Precipio Inc (PRPO) 2020 Q1 法說會逐字稿

Good day and welcome to the Precipio quarterly shareholder update call. (Operator Instructions) Please note that the conference is being recorded. Statements made during this call contain forward-looking statements

about our business. We 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, forecasts, 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, 2019, which is on our 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.

Thank you, and good afternoon, everyone. I'd like to thank you all for joining today's call and also thank those who e-mail their questions in advance. On today's call, I'd like to share some insights on our Q1 results and some of the business economics around them.

I'd also like to discuss the metrics recently released what we can learn about our business. I'll also be discussing the product side of the business and where we see it going. But first, I'd like to provide an update on our company's situation during the COVID-19 period and particularly as it impacts our pathology services side of the business. I'll begin with the customer and business side. And then I'd like to take a few moments to discuss a few operational perspectives. Our customers are oncology offices and hospitals who test their patients for the possible presence of cancer. During the COVID-19 days, hospitals have shifted their focus to COVID patients. While any non-urgent patients are asked to delay their visits. In the oncology office settings, physician offices have also scaled down their business with any noncritical patients asked to stay at home. Many of these cancer patients are dealing with immune deficiencies old age or both, which place them at high risk for COVID. And subsequently, they elected to stay at home. Although as one of our clients said,

cancer business stopped for anything, this has caused a drop in volume for the overall industry. However, we have been very fortunate to see continued growth in our business, which given the circumstances is quite unusual. Q1 saw revenues grow 77%, and we continued to grow in April as our strongest month in company history. The reason for this was the Oncometrix transaction, which where we absorbed another company's Hemepath business just in time. If you recall, the transaction was completed on March 16. The next day, the COVID outbreak led

to drastic statewide stay-at-home orders, which were taken to reduce human interaction. Because we were able to complete the automatic transaction just ahead of the start of statewide shutdowns, the Oncometrix sales team transitioned to Precipio and those customers became our customers. Therefore, while overall the industry saw a drop in volume, as did our own customers, we now have an additional customer base which filled the gap and made up for the volume drop in our current customers.

From an operational perspective, as for many businesses, COVID presented substantial challenges to lab operations. As an essential business, we remained open and operational 24/7 as we receive patient biopsies from our customers for diagnostic services. In the lab, we're used to working in a relatively tight environment with a lab staff constantly interacting with each other to transfer patient materials, share results, review slides and discuss patient cases. Performing those tasks while adhering to the guidance provided by the CDC, ensuring the safety of our employees and maintaining social distancing presents tremendous operational challenges. This required rearranging scheduling, limiting staff and their interaction while ensuring we maintain our service level and quality standards at all times.

As I mentioned, April was the strongest month with the largest ever number of cases received, our team handled those cases with great care, diligence and expediency. As we have always remember, that on the other side of our work is the cancer patient awaiting a critical diagnosis. This resulted in continued consistent quality, turnaround time and service, despite those operational challenges. We're part of the entire health care industry that has stepped up to take during this period, and I'm proud of our lab team for their dedication

and flexibility during these complicated times.

Now let's turn to business economics, in late 2019, we entered into discussions with Oncometrix on this transaction. In early 2020, when it appeared likely that this transaction was going through, we began to prepare internally staffing up in anticipation of a volume increase. At the time, Oncometrix volume was similar to ours, meaning that upon closing the deal, our volume would almost double. This means mostly adding staff in the laboratory and customer service departments to ensure we maintain the quality of our service.

During the first quarter, we hired, brought in and trained additional staff to ensure that when we hit the go button and transition to customers, we would be ready to handle their increase. Given that our lab staff is accounted for as part of variable cost, the increase in staff headcount would decrease cost of goods sold. This happened ahead of the actual transaction because we needed to bring in and train the team in advance. Therefore, with the costs incurred before the volume came in, that negatively impacted gross margins.

Some of you wrote in asking, why our gross margin didn't increase with increase in volume?

This is because at the time of the increase in revenue, we were also bringing in new hires in preparation for this Oncometrix transaction. We are already seeing volumes increase as some practices begin to see more patients and open up. As we are adequately staffed to handle the increase in volume. We expect that with the potential growth in those volumes, while the existing staff level remain fixed, our gross margins should indeed increase.

Next, I'd like to take a few moments to discuss some of the metrics. Aside from the obvious key metrics of revenue growth for our three key drivers that we focus on. The first is case volume.

Our business growth is driven by patient cases being sent to us. Each case that is sent to us is a decision by the oncologist to trust Precipio to provide the best most accurate diagnosis for the patients. Case volume increases when customers increase the usage of our laboratory as well Of course, as when new customers are introduced to Precipio.

The next two drivers are related to our customer base growth comprising of two metrics, new customers and recurring customers. We operate in an extremely competitive environment. Each doctor We meet has already has a laboratory they're using before we introduced our services. In order to win their business, we need to unseen the incumbent lab. Which means the customer needs to change their existing habits and adopt a new process. This means change which nobody likes. Our ability to continue to grow the customer base and increase the customers who use us repeatedly is an indicator of how we match up against the competition. In other words, using plain jargon, it measures the stickiness of our service and our customer loyalty.

