, direct sales have accounted for the majority of our revenue. In the latter part of 2024, we worked closely with our distributor leadership team to review what we did and identify the changes needed in order to accelerate revenue through our distribution partners because that's the way we believe we can scale this business up the fastest. We applied key learnings to build a structured high-impact strategy, and we're now beginning to see the results. This coming quarter, we will be onboarding 2 large institutional customers that will be adopting our entire HemeScreen suite of products. Both of these customers came through our distributors. Going forward, we anticipate a gradual increase in the revenue share generated through our distributor network versus direct sale. We still believe distribution is the fastest way to scale up growth, and we are committed to making those relationships work. What you can expect to see from us in 2025 is consistent and accelerated conversion of pipeline into active revenue-generating accounts, each of them serving as another building block of recurring revenue for the company. We ended Q4 with revenues of $700,000, which is approximately $2.8 million run rate. We're aiming to double that by the end of 2025. I'd now like to touch upon our plans for enhancing visibility within the financial markets, which is a key strategic focus for this coming year. As we continue to deliver strong consistent performance across multiple quarters, we will be well positioned to provide investors with clear insights into our trajectory through management guidance on key financial metrics such as revenue and EBITDA. Two things need to happen for us to feel more comfortable providing guidance. First, we need to learn to better adapt to the challenges described above, anticipate and offer solutions that ensure revenue stability for each customer. Second, we need to grow our customer base to achieve a bit more diversity and benefit from the law of large numbers where a large number of customers will help smooth the ups and downs that comprise the everyday life of growth. I believe 2025 will be a year where we achieve those goals and begin to project and predict stable growth of the business. Lastly, our Investor Relations strategy will include our participation in industry and investor conferences, increasing analyst coverage and implementing targeted investor engagement initiatives. We hope that these efforts, combined with strong execution while meeting and exceeding our performance guidance, will drive greater market awareness, increased trading volume and ultimately enhance our valuation, creating meaningful long-term value for our shareholders. In summary, while challenges remain, we are entering 2025 with strong momentum and a clear path forward. Our diagnostic services division has validated the business model by consistently exceeding breakeven and serving as a platform for continuous growth and development for the Products division, revitalized our distribution strategy, creating new opportunities for scalable growth beyond direct sales and are building a strong execution team to deliver this consistent growth. And lastly, the fundamental financial structure of our company is strong. We have a business that we anticipate will no longer need cash to cover burn or losses, and we can turn our attention to resources and to growth of this company. I sincerely appreciate your continued trust and support. For those of you who would like, please stay on to watch Andrew's video and hear his story. I look forward to reconnecting after the next quarter and to share future updates. Thank you, and have a great evening.

Thank you. At this time, we will play the recording, which can be found online at www.precipiodx.com/andrew. [Presentation]

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