Since there were a few questions about the ARPU, the average revenue per unit, I'd like to make a few moments to reiterate the decline in this number this quarter. Each case that is received by us is not only unique because of the patient, it's also unique from a revenue perspective because each case is triaged and worked up differently in a customized manner that matches the clinical circumstances. Therefore, there is no single uniform revenue amount per case, in general revenues for our whole biopsy workups, whether bone marrow or [peripheral blood] biopsies can range from $2000 to $5,000 per case. What we saw in Q1 is as we continue to introduce our Hemescreen assay was more and more clinicians began sending us samples for those tests.

The Revenue for Hemescreen is around $600, which is of course, substantially lower than the whole biopsy receipts. However, it's a good margin business and not only contributes to our profitability, but also provides outstanding clinical care to our patients. We anticipated the drop in ARPU as we continue to see this assay more broadly adopted and an increase in these lower revenue Hemescreen cases, which impacted the case mix and ARPU. For anyone who hasn't involved in any merger acquisition, you know, that the biggest challenge is making sure customers aren't lost during this process. Our commercial team has done a great job at completing the Oncometrix transition without a hiccup, ensuring that we were able to keep customers during the process. The successful completion of the transaction, combined with our strength in quality and accuracy driven by our vision of patient care is what makes me confident

that this trend of growth should continue.

Next, I'd like to spend a few moments discussing the product side of our business. The challenges of our laboratory phase during COVID-19 were not unique to us, along with the decline in volume every laboratory faced the same challenges of managing the workflow in a new social distancing environment, and larger the laboratory, the greater those challenges became.

The product side of our business sells to these very customers, large laboratories. I know many of you have been waiting to hear news of a major lab adopting IV cell Hemescreen, one of our proprietary technologies. The reality is, as you can imagine, those customers put the evaluation of new technologies on hold under these existing circumstances. Nominally, do they not have the capacity and bandwidth to onboard new technologies? Even if they did, like us, they're not allowing any outside vendors into their facilities, weathering such onboarding impossible.

Let me reiterate what I've said before. None of these customers, not one, have said that they are onboarding the process. They've all reiterated their interest in our products and have expressed frustration that they have to delay the onboarding of these technologies. I'm confident that this should happen. For many businesses, the timing of COVID-19 couldn't be worse. However, even during these unconventional and extremely difficult times, we did not stop. And we've used this time to find opportunities or to use one of my favorite phrases making lemonade at 11.

So let me share two of these Lemonade initiatives with you. The first is our Hemescreen physician office program. As we recognize that our product sale to the major labs, we're going to take a hiatus during COVID. We ask ourselves who else could use this technology. The Houston physician office program was born out of three factors. Number one, the equipment, the equipment required for your screen is a single relatively simple and inexpensive machine. Number two is the technical skilled staff capabilities. The training for laboratory

person to operate the assay is also relatively simple, virtually any customer with a small in-office laboratory couls operate this assay. Number three is the area of regulatory licensing. Most of our target customers already have the necessary licenses to run these assets. With those factors in mind, we developed a very attractive business model that can help our customers not only provide better care, but also make money.

Many physicians' offices, not only have the bandwidth now to look at these opportunities during the current

slowdown, but also the very slowdown decline in revenue provided a strong incentive for them to embrace a new source of revenue such as this program. The program was launched in mid April and a month later last week. We got our first customer. This is a very exciting program that I believe should create a strong customer base for our Hemescreen technology.

This should not only be financially beneficial to our Company, but also gives our commercial team a very powerful tool to approach and engage new customers.

Another initiative we've been working on is our next version of IV-cell. We received a lot of feedbacks from customers who tested and tried the technology, given the situation with those large laboratories, we decided to take this time to improve on our product, taking in the feedback and designing an improved version of IV-cell. While this is still in R&D stages. Initial results are exciting, and we believe that we will come out of this period with an even stronger product and more attractive to our customers. We will have

more on that as we move through the development into production phase.

In summary, despite the challenges of the world we live in today, we're lucky to be moving forward, which is more than we could say for many businesses out there. As I'm sure you know, many companies made the decision to lay off staff, contributed to the 35 plus million currently unemployed in the US. We made a different decision to take care of our own during this challenging time. As one of our many cost reduction measures, we initiated a company-wide payroll reduction plan to help preserve cash during these times. This decision was taken not only because we believe it was the right thing to do for our team. We also believe it is a prudent business decision. Laying off laboratory staff, we just recently hired seem to be very shortsighted. Additionally, it would make it difficult for us to rehire such staff once business resumes and volume increases. I'm confident we have the team and the resources to get through this and come out on the other side even stronger. Our customers have never seen better service. Our products continue to improve, and the business opportunities created during this period should be beneficial for us going forward.

I want to thank you for your ongoing support and wish you and your families, health and safety. Have a nice evening. Thank you for joining.

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